    Community Development Block Grants: Program Offers Recipients
    Flexibility but Oversight Can Be Improved (28-JUL-06,
    GAO-06-732).

    The Community Development Block Grant (CDBG) program provides
    funding for housing, economic development, and other community
    development activities. In fiscal year 2006, Congress
    appropriated about $4.2 billion for the program. Administered by
    the Department of Housing and Urban Development (HUD), the CDBG
    program provides funding to metropolitan cities and urban
    counties, known as entitlement communities, and to states for
    distribution to nonentitlement communities. This report discusses
    (1) how recipients use CDBG funds, including the extent to which
    they comply with spending limits, (2) how HUD monitors
    recipients' use of CDBG funds, and (3) how HUD holds recipients
    that have not complied with CDBG program requirements
    accountable. To address these objectives, we visited 20
    recipients, analyzed HUD data, and interviewed HUD staff.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-732
        ACCNO:   A57628
      TITLE:     Community Development Block Grants: Program Offers
    Recipients Flexibility but Oversight Can Be Improved
         DATE:   07/28/2006
      SUBJECT:   Accountability
    	     Block grants
    	     Community development
    	     Community development programs
    	     Cost control
    	     Program evaluation
    	     Interorganizational relations
    	     Community Development Block Grant

    ******************************************************************
    ** This file contains an ASCII representation of the text of a  **
    ** GAO Product.                                                 **
    **                                                              **
    ** No attempt has been made to display graphic images, although **
    ** figure captions are reproduced.  Tables are included, but    **
    ** may not resemble those in the printed version.               **
    **                                                              **
    ** Please see the PDF (Portable Document Format) file, when     **
    ** available, for a complete electronic file of the printed     **
    ** document's contents.                                         **
    **                                                              **
    ******************************************************************
    GAO-06-732

         * Report to Congressional Committees
              * July 2006
         * COMMUNITY DEVELOPMENT BLOCK GRANTS
              * Program Offers Recipients Flexibility but Oversight Can Be
                Improved
         * Contents
              * Results in Brief
              * Background
              * Recipients Fund a Variety of Activities, but HUD Lacks
                Centralized Data Showing Compliance with Statutory Spending
                Limits
                   * CDBG Recipients Use the Majority of Their Grants to Fund
                     Public Improvements and Housing Activities
                   * Almost All Funded Activities Benefit Low- and
                     Moderate-Income People, but the Criteria for Defining Target
                     Areas Are Allowed to Vary
                   * HUD Does Not Centrally Maintain the Data Needed to Determine
                     Compliance with Statutory Spending Limits on Public Service
                     Activities and Administration and Planning
                        * Congress Has Provided Some Exceptions to the Public
                          Service Spending Limit
                        * Not All Staff and Overhead Costs Funded with CDBG Are
                          Subject to the Planning and Administration Spending
                          Limit
                   * HUD Has Established a New Performance Measurement System to
                     Track Program Accomplishments
              * Although HUD Uses a Risk-Based Approach to Monitor CDBG
                Recipients, It Lacks a Plan to Replace Monitoring Staff and Has
                Not Fully Involved Field Staff in Its Plans to Redesign IDIS
                   * HUD's Monitoring Strategy Focuses on High-Risk Recipients
                   * HUD Has Limited Staff and Travel Funds to Devote to CDBG
                     Monitoring
                   * HUD Has Made Little Effort to Involve Field Staff in Plans
                     to Redesign IDIS
              * HUD Has Implemented a Clear Timeliness Policy, but Has Not Issued
                Similar Guidance on Other Enforcement Actions
                   * HUD's Timeliness Policy Has Reduced the Number of
                     Entitlement Communities That Are Slow to Expend Funds
                   * Guidance Could Help Ensure Sanctions Are Appropriate
              * Conclusions
              * Recommendations for Executive Action
              * Agency Comments and Our Evaluation
         * Objectives, Scope, and Methodology
         * Selected States' Methods of Distributing Funds
         * Activities Funded by the Recipients That GAO Visited
              * Public Improvements
              * Housing
              * Public Services
              * Economic Development
              * Acquisition
         * Comments from the Department of Housing and Urban Development
              * GAO Comments
         * GAO Contact and Staff Acknowledgments

                     United States Government Accountability Office

    Report to Congressional Committees

    GAO

    July 2006

    COMMUNITY DEVELOPMENT BLOCK GRANTS

          Program Offers Recipients Flexibility but Oversight Can Be Improved

                                           a

    GAO-06-732

    COMMUNITY DEVELOPMENT BLOCK GRANTS

    Program Offers Recipients Flexibility but Oversight Can Be Improved

      What GAO Found

    HUD data show that CDBG recipients spend the largest percentage of their
    grants on public improvements (such as water lines and streets) and
    housing, but HUD does not centrally maintain the data needed to determine
    compliance with statutory spending limits. Due to the lack of centralized
    data, GAO was not able to determine the extent to which all recipients
    have complied with statutory spending limits on public services (such as
    health and senior services) and administration and planning. However, data
    provided by HUD for the 100 most populous entitlement communities, which
    received about one-third of the CDBG funds allocated in fiscal year 2006,
    showed that not all of these entitlement communities complied with the
    limits. Of the 100 communities, 3 exceeded their public service spending
    limit, and 1 exceeded the administration and planning spending limit.
    Given that entitlement communities collectively spend at or close to the
    limits, it is important for HUD to be able to report on the extent of
    their individual compliance with these limits.

    HUD uses a risk-based approach to monitor CDBG recipients; however, it has
    not developed a plan to replace monitoring staff or fully involved its
    field staff in plans to redesign an information system they use to monitor
    recipients. HUD's monitoring strategy calls for its field offices to
    consider various risk factors when determining which recipients to review
    because it has limited monitoring resources, and its workload has
    increased as its staffing levels have decreased. For example, 13 of the 42
    field offices that oversee CDBG recipients do not have a financial
    specialist to evaluate the financial operations of each recipient, and 39
    percent of CDBG monitoring staff is eligible to retire within the next 3
    years. Despite these statistics, HUD has not developed a plan to hire
    staff with needed skills or manage upcoming retirements. Finally, although
    the Integrated Disbursement and Information System (IDIS) is a tool that
    HUD field staff use to monitor, HUD headquarters has solicited little
    input from them on efforts to redesign IDIS.

    Although it has issued a clear policy stating what actions it will take
    when entitlement communities fail to meet the statutory requirement that
    funds be spent in a timely manner, HUD has not developed similar guidance
    establishing a consistent framework for holding CDBG recipients
    accountable for deficiencies identified during monitoring. For
    deficiencies other than being slow to expend funds, HUD has the
    flexibility to institute sanctions ranging from issuing a warning letter
    to advising the recipient to return funds. Although its field offices have
    great flexibility when taking sanctions, HUD has not issued guidance
    establishing a framework to ensure that they are treating recipients that
    commit similar infractions equitably. We found instances in fiscal year
    2005 where treatment seemed inconsistent. For example, several field
    offices found that recipients had not documented that a funded activity
    met any one of the program's three national objectives, but took different
    actions. In the continued absence of guidance, HUD lacks a means to better
    ensure consistency in the sanctioning process.

                     United States Government Accountability Office

    Contents

      Letter 1

    Results in Brief 2 Background 5 Recipients Fund a Variety of Activities,
    but HUD Lacks Centralized

    Data Showing Compliance with Statutory Spending Limits 12 Although HUD
    Uses a Risk-Based Approach to Monitor CDBG

    Recipients, It Lacks a Plan to Replace Monitoring Staff and Has

    Not Fully Involved Field Staff in Its Plans to Redesign IDIS 23 HUD Has
    Implemented a Clear Timeliness Policy, but Has Not Issued

    Similar Guidance on Other Enforcement Actions 32 Conclusions 36
    Recommendations for Executive Action 38 Agency Comments and Our Evaluation
    38

      Appendixes

                                           Appendix I: Appendix II: Appendix III:

    Appendix IV:

        Appendix V:

    Objectives, Scope, and Methodology 40

    Selected States' Methods of Distributing Funds 45

    Activities Funded by the Recipients That GAO Visited 50 Public
    Improvements 50 Housing 53 Public Services 56 Economic Development 58
    Acquisition 60

    Comments from the Department of Housing and Urban Development 61 GAO
    Comments 64

        GAO Contact and Staff Acknowledgments 67

    Table 1:

      Tables

    Table 2: Table 3: Table 4: Table 5: Table 6:

    Categories of Eligible CDBG Activities 9 Percentage of CDBG Recipients
    Monitored, FY 2001-2005 24 Number of Times CDBG Recipients Were Monitored,
    FY 2001-2005 26 Sanctions Taken against CDBG Recipients, FY 2003 - 2005 34
    20 Recipients That GAO Visited 41 Information on How 10 States Distribute
    Their CDBG Funds 46

      Figures

    Contents

    Figure 1: CDBG Appropriations, 1990 - 2006 6 Figure 2: FY 2005 CDBG
    Expenditures, All Recipients 13 Figure 3: FY 2005 CDBG Expenditures,
    Entitlement Communities

    and States 14 Figure 4: Activities Funded by Recipients That We Visited 15
    Figure 5: FY 2005 CDBG Expenditures, by National Objective 17 Figure 6:
    Number of Recipients Eligible to Use Alternative Criteria

    for Defining Low- and Moderate-Income Areas 18 Figure 7: Sanctions Taken
    as Result of FY 2005 Monitoring

    Reviews, by Type 35 Figure 8: Boys and Girls Club in West Point, Georgia
    50 Figure 9: Renovated Briggs Playground Pool in Attleboro,

    Massachusetts 52 Figure 10: Corron Farm Park in Kane County, Illinois 53
    Figure 11: Single Family Housing Rehabilitation in Greeley,

    Colorado 54 Figure 12: Loaves and Fishes Community Food Pantry in
    Naperville,

    Illinois 56 Figure 13: Heartland Financial Building in Dubuque, Iowa 59

                                     Abbreviations

    CDBG            Community Development Block Grant Program
    CPD             Office of Community Planning and Development
    ESG             Emergency Shelter Grants Program
    GAO             Government Accountability Office
    GMP             Grants Management Process System
    HOME            HOME Investment Partnerships Program
    HOPWA           Housing Opportunities for Persons with AIDS Program
    HUD             Department of Housing and Urban Development
    IDIS            Integrated Disbursement and Information System
    OMB             Office of Management and Budget
    PART            Program Assessment Rating Tool

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    A

    United States Government Accountability Office Washington, D.C. 20548

    July 28, 2006

    The Honorable Robert Ney Chairman, Subcommittee on Housing

    and Community Opportunity Committee on Financial Services House of
    Representatives

    The Honorable Michael R. Turner Chairman, Subcommittee on Federalism

    and the Census Committee on Government Reform House of Representatives

    The Honorable Tom A. Coburn Chairman, Subcommittee on Federal Financial

    Management, Government Information, and International Security Committee
    on Homeland Security and

    Governmental Affairs United States Senate

    The Community Development Block Grant (CDBG) program is the federal
    government's principal community development program. It provides funding
    for housing, economic development, neighborhood revitalization, and other
    community development activities. In fiscal year 2006, Congress
    appropriated approximately $4.2 billion for the program. Administered by
    the Department of Housing and Urban Development (HUD), the CDBG program
    provides funding to metropolitan cities and urban counties, known as
    entitlement communities, and to states for distribution to nonentitlement
    communities. The program provides annual grants on a formula basis that
    takes into account population, poverty, housing overcrowding, the age of
    the housing, and any change in an area's growth in comparison with that of
    other areas. The activities undertaken with program funds must (1)
    principally benefit low- and moderate-income persons, (2) aid in the
    prevention or elimination of slums or blight, or (3) meet urgent community
    development needs.

    The CDBG program has undergone few fundamental changes since Congress
    created it in 1974. However, the administration's fiscal year 2006 budget
    proposed consolidating the program with other community and economic
    development programs in the Department of Commerce and

                                    Results in Brief

    reducing overall funding. Congress did not act on this proposal, but the
    administration proposed additional program reforms and a 27 percent
    funding reduction in its fiscal year 2007 budget. Because of these
    proposed changes, you requested that we review the use of CDBG funds and
    how HUD oversees the program. Specifically, this report discusses (1) how
    recipients have used CDBG funds, including the extent to which they have
    funded activities that meet national program objectives, complied with
    spending limits, and reported accomplishments achieved with funds; (2) how
    HUD has monitored recipients' use of CDBG funds; and (3) how HUD has held
    recipients that have not complied with CDBG program requirements
    accountable for their actions.

    To address these objectives, we visited 20 recipients-4 states, 2 urban
    counties, and 14 cities.1 We selected these recipients based on factors
    such as geographic dispersion, funding level, and need.2 During these
    visits, we interviewed staff, toured funded projects, and reviewed 144
    recipient files. We also visited four nonentitlement communities. We
    analyzed Integrated Disbursement and Information System (IDIS) data on
    expenditures and Grants Management Process (GMP) System data on the extent
    of HUD monitoring. We determined that the data were sufficiently reliable
    for the purposes of this report. Finally, we reviewed HUD's program
    regulations and guidance and interviewed headquarters and field staff. We
    performed our work from July 2005 to July 2006 in accordance with
    generally accepted government auditing standards. Appendix I provides
    additional details on our scope and methodology.

    Results in Brief

    HUD data show that CDBG recipients spend the largest percentage of their
    grants on public improvements (such as water lines and street
    improvements), housing, and administration and planning, but HUD does not
    centrally maintain the data needed to determine compliance with statutory
    spending limits on public services (such as health and senior services)
    and on administration and planning. In terms of the activities most often
    funded, some differences exist in how entitlement communities and states
    have used their funds. In fiscal year 2005, HUD data showed that

    1The 20 recipients we visited included 17 recipients in the Atlanta,
    Baltimore, Boston, Chicago, Denver, and Los Angeles metropolitan areas and
    3 recipients outside of large metropolitan areas (Warner Robins, Georgia;
    Dubuque, Iowa; and Beloit, Wisconsin).

    2"Need" comprises factors such as poverty, age of housing, and decline.

    Page 2 GAO-06-732 Community Development Block Grants

    entitlement communities-cities and urban counties-spent 27 percent of
    their funds on housing, 24 percent on public improvements, and 17 percent
    on administration and planning. Other activities they funded to a lesser
    extent included public services, acquisition of property, and economic
    development. During that same time period, HUD data showed that the
    nonentitlement communities funded by states spent 54 percent of their
    funds on public improvements, 17 percent on housing, and 15 percent on
    economic development. Because HUD's information systems do not maintain a
    record of data adjustments needed to calculate compliance, we were not
    able to determine the extent to which all recipients have complied with
    the statutory spending limits on public services and administration and
    planning. However, data collected by HUD from its field offices for the
    100 most populous entitlement communities showed that not all complied
    with the limits.3 These 100 entitlement communities received about
    one-third of the CDBG funds allocated in fiscal year 2006. Of the 100
    entitlement communities, 3 exceeded their public service spending limit,
    and 1 exceeded the administration and planning spending limit. Given that
    HUD data show that entitlement communities collectively spend at or close
    to the limits, it is important for HUD to be able to report on the extent
    of their individual compliance with these limits.

    HUD uses a risk-based approach to monitor CDBG recipients; however, it has
    not developed a plan to ensure that it has enough staff with the skills
    needed to conduct monitoring or fully involved its field staff in plans to
    redesign an information system they use to monitor recipients. Consistent
    with our internal control standards, HUD has developed a formal risk
    analysis process for its field offices to follow when determining which
    recipients to review.4 The factors considered include the size of the
    recipient's grant, the complexity of the activities that a recipient
    undertakes, and how long it has been since the department last reviewed a
    recipient. HUD's field offices generally followed this process when
    determining which recipients to review in fiscal year 2005. Our analysis
    of the extent of HUD monitoring showed that HUD reviewed most, but not
    all, CDBG recipients at least once in the 5-year period from fiscal year
    2001 through fiscal year 2005. Specifically, HUD reviewed all but 255
    recipients

    3We do not know to what extent the 100 most populous entitlement
    communities are reflective of the 1,128 entitlement communities;
    therefore, results of this analysis cannot be generalized to all
    entitlement communities.

    4GAO, Standards for Internal Control in the Federal Government,
    GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

    Page 3 GAO-06-732 Community Development Block Grants

    in fiscal years 2003 through 2005. These 255 recipients received about
    $525 million in fiscal year 2005 funding. During the 5-year period from
    fiscal year 2001 through 2005, HUD did not monitor 84 recipients that
    received a total of about $132 million in fiscal year 2005. HUD uses a
    risk-based approach because it has limited staff to devote to CDBG
    monitoring and its CDBG workload has increased as its staffing levels have
    decreased. For example, 13 of the 42 field offices overseeing CDBG
    recipients do not have a financial specialist to evaluate the financial
    operations of each recipient, and 39 percent of CDBG monitoring staff is
    eligible to retire within the next 3 years. Despite these statistics, HUD
    has not developed a plan to hire staff with needed skills or help manage
    upcoming retirements. Further, IDIS-the system that HUD uses to conduct
    on-site and off-site monitoring-does not contain all of the information
    that HUD needs to monitor recipients' performance. For example, HUD field
    staff told us that the data in IDIS are not always current because some
    recipients do not update it quarterly, as HUD recommends. HUD is currently
    redesigning IDIS, but it has solicited limited input from its field staff
    on its development plans.

    Although it has issued a clear policy stating what actions it will take
    when entitlement communities fail to meet the statutory requirement that
    funds be spent in a timely manner, HUD has not developed similar guidance
    establishing a consistent framework for holding CDBG recipients
    accountable for deficiencies identified during monitoring. HUD has set a
    timeliness standard for entitlement communities and established a grant
    reduction policy for recipients that exceed the standard. For deficiencies
    other than being slow to expend funds (such as funding an ineligible
    activity or failing to document that an activity meets one of the
    program's national objectives), HUD has the flexibility to assess
    sanctions ranging from issuing a warning letter to advising the recipient
    to return CDBG funds. Although its field offices have great flexibility
    when making sanctions, HUD has not issued guidance establishing a
    consistent framework to ensure that these offices are treating recipients
    that commit similar infractions equitably. In conducting our work, we
    found instances in fiscal year 2005 where findings that appeared to be
    similar were associated with different enforcement actions. For example,
    several field offices found that recipients had not documented that a
    funded activity met a national objective, but took different actions. One
    office advised the recipient to pay back funds. If the recipient could not
    provide further documentation, the second office planned to advise the
    recipient to provide written assurance that it would not fund that type of
    activity again, while the third office stated that it might disallow the
    expenditures.

    Treatment can continue to appear inconsistent in the absence of guidance
    to better ensure consistency and transparency in the sanctioning process.

    This report contains four recommendations designed to improve HUD's
    processes for monitoring communities' use of CDBG funds. We recommend that
    HUD centrally maintain the data needed to determine compliance with
    statutory spending limits, develop a plan for replacing an aging
    workforce, solicit additional input from its field staff on the user
    requirements for IDIS, and consider developing guidance on sanctioning
    CDBG recipients. We provided a draft of this report to HUD for its review
    and comment. In response, HUD provided a letter with comments that are
    technical in nature. In addition, we received oral comments from the
    Office of Community Planning and Development's Comptroller stating that,
    overall, HUD agrees with our findings, conclusions, and recommendations.

    Background

    The Housing and Community Development Act of 1974 combined seven
    categorical programs to form the CDBG program. The objective of the
    program is to develop viable urban communities by providing decent housing
    and a suitable living environment and expanding economic opportunities,
    principally for persons of low and moderate income. Program funds can be
    used on housing, economic development, neighborhood revitalization, and
    other community development activities. As shown in figure 1, CDBG
    appropriations have fluctuated over time.

    Figure 1: CDBG Appropriations, 1990 - 2006 Real dollars in billions
    Constant dollars in billions (2005)

    6 6

    5

    5

    4

    4

    3

    3

    2 2

    1 1

        0 0 '06 '05 '04 '03 '02 '01 '00 '99 '98 '97 '96 '95 '94 '93 '92 '91 '90 '06
        '05 '04 '03 '02 '01 '00 '99 '98 '97 '96 '95 '94 '93 '92 '91 '90

    Fiscal year Fiscal year

    Total appropriations

    Formulaallocation

    Source: HUD appropriations data.

    Note: The formula allocation represents the portion of CDBG funds that is
    available for distribution to entitlement communities and states after
    Congress sets aside funds for special purposes.

    After funds are set aside for special purposes such as the Indian CDBG
    program and allocated to insular areas, the annual appropriation for CDBG
    formula funding is split so that 70 percent is allocated among eligible
    metropolitan cities and counties (referred to as entitlement communities)
    and 30 percent among the states to serve nonentitlement communities.5
    Entitlement communities are (1) principal cities of metropolitan areas,
    (2) other metropolitan cities with populations of at least 50,000; and (3)
    qualified urban counties with populations of at least 200,000 (excluding
    the

    5Total set-asides for fiscal year 2006 are $467 million. Under the Indian
    CDBG program, HUD provides competitive grants to federally recognized
    Indian tribes and to certain tribal organizations. The four insular areas
    are American Samoa, Guam, the Northern Mariana Islands, and the Virgin
    Islands.

    Page 6 GAO-06-732 Community Development Block Grants

    population of entitled cities).6 Currently, 1,128 entitlement communities
    receive CDBG funds, which is up from 866 entitlement communities in fiscal
    year 1990; 50 states also receive CDBG funds.7 HUD distributes funds to
    entitlement communities and states based on the higher yield from one of
    two weighted formulas that consider factors such as population, poverty,
    housing overcrowding, the age of the housing, and any change in an area's
    growth in comparison with that of other areas. HUD ensures that the total
    amount awarded is within the available appropriation by reducing the
    individual grants on a pro rata basis.

    Entitlement communities may carry out activities directly or may award
    funds to subrecipients to carry out agreed-upon activities. Subrecipients
    can be governmental agencies such as public housing authorities or park
    districts; private nonprofits such as private social service agencies,
    community development corporations, or operators of homeless shelters; and
    certain private, for-profit entities that facilitate economic development.
    Whenever an entitlement community uses a subrecipient, it must enter into
    a signed, written agreement with that subrecipient that includes a
    statement of work-which describes the work to be performed, the schedule
    for completing the work, and the budget-and the recipient's recordkeeping
    and reporting requirements.

    Every activity funded by entitlement communities and states must meet one
    of three national program objectives. Activities undertaken must (1)
    principally benefit low- and moderate-income persons, (2) aid in the
    prevention or elimination of slums or blight, or (3) meet urgent community
    development needs. Recipients must use at least 70 percent of their funds
    for activities that principally benefit low- and moderate-income people
    over a period of 1, 2, or 3 years, as specified by the recipient.
    Generally, an activity is considered to principally benefit low- and
    moderate-income people if 51 percent or more of those benefiting meet the
    definition. However, the CDBG statute includes an exception that enables
    certain

    6The Office of Management and Budget (OMB) defines metropolitan areas. A
    principal city is the largest city of a metropolitan area or a city that
    meets specified statistical criteria.

    7Although 118 of the 1,128 entitlement communities no longer meet the
    definition, they remain entitlements due to a statutory provision that
    allows communities that qualified for at least 2 years to remain qualified
    indefinitely. These 118 entitlement communities were allocated about $100
    million in fiscal year 2005. The 50 state recipients include Puerto Rico
    but not Hawaii because it has permanently elected not to receive state
    CDBG program funding. HUD awards funds for the nonentitlement areas in
    Hawaii directly to the three eligible counties.

    entitlement communities to utilize CDBG funds for "area benefit
    activities" in census tracts having a low- and moderate-income population
    of less than 51 percent.8 Area benefit activities are activities that
    benefit all of the residents in a particular geographic area, such as a
    park, community center, or streets. Entitlement communities that may
    utilize this exception are those that have a limited number of census
    tracts with a majority low- and moderate-income population, and the
    exception extends to the 25 percent of census tracts within the
    entitlement community's boundaries having the highest percentages of low-
    and moderate-income persons.

    Recipients can only use their CDBG funds on 26 eligible activities. For
    reporting purposes, HUD classifies these eligible activities into eight
    broad categories, as defined in table 1. Some of the activities that can
    be funded, such as loans for housing rehabilitation, generate program
    income for recipients that must be used to fund additional activities.
    There are statutory limitations on the amounts that recipients may spend
    in two specific areas. Pursuant to provisions in annual appropriations
    laws, recipients may only use up to 20 percent of their annual grant plus
    program income on planning and administrative activities. Recipients may
    also only use up to 15 percent of their annual grant plus program income
    on public service activities.9 Entitlement communities comply with these
    requirements by limiting the amount of funds they obligate for these
    activities during the program year, while states limit the amount they
    spend on these activities over the life of the grant.

    842 U.S.C. S: 5305(c)(2)(A)(ii).

    9Public service activities funded through community based development
    organizations-organizations authorized under 24 C.F.R. 570.204 to carry
    out special activities such as economic development or new housing
    construction-are not subject to the public service spending limit.

    Page 8 GAO-06-732 Community Development Block Grants

                    Table 1: Categories of Eligible CDBG Activities

    Category            Description
    Acquisition         Includes the acquisition of real property, clearance
                           and
                           demolition, and relocation
    Administration and  Includes planning, general program administration, and
                           indirect
    planning            costs
    Economic            Includes financial assistance to for-profit businesses
                           and the
    development         rehabilitation of publicly or privately owned
                           commercial or
                           industrial property
    Housing             Includes the rehabilitation of residential properties,
                           direct
                           homeownership assistance, and code enforcement
    Public improvements Includes public facilities such as homeless shelters
                           and
                           neighborhood facilities and improvements to water and
                           sewer
                           lines and streets
    Public services     Includes health services, senior services, child care
                           services, and
                           employment training
    Repayments of       Repayments of loans obtained using current and future
                           CDBG
    Section 108 loans   allocations as collateral
    Other               Includes nonprofit organization capacity building and
                           assistance
                           to institutions of higher learning

    Source: HUD data.

    Recipients must submit a strategic plan that addresses the housing,
    homeless, and community development needs in their jurisdictions at least
    once every 5 years. The plan covers CDBG and three other formula grant
    programs administered by HUD-the HOME Investment Partnerships (HOME)
    Program, the Emergency Shelter Grants (ESG) Program, and the Housing
    Opportunities for Persons with AIDS (HOPWA) Program.10 Annually,
    recipients must submit an action plan that identifies the activities they
    will undertake to meet the objectives in their strategic plans.11 At the
    end of each year, recipients must submit to HUD an annual performance
    report detailing progress they have made in meeting the goals and

    10The HOME program provides federal assistance to participating
    jurisdictions for housing rehabilitation, rental assistance, home-buyer
    assistance, and new housing construction. The ESG program provides
    homeless persons with basic shelter and essential supportive services by
    assisting with the operational costs of shelter facilities. The HOPWA
    program provides housing assistance and related supportive services to
    persons living with human immunodeficiency virus/acquired immunodeficiency
    syndrome (HIV/AIDS).

    11Recipients have different program year start and end dates that often
    coincide with their jurisdictions' fiscal year.

    objectives outlined in their strategic and action plans. HUD staff use
    detailed checklists to review recipients' strategic and annual actions
    plans as well as their annual performance reports.

    HUD's Office of Community Planning and Development (CPD) administers the
    CDBG program through program offices at HUD headquarters and 42 field
    offices located throughout the United States. The headquarters offices set
    program policy, while staff in the 42 field offices monitor recipients.
    Each field office is headed by a CPD director. CPD has a total authorized
    staff of approximately 800-about 200 at headquarters and 600 in the field.
    CPD field offices are responsible for a broad range of grant management
    activities that include annual review and approval of entitlement grantee
    action plans, preparation and execution of grant agreements, review of
    entitlement grantee annual performance reports, managing homeless program
    competition to include reviewing over 4,500 applications; preparing
    conditional award letters; reviewing and approving technical submission
    for conditionally approved grants; setting up budgets for each grant in
    Line of Credit Control System; executing grant agreements and grant
    closeout activities, providing technical assistance to entitlement and
    competitive grantees, and recapturing unobligated/unexpended grant funds,
    as well as monitoring activities.

    In September 2005, CPD issued a new monitoring handbook. The handbook
    states that monitoring is an integral management control technique and
    that the goal of monitoring is to determine compliance, prevent/identify
    deficiencies, and design corrective actions to improve or reinforce
    program participant performance. It contains two chapters on monitoring
    the CDBG program, and these chapters include 29 exhibits for field office
    staff to use when monitoring CDBG recipients.

    HUD staff use two major information systems to monitor the use of CDBG
    funds-IDIS and GMP. Developed in fiscal year 1996, IDIS is a management
    information system that consolidates planning and reporting processes
    across HUD's four formula grant programs. The recipients use this system
    to enter information on their plans, establish projects and activities to
    draw down funds, and report accomplishments. The GMP system, created in
    fiscal year 1997, records information such as HUD's monitoring of
    recipients, provision of technical assistance, and review of recipients'
    plans and performance reports. The system is designed for use by HUD staff
    to ensure that funds are being expended properly and to provide
    information on recipient progress.

    In April 1999, we issued a report on HUD's oversight of CDBG and CPD's
    three other formula grant programs.12 At that time, we found that HUD's
    monitoring did not ensure that the programs' objectives were being met or
    that recipients were managing their funds appropriately. We also noted
    that IDIS did not provide the information necessary to accurately assess
    recipients' performance and thus did not compensate for HUD's breakdowns
    in monitoring. Specifically, we reported that IDIS (1) provided ample
    opportunity for major problems with data entry and did not allow such
    problems to be corrected easily, (2) did not provide timely and accurate
    information, and (3) had difficulty producing reports. Because of the
    actions HUD took in response to our recommendations in this report, we
    removed CPD's programs from our high-risk list in 2001.13

    We have issued standards for internal control in government that agencies
    should follow.14 Internal control helps government program managers
    achieve desired results through effective stewardship of public resources.
    Internal control standards provide the overall framework for establishing
    and maintaining internal control and for identifying and addressing major
    performance and management challenges and areas at greatest risk of fraud,
    waste, abuse, and mismanagement. Two of the standards are (1) risk
    assessment, where risks are identified and analyzed for their possible
    effect and (2) monitoring, which assesses the quality of performance over
    time and ensures that findings are promptly resolved. Another standard is
    control activities that help ensure that management's directives are
    carried out. Examples of such activities include managing an
    organization's workforce and establishing and reviewing performance
    measures and indicators.

    12GAO, Community Development: Weak Management Controls Compromise
    Integrity of Four HUD Grant Programs, GAO/RCED-99-98 (Washington, D.C.:
    Apr. 27, 1999). 13GAO, High-Risk Series: An Update, GAO-01-263
    (Washington, D.C.: January 2001). 14 GAO/AIMD-00-21.3.1.

    Page 11 GAO-06-732 Community Development Block Grants

      Recipients Fund a Variety of Activities, but HUD Lacks Centralized Data
      Showing Compliance with Statutory Spending Limits

    While the data that HUD collects on CDBG expenditures show that CDBG
    recipients fund a variety of activities, HUD does not centrally maintain
    the data needed to determine if recipients are complying with statutory
    spending limits. According to HUD's data, CDBG recipients spend the
    largest percentage of their funding on public improvements and housing
    activities. Further, recipients report that the vast majority of
    activities they fund meet the national objective of principally benefiting
    low- and moderate-income persons; however, 359 recipients are currently
    eligible for an exception that allows them to expand the definition of
    low- and moderate-income areas. There are statutory spending limits on
    public services and administration and planning, but HUD's information
    systems do not maintain all the data needed to determine the extent of
    compliance with these limits. Finally, HUD has implemented a new
    performance measurement system to improve its ability to obtain consistent
    data on accomplishments attained with CDBG funds.

        CDBG Recipients Use the Majority of Their Grants to Fund Public Improvements
        and Housing Activities

    CDBG recipients spend the largest percentage of their funding on public
    improvements and housing activities. In fiscal year 2005, recipients spent
    about $4.8 billion in CDBG funds to address a wide range of local needs.
    Approximately $508 million (or 10 percent) of these total expenditures
    were from program income generated by previous CDBG activities. As shown
    in figure 2, CDBG recipients spent 32 percent of their total funds on
    public improvements and 25 percent on housing in fiscal year 2005. Within
    the category of public improvements, recipients spent the largest
    percentage of their funds on water and sewer improvements. Under the
    housing category, the single activity that received the most funding was
    single-unit residential rehabilitation.

    Figure 2: FY 2005 CDBG Expenditures, All Recipients

    0.5% Other 2.7% Section 108 loan repaymentsAcquisition

    Economic development

    Public services

    Administration and planning

    Housing Public improvements

    Source: GAO analysis of IDIS data.

    Note: Other includes nonprofit organization capacity building and
    assistance to institutions of higher learning.

    Although both entitlement communities and states devote large amounts of
    funding to public improvements, figure 3 shows some differences in how
    they use their CDBG funds. Entitlement communities spend the largest
    percentage of their CDBG funds on housing activities. In fiscal year 2005,
    entitlement communities spent 27 percent of their CDBG allocations on
    housing activities, followed by 24 percent on public improvements, and 17
    percent on administration and planning activities. In contrast, states
    distribute over half of their CDBG funds to public improvements. In fiscal
    year 2005, states distributed 54 percent of their funds to public
    improvements, 17 percent to housing activities, and 15 percent to economic
    development. States and entitlement communities use a similar process to
    identify CDBG needs, but states also have to determine how they will
    distribute their funds to nonentitlement communities. How states choose to
    distribute their funds varies from state to state. For example, Georgia
    distributes most of its CDBG funding through a competitive process that
    funds the best projects regardless of activity type. Colorado also uses a
    competitive process, but it distributes a third of its CDBG funding to
    housing, a third to business financing, and a third to public facilities
    and community development. Pennsylvania distributes most of its CDBG
    funding using a formula method. For examples of how selected states
    distribute their CDBG funds, see appendix II.

    Figure3: FY 2005 CDBG Expenditures, Entitlement Communities and States
    CDBG expenditures by entitlement communities CDBG expenditures by states

    Source: GAO analysis of IDIS data.

    As a result of the flexibility inherent in the CDBG program, the types of
    activities that entitlement communities and states fund within each broad
    category vary considerably. During our site visits, many of the recipients
    we interviewed stated that the flexibility afforded by CDBG was one of the
    program's strengths. Figure 4 illustrates the variety of activities funded
    by the recipients we visited. More detailed descriptions of various
    activities funded by the recipients we visited can be found in appendix
    III.

    Figure 4: Activities Funded by Recipients That We Visited

     Sources: GAO (top two photos); City of Beloit, Wisconsin (middle two photos);
                      Civil Technology, Inc. (bottom two photos).

        Almost All Funded Activities Benefit Low- and Moderate-Income People, but
        the Criteria for Defining Target Areas Are Allowed to Vary

    Of the three national program objectives, recipients report that the vast
    majority of activities they fund under the CDBG program meet the objective
    of principally benefiting low- and moderate-income persons. However, some
    recipients can use different criteria when defining low- and
    moderate-income areas. As shown in figure 5, entitlement communities
    reported that 91 percent of the activities they funded in fiscal year 2005
    principally benefited low- and moderate-income persons; states reported
    that 96 percent of their activities met this national objective. The
    remaining activities funded, excluding activities coded for administration
    and planning,sought to eliminate slums or blight, addressed urgent needs,
    or were missing a national objective code. For the small percentage of
    activities missing a code, we could not determine which national objective
    was met. According to a HUD official, activities missing a national
    objective code were also administration and planning activities, however,
    we could not verify this statement based on our analysis of HUD's IDIS
    data.

    Figure 5: FY 2005 CDBG Expenditures, by National Objective Entitlement
    communitiesStates

    Source: GAO analysis of IDIS data.

    Note: Entitlement communities reported that 0.1 percent of the activities
    they funded addressed urgent needs. Numbers do not add to 100 percent due
    to rounding. The figure excludes expenditures coded as administration and
    planning, which are presumed to meet a national objective.

    A special statutory exception allows certain entitlement communities to
    count activities that benefit fewer than 51 percent low- and
    moderate-income people as meeting the corresponding national objective.
    This exception allows the recipient to use the first 25 percent of all
    census tracts in its jurisdiction to qualify as meeting the national
    objective. For example, if a city or county consists of 40 census tracts,
    only 4 of which contain 51 percent or more low- and moderate-income
    persons, that recipient can also consider the 6 census tracts with the
    next highest percentages of low- and moderate-income persons as low- and
    moderate-income census tracts.

    Currently, 359 of the 1,128 cities and urban counties that receive CDBG
    funds are eligible to use this exception. These recipients' exception
    percentages range from a high of 50.9 percent to a low of 18.5 percent.
    The exception percentage indicates the minimum percentage of low- and
    moderate-income people that must live in an area for an activity funded in
    that area to meet the low- and moderate-income national objective. As
    shown in figure 6, the majority of recipients eligible for the exception
    had an exception percentage higher than 40 percent; 39 CDBG recipients had
    a percentage less than 30 percent. Although a recipient is eligible to use
    this exception, it may not take advantage of it for all of the activities
    it funds. First, the exception only applies when the activity-such as a
    park, community center, or streets-serves an identified geographic area.
    Many activities, such as public services, benefit low- and moderate-income
    people, not an area. Also, in cases where the recipient has both areas
    that contain a majority of low- and moderate-income people and areas that
    qualify for the exception, it may choose to fund only activities that are
    in its areas with a majority of low- and moderate-income people.

    Figure 6: Number of Recipients Eligible to Use Alternative Criteria for
    Defining Lowand Moderate-Income Areas Number of CDBG recipients150

    135

          50.9 to44.9 to 39.9 to 34.9 to Less

    45.0 40.0 35 30.0 than 30 Exception percentage range

    Source: GAO analysis of HUD data.

        HUD Does Not Centrally Maintain the Data Needed to Determine Compliance with
        Statutory Spending Limits on Public Service Activities and Administration
        and Planning

    HUD does not centrally maintain the data needed to determine if
    entitlement communities and states are complying with the statutory
    spending limits on public services and administration and planning.
    Information on manual adjustments needed to determine compliance can be
    obtained from the field offices but is not readily available. By law, CDBG
    recipients may only use up to 15 percent of their funds on public service
    activities and up to 20 percent on administration and planning. We
    attempted to use the data in IDIS to assess each entitlement community's
    compliance with these spending limits but determined that certain manual
    adjustments that are needed to complete the calculations are not saved in
    IDIS.15 Entitlement communities enter these manual adjustments into IDIS
    at the end of each program year for the sole purpose of creating financial
    summary reports that show, among other things, the two spending limit
    calculations. Entitlement communities include these reports in the annual
    performance reports that they submit to HUD's 42 field offices for review.
    After they are prepared, the reports are saved in HUD's mainframe computer
    for only 5 days due to limited system capacity.

    With respect to determining state compliance, data are even more limited.
    IDIS does not currently generate reports that show the spending limit
    calculations for states. The calculations that are used to determine an
    entitlement community's compliance do not work for states because a
    state's compliance is determined based on the percentage of each grant
    that is spent on public services and administration and planning instead
    of the percentage of each program year's obligations, as is the case for
    entitlement communities. Therefore, according to the HUD official that
    heads the state CDBG program, field staff currently determine compliance
    with the spending limits during on-site monitoring and when grants are
    fully spent. However, the official noted that future design enhancements
    to IDIS will allow HUD to more easily generate information on state
    compliance with these spending limits.

    Without a record of data adjustments needed to calculate entitlement
    community compliance and data on state compliance, HUD cannot provide
    timely assurance that recipients are adhering to the spending limits. For
    example, when information on compliance with the administrative and
    planning spending limit was recently requested from HUD for a House

    15These manual adjustments reflect amounts that affect the calculation but
    are not included in IDIS.

    Page 19 GAO-06-732 Community Development Block Grants

    Congress Has Provided Some Exceptions to the Public Service Spending Limit

    report, HUD could not provide data that directly addressed the request.16
    The agency provided the data that were readily available but noted that
    the data could not be used to determine compliance with the spending
    limit. HUD stated that it would have to collect additional information on
    certain manual adjustments to give the committee a more accurate picture
    of compliance with the limit.

    In the absence of centralized data on all recipients, we requested that
    HUD contact its field offices to provide data on the extent to which the
    100 most populous entitlement communities had complied with the statutory
    spending limits in program year 2004. These entitlement communities
    received about one-third of the CDBG funds allocated in fiscal year
    2006.17 Our analysis of the limited data showed that not all of these
    entitlement communities complied with the statutory spending limits.18 Of
    the 100 entitlement communities, 3 exceeded their public service spending
    limit, and 1 exceeded the administration and planning spending limit. HUD
    could not provide similar data on the extent to which individual states
    have complied with the spending limits because, as described earlier, IDIS
    does not generate reports that track state compliance with the limits.
    According to the head of the state CDBG program, compliance with the
    limits has never really been a concern for states because they
    collectively spend well below the statutory maximums.

    Congress Has Provided Some Exceptions to the Public Service Spending Limit

    Some recipients are allowed, due to a special provision, to use more than
    15 percent of their funds for public services. By law, entitlement
    communities that used in excess of 15 percent of CDBG funds received for
    public service activities in fiscal year 1982 or 1983 are allowed to
    continue to use the higher of the actual dollar amount or percentage of
    assistance in either of those years. Due to this provision, a total of 41
    entitlement communities are allowed to use more than the 15 percent they
    would have been allowed if they were subject to the cap. For example, the
    city of

    16House Committee on Government Reform, Bringing Communities into the 21st
    Century: A Report on Improving the Community Development Block Grant
    Program, Report 109-365, January 31, 2006.

    17The percentage reported only reflects funds allocated to 99 of the 100
    entitlement communities because Jefferson County, Kentucky was no longer
    listed as a separate entitlement community in fiscal year 2006.

    18We do not know to what extent the 100 most populous entitlement
    communities are reflective of the 1,128 entitlement communities;
    therefore, results of this analysis cannot be generalized to all
    entitlement communities.

    Chicago, Illinois is allowed to use $41 million (48 percent of its fiscal
    year 2006 allocation) for public services. The city of Seattle, Washington
    is allowed to use about 36 percent of its CDBG funds for public services.
    Congress has also authorized temporary exceptions to the spending limit
    when warranted by events affecting a specific community. These temporary
    exceptions are for a limited period of time, such as 5 years, and a
    limited amount, such as up to 25 percent of their grant amount, unless
    extended by law. For instance, the city and county of Los Angeles were
    allowed to exceed the limit for a set period of time in the aftermath of
    the 1992 Los Angeles civil unrest. Also, in September 2005, HUD issued a
    suspension of the limit to enable CDBG recipients to utilize CDBG funds to
    address emergency expenses associated with the needs of Hurricane Katrina
    evacuees.19

    Not All Staff and Overhead Costs Funded with CDBG Are Subject to the
    Planning and Administration Spending Limit

    The expenses subject to the spending limit on administration and planning
    do not reflect all of the staff and overhead costs being funded with CDBG.
    CDBG recipients are allowed by regulation to incorporate into individual
    activity budgets delivery costs such as architectural and engineering
    expenses, legal expenses, insurance, permit fees, taxes, and similar
    expenses if such expenses are directly attributable or integral to
    carrying out an eligible activity. These expenses are not counted toward
    the 20 percent administrative and planning spending limit. With the
    exception of housing rehabilitation administration and code enforcement,
    HUD does not track staff costs charged to various eligible activities. In
    fiscal year 2005, CDBG recipients spent $153 million on housing
    rehabilitation administration and $133 million on code enforcement-about 6
    percent of total expenditures. While funds charged to planning and
    administration are presumed to meet the program's national objectives, HUD
    requires recipients to document that any staff or overhead costs charged
    to other eligible activities meet a national objective.

        HUD Has Established a New Performance Measurement System to Track Program
        Accomplishments

    HUD has established a new performance measurement system to better track
    accomplishments achieved with CDBG funds. IDIS currently contains data on
    CDBG-funded accomplishments, but the data are incomplete and inconsistent.
    First, HUD has not always required recipients to enter accomplishment
    data; therefore, data on the older projects are incomplete.

    19This suspension was issued pursuant to a statutory provision that allows
    the Secretary of Housing and Urban Development to suspend most, but not
    all, statutory requirements in cases where the President has issued a
    federal disaster declaration.

    Page 21 GAO-06-732 Community Development Block Grants

    Second, recipients report data differently. For example, some CDBG
    recipients report the number of persons served by a CDBG funded activity,
    while other recipients report the number of times a service is provided.
    In an effort to address these problems, HUD began verifying the accuracy
    of CDBG accomplishment data in 2004. To ensure complete and accurate data,
    HUD periodically reviews the data that recipients enter into IDIS for
    inconsistencies, inaccuracies, and omissions. HUD then gives the
    recipients feedback by placing spreadsheets on the Web for each recipient
    that indicate the fields in IDIS that need correction.

    To further track program accomplishments, HUD has developed a new
    performance measurement system for the CDBG program. In March 2006, HUD
    published performance measures developed in conjunction with a working
    group comprised of community development organizations. They undertook
    this effort in reaction to an OMB finding that the CDBG program was unable
    to demonstrate results at the national level.20 HUD's new outcome
    performance measurement system has three objectives: (1) creating suitable
    living environments, (2) providing decent affordable housing, and (3)
    creating economic opportunities. Under these broad objectives, there are
    three outcomes: (1) availability and accessibility, (2) affordability, and
    (3) sustainability. The specific outcome indicators that HUD will track
    include the number of persons assisted by a public service activity,
    number of housing units rehabilitated, and number and types of jobs
    created. Recipients could start entering the new performance measurement
    data in May 2006.

    To help recipients implement the new performance measurement system, HUD
    has scheduled 15 regional training sessions that will provide information
    to recipients on performance measurement principles and the new outcome
    framework. The first session was held in May 2006, and the last session is
    scheduled for August 2006. According to HUD, the training sessions will
    (1) provide information about how recipients can implement the outcome
    indicators through their local and state procedures for data collection
    and reporting and (2) discuss entry of the performance data into IDIS. The
    agenda topics include data quality and how to measure the

    20OMB, Department of Housing and Urban Development PART Assessments,
    February 2005. OMB uses its Program Assessment Rating Tool (PART) to
    assess and improve program performance so that the federal government can
    achieve better results. PART looks at all factors that affect and reflect
    program performance including program purpose and design; performance
    measurement, evaluations, and strategic planning; program management; and
    program results.

    Page 22 GAO-06-732 Community Development Block Grants

    outcome of various activities such as housing and economic development.
    For this training, HUD has developed a training manual and guidebook that
    contains information on measuring outcomes achieved with CDBG funds. The
    department has made these materials available to all recipients on its Web
    site. At the close of our review, these activities were too new to assess
    their effectiveness.

      Although HUD Uses a Risk-Based Approach to Monitor CDBG Recipients, It Lacks a
      Plan to Replace Monitoring Staff and Has Not Fully Involved Field Staff in Its
      Plans to Redesign IDIS

    While HUD has implemented a risk-based monitoring strategy for the CDBG
    program, it has not developed a plan to ensure that it has enough staff
    with the skills needed to conduct monitoring or fully involved its field
    staff in plans to redesign IDIS, an information system they use to monitor
    recipients. Consistent with our internal control standards, HUD has
    established a risk assessment process to identify CDBG recipients for
    review.21 HUD's monitoring strategy calls for its field offices to
    consider various risk factors when determining which recipients to review
    because it has limited monitoring resources, and its workload has
    increased as its staffing levels have decreased. For example, 13 of the 42
    field offices overseeing CDBG recipients do not have a financial
    specialist, and 39 percent of its field staff is eligible to retire within
    the next 3 years. Despite these statistics, HUD has not developed a plan
    to hire staff with needed skills or help manage upcoming retirements.
    Finally, although IDIS is one of the tools that HUD field staff use to
    monitor recipients, HUD headquarters has solicited little input from them
    on efforts to redesign IDIS.

        HUD's Monitoring Strategy Focuses on High-Risk Recipients

    HUD's monitoring of the CDBG program focuses on high-risk recipients. Each
    year, CPD sets a formal monitoring goal. Its goal in fiscal year 2005 was
    for CPD as a whole and each of its field offices to monitor a minimum of
    20 percent of their formula and competitive recipients.22 According to the
    HUD official who set the goal, he set it at 20 percent based on the need
    to balance government stewardship with available resources, including
    staff and travel funds. With a 20 percent goal, he noted that it would be
    conceivable that every recipient would be monitored over a period of 5
    years. Overall, CPD met its monitoring goal for fiscal year 2005. CPD's
    goal

    21 GAO/AIMD-00-21.3.1.

    22This 20 percent goal applies to CDBG as well as the other formula and
    competitive grant programs that CPD administers.

    Page 23 GAO-06-732 Community Development Block Grants

    was to review 942 recipients, and it completed 977 reviews. Of the 977
    reviews, 349 were CDBG reviews. However, two individual field offices did
    not monitor 20 percent of their recipients.23 As shown in table 2, CPD has
    monitored more than 20 percent of its CDBG recipients in recent years.

             Table 2: Percentage of CDBG Recipients Monitored, FY 2001-2005

                                                                    Percentage of
                                           Recipients Recipients not   recipients
    Fiscal year    Total recipients    monitored        monitored    monitored
    2001                        1,067          366            701         34.3
    2002                        1,078          408            670         37.8
    2003                        1,088          363            725         33.4
    2004                        1,158          373            785         32.2
    2005                        1,165          349            816         30.0

    Source: GAO analysis of GMP data.

    Note: Total recipients consist of entitlement communities, states, and
    insular areas (American Samoa, Guam, the Northern Mariana Islands, and the
    Virgin Islands).

    HUD's monitoring policy calls for HUD staff to focus on high-risk
    recipients when selecting CDBG recipients for review. Consistent with our
    internal control standards, HUD has developed a formal risk analysis
    process for its field offices to use when determining which recipients to
    review.24 Field office staff rate recipients on various factors that fall
    under the following four categories: financial, management, satisfaction,
    and services.25 The

    23The two offices that did not monitor 20 percent of their recipients in
    fiscal year 2005 were Fort Worth, Texas and Philadelphia, Pennsylvania.
    According to HUD officials, the Fort Worth office did not meet its goal
    because it was very involved in the Hurricane Katrina disaster recovery
    process. The Philadelphia office did not meets its goal because the staff
    person assigned to complete the remaining two monitoring visits passed
    away suddenly.

    24 GAO/AIMD-00-21.3.1.

    25The financial factors considered include the size of the grant, how
    timely the recipient has been in expending its grant funds, and the extent
    to which the recipient has received program income. The management factors
    evaluated include the complexity of the activities that a recipient
    undertakes, the timeliness and accuracy of the recipient's submissions, a
    recipient's staff capacity, and how long it has been since HUD last
    monitored the recipient on site. The satisfaction factors examined include
    whether the recipient has received citizen complaints and how responsive
    the recipient has been to any citizen complaints. The service factors
    considered are whether the recipient has met the program's national
    objectives and complied with the limitation on public service
    expenditures.

    staff total the scores from each factor and assign recipients a final
    score on a 100-point scale. At each field office, a CPD management
    representative then conducts a review to ensure the validity and
    consistency of the scores. HUD considers recipients that receive a score
    of 51 or greater to be high risk; it considers those with a score of 30 to
    50 to be medium risk; and those with less than 30 it considers to be low
    risk. Recipients that receive a high-risk rating are subject to
    monitoring, unless a management representative approves an exception. CPD
    management representatives can approve an exception if (1) the HUD Office
    of Inspector General is auditing the recipient; (2) they determine that
    monitoring is administratively infeasible in the current year, given other
    monitoring actions; or (3) they have other reasons-such as HUD recently
    monitored the recipient or it monitored another program administered by
    the recipient. Field office staff must review high-risk recipients on site
    unless they reviewed them on site in the last 2 years, and the purpose of
    the monitoring is to validate the implementation of corrective actions.
    Medium- and low-risk recipients can be reviewed using remote, or off-site,
    monitoring.

    Our review of data from GMP-the system that field staff use to record the
    results of the risk analysis process and any monitoring performed-showed
    that HUD's field offices followed the risk analysis process in all but 16
    cases in fiscal year 2005. For fiscal year 2005, HUD designated 164
    recipients as high risk. Out of these 164 recipients, GMP data showed that
    107 were monitored, 41 were granted an exception, and 16 were not
    monitored or provided an exception.26 The risk scores assigned to the 16
    high-risk recipients that HUD did not monitor or provide an exception
    ranged from a low of 51 to a high of 80.27 These 16 recipients received
    allocations totaling about $145 million in fiscal year 2005. They included
    Detroit, Michigan ($43 million), Oregon ($16 million), and Honolulu,
    Hawaii ($11 million). According to HUD, these recipients were

    26According to HUD officials, 4 of the 16 recipients that GMP showed were
    not monitored or granted an exception were monitored in fiscal year 2005,
    but the documentation was not completed in time to be counted in fiscal
    year 2005. The city of New Orleans was monitored in August 2005, just
    before Hurricane Katrina, but did not show up as being monitored because a
    monitoring letter was never completed. Similarly, HUD monitored three more
    recipients at the end of fiscal year 2005, but they did not show up as
    being monitored because the monitoring letters were not finalized prior to
    the end of the fiscal year.

    27Ten of the 16 high-risk grantees were last reviewed in fiscal year 2004,
    three were last reviewed in fiscal year 2003, two were last reviewed in
    fiscal year 2001, and one was a new grantee in fiscal year 2004.

    not monitored or granted an exception either because its field staff
    misunderstood the exception requirements or the field office responsible
    for monitoring the recipient experienced a staffing shortfall. However,
    despite not monitoring these 16 high-risk recipients, 8 of the 12
    responsible field offices monitored recipients that they did not consider
    high risk.

    Further, we found that HUD reviewed most, but not all, CDBG recipients at
    least once in the 5-year period from fiscal year 2001 through fiscal year
    2005. As shown in table 3, our analysis of GMP data showed that HUD
    monitored all but 255 recipients in fiscal years 2003 through 2005. These
    255 recipients received about $525 million in fiscal year 2005 funding.
    When we expanded our analysis to 4 years (fiscal years 2002 through 2005),
    we determined that HUD had monitored all but 140 recipients that received
    a total of about $239 million in fiscal year 2005. During the 5-year
    period from fiscal year 2001 through 2005, HUD did not monitor 84
    recipients that received a total of about $132 million in fiscal year
    2005.

          Table3: Number of Times CDBG Recipients Were Monitored, FY 2001-2005

    Number of times 3-year period (FY           4-year period    5-year period
    monitored       2003-2005)a                 (FY 2002-2005)b  (FY
                                                                    2001-2005)c
    Not monitored                           255              140            84
    Once                                    588              502           396
    Twice                                   190              300           352
    Three times                              33               94           151
    Four times                              N/A               21            48
    Five times                              N/A              N/A            16

    Source: GAO analysis of GMP data.

    aWe excluded 77 recipients that were not entitlement communities all 3
    years, resulting in a total of 1,066 recipients. HUD monitored 12 of the
    77 new entitlement communities once during the 3-year period.

    bWe excluded 86 recipients that were not entitlement communities all 4
    years, resulting in a total of 1,057 recipients. HUD monitored 16 of the
    86 new entitlement communities once during the 4-year period.

    cWe excluded 96 recipients that were not entitlement communities all 5
    years, resulting in a total of 1,047 recipients. HUD monitored 22 of the
    96 new entitlement communities once during the 5-year period.

    Monitoring recipients is critical because it often results in findings.
    During our site visits, we reviewed 144 recipient files and found
    documentation problems.28 For example, 24 of the 144 files we reviewed
    did not contain sufficient documentation to show that the activity met
    one of the three national objectives, as required by the program.29
    Another 14 files did not note which national objective the activity was
    supposed to meet. Additionally, 46 files we reviewed showed no evidence
    of monitoring by the recipient.30 In contrast, recipients we visited tended
    to have signed agreements with their subrecipients as required by program
    regulations. Of the 90 cases that involved a subrecipient, 87 files contained
    a signed subrecipient agreement, and 76 of the 87 agreements contained the
    five required elements we tested. When HUD reviews files during its
    monitoring, it finds similar occurrences. Fifty-seven percent of HUD's fiscal
    year 2005 reviews resulted in at least one finding. In total, HUD's fiscal
    year 2005 monitoring resulted in 581 findings and 447 concerns.31 Examples of
    cited findings included not documenting a national objective, funding an
    ineligible activity, poor recordkeeping, and incomplete subrecipient
    requirements.

        HUD Has Limited Staff and Travel Funds to Devote to CDBG Monitoring

    HUD employs a risk-based monitoring approach because it has limited staff
    and travel funds to devote to CDBG monitoring. CPD's staffing levels have
    decreased nationwide, as its CDBG workload has increased. From fiscal year
    1993 to the beginning of fiscal year 2006, the number of CPD field office
    staff decreased from 751 to 599, a decline of 20 percent. During the same
    time period, the number of entitlement communities grew from 889

    28We reviewed documentation on 134 projects, of which 4 involved multiple
    activities or files, for a total of 144 files.

    29The documentation required varies based on the national objective. For
    instance, if CDBG funds were spent on an activity that benefited low- and
    moderate-income people based on the creation of jobs, the recipient must
    document (1) that it entered into a written agreement with the assisted
    business containing a commitment by the business that at least 51 percent
    of the jobs would be held by low- and moderate-income people and a listing
    by job title of the full and part-time permanent jobs to be created; (2)
    the number of permanent jobs filled and which jobs were initially held by
    low- and moderate-income people; and (3) for each low- or moderate-income
    person hired, the size and annual income of the person's family prior to
    the person being hired for the job.

    30When assessing the extent of monitoring performed, we excluded the six
    projects that were administration and planning projects.

    31A finding is a deficiency in program performance based on a statutory,
    regulatory, or program requirement for which sanctions or other corrective
    actions are authorized. A concern is a deficiency in program performance
    not based on a statutory, regulatory, or other program requirement.

    to 1,128, an increase of 27 percent. This increase in workload has had a
    greater effect on certain CPD field offices. As of February 2006, the
    average number of CDBG recipients per program representative was nearly
    four.32 The number of recipients per representative exceeded this average
    at 20 of the 42 CPD field offices and was six or more at three offices.33
    The HUD official responsible for CPD field office staff told us he would
    like to have more staff but has to get the work done with what he has.
    Additionally, CPD program representatives in their role as program
    monitors oversee other HUD programs, including three other formula grant
    programs, homeless programs, and a number of smaller competitive grant
    programs. For example, at the Chicago CPD office, each representative
    monitors four to six formula grants, as well as approximately 100
    competitive grants. Although they represent fewer dollars than the formula
    grant programs, the competitive grant programs require more monitoring,
    according to CPD program managers. The programs are generally administered
    by small nonprofit organizations that experience a large amount of staff
    turnover. Further, there were 9,705 active competitive grants in fiscal
    year 2005.

    A number of CPD field offices also do not have a financial analyst.
    Financial analysts are important because they evaluate the financial
    operations of each recipient and ensure that CPD's monitoring activities
    adequately address any financial vulnerabilities in CPD programs and
    related capacity concerns. They help field offices review budget
    submissions, financial report submissions, independent audit reports, and
    drawdown requests. As of late April 2006, 13 of the 42 CPD field offices
    did not have a financial analyst. These 13 field offices averaged a CDBG
    portfolio of $60 million. In offices we visited that did not have a
    financial analyst, other staff assumed some of the responsibilities of a
    financial analyst, but these staff had other responsibilities as well and
    lacked the specialized skills of a financial analyst.

    Staffing shortages may worsen in the future because many current CPD field
    staff are eligible to retire. As of February 2006, 39 percent of CPD field
    staff was eligible to retire within the next 3 years. If we include those
    eligible for early retirement, the percentage increases to 59 percent
    within

    32A program representative is in charge of working with a recipient to
    provide technical assistance, training, program guidance, and monitoring.

    33We focused on program representatives because they are primarily
    responsible for monitoring recipients, but other CPD staff are sometimes
    assigned recipients to monitor.

    Page 28 GAO-06-732 Community Development Block Grants

    the next 3 years. For example, the four officials we interviewed in the
    Milwaukee field office told us that they were all currently eligible to
    retire, including the CPD Director. Denver field office officials told us
    that the office could lose all but one of its program representatives to
    retirement in the next 5 years.

    HUD has not developed a plan to hire staff with needed skills, such as
    financial analysts, or to help CPD manage upcoming retirements. Our
    internal control standards state that agencies, as part of their human
    capital planning, should consider how to retain valuable employees, plan
    for their eventual succession, and ensure continuity of needed skills and
    abilities.34 According to a HUD official, HUD has taken a number of steps
    to manage its CPD workforce, such as hiring interns and implementing a
    leadership development program. However, these efforts do not specifically
    address the need to hire financial analysts and replace the staff that
    will become eligible for retirement in the next few years. According to
    internal control standards, an agency should have a specific and explicit
    workforce planning strategy that allows for identification of current and
    future human capital needs and a formal recruiting and hiring plan with
    explicit links to skill needs the agency has identified.35

    HUD internal reviews and the HUD Inspector General have also noted that
    limited staffing has negatively impacted CPD's monitoring. In fiscal year
    2004, 11 of the 12 internal management reviews, known as Quality
    Management Reviews, performed at CPD field offices noted staffing
    issues.36 For example, the reports noted that one office might not meet
    its monitoring goals due to significant loss of staff and that staff at
    two offices had an unbalanced workload. Also, one report noted that the
    field office needed a financial analyst for oversight of $113 million in
    CPD program funds. Furthermore, in a June 2004 report on CPD management
    controls, the HUD Inspector General observed that reductions in field
    office staffing

    34 GAO/AIMD-00-21.3.1.

    35GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G
    (Washington, D.C.: August 2001).

    36Quality Management Reviews are HUD-wide management reviews of its field
    office programs and services.

    Page 29 GAO-06-732 Community Development Block Grants

    levels had impacted CPD's monitoring capabilities.37 The report noted
    that, between 1993 and 2003, CPD had been negatively impacted by staffing
    challenges that had plagued all of HUD.

    Further, according to HUD field office staff, limited travel budgets have
    affected their ability to monitor CDBG recipients. For fiscal year 2005,
    the travel budget for all 42 CPD field offices was about $392,000. The
    travel budgets for the six field offices we visited ranged from $2,528 in
    Baltimore (11 CDBG recipients) to $20,691 in Los Angeles (105 CDBG
    recipients). Some field office staff told us their travel budgets affect
    which recipients they select for on-site monitoring during the risk
    assessment process. For example, they will limit their monitoring of
    recipients that require a high cost of travel. They will either conduct
    off-site monitoring or document an exception, which allows them to monitor
    these recipients less often despite their risk analysis score.
    Additionally, when monitoring recipients, field office staff sometimes
    shorten their visit to fit within their travel budget. In its June 2004
    report, the HUD Inspector General reported similar findings and added that
    field offices will also reduce the amount of staff participating in a
    monitoring visit in order to reduce travel costs. According to the
    headquarters official that manages CPD's field offices, he has to balance
    the travel needs of all 42 field offices when allocating limited travel
    funds. To help the field offices better plan their travel, he has begun
    providing them with quarterly, rather than monthly, allocations of funds.

        HUD Has Made Little Effort to Involve Field Staff in Plans to Redesign IDIS

    HUD is currently redesigning IDIS but has solicited limited input from its
    field staff. IDIS, a tool that HUD field staff use to conduct on-site and
    off-site monitoring, has shortcomings that limit its usefulness as a
    monitoring tool. IDIS was designed to be a real-time information system
    providing financial disbursement, tracking, and reporting functions for
    CPD. In our April 1999 report, we noted that the system was not providing
    needed information, and our current work indicates that, despite HUD
    improvements to the system, it still is not providing all the information
    needed to monitor recipients' performance. During our site visits, field
    office staff noted that (1) the data in IDIS are not always current
    because some recipients do not update it quarterly, as HUD recommends and
    (2) the accomplishment data in IDIS are not as reliable as the financial
    data. As

    37U.S. Department of Housing and Urban Development, Office of Inspector
    General, Audit of Management Controls over Grantee and Subgrantee
    Capacity, Community Planning and Development, 2004-FW-0001 (June 2004).

    Page 30 GAO-06-732 Community Development Block Grants

    previously noted, HUD is currently working with recipients to improve the
    quality of the accomplishment data. Also, a HUD headquarters official
    noted that HUD plans to add reports that will better assist field staff
    with their monitoring. Similarly, in a report on how to incorporate
    performance measures into IDIS, the National Academy of Public
    Administration found that (1) IDIS allows data input errors and omissions,
    (2) the ability to manipulate data for reporting purposes is limited, and
    (3) HUD staff and recipients have expressed frustration with using the
    system.38

    To improve the usefulness of IDIS, HUD is currently reengineering the
    system. The department has obligated $9.4 million for development of the
    new system. One problem with the initial development of IDIS was that HUD
    did not adequately consider input from end users. HUD has attempted to
    address this problem in the statement of work for the new system by
    stating that the contractor should gather requirements from HUD
    stakeholders and recipients. Specifically, the contractor was to work with
    HUD's field offices to identify issues with the current accomplishment
    reporting, hold sessions with both field office staff and recipients to
    solicit user requirements pertaining to reports, and develop a draft
    prototype to solicit HUD stakeholder and recipient feedback on proposed
    navigation approaches. Soliciting input from end users on their
    requirements is consistent with best practices for system development. Our
    guidance on information technology investment management states that (1)
    investment control processes should ensure that key customers and business
    needs for each project are identified and that the users are engaged in
    this process and (2) users should participate in project management
    throughout a project's or system's life cycle to ensure that it supports
    the organization's business needs and meets users' needs.39

    Contrary to the IDIS statement of work and our guidance on information
    technology investment management, HUD headquarters and its contractor have
    solicited little input from field staff. As the HUD staff tasked with
    monitoring CDBG recipients, field staff are the users that rely most
    heavily on IDIS as a monitoring tool. Although HUD headquarters and the

    38Staff Report from the National Academy of Public Administration for the
    Office of Community Planning and Development, U.S. Department of Housing
    and Urban Development, Integrating CDBG Performance Measures into IDIS
    (Washington, D.C.: February 2005).

    39GAO, Information Technology Investment Management: A Framework for
    Assessing and Improving Process Maturity, GAO-04-394G Version 1.1
    (Washington, D.C.: March 2004).

    Page 31 GAO-06-732 Community Development Block Grants

    contractor have held only one session with field staff, they have already
    drafted a document outlining the system's functional requirements.
    According to the HUD official that is overseeing development of the new
    system, the one session held with field staff was unproductive; therefore,
    they plan to wait until they are making decisions regarding the standard
    reports that the system will generate to solicit additional input from
    field office staff. If HUD's plans to involve its field staff in efforts
    to improve IDIS are limited to soliciting input regarding the new system's
    reporting capabilities, the other factors that have limited IDIS'
    effectiveness as a monitoring tool may not be addressed.

      HUD Has Implemented a Clear Timeliness Policy, but Has Not Issued Similar
      Guidance on Other Enforcement Actions

    Although HUD has issued a clear policy stating what actions it will take
    when entitlement communities fail to meet the statutory requirement that
    funds be spent in a timely manner, it has not developed similar guidance
    establishing a consistent framework for holding CDBG recipients
    accountable for deficiencies identified during monitoring. Because federal
    law requires HUD to ensure timely expenditure of entitlement funds, HUD
    has set a timeliness standard for entitlement communities and established
    a grant reduction policy for recipients that exceed the standard. As it
    monitors CDBG recipients, however, HUD has the flexibility to assess other
    sanctions ranging from issuing a warning letter to advising the recipient
    to pay back CDBG funds. HUD headquarters has not issued guidance that
    describes the conditions under which each type of sanction should be
    taken, and we found instances in fiscal year 2005 where findings that
    appeared to be similar were associated with different enforcement actions.

        HUD's Timeliness Policy Has Reduced the Number of Entitlement Communities
        That Are Slow to Expend Funds

    By implementing a timeliness standard, HUD has reduced the number of
    entitlement communities that are slow to expend funds. Federal law
    requires HUD to review CDBG entitlement communities to determine if they
    have carried out their CDBG-assisted activities in a timely manner.40 It
    considers an entitlement community to be timely if, 60 days prior to the
    end of the recipient's current program year, the amount of entitlement
    grant funds available under grant agreements but undisbursed by the U.S.
    Treasury was not more than 1.5 times the entitlement grant amount for its

    40While HUD encourages states to expend their funds in a timely manner,
    its timely expenditure standard does not apply to them. Federal law only
    requires states to distribute their funds to nonentitlement communities in
    a timely manner. HUD does not have the statutory authority to impose a
    timely expenditure standard for states.

    Page 32 GAO-06-732 Community Development Block Grants

    current program year. To ensure that entitlement communities comply with
    this standard, HUD established a grant reduction policy for untimely
    recipients in November 2001. The new policy stated that an untimely
    recipient had 1 year to become timely. If it still did not meet the 1.5
    standard at the end of its next program year, HUD would reduce its next
    grant by how much it exceeded the standard, unless HUD determined that the
    lack of timely spending was due to factors beyond the recipient's control.
    For example, if a recipient's annual grant was $1 million and its 60-day
    ratio was 1.57, the maximum amount of the reduction would be $70,000 (0.07
    times $1 million).

    Since the implementation of this grant reduction policy, the number of
    untimely entitlement communities has gone down from 140 in November 2001
    to 65 as of April 2006. Of the 65 recipients that were untimely as of
    April 2006, 8 had a 60-day ratio above 2.0. The remaining recipients had
    60-day ratios between 1.51 and 2.0. Although HUD could not provide a list
    showing the total number of recipients that have been untimely for only a
    year since the inception of the standard, it has tracked the total number
    that were untimely for 2 consecutive years and, therefore, subject to
    grant reduction. As of April 2006, 14 recipients had been subject to grant
    reduction. Of these 14, HUD only reduced three recipients' funding. It
    granted exceptions to six recipients due to factors such as natural
    disasters that triggered Presidential disaster designations and did not
    take action against three because HUD failed to provide proper notice to
    the recipient when it first became untimely. The remaining two had moved
    under the 1.5 standard quickly, and HUD decided not to reduce their
    grants.

        Guidance Could Help Ensure Sanctions Are Appropriate

    When they identify deficiencies other than failing to meet the timeliness
    standard, HUD's field offices have the flexibility to determine which
    sanctions are warranted based on the conditions identified. As shown in
    table 4, HUD's monitoring of CDBG recipients during fiscal years 2003 to
    2005 resulted in approximately 1,900 findings and about 350 sanctions. In
    fiscal year 2005, HUD assessed 95 sanctions, including about $1.6 million
    in financial sanctions.

            Table 4: Sanctions Taken against CDBG Recipients, FY 2003 - 2005

    Fiscal                                                 Amount of financial
    year          Concerns       Findings      Sanctions             sanctions
    2003                   538           685           110          $2,025,487
    2004                   488           644           147           7,217,377
    2005                   447           581            95           1,616,704
    Total                1,473     1,910               352         $10,859,568

    Source: GAO analysis of GMP data.

    Note: Some, but not all, sanctions result in a financial action.

    The sanctions that HUD may take against recipients range from issuing a
    letter of warning to advising recipients to reimburse their lines of
    credit.41 Beyond the program regulations that describe the purpose of
    taking corrective actions and the various actions that can be taken, HUD
    has issued no guidance to its field offices describing what conditions its
    field staff should consider when taking corrective actions and what
    specific conditions warrant different types of corrective actions.42
    Instead, its 42 field offices have the flexibility to determine the types
    of sanctions for findings that they identify. According to HUD
    headquarters officials, field offices may call HUD headquarters for advice
    before taking sanctions against a recipient. Figure 7 shows that the
    action taken the most often during fiscal year 2005 was that of advising
    the recipient to alter or end an activity.

    41If the recipient fails to take corrective or remedial action that
    resolves the deficiency to the satisfaction of HUD, HUD may impose more
    severe sanctions, such as terminating payments to the recipient. However,
    HUD may impose these sanctions only after, in most circumstances, the
    recipient is provided an opportunity for a hearing before an
    administrative law judge.

    42The program regulations state that corrective actions should be designed
    to (1) prevent a continuation of the performance deficiency; (2) mitigate,
    to the extent possible, the adverse effects or consequences of the
    deficiency; and (3) prevent a recurrence of the deficiency.

    Figure 7: Sanctions Taken as Result of FY 2005 Monitoring Reviews, by Type

    Source: GAO analysis of GMP data.

    Note: Numbers do not add to 100 percent due to rounding. In one of the few
    cases where HUD advised a recipient to change a payment, it advised the
    recipient to reimburse expenses improperly charged to others. In the one
    case where HUD advised a recipient to reprogram funds, it advised the
    recipient to shift the funds to an eligible activity. The other sanctions
    that HUD took included advising recipients to provide additional
    documentation, collect additional information on people served, or report
    activities differently in IDIS.

    Our internal control standards state that agencies should implement
    control activities, which are policies and procedures that enforce
    management's directives and ensure accountability.43 One such strategy is
    to document the steps taken to implement internal controls. Such
    documentation should be clear and readily available. Contrary to these
    standards, HUD has not clearly documented the steps that its field offices
    take to determine the appropriate sanctions when deficiencies are
    identified during monitoring. Such guidance could establish the parameters
    within which field office should operate, while still allowing for
    consideration of individual situations. By establishing a framework within
    which field offices should operate, HUD headquarters could instill
    accountability as well as allow field staff to make individual judgments
    based on factors such as a recipient's past performance and the frequency
    and severity of findings.

    In the absence of guidance, HUD's field offices have treated recipients
    that committed similar infractions differently. In our meetings with
    several national organizations that represent CDBG recipients,
    representatives

    43 GAO/AIMD-00-21.3.1.

    noted that their members have observed inconsistent interpretation of
    program regulations across HUD field offices. Further, we found instances
    where deficiencies identified in fiscal year 2005 seemed similar to us but
    different corrective actions were taken.

         o Inability to support meeting a national objective: When one field
           office found that a recipient could not support that an activity met a
           national objective, it asked the recipient to provide either more
           documentation or a written assurance that it would not fund that type
           of activity in the future. In contrast, another field office advised a
           recipient that could not document that an activity met a national
           objective to reimburse its line of credit. In another instance, a
           field office stated that it might disallow expenditures if the
           recipient could not document that an activity met a national
           objective.
         o Documenting environmental reviews: When one field office determined
           that a recipient had not documented any follow-up compliance actions
           for projects where mitigating measures for environmental compliance
           were identified, even after the office had previously identified the
           lack of follow up as a concern, it advised the recipient to submit
           documentation showing that follow-up actions had been taken. In
           another case where a field office determined that a recipient had
           failed to fully document its environmental reviews, that field office
           advised the recipient to suspend disbursement of funds for all
           activities until it put in place revised environmental review
           procedures and the appropriate level of environmental review had been
           carried out.

    Guidance providing HUD's 42 field offices with a range of appropriate
    actions for identified deficiencies could help to provide greater
    transparency and accountability, and it could better ensure consistency of
    sanctions for similar infractions.

                                      Conclusions

    Many communities use their CDBG funds to benefit their residents and
    increase the economic health of the community. One of the cited strengths
    of the program is its flexibility, which allows communities to make
    decisions locally about the best use of the funds in their community.
    Given the program's flexibility, it is critical that HUD ensure that
    recipients use funds in a manner that is consistent with the purposes of
    the program. While there are statutory spending limits on public services
    and planning and administration, HUD does not centrally maintain the data
    needed to determine compliance with these spending limits in a timely
    manner.

    Entitlement communities collectively spend at or close to the limits on
    public services and planning and administration. Therefore, it is
    important for HUD to be able to report on the extent of entitlement
    community compliance with these limits. Without these data readily
    available, HUD cannot provide timely assurance that recipients are
    adhering to these limits.

    With program funding being cut as the number of grant recipients
    increases, it is essential for HUD to ensure that recipients use funds
    properly. Because it has limited monitoring resources, HUD has implemented
    a risk-based process to identify recipients for review. However, HUD faces
    challenges as it carries out these responsibilities. First, a large
    percentage of the field staff responsible for monitoring CDBG recipients
    will be eligible for retirement within the next 3 years. HUD has not
    developed a plan for replacing this vital program expertise. HUD has
    established an internship program and other initiatives to develop senior
    leaders, but such activities will not, in themselves, replace experienced
    professionals. Without such a plan, HUD has no way to ensure continuity of
    needed skills and abilities. Second, HUD is reengineering IDIS-the system
    that it relies on to monitor recipients it cannot review on-site-to
    address a number of shortcomings in the system, but its plans to involve
    HUD field staff in these efforts are limited to soliciting input regarding
    the new system's reporting capabilities. If it does not fully involve all
    of the system's stakeholders in the reengineering process, as it failed to
    do when initially developing the system, HUD runs the danger of repeating
    past development mistakes and having to live with a flawed system that
    limits its monitoring abilities. Developing a system that better meets the
    monitoring needs of HUD field staff has increased in importance in an
    environment where the number of monitoring staff is declining as the
    workload is increasing.

    While allowing for judgment and flexibility, an effective monitoring
    program should also make it transparent to recipients what actions may be
    taken if deficiencies are found. HUD has established a clear policy
    stating that it will reduce an entitlement community's grant funds if it
    fails to spend its funds in a timely manner, and, as a result, the number
    of untimely recipients has dropped. However, HUD has not developed similar
    guidance laying out a framework of enforcement actions that may be taken
    when certain deficiencies are identified during monitoring, and we found
    instances where findings that appeared to be similar were associated with
    different enforcement actions. Such guidance could establish the
    parameters within which field offices should operate, while still allowing
    for flexibility to address individual situations. Issuing guidance could
    also help HUD's management provide greater transparency and accountability
    to the sanctioning process.

      Recommendations for Executive Action

    In order to improve HUD's oversight of the CDBG program, we recommend
    that the Secretary of Housing and Urban Development direct the Assistant
    Secretary for Community Planning and Development to take the following
    four actions:

         o Maintain in IDIS the data needed to determine compliance with the
           statutory limitations on expenditures for public service activities
           and administration and planning.
         o Develop a plan for ensuring the proper mix of skills and abilities and
           replacing an aging CPD workforce.
         o Look for additional opportunities to solicit field staff input on IDIS
           user requirements.
         o Consider developing guidance for the CDBG program that details what
           conditions should be considered when taking corrective actions and
           what specific conditions warrant different types of corrective
           actions.

      Agency Comments and Our Evaluation

    We provided HUD with a draft of this report for review and comment. We
    received oral comments from the Office of Community Planning and
    Development's Comptroller on July 12, 2006, addressing our key findings,
    conclusions, and recommendations. He stated that, overall, HUD agrees with
    our findings, conclusions, and recommendations. In addition, HUD provided
    a letter from the General Deputy Assistant Secretary for Community
    Planning and Development with comments that were technical in nature. This
    letter and our response to each of the comments appear in appendix IV. HUD
    also provided other oral technical comments that were incorporated where
    appropriate.

    As agreed with your offices, unless you publicly announce the contents of
    this report earlier, we plan no further distribution until 30 days from
    the date of this letter. At that time, we will send copies of this report
    to the Ranking Minority Member, Subcommittee on Housing and Community
    Opportunity, House Committee on Financial Services; Ranking Minority

    Page 38 GAO-06-732 Community Development Block Grants

    Member, Subcommittee on Federalism and the Census, House Committee on
    Government Reform; Ranking Minority Member, Subcommittee on Federal
    Financial Management, Government Information, and International Security,
    Senate Committee on Homeland Security and Governmental Affairs; and the
    Chairman and Ranking Minority Member, Subcommittee on Housing and
    Transportation, Senate Committee on Banking, Housing, and Urban Affairs.
    We will also send copies to the Secretary of Housing and Urban
    Development. Copies of this report will also be available to other
    interested parties upon request. In addition, the report will be made
    available at no charge on the GAO Web site at

    http://www.gao.gov.

    If you or your staff have any questions about this report, please contact
    me at (202) 512-8678 or shearw@gao.gov. Contact points for our Offices of
    Congressional Relations and Public Affairs may be found on the last page
    of this report. Key contributors to this report are listed in appendix V.

    William B. Shear

    Director, Financial Markets and Community Investment

    Appendix I

                           Objectives, Scope, and Methodology

    The Chairman of the Subcommittee on Housing and Community Opportunity,
    House Committee on Financial Services; the Chairman of the Subcommittee on
    Federalism and the Census, House Committee on Government Reform; and the
    Chairman, Subcommittee on Federal Financial Management, Government
    Information, and International Security, Senate Committee on Homeland
    Security and Governmental Affairs requested that we review the use of
    Community Development Block Grant (CDBG) funds and how the Department of
    Housing and Urban Development (HUD) oversees the program. In particular,
    we examined (1) how recipients have used CDBG funds, including the extent
    to which they have funded activities that meet national program
    objectives, complied with spending limits, and reported accomplishments
    achieved with funds;

    (2) how HUD has monitored recipients' use of CDBG funds; and (3) how HUD
    has held recipients that have not complied with CDBG program requirements
    accountable for their actions.

    To accomplish these objectives, we analyzed fiscal year 2005 data from
    HUD's Integrated Disbursement and Information System (IDIS) and fiscal
    year 2001 through 2005 data from the Grants Management Process (GMP)
    System on all CDBG recipients. We assessed the reliability of the HUD data
    we used by reviewing information about the systems, performing electronic
    data testing to detect errors in completeness and reasonableness, and
    discussing the data with knowledgeable agency officials. We determined
    that the data were sufficiently reliable for the purposes of this report.
    In addition to analyzing HUD data on all CDBG recipients, we visited 20
    recipients. As shown in table 5, we visited 17 recipients in six large
    metropolitan areas as well as 3 smaller recipients outside large
    metropolitan areas.1 In selecting the recipients located in large
    metropolitan areas, we considered geographic dispersion, funding level,
    need,2 and proximity to a HUD field office and state capital. We selected
    the smaller recipients outside large metropolitan areas based on their
    population and location. Of the 20 recipients we visited, 4 were states, 2
    were urban counties, and 14 were cities. We also visited four

    1We considered a community to be within a metropolitan area if it was
    within 70 miles of the central city. This meant that some of the
    communities that we considered to be within a certain metropolitan area,
    such as Greeley, Colorado, were outside that metropolitan area as defined
    by the Office of Management and Budget.

    2We determined "need" using the needs scores HUD developed for its recent
    study on the formula used to distribute CDBG funds. See U.S. Department of
    Housing and Urban Development, Office of Policy Development and Research,
    CDBG Formula Targeting to Community Development Need (Washington, D.C.:
    February 2005).

    Appendix I Objectives, Scope, and Methodology

    nonentitlement communities funded by the states of Georgia and Maryland.3
    We interviewed the eight HUD field offices that monitor the grantees we
    visited and interviewed staff at HUD headquarters.4 Finally, we
    interviewed representatives of four national organizations that represent
    CDBG recipients-the Council of State Community Development Agencies, the
    National Association for County Community and Economic Development, the
    National Association of Housing and Redevelopment Officials, and the
    National Community Development Association-to obtain their views on the
    use of CDBG funds and HUD's oversight of the program.

                        Table 5: 20 Recipients That GAO Visited

    Area                          Recipient
    Atlanta metropolitan area     Atlanta, Georgia State of Georgia
    Baltimore metropolitan area   Baltimore, Maryland Baltimore County,
                                     Maryland State of Maryland
    Boston metropolitan area      Boston, Massachusetts Attleboro,
                                     Massachusetts Commonwealth of Massachusetts
    Chicago metropolitan area     Chicago, Illinois Kane County, Illinois
                                     Naperville, Illinois
    Denver metropolitan area      Denver, Colorado Greeley, Colorado State of
                                     Colorado
    Los Angeles metropolitan area Los Angeles, California Gardena, California
                                     Santa Monica, California
    Other                         Beloit, Wisconsin Dubuque, Iowa Warner
                                     Robins, Georgia

    Source: GAO.

    3These nonentitlement communities were Poulan, Georgia; West Point,
    Georgia; Denton, Maryland; and Caroline County, Maryland.

    4We interviewed staff in person and collected documentation from the
    Atlanta, Baltimore, Boston, Chicago, Denver, and Los Angeles field
    offices. We interviewed staff at the Milwaukee and Omaha field offices via
    the telephone.

    Page 41 GAO-06-732 Community Development Block Grants Appendix I
    Objectives, Scope, and Methodology

    To determine how the communities that receive CDBG funds use those funds,
    we reviewed CDBG program regulations to determine how recipients are
    allowed to use their funds. We then analyzed IDIS data on activities
    funded as of September 30, 2005, to determine (1) the activities most
    often funded by recipients in fiscal year 2005, (2) any differences
    between the activities most often funded by entitlement and state
    recipients in fiscal year 2005, and (3) the percentage of activities
    funded in fiscal year 2005 that met each of the three national program
    objectives. For examples of how communities use their funds, we relied on
    documentation provided by the 20 recipients we visited and pictures we
    took during our site visits. We had planned to use IDIS data to examine
    the extent to which CDBG recipients were complying with the statutory
    spending limits on public services and planning and administration but
    determined that (1) IDIS did not save some of the data needed to determine
    compliance by entitlement communities and (2) IDIS data cannot be used to
    determine states' compliance with the limits. Therefore, we requested data
    from HUD showing the percentage of funds spent by selected recipients on
    public services as well as on planning and administration. We initially
    requested data on the 200 entitlement communities that received the most
    funding, but HUD could only provide data on the 100 most populous
    entitlement communities within our time frames. We then analyzed that data
    to determine how many had exceeded the two spending limits in program year
    2004. We also analyzed HUD data to determine the number of recipients
    eligible for the special exception that allows certain recipients to count
    activities that benefit fewer than 51 percent low- and moderateincome
    persons as meeting the low- and moderate-income national objective in
    fiscal year 2006. To determine the status of HUD's efforts to implement a
    performance measurement system, we reviewed the notices published in the
    Federal Register and guidance on HUD's Web site as well as interviewed HUD
    officials.

    To identify how HUD monitors communities' use of CDBG funds, we reviewed
    HUD's monitoring guidance to determine which tools it uses to monitor
    recipients. To gain an understanding of HUD's formal monitoring, we
    reviewed documentation on its risk analysis process and interviewed the
    HUD headquarters officials responsible for setting monitoring policy as
    well as HUD field staff responsible for performing the monitoring. We
    analyzed data from HUD's Integrated Performance Reporting System (HIPRS)
    to determine if the Office of Community Planning and Development (CPD) met
    its monitoring goal in fiscal year 2005. We interviewed a knowledgeable
    agency official regarding the data and determined that they were
    sufficiently reliable for the purposes of this

    Appendix I Objectives, Scope, and Methodology

    report. We also analyzed GMP data to determine (1) if HUD's field offices
    complied with its risk analysis process in fiscal year 2005, (2) the
    extent to which HUD monitored CDBG recipients in fiscal years 2001 to
    2005, and (3) what types of monitoring findings HUD had in fiscal year
    2005. To determine the adequacy of HUD's monitoring resources, we reviewed
    information on CPD staffing and travel budgets. To assess the usefulness
    of IDIS as a monitoring tool, we reviewed reports on the system and
    interviewed HUD field staff regarding their experiences with using the
    system. We also reviewed HUD's plans for reengineering IDIS and discussed
    them with the responsible HUD official.

    To assess the extent to which the recipients we visited have complied with
    CDBG program regulations, we reviewed 144 project files.5 To identify
    projects for review, we requested that each recipient provide a list of
    the projects that they had awarded in calendar year 2003. We used the
    calendar year because recipients' fiscal years vary, and we chose 2003
    because we anticipated that projects would be well under way or complete
    by the time of our review. From the list that each recipient provided, we
    selected a stratified random sample of 6 to 10 projects; the number of
    files selected depended on the funding level of the recipient-more files
    were selected for recipients with larger grants.6 If we determined that a
    project selected for review was terminated after it was awarded, we
    selected a replacement project. When reviewing the files, we looked for
    (1) documentation showing that the activity funded met a national
    objective, (2) a subrecipient agreement that included the information
    required in the program regulations (if applicable), and (3) evidence that
    the recipient had monitored the activity.

    To determine the extent to which HUD has held recipients that have not
    complied with CDBG program requirements accountable for their actions, we
    reviewed the CDBG program regulations to determine what sanctions HUD can
    take against recipients. We reviewed HUD's policy on timely expenditure of
    funds and analyzed data on the number of untimely recipients as of April
    2006. We also analyzed GMP data to determine the number of sanctions that
    HUD had taken in fiscal years 2003 to 2005 and the specific types of
    sanctions it took in fiscal year 2005. In addition, we

    5We reviewed documentation on 134 projects, of which 4 involved multiple
    activities or files, for a total of 144 files.

    6For every recipient we visited, except Warner Robins, Georgia, we
    reviewed a random sample of files. In Warner Robins, we reviewed all six
    subrecipient files.

    Page 43 GAO-06-732 Community Development Block Grants Appendix I
    Objectives, Scope, and Methodology

    interviewed HUD field and headquarters staff to determine how they decide
    which sanctions to take against recipients.

    We performed our work from July 2005 to July 2006 in accordance with
    generally accepted government auditing standards.

    Appendix II

    Selected States' Methods of Distributing Funds

    The methods that states use to distribute CDBG funds vary. To demonstrate
    the variety of methods used, we examined the approach that the following
    10 states take when distributing their funds: Georgia, Colorado, Maryland,
    Massachusetts, North Carolina, New York, Ohio, Pennsylvania, Puerto Rico,
    and Texas.1 We selected these states because we visited the first four and
    the remaining six received the largest funding allocations in federal
    fiscal year 2005. To determine the method of distribution used, we
    reviewed each state's fiscal year 2005 action plan.2 Table 6 provides
    information such as how each state allocates its funds among various
    activities, the evaluation criteria used to select applications, and
    incentives or application bonuses offered.

    1The Commonwealth of Puerto Rico is a United States Territory, but it is
    classified as a state for the purposes of the CDBG program.

    2While these plans describe how each state planned to distribute its
    fiscal year 2005 allocation from HUD, they do not cover the same time
    periods because the states' fiscal years vary.

    Page 45 GAO-06-732 Community Development Block Grants Appendix II Selected
    States' Methods of Distributing Funds

           Table 6: Information on How 10 States Distribute Their CDBG Funds

                    Colorado Georgia Maryland Massachusetts New York

    FY 2005    $12,428,946    $44,692,413    $8,944,527     $38,578,167       $54,423,586
    allocation
    Program    April 1 to     July 1 to June July 1 to June April 1 to March  January 1 to
    year       March 31       30             30             31                December 31
    Breakdown  o  Housing     o  Annual      o  Community   o  Community      o  Annual
    of         (32.3%)  o     competition    development    development (54%) competition
    allocation Business       (77%)  o       (72%)  o        o  Housing       (60%)  o
               financing      Immediate      Business and   development       Economic
               (32.3%)  o     threat and     economic       support (12%)  o  development
               Public         danger (1%)  o development    Economic          (35%)  o
               facilities and Employment     (25%)  o       development (6%)  Imminent
               community      incentives     Technical      o                 threat (2%)  o
               development    (16%)a  o      assistance     Mini-entitlements  Technical
               (32.3%)  o     Redevelopment  (1%)  o  State (23%)b  o         assistance
               Technical      fund (3%)  o   administration Reserves (2%)  o  (1%)  o  State
               assistance     Technical                     Technical         administration
               (1%)  o  State assistance                    assistance        (2%)
               administration (1%)  o State
               (2%)
                              administration (2%)           (1%)  o  State
                                        (2%)                administration
                                                            (2%)
                                             o  Public
                              o  Demographic purpose  o     o  Financial
               o  Project     need  o        Project impact feasibility  o    o  Municipal
               impact  o      Program         o  Project    Affordability  o  poverty score
    Evaluation Public and     feasibility  o management  o  Readiness to      o  Program
    criteriad  private         Program       Local          proceed  o        impact  o
               commitments  o strategy  o    commitment  o  Developer         Outstanding
                Management    Project impact Project        capacity  o  Site performance
               capability      o  Leverage   feasibility  o and design  o
                              of additional   Sources and   Cost
                              resources      use            effectiveness
                              o  Urgent need of funds  o    o  Community
                                             Readiness to   needs score
                                             proceed  o
                                             Past
                                             performance

      Application Applications Annual       Applications All programs Annual
      deadline    accepted     competition  accepted at  accept       competition
                  until all    accepts      set time     applications accepts
                  funds are    applications each year.   at set time  applications
                  allocated.   at a set                  each year,   at set times
                               time each                 except       each
                               year, but                 economic     year, but
                               all other                 development, all other
                               programs                  which        programs
                               accept                    accepts      accept
                               applications              applications applications
                               until all                              on a first
                               funds are                  until all   come, first-
                               allocated.                 funds are   served
                                                         allocated.   basis, until
                                                                      all funds
                                                                      are
                                                                      allocated.

               Appendix II Selected States' Methods of Distributing Funds

    North Carolina Ohio           Pennsylvania  Puerto Rico  Texas
    $50,010,517    $54,560,938    $55,485,726   $53,094,663  $82,305,507
    January 1 to   July 1 to June  January 1 to July to June     February 1 to
    December       30                  December 30                  January 31
    31                            31

         o Community revitalization (31%)
         o Scattered site housing (29%)
         o Infrastructure (11%)
         o Housing development (4%)
         o Economic development (20%)
         o Urgent needs (2%)
         o Technical assistance (1%)
         o State administration (2%)
         o Community housing improvement (15.6%)
         o Homeless assistance (1%)
         o Formula allocation (42.5%)
         o Water and sewer (19.2%)
         o Economic development (12.3%)
         o Downtown revitalization (4.6%)
         o Discretionary grant (1%)
         o Micro enterprise business development (0.4%)
         o New horizon (0.2%)
         o Technical assistance (1%)
         o State administration (2.2%)
         o Annual competition (13%)
         o Cities (24%)
         o Towns (38%)
         o Counties (38%)
         o State administration (2%)
         o Basic grant (34%)
         o Competitive fund (61%)
         o Emergency grant (2%)
         o Technical assistance (1%)
         o State administration (2%)
         o Community development (61%)
         o Texas capital (15%)
         o Colonia (13%)c
         o Planning and capacity building (1%)
         o Disaster relief fund (4%)
         o Texas community development program- small towns environment program
           (3%)
         o Technical assistance (1%)
         o State administration (2.2%)
         o Severity of needs
         o Local commitment
         o Feasibility
         o Rotatione
         o Capacity
         o Market demand
         o Job creation
         o Community distress
         o Administrative capacity
         o Past performance
         o Program design and impact
         o Cost effectiveness
         o Leverage and coordination
         o Magnitude and severity of need
         o Third party support
         o Impact of problem on residents in affected area
         o Basic grant distributes funds evenly among 51 nonentitlement
           communities
         o Competitive fund distributes funds based on past performance, project
           impact, feasibility, and number of beneficiaries
         o Emergency grant distributes funds on a case-by-case basis
         o Project impact
         o Community needs
         o Feasibility
         o Leverage ratio
         o Management capacity
         o Past performance

    Community revitalization and scattered site housing accept applications at
    set times. All other programs accept applications until all funds are
    allocated.f

    All programs accept applications at a set time each year, except for
    Economic development, Discretionary grant and New horizon, which accept
    applications until all funds are allocated.

    All programs accept applications at a set time each year, except Annual
    competition, which accepts applications until all funds are allocated.

    Basic grant and competitive fund accept applications at a set time period
    each year. Emergency grant accept applications when an urgent need occurs.

    All programs accept applications at a set time each year or when a natural
    disaster occurs.

    Appendix II Selected States' Methods of Distributing Funds Appendix II
    Selected States' Methods of Distributing Funds

    (Continued From Previous Page)
                    Colorado Georgia         Maryland Massachusetts  New York
    Incentives   None     Available for   None     No incentives, None
    or                    certain                  but all
    application           applicants               communities
    bonuses               proposing                have a
    offered               projects in              community wide
                             revitalization           needs score
                             areas.                   that can help
                                                      their chances
                                                      of receiving
                                                      an award.
    Matching     None     Annual          None     None           Economic
    requirement           competition                             development
                             grantees must                           requires
                             match 5 percent                         applicants
                             of awards                               to match at
                             ranging from                            least 60
                             $300,001 to                             percent of
                             $500,000 and 10                         total
                             percent for                             project
                             awards over                             costs for
                             $500,000.                               which CDBG
                                                                     funds are
                                                                     being
                                                                     requested.

    North Carolina   Ohio                Pennsylvania Puerto Texas
                                                          Rico
    Economic         Economic            None         None   None
    development      development
    offers           considers
    additional       applicants to be
    funding for jobs more competitive in
    created in state the selection
    designated       process if they
    communities.     create jobs for
                        low- and
                        moderate-income
                        individuals.
    Economic         Economic            None         None   Disaster relief
    development      development                             applicants must
    requires most    requires applicants                     match awards
    grantees to      to leverage funds                       based on
    match at least   from other sources.                     population size;
    25 percent of    All other programs                      the larger the
    awards received. do not require a                        population, the
                        match, but it can                       larger the match
                        make applicants                         required. All
                        more competitive in                     other programs
                        the selection                           require a match
                        process.                                to be competitive
                                                                in the selection
                                                                process.

    Source: GAO analysis of state data.

    aThe Employment Incentive Program awards grants to nonentitlement
    communities to offer loans to private-for-profit entities that create
    and/or retain jobs for persons who are low- and moderate-income.

    bThe Mini Entitlement Program awards grants to nonentitlement communities
    based on multiple parameters that other grantees are not required to meet,
    including population, percentage of low- and moderate-income persons, age
    of housing stocks, and population density.

    cColonia refers to any unincorporated community with poor water and sewage
    systems and housing. Texas' allocation for colonia includes the Colonia
    Fund and Non-Border Colonia fund, which have geographic differences but
    address similar community needs.

    dEvaluation criteria listed are a summary of the various criteria that the
    states use to evaluate applications for their programs.

    eRotation refers to county governments that receive scattered site housing
    grants on a revolving basis to address housing needs of very low income
    families in the county. f

    The Housing development program has two components-one accepts
    applications at a set time each year and the other accepts applications
    until all funds are allocated.

    Appendix III

    Activities Funded by the Recipients That GAO Visited

    During our review of the CDBG program, we visited 16 entitlement
    communities and four states. Additionally, we visited four nonentitlement
    communities funded by two of the states we visited (Georgia and Maryland).
    These recipients funded the following examples of public improvement,
    housing, public service, economic development, and acquisition activities.

                                  Public Improvements

    West Point, Georgia (a nonentitlement community) used $500,000 in CDBG
    funds awarded by the state of Georgia to build a new Boys and Girls Club
    (see fig. 8). According to the city's application for funds, the old Boys
    and Girls Club did not have an accessible entry, had several leaks in the
    roof that could only be temporarily repaired, did not have load bearing
    walls, and had a mechanical system that appeared to be well beyond its
    reasonable life expectancy. The total budget for the project was $721,500,
    including operating costs. According to the application, the club plans on
    serving 200 children, 180 of which are from low- and moderate-income
    families.

                  Figure8: Boys and Girls Club in West Point, Georgia

    Source: GAO.

    Former location of Boysand Girls Club (left). New location and building
    for Boysand Girls Club (right).

    o  Poulan, Georgia (a nonentitlement community) utilized a $499,081 grant
    from the state of Georgia to replace a portion of the city's corroding
    water pipes. At the time of the grant, the corroding water pipes

    Appendix III Activities Funded by the Recipients That GAO Visited

    restricted the amount of water that flowed through the water lines and
    caused the water to become discolored and rusty. According to local
    officials, the water that was fed through these water lines was not
    suitable for drinking, bathing, or cleaning clothes. In addition to the
    money provided by the state, the city of Poulan provided $40,000. Over 70
    percent of residents that benefited from the new water lines had low- and
    moderate-incomes.

         o The state of Maryland awarded the town of Denton (a nonentitlement
           community) $600,000 to make improvements to city streets.
           Specifically, the funding was used to install a new storm water
           management system, curbs, gutters, sidewalks, and paving. The CDBG
           grant provided $431,913 for construction, $148,087 for project
           administration and contingency, and $20,000 for general
           administration. The project was matched with a $566,950 loan and a
           $4,920 grant from the U.S. Department of Agriculture and $7,841 from
           the town of Denton.
         o Attleboro, Massachusetts used $222,267 in CDBG funds to finance, in
           part, the reconstruction of the Fred E. Briggs Playground municipal
           pool and bathhouse, which is located in a census tract where 59
           percent of the households are of low- and moderate-income. The city
           demolished the old pool, the bathhouse, the building that housed the
           filtration system, the walkways, and the fencing and constructed a
           brand new municipal pool and bathhouse facility (see fig. 9). The
           capital project was necessary to bring both the pool and bathhouse
           into compliance with federal, state and local building and health
           codes and to provide accessibility for persons with disabilities. The
           total project cost was $537,849.

    Appendix III Activities Funded by the Recipients That GAO Visited

         Figure 9: Renovated Briggs Playground Pool in Attleboro, Massachusetts

    Source: GAO.

    o  Kane County, Illinois used $28,592 in CDBG funds to finance the
    rehabilitation of the Corron Farm Park (see fig. 10), located in and owned
    by Campton Township. The structure was listed in the Kane County Register
    of Historic Places and was vacant and badly deteriorated when
    rehabilitation work began. The building will house a local history museum
    upon completion. Additionally, local officials told us that the investment
    of CDBG funds helped reinforce local efforts to protect open space in an
    area facing rapid growth and development. The overall funding for the
    project was $64,936, with Campton Township investing $36,344 in the
    project.

    Appendix III Activities Funded by the Recipients That GAO Visited

                             Source: Kane County, Illinois.

      Housing

    Greeley, Colorado spent $236,000 in 2003 CDBG funds to continue its
    single-family housing rehabilitation program and provide emergency
    assistance to the elderly and persons with disabilities. Efforts were
    concentrated in areas targeted for urban renewal. Activities included in
    the housing rehabilitation were housing rehabilitation and weatherization,
    housing replacement, property acquisition, ramps for persons with
    disabilities and elderly, first-time home buyer's program, and urban
    renewal (see fig. 11).

    Appendix III Activities Funded by the Recipients That GAO Visited

    Source: GAO.

         o In 2003, Atlanta, Georgia provided $350,000 in CDBG funds to Southeast
           Energy Assistance (SEA) for energy-related repairs to 225 homes owned
           by low-income residents. These repairs eliminate air leaks to make
           homes more energy efficient and reduce heating and cooling costs. SEA
           is a nonprofit organization that is a service provider for the
           federally funded Weatherization Assistance Program (WAP). WAP services
           include adding insulation to floors, walls, and attics; replacing or
           repairing damaged exterior doors and windows; and installing
           weatherstripping and caulking.
         o In fiscal year 2003, the Commonwealth of Massachusetts awarded
           $1,118,125 in funding to the town of Oak Bluffs to rehabilitate 40
           units of substandard housing in the towns of Oak Bluffs, Aquinnah,
           Chilmark, Edgartown, Tisbury, and West Tisbury. Low- and
           moderate-income persons residing in substandard housing were eligible
           to participate. Upon completion of the grant, a total of 47 units had
           been rehabilitated. The project utilized three loan options: a
           deferred payment loan, a deferral agreement loan, and a direct
           reduction loan. Ten loans were

    Appendix III Activities Funded by the Recipients That GAO Visited

    issued at or under $30,000, 23 loans were issued at or under $25,000, and
    14 loans were issued at or under $20,000.

         o Chicago, Illinois provided $5.9 million in CDBG funds to build
           Wentworth Commons. Wentworth Commons provides affordable housing to
           families and individuals that were formerly homeless or at risk of
           homelessness. To qualify to live at Wentworth, applicants must make 60
           percent or less of the area median income. Overall, there are 51 units
           at the site: 24 efficiency apartments, 15 three-bedroom apartments, 9
           two- bedroom apartments, and 3 four-bedroom apartments. The site also
           features supportive services such as case management, employment
           training, and leadership development. The building is environmentally
           friendly and energy efficient. It uses solar energy to generate
           electricity into the building's electrical distribution system, which
           offsets electrical use. The total cost of the project was $13 million.
         o Los Angeles, California runs a "Handyworker" Program that provides
           minor home repair services to low-income senior citizens or homeowners
           with disabilities. The program helps keep housing from deteriorating
           by funding repairs that homeowners could not otherwise afford. In
           program year 2004, the city budgeted $2,000,000 in CDBG funds for the
           program. Grants of up to $5,000 per client were available for repairs
           or home improvements that address home safety, accessibility, and
           security issues. Improvements include exterior and interior painting,
           minor finish work, the installation of disability grab bars and
           accesiblity ramps, minor plumbing, and other repairs. Through this
           program, the city is working to preserve the existing stock of
           affordable housing. The city's goal for program year 2004 was to
           provide 1,552 households "Handyworker" services.
         o Caroline County, Maryland (a nonentitlement community) began receiving
           state of Maryland CDBG funds in 2002 to rehabilitate housing for low-
           and moderate-income households. Since 2002, the county has received
           $575,000 in CDBG funds to rehabilitate 51 homes. Additionally, the
           county also received $17,250 in CDBG funds in 2003 to complete a
           housing study. The county told us that the CDBG funds have also helped
           the county leverage $10,250 from the U.S. Department of Agriculture
           for housing rehabilitation.
         o Baltimore County, Maryland conducts a Single Family Rehabilitation and
           Emergency Repair Program. Since the inception of the program, the

           Appendix III Activities Funded by the Recipients That GAO Visited

    county has assisted nearly 1,850 income eligible households. In fiscal
    year 2005, the county spent $1 million in CDBG funds to assist 93
    households. The program provides loans of up to $25,000 per home. The
    loans are then deferred until the sale, refinance, or transfer of
    property. During ownership, the county allows homeowners to make certain
    repairs and home improvements.

                                    Public Services

    Naperville, Illinois provided $19,223 in program year 2005 funding for the
    Loaves and Fishes Community Food Pantry (see fig. 12). The food pantry
    provides groceries that ensure a healthy diet to Naperville's low-income
    and homeless clients. According to Loaves and Fishes, 3,000 Naperville
    residents live in poverty. On a weekly basis, the food pantry provides 250
    families with the equivalent of three bags of groceries to last for a
    2-week period. In 2005, the food pantry provided: services to over 1,500
    families, home delivery to over 100 seniors and individuals with
    disabilities, and over 1,800 holiday food distributions.

                                      Source: GAO.

    Appendix III Activities Funded by the Recipients That GAO Visited

         o Denver, Colorado provided $50,000 in 2003 funding to Brothers
           Redevelopment Incorporated to provide the salaries and benefits for a
           director and two part time counselors. The director and part time
           counselors provided information, referrals and mortgage counseling for
           low- and moderate-income households in the Denver community.
         o Santa Monica, California provided $242,442 in program year 2005 CDBG
           funding toward the SAMOSHEL homeless shelter. SAMOSHEL provides 110
           shelter beds to homeless adults, and expects to serve up to 500
           persons annually with their emergency shelter. Additionally, the
           shelter provides services such as access to medical and mental health
           services, permanent and transitional housing programs, domestic
           violence intervention, counseling and case management, and substance
           abuse recovery support and employment services.
         o In fiscal year 2003, Warner Robins, Georgia provided $41,000 in CDBG
           funds to the Gateway Cottage. The Gateway Cottage program targets
           young homeless mothers recovering from substance abuse. The cottage
           provides housing and resources for a time span of 1 year while
           providing training in hygiene, personal finance, substance abuse,
           parenting, and daily living skills. The program networks with other
           service providers to link clients with job training, educational
           opportunities, and physical and mental health services. Upon
           graduation from the program, clients are eligible to apply for the
           aftercare component of the program, which is supportive housing in
           conjunction with supportive services.
         o Beloit, Wisconsin provided $7,068 for the Beloit Chore Service Program
           in 2005. The program provides senior citizens with screened, qualified
           workers who will do home maintenance and repairs at affordable prices.
           The program staff screen workers and verify that they are qualified to
           perform the repair and maintenance work. The workers provide
           inexpensive home repairs, which allow seniors to remain independent
           and in their own homes.
         o Baltimore, Maryland provided $80,700 in 2003 CDBG funds to the
           Belair-Edison Neighborhoods Incorporated. The funds were used to
           undertake several activities including prepurchasing, default and
           delinquency counseling, fair housing counseling and education,
           homeownership workshops, and public information and technical
           assistance to businesses in the Belair-Edison area of Baltimore.

           Appendix III Activities Funded by the Recipients That GAO Visited

      Economic Development

    o  In fiscal year 2005, Boston, Massachusetts designated $856,697 in CDBG
    funds for its Boston Main Streets program. The city of Boston provided
    funding and technical assistance to 19 neighborhood-based Main Streets
    districts throughout the city. The program helps the local districts
    capitalize on their unique cultural and historical assets while focusing
    on the community's economic development needs. Examples of activities
    funded under the program include small business recruitment, business
    retention, and addressing competition from shopping malls and discount
    retailers. From 1995 to December 2005, the city created 540 new businesses
    and 3,643 new jobs, and leveraged $9,645,644 in additional private
    investment through the program.

    o  Dubuque, Iowa provided a $500,000 CDBG loan to Heartland Financial in
    April 2003 as an incentive to select a downtown location for the company's
    expansion of 47 new jobs (see fig. 13). The $4.5 million project provided
    for the renovation of two downtown buildings both of which are on the
    National Register of Historic Places. In addition, it provided for reuse
    of the vacant buildings, retained a workforce in the downtown, and created
    new jobs for low- and moderate-income persons.

    Appendix III Activities Funded by the Recipients That GAO Visited

                             Source: City of Dubuque, Iowa.

           Appendix III Activities Funded by the Recipients That GAO Visited

         o As of the 2003/2004 fiscal year, the city of Gardena, California had
           expended $490,755 in CDBG funds revitalizing their Van Ness Corridor.
           The goal of the revitalization was to strengthen the economic vitality
           of the city, provide employment opportunities, stimulate quality
           retail development, and create a sustainable economic base for the
           city. The city provided funds to businesses along the corridor to
           eliminate slum and blight. CDBG assistance has included financial
           assistance for facade and exterior improvements, providing block wall
           and infrastructure improvements along the corridor, conducting a
           business survey to develop and implement a business outreach program,
           and providing an on-going graffiti abatement and removal program.

      Acquisition

      	  o The state of Colorado provided $250,000 in CDBG funds to help a health
    clinic in Lafayette, Colorado acquire property to build a new facility.
    Clinica Campesina is a community health center serving the needs of the
    low-income, uninsured residents of Southeastern Boulder, Broomfield, and
    Western Adams Counties. Ninety-six percent of the patients that the clinic
    serves are at or below 200 percent of the federal poverty line. The
    clinic's patients are predominately children under the age of 13 (38
    percent) and women of childbearing age (28 percent). The total project
    budget was $1.3 million.

    Appendix IV

    Comments from the Department of Housing and Urban Development

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix. (Page references in this letter may differ.)

    See comment 1.

    See comment 2.

    See comment 3.

    See comment 4.

    Appendix IV Comments from the Department of Housing and Urban Development

                                     See comment 5.

                                     See comment 6.

                                     See comment 7.

    Appendix IV Comments from the Department of Housing and Urban Development

                                     See comment 8.

                                     See comment 9.

                            See comment 10. See comment 11.

                                    See comment 12.

    Appendix IV Comments from the Department of Housing and Urban Development

    The following are GAO's comments on the Department of Housing and Urban
    Development's letter dated July 11, 2006.

      GAO Comments

    1. We agree that it is important to monitor compliance with

    administration and planning and public service spending caps. However, our
    report emphasizes HUD's need to centrally maintain data on compliance with
    statutory spending limits so that it can report on the extent of
    compliance; therefore, we made no change to the report in response to this
    comment.

    1. The CPD staffing/hiring plan was approved in June 2006 and was
           provided to us along with HUD's written agency comments. Because the
           plan was provided at the close of this engagement this report does not
           evaluate the extent to which the plan addresses identified workforce
           needs.
    2. The guidance that HUD references was issued in the 1990s. When we
           interviewed the Director of CPD's Office of Field Management and field
           office staff regarding the monitoring of CDBG recipients, they stated
           that they were following the new CPD Monitoring Handbook, which was
           issued in September 2005. The introduction to this handbook states
           that it establishes standards and provides guidance for monitoring CPD
           programs, including CDBG. Beyond referring field staff to various
           sections of the program regulations, the new handbook does not
           describe what conditions its field staff should consider when taking
           corrective actions and what specific conditions warrant different
           types of corrective actions. Because we believe that HUD needs a
           consistent framework for holding CDBG recipients accountable for
           deficiencies identified during monitoring, we made no change to the
           report.
    3. Our report acknowledges that any additional guidance that HUD develops
           for its field staff taking sanctions could allow for the consideration
           of individual situations. Because individual situations may vary, we
           stated that such guidance could establish a framework, or parameters,
           within which field offices should operate. Although HUD points to
           several forms of guidance in its comment, none of them specifically
           addresses the concerns raised in this report. The regulatory language
           in 24 C.F.R. 570.910(a) states that corrective actions should be
           designed to (1) prevent a continuation of the performance deficiency;

    (2) mitigate, to the extent possible, the adverse effects or consequences
    of the deficiency; and (3) prevent a recurrence of the deficiency. While

    Appendix IV Comments from the Department of Housing and Urban Development

    this language establishes the purpose of taking sanctions, it does not
    provide parameters that help field staff determine which specific
    corrective sanction is appropriate to address the deficiency identified.
    Section 2-8.B. of the CPD Monitoring Handbook describes HUD's basis for
    determining whether a deficiency should result in a finding or concern,
    but it does not help field office staff determine which sanction may be
    appropriate if the deficiency results in a finding. Finally, as we
    mentioned in our response to the previous comment, the additional handbook
    HUD referenced was issued in 1992, while the CPD Monitoring Handbook was
    issued in 2005. Given the great flexibility that exists when taking
    sanctions, we believe it would be useful to provide field office staff
    further guidance to ensure they are treating recipients that commit
    similar infractions equitably.

    1. We revised the report to include the suggested text.
    2. We revised the text to make it clear that the 29 exhibits we mention
           are in the two handbook chapters that are specific to the CDBG
           program.
    3. We agree that the meetings referenced by HUD can be helpful in sharing
           information on current operational issues with IDIS. However, the
           meetings that HUD has referenced are either regularly scheduled
           management meetings or training on HUD's new performance measurement
           system. None of these meetings are the field office sessions that are
           specifically mentioned in the statement of work for the reengineered
           IDIS system. When we asked about the status of sessions that the
           statement of work said would be held with field staff regarding user
           requirements, accomplishment reporting, and proposed navigation
           approaches, the HUD official that is overseeing development of the new
           system stated that these sessions would not be held until late summer
           2006 at the earliest, although a functional requirements document had
           already been drafted. Further, additional statements made by that
           official and HUD's written comments indicate that the focus of future
           meetings with field staff will only be on reporting requirements. We
           continue to believe that soliciting input from end users on system
           requirements is consistent with best practices for system development
           and recommend that field office staff should participate in project
           management throughout the system's life cycle to ensure that the
           completed system supports both HUD's business needs and the end user
           field office needs.

    Appendix IV Comments from the Department of Housing and Urban Development

    1. We agree that monitoring low- or medium-risk grantees can serve a
           useful and valid program purpose, especially considering the large
           number of grantees designated as such. The report acknowledges that
           HUD policy permits the monitoring of medium- and low-risk recipients
           by noting that they can be reviewed using remote, or off-site,
           monitoring. Therefore, we made no change to the report.
    2. We agree that monitoring recipients is critical to fulfill statutory
           and regulatory responsibilities to assess compliance as well as carry
           out stewardship responsibilities. In our report, we are providing one
           reason why monitoring is critical, not an all-inclusive list, so we
           did not change the report.
    3. We revised the text as suggested.
    4. We agree that grant monitoring is a critical stewardship
           responsibility. This section of our report is highlighting the fact
           that program funding cuts are being made at the same time as the
           number of grant recipients is increasing, which creates challenges as
           HUD carries out its stewardship responsibilities.
    5. We agree that it is easier to develop policies and procedures to
           address timeliness deficiencies than it is to develop guidance that
           addresses the myriad of deficiencies identified during monitoring.
           However, given the importance of holding CDBG recipients accountable
           for how they use their funds, we recommend that HUD consider issuing
           additional guidance for field staff that establishes the parameters
           within which field offices should operate and provides greater
           transparency to the sanctioning process.

    Appendix V

                         GAO Contact and Staff Acknowledgments

      GAO Contact

    William Shear, (202) 512-8678

      Staff Acknowledgements

    In addition, Paul Schmidt, Assistant Director; Nima Patel Edwards; Cynthia
    Grant; Curtis Groves; Alison Martin; John McGrail; Marc Molino; David
    Noguera; David Pittman; Nitin Rao; and Paige Smith made key contributions
    to this report.

      GAO's Mission

    The Government Accountability Office, the audit, evaluation and
    investigative arm of Congress, exists to support Congress in meeting its
    constitutional responsibilities and to help improve the performance and
    accountability of the federal government for the American people. GAO
    examines the use of public funds; evaluates federal programs and policies;
    and provides analyses, recommendations, and other assistance to help
    Congress make informed oversight, policy, and funding decisions. GAO's
    commitment to good government is reflected in its core values of
    accountability, integrity, and reliability.

    Obtaining Copies of GAO Reports and Testimony

    The fastest and easiest way to obtain copies of GAO documents at no cost
    is through GAO's Web site ( www.gao.gov ). Each weekday, GAO posts GAO
    Reports and newly released reports, testimony, and correspondence on its
    Web site. To have GAO e-mail you a list of newly posted products every
    afternoon, go to www.gao.gov and select "Subscribe to Updates."

                                 Order by Mail or Phone

    The first copy of each printed report is free. Additional copies are $2
    each. A check or money order should be made out to the Superintendent of
    Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
    copies mailed to a single address are discounted 25 percent. Orders should
    be sent to:

    U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
    D.C. 20548

    To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
    512-6061

    Contact:

    To Report Fraud, Web site: www.gao.gov/fraudnet/fraudnet.htm

      E-mail: fraudnet@gao.gov

    Federal Programs Automated answering system: (800) 424-5454 or (202)
    512-7470

    Congressional Relations

    Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S.
    Government Accountability Office, 441 G Street NW, Room 7125 Relations
    Washington, D.C. 20548

      Public Affairs

    Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800
    U.S. Government Accountability Office, 441 G Street NW, Room 7149
    Washington, D.C. 20548
    *** End of document. ***