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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

March 2013: 

Community Development Block Grants: 

Reporting on Compliance with Limit on Funds Used for Administration 
Can Be Improved: 

GAO-13-247: 

GAO Highlights: 

Highlights of GAO-13-247, a report to congressional committees. 

Why GAO Did This Study: 

CDBG is the federal government’s principal community development 
program. In fiscal year 2012, Congress provided CDBG with 
approximately $3 billion for activities such as housing, economic 
development, and neighborhood revitalization. While a provision 
reducing the amount grantees can use for administration was considered 
but not enacted, GAO was required to examine grantees’ use of 
administrative funds up to the allowed 20 percent of program funds. 
This report discusses (1) the types of activities subject to the 20 
percent limit and grantees’ use of their administrative funds, (2) 
trends in funds available to grantees for CDBG administration and the 
impact of these trends on grantees’ administrative spending, and (3) 
HUD’s reporting on compliance with the limit. GAO analyzed HUD data 
and program information, reviewed federal internal control standards, 
and interviewed HUD headquarters and field office staff and 
organizations representing grantees. GAO also interviewed 12 grantees 
selected based on grant size and location, among other things, to 
obtain a range of experiences. 

What GAO Found: 

The annual appropriation for the Community Development Block Grant 
(CDBG) program allows grantees to use up to 20 percent of program 
funds for planning, management, and administration (collectively 
referred to as “administration”). Specifically, grantees may use these 
funds for a range of activities, including general management, 
oversight, and coordination; fair housing activities; preparing 
community development plans; and policy planning. The Department of 
Housing and Urban Development (HUD) uses broad categories, such as “
general program administration” and “fair housing activities,” to 
record grantees’ administrative expenses. According to HUD’s data for 
the last decade, grantees primarily recorded their administrative 
expenses under the general program administration category, which 
includes staff salaries. Grantees GAO interviewed added that they also 
used administrative funds to cover general administrative costs such 
as supplies, training, and travel. 

The amount available to grantees for administrative costs decreased 
from 2001 to 2012 by 47 percent, or about $532 million in 2012 
constant dollars, as the amount of overall CDBG funding declined. 
Grantees GAO interviewed reported taking various steps to address this 
decline, including reducing the number of CDBG staff and changing the 
types of projects they administered. For example, one grantee 
determined that it could no longer administer its housing 
rehabilitation program. However, the vast majority of the grantees 
that GAO interviewed said that reducing the statutory limit on 
administration would negatively impact their ability to administer and 
oversee CDBG-funded projects. 

HUD does not routinely determine and report on compliance with the 
administrative limit across the program. HUD reviews financial summary 
reports-—which contain information grantees enter in HUD’s Integrated 
Disbursement & Information System (IDIS) and their own internal 
accounting systems—-to determine individual grantees’ compliance. 
Internal control guidance states that information needed to assess 
compliance with laws and regulations should be timely and reported in 
a manner that allows for effective monitoring. However, HUD managers 
cannot use IDIS to generate summaries of compliance with the 
administrative limit across the program. First, grantees are not 
required to save information from their own systems in IDIS. Second, 
when such data are saved, the information is not stored as separate 
data elements that can be extracted and analyzed. Rather, HUD 
officials must download each grantee’s report and manually create a 
summary of compliance across the program. HUD’s most recent attempt to 
assemble this information for a single year required a labor-intensive 
process that ultimately produced unreliable data. Without making 
changes to IDIS that allow for summaries of compliance across the 
program, HUD lacks the ability to monitor grantees’ compliance across 
the program. Further, GAO’s analysis of financial summary reports for 
program year 2010 (the most recent year available) showed that 60 
percent of entitlement communities (eligible cities and counties) 
obligated between 15 percent and 20 percent of their funds for 
administration. Given these statistics, HUD could benefit from having 
the information it needs to determine how many grantees would be 
affected by reducing the administrative limit. 

What GAO Recommends: 

GAO recommends that HUD develop a process for annually reporting on 
compliance across the program with the statutory limit on the use of 
funds for administration. In its response, HUD noted that it was not 
required to assess cumulative compliance with the limit. As discussed 
in the report, an annual report that summarizes individual grantee 
compliance is essential to effective monitoring. 

View [hyperlink, http://www.gao.gov/products/GAO-13-247]. For more 
information, contact William Shear at (202) 512-8678 or shearw@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

The Administrative Limit Covers a Range of Activities: 

Grantees Have Cut Staff and Projects to Adjust to Reduced 
Administrative Funding: 

HUD Does Not Routinely Assess Compliance with the Administrative Limit 
Across the Program: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Department of Housing and Urban 
Development: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: IDIS Matrix Codes for Activities Subject to the 20 Percent 
Administrative Limit, as of January 2013: 

Table 2: Illustration of How Compliance with the CDBG Administrative 
Limit for Entitlement Communities Is Calculated for a Program Year: 

Figures: 

Figure 1: Use of Administrative Matrix Codes, from Fiscal Years 2001 
through 2011: 

Figure 2: CDBG Funding Available for Administrative Expenses in 
Nominal and Fiscal Year 2012 Constant Dollars, Fiscal Years 2001 
through 2012: 

Figure 3: Percentage of CDBG Funds Entitlement Communities Obligated 
for Administration, Program Year 2010: 

Abbreviations: 

CDBG: Community Development Block Grant: 

CHDO: HOME Community Housing Development Organization: 

CPD: Office of Community Planning and Development: 

ESG: Emergency Solutions Grants: 

HIV/AIDS: human immunodeficiency virus/acquired immunodeficiency 
syndrome: 

HOME: HOME Investment Partnerships: 

HOPWA: Housing Opportunities for Persons with AIDS: 

HUD: U.S. Department of Housing and Urban Development: 

IDIS: Integrated Disbursement & Information System: 

OMB: Office of Management and Budget: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

March 21, 2013: 

The Honorable Patty Murray: 
Chairman: 
The Honorable Susan M. Collins: 
Ranking Member: 
Subcommittee on Transportation, Housing and Urban Development, and 
Related Agencies: 
Committee on Appropriations: 
United States Senate: 

The Honorable Tom Latham: 
Chairman: 
The Honorable Ed Pastor: 
Ranking Member: 
Subcommittee on Transportation, Housing and Urban Development, and 
Related Agencies: 
Committee on Appropriations: 
House of Representatives: 

The Community Development Block Grant (CDBG) program is the federal 
government's principal community development program. In fiscal year 
2012, Congress provided approximately $3 billion for the program to 
fund housing, economic development, neighborhood revitalization, and 
other community development activities. Administered by the Department 
of Housing and Urban Development (HUD), the CDBG program provides 
funding to metropolitan cities and urban counties, known as 
entitlement communities, and to states for distribution to other 
communities.[Footnote 1] Activities undertaken with program funds must 
(1) principally benefit low-and moderate-income persons, (2) aid in 
the prevention or elimination of slums or blight, or (3) meet urgent 
community development needs. 

Historically, the annual appropriation for the CDBG program has 
included language allowing grantees to use no more than 20 percent of 
program funds for planning, management, and administration.[Footnote 
2] However, for 2012 the House Appropriations Subcommittee on 
Transportation, Housing and Urban Development, and Related Agencies 
proposed to reduce the 20 percent limit to 10 percent. According to 
the subcommittee's report, this change was intended to direct limited 
funds to worthwhile community development activities and to reduce 
instances of waste, fraud, and abuse among CDBG grantees. In contrast, 
the Senate bill for HUD's fiscal year 2012 appropriations retained the 
traditional 20 percent limitation for administration. To resolve the 
different versions, the Conference Report to the Consolidated and 
Further Continuing Appropriations Act of 2012 included language 
allowing 20 percent of CDBG funds to be used for administration, as 
proposed by the Senate, but directed us to review how communities used 
these funds.[Footnote 3] In response to this mandate, this report 
discusses (1) the types of activities that are subject to the 20 
percent limit on administration and the ways in which grantees have 
used their administrative funds, (2) trends in funds available to 
grantees for CDBG administration and the impact of these trends on 
grantee spending, and (3) HUD's reporting on grantee compliance with 
the limit. 

To identify and describe the types of activities subject to the 20 
percent limit on administration, we examined and summarized relevant 
statutes, HUD regulations, and Office of Management and Budget (OMB) 
guidance. We also interviewed HUD officials and a purposive, nonrandom 
sample of 12 CDBG grantees: the cities of Albany, Georgia; Antioch, 
California; Bowling Green, Kentucky; Houston, Texas; Newark, New 
Jersey; Oshkosh, Wisconsin; and Tustin, California; the counties of 
Northampton in Pennsylvania and Oakland in Michigan; and the states of 
Alaska, North Carolina, and Ohio. We selected these grantees on the 
basis of factors such as grant size, percentage of funds used for 
administration, and geographic dispersion to obtain a range of 
experiences. To determine how grantees had used their administrative 
funds, we interviewed HUD officials, reviewed the selected grantees' 
annual reports to HUD, and reviewed and summarized relevant data from 
HUD's Integrated Disbursement & Information System (IDIS).[Footnote 4] 
We determined that these data were sufficiently reliable for analyzing 
different administrative spending categories. We also reviewed HUD's 
guidance and training manuals to determine the extent to which HUD was 
providing guidance on use of funds for administration. 

To determine the availability of CDBG funds for administration, we 
interviewed HUD officials and analyzed CDBG allocation data for 2001 
through 2011. We also interviewed the selected grantees, HUD 
officials, and representatives from national organizations 
representing CDBG grantees to obtain their views on the 20 percent 
limit's impact, if any, on the types of activities grantees chose to 
fund. To determine HUD's ability to report on grantees' compliance 
with the 20 percent limit, we interviewed HUD officials and the 
selected grantees. We then compared HUD's reporting capabilities with 
internal control standards for the federal government. In addition, we 
analyzed financial summary reports on grantee compliance with the 
administrative limit for program year 2010, the most recent year for 
which such reports were readily available. We found these reports to 
be reliable for commenting on compliance with the limit. 

We conducted this performance audit from July 2012 to March 2013 in 
accordance with generally accepted government auditing standards. 
These standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. More 
information on our scope and methodology is contained in appendix I. 

Background: 

The Housing and Community Development Act of 1974 created the CDBG 
program to develop viable urban communities by providing decent 
housing and a suitable living environment and by expanding economic 
opportunities, principally for low-and moderate-income persons. 
Program funds can be used for housing, economic development, 
neighborhood revitalization, and other community development 
activities. After funds are set aside for special statutory purposes, 
the annual CDBG appropriation is allocated to entitlement communities 
and states. Entitlement communities are principal cities of 
metropolitan statistical areas, other metropolitan cities with 
populations of at least 50,000, and qualified urban counties with a 
population of 200,000 or more (excluding the populations of 
entitlement cities). Entitlement communities may carry out activities 
directly or may award funds to subrecipients to carry out agreed-upon 
activities. States distribute CDBG funds to nonentitlement localities 
not qualified as entitlement communities. In fiscal year 2012, 
Congress appropriated about $3 billion for the CDBG program, $60 
million of which was set aside for Native American tribes. The 
remainder (about $2.9 billion) was allocated to entitlement 
communities, states, and insular areas.[Footnote 5] 

Grantees can use CDBG funds for 28 eligible activities. For reporting 
purposes, HUD classifies the activities into eight broad categories--
acquisition, administration and planning, economic development, 
housing, public improvements, public services, repayments of section 
108 loans, and "other" (including capacity building for nonprofit 
organizations and assistance to institutions of higher learning). 
[Footnote 6] Some of the activities that can be funded, such as loans 
for housing rehabilitation, generate program income for grantees that 
must be used to fund additional activities.[Footnote 7] There are 
statutory limitations on the amounts that grantees may use in two 
specific areas. According to provisions in annual appropriations laws, 
grantees may use up to 20 percent of their annual grants plus program 
income on administration. Grantees may also use only up to 15 percent 
of their annual grant plus program income on public service activities 
such as job training and crime prevention activities.[Footnote 8] 
Entitlement communities comply with these requirements by limiting the 
amount of funds they obligate for these activities during the program 
year, while states limit the amount they spend on these activities 
over the life of the grant.[Footnote 9] 

HUD has provided grantees with a variety of training classes, written 
guidance, and technical assistance to help them determine which 
activities are considered administrative and demonstrate compliance 
with the 20 percent administrative limit. For example, HUD has 
prepared a training manual that includes guidance on eligible 
administrative activities and instructions for showing compliance with 
the administrative limit. HUD has also developed video training 
modules on components of the CDBG program, including administrative 
planning and financial management. Within these materials, HUD has 
also provided links to relevant OMB guidance on determining program 
administrative costs, cost allocation, and indirect costs as well as 
links to relevant HUD regulations. 

The administrative activities subject to the 20 percent limit are 
separate from "activity delivery costs" that are related to carrying 
out specific CDBG activities. Activity delivery costs, such as staff 
and overhead costs linked directly to an eligible CDBG activity (e.g., 
economic development, housing rehabilitation), are not considered 
administration and are therefore not subject to the 20 percent limit. 
For example, if a grantee's employees underwrite economic development 
loans that will be made with CDBG funds, the portion of their salaries 
spent on this function can be treated as costs of carrying out the 
economic development activity. Other costs that are considered 
activity delivery costs include the costs of printing brochures 
advertising the availability of housing rehabilitation loan funds and 
staff costs of housing rehabilitation specialists performing work 
write-ups and inspecting completed construction work. There is no 
statutory limit on the percentage of CDBG funds that may be used for 
eligible activity delivery costs, but they must be necessary and 
reasonable costs. 

Grantees must submit to HUD a strategic plan that addresses the 
housing, homeless, and community development needs in their 
jurisdictions every 3 to 5 years. This plan, known as the consolidated 
plan, covers CDBG and three other formula grants that the grantee may 
receive--the HOME Investment Partnerships (HOME) Program, the 
Emergency Solutions Grants (ESG) Program, and the Housing 
Opportunities for Persons with AIDS (HOPWA) Program.[Footnote 10] 
Annually, entitlement communities must submit an action plan that 
identifies the activities they plan to undertake to meet the 
objectives in their strategic plans.[Footnote 11] In their annual 
action plans, states describe their method for distributing funds. At 
the end of each program year, grantees must submit to HUD an annual 
performance report detailing progress they have made in meeting the 
goals and objectives outlined in their strategic and action plans and 
their compliance with statutory limits. HUD staff use detailed 
checklists to review recipients' strategic and annual action plans and 
annual performance reports. 

HUD's Office of Community Planning and Development (CPD) administers 
the CDBG program through program offices at HUD headquarters and field 
offices located throughout the United States. Among other strategies, 
HUD field staff are to use data and reports generated through IDIS to 
monitor CDBG funds. Implemented in fiscal year 1996, IDIS is a 
management information system that consolidates planning and reporting 
processes across HUD's four formula grant programs. Grantees are to 
use this system to enter information on their plans, establish 
projects and activities to draw down funds, and report 
accomplishments. Although it contains data on reported expenditures, 
IDIS is a reporting system and not an accounting system. Grantees are 
expected to use their own accounting systems in addition to IDIS to 
ensure proper management of funds. Information that grantees enter in 
IDIS is used to generate financial summary reports, which contain 
information on the CDBG funds available and expenditures incurred, 
including the percentage of funds used for low-and moderate-income 
persons, public services, and administration. 

The Administrative Limit Covers a Range of Activities: 

As previously noted, grantees may use no more than 20 percent of the 
CDBG grant and program income received for a range of activities 
related to program administration. Examples of eligible administrative 
activities include: 

* managing, overseeing, and coordinating the CDBG program; 

* providing local officials and citizens with information about the 
CDBG program; 

* conducting fair housing activities; 

* preparing reports and other HUD-required documents; 

* preparing comprehensive plans; 

* preparing community development plans; 

* developing functional plans for housing, land use, urban 
environmental design, and economic development; and: 

* providing policy planning.[Footnote 12] 

IDIS has 10 broad categories, or matrix codes, for recording 
administrative expenses (see table 1).[Footnote 13] For example, 
grantees are to use the general program administration code to report 
overall program administration, including salaries, wages, and related 
costs of grantee staff or others engaged in program management, 
monitoring, and evaluation. 

Table 1: IDIS Matrix Codes for Activities Subject to the 20 Percent 
Administrative Limit, as of January 2013: 

IDIS category: Planning; 
IDIS description: Program planning activities, including the 
development of comprehensive plans (e.g., a consolidated plan), 
community development plans, energy strategies, capacity building, 
environmental studies, area neighborhood plans, and functional plans. 

IDIS category: State planning; 
IDIS description: Should be used for awards to units of general local 
government for which planning is the only activity, or in which 
planning activities are unrelated to any other activity funded as part 
of the grant. These are often referred to as "planning-only grants" or 
"planning-only activities." 

IDIS category: General program administration; 
IDIS description: Overall program administration, including (but not 
limited to) salaries, wages, and related costs of grantee staff or 
others engaged in program management, monitoring, and evaluation. 

IDIS category: Indirect costs; 
IDIS description: Costs charged under an indirect cost allocation plan. 

IDIS category: Public information; 
IDIS description: Providing information and other resources to 
residents and citizen organizations participating in the planning, 
implementation, or assessment of CDBG-assisted activities. 

IDIS category: Fair housing activities; 
IDIS description: Fair housing activities carried out as part of 
general program administration. 

IDIS category: Submission of applications for federal programs; 
IDIS description: Preparation of (1) documents that must be submitted 
to HUD to receive CDBG funds or (2) applications to other federal 
programs for community development assistance. 

IDIS category: CDBG funding of HOME administration; 
IDIS description: CDBG funding of administrative costs for eligible 
HOME program activities. 

IDIS category: CDBG funding of HOME Community Housing Development 
Organization (CHDO) operating expenses; 
IDIS description: CDBG funding of CHDO operating expenses for eligible 
HOME program activities.[A] 

IDIS category: State administration; 
IDIS description: Costs incurred by the state to administer the CDBG 
program. 

Source: HUD IDIS state and entitlement community manuals. 

[A] A HOME CHDO is a private, nonprofit, community-based service 
organization whose primary purpose is to provide and develop decent 
affordable housing for the community it serves. 

[End of table] 

IDIS expenditure data show that for each of the last 11 fiscal years, 
grantees have recorded more than 80 percent of CDBG administrative 
expenses under the general program administration matrix code, which 
captures salaries among other things (see fig. 1).[Footnote 14] Our 
analysis showed that the second most used matrix code (ranging from 
about 11 to 14 percent from fiscal years 2001 to 2011) was the 
planning code, which captures program planning activity costs such as 
the development of grantees' consolidated plans. The amount charged 
under the remaining matrix codes ranged from about 5 percent to 9 
percent. 

Figure 1: Use of Administrative Matrix Codes, from Fiscal Years 2001 
through 2011: 

[Refer to PDF for image stacked vertical bar graph] 

Year: 2001; 
General program administration: 84.5%; 
Planning: 11%; 
State administration: 0; 
State planning: 0; 
Indirect costs: 2%; 
Fair housing activities: 1.8%; 
Other: 0.9%. 

Year: 2002; 
General program administration: 82.9%; 
Planning: 12.7%; 
State administration: 0; 
State planning: 0; 
Indirect costs: 1.9%; 
Fair housing activities: 1.9%; 
Other: 0.7%. 

Year: 2003; 
General program administration: 82.1%; 
Planning: 13.7%; 
State administration: 0; 
State planning: 0; 
Indirect costs: 1.9%; 
Fair housing activities: 1.8%; 
Other: 0.5%. 

Year: 2004; 
General program administration: 83.2%; 
Planning: 12.4%; 
State administration: 0; 
State planning: 0; 
Indirect costs: 2.2%; 
Fair housing activities: 1.7%; 
Other: 0.5%. 

Year: 2005; 
General program administration: 82.7%; 
Planning: 12.9%; 
State administration: 0; 
State planning: 0; 
Indirect costs: 2.3%; 
Fair housing activities: 1.5%; 
Other: 0.5%. 

Year: 2006; 
General program administration: 83.7%; 
Planning: 12.6%; 
State administration: 0; 
State planning: 0; 
Indirect costs: 1.6%; 
Fair housing activities: 1.7%; 
Other: 0.4%. 

Year: 2007; 
General program administration: 84.6%; 
Planning: 11.7%; 
State administration: 0; 
State planning: 0; 
Indirect costs: 1.6%; 
Fair housing activities: 1.7%; 
Other: 0.4%. 

Year: 2008; 
General program administration: 83.2%; 
Planning: 12.6%; 
State administration: 0; 
State planning: 0; 
Indirect costs: 2.0%; 
Fair housing activities: 1.6%; 
Other: 0.6%. 

Year: 2009; 
General program administration: 82.1%; 
Planning: 12.3%; 
State administration: 0.9%; 
State planning: 0.8%; 
Indirect costs: 1.5%; 
Fair housing activities: 1.8%; 
Other: 0.7%. 

Year: 2010; 
General program administration: 82.3%; 
Planning: 12%; 
State administration: 1.5%; 
State planning: 0.6%; 
Indirect costs: 1.3%; 
Fair housing activities: 1.8%; 
Other: 0.4%. 

Year: 2011; 
General program administration: 81.6%; 
Planning: 11.7%; 
State administration: 2.4%; 
State planning: 0.6%; 
Indirect costs: 1.5%; 
Fair housing activities: 1.8%; 
Other: 0.5%. 

Source: GAO analysis of IDIS expenditure data. 

[End of figure] 

The matrix code used most often, general program administration, is 
broad. HUD's guidance indicates that this category is to include 
salaries but allows other general expenses to be charged to it. 
Therefore, using HUD's matrix code data to determine how much of the 
expenses were for salaries is not possible.[Footnote 15] However, 
officials from all 12 grantees we interviewed told us that they 
primarily used their CDBG administrative funds to pay the salaries of 
employees who oversaw and managed the grant. They also noted that they 
used some funds to pay for supplies, training, travel, and planning 
costs. 

Grantees Have Cut Staff and Projects to Adjust to Reduced 
Administrative Funding: 

As overall CDBG allocations have decreased, the funding available to 
states, entitlement communities, and insular areas for administrative 
expenses has also fallen. Specifically, total CDBG funding for these 
grantees decreased from about $4.4 billion in fiscal year 2001 to 
about $2.9 billion in fiscal year 2012 (a reduction of about 33 
percent). As a result, the amount of funding available to grantees 
from CDBG grants for administrative costs decreased by 33 percent in 
nominal dollars from fiscal years 2001 through 2012.[Footnote 16] Once 
adjusted for inflation, the funds available for administrative costs 
decreased by 47 percent.[Footnote 17] Specifically, the aggregate 
amount available to CDBG grantees for administrative costs for fiscal 
year 2012 was $590 million, down from approximately $881 million in 
fiscal year 2001 nominal dollars (see fig. 2). This amount represents 
a reduction of about $292 million in nominal dollars, or $532 million 
in fiscal year 2012 constant dollars. 

Figure 2: CDBG Funding Available for Administrative Expenses in 
Nominal and Fiscal Year 2012 Constant Dollars, Fiscal Years 2001 
through 2012: 

[Refer to PDF for image: multiple line graph] 

Year: 2001; 
Nominal dollars: $881 million; 
2012 constant dollars: $1.122 billion. 

Year: 2002; 
Nominal dollars: $870 million; 
2012 constant dollars: $1.089 billion. 

Year: 2003; 
Nominal dollars: $869 million; 
2012 constant dollars: $1.067 billion. 

Year: 2004; 
Nominal dollars: $868 million; 
2012 constant dollars: $1.038 billion. 

Year: 2005; 
Nominal dollars: $825 million; 
2012 constant dollars: $956 million. 

Year: 2006; 
Nominal dollars: $743 million; 
2012 constant dollars: $834 million. 

Year: 2007; 
Nominal dollars: $743 million; 
2012 constant dollars: $809 million. 

Year: 2008; 
Nominal dollars: $719 million; 
2012 constant dollars: $765 million. 

Year: 2009; 
Nominal dollars: $729 million; 
2012 constant dollars: $766 million. 

Year: 2010; 
Nominal dollars: $790 million; 
2012 constant dollars: $822 million. 

Year: 2011; 
Nominal dollars: $661 million; 
2012 constant dollars: $673 million. 

Year: 2012; 
Nominal dollars: $590 million; 
2012 constant dollars: $590 million. 

Source: GAO analysis of CDBG allocation data. 

[End of figure] 

The 12 grantees we interviewed reported that they had taken various 
steps to address this reduction in available funding, ranging from 
reducing staff to improving record keeping to better enable them to 
allocate expenses. 

Reducing staff. Three grantees we interviewed told us they had reduced 
the number of staff that administered the CDBG program. For example, 
officials from one grantee said that the organization had placed a 
moratorium on hiring CDBG staff, and representatives from another said 
that the organization had reduced its staff by half and hired a 
consultant to administer the program. 

Leveraging supplemental funding sources. Officials from two grantees 
told us they had begun paying the salaries of existing staff with non-
CDBG funding. For example, one grantee used its local funds to 
supplement the salaries of CDBG staff. 

Limiting the number and types of projects. Three grantees told us that 
they had limited the number and types of projects they administered to 
address the reduction in funds. For example, officials from a grantee 
we contacted told us that they had revisited the consolidated plan to 
determine which CDBG activities the city could continue to fund and 
had determined that it could no longer administer its housing 
rehabilitation program. Similarly, an official from another grantee 
told us that the city had reduced the number of CDBG subrecipients it 
administered by half and developed a strategy of selecting less 
administratively burdensome grants. 

Some grantees also said that they selected projects based on the 
priorities and needs of the communities they served and not on the 
need to reduce administrative costs, but six indicated that the 
administrative limit did affect the type of projects they chose. For 
example, one grantee told us that it did not fund economic development 
projects under CDBG because it did not have the capacity to administer 
them. Similarly, officials from another grantee told us that funding a 
planning grant could depend on whether the grantee was close to the 
limit. In addition, an official from another grantee told us that the 
staff tried to manage many of their projects through larger 
subrecipients as a way to mitigate administrative expenses. 

Sharing grant administration. An official from a grantee we 
interviewed told us that a group of grantees had decided to share CDBG 
administrative costs. According to the grantee's website, the group 
coordinates activities conducted by the six participating entitlement 
communities, which are located in the same county. Group members have 
jointly prepared the 5-year consolidated plan, analyzed impediments to 
fair housing choice, and coordinated and collaborated in the CDBG 
application process and monitoring practices. According to the 
official, joining this group has helped participating entitlement 
communities save millions of dollars and made program administration 
more efficient. 

Improving record keeping. Officials from one grantee told us that they 
had taken steps to improve record keeping so that they could link more 
administrative costs to specific projects (i.e., claim more activity 
delivery costs) as a way of reducing administrative costs. 
Specifically, officials said that historically they had shared the 20 
percent of funds available for administration with their 
subrecipients. However, in 2011 the grantee decided to end this 
practice because of the reduction in available administrative funding. 
As part of this decision, the grantee evaluated the costs each 
subrecipient was charging as administrative and determined that they 
were more aligned with the definition of an activity delivery cost. 
The grantee instructed the subrecipients to report these costs as 
activity delivery costs. 

While the grantees have taken a number of steps to address declining 
funds available for administering CDBG as the program has gotten 
smaller, the vast majority of the grantees we spoke with told us that 
a reduction in the statutory limit on using funds for administration 
would have a significant impact on their ability to administer and 
oversee the projects they implemented with CDBG funding. Nine of the 
grantees we contacted said that lowering the limit would require them 
to reduce the number of CDBG staff or limit the number and type of 
projects they administered. For example, officials from a grantee said 
that they would be required to further reduce their CDBG staff and 
that the reductions would have an impact on their ability to manage 
and monitor the program. In addition, officials from other grantees 
said that a reduction might require them to cut back on their planning 
activities or undertake relatively large construction and 
infrastructure projects that carried a smaller administrative burden 
than projects such as mortgage assistance. Limiting the type or number 
of projects grantees administer could reduce some of the 
administrative burden of the program, but some grantees and national 
organizations representing CDBG grantees that we interviewed pointed 
out that certain fixed costs were associated with administering the 
CDBG program. These include preparing the required plans and reports 
and complying with other reporting requirements. Finally, officials 
from three grantees told us that grantees receiving relatively small 
CDBG grants might need to evaluate their ability to continue 
administering the CDBG program if the funds that could be used for 
administration were further limited. Officials explained that 
administering a small CDBG grant might not be cost-effective because 
of the program's complex reporting requirements. 

HUD Does Not Routinely Assess Compliance with the Administrative Limit 
Across the Program: 

Incomplete data, technical limitations of IDIS, and reliance on field 
office oversight have meant that HUD has not routinely assessed 
compliance with the limit on the use of funds for administration 
across the program. A recent congressional request for HUD to provide 
information on compliance across the program resulted in a labor-
intensive process that we determined produced unreliable results. 
Internal control standards state that information should be recorded 
and communicated in a form and within a time frame that enables 
management and others to carry out their internal control and other 
responsibilities.[Footnote 18] Specifically, internal control guidance 
states that operating information should be provided to managers so 
that they may determine whether their programs comply with applicable 
laws and regulations.[Footnote 19] The guidance also states that 
information should be presented appropriately and available on a 
timely basis to allow for effective monitoring and prompt action if 
shortcomings are found. Further, as noted previously, there has been 
congressional interest in reducing the limit on administration in 
order to direct limited funds to worthwhile community development 
activities and to reduce instances of waste, fraud, and abuse among 
CDBG grantees. We found that HUD's process for assessing compliance 
with the administrative limit for CDBG funds did not allow for 
effective monitoring across the program or for providing data that 
would inform Congress about the efficient use of these funds. 

Annually, each grantee generates a financial summary report that 
contains information on the CDBG funds available and expenditures 
incurred, including the percentage of funds used for administration. 
HUD relies on this report, which shows all the information needed to 
complete the calculation as well as the final percentage of funds the 
grantee has obligated or spent on administration, to determine if 
grantees are within the statutory limit.[Footnote 20] As noted 
previously, entitlement communities are considered to be in compliance 
if their total obligations for administration during the most recent 
program year are no more than 20 percent of the grant and program 
income for that year. Meanwhile, states are in compliance if their 
total expenditures for administration are no more than 20 percent of 
each grant and program income. 

Grantees generate the financial summary report using data from IDIS 
and make any needed adjustments based on data in their internal 
accounting systems. The information on expenditures and program income 
is available in IDIS, because grantees use it to request funds for 
CDBG activities they administer and report their program income. 
However, because compliance with the administrative limit for 
entitlement communities is assessed based on obligations and not just 
on expenditures, they may need to use additional information from 
their own internal accounting systems to report unliquidated 
obligations.[Footnote 21] For example, one entitlement community we 
spoke with had to enter unliquidated obligations when a planning 
project ultimately took less staff time than anticipated and not all 
of the funds obligated to that activity were disbursed during that 
program year. According to the grantee, the unused funds eventually 
were reallocated to other eligible activities. In addition, according 
to several grantees we spoke with, grantees may need to make other 
adjustments for a number of reasons. For example, grantees may need to 
reconcile differences between data in their internal accounting 
systems and information in IDIS, account for program income or 
administrative expenditures that were not assigned to the correct 
program year in IDIS or entered after the program year was complete, 
or correct other errors in IDIS.[Footnote 22] Table 2 provides an 
example of how compliance is determined for entitlement communities. 
In this hypothetical example, the grantee is in compliance with the 20 
percent limit. 

Table 2: Illustration of How Compliance with the CDBG Administrative 
Limit for Entitlement Communities Is Calculated for a Program Year: 

Total grant amount: $1,000,000. 

Program income: 50,000. 

Adjustment to total subject to the administrative limit[A]: 0. 

Basis for calculating the administrative limit: $1,000,000. 

Multiplied by 20 percent: x 0.20. 

Maximum dollar amount that may be obligated for administration: 
$210,000. 

Disbursed in IDIS for administration: $150,000. 

Unliquidated obligations for administration at end of current program 
year: $35,000. 

Unliquidated obligations for administration at end 
of previous program year[B]: ($20,000). 

Adjustment to total obligations for administration[C]: $5,000. 

Total obligations for administration: $170,000. 

Percent of funds obligated for administration: 16.19%. 

Source: HUD guidance. 

Note: This example is for illustrative purposes only. 

[A] Used by grantee only if necessary to adjust the total amount 
subject to the administrative limit (i.e., adding program income not 
reported in IDIS). 

[B] By subtracting the unliquidated obligations for administrative 
activities that were reported in the previous program year, the grantee 
can avoid double-counting any disbursements made for those activities 
in the current program year; these are captured in the disbursements 
from IDIS for the current program year. 

[C] Used by grantee only if necessary to adjust the amount obligated 
for administration (i.e., adding disbursements for administrative 
activities not assigned the correct year in IDIS). 

[End of table] 

While HUD can use a financial summary report to determine an 
individual grantee's compliance with the administrative limit, two 
factors limit HUD's ability to use IDIS to determine compliance across 
the program. First, as noted previously, the financial summary reports 
used to assess compliance with the limit allow for certain 
adjustments, but grantees are not required to save these adjustments 
in IDIS. In July 2006, we reported that adjustments entered in 
financial summary reports were not saved in IDIS.[Footnote 23] We 
recommended that HUD centrally maintain this information, and in 2010 
HUD made changes to IDIS to allow grantees to save the adjustments in 
the system but did not make the "save" function automatic. Instead, 
grantees must manually select a "save" option in order to save their 
changes in the system. If they do not choose this option, the 
information is not saved. In addition, HUD officials told us that 
grantees were not required to complete their financial summary reports 
in IDIS. In such cases, the system would not reflect any adjustments 
grantees made to the amount of funds they used for administration. 
While HUD officials do receive copies of the financial summary reports 
from all grantees, they do not have electronic access to the 
adjustments if grantees did not save the information.[Footnote 24] 

Difficulties in determining compliance across the program that were 
associated with saving adjustments in IDIS are further exacerbated 
when corrections have to be made to financial summary reports. When 
reviewing the reports, HUD officials have found that grantees have 
sometimes made reporting errors. These include miscategorizing 
expenditures for administration, failing to report program income, and 
failing to enter unliquidated obligations or other adjustments. HUD 
allows grantees to revise the information in IDIS or on their 
financial summary reports if such errors occur. However, if a grantee 
makes any changes to the report and does not save the adjustments in 
IDIS, the updated report that HUD officials download will not reflect 
the actual percentage of funds used for administration. 

Second, HUD does not maintain the necessary information in an easily 
accessible format and therefore has no simple way to monitor or report 
on compliance with the administrative limit across the program. 
Currently, each financial summary report that a grantee submits is 
saved as a separate document in IDIS. The adjustments made to 
calculate compliance are not separate data elements in IDIS that can 
be extracted and analyzed. Rather, the information is contained only 
in the individual reports. As a result, HUD officials must review each 
individual financial summary report to determine grantees' compliance 
with the limit. To report on compliance with the limit across the 
program, they must compile all of these reports and manually create a 
summary. HUD undertook such an exercise in 2011 in response to a 
congressional request to report on compliance across the program with 
the statutory limit on funds used for administration. HUD officials 
told us that staff at HUD's field offices went through a laborious 
process of compiling a database of grantees' financial summary reports 
for a single program year (2010) and manually entering the percentage 
that each grantee used for administration. 

For the purposes of this report, we also requested a summary of 
grantees' compliance with the statutory limit and were provided with 
this same database. In addition to the fact that the exercise covered 
only one year, we found the results to be unreliable. During our 
review of the database that HUD prepared for program year 2010 and the 
financial summary reports that supported it, our analysis revealed a 
number of data entry errors. Additionally, information was either 
missing or could not be verified based on the source reports. While a 
number of these errors were resolved during the course of our 
communications with HUD, we determined the database was unreliable for 
the purpose of describing grantees' compliance in program year 2010. 
Instead, we used the individual financial summary reports to create 
our own summary showing the percentages of funds used for 
administration that grantees reported.[Footnote 25] Our analysis 
showed that in program year 2010 less than 2 percent of entitlement 
communities exceeded the limit on administration. Almost 60 percent 
obligated between 15 percent and 20 percent of their funds for 
administration (see figure 3). 

Figure 3: Percentage of CDBG Funds Entitlement Communities Obligated 
for Administration, Program Year 2010: 

[Refer to PDF for image: vertical bar graph] 

Percent of funds obligated to administration: less than 5%; 
Percent of entitlement communities: 4%; 
Grantees: 41. 

Percent of funds obligated to administration: more than or equal to 5% 
to less than 10%; 
Percent of entitlement communities: 8%; 
Grantees: 85. 

Percent of funds obligated to administration: more than or equal to 
10% to less than 15%; 
Percent of entitlement communities: 24%; 
Grantees: 273. 

Percent of funds obligated to administration: more than or equal to 
15% to less than 20%; 
Percent of entitlement communities: 59%; 
Grantees: 669. 

Percent of funds obligated to administration: more than or equal to 
20%; 
Percent of entitlement communities: 2%; 
Grantees: 22. 

Source: GAO analysis of entitlement communities' financial summary 
reports. 

[End of figure] 

The financial summary reports HUD provided for states were for program 
year 2010 or 2011. We could not use these reports to describe state 
grantees' compliance with the administrative limit because, as 
mentioned earlier, each state's compliance is based on the percentage 
of each grant spent on administration rather than the percentage of 
each program year's obligations, as is the case for entitlement 
communities. HUD officials said that they determined compliance with 
the limit when grants were fully spent by using data on expenditures 
in IDIS to generate a financial summary report. 

Although they did not provide specifics, HUD officials told us that 
technical changes would have to be made to IDIS in order to give it 
the capability to generate reports on compliance with the 
administrative limit across the program. They also told us that any 
changes would need to be approved by the IDIS Change Control Board and 
then assigned to contractors. They added that such changes would not 
be possible for at least 12 to 18 months because a number of IDIS 
updates were already planned for 2013. Further, they noted that the 
changes were unnecessary because the agency's practice was to rely on 
field office staff to monitor and assess, at least annually, 
individual grantees' compliance with the administrative limit rather 
than to assess compliance across the program. Without information on 
annual compliance across the program, however, HUD lacks the ability 
to monitor the grantees across the program. As noted previously, its 
recent attempt to do so was labor intensive and yielded unreliable 
results. In addition, because our analysis showed that the majority of 
entitlement communities in program year 2010 obligated between 15 
percent and 20 percent of their funds for administration, HUD's lack 
of information on compliance across the program limits its ability to 
determine how many may be affected by more stringent requirements. 

Conclusions: 

A recent proposal by a House appropriations subcommittee to reduce the 
percentage of CDBG program funds that may be used for administration 
below the traditional 20 percent has highlighted the need for HUD to 
analyze and report on grantees' compliance with the current limit 
across the program. While grantees are responsible for complying with 
the limit, internal control guidance states that information needed to 
assess compliance with laws and regulations should be timely and 
reported in a manner that allows for effective monitoring. However, 
HUD faces difficulty in routinely reporting compliance across the 
program. Because of limitations in IDIS, HUD's recent attempt to 
report on grantee compliance across the program for a single year 
required a labor-intensive process that ultimately produced data that 
were not reliable. Specifically, grantees are able to save in IDIS 
certain information needed to determine the amount they used for 
administration, but they are not required to do so. As a result, these 
data may not be readily available to HUD officials. Furthermore, 
system limitations prevent HUD officials from extracting and analyzing 
data contained within grantees' financial summary reports that would 
allow HUD to assess and report on compliance across the program. 
Without this information, HUD cannot provide timely assurance that 
recipients are adhering to the limit or the number that are close to 
the limit. Additionally, a standard report listing the percentage that 
each grantee spent on administration would be a useful evaluative 
tool. For example, it would help determine the potential impact of any 
change to the statutory limit on administrative funds. 

Recommendation for Executive Action: 

In order to demonstrate compliance across the program with the 
statutory limit on funds that can be used for administration, the 
Secretary of HUD should direct the Assistant Secretary for Community 
Planning and Development to develop a process for generating annual 
reports on compliance across the program, including making any 
requisite changes to IDIS to better ensure that the agency has 
complete and analyzable data to support such reporting. 

Agency Comments and Our Evaluation: 

We provided a copy of this draft report to HUD for its review and 
comment. HUD provided written comments on the draft, which are 
summarized below and appear in their entirety in appendix II. HUD did 
not specifically state whether it agreed or disagreed with our 
recommendation but did provide comments on some of our findings and 
conclusions. 

First, HUD responded to our conclusion that it lacks information 
across the program on grantees' compliance with the 20 percent limit 
on administration. HUD stated that our conclusions incorrectly implied 
that the agency was subject to a statutory or regulatory requirement 
to determine cumulative grantee obligations relative to the limit on a 
nationwide or programwide basis. HUD noted that determining a 
nationwide statistic on the percentage of funds obligated for 
administration would reveal nothing about individual grantee 
compliance. However, our recommendation would not require HUD to 
determine cumulative obligations or a nationwide statistic on the 
percentage of funds obligated. Rather, our recommendation would 
require that HUD generate annually the same type of compliance report 
it prepared in 2011 in response to a congressional request. That 
report included the percentage that each CDBG grantee used for 
administration across the program. Rather than being statutory or 
regulatory, our conclusion speaks to general management of the 
program. Specifically, internal control guidance states that 
information needed to assess compliance with laws and regulations 
should be timely and reported in a manner that allows for effective 
monitoring and prompt action if shortcomings are found. Such an 
approach would also be consistent with congressional concerns about 
the efficient use of CDBG funds. As a result, we clarified that we 
were recommending that HUD report on compliance across the program. We 
also added language to further stress the importance of such reporting. 

Second, HUD said that it was unclear why we concluded that the 
database the agency compiled to report on compliance with the limit on 
administration in program year 2010 was unreliable. HUD pointed out 
that we used the financial summary reports contained within the 
database to prepare our own analysis. Our draft report did note that 
we had determined that these financial summary reports were reliable 
for the purposes of describing grantees' compliance with the 
administrative limit. What we found to be unreliable was HUD's 
analysis of them. For example, as noted in the scope and methodology 
appendix, we found a number of data entry errors in the database field 
that was to indicate the percentage of funds each grantee used for 
administration. We also were unable to verify some of the percentages 
that were based on the source reports. While a number of these errors 
were resolved during the course of our communication with HUD, we 
decided that it would be more reliable to use the financial summary 
reports to create our own summary analysis of the percentages of funds 
that grantees used for administration in program year 2010. We made no 
change in response to this comment. 

Third, HUD responded to our conclusion that almost 60 percent of 
entitlement communities obligated an amount that was at or close to 
the 20 percent limit. HUD commented that this conclusion implied that 
if HUD had more accurate data, it would find that some grantees were 
actually exceeding the 20 percent limit. Our draft report made no such 
linkage; instead, it noted that because our analysis showed that the 
majority of entitlement communities in program year 2010 were at or 
near the administrative limit (between 15 and 20 percent), HUD's lack 
of information on compliance across the program limits any type of 
analysis to determine how many may be affected by more stringent 
requirements. HUD also observed that 15 percent was not "just under" 
the 20 percent limit. In response to this comment, we revised how we 
presented these data. 

Finally, HUD responded to a statement in the draft report concluding 
that HUD's process for assessing compliance with the administrative 
limit did not allow for effective monitoring across the program. HUD 
provided additional information about the types of reviews that its 
field office staff conduct annually of state grantees' compliance with 
the limit on administration. However, our point was related not to 
HUD's assessment of state grantees' compliance but to our conclusion 
that HUD did not routinely report on compliance across the program. As 
our draft report noted, HUD can determine an individual grantee's 
compliance with the administrative limit but has to review each 
individual grantee's report and manually create a summary of 
compliance across the program. We made no change in response to this 
comment. 

HUD also provided a technical comment, which was incorporated into the 
report as appropriate. 

We are sending copies of this report to appropriate congressional 
committees and the Secretary of Housing and Urban Development. In 
addition, this report will be available at no charge on the GAO 
website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions on the matters discussed in 
this report, please contact me at (202) 512-8678 or by e-mail at 
shearw@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made major contributions to this report are 
listed in appendix III. 

Signed by: 

William B. Shear: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objectives of this report were to describe (1) the types of 
activities that are subject to the 20 percent limit on administration 
and the ways in which grantees have used their administrative funds, 
(2) trends in funds available to grantees for Community Development 
Block Grant (CDBG) administration and the impact of these trends on 
grantee spending, and (3) the Department of Housing and Urban 
Development's (HUD) reporting on grantee compliance with the limit. 

To identify and describe the types of activities subject to the 20 
percent limit on funds that can be used for administration, we 
examined and summarized relevant statutes, HUD regulations, and Office 
of Management and Budget guidance. We also interviewed HUD officials 
and a purposive, nonrandom sample of 12 CDBG grantees: the cities of 
Albany, Georgia; Antioch, California; Bowling Green, Kentucky; 
Houston, Texas; Newark, New Jersey; Oshkosh, Wisconsin; and Tustin, 
California; the counties of Northampton in Pennsylvania and Oakland in 
Michigan; and the states of Alaska, North Carolina, and Ohio. We used 
a database HUD field staff compiled that included the percentage that 
each grantee used for administration for program year 2010 as a 
starting point for selecting these grantees and used a two-step 
purposeful sampling procedure to select grantees with a range of 
experiences.[Footnote 26] The entitlement communities list contained 
1,134 grantees (including Washington D.C. and territories) and the 
state list contained 49 states and Puerto Rico. In the first step, we 
selected 47 grantees. We intentionally chose entitlement communities 
based on the percentages obligated for administration (less than or 
equal to 15 percent, 16 percent to 20 percent, and greater than 20 
percent) and region of the country (Midwest, Northeast, South, and 
West).[Footnote 27] From the entitlement community list, we selected 
three grantees within each of the 12 subgroups created by the 
combination of the four regions and three administrative spending 
levels. Applying these criteria resulted in 35 entitlement 
communities.[Footnote 28] From the state list, we randomly selected 
three grantees from each region for a total of 12 states. In the 
second step, we selected 12 grantees from the 47 entitlement 
communities and states initially selected. Specifically, for the 47 
entitlement communities and states, we determined their fiscal year 
2012 CDBG allocations and categorized them as above or below the 
median allocation of entitlement communities or states, based on the 
type of grantee. We then selected 12 grantees based on diversity in 
allocation amount, percentage used for administration, and region of 
the country. Because we used a nongeneralizable, purposive sample to 
select grantees, our findings cannot be used to make inferences about 
other grantees not in the sample. However, we determined that the 
selection of these grantees was appropriate for gaining an 
understanding of grantees' experiences with the administrative limit 
and that the selection would generate valid and reliable evidence to 
support our work. We found HUD's database reliable for selecting our 
sample; however, as described later in this appendix, we did not find 
the database reliable for the purpose of describing grantees' 
compliance in program year 2010. 

To determine how grantees have used their administrative funds, we 
interviewed HUD officials, reviewed the selected grantees' annual 
reports to HUD for 2010 or 2011, and reviewed and summarized 
expenditure data from HUD's Integrated Disbursement & Information 
System (IDIS).[Footnote 29] Specifically, we analyzed the expenditures 
reported under broad categories, or matrix codes, used to record 
administrative expenses to determine which codes were the most often 
used to report the grantees' administrative expenditures from fiscal 
years 2001 through 2011. We assessed the reliability of these data by 
performing basic electronic testing of relevant data elements, 
reviewing HUD's data dictionaries, and interviewing HUD officials 
knowledgeable about the data. We determined that these data were 
sufficiently reliable for analyzing different administrative spending 
categories. We also reviewed HUD's guidance and training manuals to 
determine the extent to which HUD was providing guidance on funds that 
can be used for administration. 

To determine the availability of CDBG funds for administrative 
expenses, we interviewed HUD officials and analyzed CDBG allocation 
data. Specifically, we used the programwide CDBG allocation amount to 
calculate the aggregate amount available to grantees for 
administrative expenses under the 20 percent limit for each year from 
2001 through 2012.[Footnote 30] To assess the reliability of these 
data, we reviewed information about the data and compared selected 
allocation amounts with other sources. We determined that the data 
were sufficiently reliable for estimating the amount of CDBG funding 
that could be available for administrative expenses. We also 
interviewed the selected grantees, HUD officials, and representatives 
from national organizations representing CDBG grantees to obtain their 
views on whether the 20 percent limit had affected the types of 
activities grantees chose to fund. The national organizations we 
interviewed were the Council of State Community Development Agencies, 
National Association for County Community and Economic Development, 
and National Community Development Association. 

To determine HUD's ability to report on grantee compliance with the 
administrative limit, we interviewed HUD officials and the selected 
grantees about how HUD verifies and reports grantees' compliance. We 
then compared HUD's reporting on grantee compliance with internal 
control standards for the federal government. In order to describe 
grantees' compliance in program year 2010, we first attempted to use 
the database HUD had compiled that included the grantees' financial 
summary reports--showing the calculations used to determine compliance 
with the administrative limit--and the percentage that each grantee 
used for administration in program year 2010. According to HUD 
officials, the database was compiled by field office staff manually in 
response to a congressional request. The staff entered the percentage 
that each grantee used for administration, as reported in the 
grantee's financial summary report, and then attached the report to 
the database. In order to assess the reliability of the database, we 
compared the percentages entered in the database to the percentages in 
the attached financial summary reports. We found a number of data 
entry errors and were unable to verify some of the percentages based 
on the source reports. While a number of these errors were resolved 
during the course of our communication with HUD, we decided it would 
be more reliable to use the attached financial summary reports to 
create our own summary of the percentages of funds that grantees used 
for administration in program year 2010. As previously discussed, the 
reports from the database were compiled by HUD field office staff. For 
some individual grantees, we used updated financial summary reports 
and information provided to us by HUD or grantees. Of the 1,134 
entitlement communities included in HUD's database, we did not report 
on the percentage obligated for administration for 44 entitlement 
communities. We excluded 36 entitlement communities because the 
reports HUD provided were not for program year 2010, 7 entitlement 
communities because HUD did not provide their reports, and 1 
entitlement community because HUD provided two different versions of 
the report. We determined that the financial summary reports we used 
in our analysis were reliable for the purposes of describing grantees' 
compliance with the administrative limit by reviewing documents 
describing how the reports were prepared and interviewing HUD 
officials about their oversight of the reports. As noted previously, 
we assessed IDIS data on administrative expenses, which are included 
in the financial summary reports, and determined they were reliable 
for our purposes. 

We conducted this performance audit from July 2012 to March 2013 in 
accordance with generally accepted government auditing standards. 
These standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Department of Housing and Urban 
Development: 

U.S. Department of Housing and Urban Development: 
Office of Community Planning and Development: 
Washington, DC 20410-7000: 

February 21, 2013: 

Mr. William B. Shear: 
Director of Financial Markets: 
and Community Investment: 
U.S. Government Accountability Office: 
411 G Street, SW: 
Washington, DC 20548: 

Dear Mr. Shear: 

The accompanying enclosure conveys the response of the Department of 
Housing and Urban Development to a draft report by the U.S. Government 
Accountability Office (GAO) entitled: Reporting on Compliance with 
Limit on Funds Used for Administration Can Be Improved (GA043-247, 
engagement 4250683). 

The report makes the following recommendation: 

In order to demonstrate programwide compliance with the statutory 
limit on funds that can be used for administration, the Secretary of 
HUD should direct the Assistant Secretary for Community Planning and 
Development to develop a process for generating annual reports on 
programwide compliance, including making and requisite changes to IDIS 
to better ensure that the agency has complete and analyzable data to 
support such reporting. 

Enclosed are the comments from HUD's Office of Community Planning and 
Development with respect to GAO's draft report. If you have any 
questions regarding these comments, please contact Stan Gimont at 202-
402-4559. 

Thank you for your interest in the Department's programs. 

Sincerely, 

Signed by: 

Yolanda Chavez: 
Deputy Assistant Secretary for Grant Programs: 

Enclosure: 

HUD Response to GAO Draft: 
Reporting on Compliance with Limit on Funds Used for Administration 
Can Be Improved: 
GA0-13-247, engagement 250683): 

Thank you for the opportunity to comment on the draft report. 

First, at the top of page 18 and immediately thereafter in the 
"Conclusions", GAO concludes that "Without information on annual 
programwide compliance...HUD lacks the ability to monitor the grantees 
across the program." These statements incorrectly imply that there is 
some statutory or regulatory basis to determine cumulative grantee 
obligations relative to the cap on a nationwide or program-wide basis. 
There is no such requirement. The requirement in HUD's appropriation 
acts and in the CDBG regulations is that each grantee comply with the 
cap on its own. Determining, for instance, that Entitlement grantees 
nationwide obligated 18.5 percent of their funds in any given year for 
administrative costs tells us nothing about whether any individual 
grantee complied. Furthermore, given the fundamental differences in 
measuring compliance between the State and Entitlement CDBG programs. 
it would be impossible to determine a percentage for the CDBG program 
as a whole at a specific point in time. 

In multiple places, GAO characterizes as "unreliable" the 2010 data 
that HUD collected in response to the Congressional information 
request: in the "What GAO Found" summary; at the bottom of page 12; at 
the bottom of page 16; in the middle of page 22. However, only a 
general explanation is provided as to why GAO concluded that 
information to be unreliable. For example, from page 16: 

"...a number of data entry errors. Additionally, information was 
either missing or could not be verified based on the source reports. 
While a number of these errors were resolved during the course of our 
communications with HUD, we determined the database was unreliable..." 

GAO does not provide any figures on numbers of missing or errant 
grantee reports. GAO then makes a statement near the top of page 3 
saying: 

"...we analyzed financial summary reports on grantee compliance with 
the administrative limit for program year....We found these reports to 
be reliable for commenting on compliance with the limit." 

Assuming that the report refers to GAO's data collection/analysis 
process rather than HUD's (otherwise this statement would contradict 
the above-cited references), it is unclear how the GAO-generated 
data/analysis differs from the HUD-collected data, given that both 
used the same grantee-generated PY2010 financial summary reports from 
IDIS. 

In two instances. GAO notes that -60 percent of entitlement 
communities...obligated an amount that was at or close to the 20 
percent limit." For example, in the "What GAO Found" summary: top of 
page 18. The implication seems to be that if HUD had more (or more 
accurate) data, HUD would find that some number of these grantees 
actually exceeded the 20 percent cap. HUD considers it just as-—if not 
more—-likely that this is because grantees do take the 20 percent 
administrative cap seriously and make a conscious effort to stay 
within the cap without exceeding it. Furthermore, HUD notes that 15 
percent is not just under the limit of 20 percent (it is a 25 percent 
difference). Therefore the statement that 60 percent of the grantees 
were just under the limit may be misleading. 

Footnote 9, Page 4 reads as follows: 

"For states, the expenditures subject to the 20-percent limit on 
administration are the sum of the states' own administrative costs and 
the administrative costs of nonentitlement communities. A state may 
use CDBG funds to pay its own administrative costs of up to $100,000 
and must match its administrative costs in excess of $100,000 on a 
dollar-for-dollar basis. In addition. States may use CDBG funds for 
technical assistance, such as to improve nonentitlement communities' 
reporting capabilities. Unlike funds used for a State's administrative 
costs, funds used for technical assistance are not considered when 
calculating compliance with the 20-percent limit and do not need to be 
matched. However, CDBG funds used to pay a State's administrative 
costs and technical assistance cannot, in the aggregate, exceed 3 
percent of its annual CDBG funding." 

The last sentence should be changed to read as follows: 

"However, CDBG funds used to pay a State's administrative costs cannot 
exceed $100,000 plus 3% of the State's CDBG grant plus program income, 
and technical assistance cannot exceed 3% of the State's CDBG grant 
plus program income, and in the aggregate, administrative and 
technical assistance cannot exceed $100,000 plus 3 percent of the 
State's CDBG grant plus program income." 

On page 13, the first paragraph states, "We did not find that HUD's 
process for assessing compliance with the administrative limit for 
CDBG funds allowed for effective monitoring across the program." For 
the State CDBG program. the field office analyzes the administrative 
cap in its review of the Performance Evaluation (PER) report. This 
review provides HUD with an effective evaluation of whether each State 
is in compliance with the administrative cap requirements. The review 
requirements for the PER, are contained in CPD Notice 11-03, and the 
administrative caps are covered in Attachments 4A and 5. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

William B. Shear, (202) 512-8678 or shearw@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, A. Paige Smith, Assistant 
Director; Emily Chalmers; Pamela Davidson; Anar Ladhani; John McGrail; 
Josephine Perez; and Deena Richart made key contributions to this 
report. 

[End of section] 

Footnotes: 

[1] Entitlement communities are (1) principal cities of metropolitan 
areas, (2) other metropolitan cities with populations of at least 
50,000, and (3) qualified urban counties with populations of at least 
200,000 (excluding the population of entitled cities). Other 
communities must apply to states for CDBG funding because they do not 
qualify as entitlement communities. 

[2] HUD refers to "planning, management, and administration" as 
general administration. For purposes of this report, we will use the 
term "administration." 

[3] H. R. Conf. Rep. No. 284, 112TH Cong., 1st Session (2011). 

[4] IDIS is a management information system that contains CDBG funding 
data and reported expenditures, among other things. 

[5] The four insular areas are American Samoa, Guam, the Northern 
Mariana Islands, and the Virgin Islands. 

[6] Congress established the section 108 program in 1974 as part of 
the CDBG program. This program allows communities to borrow against 
their current and future CDBG allocations to fund large-scale housing 
rehabilitation and community and economic development projects. 

[7] Program income is gross income directly generated from the use of 
CDBG funds. Examples of program income include proceeds from the 
disposition of real property purchased or improved with CDBG funds and 
payments of principal and interest on loans made using CDBG funds. 

[8] By law, entitlement communities that used in excess of 15 percent 
of CDBG funds received for public service activities in fiscal year 
1982 or 1983 are allowed to continue to use the higher of the actual 
dollar amount or percentage of assistance in either of those years. 
Due to this provision, a total of 41 entitlement communities are 
allowed to use more than the 15 percent they would have been allowed 
if they were subject to the limit. 

[9] For states, the expenditures subject to the 20 percent limit on 
administration are the sum of the states' own administrative costs and 
the administrative costs of nonentitlement communities. A state may 
use CDBG funds to pay its own administrative costs of up to $100,000 
and must match its administrative costs in excess of $100,000 on a 
dollar-for-dollar basis. In addition, states may use CDBG funds for 
technical assistance, such as to improve nonentitlement communities' 
reporting capabilities. Unlike funds used for a state's administrative 
costs, funds used for technical assistance are not considered when 
calculating compliance with the 20 percent limit and do not need to be 
matched. However, CDBG funds used to pay a state's administrative 
costs cannot exceed $100,000 plus 3 percent of the state's CDBG grant 
plus program income, and technical assistance cannot exceed 3 percent 
of the state's CDBG grant plus program income. In the aggregate, these 
two cannot exceed $100,000 plus 3 percent of the state's CDBG grant 
plus program income. 

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

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

[12] The regulations outlining eligible planning and administrative 
costs for entitlement communities are found at 24 CFR Secs. 570.205 
and 570.206, respectively. Similar regulations for states are found at 
24 CFR Sec. 570.489(a)(3). 

[13] Entitlement communities use eight of these codes, and states can 
also use two additional codes that were introduced in fiscal year 2009. 

[14] In fiscal year 2009, HUD introduced state planning and state 
administration matrix codes for state grantees to use. As a result, 
the states' use of the general program administration code decreased 
slightly in fiscal years 2009 through 2011, but states still used it 
to report over 70 percent of their administrative expenses in fiscal 
year 2011. 

[15] Because the administrative matrix codes in IDIS were general in 
nature, we reviewed the 2010 or 2011 annual performance report for the 
12 grantees we interviewed to determine if they included detailed 
information about these expenses. Our review showed that these reports 
did not include such information. Specifically, although 5 of these 
reports included some information on the administrative tasks the 
grantees performed, none of the 12 reports included a section that 
provided detailed information on the CDBG administrative activities 
and their associated costs. According to HUD officials, grantees are 
not required to include this information in their annual performance 
reports. They stated that the agency collects data on administrative 
expenses only through IDIS. 

[16] CDBG grantees may also use a portion of their program income to 
fund administration. As noted above, grantees may use no more than 20 
percent of the sum of their CDBG grant and program income for 
administration. Because program income data were not readily 
available, our analysis of available administrative funding may be 
underestimated. In addition, not all grantees use 20 percent of their 
funds for administration. 

[17] We evaluated the amount of funding available to grantees from 
CDBG grants for administrative costs after adjusting for the general 
effects of inflation using a Bureau of Economic Analysis gross 
domestic product price index. We expressed these data in fiscal year 
2012 constant dollars. 

[18] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[19] GAO, Internal Control Management and Evaluation Tool, [hyperlink, 
http://www.gao.gov/products/GAO-01-1008G] (Washington, D.C.: August 
2001). 

[20] HUD officials told us that if a grantee was found to have 
exceeded the administrative cap, HUD field office officials determined 
the appropriate corrective action, which generally was to require 
grantees to reimburse to their CDBG program account the excess amount, 
using nonfederal funds. Additionally, HUD's monitoring strategy calls 
for its field offices to consider various risk factors when 
determining which recipients to review. Compliance with the 
administrative limit is one of many factors considered in assessing 
the risk level of grantees. 

[21] States do not need to make this particular adjustment, because 
their compliance with the administrative limit is based not on 
obligations during a program year but on the percentage of each grant 
that is actually spent on administration over the life of the grant. 
States must generate a separate financial summary for each open grant 
when submitting annual performance reports. States' compliance with 
the statutory limit on administrative activities can be determined 
only when the entire grant has been spent. 

[22] According to HUD officials, in recent years IDIS has been changed 
to allow grantees to record disbursements for a completed program year 
up to 90 days after the close of that program year and to flag them as 
the previous year's disbursements. However, grantees do not always use 
this functionality and therefore need to enter adjustments in the 
financial summary report to ensure that they are accounted for in the 
correct year. 

[23] GAO, Community Development Block Grants: Program Offers 
Recipients Flexibility but Oversight Can Be Improved, [hyperlink, 
http://www.gao.gov/products/GAO-06-732] (Washington, D.C.: July 28, 
2006). 

[24] Not all compliance calculations require adjustments. 

[25] We created our summary using the financial summary reports 
attached to the database HUD provided and financial summary reports 
HUD provided to us during the course of our review. The reports from 
the database were compiled by HUD field office staff. Of the 1,134 
entitlement communities included in HUD's database, we did not report 
on the percentage obligated for administration for 44 entitlement 
communities. We excluded 36 entitlement communities because the 
reports HUD provided were not for program year 2010, 7 entitlement 
communities because HUD did not provide their reports, and 1 
entitlement community because HUD provided two different versions of 
the report. For additional information on our scope and methodology, 
see appendix I. 

[26] For state grantees, the percentage included in the database was 
generally for the most recently completed grant year. Compliance with 
the administrative limit for entitlement communities is based on 
obligations in a given program year. Compliance for states is based on 
expenditures over the life of the grant. 

[27] We combined the West and Pacific U.S. Census regions into one 
region and called it "West." 

[28] Because there were only 2 entitlement communities in the 
Northeast that met our other criteria, we could select only 2 in that 
region, resulting in 35 instead of 36 entitlement communities. 

[29] IDIS is a management information system that consolidates 
reporting processes across HUD's Office of Community Planning and 
Development programs. 

[30] CDBG grantees may also use a portion of their program income to 
fund administrative expenses. Grantees may use no more than 20 percent 
of the sum of their CDBG grant and program income for administration. 
Because program income data were not readily available, our analysis 
of available funds for administration may be underestimated. In 
addition, not all grantees use 20 percent of their funds for 
administration. 

[End of section] 

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