We audited the U.S. Department of Housing and Urban Development’s (HUD) HOME Investment Partnerships Program (HOME) as part of our fiscal year 2009 annual audit plan. Our audit objectives were to assess the adequacy of HUD’s monitoring and implementation of requirements to recapture HOME funds not committed within two years and spent within five years, assess the adequacy of HUD’s monitoring and use of its Integrated Disbursement and Information System (information system), and assess whether it was appropriate for HUD to apply the cumulative technique for assessing deadline compliance and the first-in first-out method for committing and disbursing HOME funds to participating jurisdictions.

HUD needs to improve efforts to require participating jurisdictions to cancel more than $62 million in HOME fund balances for open activities that were committed more than five years ago. The prolonged delay or failure to cancel the fund balances caused an overstatement of commitments in HUD’s information system which prevented the accurate identification of funds that were subject to recapture by HUD or the United States Treasury. In addition to the excessive fund balances, we question the eligibility of more than $11.6 million disbursed to participating jurisdictions for activities that were more than five years old, showed evidence of stalled performance, and may have warranted their classification as terminated activities.

Participating jurisdictions made more than $20.9 million in incorrect commitment entries to the information system. The inaccuracies undermined the integrity of the information system and reports generated from the system. HUD did not routinely monitor the accuracy of commitments that participating jurisdictions entered into the information system, nor did it require participating jurisdictions to implement adequate internal controls over commitments they entered into the system. HUD missed the opportunity to identify and require correction of the types of deficiencies discussed in this report because it did not routinely monitor this area. The significant inaccuracies bring into question the reliability of commitments that other participating jurisdictions entered into the information system.

HUD used a cumulative technique for assessing deadline compliance and a first-in first-out method for HOME commitments and expenditures that conflicted with statutory requirements that require the identification of HOME commitments and expenditures by the program funding year to which they relate. The statutes make no mention of the cumulative technique and the first-in first-out method as acceptable alternatives. The two HUD practices contributed to the more than $62 million in old activities remaining open as discussed above. HUD would have recaptured the funds due to the missed five-year disbursement requirement were it not for the cumulative technique. The first-in first-out method, as described by HUD, contributed to misclassification of funds in HUD’s financial system that are subject to recapture by HUD or by the United States Treasury pursuant to a separate statutory deadline that will be in place starting September 30, 2009.

We recommend that HUD identify which of the old open activities have been completed or terminated, cancel those balances, recapture shortfalls generated by the cancellations, and require repayments for HOME expenditures on terminated activities. We further recommend that HUD implement procedures to ensure that field offices monitor the accuracy of future commitments that participating jurisdictions enter into HUD’s information system, and provide technical assistance to participating jurisdictions regarding what constitutes acceptable documentation for commitments. HUD should also require participating jurisdictions to close out old HOME activities as appropriate, reallocate remaining balances for future HOME projects in a timely manner, and establish and implement adequate internal controls over commitments they enter into the information system. Furthermore, HUD should obtain a formal legal opinion from the Office of General Counsel and revise its regulations to ensure its procedures for assessing compliance with commitment and expenditure requirements are consistent with statutory requirements.