HUD 2020 Management Reform Plan: the Six Major Reforms

Recent Inspector General and GAO reports identify a serious disconnect at the program management level between responsibility and accountability. The basic problem is that the current management control process is driven by "external policemen" — the Inspector General and GAO. To be successful, HUD must change from a negative, externally-driven internal control process to a new business culture — a positive financial management process that is fully integrated with day-to-day operations and owned by program managers. An effective financial management system simply ensures that what should occur does occur.

How do we create a new business culture in which management monitors itself and looks at its own results? How do we make financial integrity everybody's business?

To transform HUD into an agency where fiscal prudence matches management responsibility, HUD will follow a three-part Management Integrity Plan.

First, it will make program managers responsible for their programs' financial management. We will hold them accountable for results — and reward them for excellent results.

Second, HUD will set clear, reasonable expectations and give managers the resources necessary to meet them. In particular, HUD will expand the role of its Chief Financial Officer.

Third, HUD will develop and demonstrate this new business culture by incorporating front-end risk assessments in reorganized and consolidated programs outlined in the Management Reform Plan.

Reform 3: Create an Enforcement Authority with one objective: to restore the public trust.

"I am concerned that we do not take a Band-Aid approach to curing deep systemic problems." Senator Barbara Mikulski, HUD and Independent Agencies Subcommittee Hearing

Restoring public trust is a priority that drives the entire reorganization. And the greatest breach of public trust is the waste, fraud, and abuse in HUD's existing portfolio of ten million housing units. Currently, each of HUD's housing agencies — PIH, FHA, FHEO, and CPD — operate independent enforcement divisions, with different priorities. PIH, for example, considers enforcement action when an authority fails its annual assessment, and has a variety of ad hoc solutions, from judicial receiverships to partnership agreements with the local housing authority. FHA, on the other hand, takes enforcement action only as a last resort; the Department's critics note that the financial interest of FHA's insurance fund can be at odds with the social interests of the tenants. Because the enforcement system clearly needs reform, HUD will make significant changes, both organizational and programmatic.

ORGANIZATIONAL CHANGES

The new HUD will combine non-civil rights compliance enforcement actions for PIH, CPD, FHEO, and Housing program participants into one new organization. This Enforcement Authority will consolidate existing employees and contract with outside investigators, auditors, engineers, and attorneys. It will also work with the Inspector General, consult with the FBI on training staff, and share information with the IRS.

The new Enforcement Authority will be responsible for all PHAs that receive a failing score on their annual assessment. It will also be responsible for all multifamily properties failing the physical and financial audit inspections performed by the real estate management system. Finally, the authority will handle all CPD and FHEO grantees who fail program compliance.

HUD will aggressively pursue owners of troubled HUD-insured and subsidized properties that do not meet established standards. This entity will receive ratings from the Assessment Center on properties that "fail" those established standards. Using professional resources under contract, the entity will: 1) quickly identify and implement appropriate sanctions based on contractor recommendations; 2) initiate appropriate civil or criminal actions in a timely manner; and 3) proceed expeditiously to acquire, foreclose on, and dispose of the property.

When a property fails its assessment, it will be forwarded for immediate action to recover the property or misspent funds. Action may include transfer of physical assets, sanctions, acquisitions, foreclosures, and civil or criminal referrals. In the event of foreclosure, a contractor will prepare the disposition plan and dispose of the property.

General contractors will perform the work through qualified subcontractors in areas of specific expertise in three major areas: asset management, legal, and property disposition. A National Advisory Board of independent stakeholders from the private and non-profit sectors will give ongoing feedback on performance and policy and will advise on particularly sensitive issues prior to final action.

PROGRAM CHANGES

HUD's legislative proposals would strengthen FHA's enforcement authority to minimize fraud and abuse in FHA and assisted housing programs. Key provisions expand the Mortgagee Review Board's ability to impose sanctions on lenders and other HUD program participants who violate HUD rules; increase equity skimming penalties and expand equity skimming prohibitions to all National Housing Act programs, Section 202, elderly, and multifamily risk-sharing pilot programs; and broaden HUD's authority to impose civil penalties and double damage remedies. These new or expanded authorities would reduce the staff burden for each enforcement action and put teeth in their ability to resolve troubled properties.

Currently the bankruptcy code legitimizes non-compliance for owners who have misused HUD funds and who avoid repayment under bankruptcy protection. HUD seeks to reform Sections 105 and 362 of the Code, which make this refuge possible. HUD's proposed amendments would allow the agency to proceed with timely foreclosure of insured or assisted multifamily housing projects, while protecting the residents, the property, and the FHA insurance fund.

"A core ideology provides the glue that holds an organization together through time." James Collins and Jerry Porras, Harvard Business Review

Reform 4: Refocus and retrain HUD'S workforce to carry out our revitalized mission. Partly because HUD was originally an amalgam of several different organizations, its mission has never been sharply defined. Moreover, HUD has often changed its emphasis to suit the times. After the HUD scandals of the 1980s, for example, all emphasis was on monitoring and enforcing regulations. At other times, the emphasis was to help grantees do whatever they wanted.

Under the new HUD, we will refocus our mission — then retrain HUD's leaner workforce to serve that mission. This reform includes four organizational components.

ORGANIZATIONAL CHANGES

HUD's mission involves both empowering communities and winning the public trust. They are distinct functions and will be performed by different individuals — and in different divisions — within the organization.

• Community Resource Representatives, a new group of HUD employees, will facilitate community empowerment by bringing in technical expertise, program knowledge, and knowledge of finance and economic development. Their purpose is to be cooperative, helpful problem solvers.

• Public Trust Officers require different skills and a different public stance. Public Trust Officers ensure that federal funds are used appropriately and that HUD customers comply with the law. They must have zero tolerance for waste, fraud, and abuse. HUD will sharply increase the number of staff devoted to this monitoring work by shifting all facilitating work to the Community Resource Representatives and placing all routine processing work in "back office" processing centers.

Once refocused, employees must be retrained. The HUD Training Academy is designing a training program for Public Trust Officers in each program area. It will retrain Community Resource Representatives as well, since they must have broad knowledge of HUD's programs and the field.

Throughout downsizing HUD will retrain and redeploy available staff to minimize workload imbalances. HUD will also try to avoid reductions-in-force (RIFs), with their disproportionate effect on mid-level and mid-career employees. Since April, 1994 a total of 1,190 employees have separated with a buyout from the Department — a 9.4 percent reduction, without one involuntary layoff.

In general, HUD will downsize by consolidating and streamlining operations; contracting out program and support functions that the private sector can perform cost-effectively; eliminating functions that are only marginally effective; and reducing part-time and temporary employees.

HUD will reduce staff levels by maintaining an employment freeze throughout the downsizing period, except for limited hiring targeted at urgently needed skills. The Department will implement early retirement and buyouts to spur staff reduction and will also offer employee outplacement and other transition services.

HUD has received approval for Voluntary Separation Incentive Payments (VSIP) — also known as buyouts — for employees in targeted locations, titles, series, grades, and program operations. Under this authority, the Department will offer 600 - 1,000 buyouts to employees to most effectively make progress toward reducing the Salaries and Expenses (S&E) Appropriation to 7,500 Full Time Equivalents (FTEs) by fiscal year2000. The buyout strategy, provided in Appendix A, will target areas where consolidations and streamlining make staff reduction most necessary. Buyouts will be used as an alternative to involuntary separations that might otherwise be required for downsizing and restructuring.

Alone, HUD's traditionally low attrition rate (less than 2 percent per year) would be insufficient to meet the target staffing number of 7,500 FTEs. Buyouts have been an integral part of HUD's efforts to streamline, downsize, and consolidate operations. These buyouts, as well as early-out authority begun in March 1994 and an employment freeze since October 1994, have substantially reduced staffing levels.

Without buyouts, HUD may have to resort to RIFs as the only other tool available to meet downsizing goals. Yet RIFs would strip the agency of key mid-level employees, disrupt agency operations, and defeat staff diversity gains.

Continued use of buyouts, however, will allow us to target management reforms to specific positions, locations, programs and/or functions. In this way, HUD can focus buyouts on those employee populations and functions which present the greatest need to reduce staff levels. Buyouts are much more cost-effective than RIFs and are more positively viewed by employees prepared to seek new challenges.

Reform 5: Establish new performance-based systems for HUD programs, operations, and employees.

"To build business performance into the human organization is difficult. But it is essential." Peter Drucker, Managing For Results

In this, we are guided by the story about Bobby Knight, who, when he first became the basketball coach at Indiana University, reportedly received a telegram from the Alumni Association: "Bobby, we're with you all the way," it read. "Win — or tie." Alumni Associations are noted for caring about results — sometimes too much. HUD's management reform plan places a new emphasis on results. It creates new internal and external benchmarks, as well as uniform standards for measuring performance, to increase productivity and accountability across program lines.

These tools increase HUD's ability to mandate compliance from contractors and customers. But by rewarding efforts that go beyond mere compliance — like performance-based grants for contractors or added autonomy for HUD employees — they will make HUD's ability to measure and reward performance and results the true foundation of its reengineering. To that end we have made one organizational change and seek legislation for many program changes.

ORGANIZATIONAL CHANGES

The Government Performance and Results Act of 1993 (GPRA) essentially requires federal agencies to demonstrate to the public that its tax dollars are being well used. GPRA requires each agency to identify specific measures of its performance, results it will achieve, and timelines for doing so.

In line with these requirements, HUD will create meaningful performance measures that hold its staff and grantees accountable for results - in a quantifiable, measurable way. These measurements will allow HUD staff to compare actual performance against established goals.

By the end of fiscal year 1997, HUD must submit to the Office of Management and Budget a three-year strategic plan and mission statement for complying with GPRA. In that document, HUD will describe its changing direction, including concrete actions. It will then establish performance measures that conform to GPRA goals. In fact, we have already begun creating these measures: at least 20 percent of HUD's major goals and objectives are based on straightforward outcome-oriented performance standards. Outside contractors will be held to the same standards.

PROGRAM CHANGES

HUD advocates the use of performance-based grant programs wherever feasible as part of its "reinvention" to serve its customers more efficiently and effectively. Performance-based grant programs distribute funds by formula, and reward good performance. They also conserve valuable staff time by eliminating time-consuming annual competitions and make funding more predictable so that grantees can plan more strategically. Finally, they give the Department greater flexibility in partnering with local communities to monitor individual projects.

Thus HUD has proposed legislation that would allow it to convert competitive grants into performance-based formula grants. Affected programs include Tenant Opportunities, Economic Development/Support Services, Public Housing Drug Elimination, and Competitive PHA Capital Funds.

In CPD, HUD has legislation to consolidate homeless assistance services from six disparate programs into one flexible, performance-based formula grant program. Affected homeless programs include Emergency Assistance, Safe Haven Housing, Supportive Housing Program, Shelter Plus Care, Rural Housing, and the Section 8 Mod Rehab Program.

Currently all PHAs must prepare extensive reports, planning documents, and other operational reviews. Monitoring compliance with this stream of paperwork requires inordinate staff time and is burdensome to those PHAs that already perform responsibly and efficiently. HUD will reduce staff oversight burdens and reward effective, high-performing PHAs by reducing the volume of paperwork they are required to submit. Specific changes HUD will make include streamlining planning submissions and performance indicators for small PHAs, and reducing submission requirements for high-performing ones. These steps will substantially reduce the burden on field staff for monitoring and oversight.

An independent Performance Evaluation Board will be established to help HUD monitor public housing authority performance. The board will be composed of seven members, all appointed by HUD, with members representing public housing authorities, residents, the real estate industry and local government.

The board will be responsible for making broad recommendations for improving HUD's oversight and monitoring of all facets of public housing authority performance. The board will be evaluate the current Public Housing Management Assessment Program (PHMAP) and suggest future improvements. The board will also study alternative performance evaluation models used in other industries, including accreditation models that can be applied to public housing. The board will also develop standards for professional competency for PHA employees and review HUD's system to increase on-site physical inspections and independent audits of PHAs.

Currently, troubled PHAs may remain on HUD's troubled list for years, consuming tremendous staff energy and oversight time in attempts to restructure and salvage these properties. This prevents HUD staff from focusing attention on those properties that may need additional support to prevent their becoming troubled. HUD proposes to place troubled PHAs in judicial receivership if they remain on the troubled list for more than one year. This step gets HUD staff out of the business of managing and restructuring large, troubled PHAs.

The Section 8 program, which subsidizes rents, is HUD's largest housing program for low-income people. Established as a means to help low-income people find affordable housing, the program has become fraught with abuse by landlords and developers. FHA insurance of multifamily Section 8 development virtually eliminated risk from the development process. As a result, investors developed "affordable" multifamily properties that required rents well above market simply to meet the development cost. Also, significant tax advantages made Section 8 development even more palatable.

Excessive subsidies reduce the incentive for managers to provide the results demanded both by residents and HUD. The FHA insurance on these properties also makes unscrupulous landlords less willing to invest in their properties. The resulting neglect, abandonment, or "deferred maintenance" has in many cases led to much lower property values, even as rents remain high.

Roughly 65 percent of HUD's Section 8/FHA loan portfolio is currently subsidizing rents that are substantially above market. In ten years, the annual cost of renewing Section 8 project-based contracts at their current above-market levels will increase to approximately $7 billion, about one-third of HUD's current budget. HUD simply cannot afford to continue this level of spending.

" Merely increasing housing assistance will not save neighborhoods or create opportunity communities. We need to empower citizens and communities to work toward their own solutions with the Federal government acting as a partner." Congressman Rick Lazio

The Department is therefore engaged in an intensive legislative push to lower these rents to market levels (mark-to-market) and restructure the portfolio of FHA-insured loans with Section 8 assistance. Without such actions, HUD risks defaulting on approximately $18 billion of federal guarantees. HUD has introduced legislation that forces landlords to bring their rents down to supportable levels and restructure their current debt. This will reduce the likelihood of massive foreclosures when landlords' Section 8 contracts expire over the next few years. Reform 6: Replace HUD's top-down bureaucracy with a new customer-friendly structure. Just like a bank or a mortgage broker, HUD realizes that we too have customers. And like a business, we have to think about what makes customers satisfied. The top-down structure that characterizes HUD, from headquarters to the smallest field office, is no longer appropriate.

That structure is based on corporate models of the 1930s and 1940s; yet while many corporations reorganized and restructured a decade ago, HUD has not kept pace.

Where are the models for HUD? One comes from the financial services field. Banks like Citibank and NationsBank have consolidated routine functions into centralized "back office" processing centers. They have established "store-front" customer offices closer — and more responsive — to their markets.

HUD has learned from their example. HUD's goal is to provide integrated delivery of services and products and to offer a single point of service to all customers. We have identified a number of organizational changes allowing us to do just that.

ORGANIZATIONAL CHANGES

The current field structure has state offices with a full staff of program-specific employees. This structure will be replaced by field offices staffed

"All institutions, including governments, churches, universities, and so on will become more inter-dependent, more market and customer-driven." Peter Drucker, Leader to Leader

with Community Resource Representatives and Public Trust Officers. While none of the field offices will close, their operations will change dramatically, becoming processing centers and new store-front service centers. In this way HUD will maintain its presence in the communities while allocating resources the way a customer-friendly Department should. Offer single point of service to customers through Community Resource Representatives Community Resource Representatives will play the most critical role in the new HUD. Highly trained generalists with expertise in all HUD programs, they will be trained with coursework in housing development, information technology, real estate and economic development, small group dynamics, and related topics. They will be the new generation of urban and community leaders.

These Community Resource Representatives will be the first point of contact for our customers and will be the Department's "front door," helping customers gain access to the whole range of HUD services. They will also help HUD coordinators assess the agency's performance and the impact of programs in local communities.