oversight

Maintenance of Effort Requirements Are Needed to Ensure Intended Use of CDBG Program Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-05-21.

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

                                                                          Issue Date
                                                                                May 21, 2008
                                                                          Audit Report Number
                                                                                2008-BO-0002




TO:           Manuel Ochoa, Deputy Assistant Secretary for Grant Programs, DG


FROM:         John A. Dvorak, Regional Inspector General for Audit, 1AGA

SUBJECT: Maintenance of Effort Requirements Are Needed to Ensure Intended Use of
           CDBG Program Funds

                                         HIGHLIGHTS

    What We Audited and Why

                As part of the Office of Inspector General (OIG) annual goals for internal audits,
                we reviewed U.S. Department of Housing and Urban Development (HUD)
                policies prohibiting the use of funds from the Community Development Block
                Grant (CDBG) program to supplant general government funds. Congress stated in
                a 2006 House congressional report1 that CDBG funds were never meant “to be
                used to replace local general government funds on projects communities should
                underwrite, regardless of whether grant dollars are available” and that “[t]he
                congressional prohibition against supplanting notwithstanding, HUD lacks the
                ability to determine whether funds are supplanted for general revenue funds
                because it does not collect the necessary data.”

                Our objective was to determine whether the HUD Office of Community Planning
                and Development (CPD) had management controls that were sufficient to ensure
                that CDBG grantees had effective procedures to preclude them from supplanting
                general government funds with CDBG program funds. We also examined
                whether there were practical ways to measure whether grantees used CDBG
                program funds to supplant general state or local government funds and indicators
1
 Entitled “Bringing Communities into the 21st Century: A Report on Improving the Community Development
Block Grant Program,’’ Report 109-365, January 31, 2006,the fifth report by the Committee on Government
Reform.
                  that grantees might be using federal program funds to supplant general
                  government funds.

    What We Found


                  HUD could not identify whether federal funds were used to supplant general
                  government funds because it had not implemented management controls to
                  provide assurances that CDBG grantees did not supplant their local budgets with
                  CDBG program funds. Specifically, HUD could not identify whether a grantee
                  supplanted its local budget because it had not identified the requirements for
                  maintenance of effort included in the Housing and Community Development Act
                  of 1974 (HCDA),2 either in policy or CDBG program regulations.

                  According to CPD program officials and as discussed in a 1980 U.S. Government
                  Accountability Office (GAO) report, when the program was implemented, there
                  was a consensus that the requirement for maintenance of effort was difficult, if
                  not impossible, to enforce because it called for an external judgment on what
                  grantees would have done if federal funds were not available. However, GAO has
                  reported more recently on the maintenance of effort requirements, and also other
                  federal agencies have established maintenance of effort requirements, ways to
                  measure compliance, and indicators of noncompliance. HUD indicated that it was
                  taking initial steps by discussing the requirement with its grantees but that this
                  activity was not a high priority. However, without maintenance of effort
                  management controls, CDBG program funds may be at risk for substitution by
                  grantees.


    What We Recommend


                  HUD should initiate efforts to address and establish maintenance of effort
                  requirements and continue its dialogue with its grantees to consider stakeholder
                  input for establishing maintenance of effort compliance requirements and
                  determine whether to or how to implement maintenance of effort requirements for
                  the program after consideration of stakeholders’ input.




2
  According to the GAO report, “Principles of Federal Appropriations Law,” issued February 2006, “The purpose of
maintenance of effort is to ensure that the federal assistance results in an increased level of program activity, and
that the grantee does not simply replace grantee dollars with federal dollars.”


                                                          2
Auditee’s Response

           We provided HUD officials with details of the draft finding throughout the course
           of the audit. We also provided HUD officials with a draft audit report on April 9,
           2008, and requested a response by May 9, 2008. We discussed the draft report
           with HUD officials at an exit conference on April 22, 2008, and received their
           written comments on May 8, 2008.
           CPD generally disagreed with the Finding, but acknowledged that HUD policies
           and regulations for the CDBG program did not address maintenance of effort
           requirements included in HCDA and agreed to consider implementing the report
           recommendations to address the issue.
           The complete text of HUD’s response, along with our evaluation of that response,
           is included in appendix A of this report.




                                            3
                            TABLE OF CONTENTS

Background and Objectives                                                            5

Results of Audit Survey
      Finding 1: A Lack of Requirements for Maintenance of Effort Inhibited HUD in   7
      Ensuring the Intended Use of CDBG Program Funds

Scope and Methodology                                                                15

Internal Controls                                                                    16

Appendixes
   A. Auditee Comments and OIG’s Evaluation                                          17
   B. HHS/DOJ Certification for Maintenance of Effort Requirements                   19




                                            4
                        BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) was enacted through the Housing and
Community Development Act of 1974 (HCDA). Under HCDA,3 Congressional findings and
declaration of purpose, is a provision that states, “It is the intent of Congress that the Federal
assistance made available under this chapter not be utilized to reduce substantially the amount of
local financial support for community development activities below the level of such support
prior to the availability of such assistance.” With this provision, Congress, in effect, mandated a
compliance requirement known as maintenance of effort. Under maintenance of effort, the
grantee is required, as a condition of eligibility for federal funding, to maintain its financial
contribution to the program at not less than a stated percentage (which may be 100 percent or
slightly less) of its contribution for a prior period, usually the previous fiscal year. The purpose
of maintenance of effort is to ensure that the federal assistance results in an increased level of
program activity and that the grantee does not replace grantee dollars with federal dollars.

A January 31, 2006, congressional report4 on the CDBG program discussed this provision. The
report expressed opinions such as “CDBG was never meant as a pool of money to replace
general revenue funds on projects a community should underwrite, regardless of whether grant
dollars are available.” The report discussed the “supplanting of funds whereby a grantee uses
CDBG dollars on projects and activities which are normally paid for out of the grantee’s general
revenue fund” and provided as an example, “if you can afford to do sewers and sidewalks in rich
neighborhoods, you shouldn’t be spending your CDBG dollars to do sewers and sidewalks in
poor neighborhoods. You should be spending your general fund dollars to do that.” This report
also stated that “The congressional prohibition against supplanting notwithstanding, HUD [the
U.S. Department of Housing and Urban Development] lacks the ability to determine whether
funds are supplanted for general revenue funds because it does not collect the necessary data.”
The congressional report concluded that “HUD [had] initiated several in-house measures to
improve internal administration of the CDBG program, an indication that reform of CDBG can
be accomplished within HUD.” Recommendations in the congressional report included that
“HUD should continue efforts to improve the internal administration of the CDBG program by
addressing the issues identified throughout this document.” A HUD Office of Inspector General
(OIG) 2007 audit5 identified an issue relating to a possible supplanting of funds in the CDBG
program, but it was not included in the report because HUD lacked clear criteria on this issue.


Our initial objective was to determine whether the HUD Office of Community Planning and
Development (CPD) had management controls that were sufficient to ensure that CDBG grantees
had effective procedures to preclude them from supplanting general government funds with
CDBG program funds. During our entrance conference with CPD program officials at HUD
headquarters, it was disclosed that, due to the impracticability of enforcement perceived by CPD,
there were no existing CPD management controls that could provide assurances that grantees did

3
  HCDA, Section 5301, Congressional findings.
4
  Entitled “Bringing Communities into the 21st Century: A Report on Improving the Community Development
Block Grant Program,’’ the fifth report by the Committee on Government Reform.
5
  Audit assignment number BO-07-0010; City of Chicopee, Massachusetts - CPD Public Works and Facilities.


                                                     5
not use CDBG funds to supplant general government funds. As a result, we expanded our
survey objectives to determine whether:

   1. There were practical ways to measure whether CDBG program funds were used to
      supplement or supplant general state or local government funds and

   2. There were indicators that grantees might be using federal program funds to supplant
      general government funds.




                                              6
                                       RESULTS OF AUDIT

Finding 1: A Lack of Requirements for Maintenance of Effort Inhibited
HUD in Ensuring the Intended Use of CDBG Program Funds
HUD policies and regulations for the CDBG program did not address maintenance of effort
requirements included in HCDA. Congressional comments included in a January 2006 House
congressional report stated that CDBG funds were never meant “to be used to replace local
general government funds on projects communities should underwrite, regardless of whether
grant dollars are available,” and that “[t]he congressional prohibition against supplanting
notwithstanding, HUD lacks the ability to determine whether funds are supplanted for general
revenue funds because it does not collect the necessary data.”

According to CPD program officials and a 1980 U.S. Government Accountability Office (GAO)
report, when the program was implemented, there was a consensus that the maintenance of effort
requirement was difficult, if not impossible, to enforce. However, since the enactment of
HCDA, GAO has reported that most federal grants do not encourage states to use federal funding
as a supplemental source, and there is a need for maintenance of effort requirements.

In 1997, GAO examined several federal grants’ designs, including CDBG. In this report, GAO
reported that the estimates of substitution [supplanting of local funds with federal funds]
approximated a total of 60 cents of every federal [grant] dollar and was caused due to a lack of
grant features, such as state maintenance of effort and matching requirements. In addition, other
federal agencies have identified policies for maintenance of effort requirements, ways to measure
compliance, and indicators of noncompliance. Clear HUD policy guidelines regarding the level
of maintenance of effort requirements and the corresponding management controls would allow
HUD a greater assurance that CDBG funds are used for their intended purpose. Without
maintenance of effort management controls, CDBG program funds may be at risk for
substitution by grantees.
______________________________________________________

HUD Policies Did Not
Address Maintenance of
Effort Requirements


                  Neither CDBG program policies nor HUD CDBG regulations addressed the
                  maintenance of effort requirements included in HCDA. Generally, maintenance of
                  effort6 requires states or localities (grantees) to maintain their own previous or
                  current level of nonfederal funding for a program before receipt of federal
                  funding, but HUD had not advised its grantees of this requirement. When the
6
 42 USC [United States Code] 5301(c) states that it is the intent of Congress that the federal assistance made
available under this chapter not be used to reduce substantially the amount of local financial support for community
development activities below the level of such support before the availability of such assistance.


                                                         7
             CDBG program was initially implemented, HUD decided against issuing
             guidance to define HCDA maintenance of effort terms such as “substantial” and
             “community development activities” in favor of a case-by-case determination.
             According to CPD program officials and as discussed in a 1980 GAO report ,
             when the program was implemented, there was a consensus that the maintenance
             of effort requirement was difficult, if not impossible, to enforce because it called
             for an external judgment on what grantees would have done if federal funds were
             not available. HUD had not reconsidered issuing requirements for the
             maintenance of effort since the initial decision.

             However, House congressional comments included in a January 31, 2006, House
             congressional report on the CDBG program discussed the maintenance of effort
             provision and HUD’s potential lack of management controls to indentify potential
             supplanting. Specifically, this report expressed opinions such as “CDBG was
             never meant as a pool of money to replace general revenue funds on projects a
             community should underwrite, regardless of whether grant dollars are available.”
             The report discussed the “supplanting of funds whereby a grantee uses CDBG
             dollars on projects and activities which are normally paid for out of the grantee’s
             general revenue fund” and provided as an example, “if you can afford to do
             sewers and sidewalks in rich neighborhoods, you shouldn’t be spending your
             CDBG dollars to do sewers and sidewalks in poor neighborhoods. You should be
             spending your general fund dollars to do that.” This report also stated that “The
             congressional prohibition against supplanting notwithstanding, HUD [the U.S.
             Department of Housing and Urban Development] lacks the ability to determine
             whether funds are supplanted for general revenue funds because it does not collect
             the necessary data.”

             HUD’s initial reasoning or determination for not developing regulations or policy
             guidance required by HCDA’s maintenance of effort provision was acceptable in
             1974. However, HUD’s initial reasoning for not developing regulations or
             guidance regarding the maintenance of effort issue no longer appears to be
             acceptable. GAO has reported on several occasions on the need to establish
             maintenance of effort requirements, and other federal agencies have established
             such requirements and identified ways to measure compliance and indicators of
             noncompliance.

GAO Found That Grants Do Not
Encourage States to Use Funding
as a Supplemental Source

             There have been several reviews by GAO on the use of federal agency program
             funds and maintenance of effort requirements. GAO has reviewed the extent to
             which federal grant dollars replace state dollars, often referred to as substitution




                                               8
                  or supplantation,7 and has expressed concern that federal grants may not increase
                  or supplement spending beyond that which states or grantees would have spent
                  without federal funds for the aided services. These reviews provide insight into
                  both sides of the issue of maintenance of effort requirements, and several of the
                  reviews made implementing recommendations. In a 1995 report,8 GAO
                  concluded, “Maintenance of effort can help ensure that federal block grant dollars
                  are used for the broad program area intended by Congress. Without such
                  provisions, federal funds ostensibly provided for these broad areas could, in
                  effect, be transformed into general fiscal relief for the states and local
                  municipalities.”

                  In a 1997 report,9 GAO indicated that the federal grant system, contrary to the
                  federal purpose, encourages states to use federal dollars as a replacement for their
                  own spending on nationally important activities as opposed to a supplement. The
                  report stated that some substitution is intended or to be expected whenever a grant
                  is received. However, the range of substitution estimates were from 11 to 74
                  cents, and the estimates of substitution clustered around 60 cents of every federal
                  dollar. This meant that for most grants, 60 cents of every federal grant dollar
                  substituted for funds that states otherwise would have spent, and every additional
                  federal grant dollar only resulted in 40 cents in additional spending on the aided
                  activity. In addition, if you applied GAO’s range of substitution estimates to
                  HUD’s FY 2008 CDBG funding as much as $395 million to $2.6 billion of may
                  be at risk for substitution.10

                  GAO also found that these fiscal substitution results reflect the way in which most
                  of the 633 federal grants they reviewed (including CDBG) were designed. GAO
                  indicated that substitution is more likely to occur in broad based grants such as
                  CDBG grants, and with maintenance of effort requirements substitution is less
                  likely to occur. A variation of the maintenance of effort provision is the so-called
                  “nonsupplant” provision, which requires that federal funds be used to supplement,
                  and not supplant, nonfederal funds that would otherwise have been made
                  available. However, GAO has reported on the difficulty with monitoring and
                  enforcing nonsupplant provisions. GAO also noted that well-designed
                  maintenance of effort provisions can deter substitution (supplanting) in a grant
                  program and are more effective when they are designed to maintain state fiscal
                  effort at a level that keeps pace with inflation and program population growth.
                  Therefore, clear guidelines over level of maintenance requirements can help grant
                  funds, such as CDBG funds, go further. In its report, GAO also suggested that “if
                  reducing substitution is a desired goal, Congress could add or strengthen matching

7
  Whereby specific-purpose federal funds are, in effect, converted to general fiscal relief to the degree states use
federal funds to free up their own resources for other state priorities. Grant funding such as CDBG grants funds are
supposed to supplement state spending, not “supplant or replace it.
8
  “Block Grants: Issues in Designing Accountability Provisions,” GAO/AIMD-95-226 (issued September 1, 1995).
9
  The GAO report is “Federal Grants: Design Improvements Could Help Federal Resources Go Further,”
GAO/AIMD-97-7 (issued December 18, 1996).
10
   Risk amount was determined by using the low of 11 cents or 11% and the high of 74 cents or 74 % substitution
estimate and the current Fiscal Year 2008 CDBG program allocations of $3,595,096,980.


                                                         9
             and maintenance of effort provisions for grant programs.” The Office of
             Management and Budget (OMB) has also stressed the importance of such
             provisions.
Other Agencies Established
Policies on Maintenance of
Effort Requirements

             Our review also found that other federal agencies have established policies for
             maintenance of effort requirements and identified indicators and ways to measure
             whether federal funds were used to supplant general state or local government
             funds. Of the four federal executive departments we reviewed, we identified that
             the U.S. Department of Health and Human Services (HHS) , U.S. Department of
             Education (DOE), and U.S. Department of Justice (DOJ) had developed grant
             application requirements, regulations, and procedures to address, monitor, and
             enforce maintenance of effort compliance. All three departments addressed the
             maintenance of effort requirements through the grant application process, and
             HHS and DOE also addressed it through regulations. In addition, the
             maintenance of effort requirement was defined either in grant instructions, other
             financial guidance, or audit compliance supplements to OMB Circular A-133,
             “Audits of States, Local Governments, and Non-Profit Organizations.”

             All three departments used grantee compliance certifications for maintenance of
             effort requirements that were completed as part of the grant application process
             for several programs within the three departments. This compliance certification
             is used to ensure that the requirements are met and that grantees use the federal
             funds to supplement and not supplant grantee program funds. For example, a
             “certification of maintenance of effort” is required for the HHS Child Care and
             Development Fund (CCDF) program, in which an agency certifies that financial
             assistance will be in addition to, and not in substitution for, comparable activities
             previously carried on without federal assistance. DOJ also has a grantee certify as
             a condition for the funding that federal funds awarded under the Community
             Oriented Policing Services program may not be used to supplant or replace
             existing local funds that would, in the absence of the grant, be made available
             from local sources (see appendix B).

             The maintenance of effort requirements were also addressed in guidance and in
             instructions associated with the grant applications process. For example, HHS
             requires submission of a fund plan to show how the funds will be used for the
             CCDF program, which describes the CCDF program to be conducted and
             provides for the estimate of grantee (i.e., nonfederal) funds available to meet the
             maintenance of effort requirement. The grant application and plan guidance
             identifies that the estimate is needed for the plan. The requirement itself is
             identified in HHS regulations (45 CFR [Code of Federal Regulations] Part 98),
             which provide that ”States shall also expend an amount of non-Federal funds for
             child care activities in the State that is at least equal to the State’s share of



                                              10
                 expenditures for fiscal year 1994 or 1995 (whichever is greater) under sections
                 402(g) and (i) of the Social Security Act as these sections were in effect before
                 October 1, 1995.”

                 Other compliance aspects of maintenance of effort requirements for the CCDF
                 program were also addressed in HHS policies and regulations. For example, HHS
                 uses regulations to allow a determination of whether program funds are
                 supplemental to the prior levels of effort provided by the agency (before the
                 award of federal funds). For instance, under these regulations, HHS requires
                 maintenance of effort accounting data on both prior state or local funding and the
                 program funds awarded and expended (which are also required conditions under
                 the terms of their cooperative agreements and grants). In addition, HHS can test
                 for supplanting during site visits and audits. When on site, HHS can determine
                 whether state or local funds are being supplanted by HHS program funds by
                 reviewing the agency’s financial status reports and maintenance of effort
                 accounting records.11 HHS also can test the agency’s reports and records for
                 completeness and accuracy and can reconcile its program budgets and
                 expenditures with those of the state or local agency. With the information
                 required through applicable regulations, the grant application process, and
                 cooperative agreements, HHS is able to determine whether program funds are
                 supplemental to the prior levels of effort provided by the agency (before the
                 award of federal funds). It can also determine whether funds that were expended
                 were for necessary, reasonable, and allowable costs.

                 In addition, the Single Audit Act of 1984 and OMB Circular A-133, “Compliance
                 Supplement,” have presumably improved monitoring and enforcement. For
                 example, HHS and DOE both use the Single Audit Act as a means, in part, to
                 ensure compliance with maintenance of effort provisions. Under this Act, OMB
                 issued Circular A-133, “Audits of State and Local Governments,” which also
                 provides for the issuance of compliance supplements to assist auditors in
                 performing the required audits. As a result, independent public accountants who
                 conduct testing of HHS and DOE grant compliance for maintenance of effort use
                 the OMB Circular A-133 compliance supplement. In the compliance
                 supplements, HHS and DOE provide extensive guidance in this area for their
                 programs, including in part

                 HHS Grants for Supportive Services and Senior Centers12

                          2.1 Level of Effort – Maintenance of Effort


11
   The agency financial reports and maintenance of effort accounting records are identified in the notices of
cooperative agreement.
12
   DHS, CFDA 93.044, Special Programs for the Aging – Title III, Part B—Grants for Supportive Services and
Senior Centers; CFDA 93.045, Special Programs for the Aging – Title III, Part C—Nutrition Services; CFDA
93.053, Nutrition Services Incentive Program.



                                                       11
                          State – The State Agency must spend for both services and administration
                          at least the average amount of State funds it spent under the State plan for
                          these activities for the three previous fiscal years. If the State Agency
                          spends less than this amount, the Assistant Secretary for Aging reduces the
                          State’s allotments for supportive and nutrition services under this part by a
                          percentage equal to the percentage by which the State reduced its
                          expenditures (42 USC 3029(c); 45 CFR section 1321.49). See III. L.1,
                          “Reporting - Financial Reporting” for the reporting requirement regarding
                          maintenance of effort.


                 DOE Grants for State Education Agencies (SEA) or Local Educational Agencies
                 (LEA)

                          In the following instances, it is presumed that supplanting has occurred:

                          a. The grantee (SEA or LEA) used federal funds (except Bilingual) to
                          provide services that the grantee was required to make available under
                          other federal, state or local laws.
                          b. The grantee used federal funds to provide services that the grantee
                          provided with nonfederal funds in the prior year.
                          c. The grantee used Title I, Part A, or Migrant Education -- State Grant
                          program funds to provide services for participating children that the
                          grantee provided with nonfederal funds for nonparticipating children.

                 Independent public accountants are required to use the compliance supplement
                 when conducting audits under the Single Audit Act.13 However, currently in the
                 compliance supplement for the CDBG grant program, the maintenance of effort
                 requirement is listed as “not applicable.” As a result, independent public
                 accountants do not test for compliance with the maintenance of effort
                 requirement14 mandated by HCDA.

                 Other agencies also ensure maintenance of effort compliance through audits.
                 These audits have identified that typically the grantees have their own [general
                 revenue fund] resources to address all the infrastructure needs of that community

13
   According to the circular, the compliance supplement serves to identify existing important compliance
requirements that the federal government expects to be considered as part of an audit required by the 1996
amendments. This document spells outs for the independent public accountants which compliance requirements are
required for each federal grant so that they are tested during the single audit to assure compliance various federal
compliance requirements.
14
   OMB Circular A-133 provides that federal agencies are responsible to annually inform OMB of any updates
needed to this supplement. This responsibility includes ensuring that program objectives, procedures, and
compliance requirements, noncompliance with which could have a direct and material effect on these individual
federal programs, are provided to OMB for inclusion in this supplement and that agencies keep current these
program objectives, procedures, and compliance requirements (including statutory and regulatory citations such as
the maintenance of effort requirement under HCDA).



                                                        12
              and should be able to allocate the resource to the infrastructure needs of various
              neighborhoods in proportion to the contributing local source or based historic
              costs. For example, DOJ-OIG has issued 25 audit reports since 1998 on grant
              programs that awarded more than $119 million. These audits identified
              supplanted funds totaling $33.1 million that were directly related to violations of
              the maintenance of effort provisions mandated by Congress and DOJ’s grant
              program nonsupplanting regulations.

              HUD program officials indicated that they were taking initial steps by discussing
              the maintenance of effort requirement with several stakeholders/grantees.
              However, they also stated that they were focusing on and addressing higher
              priority program issues such as standardized performance measurements,
              improved formula targeting, and uniform sanctioning policies, as well as staffing
              issues.

Conclusion:



              HUD’s lack of regulations and policy guidance for requirements for maintenance
              of effort inhibits it from ensuring that grantees used CDBG funds for
              supplementing and not supplanting. GAO indicated that substitution is more
              likely to occur in broad based grants such as CDBG grants. Without
              maintenance of effort requirements and management controls, CDBG program
              funds may be at risk for substitution use by grantees.

              Since HUD initial determination regarding the implementation of the maintenance
              of effort provision, other federal departments have addressed maintenance of
              effort requirements and have shown that maintenance of effort can help ensure
              that federal block grant dollars are used to supplement the program as intended by
              Congress. The three departments identified in this report, as well as their grantees
              (many of which also received HUD grants), have more than 10 years experience
              with monitoring and enforcing maintenance of effort compliance. HUD could
              draw upon this experience to address the maintenance of effort requirements for
              the CDBG program.

              HUD needs to reconsider its determination regarding implementing the
              maintenance of effort provision in HDCA. Implementing any type of permanent
              change in the CDBG program requires time and input from all of the stakeholders.
              HUD indicated that it was taking initial steps by discussing the requirement with
              its grantees.




                                               13
Recommendations


    We recommend that the HUD Deputy Assistant Secretary for Grant Programs require the
    Office of Block Grant Assistance to:

      1A. Initiate efforts to address and establish maintenance of effort requirements and
          continue its dialogue with its grantees to consider stakeholder input for
          establishing maintenance of effort compliance requirements.

     1B. Develop the necessary policies and management controls to ensure compliance
         with the maintenance of effort requirements established if it is determined that
         maintenance of effort requirements should be implemented.

     1C. Provide Congress its determination on implementation of the maintenance of
         effort statutory provision and request that the provision be rescinded if it is
         determined that maintenance of effort requirements should not be implemented.




                                           14
                SCOPE AND METHODOLOGY

To accomplish the objectives,15 we:

     •   Reviewed applicable regulations, guidance materials, and congressional and GAO reports
         to gain an understanding of the background of maintenance of effort requirements.

     •   Interviewed HUD program officials and obtained input from them for our survey
         objective.

     •   Examined OMB Circular A-133, specifically the “Compliance Supplement” to identify
         HUD guidelines as well as other agencies’ guidelines regarding maintenance of effort
         requirements.

     •   Reviewed regulations and procedures at four other federal agencies, regarding the
         maintenance of effort provision, and audit findings by these agencies related to
         noncompliance. The review included the program requirements for DOE, HHS, DOJ,
         and the U.S. Department of the Interior.

     •   Analyzed OIG reports of agencies with maintenance of effort provisions.

Our fieldwork was performed between November 2007 and January 2008.
We performed our audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




15
 Our review generally considered HUD’s maintenance of effort under provision identified in HCDA, Section 5301,
Congressional findings and declaration of purpose.


                                                     15
                             INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.


 Relevant Internal Controls


              We determined the following internal controls were relevant to our audit objectives:

                  •   Controls to ensure that grantees did not use CDBG funds to supplant their
                      local budgets.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.


 Significant Weaknesses


              Based on our review, we believe the following item is a significant weakness:

                  •   HUD lacked controls to ensure that grantees did not use CDBG funds to
                      supplant their local budgets.




                                               16
Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1



Comment 2




                         17
Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 3



Comment 4




Comment 5




Comment 6




                         18
                         OIG Evaluation of Auditee Comments


Comment 1   CPD’s statement that it cannot identify evidence that supplanting is a pervasive
            problem in the program and that it is difficult to prove confirms the point of the
            report finding. Specifically, HUD can not identify evidence because it lacks the
            ability to determine whether funds are supplanted for general revenue funds
            because it does not collect the necessary data, and had not identified the
            requirements for maintenance of effort as required under the Housing and
            Community Development Act of 1974 (HCDA), either in policy or CDBG
            program regulations. Without management controls HUD can not provide
            assurances that CDBG grantees were not supplanting their local budgets with
            CDBG program funds. The intent of Congress was that the federal assistance
            made available under CDBG not be utilized to reduce substantially the amount of
            local financial support for community development activities below the level of
            such support prior to the availability of such assistance.

Comment 2   To ensure that we did not mischaracterize HUD's intentions, we revised the
            recommendation to read initiate (instead of continue) efforts to address
            maintenance of effort requirements and continue its dialogue with its grantees to
            consider stakeholder input for establishing maintenance of effort compliance
            requirements. We also acknowledge CPD's willingness to refer the issue to
            HUD's Office of Policy Development and Research to review potential
            maintenance of effort requirements. This effort should also consider the
            feasibility of implementing MOE.

Comment 3   We acknowledge CPD's comments, but nonetheless, the intent of Congress was
            that the federal assistance made available under CDBG not be utilized to reduce
            substantially the amount of local financial support for community development
            activities below the level of such support prior to the availability of such
            assistance. CPD has indicated that because the amount of CDBG funds is small
            relative to the large city government’s total budget they do not envision a scenario
            where substantial supplanting local funds is occurring. During our review, we
            also noted the percentage of CDBG funds to the jurisdiction’s entire annual
            budget was relatively small as noted by CPD. However, the comparison to a
            total large city budget is not relevant in determining whether the local
            governments are substantially supplanting local funds, it is the comparison of the
            jurisdiction’s local budgets for “community development activities” to establish
            the significance of this funding to the grantee’s total community development
            activities that is relevant under the MOE requirements. Further, MOE is
            measured using an established baseline level of such support for a grantee’s
            locally funded community development activities. In addition, the GAO report
            cited in this report indicated that substitution is more likely to occur in broad
            based grants such as CDBG grants, and without MOE an average 60 percent of



                                             19
            the grant funds were used to supplant local funds, which would be substantially
            diminish CDBG program outcomes.

Comment 4   We acknowledge CPD's willingness to address the issue, in part, by considering
            the possibility of using grantee certifications as a method to address the report
            recommendations. Such a certification should specifically require the grantee to
            certify that the federal assistance made available under CDBG not be utilized to
            reduce substantially the amount of local financial support for community
            development activities below the level of such support prior to the availability of
            such assistance.

Comment 5   We acknowledge CPD's comments, which outline the necessary basic steps in
            implementing MOE and resolving the intent of the recommendations. However,
            the report does not oversimplify or address the process for establishing MOE
            requirements or the process for developing management controls for MOE
            compliance. It indicates that HUD has done little to determine whether MOE
            requirements can feasibly be implemented and that GAO has found that without
            MOE requirements supplanting is more likely in broad based grants like CDBG.
            The intent of Congress was that the federal assistance made available under
            CDBG not be utilized to reduce substantially the amount of local financial support
            for community development activities below the level of such support prior to the
            availability of such assistance. We agree with CPD’s suggestion that it would
            need to clearly define “substantially.” At the same time, CPD should probably
            consider the need to clearly define what constitutes “community development
            activities.” Also, the threshold should apply to the jurisdiction’s local budgets for
            community development activities and not a jurisdiction’s entire annual budget
            (see comment 3). Further, MOE is measured using an established baseline level
            of such local support or funding. CPD commented during our exit conference that
            most grantees are running a deficient budget. The establishment of such baselines
            at the present time would ensure that grantees’ baselines are established at low
            levels, and would therefore be more beneficial to the grantees in the long run. In
            addition, the report indicates that a common method used by other agencies in
            monitoring certifications or determining compliance with MOE has been under
            the Single Audit Act where independent public accountants (auditors) test for
            compliance with the maintenance of effort requirements.

Comment 6   We acknowledge CPD's efforts to address the report findings and willingness
            implement the report recommendations.




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Appendix B

  HHS CERTIFICATION FOR MAINTENANCE OF EFFORT
                 REQUIREMENTS




                      21
DOJ CERTIFICATION FOR MAINTENANCE OF EFFORT
               REQUIREMENTS




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