Major Management Challenges and Program Risks: Department of Housing and
Urban Development (Other Written Prod., 01/01/99, GAO/OCG-99-8).

This publication is part of GAO's performance and accountability series
which provides a comprehensive assessment of government management,
particularly the management challenges and program risks confronting
federal agencies. Using a "performance-based management" approach, this
landmark set of reports focuses on the results of government
programs--how they affect the American taxpayer--rather than on the
processes of government. This approach integrates thinking about
organization, product and service delivery, use of technology, and human
capital practices into every decision about the results that the
government hopes to achieve. The series includes an overview volume
discussing governmentwide management issues and 20 individual reports on
the challenges facing specific cabinet departments and independent
agencies. The reports take advantage of the wealth of new information
made possible by management reform legislation, including audited
financial statements for major federal agencies, mandated by the Chief
Financial Officers Act, and strategic and performance plans required by
the Government Performance and Results Act. In a companion volume to
this series, GAO also updates its high-risk list of government
operations and programs that are particularly vulnerable to waste,
fraud, abuse, and mismanagement.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  OCG-99-8
     TITLE:  Major Management Challenges and Program Risks: Department 
             of Housing and Urban Development
      DATE:  01/01/99
   SUBJECT:  Accountability
             Federal agency reorganization
             Financial management
             Risk management
             Mortgage programs
             Personnel management
             Housing programs
             Management information systems
             Internal controls
IDENTIFIER:  Performance and Accountability Series 1999
             HUD Grants Evaluation Management System
             HUD 2020 Management Reform Plan
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed 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.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Performance and Accountability Series

January 1999

MAJOR MANAGEMENT CHALLENGES AND
PROGRAM RISKS - DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT

GAO/OCG-99-8

HUD Challenges


Abbreviations
=============================================================== ABBREV

  CFO - X
  FHA - X
  FMFIA - X
  FSI - X
  HUD - X
  OMB - X

Letter
=============================================================== LETTER



January 1999

The President of the Senate
The Speaker of the House of Representatives

This report addresses the major performance and management challenges
that have limited the effectiveness of the Department of Housing and
Urban Development (HUD) in carrying out its mission.  It also
addresses corrective actions that HUD has taken or initiated on these
challenges, including the reforms it announced in June 1997, and
further actions that are needed.  For many years, we have reported
significant management problems at HUD.  These problems are the
results of serious deficiencies in internal controls, information and
financial management systems, organizational structure, and staffing. 
These deficiencies cut across HUD's program areas. 

HUD is making significant changes and has made credible progress
since 1997 in laying the framework for improving the way the
Department is managed.  HUD's Secretary and leadership team have
given top priority to addressing the Department's management
deficiencies.  This top management attention is critical and must be
sustained in order to achieve real and lasting change.  Importantly,
given the nature and extent of the challenges facing the Department,
it will take time to implement and assess the impact of any related
reforms.  While major reforms are under way, several are in the early
stages of implementation.  Consequently, we continue to believe, as
we reported in 1995 and 1997, that these management deficiencies,
taken together, place the integrity and accountability of HUD's
programs at high risk. 

This report is part of a special series entitled the Performance and
Accountability Series:  Major Management Challenges and Program
Risks.  The series contains separate reports on 20 agencies--one on
each of the cabinet departments and on most major independent
agencies as well as the U.S.  Postal Service.  The series also
includes a governmentwide report that draws from the agency-specific
reports to identify the performance and management challenges
requiring attention across the federal government.  As a companion
volume to this series, GAO is issuing an update to those government
operations and programs that its work has identified as "high risk"
because of their greater vulnerabilities to waste, fraud, abuse, and
mismanagement.  High-risk government operations are also identified
and discussed in detail in the appropriate performance and
accountability series agency reports. 

The performance and accountability series was done at the request of
the Majority Leader of the House of Representatives, Dick Armey; the
Chairman of the House Government Reform Committee, Dan Burton; the
Chairman of the House Budget Committee, John Kasich; the Chairman of
the Senate Committee on Governmental Affairs, Fred Thompson; the
Chairman of the Senate Budget Committee, Pete Domenici; and Senator
Larry Craig.  The series was subsequently cosponsored by the Ranking
Minority Member of the House Government Reform Committee, Henry A. 
Waxman; the Ranking Minority Member, Subcommittee on Government
Management, Information and Technology, House Government Reform
Committee, Dennis J.  Kucinich; Senator Joseph I.  Lieberman; and
Senator Carl Levin. 

Copies of this report series are being sent to the President, the
congressional leadership, all other Members of the Congress, the
Director of the Office of Management and Budget, the Secretary of
Housing and Urban Development, and the heads of other major
departments and agencies. 

David M.  Walker
Comptroller General of
the United States


OVERVIEW
============================================================ Chapter 0

Directly or indirectly, the Department of Housing and Urban
Development (HUD) affects millions of Americans as it carries out the
federal government's missions, policies, and programs for housing and
community development.  These missions range from making housing
affordable by insuring loans for multifamily rental housing
properties and providing rental assistance for about 4.5 million
low-income residents, to helping revitalize over 4,000 localities
through community development programs, to encouraging homeownership
by providing mortgage insurance to about 7 million homeowners who
might not have been able to qualify for nonfederally supported loans. 
HUD is also one of the nation's largest financial institutions, with
significant commitments, obligations, and exposure.  As of September
30, 1997, HUD was responsible for managing about $454 billion in
insured mortgages and $531 billion in guarantees of mortgage-backed
securities.\1 For fiscal year 1999, it has $24.3 billion in budget
authority. 


--------------------
\1 These mortgage-backed securities are guaranteed by HUD's
Government National Mortgage Association and backed by pools of
mortgage loans insured or guaranteed by HUD's Federal Housing
Administration, the Department of Agriculture's Rural Housing
Service, or the Department of Veterans Affairs. 


   THE CHALLENGES
---------------------------------------------------------- Chapter 0:1

We designated HUD as a high-risk area in 1994 because of four
serious, long-standing departmentwide management deficiencies.  We
reported on these deficiencies and HUD's progress in resolving them
in 1995 and 1997.\2 Taken together, these deficiencies placed the
integrity and accountability of HUD's programs at high risk. 
Specifically, internal control weaknesses, such as a lack of
necessary data and management processes, were a major factor leading
to the HUD scandals of the late 1980s.  Second, poorly integrated,
ineffective, and generally unreliable information and financial
management systems did not meet the needs of program managers and
weakened their ability to provide management control over housing and
community development programs.  Third, HUD had organizational
deficiencies, such as overlapping and ill-defined responsibilities
and authorities between its headquarters and field organizations and
a fundamental lack of management accountability and responsibility. 
Finally, an insufficient mix of staff with the proper skills hampered
the effective monitoring and oversight of HUD's programs and the
timely updating of procedures.  Resolving these management
deficiencies is particularly critical for HUD because its housing and
community development programs rely extensively on the integrity of
thousands of diverse individuals and entities, such as cities, public
housing authorities, mortgage lenders, contractors, and property
owners over whom it does not have direct control. 

HUD continues to make credible progress in overhauling its operations
to correct its management deficiencies.  First, it has improved its
financial reporting to the extent that its Inspector General was able
to provide qualified opinions on its financial statements for fiscal
years 1996 and 1997, compared with no opinion on the reliability of
its financial statements for fiscal year 1995.  In addition, it
deployed components for improving its information and financial
management systems; reorganized its resources by function; and
established various consolidated or centralized entities for
single-family insurance operations, the payment of rental assistance,
assessments of HUD-owned or HUD-supported rental properties, and
enforcement activities.  Finally, it refocused and began retraining
its workforce. 

A major contributor to this progress is HUD's June 1997 2020
Management Reform Plan, a set of proposals intended to, among other
things, correct the management deficiencies that we and others (e.g.,
HUD's Inspector General, external auditors) identified.  The plan
calls for reducing the number of programs, reducing staffing levels,
retraining the majority of the staff and separating service from
compliance functions, reorganizing the 81 field offices,
consolidating processes and functions within and across program areas
into specialized centers, and modernizing and integrating information
and financial management systems.  HUD has also linked its management
reform efforts to the strategic and annual plans it has developed
under the Government Performance and Results Act of 1993.\3 As a
result, its success in achieving strategic objectives and meeting
annual performance goals depends on the success of its management
reforms.  Booz-Allen and Hamilton, Inc., reported in March 1998 that
these reforms, when implemented, should present a significant
improvement in HUD's performance; lower the risk of fraud, waste, and
abuse in its programs; and position the Department to better serve
America's communities. 

While major reforms are under way, our recent work indicates that
internal control weaknesses and problems with information and
financial management systems persist.  Furthermore, recent reforms to
address the Department's organizational and staffing problems are in
the early stages of implementation, and it is too soon to tell
whether or not they will resolve the major deficiencies that we and
others have identified.  Consequently, we continue to believe, as we
reported in 1995 and 1997, that these deficiencies, taken together,
place the integrity and accountability of HUD's programs at high
risk.  To resolve these management deficiencies, the Department needs
to ensure that the actions being taken eliminate the remaining major
internal control weaknesses; strengthen the management and oversight
of efforts to integrate HUD's information and financial management
systems and correct these systems' weaknesses; ensure that the field
offices have enough staff to carry out the work assigned, including
the monitoring of programs and activities and the assessment of
outcomes; and ensure that all staff have the skills needed to perform
their functions. 


--------------------
\2 High-Risk Series:  Department of Housing and Urban Development
(GAO/HR-95-11, Feb.  1995) and High-Risk Series:  Department of
Housing and Urban Development (GAO/HR-97-12, Feb.  1997). 

\3 The Results Act seeks to shift the focus of government
decisionmaking and accountability from activities to results. 


      INTERNAL CONTROL WEAKNESSES
      PERSIST
-------------------------------------------------------- Chapter 0:1.1

While HUD has initiated actions that should help to address the
internal control weaknesses that we and others have identified,
material internal control weaknesses persist in its management of the
Section 8 subsidy payment process, which provides $18 billion in
rental assistance; control and management of staff resources;
management of losses resulting from defaults in the single-family and
multifamily insurance programs; implementation of automated systems
to provide needed management information or reliable data; and
monitoring of multifamily properties and of the single-family and
multifamily notes inventories.  In addition, HUD identified
inadequate contracting procedures as a departmentwide material
internal control weakness for fiscal year 1997.  Furthermore, since
we issued our 1997 report, we have reported that HUD has not
adequately monitored, among other things, its real estate asset
management contractors, the performance of appraisers of properties
purchased with FHA-insured loans, and its process for deobligating
funds no longer needed for Section 8 project-based rental assistance
contracts. 

A strong internal control system provides the framework for
accomplishing management objectives, accurate financial reporting,
and compliance with laws and regulations.  Effective internal
controls serve as checks and balances against undesired actions,
thereby providing reasonable assurance that resources are effectively
managed and accounted for.  Not having good internal controls puts an
entity at risk of mismanagement, waste, fraud, and abuse. 


      WORK REMAINS ON HUD'S
      INFORMATION AND FINANCIAL
      MANAGEMENT SYSTEMS
-------------------------------------------------------- Chapter 0:1.2

While efforts to integrate HUD's information and financial management
systems are well under way, the Department will continue to be
adversely affected by inadequate systems and information until it has
completed these efforts.  The fiscal year 1997 audit of HUD's
consolidated financial statements continued to report material
internal control weaknesses in financial systems that were
departmentwide or FHA-wide.  In addition, we recently reported that
HUD does not know when its systems integration effort will be
completed, or at what cost, because it has not yet finalized detailed
project plans or cost and schedule estimates for this effort.\4 We
concluded that without such plans, the Department is likely to
continue to spend millions of dollars, miss milestones, and still not
fully meet its objective of developing and fully deploying an
integrated financial management system.  We also reported that HUD
has not yet fully implemented a complete, disciplined information
technology investment management process.  Therefore, we concluded
that HUD does not have adequate assurance that it is selecting the
right projects or maximizing its return on investment. 


--------------------
\4 HUD Information Systems:  Improved Management Practices Needed to
Control Integration Cost and Schedule (GAO/AIMD-99-25, Dec.  18,
1998). 


      IT IS TOO EARLY TO ASSESS
      THE EFFECTIVENESS OF
      ORGANIZATIONAL CHANGES
-------------------------------------------------------- Chapter 0:1.3

Although a new field organization structure is now in place and
operational, it is too early to assess the effectiveness of this
structure in correcting organizational deficiencies.  Under HUD's
reform initiatives, some of the work previously carried out by field
offices will be transferred to centers.  Such work includes the
financial assessment and physical inspection of multifamily
properties, work related to troubled public housing authorities,
enforcement activities, and Section 8 financial management
activities.  Additionally, some service and compliance functions
formerly assigned to the field offices will be shifted to staff
designated as community builders and public trust officers,
respectively. 

However, the enforcement, financial management, and real estate
assessment centers will not be performing all of their centralized
functions until 1999 and 2000, when the transfer of functions and
responsibilities from the field offices to the centers is expected to
be complete.  To date, no significant transfers have occurred except
to homeownership centers, according to the field office managers and
staff we interviewed between July and October 1998.\5 Office managers
also indicated that the transfer of community service and outreach
functions and responsibilities from the field offices to community
builders was in a transitional phase. 


--------------------
\5 From July through October 1998, we interviewed HUD managers and
staff at selected locations about the effect on their programs and
work of the various organizational changes made under the 2020 plan. 
We judgmentally selected the Denver homeownership center; the Fort
Worth, Chicago, Houston, and New Orleans field offices; the troubled
agency recovery center at Memphis; and the real estate assessment and
enforcement centers in Washington, D.C., to conduct our work. 


      STAFFING UNDER THE 2020
      REFORM PLAN IS IN TRANSITION
-------------------------------------------------------- Chapter 0:1.4

Because staffing reforms and workload transfers from the field
offices to the centers are still occurring, the effectiveness of
HUD's changes in correcting staffing deficiencies cannot be
determined.  For example, most of the field offices we visited
initially lost staff following HUD's staffing reforms.  However, some
of these staff losses were recovered after HUD finalized staffing
decisions in September 1998.  While most of the offices we visited
reported being fully staffed, three of the centers were understaffed. 
The enforcement center had 62 percent of its authorized staff level,
the real estate assessment center 40 percent, and the Memphis
troubled agency recovery center 86 percent.  HUD managers said the
vacant positions in these centers will be advertised sometime in
1999.  In addition, HUD has not yet developed a process for
identifying and justifying its staff resource requirements. 


   PROGRESS AND NEXT STEPS
---------------------------------------------------------- Chapter 0:2

Given the severity of the management deficiencies that we and others
have observed, it would not be realistic to expect that HUD would
have substantially implemented its reform efforts and demonstrated
success in resolving its management deficiencies in the 2 years since
we issued our last report.  Nevertheless, with close oversight by the
Congress, HUD is making significant changes and has made credible
progress since 1997 in laying the framework for improving its
management.  HUD's Secretary and leadership team have given top
priority to addressing the Department's management deficiencies. 
This top management attention is critical and must be sustained in
order to achieve real and lasting change.  Importantly, given the
nature and extent of the challenges facing the Department, it will
take time to implement and assess the impact of any related reforms. 
While major reforms are under way, several are in the early stages of
implementation, and it is too soon to tell whether or not they will
resolve the major deficiencies that we and others have identified. 
Therefore, in our opinion, the integrity and accountability of HUD's
programs remain at high risk. 


MAJOR PERFORMANCE AND MANAGEMENT
ISSUES
============================================================ Chapter 1

The HUD scandals of the late 1980s focused public attention on
management problems at HUD.  In 1994, we designated HUD as a
high-risk area because of four serious, long-standing departmentwide
management problems.  These deficiencies, taken together, placed the
integrity and accountability of HUD's programs at high risk.  First,
internal control weaknesses, such as a lack of necessary data and
management processes, were a major factor leading to the scandals. 
Second, poorly integrated, ineffective, and generally unreliable
information and financial management systems did not meet the needs
of program managers and weakened their ability to provide management
control over housing and community development programs.  Third, HUD
had organizational problems, such as overlapping and ill-defined
responsibilities and authorities between its headquarters and field
organizations and a fundamental lack of management accountability and
responsibility.  Finally, an insufficient mix of staff with the
proper skills hampered the effective monitoring and oversight of
HUD's programs and the timely updating of procedures.  These problems
can affect the management of HUD's $454 billion in insured mortgages
and $531 billion in guarantees of mortgage-backed securities (as of
September 30, 1997).  They can also affect the management of HUD's
other programs, funded by $24.3 billion in budget authority for
fiscal year 1999. 


   ACTIONS ARE UNDER WAY TO
   ADDRESS INTERNAL CONTROL
   WEAKNESSES, BUT PROBLEMS
   PERSIST
---------------------------------------------------------- Chapter 1:1

Internal control weaknesses that we and others have identified at HUD
in the past include a lack of staff and resources to manage and
monitor its real estate inventory, an inadequate early warning system
to prevent losses through defaults in its single-family and
multifamily insurance programs, inadequate controls over a rental
assistance program, inadequate automated systems to provide needed
management information or reliable data, and an inadequate management
control system. 

A strong internal control system provides the framework for
accomplishing management objectives, accurate financial reporting,
and compliance with laws and regulations.  Effective internal
controls serve as checks and balances against undesired actions,
thereby providing reasonable assurance that resources are effectively
managed and accounted for.  Not having good internal controls puts an
entity at risk of mismanagement, waste, fraud, and abuse. 

In February 1997, we reported that HUD had made limited progress in
addressing internal control weaknesses by implementing a new
management planning and control program intended to identify and rank
the major risks in each program and devise strategies to abate those
risks.  We also reported that HUD had reduced the material weaknesses
identified through its Federal Managers' Financial Integrity Act
(FMFIA) assessment from 51 in the early 1990s to 9 at the end of
fiscal year 1996.\6

At the same time, we noted that the remaining material weaknesses
were long-standing and put large sums of money at risk and that
financial audits continued to identify material internal control
weaknesses in HUD's programs.  We also found that managers were not
actively assessing risks in their programs as required under the
management control program.  Finally, we reported in 1997 that HUD's
monitoring of program participants, despite its importance as a
management tool, continued to be problematic. 


--------------------
\6 Management control programs for federal agencies are mandated by
FMFIA and supplemented by requirements established by the Office of
Management and Budget.  Each year, federal departments are to report
whether their management control systems provide reasonable assurance
that the requirements of FMFIA are being met, identify any new
material weaknesses and instances of nonconformance, and report any
corrective actions taken on previously existing material weaknesses. 


      2020 REFORM PLAN IS DIRECTED
      TOWARD INTERNAL CONTROL
      WEAKNESSES
-------------------------------------------------------- Chapter 1:1.1

Under its June 1997 2020 Management Reform Plan, HUD has taken a
number of actions to begin addressing its internal control problems. 
In 1998, HUD's Office of Chief Financial Officer (CFO) established
the Risk Management Division, which worked with the Department's
program offices and nationwide centers in preparing risk assessments
for programs that were being established or substantially revised. 
In fiscal years 1997 and 1998, the CFO also worked with certain
program offices to prepare special risk assessments on some existing
programs to identify and develop action plans to reduce risks.  The
program offices, with assistance from the CFO, will continue to carry
out special risk assessments on existing programs.  The CFO is also
developing a risk evaluation database that will be used to identify
programs needing special risk reviews.  The database will include
information on program funding, reviews by us and HUD's Inspector
General, and internal reviews.  In addition, as of September 30,
1998, the CFO's Risk Management Division completed risk management
training for over 1,100 headquarters and field managers.  As of
November 1998, the CFO had also revised the 1992 handbook on HUD's
Management Control Program.  The revised handbook, among other
things, reinforces the requirement that front-end risk assessments be
performed on any new program with a funding level of $10 million or
more and on substantially revised programs or administrative
functions where the revision results in increases or decreases of
more than $10 million or the revision is equal to a change of 5
percent in the budget line item. 

As part of its reform plan, HUD established a real estate assessment
center, which has issued regulations on the physical and financial
assessments of multifamily properties and public housing authorities. 
However, the center will not be fully functional until 2000.  It will
not begin financial assessments of multifamily properties until
around April 1999, when audited financial statements on the
properties are submitted to HUD.  Although physical inspections of
public housing authorities will start in 1999, financial assessments
will not begin until 2000.  The additional year is needed to give
housing authorities time to convert their annual financial statements
from HUD's accounting guidance to generally accepted accounting
principles in accordance with the uniform financial standards for
HUD's housing programs.  The center began physically inspecting
multifamily properties in October 1998 and, according to HUD, had
inspected over 4,200 properties as of late December 1998. 

HUD also established an enforcement center to investigate and take
enforcement actions against troubled multifamily and public housing
authority properties that do not comply with HUD's regulations. 
Although the enforcement center began operations on September 1,
1998, it is not scheduled to perform all of its centralized functions
until around April 1999, when it is to begin receiving referrals of
troubled multifamily properties from the real estate assessment
center.\7 However, as of December 1998, the enforcement center was
working on 200 multifamily property cases referred to it by housing
staff, according to HUD.  Also, according to HUD, debarments of
multifamily landlords totaled about 100 in 1997, more than three
times the 1996 total. 


--------------------
\7 The referrals will be based on the property's physical and
financial condition, the property's management performance, and
residents' satisfaction.  Before being referred to the enforcement
center, public housing authorities will have 1 year to work with one
of two troubled agency recovery centers within the Office of Public
and Indian Housing to correct the deficiencies identified by the
assessment center. 


      PROBLEMS WITH INTERNAL
      CONTROLS PERSIST
-------------------------------------------------------- Chapter 1:1.2

The Chief Financial Officers Act of 1990 and the Government
Management Reform Act of 1994 required HUD and 23 other major
agencies to annually prepare and subject to audit organizationwide
financial statements.  These reports are submitted to the Congress
through the Office of Management and Budget (OMB).  The fiscal year
1997 financial statement audits conducted by public accounting firms
or HUD's Inspector General found continued material internal control
weaknesses in the programs of HUD and HUD's Federal Housing
Administration (FHA).  According to the Inspector General, HUD needs
to overcome issues with its internal control environment.  For
example, it needs to upgrade its financial systems and improve its
resource management to eliminate problems that are hindering its
ability to carry out its mission and manage its programs.  However,
the Inspector General's fiscal year 1997 financial audit of the
Government National Mortgage Association found no material internal
control weaknesses. 

HUD's Inspector General issued a qualified opinion on HUD's fiscal
year 1997 consolidated financial statements.\8 The qualification
related to HUD's inability to account for its credit programs in
accordance with federal accounting standards.\9

These accounting standards were developed to generally mirror the
credit reform legislation that was enacted to better capture the
government's cost of extending credit.  During 1998, HUD, with the
assistance of independent contractors, has focused significant effort
toward improving its ability to reasonably estimate the costs of its
loan programs and has developed a plan that, if fully implemented,
should help it prepare reasonable estimates in the future.  HUD's
current loan cost estimates are being reviewed as part of the fiscal
year 1998 financial statement audit, which, once completed, will
determine the reasonableness of these estimates. 

The fiscal year 1997 financial audit continued to find material
weaknesses in HUD's internal controls, and the Inspector General
reported that HUD continues to face major challenges in its efforts
to correct long-standing material internal control weaknesses.  For
example, HUD reported that it spent about $18 billion to provide rent
and operating subsidies through a variety of programs.  On the basis
of data for calendar year 1996, HUD estimated that it had provided
over $900 million in overpayments.  Households generally are required
to pay 30 percent of their income toward rent, and HUD provides the
balance of the rental payment.  When households fail to disclose all
of their income, HUD may end up paying a greater rental subsidy than
otherwise would be required.  This high level of improper payments
exists because HUD does not have adequate internal controls over the
process of verifying tenants' self-reported income--the primary
factor in determining the amount of assistance HUD pays.  This was
one of the material internal control weaknesses reported by HUD's
Inspector General in the financial audit report for fiscal year
1997.\10 In fiscal year 1998, HUD unveiled a multifaceted plan to
identify households' unreported and/or underreported income.  The
plan includes steps to (1) further expand HUD's computer matching
efforts, (2) strengthen recertification policies and procedures, (3)
ensure that HUD's information systems

have accurate and complete data on tenants, (4) institute penalties,
and (5) perform monitoring and oversight functions, including
revising and expanding audit procedures to be incorporated into OMB's
A-133 Compliance Supplement.\11

The public accounting firm KPMG Peat Marwick LLP, in auditing FHA's
financial statements for fiscal year 1997, found that the statements
were presented fairly, in all material respects, in conformity with
generally accepted accounting principles.\12 However, the audit
continued to find material weaknesses in FHA's internal controls. 
These weaknesses included insufficient staff and administrative
resources for such tasks as performing loss mitigation functions,\13
managing troubled

assets, and implementing new automated systems; inadequate emphasis
on providing early warning of, and preventing losses due to, defaults
on insured mortgages; and resolving remaining problems with
accounting and financial management systems.  The report added that
because of the issues' complexity, implementing sufficient changes to
mitigate these internal control weaknesses will take several years. 

In addition, we and HUD's Inspector General have identified
weaknesses related to HUD's contract management, including problems
with the Department's automated procurement systems, assessment and
planning for contract needs, and oversight of contractors'
performance.  Following the Inspector General's 1997 review of HUD's
contracting practices, contracting departmentwide was added as a
material internal control weakness in the FMFIA assessment for fiscal
year 1997.  HUD is implementing reforms to address these weaknesses,
including appointing a chief procurement officer, redesigning the
contract procurement process, and establishing standard training
requirements for staff responsible for monitoring contractors'
progress and performance. 

The other material internal control weaknesses reported as open under
the FMFIA assessment for fiscal year 1997 pertained to the (1)
Section 8 subsidy payment process, (2) multifamily resource and asset
management strategy, (3) Section 8 bond refunding, (4) single-family
resource and asset management strategy, (5) management and control of
staff resources, (6) monitoring of insured mortgages and multifamily
projects, (7) Secretary-held multifamily and single-family mortgage
notes inventories, and (8) income verification.  HUD has reduced its
material weaknesses from 51 in fiscal year 1991 to the 9 remaining
open as of fiscal year 1997.  Some of these remaining weaknesses are
long-standing--one dates back to 1983, while four others date back to
1993--and some, such as those relating to the $18 billion rental
assistance program, involve billions of dollars. 


--------------------
\8 U.S.  Department of Housing and Urban Development Audit of Fiscal
Year 1997 Financial Statements, Office of Inspector General
(98-FO-177-0004, Mar.  20, 1998). 

\9 For HUD's consolidated reporting purposes, FHA's financial results
must be reported using federal accounting standards.  FHA has been
unable to comply with these standards, particularly as they relate to
accounting for credit programs. 

\10 Other material internal control weaknesses included the need to
complete improvements to financial systems, improve resource
management, and continue efforts to improve the monitoring of
multifamily properties. 

\11 The compliance supplement outlines important provisions governing
federal programs, including the requirements for auditing them. 

\12 Federal Housing Administration, Audit of Fiscal Year 1997
Financial Statements, Office Inspector General (98-FO-131-0003, Mar. 
9, 1998) (prepared by KPMG Peat Marwick LLP for the Office of
Inspector General).  Although FHA received an unqualified audit
opinion on these financial statements, the reported amounts related
to FHA's loan programs, derived using generally accepted accounting
principles, are significantly different from those that would have
been reported had federal accounting standards been used. 

\13 FHA's loss mitigation program seeks, among other things, to
mitigate losses resulting from foreclosure by using alternatives to
foreclosure, such as loan modifications. 


      PROBLEMS IN MONITORING
      EXISTING PROGRAMS PERSIST
-------------------------------------------------------- Chapter 1:1.3

Despite its importance as a management control tool, monitoring
continues to be problematic for HUD in many program areas.  Such a
management control tool is particularly critical for HUD because its
housing and community development programs rely extensively on the
integrity of thousands of diverse individuals and entities such as
cities, public housing authorities, mortgage lenders, contractors,
and property owners.  Illustrations of HUD's monitoring problems
follow. 

  -- In July 1997, we reported that HUD's administration of its
     preservation program\14

was hampered by a number of factors that collectively limited the
Department's ability to ensure that the program was being managed
effectively and efficiently, that federal funds were being spent
wisely, and that the program was being carried out as required.\15 We
concluded that not having a uniform, up-to-date system to monitor
owners' compliance with the program's requirements limited HUD's
ability to ensure that owners were adhering to long-term
affordability restrictions requiring them to maintain properties for
low-income occupancy in exchange for financial incentives.  Our
findings contributed to the Congress's decision to stop funding the
program. 

  -- In March 1998, we also reported that HUD does not have an
     adequate system in place to oversee real estate asset management
     contractors.\16 As a result, HUD offices were not adequately
     performing all of the functions needed to ensure that the
     contractors were meeting their contractual obligations to
     maintain and protect HUD-owned properties.  Our physical
     inspection of properties under contract management identified
     serious problems, including vandalism, maintenance problems, and
     safety hazards.  We concluded that these conditions may decrease
     the marketability of HUD's properties; decrease the value of
     surrounding homes; increase HUD's holding costs; and, in some
     cases, threaten the health and safety of neighbors and potential
     buyers. 

A recent report by HUD's Inspector General also states that HUD's
oversight of real estate asset management contractors is
inadequate.\17 The report noted that some contractors had not been
visited by HUD staff since 1996 and 1997.  The problem was due to a
shortage of single-family staff because of downsizing, increased
workload, and HUD's inability to implement steps developed under its
2020 plan for handling properties when borrowers defaulted. 

  -- In our May 1998 report on appraisals of selected properties for
     home buyers seeking FHA single-family loans in New Jersey and
     Ohio, we reported that HUD field offices in Camden, New Jersey,
     and Cleveland, Ohio, had not adequately monitored the
     performance of appraisers.\18 We found that appraisal reports on
     eight of nine properties did not reflect conditions we observed
     that adversely affected the structural soundness and continued
     marketability of the houses and the health and safety of the
     occupants.  As of February 1998, five of the eight properties
     had been purchased with FHA-insured mortgages.  In addition, the
     Cleveland office did not take any disciplinary action against an
     appraiser who had received several unacceptable performance
     ratings.  To improve the appraisal process and provide more
     protection to home buyers, HUD implemented a new home buyer
     protection plan in June 1998. 

  -- In July 1998 we reported that HUD's procedures for identifying
     and deobligating funds that are no longer needed do not ensure
     that (1) all Section 8 project-based balances are evaluated each
     year and (2) balances that are no longer needed for specific
     Section 8 project-based contracts are identified and deobligated
     in a timely manner.\19 We found that the review process did not
     provide HUD with adequate assurance that the reviews were being
     conducted and identified funds were being deobligated. 
     Assurance was inadequate because HUD did not adequately oversee
     the program offices' reviews and did not require the responsible
     program officials to certify that the unexpended balances
     associated with the Section 8 project-based contracts were still
     needed.  We identified about $517 million in HUD's accounting
     system that, as of September 30, 1997, was no longer needed
     because the contracts had expired, been terminated, or never
     been executed.  We pointed out in our report that if HUD had
     identified and deobligated these funds, it could have recaptured
     and used them to reduce the Department's request for Section 8
     funding. 

  -- In July 1998, we reported problems with HUD's oversight of
     lenders' compliance with requirements of the home improvement
     loan insurance program.\20 We noted that in fiscal year 1997,
     HUD conducted on-site quality assurance reviews of only 4 of the
     approximately 3,700 lenders participating in the program.  We
     also found that loan claim files submitted by lenders to, and
     paid for by, HUD following loan defaults often do not contain
     required loan documents, including the original loan
     applications and certifications signed by the borrowers stating
     that the property improvement work has been completed. 


--------------------
\14 The preservation program was aimed at keeping existing
multifamily housing affordable for lower-income households as the
owners of these properties were approaching eligibility to pay off
their mortgages. 

\15 Housing Preservation:  Policies and Administrative Problems
Increase Costs and Hinder Program Operations (GAO/RCED-97-169, July
18, 1997). 

\16 Single-Family Housing:  Improvements Needed in HUD's Oversight of
Property Management Contractors (GAO/RCED-98-65, Mar.  27, 1998). 

\17 Semiannual Report to the Congress as of September 30, 1998, HUD,
Office of Inspector General (as of Sept.  30, 1998). 

\18 Appraisals for FHA Single-Family Loans:  Information on Selected
Properties in New Jersey and Ohio (GAO/RCED-98-145R, May 6, 1998). 

\19 Section 8 Project-Based Rental Assistance:  HUD's Processes for
Evaluating and Using Unexpended Balances Are Ineffective
(GAO/RCED-98-202, July 22, 1998). 

\20 Home Improvement:  Weaknesses in HUD's Management and Oversight
of the Title I Program (GAO/RCED-98-216, July 16, 1998). 


      WHAT REMAINS TO BE DONE
-------------------------------------------------------- Chapter 1:1.4

While HUD has initiated actions under the 2020 Management Reform Plan
that could help to address its internal control weaknesses, such as
efforts to improve the management and oversight of its real estate
inventory, the reforms are not fully implemented, and it is too soon
to assess their effectiveness.  In addition, HUD still faces
significant material internal control weaknesses, including
weaknesses in the control structure intended to help ensure that $18
billion in rental subsidies are based on tenants' correct incomes. 
As reform efforts are fully implemented, HUD needs to ensure that the
actions being taken under the 2020 reform plan and related efforts
will address the remaining material internal control weaknesses. 


      KEY CONTACTS
-------------------------------------------------------- Chapter 1:1.5

Judy A.  England-Joseph, Director
Housing and Community Development Issues
Resources, Community, and Economic
 Development Division
(202) 512-7631
[email protected]

Linda M.  Calbom, Director
Resources, Community, and Economic
 Development Division Accounting
 and Financial Management Issues
Accounting and Information Management
 Division
(202) 512-9508
[email protected]


   WORK REMAINS ON HUD'S
   INFORMATION AND FINANCIAL
   MANAGEMENT SYSTEMS
---------------------------------------------------------- Chapter 1:2

HUD relies extensively on information and financial management
systems to manage its programs.  However, we have reported in the
past that these systems have been inadequate because they were poorly
integrated, ineffective, and generally unreliable.  They neither
satisfied management's needs nor provided adequate control over HUD's
housing and community development programs. 

In 1997, we reported that HUD was continuing to make progress in
improving its information and financial management systems, but much
work remained:  Some of the projects would not be completed until
2000.  In addition, in our 1997 report we noted that HUD had reported
that most of its systems did not comply with FMFIA and therefore
could not be relied upon to provide timely, accurate, and reliable
financial information and reports to management. 


      2020 REFORM PLAN IS DIRECTED
      TOWARD SYSTEMS' WEAKNESSES
-------------------------------------------------------- Chapter 1:2.1

The 2020 Management Reform Plan called for HUD to modernize and
integrate outdated financial management information systems with an
efficient state-of-the-art system, incorporating such features as
efficient data entry, support for formulating and executing budgets,
updates on the status of funds, standardized data for quality
control, and security control.  The plan also stated that information
and accounting systems that did not comply with FMFIA would be
overhauled to correct deficiencies.  Finally, the plan stated that
information and accounting systems' functions would be consolidated
into the new accounting systems or eliminated. 

According to HUD, it had developed and deployed 11 new financial
management systems or components for these systems as of December
1998.  For example, in March 1998, the Office of Housing deployed the
first phase of the Real Estate Management System, a new system being
developed to implement 2020 reforms; the Office of Fair Housing and
Equal Opportunity deployed an enhanced version of the first module
for the Grants Evaluation Management System and completed development
on a second module to support the tracking of grantees in fiscal year
1998; the Office of Public and Indian Housing deployed the sixth
module to support the Integrated Business System's requirements and
implemented a new module to support the requirements of the Office of
Native American Programs; and the CFO's office developed and deployed
a consolidated HUD-wide general ledger for fiscal year 1999 that will
include summary transactions for the entire Department. 

As part of its 2020 reform efforts, HUD is also (1) cleaning up
certain data elements in its systems where necessary, including
verifying the reliability of the data, and (2) verifying the
reliability of other data.  Because the cleanup effort has just
begun, it is too early to assess its impact.  HUD selected 395 data
elements for cleanup and/or verification from 18 different financial
and mixed systems.  About half the data elements were selected for
verification only, to be performed by an independent contractor. 
These data elements are part of HUD's Community 2020 System, which
identifies HUD projects in a given community and provides demographic
information for use by HUD grantees and the public.  A fourth of the
data elements scheduled for cleanup will be cleaned up in the first
quarter of fiscal year 1999, and most of the remaining data elements
will be cleaned up in the second quarter of fiscal year 1999.  HUD
plans to hire a contractor to verify the cleanup results but has not
yet established a schedule for the verification. 

In March 1998, we also testified on HUD's year 2000 program.  At that
time, the Department was behind schedule in renovating 20 of its 30
mission-critical systems and was not tracking the status of work to
replace an additional 12 mission-critical systems.  HUD recently
reported that it had completed all of its year 2000 renovations for
both mission-critical and non-mission-critical systems and had
finished certifying 93 percent of these systems and implementing 86
percent of them.  HUD expects to complete the certification and
validation process by January 31, 1999. 


      PROBLEMS WITH SYSTEMS
      PERSIST
-------------------------------------------------------- Chapter 1:2.2

HUD began a financial management systems integration (FSI) effort in
1991 to replace about 100 financial and mixed systems--which support
both management and financial information needs--with 9 new standard
integrated systems over a 7-year period.  Management and oversight
problems prompted HUD to revise its FSI strategy in September 1993 to
more accurately take into account the Department's program operations
and business processes and to strengthen management and oversight. 
HUD revised its FSI strategy again in September 1997 to extend the
date for fully deploying the core financial management system (i.e.,
the backbone of FSI) to October 1999 and to include the development
and deployment of additional new systems required to meet
organizational and management changes called for in the 2020
Management Reform Plan. 

In December 1998, we reported that HUD did not know when the systems
integration effort would be completed, or at what cost, because the
Department had not yet finalized detailed project plans or cost and
schedule estimates for this effort.  We concluded that without such
plans, the Department is likely to continue to spend millions of
dollars, miss milestones, and still not fully meet its objective of
developing and fully deploying an integrated financial management
system.  While HUD's FSI cost increases and schedule delays are not
yet fully known, the Department expects to spend about $239 million
for development costs plus $132 million for maintenance costs through
September 1999.  We also reported that management and oversight
problems continue to hamper the systems integration effort and that
these problems may persist because HUD lacks an effective process to
manage its information technology investments.  For instance, HUD has
not yet fully implemented a complete, disciplined information
technology investment management process that includes selecting,
controlling, and evaluating FSI projects and conforms with
requirements in information-technology-
related legislative reforms such as the Clinger-Cohen Act of 1996 and
the Paperwork Reduction Act of 1995.  Therefore, we concluded that
HUD does not have adequate assurance that it is selecting the right
projects or maximizing its return on investment.  HUD agreed with our
overall recommendations to prepare complete and reliable estimates of
the life-cycle costs and benefits of the 1997 FSI strategy and
individual FSI projects, implement and institutionalize a disciplined
information technology investment management process that is
consistent with federal laws and guidelines, and develop and use
structured processes for estimating FSI costs. 

Other problems with information and financial management systems
continue to limit HUD's ability to effectively manage its programs,
as the following examples show. 

Our reports on HUD's tenant-based and project-based Section 8
assistance programs illustrate the need for further improvement in
financial management.  In February 1998, we reported that flaws in
HUD's budget process led to significant overestimates of contract
renewal needs.\21 For example, in its budget submission to the
Congress, HUD doubled-counted the administrative fees to be paid to
housing agencies for operating the Section 8 tenant-based program. 
We also reported that HUD made insufficient use of supporting
historical data to justify this program's needs.  Recognizing these
inaccuracies, HUD submitted a revised budget estimate that was $1
billion lower than its original estimate.  In July 1998, we reported
that HUD had requested more funding than it needed for Section 8
project-based contract amendments because it did not have effective
processes for taking unexpended balances into account when
determining funding needs as part of its budget process.  While HUD
used a model to perform such an analysis for its fiscal year 1999
budget request, we found errors in this analysis, including the
exclusion of active contracts, the incomplete reporting of all
available funding, and weaknesses in the method used to estimate
contract expenditure rates.  Recognizing these problems, the Congress
determined that no new funding for Section 8 amendments was
necessary.  Accordingly, the Congress did not provide the $1.3
billion that HUD had requested and rescinded an additional $1.65
billion in excess Section 8 funding that had been appropriated for
Section 8 amendments and the Section 8 moderate rehabilitation
program. 

In February 1998, HUD completed a departmentwide effort to evaluate
whether its systems conformed to the requirements of FMFIA and of OMB
Circular A-127.  HUD reported that 38 of its 92 systems did not
conform (HUD had reported in 1997 that 85 systems did not
conform).\22 The Inspector General's March 1998 report pointed out,
however, that 21 of the 31 systems that HUD had reclassified as
conforming did not have detailed assessments and justifications
available as required by HUD's CFO.  HUD's internal guidance for
these reviews did not stipulate when or how the program staff should
verify that the systems met OMB's requirements. 

We selected three previously nonconforming systems that were
determined to be in compliance in 1998 to obtain a better
understanding of how HUD's staff determined the systems were now in
compliance.\23 The assessments prepared by the program staff for
these systems ranged in detail from a checklist providing for "yes"
and "not applicable" responses to a list of the 12 FMFIA requirements
with narrative comments for each requirement.  The comments did not
explain how the program staff arrived at their assessments, nor were
there supporting documents explaining how they reached their
conclusions.  Program officials told us that the assessments were
based on the program staff's knowledge of the systems. 

However, reliance on staff's knowledge of a system without
verification or supporting documentation does not always result in an
accurate evaluation of the system's compliance.  In one of the three
cases, for example, we found that the program staff had determined
that the system's internal controls for data reliability satisfied
the requirements.  OMB's guidance on internal controls requires that
reliable data be obtained, maintained, and disclosed in reports
produced by the system.  However, HUD's Inspector General found, in
the fiscal year 1997 financial audit report, that the system's data
were incomplete, untimely, and inaccurate.  In another case, we were
informed that the system's security requirements had been reviewed by
HUD's technology staff, but a later investigation by HUD staff
revealed that such a review had not been performed. 

HUD's CFO is developing more detailed FMFIA guidance for program
staff.  The CFO is also aware of the need to evaluate the adequacy of
the FMFIA assessments and plans to contract for an initial assessment
of one of HUD's systems in order to determine how this evaluation can
best be accomplished for all of HUD's systems.  These efforts are in
early stages, however, and it is likely that it will be some time
before they are completed. 

In its March 1998 audit report on HUD's fiscal year 1997 consolidated
financial statements, the Inspector General continued to report
material internal control weaknesses in financial management systems
that were departmentwide or FHA-wide.  Among the major deficiencies
in these systems, which were reported in prior years and continue to
some degree, the report cited (1) inadequate assurance about the
propriety of Section 8 rental assistance payments; (2) insufficient
information on the credit quality of individual multifamily loans;
(3) insufficient information on FHA's operations by program,
geographical area, or other relevant component; (4) a lack of
integration between program and accounting systems necessitating
duplicate data entry, producing data inconsistencies, and preventing
the blending of financial and program data to develop meaningful
performance measures; and (5) security weaknesses in both HUD's
general processing controls and specific application controls.  In
addition, according to KPMG Peat Marwick LLPs audit report, some of
FHA's automated systems either do not provide needed management
information or do not produce reliable information. 

In April 1998, we reported that participation in demonstration
programs has enabled HUD to facilitate the financing of affordable
multifamily housing while limiting its exposure to loss through risk
sharing.\24 We concluded that while HUD retained responsibility for
monitoring its risk-sharing partners' performance, its data system
for monitoring the progress of credit enhancement projects is
unreliable. 


--------------------
\21 Section 8 Tenant-Based Housing Assistance:  Opportunities to
Improve HUD's Financial Management (GAO/RCED-98-47, Feb.  20, 1998). 

\22 HUD deleted 52 systems from the 1997 list of nonconforming
systems in 1998.  Thirty-one systems were reclassified from
nonconforming to conforming, 14 systems were discontinued and dropped
from the list, and 7 systems were designated as nonfinancial and
dropped from the list.  In total, five systems were added to the
list. 

\23 We selected one system from each of three HUD program
offices--the Homeless Assistance Management Information System,
Office of Community Planning and Development; Multifamily Tenant
Characteristics System, Office of Public and Indian Housing; and
Single-Family Default Monitoring System, Office of Housing. 

\24 Housing Finance:  FHA's Risk-Sharing Programs Offer Alternatives
for Financing Affordable Multifamily Housing (GAO/RCED-98-117, Apr. 
23, 1998). 


      WHAT REMAINS TO BE DONE
-------------------------------------------------------- Chapter 1:2.3

While efforts by HUD to integrate its financial systems are well
under way, it will continue to be adversely affected by inadequate
systems and information until its efforts are successfully completed. 
In the meantime, we believe HUD needs to strengthen the management
and oversight of its efforts to integrate financial systems,
including its information technology investment decisions.  In
addition, HUD needs to continue its efforts to bring nonconforming
systems into conformance with FMFIA requirements.  As part of this
process, HUD's needs to ensure that its assessments of systems to
determine conformance are well documented and verified.  Finally, HUD
needs to eliminate the material internal control weaknesses related
to systems. 


      KEY CONTACTS
-------------------------------------------------------- Chapter 1:2.4

Judy A.  England-Joseph, Director
Housing and Community Development Issues
Resources, Community, and Economic
 Development Division
(202) 512-7631
[email protected]

Joel C.  Willemssen, Director
Civil Agencies Information Systems Issues
Accounting and Information Management
 Division
(202) 512-6408
[email protected]

Linda M.  Calbom, Director
Resources, Community, and Economic
 Development Division Accounting and
 Financial Management Issues
Accounting and Information Management
 Division
(202) 512-9508
[email protected]


   IT IS TOO EARLY TO ASSESS THE
   EFFECTIVENESS OF ORGANIZATIONAL
   CHANGES
---------------------------------------------------------- Chapter 1:3

In the past, an ineffective organizational structure has also
contributed to management problems throughout HUD.  Organizational
problems have included overlapping and ill-defined responsibilities
and authorities between HUD headquarters and field organizations and
a fundamental lack of management accountability and responsibility. 

In February 1997, we reported that HUD had completed a field
reorganization in 1995, which eliminated its regional office
structure and transferred direct authority for staff and resources to
the assistant secretaries, and was planning additional reorganization
efforts.  Although HUD had not evaluated the effects of its
reorganization, most field directors we surveyed at that time rated
it as successful overall and believed that the reorganization had
achieved most of the intended goals--namely, eliminating previously
confused lines of authority within programs, enhancing communication,
reducing levels of review and approval, and improving customer
service.\25


--------------------
\25 HUD:  Field Directors' Views on Recent Management Initiatives
(GAO/RCED-97-34, Feb.  12, 1997). 


      2020 REFORM PLAN FURTHER
      REORGANIZES FIELD OFFICES
      AND CONSOLIDATES ACTIVITIES
      IN CENTERS
-------------------------------------------------------- Chapter 1:3.1

During 1997 and 1998, HUD again reorganized its field resources. 
Under its 1997 2020 Management Reform Plan, HUD reorganized its field
resources by function, rather than strictly by program, and
consolidated, centralized, or privatized functions and
responsibilities where needed.  Its actions included the following: 

  -- HUD consolidated (1) single-family housing insurance
     operations--previously carried out in 81 field offices--in four
     homeownership centers and (2) certain multifamily housing
     development and management functions--previously located in more
     than 50 field offices--into 18 hub offices. 

  -- The Office of Public and Indian Housing consolidated some of its
     functions--previously performed in 52 public housing
     offices--into 27 hub offices and 16 program centers; centralized
     the management of competitive grants and public housing
     operating and capital funds into one grants center; centralized
     applications for demolition/disposition, designated housing, and
     homeownership plans into one special applications center; and
     centralized activities to improve the performance of troubled
     public housing authorities into two troubled agency recovery
     centers. 

  -- The Office of Fair Housing and Equal Opportunity consolidated
     programs' compliance monitoring and enforcement functions within
     its existing field structure of 48 offices into 10 hubs, 9
     program centers, and 23 program offices. 

  -- HUD staff were given a primary mission--either performing
     service functions as a community builder or performing
     compliance functions as a public trust officer.  The community
     builders are to be the first point of contact for HUD customers
     and are to provide technical expertise, have knowledge of
     finance programs, and provide economic development advice to the
     community.  In contrast, public trust officers are to serve as
     the front line for monitoring and protection against waste,
     fraud, and abuse and for ensuring compliance with programs'
     requirements. 

In addition, HUD established three nationwide centers--a Section 8
financial management center to consolidate budgeting, financial, and
payment functions for its rental assistance programs; a real estate
assessment center to consolidate physical and financial assessment
functions for its real estate inventory; and an enforcement center to
consolidate its enforcement functions.  The CFO's accounting
operations have been consolidated from 10 divisions into one center. 

As noted by the Public Strategies Group and others, HUD expects to
improve both the efficiency and effectiveness of its operations
through these organizational changes.  Beyond allowing the agency to
operate with a smaller workforce, other expected benefits include (1)
reducing the time for endorsements for single-family housing
insurance and development applications for multifamily housing; (2)
reducing paperwork requirements for grant programs; (3) insuring
greater financial management accountability, since budgetary and
financial responsibilities are centralized; (4) improving HUD's
ability to manage public and assisted housing portfolios though the
operations of the assessment center; and (5) improving HUD's ability
to enforce contractual requirements with private owners, public
housing authorities, and other HUD clients.  In March 1998, we
reported that the benefits HUD anticipated from the organizational
changes were generally not based on detailed empirical analyses or
studies, but rather on a variety of factors, including some workload
data, the limited results of one pilot project, best practices
identified in HUD field offices, benchmarks from other organizations,
and managers' and staff's experience and judgment.\26

HUD has clearly linked the efforts under its 2020 Management Reform
Plan to the plan it has developed under the Results Act, so that its
success in meeting annual performance goals and achieving strategic
objectives depends on the success of its management reform efforts. 
According to HUD, its September 30, 1997, strategic plan builds on
the foundation of management reforms.  The fiscal year 1999 annual
performance plan further states that the reforms are keyed to work in
tandem with HUD's strategic plan and legislative initiatives.  The
annual performance plan established specific goals for the 2020
management reform efforts, including goals for HUD's nationwide real
estate assessment, enforcement, and Section 8 financial management
centers.  The goals include establishing a workforce that is
empowered, capable and accountable for results; establishing
streamlined, efficient operations; establishing performance that
produces results; capturing, standardizing, improving and evaluating
financial and physical data on the real estate inventory;
consolidating organizations and employees to deal with HUD's
enforcement activities; and establishing a unified center for
processing Section 8 payments.  Each of the goals has various
indicators to help measure whether it is being achieved. 

In mid-1998, HUD issued guidelines on developing new business and
operating plans to implement its management reforms, along with
performance goals, throughout the agency for fiscal year 1999.  In
developing these new plans, HUD revised its strategic objectives
somewhat from those in the strategic and annual performance plans. 
The business operating plan consolidates the seven strategic
objectives in HUD's September 30, 1997, strategic plan, into five
strategic objectives and adds one new strategic objective, "restoring
the public trust." Each program area and field office has drafted a
business operating plan showing how it expects to support the newly
defined strategic objectives and use performance goals to assess its
progress in achieving the objectives.  The business operating plans
were finalized at the end of November 1998, according to a HUD
official. 


--------------------
\26 HUD Management:  Information on HUD's 2020 Management Reform Plan
(GAO/RCED-98-86, Mar.  20, 1998). 


      ORGANIZATIONAL STRUCTURE IS
      IN PLACE, BUT TRANSFER OF
      FUNCTIONS AND
      RESPONSIBILITIES IS IN
      TRANSITION
-------------------------------------------------------- Chapter 1:3.2

During 1998, all of HUD's various offices, hubs, program centers, and
specialized and nationwide centers became operational.  However, the
real estate assessment, enforcement, and financial management centers
will not be performing all of their centralized functions until 1999
and 2000.  As previously discussed, while the real estate assessment
center had inspected over 4,200 multifamily properties as of December
1998, it will not begin the financial assessment of multifamily
properties until around April 1999, and it will not begin the
physical inspection and financial assessment of public housing
authorities until 1999 and 2000, respectively.  Furthermore, as
discussed previously, the enforcement center is not scheduled to
begin receiving referrals of multifamily properties from the real
estate assessment center until around April 1999.  The transfer of
the Section 8 financial management processing workload from HUD's
public housing field offices to the financial management center is
expected to be completed in January 1999.  However, the transfer of
the Section 8 financial management workload relating to 4,600 annual
contribution contracts from the Office of Housing field offices to
the financial management center will not begin until February 1999
and is expected to be completed in mid- to late summer 1999.  Also,
when the transfer of the financial management workload for
approximately 21,000 housing assistance contracts from the Office of
Housing field offices to the center occurs will depend on when
contract administrators are selected and deployed.  According to the
director of the financial management center, the transfer may not
take place until late 1999 or early 2000. 

There has not yet been a significant shift of functions and
responsibilities from the field offices to the centers except at
homeownership centers, according to the field office managers and
staff we interviewed between July and October 1998.  Office managers
also indicated that the transfer of community service and outreach
functions and responsibilities from the field offices to the
community builders was in a transitional phase. 


      FIELD OFFICE STAFF ARE
      POSITIVE ABOUT
      ORGANIZATIONAL CHANGES
-------------------------------------------------------- Chapter 1:3.3

A recent survey by the National Partnership for Reinventing
Government showed that 70 percent of HUD's workforce identified the
agency's reinvention efforts as a top priority.  All of the managers
and staff we interviewed said that the organizational changes under
the 2020 Management Reform Plan were beneficial overall.  For
example, some managers and staff stated that their responsibilities
and lines of authority and accountability for programs were more
clearly defined.  In addition, some managers and staff pointed out
that obtaining clearance on routine issues took less time because
program managers in the field had greater authority to make
decisions.  Managers and staff also stated that once the various
centers and community builders assume all of their functions, the
field offices will have more time to carry out their public trust
responsibilities--namely, compliance and monitoring.  However, most
managers and staff we interviewed said the transfer of functions was
in transition and they generally did not know when it would be
complete. 

Despite these generally positive comments, 15 program managers and
groups of staff we interviewed at six locations--four HUD field
offices and two centers--expressed concerns about not having enough
travel funds to conduct on-site monitoring of program activities. 
Although HUD's travel budget increased from $13.5 million in fiscal
year 1997 to $19 million for fiscal year 1999, according to these
officials, a lack of travel funds has prevented them from conducting
some on-site monitoring reviews.  According to some of these
officials, resources used in implementing some of the 2020 plan's
changes, such as staff relocation and the outreach activities of
community builders, may have contributed to the lack of travel funds. 
Additionally, the Inspector General's December 1998 semiannual report
notes that while travel funds for fiscal year 1999 are similar to
prior years' expenditures, travel funds for program staff have been
reduced by the allocation of travel funds for community builders. 
According to the report, program staff have said that travel funds
have been reduced to such a level that the staff will not be able to
perform necessary monitoring. 


      WHAT REMAINS TO BE DONE
-------------------------------------------------------- Chapter 1:3.4

Although a new field organization structure is now in place and
operational, the transfer of functions from the field offices to the
centers has not been completed, and staffing decisions were only
recently completed.  Furthermore, some of the centers that began
assuming their functions in 1998 will not be carrying out all
functions until 1999 and 2000.  In accordance with the Results Act,
HUD needs to monitor the performance of the centers as they assume
their functions, as well as track the other organizational changes,
to determine whether the 2020 reform plan's goals are being achieved. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:3.5

Judy A.  England-Joseph, Director
Housing and Community Development Issues
Resources, Community, and Economic
 Development Division
(202) 512-7631
[email protected]


   STAFFING UNDER THE 2020 REFORM
   PLAN IS IN TRANSITION
---------------------------------------------------------- Chapter 1:4

HUD has been downsizing since the 1980s.  In the past, not having
enough staff with the necessary skills--coupled with not having
adequate financial and management information systems, which could
have helped staff oversee operations--has limited HUD in performing
essential functions, such as monitoring programs and updating
procedures. 

In 1997, we reported that HUD had made some progress in addressing
problems identified in our 1995 report, including problems with staff
members' skills, resource management, and staff training, and had
begun to implement a needs assessment process to plan future
training.  We also reported that the HUD directors we surveyed at
that time generally believed that their staff members' skills had
improved over the previous 2 years; however, 40 percent of the
directors rated the Department's training as less than good.  In
addition, we reported that we and the Inspector General had continued
to identify staff resource problems in HUD's major program areas. 


      2020 REFORM PLAN HAS
      RESULTED IN SIGNIFICANT
      STAFFING CHANGES
-------------------------------------------------------- Chapter 1:4.1

Assurance that HUD has the right number of staff with the proper
skills has been an issue of concern to us, the Inspector General, and
others for a number of years.  HUD's 2020 Management Reform Plan not
only established a basic goal of reducing staffing from about 10,500
to 7,500 but also included several proposals affecting staff resource
capacity.  For example, the plan calls for refocusing and retraining
HUD's workforce; reducing more than 300 programs, through
consolidation or elimination, to 70; deregulating well-run public
housing authorities; and replacing the current field structure with
one that consolidates functions within and across program areas.  The
plan also calls for implementing a resource estimation process that,
according to HUD, will be a disciplined and analytical approach to
identify, justify, and integrate resource requirements and budget
allocations. 

Since the 2020 Management Reform Plan was announced in June 1997,
HUD's staffing, now totaling about 9,000 full-time positions, has
undergone significant changes, including the following: 

  -- Over 1,000 staff left the agency as a result of buyouts. 

  -- Over 3,000 staff were voluntarily reassigned to what HUD termed
     substantially similar positions in the same geographical area. 

  -- Over 1,000 staff were placed in new positions under a merit
     staffing plan. 

  -- Over 1,300 staff who were unplaced after the reorganization were
     placed in permanent positions as of September 1998. 

  -- More than 200 new staff were hired as community builders. 


      STAFFING TARGETS UNDER THE
      2020 REFORM PLAN ARE
      UNCERTAIN
-------------------------------------------------------- Chapter 1:4.2

Much attention has focused on the origin and rationale for the
downsizing targets in the 2020 Management Reform Plan.  When first
announced, the plan established a target of 7,500 full-time staff by
2000, a goal subsequently extended to 2002.  Our March 1998 report on
the plan found that HUD's target staffing levels were not based on a
systematic analysis of needs.  While HUD used historical workload
data to apportion or allocate predetermined target numbers of staff
among different locations or functions, it did not systematically
analyze how many staff it needed to carry out a given responsibility
or function.  Our finding was consistent with that of HUD's Inspector
General, who reported that the Department adopted a target of 7,500
staff without first performing a detailed analysis of its mission and
projected workload. 

In an April 1998 briefing on the implementation of its 2020 plan, HUD
showed an authorized staffing level of 7,826 under the reforms.  This
staffing level was consistent with a March 1998 report by Booz-Allen
and Hamilton, Inc., which concluded that 7,400 to 8,100 staff would
be adequate for HUD to properly fulfill its responsibilities in 2002,
assuming the successful implementation of the new organizations,
processes, and systems; passage of legislation to consolidate
programs; and realization of the benefits of portfolio reengineering
for multifamily properties.  In March 1998, HUD also reported that it
would maintain its current staffing level (approximately 9,000
full-time equivalent positions) unless (1) the Congress enacts
legislation to consolidate HUD's programs and (2) there is a
substantial reduction in the number of troubled multifamily assisted
properties and troubled public housing authorities. 

The 2020 Management Reform Plan also calls for HUD to implement a
proposed resource estimation and allocation process.  In its annual
performance plan for fiscal year 1999, submitted to the Congress in
March 1998, HUD noted that it no longer has departmental systems for
measuring work and reporting time and that it lacks a single
integrated system to support resource allocation.  HUD reported that
it intends to work with the National Academy of Public Administration
to develop a methodology or approach for resource management that
will allow the Department to identify and justify its resource
requirements for effective and efficient program administration and
management.  According to the Academy, the resource estimation
elements will include workload factors and analysis based on
quantifiable estimates of work requirements for planning, developing,
and operating current and proposed programs, priority initiatives,
and functions.  The methodology will also enable HUD to estimate
resources for its budget formulation and execution and to link
resources to performance measures.  According to a HUD official, as
of November 1998, work had been completed on the resource management
methodology and was ready to be tested at selected offices, but a
component to validate the methodology had not yet been completed. 


      STAFFING WAS IN TRANSITION
      AT THE OFFICES WE VISITED
-------------------------------------------------------- Chapter 1:4.3

Most of the field offices we visited initially lost staff following
the 2020 staffing changes.  However, some of these staff losses were
recovered after HUD decided in May 1998 to assign unplaced staff to
permanent positions.\27 According to HUD, most of the formerly
unplaced staff had been assigned positions as of September 1998, and
most were in place.  At a few locations, some of the formerly
unplaced staff will not be reporting to their new positions until
1999.  While most of the offices we visited reported being fully
staffed, three of the centers were understaffed.  The enforcement
center had 62 percent of its authorized staff level, the real estate
assessment center 40 percent, and the Memphis troubled agency
recovery center 86 percent.\28 HUD managers said the vacant positions
in these centers will be advertised sometime in 1999. 


--------------------
\27 After making a number of personnel decisions in the fall of 1997
to implement the 2020 reforms, HUD sent letters to approximately
3,000 employees notifying them that they had not been placed in
positions in HUD's new organization.  In May 1998, the Secretary
announced that the downsizing activity would cease and that the 1,300
staff who were still unplaced at that time would be given permanent
assignments. 

\28 The troubled agency recovery center's operations will address,
among other things, the recommendation of the National Performance
Review (now the National Partnership for Reinventing Government) that
HUD target efforts to resolve severe difficulties with problem public
housing authorities. 


      WORKLOAD WAS ALSO IN
      TRANSITION
-------------------------------------------------------- Chapter 1:4.4

Under 2020 reforms, some of the work previously carried out by HUD
field offices will be transferred to centers.  Such work includes
financial assessment and the physical inspection of multifamily
properties, work related to troubled public housing authorities,
enforcement activities, and Section 8 financial management
activities.  In addition, community builders will assume certain
functions previously carried out by field office staff.  Once
workload transfers are completed, managers at the field offices we
visited expect their workload to decrease, although these managers
did not know how much of a reduction would occur.  To date, there has
not been a significant shift in workload from the field offices to
the centers, according to the staff and managers we interviewed from
July through October 1998.  These managers and staff said the
transfer of work to the centers and the assumption by community
builders of their responsibilities was in transition. 

Additionally, efforts to match workforce to workload at HUD's
homeownership centers have presented difficulties.  According to the
Inspector General's December 1998 semiannual report, HUD's
single-family homeownership centers cannot handle the workload
currently associated with HUD's inventory of Secretary-held notes or
inventory of single-family properties, which HUD receives through
foreclosures.  This situation has developed because HUD's plans to
sell the properties before they enter its inventory have not evolved
and its plans to sell the existing notes inventory have been
postponed.  HUD is currently hiring contractors to assist in managing
and disposing of its single-family property inventory. 


      MANAGERS WERE GENERALLY
      POSITIVE ABOUT TRAINING AND
      STAFF SKILLS
-------------------------------------------------------- Chapter 1:4.5

The 2020 Management Reform Plan stated that HUD would retrain the
majority of its staff.  The field office managers and staff we
interviewed during our 1998 field office visits reported that their
training increased significantly with the plan's implementation.  The
managers and staff were generally positive about the amount of
training available to them and the quality of the training.  Training
varied from that provided at universities, to external professional
certification training, to videotaped programs and substantial
on-the-job training needed because of staff reassignments.  For
example, staff at the Memphis troubled agency recovery center
reported spending most of their first 3 months on the job in locally
developed training programs and in on-the-job-training with more
experienced public housing staff.  Staff and managers reported a need
for continuing program area and specialized computer training. 

In addition, managers reported during our 1998 field office visits
that the skills of their staff varied from adequate to excellent and
were sufficient for the staff to do their jobs, except in the case of
some of the recently assigned, formerly unplaced staff.  The managers
told us that while the formerly unplaced staff may lack specific
program knowledge, they have the ability to do the work. 


      WHAT REMAINS TO BE DONE
-------------------------------------------------------- Chapter 1:4.6

Because staffing reforms and workload transfers from the field
offices to the centers are still in transition, the effectiveness of
HUD's changes in correcting staffing deficiencies cannot be
determined.  In accordance with the Results Act, HUD needs to closely
monitor the implementation of its staffing reform efforts to ensure
that the field offices and staff have the resources and skills to
carry out the work assigned, including the monitoring of programs and
activities and the assessment of outcomes.  In addition, HUD needs to
complete its efforts to develop a process for identifying and
justifying its staff resource requirements. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:4.7

Judy A.  England-Joseph, Director
Housing and Community Development Issues
Resources, Community, and Economic
 Development Division
(202) 512-7631
[email protected]


RELATED GAO PRODUCTS
============================================================ Chapter 2

HUD Information Systems:  Improved Management Practices Needed to
Control Integration Cost and Schedule (GAO/AIMD-99-25, Dec.  18,
1998). 

Section 8 Project-Based Rental Assistance:  HUD's Processes for
Evaluating and Using Unexpended Balances Are Ineffective
(GAO/RCED-98-202, July 22, 1998). 

Home Improvement:  Weaknesses in HUD's Management and Oversight of
the Title I Program (GAO/RCED-98-216, July 16, 1998). 

Appraisals for FHA Single-Family Loans:  Information on Selected
Properties in New Jersey and Ohio (GAO/RCED-98-145R, May 6, 1998). 

Housing Finance:  FHA's Risk-Sharing Programs Offer Alternatives for
Financing Affordable Multifamily Housing (GAO/RCED-98-117, Apr.  23,
1998). 

Single-Family Housing:  Improvements Needed in HUD's Oversight of
Property Management Contractors (GAO/RCED-98-65, Mar.  27, 1998). 

Year 2000 Computing Crisis:  Strong Leadership Needed to Avoid
Disruption of Essential Services (GAO/T-AMID-98-117, Mar.  24, 1998). 

HUD Management:  Information on HUD's 2020 Management Reform Plan
(GAO/RCED-98-86, Mar.  20, 1998). 

Section 8 Tenant-Based Housing Assistance:  Opportunities to Improve
HUD's Financial Management (GAO/RCED-98-47, Feb.  20, 1998). 

Housing Preservation:  Policies and Administrative Problems Increase
Costs and Hinder Program Operations (GAO/RCED-97-169, July 18, 1997). 

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

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


PERFORMANCE AND ACCOUNTABILITY
SERIES
============================================================ Chapter 3

Major Management Challenges and Program Risks:  A Governmentwide
Perspective (GAO/OCG-99-1)

Major Management Challenges and Program Risks:  Department of
Agriculture (GAO/OCG-99-2)

Major Management Challenges and Program Risks:  Department of
Commerce (GAO/OCG-99-3)

Major Management Challenges and Program Risks:  Department of Defense
(GAO/OCG-99-4)

Major Management Challenges and Program Risks:  Department of
Education (GAO/OCG-99-5)

Major Management Challenges and Program Risks:  Department of Energy
(GAO/OCG-99-6)

Major Management Challenges and Program Risks:  Department of Health
and Human Services (GAO/OCG-99-7)

Major Management Challenges and Program Risks:  Department of Housing
and Urban Development (GAO/OCG-99-8)

Major Management Challenges and Program Risks:  Department of the
Interior (GAO/OCG-99-9)

Major Management Challenges and Program Risks:  Department of Justice
(GAO/OCG-99-10)

Major Management Challenges and Program Risks:  Department of Labor
(GAO/OCG-99-11)

Major Management Challenges and Program Risks:  Department of State
(GAO/OCG-99-12)

Major Management Challenges and Program Risks:  Department of
Transportation (GAO/OCG-99-13)

Major Management Challenges and Program Risks:  Department of the
Treasury (GAO/OCG-99-14)

Major Management Challenges and Program Risks:  Department of
Veterans Affairs (GAO/OCG-99-15)

Major Management Challenges and Program Risks:  Agency for
International Development (GAO/OCG-99-16)

Major Management Challenges and Program Risks:  Environmental
Protection Agency (GAO/OCG-99-17)

Major Management Challenges and Program Risks:  National Aeronautics
and Space Administration (GAO/OCG-99-18)

Major Management Challenges and Program Risks:  Nuclear Regulatory
Commission (GAO/OCG-99-19)

Major Management Challenges and Program Risks:  Social Security
Administration (GAO/OCG-99-20)

Major Management Challenges and Program Risks:  U.S.  Postal Service
(GAO/OCG-99-21)

High-Risk Series:  An Update (GAO/HR-99-1)


The entire series of 21 performance and accountability reports and
the high-risk series update can be ordered by using the order number
GAO/OCG-99-22SET. 


*** End of document. ***