    Community Development: Weak Management Controls Compromise Integrity of
    Four HUD Grant Programs (Chapter Report, 04/27/99, GAO/RCED-99-98).

    Pursuant to a congressional request, GAO provided information on whether
    controls are in place to ensure that block grant programs' objectives
    are being achieved and that funds are being managed appropriately,
    focusing on whether: (1) the Department of Housing and Urban
    Development's (HUD) on-site monitoring of grantees under the Grants
    Management System is adequate; and (2) the Integrated Disbursement and
    Information System provides the data HUD needs to accurately assess
    grantees' performance.

    GAO noted that: (1) while the Grants Management System provides a
    logical, structured approach to managing the four block grant programs,
    HUD's monitoring under the system--including on-site monitoring of
    grantees and the Integrated Disbursement and Information System--does
    not ensure that the programs' objectives are being met and that grantees
    are managing their funds appropriately; (2) HUD considers its on-site
    monitoring of grantees essential, but GAO found this monitoring is
    inadequate; (3) the five field offices GAO visited (accounting for about
    20 percent of all block grant funds in fiscal year (FY) 1998, or $1.18
    billion) conduct on-site monitoring infrequently because of a shift to a
    more collaborative relationship with the grantees and because of a lack
    of resources, according to the directors of the field offices; (4)
    furthermore, on-site monitoring seldom targets the grantees that receive
    the poorest evaluations from the field officers compared with other
    grantees, and this monitoring is not uniform or comprehensive because
    the field officers lack specific guidance; (5) the reviews of some
    grantees conducted by GAO and others, especially HUD's Inspector
    General, have identified significant problems in grantees' finances and
    performance; (6) while such reviews are not generalizable to all block
    grant programs, these reviews, along with the breakdowns in monitoring,
    call into question the integrity of programs funded at nearly $6 billion
    in FY 1998, including their safeguards against fraud, waste, and abuse;
    (7) for its part, HUD's Integrated Disbursement and Information System
    does not provide the information HUD needs to accurately assess
    grantees' performance and thus does not compensate for these breakdowns
    in monitoring; (8) fraught with major design flaws, the information
    system makes the process for establishing and maintaining accounts
    difficult and provides ample opportunity for major problems with
    entering data, does not allow such problems to be corrected easily,
    cannot track the program income from the revolving funds that grantees
    establish, does not provide timely and accurate information, and has
    difficulty producing reports; and (9) GAO also determined that the
    security controls for the information system are weak and therefore do
    not provide assurance that the system is safe from fraud and abuse.

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

     REPORTNUM:  RCED-99-98
         TITLE:  Community Development: Weak Management Controls Compromise
    	     Integrity of Four HUD Grant Programs
          DATE:  04/27/99
       SUBJECT:  Internal controls
    	     Financial management
    	     Housing programs
    	     Block grants
    	     Grant monitoring
    	     Community development programs
    	     Program abuses
    	     Management information systems
    	     Computer security
    IDENTIFIER:  HUD Grants Management System
    	     HUD Integrated Disbursement and Information System
    	     Community Development Block Grant Program
    	     HUD Home Investment in Affordable Housing Program
    	     HUD Emergency Shelter Grant Program
    	     HUD Housing Opportunities for Persons with AIDS Program
    	     HUD Empowerment Zones and Enterprise Communities Programs
    	     HUD 2020 Management Reform Plan
    	     HUD Community 2020 System

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    COMMUNITY DEVELOPMENT: Weak Management Controls Compromise
    Integrity of Four HUD Grant Programs GAO/RCED-99-98 United States
    General Accounting Office

    GAO Report to Congressional Requesters

    April 1999 COMMUNITY DEVELOPMENT Weak Management Controls
    Compromise Integrity of Four HUD Grant Programs

    GAO/RCED-99-98

      GAO/RCED-99-98

    GAO United States General Accounting Office

    Washington, D. C. 20548 Resources, Community, and Economic
    Development Division

    B-281322 April 27, 1999 The Honorable Wayne Allard Chairman,
    Subcommittee on Housing

    and Transportation Committee on Banking, Housing,

    and Urban Affairs United States Senate

    The Honorable Rick A. Lazio Chairman, Subcommittee on Housing

    and Community Opportunity Committee on Banking

    and Financial Services House of Representatives

    In response to a request by you as Chairman of the Subcommittee on
    Housing and Community Opportunity, House Committee on Banking and
    Financial Services, and the former Chairman of the Subcommittee on
    Housing Opportunity and Community Development, Senate Committee on
    Banking, Housing, and Urban Affairs, this report discusses whether
    controls are in place to ensure that block grant programs'
    objectives are being achieved and that funds are being managed
    appropriately. In particular, the report discusses whether (1) the
    Department of Housing and Urban Development's (HUD) on- site
    monitoring of grantees under the Grants Management System is
    adequate and (2) the Integrated Disbursement and Information
    System provides the data HUD needs to accurately assess grantees'
    performance.

    As arranged with your offices, unless you publicly announce its
    contents earlier, we plan no further distribution of this report
    for 30 days after the date of this letter.

    We are providing copies of this report to Senator Connie Mack, the
    Chairman of the Subcommittee on Economic Policy, Senate Committee
    on Banking, Housing, and Urban Affairs; the Honorable Andrew
    Cuomo, the Secretary of Housing and Urban Development; and other
    interested parties. We will also make copies available to others
    upon request. Major contributors to this report are listed in
    appendix II.

    Judy A. England- Joseph Director, Housing and Community

    Development Issues

    Executive Summary Purpose About one- quarter of the Department of
    Housing and Urban

    Development's (HUD) budget almost $6 billion in fiscal year 1998
    is devoted to four formula block grant programs that support
    community development: the Community Development Block Grant
    Program, the Home Investment in Affordable Housing Program, the
    Emergency Shelter Grant Program, and the Housing Opportunities for
    Persons With AIDS Program. While each of these programs has a
    different purpose, they all provide federal funds to help grantees
    primarily state and local governments finance projects and
    services for local residents. In 1995, HUD revamped its approach
    to managing these formula block grants by requiring grantees to
    develop a consolidated plan that lays out how they will use all
    four programs. As part of its revamped approach, HUD changed its
    monitoring of grantees to reflect the collaborative relationship
    it was trying to establish with them. Under this approach, known
    as the Grants Management System, HUD developed the Integrated
    Disbursement and Information System so that grantees could enter
    information into a database that describes their planning and
    projects, draw federal funds, and inform the Department about how
    they are using those funds and what they are achieving with them.

    Concerned about changes in HUD's approach to program monitoring,
    the former Chairman of the Subcommittee on Housing Opportunity and
    Community Development now the Subcommittee on Housing and
    Transportation Senate Committee on Banking, Housing, and Urban
    Affairs, and the Chairman of the Subcommittee on Housing and
    Community Opportunity, House Committee on Banking and Financial
    Services, asked GAO to assess whether controls are in place to
    ensure that the block grant programs' objectives are being
    achieved and that funds are being managed appropriately. In
    particular, GAO examined whether (1) HUD's on- site monitoring of
    grantees under the Grants Management System is adequate and (2)
    the Integrated Disbursement and Information System provides the
    data HUD needs to accurately assess grantees' performance.

    Background The Grants Management System and the Integrated
    Disbursement and Information System are administered by HUD's
    Office of Community

    Planning and Development through 42 field offices throughout the
    United States. The Grants Management System which HUD developed to
    deemphasize compliance monitoring of grantees and to promote a
    more collaborative approach that includes up- front assistance and
    a reliance on grantees' monitoring systems uses the Integrated
    Disbursement and

    GAO/RCED-99-98 Community Development Page 2

    Executive Summary

    Information System as its chief monitoring tool. Allowed
    considerable independence in carrying out the Grants Management
    System, the field offices develop their own work plans, conduct
    their own evaluations of grantees to determine which need more
    oversight and assistance, set their own monitoring schedules, and
    determine the type and amount of technical assistance they provide
    to their grantees.

    Results in Brief While the Grants Management System provides a
    logical, structured approach to managing the four block grant
    programs, HUD's monitoring

    under the system including on- site monitoring of grantees and the
    Integrated Disbursement and Information System does not ensure
    that the programs' objectives are being met and that grantees are
    managing their funds appropriately. HUD considers its on- site
    monitoring of grantees essential, but GAO found this monitoring is
    inadequate. The five field offices GAO visited (accounting for
    about 20 percent of all block grant funds in fiscal year 1998, or
    $1.18 billion) conduct on- site monitoring infrequently because of
    a shift to a more collaborative relationship with the grantees and
    because of a lack of resources, according to the directors of the
    field offices. Furthermore, on- site monitoring seldom targets the
    grantees that receive the poorest evaluations from the field
    offices compared with other grantees, and this monitoring is not
    uniform or comprehensive because the field offices lack specific
    guidance. The reviews of some grantees conducted by GAO and
    others, especially HUD's Inspector General, have identified
    significant problems in grantees' finances and performance. And
    while such reviews are not generalizable to all block grant
    programs, these reviews, along with the breakdowns in monitoring,
    call into question the integrity of programs funded at nearly $6
    billion in fiscal year 1998, including their safeguards against
    fraud, waste, and abuse. This report makes recommendations
    designed to improve the integrity of the block grant programs.

    For its part, HUD's Integrated Disbursement and Information System
    does not provide the information the Department needs to
    accurately assess grantees' performance and thus does not
    compensate for these breakdowns in monitoring. Fraught with major
    design flaws, the information system makes the process for
    establishing and maintaining accounts difficult and provides ample
    opportunity for major problems with entering data, does not allow
    such problems to be corrected easily, cannot track the program
    income from the revolving funds that grantees establish, does not
    provide timely and accurate information, and has difficulty
    producing reports. GAO also determined that the security controls

    GAO/RCED-99-98 Community Development Page 3

    Executive Summary

    for the information system are weak and therefore do not provide
    assurance that the system is safe from fraud and abuse. This
    report recommends modifying or replacing the Integrated
    Disbursement and Information System, whichever is more cost-
    effective, and taking other steps to improve system security.

    Principal Findings Monitoring Under the Grants Management System
    Does Not Ensure That the Programs' Objectives Are Being Met and
    That Grantees Are Managing Their Funds Appropriately

    Although HUD's Grants Management System Policy Notebook states
    that on- site monitoring is an essential tool for determining
    whether program requirements are being met, it does not specify
    when on- site monitoring should be done. During fiscal year 1998,
    the five field offices GAO reviewed conducted visits to 33
    grantees, or just 14 percent of their 228 grantees. Moreover,
    while HUD's annual comparative review of grantees' performance is
    intended to target the grantees most in need of attention, only 38
    of the 85 grantees HUD had originally designated for on- site
    monitoring were determined to be among the lowest performing
    grantees, or those needing the most oversight or assistance. Of
    the 33 grantees that actually received on- site monitoring, only
    15 were among the lowest performing. According to the directors of
    four of the five field offices, the level of on- site monitoring
    fell by 88 percent from 1990 through 1998 because of the shift to
    a more collaborative relationship with the grantees and a lack of
    staff resources to conduct on- site monitoring, combined with
    increased responsibilities for field office staff. Despite
    recognition of this problem, the Office of Community Planning and
    Development has not conducted a workforce analysis since 1996.
    Furthermore, the on- site monitoring that does occur is not
    uniform or comprehensive because the Policy Notebook does not
    specify the issues that should be covered during a visit. Another
    problem is the latitude granted field offices in evaluating
    grantees' performance. The Policy Notebook provides the individual
    field offices with considerable discretion in targeting grantees
    for review.

    In visits to 11 grantees, GAO found significant problems that
    could have been detected with on- site monitoring. Some project
    files had no evidence that the grantees monitored the recipients
    of funds, such as nonprofit organizations, and in one instance,
    the grantee acknowledged that it had not monitored any of its
    recipients in the 1998 program year. Other files lacked
    documentation to support payments and to justify cost overruns,
    including one overrun of about $100,000. At one grantee, the nine
    project

    GAO/RCED-99-98 Community Development Page 4

    Executive Summary

    files GAO reviewed lacked such key information as certifications
    that the recipients have low or moderate incomes, statements of
    work, and contracts, making determinations about the grantee's
    performance impossible. Similarly, in 11 reports since the
    implementation of the Grants Management System, HUD's Inspector
    General has found that grantees are not complying with financial
    and performance requirements and has questioned the expenditure of
    about $26 million. The Inspector General has also faulted HUD's
    monitoring of grantees. In some cases, the Inspector General could
    not determine the extent of this monitoring because of missing
    information, and in other cases, HUD had not annually assessed
    grantees, as required.

    The Integrated Disbursement and Information System Is Not
    Providing Needed Information

    Although the Integrated Disbursement and Information System (IDIS)
    was designed to provide complete, accurate, and timely information
    on grantees' expenditures and accomplishments, these goals are not
    being achieved because of four significant problems. First,
    because of flaws in the design of the information system, grantees
    have had to enter the same information multiple times into another
    of HUD's information systems; into IDIS, several times; and into
    the grantees' own systems for reporting to their city which could
    result in errors simply because of the multiple data entries.
    According to HUD, as of mid- February 1999, grantees had access to
    a batch file transfer process, referred to as Electronic Data
    Interchange, which allows grantees to automatically extract data
    from their own information systems and enter it into IDIS. Another
    difficulty is the time involved for grantees to access and use the
    system; in visits to grantees, GAO observed that accessing the
    system took as long as 40 minutes.

    Second, when grantees enter incorrect information into IDIS,
    making corrections is difficult. Five of the 11 grantees GAO
    visited reported having multiple, significant errors in the system
    that they could not readily rectify. To make the corrections, IDIS
    technical staff sometimes instructed the grantees to create fake
    activities within IDIS ( dummy accounts) to reverse the incorrect
    data although some of the grantees GAO spoke with were reluctant
    to do this because the information could appear to be inaccurate
    or fraudulent to outside observers.

    Third, IDIS cannot track program income as it is received from the
    revolving loan funds that many grantees establish for such things
    as economic development loans. IDIS operates on the assumption
    that program income, from whatever source, should be used
    immediately to

    GAO/RCED-99-98 Community Development Page 5

    Executive Summary

    fund the next activity. That is, the system cannot segregate
    income from revolving funds from other program income, although
    regulations permit grantees to preserve program income for reuse
    exclusively in their revolving funds. To work around this
    limitation, HUD instructs grantees to delay entering information
    on such income until they are ready to spend the money, but this
    approach requires grantees to keep two sets of books and prevents
    HUD from using IDIS to determine how much income grantees' are
    earning from their revolving funds and if grantees are meeting a
    regulatory requirement to spend grant money in a timely manner.

    Fourth, while IDIS was intended to allow HUD to track grantees'
    performance on a real- time basis, it does not do so. IDIS does
    not require grantees to enter performance information before it
    releases grant funds to them. Grantees can obtain all funds for an
    activity without entering any performance information about it,
    and most of the grantees GAO visited waited until the end of the
    program year to enter information, when they were required to
    complete annual reports. And after grantees have entered the
    performance information, they have found that printing reports is
    difficult, requiring staff to work through a number of computer
    screens as many as 70 at one field office GAO visited. GAO also
    determined that the security controls for IDIS are weak and
    therefore do not provide assurance that the information system is
    safe from fraud and abuse. Although GAO's Standards for Internal
    Controls states that users should have limited, or segregated,
    access to a computer system according to their responsibilities, 1
    GAO found instances in which particular users at grantee locations
    had access that allowed them to both establish activity accounts
    and draw down funds, thereby increasing the opportunity for
    undetected errors or fraud. GAO also found instances in which
    terminated employees retained access to IDIS. According to the HUD
    official responsible for IDIS security, the staff resources
    devoted to arranging access for grantees are strained. Just he and
    two others handle the thousands of requests for access, he
    explained, and they cannot review the requests for
    appropriateness. In addition, GAO found that the security officer
    was not knowledgeable about computer security; the officer
    acknowledged that while he is familiar with computer networks, he
    has not done any work in security and has had no pertinent
    training. HUD is now developing a new Department- wide information
    system based on IDIS to manage all of its grant programs. IDIS'
    major functions are to be converted to a Windows environment,
    which will be more user- friendly. But given the extent and nature
    of the problems with IDIS, GAO questions its

    1 GAO Internal Control: Standards for Internal Control in the
    Federal Government Exposure Draft (GAO/AIMD-98-21. 3.1.).

    GAO/RCED-99-98 Community Development Page 6

    Executive Summary

    use as a model for the Department- wide system. To address the
    problems GAO identified, IDIS will need to be modified extensively
    or replaced, whichever is more cost- effective.

    Recommendations To improve the integrity of the four block grant
    programs, GAO recommends that the Secretary of Housing and Urban
    Development direct

    the Assistant Secretary for Community Planning and Development to
    (1) emphasize the importance of on- site monitoring by specifying
    the level of grantee performance that requires it and the steps
    that should be taken in conducting it; (2) conduct a workforce
    analysis to determine the resources that may be required to better
    support the monitoring of grantees; and (3) improve the Grants
    Management Process information system by providing guidance to the
    field offices to ensure that they are entering information
    consistently. GAO also recommends that HUD consider whether it is
    more cost- effective to modify IDIS or replace it. Furthermore,
    before IDIS is used as the base for developing the new grants
    management information system for all of HUD's grant programs, GAO
    recommends that the problems it has identified with IDIS be
    corrected.

    Lastly, HUD should immediately take steps to ensure that access to
    the Integrated Disbursement and Information System (IDIS) is
    appropriately limited and to ensure that the security officer for
    IDIS is fully aware of his responsibilities and has the
    appropriate training and staff. Chapters 2 and 3 contain
    additional details on these recommendations.

    Agency Comments GAO provided HUD with a draft of this report for
    its review and comment. HUD disagreed with a number of points in
    the report. HUD did not comment

    directly on the recommendations aimed at strengthening the
    integrity of the formula grant programs or improving the
    Integrated Disbursement and Information System. (See app. I.)

    HUD commented that the report is unduly critical of its controls
    over the four formula block grant programs. HUD offered two
    overall reasons for this view. First, it commented that the report
    did not document the large- scale changes that HUD had undertaken
    and that have led to significant managerial improvements and
    strengthened accountability in the programs. Second, HUD disagreed
    about the extent of on- site monitoring of grantees that was
    necessary to provide effective management oversight, noting it has
    taken a more comprehensive,

    GAO/RCED-99-98 Community Development Page 7

    Executive Summary

    modernistic approach that is, an ongoing, continuous process of
    which on- site monitoring visits are one of several elements.

    GAO's report recognizes that HUD has undertaken important changes
    to improve program management and accountability. It notes, among
    other things, that HUD has revamped its approach to managing the
    programs by requiring grantees to develop a consolidated plan that
    lays out how they will use the funds for all four programs,
    changed its monitoring of grantees to reflect a collaborative
    relationship, and developed the Integrated Disbursement and
    Information System so that grantees could, among other things,
    enter information describing their planning and projects and draw
    federal funds. GAO's report also concludes that HUD's revamped
    system provides a logical, structured approach to managing the
    block grant programs and that HUD has recognized the need for
    effective systems for overseeing the handling of program funds and
    the achievement of program objectives. Furthermore, GAO added to
    this report information on management improvements made to the
    Grants Management System that HUD reported after GAO had completed
    its field work. This information included, for example, HUD's
    distribution of additional instructions for incorporating more
    traditional risk elements, such as unresolved audit and monitoring
    findings, into the field offices' annual comparative review
    process.

    GAO also agrees that HUD has taken a more ongoing, continuous
    approach to monitoring grantees and that this approach can provide
    useful insights into grantees' problems and achievements. However,
    GAO questions whether, at this time, approaches other than
    significant levels of on- site monitoring of grantees can
    adequately ensure that program objectives are being met and that
    funds are being managed appropriately, given the shortcomings of
    the Integrated Disbursement and Information System and other
    monitoring tools, such as consultations and technical assistance
    visits. GAO believes on- site monitoring is currently all the more
    important to compensate for these shortcomings. This is not to say
    that on- site visits should be made to every grantee each year;
    but rather, GAO believes periodic visits to grantees HUD
    identifies as needing improvements are essential.

    HUD also did not comment on GAO's findings about the accuracy,
    completeness, and timeliness of the Integrated Disbursement and
    Information System information on grantees' expenditures and
    program performance. Instead, it commented that GAO's assessment
    fails to consider recent efforts to improve it. HUD provided
    compensating factors

    GAO/RCED-99-98 Community Development Page 8

    Executive Summary

    for some of the Integrated Disbursement and Information System's
    weaknesses and pointed to recent and planned changes to the system
    it believed will correct these problems. GAO believes that HUD's
    recent and planned changes could, if properly implemented, improve
    the Integrated Disbursement and Information System. However, the
    numerous additional problems in usability, accuracy, and security
    still compromise HUD's ability to ensure the integrity of the four
    formula block grant programs. Therefore, we did not make any
    changes to our recommendations.

    GAO continues to believe that HUD's revamped approach to managing
    the programs, as implemented, does not provide adequate assurance
    that the four block grant programs are meeting their objectives
    and that the funds are being managed appropriately. In the draft
    of this report, GAO proposed that HUD provide clearer and more
    detailed guidance on the factors that should be considered in
    evaluating grantee performance, with a heavier emphasis on factors
    that ensure compliance with program requirements. In view of the
    fact that HUD has distributed guidance adding more traditional
    risk factors to its annual comparative review, GAO has deleted
    that proposed recommendation from the report. Furthermore, GAO
    proposed that HUD improve the Grants Management Process
    information system so that field offices have a single data entry
    point for information on their monitoring activities. In view of
    the fact that on March 29, 1999 HUD added Grants Management
    Process screens to allow field offices to describe their
    monitoring activities, GAO has deleted that proposed
    recommendation from the report. In addition, GAO added information
    to the report to reflect HUD's guidance on conducting its annual
    comparative review and its plans to update the Grants Management
    Policy Notebook. Where appropriate, GAO has included other
    technical changes to the report. GAO's detailed responses and
    HUD's comments appear in appendix I and are discussed in chapters
    2 and 3.

    GAO/RCED-99-98 Community Development Page 9

    Contents Executive Summary 2 Chapter I Introduction

    12 Four Block Grant Programs Provide Funds for Community

    Revitalization and Aid to the Homeless 12

    CPD's Oversight of Grants Through the Grants Management System

    14 IDIS 19 Objectives, Scope, and Methodology 20

    Chapter 2 Monitoring Under the Grants Management System Does Not
    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    23 CPD's Implementation of the Grants Management System Does

    Not Ensure That On- Site Monitoring Occurs and That the Poorest
    Performing Grantees Are Reviewed

    24 Reviews Have Identified Significant Financial and Performance

    Problems at Grantees 32

    Little Oversight by CPD Headquarters of Field Offices' Operations
    34 Conclusions 36 Recommendations to the Secretary of Housing and
    Urban

    Development 37

    Agency Comments and Our Evaluation 37 Chapter 3 Financial and
    Management Information System Is Not Providing the Information
    Needed to Manage and Monitor Grant Programs

    39 IDIS' Design Flaws Make the System Difficult to Use, and

    Information Is Not Always Complete, Accurate, and Timely 39

    Security Controls Do Not Provide Assurance That IDIS Is Safe From
    Fraud and Abuse

    44 HUD Plans Major Changes 47 Conclusions 47 Recommendations to
    the Secretary of Housing and Urban

    Development 48

    Agency Comments and Our Evaluation 49 Appendixes Appendix I:
    Comments From the Department of Housing and

    Urban Development 50

    Appendix II: Major Contributors to This Report 81

    GAO/RCED-99-98 Community Development Page 10

    Contents

    Figures Figure 1.1: The Grants Management System's Seven- Step
    Process 17 Figure 1.2: CPD's Management of Formula Grant Programs
    20

    Figure 2.1: Five Field Offices' On- Site Monitoring of Grantees,
    Fiscal Year 1998

    25 Figure 2.2: Field Offices' On- Site Monitoring of Poor
    Performing

    Grantees 26

    Abbreviations

    AIDS Acquired immunodeficiency syndrome HIV/ AIDS Human
    immunodeficiency virus/ acquired

    immunodeficiency syndrome HOME Home Investment in Affordable
    Housing Program HUD Department of Housing and Urban Development
    IDIS Integrated Disbursement and Information System CPD Office of
    Community Planning and Development

    GAO/RCED-99-98 Community Development Page 11

    Chapter I Introduction

    About one- quarter of the Department of Housing and Urban
    Development's (HUD) budget almost $6 billion in fiscal year 1998
    is devoted to four formula block grant programs that support
    community development. While those programs have different
    purposes, they all provide federal funds to grantees to help
    finance projects and services for local residents. The grantees
    include (1) 964 communities known as entitlement communities
    generally cities designated as central cities of metropolitan
    statistical areas, other cities with populations of at least
    50,000, and qualified urban counties with populations of at least
    200,000 and (2) 48 states and some communities besides entitlement
    communities whose programs are administered directly by HUD.

    In 1995, HUD revamped its management of these formula block grant
    programs. Instead of having a grantee develop separate plans for
    each program, a grantee is now required to develop a consolidated
    plan that lays out how it will use funds from the four programs
    for community development. To implement the use of consolidated
    plans and focus on performance monitoring, HUD instituted the
    Grants Management System a seven- step process for managing
    program funds and activities which placed greater reliance on the
    communities' actions to police themselves; it also phased in the
    Integrated Disbursement and Information System (IDIS), which is a
    computerized reporting system for recording the information
    grantees provide on their withdrawal of grant funds and their
    accomplishments.

    Four Block Grant Programs Provide Funds for Community
    Revitalization and Aid to the Homeless

    HUD's Assistant Secretary for Community Planning and Development
    administers four formula block grant programs that help
    communities plan and finance their growth and development and
    provide shelter and services for homeless people. The four
    programs are the Community Development Block Grant Program, the
    Home Investment in Affordable Housing Program (HOME), the
    Emergency Shelter Grant Program, and the Housing Opportunities for
    Persons With AIDS Program. The grantees in these programs
    distribute their grant funds to some 10,000 subrecipients, such as
    nonprofit providers, while the states distribute their grants to
    local governments. These subrecipients and local governments
    provide services directly to the beneficiaries of the programs.

    In order to participate in the four programs, grantees must meet
    general and specific requirements. For instance, in order to apply
    for one of the four formula grants, a grantee must develop a long-
    term plan, generally for 3 to 5 years, that lays out activities
    under all four programs. This plan must

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    Chapter I Introduction

    include an assessment of needs for housing and the homeless; a
    housing market analysis; a 1- year action plan; certifications of
    compliance with various regulatory requirements, standards, and
    procedures that the jurisdiction will use to monitor activities
    carried out in furtherance of the plan; and a citizen
    participation and government consultation plan. Projects and
    activities undertaken with program funds must meet the specific
    objectives and requirements of each program.

    Community Development Block Grant Program

    The Community Development Block Grant Program has long been the
    principal federal community development program, providing funding
    for metropolitan cities and urban counties and for small cities.
    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 must address at
    least one of three national objectives: They must (1) benefit low-
    and moderate- income families, (2) aid in the prevention or
    elimination of slums or blight, or (3) meet urgent community
    development needs. In fiscal year 1998, the Congress appropriated
    about $4.9 billion for the Community Development Block Grant
    Program. This funding was subject to over $700 million in set-
    asides, including ones for Indian tribes and historically black
    colleges.

    Home Investment in Affordable Housing

    The HOME Program provides federal assistance to participating
    jurisdictions or Indian tribes for housing rehabilitation, rental
    assistance, assistance to first- time homebuyers, and new housing
    construction. The HOME formula for allocating funds measures a
    jurisdiction's share of the total need for an increased supply of
    affordable housing.

    In fiscal year 1998, the Congress appropriated about $1.5 billion
    for the HOME Program$ 863 million was allocated by formula to
    cities, urban counties, and consortiums (contiguous units of local
    government), and $575 million went to the states. The program's
    funding is also subject to several set- asides.

    Emergency Shelter Grants Program

    The Emergency Shelter Grants Program is designed to supplement
    state, local, and private efforts to provide emergency shelter
    assistance for the homeless. Program funds can be used to
    rehabilitate or convert buildings for use as emergency shelters
    for the homeless, to pay for certain operating expenses and
    essential services in connection with emergency

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    Chapter I Introduction

    shelters for the homeless, and to conduct activities to prevent
    homelessness.

    Under this program, HUD makes grants to the states, units of
    general local government, and territories on the basis of the
    Community Development Block Grant formula. In fiscal year 1998,
    the Congress appropriated $823 million for Homeless Assistance
    Grants, of which $165 million was allocated for the Emergency
    Shelter Grants program.

    Housing Opportunities for Persons With AIDS

    The Housing Opportunities for Persons With AIDS Program gives
    states and localities the resources and incentives to devise long-
    term strategies for meeting the housing needs of low- income
    persons with human immunodeficiency virus/ acquired
    immunodeficiency syndrome (HIV/ AIDS) or related diseases.

    HUD awards 90 percent of the annual appropriation by formula to
    eligible metropolitan statistical areas and states. Metropolitan
    areas with populations greater than 500,000 and more than 1,500
    cumulative cases of AIDS are eligible for grants; the most
    populous city in an eligible metropolitan area serves as that
    area's grantee. In addition, states with more than 1,500
    cumulative cases of AIDS in areas outside of eligible metropolitan
    areas qualify for funds. The remaining 10 percent of the program's
    annual appropriation is set aside for grants awarded on a
    competitive basis. In fiscal year 1998, the Congress appropriated
    $204 million for the Housing Opportunities for Persons With AIDS
    Program.

    CPD's Oversight of Grants Through the Grants Management System

    HUD's Office of Community Planning and Development (CPD)
    administers the four formula grant programs through 42 field
    offices located throughout the United States. These offices report
    directly to CPD's Office of Executive Services, Field Management
    Division. Both headquarters and field offices are now relying on
    the Grants Management System to oversee grantees.

    Field Office Organization Each field office is managed by a
    director, who is responsible for ensuring that the field office's
    annual work plan is carried out. An annual work plan is based on
    the field office's annual assessment of each grantee and a
    comparison of the grantees' performances (known as an annual
    comparative review). The work plan describes the actions the field
    office plans to take for each grantee during the year. For
    example, grantees

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    Chapter I Introduction

    designated as needing improvement may be scheduled for technical
    assistance or on- site monitoring.

    Reporting to the director are teams of CPD representatives who are
    responsible for monitoring a caseload of grantees. Each team is
    managed by a program manager. Several types of support staff
    supplement the efforts of the CPD representatives. For example,
    financial analysts review, monitor, evaluate, and provide
    technical advice and assistance on financial matters concerning
    grant awards and grantees' financial systems. Other support staff
    include environmental, relocation and real estate, and clerical
    staff.

    CPD Headquarters' Organization

    The 42 field offices report directly to the Office of Executive
    Services, Field Management Division. The division is responsible
    for setting priorities, promulgating departmental goals, providing
    resources, solving problems, representing the field offices in
    headquarters, training, and evaluating field offices' performance.
    It operates through eight desk officers, each of whom is
    responsible for a number of field offices including monitoring the
    offices' operations, providing assistance, and providing input to
    the field offices' end- of- the- year evaluation signed by the
    Director of the Office of Executive Services.

    The desk officers oversee the field offices through telephone
    conversations and E- mail correspondence, occasional on- site
    visits, and periodic queries to the Grants Management Process
    information system. This information system is a computerized
    management information system that the field offices use to record
    their interactions with their grantees. For example, once a CPD
    representative completes a review and assessment of the grantee's
    annual plan for using its formula grant funds, the results are
    entered into the Grants Management Process information system.

    Grants Management System

    In 1995, HUD introduced the Grants Management System to ensure
    that formula block grantees are achieving high performance and are
    in compliance with program requirements. This system deemphasized
    compliance monitoring and placed greater emphasis on (1) promoting
    a more collaborative approach that includes up- front assistance
    to help grantees achieve their goals and identify and solve their
    problems and (2) ensuring that grantees develop systems to monitor
    their own performance. Before the Grants Management System, HUD's
    primary

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    Chapter I Introduction

    activities in administering the block grant programs were to
    assist communities in understanding program requirements and to
    monitor local programs to ensure compliance with statutory and
    regulatory requirements.

    The Grants Management System and the information systems
    supporting it the Integrated Disbursement and Information System
    (IDIS) and the Grants Management Process information system are
    intended to help HUD comply with the requirements of the
    Government Performance and Results Act of 1993 (P. L. 103- 62).
    The act requires agencies to establish long- term general goals as
    well as associated annual goals. In addition, agencies must
    measure their performance against the goals they have set and
    report publicly on how well they are doing. The Grants Management
    System is intended to target limited resources so that they can
    best be used to achieve locally defined goals while also providing
    best practices to serve as models to enhance and improve
    performance among all grantees.

    As figure 1 shows, the Grants Management System is a seven- step
    process of interaction between CPD and the grantees that involves
    (1) consulting, (2) conducting a plan review and assessment, (3)
    monitoring a grantee's performance (performance- based program
    management), (4) reviewing the grantee's consolidated annual
    performance and evaluation report, (5) conducting an annual
    community assessment, (6) conducting an annual comparative review,
    and (7) systematically identifying and encouraging the use of best
    practices. Broadly, the Grants Management System establishes
    internal controls plans, methods, and procedures used to meet
    objectives that involve monitoring and, according to GAO's
    Standards for Internal Controls in the Federal Government, must
    themselves be monitored. Field offices enter the results of each
    of these steps into the Grants Management Process information
    system.

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    Chapter I Introduction

    Figure 1.1: The Grants Management System's Seven- Step Process

    Source: CPD.

    Consultation CPD uses consultation as a tool to enhance the
    quality and effectiveness of a grantee's plans and programs. These
    consultations are held as early as possible in the grantee's
    process for developing its next year's planned activities. The
    participants in these meetings should include the chief elected
    official of the community and other stakeholders, as appropriate.
    The discussions should be centered on relevant planning,
    performance, and compliance issues. When possible, these
    discussions should be conducted at the grantee's offices.

    Plan Review and Assessment CPD uses the grantee's consolidated
    plan and annual action plan as the basis for its program
    management and evaluation responsibilities. CPD's review and
    assessment focuses on the plans' completeness; their effectiveness
    as communication tools for citizens; the soundness of their
    strategies and the likelihood that they will address identified
    needs; and their ability to serve as the basis of future
    assessment and performance evaluation. CPD has 45 days from
    receipt of the plans to review and approve or disapprove them or
    the plans are automatically approved.

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    Chapter I Introduction

    Performance- Based Program Management

    CPD is to oversee the grantee's activities throughout the program
    year through performance- based management. This process includes
    an assessment of the performance and overall effectiveness of the
    programs implemented by the grantees as well as traditional
    compliance monitoring. CPD must use a wide range of tools in
    evaluating a grantee's performance. These tools include the
    consolidated and action plan review and assessment, performance
    data that the grantee enters into IDIS, the annual community
    assessment, on- site monitoring, and consultations with community
    officials and other stakeholders to define or improve a local
    program.

    Consolidated Annual Performance and Evaluation Report

    At the end of the program year, a grantee submits a consolidated
    annual performance and evaluation report whose goal is to show
    what the grantee has accomplished with the grant funds. The report
    allows CPD, local officials, and the public to draw conclusions on
    grantees' performance. A grantee should submit this report to its
    CPD field office 90 days after the end of the grantee's program
    year, which varies by grantee. The report is to cover all
    activities undertaken by the grantee during the program year
    regardless of the fiscal year of the grant. If a grantee fails to
    submit the report in a timely manner, CPD can suspend or terminate
    the grantee's funding. According to the Grants Management System
    Policy Notebook, CPD's review of the report should be completed
    within 60 days of receipt; however, this time frame is not
    required by regulation.

    Annual Community Assessment Using the consolidated annual
    performance evaluation report and other available information,
    such as the results of monitoring activities, CPD annually
    assesses each grantee's performance to determine whether the
    grantee has carried out its planning, activities, and reporting in
    accordance with statutory requirements and provides the grantee
    with a written report on its performance. This assessment is to
    begin no later than 3 months after the end of the program year.
    CPD is to complete the assessment within 60 days and provide the
    grantee with a letter that cites the grantee's accomplishments and
    any areas that need improvement. The grantee is given 30 days to
    comment on the assessment's findings.

    Annual Comparative Review In conducting an annual comparative
    review, each field office evaluates its portfolio of grantees by
    quality and risk and identifies grantees that it considers to be
    performing exceptionally well, those that are performing
    adequately, and those that need more oversight or assistance. At
    the completion of this review, CPD develops a work plan for each
    grantee that describes the management strategy for the grantee for
    the coming program year. If the grantee has areas needing
    improvement, the field office will

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    Chapter I Introduction

    identify actions and strategies for addressing that problem.
    Actions may include on- site monitoring, technical assistance
    provided by staff and contractors, peer- to- peer assistance, and
    training.

    Best Practices During the annual comparative review or at any
    time, field offices identify best practices systems and programs
    that work particularly well and that can be used to improve the
    performance of other grantees. Best practices are programs or
    projects, management tools, and/ or techniques that fulfill at
    least two of the following characteristics:

     They generate a significant positive impact on those they are
    intended to serve or manage and are replicable in other areas of
    the country, region, or local jurisdiction.  They demonstrate the
    effective use of partnerships among government

    agencies, nonprofit organizations, and/ or private businesses.
    They display creativity in addressing a problem.

    IDIS IDIS is a computer- based management information system that
    consolidates planning and reporting processes across the four
    formula

    grant programs. The grantees use this system to enter information
    on consolidated planning, establish projects and activities to
    draw down funds, and report accomplishments. The system is
    supposed to reduce the grantees' reporting burden by providing a
    single computer system for obtaining funding and reporting on the
    use of grant funds, regardless of the formula grant program.
    Moreover, the system is supposed to provide CPD staff with real-
    time performance data from the grantees, such as the number of
    people served, jobs created, houses rehabilitated; income
    characteristics of beneficiaries; benefits provided; information
    to judge if national objectives are being met; and information on
    funds drawn down by the grantees. This information is needed for
    CPD to evaluate grantee performance and to determine the
    assistance is needed.

    Figure 1.2 shows CPD's structure and information systems in
    managing the four formula grant programs.

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    Chapter I Introduction

    Figure 1.2: CPD's Management of Formula Grant Programs

    Source: GAO's analysis of CPD data.

    Objectives, Scope, and Methodology

    The former Chairman of the Subcommittee on Housing Opportunity and
    Community Development now the Subcommittee on Housing and
    Transportation, Senate Committee on Banking, Housing, and Urban
    Affairs, and the Chairman of the Subcommittee on Housing and
    Community Opportunity, House Committee on Banking and Financial
    Services, asked GAO to assess whether controls are in place to
    ensure that the block grant programs' objectives are being
    achieved and that funds are managed appropriately. In particular,
    we examined whether (1) HUD's on- site monitoring of grantees
    under the Grants Management System is adequate and (2) the
    Integrated Disbursement and Information System provides the data
    HUD needs to accurately assess grantees' performance.

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    Chapter I Introduction

    Our work focused on CPD's four formula grant programs the
    Community Development Block Grant Program, HOME Investment in
    Affordable Housing Program, Housing Opportunities for Persons With
    AIDS Program, and Emergency Shelter Grants Program. We evaluated
    IDIS operations and the Grants Management System, CPD
    headquarters' oversight of its 42 field offices, and 5 field
    offices' oversight of 11 grantees. In selecting field offices, we
    considered geographic dispersion, size, grant fund allocations,
    and past performance.

    In addressing both questions, we examined information from a
    number of sources, including relevant GAO reports, the HUD Office
    of the Inspector General's audits of CPD's formula grant programs,
    and independent contractor's audits and studies of IDIS and CPD's
    internal controls. In addition, we interviewed key agency
    officials, the independent contractors supporting IDIS and
    reviewing the Grants Management System, and representatives of
    various grantee organizations.

    In evaluating the Grants Management System, we interviewed CPD
    officials at field offices located in Fort Worth, Texas; Boston,
    Massachusetts; Los Angeles, California; Coral Gables, Florida; and
    Omaha, Nebraska. In our analysis, we applied the relevant criteria
    GAO has issued on internal controls and guidelines for evaluations
    and the laws, regulations, and procedures pertaining to the four
    formula block grant programs. We evaluated the Grants Management
    System's design and reviewed its implementation in each of the
    five field offices. Specifically, we assessed the caseloads of
    each field office representative; analyzed the offices' process
    for reviewing and monitoring grantees' action plans, transactions,
    and performance information; and documented the field offices'
    responses to this information.

    We also visited a total of 11 grantees managed by the five field
    offices we visited. These grantees were selected on the basis of
    their size, performance evaluations, and proximity to the field
    offices. While at these grantees, we interviewed relevant city
    officials and conducted limited file reviews to determine if HUD
    was effectively managing these grants, obtained the grantees'
    opinions on the level of monitoring and technical assistance
    provided by the CPD field office; and validated selected
    information provided through IDIS. The grantees we visited include
    Fort Worth, Arlington, and Dallas, Texas; Lincoln, Nebraska;
    Council Bluffs, Iowa; Medford, and Lowell, Massachusetts;
    Inglewood, and Ontario, California; and Miami, and Pompano Beach,
    Florida.

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    Chapter I Introduction

    We evaluated IDIS internal controls and conducted selective
    testing of IDIS transactions. We interviewed key HUD officials
    both in headquarters and the field as well as staff at the
    grantees we visited regarding IDIS' functionality, training, and
    security. We also tested IDIS' accuracy by tracing financial and
    accomplishment data to source documents for randomly selected
    activities.

    Our review was conducted from May 1998 through April 1999 in
    accordance with generally accepted government auditing standards.

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    Chapter 2 Monitoring Under the Grants Management System Does Not
    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    While the Grants Management System provides a logical, structured
    approach to managing the four block grant programs, CPD's
    monitoring under the system, of which IDIS is a critical part,
    does not ensure that program objectives are being met and that
    funds are being managed appropriately. While the on- site
    monitoring of grantees is an essential tool for making such
    determinations, it is all the more important because of the
    shortcomings of IDIS (discussed in ch. 3) and other monitoring
    tools, such as consultations, technical assistance visits and
    audits performed by independent public accounting firms. For the
    five CPD field offices we visited, accounting for approximately 20
    percent of all formula grant funds in fiscal year 1998 ($ 1.18
    billion), most of the poorest performing grantees, identified by
    CPD through the annual comparative review, were not identified for
    on- site visits. And even when on- site visits were scheduled for
    the poorest performing grantees, the visits often did not occur
    because of a shift in emphasis away from intensive on- site
    monitoring and resource constraints in the field offices.
    Furthermore, CPD headquarters has reduced its oversight of the
    field offices because of a desire for a more collaborative
    relationship and because of resource constraints.

    Such breakdowns in monitoring make the Department vulnerable to
    fraud, waste, and abuse in its formula grants programs. In our
    review of 11 grantees, we identified various problems related to
    the financial operations of and results achieved by grantees,
    including vouchers assigned to the wrong project and year and
    incomplete or missing information on key data such as recipients,
    statements of work, and contracts. In addition, since the Grants
    Management System was introduced in 1995, HUD's Inspector General
    has questioned grantees' expenditure of about $26 million.
    Finally, the Inspector General and an independent study performed
    in 1998 of six field offices and 11 grantees reported that CPD's
    monitoring is inadequate.

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    Chapter 2 Monitoring Under the Grants Management System Does Not
    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    CPD's Implementation of the Grants Management System Does Not
    Ensure That On- Site Monitoring Occurs and That the Poorest
    Performing Grantees Are Reviewed

    While HUD's Grants Management Policy Notebook emphasizes the
    importance of on- site monitoring in implementing the Grants
    Management System, stating that on- site monitoring is an
    essential tool for determining whether important program
    requirements are being met, the five field offices we visited have
    generally conducted limited on- site monitoring of grantees and of
    those grantees CPD identifies as most in need of oversight or
    assistance. Furthermore, when on- site reviews occur, field
    offices may not obtain the comprehensive, in- depth information
    they need to oversee grantees' performance. A problem exists with
    the definition of poor performance because CPD has not established
    standard criteria for determining the level of performance
    grantees achieve, which means that CPD has no assurance that the
    grantees most at risk of failing to meet program requirements are
    consistently being identified for more intensive review.

    Field Offices Have Conducted Limited On- Site Monitoring of
    Grantees and Have Not Focused on the Poorest Performing Grantees

    The field offices we visited targeted about 37 percent of their
    grantees for on- site monitoring but visited far fewer. As figure
    2.1 shows, during fiscal year 1998, the five field offices
    identified 85 of their 228 grantees for on- site monitoring but
    only conducted 33 visits 14 percent of all grantees.

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    Chapter 2 Monitoring Under the Grants Management System Does Not
    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    Figure 2.1: Five Field Offices' On- Site Monitoring of Grantees,
    Fiscal Year 1998

    Source: GAO's analysis of CPD's data.

    Furthermore, while the grantee evaluation performed during the
    annual comparative review is intended to maximize the use of
    limited resources by targeting the grantees most in need of
    attention, the 33 grantees visited by the five field offices were
    not necessarily those CPD had determined were the poorest
    performers. As figure 2.2 shows, only 38 of the 85 grantees
    designated for on- site monitoring were rated among the lowest
    performing grantees in the annual comparative review, that is,
    those needing the greatest oversight or assistance. Moreover, only
    15 were actually monitored, and the remaining 23 visits were
    cancelled because of resource limitations, according to the field
    office directors.

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    Chapter 2 Monitoring Under the Grants Management System Does Not
    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    Figure 2.2: Field Offices' On- Site Monitoring of Poor Performing
    Grantees

    Source: GAO's analysis of CPD's data.

    According to the CPD directors of four of the five field offices,
    they have significantly reduced their on- site monitoring of
    grantees in recent years. 2 According to monitoring information
    provided by the four directors, on- site monitoring in these
    offices fell by about 88 percent between 1990 and 1998.
    Nevertheless, officials of two associations that represent
    grantees the National Community Development Association and the
    National Association for County Community and Economic Development
    and several grantees we visited supported more on- site monitoring
    because monitoring ensures that they are generally on the right
    track. They said they want to know whether they are operating
    their programs properly and to have problems corrected before they
    are penalized for inadequate management. One association official
    said that some grantees are becoming concerned because they have
    not been monitored in years.

    2 The Miami field office could not provide historical monitoring
    information because it was not established until 1996.

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    Chapter 2 Monitoring Under the Grants Management System Does Not
    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    Infrequent on- site monitoring by CPD has occurred for two
    principal reasons discussed below: (1) a shift in emphasis under
    the Grants Management System and (2) significant resource
    reductions.

    Shift in Monitoring Emphasis The Grants Management System shifted
    the focus of the government/ grantee relationship from one of
    monitoring grantee compliance with program requirements to a more
    collaborative relationship that includes up- front assistance to
    help grantees achieve their objectives and identify and solve
    problems. In line with this philosophy, CPD encouraged the field
    offices to increase the level of remote monitoring through IDIS
    and other tools such as IDIS reports, consultations, technical
    assistance visits, and audits performed by independent accounting
    firms and reduce the level of intensive on- site monitoring. In
    February 1997, we reported that of the 32 CPD directors surveyed,
    41 percent said that headquarters' emphasis on completing
    essential monitoring was low, and 66 percent believed that the
    amount of on- site inspections should increase. 3

    Significantly Reduced Resources As the directors of the five field
    offices said, and as we reported in

    February 1997, the level of on- site monitoring is lower than it
    should be principally because of a lack of staff and travel funds.
    Resources have been reduced while responsibilities have increased.
    CPD lost almost one- fourth of its staff 264 people between 1992
    and 1997. At the same time, staff have had to take on new
    responsibilities for programs worth billions of dollars:
    homelessness programs, technical assistance grants, and
    Empowerment Zone and Enterprise Community grants. 4 This caused
    the annual grants per employee to double from about two to about
    four over approximately the same period. In addition, the staff in
    some field offices have to carry out administrative tasks because
    of administrative staff shortages. CPD directors told us that
    staff reductions, combined with workload increases, have forced
    them to have to make sacrifices, and they consistently mentioned
    the elimination of on- site monitoring as one of those sacrifices.

    Furthermore, CPD directors told us that the Grants Management
    System was not generating resource efficiencies as they had hoped.
    While IDIS, along with the Grants Management Process information
    system, were to

    3 HUD: Field Directors' Views on Recent Management Initiatives
    (GAO/RCED-97-34, Feb. 12, 1997). 4 CPD oversees a number of
    programs designed to reduce homelessness, technical assistance
    grants to help grantees correctly administer CPD programs, and the
    Empowerment Zone and Enterprise Community Program, which is
    designed to help selected distressed communities develop
    comprehensive approaches for dealing with their social and
    economic problems.

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    Chapter 2 Monitoring Under the Grants Management System Does Not
    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    foster the efficiencies of remote monitoring, IDIS requires
    substantial time to learn and maintain, and the annual
    consultations also use time and travel dollars, the directors
    reported. According to the directors, these extra requirements
    make on- site monitoring more difficult.

    Officials in one field office told us that the cost of travel is a
    major factor in determining which grantees will receive on- site
    monitoring because the field office has to cover a large
    geographic area. They said that the grantees that are relatively
    close to the field office receive the greatest oversight. For
    instance, while this field office had nominated a grantee for a
    best practices award, field office staff still made weekly
    technical assistance visits to that grantee because it was nearby.
    Yet, of the field office's 16 poorest performing grantees, only 3
    received on- site monitoring. In May 1997, CPD acknowledged these
    problems in its Management Reform Plan, which noted the following:

    Among . . . [CPD's] key problems are: a. Staff and travel funds
    are too limited to do adequate on- site monitoring and validation
    of high risk activities of grantees. b. CPD approves over 1,300
    competitive grants a year and has to monitor cumulatively many
    thousands of competitive grants, a workload increasingly difficult
    to handle with the loss of 23% of staff since 1992 and continued
    drop in staff under the downsizing. c. With the approval of
    hundreds of economic development projects in the past several
    years, CPD has insufficient staff resources in both number and
    expertise to monitor these programs adequately. 5

    Despite recognition of this problem, CPD has not conducted a
    workforce analysis to determine its staffing needs and accurately
    target its staff resources since 1996. Furthermore, while HUD's
    travel budget increased from $15.6 million in fiscal year 1998 to
    $19 million for fiscal year 1999, HUD decreased CPD's field office
    travel allocation from $416,051 in 1998 to $412,000 in 1999.
    Moreover, the field office travel allocation for fiscal year 1999
    is over $100,000 less than it was in fiscal year 1994.

    On- Site Monitoring That Is Conducted Is Not Uniform or
    Comprehensive

    Before the Grants Management System was established, field offices
    used the CPD Monitoring Handbook more universally. This handbook
    specified the level of monitoring warranted for high- risk
    grantees and the scope and intensity of the on- site review. It
    indicated that on- site monitoring should include validating
    reported information by reviewing case files; reviewing financial
    information; spot- checking capital improvement projects; and

    5 The HUD 2020 Management Reform Plan presents a fundamental
    management overhaul that focuses on improving HUD's management of
    its programs and staff.

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    Chapter 2 Monitoring Under the Grants Management System Does Not
    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    visiting sites that provide direct services to beneficiaries, such
    as a homeless shelter. It also included checklists that focused on
    compliance with program requirements, such as the grantee's
    progress in achieving project objectives, compliance with national
    objectives for the Community Development Block Grant Program,
    grant administration, citizens' participation, and property
    rehabilitation activities, among others. Some of these activities
    were reviewed by CPD representatives, while others were reviewed
    by specialists such as financial analysts. Staff had to report on
    the results of the review in the form of a letter to the grantee
    and other relevant officials. According to one field office
    director we spoke with, a comprehensive on- site review would
    usually take about a week or two to complete.

    Under the Grants Management System, however, CPD has no assurance
    that such comprehensive on- site monitoring will occur. The Grants
    Management System Policy Notebook does not ensure that field
    offices will conduct comprehensive monitoring of the grantees that
    they do visit because it does not provide specific procedures that
    have to be carried out during such a visit. Two field office
    directors and the Director of CPD's Field Management Division said
    that the principles in the monitoring handbook still applied but
    that field offices are not required to follow them. Field offices
    have significantly curtailed the actions they take during on- site
    monitoring.

    Instead, monitoring under the Grants Management System targets the
    specific aspects of grants administration in which the grantee
    needs improvement. For example, one field office focused its
    monitoring visits only on the grantees' monitoring of
    subrecipients. Of the five offices that we visited, only one
    office had conducted a comprehensive on- site monitoring of a
    grantee in 1998. According to the field office director, the field
    office no longer routinely conducts comprehensive on- site
    monitoring, but did so in this instance in response to a citizen's
    allegation of fraud in the use of federal funds.

    The lack of specific monitoring guidance thus allows for
    significant variation in the way HUD field offices oversee almost
    $6 billion in formula grant funds. While one field office we
    visited focused its half- day monitoring visits only on the
    grantees' monitoring files for subrecipients, another office
    conducts complete multiday reviews of one of a grantee's programs.
    In a third field office, the complete fiscal year 1998 on- site
    monitoring for one grantee that receives $28 million annually in
    CPD

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    formula allocations consisted of a one- day visit to one HOME
    project by a single HUD employee, who had never before conducted a
    monitoring visit.

    According to HUD, the Grants Management Policy Notebook will be
    revised to provide detailed guidance to field offices on ensuring
    compliance with program laws and regulations. This guidance is
    scheduled to be made final and distributed at the end of July
    1999.

    Tools Other Than On- Site Monitoring Are Not Providing Accurate
    and Complete Information

    The directors of the five CPD field offices we visited generally
    agreed that comprehensive on- site reviews provide a higher level
    of assurance of program compliance and proper use of funds than
    other available tools IDIS reports, consultations, technical
    assistance visits, and audits performed by independent public
    accounting firms. These other tools do not provide the detailed
    information that field offices need to effectively monitor program
    performance, according to the directors. As we discuss in chapter
    3, we found during our visits to field offices that grantees were
    not always entering complete and accurate information into IDIS
    and that the system cannot provide timely and accurate information
    on grantees' performance. In addition, some CPD representatives
    were not using IDIS to retrieve information on grantees'
    performance. Furthermore, field offices' consultations with
    grantees are primarily geared to providing local officials with an
    evaluation of the grantees' performance and to identifying
    technical assistance needs and resources, rather than reviewing
    projects and activities and documentation supporting those
    activities. Similarly, technical assistance visits are made to
    provide the grantees with information to help them operate their
    programs more effectively. One director acknowledged that field
    office staff can make observations on grantees' financial and
    performance matters during these visits, but the visits' primary
    purpose is not monitoring. Moreover, technical assistance is often
    performed by contractors who do not have a monitoring role.
    Finally, according to the Director of the Field Management
    Division and all five field office directors, independent public
    accounting audits do not provide enough detailed program
    performance information. 6

    6 The Single Audit Act, 31 U. S. C. 7501- 750, provides uniform
    audit requirements for all federal assistance programs, that award
    funds to states, local governments, or nonprofit organizations.
    Rather than being a detailed review of individual grants or
    programs, a single audit is an organizationwide financial and
    compliance audit that focuses on accounting and administrative
    controls. A single audit is designed to advise federal and grantee
    officials and program managers on whether an organization's
    financial statements are fairly presented and to provide
    reasonable assurance that federal financial assistance programs
    are managed in accordance with applicable laws and regulations. It
    is not intended to provide detailed performance information.

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    Chapter 2 Monitoring Under the Grants Management System Does Not
    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    The Grants Management System Does Not Provide Uniform Criteria for
    Evaluating Grantees' Performance

    The latitude allowed in evaluating the level of grantees'
    performance is another problem for monitoring under the Grants
    Management System. The field offices have considerable discretion
    in setting their annual work plans including deciding on which
    grantees are poor performers and what type of oversight they may
    need. The Grants Management Policy Notebook, which describes how
    to manage a grantee's performance, provides only general criteria
    for evaluating this performance. These criteria include the
    adequacy of the grantee's consolidated plan and the grantee's
    efforts to (1) address the continuing needs of the homeless
    population, (2) provide affordable housing to all populations and
    income groups, (3) increase economic opportunity, (4) provide a
    suitable living environment for its recipients, and (5) meet
    program requirements. The policy notebook leaves it to the
    individual field office to determine which of these factors to
    weigh more heavily in targeting grantees for review. On the basis
    of these criteria, the field office is to determine which grantees
    are performing exceptionally well, performing adequately, or
    needing more oversight or assistance.

    While these criteria include an important focus on results in the
    community, they do not provide assurance that field offices will
    consistently emphasize the factors that will target grantees on
    the basis of compliance with internal controls designed to protect
    against fraud or abuse. According to two field office directors,
    in determining which grantees need to be monitored more closely in
    the coming year, the Grants Management System shifted the focus
    from the factors that could result in the inappropriate use of
    federal funds to the more performance- based factors presented in
    the Grants Management Policy Handbook. Furthermore, in reviewing
    the Community Development Block Grant Program, an independent
    accounting firm noted the need to identify at- risk grantees by
    using more traditional risk factors, such as unresolved audit or
    monitoring findings, the number of subgrantees and subrecipients
    receiving funds, the amount of program income, the size of the
    grant, the last date of monitoring, and staff turnover. 7 In
    response to this report, on September 29, 1998, HUD promulgated
    risk analysis guidance that included most of these risk factors.

    7 Soza & Company Ltd. U. S. Department of Housing and Urban
    Development Office of Audit Resolution, Verification Review of
    Material Weakness 91- 02, Community Development Block Grant CDBG,
    March 19, 1998.

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    Chapter 2 Monitoring Under the Grants Management System Does Not
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    Achieve Program Objectives

    Reviews Have Identified Significant Financial and Performance
    Problems at Grantees

    Our visits to 11 grantees and 11 reports by HUD's Inspector
    General, while not generalizable to all block grant programs,
    identified significant problems that could have been identified if
    field offices were conducting comprehensive on- site monitoring.
    Specifically, at several grantees, we found problems in the
    monitoring of subrecipients that ranged from a lack of records
    showing that such monitoring had been done, although the grantees
    said monitoring had occurred, to an acknowledgement by one grantee
    that no monitoring had occurred during the 1998 program year.
    Without subrecipient monitoring, HUD has no assurance that
    subrecipients are complying with program requirements and are
    achieving their intended objectives.

    For other grantees, in examining the project files, we found
    inadequate documentation to support payments to contractors,
    payment vouchers that were unrelated to the project, and a lack of
    documentation to justify project overruns. For example, at one
    grantee, the project files were missing so much information that
    we could not determine if we had identified all of the problems.
    This grantee had incomplete or missing information on such key
    data as the qualifications of recipients served, such as
    certifications that recipients are of low or moderate- income,
    statements of work, and contracts in the nine project files we
    reviewed. Although this grantee received a monitoring visit in the
    1998 program year, the monitoring was targeted to specific program
    areas, and the monitoring report did not disclose the problems we
    identified. For example, for one project budgeted for $30,000, the
    file included two contracts indicating that it had received
    $40,000 and then another $60,000. We were told that the latter
    $60,000 contract was cancelled, but the file included no
    documentation of this. For another project budgeted for $135,000,
    the file included weekly progress reports, but payment vouchers
    (justifying the payments made to contractors) and other important
    documents, such as a statement of work, were missing. And for
    still another project, the file indicated that the project was
    budgeted at $145,000 and internal accounting records indicated
    that over $300,000 was spent, but neither of these figures could
    be reconciled with the withdrawal of approximately $240,000 that
    was recorded in IDIS. The file did not include any justification
    or support for the discrepancies and the overrun. This grantee was
    not alone in poorly accounting for its use of funds. For example,
    at another grantee, we could not reconcile payment vouchers with
    project totals for a street- paving project that cost $259,200.

    Our reviews also showed problems with reporting accomplishments
    and determining whether grantees were following regulations. For
    example, at

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    Chapter 2 Monitoring Under the Grants Management System Does Not
    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    another grantee, we observed the double- counting of
    accomplishments from one project. In particular, the project file
    supported only half as many demolitions as were reported in IDIS.

    In 11 reports based on reviews of some grantees, HUD's Inspector
    General found that grantees are not complying with financial and
    performance requirements and consequently has questioned the
    expenditure of about $26 million in grant funds since HUD began
    using the Grants Management System. For example, the Inspector
    General reported that a grantee had improperly charged over $2
    million in administrative costs to prior program years. Since the
    costs were transferred before the end of the program year, the
    grantee did not disclose these costs in its annual performance
    report. Without on- site validation of the information in the
    report, the CPD field office could not determine that improper
    transfers had been made. According to the CPD representative who
    was responsible for this grantee, the limited monitoring that was
    done during this period could not have identified the conditions
    the Inspector General had uncovered.

    In another audit, the Inspector General found significant
    weaknesses in a grantee's internal controls for its housing
    rehabilitation program under its Community Development Block Grant
    Program. For example, the Inspector General identified 11 houses
    that had recently been rehabilitated, inspected, and approved by
    the grantees' inspectors. However, the Inspector General's
    inspectors said these houses should not have passed inspection.
    According to the Inspector General's report, the deficiencies
    identified by the Inspector General's inspectors had been allowed
    to go uncorrected because the grantee's inspectors were not
    specifically trained to perform inspections and were pressured to
    perform cursory inspections in order to meet production goals. In
    addition, the Inspector General reported that because the grantee
    did not have any procedures for collecting payments on
    rehabilitation loans, the grantee had a delinquent loan balance of
    over $100,000. Some of these loans had been delinquent for over 8
    years. The Inspector General reported that this audit was
    initiated by the grantee, not CPD, following up on an audit
    conducted by an independent accounting firm.

    HUD's Inspector General has also specifically faulted CPD's
    monitoring of grantees. For example, in its audit of HUD's fiscal
    year 1997 financial statement, 8 the Inspector General focused on
    whether the Grants Management System had been implemented and
    whether the system was

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

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    Chapter 2 Monitoring Under the Grants Management System Does Not
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    providing adequate oversight of grantees. For some of the
    grantees, the Inspector General could not determine the extent of
    CPD's monitoring of grantees' performance because it could not
    find documentation of monitoring in CPD's files. It also found
    that CPD had not done annual community assessments for some
    grantees. Though these required assessments are needed in order to
    reach an opinion on the grantees' performance for the year, CPD
    officials explained that staff shortages resulting from HUD's
    downsizing during fiscal year 1997 had prevented them from
    conducting the assessments. The Inspector General concluded that
    CPD could not ensure that all grantees were expending funds only
    on eligible activities and individuals.

    In addition, the independent accounting firm assigned to the
    verification review of CPD's actions to correct material
    weaknesses in the Community Development Block Grant Program
    faulted CPD's practices for monitoring grantees. Its report
    indicated that four of the six field offices visited had not
    conducted significant on- site monitoring visits for fiscal years
    1996 and 1997.

    Little Oversight by CPD Headquarters of Field Offices' Operations

    In addition to the problems in CPD's monitoring of grantees, CPD
    headquarters is not adequately monitoring the field offices'
    operations. According to representatives of an independent
    accounting firm that reviewed CPD's actions to correct material
    weaknesses in the Community Development Block Grant Program (which
    represents almost three- quarters of the funding for the four
    block grant programs examined), CPD headquarters' oversight of the
    field offices is almost nonexistent. The March 1998 report states
    the following:

    CPD had conducted Field Office Reviews in the past, however these
    reviews have been discontinued. We were unable to identify any
    procedures being performed by Headquarters that would be adequate
    for evaluating the quality and sufficiency of procedures being
    applied by the Field Offices.

    In addition, the representatives of the accounting firm said that
    the lack of headquarters oversight represents a material weakness
    in internal controls. The report recommended that CPD headquarters
    design a methodology for determining the adequacy of field
    offices' compliance- monitoring procedures. HUD is still reviewing
    the report to determine how it will respond to the
    recommendations.

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    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    Headquarters staff infrequently visit the 42 field offices making
    fewer than five visits in the last 2 years according to the
    Director of the Field Management Division. When they do visit,
    headquarters staff do not have to formally report their findings.
    These limited visits to field offices reflect a change in
    headquarters' oversight in recent years. One desk officer told us
    that headquarters had moved away from field office monitoring in
    an attempt to improve relationships with the field offices
    headquarters believed that these visits antagonized the field
    offices. However, he believed that monitoring visits helped bring
    headquarters closer to the problems and realities that the field
    offices faced. In the past, he explained, these visits always
    generated findings, and the field offices welcomed the feedback
    and suggestions for improvement that resulted. But now, he stated,
    he does not have enough information to assess the field offices'
    performance.

    In addition, the desk officers' primary monitoring tool the Grants
    Management Process information system yields incomplete and
    inconsistent data. Consequently, headquarters staff do not know if
    field offices are fulfilling their program responsibilities. Our
    review of a Grant Management Process report on the field offices'
    compliance with the time requirement for approving or disapproving
    grantees' annual action plans showed that the field offices are
    interpreting the requirement differently and consequently entering
    different, sometimes misleading, approval dates into the system. 9
    For example, one field office we visited believed that the
    approval date was the day the CPD representative approved the
    plan; another, that it was the date the field office director
    approved the plan; and a third, that it was the date the local
    Congressman notified the grantee that the grant had been approved.
    Moreover, the desk officer responsible for one of these offices
    could not explain an apparently significant number of late
    approvals. However, in our visit to this field office, we learned
    that, for many of the plans reviewed, field office staff had
    either incorrectly entered the data or had found deficiencies in
    the plans but failed to reject them while they waited a resolution
    of the deficiencies. On- site monitoring, or even more questioning
    of the field offices, would have identified this problem and
    allowed the headquarters staff to resolve it.

    Finally, while the Grant Management Process's information system
    is supposed to be the headquarters staff's principal monitoring
    tool, it has not been useful for recording information about field
    offices' monitoring of grantees. At the time of our review, it did
    not contain a clear data entry

    9 Field offices are required to review and approve or disapprove
    grantees' annual action plans within 45 days after receiving the
    plan. If the field office does not act on the plan within 45 days,
    the plan is automatically approved.

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    point for field offices to record the results of their monitoring
    activities in the database. Therefore, field offices entered these
    results in different locations in the system. In order to
    determine where field offices were recording this information, HUD
    hired a contractor to peruse the system and identify all recorded
    information that appeared to be related to monitoring. The
    contractor's report covering the third and fourth quarters of
    fiscal year 1997 showed that the field offices were entering
    monitoring data in three of the system's eight data entry points,
    and no monitoring information was entered for more than 75 percent
    of the grantees that were scheduled for on- site monitoring.
    Without a specific area in which field offices can record
    monitoring activities, headquarters staff cannot be assured that
    they have access to all pertinent monitoring information to
    oversee field offices' operations.

    We were told by HUD that a process for tracking on- site
    monitoring activities was implemented. This includes the addition
    of Grants Management Process screens to allow field offices to
    describe their on- site monitoring activities in terms of the
    program monitored, program issues covered, the number of days
    spent with the grantee, issues identified and sanctions imposed.
    According to HUD, this addition to the system was implemented on
    March 29, 1999.

    Conclusions As it is currently implemented, CPD's Grants
    Management System provides little assurance that four block grant
    programs, funded at nearly $6 billion

    annually, are meeting their objectives and that the funds are
    being managed appropriately. While the Grants Management System's
    approach to monitoring seems logical, it has not been effective.
    The field offices we visited are conducting limited on- site
    monitoring of grantees, although such monitoring is all the more
    important because of the shortcomings of IDIS. And when on- site
    monitoring does occur, it does not focus on the grantees who are
    the poorest performers, and it is not uniform or comprehensive.
    These problems are caused in part by a lack of uniform criteria on
    how to assess the level of performance for each grantee and the
    lack of specificity in the broad criteria that do exist to
    determine grantees' compliance with program requirements, although
    such requirements are intended to encourage the safeguarding of
    funds. According to the directors of the field offices, the level
    of on- site monitoring is also lower because of a combination of a
    lack of staff resources and travel funds and increased
    responsibilities.

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    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    While we found these problems with field offices' monitoring of
    grantees, we also found that the headquarters staff's oversight of
    the field offices was problematic. Headquarters staff rarely visit
    the field offices, and while the Grants Management Process
    information system is intended to be headquarters' staff primary
    tool to oversee the field offices' monitoring of grantees, at the
    time of our review, the information system did not contain a
    specific data entry point for field offices to enter data on their
    monitoring activities.

    In all, HUD has no assurance that program requirements are being
    fulfilled. These requirements are critical to its goal of
    restoring the public trust in its management of billions of
    dollars in formula grant funds. Until HUD strengthens its
    monitoring of the financial operations of and results achieved by
    program grantees and its field office operations, the integrity of
    its formula grant programs is at risk.

    Recommendations to the Secretary of Housing and Urban Development

    In order to ensure that the Grants Management System identifies
    problems in achieving program objectives and safeguarding grant
    funds and protects the integrity of the block grant programs, we
    recommend that Secretary of Housing and Urban Development direct
    the Assistant Secretary for Community Planning and Development to
    take the following actions to improve oversight by field offices
    and headquarters:

     Emphasize the importance of on- site monitoring by specifying the
    level of grantee performance that requires on- site monitoring and
    the steps that should be taken in conducting such monitoring.
    Conduct analyses to determine the staffing and travel funds that
    may be

    required to better support the monitoring of grantees and direct
    available resources to the field offices as needed.  Direct desk
    officers within the Office of Community Planning and

    Development at headquarters to visit their field offices to better
    assess how well the field offices are monitoring their grantees,
    to determine what problems the field offices are experiencing, and
    to provide technical assistance.  Improve the Grants Management
    Process information system by providing

    guidance to the field offices to ensure that they are entering
    information consistently.

    Agency Comments and Our Evaluation

    While HUD did not comment on our recommendations, it commented
    that our report did not recognize its recent improvements to
    internal controls

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    Ensure That Grantees Are Managing Their Funds Appropriately to
    Achieve Program Objectives

    and that our report focused too much on on- site monitoring.
    Specifically, it commented that its revamped approach to grants
    management ensures basic program compliance through a continuing,
    on- going process that includes on- site monitoring along with
    other elements. HUD commented that the majority of its monitoring
    activities can be done remotely, including review of key
    documents, the high risk assessment process, the grantee
    consultation, and the effective use of the Grants Management
    Process information system and IDIS. HUD also stated that it
    conducts on- site monitoring when conditions require it.
    Furthermore, HUD commented that it has distributed guidance adding
    more traditional risk factors to its annual comparative review and
    is in the process of updating its Grants Management Policy
    Notebook and Grants Management Process information system to
    better account for on- site monitoring.

    We disagree that the majority of monitoring activities can be done
    remotely. Our report shows that the tools other than on- site
    monitoring are not, at this time, providing the accurate and
    complete information HUD needs to effectively monitor program
    performance. We believe the questionable quality of the data from
    remote monitoring sources such as IDIS increases the need for on-
    site monitoring at this time. Additionally, for the field offices
    we visited, we found that HUD did not conduct on- site visits to
    many of the grantees it regarded as the poorest performers in
    1998. Consequently, we continue to believe that HUD's approach to
    managing the programs, as implemented, provides little assurance
    that the four grant programs are meeting their objectives and that
    the funds are being managed appropriately.

    In a draft of this report, we proposed that HUD provide clearer
    and more detailed guidance on the factors that should be
    considered in evaluating grantee performance, with a heavier
    emphasis on the factors that ensure compliance with program
    requirements. In view of the fact that HUD has distributed
    guidance adding more traditional risk factors to its annual
    comparative review, we deleted our proposed recommendation from
    the report. Furthermore, GAO proposed that HUD improve the Grants
    Management Process information system so that field offices have a
    single data entry point for information on their monitoring
    activities. In view of the fact that on March 29, 1999 HUD added
    Grants Management Process screens to allow field offices to
    describe their monitoring activities, GAO has deleted that
    proposed recommendation from the report. In addition, we added
    information to our report to reflect HUD's new guidance on
    conducting its annual comparative review and its plans to update
    the Grants Management Policy Notebook.

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    Chapter 3 Financial and Management Information System Is Not
    Providing the Information Needed to Manage and Monitor Grant
    Programs

    CPD's chief monitoring tool for the Grants Management System the
    Integrated Disbursement and Information System (IDIS) does not
    produce the complete, accurate, and timely information that the
    Department should obtain from a computerized database to
    effectively manage and monitor almost $6 billion in block grants.
    The first of nine new standard integrated systems deployed by HUD
    to manage and monitor the programs, IDIS has major design flaws
    that make it difficult for grantees to enter information
    accurately and for field office officials and grantees to use the
    information to monitor performance. 10 Furthermore, CPD cannot
    ensure that IDIS is safe from fraud and abuse because it has not
    put into place the security controls needed to safeguard the
    formula block grant funds. CPD has not developed a security plan
    to control and monitor access to the system to minimize
    opportunities for unauthorized or inappropriate transactions. In
    addition, CPD has not ensured that the security officer in charge
    of the system has clearly defined duties and the technical
    expertise and staff needed to oversee the system. HUD is now
    developing an agencywide information system that manages all 51
    grant programs for the agency, and it plans to use IDIS, along
    with a grants management system being developed by the Department
    of Health and Human Services, as the basis for the new system.

    IDIS' Design Flaws Make the System Difficult to Use, and
    Information Is Not Always Complete, Accurate, and Timely

    Although IDIS was designed to provide CPD with accurate, complete,
    and timely information on grantees' expenditures and program
    performance, these goals are not being achieved because of four
    significant problems. Specifically, (1) the process for
    establishing and maintaining grant activity information is time-
    consuming and cumbersome and provides ample opportunity for major
    data entry problems, (2) correcting major data entry problems in
    IDIS is difficult, (3) IDIS does not readily enable grantees to
    accurately report income generated by grant- funded revolving
    funds (program income), and (4) grantees find it difficult to
    produce comprehensive and timely reports using IDIS.

    10 In 1991, HUD initiated the Financial Systems Integration effort
    to develop and deploy an integrated financial and management
    information system that would provide timely and accurate
    information to managers and enable HUD to properly manage its
    financial resources. IDIS is 1 of 9 standard integrated systems
    approved under the system integration effort that would replace
    about 100 financial and mixed systems. See, HUD Information
    Systems: Improved Management Practices Needed to Control
    Integration Cost and Schedule (GAO/AIMD-99-25, Dec. 18, 1998).

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    Chapter 3 Financial and Management Information System Is Not
    Providing the Information Needed to Manage and Monitor Grant
    Programs

    IDIS' Design Makes Establishing and Maintaining Project and
    Activity Accounts Unnecessarily Difficult

    IDIS information is critically important in managing and
    monitoring grantees' performance given CPD's emphasis on remote
    monitoring (as discussed in ch. 2). Nevertheless, the system is so
    cumbersome that grantees, even though trained on IDIS, find it
    difficult to use to set up project and activity accounts and to
    maintain those accounts. For most of the grantees we visited,
    grantees had to enter data two or more times, found accessing and
    using IDIS to be time consuming, and had to work through a
    complicated series of steps to enter or retrieve information.

    To set up project and activity accounts, grantees have to enter
    much of the same information into two separate HUD information
    systems IDIS and HUD's Community 2020 system 11 (or its precursor,
    Consolidated Planning Software). These systems are not
    automatically linked so that entering data into one system would
    automatically update both systems. In addition to the errors that
    grantees could make simply because they have to enter the data
    twice, other types of errors could occur that reduce the quality
    of the information produced by these systems. For example, one
    grantee we visited numbered projects differently between the two
    systems; consequently, it was difficult to compare the grantees'
    project plan with the actual use of grant funds. While this
    initial set of double data entries is time- consuming and
    cumbersome, IDIS' design provides yet another opportunity for
    redundancy. For example, for some projects grantees must enter
    nearly exactly the same information a third time to describe the
    projects' activity. In one field office, the IDIS focal point told
    us that for 98 percent of the office's projects, data had to be
    entered three times.

    Redundant data entry problems also occurred for most of the
    grantees we visited because they must enter activity information
    into their own automated accounting systems, as well as HUD's
    systems, to comply with their city's requirements. At the time of
    our review, CPD had not developed a reliable method to
    electronically transfer data between grantees' systems and IDIS.
    This problem is especially troublesome for states that must enter
    data for all small cities under their program. For example, Texas
    which at the time of our review had not yet started using IDIS has
    the largest state community development program 287 subrecipient
    cities for which it must enter data. According to HUD, as of mid-
    February 1999, grantees had access to a batch file transfer
    process, referred to as Electronic Data

    11 HUD's Community 2020 software contains information on HUD
    projects, such as housing and community development projects;
    funding sources; performance indicators; and neighborhood
    locations. It combines this information with U. S. Bureau of the
    Census' geographic and demographic information to provide a means
    for community constituents to understand where and how HUD
    resources are being spent.

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    Interchange, which allows grantees to automatically extract data
    from their own information systems and pass it to IDIS.

    Another difficulty for grantees is simply the amount of time it
    can take to access and use IDIS. Each time grantees enter
    information into IDIS, they use their desktop computers to link to
    a communications system, dial into IDIS, and enter a user
    identification number and password to obtain access to IDIS at
    authorized levels. We observed that it took up to 40 minutes to
    obtain access to IDIS. Remaining connected to IDIS is also
    difficult. One grantee estimates that it loses its connection to
    IDIS prematurely 50 percent of the time.

    Once they have obtained access, IDIS' design forces grantees to
    work through a complicated series of steps to enter or retrieve
    information. The grantees must use designated function keys on the
    computer keyboard to take required actions at various points in
    this process, but the meaning of the function keys sometimes
    changes from screen to screen, causing some confusion and missteps
    for the grantees and prolonging the time it takes to enter data.
    In addition, a grantee must work through and exit two separate
    series of screens in order to enter both financial and performance
    data for the same activity.

    Opportunities for Significant Data Entry Errors Exist, and
    Corrections Are Not Always Possible

    When grantees enter incorrect data, IDIS does not easily allow
    them to rectify the errors. Five of the 11 grantees we visited
    reported having multiple, significant errors in IDIS data entries
    that they could not readily correct. To address these problems,
    the IDIS technical assistance staff instructed grantees to open
    accounts for nonexistent activities ( dummy accounts) in some
    instances, which in effect reverse the incorrect data. In one
    case, a grantee had incorrectly entered program income funds and
    had to open multiple dummy activity accounts and charge false
    amounts against them to rectify its error. Some grantees we spoke
    to were reluctant to create dummy accounts because these accounts
    would appear inaccurate or fraudulent to outside observers.

    Some of these problems were so severe that they made CPD's
    monitoring activities through IDIS impossible. For example, one
    grantee had incorrectly entered all of its 1997 program year
    activities as occurring in the 1996 program year, thereby mixing
    activities for both years. To further complicate matters, this
    grantee had not expended all grant funds for 1996. As a result,
    CPD field and headquarters officials could not determine the
    amount of funds drawn down or the performance of program
    activities for

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    either year without actually auditing the grantee's documents. We
    brought this matter to CPD's and the grantee's attention in
    October 1998, and as of January 1999, it had still not been
    resolved.

    At 8 of the 11 grantees we visited, we compared data shown in IDIS
    with the information in the grantee's files on the same
    activities. Although we only looked at a small number of randomly
    selected activities, we found a wide variety of significant data
    problems, ranging from a complete lack of performance data at one
    grantee to double- counting of accomplishments at another. For
    example, one grantee set up an activity to cover five types of
    services for senior citizens, ranging from home maintenance to
    transportation to a recreational center. The grantee then lumped
    all accomplishment data for these widely varying services together
    as one total number of elderly people served, even though
    individuals might participate in more than one of the services or
    be multiple users of the same service. These types of problems
    would not only make reports on individual grantees inaccurate but
    also make reports that combined data at a regional or national
    level meaningless or misleading.

    IDIS' Flaws Preclude the Tracking of Program Income From Revolving
    Funds

    In addition to its overall design problems, IDIS also does not
    enable grantees to link program income income produced by projects
    they have funded or repayments into revolving loan accounts to the
    activity that generated it, such as economic development loans.

    HUD has instructed formula grantees not to enter program income
    from revolving fund programs into IDIS when they are received, as
    is done with other types of program income. This is because the
    design of IDIS does not allow grantees to segregate revolving fund
    income from other types of program income. IDIS operates on the
    assumption that all program income is depleted before grant funds
    are used, regardless of the type of grant activity being funded.
    Handling program revenues in this manner does not create a problem
    unless the income is associated with a revolving fund. However,
    CPD regulations provide grantees with specific permission to
    reserve program income from revolving fund programs for re- use
    exclusively in the revolving fund. According to a HUD official,
    3,230 revolving funds were created in the Community Development
    Block Grant Program in 1994. 12

    12 The last year for which HUD could provide a complete number of
    revolving funds for the Community Development Block Grant Program
    was 1994. Twenty- one percent of the data for 1995 was missing.
    Subsequent years' data are stored in IDIS, and HUD officials have
    not yet determined how to aggregate the data on revolving funds.

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    To ensure that the program income from revolving funds is recycled
    into the revolving fund, HUD instructs grantees to only enter the
    income in IDIS at the moment they redistribute the money. However,
    HUD's recommended remedy is flawed. It requires grantees to keep
    two sets of books: the actual amount of the revolving fund and the
    amount entered into IDIS. Entering program income only when it is
    needed for another loan shields the true amount from CPD
    representatives that monitor the project remotely through IDIS. It
    also makes it very difficult to ensure that the grantee is meeting
    its regulatory requirements. For example, because CPD cannot use
    IDIS to determine how much program income is being generated from
    revolving funds and therefore what a grantee's total program
    income is, CPD cannot use IDIS to determine if a grantee is
    meeting a requirement to spend grant money in a timely manner. In
    addition, interest produced by revolving funds should not be
    recycled into the revolving fund for future use but should instead
    be returned to CPD, which is responsible for overseeing interest
    repayments and forwarding the interest to the U. S. Treasury.
    Given the lack of information about revolving fund balances in
    IDIS, CPD will have trouble determining if a grantee is repaying
    interest as required. One regional CPD office, for example,
    received large interest repayment checks that resulted from
    revolving fund balances, but the office had not expected these
    repayments because it had been unaware of the balances. One
    grantee sent a check for $10,728.03 for interest earned by a
    revolving fund balance during a 13- month period.

    IDIS Does Not Provide Timely and Accurate Information and Makes It
    Difficult to Produce Reports on Grantees' Use of Funds and
    Performance

    While IDIS was intended to allow CPD to track grantees'
    performance on a real- time basis, it does not do so for several
    reasons. First, a grantee can withdraw all funds for an activity
    without entering any performance information for that activity, as
    was often the case with the grantees we visited. Most did not
    enter any performance data until the end of the program year, when
    such data were required to complete annual reports. Second, three
    grantees that did try to enter performance data were hindered from
    doing so because IDIS requires grantees to enter financial and
    performance data separately. Third, even when grantees enter
    information more frequently, the information may not be useful for
    tracking performance because IDIS does not identify when the
    performance data were entered. IDIS has only one entry field for
    entering performance data for the year, so that additional data
    entries erase previous entries.

    In addition to these overall problems, IDIS does not enable
    grantees to always record exact information on the outcomes of
    activities. Specifically, IDIS provides 12 choices for describing
    benefits, such as the

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    number of youth, households, or businesses benefiting from
    projects. However, this list is not comprehensive enough to cover
    the wide range of benefits that occur in program activities. For
    example, one grantee had demolished four blighted buildings and to
    record this information in IDIS had to describe the work as four
    public facilities because there was no better option. At the field
    office level, then, real- time inquiries to IDIS for information
    on grantees' performance are unreliable.

    Equally important, creating reports at the end of the program year
    or at any time is difficult. To create and print a report, the
    user either the grantee or field office staff must work through a
    series of IDIS screens as many as 70 at one field office we
    visited to begin to create a report. Problems can occur during
    this process. For example, at one field office, the staff could
    not produce any of the reports we had requested for 3 days because
    the IDIS software for producing reports was not functioning. In
    another field office, the staff could create reports for only one
    grantee the first on the list of choices and it took 24 hours to
    correct the problem. Furthermore, IDIS' error messages can be
    difficult to decipher, making the task of fixing the problem even
    more time- consuming. Once the report is produced in IDIS'
    mainframe computer, the user still has to transfer it to a desktop
    computer and edit it before it can be printed. Because of these
    difficulties, many of the grantees we visited did not produce any
    more reports from IDIS than were necessary for the end of program
    year reporting to HUD. In addition, at the time of our review, CPD
    had removed the function for the consolidated annual performance
    and evaluation report a report all grantees must submit to HUD at
    the end of the program year because IDIS was generating reports
    with errors. For example, we found that one grantee had entered
    correct information into IDIS, but the system produced a report
    with incorrect information. Besides reporting to HUD, grantees use
    the end of the year report to communicate information about the
    use of block grant funds to their citizens. This problem also
    frustrated the ability of CPD field office staff to provide
    headquarters with some progress reports. In January 1999, HUD was
    still attempting to correct the reporting capability within IDIS.

    Security Controls Do Not Provide Assurance That IDIS Is Safe From
    Fraud and Abuse

    Although grantees use IDIS to initiate the transfer of
    approximately $6 billion a year in grant funds, CPD has not
    established a secure method for setting up and maintaining access
    rights for using IDIS. While HUD cannot select which grantee staff
    should have access rights that is the grantee's responsibility it
    can take actions to ensure that designated grantee staff have
    appropriate levels of access and that staff who leave the
    grantee's employment do not retain access. To provide security
    against the

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    inappropriate use of funds, for example, grantee staff should have
    limited, or segregated, access to the computer system. 13 In such
    a case, the individual who could establish activity accounts would
    not also be able to approve the withdrawal of funds for those
    activities. However, HUD has not taken these actions to safeguard
    federal grants, either at headquarters or in the field offices.

    Furthermore, according to the HUD official responsible for IDIS
    security, at a basic level the staff resources devoted to this
    task are strained. He explained that the thousands of requests for
    new user accounts, reinstatement of expired user accounts, and
    revocation of accounts are handled only by himself, an assistant,
    and one contract employee. As a result, assigning access rights to
    a new user takes a month or more and there are no staff to
    catalogue the forms requesting access, making it difficult to
    review original access rights or retrieve forms when necessary.

    Additionally, neither the security official nor his staff review
    these requests for appropriateness, to determine whether the
    requested access rights are necessary to perform the duties
    assigned to the user or whether access rights ensure segregation
    of tasks such as setting up activities and approval of drawdowns.
    Instead, their main function has been to assign access rights to
    IDIS or to reinstate rights when passwords have expired. Even when
    notified by grantees that IDIS access rights should be revoked
    because the person with those rights is no longer employed by the
    grantee, the security official told us that removing the person's
    rights is not a high priority. Once IDIS accounts have been
    established, grantees have the authority to change access levels
    for their staff without any level of oversight by CPD. At the time
    of our review, CPD did not periodically produce any reports for
    the grantees' IDIS focal points or field office staff that showed
    the current access rights of the grantees' staff.

    Not surprisingly, given this absence of oversight, we found
    multiple problems with access rights at five of the eight grantees
    with whom we discussed access rights. Specifically:

     Duties among authorized users were not adequately segregated at
    three of the grantees, so these users could both set up activity
    accounts and draw

    13 According to GAO Internal Control: Standards for Internal
    Control in the Federal Government Exposure Draft (GAO/AIMD-98-21.
    3.1), page 21, Key duties and responsibilities should be divided
    or segregated among different people to reduce the risk of error
    or fraud. This should include separating the responsibilities for
    authorizing transactions, processing and recording them, reviewing
    the transactions, and handling the related assets. To reduce the
    risk of error, waste, or fraud or to reduce the risk of their
    going undetected, no one individual should control all key aspects
    of a transaction or event.

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