HUD Management: Information and Issues Concerning HUD's Management Reform
Efforts (Testimony, 05/07/98, GAO/T-RCED-98-185).

GAO discussed management issues concerning the Department of Housing and
Urban Development (HUD), focusing on: (1) the progress HUD has made in
addressing management deficiencies and the need for additional
improvement; (2) the activities under HUD's 2020 management reform and
other efforts to address its deficiencies; (3) issues that GAO believes
are key as HUD implements its management reforms; and (4) the
relationship between HUD's reform efforts and its Government Performance
and Results Act plans.

GAO noted that: (1) HUD has made progress in addressing problems that
led to GAO's high-risk designation, but much remains to be done; (2)
prior to announcing the 2020 management plan, HUD had among other
things: (a) addressed internal control weaknesses by implementing a new
management planning and control program and reduced the material
weaknesses identified under the Federal Managers' Financial Integrity
Act (FMFIA) assessment; (b) continued to make progress in improving its
information and financial management systems; (c) completed a field
reorganization that transferred direct authority for staff and resources
to the Assistant Secretaries; and (d) made some progress in addressing
problems with staff members' skills and with resource management; (3)
however, GAO's recent work and that of the Inspector General indicate
the need for continued progress in these areas; (4) under HUD 2020
Management Reform Plan and related efforts, HUD is in the process of
making significant changes that will affect most aspects of its
operations; (5) the plan calls for reducing the number of programs,
reducing staffing, retraining the majority of the staff, reorganizing
the 81 field offices, consolidating processes and functions within and
across program areas into specialized centers, and modernizing and
integrating the financial and management information systems; (6)
several interrelated issues are particularly important for achieving the
intended benefits of HUD's management reform efforts: (a) HUD's ability
to meet planned timetables for implementing key reforms; (b) the
adequacy of staffing during and after the transition to the new HUD; (c)
the Department's ability to reduce the number of troubled public housing
authorities and troubled multi-family projects; and (d) HUD's ability to
effectively improve its procurement and contracting practices, including
its oversight of contractors; (7) the HUD 2020 Management Reform Plan
appears to be the driving force behind agency operations, and it is
clearly linked to the agency's strategic and annual performance plans
required by the Results Act; (8) the degree to which HUD is successful
in implementing its reform efforts will influence its success in meeting
its goals and objectives outlined in the strategic and annual
performance plans; (9) both appear to rely in part on many of the same
legislative proposals that could affect HUD's staffing needs and the
attainment of strategic objectives; and (10) HUD's strategic plan could
be improved by clarifying the impact on meeting objectives if the
legislative proposals are not enacted.

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

 REPORTNUM:  T-RCED-98-185
     TITLE:  HUD Management: Information and Issues Concerning HUD's 
             Management Reform Efforts
      DATE:  05/07/98
   SUBJECT:  Housing programs
             Internal controls
             Federal agency reorganization
             Strategic planning
             Human resources utilization
             Financial management systems
             Federal downsizing
IDENTIFIER:  HUD 2020 Management Reform Plan
             HUD HOPE VI Program
             Government Performance and Results Act
             GPRA
             
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Cover
================================================================ COVER


Before the Subcommittee on Housing Opportunity and
Community Development, Committee on Banking,
Housing, and Urban Affairs, U.S.  Senate

For Release
on Delivery
Expected at
10 a.m.  EDT
Thursday
May 7, 1998

HUD MANAGEMENT - INFORMATION AND
ISSUES CONCERNING HUD'S MANAGEMENT
REFORM EFFORTS

Statement of Judy A.  England-Joseph, Director,
Housing and Community Development Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-98-185

GAO/RCED-98-185T


(385735)


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

  HUD -
  FMFIA -
  OMB -
  HOPEVI -
  FHA -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss management issues
concerning the Department of Housing and Urban Development (HUD). 
HUD has been the subject of sustained criticism for weaknesses in its
management and oversight abilities that have made it vulnerable to
fraud, waste, abuse, and mismanagement.  In 1994, we designated HUD
as a high-risk area because of four long-standing departmentwide
management deficiencies:  weak internal controls, inadequate
information and financial management systems, an ineffective
organizational structure, and an insufficient mix of staff with the
proper skills.  In February 1997, we reported that HUD had formulated
approaches and initiated actions to address these deficiencies but
that its efforts were far from reaching fruition.\1 In June 1997, HUD
announced its "HUD 2020 Management Reform Plan," a sweeping set of
proposals intended to, among other things, address identified
management weaknesses and continue downsizing the Department .  The
plan has continued to evolve since June 1997. 

Our statement today is based upon our past reviews of various HUD
programs, our report providing information on HUD's 2020 Management
Reform Plan,\2 our reviews of HUD's strategic and annual performance
plans prepared pursuant to the Government Performance and Results
Act, reports recently issued by HUD's Inspector General, and
information HUD provided to us in an April briefing on the status of
its reform efforts.  Our statement discusses (1) progress HUD has
made in addressing management deficiencies and the need for
additional improvement, (2) the activities under HUD's 2020
management reform and other efforts to address its deficiencies, (3)
issues that we believe are key as HUD implements its management
reforms, and (4) the relationship between HUD's reform efforts and
its Results Act plans. 

In summary: 

  -- HUD has made progress in addressing problems that led to our
     high-risk designation, but much remains to be done.  Prior to
     announcing the 2020 management reform plan, HUD had among other
     things (1) addressed internal control weaknesses by implementing
     a new management planning and control program and reduced the
     material weaknesses identified under the Federal Managers'
     Financial Integrity Act (FMFIA) assessment; (2) continued to
     make progress in improving its information and financial
     management systems; (3) completed a field reorganization that
     transferred direct authority for staff and resources to the
     Assistant Secretaries; and (4) made some progress in addressing
     problems with staff members' skills and with resource
     management.  However, our recent work and that of the Inspector
     General indicate the need for continued progress in these areas;
     for example, the agency's financial statement audit for fiscal
     year 1997 indicates that HUD still faces significant material
     weaknesses, including weaknesses in its control structure
     intended to help ensure that $18 billion in rental subsidies are
     based upon tenants' correct incomes. 

  -- Under the HUD 2020 Management Reform Plan and related efforts,
     HUD is in the process of making significant changes that will
     affect most aspects of its operations, including the
     long-standing management problems and issues facing the Agency. 
     The plan calls for reducing the number of programs, reducing
     staffing, retraining the majority of the staff, reorganizing the
     81 field offices, consolidating processes and functions within
     and across program areas into specialized centers, and
     modernizing and integrating the financial and management
     information systems.  As we stated in our March 1998 report, the
     plan is directed in part towards correcting the management
     deficiencies that we and others have identified.  However,
     because the reforms are not yet complete and some of the plan's
     approaches are untested, the extent to which they will result in
     the intended benefits is unknown. 

  -- Several interrelated issues are particularly important for
     achieving the intended benefits of HUD's management reform
     efforts:  (1) HUD's ability to meet planned timetables for
     implementing key reforms, (2) the adequacy of staffing during
     and after the transition to the "new HUD," (3) the Department's
     ability to reduce the numbers of troubled public housing
     authorities and troubled multifamily projects (according to
     physical, financial and/or management measures), and (4) HUD's
     ability to effectively improve its procurement and contracting
     practices, including its oversight of contractors.  It will also
     be important for HUD, as it implements the reforms, to assess
     the extent to which the reforms are achieving the desired
     outcomes and whether they are fully addressing known problems. 

  -- The HUD 2020 Management Reform Plan appears to be the driving
     force behind agency operations, and it is clearly linked to the
     Agency's strategic and annual performance plans required by the
     Results Act.  The degree to which HUD is successful in
     implementing its reform efforts will influence its success in
     meeting its goals and objectives outlined in the strategic and
     annual performance plans.  Both appear to rely in part on many
     of the same legislative proposals that could affect HUD's
     staffing needs and the attainment of strategic objectives.  As
     we have reported, HUD's strategic plan could be improved by
     clarifying the impact on meeting objectives if the legislative
     proposals are not enacted.\3


--------------------
\1 High-Risk:  Department of Housing and Urban Development
(GAO/HR-97-12, Feb.  1997). 

\2 HUD Management:  Information on HUD's 2020 Management Reform Plan
(GAO/RCED-98-86, Mar.  20, 1998). 

\3 Managing for Results:  Agencies' Annual Performance Plans Can Help
Address Strategic Planning Challenges (GAO/GGD-98-44, Jan.  30,
1998). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

HUD is the principal government agency responsible for programs
dealing with housing, community development, and fair housing
opportunities.  HUD's missions include making housing affordable by
providing mortgage insurance for multifamily housing, providing
rental assistance for about 4.5 million lower-income residents,
helping revitalize over 4,000 localities through community
development programs, and encouraging homeownership by providing
mortgage insurance.  HUD is one of the nation's largest financial
institutions, responsible for managing more than $454 billion in
mortgage insurance and $531 billion, as of September 30, 1997, in
guarantees of mortgage-backed securities.  The agency's budget
authority for fiscal year 1998 is about $24 billion. 

HUD has initiated a number of reform and downsizing efforts in the
1990s .  In February 1993, then-Secretary Cisneros initiated a
"reinvention" process in which task forces were established to review
and refocus HUD's mission and identify improvements in the delivery
of program services.  HUD also took measures in response to the
National Performance Review's September 1993 report, which
recommended that HUD eliminate its regional offices, realign and
consolidate its field office structure, and reduce its field
workforce by 1,500 by the close of fiscal year 1999.  Following a
July 1994 report by the National Academy of Public Administration
that criticized HUD's performance and capabilities, Secretary
Cisneros issued a reinvention proposal in December 1994 that called
for major reforms, including a consolidation and streamlining of
HUD's programs coupled with a reduction in staff to about 7,500 by
the year 2000.  Building upon the earlier reinvention efforts,
Secretary Cuomo initiated the 2020 planning process in early 1997 to
address, among other things, HUD's downsizing goals and management
deficiencies. 

The Congress enacted the Government Performance and Results Act of
1993 in conjunction with the Chief Financial Officers Act and
information technology reform legislation to help instill
performance-based management in the federal government.  The Results
Act seeks to shift the focus of government decisionmaking and
accountability away from a preoccupation with the activities--such as
grants and inspections made--to a focus on the results--such as the
real gains in employability, safety, responsiveness, or program
quality.  Under the act, agencies are to develop strategic plans,
annual performance plans, and annual performance reports. 


   HUD HAS MADE PROGRESS IN
   ADDRESSING MANAGEMENT PROBLEMS
---------------------------------------------------------- Chapter 0:2

The HUD scandals of the late 1980s served to focus a great deal of
public attention on the management problems at HUD.  We designated
HUD as a high-risk area because of four long-standing, departmentwide
management problems.  First, internal control weaknesses, such as a
lack of necessary data and management processes, were a major factor
leading to the scandals.  Second, poorly integrated, ineffective, and
generally unreliable information and financial management systems did
not meet program managers' needs and weakened their ability to
provide management control over housing and community development
programs.  Third, HUD had organizational problems, such as
overlapping and ill-defined responsibilities and authorities between
HUD headquarters and field organizations and a fundamental lack of
management accountability and responsibility.  Finally, an
insufficient mix of staff with the proper skills hampered the
effective monitoring and oversight of HUD's programs and the timely
updating of procedures.  We have testified before this Subcommittee
on specific major management challenges facing HUD that are
illustrative of these four deficiencies discussed above.\4

In February 1997, we reported that HUD had made some progress in
addressing these problems.\5 Specifically, we reported that HUD: 

  -- had made limited progress in addressing internal control
     weaknesses by implementing a new management planning and control
     program intended to identify and rank the major risks in each
     program and devise strategies to abate those risks, and had
     reduced its material weaknesses identified under the FMFIA
     assessment from 51 in the early 1990s to 9.  At the same time,
     we noted that the remaining material weaknesses were
     long-standing and involved large sums of money, and that
     financial audits had continued to identify material internal
     control weaknesses in HUD's programs.  We also found that
     managers were not actively assessing risks in their programs as
     required under the management control program.  Finally, despite
     its importance as a management tool, HUD's monitoring of program
     participants continued to be a problem area. 

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

  -- had completed a field reorganization that eliminated its
     regional office structure and transferred direct authority for
     staff and resources to the Assistant Secretaries, and was
     planning additional reorganization efforts.  Although HUD had
     not evaluated the effects of its reorganization, most field
     directors we surveyed rated it successful overall and believed
     that the reorganization had achieved most of the intended
     goals--namely, eliminating previously confused lines of
     authority within programs, enhancing communications, reducing
     levels of review and approval, and improving customer service.\6

  -- had made some progress in addressing the problems with staff
     members' skills and with resource management.  The Department
     had increased staff training since our 1995 report and begun to
     implement a needs assessment process to plan future training. 
     We noted that HUD directors we surveyed generally believed that
     the skills of their staff had improved over the previous 2
     years; however, 40 percent of the directors rated the
     Department's training as less than good.  In addition, we and
     HUD's Inspector General continued to identify staff resource
     problems in HUD's major program areas, specifically in public
     housing and the Federal Housing Administration (FHA).  Finally,
     we reported that the problem of inadequate staff resources to
     monitor and administer HUD's current array of programs likely
     would be compounded as the Department implemented plans to
     downsize. 

Our February 1997 report concluded that HUD programs continued to
pose a high risk to the government in terms of their vulnerability to
waste, fraud, abuse, and mismanagement; that HUD needed to complete
its corrective actions; and that HUD and the Congress needed to work
together to implement a restructuring strategy that focuses HUD's
mission and consolidates, reengineers, or reduces HUD's programs to
bring its responsibilities in line with its management capacity. 

In its March 1998 report on the audit of the agency's fiscal year
1997 consolidated financial statements, HUD's Inspector General
reported that management problems continue.\7 For example, the report
identified seven material internal control weaknesses, including the
agency's failure to establish a control structure that provided
reasonable assurance that $18 billion in rental subsidies are based
upon tenants' correct incomes.\8

Other material weaknesses included the needs for HUD to upgrade its
financial management systems; FHA to improve its accounting and
financial management systems;\9

HUD to improve the management of its resources, which affects the
Department's ability to monitor program recipients and contractors;
and HUD to improve its monitoring of multifamily projects. 

Our work has also shown a continuing need for improvement.  For
example: 

  -- Our recent report on HUD's tenant-based Section 8 assistance
     program illustrates the need for further improvement in
     financial management.  \10 We found that flaws in HUD's budget
     process, including double-counting of administrative fees that
     are paid to housing agencies for operating the Section 8 program
     and insufficient use of supporting historical data, led to
     significant overestimates of contract renewal needs. 
     Recognizing these inaccuracies, HUD submitted a revised budget
     estimate that was $1 billion lower than its original estimate. 
     The agency agreed with our recommendations for improvements in
     this area. 

  -- Similarly, in our on-going review of the project-based Section 8
     program, we found errors in the analyses the Department uses to
     support its requests for funding to amend Section 8 contracts
     that do not have sufficient funding.  As we discussed in recent
     testimony on HUD's fiscal year 1999 budget request, these errors
     contributed to HUD substantially overestimating the funding
     needed to amend Section 8 project-based contracts in fiscal year
     1999.\11 The errors included omitting relevant Section 8 funding
     and contracts.  We are continuing to work with HUD to ensure
     that these errors are corrected. 

  -- We recently testified that HUD faces Year 2000 risks with its
     automated systems (the possibility that systems that represent
     the year using two digits rather than four will generate
     incorrect results beyond 1999).  \12 System failures could
     interrupt the processing of applications for mortgage insurance,
     the payment of mortgage insurance claims, and the payment of
     rental assistance.  According to HUD's schedule for the 30
     mission-critical systems undergoing renovation, testing, and
     certification or where renovation has not yet begun, all of
     these actions will be completed by December 31 of this year. 
     \13 However, at the time of our testimony HUD was behind
     schedule on 20 of these 30 mission-critical systems, with 13 of
     the 20 experiencing delays of 2 months or more.  Furthermore,
     HUD reported that 5 of these 13 have "failure dates"--the first
     date that a system will fail to recognize and process dates
     correctly--between August 1, 1998 and January 1, 1999.  To
     better ensure the completion of work on mission-critical
     systems, HUD officials decided to halt routine maintenance on
     five of its largest systems, beginning April 1. 


--------------------
\4 See Housing and Urban Development:  Reform and Reinvention Issues
(GAO/T-RCED-95-129, Mar.  14, 1995). 

\5 GAO/HR-97-12. 

\6 HUD:  Field Directors' Views on Recent Management Initiatives
(GAO/RCED-97-34, Feb.  12, 1997). 

\7 U.S.  Department of Housing and Urban Development Audit of Fiscal
Year 1997 Financial Statements, Office of Audit, Office of Inspector
General (98-FO-177-0004, Mar.  20, 1998). 

\8 Based upon its computer matching efforts using calendar year 1996
data, HUD estimates that overpayments of rental subsidies were from
$755 million to $1.12 billion. 

\9 Also, FHA's systems are not capable of generating the
case-specific cash flow data needed to comply with credit reform.  As
a result, HUD has not been able to accurately report the costs of its
credit programs (the primary purpose of credit reform) in its
consolidated financial statements--information important to executive
and congressional decisionmakers. 

\10 Section 8 Tenant-Based Housing Assistance:  Opportunities to
Improve HUD's Financial Management (GAO/RCED-98-47; Feb.  20, 1998). 

\11 Housing and Urban Development:  Comments on HUD's Fiscal Year
1999 Budget Request (GAO/T-RCED-98-137, Mar.  25, 1998). 

\12 Year 2000 Computing Crisis:  Strong Leadership Needed to Avoid
Disruption of Essential Services (GAO/T-AIMD-98-117; Mar.  24, 1998). 

\13 HUD has designated 63 systems as mission-critical; of which 33
are already compliant, renovated and certified as compliant, or being
replaced. 


   2020 REFORMS ARE DIRECTED
   TOWARDS CORRECTING MANAGEMENT
   WEAKNESSES
---------------------------------------------------------- Chapter 0:3

Under the HUD 2020 Management Reform Plan and related efforts, HUD is
in the process of making significant changes that will affect most
aspects of its operations, including the long-standing management
problems and issues facing the agency.  The plan calls for reducing
the number of programs, reducing staffing levels, retraining the
majority of the staff, reorganizing the 81 field offices,
consolidating processes and functions within and across program areas
into specialized centers, and modernizing and integrating the
financial and management information systems.  As we stated in our
March 1998 report, the plan is directed in part towards correcting
the management deficiencies that we and others have identified. 
However, because the reforms are not yet complete and some of the
plan's approaches are untested, the extent to which they will result
in the intended benefits is unknown.  The following sections discuss
how HUD's reform efforts address weaknesses we have identified with
the Department's internal controls, financial and information
management systems, organizational structure, and staffing. 


      INTERNAL CONTROLS
-------------------------------------------------------- Chapter 0:3.1

A strong internal control system provides the framework for the
accomplishment of management objectives, accurate financial
reporting, and compliance with laws and regulations.  Effective
internal controls serve as checks and balances against undesired
actions such as fraud, thereby providing reasonable assurance that
resources are effectively managed and accounted for. 

HUD's 2020 Management Reform Plan calls for a number of actions that
if effectively implemented could help to address internal control
weaknesses, including the need for more monitoring.  These actions
include (1) implementing a new financial integrity program, under
which program managers will be held accountable for financial
management; (2) establishing a risk management office within the
Office of Chief Financial Officer to integrate risk management as a
day-to-day operations in program offices; (3) improving financial
management systems; (4) establishing a real estate management
assessment center to perform physical and financial assessments of
the multifamily inventory and public housing authorities; and (5)
establishing a consolidated enforcement center responsible for
investigating and taking enforcement actions against organizations
administering HUD funds, such as public housing authorities,
communities, and multifamily project owners who do not comply with
the programs they administer. 

In reporting on HUD's consolidated financial statements for fiscal
year 1997, the Inspector General stated that to improve its internal
control environment HUD needed to be successful in completing efforts
to upgrade its financial management systems, correct resource
management shortcomings, address weaknesses with its management
control program, and improve program performance measures.  The
Inspector General also stated that the management integrity
program--implemented under the HUD 2020 reform effort--was soundly
conceived but that it was too early to evaluate how effective the
program would be.  HUD's Office of Risk Management had not become
operational until the second quarter of fiscal year 1998.  The report
also noted that HUD's success in addressing the longstanding
monitoring deficiency is dependent upon a concept for standardizing
inspections of multifamily projects and public housing authorities
that had not been tested.  In April, HUD officials told us they were
in the process of testing the physical assessment procedures and
expected to test the financial assessment procedures within 6 months. 
Finally, although the HUD 2020 Management Reform Plan did not
specifically address the internal control weakness relating to
verifying tenants' incomes under HUD's rental assistance programs,
the agency has begun implementing some actions under the reform
effort, according to the Inspector General's report. 


      INFORMATION AND FINANCIAL
      MANAGEMENT SYSTEMS
-------------------------------------------------------- Chapter 0:3.2

HUD relies extensively on information and financial management
systems to manage its programs.  The 2020 plan calls for HUD to
modernize and integrate outdated financial management information
systems with an efficient state-of-the-art system, incorporating such
features as efficient data entry, support for budget formulation and
execution, updates on the status of funds, standardized data for
quality control, and security control.  The plan also states that
information and accounting systems that do not comply with FMFIA
would be overhauled to correct deficiencies, their functions would be
consolidated into the new accounting systems, or they would be
eliminated. 

HUD's project to modernize and integrate its financial management
systems has been ongoing for 6 years, and was revised to support the
2020 plan.  The revised project plan calls for the consolidation of
four general ledger systems into a core accounting system;\14

an executive information system; and Communities 2020, a mapping
software that will show the impact of HUD's funding activities in
local communities.  Recently, the Department decided to forgo
purchasing a new software package to integrate its financial systems;
instead, it will continue to implement the Federal Financial Systems
software, which it began using in 1995.  The Department plans to
complete the systems integration project by September 1999 and has
separated it into two phases.  In the first phase, HUD will implement
the Federal Financial Systems software as its consolidated general
ledger and the FHA's general ledger by September 30, 1998.  In the
second phase, by September 30, 1999, HUD will fully implement the
software as its core accounting system and integrate it with program
information systems that contain financial data. 

In addition, in February 1998, HUD completed a departmentwide effort
to evaluate whether its systems conform to FMFIA requirements and OMB
circular A-127, and it reported that 38 of its 92 systems were
nonconforming systems (HUD had previously reported that 85 were not
in compliance).\15 The Inspector General's March 1998 report pointed
out, however, that 21 of the 31 systems that HUD reclassified as
complying did not have detailed assessments and justifications
available as required by HUD's Chief Financial Officer. 


--------------------
\14 The core accounting system is to conform with the government-wide
standards issued by the Joint Financial Management Improvement
Program and Office of Management and Budget Circular A-127 on
financial management systems. 

\15 Thirty-one systems were classified from nonconforming to
conforming, 14 systems were discontinued and dropped from the list, 7
systems were designated as nonfinancial and dropped from the list,
and 5 systems were added to the list. 


      ORGANIZATIONAL STRUCTURE
-------------------------------------------------------- Chapter 0:3.3

The 2020 Management Reform Plan calls for reorganizing field
resources by functions, rather than program "cylinders," and
consolidating or centralizing functions.  For example: 

  -- HUD is consolidating single-family housing insurance
     operations--previously carried out in 81 field offices--in four
     homeownership centers, and is consolidating certain multifamily
     housing development and management functions--previously located
     in more than 50 field offices--into 18 hub offices. 

  -- The Office of Public Housing is consolidating some of its
     functions--previously performed in 52 public housing
     offices--into 27 hub offices and 16 program centers;
     centralizing the management of competitive grants and public
     housing operating and capital funds into one Grants Center;
     centralizing applications for demolition/disposition, designated
     housing plans and homeownership plans into one Special
     Applications Center; and centralizing activities to improve the
     performance of troubled public housing authorities into two
     Troubled Agency Recovery Centers. 

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

In addition, HUD is establishing three nationwide centers to
consolidate across programs payments for rental assistance, physical
and financial assessments of real estate, and enforcement functions. 
The budget and chief financial officer's functions are being
consolidated and accounting operations are being consolidated from 10
divisions into one center. 

HUD expects to improve both the efficiency and effectiveness of its
operations through these organizational changes.  Specific expected
benefits include (1) reducing the time for endorsements for
single-family housing insurance and development applications for
multifamily housing; (2) reducing paperwork requirements for grant
programs; (3) greater financial management accountability, since
budgetary and financial responsibilities are centralized; (4)
improving HUD's ability to manage public and assisted housing
portfolios though the operations of the assessment center; and (5)
improving HUD's ability to enforce contractual requirements with
private owners, public housing authorities, and other HUD clients. 
As we noted in our March 1998 report, HUD's anticipated benefits from
these organizational changes are generally not based upon detailed
empirical analyses or studies; but rather on a variety of factors,
including some workload data, limited results of one pilot project,
identified best practices in HUD field offices, benchmarks from other
organizations, and managers' and staffs' experience and judgment.  We
concluded that because the reforms are not yet complete and some of
the approaches are untested, the extent to which they will result in
the intended benefits is unknown. 

We believe it is too early to judge the effectiveness of HUD's
organizational changes.  It will be some time before the proposed
reforms are completely implemented, any operational problems reveal
themselves, and corrections are made.  However, we note that the
Inspector General's December 1997 report raised concerns about
organizational structure, similar to those highlighted in our
high-risk report, relating to the Office of Public and Indian Housing
reorganization.  The Inspector General stated that the structure and
operating plans for overseeing programs and housing authorities may
be difficult to implement because they provide for assigning staff
authority and responsibilities in a fragmented and overlapping
manner.\16


--------------------
\16 Department of Housing and Urban Development, Office of Inspector
General Semiannual Report to Congress as of September 30, 1997
(Washington, D.C.:  HUD, Dec.  29, 1997). 


      STAFFING
-------------------------------------------------------- Chapter 0:3.4

Assurance that HUD has the right number of staff with the proper
skills has been an issue of concern to us, the Inspector General, and
others for a number of years.  The HUD 2020 Management Reform
Plan--in addition to its basic goal of reducing staffing to
7,500--has several proposals that affect staff resource capacity. 
For example, the plan calls for:  refocusing and retraining HUD's
workforce, consolidating and/or eliminating more than 300 programs
into 70, deregulating well-operating public housing authorities, and
replacing the current field structure with one that consolidates
functions within and across program areas.  The plan also calls for
implementing a resource estimation process that, according to HUD,
will be a disciplined and analytical approach to identify, justify,
and integrate resource requirements and budget allocations. 

In commenting on a draft of our March 1998 report, HUD's Acting
Deputy Secretary stated that the Department plans to achieve its
downsizing goal of 7,500 full-time employees by 2002 in two phases. 
During the first phase, HUD has reduced staff to approximately 9,000
employees.  According to the Acting Deputy Secretary, HUD now plans
to continue downsizing to 7,500 by 2002--the second phase--only if
(1) the Congress enacts legislation to consolidate HUD's program
structure and (2) there has been a substantial reduction in the
number of troubled multifamily assisted properties and troubled
public housing authorities. 


   KEY IMPLEMENTATION ISSUES
---------------------------------------------------------- Chapter 0:4

Several interrelated issues are particularly important for achieving
the intended benefits of HUD's management reform efforts:  (1) HUD's
ability to meet planned timetables for implementing key reforms, (2)
the adequacy of staffing during and after the transition to the "new
HUD," (3) the Department's ability to reduce the numbers of troubled
public housing authorities and troubled multifamily projects, and (4)
HUD's ability to effectively improve its procurement and contracting
practices, including its oversight of contractors.  It will also be
important for HUD, as it implements the reforms, to assess the extent
to which the reforms are achieving the desired outcomes, which will
depend on both its capacity to carry out the reforms and their
sustainability under changing leadership. 


      ABILITY TO MEET PLANNED
      TIMETABLES
-------------------------------------------------------- Chapter 0:4.1

Because of the sheer scope of HUD's management reform efforts, the
Department has a large number of actions underway simultaneously--at
a time when it has just downsized by nearly 10 percent .  The
Department plans to have its reorganization completed by September
30, 1998, including the establishment of the new consolidated
functional centers.  These changes, in turn, require other efforts,
such as developing operating procedures and selecting and training
staff, that must be completed in order to implement the planned
reforms. 

One area in which it may be difficult for HUD to meet targeted
timeframes relates to the "mark-to-market" change as described in the
2020 plan.  Specifically, the 2020 plan described HUD's intention to
reduce excessive rent subsidies to market levels for assisted
housing, noting that roughly 65 percent of HUD's insured Section 8
multifamily portfolio (the portfolio of multifamily properties with
both project-based rent subsidies and HUD-insured mortgages) have
rents that are substantially above market levels.  On October 27,
1997, the Congress enacted legislation to, among other things, reduce
the long-term costs of project-based rental assistance and encourage
project owners to restructure their FHA-insured mortgages and
project-based assistance contracts before their contracts expire.\17

HUD officials responsible for mark-to-market operations are currently
taking steps to begin implementing the mark-to-market program by the
mandated date of October 27, 1998.\18 These steps include developing
a management infrastructure, drafting interim and final regulations
for the program, pursuing an Internal Revenue Service ruling on debt
restructuring, and beginning the solicitation process for the third
parties who will be responsible for actually restructuring the
HUD-insured mortgages and rental assistance.  However, according to
HUD mark-to-market officials, HUD lacks the in-house capability to
complete some other tasks that are essential to effectively
implementing the mark-to-market program.  These tasks include
providing HUD staff and third-party partners with operating manuals,
developing an organizational structure, assessing and revising
information systems, providing briefings for HUD staff and third
party partners regarding operating procedures, and developing budget
analyses.  HUD intends to obtain the capacity to complete such tasks
through a task order under an existing management studies contract;
however, the award of the task order has been delayed. 

Another area in which HUD may have difficulty achieving its intended
schedule for implementing changes is in developing alternatives to
its property disposition process.  To address poorly controlled and
monitored disposition of single-family properties, HUD plans to
privatize or contract out most property disposition activities. 
Specifically, according to officials in HUD's Single-Family Housing
Division, the Department plans to sell the rights to properties
before they enter HUD's inventory, thus enabling quick disposition
once the properties become available.  However, many of the details
of these sales, which HUD refers to as "privatization sales," remain
to be developed.  In addition, HUD has proposed legislation to allow
the Department to take back notes when claims are paid, rather than
requiring lenders to foreclose and convey properties.  HUD would then
transfer the notes to a third party for servicing and/or disposition. 

Since HUD has not fully developed plans for these alternative methods
of property disposition, its schedule for implementing changes may be
delayed.  For example, according to single-family property
disposition officials, HUD expected to publish a proposed rule
amending the current property disposition regulations in about March
1998, have a financial adviser hired by April 1998, conduct the first
privatization sale in the summer of 1998, and publish the final rule
amending the current regulations by September 1998.  However, as of
April 27, 1998, these steps had not been completed and HUD was unable
to estimate when the events might occur. 


--------------------
\17 Department of Veterans Affairs and Housing and Urban Development,
and Independent Agencies Appropriations Act, 1998 (P.L.  105-65). 

\18 The legislation requires that HUD issue final regulations to
implement the restructuring program by the later of:  (1) Oct.  27,
1998, or (2) within 3 months after a director is appointed to the
Office of Multifamily Housing Assistance Restructuring (also
established by the legislation). 


      ADEQUACY OF STAFFING
-------------------------------------------------------- Chapter 0:4.2

Our work, and that of the Inspector General, has identified problems
with the adequacy of staff training and with the means of determining
staffing resource needs.  The 2020 Management Reform Plan, which
incorporates the continued downsizing at HUD and the assignment of
many staff to new duties, heightens the importance of both of these
issues. 


         MEETING TRAINING NEEDS
------------------------------------------------------ Chapter 0:4.2.1

Our February 1997 report noted that HUD had taken steps to increase
the effectiveness of its staff training by, among other things,
beginning to implement a needs assessment process for future
training, forming partnerships with colleges and universities to
create new educational opportunities, and substantially increasing
expenditures for training.  HUD's field program directors that we
surveyed for the report indicated that these efforts may have
produced positive effects--for example, about 85 percent of the
directors said that the skills of their staff had improved at least
somewhat during the preceding 2 years--but that pockets of problems
remained.  More than one-fourth of the directors at that time were
not satisfied with their staffs' knowledge of new regulations or with
their staffs' interpersonal skills; 42 percent were not satisfied
with their staffs' knowledge of information systems. 

The need for staff training may be even more critical with the advent
of HUD 2020, because over 1,000 employees have left the Department
and HUD has reassigned some 1,300 employees.  (Many more employees
may be reassigned through the merit staffing of about 700 positions,
which HUD initiated in April and expects to complete by June.)
Cumulatively, this represents a significant loss of staff expertise. 
HUD's Inspector General reported in December 1997 that "[m]any of
HUD's technical staff experts and mid- and senior-level managers have
already left the Department, taking with them vast institutional
knowledge and program expertise that cannot be easily replaced.  "

To cope with the reforms and the attendant personnel and operational
changes, HUD has laid out an ambitious training program.  For
example, HUD plans to begin comprehensive training for all personnel
assigned to the Section 8 Financial Management Center beginning June
1, 1998, and to train HUD staff on new tools and technology for
physical inspections of properties (26 HUD inspectors have already
been trained).  HUD has also developed a training agenda and
tentative schedule for staff of the new Enforcement Center and for
Housing's quality assurance staff; this training is to include input
from the Inspector General's office.  In addition, according to the
2020 plan, HUD intends to create training programs for its new
community resource representatives and public trust officers,
including specialized training at universities beginning in the fall
of 1998. 


         DETERMINING STAFF
         RESOURCE NEEDS
------------------------------------------------------ Chapter 0:4.2.2

Much attention has been focused on the origin and rationale for the
downsizing targets in the 2020 management reform plan.  We believe
that there are two issues here that deserve the Congress's and HUD's
attention.  The first is ensuring that HUD has an adequate number of
staff to carry out vital functions during the transition to its new
organizational structure.  The second is developing a systematic
means of determining staff resource needs that can accommodate future
organizational changes. 

HUD's 2020 Management Reform Plan, when announced in June 1997,
projected a target staffing level of 7,500 (on a full-time equivalent
basis) by the year 2000, subsequently extended to 2002.  However,
more recently HUD has indicated that it may need more staff.  A staff
summary provided at HUD's briefing for us on April 17 shows an
authorized staffing level of 7,826 under the reform plan.  (A report
by Booz-Allen & Hamilton, Inc., reported that HUD's projected
staffing levels increased from 7,500 to 7,826 due to field
management, the Enforcement Center, and the Assessment Center.)
According to HUD's acting Deputy Secretary, this staffing level is
likely to be needed even if the Congress enacts legislation
consolidating programs; and it does not include any new
responsibilities that may be imposed on HUD. 

Our March report on the 2020 Management Reform Plan found that HUD's
target staffing levels were not based upon a systematic analysis of
needs.  While HUD used historical workload data to apportion or
allocate predetermined target numbers of staff among different
locations or functions, it did not use a systematic analysis directed
at determining how many staff are needed to carry out a given
responsibility or function.  Our finding is consistent with that of
HUD's Inspector General, who reported that the Department's target of
7,500 staff was adopted without first performing a detailed analysis
of HUD's mission and projected workload.  In its annual performance
plan for fiscal year 1999, HUD noted that departmental systems for
measuring work and reporting time are no longer available and that it
lacks a single, integrated system to support resource allocation. 

The 2020 Management Reform Plan calls for HUD to implement a proposed
resource estimation and allocation process.  HUD intends to work with
the National Academy of Public Administration to develop a
methodology or approach for resource management that will allow the
Department to identify and justify its resource requirements. 
According to the Academy, the resource estimation elements will
include workload factors and analysis based on quantifiable estimates
of work requirements for planning, developing, and operating current
and proposed programs, priority initiatives, and functions.  The
methodology is also to enable HUD to estimate resources for its
budget formulation and execution and to link resources to performance
measures. 


      REDUCING THE NUMBERS OF
      TROUBLED HOUSING AUTHORITIES
      AND MULTIFAMILY PROJECTS
-------------------------------------------------------- Chapter 0:4.3

While HUD plans to have certain of its structural reforms--such as
the new Troubled Agency Recovery Centers and its Enforcement
Center--in place by early fall of this year, reducing the numbers of
troubled public housing authorities and multifamily projects partly
depends on successfully implementing other elements of the 2020
reform plan, including some that require legislation.  For example,
the 2020 plan includes a legislative proposal to reform bankruptcy
laws to prevent owners from using them as a refuge from enforcement
actions. 

HUD is currently responsible for overseeing about 54 troubled public
housing authorities .  The 2020 reform plan proposes to revise the
existing program for assessing the management of public housing, as
well as incorporate information from physical inspections, audits,
and evaluations of community and residents' satisfaction, to provide
a comprehensive annual assessment.  The Inspector General reported in
December that, according to HUD officials, this effort could increase
the number of housing authorities defined as troubled to more than
500, depending on the scoring system used.  Furthermore, the 2020
plan calls for mandating a judicial receivership for any large
housing authority that remains on the troubled list for more than 1
year.  According to the plan, this action would require legislation. 
The Inspector General noted that HUD might have to deal with a large
number of receivership actions with a downsized staff. 

Reducing the number of troubled multifamily properties--which HUD
estimates to number about 5,400 --could also prove difficult.  HUD's
revised processes for identifying and dealing with troubled
properties are not yet fully developed, and the respective roles that
multifamily project managers--located in field offices--and the
enforcement center will play in taking actions on troubled
multifamily projects are not yet clear.  The 2020 plan noted that HUD
lacked an efficient system to identify, assess, and respond to
troubled properties, and stated that the Department-wide enforcement
authority would handle troubled properties.  However, according to
information provided to us in the April briefing, HUD has created
quality assurance divisions in its multifamily field structure and
created senior project manager positions to handle severely troubled
projects.  It is also developing an automated tool to provide
information on all conditions and activities of multifamily projects;
the plans include access to the Assessment Center's physical
inspection and financial data. 

While the Department has reduced staff workload by transferring some
responsibilities, according to HUD officials, it has not yet achieved
the workload ratios (nontroubled projects per asset manager)
anticipated by the 2020 plan.  Part of the rationale for this
workload realignment is to prevent additional projects from becoming
troubled.  If the physical and financial assessments of properties
indicate that more properties are troubled than currently estimated,
HUD may need more staff and/or time to reduce the number of troubled
properties. 


      IMPROVING PROCUREMENT AND
      CONTRACTING PRACTICES
-------------------------------------------------------- Chapter 0:4.4

HUD awards millions of dollars in contracts each year.  The 2020
Management Reform Plan calls for HUD to contract with private firms
for a number of functions, including physical building inspections of
public housing and multifamily insured projects; legal,
investigative, audit, and engineering services for the Enforcement
Center; and activities to clean up the backlog of troubled assisted
multifamily properties .  The plan also encompasses the potential use
of contractors to help dispose of single-family properties and to
manage construction in the HOPE VI program.\19 The Department--with
fewer staff--will be responsible for ensuring that agency needs are
accurately reflected in contract specifications and that contracts
are fairly awarded and properly administered.  Inadequate contracting
practices leave HUD vulnerable to waste and abuse. 

We and the Inspector General have identified weaknesses in HUD's
procurement systems, needs assessment and planning functions, and
oversight of contractor performance.  For example: 

  -- HUD's ability to manage contracts has been limited because its
     procurement systems did not always contain accurate critical
     information regarding contract awards and modifications and
     their associated costs.  Although HUD recently combined several
     of its procurement systems, the new system is not integrated
     with HUD's financial systems, limiting the data available to
     manage the Department's contracts. 

  -- Inadequate oversight of contractor performance has resulted in
     HUD's paying millions of dollars for services without
     determining the adequacy of the services provided. 

  -- HUD staff have often not been trained or evaluated on their
     ability to manage the contracts for which they have oversight
     responsibility and have not always maintained adequate
     documentation of their reviews of contractors.  This situation
     limits assurance that adequate monitoring has occurred. 

For example, we recently reported that HUD did not have an adequate
system in place to assess its field offices' oversight of real estate
asset management contractors, who are responsible for safeguarding
foreclosed FHA properties.\20 The three HUD field offices we visited
varied greatly in their efforts to monitor the performance of these
real estate asset management contractors, and none of the offices
adequately performed all of the functions needed to ensure that the
contractors meet their contractual obligations to maintain and
protect HUD-owned properties. 

HUD has recognized the need to improve its procurement processes and
has begun taking actions to address weaknesses that we and the
Inspector General have identified.  The 2020 plan includes an effort
to redesign the contract procurement process.  HUD has recently
appointed a chief procurement officer who will be responsible for
improving HUD procurement planning and policies, reviewing and
approving all contracts over $5 million, and implementing
recommendations that may result from an ongoing study of HUD's
procurement practices by the National Academy of Public
Administration.  HUD is also establishing a contract review board,
composed of the chief procurement officer and other senior HUD
officials, that will be responsible for reviewing and approving each
HUD program office's strategic procurement plan and reviewing the
offices' progress in implementing the plans.  In addition, HUD is
taking actions to strengthen its monitoring of contractor activities
by establishing standard training requirements for the HUD staff
responsible for monitoring contractors' progress and performance and
by including standards relating to contractor monitoring in its
system for evaluating employee performance.  HUD is also planning
actions to integrate its procurement and financial systems. 

We view these actions as positive steps.  However, some key issues
concerning their implementation remain to be decided, such as the
relationship between the chief procurement officer and HUD's Office
of Procurement and Contracts, the precise role of the contract review
board in overseeing HUD's procurement actions, and HUD's ability to
have the necessary resources in place to carry out its procurement
responsibilities effectively.  Perhaps even more important is the
extent to which these actions will lead to a change in HUD's culture,
so that acquisition planning and effective contractor oversight will
be viewed by both management and staff as being intrinsic to HUD's
ability to carry out its mission successfully. 


--------------------
\19 The HOPE VI program provides funds for, among other things, the
demolition, rehabilitation, and construction of public housing. 

\20 Single-Family Housing:  Improvements Needed in HUD's Oversight of
Property Management Contractors (GAO/RCED-98-65, Mar.  27, 1998). 


   HUD HAS LINKED RESULTS ACT
   PLANS TO MANAGEMENT REFORM
   EFFORTS
---------------------------------------------------------- Chapter 0:5

The HUD 2020 Management Reform Plan appears to be the driving force
behind agency operations.  HUD has clearly linked its management
reform efforts to the agency's Results Act plans, so that its success
in meeting annual performance goals and achieving strategic
objectives depends on the success of the management reform efforts. 
In addition, HUD's legislative proposals for 1997 support both its
management reforms and strategic objectives. 

In its September 30, 1997, strategic plan, HUD stated that the plan
builds on the foundation of the sweeping management reforms.  Each of
the plan's objectives includes a discussion of the reform efforts
that will affect the objective.  The plan also notes that the
Secretary's mission to restore the public's trust in HUD--one of the
purposes of the 2020 HUD Management Reform Plan--permeates the
Department and is an integral part of each and every objective in the
strategic plan.  The plan states the important linkage to the HUD
2020 Management Reform Plan:  "To create a new HUD, we will need the
full range of approaches set out in [the] Strategic Plan and the
Management Reform Plan.  The success of these efforts is dependent on
the success of the whole." The annual performance plan, submitted to
the Congress in March 1998, also provides a discussion of how the
reform efforts affect each objective. 

The annual performance plan includes--in addition to the performance
goals that are associated with specific strategic objectives--a
number of performance goals for "management reform;" in both cases,
the performance goals include indicators.  The plan does not
explicitly link the management reform goals to the strategic
objectives or performance goals where there are logical opportunities
to do so.  For example, one proposed performance indicator under the
management reform performance goals is "achieve a reduction in the
number of troubled properties over the next five years." This could
logically support HUD's strategic objective of increasing the
availability of affordable housing in standard condition (one of
whose indicators is "increase the percentage of project-based Section
8 units in standard physical and financial condition"), but the plan
does not make this linkage. 

In reviewing HUD's strategic plan, we observed that it contained a
number of legislative proposals that appeared to affect the strategic
objectives but did not make clear the impact on meeting the
objectives if the legislative proposals were not enacted.  We noted
that the plan could be improved to better meet the purposes of the
Results Act if this lack of clarity was addressed.  More recently, in
reviewing the annual performance plan, we noted that HUD does not
discuss the impact on its annual performance goals if the proposed
legislation is not enacted. 


-------------------------------------------------------- Chapter 0:5.1

In summary, Mr.  Chairman, HUD is at a particularly crucial moment as
it adapts to a significant loss of staff expertise; a workforce that
includes large numbers of personnel assigned to new responsibilities;
a new organizational structure with units whose specific duties,
responsibilities, and operating procedures are still evolving; and
the implementation of many new systems and processes.  This situation
merits the close attention of the Congress and HUD's managers.  We
look forward to working with the Subcommittee in your oversight
efforts. 

This concludes my prepared remarks.  We will be pleased to respond to
any questions that you or other Members of the Subcommittee might
have. 


*** End of document. ***