Management Challenges: GAO's Responses to HUD's Comments (Letter Report,
07/14/1999, GAO/RCED/AIMD-99-189).
This report provides (1) the Department of Housing and Development's
(HUD) comments on GAO's designation of HUD as an area within the
government at particularly high risk for waste, fraud, abuse, and
mismanagement and (2) GAO's response to those comments.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED/AIMD-99-189
TITLE: Management Challenges: GAO's Responses to HUD's Comments
DATE: 07/14/1999
SUBJECT: Internal controls
Financial management systems
Information resources management
Federal agency reorganization
Housing programs
Risk management
Human resources utilization
Accountability
Strategic information systems planning
IDENTIFIER: GAO High Risk Program
High Risk Series 1997
Performance and Accountability Series 1999
HUD 2020 Management Reform Plan
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United States General Accounting Office GAO
Report to Congressional Requesters July 1999
MANAGEMENT CHALLENGES GAO's Responses to HUD's Comments
GAO/RCED/AIMD-99-189 GAO United States General Accounting
Office Washington, D.C. 20548 Resources, Community, and Economic
Development Division B-282678 July 14, 1999 The Honorable Wayne
Allard Chairman, Subcommittee on Housing and Transportation
Committee on Banking, Housing, and Urban Affairs United States
Senate The Honorable John F. Kerry Ranking Minority Member
Subcommittee on Housing and Transportation Committee on Banking,
Housing, and Urban Affairs United States Senate As part of the
work in producing our January 1999 report Major Management
Challenges and Program Risks: Department of Housing and Urban
Development (GAO/OCG-99-8), on December 15, 1998, we provided the
Department with a statement of facts for its review and comment.
In response, in a letter dated December 28, 1998, the Department
of Housing and Urban Development's (HUD) Deputy Secretary stated
that he was disappointed with the conclusion we reached regarding
HUD's risk status (that the integrity and accountability of HUD's
programs remain at high risk) and raised several concerns about
our statement of facts. Specifically, the Deputy Secretary raised
concerns about (1) our designation of HUD's programs as a high-
risk area and the criteria we use in designating an area as high-
risk and in removing that designation; (2) HUD's belief that we
had not fully addressed the impact and significance of reforms
that the Department has recently instituted; (3) HUD's belief that
our December 18, 1998, report on HUD's information systems was not
accurate and complete;1 and (4) HUD's belief that there were
inaccuracies in our statement of facts. You asked that we provide
you with our response to the issues raised by the Deputy
Secretary. This report responds specifically to the issues HUD
raised. Appendix I includes HUD's letter; and appendix II, our
point-by-point evaluation of HUD's comments. 1HUD Information
Systems: Improved Management Practices Needed to Control
Integration Cost and Schedule (GAO/AIMD-99-25, Dec. 18, 1998).
Page 1 GAO/RCED/AIMD-99-189 HUD's
Management Challenges B-282678 GAO's Designation of In summary,
our conclusion that HUD's programs are a high-risk area is HUD's
Programs as a based on the status of four serious, long-
standing Department-wide management deficiencies that, taken
together, have placed the integrity High-Risk Area and
accountability of HUD's programs at high risk since 1994. We and
others (i.e., HUD's Inspector General and external auditors) have
observed these significant management deficiencies that cut across
HUD's program areas, and we have issued numerous reports about
them over the past 15 years.2 We designated HUD's programs as a
high-risk area in 1994 because of (1) internal control weaknesses,
such as a lack of necessary data and management processes that
were a major factor leading to the HUD scandals of the late 1980s;
(2) poorly integrated, ineffective, and generally unreliable
information and financial management systems that did not meet the
needs of program managers; (3) organizational deficiencies, such
as overlapping and ill-defined responsibilities; and (4) an
insufficient mix of staff with the proper skills, which hampered
the effective monitoring and oversight of HUD's programs. As
pointed out in our January 1999 report on HUD's major management
challenges and program risks, our recent work indicates that,
while HUD has made credible progress in laying the framework for
improving its management, internal control weaknesses and problems
with information and financial management systems persist at the
Department. Furthermore, recent reforms to address the
Department's organizational and staffing problems are in the early
stages of implementation, and it is too soon to tell whether or
not they will resolve the major deficiencies that we and others
have identified. Consequently, as we reported in 1995 and 1997,3
these deficiencies, taken together, continue to place the
integrity and accountability of HUD's programs at high risk. Our
criteria for designating a program or agency high-risk and
removing that designation have been discussed with HUD officials
on several occasions. In addition, our criteria were included in
our 1997 High-Risk Series report and in our written response to
HUD's then Acting Deputy Secretary's June 23, 1998, letter on this
subject. We have pointed out that our criteria for designating
programs or agencies as high-risk areas stem directly from our
professional and objective judgment about patterns of 2App. III
provides a list of major GAO reports on HUD's management, issued
from 1984 through April 1999. 3High-Risk Series: Department of
Housing and Urban Development (GAO/HR-95-11, Feb. 1995) and High-
Risk Series: Department of Housing and Urban Development (GAO/HR-
97-12, Feb. 1997). Page 2
GAO/RCED/AIMD-99-189 HUD's Management Challenges B-282678
significant management deficiencies uncovered over time in our
audits, as well as those of inspectors general and others, that
remain largely unresolved. We stated in our response to HUD's June
23, 1998, letter that programs and agencies for which we have
removed our high-risk designation are those that have demonstrated
results in overcoming management deficiencies. We further stated
that it is important to note that while reform initiatives are
important, plans for reform are not sufficient in and of
themselves. Rather, it is the results of such reform initiatives-
demonstrating that management problems have been corrected-that
count. We have also pointed out to HUD officials our consistent
application of our criteria for high-risk designations.
Specifically, we reached our conclusion about HUD and all of our
determinations of which government operations are considered to be
high-risk in our January 1999 Performance and Accountability
Series reports4 using the same methodology and criteria, which
were the same as those used for our February 1997 High-Risk Series
reports. HUD's Reforms We disagree with the Deputy Secretary's
statements that the impact and significance of reforms that HUD
has recently instituted were not fully addressed in our statement
of facts. In the statement of facts we provided to HUD and in our
January 1999 report on HUD's major management challenges and
program risks that followed, we described the major actions the
Department has taken and the achievements it has realized since it
launched its 2020 Management Reform Plan in June 1997. In
addition, we discussed HUD's goals under the plan for the areas
where we identified management deficiencies: internal controls,
systems, organization, and staffing. We also stated that HUD's
reforms should help to address internal control weaknesses facing
the agency and described HUD's establishment and implementation of
risk assessments for programs that were established or
substantially revised; the Department's development and deployment
of certain information and financial management systems; and the
establishment and operation of various HUD offices, including the
Department's specialized and nationwide centers that consolidate
processes and functions within and across program areas. Beyond
the statement of facts provided to HUD, in our final report on
HUD's management challenges and program risks, our "Overview"
included a summary of HUD's achievements since its 2020 plan was
announced and 4Major Management Challenges and Program Risks: A
Governmentwide Perspective (GAO/OCG-99-1, Jan. 1999). Page 3
GAO/RCED/AIMD-99-189 HUD's Management Challenges B-282678 our
conclusion that HUD has made credible progress in laying the
framework for improving its management. In other recent reports
and testimonies, we have recognized HUD's continued emphasis on,
and progress toward, addressing its long-standing management
deficiencies. HUD's Secretary and leadership team have given top
priority to addressing the Department's management deficiencies.
This attention by top management is critical and must be sustained
in order to achieve real and lasting change. Importantly, given
the nature and extent of the challenges facing the Department, it
will take time to implement and assess the impact of any related
reforms. GAO's Report on Many of the Deputy Secretary's
comments on our statement of facts HUD's Information related
to a draft of our December 18, 1998, report on HUD's information
systems. The final report contained our responses to those
comments as Systems well as clarifications we made
to the report as a result of HUD's comments. For example, the
Deputy Secretary stated that the draft of our December 1998 report
was not accurate about the amount to be spent to develop financial
systems and that a more accurate estimate for the effort is $250
million. In our December 1998 report and statement of facts, we
had stated the Department expects to spend about $239 million for
development costs plus $132 million for maintenance costs. We also
reported that HUD had not yet finalized the plans, costs, and a
schedule to complete its current financial systems integration
strategy, so systems costs continue to be uncertain. Accordingly,
HUD's estimates have fluctuated considerably, as reflected in
various documents received from the Chief Financial Officer and
his staff. We reported, for example, that cost estimates have
changed from the $540 million reported by HUD in June 1998; to the
$255 million cited in the Department's November 12, 1998, comments
on our draft report on information systems; to the $239 million
that HUD reported a week later. However, we found that the $255
million and the $239 million estimates did not include at least
$132 million associated with maintaining the systems. As pointed
out in our December 1998 report, HUD's continuing uncertainty as
to what the total cost estimate is for its financial systems
integration demonstrates the Department's need to develop and use
well-defined cost-estimating processes to prepare reliable cost
estimates. The Accuracy of Our We also disagree with the Deputy
Secretary's statements that there were Statement of Facts
inaccuracies in our statement of facts. Many of the statements
identified as Page 4 GAO/RCED/AIMD-99-189
HUD's Management Challenges B-282678 inaccurate related to
statements that clearly described HUD's past problems, and not
current problems as construed by the Deputy Secretary. For
example, HUD asserted that the statement, "Managers were not
actively assessing risks in their programs as required under the
management control program," was totally false. The statement HUD
quoted was in a paragraph in our statement of facts that began "In
February 1997 we reported. . . ." This paragraph summarized the
information we had reported in our 1997 High-Risk Series report
regarding internal controls. Our January 1999 report on HUD's
major management challenges and program risks reiterated the
phrase "we reported in 1997" to make it clearer that this
statement referred to past problems at HUD. Lastly, in taking the
Deputy Secretary's concerns into account, we added information he
provided to update our final report on HUD's management challenges
and program risks, including the completion of inspections for
over 4,200 multifamily properties by HUD's real estate assessment
center; the referral of 200 cases involving multifamily properties
to the enforcement center; the increase in debarments of
multifamily housing landlords; and the progress made by HUD in
implementing reforms, as reported by HUD's consultants. We also
added further details on the number of financial management
systems or components of these systems developed or deployed by
HUD under its systems integration efforts and the number of HUD
managers that have completed risk management training. Where
appropriate, we incorporated other clarifications to our final
report on the basis of the Deputy Secretary's comments. We are
sending copies of this report to the appropriate Senate and House
committees; the Honorable Andrew Cuomo, Secretary of Housing and
Urban Development; and the Honorable Jacob Lew, Director, Office
Management and Budget. We will make copies available to others
upon request. Page 5 GAO/RCED/AIMD-99-189
HUD's Management Challenges B-282678 If you or your staff have any
questions, please call me at (202) 512-7631. Other GAO contacts
for and key contributors to this report are listed in appendix IV.
Sincerely yours, Judy A. England-Joseph Director, Housing and
Community Development Issues Page 6
GAO/RCED/AIMD-99-189 HUD's Management Challenges Page 7
GAO/RCED/AIMD-99-189 HUD's Management Challenges Contents Letter
1 Appendix I
10 The Department of Housing and Urban Development's Comments on
the Major Challenges and Program Risks Identified in GAO's
Statement of Facts Appendix II
82 GAO's Responses to HUD's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Appendix III
128 Major GAO Reports on HUD's Management Appendix IV
130 GAO Contacts and Staff Acknowledgments Page 8
GAO/RCED/AIMD-99-189 HUD's Management Challenges Contents
Abbreviations CFO Chief Financial Officer DOD
Department of Defense FHA Federal Housing Administration
FMFIA Federal Managers Financial Integrity Act FSI
financial systems integration GAO General Accounting
Office HUD Department of Housing and Urban Development
HUDCAPS HUD's Centralized Accounting and Program System IG
Inspector General I-TIPS Information Technology Investment
Portfolio System JFMIP Joint Financial Management
Improvement Project OIG Office of the Inspector General
OMB Office of Management and Budget REAC real
estate assessment center SFFAS Statement of Federal
Financial Accounting Standards Page 9
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Note: GAO's responses appear in app. II. The page nos.
cited in HUD's letter refer to GAO's Dec. 15, 1998, statement of
facts provided to HUD. HUD's comment 1. Page 10
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 2. HUD's comment 3. Page 11
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 4. HUD's comment 5. Page 12
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 6. Page 13
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 7. Page 14
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 8. HUD's comment 9. Page 15
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 10. Page 16
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 11. HUD's comment 12. HUD's comment 13.
HUD's comment 14. Page 17
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 15. Page 18
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 19 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 20
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 21 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 22
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 23 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 24
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 25 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 26
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 16. Page 27
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 28 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 29
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 30 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 31
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 32 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 33
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 17. Page 34
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 35 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 36
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 18. HUD's comment 19. Page 37
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 20. Page 38
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 21. Page 39
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 40 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts HUD's comment
22. Page 41 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix I The Department of Housing and
Urban Development's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts Page 42
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 23. Page 43
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 24. HUD's comment 25. Page 44
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 26. Page 45
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 27. HUD's comment 28. Page 46
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 29. Page 47
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 30. Page 48
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 49 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts HUD's comment
31. Page 50 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix I The Department of Housing and
Urban Development's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts HUD's comment 32.
Page 51 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix I The Department of Housing and
Urban Development's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts HUD's comment 33.
Page 52 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix I The Department of Housing and
Urban Development's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts HUD's comment 34.
Page 53 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix I The Department of Housing and
Urban Development's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts HUD's comment 35.
HUD's comment 36. HUD's comment 37. Page 54
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 38. HUD's comment 39. HUD's comment 40.
HUD's comment 41. HUD's comment 42. HUD's comment 43. Page 55
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 56 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 57
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 44. HUD's comment 45. Page 58
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 46. Page 59
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 47. HUD's comment 48. Page 60
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 61 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts HUD's comment
49. Page 62 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix I The Department of Housing and
Urban Development's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts Page 63
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 50. Page 64
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 65 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 66
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 51. Page 67
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 68 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts HUD's comment
52. HUD's comment 53. Page 69
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 70 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts HUD's comment
54. Page 71 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix I The Department of Housing and
Urban Development's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts HUD's comment 55.
HUD's comment 56. Page 72
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 73 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts HUD's comment
57. Page 74 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix I The Department of Housing and
Urban Development's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts Page 75
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 58. Page 76
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts HUD's comment 59. HUD's comment 60. Page 77
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 78 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts Page 79
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix I The
Department of Housing and Urban Development's Comments on the
Major Challenges and Program Risks Identified in GAO's Statement
of Facts Page 80 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix I The Department of Housing
and Urban Development's Comments on the Major Challenges and
Program Risks Identified in GAO's Statement of Facts HUD's comment
61. HUD's comment 62. Page 81
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts Note: References to
page numbers refer to those of HUD's letter of December 28, 1998.
1. HUD's Comment, p. 1 HUD commented that "Comprehensive
reorganization, major system developments and deployment,
carefully crafted staffing reforms, and the hallmark achievement
of HUD's first ever audited financial statements are all glossed
over by GAO as minor advances and are presented as interesting
interim movements toward some unknown mark on an undefined
measuring stick."1 GAO's Response We disagree. In the statement of
facts we provided HUD on December 15, 1998, we described the major
actions it has taken and the achievements it has realized since it
launched its 2020 Management Reform Plan in June 1997, including
each of the items mentioned above by the Department. In addition,
we discussed HUD's goals under the plan for the areas where we
identified management deficiencies: internal controls, systems,
organization, and staffing. Beyond the statement of facts provided
to HUD, in our final report2 our "Overview" included a summary of
HUD's achievements since the 2020 plan was announced and our
conclusion that HUD has made credible progress in laying the
framework for improving its management. HUD's comment implies that
our statement of facts lacked clear criteria for evaluating its
progress. See our response to comment 3 for a discussion of our
criteria for evaluating HUD's progress and related matters. 2.
HUD's Comment, p. 2 HUD commented that under its 2020 Management
Reform Plan, "the Department implemented a bold initiative to
fundamentally re-design the manner in which HUD delivers its
programs." According to HUD, "The profound significance of . . .
[its] major achievements and accomplishments is missing in the
report, as well as a corresponding 1HUD was referring to its
fiscal year 1997 financial statements, upon which it received a
qualified audit opinion. After HUD responded to our statement of
facts, HUD's Inspector General issued, on March 29, 1999, its
unqualified opinion on HUD's consolidated federal accounting-based
financial statements for fiscal year 1998, which is further
discussed under HUD's comment 17. 2Major Management Challenges and
Program Risks Department of Housing and Urban Development
(GAO/OCG-99-8, Jan. 1999). Page 82
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts description of
reduced risk at the agency. The Department has developed and
implemented a detailed plan for reform-a plan that has reduced the
risk of waste, fraud, and abuse." According to HUD, "the tenor of
the draft report leaves the reader to conclude that, since there
are not absolute measurable results in all areas, little that is
positive has happened at the Department during the past two
years." GAO's Response As mentioned, the statement of facts we
provided HUD described a number of positive achievements made by
HUD since it launched its 2020 reforms. We stated, among other
things, that HUD's reforms could help to address internal control
weaknesses facing the agency and described HUD's establishment and
implementation of risk assessments for programs that were
established or substantially revised; development and deployment
of information and financial management systems; and establishment
and operation of various HUD offices, including its specialized
and nationwide centers that consolidate processes and functions
within and across program areas. While the 2020 reforms may help
reduce HUD's risks, we were not aware of significant evidence
demonstrating that risks had actually been reduced at the time of
our work regarding major management challenges and program risks.
In addition, HUD's comments on our statement of facts do not
present evidence demonstrating that its risks have been reduced.
HUD's fundamental contention is that since it has made plans and
begun implementing changes in the way it delivers programs, risks
have been reduced. The only evidence HUD provided in its December
28, 1998, letter demonstrating that its risks have been reduced is
a 300-percent increase in debarments, which appears to be based on
the increase in debarments from 30 debarments in 1996 to about 100
in 1997. Our January 1999 report on HUD's major management
challenges and program risks included this information. HUD's
characterization of the tenor of our report may, in part, be
attributable to the fact that as a statement of facts, the
document provided to HUD did not include the "Overview" that
appeared in the final report. As explained previously, the
"Overview" provided our views on the significance of the 2020 plan
reforms. Page 83 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix II GAO's Responses to HUD's
Comments on the Major Challenges and Program Risks Identified in
GAO's Statement of Facts 3. HUD's Comment, pp. 2 and 3 HUD
expressed concern that we had not provided the specific criteria
for the "high-risk" designation to be removed since the Department
raised the question in a June 23, 1998, letter from the
Department's Acting Deputy Secretary to GAO's Acting Comptroller
General. In that letter, HUD requested that we present established
and objective criteria that had been and would be used to
determine what programs in an agency constitute high risk and what
makes an entire federal agency high-risk. GAO's Response Our
conclusion that HUD's programs are high-risk is based on the
status of four serious, long-standing Department-wide management
deficiencies that, taken together, have placed the integrity and
accountability of HUD's programs at high risk since 1994. We have
issued numerous reports and testimonies over the past 15 years
pointing to these significant management deficiencies that cut
across HUD's program areas. We and others (i.e., HUD's Inspector
General and external auditors) have observed these management
deficiencies. Because HUD is one of the nation's largest financial
institutions responsible for managing about $454 billion in
insured mortgages, about $531 billion in guarantees of mortgage-
backed securities, and about $24 billion in current budget
authority and because these four weaknesses continue largely
unresolved or recent reforms to address them are in the early
stages of implementation (and it is too soon to tell whether they
will resolve the deficiencies), our professional judgment is that
HUD's programs continue to be a high-risk area. On several
occasions, we have discussed with HUD officials our criteria for
designating a program or agency high-risk. In addition, we
included our criteria in our 1997 High-Risk Series report3 and in
our written response to HUD's Acting Deputy Secretary's June 23,
1998, letter on this subject. We have pointed out that our
criteria for designating programs or agencies as high-risk areas
stem directly from our professional and objective judgment about
patterns of significant management deficiencies uncovered over
time in our audits, as well as those of inspectors general and
others, that remain largely unresolved. We stated in our response
to HUD's June 23, 1998, letter that programs and agencies for
which we have removed our high-risk designation are those that
have demonstrated results in overcoming management deficiencies.
We further stated that it is important to note that while reform
initiatives are important, plans for reform are not sufficient in
and of themselves. Rather, it is the results of 3High-Risk Series:
Department of Housing and Urban Development (GAO/HR-97-12, Feb.
1997). Page 84 GAO/RCED/AIMD-99-189
HUD's Management Challenges Appendix II GAO's Responses to HUD's
Comments on the Major Challenges and Program Risks Identified in
GAO's Statement of Facts such reform initiatives-demonstrating
that management problems have been corrected-that count. As
mentioned above, our February 1997 High-Risk Series report on HUD
clearly laid out the actions-such as eliminating material internal
control weaknesses-that we believed were necessary to reduce the
risks to the agency's programs. We also met with HUD officials in
August 1997 and provided them with a list of corrective actions
that would need to be substantially completed to address the
deficiencies that made HUD high-risk in our opinion, such as
completing improvements to its financial and information
management systems. The list largely mirrored the discussion in
our February 1997 report. As pointed out in our January 1999
report on HUD's major management challenges and program risks, our
recent work indicates that internal control weaknesses and
problems with information and financial management systems persist
at the Department. Furthermore, recent reforms to address the
Department's organizational and staffing problems are in the early
stages of implementation, and it is too soon to tell whether or
not they will resolve the major deficiencies that we and others
have identified. Consequently, we continue to believe, as we
reported in 19958 and 1997, that these deficiencies, taken
together, place the integrity and accountability of HUD's programs
at high risk. 4. HUD's Comment, p. 3 HUD asserted that we have has
been unable to articulate what constitutes high risk at the
Department and for all agencies and in fact have acknowledged that
no such governmentwide test of high risk exists. HUD also stated
that it should be provided specific criteria used to determine
whether an agency is high-risk; the data used to determine whether
an agency is high-risk; the data showing how other agencies stood
when we applied that objective, standardized high-risk test; and
the analysis we used in comparing the data on HUD to the high-risk
criteria. GAO's Response As discussed in our response to comment
3, we have informed HUD officials about what constitutes high risk
at the Department in our opinion, what the Department needs to
accomplish to remove the designation, and what is not sufficient
to remove the designation. 8High-Risk Series: Department of
Housing and Urban Development (GAO/HR-95-11, Feb. 1995). Page 85
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts In response to HUD's
request that it be provided the criteria we use to determine
whether any agency is high risk and how the agencies compared when
we applied our criteria, we have informed HUD officials that the
criteria we apply to the Department are the same criteria we have
applied to other agencies. Our criteria included considering
factors such as the significance of HUD's management deficiencies,
their impact on program operations, past successes achieved in
resolving the deficiencies, and the amount of risk inherent in
HUD's operations. We also have informed HUD officials that
different agencies' functions, programs, and organizational units
have been removed and added each time we have updated our high-
risk designations. Because different agencies present different
exposures to risk and management deficiencies can differ in their
impact on programs, we have advised HUD officials that
independent, professional, and objective judgment of knowledgeable
GAO professionals plays a role in determining whether a program is
high-risk. We have also advised them that professional judgment
will also play a role in determining at what point improvements
made by HUD in resolving its management deficiencies will mean
that the agency overall will no longer warrant the designation
high-risk, but that individual functions and/or specific programs
within the agency may instead be designated high-risk. In our
January 8, 1999, response to HUD's Deputy Secretary's letter of
December 28, 1998, we pointed out our consistent application of
our criteria for high-risk designations. We explained that we
reached our conclusion about HUD and all of our determinations of
which government operations are considered to be high-risk in our
January 1999 Performance and Accountability Series reports9 using
the same methodology and criteria, which were the same as those
used for our February 1997 High-Risk Series reports. 5. HUD's
Comment, pp. 3 and 4 HUD stated that senior GAO staff had
indicated that no high-risk test was being applied to all federal
agencies, that the label of high risk was applied on the basis of
the professional judgment of GAO staff, and that a high-risk test
of having four or more agencywide problems had not been applied to
any other agency. 9Major Management Challenges and Program Risks:
A Governmentwide Perspective (GAO/OCG-99-1, Jan. 1999). Page 86
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts GAO's Response HUD's
assertion is incorrect. Senior GAO officials have told HUD
officials that we consider the implications of all management
deficiencies in determining whether an agency is high-risk or not.
The fact that a specific number of agencywide problems exist at a
particular agency does not automatically mean that an agency or
program is high-risk. To apply such a limited test would discount
the effect of such factors as the prevalence of the deficiencies,
past successes achieved by agencies in resolving them, and
exposure to risk. Overall, the intent of our special effort to
review and report on federal government program areas that we
consider at greater risk is to focus our resources and attention
as well as those of the Congress and agency management on actions
needed to correct the most serious problems in selected areas. Our
criteria for designating programs as high-risk areas stem directly
from our professional and objective judgment about patterns of
significant management deficiencies in the federal government
uncovered over time in our audits, as well as those of inspectors
general and others, that remain largely unresolved. A
determination includes our consideration of factors such as the
seriousness of the management deficiencies identified; their
cumulative impact on program operations, federal spending, and the
ability of an agency to carry out its mission; the results
achieved by past efforts to resolve the deficiencies; and the
amount of risk of fraud, waste, and abuse inherent in an agency's
operation. In addition, as we pointed out in our January 1999
performance and accountability series, an increasing amount of
information is becoming available through the implementation of
the performance-based management legislation that the Congress has
enacted. This information makes it both possible and appropriate
for GAO to periodically reassess the methodologies and criteria it
uses to determine which operations, functions, and entities should
be included in the performance and accountability series reports
and which should be identified as "high-risk." We also pointed out
in this January 1999 report that we plan to undertake a
comprehensive review and reassessment of this area during 1999. In
conducting this review and reassessment, and in accordance with
our normal practices, we will consult with key stakeholders,
including selected congressional and agency representatives,
before completing our approach to the 2001 series. Page 87
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts Our review effort
likely will result in new ways of determining and presenting major
management challenges and program risks, especially in connection
with selected functions (e.g., strategic planning, organizational
alignment, human capital strategies, and contract management) as
well as at the overall department and agency level. This
reassessment may also result in the consolidation of GAO's current
high-risk series as an important component of an expanded
performance and accountability series. The ultimate determination
of what should be included in this series and what should be
deemed to be "high-risk" will continue to involve the independent,
professional, and objective judgment of GAO professionals. 6.
HUD's Comment, p. 4 HUD asserted that GAO has a shifting standard
for determining if HUD is high-risk. HUD stated that senior GAO
staff initially indicated that they would apply a standard for
removing HUD from the high-risk list if "reasonable progress" was
achieved in implementing the 2020 reforms and at another time
stated that the standard would be "results" and a demonstration
that HUD's problems have been fixed completely-that there were
substantial, long-term results bearing out the success and
sustainability of the reforms. GAO's Response Senior GAO officials
informed HUD officials that we would be fair in assessing the
progress made by the Department and that reasonable progress in
successfully resolving its management deficiencies by means of
verifiable results was the standard we would apply in our review.
HUD is incorrect in asserting that the standard we said we would
apply was reasonable progress in implementing the 2020 plan
reforms. 7. HUD's Comment, p. 5 HUD commented that if we believed
that it was not possible for HUD to be removed from the list, that
working assumption must be stated explicitly in the report or the
report would be misleading. GAO's Response Our views on the
difficulties faced by HUD in resolving its management deficiencies
and removing the high-risk designation were communicated to the
Department and others over a year ago. In testimony before the
Page 88 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix II GAO's Responses to HUD's
Comments on the Major Challenges and Program Risks Identified in
GAO's Statement of Facts Subcommittee on Housing Opportunity and
Community Development, Senate Committee on Banking, Housing, and
Urban Affairs, on May 7, 1998, we said that HUD's management
deficiencies have had a long history, that they did not happen
overnight, and that it will not be easy for HUD to overcome many
of them. In addition, in response to a specific question from
Chairman Connie Mack regarding whether HUD was still high-risk and
the likelihood of removing the agency from our next series of
high-risk reports, GAO's Director of Housing and Community
Development Issues, made the following comments: "They are high-
risk today, and there's a very good chance that they will be high-
risk early next spring, when we issue our next report. However, I
think we will be recognizing the progress that the agency has
made. And the big point is realizing that this is a multiyear
effort. It is not an easy task that they have set out." A copy of
the draft hearing transcript was attached to our July 24, 1998,
letter to the Acting Deputy Secretary. Our January 1999 report on
HUD's major management challenges and program risks included the
statement that, given the severity of HUD's management
deficiencies, it would not be realistic to expect that the
Department would have substantially implemented its reform efforts
and demonstrated success in resolving its management deficiencies
in the 2 years since we issued our last report. 8. HUD's Comment,
p. 6 HUD asserted that senior GAO staff, in repeated discussions,
said they believed that HUD had made substantial progress in
reducing risk, that the agency's risk profile was significantly
improved over the last time GAO conducted a review. Yet, HUD
asserted, this view was absent from the report. GAO's Response In
reports, testimonies, and meetings, senior GAO officials have
complimented HUD officials for undertaking reforms of its
programs. The GAO officials have characterized these reforms as
representing solid progress, as being far-reaching, as affecting
nearly all operational aspects of the Department, and as
constituting credible progress. However, they have not
characterized these reforms as reducing risk or significantly
improving HUD's risk profile. Rather, they have consistently
maintained that it must be demonstrated that reforms have led to
Page 89 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix II GAO's Responses to HUD's
Comments on the Major Challenges and Program Risks Identified in
GAO's Statement of Facts substantial and verifiable results in
resolving management deficiencies to remove the high-risk
designation. At the same time, as we discuss in our responses to
comments 4 and 5, the independent, professional, and objective
judgment of knowledgeable GAO professionals plays a role in
determining whether a program is high-risk. 9. HUD's Comment, p. 6
HUD commented that GAO's draft report failed to use and cite three
independent and objectives studies of the Department's reforms by
management experts-Booz-Allen and Hamilton, the Public Strategies
Group, and PricewaterhouseCoopers. GAO's Response While GAO's
statement of facts mentioned the Booz-Allen and Hamilton, Inc.,
report, the thrust of this report was not discussed in detail in
our statement of facts. This was because this report as well as
the Public Strategies Group and PricewaterhouseCoopers reports
were primarily aimed at describing the progress made in
implementing the 2020 reforms, and not at developing evidence
demonstrating that the reforms have led to substantial and
verifiable results in resolving HUD's management deficiencies. In
our January 1999 report on HUD's major management challenges and
program risks, we included information on the Public Strategies
Group report in addition to the Booz-Allen and Hamilton, Inc.,
report. 10. HUD's Comment, p. 7 HUD commented that GAO had
withheld the conclusion section of the report from HUD's review
and that senior GAO staff were orally characterizing the report as
maintaining the high-risk label for HUD. The absence of the
section, HUD said, severely compounded its difficulty in
responding accurately and appropriately to the specific text of
the report. GAO's Response The statement of facts we provided HUD
officials for review did not contain conclusions. This is because
this statement was provided to HUD officials to obtain their
comments on the accuracy and completeness of the information we
obtained and analyses we made. We did not obtain agency Page 90
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts comments on the draft
conclusions of any of our reports in the January 1999 series on
major management challenges and program risks. 11. HUD's Comment,
p. 8 HUD asserted that we characterized its financial management
systems inaccurately, given the many comprehensive systems
improvements that have been made within the past few years. HUD
stated that our discussion was focused almost entirely on process
improvements and was not properly balanced by the brief summary of
major system accomplishments. HUD cited the statement in our
report, "According to its CFO [Chief Financial Officer], HUD
continues to make progress addressing system problems by deploying
systems and/or system modules to manage and monitor the
Department's programs," and stated that "it should be clear to any
objective viewer that when a large number of systems have been
successfully developed and deployed, a substantial improvement in
the systems environment has inevitably occurred." However, HUD
stated, "GAO refuses to attest to such facts despite its one-year
review and only attributes this information to 'CFO' hearsay."
GAO's Response We disagree. Our statement of facts (1) noted that
HUD had developed and deployed a number of systems or components
for systems; (2) provided examples of these systems; and (3)
referred to our report entitled HUD Information Systems: Improved
Management Practices Needed to Control Integration Cost and
Schedule (GAO/AIMD-99-25, Dec. 18, 1998), which included a more
detailed discussion of HUD's major system accomplishments. In our
December 1998 report, we reported that although HUD had developed
and deployed various systems or modules for 12 of 14 systems
integration projects, the Department did not know when the systems
integration effort would be completed, or at what cost, because
the Department had not yet finalized detailed project plans or
cost and schedule estimates for this effort. We concluded that
without such plans, the Department is likely to continue to spend
millions of dollars, miss milestones, and still not fully meet its
objective of developing and fully deploying an integrated
financial management system. We also disagree with the
implications of HUD's comment that our December 1998 report on
HUD's information systems should have Page 91
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts concluded that when a
large number of systems have been successfully developed and
deployed, a substantial improvement in the systems environment has
inevitably occurred. Successfully developing and deploying systems
depend on several factors, including whether user requirements
were met, existing material or internal control weaknesses were
eliminated, and the systems were developed and deployed using
sound methodologies. Given the objectives and scope of our review,
we could not conclude in our December 1998 report whether HUD had
successfully developed and deployed a large number of systems or
had made substantial improvements in its systems environment. 12.
HUD's Comment, p. 8 HUD believed that our observation that it did
not finalize the revised project plans for completing the core
accounting system (HUDCAPS) was wrong. HUD stated that during the
initial phase of the 1-year review of systems at HUD, it provided
us with a completed first-year plan; a final draft of the second-
year plan; and, in November 1998, the complete project plan. GAO's
Response HUD's comment relates to our December 1998 report on
HUD's information systems and not our statement of facts. We agree
that HUD provided us with copies of the fiscal year 1998 and
fiscal year 1999 project plans for HUDCAPS. However, we found that
the fiscal year 1999 plan was incomplete because it did not
include a schedule that showed key milestones, tasks, task
dependencies, and a critical path demonstrating how HUDCAPS would
be completed and integrated with other systems by October 1999,
the date projected by HUD for completing an integrated core
financial system. In addition, on December 4, 1998, HUD provided
to us what the Department referred to as a complete project plan
for the core accounting system, HUD's Centralized Accounting and
Program System (HUDCAPS). This was 22 days after HUD provided us
with official comments on our draft report and 35 days after we
had requested comments. By that time, our report was already being
printed for publication and, consequently, was issued without
noting whether a project plan for HUDCAPS had been completed.
Also, in our December 1998 report, we pointed out that HUD had not
yet finalized other detailed project plans that are necessary to
complete the systems integration effort. Page 92
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 13. HUD's Comment, p.
8 HUD commented that it had recently installed a standard general
ledger and chart of accounts that did not previously exist. It
asserted, "This is a critical accomplishment that was barely
mentioned by GAO and is key to the Department's publishing
integrated financial statements for the entire agency." GAO's
Response HUD's deployment of a Department-wide standard general
ledger was mentioned in our statement of facts. However, detailed
information on it was not included in our statement because it had
been in effect for so little time during the period of our review.
The new standard general ledger was not used to prepare HUD's
fiscal year 1998 consolidated financial statements but will be
used to prepare its fiscal year 1999 consolidated financial
statements, for which an audit report will be prepared in the
spring of 2000. In addition, while the new standard general ledger
and chart of accounts should greatly improve the efficiency of
preparing integrated financial statements for the entire agency,
HUD was already able to produce integrated financial statements
prior to these improvements. 14. HUD's Comment, p. 9 HUD commented
that our statement of facts dwelt on the Department's efforts to
evaluate whether its management systems conform to the
requirements of Federal Managers' Financial Integrity Act (FMFIA)
and of the Office of Management and Budget (OMB) Circular A-127.
HUD also stated that it self-declared certain systems as
noncompliant based on its interpretation of the general Joint
Financial Management Improvement Project (JFMIP) criteria. HUD
asserted that it chose to apply a vigorous standard whereby if
only 1 of the 12 criteria was unmet, then the system was labeled
as noncompliant. HUD also stated that it had yet to obtain any
clear guidance from GAO, despite repeated inquiries, on whether
the Department was applying a significantly higher standard for
systems noncompliance than other agencies. GAO's Response HUD's
comments imply that it was holding itself to a higher standard
than other federal agencies because it declared systems
nonconforming if only 1 of the 12 JFMIP criteria was unmet.
However, HUD's records show that most of the 38 systems it
declared not in conformance with FMFIA criteria Page 93
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts in 1998 did not
conform with 3 or more of the 12 criteria. According to HUD's
records, 21 of 38 nonconforming systems did not meet 3 or more of
the 12 criteria, and 10 of the 21 nonconforming systems did not
meet 10 or 11 criteria. Three of the 38 systems were reported as
nonconforming because they did not meet one criterion; 9 did not
meet two criteria; information on why 4 systems were not in
conformance was not available; and another system, although
reported to be nonconforming, was actually conforming. We have not
reviewed the standards applied by other federal agencies in
determining their systems' compliance with JFMIP criteria and
therefore cannot offer any comments on the standards they follow.
15. HUD's Comment, p. 9 HUD stated, "We strongly believe that it
is very important that these system accomplishments be highlighted
and discussed in greater detail, and that these changes are
reflected in a changed GAO analyses of HUD's systems." GAO's
Response See our response to comment 11. 16. HUD's Comment, p. 18
HUD commented that during the past year, the Department had
aggressively tackled the issue of computer matching and income
verification and improved subsidy verification. HUD established a
task force with staff from Public and Indian Housing; Policy
Development and Research; the Assessment Center; and the Chief
Financial Officer's (CFO) Office to expand capabilities for
ensuring that subsidies are paid on the basis of tenants' incomes
that are correct. GAO's Response Our statement of facts pointed
out the material internal control weakness over the process of
uncertain verification of tenants' incomes. The statement also
explained that in fiscal year 1998, HUD unveiled a multifaceted
plan to address this weakness. The effectiveness of the steps HUD
has taken to address this issue, however, will most likely not be
known until the fiscal year 1999 financial statement audit is
completed in the spring of 2000. Page 94
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 17. HUD's Comment, p.
25 Concerning the Department's financial statements, HUD commented
that it received its first-ever qualified audit opinion 2 years
ago (in prior years, auditors issued disclaimers of opinion) and
that it was on track to receive an unqualified (clean) opinion for
its fiscal year 1998 consolidated financial statement. According
to HUD, "This is a keystone achievement and reflective of the
changing attitude of HUD managers in recognizing their fiscal
responsibilities and the vast improvement in HUD's financial
systems and financial data." GAO's Response Our statement of facts
on HUD's major management challenges and program risks pointed out
that HUD had received a qualified opinion on its fiscal year 1997
financial statements. Beyond the statement of facts provided to
HUD, in our final report our "Overview" pointed out HUD's
improvement in receiving a qualified opinion on its fiscal years
1996 and 1997 financial statements. After we issued our report on
HUD's major management challenges and program risks, HUD's
Inspector General issued, on March 29, 1999, its unqualified
opinion on HUD's consolidated federal accounting-based financial
statements for fiscal year 1998. The Inspector General stated in
this report that in previous fiscal years, she was unable to
conclude that HUD's consolidated financial statements were
reliable in all material respects. Therefore, her ability to
conclude that HUD's fiscal year 1998 financial statements were
reliable was noteworthy. We agree that obtaining an unqualified
opinion on its fiscal year 1998 financial statements was a
noteworthy accomplishment for HUD. However, the Inspector General
also stated that because of continued weaknesses in HUD's internal
controls and financial management systems, this accomplishment
came only after HUD and its contractors went through extensive ad
hoc analyses and special projects to develop account balances and
necessary disclosures. 18. HUD's Comment, p. 28 HUD commented that
credit reform (the reason for the qualified opinion in fiscal year
1997) initiatives within the Department have made significant
progress. The Federal Housing Administration (FHA) has received
from a major public sector accounting firm an unqualified (clean)
opinion on its Page 95 GAO/RCED/AIMD-
99-189 HUD's Management Challenges Appendix II GAO's Responses to
HUD's Comments on the Major Challenges and Program Risks
Identified in GAO's Statement of Facts statements since 1993, HUD
explained. The Department expected compliance with the
requirements of credit reform in its fiscal year 1998 financial
statements and stated that significant work has already been
accomplished. GAO's Response Our January 1999 report on HUD's
major management challenges and program risks included material
recognizing that during 1998, HUD, with the assistance of
independent contractors, focused significant effort on improving
its ability to prepare loan program cost estimates in accordance
with federal accounting standards and credit reform requirements.
Our January 1999 report also stated that HUD has developed a plan
that, if fully implemented, should help it prepare reasonable
estimates of loan program costs in the future. Also, although FHA
received an unqualified audit opinion on its fiscal year 1997
financial statements, the amounts reported for FHA's loan program
costs were derived using private sector generally accepted
accounting principles that are significantly different from those
prepared on the basis of federal accounting standards. After we
issued our report on HUD's major management challenges and program
risks, HUD's Inspector General and the public accounting firm KPMG
LLP issued unqualified audit opinions on HUD's consolidated and
FHA's federal accounting-based financial statements for fiscal
year 1998. These unqualified opinions indicate that HUD and FHA
were able to develop reasonable estimates of loan program costs
for fiscal year 1998. However, the Inspector General also noted
that this required extensive ad hoc efforts by HUD's Office of
Housing and contractor support personnel. 19. HUD's Comment, p. 28
HUD commented, "GAO says that [the Department's] systems are
inadequate because they are poorly integrated, ineffective and
generally unreliable." Disagreeing, HUD stated that over 60
percent of its systems are compliant, including its financial
systems. In support of this, HUD stated, "Our financial statements
are now considered accurate (save for a single audit qualification
on credit reform) and thus, the underlying data are accurate-which
was not true two years ago." HUD contended that we downplayed this
accomplishment despite the significant attention focused on this
goal by the Congress, OMB, and GAO management. Page 96
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts GAO's Response HUD's
comment on our characterization of its systems misstated the
statement of facts we provided to the Department. Our
characterization appeared in a passage that began, "However, these
systems have been inadequate because . . ." and went on to
summarize the information we had reported in our 1997 High-Risk
Series report regarding information and financial management
systems. In our January 1999 report on HUD's major management
challenges and program risks, we added the phrase "we have
reported in the past" to make it clearer that the statement
referred to HUD's past problems. 20. HUD's Comment, p. 29 HUD
commented that significant work has been done to develop new
accounting and financial management systems: "We now have a new
standard, fully compliant HUD-wide general ledger. And, we have
developed and deployed 11 new financial management systems." GAO's
Response See our response to comment 13 for a discussion of HUD's
general ledger. Our January 1999 report on HUD's major management
challenges and program risks recognized the development and
deployment of the 11 financial management systems. Our December
1998 report on HUD's information systems contained additional
information on the status of HUD's systems integration projects.
21. HUD's Comment, pp. 30-32 HUD asserted that there have been
major, comprehensive accomplishments in financial systems
integration. Accordingly, HUD said that we should be able to
state, on the basis of the documentation submitted, that the
listed 11 systems have been developed and deployed during the past
few years: the Integrated Disbursement and Information System; the
Integrated Business System; the HUD Procurement System; the Grants
Evaluation Management System; HUDCAPS; the Tenants Rental
Assistance Certification System; the Budget Formulation System;
the Community 2020 Geographic Information System; the Budget
Outlay Support System; the Single Family Premium Collection
System; and the Real Estate Management System. Page 97
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts GAO's Response Our
statement of facts mentioned that HUD was continuing to make
progress addressing system problems by deploying systems or
modules to manage and monitor departmental programs and provided
examples of these systems. Our December 1998 report on HUD's
information systems included a detailed discussion on the status
of HUD's financial systems integration and the systems that have
been developed and deployed to support it. (Also, see our response
to comment 11.) 22. HUD's Comment, pp. 32 and 33 HUD commented
that the Department agreed with a principal finding of our
December 1998 report on its information systems-that the
Department must improve its information technology capital
planning process. However, according to HUD, our report did not
take note of several major accomplishments and, in effect,
suggested that no process was in place. HUD commented that it has
had in place a structured process for selecting information
technology investments since 1989 and has consistently made
improvements to that process over the past decade. GAO's Response
We disagree. Our statement of facts and December 1998 report
stated that HUD did not have an effective process to manage its
information technology investments. This is not the same as
stating that there was no process in place, as suggested by HUD's
comments. Specifically, in our December 1998 report, we explained
that we reviewed HUD's recent selection and control processes
beginning with fiscal year 1997 and found that both processes were
incomplete and inadequate to make sound investment decisions and
properly manage the selected investments. The major deficiencies
we found with HUD's processes were that (1) investment decisions
were made without reliable, complete, up-to-date project-level
information and (2) oversight was not based on project-specific
measures, which are required to effectively monitor and control
information technology projects. Page 98
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 23. HUD's Comment, p.
34 HUD asserted that the statement, "Managers were not actively
assessing risks in their programs as required under the management
control program," was totally false. HUD went on to discuss risk
assessments that have been prepared since 1996, as well as its
Community Planning and Development's grants management system.
GAO's Response The statement HUD quoted was in a paragraph in our
statement of facts that began, "In February 1997 we reported. . .
." This paragraph summarized the information we had reported in
our 1997 High-Risk Series report regarding internal controls. Our
January 1999 report on HUD's major management challenges and
program risks reiterated the phrase "we reported in 1997" at the
end of the paragraph to make it clearer that this statement
referred to past problems at HUD. Contrary to the implications of
HUD's comments on risk assessments, our statement of facts
discussed the Department's activities regarding the preparation of
risk assessments for its nationwide centers, as well as other
programs. In addition, our statement discussed a number of other
activities HUD initiated to address its internal control problems,
including the establishment of the Risk Management Division and
real estate and enforcement centers and the development of a risk
evaluation database. Also, in our February 1997 High-Risk Series
report, we pointed out that in July 1994, HUD began implementing
its new management planning and control program, which was based
on front-end risk assessments of certain programs. At the time of
our work on HUD's major management challenges and program risks,
we were completing a review of HUD's Community Planning and
Development's grant management system. Subsequently, on April 27,
1999, we issued a report entitled Community Development: Weak
Management Controls Compromise Integrity of Four HUD Grant
Programs (GAO/RCED-99-98). 24. HUD's Comment, p. 35 HUD commented
that the heading "2020 Reform Plan Directed Toward Internal
Control Weaknesses" was a misleading statement and needed to be
revised to accurately reflect that the plan was not solely
directed toward internal control weaknesses and to state that 2020
effectively Page 99 GAO/RCED/AIMD-99-
189 HUD's Management Challenges Appendix II GAO's Responses to
HUD's Comments on the Major Challenges and Program Risks
Identified in GAO's Statement of Facts addressed those problems.
HUD also noted that 1,100 field and headquarters managers received
internal control training during fiscal year 1998. GAO's Response
Our statement of facts described actions initiated by HUD under
its 2020 reform plan that were intended to address its internal
control problems as well as its other management deficiencies. In
the "Overview" section of our statement, which was not provided to
HUD, we stated that HUD's 2020 reform plan addresses more than its
management deficiencies. However, we disagree that HUD's actions
effectively addressed the internal control weaknesses that we and
others previously reported. Our statement of facts and January
1999 report on HUD's major management challenges and program risks
showed that internal control problems persist at HUD. As pointed
out in those documents, material internal control weaknesses
persist in its (1) management of the Section 8 subsidy payment
process, which provides $18 billion in rental assistance; (2)
management of staff resources; (3) management of losses resulting
from defaults in the single-family and multifamily housing
insurance programs; (4) implementation of automated systems to
provide needed management information or reliable data; (5)
monitoring of multifamily properties and single-family and
multifamily housing notes inventories; and (6) contracting
procedures. Furthermore, since we issued our February 1997 High-
Risk Series report on HUD, we have reported that the Department
has not adequately monitored, among other things, its real estate
asset management contractors, the performance of appraisers of
properties purchased with FHA-insured loans, and its process for
deobligating funds no longer needed for Section 8 project-based
rental assistance contracts. Finally, the statement of facts
recognized that as of September 30, 1998, the CFO's Risk
Management Division completed risk management training for
headquarters and field managers and supervisors at or above the
GS-13 level. Our January 1999 report on HUD's major management
challenges and program risks included the information that over
1,100 HUD headquarters and field managers completed risk
management training. Page 100
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 25. HUD's Comment, p.
35 HUD commented that the statement, "REAC [the real estate
assessment center] will not be fully functional until 2000," does
not acknowledge that "significant aspects of REAC's housing
assessment operations are already functioning well beyond any
systems ever used at HUD." As an example, HUD explained that the
center's new physical inspection data collection device and
protocol are already in operational use, with over 4,200
inspections completed through mid-December 1998. HUD felt that we
"should . . . acknowledge that all critical components of REAC's
housing assessment processes are scheduled to be functioning to
improve the Department's monitoring and enforcement activity
before the year 2000." In addition, HUD explained, the center has
completed initial advisory scores for several hundred public
housing authorities and is assisting the enforcement center with
physical and financial assessments of 200 enforcement case
referrals made by the multifamily housing program center's staff.
GAO's Response Our statement of facts pointed out that as part of
its reform plan, HUD established a real estate assessment center,
which had issued regulations on the physical and financial
assessments of multifamily properties and public housing
authorities. It also pointed out that the center would not be
fully functional until 2000 because it would not begin financial
assessments of multifamily properties until around April 1999,
when audited financial statements on the properties were to be
submitted to HUD. Lastly, our statement of facts pointed out that
although physical inspections of public housing authorities would
start in 1999, financial assessments would not begin until 2000.
The additional year is needed to give housing authorities time to
convert their annual financial statements from HUD's accounting
guidance to generally accepted accounting principles in accordance
with the uniform financial standards for HUD's housing programs.
In addition, our statement of facts discussed the potential
benefits that HUD expects to achieve through the establishment of
the real estate assessment center and acknowledged that HUD plans
to physically and financially assess the total inventory of
multifamily properties and public housing authorities. However, to
date neither HUD nor we are able to evaluate the extent to which
this reform has led to substantial and verifiable results in
resolving management weaknesses. Page 101
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts Regarding the
inspections completed by the center, our January 1999 report on
HUD's major management challenges and program risks recognized
that 4,200 inspections had been completed as of late-December
1998. Our report also recognized that 200 cases had been referred
to the enforcement center. In this regard, it should be noted that
HUD's portfolio of multifamily properties totals around 32,000,
and more than 13,000 public housing developments nationwide. 26.
HUD's Comment, p. 36 HUD commented that our statement, "Although
the Enforcement Center began operations on September 1, 1998, it
is not scheduled to perform all of its centralized functions until
around April 1999, when it is to begin receiving referrals of
troubled multifamily properties from the Real Estate Assessment
Center," did not recognize that the enforcement center had been
receiving cases and performing all of its functions and was
regularly receiving additional cases from Housing and the real
estate assessment center. To date, HUD reported, the enforcement
center had received 200 cases, and the Department had dramatically
improved enforcement at the agency, for example, increasing
debarments of bad landlords by 300 percent over the years. GAO's
Response HUD's comment that the enforcement center had received
200 cases from Housing and the real estate assessment center is
inconsistent with other statements made in the letter, which said
that the 200 referrals came from the Office of Multifamily Housing
(see comment 25). On January 8, 1999, an enforcement center
official advised us that all referrals had come from the Office of
Multifamily Housing only. As discussed previously, our January
1999 report on HUD's major management challenges and program risks
recognized the 200 cases received by the enforcement center and
the increase in debarments. 27. HUD's Comment, p. 37 HUD commented
that we would be more accurate if we stated that material
weaknesses are found within the financial statements at all
federal agencies and departments. According to HUD, "Most cabinet
level agencies have on the average 8-24 material weaknesses with
DOD [the Department of Defense] exceeding 50 open material
weaknesses." Consequently, HUD felt Page 102
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts that this problem is
not isolated to HUD and that we needed to make this
acknowledgment. GAO's Response Our statement of facts and January
1999 report on HUD's major management challenges and program risks
were about HUD and not other federal agencies. Other GAO reports
have been prepared on such challenges and risks faced by other
agencies. However, it should be noted that on the basis of fiscal
year 1997 audits, there were six federal entities that had no
material internal control weaknesses. Also, we have designated
DOD's financial management as high-risk since 1995. 28. HUD's
Comment, pp. 37 and 38 HUD commented that "GAO fails to tell the
entire story," particularly about how HUD compares to other
federal agencies regarding compliance with the reporting
requirements under credit reform and Statement of Federal
Financial Accounting Standards (SFFAS) No. 2. Approximately 60
percent of the agencies that credit reform affects have not
achieved full compliance, HUD stated. However, HUD pointed out,
FHA has achieved compliance for its credit programs in accordance
with private sector accounting standards-that is, FHA has received
an unqualified (clean) audit opinion under generally accepted
accounting principles for its financial statements since 1993. As
a result of the qualification in HUD's fiscal year 1997
consolidated financial statement audit, FHA has developed a plan
to comply with the reporting requirements of SFFAS No. 2. HUD
asserted that its work and accomplishments in this area had been
praised in another GAO report titled Credit Reform: Key Credit
Agencies Had Difficulty Making Reasonable Loan Program Cost
Estimates. (Our credit reform report was a draft report at the
time HUD made these comments). HUD concluded, therefore, that
there appeared to be a tension, if not direct contradiction,
between this other report and the statement of facts. Also, HUD
stated that we should emphasize the accomplishment of receiving a
qualified opinion because 2 years ago, the Department was not able
to receive any type of opinion on its financial statement. Page
103 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix II GAO's Responses to HUD's
Comments on the Major Challenges and Program Risks Identified in
GAO's Statement of Facts GAO's Response Our report on credit
reform entitled Credit Reform: Key Credit Agencies Had Difficulty
Making Reasonable Loan Cost Estimates (GAO/AIMD-99-31) was issued
on January 29, 1999. This report showed that three out of the five
key credit agencies we reviewed were not able to comply with
credit reform, including HUD. The discussion in that report
related to HUD's ability to comply with credit reform was entirely
consistent with our January 1999 report. For example, our credit
reform report stated, "HUD was unable to provide adequate
supporting data for its fiscal year 1997 financial statements
estimates of its loan program costs, which resulted in a qualified
audit opinion from HUD's IG [Inspector General] on those financial
statements. This lack of supporting data also raises questions
about the integrity of loan program cost information submitted for
budgetary purposes." The report also contained a discussion of the
effort made by HUD in 1998 to resolve this problem and the plan it
developed. (Also, see our response to HUD's comment 18 on the
fiscal year 1998 financial statement audits.) 29. HUD's Comment,
p. 38 HUD commented that our statement, "Although HUD has reduced
its material weaknesses from 51 in fiscal year 1991 to the 9
remaining open as of fiscal year 1997, some of the remaining
weaknesses are long-standing," was very dismissive in its tone, so
HUD suggested deleting the "although." HUD maintained that the
reduction was real progress. GAO's Response Our statement intended
to provide evidence of the progress HUD has made since 1991 in
this area. At the same time, it is important to note that some of
the nine material weaknesses remaining open as of fiscal year 1997
are indeed long-standing-one dates back to 1983, while four others
date back to 1993-and some, such as those relating to the $18
billion rental assistance program, involve billions of dollars. It
should also be noted that in our February 1997 High-Risk Series
report, we reported that at the end of fiscal year 1995, HUD
reported that it had nine material internal control weaknesses,
the same number as in 1997. Since our February 1997 report, HUD
has removed four material Page 104
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts weaknesses and added
four, so the total remains at nine. The four areas in which
material weaknesses were removed were community development block
grant entitlements, Section 236 excess rental income, Section 235
accounting system, and the title II prepayment and preservation
program. The four material weaknesses added involved the
monitoring of insured mortgages and multifamily projects,
Secretary-held multifamily and single-family mortgage notes,
income verification, and contracting. We deleted the word
"although" in our January 1999 report, as suggested by HUD. 30.
HUD's Comment, p. 39 HUD questioned the use of material from our
report Housing Preservation: Policies and Administrative Problems
Increase Costs and Hinder Program Operations (GAO/RCED-97-169,
July 18, 1997) as an illustration of monitoring problems at HUD.
The Department pointed out that the program is no longer funded
and that the remaining issues from that report relate to oversight
of those projects that were funded and their compliance with
affordability restrictions that owners agreed to in exchange for
financial incentives. According to HUD, since the report was
issued in July 1997, the Department, along with Multifamily
Housing in particular, has taken significant steps that will
greatly enhance its ability for project oversight to ensure
compliance with program requirements. HUD also explained the steps
it has taken to enhance its ability to ensure compliance with
program requirements. GAO's Response The description in our
statement of facts of the problems we found in HUD's preservation
program was accurate. Contrary to HUD's assertion that the report
dealt mainly with funding and targeting aspects of the program,
substantial segments of the report dealt with problems in HUD's
management and oversight of the program. As noted in our report,
these problems contributed to the program's high cost and hampered
its effectiveness. One of the key problems we identified was that
headquarters' oversight of its field offices' implementation of
the program was limited. For example, headquarters did not conduct
systematic reviews of field offices that processed preservation
transactions, and the information received by headquarters was
generally limited to the aggregate dollar amounts of the
preservation incentives approved by field offices. As a result,
HUD headquarters was not in a position to identify or Page 105
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Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts respond effectively
to problems and issues that arose. We also questioned whether some
of the reviews performed by HUD field offices of applications for
preservation funding were sufficient to ensure that the costs were
prudent and represented the best use of preservation funds. While
the Congress terminated funding for the preservation program, a
key factor in the Congress's decision was HUD's poor management of
the program-a point clearly stated in our statement of facts we
provided to the Department. HUD remains responsible for ensuring
that property owners who participated in the program comply with
affordability restrictions that were placed on their properties
and stated that its newly created Office of Quality Assurance will
be testing cases and project managers' follow-up to ensure that
HUD's field offices are addressing the affordability and
compliance requirements under the preservation program. While we
have not performed any recent work to assess HUD's actions in this
area, the Department did not indicate that any such reviews have
been performed or that it has formulated any specific guidance for
its field offices to follow on how they should monitor property
owners' compliance with affordability restrictions (a weakness
identified in our report). 31. HUD's Comment, p. 41 According to
the Department, GAO's statement, "HUD's inability to implement
plans under 2020 for handling properties on which borrowers
defaulted was due to a shortage of Single Family staff because of
downsizing." was false. HUD asserted that it has adequate staffing
in its single-family housing operations. GAO's Response HUD's
comment misstated the statement of facts we provided to the
Department. Our statement of facts said that the Inspector General
reported that "The problem [of oversight of contracts] was due to
a shortage of single-family staff because of downsizing and HUD's
inability to implement plans under 2020 for handling properties on
which borrowers defaulted." Our statement of facts did not state
or imply that HUD's inability to implement the 2020 plan was due
to a shortage of staff because of downsizing. Also, we attributed
the assessment to HUD's Inspector General in her December 1998
semiannual report to the Congress. Page 106
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts However, we revised
the above statement in our January 1999 report on HUD's major
management challenges and program risks to reflect the specific
wording used in the Inspector General's semiannual report and to
more fully describe her reasons for characterizing the oversight
of contractors as inadequate. 32. HUD's Comment, p. 42 HUD
commented that we gave "only passing reference to the Home Buyer
Protection Plan, in fact just one sentence." HUD explained that it
is aggressively implementing the plan, which was announced in June
1998. GAO's Response We disagree that more information on the Home
Buyer Protection Plan was needed in our January 1999 report. Many
of the plan's procedures and operations had not been finalized or
implemented at that time. Therefore, we are unable to comment on
whether the Home Buyer Protection Plan has led to substantial and
verifiable results in improving HUD's appraisal process. After we
issued our report on HUD's major management challenges and program
risks, in April 1999 we issued a report on HUD's appraisal
process, which discussed, among other things, potential changes to
various processes resulting from the Home Buyer Protection Plan.4
33. HUD's Comment, p. 43 HUD disagreed with our statement that it
is too early to assess the effectiveness of the reform efforts to
address internal control weaknesses. HUD stated that giving only
one sentence for such a major reform is misleading to the reader
and indicates a bias against documenting how substantially HUD has
reduced risk. HUD stated that we are taking the approach that
unless "operational perfection is attained . . . then the work and
efforts to date remain unrecognized, unmeasurable, and without
impact on the HUD operations." HUD also stated that our statement
of facts did not recognize the risk assessments that had been
completed, the internal control training provided to its managers,
the high-level management attention paid to corrective action
plans, and the demonstrable steps taken toward resolving several
open material weaknesses. HUD also pointed to the Booz-Allen
Hamilton study issued in March 1998 as further evidence that
progress is being made. 4Single-Family Housing: Weaknesses in
HUD's Oversight of the FHA Appraisal Process (GAO/RCED-99-72, Apr.
16, 1999). Page 107 GAO/RCED/AIMD-99-
189 HUD's Management Challenges Appendix II GAO's Responses to
HUD's Comments on the Major Challenges and Program Risks
Identified in GAO's Statement of Facts GAO's Response Our
statement of facts recognized the steps HUD has taken to address
its internal control weaknesses, such as risk assessments that
have been and are being performed and internal control training
provided to its managers, as discussed in our response to comment
23. We also recognized in our statement of facts that the 2020
reform plan has potential for addressing HUD's deficiencies. Our
basic point on internal control weaknesses and HUD's other
management deficiencies is that HUD is making significant changes
and has made credible progress since 1997 in laying the framework
for improving the way the Department is managed. However, given
the nature and extent of the challenges facing the Department, it
will take time to implement and assess the impact of any related
reforms. While major reforms are under way, several are in the
early stages of implementation, and it is too soon to tell whether
or not they will resolve the major deficiencies that we and others
have identified. Consequently, we continue to believe, as we
reported in 1995 and 1997, that these management deficiencies,
taken together, place the integrity and accountability of HUD's
programs at high risk. HUD indicated that a study by Booz-Allen is
further evidence that progress is being made. This review, which
primarily involved Booz-Allen's review and analyses of HUD's
staffing requirements under the 2020 reorganization, was conducted
from December 19, 1997, through February 27, 1998. Booz-Allen
obtained information for its study primarily by reviewing HUD's
implementation plans and assessing the adequacy and reasonableness
of the staffing levels proposed in each plan. While the Booz-Allen
study noted that the 2020 organization is in place, as stated in
HUD's comments, it also characterizes some of the changes under
the reorganization much the same as we did, namely, as being in
process. For example, the study stated that the organization "is
being staffed" and that "progress has been made in implementing
the revised organizations." The study did not offer evidence of
substantial and verifiable results in resolving HUD's management
deficiencies as a result of the 2020 reforms. Furthermore, the
study is dated March 1998, before all of the centers were
operational, HUD's downsizing was officially halted, or the
"unplaced" staff were given permanent assignments. Page 108
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 34. HUD's Comment, p.
44 HUD commented that the heading in our statement of facts "Much
Work Remains on HUD's Information and Financial Management
Systems" mischaracterized the work that the Department has done in
the past 2 years. For example, HUD stated that it has developed
and implemented 11 new systems and that all of its accounting
systems are A-127 compliant. HUD suggested that the heading be
revised to "Much Work Has Been Accomplished Relating To HUD's
Information and Financial Management Systems." GAO's Response Our
statement of facts and December 1998 report on HUD's information
systems noted that progress has been made in developing and
deploying systems. However, our December 1998 report concluded
that while the Department has developed and deployed various
modules and systems for 12 of the 14 different projects initiated
under the 1993 and 1997 financial systems integration strategies,
the systems integration effort has not yet been completed.
Additional work that must be completed before HUD has integrated
its financial management and information system includes (1)
developing interfaces between the mixed systems and the core
financial management system and (2) completing the individual
systems integration projects (i.e., the mixed systems) such as the
Grants Evaluation Management System, FHA's Mortgage Insurance
System, and the FHA Financial Data Warehouse. In addition, as
pointed out in our 1999 report on HUD's major management
challenges and program risks, work on cleaning and verifying
certain data elements from 18 different financial and mixed
systems is in process. 35. HUD's Comment, p. 45 HUD commented that
our statement that most of HUD's systems, "did not comply with
Federal Managers' Financial Integrity Act (FMFIA) and therefore
could not be relied upon to provide timely, accurate and reliable
financial information and reports to management," was misleading,
given the documentation that had been provided to us. HUD also
stated that it has had far more vigorous standards for compliance
with FMFIA than any other federal agency. While HUD noted that
some nonfinancial systems are not yet compliant with the act, it
stated the systems that have the most risk exposure for HUD are
fully compliant. Page 109 GAO/RCED/AIMD-
99-189 HUD's Management Challenges Appendix II GAO's Responses to
HUD's Comments on the Major Challenges and Program Risks
Identified in GAO's Statement of Facts GAO's Response HUD's
comment misstated the statement of facts we provided to the
Department. The statement appeared in a paragraph that began, "In
1997 we reported. . . ." This paragraph summarized the information
we had reported in our 1997 High-Risk Series report regarding
information and financial management systems. We reported that at
that time, 93 of HUD's 116 systems did not comply with FMFIA. In
our January 1999 report on HUD's major management challenges and
program risks, we reiterated the phase "in our 1997 report" to
make it clearer that the statement referred to HUD's past
problems. In our statement of facts, we acknowledged that HUD in
1998 reported that 38 of its 92 systems were not in compliance
with FMFIA. However, we also reported that for three systems we
reviewed, HUD's determination that the systems complied with FMFIA
requirements was based upon staff members' knowledge, without any
verification or documentation. In addition, our statement of facts
reported that the Inspector General's March 1998 report to the
Congress pointed out that 21 of the 31 systems that HUD had
reclassified as conforming in 1998 did not have detailed
assessments and justifications available, as required by HUD's
CFO. HUD's internal guidance for these reviews did not stipulate
when or how the program staff should verify that the systems met
OMB's requirements. (Also see our response to comment 14 regarding
the Department's assertion that it may have more vigorous
standards for complying with FMFIA than any other federal agency.)
36. HUD's Comment, p. 45 HUD commented that our statement of facts
negatively described HUD's data clean up efforts and that our
description had a dismissive tone that incorrectly ignored its
work to date. GAO's Response We disagree. Our statement of facts
presented a factual discussion of the status of HUD's data cleanup
efforts, which we said were ongoing, and concluded that it was too
soon to assess their impact. Page 110
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 37. HUD's Comment, p.
45 HUD commented that it agreed with the general recommendations
in our December 1998 report on HUD's information systems but that
the thrust of our report was not properly focused and was in some
cases inaccurate. According to HUD, "The report is not accurate
concerning the dollars expended on the development of financial
systems; the report does not properly compare like systems when
year to year comparisons are made; and most importantly, the
report does not cite in its conclusions the many system
improvements that HUD has accomplished. In short, the conclusions
and recommendations are focused almost entirely on process
improvements and are not properly balanced by summarizing the
major system accomplishments of the Department." GAO's Response
The majority of these comments are associated with our December
1998 report and do not relate to issues discussed in our statement
of facts. HUD's comments and our responses to those comments were
contained in our December 1998 report and are discussed in the
following passages-items 38 through 43. 38. HUD's Comment, pp. 46-
49 HUD commented that our December 1998 report was not accurate
about the dollars expended on the development of financial
systems. HUD also commented that the report indicated that the
initial cost of the Department's financial systems integration
(FSI) strategy was $103 million; that the number increased to $206
million with the 1993 strategy; and that by the end of fiscal year
1999, the cost would be approximately $540 million. According to
HUD, this interpretation was misleading and inaccurate because it
did not compare like systems and did not differentiate development
costs, maintenance costs, and non-FSI costs. "A more accurate
estimate for the FSI effort is $250 million. This is a key point,"
HUD asserted, "and the numbers and the text should be corrected. .
. ." Page 111 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix II GAO's Responses to HUD's
Comments on the Major Challenges and Program Risks Identified in
GAO's Statement of Facts GAO's Response In our December 1998
report and statement of facts we stated the Department expects to
spend about $239 million for development costs plus $132 million
for maintenance costs. However, we also reported that HUD had not
yet finalized the plans, cost, and schedule to complete its
current FSI strategy, and, therefore, FSI costs continue to be
uncertain. Accordingly, HUD's estimates have fluctuated
considerably, as reflected in various documents we received from
the CFO and his staff. For example, cost estimates have changed
from the $540 million reported by HUD in June 1998, to the $255
million cited in the Department's November 12, 1998, comments on
our draft report on information systems, to the $239 million that
HUD reported a week later. However, we found that the $255 million
and the $239 million estimates did not include at least $132
million associated with maintaining FSI systems. As pointed out in
our December 1998 report, HUD's continuing uncertainty as to what
the total cost estimate is for FSI through September 1999,
demonstrates the Department's need to develop and use well-defined
cost-estimating processes to prepare reliable cost estimates. 39.
HUD's Comment, p. 46 HUD commented that our December 1998 report
did not properly compare like systems when year-to-year
comparisons were made. GAO's Response In our December 1998 report,
we responded to this comment by stating that we were asked to
identify the initial objectives; development, deployment, and
maintenance costs; and completion dates for HUD's FSI effort and
how they had changed. Our report described the systems and the
estimated costs that were included as part of the three plans and
strategies for achieving integrated financial management systems.
In addition, in our December 1998 report, we explained that HUD's
underlying strategy to implement integrated financial management
systems had changed three times. In finalizing the December 1998
report, we also clarified estimates for the FSI strategies and the
expected costs through fiscal year 1999. Page 112
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 40. HUD's Comment, p.
46 According to HUD, we did not cite the many system improvements
that HUD has accomplished. GAO's Response As described, HUD's
comment relates to our December 1998 report. We responded to this
comment in our December 1998 report by summarizing the actions
taken by HUD to date in our conclusions and adding information to
our discussions of various FSI systems throughout the report. 41.
HUD's Comment, p. 46 HUD commented that it was not given credit
for the fact that it was one of the first agencies to implement
the Information Technology Investment Portfolio System (I-TIPS).
GAO's Response Our December report gave HUD credit for deploying
I-TIPS to select information technology investments. However, it
did not state that HUD was among the first agencies to implement
I-TIPS because our work did not focus on comparing HUD to other
federal agencies in implementing I-TIPS. Our objective was to
determine whether HUD had followed industry best practices and had
implemented the provisions of the Clinger-Cohen Act of 1996 and
the Paperwork Reduction Act of 1995 that are required to manage
FSI projects as investments. 42. HUD's Comment, p. 46 HUD
commented that we also observed that the Department did not
finalize the revised project plans for completing the core
accounting system, HUDCAPS. HUD explained that it provided the
final plan for completing HUDCAPS to us earlier. Furthermore, the
Department pointed out that it recently installed a standard
general ledger and chart of accounts, which the Department felt
was barely mentioned in the statement of facts. Page 113
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts GAO's Response See
GAO's response to comments 12 and 13. 43. HUD's Comment, pp. 46
and 47 HUD felt that the accomplishments of the Department were
scattered throughout and not properly brought together and
highlighted; "cumulatively," HUD asserted, "they paint a very
different picture of the agency's progress." GAO's Response HUD's
comment is primarily associated with our December 1998 report on
the Department's information systems. To respond to HUD's comment,
we summarized the status of HUD's FSI effort to date and expanded
the discussion of individual FSI projects to reflect the new
information provided by HUD. Also, for our January 1999 report on
HUD's major management challenges and program risks, we added
information stating that HUD had told us that it had developed and
deployed various modules and systems for 11 financial management
systems. 44. HUD's Comment, p. 49 HUD commented that we made "a
very weak mention" of the fact that the Department had completed
its Year 2000 renovation of all systems, both mission critical and
noncritical ahead of schedule. HUD also stated that we failed to
mention that it was 93 percent complete with the certification of
its systems and 86 percent complete with its implementation as of
December 1998. GAO's Response Our January 1999 report on HUD's
major management challenges and program risks was updated to
reflect that recently HUD reported that the certification of its
systems was 93 percent complete and its implementation was 86
percent complete. Page 114
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 45. HUD's Comment, p.
49 HUD disputed our use of the weaknesses we reported in its
estimates of project-based Section 8 amendment needs and
recaptures of project-based Section 8 funding as an example of a
financial management systems problem.6 (The reports in question
are our reports entitled Section 8 Project-Based Rental
Assistance: HUD's Processes for Evaluating and Using Unexpended
Balances Are Ineffective (GAO/RCED-98-202, July 22, 1998) and
Section 8 Tenant-Based Housing Assistance: Opportunities to
Improve HUD's Financial Management (GAO/RCED-98-47, Feb. 20,
1998). HUD asserted that the Congress's decision to reduce budget
authority associated with project-based Section 8 amendments by
$2.9 billion was a policy decision rather than attributable to a
systems problem. GAO's Response While the Congress's decision to
reduce the funding for Section 8 amendments was ultimately a
policy decision, HUD failed to note that the decision was reached
only after we identified serious flaws in the estimates of the
project-based Section 8 amendment needs that HUD had provided to
the Congress in connection with its fiscal year 1999 budget
request. More specifically, we found that HUD had substantially
overestimated its long-term funding needs for project-based
Section 8 amendments and had underestimated the amount of
recaptured funds that could be used to meet its fiscal year 1999
amendment needs. These problems occurred because HUD did not
ensure that the data used to analyze project-based Section 8
amendment needs were complete, accurate, and current. HUD also did
not sufficiently review the analyses of amendment needs that a HUD
contractor performed to ensure that they were reliable. We found
substantive errors in these analyses. When these errors were
corrected and the analyses were updated to take into account the
OMB's then-current economic assumptions, the estimate of long-term
shortfalls in Section 8 amendment needs decreased from $19 billion
to less than $2 billion. Furthermore, while HUD's budget request
indicated that only $463 million in recaptured funds could be used
to offset fiscal year 1999 Section 8 amendment needs, the revised
analyses indicated that HUD would be able to recapture almost $3.7
billion from Section 8 contracts expiring in fiscal years 1998 and
1999, a substantial portion of which could be used to offset these
needs. We also note that in responding to our December 1998
report, HUD agreed with our recommendation for 6Amendment funding
is provided to Section 8 contracts that have insufficient funding
available for HUD to make rental assistance payments through the
remaining life of the contracts. In contrast, for project-based
Section 8 contracts for which expenditures have been less than
anticipated, funds may be recaptured and used to help fund other
Section 8 contracts. Page 115
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts improvements in its
preparation of future budget requests for the Section 8 project-
based program. 46. HUD's Comment, p. 50 HUD commented that we
painted an inaccurate picture of its oversight of the Section 8
tenant-based and project-based assistance programs. HUD pointed
out that no housing authority had ever double-paid administrative
fees and that it had not yet agreed with our assertion that fees
have been double-counted for project-based assistance. HUD
disputed the reference to $1 billion and believed that $1,416,000
(annual cost) would depict a more adequate accounting picture. HUD
also asserted that its process model was appropriate, although we
and the Congress disagreed with the approach and assumptions that
provided for level funding of increases for Section 8 over the
budget period and the application of current excesses. GAO's
Response We agree that language in our statement of facts could
have been construed to mean that administrative fees to housing
agencies had been double paid in both the tenant- and project-
based programs, although this was not the statement's intent. Our
January 1999 report on HUD's major management challenges and
program risks clarified that the double-counting occurred only in
the budgeting process and did not involve the project-based
portion of the Section 8 program. However, our statement that HUD
in September 1997 submitted to the Congress a revised budget
estimate that was over $1 billion less than its original estimate
for renewing Section 8 housing assistance contracts was correct.
Furthermore, the principal reason for this amended budget request
was, as HUD stated in its comments on our report, the
identification of the double-counting error and its subsequent
adjustment. Regarding project-based Section 8 amendments, HUD was
incorrect in stating that we and the Congress disagreed with the
approach and assumptions that provided for a level funding of
Section 8 increases over the budget period. Our concerns with
HUD's estimates of Section 8 amendment needs had nothing to do
with the concept of leveling out funding shortfalls. The revised
analyses cited in our report on project-based Section 8 unexpended
balances all used the leveling methodology that HUD built into its
Budget Forecasting System model. Under this approach, HUD spreads
estimated funding shortfalls over the Page 116
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts remaining term of a
Section 8 contract rather than beginning to recognize them in the
year in which the contract is projected to run out of funds.
Instead, as discussed in our response to the previous comment, our
concerns related to the fact that HUD's estimates of amendment
needs were overstated because of errors, omissions, and
methodological weaknesses. 47. HUD's Comment, p. 51 HUD commented
that we repeated our statement, "In 1997... we noted that HUD had
reported most of its systems did not comply with FMFIA and
therefore could not be relied upon to provide timely, accurate,
and reliable financial information and reports to management."
four times and that HUD finds no fault with its methodology to
determine compliance with FMFIA. HUD suggested that we rewrite
this section in a more positive tone. GAO's Response HUD is
incorrect. This statement was not repeated in our statement of
facts, although we did mention FMFIA a number of times in
describing HUD's management deficiencies in internal controls and
information systems. As in the other sections of our statement of
facts, we began the discussion of information and financial
management systems with a summary statement of concerns described
in our 1997 High-Risk Series report, which included this
statement. We then discussed the current status of systems'
compliance and HUD's determination of their conformance with FMFIA
standards. In our statement of facts, we also discussed FMFIA
under the section on internal controls. That discussion focused on
the material internal control weaknesses identified through HUD's
FMFIA assessment, and we noted that HUD had reduced the number of
weaknesses identified. We did not reword the lead-in paragraph to
this section, as HUD suggested, because it was a restatement of
facts in an issued GAO report. Material weaknesses reported under
FMFIA are those management control deficiencies that the agency
head determines are significant enough to be reported in the
annual FMFIA report. In addition, government auditors are also
required to identify management control weaknesses that, in their
opinion, pose a risk or threat to the internal control systems of
an audited entity, such as a program or operation, even if the
management of the entity would not report the weaknesses outside
of the agency. HUD's Office of Inspector General uses the terms
"material weaknesses" and "reportable conditions" to identify
these weaknesses. Page 117
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 48. HUD's Comment, p.
51 HUD commented that we painted a negative picture of FHA's
compliance with the Credit Reform Act of 1990. GAO's Response See
our responses to comments 18 and 28. In our January 1999 report,
we moved the paragraph to which HUD referred and combined it with
the discussion of credit reform in a section on internal controls.
49. HUD's Comment, p. 53 HUD commented that our statement, "HUD
expects to improve both the efficiency and effectiveness of its
operations through these organizational changes," did not reflect
that HUD's organizational changes, implemented through the HUD
Management Reform Plan, were already improving the efficiency and
effectiveness of operations. As proof, HUD cited excerpts from two
reports prepared by HUD consultants. GAO's Response As described
in our statement of facts, while HUD's organizational structure is
in place, it is too early to assess whether the problems we
identified in the past have been corrected. Specifically, the
enforcement, financial management, and real estate assessment
centers will not be performing all of their centralized functions
until 1999 and 2000, when the transfer of functions from the field
offices to the centers has been completed. Consequently, we cannot
yet determine if these reform efforts have led to substantial and
verifiable results in resolving HUD's management deficiencies.
Moreover, neither HUD nor the consultants it cited provided any
evidence demonstrating that the organizational changes have led to
substantial and verifiable results in resolving management
deficiencies. Rather, one of the consultants, David Osborne,
endorsed the 2020 plan's concept and discussed improvements that
will occur to HUD's operations once the plan is implemented. The
other consultant, PricewaterhouseCoopers, in its December 1998
report on HUD's 2020 reforms, found that implementation of some of
the 2020 plan's reforms-such as the establishment of the community
builders and the enforcement, real estate assessment, and troubled
agency recovery centers-is well under way, with each project Page
118 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix II GAO's Responses to HUD's
Comments on the Major Challenges and Program Risks Identified in
GAO's Statement of Facts meeting or substantially meeting all of
the critical milestones that HUD established for completion as of
September 1; however, the report did not address the effectiveness
of the changes being made or completed. 50. HUD's Comment, p. 55
HUD commented that our statement, "the organizational changes were
generally not based on empirical analysis or studies," was
completely inaccurate. HUD referred to a March 5, 1998, letter to
GAO, which laid out different analytical methods used to design
the 2020 plan, including the review of critical reports; pilot
program experience; change agent teams; and consultations with
outside experts, affected constituent groups, the Congress, and
HUD's Inspector General. HUD also commented that it consulted with
recognized management experts prior to the June 1997 release of
the 2020 plan, and with affected constituent groups and the
Congress after the plan's release. In addition, HUD stated that it
had incorporated the Inspector General's suggestions into its
implementation plans. GAO's Response HUD's March 5, 1998, letter
was in response to a draft of our report entitled HUD Management:
Information on HUD's 2020 Management Reform Plan (GAO/RCED-98-86,
Mar. 20, 1998). In both that report and our statement of facts, we
stated that the efficiencies HUD claimed under the 2020 plan were
generally not based on detailed empirical analyses or studies.
Instead, HUD relied on a variety of factors, including workload
data; the limited results of one pilot project; best practices
identified in HUD field offices; benchmarks from other
organizations, and managers' and staff members' experience and
judgment. We agree that consultations with management experts,
affected constituent groups, the Congress, and HUD's Inspector
General are useful in improving the reforms being undertaken
(including organizational changes) and building support for them.
However, the purpose of our January 1999 report was to provide
information on HUD's analytical support for the efficiencies it
expects from the reforms-that is, the extent of data supporting
the anticipated quantitative and qualitative benefits stated in
the 2020 reform plan. Page 119
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 51. HUD's Comment,
pp. 58-60 HUD commented that our heading "Organizational Structure
Is in Place, but Transfer of Functions and Responsibilities Is in
Transition" and the information following it should be changed to
reflect that centers established under the 2020 plan are
"performing significant functions which provide vital support to
all of the Department's major program areas." HUD discussed the
operations of some of the centers, other management reforms in
program areas, and the efforts of the community builders and
community builder fellows. GAO's Response We believe that our
heading was supported by the information we included in the
section and that it provided an accurate description of HUD's
status in implementing its organizational changes under the 2020
reforms. For example, when the transfer of the financial
management workload for approximately 21,000 housing assistance
contracts from the Office of Housing field offices to the
financial management center occurs will depend on when contract
administrators are selected and deployed. According to the
director of the financial management center, the transfer may not
take place until late 1999 or early 2000. Our basic point is that
although a new field organization structure is now in place and
operational, it is too early to assess the effectiveness of this
structure in correcting organizational deficiencies. The
enforcement, financial management, and real estate assessment
centers will not be performing all of their centralized functions
until 1999 and 2000, when the transfer of functions from the field
offices to the centers has been completed. 52. HUD's Comment, p.
60 HUD commented that we made a broad generalization in saying
that "most managers and staff said the transfer of functions was
in transition and they did not know when it would be complete."
Since we visited "only five HUD offices and a small number of
headquarters organizations," the Department asserted, we were
"reporting hearsay rather than statistically significant fact."
Page 120 GAO/RCED/AIMD-99-189 HUD's
Management Challenges Appendix II GAO's Responses to HUD's
Comments on the Major Challenges and Program Risks Identified in
GAO's Statement of Facts GAO's Response From July through October
1998, we interviewed HUD officials in the Denver homeownership
center; the Ft. Worth, Chicago, Houston, and New Orleans field
offices; the troubled agency recovery center at Memphis; and the
real estate assessment and enforcement centers in Washington,
D.C., about various aspects of their operations before the 2020
reforms were implemented and after their implementation. We also
interviewed randomly selected professional staff from each of the
program areas in those locations. In total, we interviewed over 50
program managers and professional staff from 25 programs at the
locations we visited. The purpose of our interviews was not to
obtain a statistically valid sample of HUD employees' views on the
reorganization. Rather, it was to obtain information from program
managers and staff at selected locations affected by the
reorganization. In response to HUD's comment, however, our final
report, where appropriate, indicated that the views expressed are
those of the HUD staff that were interviewed only. 53. HUD's
Comment, p. 60 HUD commented that our statement, "Although a field
organization structure is in place, staffing decisions were only
recently completed, and some centers are significantly
understaffed," was "just wrong." HUD stated that staffing at the
enforcement center would be completed in February and that
staffing at the real estate assessment center was on target with
its phased systems. GAO's Response It was not the intent of our
statement of facts to imply criticism about staffing levels but,
rather, to provide evidence on the status of staffing. As we
stated in our statement of facts, staffing decisions for about
1,300 employees were completed in September 1998, when the
unplaced staff were given permanent assignments. The reported
staffing levels at the centers were based upon our interviews
through October, and the time frames were noted in our statement
of facts. We also recognized in our statement of facts that HUD
managers expected to advertise the unstaffed positions in 1999. In
its comments, HUD also noted that full staffing at the centers had
not yet been achieved. We deleted the word "significantly" from
the discussion of staffing levels in our January 1999 report on
HUD's major management challenges and program risks. Page 121
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 54. HUD's Comment, p.
62 HUD commented that our statement, "Staff losses were recovered
after HUD decided in May 1998 to assign unplaced staff to
permanent positions," failed to recognize one of the major goals
of the 2020 plan, which is to change the way the Department
operates. According to HUD, to ensure that additional staff
addressed management deficiencies, unassigned staff were placed in
areas that represented long-standing departmental problems that
2020 had addressed. GAO's Response It is not clear to us what HUD
intended with this statement. The point of this section of our
statement of facts was to demonstrate that staffing under HUD's
new organizational structure was in transition because some
positions were only recently filled and some of the centers
established under the 2020 plan were not yet fully staffed. 55.
HUD's Comment, p. 63 HUD commented that we should update our
statement that "the Enforcement Center had only 62% of its staff"
to reflect the staffing level it intended to achieve by the end of
January 1999. HUD also noted that the remaining positions were due
to be filled by February 1999. GAO's Response Our statement of
facts noted what HUD's staffing levels were as of the time of our
work and stated that the managers of the centers planned to
advertise the remaining positions in 1999. To add material to our
final report on when expected staffing levels would be met would
not have been appropriate in our opinion because of the degree of
uncertainty that surrounded some of HUD's staffing expectations.
For example, the director of the enforcement center told us that
he was not sure whether positions would be filled at the center
because they had been advertised previously but had not been
filled. 56. HUD's Comment, p. 63 HUD commented that our interviews
must have been premature because our statement, "to date there has
not been a significant shift of workload from the field offices to
the centers, according to the staff and managers we interviewed
from July through October," was totally inaccurate. HUD Page 122
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts provided an example
of 200 referrals of troubled projects to the enforcement center
and spoke of the shift of some work to the financial management
center and the grants management center. GAO's Response Our
statement of facts reflected the status of workload transfers at
the time of our review. As pointed out in our January 1999 report
on HUD's major management challenges and program risks, the real
estate assessment, enforcement, and financial management centers
will not be performing all of their centralized functions until
1999 and 2000. While the real estate assessment center had
inspected over 4,200 multifamily properties as of December 1998,
it would not begin financial assessments of multifamily properties
until around April 1999, and it will not begin its physical
inspections and financial assessments of public housing
authorities until 1999 and 2000, respectively. In this regard, it
should be noted that HUD's portfolio of multifamily properties
totals around 32,000 and more than 13,000 public housing
developments nationwide. Furthermore, the enforcement center was
not scheduled to begin receiving referrals of multifamily
properties from the real estate assessment center until around
April 1999. The transfer of the Section 8 financial management
processing workload from HUD's public housing field offices to the
financial management center was expected to be completed in
January 1999. However, the transfer of the Section 8 financial
management workload relating to 4,600 annual contribution
contracts from the Office of Housing field offices to the
financial management center was not to begin until February 1999
and was expected to be completed in mid- to late summer 1999.
Also, when the transfer of the financial management workload for
approximately 21,000 housing assistance contracts from the Office
of Housing field offices to the center occurs will depend on when
contract administrators are selected and deployed. According to
the director of the financial management center, the transfer may
not take place until late 1999 or early 2000. In addition, we do
not believe that the referral of 200 cases of troubled projects to
the enforcement center represents a significant shift in workload
because HUD has at least 2,500 troubled multifamily projects in
inventory, and, by some of its own estimates, the total may be as
high as 5,000. In addition, a significant function of the
financial management center relates to the Office of Housing's
workload, which has yet to be transferred. Page 123
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Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts 57. HUD's Comment, p.
65 In reference to our statement that "HUD's single family
homeownership centers cannot handle the current workload of HUD's
inventory," the Department stated that FHA had not yet implemented
scheduled staffing reductions in the single-family HUD-owned
property disposition or asset management divisions and that any
criticism of FHA's performance in this area could not be linked to
a reduction in staffing levels for single-family properties. HUD
also pointed out that the fact that about 60,000 properties were
sold indicates that staffing levels are adequate. HUD also stated
that FHA is in the process of implementing new marketing and
management contracts to maintain, protect, and sell HUD-owned
properties, which will allow for a realignment of HUD staffing.
The contract is based on a pilot program operated in three
locations over the last 2 years. GAO's Response We revised our
January 1999 report on HUD's major management challenges and
program risks, deleting the reference to inadequate staffing as a
reason for not being able to handle the workload. Our statement
was based on HUD's Inspector's General's December 1998 report to
the Congress. HUD's conclusion that selling 60,000 properties
indicates that staffing is adequate is questionable. When the 1989
HUD scandals occurred, HUD was selling a large number of
properties. The problem was not selling properties; rather, it was
exercising proper control over the agents who were doing the
selling and over the properties while they were in HUD's
inventory. It should be noted that in discussing the contracting
pilot, HUD focused on its successful aspects and did not mention
other aspects of the pilot that were less successful. For example,
HUD stated that at two pilot sites, the average sales price
increased and FHA's average profit per property sold increased or
remained constant. This is not the complete story. According to
HUD's evaluation of the pilot, the sales price at one office
increased by 17 percent, but the increase at the other site was
minimal-less than 1 percent. The third site experienced an 8-
percent loss. Regarding profit, one site experienced a 15-percent
increase, a second experienced a 2-percent decrease, and at the
third there was a "dramatic" decrease (the percentage is not cited
in HUD's analysis). Thus, while the new approach Page 124
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts seems to offer
potential, it is not clear how much more successful the new
approach will be than HUD's traditional approach. 58. HUD's
Comment, p. 67 HUD commented that our statement, "Because of the
workload situation, it is taking HUD longer to sell the properties
and, as a result, the OIG [Office of Inspector General] estimates
the agency is incurring additional costs of $1 million a day," was
"wholly inaccurate." GAO's Response Our statement was based on a
December 1998 HUD Inspector General report to the Congress and was
so attributed in our statement of facts. Because we had not
independently verified this information, we deleted this sentence
from our January 1999 report on HUD's major management challenges
and program risks. 59. HUD's Comment, p. 68 HUD maintained that
our statement, "Because staffing reforms have not been fully
implemented, their effectiveness in correcting management
deficiencies cannot be demonstrated," was wrong for two reasons.
First, HUD stated that the 2020 staffing plan and placement
actions were, for the most part, completed and implemented.
According to HUD, "Nine thousand placement actions have been
completed by the Department, as part of establishing new and
operational management reform organizations." Second, HUD stated
that reform operations were well under way, as "evidenced by the
actual performance of workload requirements by all program and
consolidated centers." GAO's Response We revised our January 1999
report on HUD's major management challenges and program risks to
state that, "Because staffing reforms and workload transfers from
the field offices to the centers are still in transition, the
effectiveness of HUD's changes in correcting staffing deficiencies
cannot be determined." While we agree that the bulk of the
staffing decisions resulting from the 2020 reforms have been made,
we disagree that there is evidence that the resulting staffing
levels are adequate to meet workload needs. As previously stated,
workload transfer from the field offices to the centers is still
in a transitional phase. Until Page 125
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix II GAO's
Responses to HUD's Comments on the Major Challenges and Program
Risks Identified in GAO's Statement of Facts most of that transfer
takes place, neither the field offices nor the centers will know
whether they can handle the workload. The director of the
financial management center told us, for example, that the
center's authorized staffing level would be inadequate once it
assumed its full workload in about a year. In addition, as pointed
out in our statement of facts and January 1999 report, both we and
HUD's Inspector General reported that monitoring and oversight of
programs continues to be a problem at HUD. 60. HUD's Comment, p.
68 HUD noted that we cited HUD's material internal control
weakness of "inadequate emphasis on providing early warning of and
preventing losses due to defaults on insured mortgages" in our
statement of facts. HUD provided information on actions it had
planned or taken to address this weakness. GAO's Response The
material internal control weakness cited by HUD was reported by
independent public accountants in their audit of FHA's fiscal year
1997 financial statements. On March 12, 1999, after the issuance
of our January 1999 report on HUD's major management challenges
and program risks, the same material internal control weakness was
reported by an independent public accountant in its audit of FHA's
fiscal year 1998 financial statements. 61. HUD's Comment, p. 72
Criticizing a point we made about travel funds ("The lack of
sufficient travel funds to conduct on-site monitoring of program
activities is a problem. According to some officials, the scarcity
of travel funds has prevented them from conducting some on-site
reviews"), HUD characterized the statement as "another example of
how GAO takes isolated comments garnered from a non-statistically
significant base and extrapolates into broad generalizations and
then does not even check the underlying facts." HUD pointed out
that the travel budget has significantly increased from $13.5
million to $15.6 million to $19 million for fiscal years 1997,
1998, and 1999. Page 126 GAO/RCED/AIMD-
99-189 HUD's Management Challenges Appendix II GAO's Responses to
HUD's Comments on the Major Challenges and Program Risks
Identified in GAO's Statement of Facts GAO's Response We disagree
with HUD's characterization of our statements. In our statement of
facts, we clearly established that the information obtained was
from interviews of managers and staff conducted during visits to
six field locations. The information was not intended to be nor
was it presented as the views of a larger group of HUD employees.
Nevertheless, we revised our January 1999 report on HUD's major
management challenges and program risks to specify that 15 of the
program managers and groups of staff out of the 38 we interviewed
expressed concerns regarding the availability of travel funds for
monitoring. We also included in our January report HUD's comments
regarding the increase in the budget for travel funds. However, it
should be noted, as pointed out in the report, that increases in
travel funds do not necessarily translate into more travel funds
for monitoring programs. Finally, HUD's Inspector General has also
reported that it has been told that travel funds for program
monitoring may not be adequate. 62. HUD's Comment, p. 72 HUD
commented that our statement, "Program officials and a community
builder in one HUD field office identified a need for HUD to
clarify the authority of the community builders in dealing with
HUD staff, locally elected officials, and industry
representatives," reflected an isolated instance that had been
dealt with in training; therefore, HUD felt the statement should
be deleted. GAO's Response We had included this example in our
statement of facts because the incident that prompted both the
community builder and program officials to bring it to our
attention was in our opinion, and theirs, very serious. However,
we deleted the example from our final report. Page 127
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix III
Major GAO Reports on HUD's Management Community Development: Weak
Management Controls Compromise Integrity of Four HUD Grant
Programs (GAO/RCED-99-98, Apr. 27, 1999). HUD Information Systems:
Improved Management Practices Needed to Control Integration Cost
and Schedule (GAO/AIMD-99-25, Dec. 18, 1998). Section 8 Project-
Based Rental Assistance: HUD's Processes for Evaluating and Using
Unexpended Balances Are Ineffective (GAO/RCED-98-202, July 22,
1998). Home Improvement: Weaknesses in HUD's Management and
Oversight of the Title I Program (GAO/RCED-98-216, July 16, 1998).
Appraisals for FHA Single-Family Loans: Information on Selected
Properties in New Jersey and Ohio (GAO/RCED-98-145R, May 6, 1998).
Housing Finance: FHA's Risk-Sharing Programs Offer Alternatives
for Financing Affordable Multifamily Housing (GAO/RCED-98-117,
Apr. 23, 1998). Single-Family Housing: Improvements Needed in
HUD's Oversight of Property Management Contractors (GAO/RCED-98-
65, Mar. 27, 1998). Year 2000 Computing Crisis: Strong Leadership
Needed to Avoid Disruption of Essential Services (GAO/T-AIMD-98-
117, Mar. 24, 1998). HUD Management: Information on HUD's 2020
Management Reform Plan (GAO/RCED-98-86, Mar. 20, 1998). Section 8
Tenant-Based Housing Assistance: Opportunities to Improve HUD's
Financial Management (GAO/RCED-98-47, Feb. 20, 1998). Housing
Preservation: Policies and Administrative Problems Increase Costs
and Hinder Program Operations (GAO/RCED-97-169, July 18, 1997).
High-Risk Series: Department of Housing and Urban Development
(GAO/HR-97-12, Feb. 1997). HUD: Field Directors' Views on Recent
Management Initiatives (GAO/RCED-97-34, Feb. 12, 1997).
Multifamily Housing: Effects of HUD's Portfolio Reengineering
Proposal (GAO/RCED-97-7, Nov. 1, 1996). Page 128
GAO/RCED/AIMD-99-189 HUD's Management Challenges Appendix III
Major GAO Reports on HUD's Management Housing and Urban
Development: Limited Progress Made on HUD Reforms (GAO/T-RCED-96-
112, Mar. 27, 1996). Homeownership: Mixed Results and High Costs
Raise Concerns About HUD's Mortgage Assignment Program (GAO/RCED-
96-2, Oct. 18, 1995). Housing and Urban Development: Public and
Assisted Housing Reform (GAO/T-RCED-96-25, Oct. 13, 1995).
Federally Assisted Housing: Expanding HUD's Options for Dealing
With Physically Distressed Properties (GAO/T-RCED-95-38, Oct. 6,
1994). Federally Assisted Housing: Condition of Some Properties
Receiving Section 8 Project-Based Assistance Is Below Housing
Quality Standards (GAO/T-RCED-94-273, July 26, 1994). Section 8
Rental Housing: Merging Assistance Programs Has Benefits but
Raises Implementation Issues (GAO/RCED-94-85, May 27, 1994). HUD
Information Resources: Strategic Focus and Improved Management
Controls Needed (GAO/AIMD-94-34, Apr. 14, 1994). Multifamily
Housing: Status of HUD's Multifamily Loan Portfolios (GAO/RCED-94-
183FS, Apr. 12, 1994). Multifamily Housing: Impediments to
Disposition of Properties Owned by the Department of Housing and
Urban Development (GAO/T-RCED-93-37, May 12, 1993). HUD Reforms:
Progress Made Since the HUD Scandal, but Much Work Remains
(GAO/RCED-92-46, Jan. 31, 1992). Increasing the Department of
Housing and Urban Development's Effectiveness Through Improved
Management (GAO/RCED-84-9, Vols. I and II, Jan. 10, 1984). Page
129 GAO/RCED/AIMD-99-189 HUD's Management
Challenges Appendix IV GAO Contacts and Staff Acknowledgments GAO
Contacts Judy A. England-Joseph, (202) 512-7631 Linda M.
Calbom, (202) 512-9508 Joel C. Willemssen, (202) 512-6408
Acknowledgments In addition to those named above, Shirley L.
Abel, Yvette R. Banks, Jeannie B. Davis, David G. Gill, Angelia V.
Kelly, Robert Procaccini, Phillis L. Riley, Stewart O. Seman, and
John H. Skeen, III, made key contributions to this report.
(385787) Page 130 GAO/RCED/AIMD-
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