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





  RESULTS OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT'S FISCAL 
                  YEAR 1999 FINANCIAL STATEMENTS AUDIT

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 22, 2000

                               __________

                           Serial No. 106-167

                               __________

       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

                               __________

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                     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
                    Lisa Smith Arafune, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois               JIM TURNER, Texas
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                         Randy Kaplan, Counsel
                           Bryan Sisk, Clerk
                    Trey Henderson, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 22, 2000...................................     1
Statement of:
    Gaffney, Susan, Inspector General, Department of Housing and 
      Urban Development, accompanied by Kathryn Kuhl-Inclan, 
      Assistant Inspector General for Audit; James Heist, 
      Director of the Financial Audits Division; Benjamin Hsiao, 
      Director of the Information Systems Audit Division; and 
      Saul Ramirez, Deputy Secreary, Department of Housing and 
      Urban Development, accompanied by Victoria Bateman, 
      Comptroller for FHA........................................     7
Letters, statements, etc., submitted for the record by:
    Gaffney, Susan, Inspector General, Department of Housing and 
      Urban Development, prepared statement of...................    10
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Ramirez, Saul, Deputy Secreary, Department of Housing and 
      Urban Development, accompanied by Victoria Bateman, 
      Comptroller for FHA, prepared statement of.................    27
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................     5

 
  RESULTS OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT'S FISCAL 
                  YEAR 1999 FINANCIAL STATEMENTS AUDIT

                              ----------                              


                       WEDNESDAY, MARCH 22, 2000

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Biggert, Ose, Turner, and 
Maloney.
    Staff present: J. Russell George, staff director and chief 
counsel; Randy Kaplan, counsel; Louise DiBenedetto, GAO 
detailee, Bonnie Heald, director of communications; Bryan Sisk, 
clerk; Ryan McKee, staff assistant; Trey Henderson, minority 
counsel; and Jean Gosa, minority assistant Clerk.
    Mr. Horn. A quorum being present, the Subcommittee on 
Government Management, Information, and Technology will come to 
order.
    This hearing is the fourth in a series of hearings to 
examine the results of the financial audits of selected Federal 
agencies. We began this series in February and have since heard 
from witnesses representing the Internal Revenue Service, the 
Health Care Financing Administration, and the Department of 
Agriculture.
    Today, we will focus on financial management practices at 
the Department of Housing and Urban Development [HUD].
    On March 1, 2000, HUD's Inspector General issued a report 
entitled, U.S. Department of Housing and Urban Development 
Attempt to Audit the Fiscal Year 1999 Financial Statements.
    In her report, the Inspector General noted that she could 
not express an opinion on the financial statements because of 
the Department's inability to produce verifiable financial 
statements in a timely manner.
    It is no secret that management weaknesses have plagued HUD 
over the years. The General Accounting Office lists HUD as a 
high-risk agency because its programs are at high risk to 
fraud, waste, and mismanagement. Last year, the Inspector 
General gave HUD its first--and only--unqualified opinion. 
However, the Inspector General noted that verifying the 1998 
statements required extensive work and contractor support.
    Many of the same deficiencies continued to exist in fiscal 
year 1999. In addition, however, HUD's effort to develop a new 
financial management system led to the Inspector General's 
disclaimer of opinion for 1999.
    HUD provides rent and operating subsidies that benefit more 
than 4 million lower-income households through a variety of 
programs, including public and Section 8 housing. Eligibility 
for these programs depends directly on self-reported income. 
The Inspector General found that HUD's financial control 
structure did not provide the agency with sufficient 
information to verify whether tenant incomes were accurate, 
which often leads to overpayments. Today, we want to learn what 
the Department is doing to resolve these serious problems.
    [The prepared statements of Hon. Stephen Horn and Hon. Jim 
Turner follow:]

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    Mr. Horn. We welcome our witnesses and look forward to 
their testimony.
    Today's witnesses are Susan Gaffney. She is accompanied by 
Kathryn Kuhl-Inclan, Assistant Inspector General for Audit; 
James Heist, Director of the Financial Audits Division; 
Benjamin Hsiao, Director of the Information Systems Audit 
Division; and Saul Ramirez, Deputy Secretary, Department of 
Housing and Urban Development; and he is accompanied by 
Victoria Bateman, Comptroller for FHA.
    If you will stand and raise your right hands.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that all six witnesses have 
affirmed the oath, and we will now start with the distinguished 
Inspector General, Susan Gaffney.
    For those of you who haven't been here before, once we 
introduce somebody, their full statement is in the record. We 
want you to summarize it in maybe 5 to 10 minutes and look us 
in the eye and tell us what this is all about and try to cut 
out the bureaucratic labels. That is for keeping in the 
buildings but not on Capitol Hill. I want to have a dialog here 
and not bureaucratic lingo.
    Ms. Gaffney, it is all yours.

 STATEMENTS OF SUSAN GAFFNEY, INSPECTOR GENERAL, DEPARTMENT OF 
  HOUSING AND URBAN DEVELOPMENT, ACCOMPANIED BY KATHRYN KUHL-
  INCLAN, ASSISTANT INSPECTOR GENERAL FOR AUDIT; JAMES HEIST, 
  DIRECTOR OF THE FINANCIAL AUDITS DIVISION; BENJAMIN HSIAO, 
 DIRECTOR OF THE INFORMATION SYSTEMS AUDIT DIVISION; AND SAUL 
   RAMIREZ, DEPUTY SECREARY, DEPARTMENT OF HOUSING AND URBAN 
 DEVELOPMENT, ACCOMPANIED BY VICTORIA BATEMAN, COMPTROLLER FOR 
                              FHA

    Ms. Gaffney. Thank you, Mr. Chairman.
    When the CFO Act was enacted in 1990, I had some questions 
about whether this good management legislation was really going 
to have substantive results. Now, looking back, there is a lot 
of good news. The Congress, OMB, agency CFOs, and IGs, I think, 
have made progress governmentwide in improving financial 
management, although that progress has been slow.
    But the CFO's Act has kept the spotlight on financial 
management and the importance of financial management in the 
agencies. That is very good.
    The bad news, from my perspective, is that this spotlight 
has narrowed increasingly to look at the importance of 
unqualified opinions on agency financial statements. There is 
significant pressure from OMB and from the Congress, I believe, 
for agencies to get unqualified opinions on their financial 
statements. There seems to be an assumption that an unqualified 
opinion equates to what I read in the media last week, the 
``good housing seal of approval'' on agency financial 
management. Mr. Chairman, that is simply not the case, and 
there are a couple of reasons for that I would like to point 
out.
    What the CFOs Act is about is having reliable, accurate 
financial information on an ongoing basis. Financial statements 
are prepared once a year at a particular point in time. They 
don't give you any necessary indication of how well the agency 
is doing in terms of ongoing financial management. The second 
thing that is important to understand is that virtually any 
entity, given enough time and resources, can get an unqualified 
opinion on its financial statements.
    My concern is that, with this obsession with unqualified 
opinions on financial statements, we are essentially gaming the 
CFO's Act. This is not what the CFOs Act was about, but we 
seemed to have stopped our measurement of success with the 
opinion. So, let me tell you how this plays out.
    Last year, HUD produced financial statements. Their 
financial systems were not capable of producing auditable 
financial statements, and so they hired contractors and spent 
more than $2 million in getting their financial statements in 
shape. We audited them and gave HUD an unqualified opinion. 
That was last year.
    In the intervening year, HUD tried to do something very 
good. They tried to implement a standard general ledger for the 
Department, in order to overcome a real weakness that they had. 
That is great news. But they had difficulty in implementing the 
standard general ledger and couldn't produce financial 
statements, so this year we issued a disclaimer of opinion.
    Now the irony of the situation is that if HUD had not tried 
to do something good, which was to implement the standard 
general ledger, if they had just done what they did last year, 
which was not implement the standard general ledger and hire 
consultants for $2 to $3 million to put together financial 
statements, they probably would have gotten another unqualified 
opinion.
    What we should be looking for is agency ability to produce 
financial statements in the course of various ongoing 
operations, and I suggest to you that a once-a-year opinion on 
financial statements is not an adequate measure of an agency's 
abilities to do this. I am telling you, this compulsion with 
that opinion has become counterproductive.
    HUD is now extremely motivated to get an unqualified 
opinion. What I suggest to you is that we need some different 
and/or additional performance measures, and I am not just 
talking about HUD, I am talking governmentwide. We need somehow 
to be assessing whether it is the agency financial systems that 
are producing the financial statements without the need for 
extensive additional manipulation. We also need performance 
measures that look at the report on internal controls.
    Each one of these audits has three parts: the opinion, the 
report on internal controls, and the report on compliance with 
laws and regulations, but no one ever talks about the report on 
internal controls or the report on compliance with the laws and 
regulations, and the reason is that they are boring, they lack 
the pizazz of the opinion. But it is the report on internal 
controls that outlines all those boring systemic problems that 
need to be fixed before you have financial systems that can do 
what we want to do on an ongoing basis. I think we also need to 
measure institutional/organizational things like do the 
agencies have CFOs in place, do they have CIOs in place, and do 
the CIOs and CFOs have sufficient authority and responsibility 
to get the job done in the agencies.
    In the case of HUD, in spite of the fact that they got an 
unqualified opinion, the material weaknesses and reportable 
conditions that we have been reporting have essentially 
remained unchanged. HUD has not had a CFO in place for a year 
now. Further, HUD has a CIO who has no operational authorities 
or responsibility. In HUD, the CIO has been defined as a policy 
role. The information technology people are under a separate 
organizational unit, the Office of Administration, and in a 
recent reorganization of the Office of Administration the 
standing of that information technology staff has, in my 
opinion, been reduced.
    So, my plea to you is let us look more broadly at these 
things, let us develop additional measures, and let's get at 
the institutional problems rather than just the pizazz.
    Thank you, Mr. Chairman.
    Mr. Horn. Thank you for that testimony.
    [The prepared statement of Ms. Gaffney follows:]

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    Mr. Horn. We now turn to the Deputy Secretary, Mr. Saul 
Ramirez, Department of Housing and Urban Development. Welcome.
    Mr. Ramirez. Thank you, Chairman Horn and Ranking Member 
Turner, for allowing us to testify on this issue of the audit 
and where we currently stand as far as our financial condition.
    I would like to request that my written testimony which was 
provided be submitted for the record, and I will summarize my 
comments working off of it.
    Let me say first that the Department's financial house is 
in order. HUD has received a $26 billion budget for the 
delivery of decent, safe, and sanitary housing to over 5 
million Americans, and we have invested those funds in sound 
policies and programs that have assisted homeless people, low-
income families, and first-time home buyers in communities 
across the country.
    FHA and its Mutual Mortgage Insurance Fund are the 
healthiest they have been in decades. The total value of the 
fund stands at an all-time record high at over $16.6 billion, 
an increase of $5.3 billion from the economic value reported in 
fiscal year 1998. The Clinton administration's fiscal year 2001 
budget proposal has already projected over $20 billion to be 
returned to the Treasury by FHA from 2002 to 2006. When 
combined with the current economic value of $17 billion, this 
amount is more than sufficient to assure the safety and 
soundness of FHA's $450 billion portfolio of outstanding 
mortgage insurance.
    Building on their successes, HUD has been working very hard 
to improve our management controls, including our financial 
management systems, in order to rebuild public confidence in 
our ability to administer housing funds. Last year, for the 
first time, HUD received an unqualified opinion for its fiscal 
year 1998 financial statements. We regarded that as a 
significant achievement, but we did not rest on our laurels. We 
proceeded with the implementation of an ambitious new financial 
management system called HUDCAPS which, when completed, will 
result in a significant consolidation of the agency's financial 
reporting protocols from over 80 different systems to a handful 
of systems.
    We have a multiyear conversion plan that we have put in 
place and is under way. The technical and logistical challenges 
that were posed are as a result of the task of transferring 
nearly 1 trillion transactions from our old general ledger 
system, the PAS system, to the new HUDCAPS system, 
significantly complicating the task of preparing and auditing 
our financial statements. Each of these 1 billion transactions 
have been converted from PAS to HUDCAPS, and the funds reported 
had to be reconciled to the fund balances as reported to 
Treasury. The audit occurred in the middle of this conversion 
and reconciliation process.
    Mr. Horn. Just so we can understand that chart, obviously 
the FHA is Federal Housing Administration. And what is GNMA?
    Mr. Ramirez. GNMA is Ginnie Mae. LOCCS is our payment 
system for our grantees and customers.
    Mr. Horn. What does it do?
    Mr. Ramirez. It tracks their spending rates. CDBG grant 
money, in order for a grantee to draw down on their 
entitlement, they need to file their request through the LOCCS 
system, which is the payment system.
    Mr. Horn. What is L-O-C-C-S? Can anybody explain that?
    Mr. Ramirez. The acronym is Letter of Credit--the acronym 
itself----
    Mr. Hsiao. Line of Credit Control System.
    Mr. Ramirez. It is a drawdown system. I thought we were 
going to stick to plain English, not bureaucratic jargon.
    Mr. Horn. Exactly. HUDCAPS is what?
    Mr. Ramirez. It is our recapture system for the agency. The 
general ledger for all of the different activities that take 
place within the Department through the different programs that 
we administer.
    Mr. Horn. What is P-A-S?
    Mr. Ramirez. That is the PAS system, which is the current 
ledger system which is our primary accounting system.
    Mr. Horn. What is Hyperion?
    Mr. Ramirez. That is the equivalent of a Lotus system, but 
for financial reporting systems that produces the actual 
financial statements that you see that they are pointing to at 
the end.
    Ms. Gaffney. To be fair to Mr. Ramirez, just for the 
record, that is our chart. I just wanted to make sure that the 
chairman knew that you were being put on the spot with our 
chart.
    Mr. Ramirez. Thanks.
    Let me just continue, Mr. Chairman. If you have any 
questions, I will try to answer them.
    Each of these transactions, the trillion transactions that 
we do a year that are currently booked through the principal 
accounting system or primary accounting system, the PAS, were 
being converted to HUDCAPS. The audit occurred in the middle of 
that conversion, and so what we were doing is running 
simultaneously in order to be able to make sure our system 
would hold the transactions when we went into HUDCAPS, the PAS 
system and our HUDCAPS system. Ultimately, what happened was 
the HUD Inspector General's office informed us that they were 
unable to complete their task, as the Inspector General 
mentioned, of auditing our financial statements for 1999 by the 
March 1 deadline which had been accelerated under the new 
requirements.
    We are working with the OIG to enable a complete review of 
our financial statements, and I am proud to say that we are 
working well in that endeavor. The retention of a clean audit 
opinion on HUD's consolidated financial statements is an annual 
goal that we are working at.
    Closely related and even of greater importance, and I agree 
with what the Inspector General stated, is to deal with our 
corrective actions, with our long-standing material internal 
control and systems weaknesses which led to the GAO designating 
HUD as a high-risk agency in 1994. HUD's efforts to correct 
these weaknesses were recognized just last month by GAO's David 
Walker, the Comptroller General, who testified before the House 
Budget Committee that HUD had made credible progress toward 
improving its management and that HUD's management team had 
given top priority to addressing the Department's management 
deficiencies.
    Some of the HUD reforms referenced by Mr. Walker are worth 
noting here, particularly those relating to modernizing our 
financial systems.
    As the committee is well aware, several long-standing 
agency weaknesses related to HUD's inability to manage our 
housing portfolio. We did not know exactly what properties we 
were funding and how to maximize the public dollars for 
investments and improvements to public and assisted housing. To 
address this, HUD developed and tested a four-part Public 
Housing Assessment System which evaluates our public housing 
authorities on their physical condition, financial soundness, 
management capacity, and resident satisfaction. As a result, we 
now have the Nation's first computerized record detailing the 
condition of our housing stock.
    As part of these assessment protocols, HUD also developed a 
state-of-the-art tenant income verification, a fraud prevention 
system that uses computer-matching technology to identify 
potential underpayments of tenant income and ensures that only 
income qualified households receive housing subsidies to 
benefit tenants and property administrators by streamlining the 
verification process.
    We are now in a position to perform front-end risk analysis 
for new housing programs, provide regulatory relief to the 
public and assisted housing properties that score exceptionally 
well on their assessments, and target our resources to those 
who need to elevate their delivery of decent, safe, and 
sanitary housing to our residents.
    The results are reflected not only in our communities but 
in HUD's financial and audit reports as well.
    Turning our attention to the audit reports, I am pleased to 
report that although we started fiscal year 1999 with eight 
material weaknesses, one material weakness, management and 
control of staff resources, was downgraded to a reportable 
condition. This was accomplished because HUD completed 
organizational changes, provided greater management 
accountability for achieving program and operating goals, and 
enhanced the Management Control Program structure and 
activities, as well as increased risk-based management control 
techniques.
    In addition, the Federal Housing Administration 
accomplished significant progress in addressing its three 
reported material weaknesses, eliminating one of them and 
downgrading another to a management concern.
    In this year's FHA audit, the material weakness relating to 
the FHA Resource and Asset Management Strategy has been 
completely eliminated. In addition, the real estate assessment 
tools I just described have enabled FHA to monitor its insured 
multifamily portfolio such that the material weaknesses related 
to our early warning and loss prevention for FHA insured 
mortgages was downgraded to a management concern. Only one 
material weakness remains open--that is the FHA Federal basis 
and budgetary reporting. Even here, significant actions have 
been taken to account for FHA's financial commitments, such as 
routine procedures to analyze contracts and purchase orders as 
well as reviews of loan guarantee commitments and endorsements 
to ensure that all our credit subsidy amounts have been 
properly recorded.
    We have dedicated resources to address each and every 
material weakness and reportable condition cited in the audit. 
Already, we are in the process of completing the HUDCAPS 
conversion and reconciling process by compiling documentation 
to support the reconciliation which was a weakness and I 
believe the principal reason that the Inspector General felt 
that they needed to file the disclaimer on our finances.
    We are hopeful, though, that we will yet receive a clean 
audit for the fiscal year 1999 and in particular our financial 
statements. Our goal is to ensure that our statements merit 
unqualified opinions year after year, but, more importantly, 
that we do address in a very concrete and measurable way the 
internal controls and system controls that have traditionally 
plagued the agency in the past which we are addressing today to 
deal with them and eliminate those material weaknesses that we 
have. With the final implementation of our HUD 2020 management 
reform plan, I feel very confident that we will be able to 
address the remaining concerns that are addressed in the audit, 
Mr. Chairman.
    Thank you very much.
    Mr. Horn. Thank you very much.
    [The prepared statement of Mr. Ramirez follows:]

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    Mr. Horn. We have three opening statements, maybe four 
here. Do you have one, the gentlewoman from Illinois?
    Mrs. Biggert. I do, but if you would just include it in the 
record.
    Mr. Horn. Mr. Turner has an opening statement. We will put 
it at the beginning as if read. That will save us some time.
    Let me ask, we are going to go 5-minute rounds here, and 
that will get more questions on the table.
    We are nearly halfway through the fiscal year 2000, and the 
question is, has the Department adequately addressed the 
problems that resulted in your disclaimer of opinion, Ms. 
Gaffney, on the fiscal year 1999 financial statements?
    Ms. Gaffney. I am going to ask Mr. Heist, who is in charge 
of the financial audit, to answer that question.
    Mr. Heist. What I can say to that point, as the Deputy 
Secretary said, they are working hard to document what they 
need to do to support the reconciliation process. I can only 
speak to where we were when we stopped the audit. They had 
significant differences that were unexplained to us with 
respect to their reconciliations. They brought in an accounting 
firm to help them work through those issues; and, as they 
indicated, they will be making that information available for 
our review as we proceed with our responsibility to audit the 
fiscal year 2000 financial statements. We have to establish 
opening balances for that audit anyway, so the logical way to 
proceed is to finish our audit work related to fiscal year 
1999.
    Mr. Horn. The Deputy Secretary asked the Inspector General 
to extend her March 1 reporting deadline to June 2000, so she 
may be able to render an opinion on the Department's fiscal 
year 1999 financial statements. Is that true?
    Mr. Ramirez. We didn't ask for an extension of the date. 
What we asked for is that they would work with us to come back 
by June to come out with an opinion on our 1999 financial 
statements, Mr. Chairman.
    Mr. Horn. Moving that date would not be in compliance with 
the Chief Financial Officer Act of 1999. I guess I would just 
ask, how do you justify not meeting the statutory March 1 
deadline?
    Mr. Ramirez. We felt confident that we could have reached 
the March 1 deadline and had documentation that we feel could 
have effectively answered the major concerns that led to the 
disclaimer that was filed by the Inspector General and that the 
numbers that remained after us answering the concerns that they 
had specific to the amounts that they were claiming caused the 
disclaimer would be immaterial in accountant terms for me. A 
lot of money still but in accountant percentages would have 
dictated that it would have been an immaterial amount.
    That information, unfortunately, was not reviewed before 
March 1 because the auditors felt that they had completed their 
work prior to that day, which is their prerogative certainly. 
Our wish would only be, as Mr. Heist has mentioned, that as 
they continue to work with us now to review this information 
and additional information to be able to effectively show what 
occurred when we were running the dual systems because what 
basically happened was we were very aggressive in trying to 
convert our general ledgers into the HUDCAPS system. Again, let 
me reiterate for the system that this is a multi-year effort. 
It is an activity that is consolidating, as I mentioned, 80 
systems into just a handful and creating some standardization 
along the way.
    We ran the PAS system, which was the system that got us a 
clean opinion last year, at the same time. We focused the 
Inspector General's attention to HUDCAPS and neglected to--as 
equally emphasize the PAS system to track back the actual 
transactions. And so when it went down to this Hyperion 
statement that was coming out of HUDCAPS, they were unable to 
reconcile certain transactions that had occurred between the 
PAS system and the HUDCAPS system that threw off the Hyperion 
financial statements that came out, referring back to the 
chart.
    We tried to address those prior to the March 1 deadline. 
Again, regrettably, they did not review this information at the 
same time because they felt that the majority of their work was 
complete and, as I understand, in their opinion would push them 
past the March 1 deadline.
    I would like to just again concur and reiterate what Mr. 
Heist has said, that they are working to get the fund balances 
close for 1999 so that we can then properly account for 2000, 
and my only request was that we will try to get this work done 
before June 1. We feel very confident that we can provide the 
information to get this work done before June 1.
    Mr. Horn. Vicky.
    Ms. Bateman. We have not asked for an extension of the 
March 1 deadline because we know that is the OIG's prerogative. 
We have three technical issues that caused the disclaimer. What 
we have done at this point is obtain the supportable 
documentation that we need to satisfy them. We have since met 
with the OIG, showed them what we have done and asked them to 
come and work with us. What we are asking for is that they 
allow us to restate our 1999 statements based on the supporting 
detail that we have been able to adjust our cash balances with 
Treasury, come back now and not next year to finish the 1999 
audit, and save the taxpayers money instead of repeating this 
next year. By June--initially, they said it would be 6 to 8 
weeks to complete the audit. We are saying, come back now, we 
are ready for you. Let us restate the 1999 and render an 
opinion as part of your 2000 audit and let's move on.
    Mr. Ramirez. By way of introduction, Mr. Chairman, this is 
Victoria Bateman. She is the comptroller for FHA.
    FHA did garner a clean opinion from the Inspector General's 
books. When this issue came up 2 weeks out of the March 1 
deadline that was brought to my attention by the CFO's office, 
I put together a team to address it as expeditiously as 
possible, and Ms. Bateman has been leading that team for me to 
clear up these specific issues as they relate to what led to a 
disclaimer, sir.
    Mr. Horn. On my sheet here it says Victoria Bateman, Acting 
Chief Financial Officer.
    Mr. Ramirez. That is not correct, sir. Dave Gibbons is the 
Deputy CFO. We have over the last year aggressively tried to 
recruit a CFO candidate and twice we have been at the point of 
making offers only to be countered on both offers by the 
private sector for substantially more money to both candidates 
and as a result lost the opportunity to hire them. We are 
aggressively seeking to hire our CFO and working to get a 
candidate that would meet also with the pleasure of the Senate 
committee that would confirm the nomination for CFO.
    Mr. Horn. Will that CFO be exclusively in the position of 
CFO or is he or she going to be doing other things?
    Mr. Ramirez. No, exclusively CFO.
    Mr. Horn. Mr. Turner, you have 8 minutes. I went over, but 
I wanted to finish that up.
    Mr. Turner. Ms. Gaffney, since HUD was placed on the high-
risk list back in 1994, is it fair to say that HUD has made 
significant progress in getting its financial house in order?
    Ms. Gaffney. What I think is fair to say is that HUD has 
recognized its areas of systemic weakness to a degree that it 
never did before and that, in each of these areas, it has plans 
in place, and activities under way to address the problems; and 
I think what you are hearing is this situation, this disclaimer 
of opinion resulted from HUD trying to correct one of its 
systemic weaknesses. So that is a good thing. But we are not at 
the end of any of these processes. We are not to the point 
where we can say the corrective actions have been taken.
    Mr. Turner. So what you are saying is that the problem that 
resulted in your failure to be able to issue an opinion by 
March 1, that problem was created by the fact that they are 
converting this payment system, which is a good thing?
    Ms. Gaffney. Exactly. It is unfortunate the implementation 
didn't go smoother, but you have to recognize that this was an 
attempt to solve a problem that we have been identifying for 
years.
    Mr. Turner. OK. So we missed a deadline because we were 
trying to correct a problem that everyone agreed needed to be 
corrected?
    Ms. Gaffney. Correct.
    Mr. Turner. I have heard a little conversation about the 
failure to meet the deadline. It seems that we may be making 
too much of that, even though it is statutory. If I understand 
the sequence of events, we basically had a week before the 
March 1 deadline when you gave HUD notice that you didn't think 
that you were going to be able to issue an opinion, and they 
tried to get all of the things together you needed, and yet 
time was running out, and you didn't take those things into 
account, and you ended up passing the March 1 deadline unable 
to issue an unqualified opinion. Is it fair to say that we 
shouldn't make too much of what went on during that period of 
time with regard to the failure to meet the March 1 deadline? 
This doesn't represent any severe financial problem that is in 
question that has resulted in the failure to meet the March 1 
deadline, it is a matter of basically communication and the 
furnishing of adequate information?
    Ms. Gaffney. No, I don't agree with that. I don't mean to 
repeat myself, Mr. Turner. I don't know if you were here for my 
opening statement. What I agree with you about is we are all 
making too much out of the opinion on the audit on the 
financial statements.
    I think we are attributing to the opinion, the unqualified 
opinion, the disclaimer of opinion, the adverse opinion, 
importance that is not warranted.
    Given that, my plea to you today is, let's look at the more 
important stuff. We should be concerned about getting that 
general ledger implemented, and we should be doing everything 
to help HUD get it implemented. And if HUD gets a disclaimer of 
opinion in the process, so what? The problem is that the 
opinion is being used as the sole measurement.
    With respect to the March 1 deadline, you know, we worked 
on this audit since June--June through February. We devoted 20 
staff years to this audit. At some point, the preoccupation and 
the focus of resources on the financial statements and the 
audit I think becomes counterproductive. We should be trying to 
get the real stuff done.
    Mr. Turner. I think we all understood the point you made, 
and I think there is probably general agreement that the 
emphasis should be on a broader range of issues, including 
internal control, which is what they were trying to address in 
implementing the HUDCAPS system.
    The only point I was trying to make is that the dispute 
over whether or not the data was provided by March 1 and 
whether or not you got the opinion done by March 1 is not a 
reflection of any severe financial problem. It is more of an 
internal thing between you and HUD that perhaps will now be 
resolved by June 1, as I understand it. And so I don't want 
there to be a misimpression that somehow HUD has a severe 
financial problem simply because that March 1 deadline was not 
an unqualified opinion, was not reached or given by you by 
March 1. I don't think that is what you intended for that 
action to say.
    Ms. Gaffney. HUD did not have the financial statements in 
shape and we didn't have a chance to finish our audit of them 
by March 1. I am convinced that, as Mr. Ramirez and Ms. Bateman 
have said, that by June that undoubtedly will take place. Which 
is not to say that HUD doesn't have serious financial 
management problems, but I agree that they will be able to do 
that.
    Mr. Turner. I think that is important for us all to 
understand.
    With regard to your criticism of the emphasis on the 
financial audit, I am not sure what the answer to that is, 
other than what you just said, and that is for us to think 
about the broader range of issues that we should be concerned 
about.
    The law does say we have got the March 1 deadline. You do 
it every year. It is something we all look to. I think as a 
committee we certainly can be sensitive to the fact that we 
shouldn't make too much of that process, but it is statutory 
and it is important to try to meet the deadline.
    Mr. Chairman, I have no further questions.
    Mr. Ramirez. May I?
    Mr. Horn. Yes, please.
    Mr. Ramirez. In our efforts--and I can appreciate the 
Inspector General's overall emphasis on condition, entire 
condition of the agency, but the measuring stick is the 
financial audit and the condition of the report that comes out 
from this audit.
    As we were getting close to this deadline--and, yes, the 
work did start in June. It came down out of these trillion 
transactions that we did a year that we transferred and ran 
simultaneously. And, again, shame on us for not focusing the IG 
on both systems during that period and just on HUDCAPS, that it 
came down to three transactions and we were prepared to explain 
those three transactions prior to that March 1 deadline.
    Apparently, there was a great deal of work that had already 
gone into preparing this audit that the Inspector General had 
done; and, yes, they did invest 20 man years to this audit; but 
we did work with them to adjust for their vacation schedules 
during the holidays and other periods that were critical coming 
into the closure of this audit to try to get to a resolution in 
this regard. That is behind us, and we accept that, and we 
appreciate the acknowledgment from the Inspector General to 
resolve the issue by June if not sooner. We believe we can do 
it sooner and with their help and cooperation we feel very 
confident that we will be able to report back together to this 
committee and the Nation as a whole as to an accurate read of 
our financial condition.
    But I would like to also quickly state that, in addition to 
our financial statement and perhaps coming out with a clean 
opinion prior to this June date from 1999, that we still have 
internal controls and system weaknesses that we are addressing 
to try to resolve and these have been weaknesses that have been 
systemic over the last 2 decades. And so old habits are hard to 
break, but we are breaking them. It is clearly indicated by 
many of these weaknesses or several of these weaknesses, to be 
more accurate, that have already been downgraded by the 
Inspector General to just management concerns for the 
Department.
    Mr. Turner. Well, I appreciate those remarks and I think it 
is probably incumbent upon this committee to continue to 
encourage the IG and the agency to meet the March 1 deadline. I 
agree that audit report is looked to as a significant indicator 
of your financial standing. But I gather from the interchange 
that we have had this morning that the fact that it was not 
issued by that date did not reflect any significant financial 
difficulties within the agency but rather reflected the fact 
that you are in the midst of this conversion and it created 
some problems between the two offices that apparently for 
whatever reason, it didn't happen and you are going to do it 
and we would urge you next year to try to meet the deadline.
    Mr. Ramirez. Just to quickly wrap that up, and thank you 
very much for those comments, Congressman Turner, we are 
already preparing to start generating not an annual report but 
quarterly reports so that we can better work together to assess 
the financial conditions of the agency and we are quickly 
getting to that particular point.
    I would like to just conclude by again reassuring this 
committee and the taxpayers that we know better than ever at 
the Department where our money was spent and are prepared to 
provide any auditor the audit trail of how the bulk of our 
resources were spent there at the Department of Housing and 
Urban Development.
    Mr. Turner. Thank you, Mr. Chairman.
    Mr. Horn. Let me pursue some of these fiscal matters.
    Was Mr. Gibbons in charge of clearing this particular 
audit?
    Mr. Ramirez. The financial management of the organization 
under the CFO's operation has several points, but he was 
responsible for shepherding the entire effort from the 
different divisions that are responsible for compiling the 
information that the Inspector General needs in order to 
conduct an audit.
    Mr. Horn. What was his title at this point?
    Mr. Ramirez. Deputy Chief--Deputy Financial Officer and 
acting in essence Financial Officer because of the vacancy.
    Mr. Horn. Was he able to give full attention to that?
    Mr. Ramirez. Yes. He was giving his full attention. We were 
focusing on material weaknesses ironically and the period of 
discussions with the auditors between June and their disclaimer 
in March, and as a result a great deal of our effort went into 
trying to resolve those material weaknesses and management 
concerns that were in our previous audits. It didn't focus----
    Mr. Horn. Was he on vacation during this time and was that 
why the whole thing was late?
    Mr. Ramirez. No. When Mr. Gibbons left the country for a 
couple of weeks and it was--it was the 2 weeks before this was 
completed, the Inspector General's auditing team and our team 
had been meeting on a weekly basis. Prior to that they had been 
meeting on a biweekly basis. It was his impression as a result 
of the last biweekly and checking with his staff primarily and 
getting a general indication of the different activities that 
the Inspector General had been focusing their work on till 
prior to the week before that we were in sound condition. That 
does not, though, excuse the fact that we did not do as good an 
effort of focusing the Inspector General's attention on both 
our HUDCAPS and PAS system at the same time, Mr. Chairman.
    Mr. Horn. In implementing the new system, why didn't you 
consider the need for a backup plan to ensure that you could 
produce all of the reliable financial statements?
    Mr. Ramirez. We did, sir, and that was the PAS system. We 
ran concurrent systems.
    Mr. Horn. And did that satisfy you, Inspector General?
    Mr. Ramirez. It is unusual but in defense of the Inspector 
General we focused their attention on the HUDCAPS system and 
general ledger as the principal source of documents and amounts 
for their audit work and did not refer them back to the PAS 
system as----
    Mr. Horn. That is the system used in 1999?
    Mr. Ramirez. It got us a clean opinion. If we said don't 
look at HUDCAPS because we are going to conversion, look at 
PAS, I think we would have been in better condition. All of the 
Treasury reports came back fine through our PAS system.
    Mr. Horn. Mr. Hsiao.
    Mr. Hsiao. My name is Ben Hsiao, Director of the 
Information Systems at HUD OIG, and I have been reviewing and 
looking at HUDCAPS for a number of years for the financial 
statement audit.
    I want to clarify something. HUDCAPS is kind of like LOCCS 
but it pays for another set or programs besides the grants, it 
pays the Section 8, what they call the voucher program, which 
is essentially payments to the housing authorities. That system 
was envisioned to be the general ledger. That decision was made 
a year and a half or 2 years ago back in 1997. They never 
envisioned that PAS would go away, but they would translate all 
of the numbers in PAS into HUDCAPS. One of the difficulties 
they had was that PAS data did not contain the source year 
along with a bunch of other variations, which by the way we are 
going to look at in depth to make sure and figure out why this 
conversion went awry.
    The conversion was very problematic. And in the interface 
between PAS and HUDCAPS they were rejecting transactions 
hundreds a day. They finally got it working somewhat, but as I 
understand it, it is still problematic and we have to work on 
it. In fact, I was informed yesterday that we plan to do 
extensive work on this so we can come up with recommendations 
to correct the problems in HUDCAPS. There are lots and lots of 
problems. Many are technical, but it has not been an easy 
implementation. There are a lot of difficulties, many of which 
I think can be overcome but it takes management effort and it 
takes a tremendous effort on the part of the CFO and CIO and 
the IT.
    I want to set the record straight that HUDCAPS is not the 
only system. PAS has always been there, but translating the 
data was the major problem in not producing a financial 
statement.
    Mr. Horn. The Inspector General testified the most critical 
need faced by HUD in improving its internal controls is to 
complete development of adequate financial systems.
    Mr. Hsiao. Absolutely.
    Mr. Horn. Mr. Ramirez, when do we expect those systems to 
be in place and operating properly?
    Mr. Ramirez. I don't disagree, it is a complex, messy 
process when you have to convert 80 some odd systems into a 
handful of systems and a trillion transactions a year and I 
challenge anybody who has a checkbook which has a trillion 
transactions that does not have to go through an in-depth trial 
and error. The important thing to note is that the PAS system 
was accounting for our resources. We did not go into this first 
phase of major conversion, and I think the Inspector General 
would agree that this was the first major conversion into 
HUDCAPS, without making sure that we kept track of the 
resources that we are appropriated to administer.
    I would say that in our HUDCAPS effort, I would venture to 
say that we will be well in control of the HUDCAPS operation 
and conversion within the next 18 months or so. We are looking 
forward to the work that the Inspector General, in particular 
Ben here was a great computer technician, to get their advice 
and recommendations as we move through this process, sir.
    Mr. Horn. I am glad to see your optimism on that, but Ms. 
Gaffney reported that the HUDCAPS does not fully comply with 
the Federal financial system requirements. Will the Inspector 
General elaborate on what she means by that?
    Ms. Gaffney. HUDCAPS does not comply. The easiest example 
is that FHA and GNMA are supposed to be feeding summary data 
into HUDCAPS on a monthly basis. FHA, because of problems that 
it had in its own system inputs their data into HUDCAPS only 
once, and that was after the close of the fiscal year. 
Obviously one of the government financial system standards is 
that you have accurate, timely information. In this case the 
failure to post into HUDCAPS meant that there was no such 
information.
    Ms. Bateman. Mr. Chairman, as the FHA Comptroller at the 
time, the IG is correct. FHA did not supply its data by year 
end close. I was very concerned at that point with the 
conversion of HUDCAPS, and I was aware of the fund balance of 
Treasury reconciliations. I didn't want to take my data and put 
it into HUDCAPS and risk FHA getting an unclean opinion. We put 
a corrective action plan in place to make the general ledger 
good within the next 12 months. We are working to get the 
summary data, we have dedicated resources to get files out of 
the FHA legacy systems and treat it at summary level into 
HUDCAPS.
    Keep in mind, FHA is a subsidiary of HUD, a very large 
subsidiary of HUD, and we have a commercial package and we have 
to do Federal reporting at this point. I am summarizing that 
data at a very high level because you don't want a million 
transactions going into your general ledger, which is HUDCAPS.
    In order to get through the audits I want to make sure that 
FHA has a clean opinion and not make the conversion from PAS to 
HUDCAPS even worse. We thought we made a good decision not to 
put more data into HUDCAPS. But we do have auditable data going 
from the HUDCAPS back to FHA. It is supportable and auditable. 
KPMG tells you it is a clean opinion.
    The real issue came down to when we converted from PAS to 
HUDCAPS, we took those trillion transactions and put it in. We 
knew that we couldn't get any reporting out HUDCAPS, it is a 
brand new system. We didn't get the reports that we needed to 
reconcile to Treasury. We are now getting those reports and we 
are able to support the 224s and reporting to Treasury, and we 
have invited the IG to come back in and work with us to get the 
clean opinion.
    But Ben is right, we have more issues than just this 
conversion. The IG pointed out three reasons that they had 
disclaimer. They were right. We acknowledge that we have these 
problems. We made a lot of adjustments to Hyperion outside the 
system. Shame on us for doing that. It is lessons learned.
    I think the IG has been very gracious to work with us 
instead of waiting a whole year. But there are internal control 
issues. We have stopped all system conversions based on the 
IG's recommendation. The Deputy Secretary has tasked me to make 
sure that we have the controls in place before we do any more 
conversions. So our No. 1 priority is to get auditable to get 
to the clean opinion, let's take our time and do it right. Look 
at the cost of doing this, and the last thing I want to do is 
put FHA detail into HUDCAPS, a million transactions a day.
    Mr. Horn. We thank you for that perspective. We have a vote 
on the floor now. We are delighted to see the gentlewoman from 
New York. You are free to use all of the time you wish on 
questioning while we are going over to vote and we will keep 
the door open for you.
    Mrs. Maloney [presiding]. Thank you very much, Mr. 
Chairman. I thank you for your persistent and ongoing 
commitment to better financial management not only in HUD but 
all financial agencies. I have been watching the progress at 
HUD from my position on the subcommittee and on the Banking 
Committee as well, and I have been particularly interested in 
some of the strides made under Secretary Cuomo not only because 
he is a fellow New Yorker from my State but because he has set 
out to tackle what seems to be an impossible task improving 
HUD's management and organization and by most accounts these 
efforts are well on their way to success.
    Like many of my colleagues, I am especially pleased last 
year when HUD received its first ever clean audit and all of us 
know HUD has a history of mismanagement, so the fact that HUD 
did receive a clean audit is really noteworthy and I would like 
to ask Mr. Ramirez, do you expect to receive a clean audit for 
this fiscal year in the near future when it is completed?
    Mr. Ramirez. We believe that we have the supporting 
documentation that upon review by the Inspector General will in 
all probability lead us to a reflection of sound financial 
condition and a clean opinion on their part. We will work with 
them to be able to justify our reasons as to why, and so we 
feel very comfort about that.
    Mrs. Maloney. Well, an issue I am very interested in, and I 
know that the chairman is as well, is how we can help the 
government operate more efficiently by making sure that the 
right people get the right benefits. I understand that HUD is 
taking steps in this direction by implementing a nationwide 
income verification program so that tenants pay their fair 
share of rent. Could you discuss what HUD is attempting to 
accomplish with this effort, and what sort of progress you have 
made?
    Mr. Ramirez. We have made substantial progress in that 
area, and it has been one of the major weaknesses that has been 
highlighted by the Inspector General in their reports. Based on 
a sampling of approximately 1,000 residents, they compulate and 
trend out an amount of potential lost revenues as a result of 
underpayments.
    We have now modernized our income verification process by 
linking with Social Security and IRS to get information on 
residents, and when there is a discrepancy, an $8,000 
discrepancy on the public housing side or a $4,000 discrepancy 
on the multifamily side, the resident receives a letter or will 
be receiving a letter as soon as we send them out to go back to 
their respective landlord or housing authority to recertify 
their income. We have done a $4 million-plus survey of that 
information out of our new system and we have found it to be 
very effective and impacted residents about 280,000, or so we 
estimate.
    We are working with the industry quite closely, as well as 
resident groups to make sure that the notice that goes out is 
crafted in such a way that it would encourage individuals to go 
back and get their incomes recertified but at the same time not 
make it one that would be in essence the gotcha game. We feel 
by doing this we will greatly enhance our estimate of 
underpayments and to some smaller degree overpayments that 
actually occur within our system and better narrow that 
estimate which has been put out by the Inspector General of 
close to in some instances $900 million-plus.
    Mrs. Maloney. I am going to give two more questions and at 
the completion of them the hearing would stand in recess and 
then I am going to dash to vote.
    I am interested and you may have already answered this, but 
I am interested in the fact that GAO has listed all of HUD's 
programs on its high risk list. Do we have anybody here from 
GAO?
    Ms. Gaffney. No.
    Mrs. Maloney. What progress is HUD making to address the 
specific problems that were raised in the GAO report that they 
brought up?
    I am also very interested in what is your followup in 
inspecting properties which receive financial assistance from 
HUD in making sure that those dollars are allocated properly 
and spent properly?
    Those two questions and I would like them in the record. I 
may have to dash because I walk slower than the chairman, and 
he has already left. Answer those two questions.
    Mr. Ramirez. For the record what we have done with GAO have 
worked closely in establishing a working protocol which has 
been very effective in trying to address not just prior audits 
and recommendations that they made but current audits that they 
have initiated. Mr. Walker, the Comptroller, has stated here 
before Congress that we have made considerable progress. On our 
continuing relationship with him we feel very comfortable with 
the work we are doing that by January 2001 that we will be 
prepared to have GAO make a recommendation that HUD as an 
agency be taken off the high risk list.
    On our inspection protocols, we have for the first time 
gone out and assessed the physical condition of our entire 
portfolio, over 40,000-plus properties. We are currently 
assessing all of their financial statements to make sure that 
finances are in order and that they are sound.
    Third, taking into consideration the residents alone as 
well as the condition and circumstances that they live in, and 
for the first time we can accurately assess the physical, 
financial, and also resident approval of our properties.
    So thank you very much for those questions, Congresswoman.
    Mrs. Maloney. You are in recess until the chairman returns.
    [Recess.]
    Mr. Horn [presiding]. The recess is over and we will 
continue the questioning.
    I want to ask just one question of the Inspector General. 
Given this late date, wouldn't it be more productive for your 
office to focus its resources on the fiscal year 2000 audit?
    Ms. Gaffney. We are going to focus our efforts on the 
fiscal year 2000 audit. However, we need opening balances for 
fiscal year 2000, which means they need to do the 
reconciliation work that they are talking about and we will 
need to look at that work. But our work will be in the context 
of the fiscal year 2000 audit.
    Mr. Horn. I think we are a little unclear as to whether you 
are going to issue an opinion on the fiscal year 1999 financial 
statements in June?
    Ms. Gaffney. We have not made that decision. Certainly that 
is the request that HUD is making. We haven't made that 
decision.
    Mr. Heist. One of our options, since HUD in fiscal year 
2000 will also be reporting on 1999 and including comparative 
financial statements, we could change our opinion when we issue 
the report for fiscal year 2000. That is one of our options.
    Ms. Gaffney. To go back to our position, what we should not 
be doing is diverting time and energy from our 2000 audit at 
this point.
    Mr. Horn. I yield 10 minutes to Mr. Ose and if he needs 
more, we will give him another 10.
    Mr. Ose. Mr. Chairman, thank you. Procedurally, if I 
understand correctly, we had an audit and an opinion expressed 
on that audit in previous years to the current year, and what I 
am trying to figure out is for some reason we have not been 
able to get to a similar point on the current year that would 
otherwise comply with the reporting date requirement with the 
CFO act. That is some opinion as to the financial condition of 
the agency issued on or before March 1; am I correct on that? 
Were we able to achieve that goal last year?
    Ms. Gaffney. Yes.
    Mr. Ose. I have read the testimony and I can't pick out 
what happened? Why are we unable to issue an audit or an 
opinion on the audit? Is it because the audit is not completed?
    Ms. Gaffney. The financial statements were not completed; 
therefore, the audit was not completed. The answer to your 
question is HUD tried something new in 1999. They tried to 
overcome a weakness and implemented this new HUDCAPS system and 
that created a whole new set of difficulties for HUD that they 
had not experienced the previous year.
    Mr. Ose. From a processing side?
    Ms. Gaffney. Right.
    Mr. Ose. That is the reference to the trillion 
transactions?
    Ms. Gaffney. Right.
    Mr. Ose. Well, I must say--I am at least partially 
entertained by the----
    Ms. Gaffney. Irony, right?
    Mr. Ose [continuing]. The consequence of an agency not 
responding to a statutory requirement laid out by the Congress. 
Are there sanctions, Mr. Chairman, to such a failure? I mean, 
I----
    Mr. Horn. Well, the sanction we try to think is the law, 
and that has not been obeyed in several administration areas 
because they have made the Chief Financial Officer, say the 
Assistant Secretary for Management and Treasury sort of 
subsumes everything, the CIO, CFO. That wasn't the intent of 
the Republicans or Democrats. Those are full-time jobs, 18 
hours a day, if you are doing it right. That is where some of 
the mess has been, is they haven't focused on it within their 
own administration.
    Mr. Ose. In a situation like we are confronted with today, 
which is we don't have all the balances on which to move 
forward, in that situation recognizing what the law is, what 
are Congress's--I guess I should ask----
    Mr. Horn. If you think they are really playing games, you 
shorten the amount of appropriations granted. That is not a new 
task. For example, when the Federal Elections Commission was 
given $3 million to get their computers moving because they 
weren't able to respond to thousands of people with the press 
and candidates, they completely violated what Congress had 
specified. Needless to say, they took a whack out of that 
budget the next year. That is your one penalty when you think 
one agency is messing around and thumbing their nose at 
Congress.
    Mr. Ose. The concern that I have is if the agency directed 
to perform this audit, whether that be the Office of the 
Inspector General or the HUD itself, is not in compliance to 
the statutory requirement for whatever reason, I would think 
that they would have come back to us and asked for additional 
resources or assistance to expedite solving that problem.
    My question would be: Has such a request been received from 
the administration or any of these--particularly HUD in this 
case--any of the agencies that are so affected?
    Mr. Horn. I am unaware of any but if you are a cabinet 
officer or a Deputy Secretary who is here today, you have to 
reprogram money at the end of the year. And if you are serious 
about this, you move some of that reprogrammed money----
    Mr. Ose. Discretionary money?
    Mr. Horn. Absolutely. When Dr. Raines came in as Director 
of OMB, I told him what we had been urging the cabinet to do, 
reprogram it; and he said I agree with you. That is how Y2K was 
dealt with so they didn't have to spin their wheels for 1 year 
between the budget office in the executive branch and the 
legislative branch.
    Ms. Gaffney. Mr. Chairman, there was a brief discussion 
when you were asking questions about who was the acting CFO. In 
point of fact, Mr. Gibbons was our point of contact for this 
audit. He was the acting CFO. I have known Dave Gibbons for a 
long time, and I have enormous respect for him. But he is not 
an accountant. He doesn't know accounting. He is a budget 
person. He worked in OMB for many years. So, Mr. Gibbons was 
very ill equipped to deal with this situation.
    If you want to know how I think the Congress should help; 
Mr. Ramirez has said it is now a year since they have had a 
qualified CFO in place and my bet is everyone is now saying it 
is too late in this administration, we are going to give up on 
it for--how long do we have to go, 10 months?
    Mr. Horn. You are right about that. I happened to have 
joined an administration in the last year and a half and it is 
almost impossible to get people.
    Mr. Ose. Let me explore that a little bit. Let me digress 
first. Is it you, Mr. Ramirez, or whomever, who would I ask the 
question of, has the agency asked for additional resources from 
Congress in order to address this problem?
    Mr. Ramirez. No, we haven't but we have utilized the 
discretion that the chairman alluded to that was talked about 
when Dr. Raines was head of OMB and we have redirected 
resources to remediate the matter.
    Prior to that there has been talk about us hiring an 
accounting firm to come in last year to help us get a clean 
audit. Their sole purpose was not to help us get a clean audit 
but to help us clean up the data to be able to get a clean 
audit.
    Mr. Ose. That was the Hyperion people?
    Mr. Ramirez. No, that was Arthur Andersen.
    What we have done is, taking into account what led to us 
being classified as a high risk agency, was that over the last 
two decades, approximately 80 systems, accounting systems, were 
built within the Department and there was little communication 
between these systems. Three and a half years ago or so, a 
little less than that, we took the position that our effort was 
to consolidate these systems into a handful of systems that 
could talk to each other and could better account for our 
resources. We have made significant progress, but we have not 
completed the task. There is still internal controls that need 
to be dealt with.
    This year, and the reason that there was a disclaimer filed 
by the Inspector General on March 1, and I need to remind the 
committee members, although I don't think you need reminding, 
this was reduced by 30 days from last year's deadline as well. 
What we did this year was we went through a significant 
conversion, ran dual systems during this conversion but focused 
primarily our attention as it related to the audit that was 
being done on the financial piece. Let me say that was the only 
piece that led to a disclaimer. All of their other work has 
been done.
    So again, our hope is as a result of that, and that being 
the only piece, we are prepared to move ahead with the 
Inspector General to clear up the 1999 finances. We know where 
the dollars were spent, we can show them where they were spent, 
and we are prepared to do that. We would hope that it would be 
sooner than June that we could come to terms. They have 
indicated back to us that it will take them approximately 6 
weeks to review this one last piece of information, and that is 
fine because I can appreciate their efforts primarily being 
focused, as the chairman has said, on their 2000 audit but we 
will also in order to facilitate the 2000 audit work which 
actually technically does not start for them until June any way 
to come in here, is that we will now have quarterly reports 
that in the past were not being generated that can help 
facilitate and deal with whatever workload they may have.
    We are looking forward to working that through, but to get 
back to your specific question, we did not see a need to come 
to Congress for additional resources. We appreciate the 
discretion that was allowed to us based on the leadership of 
the chairman to allow us to dedicate the necessary resources to 
be able to resolve the issues that were highlighted as the 
reasons for the disclaimer in our financial statements.
    Ms. Bateman. Keep in mind that we don't agree with the 
disclaimer. We felt as if we had the resources and the 
statements were prepared, and we were ready to address their 
concerns. And that February 21, the OIG said they had to issue 
an opinion by March 1. We felt that we had the supportable 
detail to refute the disclaimer. We felt that if we did do as 
Congress mandated, which was prepare the statements and be 
subject to the audit.
    Mr. Ose. You mentioned that 3\1/2\ years ago, Mr. Ramirez, 
you undertook the--started the effort to allow this system, the 
new system to come into place?
    Mr. Ramirez. No. Our efforts are capitalized in our HUD 
2020 reform. They are a comprehensive effort to deal with not 
just the financial systems, which are a weakness that had been 
outlined for years as a material weakness in the Department, 
but also dealt with a more comprehensive approach to solving 
other weaknesses like management and----
    Mr. Ose. When did that program become initiated?
    Mr. Ramirez. We went through approximately 12 months of 
setting up the system.
    Mr. Ose. Beginning in?
    Mr. Ramirez. Beginning in 1997. We went through a full 
cycle of our 2020 structure in place already for a year. We are 
into the second year of a full--of now the second year of a 
cycle of our management structure in place to deal with the 
specific concerns. In fact, Mr. Walker from GAO has alluded to 
the fact that our staffing, our structure, and our placing of 
staff have led us to make credible progress in getting us off 
the high risk list and is no longer an issue as it related to 
us getting on the high risk initially.
    We still have more work to do, don't misunderstand me, 
Congressman, and we are working quite diligently to get it 
done. But we, and I say it in all candor as the Deputy 
Secretary, our financial house isn't where it needs to be, but 
it is in the best condition it has ever been in the history of 
our Department and us going from an agency that basically went 
out there and built boutique systems of accounting that 
couldn't talk to each other to consolidating them now to an 
effective accounting system to deal with a full financial 
integration of our Department.
    Mr. Ose. Let me just share with you the difficulty I have 
here.
    Mr. Ramirez. Yes, sir.
    Mr. Ose. Fifteen months ago I was on the private side. Now 
I have the privilege of serving here in Congress. My affairs 
continue. If I can't get an opinion from my auditor or a clean 
set of books then I have to stay in Sacramento and fix my 
business. I cannot come back here and do the job that I was 
elected to do, and believe me, this weekend was not a lot of 
fun at my house in Sacramento. Unless we can solve this 
problem, unless we can get a clean opinion, Congress has no 
evidentiary basis on which to make decisions related to the 
funding that you all are requesting of us.
    Mr. Ramirez. Let me reassure you, and if you look at the 
audit and the substance outside of the actual reconciliation 
with Treasury, which was the item that led to this disclaimer 
that our financial house is in order. The biggest operator 
within the Department is FHA. FHA got its own independent audit 
that came out with a clean opinion. We still have material 
weaknesses within FHA but I am happy to note that the Inspector 
General withdrew one completely, downgraded another one, and we 
are working diligently to solve the third within FHA.
    Within our overall accounting system what we have been able 
to do is that we believe that the disclaimer that was issued on 
March 1, recognizing the statutory requirement primarily placed 
on the Inspector General to produce this audit, caused us to 
not work with the Inspector General over the last week because 
that was when this particular issue was raised to management as 
an issue that would lead to a disclaimer within our financial 
statements to clear up the concerns that they had. And out of 
the trillion transactions it came down to three, and we were 
prepared to document those three transactions to show that it 
did not produce a materiality to cause a disclaimer to take 
place. That did not occur and that is behind us.
    Mr. Ose. Does the Office of Inspector General agree with 
that?
    Ms. Kuhl-Inclan. We respectfully disagree with that, sir. 
It wasn't just an issue of a fund balance with Treasury. It 
first began that any good business has a general ledger that 
you can depend on. And so when you process these transactions 
that flow through PAS, the 1 trillion transactions, and so many 
are rejected on a day-to-day basis, we had to be comfortable 
with why those transactions were being rejected. That was the 
one thing that we were trying to get the Department to do and 
for us to understand the reason for the rejection.
    The next issue was the fund balance with Treasury. If you 
don't reconcile your cash balances on a monthly or even 
quarterly basis, then you don't know where you stand. That is 
good business sense. That was not being done.
    The third issue, when you prepare financial statements, 
they must be based on the general ledger. They had some 264 
entries that didn't go through the general ledger. That was 
over $60 billion worth of entries that didn't go through the 
general ledger. We cannot rely on financial statements where 
the general ledger is not the source document.
    Mr. Ose. You are referring to Ms. Gaffney's written 
testimony on page 4 as it relates to the adjustments to the 
general ledger?
    Ms. Kuhl-Inclan. Exactly. You can't run those adjustments 
outside of the general ledger. We didn't know what the 
adjustments meant, nor did we have the proof to show the 
documentation for those entries. Any good business runs on a 
general ledger. And then we had the issue of material 
weaknesses. The material weakness and reportable conditions 
have not really changed. Some have been downgraded, some have 
been upgraded, but there has been no change since we started in 
1991.
    The issue of resource management, yes, we took it off. That 
is why you have problems monitoring your multi-family 
portfolio. It became an issue why these material weaknesses are 
occurring versus standing alone analyzing your basic resources. 
We have not really altered our opinion or our ideas about what 
are material weaknesses and reportable conditions since we 
began the audit. Those conditions still remain. There have been 
some changes, yes.
    Mr. Ose. I want to make sure that I understand you 
correctly. These are material weaknesses that were pointed out 
in 1991?
    Ms. Kuhl-Inclan. Yes.
    Ms. Gaffney. Yes.
    Ms. Kuhl-Inclan. Some are more serious than others. But 
that group of reportable conditions has basically been in 
effect since we started doing the audit. There has not been any 
significant change.
    Mr. Ose. So we still suffer those same material weaknesses 
in the opinion of the Inspector General?
    Ms. Kuhl-Inclan. Yes, sir.
    Mr. Ose. Mr. Ramirez.
    Mr. Ramirez. First, let me address the issue of 200-some 
odd entries that were made. We made it clear at the hearing 
that this was a conversion year. All of those 200 entries were 
specifically related to conversion. If they would have just 
audited the PAS system, which was the one that got us a clean 
opinion last year, we would probably have gotten a clean 
opinion this year.
    Ms. Kuhl-Inclan. But that is not the general ledger.
    Mr. Ramirez. They didn't, and that is where the supporting 
documentation is to the HUDCAPS. We were prepared prior to 
March 1 on the $63 billion that she is talking about that were 
material were two entries that we had the supporting document 
prior to March 1 that they refused to receive until after March 
1.
    Mr. Hsiao. From a systems perspective, last year they had a 
little program called CRS which really summarizes PAS data into 
a financial statement. That is real key. You can't get 
information, that is why we have Hyperion. These systems are 
old. You and I, even me with my knowledge and my experience, it 
would be very difficult to get any data out of it. You need a 
set of essentially COBOL programmers to get anything out of it.
    Mr. Ose. We did COBOL when I was in college. Seriously?
    Ms. Gaffney. Yes.
    Mr. Hsiao. This is over 20-plus years old. That is very 
difficult to get data. That is why they had these reporting 
systems so you can easily produce the financial statements. It 
is not easy to go in and produce financial statements from PAS. 
CRS--when they converted, CRS did not work. They did not 
produce financial statements from PAS into CRS, it went 
straight to HUDCAPS, converted and then went to Hyperion, and 
that is how the financial statement gets produced.
    Mr. Ose. Mr. Chairman, if I might, I am trying to approach 
this methodically and I think the first question I might ask, 
and unfortunately I am not sure that we will get an answer 
here, is that from 1991 to the present we have had no apparent 
change in the material weaknesses. Now, if I understand 
correctly, perhaps the CRS system did not lend us the 
information to create the solutions by virtue of its antiquated 
nature but the reality is that this has been every year 
tolerated.
    Ms. Gaffney. Right.
    Mr. Ose. I don't understand why we tolerate it. Mr. Ramirez 
is the Deputy Secretary, who is the Deputy of HUD. Why is it 
that we are not doing anything about this? Why does it take us 
8 years to address these material weaknesses that we kicked up 
by virtue of the good work previous Congresses did.
    Ms. Gaffney. You know what I am going to say.
    Mr. Horn. Have any problems come in terms of corruption, 
pilfering, and embezzlement because of that general ledger 
being so useless?
    Ms. Gaffney. I have no evidence of that.
    Mr. Horn. You have no evidence of that, OK. Because that is 
a field day for anyone who figures gee, they will never figure 
these books out.
    Ms. Gaffney. Right. I would like to answer you by saying 
what is remarkable is the guts of what is wrong is the material 
weaknesses. HUD has plans, HUD always has plans to correct 
material weaknesses, but the problem in the government, 
generally, is nobody talks about the material weaknesses. They 
talk about the unqualified audit opinion and what is happening 
is agencies are jury rigging financial statements and getting 
unqualified opinions, and then that is the end of the story. If 
you got an unqualified opinion, you are a success. It is really 
very problematic.
    Mr. Horn. You are telling me the corporate culture rests on 
what, on simply saying you have an unqualified opinion?
    Ms. Gaffney. That's it. You get an unqualified opinion and 
you are a success, so agencies will do anything to get an 
unqualified opinion. And it actually doesn't take that much. 
All you have to do is hire a bunch of consultants from 
accounting firms, have them jerry-rig financial statements, 
take enough time to do it and have them audited, and you will 
get an unqualified opinion no matter what your material 
weaknesses are.
    Mr. Horn. I can guarantee you that the Federal Government 
and the California State government, which is the second 
largest entity in this country in government, they have old 
timers for years that balanced the numbers and they plugged in 
a little number here and there and somehow they all balanced.
    Ms. Gaffney. Right.
    Mr. Ramirez. I would counter by saying that the accounting 
expertise that we brought in was to clear up a system that had 
been sorely lacking improvement for years. We are taking the 
most aggressive stand ever to do that and I would venture to 
say that the very same kind of experts and consultants that the 
Inspector General hired to do the audit for FHA did not jerry-
rig any numbers to come out with a clean opinion for FHA.
    So these are the top five financial accounting firms in 
this country that do primarily the work for the Federal 
Government and the reason that we hired them was not to do our 
financial statements but to get to the heart of what we believe 
is the problem, and I think the Inspector General would concur, 
which is that the data that was in those systems needed to be 
cleaned up in order for it to be quality accounted for and 
booked. I would say that all financial statements, corporate or 
government, should seek and strive for a clean opinion because 
that truly is the benchmark of what we want to do. As equally 
important is to take into consideration and implement those 
recommendations that are made by auditors even when they issue 
clean opinions to deal with weaknesses that they have found in 
your systems. We are convinced that the disclaimer issued was 
issued because of a timing concern and the lack of effort of 
review to deal with the three items out of a trillion by the 
Inspector General.
    That is behind us, Mr. Chairman. I believe in working 
productively and proactively to resolve our differences and our 
issues. I am looking forward to hopefully resolving sooner than 
the 6 weeks that the Inspector General has indicated to us it 
will take them to review these specific items that they 
mentioned as a disclaimer to come back to you and quality 
report the financial condition of our finances.
    And finally, let me just say that I would ask the 
Congressman to look at the substance of the entire financial 
report that was prepared by the Inspector General because she 
is correct, although we focus on a clean opinion, there is a 
lot of good material that still highlights our weaknesses but 
also captures the strengths that have come into being as a 
result of our efforts, and we want to work collaboratively to 
resolve these issues that are before you at this time, Mr. 
Chairman.
    Mr. Horn. Has the Department looked at an off the shelf 
general ledger in updating itself? What do your consultants 
say?
    Mr. Ramirez. What we have had again, the dynamics of the 
problem that was a material weakness even before Inspector 
General Gaffney came in as Inspector General and it is 
Secretary Andrew Cuomo from New York, the Secretary of Housing 
and Urban Development, and those weaknesses when Jack Kemp was 
there, and in fact were trying to be resolved as a result of 
the debacle that was had by the leadership of Samuel Pierce 
that led to the scandals in the eighties.
    To bring a little history to that, that is when we had 
these different systems that weren't talking to each other. We 
felt it important to get to what the IG was recommending, what 
GAO is recommending as well, that we integrate our financial 
systems. We are striving for that. What led to the disclaimer, 
as the Inspector General has stated before this committee, is 
that as a result of us trying to do something right and being 
caught in a time-consuming difficult conversion but yet running 
a parallel system to make sure. As the Congressman has said and 
quite correctly, that if we can't show you how we spent our 
money we should not be getting money, we are prepared to show 
you how and where we spent our money. It didn't get into the 
general ledger HUDCAPS, as was mentioned earlier by the 
Inspector General, and that is correct, too. But what we were 
saying is that when this issue was brought up and this was an 
issue that led to her coming out with saying that there would 
be a disclaimer came to our attention a week before the March 1 
deadline. By the next day within 12 hours we were prepared to 
sit down with the Inspector General and outline what these 
numbers were and what they meant. They did not receive this 
information and refuse to acknowledge this information until 
after March 1. I can appreciate that. They are under a 
statutory requirement to file something by the first, but it 
was a week before and it was three items out of a trillion.
    Yes, there were a lot of other things that could be brought 
up as weaknesses. Yes, they were there and they were there last 
year when we got a clean opinion from the Inspector General. We 
have reduced some. Some have been highlighted even more. That 
has also been acknowledged by the Inspector General. That 
wasn't what was discussed over that period of time that the 
audit occurred. The incident that led to the disclaimer was 
brought to management's attention a week before the first and 
we were prepared within 12 hours to respond to that but it was 
not accepted.
    Mr. Horn. Well, you have mentioned the tenant income 
verification system to address the problem of subsidy payments. 
Do you think that will eliminate the problem?
    Mr. Ramirez. That will eliminate, we believe, after we have 
run the system and have run one survey, and we are in the 
process of getting these letters out, but we will run another 
cycle and it will be an annual verification process. It will 
clearly be able to point to a more accurate number than the one 
that has been derived out of a sampling of a thousand 
households, as it currently is being done under the method that 
the Inspector General has employed for the last several years. 
We will be able to get to a more accurate number and to the 
person who is underpaying to be able to either get them to 
their fair share of rent or to get families or individuals that 
are qualified into those housing units and reduce that waste 
that is currently being outlined as a weakness.
    Ms. Kuhl-Inclan. One point, we agree with the tenant 
verification process, but it is a back-end process. They are 
reviewing the income of tenants after they are in the units. 
One of the material weaknesses is the up-front issue--
overseeing the multifamily projects which receive payments and 
Section 8 moneys. What kind of monitoring is HUD doing to make 
sure that the owners and housing authority executive directors 
are ensuring that the right tenants get in in the first place?
    Yes, they are doing tenant income verification, and we 
agree with that, but it doesn't exclude the up front issue, 
which is a material weakness of overseeing and monitoring 
multifamily efforts at the beginning of the process, not the 
end.
    Mr. Horn. Mr. Ramirez, you testified that the Department's 
financial house is now really in order?
    Mr. Ramirez. No, I said it is in the best condition it has 
been in the history of the Department, sir, and we still have 
work to do.
    Mr. Horn. Yes, I think you have a lot of work to do and you 
do too and you know it, and I appreciate your comments on that. 
So we agree you can't really make an assertion when the 
Inspector General continues to report material weaknesses and 
you won't produce financial statements in a timely manner.
    Mr. Ramirez. We can dispute it. We believe that, sir, is 
behind us. We don't want to bog down our work in the present as 
a result of what occurred in the past. We are hopeful, as 
indicated by the Inspector General, that we resolve this 1999 
disclaimer based on what got the financial statements 
disclaimed, and be able to report back to you in a timely 
manner the financial condition, overall financial condition of 
the Department, sir.
    Mr. Horn. Well, you say in your first full paragraph that 
the Department's financial house is in order.
    Mr. Ramirez. Mr. Chairman, we have not reached management 
nirvana, and we are not going to get there any day soon, but we 
are making credible progress, as Mr. Walker has said from the 
GAO.
    Mr. Horn. I don't know that we can beat this poor old dog 
any more. It kept going through my mind that Hyperion is a 
facility in El Segundo, CA, of the city of Los Angeles, a waste 
water and water treatment facility.
    Mr. Ramirez. Isn't it a shame that they use that throughout 
the Federal Government?
    Mr. Horn. And any good parochial student here probably 
studied mythology, Greek and Roman, and I think that is it, 
too. We have an analogy on the West Coast.
    Mr. Ramirez. Yes, we agree.
    Ms. Gaffney. Mr. Chairman, may I just say one thing?
    Mr. Horn. Go ahead.
    Ms. Gaffney. HUD did want an extension of the March 1 date. 
The other thing is that OMB tried very hard. They said that we 
should extend by a couple of days, a couple of weeks, a month 
because of the importance of getting an unqualified opinion. We 
should do whatever. So I just wanted you to be aware that that 
kind of pressure exists.
    Mr. Ramirez. Let me say by a matter of days, four agencies 
did delay their report through their Inspector General's 
office, and it did produce in a quite expeditious manner, as we 
believe it would have for us, a clean opinion, sir.
    Mr. Horn. Well, I am worried about the possibility for 
corruption.
    Mr. Ramirez. We all are.
    Mr. Horn. Do you have your own investigative unit within 
the Department?
    Mr. Ramirez. We leave all of the criminal investigation 
work to the Inspector General. Our focus through the 
enforcement center is to deal specifically with civil 
violations of law. In particular, what has been set statutorily 
and regulatorily through the agency by way of landlords, 
grantees and recipients, sir.
    Mr. Horn. Well, you have a major mandate without question. 
It is a very difficult Department. Historically you are talking 
about decentralization all over the place and it will be a real 
gold medal if somebody pulls that together.
    Mr. Ramirez. Thank you.
    Mr. Horn. Let me thank the staff that put this hearing 
together, J. Russell George, the staff director and chief 
counsel for the subcommittee; Randy Kaplan, counsel, and he is 
to my left and your right; and Louise DiBenedetto is from GAO 
and a professional staff member working for us. Bonnie Heald, 
director of communications; Bryan Sisk, clerk; Ryan McKee, 
staff assistant. The minority staff, Trey Henderson is counsel 
and Jean Gosa is minority clerk, and the court reporter today 
is Doreen Dotzler. We thank you very much, and with that we are 
adjourned.
    [Whereupon, at 11:55 a.m., the subcommittee was adjourned.]

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