oversight

Housing and Urban Development: HUD's Management Deficiencies, Progress on Reforms, and Issues for Its Future

Published by the Government Accountability Office on 1997-03-06.

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

                   United States General Accounting Office

GAO                Testimony
                   Before the Subcommittee on Human Resources and
                   Intergovernmental Relations, Committee on Government
                   Reform and Oversight, House of Representatives


For Release
on Delivery
Expected at
                   HOUSING AND URBAN
1:30 p.m. EST
Thursday           DEVELOPMENT
March 6, 1997



                   HUD’s Management
                   Deficiencies, Progress on
                   Reforms and Issues for Its
                   Future
                   Statement of Lawrence J. Dyckman,
                   Associate Director
                   Housing and Community Development Issues,
                   Resources, Community, and Economic
                   Development Division




GAO/T-RCED-97-89
Mr. Chairman and Members of the Subcommittee:

Two years ago before this Subcommittee, we discussed the most
important management and budget problems facing the Department of
Housing and Urban Development (HUD) as part of your effort to help set
the stage for addressing those problems. We are pleased to return here
today to discuss progress that has been made since then and the problems
and challenges that remain for both the Congress and HUD.

HUD remains a Department with serious management and budgetary
problems. While it has formulated approaches and initiated actions over
the last 2 years to address some of its most significant problems, those
actions are far from complete. HUD’s programs continue to represent large
federal loan commitments and discretionary spending, much of which
goes for rental assistance to those people who are least able to afford
decent housing. Therefore, we believe that controlling spending for these
programs will require a continued reexamination—by both the Congress
and the administration—of federal housing policies and the type of
program delivery systems best suited to carry out those policies.

As we said in a statement to your full Committee on February 12 of this
year, the Congress is an important partner in working with executive
branch agencies to implement the Government Performance and Results
Act (GPRA), which focuses on clarifying missions, setting programmatic
goals, and measuring performance toward those goals.1 Building on GPRA’s
call to measure performance better and focus on results, the Congress has
enacted additional important reforms including (1) the Government
Management Reform Act of 1994, which expanded the 1990 Chief
Financial Officers (CFO) Act’s requirements for financial statements and
controls that can pass the test of an independent audit; and (2) the 1996
Clinger-Cohen Act, which is directed at more effective management and
use of information technology to better support agencies’ missions and
improve program performance.

Our statement today is based on several reports that we have issued and
testimony that we have given over the past 2 years as well as our ongoing
work. (See app. I for a list of related GAO products). It will focus on (1) the
long-standing management deficiencies that hamper HUD’s effectiveness,
progress made in addressing these problems, and the work remaining in
the coming years; (2) the problems in HUD’s assisted and public housing

1
 Managing for Results: Using GPRA to Assist Congressional and Executive Branch Decisionmaking
(GAO/T-GGD-97-43, Feb. 12, 1997).



Page 1                                                                      GAO/T-RCED-97-89
                          programs—which account for the largest portion of its outlays and a vast
                          share of the budget authority HUD expects to need in the future; and,
                          (3) the need to achieve consensus on federal housing policy, HUD’s
                          mission, and the resources devoted to achieving that mission.

                          In summary, we found the following:

                      •   Four long-standing, Department-wide management deficiencies continue
                          to make HUD vulnerable to waste, fraud, abuse, and mismanagement.
                          These deficiencies are weak internal controls, inadequate information and
                          financial management systems, an ineffective organizational structure, and
                          an insufficient mix of staff with the proper skills. While HUD has made
                          progress in addressing these weaknesses, we have determined that much
                          remains to be done and that therefore the Department continues to
                          warrant the focused attention that comes with being designated by GAO as
                          a “high-risk area.”2
                      •   HUD faces a variety of problems in its largest assisted and public housing
                          programs. These include how to (1) continue providing Section 8 housing
                          assistance to 3 million families while not undermining the funding for
                          other important housing and community development programs,
                          (2) reduce excess rental subsidies to some insured multifamily properties
                          while minimizing insurance losses to the Federal Housing Administration
                          (FHA) fund and ensuring that those properties meet basic housing quality
                          standards, and (3) help public housing authorities deal with increasingly
                          tight funding levels while ensuring a minimum level of oversight and
                          assistance from HUD for the authorities with management problems.
                      •   The Congress and the administration need to agree on the future direction
                          of federal housing policy and put in place the organizational and program
                          delivery structures that are best suited to carrying out that policy. Doing
                          so will require revisiting fundamental issues about that policy, including
                          whom the federal government will serve, how much will be spent on those
                          being served, and how—via existing systems, block grants, devolution to
                          states, or other means—those policies will be implemented.


                          Established in 1965, HUD is the principal federal agency responsible for
Background on HUD’s       programs dealing with housing and community development and fair
Programs and Budget       housing opportunities. Through its programs, HUD provides rental
                          assistance to more than 4 million lower-income households, has insured
                          mortgages for about 23 million homeowners, has helped revitalize over

                          2
                           We identified areas throughout the government that are especially vulnerable to waste, fraud, abuse,
                          and mismanagement and termed these “high-risk areas.” See GAO’s High-Risk Series (GAO/HR-97-1,
                          Feb. 1997).



                          Page 2                                                                           GAO/T-RCED-97-89
                   4,000 communities, and helps ensure that access to housing is equally
                   available to all.

                   HUD is responsible for the expenditure of significant amounts of tax
                   dollars. The net budget outlays for HUD’s programs were close to
                   $25.5 billion in fiscal year 1996, the vast majority of which was for assisted
                   and public housing programs. HUD also is responsible for managing more
                   than $400 billion in mortgage insurance, $464 billion in guarantees of
                   mortgage-backed securities, and about $180 billion in prior years’ budget
                   authority for which it has future financial commitments.


                   The HUD scandals of the late 1980s served to focus a great deal of public
HUD’s Management   attention on the management problems at HUD. HUD’s information and
Deficiencies       financial management systems were inadequate, failing to meet program
                   managers’ needs or to provide adequate oversight of housing and
                   community development programs. These internal controls weaknesses
                   were a major factor leading to the scandals. The organizational problems
                   at HUD included overlapping and ill-defined responsibilities and authorities
                   between the Department’s headquarters and field organizations as well as
                   a fundamental lack of management accountability and responsibility.
                   Finally, an insufficient mix of staff with the proper skills hampered HUD’s
                   ability to effectively monitor and oversee its programs.

                   HUD’s slow progress in correcting the fundamental management
                   weaknesses that allowed the scandals to occur and a concern that HUD
                   needed heightened congressional attention led us to designate the
                   Department as a “high-risk area” in January 1994. In February 1995, we
                   reported in more depth on HUD’s management deficiencies as part of GAO’s
                   biennial High-Risk Series,3 and, last month, we reported on the corrective
                   actions that HUD has taken or initiated since our February 1995 report.4
                   Because HUD is still working to correct its management weaknesses and, in
                   some areas, has a long way to go, we have determined that the Department
                   continues to warrant being designated as a “high-risk area.”

                   HUD has made progress in addressing each of the major management
                   deficiencies, but in most cases, much work remains for the Department
                   before its actions will be complete. For example, HUD has made progress
                   improving its internal controls, but major problems persist. HUD has
                   implemented a new management planning and control program intended

                   3
                    High-Risk Series: Department of Housing and Urban Development (GAO/HR/95-11, Feb. 1995).
                   4
                    High-Risk Series: Department of Housing and Urban Development (GAO/HR-97-12, Feb. 1997).



                   Page 3                                                                      GAO/T-RCED-97-89
to identify and rank the major risks in each program and develop
strategies to abate those risks. Also, HUD has reported that its number of
material internal control weaknesses dropped from over 51 in the early
1990s to only 9 at the end of fiscal year 1995.

However, we and HUD’s Inspector General question the effectiveness of the
Department’s management control program in identifying material
weaknesses and assessing front-end risks. For example, we noted in our
review of the fiscal years 1995 and 1996 management plans prepared by
several of HUD’s major program areas that the only risks identified in the
management control section of each plan were previously identified
material weaknesses and the abatement actions were those previously
outlined in HUD’s report on compliance with the Federal Managers’
Financial Integrity Act. In addition, the Inspector General stated that
weaknesses existed in the management control program because HUD’s
major program areas were not performing front-end risk assessments on
new or substantially modified programs, as required.

Furthermore, even though HUD has reduced the number of material
internal control weaknesses, some of those remaining weaknesses are
significant and long-standing. For example, these remaining material
weaknesses (first identified in fiscal years 1983 through 1993) include
weaknesses that affect more than $18 billion in subsidy funds that HUD
disburses annually, primarily through its Section 8 and Section 236
programs. For both fiscal years 1994 and 1995, HUD’s auditors were not
able to express an opinion on the reliability of HUD’s consolidated financial
statements. The fiscal year 1995 audit of FHA’s financial statements
continued to identify internal control weaknesses, including a lack of staff
and administrative resources for such tasks as performing loss mitigation
functions, managing troubled assets, and implementing new automated
systems.5

Much work also remains for HUD to improve its information and financial
management systems. HUD has continued to make progress on these
systems over the last 2 years, moving beyond the planning stages to where
portions of major new systems are becoming operational. However, some
of the projects involving major improvements to HUD’s systems will not be
completed before the year 2000. Furthermore, HUD reported in March 1996
that 93 out of 116 of its information and financial management systems did
not meet the requirements of the Federal Managers’ Financial Integrity Act

5
 Federal Housing Administration, Audit of Fiscal Year 1995 Financial Statements, prepared by KPMG
Peat Marwick LLP for the Office of Inspector General (June 7, 1996).



Page 4                                                                        GAO/T-RCED-97-89
and therefore could not be relied upon to provide timely, accurate, and
reliable information and reports to management. As we said in our
testimony last month,6 conclusions about what the government is
accomplishing with the taxpayers’ money cannot be drawn without
adequate program performance and cost information. HUD plans to replace
or enhance these systems, but its efforts have been hampered by problems
with systems development, funding constraints, and data conversion
problems.

HUD has taken a number of steps to address the problems with its
organizational structure. It has completed a field reorganization, which
was intended to eliminate previously confused lines of authority, enhance
communications, reduce levels of review and approval, and improve
customer service; transferred direct authority for field staff and resources
to the Assistant Secretaries in HUD headquarters; and, restructured its 81
field offices. HUD is continuing its reorganization efforts, which will include
reducing headquarters staff, redeploying staff, and further streamlining
and consolidating field activities. When we recently conducted a telephone
survey of HUD’s field directors about the Department’s reorganization
efforts, the respondents rated three areas as good or excellent—HUD’s
success in improving the lines of program management authority,
empowering staff, and improving communications with headquarters and
HUD’s customers.7 However, HUD has found that, to some extent, the
reorganization has impaired communications across program lines at its
field offices. HUD is taking actions, such as adding program integration
requirements to senior managers’ performance expectations and
appraisals, that it believes will alleviate this situation.

HUD has made progress on its efforts to address the problems with staff
members’ skills. HUD has begun to implement a needs assessment process
to plan future training. In addition, HUD has increased staff training and has
begun to evaluate the effectiveness of its stepped-up training efforts. While
the field directors we surveyed generally believed that the skills of their
staff have improved over the past 2 years, 40 percent of these directors
rated HUD’s current training as less than good. The field directors also said
that more training is needed in the use of information systems, the
implementation of program regulations, HUD-related technical skills, and
interpersonal skills. In addition, we and HUD’s Inspector General continue
to find staff resource problems in some of HUD’s major program areas,
including public housing and FHA.

6
 See footnote 1.
7
 HUD: Field Directors’ Views on Recent Management Initiatives (GAO/RCED-97-34, Feb. 12, 1997).



Page 5                                                                       GAO/T-RCED-97-89
                                    In addition to wrestling with critical agencywide management weaknesses,
HUD’s Assisted and                  HUD faces a daunting task in managing the costs associated with
Public Housing                      (1) renewing Section 8 contracts for assisted housing, (2) the multifamily
Programs Face                       projects that FHA has insured, and (3) ensuring the soundness of public
                                    housing in a time of intense scrutiny and pressure on all housing programs
Difficult Management                in light of the move to reduce the budget deficit. As I mentioned earlier,
and Budget Problems                 these rental assistance programs serve more than 4 million low-income
                                    households; figure 1 illustrates the number of households currently
                                    receiving Section 8 tenant-based and project-based assistance and the
                                    number in public housing.


Figure 1: Number of Households in
HUD-funded Assisted and Public
Housing                                                                              Public Housing
                                                                                     (1.25 million households)
                                    Tenant-based Section 8
                                    (1.43 million households)
                                                                                  31.4 %

                                                                35.8 %


                                                                                  32.7 %




                                                                                    Project-based Section 8
                                                                                    (1.3 million households)




                                    Figure 2 gives you an overall picture of whom HUD’s rental assistance
                                    programs are serving.




                                    Page 6                                                      GAO/T-RCED-97-89
Figure 2: Characteristics of
HUD-assisted Renters           Percent of assisted renters in 1995
                               70


                               60             53
                                                                 51
                                                                                                 48
                               50


                               40
                                                                                30

                               30


                               20


                               10


                                0
                                        Non-white      Families       Elderly household   Primary income
                                                     with children      (65 and older)  is public assistance
Retaining Support for          Under Section 8 of the 1937 Housing Act (as amended), HUD contracts with
Important Housing              public housing authorities and private property owners to provide housing
Programs in the Face of        assistance for low income families. In fiscal year 1998, Section 8 contracts
                               covering 1.8 million housing units will expire, an increase of more than a
the Spiraling Costs of         million over 1997. To the extent that HUD may not have the budget
Section 8 Contract             authority to renew these contracts, the currently assisted families could
Renewals                       face rent increases or displacement. Moreover, owners of many
                               multifamily properties currently receiving Section 8 assistance will default
                               on their FHA-insured mortgages if the assistance is withdrawn. (We address
                               in greater detail those properties with FHA-insured loans later in this
                               testimony).

                               Overall, the price of renewal is high and will increase over the next several
                               years. Figure 3 shows HUD’s estimates of over $9 billion for the fiscal year
                               1998 budget authority it will need to renew contracts covering over
                               1.8 million housing units; figure 3 also shows how the escalating needs for
                               section 8 budget authority will soon surpass funding levels for all of HUD’s
                               other programs. As you can see in figure 4, this budget authority grows to
                               over $21 billion by the year 2006. This amount exceeds HUD’s total budget
                               authority of about $19.3 billion in fiscal year 1997. With increases in
                               budget authority of this magnitude forecast for the next 8 years, other



                               Page 7                                                          GAO/T-RCED-97-89
                                         long-standing HUD programs with significant funding could be at risk of
                                         being funded at levels less than would support their current commitments.
                                         These programs include public housing at more than $6 billion, community
                                         development block grants at nearly $5 billion, and homeless assistance at
                                         nearly $1 billion.


Figure 3: Budget Authority Required to
Renew Existing Section 8 Contracts
                                         Billions of dollars
                                         $25


                                         $20


                                         $15


                                         $10


                                          $5


                                          $0
                                               1997   1998     1999   2000     2001      2002     2003   2004   2005    2006
                                                                               Fiscal year
                                                                      Tenant Based Project Based Total




                                         Page 8                                                            GAO/T-RCED-97-89
Figure 4: Budget Authority Required to
Renew Existing Section 8 Contracts
Through Fiscal Year 2006                 Dollars in billions




                                         20



                                         15
                                                         All Other
                                                       HUD Programs

                                         10
                                                                                      Section 8
                                          5



                                          0
                                          1996        1997      1998       1999       2000        2001        2002
                                                                        Fiscal year




                                         Funding these programs as well as the Section 8 housing assistance
                                         program will be difficult in the face of other agencies’ competing budget
                                         requests. The challenge for HUD will be to demonstrate that it is operating
                                         its programs efficiently, that it has planned realistic reforms that will lead
                                         to decreased costs, and that the programs themselves are achieving the
                                         goals and policy objectives that the Congress envisioned in creating them.


Costs Associated With                    Over the past 2 years, HUD has begun the difficult process of attempting to
Multifamily Projects                     resolve three basic problems affecting its insured Section 8 portfolio: high
                                         subsidy costs, high exposure to insurance loss, and the poor physical
                                         condition of some properties. In 1995, HUD introduced its “mark-to-market”
                                         proposal (subsequently renamed “portfolio reengineering”), through which
                                         it sought to (1) reduce subsidies by setting rents at market levels,
                                         (2) reduce the mortgages on those properties as necessary to achieve
                                         positive cash flows and terminate the FHA mortgage insurance on them,
                                         and (3) replace project-based Section 8 subsidies with portable
                                         tenant-based subsidies.

                                         The insured Section 8 portfolio—the subject of the portfolio reengineering
                                         proposal—consists of more than 8,600 properties containing just under



                                         Page 9                                                          GAO/T-RCED-97-89
859,000 apartments. The properties provide housing for a diverse
population, including families and single adults as well as special-needs
populations such as the elderly and the disabled. These properties have
FHA insurance, loans with unpaid principal balances of nearly $18 billion,
and receive project-based Section 8 assistance, much of which HUD
provided under long-term contracts executed in the 1970s. Over time,
these properties’ Section 8 subsidies have increased dramatically, and
today many of the Section 8 contracts are reaching their expiration.
However, for many properties, reductions in the Section 8 subsidies
without a reduction in the outstanding mortgage balances on those
properties would lead to defaults and partial claims against FHA’s
insurance fund. This would happen because, without a continuation of the
subsidy, many of the projects would not be economically viable.

Recognizing this predicament—properties that cannot command market
rents high enough to cover their federally insured mortgages but which
continue to receive excessively costly Section 8 subsidies—HUD proposed
to restructure the FHA-insured mortgages and bring income and expenses
into line so that they could operate on market rents. HUD’s fiscal year 1997
appropriation includes a demonstration program covering those properties
with contract rents exceeding 120 percent of fair market rents. For owners
who are eligible for and agree to participate in this demonstration, HUD has
the flexibility to use tools such as reinsurance, debt forgiveness, and
second mortgages to decrease the escalating costs of Section 8 rental
assistance, prevent mortgage defaults, protect residents against
dislocation, and resolve associated tax issues.8

In 1996, HUD hired Ernst & Young LLP to study a randomly selected sample
of 558 properties to obtain information about how HUD’s original
mark-to-market proposal would affect them. Subsequently, we selected 10
of the properties included in Ernst & Young’s study as case studies and
hired three licensed real estate appraisal firms to help assess the effects of
HUD’s proposal on them.9 Among other things, Ernst & Young found that 60
to 66 percent of the properties in the insured Section 8 portfolio receive
above-market rents and that $9.2 billion to $10.2 billion would be required
to address deferred maintenance and future capital needs at the properties
if they were to compete in the marketplace without project-based

8
 For owners who are eligible for but do not choose to participate in the demonstration, contract rents
are reduced to 120 percent of fair market rents. For projects with rents below 120 percent of fair
market rents, the appropriation requires HUD, if requested by the project owner, to renew the
assistance contract for 1 year.
9
 Multifamily Housing: Effects of HUD’s Portfolio Reengineering Proposal (GAO/RCED-97-7, Nov. 1,
1996).



Page 10                                                                          GAO/T-RCED-97-89
                            subsidies. We believe that for the most part, the methodology and
                            assumptions that Ernst & Young used were reasonable given their study’s
                            overall scope. However, for most of the 10 properties we reviewed, the
                            study estimated substantially higher deferred maintenance needs than did
                            the property owners or managers and our contract appraisers.

                            HUD’s initiative to reengineer its portfolio recognizes a reality that has
                            existed for some time—namely, that the value of many of the properties in
                            the insured Section 8 portfolio is far lower than the mortgages on the
                            properties suggest. Addressing the problems of HUD’s insured multifamily
                            portfolio will inevitably be costly and difficult. As the Congress evaluates
                            the options for addressing this situation, the fundamental problems that
                            have affected the portfolio and their underlying causes will be important
                            to consider. Any approach that is implemented should address not only
                            the high costs of Section 8 subsidies, but also the government’s high
                            exposure to insurance loss, the poor physical condition of some of the
                            properties, and the underlying causes of these long-standing problems
                            with the portfolio. The overarching objective should be to implement the
                            process as efficiently and cost-effectively as possible, recognizing not only
                            the interests of the parties directly affected by restructuring but also the
                            impact on the federal government.


Ensuring the Soundness of   About 3 million low-income people, many of whom are elderly or disabled,
Public Housing              live in public housing, which is operated on a day-to-day basis by local
                            public housing authorities (PHA). HUD currently provides PHAs with
                            $5.4 billion a year to help them operate and modernize their projects.
                            However, over time, the costs for PHAs have begun to exceed the financial
                            resources available to them because their tenants’ incomes—on which the
                            amount they pay the PHAs in rent is based—have declined steadily over the
                            last decade. In addition, over the last several years, the amounts
                            appropriated for HUD’s operating subsidy to the PHAs have not kept pace
                            with the PHAs’ expected costs. The recent welfare reforms could further
                            reduce the rents that the tenants are able to pay if they lose welfare
                            benefits without finding work. With funding for the PHAs increasingly tight,
                            interest has been keen in knowing how well the PHAs are managing their
                            properties and whether HUD has been adequately identifying and helping
                            those PHAs having management problems.


Reducing Housing            HUD provides the PHAs with an operating subsidy to supplement the rent
Authorities’ Need for       paid by residents because federal statutory requirements generally limit
Operating Subsidies         the amount that tenants may be required to pay to 30 percent of their


                            Page 11                                                      GAO/T-RCED-97-89
income. Also, until recently, federal preferences for admission to public
housing required the PHAs to give preference to admitting those who are
usually the poorest of the poor. By concentrating the very poor in public
housing, these preferences limited the PHAs’ ability to meet operating
expenses on their own and gave rise to the need for a subsidy from HUD to
make up the difference between the rents that the PHAs could charge and
what it costs them to operate their projects.

A decline in the average income of public housing residents since 1981 has
led to a steady increase in the PHAs’ need for operating subsidies. In 1981,
the average income of public housing residents was 33 percent of the area
median income, but by 1995 the average had dropped to 17 percent. As a
result, 1982 operating subsidy needs were $1.5 billion, while in 1996 needs
reached $3.1 billion (in nominal dollars). However, for several years in a
row now, budgetary pressures and reduced appropriations have meant
that HUD could not fully fund the difference between tenants’ rents and the
PHAs’ operating costs—for example, in fiscal year 1996, HUD’s subsidy was
90 percent of the PHAs’ expected operating costs. In many cases, the effect
of reduced operating subsidies can be that the PHAs defer routine
maintenance, which, over time, can lead to deteriorated housing
conditions and higher accrued needs for major rehabilitation and
modernization.

Congress has proposed legislation and HUD has taken steps over the last 2
years to give the PHAs more flexibility in managing their properties to
strengthen the long-term viability of this housing. These steps—public and
assisted housing reform bills in both the House and Senate10 and HUD’s
efforts to relax some requirements—are aimed at encouraging the PHAs to
find additional sources of income and allowing them to admit tenants with
a broader mix of incomes so that the PHAs have less need for an operating
subsidy from HUD. For its part, HUD has attempted to increase incentives
for the PHAs to generate additional nonrental income by allowing them to
keep more of that income to meet their operating expenses. Previously,
each dollar of extra income that a PHA generated reduced its subsidy by a
dollar, thereby creating a disincentive to generating additional income
from sources other than rent.

The Congress, HUD, and many of those in the public housing industry were
in general agreement on the financial and other benefits of admitting
tenants with a broader mix of incomes to public housing to better ensure

10
  The House of Representatives passed H.R. 2406, The United States Housing Act of 1996, and the
Senate passed S. 1260, the Public Housing Reform and Empowerment Act of 1995. Agreement was not
reached on a compromise between the two bills before the 104th Congress adjourned.



Page 12                                                                    GAO/T-RCED-97-89
                            public housing’s long-term viability. However, neither of the reform bills
                            nor a compromise between the two has been enacted into law. As a result,
                            each of HUD’s last two annual appropriations included provisions
                            temporarily repealing the federal preferences as well as other statutory
                            requirements that were seen as limiting the PHAs’ management discretion.11

                            The reforms that were contained in H.R. 2406 and S. 1260 would likely
                            improve the long-term viability of public housing. The PHAs have agreed,
                            telling us that reforms such as allowing them to admit tenants with
                            incomes higher than those they currently house will enable them to adjust
                            to possible reductions in the operating subsidies.12 However, the PHAs also
                            said that they need an adjustment period in which to admit new tenants
                            before the subsidies are significantly cut; industry associations
                            representing PHAs have said that the PHAs need more certainty that these
                            reforms are permanent so that they know that they will not be operating
                            under the old rules in the next new federal fiscal year.

                            In public housing, just as in a myriad of other HUD programs, there remains
                            a need for HUD and the Congress to reach consensus on whom will be
                            served and at what cost. While, over time, income mixing can help the PHAs
                            meet more of their operating expenses on their own, adopting such a
                            strategy comes at the expense of those very low-income people who have
                            been given preference for admission to public housing for years. This
                            strategy may also exacerbate worst-case housing needs among the poor,
                            which, according to HUD, are at an all-time high.


Improving HUD’s Oversight   With the funding for public housing increasingly tight, knowing how well
of Housing Authorities’     the PHAs are managing their properties with the resources HUD gives them
Performance                 takes on added importance. However, we recently found that HUD’s
                            primary tool for measuring PHAs’ performance, the Public Housing
                            Management Assessment Program (PHMAP), needs to be more accurate and
                            useful in order for HUD to ensure that it is identifying all of the PHAs to
                            which it should be targeting its limited oversight and technical assistance
                            resources.13



                            11
                             For example, each appropriation waived the “one-for-one” replacement requirement, which
                            mandated that the PHAs replace each unit of housing they elect to demolish with another unit or a
                            Section 8 certificate.
                            12
                             Housing and Urban Development: Public and Assisted Housing Reform (GAO/T-RCED-96-25, Oct. 13,
                            1995).
                            13
                             Public Housing: HUD Should Improve the Usefulness and Accuracy of Its Management Assessment
                            Program (GAO/RCED-97-27, Jan. 29, 1997).


                            Page 13                                                                         GAO/T-RCED-97-89
    HUD uses PHMAP to annually collect data from each PHA on basic indicators
    of management performance, such as vacancy rates and operating
    expenses. The PHAs submit and certify to the accuracy of most of the data
    on these indicators. On the basis of aggregate performance against these
    indicators, HUD calculates a score from 0 to 100 for each authority and
    assigns one of the following three designations: “troubled performer” for a
    score less than 60, “standard performer” for a score between 60 and less
    than 90, and “high performer” for a score of 90 or above. Troubled PHAs
    must enter into a binding agreement with HUD stipulating the problems the
    authority needs to address and an approach and timetable to resolve them.
    Standard- and high-performing authorities that fail any indicator must
    submit a plan for improving their performance in that indicator. HUD
    requires its field offices to go to troubled PHAs to verify the data that the
    PHAs submit (and thus, the PHMAP score) when those data would lead to a
    score high enough to remove the “troubled” designation.

    We found HUD needs to do a better job of ensuring that all of its field
    offices comply with PHMAP’s follow-up requirements and use PHMAP scores
    and other information available to them to better target their limited
    technical assistance resources. HUD’s field offices have the bulk of the
    Department’s responsibility for the day-to-day implementation of PHMAP,
    including negotiating the binding agreements required of troubled PHAs,
    approving improvement plans for standard and high performers, and
    monitoring the PHAs’ progress in meeting agreed-upon goals to which they
    have committed themselves. However, according to the results of a survey
    of all of HUD’s public housing field offices, we found HUD has not been
    systematically complying with PHMAP’s statutory and regulatory follow-up
    requirements for all housing authorities. For example, in 1995,

•   less than 20 percent of the troubled PHAs that should have been operating
    under a binding agreement with HUD actually were;
•   nearly a third of HUD’s field offices had not ensured that standard- and
    high-performing PHAs developed improvement plans for each indicator
    they failed; and,
•   the field offices confirmed the accuracy of the data behind fewer than
    30 percent of the troubled PHAs’ PHMAP scores that HUD requires them to
    confirm.

    Some field offices cited resource constraints—a lack of staff, travel funds,
    or expertise—as the main reason for not meeting follow-up requirements,
    while others opted not to enforce the requirements when they believed the
    PHAs were already addressing their problems. Differences in how the field




    Page 14                                                     GAO/T-RCED-97-89
                      offices interpret their role in helping the PHAs improve performance also
                      played a part in the field offices’ oversight and technical assistance
                      activities. Some field offices told us they interpret their role narrowly,
                      generally limiting their assistance to advice, information on complying
                      with HUD’s regulations, and suggestions for solving management problems.
                      Others were more willing to get involved in the PHAs’ operations by
                      performing tasks such as setting up proper tenant rent records and waiting
                      lists.

                      The bottom line is that HUD is not maintaining a consistent, minimally
                      acceptable level of oversight at all PHAs. Without this oversight, HUD cannot
                      be reasonably confident that the housing authorities are using federal
                      funds appropriately, managing and maintaining their developments
                      properly, and reporting performance information accurately.


                      Since it was created in 1965, HUD has grown to include some 240 programs
Future Federal        and activities (according to a December 1994 report by HUD’s Inspector
Housing and           General) and hundreds of billions of dollars in financial commitments.
Community             Through its multiple social and financial roles, it directly or indirectly
                      affects most Americans. Over the years, we and others have criticized the
Development Policy:   inefficiencies in HUD’s organization and the deficiencies in its management.
Coming to Consensus   Leaders in the administration and in the Congress agree that HUD must, at a
                      minimum, be restructured to better meet the nation’s housing and
on HUD’s Mission      community development needs. Some policymakers believe that HUD’s
                      problems are so great that they can be cured only by dismantling the
                      agency and transferring or eliminating its functions. In its initial
                      Reinvention Blueprint, HUD proposed major changes, including
                      consolidating programs, devolving responsibility for program design and
                      implementation to states and localities, and HUD’s assuming the role of
                      overseer and clearinghouse for national models. While some limited, yet
                      significant, improvements to HUD’s existing program structure have been
                      made, a comprehensive redesign of HUD’s overall mission and program
                      delivery structure has not occurred. Likewise, various bills to
                      fundamentally restructure HUD’s programs to subsidize multifamily rental
                      housing also have been proposed, but thus far none has been enacted.

                      HUD’s programs will remain at high risk to fraud, waste, abuse, and
                      mismanagement until the agency completes more of its planned corrective
                      actions and until the debate over HUD’s future—in which the Congress
                      must participate—is settled. In our view, the Congress now has an
                      excellent opportunity to help HUD eliminate the deficiencies that make it a



                      Page 15                                                      GAO/T-RCED-97-89
high risk and to align the agency’s management responsibilities and
capacity by authorizing a major restructuring strategy that focuses HUD’s
mission and significantly consolidates, reduces, and/or reengineers its
many separate program activities. What is needed now is for the
administration and the Congress to agree on the future direction of federal
housing and community development policy and the organizational and
program delivery structures that are best suited to carry out that policy—a
process that will involve inherent trade-offs between the needs of those
seeking HUD’s assistance and other demands on the total federal budget. As
the Congress provides input to HUD’s and other agencies’ strategic plans, as
required by GPRA, it can insist that agencies show how their programs are
aligned with related efforts in other agencies.14 Congress can also use the
GPRA planning process to seek opportunities to streamline government by
comparing the effectiveness of similar program efforts carried out by
different agencies.


Mr. Chairman, this concludes our prepared remarks. We will be pleased to
respond to any questions that you or other Members of the Subcommittee
might have. We in GAO look forward to working with the Congress to help
address HUD’s management deficiencies and their impact on housing and
community development programs.




14
 In order to successfully implement the initial requirements of GPRA, HUD must prepare, by the end
of this fiscal year a strategic plan that includes a statement of its mission.



Page 16                                                                        GAO/T-RCED-97-89
Page 17   GAO/T-RCED-97-89
Page 18   GAO/T-RCED-97-89
Appendix I

Related GAO Products


              Public Housing: Status of the HOPE VI Demonstration Program
              (GAO/RCED-97-44, Feb. 25, 1997).

              Housing and Urban Development: Potential Implications of Legislation
              Proposing to Dismantle HUD (GAO/RCED-97-36, Feb. 21, 1997).

              Managing for Results: Using GPRA to Assist Congressional and Executive
              Branch Decision-Making (GAO/T-GGD-97-43, Feb. 12, 1997).

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

              GAO   High-Risk Series (GAO/HR-97-1, Feb. 1997).

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

              Public Housing: HUD Should Improve the Usefulness and Accuracy of Its
              Management Assessment Program (GAO/RCED-97-27, Jan. 29, 1997).

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

              Public Housing: Partnerships Can Result in Cost Savings and Other
              Benefits (GAO/RCED-97-11, Oct. 17, 1996).

              Housing and Community Development Products 1995 (GAO/RCED-96-248W,
              Aug. 1996).

              Multifamily Housing: HUD’s Portfolio Reengineering Proposal: Cost and
              Management Issues (GAO/T-RCED-96-232, July 30, 1996).

              Multifamily Housing: Issues Facing the Congress in Assessing HUD’s
              Portfolio Reengineering Proposal (GAO/T-RCED-96-231, July 26, 1996).

              Executive Guide: Effectively Implementing the Government Performance
              and Results Act (GAO/GGD-96-118, June 20, 1996).

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




              Page 19                                                    GAO/T-RCED-97-89
           Appendix I
           Related GAO Products




           Housing and Urban Development: Public and Assisted Housing Reform
           (GAO/T-RCED-96-22 and GAO/T-RCED-96-25, Oct. 13, 1995).

           Public Housing: Converting to Housing Certificates Raises Major
           Questions About Cost (GAO/RCED-95-195, June 20, 1995).

           Public Housing: Funding and Other Constraints Limit Housing Authorities’
           Ability to Comply With One-for-One Rule (GAO/RCED-95-78, Mar. 3, 1995).

           Housing and Urban Development: Reforms at HUD and Issues for Its Future
           (GAO/T-RCED-95-108, Feb. 22, 1995).

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




(385665)   Page 20                                                  GAO/T-RCED-97-89
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