[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]





       PROVIDING ADEQUATE HOUSING: IS HUD FULFILLING ITS MISSION?

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON CRIMINAL JUSTICE,
                    DRUG POLICY, AND HUMAN RESOURCES

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 3, 1999

                               __________

                           Serial No. 106-140

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform


                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
66-338                     WASHINGTON : 2000



                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH-HAGE, Idaho              (Independent)
DAVID VITTER, Louisiana


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Criminal Justice, Drug Policy, and Human Resources

                    JOHN L. MICA, Florida, Chairman
BOB BARR, Georgia                    PATSY T. MINK, Hawaii
BENJAMIN A. GILMAN, New York         EDOLPHUS TOWNS, New York
CHRISTOPHER SHAYS, Connecticut       ELIJAH E. CUMMINGS, Maryland
ILEANA ROS-LEHTINEN, Florida         DENNIS J. KUCINICH, Ohio
MARK E. SOUDER, Indiana              ROD R. BLAGOJEVICH, Illinois
STEVEN C. LaTOURETTE, Ohio           JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
DOUG OSE, California                 JANICE D. SCHAKOWSKY, Illinois
DAVID VITTER, Louisiana

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
           Sharon Pinkerton, Staff Director and Chief Counsel
                Mason Alinger, Professional Staff Member
               Frank Edrington, Professional Staff Member
                          Lisa Wandler, Clerk
                    Cherri Branson, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on November 3, 1999.................................     1
Statement of:
    Beard, D. Michael, District Inspector General for Audit, 
      Texas, Department of Housing and Urban Development; Carolyn 
      Federoff, vice president, Massachusetts State Office AFGE 
      Local 3258; and Saul Ramirez, Jr., Deputy Secretary, 
      Department of Housing and Urban Development................    85
    Kuhl-Inclan, Kathy, Assistant Inspector General for Audit, 
      Department of Housing and Urban Development; Joyce Gibson, 
      spokeswoman, Coalition for Accountability; Cheryl Peterson, 
      homeowner, Boise, ID; and William Apgar, Assistant 
      Secretary for Housing, Department of Housing and Urban 
      Development................................................    13
Letters, statements, et cetera, submitted for the record by:
    Apgar, William, Assistant Secretary for Housing, Department 
      of Housing and Urban Development:
        Information concerning previous participation experience.    52
        Prepared statement of....................................    35
    Beard, D. Michael, District Inspector General for Audit, 
      Texas, Department of Housing and Urban Development, 
      prepared statement of......................................    87
    Federoff, Carolyn, vice president, Massachusetts State Office 
      AFGE Local 3258, prepared statement of.....................   111
    Gibson, Joyce, spokeswoman, Coalition for Accountability, 
      prepared statement of......................................    30
    Kuhl-Inclan, Kathy, Assistant Inspector General for Audit, 
      Department of Housing and Urban Development, prepared 
      statement of...............................................    16
    Mica, Hon. John L., a Representative in Congress from the 
      State of Florida:
        Memo dated September 10, 1999............................   165
        Prepared statement of....................................     6
    Ramirez, Saul, Jr., Deputy Secretary, Department of Housing 
      and Urban Development, prepared statement of...............   121

 
       PROVIDING ADEQUATE HOUSING: IS HUD FULFILLING ITS MISSION?

                              ----------                              


                      WEDNESDAY, NOVEMBER 3, 1999

                  House of Representatives,
Subcommittee on Criminal Justice, Drug Policy, and 
                                   Human Resources,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:10 a.m., in 
room 2154, Rayburn House Office Building, Hon. John L. Mica 
(chairman of the subcommittee) presiding.
    Present: Representatives Mica, Mink, Kucinich, and Tierney.
    Staff present: Sharon Pinkerton, staff director and chief 
counsel; Steve Dillingham, special counsel; Mason Alinger and 
Frank Edrington, professional staff members; Lisa Wandler, 
clerk; Cherri Branson, minority counsel; and Jean Gosa, 
minority staff assistant.
    Mr. Mica. I would like to call the Subcommittee on Criminal 
Justice, Drug Policy, and Human Resources to order.
    This morning I would like to open with a statement and 
yield to other Members as they arrive, but we would like to 
proceed. We have a full agenda, two full panels. We will try to 
expedite the hearing as quickly as possible today.
    Today's hearing before the Subcommittee on Criminal 
Justice, Drug Policy, and Human Resources will examine recent 
developments at the Department of Housing and Urban 
Development. Specifically, we will focus on changes in two HUD 
program areas. The first topic will be the Federal Housing 
Authority [FHA], Marketing and Management Program. The second 
topic will be HUD's Community Builders Program. As I pointed 
out to our subcommittee members, we do have oversight 
jurisdiction and investigation jurisdiction over HUD, and I 
believe this is our first subcommittee hearing and probably our 
only one this year, so we will cover these two areas.
    As we examine changes that have occurred and problems that 
have arisen in these two programs, it is important to remember 
that program problems are not new at HUD. In fact, HUD has had 
the continuing distinction of being classified by the General 
Accounting Office [GAO], as being a department at which is 
termed ``high risk.''
    The reasons that underlie this ``high risk'' designation by 
GAO are numerous and, of course, documented. They include a 
series of problems which are internal control weaknesses, 
unreliable information and management systems, organizational 
deficiency, and ineffective program monitoring and oversight, 
which is due, in part, to staff with inadequate skills. Again, 
these are some comments and observations and determinations by 
the General Accounting Office.
    The seriousness of these deficiencies is magnified when you 
consider the scope of the Department's responsibilities, which 
continue to multiply. FHA now insures about 6.5 million loans 
totaling over $400 billion. In fiscal year 1998, FHA paid out 
more than 76,000 claims valued at almost $6 billion, and had 
more than 42,000 properties in its inventory. HUD staff now 
includes approximately 9,300 Federal employees, and its annual 
budget exceeds $26 billion. This subcommittee needs to explore 
and know a little bit more about whether taxpayers are, in 
fact, getting the most for their tax dollars and whether 
housing needs for those who need these public housing 
assistance programs are being met.
    Today, we will examine changes regarding two HUD programs 
and attempt to learn whether recent changes have made things, 
in fact, better or worse.
    First, we will hear from witnesses on the topic of HUD's 
Marketing and Management Program, which replaced the Real 
Estate Asset Management Program. The new program contracts out 
critical marketing and management responsibilities. We will try 
to find out why HUD decided not to follow OMB Circular A-76 in 
studying the costs and benefits of the program prior to 
implementing it. If a comprehensive study had been conducted, 
could current problems have been avoided? Is the program now 
working properly, or do risks continue? What needs to be done 
in light of the fact that the largest contractor, Intown, has 
filed for bankruptcy, apparently leaving others holding the 
bag?
    On March 29, 1999, HUD awarded 16 Management and Marketing 
contracts to seven contractors for a 5-year value of about $927 
million, nearly $1 billion. The contractors manage nearly every 
aspect of the property disposition, including acquiring and 
maintaining property, and marketing and selling it. The Office 
of Inspector General will testify today that HUD, in fact, and 
this is from their testimony, ``did not adequately document or 
evaluate basic business decisions before executing these 
contracts.''
    We will also hear testimony that some properties are not 
being maintained as they should be, and some are not being 
disposed of efficiently. There are continuing reports of 
damage, vandalism, neglect and delay, probably also decay. 
Overall inventory has increased, and defaults are up. Why does 
this occur? Is there adequate incentive for contractors and 
subcontractors to protect and enhance property values? Should 
properties continue to be sold in a condition as is?
    A serious problem identified by the Office of Inspector 
General is that the contracts are not clear about how 
contractor costs will be reimbursed or whether penalties can be 
assessed for poor performance. This omission and lack of 
clarity reportedly results in needed repairs and maintenance 
being ignored.
    A major marketing and management failure is the recent 
experience of the largest contractor, Intown. That contractor, 
Intown, successfully bid on and received 7 of 16 management 
contracts, covering some 39 percent of HUD's properties. The 
company's recent bankruptcy filing has caused contractor liens 
to be placed on many properties, creating serious financial and 
legal problems for both subcontractors and also for people in 
need of affordable housing. Why did one company get the lion's 
share of the contracts and then go bankrupt within months? Is 
the problem being remedied? These are questions which I think 
this subcommittee must ask and which we must seek answers for 
today.
    Let me run this tape here.
    [Videotape played.]
    Mr. Mica. This is just one television account of some of 
the problems that have occurred across the country. I saw a 
similar piece here in the District of Columbia because of some 
of the problems, the default situation and the condition of 
properties. We could play many of these tapes, as I said. This 
one was from Idaho.
    Our second topic today that we are going to address, 
briefly, is the controversial Community Builders Program. We 
want to look at specifically why the program was developed and 
implemented in the manner that it was, and what the successes 
and failures of that program are to date. Why wasn't a 
comprehensive study conducted on the need for such a program 
when it was started, and how has that project developed to 
date? Those will be some of the questions we will ask.
    The Department claims to have relied upon recommendations 
from a 1994 consultant report performed by the National Academy 
of Public Administration in proposing the program. A clear 
reading of the NAPA report recommends that a small number of 
staff be assigned to State coordinators, and that experienced 
staff, ``who can work well with community leaders'' and 
``effectively across the complexity of HUD's programs'' be 
selected through a ``merit system process.'' That was their 
recommendation.
    How can this recommendation be misconstrued as justifying 
the hiring of hundreds of persons, persons lacking HUD 
knowledge and experience, outside of normal competitive merit 
system selection rules and procedures? Having chaired the Civil 
Service Subcommittee, I can tell you that I am aware of no one 
who envisioned the hiring of hundreds of individuals for this 
type of program relying on a minor revision in regulations 
governing the provision that we have in Civil Service for 
excepted service. I am very troubled that the Department chose 
to drive a Mack truck through a small regulatory opening 
intended to provide some flexibility under unique hiring 
circumstances. I think we are up to 800 Community Builders in a 
program the size of some small agencies.
    In the recent fiscal year 2000 appropriations language, 
Congress is requiring that HUD conduct an open competition for 
these positions and evaluate job applicants pursuant to normal 
hiring practices in the future.
    Perhaps veterans' preferences will now be properly 
evaluated and applied to new hires, as was not done originally, 
and happens to be one area that we have focused on. We were 
able in Civil Service to get some changes in the law, and now 
the law has been circumvented.
    I am also very concerned about certain conflicts of 
interest and ethical lapses of some Community Builders, 
resulting in reprimands and employment terminations. Why would 
HUD allow federally employed Community Builders to hold 
partisan elective offices? Were these employees adequately 
briefed and assessed at the beginning of the hiring process? 
Hopefully, these deficiencies have been corrected.
    I am very pleased that the appropriators have attempted to 
correct this situation, but I am uncertain that they have done 
enough. I will seek more assurances from HUD that further 
corrections have been made and that past irregularities in this 
program and hiring practices will not be repeated. I am 
awaiting the findings of the review of HUD's personnel 
practices by the Office of Personnel Management, as requested 
by the Office of Inspector General.
    The concerns that I have outlined with these two programs 
raise a much broader issue that is very important to our 
subcommittee and to many others, including some of our 
witnesses today.
    Is HUD focusing on obtaining affordable homes for deserving 
people, or is it investing too much time, energy and money in 
promoting its image, and on an off-track agenda? HUD's stated 
mission is to, and let me quote from their mission statement, 
``promote adequate and affordable housing, economic 
opportunities, and a suitable living environment free from 
discrimination.'' I think we will hear testimony today that 
brings into question HUD's progress in promoting this mission.
    I am very concerned that millions of dollars have been 
unwisely expended on training and travel for temporary 
employees who will be leaving their positions soon. I am also 
concerned about the millions of dollars devoted to HUD's TV 
studio. I am also concerned that the Secretary is traveling 30 
percent of his time, making public appearances across the 
Nation, while his Department continues to experience 
significant problems and to be, not as I have termed it, but as 
GAO has termed it, at risk for even more.
    I do not accept the Department's response that public 
relations has not been a major factor in HUD's operations and 
programs. An OIG audit found that a significant number of 
Community Builders state that they spend 50 percent or more of 
their time on public relations activities.
    Today, HUD has released the findings of the Ernst & Young 
analysis of the Community Builder Program, a study that was 
designed, funded and reviewed by HUD. The conclusions of the 
study indicate that Community Builders improved customer 
services and perceptions.
    The report also mentions expanded outreach, increased 
partnering, valuable experiences, and furtherance of strategic 
objectives. While I realize that HUD prefers the terminology 
``customer relations'' rather than ``public relations'' in 
describing Community Builder roles, I think there is an obvious 
overlap of the two terms in this program.
    Furthermore, I am not persuaded that HUD should distinguish 
its employees with public trust responsibilities from Community 
Builders. I also fail to understand how HUD's strategic goal of 
restoring public trust is served by filling hundreds of 
positions with employees dedicated to improving HUD's image 
and/or customer relations. It is my opinion that capable 
Federal employees with knowledge, training and experience in 
performing HUD business effectively and efficiently can, in 
fact, earn public trust. From what I see, a new public 
relations core may be, in fact, unnecessary. It is also 
wasteful and harmful to employee morale, and, most importantly, 
it drains significant personnel resources from HUD programs 
that remain at risk.
    In conclusion, the Community Builders Program has been a 
topic of considerable controversy in the Department, in the 
press, and in Congress. On September 16, 1999, the Senate 
Appropriations Committee reported, and again this is their 
report, ``There is no valid evidence that these Community 
Builders are communicating HUD programs effectively or 
providing a link for the delivery of program services, and much 
of the activity seems to be primarily for public relations. In 
many cases, the Community Builders do not appear to act like 
HUD staff, but instead act in the capacity of lobbyists for a 
particular community or group.'' Again, not my comment, but the 
Senate appropriations report.
    Because of these concerns, appropriations conferees 
mandated that the existing Community Builders Program with 
temporary fellows is to terminate effective September 1, 2000. 
Any functions now being performed by the Community Builders 
fellows will be carried out by regular Civil Service employees. 
I hope that meaningful lessons have been learned from this 
unfortunate and sad chapter in HUD's history and will not be 
repeated again.
    I would like to thank our witnesses for appearing today, 
some of whom have traveled at a great distance with personal 
sacrifice, and I look forward to hearing from each of you as we 
explore how best we can meet our Nation's critical housing 
needs and ensure a maximum return on our Nation's precious tax 
dollars.
    With that background and those opening remarks, I am 
pleased to yield to our ranking member, the gentlewoman from 
Hawaii.
    [The prepared statement of Hon. John L. Mica follows:]

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    Mrs. Mink. Thank you very much, Mr. Chairman. I would like 
to also join with you in welcoming the panelists that have been 
called to examine these two areas that the chairman has so 
carefully outlined as problem areas that he feels oversight 
responsibility in examining. And while I agree certainly that 
we do have that responsibility to make sure that the programs 
that are implemented by all of the executive departments are 
working well and have consistent missions that relate to their 
statutory functions, in both of these cases today I raise some 
of my own personal qualms about the necessity of pursuing these 
issues.
    In the first place, the full Committee on Government Reform 
not too many months ago conducted a hearing about the whole 
matter of the foreclosures and the management of the properties 
under foreclosure, the long-term possession by the HUD 
department, and the failure to put these properties out to 
market in a reasonable length of time. And it seemed to me that 
as an outcome of that hearing, that much was said, and the 
Department, I thought, responded to the questions of the 
chairman of the full committee quite adequately.
    We are placing on the department a huge responsibility to 
be able to balance the demands of efficiency and also 
productivity and to assure against loss of public funds in this 
whole program of mortgages and foreclosures and management. As 
a matter of deeply held personal commitment, I generally do not 
support the notion of privatizing what I consider to be 
functions that government could very well perform adequately, 
and it seems to me that this whole idea of property management 
is one area in which HUD could have retained responsibility. 
But given the huge hue and cry about the management program, I 
can see why HUD felt compelled under the demands for reform and 
change and responding to criticism, opening up a whole new area 
of privatization. And now that they have done that, responded 
to the private cry--the public cry for privatization, it seems 
a bit hasty to now fall upon the Department for having retained 
someone who totally failed, as a private contractor, from 
performing its responsibilities.
    I think that the Department should answer the questions as 
to the propriety of this particular contract, and why the 
contractor was selected, and how it performed, and why the 
contract was terminated. I think those are reasonable 
questions. But the whole concept of challenging the 
government's decision to privatize because of one failure I 
think is a bit premature and certainly something that I don't 
fall readily to, basically because I really don't like the 
whole idea of privatization in the first place. But having done 
that, it seems to me that the government has done, in this 
case, a fairly reasonable job in making sure that there was 
reasonable value performed by the contractor.
    On the matter of the community development--developer or 
Community Builders Program, again, in the years that I have 
been in Congress, there has always been a hue and cry by the 
Congress and others in the public that the Department needed to 
find ways in which to respond to the public criticism of 
connecting its major responsibilities to the public so that the 
public would have a better understanding of what its functions 
were, and we have demanded, in fact insisted, that the 
Department look for ways to revise its functioning, to reform 
its general mission and the way in which its responsibilities 
were being conducted. So, here is an initiative which the 
Department has embarked upon, and now it is being mercilessly 
criticized for failures to conform to the expectations of the 
public.
    Now, I personally have some views and conclusions that I 
have made about this initiative, but I certainly don't fault 
the Department for having moved in this direction.
    I am pleased that, and hopefully, with the decisions made 
by our appropriators in terms of revision of this program, I 
hope that the criticism has now been put to rest, and we can 
analyze it from the viewpoint of whether any substantial 
advantages have been developed as a result of the 
implementation of this program. I have been advised that, yes, 
there have been some substantial improvements to the overall 
conduct of the Department because of the Community Builders 
participation in implementation of the Department's mission.
    So yes, I look forward to the panelists, Mr. Chairman, 
today to elucidate on both of these issues. I must say in 
advance, next door my Committee on Education and the Workforce 
is having a markup on four bills, and I may have to drift in 
and out, and I apologize if I am called to vote next door. 
Thank you very much.
    Mr. Mica. Thank you.
    I recognize the gentleman from Massachusetts Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman.
    I really have nothing to add to the remarks that have 
previously been made, except to also say that I am on the same 
committee as Mrs. Mink, and that you may find me coming in and 
out to vote on the markup over there, but I would prefer, if we 
could, to get on with the witnesses and thank them all for 
sharing their time and thoughts with us this morning. Thank 
you.
    Mr. Mica. Thank you.
    Mr. Kucinich, would you like to make an opening statement?
    Mr. Kucinich. I just want to join my colleagues in 
welcoming the witnesses and particularly those who are serving 
the Department of Housing and Urban Development, thanking them 
for the work that they do, and I look forward to working with 
you.
    Mr. Mica. Thank you, Mr. Kucinich.
    Let me just say as I introduce our first panel that we did, 
in fact, on March 23rd hold a full committee meeting on the 
question of Marketing and Management Programs. It is my 
understanding, just for the record, that, in fact, Intown 
Properties won a contract in March to manage and market a $367 
million program. Since that time, Intown, as I stated, has 
filed for bankruptcy, so that has occurred since then; in fact, 
on September 22nd. Since then, the press has exposed and others 
have found that the contractor that HUD contracted with was a 
convicted felon with a string of and histories of bankruptcies.
    So I think our subcommittee is moving in a proper fashion 
of oversight and investigations to see how that contract got in 
that situation, what is going on with this program. Community 
Builders has been battered around. We have put off a hearing, 
and the Senate has gone before us and appropriators. But we 
still have an obligation to look at what has happened there and 
how that program will be phased down or replaced.
    With those comments, let me introduce our first panel of 
witnesses. You will have to help me with the name here. Ms. 
Kathy Kuhl-Inclan. Ms. Kathy Kuhl-Inclan is Assistant Inspector 
General for Audit of the Department of Housing and Urban 
Development; Ms. Joyce Gibson is a spokeswoman from Chicago, 
IL, for the Coalition for Accountability; and Ms. Cheryl 
Peterson is a homeowner from Boise, ID. We also have the 
Honorable William Apgar, who is the Assistant Secretary for 
Housing with the Department of Housing and Urban Development.
    I would like to welcome all of our witnesses. We are an 
investigations and oversight subcommittee of Congress. We do 
swear in our witnesses, so if you would stand to be sworn.
    [Witnesses sworn.]
    Mr. Mica. Let the record reflect that the witnesses 
answered in the affirmative.
    I would like to again welcome our panelists. I think what 
we are going to do is, we have had you sworn, take about a 15-
minute recess, run to the floor, vote and come back. So if you 
will excuse us for about 15 minutes, we will vote and then 
return. This subcommittee will stand in recess.
    [Recess.]
    Mr. Mica. I would like to call the Subcommittee on Criminal 
Justice, Drug Policy, and Human Resources back to order.
    Our first agenda item again is panel one, and deals with 
the Marketing and Management Program. I have introduced our 
witnesses, so we will go directly to Ms. Kathy Kuhl-Inclan, who 
is Assistant Inspector General for Audit with the Department of 
Housing and Urban Development. I did swear you in, and I also 
will advise each of our witnesses that if you have lengthy 
statements or documentation or reports that you would like made 
a part of the record, if you will just request that, and by 
unanimous consent, we will include as much as possible of that 
information in the record.
    So with that, we will recognize the Assistant Inspector 
General for Audit with HUD. Welcome, and you are recognized.

 STATEMENTS OF KATHY KUHL-INCLAN, ASSISTANT INSPECTOR GENERAL 
 FOR AUDIT, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; JOYCE 
   GIBSON, SPOKESWOMAN, COALITION FOR ACCOUNTABILITY; CHERYL 
 PETERSON, HOMEOWNER, BOISE, ID; AND WILLIAM APGAR, ASSISTANT 
    SECRETARY FOR HOUSING, DEPARTMENT OF HOUSING AND URBAN 
                          DEVELOPMENT

    Ms. Kuhl-Inclan. Thank you. Chairman Mica and other members 
of the subcommittee, I appreciate the opportunity to appear 
before you today to discuss the Management and Marketing 
contracts for HUD's property disposition activities.
    On September 17, 1999, our Southeast/Caribbean District 
issued a comprehensive audit of HUD property disposition 
activities entitled, ``Nationwide Internal Audit of Federal 
Housing Administration's Single-Family Property Disposition 
Program.'' When we began this review, plans for contracting out 
property disposition activities were still under discussion. By 
the end of our audit, the M&M contracts, as they have been 
called, had been awarded, but had not yet been started.
    I want to make it clear that we have not audited the 
current Management and Marketing contracts. We made a conscious 
decision to hold off on any detailed audit work until the M&M 
contracts had sufficient time to get up to speed. We believe 
that sufficient time has elapsed, and we plan to begin that 
audit this month.
    We did have an opportunity to review the M&M contracts and 
the contracting monitoring policies toward the end of our 
property disposition audit. We also looked at the M&M contracts 
in an audit of the departmental procurement activities earlier 
in the year. Our property disposition audit noted that while 
the M&M contracts and contract monitoring policies were 
comprehensive, there were some areas in need of improvement. 
Contracts did not contain sufficient information regarding 
FHA's reimbursement to contractors for property repair costs or 
monetary penalties for contractor noncompliance.
    In addition, the new Contracting Monitoring Manual did not 
provide comprehensive guidance to review and approve 
reimbursements of repair costs, conduct contract risk 
assessments, and document monitoring results. We thought 
clarity and consistency in applying this policy was needed, and 
I would like to add that the HUD staff agreed with us almost 
immediately and indicated that they would make these changes to 
their policies.
    Our recent internal audit followup review of HUD 
contracting was dated September 30th and examined the 
contracting actions leading up to the M&M contracts. The 
Department carried out this procurement action without 
conducting an OMB Circular A-76 cost comparison to determine if 
contracting out was warranted. While these M&M contracts were 
at an anticipated cost of $927 million over the next 5 years, 
the Department believed that a cost comparison was not legally 
required. We disagreed. The supplement to Circular A-76 states 
that the circular is not designed to simply contract out; 
rather it is designed to balance the interests of the parties 
in a make or buy cost comparison, provide a level playing field 
between public and private offerors to competition, and 
encourage competition and choice in the management and 
performance of commercial activities.
    The Department stated that there is no requirement to 
conduct an A-76 review if the contract is not affecting more 
than 10 HUD employees. Additionally, it said that it is the 
program office's responsibility to evaluate all the procurement 
activities and the contracting office's responsibility to 
ensure that once the decision is made, that the award is 
carried out efficiently. We believe the Office of Procurement 
and Contracts needs to be more involved.
    We reviewed the implementation and pre-award files for the 
M&M contracts. Prior to award, these kinds of functions were 
handled by a combination of HUD staff and the Real Estate Asset 
Managers [REAM], contractors. Even though these procurements 
have a 5-year spending authority of almost $1 billion, and the 
contractors will have substantial control over HUD's 
multibillion-dollar single-family property inventory, the 
Office of Housing did not adequately document or evaluate basic 
business decisions before executing these contracts. Instead of 
preparing an A-76 cost study, the Office of Housing requested a 
determination from the Chief Financial Officer that a study was 
not technically required. The memorandum did not explain 
Housing's intent to contract out the entire process at the cost 
of almost $200 million a year.
    The CFO did agree with Housing that since the Department 
was not reducing staff, the study was not required, but that 
didn't make sense to us, because of all of the downsizing and 
the restructuring of the Department that had been done and was 
being considered.
    In addition to the absence of a cost analysis for the M&M 
procurement, we questioned the Department's examination of the 
financial and operational capacity of the bidders. Intown 
Management Group was awarded contracts comprising almost 40 
percent of HUD's work, making Intown one of the largest 
property managers in the country. We asked contracting staff if 
they considered Intown's financial capacity to manage such a 
large contract. We reviewed the summary of negotiations and 
technical evaluation reports and did not see a discussion of 
their capacity. The staff indicated that these matters were 
discussed, and it was determined that the Intown had sufficient 
financing.
    During negotiations, Intown reduced its original bids from 
$565 million to $367 million. That is a 30 percent drop. 
Revised best pricing schedules provided by Intown during the 
negotiation process may have been overly ambitious. In fact, 
Intown's estimated costs would actually decrease due to 
improved efficiencies. By contrast, staff stated that Intown 
had the highest technically rated proposal and believed the 
negotiation process evidenced HUD's interest in procuring the 
best value.
    When we completed our field work in August 1999, Intown had 
sold only 2.8 percent of its assigned inventory. M&M contracts 
receive 30 percent of the fees when properties are listed and 
the remaining 70 percent when properties are sold. 
Consequently, there was a concern that Intown would not be able 
to adequately maintain the 20,000 HUD properties assigned to 
them without the revenues it generated from property sales.
    On September 23rd, HUD announced it had terminated the M&M 
contract with Intown Management Group. We hope that those 
contractors remaining can manage this large workload that is 
left. We anticipate a report from our upcoming audit in about 6 
months, and we will be happy to keep you apprised. Thank you.
    Mr. Mica. Thank you.
    [The prepared statement of Ms. Kuhl-Inclan follows:]

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    Mr. Mica. We will next hear from Ms. Joyce Gibson, who is 
the spokesperson for the Coalition for Accountability from 
Chicago, IL. Welcome, and you are recognized.
    Ms. Gibson. Good morning, Mr. Chairman. My name is Joyce A. 
Gibson. I am the president and owner of J.A. Gibson Realty & 
Associates in Chicago. I would like to thank the committee for 
allowing me this opportunity. I am here today as a spokesperson 
for the Unity Coalition for Accountability, a loosely formed 
coalition of 70 small businesses, 240 churches, and a handful 
of community organizations in Illinois and Indiana who are 
concerned about the lack of responsibility and accountability 
HUD has exhibited with respect to its M&M contracting program.
    Our coalition was formed after Intown Management, a HUD 
Marketing and Management prime contractor, lost its contract 
and declared bankruptcy. That was September 22, 1999. For many 
small businesses in Illinois and Indiana, and 20 other States 
around this country, that day will live in infamy. It was the 
day we learned that after providing millions of dollars in 
labor and material over a period of 5 months to maintain HUD-
owned properties, we would not be paid.
    From the information we have gathered, the amount owed in 
Illinois alone is $3.5 million, and that just represents the 
contractors who have heard about our efforts and contacted us. 
As we began to talk to more people over the Internet, we 
realized that this problem was much larger than just a few 
vendors not being paid in Illinois. We have heard from an 
appraiser in Maryland who is owed $411,000, a contractor in 
Virginia owed $41,000, a property manager in New York owed 
$54,000, and the list goes on, totaling more than $7.5 million. 
Mind you, this figure only represents moneys owed to 
approximately 87 subcontractors.
    When we started this effort, we were only focused on the 
short-term view: Our money. As we talked to more people in our 
respective communities, we began to see an even bigger problem, 
one of abandoned homes that create unsafe, unhealthy 
environments; lost tax revenues to local municipalities; and a 
destabilization and devaluation of the communities where these 
properties are located. It is why our efforts have been joined 
by local ministers and community groups concerned about housing 
issues.
    I am here to represent the small voice of hard-working 
citizens that often get overlooked. We don't have the millions 
to hire lobbyists to speak for us. We pass the hat, hope we 
have enough money for airfare and room accommodations, and pray 
that we can spare the time from our businesses to make the 
trip. That is why we are extremely grateful that someone in our 
government is willing to spare the time to listen to what we 
have to say.
    It is our understanding that HUD has taken the position 
that they are not responsible for the actions of their 
contractor. We disagree. We believe that HUD contracted an 
agent, Intown Management, and the agent provided management and 
marketing services for the owner of this property: HUD. As a 
realtist, this says that an agency relationship existed, and 
under an agency relationship, they cannot just walk away and 
not be accountable for the actions of their agent. HUD still 
has accountability and responsibility.
    Most of the vendors were willing to provide services 
because Intown was HUD's prime contractor. To many of us, that 
meant payment would be slow in coming, but it was guaranteed 
payment. That is why people felt confident in refinancing their 
homes to buy equipment and purchase materials. That is why 
people continued to provide services even after there was no 
payment for 90 days. It wasn't because of Intown; we didn't 
know them, nor do we know them now. We trusted that our 
government had made a wise selection and that our government 
was behind these people.
    I am sure that it was not HUD's intention to stick it to 
small business, but that is exactly what has happened in the 
M&M program. Intown is the second contractor that HUD has had 
in the Chicago area. There are vendors who contacted us who 
have not only not been paid by Intown, but who are still owed 
money from a contractor called Citywide. And to add insult to 
injury, we have been informed as of yesterday that many of the 
vendors who were promised payment in 14 days by the new 
contractor, Goldenfeather, are now 30 days due, and counting.
    I don't know how much money was paid to Intown, but it 
would seem to me that HUD has a responsibility to pay for the 
services that were contracted on their behalf up to and 
including the day that they pulled the plug.
    Additionally, HUD has got to take responsibility for the 
condition of the properties that are in our communities. These 
properties belong to the taxpayers. HUD cannot delegate its 
responsibility to no-name companies and then walk away.
    We believe that HUD needs to rethink its current use of 
national contractors and return to the model that allows for 
local-based management and marketing of HUD properties. We also 
believe that HUD must establish more effective monitoring 
guidelines. We cannot continue with a program that erodes the 
credibility of our government and causes economic devastation 
to its citizenry. Thank you.
    Mr. Mica. Thank you for your testimony.
    [The prepared statement of Ms. Gibson follows:]

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    Mr. Mica. We will also hear from Ms. Cheryl Peterson, a 
homeowner from Boise, ID. Welcome, and you are recognized.
    Ms. Peterson. Thank you.
    In August of this year, my husband and I bid on a HUD home, 
and we won that bid. On September 24th, we signed the closing 
documents and were preparing to move. Earlier in this same 
week, HUD fired Intown, their management company. The next day, 
Intown filed bankruptcy, and it became uncertain who would 
represent HUD in completing our paperwork process.
    On September 30th, our paperwork was received back from 
HUD, and we were in the final stage of acquiring our home. On 
Monday, October 4th, our title company went to record the deed 
at city hall, and it was discovered that there was a $1,320 
lien placed on the property and numerous other properties in 
the State of Idaho.
    At this time the situation became very stressful for my 
family. Within 2 weeks, we really did not have a place to live. 
We called everyone. We called our realtor, our title company, 
our lender, our lawyer and our Congresswoman. Within a few 
days, there was yet no resolve.
    So, on October 7th, we paid the $1,320 lien, believing that 
we would have our home that day. Yet, when the title company 
went to city hall to record the deed, they called to say that 
another lien had been placed on our home. We had a difficult 
decision to make at that time. It was either to back out, cut 
our losses, or pay the $120. And this, of course, was somebody 
else's debt, not ours.
    So on October 8th, we paid the $120, and we were recorded 
that day, and the home became ours. As a taxpayer, we paid 
$1,440 for property management.
    We did have to ask ourselves what we were paying for. The 
weeds on the right side of the house were chest high, the grass 
was dead, there was a beehive in the sprinkler box that was a 
foot in diameter. This home had sat vacant for 6 months. Yet, 
in the end, we were very thankful that we were never without a 
place to live and that we now have a place that we call home. 
Thank you.
    Mr. Mica. Thank you for sharing your experience with us.
    We will now hear from Mr. William Apgar, who is the 
Assistant Secretary for Housing of HUD. Welcome, and you are 
recognized, sir.
    Mr. Apgar. I am pleased to testify today about how HUD 
has----
    Mr. Mica. You might pull that mic over.
    Mr. Apgar. I am pleased to testify today about how HUD is 
fulfilling its mission to address the homeownership and 
affordable housing needs of the Nation and to report on our 
progress in the management market initiative.
    The past 12 months have been historic for the Department. 
Secretary Cuomo's 2020 reforms have produced substantial 
evidence that HUD works. At the start of the year, our progress 
in reforming the Department was recognized by the House and 
Senate as they approved the best HUD budget in a decade. The 
year culminated last month when Congress enacted an even 
smarter and stronger budget, giving us $1.5 billion more 
resources to do our programs, including 60,000 new rental 
vouchers, a homeownership security program for older Americans, 
a major job creation program, and new tools to assess the 
growing crisis of opt-outs.
    FHA has also had an outstanding year this year. We have 
assisted 1.3 million families in purchasing homes, with an all-
time record of $125 billion in mortgage insurance. FHA 
multifamily mortgage insurance remained at a near record level 
of $4.1 billion.
    Regarding the implementation of the M&M initiative, I am 
also pleased to report that after 7 months of operation, six of 
the seven contractors retained by HUD are generating very 
positive results and have demonstrated that profit-motivated, 
private sector real estate professionals can more efficiently 
and effectively manage, market and sell REO properties. The 
bottom line is the M&M system is selling more homes faster and 
doing so in a way that is generating greater returns to the 
FHA.
    Since implementing the M&M initiative nationwide, in March, 
six of our seven contractors, who had the responsibility of 
more than 60 percent of the inventory at takeover, had 
performed well. Over the first 6 months they have increased 
HUD's average gross property sales by 25 percent; they have 
increased FHA's recovery on the mortgage insurance claims by 
some $3,243 per property. Taken together, these six contractors 
have sold 16,273 properties through September, and with an 
improvement in our recovery rates, we have generated savings of 
more than $50 million to the Department.
    Still, despite the overall success of the M&M initiative, 
one contractor, Intown Management Group, failed to meet HUD's 
performance standards. Intown did not properly maintain HUD's 
properties, as was discussed, and they were extremely slow to 
list properties for sale and to enter into sales contracts. 
While this has lead to substantial problems for FHA, for 
homeowners, for communities, for subcontractors, I want to 
stress that it is the FHA monitoring and control system that 
identified the problems with Intown and developed a record that 
facilitated termination of the contract and the proposed 
debarment of the principals and will be a basis for future 
actions as we seek to hold Intown accountable for their failure 
to meet the obligations of this contract.
    This monitoring system noted problems in the very early 
days of the contracts. Within 45 days, we terminated one Intown 
contract. But, despite our repeated efforts, Intown's overall 
performance didn't improve. Having started with 16,803 homes, 
the inventory in the Intown area swelled to 26,000 homes by the 
end of September, an increase of 9,400 homes. In contrast, over 
the same period, the other six contractors sold more than 
16,000 homes, and collectively the inventory in these areas 
held more or less steady.
    There are a lot of statistics here, and I will explain them 
more in detail in my written statement, which I would like to 
have included in the record. But the bottom line is simple. 
Intown didn't sell homes. They didn't even do a good job of 
listing homes for sale. As a result, the overall inventory 
mushroomed.
    My testimony also includes detailed descriptions of how we 
are doing in the 6 weeks since we terminated the Intown 
contract. I am pleased to report that the new replacement 
contractors are working well. For example, in just 6 weeks, 
they have completed the sale of over 1,900 properties, nearly 
as many as Intown did in the 6 months that they had the 
contract. The new contractors in 6 weeks have sold almost as 
many homes.
    I would like to end my testimony with an assessment of how 
we got to this situation today. My answer is simple. Intown 
failed because its three principal partners did not deliver the 
resources that they promised in their proposal. Each of these 
individuals had performed well in the past under HUD and other 
Federal contracts.
    Consider Larry Latham, a recognized leader in online real 
estate marketing. The proposal indicated that Mr. Latham would 
be in charge of marketing, but Intown's marketing effort was 
slow to start and, even after 6 months, was hopelessly 
inadequate. I am not a lawyer, but I believe that Intown and 
its three partners misrepresented to HUD the resources that 
they would bring to the contract, and in doing so, may have 
committed fraud against the U.S. Government.
    That is why I recently moved to immediately suspend each of 
Intown's principals from all government contracting and also 
proposed that they be debarred for a period of 10 years. 
Moreover, I have asked HUD's Office of General Counsel to refer 
the three principals to HUD's Office of Inspector General 
within the Department of Justice for criminal investigation.
    In conclusion, I feel that HUD and the FHA are headed in 
the right direction. I thank you for this opportunity to 
testify, and I look forward to answering your questions today.
    Mr. Mica. Thank you, Mr. Apgar.
    [The prepared statement of Mr. Apgar follows:]

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    Mr. Mica. Right off the bat, let's get into the Intown 
situation. A contract was awarded in March for $367 million. It 
defaulted and filed bankruptcy on September 22nd. I have a 
story from the Atlanta Constitution, and through some simple 
checking they found that the principal here, Melton L. Harrell, 
who won the contract, had a record of felony convictions and 
had a history of filing bankruptcy, I mean a pretty basic check 
that even the media did.
    Was HUD aware of this individual's background and his 
record of bankruptcy and felony convictions?
    Mr. Apgar. We were not aware at the time that the contract 
was issued. Let me explain our process.
    Mr. Mica. Wouldn't you check? This is over a third of $1 
billion.
    Mr. Apgar. I hear you. Under our process we have a previous 
participation review. It is the responsibility of the Inspector 
General's Office to conduct that review. We asked them in 
October, when we first had Intown's bid, again in December, to 
review Intown for their suitability for this contract. I have 
here letters signed by appropriate officials at the Inspector 
General's Office that said they conducted such a review and 
found nothing.
    Notice that there is no requirement for the Federal 
Government in its contracting procedure to check background 
checks on criminal records going back that far. We did check 
the Dunn & Bradstreet records. They showed nothing of any 
nature of financial liability. We checked other performance 
records relative to HUD contracts. Each of the contractors had 
substantial contract experience with the Federal Government, 
and there was no indication of any of that work by Mr. Latham, 
Mr. Gonzalez or Mr. Harrell had any problem, including 
substantial contracts with the Department of the Army, the 
FDIC, and other Federal agencies.
    Mr. Mica. Well, Ms. Kuhl-Inclan, the Assistant Secretary, 
is saying that it was your responsibility to check, and he has 
a report here that says that you found a clean bill of health; 
is that correct?
    Ms. Kuhl-Inclan. That check was done by another part of the 
Office of the Inspector General. I am not aware of the letters 
he has, but I will be glad to check on that when I return to my 
office.
    Mr. Apgar. You are right, it is part of the standard of 
previous participation experience report. The letterhead is the 
Office of the Inspector General. I appreciate that this is not 
done by Kathy's division, so she might not be aware of this, 
but this is standard contracting procedure. The Inspector 
General is the responsible party for identifying potential 
criminal violations on the part of contractors.
    Mr. Mica. Well, somewhere it seems like somebody missed the 
boat. I mean, just a perfunctory check by the Atlanta 
Constitution seems to reveal that we are dealing with a 
convicted felon with repeated bankruptcy failures.
    Mr. Apgar. Again, in terms of the bankruptcy----
    Mr. Mica. It is astounding to me. I have been in the 
development business, and I couldn't imagine an award anywhere 
near this size and not having the scrutiny.
    Now, we will have to find out where the problem is. Is the 
Department going after these folks? Are you reporting them to 
the Department of Justice?
    Mr. Apgar. Yes. As I mentioned in the testimony, we have 
made appropriate referrals to our Office of General Counsel. 
They are considering a referral to the Inspector General, as 
well as to the Justice Department, and it is under review. The 
whole item is now, of course, in bankruptcy court.
    Mr. Mica. Did you say considering, or is this under way?
    Mr. Apgar. From my point of view, it is under way.
    Mr. Mica. So we should expect some action by the Department 
of Justice.
    Is there someone at the Department of Justice now who has 
already started an investigation?
    Mr. Apgar. Working through our Enforcement Center, they 
have met with people from the Department of Justice. I could 
get you the names of the Department of Justice people that they 
have been working with.
    Mr. Mica. Could you provide us with that?
    Mr. Apgar. Right.
    Mr. Mica. The next question is we have people like Ms. 
Peterson. She has laid out $1,400. It may not seem like a lot 
to people in Washington, put probably a good part of her 
savings to close on this house. A lien was slapped. The lien 
was really the responsibility of a mistake made by HUD in 
awarding a contract--the contract to these fleecing artists.
    Is there a system now being considered to reimburse people?
    And Ms. Gibson told us about subcontractors that haven't 
been paid to the tune of multimillion dollars. What is the plan 
for resolution for these folks?
    Mr. Apgar. Well, I by no means minimize Ms. Peterson's 
$1,400 lien. She is, in fact, an FHA home-buyer and insured her 
house with the Federal Housing Administration, so we know our 
customer profiles very well and appreciate that for that 
family, $1,400 was a major problem.
    In Intown's failure, they failed to pay many contractors 
across the country. Those contractors rightfully put liens on 
our property. We now have a system in place where we are 
bonding the liens. That is the way of preserving our capacity 
to recover against Intown in bankruptcy, while at the same time 
allowing the sales to go forward.
    Mr. Mica. That has been in only 20 States so far, or some 
States? It is not in place everywhere?
    Mr. Apgar. No. We are going State by State. The proof is in 
the pudding. We have sold almost 2,000 homes, and so we have 
substantially attacked the lien problem.
    Mr. Mica. What about this lady sitting next to you?
    Mr. Apgar. In cases where individuals paid their own liens, 
we will establish a process in which we will repay them for 
that lien and assume the responsibility as we have with the 
other liens in order to let the sales go forward.
    Mr. Mica. How much is the taxpayer going to end up paying 
as a result? Is there any estimate? Has the IG or has your 
Department estimated what this is going to cost us in the end?
    Mr. Apgar. Well, it is our understanding there will be no 
cost to the government; that, in fact, I would say that our 
overall program has been generating benefits in excess of the 
cost of the program.
    In terms of the liens, of course, we paid every dollar that 
Intown billed us, so they had the money to pay many of these 
contractors. That matter will be resolved in bankruptcy court.
    Mr. Mica. But we don't have a clear estimate as to what 
this will cost?
    Mr. Apgar. The bankruptcy court is assembling a nationwide 
estimate of what was owed and what was paid. I mean, let's be 
clear. Intown, when we seized their records, were in 
substantial disarray. We literally had to do almost like a 
midnight raid in order to get into their offices. And again, 
the records were in substantial disarray.
    Mr. Mica. But what concerns me finally is we have Ms. 
Gibson testifying today under oath that now we have another 
contract--well, we have a previous contractor, Citywide, 
replaced, what is it, Goldenfeather.
    Ms. Gibson. Goldenfeather replaced Intown. Intown replaced, 
I guess, the previous contractor, Citywide.
    Mr. Apgar. If I could say a word about Goldenfeather.
    Let me tell you a little bit about Goldenfeather. 
Goldenfeather was and is one of the best contractors we have 
had and proven by experience. They took over initially the very 
difficult southern California market. They have been now 
selling homes faster than they have been taking them in, 
lowering the inventory, returning good return, better than we 
did through our old system.
    Mr. Mica. But they are overtaking Citywide, which has not 
met its obligations.
    Mr. Apgar. Now they are in Chicago trying to dig out from 
the mess that Intown had created, and we fully anticipate that 
they will be able to work with the contractors, pay the liens 
where they are appropriate, and move forward.
    Mr. Mica. Ms. Gibson, you testified, however, that 
Citywide, was that the one that----
    Ms. Gibson. The first--there were people who told us that 
they had worked for, and I don't know if they were M&M or REAM 
contractors, but they were called Citywide, and that when they 
came to us, because they had not been paid by Intown, a number 
of them had said they were still waiting to be paid from 
Citywide.
    Mr. Mica. Which was the previous one?
    Ms. Gibson. Which was the first one.
    Mr. Mica. Before Intown.
    Ms. Gibson. Before Intown.
    Now, a lot of those people went and signed up to work for 
Goldenfeather, even though our position was that they should 
not work for Goldenfeather until Goldenfeather was able to put 
in writing to us that we would be paid for services. 
Goldenfeather refused to do that. My position was that I was 
not going to do anything else on any contract until HUD was 
prepared to say, these are the people we sent to town to do 
work for us and we backed them. If that is not happening, then 
most of the contractors that I represent are not providing 
services for Goldenfeather, and as of last week, they were 
begging for contractors because their credibility has been 
shot. So therefore, the properties are sitting. They do not 
have enough contractors in the Chicago area to meet the needs, 
and people are not going to provide those services because we 
don't have any accountability or feel that we are going to be 
paid.
    Mr. Mica. Let me clarify for the record, if I may. Is it C-
I-T-Y--Citiwest, not Citywide. I have been saying Citywide. 
Citiwest, what is more disturbing to me, Mrs. Ranking Member, 
is Citiwest, who she is talking about, who didn't perform 
before Intown, who went bankrupt, that didn't perform, has 
contracts that were given June 19th for business in New England 
and now hasn't performed in New England; only has 84 of 218 
properties available. So the dudes that messed up in her area 
have now moved into the Northeast to perform their 
nonperformance tasks.
    Mr. Apgar. If I could give you a full report on Citiwest's 
performance in New England, I am not sure what information you 
are looking at, but they have performed well under this 
contract. They also have increased the FHA's----
    Mr. Mica. Did you talk to them about meeting their 
obligation back in----
    Mr. Apgar. There is no evidence that they haven't. We would 
be happy to hear that complaint.
    Mr. Mica. We just had testimony to that effect.
    I have taken more than my time.
    Mr. Apgar. With all due respect to Ms. Gibson, she also 
testified that Goldenfeather was begging for contractors. Our 
reports from Goldenfeather, that they are up and operating in 
Chicago, and they have ample resources to perform these 
contracts. Obviously, Ms. Gibson is not one of those 
contractors, but others have stepped forward, and the process 
is working.
    Mr. Mica. Mrs. Mink.
    Mrs. Mink. I think that one of our fundamental principles 
in America is that if people work for whoever, even under 
bankruptcy laws, that they have a priority commitment on the 
part of the court and the government that they be paid, and it 
seems to me that that principle needs to be recognized by HUD.
    Now, going back to the Intown contract of $300-some 
million, what was that money supposed to represent, if it was a 
contract of commitment to Intown?
    Mr. Apgar. This was a performance-based contract. Intown 
got paid when they listed properties and when they sold 
properties.
    Mrs. Mink. So the $360-some-odd million is an estimated 
value of the properties that was assigned to Intown to sell?
    Mr. Apgar. Right. Estimated--the number of properties that 
they were assigned over a 5-year period over an estimated 
basis.
    Mrs. Mink. So the assumption is if they did their job and 
sold the properties, then they could pay all of the people that 
helped them perform in the maintenance and upkeep of these 
properties before they were sold.
    Mr. Apgar. That's right. It was a performance contract. 
They got an initial just for listing the property, and they got 
additional payment when they sold the property.
    Mrs. Mink. So in some instances then, the properties were 
actually listed, and the government then paid them the 30 
percent advance fee, even though the properties were not sold; 
is that correct?
    Mr. Apgar. Right. We paid them in two stages.
    Mrs. Mink. How much was paid to Intown then?
    Mr. Apgar. How much was paid to Intown in total? Many 
millions of dollars. I have to get the exact figure.
    Mrs. Mink. Out of that money that Intown was paid, is there 
any way to make sure that the actual obligations to the 
subcontractors are actually met for maintenance, or is that not 
part of the contract that you entered into with Intown, that 
they pay these obligations first out of that 30 percent?
    Mr. Apgar. Yes. They are bound by all kinds of contractual 
law which says that as contractors and in their relationship to 
subcontractors, they are obligated to pay.
    Mrs. Mink. So what is the overall total then of the 
subcontractors' claims against Intown? Now that it is all 
public and it is in the bankruptcy courts, I imagine that that 
total figure is available.
    Mr. Apgar. No. They are still totaling up the figure.
    Mrs. Mink. What is your estimate of what the figure would 
be?
    Mr. Apgar. Oh, several millions of dollars, maybe as many 
as $10 million.
    Mrs. Mink. Up to $10 million.
    Mr. Apgar. Yes. That is just a rough estimate.
    Mrs. Mink. Now, is that----
    Mr. Apgar. Can I explain why it is difficult to sort this 
out? We don't have clear information as to whether or not 
Intown has taken the money we have given them already and paid 
these contractors.
    Mrs. Mink. That was my earlier question; you made the 
estimate that it is about $10 million. Is any part of that 
money somewhere in escrow so that these people can be paid?
    Mr. Apgar. We withheld every payment that wasn't made at 
the time of termination back, and that is part of our resources 
that are moving forward.
    Mrs. Mink. So does HUD consider this to be a firm 
obligation to meet with respect to all of these subcontractors 
and workers that have not been paid for work that they have 
done?
    Mr. Apgar. We have, as we noted, taken the step of paying 
all the liens by posting surety bonds. By doing it that way, of 
course, it retains our claims in bankruptcy court so that we 
will be able to recover against those claims. We want to be 
careful not to pay twice for work that has already been done, 
and we have no obligation or resources to do that. It was our 
intention to work to make sure that the subcontractors are made 
whole, consistent with the operations of the bankruptcy court.
    Mrs. Mink. How long do you think that process will take 
before these people can be paid?
    Mr. Apgar. Well, we are paying already, as folks who have 
liens are being paid. We cleared almost 2,000 houses for sale, 
and the liens on all of those are being paid.
    Mrs. Mink. You are making good on the liens. How about Ms. 
Peterson's?
    Mr. Apgar. Right. It has come to our attention that a few 
people paid their own liens in order to do this, and then our 
procedure will be to identify those folks and pay their lien--
--
    Mrs. Mink. So Ms. Peterson can expect to get her money 
soon?
    Mr. Apgar. As soon as we can handle that transaction, that 
is correct.
    Mrs. Mink. Thank you.
    I have a whole bunch of other questions, but I am being 
beckoned to my other committee. But I did want to get to the 
point of the how come they didn't know about this individual's 
defaulting on bankruptcies and criminal record, and you stated 
that it was the Inspector General's responsibility. As I 
understand it, this is an entirely separate operation, so it is 
unfair to place that burden of failure of knowing who these 
people were on the Department when you have an Inspector 
General that is supposed to be doing the job.
    Mr. Mica. Well, let me say just in a quick dialog with the 
ranking member, if I may, and Mr. Tierney, that there is 
something wrong on the procedure. I don't know if it is in the 
law or in the regulations or their administrative procedure, 
but when you can award a $367 million contract to a guy with a 
conviction of felonies and a series of bankruptcies with that 
much public trust responsibility, there is something wrong.
    Mrs. Mink. Can I make an amusing comment, side-bar?
    Mr. Mica. Go right ahead.
    Mrs. Mink. I understand that the Majority party, however, 
is adamantly opposed to the administration's recommendation 
that we do establish a policy in which we examine the records 
of the would be contractors, and while I think that is a very 
good stand that the administration's taking, I wonder why it is 
being so vehemently opposed on your side.
    Mr. Mica. Well, I don't oppose it. I happen to be----
    Mrs. Mink. Good. Score one.
    Mr. Mica [continuing]. In favor of looking at what the 
problem is here, but obviously, we have a report that was just 
read by the Assistant Secretary from the IG office within the 
agency that is supposed to perform this function. Something 
went wrong, badly wrong, in this process, and whether it is 
changing the law, the regulation or whatever, we need to look 
at it. I am open to that, certainly.
    Let me yield now to Mr. Tierney, the gentleman from 
Massachusetts.
    Mr. Tierney. Thank you, Mr. Chairman. I am not going to 
take up any time. I think that you have pretty much hit it on 
the head, that where we ought to be going with this is looking 
at the process and determining where it broke down and what we 
should do to make sure it doesn't happen again; because 
clearly, you are exactly on point, that we should not be giving 
contracts out of this magnitude without some investigation into 
the past.
    We have now identified that nobody at this table was 
supposed to do the investigation, but one of the agencies 
should have. Maybe the next set of hearings should be bringing 
those people in to find out why they didn't do the appropriate 
job. Thank you.
    Mr. Mica. I thank the gentleman.
    We are going to leave the record open for at least 3 weeks, 
because we will have additional questions that we are going to 
ask the agency.
    Ms. Gibson, let me just clarify again, the contractor you 
spoke about was Citiwest that was in Chicago before Intown, and 
Citiwest was taken over by Intown. But you are telling me that 
there were--I don't know if there still are, but there were 
obligations of Citiwest, the first one, not met.
    Can you again enlighten the subcommittee?
    Ms. Gibson. Some of the subcontractors, again, when they 
came to us, they said that they were still waiting to receive 
all of their full compensation out of Citiwest. They had not 
received that money, and then my question, of course, to them 
was, if you haven't been paid from the first contract, why are 
you now with Intown, in this boat with those of us who came on 
board just with Intown? Their response was, well, we had to 
work. Those people are probably still with Goldenfeather.
    But I just have a question, because I am really not 
understanding what Mr. Apgar just said to us. I am trying to 
understand, are you saying that if we put liens on the 
property, we will get paid, because you are saying you are 
going to pay off the vendors that put liens on the property. We 
were advised against putting liens on the property by some 
attorneys who had done work for HUD, because we have called, I 
think, every agency in this government trying to find out how 
we get remedy. We were advised against putting liens. But what 
I seem to be hearing you say is that if we, as small vendors, 
put liens on the HUD property, then you will pay us our money. 
I am just asking for clarification.
    Mr. Mica. Secretary Apgar, she raised the question, and I 
think you addressed how the lien folks--and you did say that in 
some States you are in a bonding situation, so there are some 
that aren't. But what about also this question of nonlien 
obligations?
    Mr. Apgar. It is my understanding that State law enables 
contractors of this type to place liens against the property as 
a way of securing an interest. I am particularly mindful of the 
fact that many of these contractors are literally the folks who 
cut the glass and do small chores all the way up to substantial 
rehab contractors, and that is essentially a way of getting 
around issues of bankruptcy court and other complexities. So, 
in fact, I don't know who advised Ms. Gibson as to how to 
pursue her rights, but contractors that have placed liens 
against the properties have secured their interest that way, 
and we are, in fact, moving ahead with paying those contractors 
in order to facilitate the sale of the property.
    Mr. Mica. But again, those who haven't slapped a lien on, 
what is their recourse?
    Mr. Apgar. They don't lose their claim, and as we work with 
the bankruptcy court, we are pursuing options so that we can 
pay contractors directly.
    Mr. Mica. Do you know how much money was disbursed to 
Intown before they filed bankruptcy?
    Mr. Apgar. That is a number that I would have to check on.
    Mr. Mica. I would like that information.
    Mr. Apgar. The annual contract, if they sold the 
properties, it would have been many millions of dollars. They 
sold so few that the actual disbursements were small, or less 
than they would have been if they had been performing.
    Mr. Mica. My question would be if the portion--I guess they 
got a certain amount for management and other----
    Mr. Apgar. They got--for initial listing?
    Mr. Mica. Well, for their initial activities, right.
    Mr. Apgar. They got initial listing fees, that is correct.
    Mr. Mica. What percentage was it?
    Mr. Apgar. I think it was 30 percent of the overall payment 
that they eventually received that came up front, and then----
    Mr. Mica. I would like to know how much of that they did 
get, excluding money for the sales, how much money they did 
get.
    Mr. Apgar. Right. I will get you that figure, sir.
    Mr. Mica [continuing]. I think that is important.
    Mr. Apgar. There are no buzzes coming from the air back 
here, so I think my supporting folks don't have that. We will 
give you the exact number. We do have these numbers, of course, 
in our central computers.
    Mr. Mica. All right. Finally, you said you had a report 
from the IG. Who signed that report? Can you tell us what 
office it came from?
    Mr. Apgar. Yes. It is the previous participation 
experience. It is the IG's office, and it is signed by a Mary 
Dickens.
    Mr. Mica. Dickens?
    Mr. Apgar. I am trying to read this. It is handwritten 
here. Dickens. I am sure that our contracting office could give 
you the name of this person because----
    Mr. Mica. Are you familiar, Ms. Kuhl-Inclan?
    Ms. Kuhl-Inclan. It is Mary Dickens, yes.
    Mr. Mica. Mary Dickens. What office of the IG?
    Ms. Kuhl-Inclan. She works in our Office of Management and 
Policy.
    Mr. Mica. All right. Would you provide us with a copy of 
that report for the record?
    Mr. Apgar. Yes. Be happy to.
    Mr. Mica. Without objection, those reports will be included 
as part of the record.
    [The information referred to follows:]

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    Mr. Mica. Ms. Kuhl-Inclan, what went wrong?
    Ms. Kuhl-Inclan. I can only--I really don't know, sir. 
Intown Management Group was a brand-new organization, and that 
is the only thing I can speculate is that it was looked at--
when the request came in, it came under Intown Management 
Group. Our experience had been with Intown Properties, Inc., 
but that is only speculation. I will have to get you a complete 
answer.
    Mr. Mica. Is your office also recommending working with the 
Department of Justice now to make certain that we pursue both 
criminal and civil action against these folks?
    Ms. Kuhl-Inclan. I have not seen the request to our office, 
but yes, if it is sent to us, we will make sure that we work 
with the office, for both civil and criminal.
    Mr. Mica. Do you have anything else, Mr. Tierney?
    Mr. Tierney. No. We are obviously talking to the wrong 
people, but I would assume the IG's office would check the 
principals at least for their background.
    Ms. Kuhl-Inclan. I have no--I will give you a complete 
explanation.
    Mr. Mica. Well, we may follow through with your request. I 
think this is a large enough item for us to continue pursuing 
not only in this hearing, but a subsequent hearing, to make 
certain the program works well. I mean, we want people like 
Mrs. Peterson to have housing. We want to dispose of these 
properties. We don't want folks like Ms. Gibson out there also 
left holding the bag and other subcontractors across the 
country. This is a pretty big problem, and when they went down, 
it has created some incredible problems. But we need to work 
our way through this and make sure that it doesn't happen 
again, for God's sake.
    Well, I thank this panel. We have fulfilled some of our 
responsibility in conducting oversight and investigation on 
this program. We will excuse you at this time, and we will call 
our second panel.
    In the second panel we are going to discuss the Community 
Builders Program, which we have heard has been the source of a 
great deal of controversy, to discuss that program and some of 
the problems surrounding it. We have several panelists. They 
include Mr. D. Michael Beard, who is the District Inspector 
General for Audit, Texas, Department of Housing and Urban 
Development; Ms. Carolyn Federoff, and she is vice president of 
the Massachusetts State Office AFGE, and I am glad to see Mr. 
Tierney here from Massachusetts; and we have the Honorable Saul 
Ramirez, Jr., Deputy Secretary, Department of Housing and Urban 
Development.
    Ms. Kathy Kuhl-Inclan, I am told you are also going to sit 
in on this panel. You have been sworn. If the other three could 
please stand.
    [Witnesses sworn.]
    Mr. Mica. The witnesses answered in the affirmative. We 
welcome the three new panelists. Again, if you have lengthy 
statements or additional information you would like added to 
the record, we would be glad to do that upon request.
    With that, I will recognize first Mr. D. Michael Beard, 
District Inspector General for Audit, Texas, Department of 
Housing and Urban Development.

STATEMENTS OF D. MICHAEL BEARD, DISTRICT INSPECTOR GENERAL FOR 
  AUDIT, TEXAS, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; 
 CAROLYN FEDEROFF, VICE PRESIDENT, MASSACHUSETTS STATE OFFICE 
   AFGE LOCAL 3258; AND SAUL RAMIREZ, JR., DEPUTY SECRETARY, 
          DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Beard. Chairman Mica, Ranking Member Mink, and other 
subcommittee members, I appreciate the opportunity to appear 
before you today to discuss the results of our audit on 
Community Builders at the Department of Housing and Urban 
Development. I am accompanied today by Kathryn Kuhl-Inclan, the 
Assistant Inspector General for Audit.
    Our audit generally found problems with the Community 
Builder concept, its implementation and its impact on HUD. 
While we did see some positive results from the 85 Community 
Builder specialists, overall we concluded that HUD could not 
afford the Community Builder concept. Over the last two 
decades, HUD has downsized from 20,000 employees to just over 
9,000. During this same period, HUD's programs have increased 
dramatically. The General Accounting Office placed the 
Department on its ``high risk'' list.
    Our audits have also identified some weaknesses. A common 
theme in these audits is the lack of sufficient resources to 
effectively manage and monitor programs. We do not see how 
Community Builders contribute to resolving any of those 
deficiencies. On the contrary, we believe a large number of 
staff devoted to this function diverted other staff resources 
from performing oversight functions.
    The Community Builders was an attempt to separate the 
outreach and monitoring functions. However, HUD chose an 
expensive and controversial solution. HUD did not properly 
establish the necessity for the Community Builders or the level 
of resources it required. Rather than targeting staff from 
within, HUD chose to look to the general public for Community 
Builder fellow positions. In our view, HUD used Schedule A 
authority because it offered the most latitude in hiring 
outside Civil Service rules.
    In selecting personnel for Community Builder fellow 
positions, HUD ignored veterans' preference and OPM's rule of 3 
selection process. Senior management dismissed the failure to 
follow veterans' preference and selection rules as 
administrative errors. Further, in response to our report, HUD 
stated they complied with veterans' preference. However, audit 
evidence shows they did not. In light of the foregoing, we have 
asked Director Lachance of the Office of Personnel Management 
to conduct a full review of HUD actions.
    The Community Builders' positive impact on HUD's mission is 
indeterminable. The Community Builders' purpose is everything 
from providing one-stop customer service to solving the 
toughest economic and social problems facing communities. This 
visionary mission is not easily measured or realistically 
accomplished.
    Through the establishment of the Community Builder Program, 
HUD has redirected a significant amount of its staff resources 
to outreach and customer relation activities. Since the 
function was created without any increase in HUD funding, all 
associated costs reduced the funds available for other program 
staff. These other program staff, known as public trust 
officers, have the responsibility for monitoring and overseeing 
several HUD programs. At a time when HUD is designated by GAO 
as a high-risk agency, HUD can ill afford to devote substantial 
resources to the Community Builder concept. Community Builder 
activities do little to address HUD's mission and require 
scarce resources being directed away from areas that could help 
in addressing the many identified material weaknesses in HUD's 
program.
    Our overall conclusion is HUD should discontinue the 
Community Builder position. As designed and implemented, the 
Community Builder function is too costly. Excluding the 
Community Builder specialists assigned to specific program 
areas, HUD never established the need for Community Builders, 
identified skills Community Builders would need, or gave focus 
to their activities.
    In responding to our report, HUD cites favorable comments 
by other organizations on Community Builders; however, these 
organizations performed limited reviews. For example, the 
interim Ernst & Young report stated their work was limited to 
reporting on 25 case studies identified by HUD.
    HUD had also asked to control the selection of the people 
that we wanted to interview and the sites that we wanted to 
visit, but we declined.
    HUD also cited several instances where Community Builders 
have had a positive impact. We have no doubt individual 
Community Builders have had a positive impact; however, we 
believe career HUD employees have always had a positive impact 
and could have had an even greater impact if given the same 
resources provided to the Community Builders.
    Let me emphasize that we are the only entity to give the 
Community Builder Program an independent review. The other 
organizations that have reviewed it are consultants. I would 
like to quote from the engagement parameters of the Ernst & 
Young report which says, ``Our sample of case studies was drawn 
solely from the population of case studies provided by HUD. The 
terms and scope of our engagement did not provide for us to 
independently verify or otherwise test the completeness of the 
overall case study population provided. Further, this report is 
based solely on information submitted by the Community 
Builders, HUD, and individuals interviewed. In addition, all 
case study interview sources were identified from the Community 
Builders, identified as references in their individual 
selective case studies. Our findings and observations relate 
solely to the selected case studies. The scope of our 
engagement did not provide for us to interview HUD employees 
regarding the Community Builders Program. These and other 
engagement parameters are described in more detail in section 5 
of the report.''
    The project was considered a consulting engagement under 
the standards of the American Institute of Certified Public 
Accountants. So therefore, it was not an audit engagement.
    Thank you very much.
    Mr. Mica. I thank the gentleman.
    [The prepared statement of Mr. Beard follows:]

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    Mr. Mica. I would like to yield now to the gentleman from 
Massachusetts, Mr. Tierney, for the purpose of an introduction.
    Mr. Tierney. Thank you, Mr. Chairman.
    It is my pleasure to introduce Carolyn Federoff, who is 
known to me for her fine work up in our area. Carolyn Federoff 
works in the Boston office of the Department of Housing and 
Urban Development. As the development attorney with the 
Department, she has helped in the development of many projects, 
particularly in my district, including the Whittier School 
Apartments, which is an eight-unit development for persons with 
mental disabilities in Amesbury, as well as the HEPA 39 
apartments, which in reality is a 54-unit development for the 
elderly. She has an outstanding reputation amongst HUD's 
clients.
    Carolyn has been elected union representative for more than 
10 years, and during that time she and her coworkers have kept 
the Massachusetts congressional delegation informed of proposed 
changes to HUD and the impact on our constituents. I will just 
add that she has done an excellent and incredible job. We 
appreciate her services, and I am pleased to introduce you 
today, Carolyn.
    Mr. Mica. Thank you, Mr. Tierney.
    Welcome, you are recognized.
    Ms. Federoff. Thank you, Congressman Tierney, for that kind 
introduction, and thank you, Mr. Chairman and Members, for 
inviting me to testify on behalf of our members. We represent 
members throughout New England, and our members are very happy 
that you are taking an interest in the programs and issues at 
HUD. I hope that you will place my written testimony into the 
record, but I am going to provide only some details.
    Mr. Mica. Without objection, your entire statement will be 
included in the record.
    Ms. Federoff. A little bit of background. In 1991, the 
Boston office had 322 staff. In 1999, we have 183 staff, which 
represents a 43 percent reduction in staff over 8 years. 
Currently, more than 10 percent of our staff are Community 
Builders.
    HUD is very resource-poor, but what particularly disturbs 
employees is that we believe it uses its resources poorly, and 
the M&M contract is a case in point, which the previous panel 
did discuss, and that is covered in my written testimony.
    There is another contract that was considered in that same 
audit by the IG that looked at the M&M contract, and that is 
the Section 8 contract administration contract. That is also a 
$1 billion contract over 5 years for which the agency has not 
conducted any credible cost-benefit analysis and certainly no 
cost-benefit analysis under A-76. Based upon our review of 
agency documents, we believe that contract is $159 million more 
than hiring HUD staff annually. That works out to more than 
27,000 housing vouchers that could be provided for homeless 
families if this work were to be kept in-house as opposed to 
contracted out. The IG also mentions that there are significant 
threats to the integrity of the program if this were to be 
contracted out.
    I realize that this panel is concerned primarily with 
Community Builders. Now, first allow me to say that our 
testimony is not directed toward individual Community Builders, 
because, in fact, all of the Community Builders that I know 
personally are, in fact, committed to the mission of the agency 
and came here with that express purpose. Our concern is that 
given the expenditure of funds and the expenditure of resources 
that is necessary to maintain the Community Builder Program, 
that, in fact, it is not significant enough to warrant that 
distribution of resources.
    In New England, we presently have 43 Community Builders. 
Only the Office of Housing has more staff resources than the 
Community Builder Program has in New England. So, for example, 
our Community Planning and Development Office has 28 staff in 
new England. This staff oversees congressionally mandated 
programs, such as 55 community development block grant 
recipients, 28 home recipients, 22 emergency shelter grant 
recipients and 550 McKinney homeless grant recipients.
    In Massachusetts alone, the staff is responsible for 
overseeing more than $170 million in funds, and they are also 
responsible for Maine, New Hampshire, Vermont and Rhode Island. 
So statutorily mandated, taxpayer-funded program 
responsibilities receive only two-thirds of the staff that is 
currently dedicated to front office responsibilities, 
responsibilities which have no statutory mandate or rule or 
regulation.
    Now, the grade parity issue has been an issue that has been 
identified, the Community Builders GS 13, 14 and 15. And 
frequently as a union rep, I am asked what is the impact on 
rank and file, and clearly there is an impact on rank and file, 
but this really has to be taken as a full management issue.
    Let's compare one Community Builder position, which is the 
Officer Next Door Program. The Officer Next Door Program staff 
person is a job that had previously been one part of a GS-11 
single-family property disposition specialist job, and I 
understand that this Community Builder fellow has far more 
territory to cover than any GS-11 PD specialist had previously. 
However, this person has--oversees no staff, has no fiscal 
responsibilities, and cannot obligate agency funds, and is a 
GS-15. Compare this to our Director of our--of the New England 
multifamily Hub. That GS-15 Director is responsible for 
overseeing 88 staff in five offices, more than $150 million in 
development dollars in 1999 alone, the largest portfolio in the 
country of 2,266 active properties, and more than 200 
properties in the development pipeline.
    Now, why would you become a manager in the Federal 
Government if you have that much responsibility and are paid 
the same amount as the GS-15 down the hallway?
    This is an issue that attacks the morale of the agency 
throughout the entire agency. I realize that the agency is 
saying that this is no longer an issue, that we are no longer 
going to have a temporary Community Builder Program. Well, in 
fact, it appears that we are going to have a permanent 
Community Builder Program, and this is going to be a severe 
blow to the morale of employees throughout the agency.
    We hope that this committee and our representatives in 
Congress will look seriously at the distribution of resources 
in our agency, particularly with regard to the Community 
Builders and the Section 8 administrative contract, which is a 
serious issue for our members and for our constituents. Thank 
you for giving us this opportunity.
    Mr. Mica. Thank you for your testimony.
    [The prepared statement of Ms. Federoff follows:]

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    Mr. Mica. We will now hear from Mr. Ramirez, who is the 
Deputy Secretary for the Department of Housing and Urban 
Development.
    You are recognized, sir. Welcome.
    Mr. Ramirez. Thank you very much, Mr. Chairman and members 
of the subcommittee. It is certainly a pleasure to be here, and 
as I mentioned, I am the Deputy Secretary, my name is Saul 
Ramirez, and it is a pleasure to be here to discuss our 
Community Builder Program. I would like to request that both my 
written and oral testimony be included for the record, Mr. 
Chairman.
    Mr. Mica. Without objection, so ordered.
    Mr. Ramirez. Let me say that this is an innovation that we 
are extremely proud of, and it is a critical part of our 
successful management reform efforts and is making the 
Department work better for the people we serve. Please allow me 
a brief moment to explain how the Community Builder Program 
came about.
    For years, HUD was considered the poster child of inept 
government. It was criticized as a bureaucracy riddled with 
waste, fraud and abuse, and was known more for red tape than 
results. The media reported HUD scandals and landlord rip-offs. 
HUD customers shared horror stories of making 10 phone calls to 
10 different people, just to find a simple answer, if they 
could get one at all.
    In 1994, with the recommendation of Congress, HUD worked 
with the National Academy of Public Administration to look at 
its management. NAPA told HUD that it needed to make working 
with communities just as important as enforcing regulations. 
They said HUD should be providing comprehensive services to the 
communities it serves.
    By January 1997, when Secretary Cuomo arrived, many in 
Congress were fed up with the situation at HUD, citing sloppy 
or nonexistent accounting, shoddy program monitoring and 
blatant disregard for the needs of the customers. They called, 
in fact, for HUD's elimination. HUD needed to get its own house 
in order first and fast, and a goal for a comprehensive 
management reform plan was designed to transform HUD into a 
streamlined, effective community partner.
    First we began to restore the public trust and improve our 
competency. We focused agency staff on ridding waste, fraud and 
abuse. We cracked down on bad landlords, debarring those who 
were cheating taxpayers or who refused to provide safe, decent 
housing. We hired an FBI agent to head up our new Enforcement 
Center, and we went after lenders who discriminated and 
cheated. We built a system for the first time that enabled us, 
in fact, to assess the condition of our entire housing 
portfolio, and, for the first time in our Department's history, 
we balanced our books and had a clean opinion, as concurred by 
the Inspector General.
    But we also needed to better serve our current clients and 
customers as well as those underserved communities still in 
desperate need of assistance and who found us unapproachable. I 
am certain that no one in this room would disagree with me when 
I say that cutting red tape and streamlining operations is the 
right goal, and that is exactly what Community Builders helped 
do, and here is how.
    At the heart of better customer service and better overall 
management, it is the recognition that the employee role 
confusion undermines performance. Now, let me repeat that. The 
recognition that employee role confusion undermines 
performance. NAPA understood this, as well as David Osborne, 
who warned HUD of pitfalls when one employee must assume two 
contradictory roles. We know HUD staff can no longer wear two 
hats, serving as both facilitators to help communities access 
resources, and monitor those same communities and make sure 
that they use their funds properly. These contradictory roles 
weaken both customer service and monitoring and compliance.
    Using private sector reorganization as a model, HUD took a 
customer service function that was performed by all HUD 
employees and concentrated them in a small number of employees, 
our Community Builders. Now, Community Builders, some 9 percent 
of the agency work force, focus on customer service, leaving 
more than 90 percent of the agency to put 100 percent of its 
time into restoring the public trust in meeting our mission to 
meet compliance and monitoring efforts within the Department. 
This change makes sense to all of us intuitively. What 
insurance company would have the same group of employees act as 
both a sales force and an underwriting force?
    We are pleased to say that many people agree with these 
changes that we have made and, in particular, in our Community 
Builder Program. You have alluded to the Ernst & Young report 
that concludes, in fact, that the Community Builder Program may 
serve as an innovative government model for improved customer 
service for government institutions at all levels.
    I would also like to state that Andersen Consulting 
conducted a survey in which they found, ``In striking contrast 
to the image of the Federal bureaucracy, HUD staff is perceived 
by customers as providing exemplary service and accurate 
information. Many of these customers are public entities and 
officials, Members of Congress, and others that have worked 
directly with Community Builders,'' and I have submitted a list 
of some of the hundreds of people and organizations that we 
have heard from as it relates to this effort.
    I would like to just conclude by saying that the OIG is the 
only organization that has criticized HUD Community Builders, 
and that the Department firmly disagrees with the OIG 
criticism. In fact, it would take me hours to just walk through 
the many mistakes and misassumptions that the OIG report has 
stated.
    So I urge you to thoroughly review the detailed response 
that we have provided you in response to their audit.
    Let me just briefly state three items that we disagree on. 
First, the OIG argues that there were problems with the process 
for hiring Community Builders. HUD followed all proper 
procedures and consulted with the Office of Personnel 
Management to institute a very stringent hiring process, a 
process, I might add, that was carried out entirely by civil 
servants. Congress decided at this point, though, in its most 
recent budget that we make all Community Builders now Civil 
Service positions, and we are moving in that direction.
    The second point that the IG highlights is that the 
Community Builders take up too many of the Department's 
resources. Well, that is just simply wrong. I would refer you 
to that chart of our salaries and expenses, as well as our 
travel dollars that we allocate in the Department, and would be 
happy to allude to in greater detail as it relates to that.
    Third, I would like to say that the Community Builders do 
add value in contrast to what the Inspector General has cited 
in their report, and Members of Congress, mayors, HUD customers 
and clients and respected organizations that are credible, like 
Ernst & Young, Andersen Consulting, Booz-Allen, public strategy 
groups, have stated specifically that Community Builders are a 
tremendous asset to the Department. Even GAO and NAPA 
acknowledge that the Department is moving in the right 
direction to deal with its weaknesses.
    We at the Department are still not satisfied with that and 
are working to improve our systems, and will outline any 
additional detail in improving those systems, but I am prepared 
to answer any questions that you may have at this time as it 
relates to this subject or any other, Mr. Chairman.
    Mr. Mica. Thank you.
    [The prepared statement of Mr. Ramirez follows:]

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    Mr. Mica. Your testimony stated that the only organization 
that has criticized the Community Builders is the OIG. I would 
imagine that Ms. Federoff represents--who is representative our 
civil servants, maybe AFGE has a different opinion. I think she 
stated some of that here.
    There was concern about the selection process. There is 
concern when you have someone with no supervisory 
responsibility, limited duties as far as oversight of financial 
obligations and things of that sort, major consequences being 
at a substantially different pay grade. That sounds 
inequitable. So, I think other than the OIG, and I did cite the 
U.S. Senate, I guess that could be referred to as an 
organization, although sometimes it is a bit disorganized, has 
been very critical.
    Ms. Federoff, we are now sort of institutionalizing the 
Community Builders. If we were to properly do that in your 
estimation, how would we proceed?
    Ms. Federoff. Well, I believe that, in fact, there is a 
role to play by Community Builders. However, I think it would 
be a smaller cadre of staff that would be more appropriately 
graded to reflect the duties that they are doing and put them 
on par with other employees within the Department.
    I believe that one of the largest problems with this 
program is the large numbers of temporary employees at very 
high-grade levels that causes a significant morale problem.
    Mr. Mica. Well, that is one of the inequities I pointed out 
that you had mentioned. We have this in place--Congress wants 
it changed, and I am sure that there has been some good to come 
out of the program. The problem we have now is we have a lot of 
these folks in high-paying positions selected on a different 
basis.
    Mr. Ramirez. May I address that?
    Mr. Mica. In fact, I was going to ask you a question about 
it.
    Mr. Ramirez. Yes.
    Mr. Mica. As we make this transition, how are the employees 
or employees' groups going to have a say in how this is 
organized? It was my understanding that OPM uses civil servants 
to help in the selection process. Is that correct?
    Mr. Ramirez. No. All of the hiring was done by HUD civil 
servants for the external Community Builders. If I may, the 
total number is almost even between career Community Builders 
and fellows at this time. There are a few more fellows than 
there are career.
    Mr. Mica. So you are going to fire all the fellows?
    Mr. Ramirez. No. What we are going to do, sir, is we are--
as term employees are subject to, and we have had other types 
of term employees employed by the Department that are subject 
to limited tenure--let me just state a couple of points.
    First off, we went into this reform with the national 
representatives as well as locals into 2020 reform, which 
included Community Builders, at the onset of this. We have kept 
that dialog current with our national representative and also 
met with the local presidents. I was sorry to miss Ms. 
Federoff.
    Mr. Mica. How would you propose to bring the pay schedule 
in to some----
    Mr. Ramirez. I was going to get to that point. I would like 
to state this for the record, that if you take the Grades 13s, 
14s and 15s on the career side of Community Builders and the 
fellow side, that, in fact, the career Community Builders 
average more than $5,000 in their salary than the fellows, if 
you take out--if you take the average of salaries between those 
grades. What we are proposing to do is, again, based on the 
formula for need and other activities within a jurisdiction, 
allocate those fellows accordingly.
    I would like to also add that we did follow the veterans' 
preference in contrast to what has been stated by the OIG, and 
would say that, in fact, the Neighborhood Next Door, a fellow 
that was alluded to by Ms. Federoff as well as the other two 
are veterans that were hired by the Department. So there have 
been a lot of items that have been stated that have not been 
thoroughly reviewed or investigated or have not had the kind of 
objectivity that we would like to place forth as we move 
forward in meeting Congress's wishes to make sure that we 
address the deficiencies that we have as a department, Mr. 
Chairman.
    Mr. Mica. Ms. Federoff, again, back to the question of how 
do we achieve some new equity as far as pay, what would be your 
recommendation? We talked a little bit about positions, about 
getting the pay schedule in order. How do we solve something 
like that now that we have gotten ourselves into this?
    Ms. Federoff. This is a very uncomfortable position for a 
union representative to be in.
    Mr. Mica. Well, you know, the Federal employees have a lot 
at stake. There are 90 percent of your folks that are living by 
a different set of rules and regulations. Congress----
    Mr. Ramirez. That is not so, sir. They were all hired under 
the same standards that are applied to higher public trust 
officers and by civil servants. They were the same rules and 
same regulations, and the compensation that they received was 
based on the analysis that the Federal Government provides to 
hire new outside hires into the Federal Government as well as 
position descriptions and responsibilities that they assume.
    Mr. Mica. Well, Ms. Federoff doesn't seem to agree entirely 
with that. Maybe you would like to comment.
    Ms. Federoff. Well, it is interesting that in the Inspector 
General's report the Inspector General does quote, I believe, 
yourself as saying that much of the work being done by 
Community Builders now is work that had been done for at least 
6 years previously by our CPD staff. The journey level for our 
CPD staff is a Grade 125.
    Now, what is particularly infuriating for our staff is that 
the very best work, quite frankly the ``funnest'' work that we 
do, which is customer relations, was taken away from us, and we 
were told, no, now all you are going to do is be enforcers. I 
didn't come to work for the United States in order to be an 
enforcer. I came to work with customers, to find a way to get 
them the product that they deserve. And now to be told that the 
very best work I do will be given to another employee at a 
Grade 13, 14, 15, and I will be relegated to doing nothing but 
enforcement actions is--quite frankly, insulting.
    Mr. Mica. She is not a happy camper.
    I do want to give the gentleman a chance.
    Mr. Ramirez. Real quickly. She sells herself short to say 
she would be just a regulator. She brings a technical expertise 
and the program experience that is necessary to deliver that 
product.
    And I would like to say two more things real quickly. First 
off, all HUD employees had an opportunity to apply for 
Community Builder positions. No one was excluded. So if they 
chose to want to do that, they could have applied for those 
positions.
    Second, I will note that even after the first year of 
implementation, that as a result of having our public trust 
officers concentrate 100 percent of their efforts to, yes, 
compliance and monitoring, which is a statutory requirement, as 
well as facilitating program expertise, that in particular 
those activities that community development workers or staffers 
were doing, we have actually increased our numbers. We have 
been able to show that in our Home Household Program, for 
example, we went from, in 1998 where we serviced 75,323 homes 
to, in 1999, 90,958. We also went out there and increased, in 
this particular line of work, new community partnerships. We 
went from a goal of 300 to 609 that were created as a result of 
that. We believe that in addition to that, community 
consultations were almost doubled as a result of now having a 
true bifurcation of responsibilities that allows for the 
technical expertise, the compliance and monitoring effort be 
focused 100 percent, and the Community Builders be the contact 
for the general information-gathering and dissemination of what 
the Department does.
    I would like to finish by saying that as a mayor for over 8 
years, one of the most difficult things I had to contend with, 
as mayor in dealing with HUD, was that I had a community 
development representative come in 1 week, an FHA 
representative coming the following week, and intermittently 
nobody knew that each other was down there, and I needed both 
of those to make projects work in a comprehensive way. That is 
what we are trying to get to with this particular program of 
Community Builders.
    Mr. Mica. Thank you.
    I will yield to Mr. Tierney, the gentleman from 
Massachusetts.
    Mr. Tierney. Thank you, Mr. Chairman.
    Mr. Beard, you have been getting off scot-free here, so I 
want to talk to you for a second.
    I understand what the Under Secretary is saying, and I 
understand what Ms. Federoff is saying, but I guess the 
question I would have is coming from Boston, where we have gone 
from an office of about 322 employes down to about 237, that is 
about a 26 percent whack there, at a time when Congress is 
mandating certain programs to be operated and adding some, such 
as the McKinney program, what does your office say about the 
appropriateness of instituting a new public relations type of 
effort, one, I think, that we are going to have trouble 
servicing the mandates that Congress has put on for programs?
    Mr. Beard. This is the point that we are making. HUD's 
resources are shrinking. The Inspector General has consistently 
taken the position that HUD does not have sufficient people to 
do the work outlined for it to do now, and as this number is 
shrinking, what has happened is HUD has taken a large chunk of 
people away from what its primary functions are to do this 
customer service, public relations function.
    This is one of the points that we are making. It can't 
afford to do this, because it is being asked to do so much 
more. It has so many more programs. Its monitoring and 
enforcement functions are extremely important, and they don't 
have the resources to do that.
    Mr. Tierney. Now, if we give the Under Secretary credit at 
least for the fact that there is some obvious legitimacy to 
having some outreach to communities and coordinating HUD's 
efforts so that mayors and other local officials don't go 
around, what is the recommended way of dealing with all of the 
enforcement and monitoring provisions and using resources to 
also take care of those issues; and is the Under Secretary's 
argument that you can't do both from the same position because 
it is a conflict which is going to compromise your position 
relevant in your view?
    Mr. Beard. It is not relevant, in my view. As a matter of 
fact, the one individual that that has really settled on is the 
Secretary's representative. They still play both an enforcement 
and outreach function.
    HUD has always had an outreach function. It has always been 
there with the Secretary's representatives. It has always been 
there with the office managers and State coordinators. They 
have different titles, but there have always been contacts from 
mayors, towns, executive directors to come to one person to ask 
their questions and get the answers that they need.
    So I don't think it is a function that we dismiss, it is an 
important function. But our point is the scale that this 
particular Community Builder position has been built to has 
taken away too much from the other things that HUD is supposed 
to be doing.
    Mr. Tierney. Ms. Federoff, the employees, the ones that are 
left with the idea of monitoring in that position, they must 
now feel overwhelmed with what is left to them in terms of the 
fact that they have fewer flows, particularly in the Boston 
office, have all of those responsibilities, and they have 
another group of about 16, I think it is, in the Boston office 
come in, and their job doesn't expend any funds, they are just 
out there, as you say, having the fun end of the job. I am sure 
they serve a purpose, but what effect does this have on 
employees?
    Ms. Federoff. I know that when I was provided an 
opportunity to testify before this subcommittee, I sent a 
message out to our local executive board, our stewards and our 
alternate stewards and asked them should I, in fact, testify, 
and I got back a resounding yes, and I was told emphatically 
that I was to stress the morale issue on Community Builders, 
that that was our membership's top priority, although, quite 
frankly, I am more exercised over contracting out. But yes, our 
employees are very concerned about this program.
    Mr. Tierney. Well, the contracting out issue, I guess, is 
one that we are not going to get into today, although I would 
love to both on the other issue and this issue. It seems to me 
that is one direction where some in the majority have been 
going, and I think this is just one more example of how that is 
a failed policy and a bad idea. Maybe we could talk about the 
IG report or the agency's plan to contract out Section 8 and 
talk about how there is about $38 million missing in that 
operation that we could have probably saved by keeping it in-
house and work on that basis.
    So I guess I just want to go on record as saying that I 
think that we should probably do a lot better in terms of 
morale, we should probably do a lot better in terms of getting 
this function served within our existing staff, but not at the 
sacrifice to those programs that Congress has mandated.
    Mr. Ramirez. May I address that? In our reorganization 
efforts, there have been a little less of an equal amount of 
public trust positions that were created and have been 
available to other employees, or all employees of HUD to 
actually apply for and still dedicate themselves to doing 
public trust work. It is not like we went out and only hired 
Community Builders. In this process we staffed up an 
enforcement center and a real estate assessment center that, by 
the way, for the first time has inspected our entire portfolio 
for physical and financial conditions.
    And let me just state for the record that the downsizing of 
the Boston office was primarily due to the fact that we 
consolidated our underwriting activities into four centers 
around the country in our single-family operation, and as a 
result of that, we have now been able to show with unequivocal 
results that we went from 1,000,080 endorsements last year to 
over 1,291,000 endorsements.
    All we have tried to do here in this reorganization and in 
the reform that was as a result of Congress coming out there 
and pointing out real weaknesses that we have had for over 10 
years, since Ms. Federoff has been there, is that we are trying 
to address them in a real, bold, innovative and responsible 
way. We think we have been able to balance it. We think we have 
strengthened our public trust role. The numbers reflect it 
through the results of our business and operating plan, and the 
Community Builders are out there facilitating programs to 
underserved areas and touching communities that have not been 
touched in the past. We look forward, though, to working to 
further refine, strengthen, and move into the direction that 
Congress has so instructed us.
    Mr. Tierney. I appreciate your comments, but I just as 
strongly want to urge you back that I think you can do better.
    Mr. Ramirez. Absolutely.
    Mr. Tierney. I am not nearly as sold on the success of this 
program as you are, and I think that in Boston alone, although 
you consolidated everything down to Hartford or whatever, you 
took those 90 positions away from Boston and filled them with 
16 PR people, in my view that are not implementing programs, 
and I don't think that is such a hot break for the Boston and 
greater Boston area. So if you could take that message back to 
Mr. Cuomo, maybe we can do better.
    Mr. Ramirez. I would be glad to, sir.
    Mr. Beard. Mr. Chairman, could I be allowed to just mention 
the irregularities in hiring?
    Mr. Mica. Go right ahead, on Mr. Tierney's time.
    Mr. Beard. Page 143 of the report, I would like to draw 
your attention to a letter written by the Deputy Director of 
the Office of Human Resources in which she informs a 10-point 
disabled veteran that the selecting official at HUD was free to 
select any 3 of the 41 candidates listed for the Fort Worth 
job, and that is precisely how HUD approached hiring people. 
They selected anybody they wanted to off of any list they were 
dealing with.
    In our letter to Janice Lachance, the Director of OPM, this 
is what we listed that she should be looking into in terms of 
Schedule A and both hiring irregularities: HUD did not 
establish that it was facing a limited pool of applicants; it 
did not set up a plan for cross-fertilization to occur; 
intended the individuals hired with occupied policy-determined 
positions; conducted full examinations of the applicants when 
Schedule A anticipates examinations would be impractical; 
failed to establish the need for 460 temporary employees; 
advertised using a GS-13, 14, 15 career ladder; failed to 
determine needed skills; failed to determine needed grade 
levels; failed to mention veterans' preference in the 
advertisement; prepared one best qualified list for all 
applicants rather than three separate lists for each level 
advertised; failed to document or show how they determined a 
successful applicant's grade level; hired at grade levels 
higher than the Department's norm; hired Schedule A employees 
to perform functions previously performed by career staff 
without the required approval from OPM; ignored veterans' 
preference in the selection process; and ignored the prescribed 
selection process set forth in 5(c)FR302, which is essentially 
rule of 3.
    Mr. Ramirez. Let me just comment on that. Before we moved 
on with our Schedule A authority as allowed by law, we had our 
human resource department craft it out. We had OPM's input in 
implementing the Schedule A, and I would like to note for the 
record that a current Assistant Counsel for the Office of the 
Inspector General, Mr. Anthony De Marco, was the one who 
crafted and signed off on the legal analysis on the Schedule A 
hiring authority and its appropriateness as it relates 
specifically to the external Community Builders.
    Mr. Mica. Well, we seem to have some serious internal 
problems in the agency, making certain that the intent of 
Congress and also the law on regulations as we would like to 
see them fulfilled are, in fact, executed. I am very concerned 
about the veterans' preference matter. I worked for 4 years to 
try to make certain that our veterans have preference and are 
considered as having served in Federal employment, and we want 
them to have that recognition and consideration in the Federal 
jobs opportunities. So I am not a happy camper about that at 
all.
    Mr. Tierney has expressed some of his concern. We want this 
to work. Certainly the agency has to resolve these things.
    Mr. Ramirez. Let me just say that, again, we are of the 
opinion and do have the legal analysis and the record shows if 
someone would look at the process of how it was employed, and 
it is being looked at, veterans were hired, Mr. Chairman.
    Mr. Mica. Again, there is something wrong, whether it was 
the previous panel or the IG's office, one arm of the IG's 
office doesn't know what the other end of the Department is 
doing; whether it is somebody checks off in your agency, it is 
still not as we intended it.
    We also have contracted out, and it has been part of the 
new majority's intent, even the administration, the Vice 
President, what is it, reinventing government, wants to 
contract some of these things out. It wasn't our intent to 
contract out work to convicted felons with bankruptcy 
histories. Something has gone askew in the process. So whether 
it is with the previous panel or this panel, we want this thing 
to work right.
    I have some serious questions about home builders--I am 
sorry, Community Builders and HUD. Mr. Apgar works for you?
    Mr. Ramirez. Yes.
    Mr. Mica. He sent out a memo, and it is my understanding 
Community Builders are supposed to work with tenants and with 
individuals, whoever needs information. He sent out a memo on 
September 10th. We have a copy that says it has come to our 
attention that in their effort to provide responsive customer 
service, Community Builders in certain areas have 
misrepresented or overstepped their role in dealing with HUD's 
identified troubled family projects. He goes on to say, at no 
time is it proper for the Community Builder to schedule 
meetings, respond to or initiate contacts directly with an 
owner, owner's representative, owner's agent, the media, 
tenants, Members of Congress, or their staffs regarding a 
troubled multifamily project without the explicit prior 
agreement of the Director of the Multifamily Hub/Program Center 
and, where DEC is involved--I can read the rest of this memo, 
and we will make it a part of the record.
    [The information referred to follows:]

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    Mr. Mica. But, you know, they have certain responsibilities 
to work with everyone. Here we have memos being sent out----
    Mr. Ramirez. And I know you don't--and I am glad you are 
including the entire memo for the record, sir. But it also 
states that this is in regards to multifamily projects that are 
currently----
    Mr. Mica. Right, current troubled multifamily projects.
    Mr. Ramirez. That are currently being investigated by the 
Enforcement Center. Once it is in the Enforcement Center's 
hands, we are coordinating the troubled projects directly with 
the program manager for the site, as well as--and that is--that 
was the spirit of that memo as it was sent out, and I regret 
that Assistant Secretary Apgar is not here, but it was in 
direct response to projects that were being referred to the 
Enforcement Center, of which we have 500 nationwide right now.
    Mr. Mica. Well, I have additional questions regarding this 
memo, other specific problems that have been brought to the 
attention of the subcommittee. Without objection, we will leave 
the record open for at least 3 weeks.
    We will not have any further questions at this time. 
Unfortunately, we do have a vote pending, and it will be some 
time before we get back. So we will dismiss this panel and 
thank you for your cooperation.
    There being no further business to come before the 
subcommittee at this time, this meeting is adjourned.
    [Whereupon, at 12:30 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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