Capacity Building: Section 4 Program Has Expanded and Evolved
(15-SEP-03, GAO-03-975).
Congress recognized the importance of building the capacity of
community development organizations by passing Section 4 of the
HUD Demonstration Act of 1993. The act authorized the Department
of Housing and Urban Development (HUD) to partner with several
national nonprofit organizations that provide funding to these
community groups for such things as training, staff salaries,
office equipment and supplies, and management information
systems. In 2002, HUD provided $31 million for capacitybuilding
activities. To help Congress with its oversight of Section 4, we
reviewed the evolution and use of Section 4 funding, the
importance of Section 4 funding to private sector involvement,
and the management controls and measurements that are in place to
assess Section 4.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-975
ACCNO: A08460
TITLE: Capacity Building: Section 4 Program Has Expanded and
Evolved
DATE: 09/15/2003
SUBJECT: Community development programs
Cost sharing (finance)
Federal grants
Financial management systems
Funds management
Grant monitoring
Grants-in-aid
Internal controls
Private sector
Nonprofit organizations
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GAO-03-975
United States General Accounting Office
GAO Report to Congressional Requesters
September 2003
CAPACITY BUILDING
Section 4 Program Has Expanded and Evolved
GAO-03-975
Contents
Letter
Results in Brief
Background
Section 4 of the HUD Demonstration Act of 1993 Has Evolved and
Expanded Over the Years Federal Funding Has Encouraged Private Sector
Involvement in
the Section 4 Grantees' Community Development Initiatives HUD's Grantee
Monitoring and Oversight Is Limited Conclusions Recommendation for
Executive Action Agency Comments Scope and Methodology
1
2 6
10
19 22 26 27 27 27
Appendix I Contact and Staff Acknowledgments 30
GAO Contact 30 Acknowledgments 30
Tables
Table 1: NCDI Funding, 1991-2004 (in millions of dollars) 12 Table 2:
Section 4 Funding, 1994-2003 (in millions of dollars) 13 Table 3:
Additional Federal Funding for Capacity-Building and
Technical Assistance (in millions of dollars) 18 Table 4: Private Sector
Funding (in millions of dollars) 21
Figures
Figure 1: The Organizational Structure of Section 4 4 Figure 2: Locations
of HFHI Affiliates Receiving Section 4 Funds between 1997 and 2001 8
Figure 3: Cities Where YouthBuild USA Affiliates Received Section 4 Funds
between 1997 and 2001 10 Figure 4: Effect of Funding for CHAPA, an
Enterprise Subrecipient, for Technology Improvements 15 Figure 5:
Enterprise and LISC Subrecipient Rural County Coverage 17
Abbreviations
CDC Community Development Corporation
CDBG Community Development Block Grant
CHAPA Citizen's Housing and Planning Association
Enterprise The Enterprise Foundation
GED General Equivalency Diploma
HFHI Habitat for Humanity International
HOME Home Investment Partnerships Program
HOPWA Housing Opportunities for Persons with AIDS
HUD U.S. Department of Housing and Urban Development
GIS Geographical Information Software
LISC Local Initiatives Support Corporation
NCDI National Community Development Initiative
OMB Office of Management and Budget
PART Program Assessment Rating Tool
YBUSA YouthBuild USA
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United States General Accounting Office Washington, DC 20548
September 15, 2003
The Honorable Sue W. Kelly
Chairman, Subcommittee on Oversight and Investigations
Committee on Financial Services
House of Representatives
The Honorable Bob Ney
Chairman, Subcommittee on Housing and
Community Opportunity
Committee on Financial Services
House of Representatives
For fiscal years 1997 through 2002, the Department of Housing and Urban
Development's (HUD) budget for 20 capacity-building and technical
assistance programs was over $860 million.1 Of these funds, almost
$150 million was specifically designated to build the capacity of local
community development and affordable housing organizations through the
Section 4 program. Since its inception in 1993, the program has provided
capacity-building funds and services to over 1,590 local organizations in
more than 783 cities nationwide, either through direct grants or
substantial
technical assistance activities.
To assist you with your oversight of the Section 4 capacity-building
program, you asked us to
o describe how funding under Section 4 of the HUD Demonstration Act of
1993 has evolved and expanded over the years, how grantees use Section 4
funding, and what other federal funding is available for capacity
building;
o determine the importance of Section 4 funding to private sector
involvement in community development initiatives; and
1Capacity building can generally be defined as strengthening the
capabilities of program recipients or providers-typically housing or
community development organizations-to build institutional knowledge
within those organizations. Among other things, capacity-building
assistance can include funding for training, hiring staff, purchasing
software, obtaining expertise from outside sources, and developing
accounting systems and strategic plans. Technical assistance can generally
be defined as training designed to improve performance or management.
Congress and HUD sometimes use the terms interchangeably.
o
determine how HUD and Section 4 grantees control the management and
measure the impact of Section 4 programs.
To address these objectives, we reviewed public laws, federal regulations,
HUD directives, budget documents, and other materials that describe the
Section 4 program and authorized/appropriated funding amounts. We
interviewed HUD headquarters officials and grantee and subrecipient
officials at both the national headquarters and local office levels. We
visited subrecipients in eight cities, and at several we conducted file
reviews to evaluate grantee internal controls. Finally, we interviewed
private funders that provided grants or loans to the grantees and
subrecipients. We conducted our work in accordance with generally accepted
government auditing standards in Baltimore, MD; Boston, MA; Cleveland, OH;
Frederick, MD; Hughesville, MD; Kingston, RI; Americus, GA; and
Washington, D.C. Our scope and methodology are discussed in greater detail
at the end of this letter.
Section 4 of the HUD Demonstration Act of 1993 has evolved from a narrowly
targeted initiative that focused on providing funding for capacity
building in 23 urban areas to a broader program that funds groups and
activities in urban, rural, and tribal areas nationwide. Section 4
authorized HUD to become an equal partner with several private foundations
and financial institutions in the already existing National Community
Development Initiative (NCDI). NCDI, currently known as Living Cities,
began in 1991 as a partnership of public and private, for-profit and
nonprofit funders committed to revitalizing urban communities. NCDI
enlisted the assistance of two nationally recognized community building
organizations, the Local Initiatives Support Corporation (LISC) and the
Enterprise Foundation (Enterprise) to work with local community
development corporations (CDC) in 23 cities.2 In 1997, eligibility for
Section 4 funding was expanded to include Habitat for Humanity
International (HFHI), YouthBuild USA (YBUSA) and activities in cities
where NCDI was not active and in rural and tribal areas (fig. 1). Since
then, the four designated grantees have delivered Section 4 funds and
2Community development corporations are neighborhood-based nonprofit
organizations that are involved in initiatives that focus on improving the
economic, social, and physical condition of their communities.
Results in Brief
services as operating support to their subrecipients (CDCs and
affiliates).3 The grantees determine their individual approaches and
administer their funds in a variety of ways. Grantees can also tap into
other federal funding sources such as Community Development Block Grant
(CDBG) funding for capacity-building and technical assistance.
3Affiliates are independent, locally run nonprofit organizations joined to
national organizations by an agreement. HFHI affiliates agree to build
low-income housing, while YBUSA affiliates agree to provide job training,
education, counseling, and leadership development opportunities through
the construction and rehabilitation of affordable housing.
funding directly influenced private sector involvement in community
development initiatives, all four grantees and most of the private
foundations and lenders we contacted stressed the importance of federal
funding in leveraging funds from the private sector. For example, one
senior executive from a major lending institution indicated that federal
participation in NCDI provides funders with both a symbolic and a
financial incentive to join the NCDI consortium. Symbolically, federal
funding provides a sense of credibility to NCDI, as funders see federal
participation as a sign of good housekeeping and reduced risk.
Financially, federal participation adds more money to NCDI
capacity-building initiatives, in turn enabling subrecipients to raise
more private funding. In addition, Section 4 calls for significant private
sector participation because every dollar that is provided to grantees
must be matched with three dollars from private sources. Since federal
regulations permit contributions in the form of cash or verifiable third
party in-kind services, private sector involvement comes in the form of
grants, loans, donated land and equipment, pro bono legal services,
donated office space, and voluntary labor.4 Although all four grantees are
able to raise these required matching funds, each grantee has its own
policies and may raise funds nationally, locally, or both. Since the four
grantees became eligible for Section 4 funding, they have raised nearly
$800 million in cash and in-kind contributions from private foundations
and businesses.
HUD uses desk audits and other document reviews to assess grantees' use of
funds and relies on grantees to monitor their subrecipients. However, HUD
does not measure the impact of its grants. HUD is responsible for ensuring
that Section 4 funds are used according to federal law and regulations and
that grantees are utilizing funds efficiently and effectively. HUD carries
out this responsibility through limited desk reviews of work plans that
outline proposed activities and expected outcomes; quarterly and annual
progress reports that determine whether grantees are achieving their
stated goals; and payment vouchers and supporting documentation, which
help ensure that federal funds are used only for eligible activities. HUD
receives the same reports and follows the same processes for both NCDI and
non-NCDI activities but reviews NCDI work plans in consort with other NCDI
funders and non-NCDI activities on its own. HUD depends on grantees to
provide oversight of their subrecipients.
4Federal regulation 24 CFR 84.23 specifies what constitutes a matching
contribution and how it is counted and reported. These contributions
cannot be included to meet the matching requirements of any other
federally assisted program and cannot be paid by the federal government
under another award.
While it appeared that grantees maintained far-reaching organizational
structures and processes to monitor and control their subrecipients, we
found that one grantee had reimbursed a subrecipient for a bad debt, an
activity that is prohibited by the Office of Management and Budget (OMB).5
HUD does not currently measure the impact of Section 4 funding but relies
on its grantees to measure the impact of their individual programs.
However, HUD is taking steps to develop a framework for assessing the
effectiveness of its technical assistance programs and will take part in
an OMB Program Assessment Rating Tool review (PART) designed to help in
making informed budget decisions, supporting management, identifying
program design problems, and promoting performance measurement and
accountability.6
Background
In 1991, a group of for-profit and nonprofit public and private funders
started NCDI, currently known as Living Cities, to revitalize urban
communities.7 NCDI is composed of 17 major corporations, foundations, and
the federal government-HUD and the Office of Community Services of the
Department of Health and Human Services. In its first decade of operation,
NCDI assembled a community development system composed of
o two of the largest national community-building organizations to
administer the initiative-LISC and Enterprise;
o 300 CDCs in 23 cities; and
o local operating support collaboratives, which include local
foundations, banks, corporations, and local governments, that identify and
draw on local technical expertise and governmental and economic resources
and use them to sustain and enhance the capacity of CDCs.
5OMB Circular A-122 indicates that, among other things, bad debts are
ineligible for federal funding.
6PART is a series of questions designed to provide a consistent approach
to rating programs across the federal government.
7Prior to becoming Living Cities, NCDI was a virtual organization handled
by consultants. NCDI did not have staff or occupy office space. Living
Cities now has staff and oversees NCDI's operations.
As of September 1, 2001, NCDI had provided $234.8 million to its 23
cities. Of this amount, about three-quarters was for project funding and
the balance, about $60 million, supported capacity building with operating
grants and training.
LISC, founded in 1979 and headquartered in New York City, is the largest
community-building organization. LISC's mission, involving hundreds of
CDCs, is to rebuild whole communities by supporting these groups. LISC
operates local programs in 38 urban program areas and 70 rural
communities. According to LISC, it has raised more than $4 billion from
over 2,200 investors, lenders, and donors, which has leveraged an
additional $6 billion in public and private sector funds. In addition,
according to LISC, it has helped 2,200 CDCs build or rehabilitate more
than 110,000 affordable homes, created over 14 million square feet of
commercial and community space, and helped generate 40,000 jobs.
Enterprise was founded in 1982 as a vehicle for helping low-income people
revitalize their communities. Headquartered in Columbia, Maryland,
Enterprise has offices in 18 communities across the nation. Enterprise
works with a network of 2,200 nonprofit organizations, public housing
authorities, and Native American tribes in 800 locations, including more
than 100 CDCs. The Enterprise Foundation provides these organizations with
technical assistance, training, short and long-term loans, equity
investments, and grants. According to Enterprise, it has raised nearly
$430 million to support community-based development that has helped
produce 17,000 affordable homes and assisted 20,000 low-income individuals
in finding employment.
HFHI, founded in 1976 and headquartered in Americus, Georgia, is a
nonprofit ecumenical Christian housing ministry (faith-based organization)
seeking to eliminate substandard housing. HFHI builds and rehabilitates
houses with the help of homeowner (partner) families, volunteer labor, and
donations of money and materials. Work is done at the local community
level by affiliates that coordinate all aspects of home building,
including fund-raising, building site selection, partner family selection
and support, construction, and mortgage servicing. HFHI provides its
affiliates with information, training, and a variety of other support
services. Affiliates are primarily volunteer driven, though some have
their own staff. Affiliates are monitored and supported by HFHI staff
across the country. HFHI currently has over 1,669 affiliates, and in 27
years has built over 150,000 houses worldwide, including more than 40,000
homes in the United States. Figure 2 shows the 526 cities where HFHI
affiliates have directly received Section 4 funds.
leadership development opportunities through the construction and
rehabilitation of affordable housing, serve young adults ages 16 to 24 in
their own communities. Participants split their time between the
construction site and the classroom, where they earn GEDs or high school
diplomas and prepare for jobs or college. The buildings that are
constructed or rehabilitated during the program are primarily low-income
housing. YouthBuild USA serves as the national intermediary and support
center for over 200 Youthbuild programs. Over half of the Youthbuild
programs are members of YBUSA's affiliated network. As shown in figure 3,
YBUSA affiliates located in 106 cities have received Section 4 funds from
1997 to 2001.
activities they authorize. Each grantee has initiatives in rural and
tribal areas.9 Additional federal funding, such as Community Development
Block Grants, is also available to grantees for capacity building and
technical assistance.
Section 4 Provides Capacity-Building Funding to Four Organizations
NCDI in 1991 started with seven large national foundations and a major
insurance company and was administered by LISC and Enterprise. This
consortium of funders believed CDCs could achieve greater and more lasting
success if they could count on a significant reliable commitment of
multiyear operating support, project financing, technical assistance, and
training. To date, NCDI has had four phases (rounds) of funding. In the
first phase (1991-93), NCDI funders pledged $62.9 million (see table 1).
With the enactment of Section 4, HUD joined phase II of NCDI, which also
included 12 private foundations and financial institutions, as an equal
partner.10 Congress' goal in authorizing HUD to participate in NCDI was to
develop the capacity and ability of CDCs to undertake community
development and affordable housing projects and programs. HUD's
involvement resulted in some changes to the way funds were disbursed.
While the foundations provided funding through Living Cities (NCDI), which
in turn distributed grant funds to LISC and Enterprise, HUD distributed
its funding directly to LISC and Enterprise. In addition, unlike other
NCDI funders, HUD provided funding only after expenses were incurred,
monitored funding more closely, and restricted uses to capacity-building
activities. In 2001, 17 foundations and corporations committed another 10
years to the initiative.
9None of the grantees distinguish between rural and tribal programs.
10NCDI's goals coincided with HUD's program goals in the Community
Development Block Grant Program and the Home Investment Partnerships
Program (HOME). Both programs emphasize the use of neighborhood-based,
nonprofit community development organizations to provide affordable
housing and economic development in low-income neighborhoods.
Table 1: NCDI Funding, 1991-2004
Dollars in millions
Living Cities
Living Cities NCDI I NCDI II NCDI III (Second Decade)
Initiative 1991-1993 1994-1997 1998-2001 2001- 2004 Total
Private funder $62.86 $67.85 $87 $93.7 $311.41
HUD 0 20 16 20
Total $62.86 $87.85 $103 $113.7 $367.41
Source: NCDI.
Congress did not appropriate funds for HFHI and YBUSA until 1997 (see
table 2).11 At that time, LISC and Enterprise were given the option of
using Section 4 funding to continue NCDI activities in the original 23
cities or to undertake new non-NCDI activities in other cities, which
expanded the geographical dispersion of Section 4 funding. In addition,
Congress required the grantees to set aside a portion of Section 4 funding
for rural and tribal areas. Unlike the NCDI activities, whose funding
objectives were determined by the responsible funders, LISC and Enterprise
worked directly with HUD in creating the objectives for non-NCDI cities.
11Section 4 grants cover a 4-year period. We are only providing
information on the FY 1997 grant for HFHI and YBUSA because it was the
only grant that had been completed at the time of our review.
Table 2: Section 4 Funding, 1994-2003
Dollars in millions
Total $ allocated for
Fiscal year Enterprise LISC YBUSA HFHI Section 4
NCDI non-NCDI NCDI non-NCDI
1994 $10 $0 $10 $0 $0 $0 $20
1995 0 0 0 0 0 0
1996 5 0 5 0 0 0
1997 3 4.6 3 4.6 7.6 7.6
1998 0 7.5 2 5.5 0 0
1999 0 7.5 2 6 0 0
2000 0 10 2 8.2 2.5 3.8
2001 10 2.5 10 2.5 4 3.5
2002 0 12.5 1.4 11 2 4
2003 0 14 3 11 2 4.2
Total $28 $58.6 $37.7 $48.8 $18.1 $23.1 $214.3
Source: HUD.
Grantees Use a Variety of Methods to Help Build Capacity
LISC and Enterprise are national organizations that use local program
offices to provide financial and technical support to CDCs. The staff at
the local program offices work with CDCs to achieve community-driven
goals. For example, through its Boston local office, LISC provided several
Section 4 grants to the Madison Park Development Corporation. A $78,000
grant was used to help the CDC improve the Dudley Square Business district
in the Roxbury neighborhood of Boston. The Cleveland Enterprise office
provided Section 4 funds to the Cleveland Neighborhood Partnership
Program, a local support collaborative that provides organizational and
real estate development and neighborhood planning for Cleveland CDCs.
According to HFHI and YBUSA officials, these organizations provide direct
grants to affiliates but operate somewhat differently. HFHI has provided
grants to affiliates on a 3-year diminishing basis to hire new staff or
establish warehouse facilities, with an expectation of increasing house
production by at least 15 percent. In addition, HFHI has established
regional support centers to bring technical assistance closer to
affiliates. YBUSA uses Section 4 funds to provide a variety of grants to
its affiliated network, such as operating grants, program enhancement
grants, special assistance grants, and scholarships to staff and students.
In addition,
YBUSA has used Section 4 funds to build its capacity to serve as a
national support center and to provide technical assistance and training.
LISC and Enterprise consider the subrecipient's stage of development when
making Section 4 funding decisions. For example, a new organization might
receive Section 4 funds to pay for a portion of the salary of the
executive director, whereas more established CDCs might receive funding to
upgrade their financial management software. All grantees stressed that
because capacity building takes time, they provide multiyear support to
subrecipients. However, three of the four grantees indicated that they
generally fund subrecipients in ways that encourage the organizations to
become financially independent. Officials from LISC and Enterprise
explained that although some subrecipients receive multiple grants for
several years, the grants are small enough to keep subrecipients from
becoming dependent on Section 4 funds for daily operations. As noted
earlier, HFHI's grants, which are provided to hire new staff, diminish
over a 3-year period. According to HFHI, the affiliates' gradual
absorption of staff costs leads to independence from-rather than
dependence on-federal funding. YBUSA, however, has provided Section 4
funding to affiliates to pay for general operations during years when they
had not received funding under HUD's Youthbuild program.
Generally, Section 4 funds are used to pay for staff salaries, training,
technology, and office supplies and equipment and to fund the operating
support collaboratives. For example, with its 1997 funds HFHI provided
direct grants to 60 affiliates to pay for staff salaries (usually an
executive director). The YouthBuild Boston affiliate used Section 4 funds
to hire an administrative coordinator and enhance its technological
capabilities. The Washington, D.C., LISC office provided Section 4 funding
to a local CDC to pay for some staff training and to purchase equipment
and other supplies to outfit a homebuyer's training center. Enterprise has
used Section 4 funds to develop on-line tools, such as a best practices
database, and to bring current technology to CDCs. For example, Enterprise
awarded one nonprofit organization, Citizen's Housing and Planning
Association (CHAPA) in Boston, Section 4 funds to administer the NET-Works
program, a program to enhance the technological capacity of CDCs in the
New England region. As a result, 36 CDCs received computer equipment,
Internet access, and assistance in developing websites. Figure 4
illustrates the broad impact that Section 4 funding had for this nonprofit
organization on other CDCs.
Figure 4: Effect of Funding for CHAPA, an Enterprise Subrecipient, for
Technology Improvements
Congress did not require grantees to set aside Section 4 funding for rural
and tribal areas until 1997.12 All four grantees currently have
initiatives that focus on these areas. For example, LISC has a rural
office that supports both a national program and a program in the
Mississippi River Delta Region of the United States covering 56 counties
and parishes. In fiscal years 1997 through 2002, LISC awarded Section 4
grants totaling
12For its rural and tribal programs, YBUSA generally follows the Rural
Housing Service's requirement that most households receiving assistance be
located in rural communities with fewer than 20,000 residents. HFHI
classifies rural counties as those with fewer than 100,000 residents and
rural cities as those with no more than 25,000 residents. LISC defines
rural counties as those having no cities with 50,000 or more residents.
Enterprise considers communities rural if they have fewer than 50,000
residents.
Source: GAO analysis of CHAPA data.
Rural Areas Now Have Access to Section 4 Funding
approximately $9 million to rural CDCs. Enterprise has awarded $6.2
million in Section 4 grants to rural CDCs. Unlike LISC, Enterprise does
not have a rural office. Enterprise services its rural and tribal
subrecipients through partnerships with other state and regional rural
agencies and the Housing Assistance Council, which administers
Enterprise's Rural Capacity Building Initiative, and through its regional
and local office structure.13 Although 218 of the 1,003 LISC and
Enterprise CDCs provide services to rural and tribal areas, many of them
cover large geographical areas. For example, 57 of the 72 rural CDCs that
are funded by LISC, operate in more than one county, and 64 of the 146
rural CDCs that are funded by Enterprise operate in more than one county.
Figure 5 shows the cities where LISC and Enterprise subrecipients who work
in rural areas are located and the multiple counties they serve.
13The Housing Assistance Council is a national nonprofit corporation
created to increase the availability of decent and affordable housing for
rural low-income people.
that as of July 2003, 84 of the 203 operating Youthbuild programs were
rural and partly rural.
Grantees Receive Capacity-Building Funding from Other Federal Programs
LISC, Enterprise, HFHI, and YBUSA also receive capacity-building and
technical assistance funds from other HUD programs (table 3). The primary
difference between Section 4 funding and other federal funding is that the
other federal funding for capacity-building and technical assistance is
generally awarded competitively, while Section 4 funding is
noncompetitive. Several federal programs offer capacity-building funds:
CDBG, HOME, and Housing Opportunities for Persons with AIDS (HOPWA). All
grantees' Section 4 capacity-building funds exceed those received from
other federal programs.
Table 3: Additional Federal Funding for Capacity-Building and Technical
Assistance
Dollars in millions
Total other
federal
Intermediary funding Federal program
LISC 8.6 CDBG Technical Assistance
HOME Technical Assistance
(1994-2002)
Enterprise 13.1 CDBG Technical Assistance HOME Technical Assistance HUD
Technical Assistance /Capacity Building HOPWA Technical Assistance
(1995-2002)
YBUSA 20.2 Youthbuild program (1997-2002)
Corp. for National and Community Service for AmeriCorps (1997-2003)
U.S. Dept. of Labor for Welfare to Work (1998-2001)
HFHI 7.5 Self-help Homeownership Opportunity Program (1999)
Source: LISC, Enterprise, YBUSA, and HFHI.
Federal Funding Has Encouraged Private Sector Involvement in the Section 4
Grantees' Community Development Initiatives
While it was difficult to demonstrate empirically that Section 4 directly
influenced private sector involvement in community development activities,
funders and grantees said that federal involvement served as a catalyst
for private fund-raising and provided credibility to subrecipients in
terms of their ability to comply with the requirements that are associated
with federal funding. Some local funders of CDCs and affiliates were not
aware of the specific Section 4 funding the subrecipients received but
indicated that both federal funding and diverse funding streams are
important. Since matching funds can be raised either nationally, locally,
or a combination of both, each grantee employs its own matching policy and
raises funds from foundations, corporations, banks, individual donors, and
nongovernmental sources. Since the creation of Section 4, grantees have
raised nearly $800 million from the private sector, in matching and other
cash and in-kind contributions.
Grantees and Private Contributors Generally Believe that Federal Funding Is
Important to Private Sector Participation
The grantees and nearly all of the private lenders and foundations we
contacted stressed the importance of federal funding in leveraging funds
from the private sector. For example, officials from LISC, Enterprise, and
Living Cities indicated that private funding and lending have increased
since HUD's involvement. In addition, Enterprise officials indicated that
the private sector believes that federal funding provides an incentive to
work in areas and projects that would be less likely to receive funding
without federal involvement. HFHI officials said that federal funding is
imperative because it is the only way for all-volunteer organizations to
transition into staff-managed, volunteer-based organizations. YBUSA
officials said that federal funding, especially funding that leverages
private funding, has enabled YBUSA to be proactive in assisting Native
American and rural programs.
NCDI lenders and funders indicated that Section 4 funding had both a
psychological and a real impact on private sector involvement in the
initiative. For example, one senior executive from a major lending
institution indicated that federal participation in NCDI provided funders
with a symbolic and financial incentive to join the NCDI consortium.
Symbolically, federal funding provides a sense of credibility to NCDI, as
funders see federal participation as a sign of good housekeeping and
reduced risk. Financially, federal participation adds more money to NCDI
capacity-building initiatives, in turn enabling subrecipients to raise
more private funding. Another lender said that HUD's participation in a
CDC through Section 4 funding served as an indication of good management
and internal controls. An insurance company also noted that Section 4
funding showed that the federal government was strongly committed to a
coordinated effort to build CDC capacity, and a foundation told us that
the federal presence legitimized NCDI as the CDC capacity-building vehicle
with the greatest payoff. Furthermore, nearly all of the YBUSA and HFHI
private funders that we interviewed said that federal funding was an
incentive for their participation in the program. For example, one funder
said that federal support was like a "seal of approval." Another funder
said that Section 4 funding created a positive incentive because the
availability of invaluable hard-to-get federal funding increased the
viability of any project.
Most funders and lenders that provide funding directly to CDCs and
affiliates stressed that federal funding was beneficial, but some of those
local funders were not aware that subrecipients received Section 4 funds.
Some LISC and Enterprise subrecipient funders explained that federal
funding and diverse funding streams were characteristics of a viable
organization. One funder suggested that public funding was critical, since
private philanthropy could only do so much. Another foundation indicated
that it looked to organizations that had a diversified funding structure,
since it could not provide sole support for an organization.
The four funders we spoke with that provided funding directly to the
YouthBuild Boston affiliate were split on whether federal participation
was an incentive to their involvement. Two said that federal participation
was an incentive; while the other two said their decision to provide
funding was based solely on the affiliate's mission.
Officials from most of the five organizations we spoke with that provided
funding to an HFHI affiliate in Rhode Island indicated that federal
participation was not an incentive, but two said that having other sources
of funding encouraged them to participate. An official from one
organization indicated that while federal funding indirectly provides an
incentive for participation, the organization provided funding primarily
based on the affiliate's reputation and mission.
Cost Sharing Requirements Are Specified in Law and Grantee Policies
Section 4 funding calls for significant private sector participation in
community development initiatives because Section 4 requires that grantees
match each dollar awarded with three dollars in cash or in-kind
contributions from private sources. Matching funds are raised nationally
and locally and come from nongovernmental sources including private
foundations, corporations, banks, and individual donors. Each grantee has
its own matching policy and procedures for complying with the matching
requirement.
LISC and Enterprise generally meet their matching requirement at the
national level but encourage CDCs to seek private contributions to aid in
the match. However, LISC requires subrecipients in rural areas to raise at
least $1 for each $1 they receive; the remainder of the match is raised
nationally. Conversely, HFHI and YBUSA require their affiliates to raise
at least $3 for every dollar of Section 4 funding they receive. While both
HFHI and YBUSA impose this requirement on all of their affiliates,
including those in rural and tribal areas, if YBUSA rural and tribal
affiliates cannot raise the 3 to 1 match, the national organization will
provide the difference. Officials from the four grantees told us that
raising the private matching funds had not been a problem. For example,
for the 1997 grant HFHI and its 60 affiliates that received Section 4
funding raised almost $155.6 million in private contributions. YBUSA and
its affiliates raised $26.6 million in private contributions to match its
$7.6 million grant.
Grantees Have Raised Since the four grantees became eligible for Section 4
funding, they have Significant Amounts of raised nearly $800 million from
the private sector in matching funds and Private Sector Funding and other
cash and in-kind contributions. However, we could not demonstrate Other
Resources empirically that Section 4 funding influenced the grantees'
fund-raising
owing to external factors such as economic trends and private sector
interests. Between 1994 and 2001, LISC and Enterprise raised $457 million,
and from 1997 to 2002, HFHI and YBUSA raised $341 million (see table 4).
Table 4: Private Sector Funding
Dollars in millions
Grantee Private sector funding Time period
LISC $319.9a 1994-2001
Enterprise 136.7 1994-2001
YouthBuild USA 26.6b 1997-2001
HFHI 314.5 1998-2002
Total $797.7
Source: LISC, Enterprise, YBUSA, and HFHI.
aLISC private sector grants for 1994 and 1995 contain government funding
due to different accounting practices at that time.
bThis number only includes YBUSA's matching funds and not all private
sector funding.
In addition to providing funding, the private sector has contributed
in-kind services to CDCs, including managerial skills, mentoring, and
volunteer labor. For example, representatives from the private sector
serve on
LISC's local advisory boards to help local program offices make funding
decisions and are members of operating support collaboratives in several
cities. HFHI's local affiliates use volunteers for office and construction
work and for their boards of directors.
HUD's Grantee Monitoring and Oversight Is Limited
HUD monitoring is limited to desk reviews of the grantees' compliance with
their grant agreements. In general, the grant agreements require several
kinds of reporting information including work plans, semiannual or
quarterly financial status reports, requests for grant payment vouchers,
and final reports. However, HUD's involvement in reviewing grantee work
plans differs for NCDI and non-NCDI activities. Since HUD does not
directly monitor the subrecipients' capacity-building activities, it
relies on the grantees to monitor and oversee them. The grantees have
several mechanisms in place to ensure that subrecipients are complying
with their individual grant agreements. However, in a subset of files we
reviewed, we found that a grantee had funded an ineligible activity for
one subrecipient. Also, HUD does not have specific impact measures in
place for Section 4.
HUD Monitors Grantees but Not Subrecipients
HUD's efforts to monitor the grantees include desk reviews of work plans,
annual performance reports, semiannual financial status reports, requests
for grant payment vouchers, and final performance reports. According to
HUD, the four grantees sign grant agreements that obligate them to comply
with HUD and OMB requirements. For example, grantees must submit work
plans that identify when and how federal funds and nonfederal matching
resources will be used and present performance goals and objectives in
enough detail to allow for HUD monitoring. In addition, the grant
agreements require grantees to submit annual reports showing actual
progress made in relation to the work plans, plus semiannual financial
status reports that show private sector matches and grant expenditures to
a certain date. Grantees are not permitted to begin activities or to draw
down funds until HUD approves the work plans. Furthermore, the grant
provisions require that in order to receive payment, grantees must submit
a payment voucher with supporting invoices that provide enough information
to allow HUD to determine whether the costs are reasonable in relation to
the work plan's objectives. Finally, the grant agreement stipulates that
within 90 days of completing the grant award, the grantee must submit a
final report summarizing all the activities conducted under the award
including any significant program achievements and problems reasons for
the program's success or failure.
HUD officials told us that staffing constraints caused the agency to focus
mostly on grantee work plans and payment vouchers. HUD reviews how
the grantees select subrecipients, set benchmarks, and plan to build
capacity. HUD uses different processes to review NCDI and non-NCDI work
plans. As an equal player, HUD reviews NCDI's work plans together with
other funders and meets twice a year to discuss NCDI initiatives and goals
for each city. However, HUD reviews and approves non-NCDI work plans by
itself. A HUD official told us that HUD staff focus most of their
attention on the funding aspects of the work plans. HUD officials told us
that they check the semiannual financial status reports and accompanying
narratives to determine whether the expended amounts are in line with the
amounts stated in the work plans.
Section 4 grant funds are provided to grantees after costs are incurred,
so grantees must periodically submit vouchers and supporting documentation
that detail expenditures by city or project in order to receive payment.
HUD staff review the vouchers and supporting documentation to ensure that
funds are used for the eligible activities stated in the work plans and
that expenditures such as travel and indirect costs are within HUD
guidelines and do not exceed available funding. HUD has denied payments
for activities not contained in approved work plans or not supported by
the required documentation. For example, in March 2003, HUD withheld over
$650,000 in Section 4 funding because one grantee did not submit a final
report, several financial reports, a work plan, and two annual plans. In
June 2003, however, the grantee provided the necessary documents and HUD
released the funds.
In addition, grantees must submit financial status reports that show
whether the organizations are meeting their matching requirements.
However, HUD relies on the grantees to ensure that they and their
subrecipients are matching funds correctly. Both LISC and Enterprise have
a formal matching policy. LISC's policy explicitly states that counting
the same funds as matching funds under more than one program is prohibited
and requires its subrecipients to identify the sources and amounts of
matching funding they have received twice a year. Enterprise's matching
requirements are tracked on an ongoing basis and are certified by an
Enterprise official. YBUSA requires its affiliates to submit documentation
that supports the sources and amounts of matching funds committed before
it will release Section 4 funding, and HFHI requires affiliates to report
matching funds data quarterly.
HUD Relies on Grantees to Monitor Subrecipients
HUD does not directly monitor subrecipients' and affiliates'
capacity-building activities but instead relies on the grantees for
monitoring and oversight. Like HUD, grantees initiate grant agreements
with their subrecipients and affiliates. These grant agreements generally
include such things as the purpose of the grant, grant amount, time frame,
disbursement conditions, causes for suspension and termination,
restrictions on use of grant funds, and reporting and accounting
requirements that describe how the grantee will monitor the grant. The
grantees use the grant agreements as the basis for monitoring their
subrecipients' performance.
The grantees use several mechanisms to ensure that subrecipients are
complying with their grant agreements. For example, LISC and Enterprise
officials indicated that throughout the grant period, local offices
communicate with their subrecipients by telephone or email or in person in
order to follow their progress. Similarly, YBUSA staff told us that they
monitor affiliates by telephone as well as through on-site technical
assistance. LISC, Enterprise, and YBUSA require each subrecipient to
submit a monthly activity report, semiannual project reports and
narratives, and final reports. However, the grantees have different
procedures, forms, and checklists that guide their monitoring activities.
Operating support collaboratives aid LISC and Enterprise in their
oversight through proposal reviews, organizational assessments, work plan
reviews, on-site reviews, quarterly report reviews, and annual and 3-year
evaluations. The LISC and Enterprise local offices use the collaboratives'
monitoring information when making their Section 4 funding decisions.14
HFHI and its regional office personnel evaluate all affiliates every 3
years based on a "Standards of Excellence" program. The program has three
elements: best practices, acceptable practices, and minimum standards.
According to HFHI officials, continued failure to meet minimum standards
will lead to probationary status and eventually disaffiliation. The
program provides clear guidelines for affiliate self-assessments and HFHI
evaluations as well as a systematic process for ensuring that Habitat
14The operating support collaboratives vary by city. The one in Cleveland,
for example, distributes money competitively each year, while the one in
Washington, D.C., has a 3-year funding cycle. They may be run by an
independent nonprofit organization or as an entity of Enterprise or LISC.
In some instances, subrecipients that received funds from the operating
support collaboratives also received Section 4 grants directly from
Enterprise or LISC.
affiliates are complying with the organization's basic principles. If HFHI
national or regional staff are aware of illegal activities or violations
of HFHI's minimum standards, immediate action can be taken to correct the
problem. The evaluation covers internal controls and audits. All
affiliates with an annual income of $250,000 or more, assets of $500,000
or more, or both are required to have an independent annual audit.
Affiliates are also requested to submit their annual report to HFHI.
Even with Comprehensive Controls, Problems May Still Occur
While the grantees appear to have comprehensive processes to monitor and
control their subrecipients, our review of seven subrecipients' grant
files identified a subrecipient that suffered from organizational and
financial problems that eventually led to its demise. This subrecipient
was the grantee's second-largest in terms of Section 4 funding, receiving
10 grants that totaled almost $1 million over a 7-year period. One grant
for $143,000 paid for several activities, one of which was a bad debt-an
ineligible expenditure according to OMB Circular A-122. Since HUD
officials do not receive and review subrecipient grant agreements and
payment vouchers, HUD was not aware of the ineligible cost. The grantee
has since taken several steps to ensure that similar problems do not
occur, including having a staff member perform increased subrecipient
monitoring to verify that sufficient management controls are in place to
ensure that grant funds are used appropriately and effectively. This
monitoring includes a full review of the grant request and award
documents, followed by a review of supporting documentation to verify
compliance with allowable expenses and consistency with the work plan. In
addition, site visits are made to subrecipients that have received large
amounts of funding and a "watch report" is maintained to track all
subrecipients that are late in responding to requests for information.
HUD Does Not Measure the Impact of Section 4 Funding
HUD has not measured the impact of Section 4 funding on improving the
capacity of its grantees and subrecipients. However, HUD requires its
grantees to submit annual work plans that include specific details of how
federal and private resources will be used and to identify performance
goals and objectives that should be attained during the grant period. In
addition, OMB is currently requiring HUD and the NCDI grantees to conduct
a PART review. PART assessments are used for making budgeting decisions,
supporting management, identifying design problems, and promoting
performance measurement and accountability. The assessment includes
questions on a program's purpose and design, strategic planning,
management, and results. Furthermore, in response to a GAO report
recommendation that HUD require program offices to determine the
Conclusions
practicability of measuring the impact of technical assistance and
establishing objective, quantifiable, and measurable performance goals,
HUD is working with a group of national technical assistance providers to
develop a framework to assess the effectiveness of its technical
assistance programs. 15
Living Cities has also contracted with a consultant to develop impact
measurements for the 23 NCDI cities. Other evaluations16 have resulted in
measures that gauge the capacity-building system in NCDI cities and
categorize organizational capabilities into five different stages of
growth- initiation, demonstration, professionalization,
instutionalization, and maturation.17
While Section 4 funds must be used for capacity-building initiatives,
grantees are afforded a great deal of discretion as to how they
administer, use, and oversee these funds. HUD is responsible for ensuring
that grantees are utilizing Section 4 funds according to federal law and
regulations and has several controls in place to ensure that they do.
However, HUD relies primarily on its grantees to make certain that this
responsibility is carried out at the subrecipient level. We found that
grantees generally had good management systems and controls in place to
monitor their subrecipients and to ensure that they carried out their work
plans, met their objectives, and used federal funds legally and
responsibly. However, even with good controls, problems can still occur,
as we found
15U.S. General Accounting Office, HUD MANAGEMENT: Impact Measurement
Needed for Technical Assistance, GAO-03-12 (Washington, D.C.: Oct. 25,
2002).
16Christopher Walker and Mark Weinheimer, "Community Development in the
1990s" (Washington, D.C.: The Urban Institute, September 1998); and
Weinheimer and Associates, "HUD Section 4: Building the Capacity of CDCs,"
(Washington, D.C.: Assessment Report, June 2001).
17Initiation refers to the first stage of growth, when a civic or church
group forms to provide a social service or advocate on an issue. The group
lacks staff or at least lacks staff trained in development. Demonstration
occurs when an existing group assumes an initial program in community
development. The new CDC lacks staff and relies on volunteers. In the
third stage, professionalization, the CDC takes on larger projects (20-30
units) or builds several homes and is able to secure funds for staff and
more projects. When a CDC reaches the fourth stage, institutionalization,
the staff has developed expertise and taps into public and private sources
of support that is enabling it to do one large project after another. A
CDC has reached maturation when it can maintain a consistent level of
staff expertise, manage multiple projects simultaneously, and move into
new programs that meet community needs.
at one CDC. While HUD has overarching responsibility for detecting such
internal control failures, the cost-effectiveness of adding additional
federal controls at the subrecipient level must be weighed against the
size of the program and the amount of federal funding involved. Given the
relative size of the Section 4 program and the fact that similar problems
should not recur if HUD and the grantees remain vigilant, we do not
believe that additional controls are necessary at this time.
Recommendation for We recommend that the Secretary of HUD take steps to
recover the grant funds that one Section 4 grantee used to cover a bad
debt.
Executive Action
Agency Comments
Scope and Methodology
In an e-mail dated August 7, 2003, HUD provided technical comments, which
we incorporated into this report as appropriate.
To accomplish our objectives, we reviewed public laws, federal
regulations, HUD directives, budget documents and other material that
described the Section 4 program, grantees' missions and organizational
structures, and authorized and appropriated funding. To determine how
Section 4 funding has evolved and expanded over the years and how grantees
use Section 4 funding, we interviewed HUD, Living Cities, LISC,
Enterprise, YBUSA, and HFHI officials in national, local, and rural
offices, and subrecipients in Americus, GA; Baltimore, MD; Boston, MA;
Cleveland, OH; Frederick, MD; Hughesville, MD; Kingston, RI; and
Washington, D.C. We collected data from LISC, Enterprise, and YouthBuild
USA showing the number of multiple grants and amounts provided to CDCs or
affiliates. We selected five CDCs/affiliates from three grantees. For LISC
and Enterprise, we chose the CDCs that had received the greatest number of
grants and analyzed the purpose of each grant. For YBUSA, we selected the
affiliates that had received the highest dollar amounts.18 To create the
maps of subrecipients and cities that received Section 4 funding, we
obtained city data from NCDI, LISC, Enterprise, YBUSA, HFHI, and CHAPA and
used geographical information software (GIS) to create the maps. We used
the same software to create the rural
18The criteria differed for YBUSA because of the shorter grant time frame.
Habitat for Humanity was not included in this analysis because it does not
allow affiliates to receive multiple grants in any Section 4 grant cycle.
county maps with data obtained from LISC and Enterprise that listed each
CDC categorized as rural and the counties they served.
To determine the importance of Section 4 funding to private sector
involvement in community development initiatives, we reviewed public laws,
federal regulations, HUD directives, budget documents, and other
materials. We obtained 1994 through 2001 private contribution data from
LISC and Enterprise and 1997 through 2001 data from YBUSA and HFHI. We
obtained matching policy information from HUD and the grantees and
interviewed private funders that had provided either grants or loans to
each of the grantees and subrecipients we visited in Boston, MA;
Baltimore, MD; Frederick, MD; and Kingston, RI. We based our selections on
the subrecipients' proximity to our offices in Washington D.C., and
Boston, MA, and the amount of Section 4 funding they received.
To determine how HUD and Section 4 grantees controlled the management and
measured the impact of Section 4 programs, we reviewed and analyzed HUD
and grantee criteria, processes and procedures for monitoring,
controlling, and measuring performance and tested grantee monitoring and
control procedures at seven subrecipients. In addition, we reviewed
reports prepared by Living Cities and the Urban Institute that discussed
NCDI's history and accomplishments.
We conducted our work from September 2002 through April 2003 in accordance
with generally accepted government auditing standards.
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Please contact me at (202) 512-8678 if you have any questions about this
report. Key contacts and contributors are listed in appendix I.
Thomas J. McCool Managing Director, Financial Markets and Community
Investment
Appendix I: Contact and Staff Acknowledgments
GAO Contact Andy Finkel (202) 512-6765
Acknowledgments In addition, Emily Chalmers, Nadine Garrick, Diana
Gilman, John McGrail, John Mingus, Frank J. Minore, and Marc Molino made
key contributions to this report.
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