The U. S. Department of Housing and Urban Development's (HUD) Office of Inspector General audited HUD's administration of the Community Development Block Grant (CDBG) set-aside for colonias (colonia set-aside). We performed the review because of concerns that surfaced during an audit survey of the state of Texas's colonia set-aside funds. That review showed that HUD had not issued regulations or handbooks that required compliance with Section 916 of the Cranston-Gonzalez National Affordable Housing Act of 1990 (Act). In addition, HUD could not determine whether Texas used its colonia set-aside funds in the most efficient and effective manner or whether it accomplished the intended purposes of providing water and sewage systems to the most needy colonia residents. Our audit objective was to determine whether HUD ensured that the states of New Mexico, Arizona, Texas, and California (states) expended colonia set-aside funds in compliance with the Act.

We found that HUD did not issue regulations or handbooks specific to the administration of the set-aside funds or develop performance measures to track accomplishments. Thus, it did not ensure that the states expended the funds in compliance with the Act and could not track accomplishments. Rather, HUD allowed the states to define colonias and determine how to distribute the funds. The states had different definitions of colonias and did not always prioritize funding to the colonias with the greatest needs as required. As a result, between 2004 and 2007, New Mexico and Arizona allocated or expended more than $8.4 million in colonia set-aside funds for projects that did not meet the requirements of the Act and did not meet the intended beneficiaries' basic health and safety needs. In addition, HUD could not report on the progress or effect of the set-aside funds in meeting the colonia residents' needs regarding water, sewage, and housing.

We recommend that HUD require the states of New Mexico and Arizona to support or repay more than $8.4 million. Further, HUD should implement effective internal controls to ensure that the states comply with the Act and implement performance measures specific to the colonia set-aside to help ensure that funds are used effectively to meet water, sewage, and housing needs of the colonia residents. By implementing effective controls, HUD can put more than $2.8 million to better use over the next 12 months.