Major Management Challenges and Program Risks: Department of Housing and
Urban Development (Letter Report, 01/01/2001, GAO/GAO-01-248).
This report, part of GAO's high-risk series, discusses the major
management challenges and program risks facing the Department of Housing
and Urban Development (HUD). These challenges include reducing HUD's
single-family insurance risk, improving HUD's rental housing assistance
programs, and resolving issues related to information and financial
management.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GAO-01-248
TITLE: Major Management Challenges and Program Risks: Department
of Housing and Urban Development
DATE: 01/01/2001
SUBJECT: Risk management
Accountability
Financial management
Internal controls
Housing programs
Mortgage programs
Personnel management
Information resources management
Rental housing
IDENTIFIER: High Risk Series 2001
HUD 2020 Management Reform Plan
HUD Section 8 Rental Assistance Program
HUD Tenant Rental Assistance Certification
HUD Multifamily Tenant Characteristics System
HUD Financial Systems Integration
HUD Central Accounting and Program System
HUD Grants Management System
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GAO-01-248
Performance and Accountability Series
January 2001 Major Management Challenges and Program Risks
Department of Housing and Urban Development
GAO- 01- 248
Letter 3 Overview 6 Major
14 Performance and Accountability Challenges
Related GAO 54
Products Performance
56 and Accountability Series
Lett er
January 2001 The President of the Senate The Speaker of the House of
Representatives
This report addresses the major performance and accountability challenges
facing the Department of Housing and Urban Development (HUD) as it seeks to
encourage homeownership, promote affordable housing, and revitalize
communities. It includes a
summary of actions that HUD has taken and are under way to address these
challenges. It also outlines further actions that GAO believes are needed.
This analysis should help the new Congress and administration carry out
their responsibilities and improve government for the benefit of the
American people. This report is part of a special series, first issued in
January 1999, entitled the Performance and Accountability Series: Major
Management Challenges and Program Risks. In that series, GAO advised the
Congress that it planned to reassess the methodologies and criteria used to
determine which federal government operations and
functions should be highlighted and which should be designated as
“high risk.” GAO completed the assessment, considered comments
provided on a publicly available exposure draft, and published its guidance
document, Determining Performance and Accountability Challenges and High
Risks (GAO- 01- 159SP), in November 2000.
This 2001 Performance and Accountability Series contains separate reports on
21 agencies- covering each cabinet department, most major independent
agencies, and the U. S. Postal Service. The series also includes a
governmentwide perspective on performance and management challenges across
the federal government. As a companion volume to this series, GAO
is issuing an update on those government operations and programs that its
work identified as “high risk” because of either their greater
vulnerabilities to waste, fraud, abuse, and mismanagement or major
challenges
associated with their economy, efficiency, or effectiveness. David M. Walker
Comptroller General of the United States
Overview The Department of Housing and Urban Development (HUD) encourages
homeownership by providing mortgage insurance through its Federal Housing
Administration (FHA) for about 7 million homeowners who otherwise might not
have qualified for loans, as well as by managing about $508 billion in
insured mortgages and $570 billion in guarantees of mortgagebacked
securities. It also makes housing affordable for about 4 million low- income
households by insuring loans for multifamily rental housing and providing
rental assistance. In addition, it has helped to revitalize over 4, 000
localities through community development
programs. To accomplish these missions, HUD relies on the performance and
integrity of thousands of mortgage lenders, contractors, property owners,
public housing agencies, communities, and others to administer its programs.
Strong oversight and management are critical to ensure that HUD's reliance
on these third parties results in the effective and efficient stewardship of
federal funds and the accomplishment of federal programs' goals and
objectives. In the late 1980s, various management deficiencies led to a
number of widely publicized instances of waste, fraud, abuse, and
mismanagement at HUD. In 1994, we designated all of HUD's major program
areas as high risk because four major departmentwide deficiencies continued
to undermine the integrity and accountability of HUD's programs. These
deficiencies included (1)
internal control weaknesses, such as a lack of necessary data and management
processes; (2) poorly integrated, ineffective, and generally unreliable
information and financial management systems; (3) organizational
deficiencies, such as overlapping and ill- defined responsibilities and
authorities between HUD headquarters and field organizations, and a
fundamental
lack of management accountability and responsibility; and (4) an
insufficient mix of staff with the proper skills.
In 1997, HUD initiated its 2020 Management Reform Plan to address these and
other deficiencies. In our January 1999 report on HUD's management
challenges and program risks and our high- risk series update, 1 we reported
that HUD had made credible progress in overhauling its operations but that
several reforms were in the early stages of implementation. Accordingly, we
concluded that HUD's management deficiencies, taken together, continued to
place the integrity and accountability of the Department's programs at high
risk.
During the past 2 years, HUD has continued to make progress in addressing
these problems. To address its internal control weaknesses, HUD has since
January 1999 implemented new early warning monitoring tools, including the
first physical inspections and financial assessments of the entire
multifamily housing inventory. Through a large- scale computer matching
initiative, which linked income data reported by tenants for
housing and tax purposes, HUD also identified and sent letters to 211,000
households that may have underreported their incomes for housing purposes,
thereby resulting in excess subsidy payments, estimated by HUD at $3. 1
billion over the last 4 years.
To improve its information and financial management systems, HUD has taken
actions to develop an information technology investment management process
to improve and strengthen the selection, control, and evaluation of
information technology projects. In addition, HUD has reduced the number of
financial management systems that are not in compliance with federal
requirements. 1 Major Management Challenges and Program Risks: Department of
Housing and Urban Development (GAO/ OCG- 99- 8, Jan. 1999 and High- Risk
Series: An Update (GAO/ HR- 99- 1, Jan. 1999).
To strengthen organizational links between headquarters and the field,
improve accountability, and accomplish its missions more efficiently, during
fiscal year 1999 HUD substantially completed its reorganization under the
2020 Management Reform Plan. Staff and workload were transferred from the
field to several new specialty centers, which are now operating and have
started to produce some results. For example, the Homeownership Centers
reduced the average time for processing single- family mortgage loans from 4
to 6 weeks to 2 to 3 days and the
Enforcement Center relocated 427 families from substandard housing and
recovered $12. 6 million from property owners for ineligible costs. To
ensure that it has the appropriate mix of staff with the proper skills to
carry out its missions, HUD piloted a new resource estimation and allocation
process to determine appropriate staffing levels. It also provided
more training and travel funds for its staff. HUD has taken important steps
toward addressing some of its other management deficiencies. Its top
management has given high priority to implementing the Department's 2020
Management Reform Plan, the Department's reorganization is substantially
complete, and the Department's reform efforts have resulted in some
improvements. Recognizing the progress HUD has
made and consistent with our criteria for determining high risk, 2 we are
redefining and reducing the number of HUD programs deemed to be high- risk.
Specifically, because of the actions taken by HUD in response to our
recommendations to improve its management controls over its Community
Planning and Development programs, we no longer believe this HUD program
area is at high risk. However, significant weaknesses (i. e., 2 Determining
Performance and Accountability Challenges and High Risk (GAO- 01- 159SP,
Nov. 2000).
internal controls, information and financial management systems,
organizational deficiencies, and staffing problems) still persist in two of
HUD's major program areas which remain at high- risk- single- family
mortgage insurance and rental housing assistance. In addition, HUD needs to
continue addressing management challenges in two other areas- information
and financial management systems and human capital.
Continued improvements needed to reduce HUD's single- family insurance risk
? Continued improvements needed to ensure HUD's rental housing assistance
programs are used effectively and efficiently
? Resolution needed for information and financial management systems and
human capital issues
Single- Family To reduce financial risks, HUD's FHA needs to continue
Mortgage Insurance to improve its management over home mortgage loans
Programs made by private lenders that it insures against nearly all losses.
While various factors, including a strong
economy, have resulted in the accumulation of capital reserves of about $16.
6 billion on FHA- insured home loans valued at about $454 billion, we
estimate that FHA lost about $1. 9 billion during fiscal year 2000 on the
sale of foreclosed homes that it had insured. We and HUD's
Inspector General have identified opportunities to strengthen FHA's single-
family mortgage insurance
programs' management and internal controls and reduce financial risks. These
include: ? strengthening the integrity of the single- family loan
origination process; ? promoting better monitoring of lenders, appraisers,
and property management and marketing contractors; and ? ensuring that
sufficient staff are available and have the skills needed to carry out FHA's
home loan mission.
HUD also needs to resolve two material internal control weaknesses
identified by its Inspector General relating to FHA's information and
financial management systems-( 1) fully reconciling accounting and budget
systems for loan guarantees to ensure that all credit subsidy amounts are
recorded properly and (2)
improving information systems to support business processes more
effectively. The Department has begun to address many of our recommendations
and those of the Inspector General,
but it has not completed actions to implement most of them. Because of the
programs' size, the variety of management challenges FHA faces, and the
potential liability FHA has assumed, these programs remain at high- risk. To
reduce the programs' financial risks, FHA must continue its efforts to
strengthen its controls and monitoring. This includes completing actions on
our recommendations, such as clarifying HUD's authority to hold FHA-
approved lenders accountable for poor- quality FHA single- family
appraisals. HUD must also continue its efforts to resolve the programs' two
material internal control weaknesses and assess its staffing needs.
Rental Housing Making decent, affordable rental housing available for
Assistance Programs eligible low- income households is a top priority for
HUD. However, HUD is able to serve fewer than half of the households who are
eligible for assisted housing. Consequently, it is essential that HUD ensure
that these programs are used efficiently and effectively to maximize the
number of households it can assist. While the Department has made
improvements, there are still
significant opportunities to (1) reduce excess subsidy payments which have
totaled about $3. 1 billion over the last 4 years by ensuring that only
eligible families occupy housing units and that those families are paying
the correct rents; (2) ensure that providers of rental housing maintain
housing that is decent, safe, sanitary,
and in good condition; and (3) be certain that HUD has the capital resources
and controls it needs to detect and address problems that exist in its
rental housing assistance programs.
HUD is addressing these challenges as well as our recommendations and those
of the Inspector General. However, its actions are not yet complete. Because
of their size and complexity and the opportunity to provide assisted housing
to more low- income households through better management, these programs
remain at high- risk. HUD must continue to strengthen its internal controls
by completing its efforts to ensure that correct rental housing subsidies
are paid. It must also complete actions on our recommendations aimed at
improving the quality of contractors' physical inspections of the condition
of public and multifamily housing. This
includes revising its quality assurance activities to ensure that they
provide the timely, reliable, and useful information needed for HUD to
assess, among other things, compliance with inspection contracts.
Information and To become a high- performing organization, HUD needs
Financial
to resolve management challenges related to Management Systems information
and financial management systems and and Human Capital human capital. HUD
has a variety of actions under way Issues
to address its information and financial management systems and human
capital challenges. HUD has determined that its financial management
systems, largely deployed under its Financial Systems Integration effort, do
not meet all of its needs. HUD announced its intention to replace these
systems, and a new plan is in the early stages of development. It is too
soon to tell whether HUD will be successful in this latest
attempt to deploy an integrated financial management system to upgrade the
Department's program and financial management capacity. It is also too soon
to assess the effectiveness of actions HUD has taken to address delays in
the preparation of its consolidated financial statements. After issuing an
unqualified
opinion on HUD's fiscal year 1998 consolidated financial statements, the
Inspector General was unable to issue an opinion the following year. This
occurred because, as the Inspector General reported in March 2000, HUD had
experienced problems implementing a new general
ledger system and could not prepare its fiscal year 1999 consolidated
financial statements in time for the Inspector General to complete the audit
by the statutory deadline. Whether HUD has resolved this problem will not be
known until the fiscal year 2000 financial statements audit is completed in
the spring of 2001. It is therefore critical that HUD, like most other
federal
agencies, continue to focus on improving its information technology
management processes to help ensure success in these and other systems
initiatives across the Department.
HUD must also resolve a number of human capital issues. First, it must make
further adjustments to workload. About half of the workload remains to be
transferred to the Financial Management Center, the workload of two other
centers is less than intended, and HUD must finish transferring functions
from the field to the centers as planned. Second, it must complete its
actions to develop departmental systems for measuring work including
considering whether the benefits of the
approximately 600 Community Builders it has hired in recent years are worth
the costs of hiring and training them. Lastly, it must staff its programs
adequately. In responding to a recent survey, HUD managers at the centers
and in the field told us they did not have enough staff. Field managers
noted, for example, that although some of their former functions were
shifted to the centers, other functions have not yet been transferred as
planned, and new programs, regulations, and management initiatives have
increased their responsibilities without increasing their staff. To resolve
these management challenges and more
effectively manage its programs, HUD needs to (1) deploy a reliable
financial management system that meets its program and financial management
needs and complies with federal requirements, (2) continue to develop a
process to identify and justify its staff resource requirements, and (3)
ensure that staff are available and have the skills needed to carry out the
work assigned. HUD's human capital problems can be seen as part of a broader
pattern of human capital shortcomings that have eroded mission capabilities
across the federal government. (See High- Risk Series: An Update (GAO- 01-
263, Jan. 2001) for a discussion of human capital as a newly designated
governmentwide high- risk area.)
Major Performance and Accountability Challenges
HUD has wide- ranging responsibilitiesfrom increasing homeownership to
providing affordable rental housing to spurring economic development. HUD
meets these responsibilities generally by relying on the performance and
integrity of thousands of diverse entities that administer its programs,
making effective oversight and adequate information systems crucial to the
achievement of its objectives. In fiscal year 1999 alone, about 10, 000
lending institutions, in total, made 1.3 million FHA- insured single- family
mortgages valued at about $125 billion. Management and marketing contractors
manage FHA's inventory of about 50, 000 single- family homes at a 5- year
cost to HUD of about $927 million. About 4, 500 housing authorities
administer HUD's public housing and tenant- based rental assistance
programs, which serve over 2. 8 million households. Section 8 contract
administrators 1 will be managing over half of HUD's 22, 000 project- based
Section 8 contracts covering about 993,000 multifamily housing units. Over
the years, we, HUD's Inspector General, and others have documented problems
with HUD's performance and management and have recommended reforms. This
report summarizes our recent findings and those of others on HUD's efforts
to (1) make mortgage financing more accessible to homebuyers; (2) provide
decent, affordable rental housing; and (3) address other management
challenges that cut across HUD's
programs. 1 HUD contracts with private property owners to provide housing
rental assistance, called Section 8 project- based assistance, on behalf of
eligible low- income households. In the past, HUD field staff managed most
housing assistance contracts.
Continued FHA administers several programs aimed at making Improvements
mortgage financing more accessible to homebuyers, Needed to Reduce
particularly low- income and first- time homebuyers. To HUD's SingleFamily
expand homeownership, FHA insures private lenders Insurance against nearly
all losses on mortgages that finance
Risk single- family homes. As of the end of fiscal year 1999,
FHA had insurance commitments on about 6. 7 million mortgages with a value
of about $454 billion. In recent years, various factors, especially
favorable economic conditions, have resulted in the accumulation of capital
reserves of about $16. 6 billion and a national homeownership rate that has
increased to an all- time high.
FHA's single- family mortgage insurance programs have undergone significant
changes since HUD initiated its 2020 Management Reform Plan. Specifically,
HUD consolidated its single- family operations (previously carried out in 81
field offices) into four Homeownership Centers, reduced its staffing in
these operations by about 50 percent, began privatizing or contracting for
most property disposition activities, and eliminated most loan- servicing
functions by selling much of its
inventory of HUD- held mortgages. Through these reforms, HUD expected to
significantly reduce its staffing, cut insurance endorsement processing
time, improve underwriting and loss mitigation, 2 and make more single-
family loans to targeted populations. HUD
also expected the reforms to address problems such as poor control and
monitoring of its single- family properties and inconsistent delivery of
services. Our reviews since January 1999 indicate that HUD and FHA have made
considerable progress in streamlining 2 FHA's loss mitigation program seeks,
among other things, to mitigate
losses resulting from foreclosure by using alternatives to foreclosure, such
as loan modifications.
operations and making FHA's single- family mortgage insurance programs more
efficient. However, we estimate that FHA continues to lose funds (about $1.9
billion during fiscal year 2000) on the sale of foreclosed homes that it had
insured. Our reviews and those of the Inspector General also show that
significant deficiencies remain in FHA's internal controls, human capital
strategies, and information and financial management systems. Because of
these deficiencies, the single- family mortgage insurance programs remain at
high risk.
Internal Control Since 1999, we have identified a number of internal
Weaknesses Exist in
control weaknesses in the management and monitoring Single- Family of FHA's
single- family insurance programs in the areas of Operations loan
origination, appraisals, and property disposition. In response to our
recommendations and those of the Inspector General, FHA has initiated
actions to address these issues. However, most of these corrective actions
have not yet been completed, and some were taken too
recently to determine whether they will ultimately resolve the internal
control weaknesses. ? In April 2000, we reported that HUD's process for
granting FHA lenders direct authority to endorse FHA- insured home loans
provides limited assurance that lenders receiving this authority are
qualified. 3 We also noted that HUD's monitoring of lenders does not
adequately focus on the lenders and loans that pose the greatest insurance
risk to the Department.
We made several recommendations to improve HUD's processes for approving
lenders to underwrite mortgages, target lenders and loans for quality
control reviews, and take enforcement actions against poorly performing
lenders. 3 Single- Family Housing: Stronger Oversight of FHA Lenders Could
Reduce HUD's Insurance Risk (GAO/ RCED- 00- 112, Apr. 28, 2000).
According to HUD, it began addressing some of these recommendations in late
2000 and will implement other actions in 2001. In addition, HUD reported
that the Enforcement Center and Credit Watch and Neighborhood Watch programs
have helped improve its monitoring of lenders. 4 HUD also reported that such
increased monitoring resulted in referrals of more lenders to its Mortgagee
Review Board, 5 which sanctioned 61 lenders in fiscal year 2000, up from 18
in fiscal year 1997. Fifty of these lenders were fined a total of $3. 3
million.
? In April 1999, we reported that HUD was not adequately monitoring the
performance of appraisers or holding appraisers accountable for the quality
of their appraisals of single- family properties to be insured by FHA. 6
When incomplete or inaccurate appraisals result in overvaluations of
property, FHA may be exposed to greater financial risks. Three of HUD's four
Homeownership Centers were not
meeting a requirement to conduct on- site evaluations of completed
appraisals for not fewer than 10 percent of the appraisals in their
jurisdictions, and
HUD did not field- review the work of thousands of appraisers who conducted
10 or more FHA appraisals. We also found that few poorly performing
appraisers were sanctioned. Officials at two
Homeownership Centers attributed some of these problems to a lack of staff,
a lack of adequate travel funds, and gaps in documentation that occurred
4 Credit Watch and Neighborhood Watch are two programs that enable FHA to
analyze trends in claim and default data by lender and impose sanctions on
problem lenders. 5 The Mortgagee Review Board is the entity within HUD that
can impose administrative sanctions against a lender, withdraw a lender's
authority to make FHA- insured loans, or both.
6 Single- Family Housing: Weaknesses in HUD's Oversight of the FHA Appraisal
Process (GAO/ RCED- 99- 72, Apr. 16, 1999).
during the consolidation of single- family mortgage insurance activities.
Additionally, HUD has not aggressively enforced its policy to hold lenders
equally accountable with the appraisers they select for the accuracy and
thoroughness of appraisals. We reported that this problem occurred because
the staff for HUD's Mortgagee Review Board did not believe that HUD had the
authority to hold a lender accountable for the quality
of an appraisal simply because the lender had selected the appraiser.
Although HUD has begun implementing many of our recommendations to improve
appraisals and has a policy to hold lenders responsible for the quality of
appraisals, it has not yet clarified the circumstances under which and the
actions by which the policy should be enforced.
? In May 2000, we reported that most of the contractors hired by HUD to
manage and market the single- family homes it had acquired following
foreclosures were having difficulty maintaining and securing the properties.
7 During fiscal year 1999,
HUD awarded contracts for managing and marketing these single- family
properties. The contractors increased the net recovery from sales (the
percentage of a property's value that HUD realizes after paying all costs
associated with managing the property) from 79.7 to 80. 2 percent, as well
as the number of properties sold.
7 Single- Family Housing: Stronger Measures Needed to Encourage Better
Performance by Management and Marketing Contractors (GAO/ RCED- 00- 117, May
12, 2000).
However, we found that the contractors were having problems meeting their
performance requirements and stronger measures were needed to encourage
better performance by the contractors. During our visits to properties, we
found evidence of vandalism, disrepair, or inadequate security. A public
accounting firm also identified weaknesses in FHA's monitoring and
management of its single- family property inventory, which resulted in an
internal control deficiency in FHA's fiscal year 1999 financial statements
audit. Problems in maintaining single- family properties have existed for
some time. We found similar problems with HUD's oversight of contractors
during a similar review in 1998, when we reviewed the contractors
maintaining HUD's single- family properties at that time. 8 According to
HUD, it (1) has begun to implement
measures to ensure that the new management and marketing contractors are
correcting problems in a timely manner and (2) is negotiating contract
modifications that permit monetary penalties for poor maintenance and
rewards for excellent maintenance, as suggested by the Inspector General and
others.
? In June 1999, we reported that HUD had done little to address the
management problems identified by the Inspector General and others in its
203( k) program, which provides loans for home rehabilitation. 9 We reported
that these problems include concerns that the design of this program
encourages risky property deals and overstates property appraisals and that
homes are not being properly rehabilitated. We also reported HUD was not
ensuring that lenders comply with the program's guidelines or that home 8
Single Family Housing: Improvements Needed in HUD's Oversight of Property
Management Contractors (GAO/ RCED- 98- 65, Mar. 27, 1998).
9 Homeownership: Problems Persist with HUD's 203( k) Home Rehabilitation
Loan Program (GAO/ RCED- 99- 124, June 14, 1999).
inspectors and consultants are properly trained and monitored. The claims
rate for loans endorsed from fiscal year 1994 through fiscal year 1996 was
double that for loans made under the other HUD singlefamily
programs. According to HUD, the 203( k) program represents a very small
percentage of its single- family loans, and the Department has recently
taken steps to improve the program. Specifically, as of July 2000, HUD made
mortgagees fully responsible for ensuring that inspections of rehabilitated
homes are completed
and for approving payments to contractors. Furthermore, consultants who are
responsible for designing and overseeing home rehabilitation loans have been
required to register with HUD since September 26, 2000, in order to continue
participating in the program.
Internal control weaknesses in FHA's single- family mortgage insurance
programs have also, at times, led to fraud, waste, and abuse. In its latest
semiannual report, HUD's Office of Inspector General stated that its work
demonstrates a need for tighter internal controls in FHA's single- family
mortgage insurance programs. Among other things, the Inspector General noted
that (1) 39 individuals involved in a $110 million fraudulent loan scheme
were indicted in a case involving property “flipping” (single-
family properties that are bought and
quickly resold at inflated prices based on fraudulent appraisal values) and
(2) the use of fraudulent documentation to qualify borrowers for FHA-
insured mortgages led to criminal indictments and convictions in several
communities.
Human Capital Issues Both we and the Inspector General have found that
Remain human capital issues remain a concern for HUD in its single- family
mortgage insurance programs. Staffing for the single- family programs was
reduced by about 50
percent after HUD implemented the 2020 Management Reform Plan and
consolidated the single- family workload into the four Homeownership
Centers. A lack of staff and insufficient training and travel resources were
cited as reasons for some of the problems we identified in our reviews.
Human capital issues also surfaced in reviews performed by the Inspector
General and in the responses of HUD managers to a survey we recently
conducted. Nevertheless, HUD reports substantial increases in productivity
in some areas as a result of the consolidations. For example, the
processing time for FHA single- family loan endorsements has declined from 4
to 6 weeks to 2 to 3 days, even though HUD reported a record 1. 3 million
loans were endorsed in fiscal year 1999.
Between September and October 2000, we surveyed HUD managers to obtain their
views on staffing and workload issues after HUD implemented its 2020
Management Reform Plan. This survey was similar to one we conducted in 1996,
before HUD implemented its 2020 plan. In responding to our 2000 survey,
about half the single- family managers reported that they had fewer staff
than necessary and their workload had continued to increase. About 53
percent of the single- family managers surveyed said they had fewer staff
than necessary to carry out the activities in their area of
responsibility, and about 58 percent said their workload had increased over
the last 2 years. In 1996, 61 percent of the single- family managers we
surveyed said they had fewer staff than necessary, and 50 percent said their
workload had increased. On the other hand, most single- family managers said
they were satisfied with the skills of their employees and recognized that
those skills had improved greatly in recent years. About 89 percent of the
single- family managers said they were satisfied with the current
match between the skills of their staff and the skills these staff needed to
carry out their duties, and about 53
percent said the skills of their staff had improved greatly over the past 2
years. However, about 79 percent advocated more training in technical skills
related to job responsibilities, and about 74 percent said training for
using information systems should be increased. These results are consistent
with those of our 1996 survey, although the percentage of managers who (1)
were greatly satisfied with skills of their staff and (2) said that these
skills had improved greatly over the past 2 years was much higher than in
1996. The following examples illustrate human capital issues we identified
in our reports on FHA's single- family mortgage insurance programs:
? In our April 2000 report on HUD's oversight of FHA lenders, Homeownership
Center officials stated that high- risk lenders were not always reviewed, in
part because of inexperienced staff. The officials explained that many of
the staff assigned to review lenders came from a pool of unassigned staff
after the reorganization and had no background in lendermonitoring
and credit issues. To address this problem, the officials said they provided
both classroom and on- the- job training to the new staff. ? In our June
1999 report on the 203( k) mortgage insurance program, we reported that HUD
has not
committed the resources needed to adequately oversee the program. We
reported that officials at two Homeownership Centers told us they do not
have staff qualified to do quality assurance reviews for 203( k) home
rehabilitation loans. Quality assurance reviews are important because the
203( k) program involves multiple entities and cost estimates, including a
HUD- approved consultant to determine the extent of work needed and cost
estimates for this work and an inspector to monitor the progress of
rehabilitation work. In addition, according to one official responsible for
17 states, the center did not have sufficient travel funds to
provide adequate oversight of any of its single- family programs, including
the 203( k) program, during the first quarter of fiscal year 1999.
? In our April 1999 report on HUD's oversight of appraisers, officials at
the Philadelphia and Denver Homeownership Centers told us that they rarely
conducted evaluations of field review contractors because they lacked
sufficient staff and travel resources. 10 They neither tracked the
percentage of each contractor's work that received field reviews nor
evaluated the contractor's performance. As a result, HUD's ability to assess
the quality of the appraisals used to support FHA loans was weakened.
HUD's Office of Inspector General has also expressed concerns about the
adequacy of FHA's resources in its reports on HUD's and FHA's financial
statements. 11 Until February 2000, the Inspector General reported internal
control weaknesses related to FHA's staff and administrative resources as a
material internal control weakness. The report on FHA's fiscal year 1999
financial statements audit no longer reported these problems as a separate
material weakness. Instead, the Inspector 10 HUD contracts with licensed
appraisers to conduct field reviews of completed appraisals. About three-
quarters of the 80, 958 field reviews conducted in fiscal year 1998 were
performed by field review contractors. 11 HUD's Inspector General contracts
with independent public accountants to audit the financial statements of
HUD's FHA. The
Inspector General's report on HUD's consolidated financial statement audit
includes the material internal control weaknesses identified by the
independent public accountants at FHA, as well as the material weaknesses
identified by the Inspector General at HUD. Because the Inspector General is
responsible for the FHA audit and reports on both
FHA's and HUD's material weaknesses, this report refers to both sets of
material weaknesses as material weaknesses identified by the Inspector
General in its audits of HUD. See U. S. Department of Housing and Urban
Development Attempt to Audit the Fiscal Year 1999 Financial Statements,
Office of Inspector General (00- FO- 1770003,
Mar. 1, 2000) and Federal Housing Administration, Audit of the Fiscal Year
1999 Financial Statements, Office of Inspector General (00- FO- 131- 0002,
Feb. 29, 2000) (prepared by KPMG LLP for the Office of Inspector General).
General reassessed the problems in light of improvements HUD made in
addressing its resource issues. The Inspector General recategorized the
weakness as a cause contributing to other reportable conditions. However,
the Inspector General noted that significant problems remain with HUD's
resource issues and that it is critical for the Department to continue
addressing the previously identified problems by completing ongoing plans.
Lastly, the National Academy of Public Administration (NAPA) also reported
in October 1999, in a pilot test of a proposed resource estimation
methodology, that staffing was insufficient for the processing and
underwriting functions of the Office of Housing's single- family mortgage
insurance program at both headquarters and the Denver Homeownership Center.
12 This pilot test led to HUD's initiating a resource estimation and
allocation study departmentwide. The first phase began in August 2000, and
the entire study is expected to be finished in about 18 months.
Information and Public accounting firms, in auditing FHA's financial
Financial
statements, have since 1993 found that the statements Management Systems
were presented fairly, in all material respects, in Concerns
conformity with generally accepted accounting principles. However, the
auditors have cited material internal control weaknesses related to FHA's
accounting
and information systems. These weaknesses, according to the Inspector
General's March 2000 report on HUD's financial statements, were that (1)
FHA's budgetary and financial accounting controls must be improved and (2)
12 Aligning Resources and Priorities at HUD: Designing a Resource Management
System, A Report by a Panel of the National Academy of Public Administration
for Congress and the Department of Housing and Urban Development (Oct.
1999).
FHA's information systems must be enhanced to more effectively support FHA's
business processes. In October 2000, we reported that HUD had actions under
way or planned to address these weaknesses, including (1) fully reconciling
accounting and budget systems for loan guarantees to ensure that all credit
subsidy amounts are recorded properly and (2)
continuing to modernize FHA's information and financial management systems
and reduce the agency's reliance on older systems. 13 We concluded that
FHA's actions should help it continue to make progress in resolving these
and other material weaknesses. FHA has
undertaken extensive efforts to improve its financial reporting and has
developed plans to obtain a more current commercially available financial
management system. (For more information, see our discussion in this report
of HUD's information and financial management systems and human capital
issues.)
Key Contact Stanley J. Czerwinski, Director Physical Infrastructure (202)
512- 7631 czerwinskis@ gao. gov Continued
HUD encourages the development of affordable rental Improvements housing
through a wide range of assistance and
Needed to Ensure incentives. Specifically, it provides (1) mortgage That
HUD's Rental insurance through FHA for the construction and Housing
Assistance rehabilitation of multifamily developments, (2) projectbased
Programs Are Used rental assistance to owners of insured and Effectively and
uninsured projects, (3) grants for the development of Efficiently
multifamily housing, (4) operating subsidies for public 13 HUD Management:
Status of Actions to Resolve Serious Internal Control Weaknesses (GAO- 01-
103, Oct. 16, 2000).
housing agencies, and (5) tenant- based vouchers for eligible households to
use in securing privately owned housing.
HUD's rental assistance programs are administered by about 4, 500 housing
authorities, as well as under contracts covering about 22, 000 privately
owned properties. The assistance provided under these contracts is called
Section 8 project- based assistance. HUD, often working through third
parties, is responsible for ensuring that the properties remain in good
physical and financial condition and that the households
receiving rental assistance meet eligibility requirements and obtain the
proper amount of assistance. In fiscal year 1999, HUD provided about $19
billion in rental subsidies to make housing affordable for an estimated 4
million households. Under HUD's Section 8 programs, about 1. 4 million
households received tenantbased
vouchers and 1. 3 million households received project- based housing for
which HUD contracted directly with housing providers. HUD also provided
funds for 1. 2 million units of public housing and, through FHA, insured
about 15, 450 multifamily mortgages with an unpaid principal balance of
nearly $53 billion as of the end of fiscal year 1999.
Despite the magnitude of the assistance it provides, HUD is able to serve
fewer than half of those who are eligible for assisted housing. In its
current strategic plan, HUD reports that in 1997, a record 5. 4 million
households experienced worst- case housing needs, including 2 million
families with children and 1. 2 million elderly households. 14 At the same
time, about 7 percent
of all households and 15 percent of very- low- income renters lived in
housing with severe or moderate physical problems. HUD faces considerable
challenges in closing the gap between the number of households needing
housing assistance and those that presently receive it. Furthermore, the
fact that this gap exists places
increased importance on HUD having internal controls that ensure that (1)
existing housing subsidies are received only by eligible households and
households receive no more than the amounts to which they are entitled and
(2) housing providers receiving rental assistance payments from HUD comply
with HUD's standards for housing that is decent, safe, sanitary, and in good
repair. Our reviews and those of the Inspector General show that significant
deficiencies remain in
these areas as well as in human capital strategies. Because of these
deficiencies, the rental housing assistance programs remain at high risk of
fraud, waste, abuse, and mismanagement.
Actions to Improve HUD estimates that it paid about $935 million in excess
Internal Controls subsidies in its rental assistance programs in fiscal year
Over Rental Housing 1999. Moreover, HUD estimates that the percentage of
Subsidies Need to Be excess subsidies it paid has increased in recent years.
Completed
This overpayment occurred because tenants 14 Worst- case housing needs are
defined as the needs of unassisted very- low- income renters who pay more
than half of their income for housing or live in severely substandard
housing.
underreported or failed to report their income. In audits of HUD's
consolidated financial statements, HUD's Inspector General has since fiscal
year 1995 reported as a material internal control weakness that HUD needs to
improve its efforts to ensure that it is paying correct
rental subsidies. To address this issue, HUD undertook a large- scale
computerized comparison of the income data that tenants reported to housing
authorities or property owners and to the Internal Revenue Service (IRS) or
the Social Security Administration (SSA). This effort was
designed to identify households that underreported their income to housing
authorities or property owners. Underreporting is a problem for HUD because
it increases the government's subsidy payments, reduces
the number of families who may be assisted, and may result in ineligible
families' retaining subsidized units. Table 1 presents the amount of
assistance and excess rental subsidy paid for fiscal years 1996 through
1999.
Table 1: Estimated Excess Subsidy Payments, Fiscal Years 1996- 99 Estimated
excess
Percentage of excess Fiscal year reported a subsidy payments Program
expenditures subsidies
1996 $538 b $19,257 2.8% 1997 804 18,069 4.4% 1998 857 18,600 4.6% 1999 935
c 18,606 5.0%
a The estimated excess subsidy payments are reported in footnotes to HUD's
annual financial statements for HUD fiscal years ending September 30 of each
year; however, the estimates are computed from
data for the preceding calendar year. b HUD's Inspector General concluded,
in the audit of HUD's fiscal year 1996 financial statements (97- FO- 177-
0003), that HUD's $538 million
estimate of excess subsidies was understated because HUD did not include
Supplemental Security Income in the computer matching. In addition, the
Inspector General expressed concern about the completeness of HUD's tenant
databases. HUD reported to us that
subsequent analysis shows that underreported SSI income has a nominal effect
on the estimate of excess subsidies.
c Although HUD's Inspector General disclaimed on opinion on HUD's fiscal
year 1999 financial statements (00- FO- 177- 0003), the reasons for the
disclaimer did not relate to HUD's estimate of its excess subsidy payments.
HUD's Real Estate Assessment Center (REAC) assumed
responsibility for the income- matching project and identified a potential
universe of tenants whose income, as reported to IRS or SSA, exceeded the
thresholds set by the computer- matching program. During the spring and fall
of 2000, HUD sent letters to about 211, 000 tenants who continued to reside
in assisted housing,
notifying them of possible discrepancies in the income data they had
reported to the public housing agencies and IRS or SSA. Although the
Department planned to send the letters out in October 1999, concerns raised
by tenants and industry groups delayed the mailings until
May 2000, and the mailing was not completed until October 2000. The delays
in implementing this process mean that limited information is available to
date on whether this effort will result in improved controls for
ensuring that correct rental subsidies are paid for eligible tenants.
While this process is a significant step toward ensuring that correct rental
subsidies are paid, there are problems in some of the data systems used for
income matching. The income verification process used two HUD data sources
for the tenant income information- the Multifamily Tenant Characteristics
System for public housing residents and the Tenant Rental Assistance
Certification System (TRACS) for Section 8 projectbased
renters. In a September 2000 report, the Inspector General stated that TRACS
has data inaccuracies that decrease the effectiveness of HUD's income
verification efforts. 15 The Inspector General recommended that HUD ensure
that planned actions to upgrade TRACS are followed through and that TRACS
data are useful and
cost- efficient. If these results are not possible, other alternatives
should be pursued and TRACS discarded, according to the Inspector General.
Actions to Improve To address concerns about the quality of its subsidized
Internal Controls housing and to ensure that it is subsidizing only decent
Over Housing Quality
housing, HUD contracted for physical and financial Need to Be
assessments of assisted and insured multifamily and Completed public housing
projects. During fiscal year 2000, HUD's REAC oversaw physical inspections
of HUD's multifamily assisted housing and public housing inventory,
conducted according to a standardized physical inspection process. As of
April 2000, contractors had conducted baseline inspections for
26, 528 multifamily properties and over 3,100 public housing authorities
with 13, 607 properties. These figures represent about 92 percent of the
multifamily properties and all of the public housing properties that REAC
intended to include in the baseline inspections. The results of the first
physical inspections indicate that 15 Housing Subsidy Payments Office of
Housing, Office of Inspector General (00- KC- 103- 0002, Sept. 29, 2000).
most properties are in satisfactory condition; however, concerns remain
about the quality of those inspections. In our July 2000 report on HUD's new
physical inspection system, 16 we found that (1) when quality assurance
staff performed on- site follow- up reviews to assess the adequacy of
completed inspections, they found that the inspections were often not
carried out consistently with REAC's requirements and (2) gaps exist in
REAC's quality assurance procedures related to the inspections.
Specifically, when the reviewers
accompanied the contract inspectors to judge their performance, they found
that 12 percent of 728 initial inspections did not meet REAC's standards.
Furthermore, about 35 percent of another 819 inspections that received
follow- up reviews did not meet the standards. We also accompanied REAC
quality assurance reviewers on 10 follow- up reviews, and in each of the 10
reviews, the reviewer determined that the original inspection did not meet
REAC's standards and required that a new inspection be performed.
Because these reviews were not performed randomly and the effects of the
problems on the inspection scores cannot be readily determined, it is
unclear to what extent problems with the inspections affected the overall
inspection results. REAC officials acknowledged that the percentage of
inspections identified as not meeting standards was unacceptable, although a
precise tolerance level had not been established to evaluate the reliability
of the inspections.
Our report noted that although REAC deserves credit for establishing quality
assurance procedures, we found gaps or weaknesses in some of these
procedures that 16 HUD Housing Portfolios: HUD Has Strengthened Physical
Inspections but Needs to Resolve Concerns About Their Reliability (GAO/
RCED- 00- 168, July 25, 2000).
substantially limited their effectiveness. For example, REAC did not have
procedures for ensuring that quality assurance reviews were performed
systematically or that the identified problems were resolved quickly and
appropriately. Moreover, REAC did not always report the results of its
quality assurance reviews to inspection contractors in a timely manner, and
REAC did not have the systems and records needed to ensure that corrective
actions were taken after problems were identified. While HUD has taken steps
to address our recommendations concerning its quality assurance
activities, it is too soon to determine whether these steps are sufficient
to ensure the accuracy and reliability of REAC's physical inspection scores.
We also reported in July 2000 that despite the preponderance of satisfactory
scores, a substantial number of properties were cited during the inspections
for exigent (life- threatening) health and safety problems. For example,
almost one- third of the multifamily and public housing properties received
health and safety citations for defects that REAC categorizes as
“lifethreatening.”
Examples of such defects, according to REAC documents, include missing or
inoperable smoke detectors, electrical system problems, hazards, missing
fire extinguishers, and the presence of security bars. The properties were
referred to field offices for immediate follow- up for urgent health and
safety issues or to the Departmental Enforcement Center for enforcement
action. The purpose of HUD's Departmental Enforcement Center is to ensure
that effective enforcement action occurs, including follow- up on the most
serious
violations found as a result of physical inspections of multifamily and
public housing projects. The center, among other things, addresses problems
of multifamily properties that have failed physical inspections or financial
assessments or require corrective action by owners, lenders, and management
agents who are not in
compliance with HUD's program guidance. As of September 30, 2000, the center
had, among other things,
? relocated 427 families from substandard housing and identified nearly $43
million in ineligible multifamily project costs and expenses and obtained
$12. 6
million in recovery repayments, ? negotiated $26. 7 million in proposed
owner investments to repair physical problems in multifamily properties, and
? secured another $14. 2 million from project replacement reserves to repair
physical problems in multifamily properties. Recently, in a December 2000
report on HUD- assisted housing, NAPA also reported on HUD's process for
monitoring and overseeing assisted housing. 17 NAPA found that HUD is moving
in a positive direction in improving the quality of HUD- assisted housing
but that
HUD's new quality assurance system has design deficiencies and barriers to
effective implementation. Among its principal concerns, NAPA reported that
(1) certain quality assurance elements were not well developed, particularly
internal quality assurance procedures and the appeals process, and (2) many
housing providers, including HUD, lack the necessary staffing, automated
systems, and technical assistance and training capacity to effectively
manage and
implement the Department's quality assurance system. The report recommended
that HUD modify its evolving quality assurance system significantly, make
certain urgent operational improvements in the system that is now being
used, and continue to refine the system to achieve greater flexibility and
results. Specifically, NAPA's recommendations included
17 Evaluating Methods for Monitoring and Improving HUD- Assisted Housing
Programs, National Academy of Public Administration (Dec. 2000).
? finalizing and implementing the appeals process for public housing
agencies; ? enhancing HUD's capacity to administer the system, including
improving telephone and electronic
communications between housing providers and HUD's REAC and program offices;
and ? upgrading the capacity of housing providers with new training
opportunities and improved computer capacity.
Finally, in a November 2000 report on the performance of the public housing
program, 18 we noted that for HUD to be held accountable for the performance
of the public housing program, it must first hold housing agencies
accountable for providing safe and decent housing and
protecting the federal investment in their properties. HUD provides
assistance to public housing agencies, spending nearly $7 billion annually
to develop affordable housing for low- income households. We reported that
HUD needed to better ensure that it is accurately measuring the performance
of all housing agencies so
that it can reward high performers and hold troubled and substandard
agencies accountable. We recommended that HUD (1) verify housing agencies'
management operations certifications of major housing systems for accuracy
and completeness and (2) ensure that it uses adequately verified housing
agency performance information as the basis for planned performance bonuses
and bonus points on applications for competitive grants.
Human Capital Under the 2020 Management Reform Plan, HUD has
Weaknesses implemented significant organizational changes and
contracted out substantial portions of the rental housing assistance
programs' workload. But weaknesses in 18 Public Housing: HUD Needs Better
Information on Housing Agencies' Management Performance (GAO- 01- 94, Nov.
9, 2000).
HUD's ability to oversee its multifamily and public housing properties have
eroded mission capabilities. In responding to our recent survey of HUD
managers, about 51 percent of the multifamily managers reported that they
have fewer staff than needed to carry out their activities. In addition,
about 57 percent of the multifamily managers reported that the workload of
their staff has increased over the past 2 years; about 74 percent attributed
workload increases to new programs, and about 83 percent cited new
regulations or initiatives. Managers in the Office of Public and Indian
Housing,
which oversees public housing agencies, expressed similar concerns. About 86
percent of these managers told us that they have fewer staff than they need
to carry out the programs and activities in their area of responsibility.
About 86 percent of these managers said that the workload had increased over
2 years ago, about
86 percent attributed this increase to new programs, and 97 percent cited
new regulations and initiatives. In our November 2000 report on measuring
the performance of public housing agencies, we also reported that over 80
percent of HUD's public housing directors believed they have a less or much
less than adequate number of field office staff to provide effective
assistance to the housing agencies. When asked whether HUD has the tools and
resources (number of staff; staff expertise; and training, travel, and
contract funds) to ensure the accuracy and completeness of management
operations certifications for major housing systems, 80 percent said HUD
probably or definitely did not.
As we also reported in November 2000, public housing field officials told us
they believe they are not adequately prepared to assist housing agencies
because
of insufficient field office staff, increasing workload, lack of staff
qualifications and training, and insufficient training and technical
assistance funds. HUD
headquarters acknowledged that the field offices needed additional training,
in part because of the substantial turnover in staff in recent years and in
part because of numerous new and revised program requirements resulting from
recent public housing reforms. HUD has
begun providing additional training, but the field offices face resource
constraints. HUD officials told us that they doubt they will be able to
increase field office staffing,
and, as a result, HUD is evaluating the field offices' workload, focusing on
reducing or eliminating responsibilities that may no longer be necessary. In
addition, to ease staffing shortages caused by staff reductions and
streamlining under the 2020 Management Reform Plan, HUD awarded contracts in
fiscal year 2000 for third- party contractors to administer about 22, 000
project- based Section 8 housing assistance payments contracts, estimated to
cost about $200 million annually. By contracting for this work, HUD planned
to free its staff for other functions, such as monitoring the multifamily
portfolio. However, HUD awarded these contracts later than planned because
of delays in announcing the request for proposals during the summer of 1999
and in reviewing the proposals. As a
result, the first contracts were not awarded until February 2000, and as of
November 2000, about 16, 000 contracts had not yet been transferred to the
Financial
Management Center. Consequently, field office staff are still performing
some of the tasks HUD had planned to shift to the Section 8 contractors.
Finally, as discussed in the section on HUD's singlefamily mortgage
insurance programs, HUD's oversight of contractors and other entities, such
as lenders, has
suffered because of limits on the experience, qualifications, and number of
HUD staff available for monitoring and other oversight functions. In the
near future, we plan to look at HUD's capacity to oversee contractors.
Key Contact Stanley J. Czerwinski, Director Physical Infrastructure (202)
512- 7631 czerwinskis@ gao. gov Resolution Needed
To improve its management, HUD needs to resolve a for Information and number
of challenges related to its information and
Financial financial management systems and its human capital. Management
HUD needs to deploy a reliable financial management Systems and
system that meets its program and financial Human Capital
management needs and complies with federal Issues requirements. Moreover, in
the human capital area, HUD needs to ensure that (1) its organizational
realignment efforts are achieving the efficiencies envisioned, (2) it
continues to develop a process to identify and justify its staffing
requirements, and (3) staff are available and have the skills needed to
carry out the work assigned.
HUD's human capital problems can be seen as part of a broader pattern of
human capital shortcomings that have eroded mission capabilities across the
federal government. (See High- Risk Series: An Update (GAO- 01- 263, Jan.
2001) for a discussion of human capital as a newly designated governmentwide
high- risk area.) HUD Needs to Since January 1999, HUD has initiated several
actions to Continue Efforts to improve its information technology management
and Resolve Problems information and financial management systems. These
Related to include preparing a cost- benefit analysis of the 1997
Information and strategy to complete its Financial Systems Integration
Financial
(FSI) effort and using this analysis to define the project's Management
Systems
scope and completion date, establishing a significant part of an information
technology investment management process, implementing improvements to
correct material internal control weaknesses in its systems, and continuing
efforts to bring its financial management systems into compliance with
federal requirements.
Although the Department has made progress, it continues to have problems.
For example, HUD officials have determined that the financial management
systems, developed under the recently completed FSI effort, do not meet all
of its needs. As a result, the Department plans to replace the financial
management systems, raising uncertainty as to whether the effort will
be successful and timely. In addition, HUD experienced difficulties in
implementing a departmentwide general ledger system, and as a result, the
Inspector General could not complete the fiscal year 1999 financial
statements audit within the statutory deadline.
HUD Has Taken HUD's FSI effort, which involves the replacement of Action to
Address
about 100 information and financial management Information and systems,
dates back to 1991. As we reported in Financial
December 1998, HUD revised its strategy to complete Management Systems the
FSI project in 1993 and again in 1997. However, Problems because this effort
was not supported by thorough analysis and did not receive adequate
management and oversight, costs rose, and implementation was delayed.
Moreover, HUD did not know when the effort would be completed, or at what
cost, because it had not prepared detailed project plans or cost and
schedule estimates for all components of the 1997 strategy. 19 We
recommended
that HUD prepare an estimate of the life- cycle costs and benefits of the
overall 1997 FSI plan. In March 2000, Arthur Anderson, LLP, completed a
cost- benefit analysis for the revised 1997 FSI strategy. The Chief
Financial Officer (CFO) used this analysis to redefine the objective and
scope of the FSI project, and HUD
completed the redefined project on November 30, 2000. 19 HUD Information
Systems: Improved Management Practices Needed to Control Integration Cost
and Schedule (GAO/ AIMD- 99- 25, Dec. 18, 1998).
HUD has coordinated with the Office of Management and Budget (OMB) and with
us to establish an information technology investment management process that
is expected to conform with industry best practices and legislative
requirements. Management and oversight problems hampered the FSI effort
because
HUD did not have a disciplined, data- driven process to select, control, and
evaluate its information technology investments. Furthermore, its process
was not in conformance with industry best practices or with the requirements
of the Clinger- Cohen Act of 1996 and the
Paperwork Reduction Act of 1995. The Department developed selection
procedures and criteria and established the Technology Investment Board
Executive Committee, which selected projects and made funding decisions for
fiscal years 2000 and 2001. The Department also recently developed control
procedures and established a project management board, which has begun to
review information technology projects that are under way. Finally, to
complete its investment management process, HUD is beginning to develop
evaluation procedures to determine whether its information technology
investments are achieving the expected benefits and to identify
opportunities for further improvement. HUD has taken actions to address
three systems- related material internal control weaknesses identified in
the
Inspector General's March 2000 audit report on HUD's financial statements.
Two of these material weaknesses- FHA's budgetary and financial accounting
controls must be improved and FHA's information
systems must be enhanced to more effectively support FHA's business
processes- are related to FHA's systems and were discussed in this report in
the section on single- family mortgage insurance programs. The third
material weakness is that HUD's financial systems are not fully compliant
with federal financial systems
requirements. In our October 2000 report on the status of HUD's actions to
resolve serious internal control
weaknesses, we reported that HUD had actions under way or planned to bring
its core financial systems into compliance with federal financial systems
requirements.
We concluded that HUD's strategy should help it continue to make progress in
resolving all three of these material weaknesses.
In addition to those mentioned previously, some of the most significant
improvements in HUD's development of financial management systems since
March 1999, according to HUD CFO officials, include the following: ? HUD
completed the implementation of the HUD
Central Accounting and Program System (HUDCAPS) as the departmentwide
general ledger and budget execution system. ? HUD implemented the prototype
of the Empowerment Information System and data warehouse using selected
Community 2020 and
financial data. 20 HUD also completed in October 2000 its latest
departmentwide effort to evaluate whether its systems conform with federal
financial systems requirements. 21 HUD reported that the number of
nonconforming systems continues to decline and that at the end of fiscal
year 2000, 12 of its 66 systems were nonconforming. In January 1999, we
reported that, according to HUD, it had completed all of its year 2000
renovations for both mission- critical and non- mission- critical systems.
As of
20 Community 2020 is a Geographic Information Systems (GIS) software, with a
database of 640 Census data elements, that shows where tax dollars are being
spent in the community. According to
HUD, the program was designed to facilitate citizens' involvement in the
process of local community development. 21 OMB Circular No. A- 127
prescribes policies and standards for executive departments and agencies to
follow in developing, operating, evaluating, and reporting on financial
management systems.
March 1, 2000, HUD had experienced minimal disruptions from the millennium
rollover, and no major systems failed, according to the Inspector General.
Some Systems After significantly revising the scope of its FSI project,
Problems Persist HUD now plans to replace its financial management systems,
creating some uncertainty about whether and
when HUD will have a more modern, complete, and reliable financial
management system. The CFO narrowed the objective and scope of the FSI
project to completing a core general ledger that is compliant with federal
financial systems requirements. Other
components of the FSI project, specifically the Departmental Grants
Management System and Enterprise Data Warehouse, were removed from and are
no longer a part of the FSI project. Because HUD truncated the FSI project,
as of November 30, 2000, it considered the project complete and the core
general ledger system substantially compliant with federal financial systems
requirements. The effectiveness of the actions taken by HUD will not be
known until the fiscal year 2000 financial statement audit is completed in
the spring of 2001.
While HUD considers its FSI project complete, the current financial
management systems do not meet all of HUD's needs because they create
burdensome manual reconciliation activities, increase the complexity and
cost of maintenance, could cause diminished data control and integrity, and
have inefficient system interfaces, according to HUD's Financial Management
Vision statement. Accordingly, HUD now plans to replace its financial
management systems, largely developed under the FSI effort, with a new
system. This new plan is still in the early stages, and it reflects HUD's
vision of developing a new integrated financial management system, but it
leaves uncertain whether and when HUD will finally implement a system that
will
meet its program and financial management needs.
After issuing an unqualified opinion on HUD's fiscal year 1998 consolidated
financial statements, the Inspector General was unable to issue an opinion
the following year. The Inspector General reported in March 2000 that this
was because HUD's fiscal year 1999 consolidated financial statements were
not ready in time for the Inspector General to complete the audit by the
statutory deadline. A new departmentwide general ledger system, implemented
in fiscal year 1999, rejected or incorrectly
posted numerous transactions, which then had to be manually researched and
corrected. Furthermore, there was no software to help reconcile the general
ledger cash accounts with the Department of the Treasury's account balance.
According to the Inspector General, these implementation problems delayed
HUD's financial reconciliation processes and resulted in numerous
adjustments to make HUD's general ledger balance agree with Treasury's
records. The Inspector General said there were 42 adjustments totaling about
$17. 6 billion to adjust the fiscal year 1998 ending balance and 242
adjustments totaling about $59. 6 billion to adjust the fiscal year 1999
activity balance.
As a result of these problems, HUD was unable to prepare auditable financial
statements and related disclosures in a timely manner, and the Inspector
General could not complete the audit within the statutory time frames. The
Inspector General also stated that the Department's core financial system
did not fully comply with federal financial systems requirements because the
departmental general ledger, HUDCAPS, was not updated with data from FHA
each month and the data entry process was not timely or efficient. HUD has
since taken actions to correct these problems, according to HUD officials.
For example, HUD initiated studies aimed at resolving factors that
contributed to the disclaimer, including its procedures for posting
corrective adjustments during the year and its process
for reconciling the funds balance with the Department of the Treasury's
records. HUD officials also reported to us in May 2000 that they had
completed the fiscal year 1999 reconciliation of funds balance with the U.
S. Treasury. In addition, the Inspector General reported
that a number of technical difficulties with interfaces between key
transaction systems had been resolved. 22 The effectiveness of the actions
taken by HUD will not be known until the fiscal year 2000 financial
statements audit is completed in the spring of 2001.
A key component of HUD's FSI strategy was the Departmental Grants Management
System (DGMS) a
departmentwide mixed management and financial information system that HUD
expected to complete in July 2000. HUD has experienced problems with the
development of this system, which was intended to support the Department's
mission to restore the public trust by implementing a processing system that
would
consolidate all information on grants. HUD expected the 22 Statement of
Susan Gaffney, Inspector General, U. S. Department of Housing and Urban
Development, Tuesday, Sept. 26, 2000, before the Subcommittee on Housing and
Transportation, U. S. Senate.
system to provide it with up- to- date information about competitive and
entitlement grants and allow it to serve clients more efficiently. However,
HUD suspended the system's development in June 2000 because it was concerned
that delays in correcting software defects, as well as the software
development approach, would not consistently meet all of the Department's
needs or the needs of its business partners. HUD is recompeting the DGMS
project. According to the Inspector General, $5. 3 million had been budgeted
for the development of DGMS in fiscal year 1999 and $6. 3 million in fiscal
year 2000.
In addition, the Inspector General reported in November 1999 that the
initial efforts to develop DGMS were not cost- effective. In particular, the
Inspector General reported that the option selected was the costliest and
riskiest of the alternatives considered in the DGMS feasibility study.
Moreover, the choice of this option led to the simultaneous development of
another
departmental systemthe Integrated Disbursement and Information System
(IDIS). The Inspector General concluded that this duplicative approach to
supporting grants management would lead to higher development
costs and greater risks of failure.
DGMS was intended to serve as a departmentwide information system that would
be used to manage all of HUD's 51 grant programs, including its Community
Planning and Development (CPD) grants to communities' operations. CPD's
information and financial management system- IDIS- was designed to provide
HUD's CPD operations with accurate, complete, and timely information on
grantees' expenditures and program performance. We reported in April 1999
that these goals were not being achieved because of four significant
problems. 23 Specifically, (1) the process for
establishing and maintaining grant activity information was time- consuming
and cumbersome and provided ample opportunity for major data entry problems,
(2)
major data entry problems were difficult to correct in IDIS, (3) IDIS did
not readily enable grantees to accurately report income generated by grant-
funded revolving funds (program income), and (4) grantees found it difficult
to produce comprehensive and timely reports using IDIS. The Inspector
General reported in May 2000 that several changes were being made to improve
the IDIS software, but the changes were being
implemented without adequate testing. 24 As a result, additional programming
errors were being introduced, preventing CPD from achieving its goals.
In addition, in reviewing the decline in the number of systems that do not
conform with federal financial systems requirements, the Inspector General
reported in March 2000 that the CFO primarily relies on HUD's program
offices to certify the systems' conformity. HUD does not require in- depth
reviews of systems before 23 Community Development: Weak Management Controls
Compromise Integrity of Four HUD Grant Programs (GAO/ RCED- 99- 98, Apr. 27,
1999).
24 Integrated Disbursement and Information System, Office of Inspector
General (00- DP- 166- 0003, May 11, 2000).
reclassifying them from nonconforming to conforming. As a result, according
to the Inspector General, systems were improperly classified as compliant
and deficiencies were not identified. The Department intends to use a
compliance review guide in fiscal year 2001, which provides substantially
more detailed
assessment criteria than were used in the past. Finally, like many other
federal agencies, HUD needs to continue to focus on improving its
information technology management processes. HUD has continued its efforts
to address the long- standing, fundamental management issues we raised in
1994 and 1998. 25 These
issues involve (1) developing, integrating, and maintaining processes for
strategic business and information resources management planning, enterprise
architecture, and information technology investment management to routinely
meet the Department's needs
and (2) establishing sufficient security over the Department's sensitive
information and systems. Resolving these issues is essential to achieving
lasting improvements in the management of information technology and
achieving consistently superior support for HUD's programs and operations.
25 HUD Information Resources: Strategic Focus and Improved Management
Controls Needed (GAO/ AIMD 94- 34, Apr. 14, 1994) and HUD Information
Systems Improved Management Practices Needed to Control Integration Cost and
Schedule (GAO/ AIMD- 95- 25, Dec. 18, 1998).
HUD Needs to In the past, we reported that an ineffective Continue Efforts
to organizational structure and an insufficient number of Resolve staff with
the necessary skills limited HUD in Organizational and
performing essential functions and contributed to our Staffing Problems
designation of HUD's programs as high risk. In 1997, HUD began to reorganize
by function, following its 2020 Management Reform Plan, rather than
continuing to operate strictly within individual programs. As noted in the
previous sections on HUD's single- family mortgage insurance and rental
housing assistance programs, HUD transferred many staff from its field
offices to various hubs, program centers, and specialized and nationwide
centers. HUD has substantially completed this transfer and implemented its
organizational realignment to the extent that it has begun to achieve some
results. HUD is
also implementing a new process to improve its estimation of resource needs
and allocation of staff, and it has made additional funding available for
training and travel. However, even before it began its staffing and
allocation process, HUD created the position of Community Builder to provide
hands- on service and outreach to communities. HUD currently has over 600
Community Builders, even though, as we reported in September 1999, 26 the
Department has not compared the program's costs and benefits to determine
whether the benefits are worth the costs of hiring and training the
Community Builders.
However, not all of the results envisioned by the 2020 plan have yet been
realized. Problems remain related to the operations of some of the
reorganized activities, particularly in terms of workload. Moreover,
insufficient staffing and limited travel funds continue to affect HUD in
carrying out its mission. Our recent telephone survey 26 HUD's Fiscal Year
2000 Budget Request: Additional Analysis and Justification Needed for Some
Programs (GAO/ RCED- 99- 251, Sept. 3, 1999).
of HUD managers indicated that they believe they do not have enough staff
and that their workload has increased, rather than decreased as expected.
HUD Has Taken As of September 2000, HUD had 8,951 full- time Action to
Address
employees administering its programs and functions, Staffing Problems
somewhat below its fiscal year 2000 authorization of 9, 300 full- time
employees. HUD requested additional staff in its budget submissions for
fiscal years 2000 and 2001, but the Congress declined to provide additional
resources, in part because of concerns that HUD lacks a reliable resource
management system to determine the appropriate level of staff. In its annual
performance plan for fiscal year 1999, submitted to the Congress in March
1998, HUD noted that it lacked departmental systems for measuring work and
reporting time and that it lacked a single integrated system to support
resource allocation. The absence of this capability concerned the Congress,
which requested that NAPA examine HUD's practices for estimating human
resource needs. For the past 2 years, NAPA and HUD have worked together to
design and pilot- test a methodology for a resource management system. In
August 2000, HUD began to implement the
new process in three phases, the last of which is scheduled to be completed
in December 2001.
Since January 1999, HUD has also taken steps designed to ensure that its
employees have the skills and knowledge to carry out their functions. During
fiscal year 2000, HUD greatly increased its expenditures for technical and
management training, spending about $5. 9 million compared with $1. 7
million in fiscal year 1999. According to our telephone survey of HUD
managers, most were satisfied with the training available to them and their
staff. 27 Almost three- quarters of the managers rated HUD's current
training as excellent or good and said the training was better now than it
was 2 years ago.
Overall, the managers responding to our current survey as well as our 1996
28 survey expressed satisfaction with their staff's skills. The vast
majority in the current survey (89 percent) said they were very satisfied or
generally satisfied with their staff's skills, and nearly all
(95 percent) said their staff's skills had improved greatly or somewhat. In
the current survey, a higher proportion of the managers rated their staff's
individual skills as excellent or good, and a smaller proportion classified
their staff's skills as fair or poor. The ratings covered interpersonal
skills, knowledge of new programs, knowledge of information systems,
technical skills, and knowledge of existing and new regulations. These
results are particularly noteworthy because, as we 27 We conducted a
telephone survey of managers of HUD's major programs in selected field
offices and in six specialty centers. Our survey, conducted during September
and October 2000, asked the managers for their views on current staffing
skills, training, and
workload in their areas of responsibility. The survey included 110 field
office managers in three major program areas (multifamily housing, community
planning and development, and public housing) at 39 offices. It also
included 45 managers in six specialty centers- Homeownership, REAC, Troubled
Agency Recovery, Enforcement,
Financial Management, and Grants Management- to reflect the current
organization.
28 HUD: Field Directors' Views on Recent Management Initiatives (GAO/ RCED-
97- 34, Feb. 12, 1997). In 1996, we conducted a similar survey of 155 HUD
field office managers. Specialty centers did not exist at that time.
reported in January 1999, field office managers told us then that some newly
placed staff lacked the specific program knowledge necessary to do their
jobs, whereas
our current survey shows that 91 percent of the field office managers were
satisfied with their staff's skills.
Between fiscal year 1998 and fiscal year 2000, HUD's overall travel budget
increased from about $17. 8 million to about $22 million. The majority of
the program offices or areas experienced increases, although a few
experienced decreases. Despite increases in travel funds, HUD field offices
continue to report that they lack sufficient travel resources, as noted in
the section on HUD's single- family mortgage insurance programs.
Some Organizational According to reports that we and the Inspector General
and Staffing
have issued, our recent audit work, and the results of Problems Persist our
telephone survey, HUD's reorganization has not proceeded exactly as planned,
and imbalances in workload have occurred at several specialty centers and in
some of the field offices. 29 In addition, insufficient staffing and the
need to increase training continue to affect HUD's ability to carry out its
mission efficiently and effectively. The managers we surveyed reported that
training and staff skills have generally improved, but the managers also
believe that training should be increased.
The workload in the related field offices remains larger than planned, in
part because some responsibilities remain to be transferred to the centers
and in part because the field offices have acquired new responsibilities. In
addition to handling workload that has not moved to the centers as soon as
planned, the field offices have acquired additional work as new programs,
regulations, and management initiatives have 29 The telephone survey and
specialty center workload issues are described in the overview section and
program sections, respectively.
created new responsibilities. The field offices have not received additional
staff to carry out these new responsibilities. About 79 percent of the HUD
field office managers we surveyed reported increases in their workload over
the last 2 years. In addition to workload imbalances, HUD centers and field
offices have experienced problems related to insufficient staffing. Our
recent telephone survey of HUD managers found that most managers (65
percent) at the centers and field offices believe they do not have enough
staff to carry out their programs and activities. A higher proportion of
field office managers (71 percent) than center managers (48 percent) said
they do not have sufficient staff to carry out programs and activities. The
1996 survey, conducted before HUD implemented its reform actions, found that
77 percent of the managers believed they lacked sufficient staff to carry
out programs and activities effectively. Figure 1 summarizes
HUD managers' views on the adequacy of their staffing levels.
Figure 1: Field Office and Specialty Center Managers' Views on Adequacy of
Staffing Levels
80 Percent of managers
70 60 50 40 30 20 10
0 Staff more
Enough Staff less
than needed staff
than needed
Field Centers Source: GAO's 2000 survey of HUD managers.
Although the majority of the managers reported being satisfied with the
training HUD provides, managers at both the centers and field offices agreed
that HUD
should increase training in several areas. Specifically, managers stated
that training should be increased in the areas of information systems (75
percent), program regulations and changes (72 percent), technical job skills
(71 percent), and interpersonal skills (59 percent).
Center managers were more critical of HUD's training then were field office
managers. About 59 percent of center managers rated HUD's training as
excellent or good, compared with 80 percent of field office managers. In
addition, 47 percent of center managers stated that HUD's training is better
than it was 2 years ago, compared with 81 percent of field office mangers.
We believe this difference in managers' views on HUD's
training is consistent with the fact that the centers are fairly new and
center staff may require more training to learn the specialized skills
needed to do their jobs.
Key Contact Stanley J. Czerwinski, Director Physical Infrastructure (202)
512- 7631 czerwinskis@ gao. gov Linda Koontz, Director
Information Technology (202) 512- 6240 koontzl@ gao. gov Linda M. Calbom,
Director
Financial Management and Assurance (202) 512- 9508 calboml@ gao. gov
Related GAO Products Public Housing: HUD Needs Better Information on Housing
Agencies' Management Performance (GAO- 01- 94, Nov. 9, 2000).
HUD Management: Status of Actions to Resolve Serious Internal Control
Weaknesses (GAO- 01- 103, Oct. 16, 2000).
Benefit and Loan Programs: Improved Data Sharing Could Enhance Program
Integrity (GAO/ HEHS- 00- 119, Sept. 13, 2000). Mortgage Financing:
Financial Health of the Federal Housing Administration's Mutual Mortgage
Insurance Fund (GAO/ T- RCED- 00- 287, Sept. 12, 2000).
HUD Housing Portfolios: HUD has Strengthened Physical Inspections but Needs
to Resolve Concerns About their Reliability (GAO/ RCED- 00- 168, July 25,
2000).
Observations on HUD's FY 1999 Annual Performance Report and FY 2001 Annual
Performance Plan (GAO/ RCED- 00- 211R, June 30, 2000).
Single- Family Housing: Stronger Measures Needed to Encourage Better
Performance by Management and Marketing Contractors (GAO/ RCED- 00- 117, May
12, 2000).
Single- Family Housing: Stronger Oversight of FHA Lenders Could Reduce HUD's
Insurance Risk (GAO/ RCED- 00- 112, Apr. 28, 2000). Status of GAO's
Recommendations Related to High- Risk Issues at the Department of Housing
and Urban Development (B- 284624, Mar. 10, 2000).
HUD's Loan Origination and Foreclosed Property Management Processes (GAO/
AIMD- 00- 41R, Nov. 19, 1999). HUD's Fiscal Year 2000 Budget Request:
Additional Analysis and Justification Needed for Some Programs (GAO/ RCED-
99- 251, Sept. 3, 1999).
Multifamily Housing: HUD Missed Opportunities to Reduce Costs on Its
Uninsured Section 8 Portfolio (GAO/ RCED- 99- 217, July 30, 1999).
Homeownership: Information on Single- Family Loans Sold by HUD (GAO/ RCED-
99- 145, June 15 1999).
Homeownership: Problems Persist with HUD's 203( k) Home Rehabilitation Loan
Program (GAO/ RCED- 99- 124, June 14, 1999). Community Development: Weak
Management Controls Compromise Integrity of Four HUD Grant Programs (GAO/
RCED- 99- 98, Apr. 27, 1999).
Single- Family Housing: Weaknesses in HUD's Oversight of the FHA Appraisal
Process (GAO/ RCED- 99- 72, Apr. 16, 1999). Major Management Challenges and
Program Risks: Department of Housing and Urban Development (GAO/ OCG- 99- 8,
Jan. 1999).
High Risk Series: An Update (GAO/ HR- 99- 1, Jan. 1999). Major Management
Challenges and Program Risks: A Governmentwide Perspective (GAO/ OCG- 99- 1,
Jan. 1999).
Performance and Accountability Series
Major Management Challenges and Program Risks: A Governmentwide Perspective
(GAO- 01- 241)
Major Management Challenges and Program Risks: Department of Agriculture
(GAO- 01- 242)
Major Management Challenges and Program Risks: Department of Commerce (GAO-
01- 243)
Major Management Challenges and Program Risks: Department of Defense (GAO-
01- 244)
Major Management Challenges and Program Risks: Department of Education (GAO-
01- 245)
Major Management Challenges and Program Risks: Department of Energy (GAO-
01- 246)
Major Management Challenges and Program Risks: Department of Health and
Human Services (GAO- 01- 247)
Major Management Challenges and Program Risks: Department of Housing and
Urban Development (GAO- 01- 248)
Major Management Challenges and Program Risks: Department of the Interior
(GAO- 01- 249)
Major Management Challenges and Program Risks: Department of Justice (GAO-
01- 250)
Major Management Challenges and Program Risks: Department of Labor (GAO- 01-
251)
Major Management Challenges and Program Risks: Department of State (GAO- 01-
252)
Major Management Challenges and Program Risks: Department of Transportation
(GAO- 01- 253)
Major Management Challenges and Program Risks: Department of the Treasury
(GAO- 01- 254)
Major Management Challenges and Program Risks: Department of Veterans
Affairs (GAO- 01- 255)
Major Management Challenges and Program Risks: Agency for International
Development (GAO- 01- 256)
Major Management Challenges and Program Risks: Environmental Protection
Agency (GAO- 01- 257)
Major Management Challenges and Program Risks: National Aeronautics and
Space Administration (GAO- 01- 258)
Major Management Challenges and Program Risks: Nuclear Regulatory Commission
(GAO- 01- 259)
Major Management Challenges and Program Risks: Small Business Administration
(GAO- 01- 260)
Major Management Challenges and Program Risks: Social Security
Administration (GAO- 01- 261)
Major Management Challenges and Program Risks: U. S. Postal Service (GAO-
01- 262)
High- Risk Series: An Update (GAO- 01- 263)
GAO United States General Accounting Office
Page 1 GAO- 01- 248 HUD Challenges
Contents
Page 2 GAO- 01- 248 HUD Challenges
Comptroller General of the United States
Page 3 GAO- 01- 248 HUD Challenges United States General Accounting Office
Washington, D. C. 20548
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Performance and Accountability Series
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