[Senate Hearing 107-]
[From the U.S. Government Printing Office]


                                                      S. Hrg. 107- 1015


                      HUD'S MANAGEMENT CHALLENGES
=======================================================================

                                HEARING

                               before the

               SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                                   ON

    THE MANAGEMENT PROBLEMS AT THE DEPARTMENT OF HOUSING AND URBAN 
 DEVELOPMENT AND THE IMPACT THESE PROBLEMS ARE HAVING ON HUD'S ABILITY 
  TO MEET ITS MISSION OF PROVIDING DECENT, SAFE, AND SANITARY HOUSING

                               __________

                             JULY 24, 2002

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs





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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia                 CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey           MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii              JOHN ENSIGN, Nevada

           Steven B. Harris, Staff Director and Chief Counsel

             Wayne A. Abernathy, Republican Staff Director

                    Jennifer Fogel-Bublick, Counsel

               Jonathan Miller, Professional Staff Member

           Sherry E. Little, Republican Legislative Assistant

                 Mark A. Calabria, Republican Economist

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                 ______

               Subcommittee on Housing and Transportation

                   JACK REED, Rhode Island, Chairman

                 WAYNE ALLARD, Colorado, Ranking Member

THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JOHN ENSIGN, Nevada
JON S. CORZINE, New Jersey           RICHARD C. SHELBY, Alabama
CHRISTOPHER J. DODD, Connecticut     MICHAEL B. ENZI, Wyoming
CHARLES E. SCHUMER, New York         CHUCK HAGEL, Nebraska
DANIEL K. AKAKA, Hawaii

                     Kara M. Stein, Staff Director

              Tewana Wilkerson, Republican Staff Director

                                  (ii)





                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JULY 24, 2002

                                                                   Page

Opening statement of Senator Reed................................     1

Opening statements, comments, or prepared statements of:
    Senator Allard...............................................     6
    Senator Sarbanes.............................................    30

                               WITNESSES

Alphonso Jackson, Deputy Secretary & Chief Operating Officer, 
  U.S. Department of Housing and Urban Development...............     3
    Prepared statement...........................................    30

Stanley J. Czerwinski, Director, Physical Infrastructure, U.S. 
  General Accounting Office......................................     7
    Prepared statement...........................................    36
    Response to written questions of Senator Reed................    51

Carolyn Federoff, President, American Federation of Government 
  Employees, AFL-CIO, Council of HUD Locals, 222.................    10
    Prepared statement...........................................    44
    Response to written questions of Senator Reed................    55

                                 (iii)


                      HUD'S MANAGEMENT CHALLENGES

                              ----------                              


                        WEDNESDAY, JULY 24, 2002

                               U.S. Senate,
  Committee on Banking, Housing, and Urban Affairs,
                Subcommittee on Housing and Transportation,
                                                    Washington, DC.

    The Subcommittee met at 2:32 p.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Jack Reed (Chairman of 
the Subcommittee) presiding.

             OPENING STATEMENT OF SENATOR JACK REED

    Senator Reed. The hearing will come to order.
    Good afternoon. Let me welcome all of our witnesses to 
today's Housing and Transportation Subcommittee hearing on 
HUD's management challenges.
    The Subcommittee is very concerned about the management 
problems at the Department of Housing and Urban Development and 
the impact these problems are having on HUD's ability to meet 
its mission of providing decent, safe, and sanitary housing.
    The Department of Housing and Urban Development's programs 
affects millions of Americans every year. HUD provides rental 
assistance to 5.2 million people, and mortgage insurance to 7 
million homeowners. HUD has helped revitalize over 4,000 
communities, and it managed about $545 billion in mortgages 
last year.
    Unfortunately, two of HUD's programs--the Single-Family 
Mortgage Insurance Program and the Multifamily Rental Housing 
Assistance Program--make up 70 percent of HUD's business and 
are currently on GAO's ``high-risk'' list and considered 
``extremely vulnerable'' to fraud, waste, and abuse.
    GAO's concerns largely focus on issues such as staffing at 
HUD. HUD currently has 9,100 employees who oversee almost the 
same number of contractors, in addition to doing their own job. 
A current study by HUD itself shows that HUD is understaffed by 
at least 1,000 FTE's.
    HUD is on the cusp of losing almost half of its career 
workforce by June 2003, because of potential retirements, and I 
think that is an important point to note--that half of your 
present employees could walk out the door next year. And these 
are the most experienced individuals, those who have been with 
the programs the longest, and those who have the most knowledge 
and experience of housing issues. This makes HUD's current 
decisions about staffing extremely critical.
    We hope to explore today what HUD's plans are for retaining 
current staff, hiring new employees, and maintaining a core of 
expertise to lead the Agency into the future.
    HUD also continues to have problems overseeing its 
thousands of contractors, especially in the FHA Single-Family 
Insurance and Multifamily Housing Programs.
    In addition, since 1984, HUD has had problems with its 
hardware and software systems. These problems make it more 
difficult for HUD's staff to do their job and properly oversee 
contractors. These systems also keep track of billions of 
dollars in loans and rent subsidies. If these systems fail to 
meet HUD's needs, HUD will continue to have problems 
maintaining oversight over those contractors who provide 
services, keeping track of billions of taxpayer dollars, and 
defining the number of people who are helped by their programs.
    Although I understand that new managers have the right to 
make management changes as long as they comply with Federal 
law, I am concerned that HUD's reorganization may jeopardize 
past improvements. HUD cannot afford to regress given its 
tenuous footing and continuing management challenges.
    That is why we have asked GAO to come here today to talk 
about its findings. GAO has been a nonpartisan voice that 
continues to challenge HUD to make improvements. Senator 
Sarbanes, Senator Allard, and myself commissioned GAO to draft 
a series of reports on HUD, the first of which is being 
released at today's hearing.
    We also will be hearing today from an officer of one of the 
unions representing HUD employees.
    This Committee wants HUD to succeed and to meet the many 
challenges that it is facing. We want HUD to be able to 
effectively and efficiently provide families with important 
rental assistance and to help make the American Dream of owning 
a home a reality for many first-time and minority homebuyers. 
And that is why we are holding this important oversight hearing 
today.
    I must also add that this concern has been consistent over 
many, many committees. I know my Ranking Member, Senator 
Allard, was equally concerned about HUD's management and that 
goes back several years, back to 1984 and before.
    So let me just say that we are pleased and very delighted 
to have Alphonso Jackson, Deputy Secretary of the Department of 
Housing and Urban Development here today. Then we will hear 
from Mr. Stanley Czerwinski, Director of Physical 
Infrastructure of the U.S. General Accounting Office. Our third 
witness will be Ms. Carolyn Federoff, who is President of the 
American Federation of Government Employees, Council of HUD 
Locals 222.
    Each of our witnesses has been asked to discuss HUD's 
management challenges, the status of the Administration's 
efforts to address these challenges, and ideas for further 
improvement.
    When Senator Allard arrives, I will take the opportunity to 
interrupt at an appropriate moment so he may give his opening 
statement, and similarly, with my other colleagues. But at this 
point, Mr. Jackson, let me just further add that prior to your 
appointment as Secretary you were the President of American 
Electric Power-Texas, in Austin, Texas.
    Let me say for the record that in addition to Deputy 
Secretary Jackson, we also have with us John Weicher, FHA's 
Commissioner; Angela Antonelli, CFO of HUD; Vickers Meadows, 
Assistant Secretary for Administration; Melody Fennel, who is 
Assistant Secretary for Congressional Affairs; and Roy 
Bernardi, the Assistant Secretary for Community and Planning 
Development.
    We thank all of you for joining us today.
    Mr. Secretary, please.

                 STATEMENT OF ALPHONSO JACKSON

           DEPUTY SECRETARY & CHIEF OPERATING OFFICER

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Jackson. Thank you very much, Chairman Reed, and thanks 
to all of the Members of the Subcommittee.
    I am thankful for the opportunity to appear before you 
today to discuss HUD's staffing, acquisition management, and 
information system challenges. I am happy to provide you with 
the update of the substantial progress our Administration is 
making to address these issues.
    Under the leadership of Secretary Martinez, the first year 
of our new Administration was largely devoted to getting the 
management team in place, assessing HUD's management 
environment, and formulating viable strategies and plans to 
address the major management challenges and program risks that 
face the Department. In formulating our strategies and plans, 
we strongly considered the input on HUD's management challenges 
and program risks as described by the U.S. General Accounting 
Office, better known as GAO, and HUD's Office of Inspector 
General.
    I believe our management team and the GAO share a common 
view that improvements to HUD's management of its human 
capital, acquisitions, and information systems are essential to 
addressing HUD's remaining high-risk program areas--the 
Multifamily Rental Housing Assistance and Single-Family 
Mortgage Insurance Programs--and to maintaining adequate 
control over other program activities previously considered 
high-risk.
    The inclusion of our management challenges and program 
risks in the President's Management Agenda is indicative of the 
importance placed on these issues. We welcome the GAO's 
independent assessment, and I am confident that they will see 
that we are moving in the right direction to address our 
management challenges, reduce our program risk, and improve our 
program performance.
    We also appreciate the advice, the counsel, and the 
constructive dialogue of the HUD union.
    Since coming to office, I have made it a priority to meet 
with the HUD union representatives, with Ms. Federoff and the 
union there at HUD, monthly to discuss issues that are of 
interest to them and how we can better manage our HUD 
organization.
    The first area I want to discuss is human capital 
management.
    Human capital is HUD's most important and valuable asset. 
We have taken substantial steps to enhance and to better 
utilize our 
existing staff capacity, and to obtain, develop, and maintain 
the staff capacity necessary to support HUD's future program 
delivery.
    As you are well aware, decisions were made and actions 
taken by HUD's leadership to undertake separate realignment of 
headquarters and field activities to better use our existing 
resources and to strengthen our program, and to deliver the 
services better. The details of this realignment are in my 
testimony and I am asking that it be submitted for the record.
    Senator Reed. Without objection.
    Mr. Jackson. Thank you, and I am more than happy to answer 
any questions that you have about the details of this 
realignment.
    We have formalized our realignment structure, with the 
publication of delegations of authority in the Federal 
Register, and are providing current operating policies and 
procedures to support staff training and ongoing operations.
    In addition, the Department has taken on other positive 
actions to improve HUD's human capital. For example, we have 
developed a Human Capital Strategic Management Plan in February 
2002, to provide an overall framework of our human capital 
activities, developed a departmental succession strategy to 
assess the impact of potential human capital loss and results 
of skill imbalance, as you just noted.
    Completed in 2001 the implementation of the new Resource 
Estimate and Allocation Process, known as REAP, to use as a 
baseline estimate and justify its staffing resources needs to 
allocate for the proper resources.
    Significant improvements in our training, including e-
training programs and their availabilities.
    Expanded recruitment, retention efforts to take advantage 
of the excellent programs, such as the Presidential Management 
Intern Program, the new HUD Intern Program, the Legal Honors 
Program, and the Senior Executive Service Candidate Development 
Program to establish a pipeline from our perspective of well-
qualified employees to meet the staffing needs and the 
anticipated skills shortages that will occur.
    The second management challenge I would like to discuss is 
acquisitions management.
    HUD is heavily relying on contract services in support of 
its current operations, as you just stated. HUD's contracted 
services go well beyond facilities management and other routine 
services to many core program functions. Given the extent and 
significance of HUD's contracted services, the Department has 
taken positive steps to address the acquisition challenges.
    For example, the Department has reestablished a senior-
level Contract Management Review Board, we call CMRB, to review 
and approve annual procurement plans for each HUD component, 
and to approve all contracts over $500,000. The CMRB helps to 
assure that HUD's contract resources are used to address the 
Department's priority service needs.
    The Department also is increasing the use of integrated 
program teams to improve the quality and the timeliness of 
procurement 
actions. The Secretary and I recognize that small businesses 
are 
vitally important to job growth and the economic strength of 
the country. The Secretary has challenged HUD to award at least 
50 percent of its contracts to small businesses. As of June 30, 
41 percent of the fiscal year 2002 contract dollars have been 
awarded to small businesses, and I am particularly pleased that 
women-owned businesses accounted for 21 percent, well above the 
5 percent that Congress has established.
    The third challenge that I would like to discuss is 
information technology, as you so noted.
    The adequate automated information systems are essential to 
the effective administration of HUD's large, diverse, and 
complex program universe. However, to be very candid and 
honest, we recognize that HUD has antiquated systems that are 
poorly integrated, inefficient, and inadequate for meeting many 
essential program management information needs. We have taken 
significant actions to address this challenge.
    HUD integrated its IT capacity planning process with HUD's 
Enterprise Architecture and e-Government directives from the 
Office of Management and Budget. This will better assure 
efficient resource use and effective business results.
    HUD's Enterprise Architecture initiative is designed to 
provide Department-wide documentation of HUD's current business 
and technology systems to better manage HUD's current 
information systems and meet future information systems needs.
    HUD's Enterprise Security Program was established to 
provide protection for HUD's critical infrastructure, both 
physical and information systems. HUD's Office of Inspector 
General recognized both substantial control improvements in 
HUD's mainframe computer system.
    As you can see, our efforts to meet HUD's human capital, 
acquisitions, and systems challenges have been very extensive. 
It will continue, and it must be strong. Our efforts to better 
manage our staffing, acquisitions, and information systems is 
important. We believe that we are making progress in the two 
remaining high-risk program areas--our Multifamily Rental 
Housing Assistance and Single-Family Mortgage Insurance 
Programs. We welcome the pending independent assessment of our 
progress through the GAO's biennial Government-wide review of 
major management challenges and high-risk programs.
    In conclusion, Mr. Chairman, I would like to say simply 
that we have established a leadership meeting every month at 
HUD, and in this leadership meeting, we track the progress of 
each one of the President's Management Agendas and the GAO's 
agenda as to what we need to be doing.
    The Secretary and I hold the senior leadership responsible 
for making sure that this accountability is talked about every 
month in our executive management meeting. Even more 
importantly, the Secretary and I firmly believe that in not 
only recruiting new staff at HUD, but also we have not over the 
past years trained, retrained, or empowered our employees to do 
their job in an outstanding manner.
    Over the last 18 months, the Secretary and I have traveled 
extensively to field offices to meet our staffs. As you know, 
almost two-thirds of HUD's staff is in the field and the 
operations there are critical. Some of the HUD field offices, 
as I have been told when I was in one city, had never seen a 
HUD Secretary or a Deputy Secretary in 21 years.
    We believe that the strength of this organization is in the 
field and if we do not show up in the field, as well as show up 
at the headquarters, we will have and continue to have serious 
trouble.
    I have talked during this period of time, Mr. Chairman, to 
more than 1,200 HUD staff in the past 18 months, and we have 
seen the morale in the field grow stronger every day.
    It is my belief that as the Deputy Secretary and the Chief 
Operating Officer of the Agency, that not only am I to manage 
our staff here at HUD Headquarters, but also our job is to make 
sure that the staff in the field realize that they are just as 
intricate a part of HUD as the HUD Headquarters. And we are 
making every effort to do that.
    Last, the Secretary and I have made a commitment that we 
will enter no city without visiting with the HUD staff, whether 
it is field or regional staff; and to date, the Secretary and I 
have kept that commitment.
    So, I am glad to be here and I will be happy to answer any 
questions that you may have.
    Senator Reed. Thank you very much.
    Prior to introducing the other panelists, let me recognize 
the Ranking Member, Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, thank you. I apologize for 
being late. The votes that we had moved my schedule back a 
little.
    I want to congratulate you on holding this hearing. I 
believe that oversight is one of Congress' most important 
functions. I think all too often, this critical responsibility 
is ignored. It is nothing glamorous, but very important. 
Frequently, you do not get any credit for holding these kinds 
of oversight hearings.
    This hearing is a helpful way, I think, to perform our 
charge. When you and I changed places, I think I had some 10 
oversight hearings at that particular time. And Mr. Czerwinski 
frequently showed up.
    I think there were some favorable results that were 
happening as a result of that. I look back at 1997, when HUD 
described itself as a poster child for inept government. We had 
reports coming out of the GAO and the Inspector General. And 
since that time, the Department has undertaken a variety of 
initiatives designed to transform the Agency. GAO has reported 
that HUD has been making creditable progress toward its goal of 
reform. It has reduced the number of HUD programs deemed to be 
high-risk.
    Although HUD has made considerable progress, Mr. Chairman, 
much remains to be done. Last year, I requested that GAO 
conduct a comprehensive evaluation of the Department's 
progress, HUD's ability to sustain improvements and changes are 
still needed.
    As always, I appreciate the work that the GAO has done for 
this request. In fact, today, they are releasing a report on 
HUD's human capital issues as a part of my request. It is my 
hope that their findings will be helpful to the Congress as we 
consider authorization and appropriation matters concerning 
HUD. Additionally, I believe that this body of work can be 
extremely helpful to HUD. I am hopeful that they will work 
closely together to identify and implement necessary 
improvements at the Department. In this matter, HUD can become 
a strong Agency that meets its mission with effectiveness and 
efficiency.
    I would like to thank our witnesses for being here today. I 
am pleased that Alphonso Jackson of HUD is here to update us on 
the Department's status. I know that you have had a very busy 
schedule personally, and I appreciate your taking the time to 
come forward with this important responsibility.
    I also welcome Carolyn Federoff, the President of the 
American Federation of Government Employees, Council 222. 
Carolyn, your perspective as a HUD employee will be helpful as 
we discuss HUD's reforms.
    Finally, I want to extend a special welcome to Stan 
Czerwinski of the General Accounting Office. Stan has been an 
invaluable resource for me and my staff during my years as 
Chairman and now as Ranking Member. I had the pleasure of 
receiving testimony from Stan on a number of occasions. His 
insight and expertise has been extremely helpful.
    Unfortunately for this Subcommittee, I understand that Stan 
is probably testifying before us for the very last time in his 
current capacity. Next month, you will be Comptroller of GAO. I 
want to congratulate you on that. And while I am sure that you 
will be incredibly successful in your new position, we are 
going to miss you here at the witness table.
    Stan, thank you for your hard work on behalf of this 
Subcommittee. And again, thank you, Mr. Chairman, for convening 
this oversight hearing. I look forward to hearing today's 
testimony.
    Senator Reed. Thank you very much, Senator Allard.
    As I pointed out in my opening remarks, oversight 
activities are not unique to this Chairmanship. You were very 
active as an oversight Chair, and we are following through with 
some of the issues that collectively, we were pushing 2 and 3 
years ago.
    Senator Allard. Yes. Very good. Thank you, Mr. Chairman.
    Senator Reed. I want to join Senator Allard in both 
recognizing Stan Czerwinski, and thanking him for his valuable 
testimony on many different occasions, and wishing you well in 
your new position as Comptroller. And again, you will probably 
not be here as you are now. Mr. Czerwinski is testifying in his 
capacity as the senior GAO expert with respect to housing 
programs in the U.S. Government. He will broaden that expertise 
as Comptroller.
    So, we will get you back here in some guise, Stan.
    [Laughter.]
    Please, go ahead.

               STATEMENT OF STANLEY J. CZERWINSKI

               DIRECTOR, PHYSICAL INFRASTRUCTURE

                 U.S. GENERAL ACCOUNTING OFFICE

    Mr. Czerwinski. Mr. Chairman, I happen to notice that you 
are on the Appropriations Committee, in my new position, I will 
be working closely with Appropriations, so we will be still 
talking.
    Senator Reed. I have become very popular recently.
    Mr. Czerwinski. Yes, you have. Mr. Chairman and Mr. Allard, 
before I begin, I would like to express my appreciation for 
this Subcommittee's diligent oversight. That is a theme that 
you are going to hear from me during this hearing.
    Your work is instrumental to improving HUD. You are asking 
the right questions and we are seeing results at HUD because of 
that. And I think there is evidence of that today, with the 
Deputy Secretary, you, and GAO agreeing as to what the top 
management challenges are.
    I also wanted to mention that it is really crucial that 
this oversight is bipartisan, as you have done, going back to 
the leadership of Mr. Allard and now with you, Mr. Chairman. It 
is very gratifying to us to see you holding this oversight 
hearing. I know oversight is not glamorous, but to the GAO, it 
is our lifeblood.
    In my testimony today, I want to update our high-risk 
assessment of HUD, then outline what we think still needs to be 
done.
    You may recall in the mid-1990's, GAO designated HUD as a 
whole, high-risk, the only Agency in Government to be 
designated that way.
    In our last high-risk series of January 2001, we noted the 
credible progress that HUD had made. As a result, we no longer 
said that the whole Agency was at high-risk, but instead, two 
major program areas. As you noted, Mr. Chairman, these two 
areas comprise about 70 percent of HUD's budget--Single-Family 
Mortgage Insurance and Multifamily Rental Housing Assistance.
    In fairness to HUD, I want to note that HUD faces inherent 
risks that most agencies in Government do not. For example, it 
has about $1 trillion of exposure on the financial markets 
through FHA and Ginnie Mae. Also, in carrying out its mission, 
HUD relies on third parties, including about 10,000 lenders, 
25,000 appraisers, and about 12,000 subsidized landlords.
    We have made, and to its credit, HUD has implemented, a 
number of recommendations to address deficiencies in lender and 
appraiser oversight, property disposition, tenant income, and 
property inspection. Yet, problems persist.
    If we were to issue the high-risk report update today, we 
would still find that Single-Family Mortgage Insurance and 
Multifamily Rental Housing Assistance to be of high-risk. This 
is, in some sense, because the programmatic fixes are really 
addressing the symptoms rather than the root causes.
    As you noted, at the request of this Committee, for the 
past 2 years, we have been focusing on the root causes. Just to 
reiterate what has already been said today, the top three root 
causes that we all agree on are human capital, acquisition 
management, and program and financial information systems. As 
the chart to your left shows, we see those three root causes 
sweeping through all of HUD's programs.
    Mr. Chairman and Mr. Allard, you released our report today 
on human capital. I would like to briefly summarize what that 
report says. Simply said, HUD does not have the right people, 
with the right skills, in the right places, to do the right 
things.
    As you mentioned, HUD has the additional challenge, or 
maybe it is an opportunity, of having more people who are 
eligible to retire than any Agency in the Federal Government. 
This means that it is critical for HUD to determine the mission 
that it wants the Agency to have now and in the future, decide 
what skills it needs to carry out that mission, assess what 
skills it has now and then match what it has with what it 
needs.
    I guarantee that there will be a gap. There is no question 
about that. HUD then needs strategies for filling that gap. 
These strategies include recruiting, retaining, and training 
staff.
    As Mr. Jackson noted, HUD has taken the first step with 
REAP. REAP is a snapshot. It provides a picture of what the 
Agency has today in terms of skills and needs. However, because 
as you mentioned, Mr. Chairman, HUD could be losing about a 
thousand people each year, HUD must be looking to see how it 
will fill those losses. The answer to that question will 
determine whether HUD as an Agency takes the shape that its 
leadership and the Congress wants it to take.
    As you may recall, HUD had about 50 percent more staff a 
decade ago than it does today. Over that decade, HUD's 
responsibilities have not diminished. Instead, HUD relies much 
more on contractors. In fact, contractor reliance, as measured 
by spending, has grown 62 percent within a 5-year period. This 
reliance, without proper oversight and monitoring in place, can 
result in significant problems and abuse.
    At your request, and again, you are requesting all the 
right things--we will be reporting on acquisitions this 
September. We will be including concrete examples of contracts 
gone wrong.
    What I would like to do today is give you an interim look 
at the findings of our work. The bottom line is that 
contracting problems are caused by three things at HUD.
    The first is inadequate monitoring. HUD's monitoring does 
not hold the contractors accountable. The second cause of 
contracting problems goes back to the issue of human capital. 
You will see there is another theme, that these root causes are 
not independent. One affects the other. Because they have fewer 
people, they rely on more contracting. Because they rely on 
more contracting, it exacerbates the human capital weaknesses. 
What we have found is that HUD all too often lacks the right 
number of employees in the right locations, with the 
appropriate skills and training to oversee contractors. 
Finally, HUD has no single information system to accurately 
track contractor obligations, milestones, and performance. This 
leads me to the third area and the final top management 
priority--financial and programmatic information systems.
    As you can probably guess, you have requested that study 
also and we will be reporting to you by the end of the year, 
but I want to give you a simple bottom-line today. In layman's 
terms--HUD's systems do not talk to one another. Sadly, this is 
not a new problem. We first reported it 20 years ago. As a 
result, even if HUD has the right people with the right skills 
in the right places, their oversight is going to be difficult 
without the information they need.
    For example, if a HUD employee wanted to visit or evaluate 
a lender, he or she would have to get data on the lender's 
address from one data system, the loan volume data from another 
system, default and claim data from yet another system, and 
finally, complaint information from another system.
    The two key thoughts I want to leave you with on 
information systems are systems integration and user needs. HUD 
must make its systems compatible. In making the systems 
compatible, emphasis has to be given to doing it in a way that 
addresses the needs of the users to do their jobs.
    I would like to close by saying that in my 5 years 
directing the GAO's housing work, it has been an honor to 
assist this Subcommittee. You have provided quality oversight 
and that makes a big 
difference.
    Our teams are over at HUD every day and we see the response 
at HUD because of the kinds of questions you are asking. And 
again, I think this hearing is a real example of all of us 
agreeing on what the major issues are.
    Also, your staffs have shown professionalism and 
dedication. Day in and day out, we deal with your staffs, on 
both sides of the aisle. I have not seen staffs of that quality 
in my 20 years in Government. It has been an honor and a 
privilege to work with you.
    I would like to leave you with one thought. And that is, we 
would ask you to keep watching and to working closely with HUD 
and please continue to ask GAO to help you do it.
    Senator Reed. Thank you very much, Mr. Czerwinski, for your 
excellent testimony. Again, we thank you for your service to 
the Committee and to the GAO. And we look forward to working 
with you in a different capacity.
    I have been remiss because I should have initially asked 
everyone to stay within the 5-minute time limit and that your 
full statements would be made a part of the record. But, 
through telepathic means, both Secretary Jackson and Mr. Stan 
Czerwinski did that.
    Now, we are pleased to introduce Carolyn Federoff, who is 
the President of the American Federation of Government 
Employees, Council of HUD Locals, 222. The Council is HUD's 
largest employee union, representing approximately 6,000 
employees. And she has been President since May 2001.
    Welcome, Ms. Federoff.

                 STATEMENT OF CAROLYN FEDEROFF

               PRESIDENT, AMERICAN FEDERATION OF

                 GOVERNMENT EMPLOYEES, AFL-CIO

                   COUNCIL OF HUD LOCALS, 222

    Ms. Federoff. Thank you very much, and thank you for 
inviting us to speak for HUD's career bargaining unit 
employees.
    First, I want to thank both of my fellow panelists here.
    The Deputy Secretary has, in fact, invited us to meet with 
him monthly to discuss employee issues, and we are very 
appreciative for that opportunity. And the GAO, especially with 
your leadership, has made recommendations that our employees 
always eat up. They like when the GAO reports come out. They 
want to be able to read them. They want to see what our Agency 
is doing and what we can do better.
    So thank you very much.
    My written testimony, which I would like to have submitted 
for the record----
    Senator Reed. Without objection.
    Ms. Federoff. --is a detailed look at HUD's human capital 
management issues and oversight of contractors. But my oral 
testimony is much more pointed.
    HUD employees have been concerned for a long time with our 
designation by GAO as a high-risk agency. But even without this 
designation, we would be concerned for the long-term viability 
of HUD programs. We believe that no administration can resolve 
these issues without the sustained support of Congress.
    HUD's programs are largely bricks and mortar. They are 
long-term investments. This is one of the distinguishing 
characteristics of the challenges that face HUD.
    The programs that Congress creates have a lifespan longer 
than the lifespan, or rather, the careerspan, of a Federal 
employee. So that a Section 202 development that is built today 
will continue to have a HUD mortgage in place in 2040, well 
after the current employees at HUD have retired.
    Furthermore, the nature of developments is such that they 
either have problems at the very beginning of their lifespan or 
they have problems at the very end of their lifespan. So it is 
very important to have staff continuity, to have the sharing of 
institutional memory from one generation of HUD employees to 
the next generation of HUD employees. And that is crucial to 
problem-solving, when problems arise.
    Now all American employers at this point are facing the 
impending retirement of the Baby Boom generation. So this is a 
problem that is not unique to HUD. But because of the unique 
programs that HUD is responsible for, that problem, in fact, 
can be a crisis.
    Currently, HUD only fills vacancies after they occur, 
frequently months or even years after a seasoned employee has 
left.
    In our written testimony, we recommend no reduction in HUD 
staffing ceiling. But the truth is, if 4,500 employees are 
projected to, or are eligible to retire within the next 5 
years, we need to hire 2,000 employees within the next 2 years. 
We have to hire this staff now in order to permit mentoring and 
a transfer of knowledge. We cannot replace journey-level staff 
with entry-level staff.
    This is a task that no administration can accomplish 
without Congressional support. As stewards of the public trust, 
and as HUD employees, we do not want to hear that it cannot be 
done or that we have deficit budgets.
    It can be done. We know this because the money is already 
being spent. It is being spent on contractors. With the 
knowledge, and sometimes the express approval of Congress, HUD 
spends more money on contractors than it would cost to hire HUD 
employees.
    The Section 8 Contract Administration contracts alone, 
which are part of the rental housing assistance contracts, 
would cover 2,500 additional HUD staff. These contracts are 
costing us $220 million a year now, and when they are in full 
force, will cost us $280 million. Now the contracts replace the 
need for a maximum of 1,250 staff. And this is only one example 
of many examples.
    We need Congress to work with HUD and stop playing smoke 
and mirrors with the budget.
    Our written testimony includes recommendations that would 
assist recruitment and retention. It would assist the use of 
retention programs, such as loan forgiveness, child care 
subsidies, extend permanent positions to its interns, reform an 
overly bureaucratic human resources department. But these are 
Band-Aids. They will make HUD a better place to work for the 
workers that remain. But we need more than Band-Aids. We need 
whole blood. We need staff and we need them now.
    Congress can make a difference between the long-term 
success of the programs that it authorizes or it can assist in 
their failure.
    Thank you.
    Senator Reed. Thank you very much, Ms. Federoff.
    Thank you all for your excellent testimony. And I think you 
have laid out in very graphic terms the serious challenges.
    As Mr. Czerwinski pointed out, HUD is the most vulnerable 
agency to retirements in the whole entire Federal Government. 
And thinking that if even a third or a half of the retirements 
take place, that will have a crippling effect on the Agency, an 
Agency that is responsible for over $500 billion in mortgages.
    The consequences of mismanagement are not simply that 
people do not get the full services that they need and deserve. 
But it could be huge financial consequences for the Federal 
Government. So this is a very serious challenge.
    Mr. Secretary, we all agree on the critical issues--human 
capital, information technology, and oversight acquisition of 
contractors. Do you think that the budget that was sent up this 
year to Congress reflects the seriousness of these challenges, 
reflects the potential loss of thousands of employees and the 
fragility of the Agency at this point?
    Mr. Jackson. Before answering, Mr. Chairman, I want to say 
that I appreciate both persons' testimony because I think that 
they specifically zoomed in on the points that are very 
critical to us.
    In answering your question, I will simply say, I think the 
budget reflects that we are trying to address the needs that 
the GAO and the unions have consistently told me. That is, 
human capital, information technology, succession plans, 
because they are critical.
    As Carolyn will tell you, often I have said to her, I would 
hate to see a third of our employees leave on our watch--that 
is, the Secretary and my watch--because I think it would be 
absolutely devastating.
    I think if we go back to 1995, when we had a situation 
where there was no thought, not methodically or otherwise, and 
we were forced to cut HUD's staff.
    The young employees that Ms. Federoff is talking about that 
would have been the middle employees this year, were taken 
away. In the process, it left seasoned employees. We were in a 
hiring freeze. It did not occur.
    But what we expected out of the employees at HUD, and I 
think, under the circumstances, with my traveling in the field, 
these employees have done an excellent job of maintaining HUD 
as best that they could, with the limited resources. We 
expected them to do the same amount of work with an increased 
budget.
    I do believe that if, as we have said to OMB and to GAO, we 
have a budget that, if given the priorities to hire people to 
do some of the job, and to terminate some of the contractual 
arrangements that we have, the third-party contractual 
arrangements, I truly believe that we can hire the staff that 
can be trained.
    I think that one of the things that Ms. Federoff said that 
was so important, which I did when I was running AEP, which was 
a $13 billion corporation, when we realized that we had 
somebody leaving the organization, we brought someone in to be 
trained by that person. That is not the way that we have 
operated at HUD because of the hiring freeze. We believe now in 
our process of trying to recruit and hire new staff members, 
staff members who have the expertise, to give them an 
opportunity to work with those persons who have this expertise 
who will be leaving us within the next 3 years.
    So, I would say, yes, the budget does reflect it. And the 
Secretary is very concerned that we address the needs of human 
capital, as has been denoted to you today, we address the needs 
of information technology.
    I cannot come here, as Stan can tell you, and contradict 
him, I am not in the position to do that. I am in the position 
to listen to him. And that is why we have periodically worked 
with him, without the insistence of being told by Congress.
    I just believe that Government, as when I ran the 
corporation, has two functions. That is, to have the profit and 
shareholders' return. I believe that the profit is saving the 
taxpayers money. The shareholders' return is making sure that 
the taxpayers get what they have paid for. And I believe that 
with the help of GAO, with the support of Congress, as Ms. 
Federoff has said, and with the union's help, that can be 
accomplished, and I think the budget reflects that.
    Senator Reed. Well, as I understand it, Mr. Secretary, HUD 
has not asked for any additional dollars for staff in fiscal 
year 2003. And going to Ms. Federoff 's point, if we are going 
to make any serious transition in the face of these 
retirements, you have to get the people on board now so that at 
least they have a year or two to learn what they can from the 
hands.
    Mr. Jackson. I agree. Let me say this to you on that.
    We are in the process, as Ms. Federoff knows, of hiring 400 
new employees. I won't say new because some will come from 
internal promotion. But we are in that process. We have also 
asked OMB for another 400 next year, to get us up to the 9,100 
level.
    What we have decided is this, we know that we have a 
shortage. But I think that REAP was the beginning. We need to 
look at this systematically and thoroughly, and say, where is 
it that we have serious problems of losing people, whether it 
is in CPD, community development and planning, whether it is in 
housing, whether it is in public and Indian housing, and begin 
to replace those people systemically.
    Yes, I am very concerned. I cannot say to you today we are 
not. But I do also believe that in the process, it is not 
necessarily from my perspective more money. I think that if 
given the opportunity, as I have said on a number of occasions 
to OMB, to utilize our money more efficiently--that is, to end 
some of the contracting that we do--that I think we can address 
these needs clearly.
    Senator Reed. Thank you.
    Mr. Czerwinski, you might not have a detailed knowledge of 
the budget submission, but you certainly, I would suspect, have 
a feel for the kind of money we are talking about--getting a 
well-trained workforce in place and staying in place despite 
retirements, improvements in hardware and software and computer 
systems, and active oversight of contractors. That is a lot of 
money, even if you are efficient and you get more flexibility, 
I would suspect. Do you have any thoughts?
    Mr. Czerwinski. Yes, Mr. Chairman. Ultimately, HUD may need 
more money. But the key is before they can come and ask for 
more money, they need to have a credible plan and a vision for 
what they are going to do with it.
    Let us use human capital as an example.
    As we agree, REAP, is a first step, a snapshot of what is 
going on today. What HUD needs to do, though, is to project 
what it wants the Agency to look like, and then target the 
shortages and gaps to that vision.
    They need a recruiting strategy, targeting certain schools, 
certain types of professions. Then, once they have that, they 
have to implement it. And that is probably ultimately going to 
take money. They need to have a compelling plan before, in all 
fairness, they can come and ask you for that.
    Senator Reed. Mr. Secretary, when can we expect to have the 

details of that plan from HUD that Mr. Czerwinski said?
    Mr. Jackson. Very soon. We are in the process of developing 
a 5-year human capital plan because that was one of the things 
that the Secretary and I initially said. We did not have one, 
and again, Stan knows it. We have been discussing that, not 
only with GAO, but also with OMB, and with the union. And I am 
convinced that we will have that very soon for you.
    Senator Reed. Let me ask, before I turn to the Ranking 
Member, Ms. Federoff, if she has any comments on this line of 
discussion we have had?
    Ms. Federoff. Well, two comments. One is that I think the 
Agency is hampered by a severe reduction in their human 
resource staff in the 1990's. So that the Agency restructured 
in 1995 with the goal of going from one human resource manager 
or personnel specialist per 60 employees down to one to 100. I 
think that loss of staff has made it very difficult for this 
Administration to quickly respond to the need for a human 
capital plan. I think that focusing staff in those areas would 
help the Agency be more responsive.
    The other item is that we would certainly support the 
Deputy Secretary in giving HUD the ability to transfer dollars 
that are spent on contractors to S&E. My familiarity with the 
budget is that there is not that flexibility, and it would have 
to be specifically authorized. And we would certainly support 
that authorization.
    Senator Reed. Thank you very much.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    I would just comment on the lack of compatibility between 
the various computers that we have in HUD. Of all your 
testimony, I think that that is one of the things that is the 
most disappointing to me. It seems to me like it is one of the 
easiest things to be able to rectify.
    I can understand sometimes the problems with compatibility 
maybe between the IRS and maybe the CIA or something like that. 
But there is an effort within the Government to try and even 
make those compatible. Isn't there a relatively quick solution 
to this, or is this more complicated than just what appears on 
the surface?
    Mr. Jackson. I will say this to you, Senator, that when I 
walked into HUD after running AEP, I was absolutely not only 
dismayed but also shocked that there was no interaction between 
the information technology systems.
    We immediately went to the point again with the help of 
GAO, OMB, and I said we cannot continue this process.
    We are in the process right now of planning. We have one 
area that we are addressing which we call the information 
technology system contract out on the streets, and we should be 
getting the results back very soon.
    Another thing, I think it is imperative and it is 
relatively simple. But I do not think we can again do what we 
did in 1995 without being very methodical, cutting people out 
of the staff at HUD.
    I believe that if we could do this in a very systematic 
manner, we will be able to make sure we have an information 
technology system within a couple of years that interacts and 
talks to each other.
    I must tell you that, as you have just stated, I was 
absolutely shocked when I came here, having a system from a 
corporation that we talked to each other all over the country. 
AEP was the largest electrical company in this country. Yet, we 
could talk to each other from Texas all the way to Washington, 
DC. And not to have that in the Federal Government was 
absolutely shocking. But we are moving expeditiously to make 
sure we have that and we are working with GAO and OMB to make 
sure that that is done.
    Senator Allard. Mr. Czerwinski, I think that my colleague 
here brought up some issues related to the budget. So, I was 
thinking back on our testimony that we had the year before last 
maybe. At one point in time, we had $10 billion in unobligated 
dollars in HUD. Are those unobligated dollars still there, as 
far as you know?
    Mr. Czerwinski. There are still sizable numbers, probably 
closer to $5 billion.
    Senator Allard. There is still a sizable number there.
    Mr. Czerwinski. Yes.
    Senator Allard. You wouldn't still say necessarily as much 
as $10 billion, but there is still a sizable number there.
    Is there any reason why you have to ask for an increase in 
HUD spending when you have unobligated dollars in HUD there? 
Can't they be used for current programs? Is there any reason 
why that cannot happen?
    Mr. Jackson. I think that, from my understanding, the 
monies designated for specific programs, once they are 
allocated----
    Senator Allard. Yes, but this is unobligated. I had the 
impression that unobligated means that they are not necessarily 
designated for any specific program.
    Mr. Jackson. From my understanding last year, all 
unobligated monies--not all, but most of the unobligated monies 
had to be returned back to Congress. Therefore, I would say to 
you, Senator, that I believe that if given that authority, as I 
said previously in my testimony, I am not convinced that we 
necessarily need more funds. I think that Stan spoke to that. 
If we are given the right to utilize the fund in a very 
efficient and effective manner, to hire and train new staff, 
clearly, I think we can do a lot of it within the present 
budget.
    Senator Allard. So, you are telling me at the end of each 
fiscal year, unobligated dollars get held in the Department? 
They do not get transferred over to the next year?
    Mr. Jackson. I am not sure. Let me ask that.
    [Pause.]
    If they are not obligated, they do not stay with the 
Department. I did not think so because I know we had to return 
unobligated monies last year.
    Senator Allard. Stan, do you have a comment on that?
    Mr. Czerwinski. My understanding, Senator Allard, is that 
most of the unobligated monies are what is called no-year 
budget authority. They sit until the Congress or HUD takes 
action to essentially sweep them up. A certain amount is swept 
up in most years. But there is also amounts that sit.
    If the question you are asking is, could those monies be 
used for other purposes, yes, they could, but it would take a 
reprogramming authority given to HUD to do that.
    Senator Allard. Does that go through the appropriations 
bill or is that an authorization?
    Mr. Czerwinski. Appropriations.
    Senator Allard. The appropriations does that. So is the 
budget request now, does that reflect recycling or reusing 
those unauthorized dollars that are sitting there?
    Mr. Jackson. Let me say as an answer, some of them reflect 
years that, clearly, the money must be spent.
    We have in Section 8 a program that is obligated for 
project-based for a 30-year period of time. All the funds are 
not obligated at one time, but clearly, they are going to be 
spent. Those funds that are not in a situation of Section 8, I 
would perceive, as Stan has said, that if they are 
reauthorized, yes, we can use them.
    Senator Allard. Okay. If we have a problem of not enough 
dollars there, Mr. Chairman, to meet some of these needs, it 
might be that we just need some simple language in there that 
would allow them to handle the unobligated dollars that are 
sitting there, if there is any that are sitting there. And I do 
not know. How do we find out what that unobligated amount is as 
we move toward the end of this budget year?
    Mr. Jackson. I would be happy to submit a detailed report 
to you if you would like to know that.
    Senator Allard. Would you do that, Mr. Jackson?
    Mr. Jackson. Yes, I would.
    Senator Allard. I would appreciate it.
    Senator Reed. As I understand it, the Department has to 
request a reprogramming from the Appropriations Committee, 
which would have to be cleared by the Office of Management and 
Budget. I would be very happy to push that along if we got it 
up here.
    Senator Allard. Okay. Now the other area that I want to 
talk a little bit about, and this shouldn't surprise any of you 
because any time you have testified in front of this Committee, 
I always ask you about the Government Performance and Results 
Act. I think it is important that we work on it--I am glad that 
the President seems to be moving in that direction for all 
agencies. But the Results Act requires agencies to utilize 
outcome rather than process-based management.
    I was extremely pleased to see that the President's fiscal 
year budget of 2003 request begins to incorporate the next 
step, which is outcome-based budgeting. And this is for all of 
you--would you please comment on the importance of the Results 
Act for an agency in transition like HUD?
    Mr. Jackson. I think it is absolutely important and 
imperative. Again, I am not one to cast aspersions, but I have 
so often said that, and I have said it to you, Stan, that if I 
had run AEP as we have run HUD over the years, I wouldn't have 
lasted 4 months as President of that company.
    So, I do believe that outcome-based analysis is the most 
crucial thing to know exactly where you are going. And that is 
why I am pleased that we had set some processes in place to 
judge that. But the President's Management Agenda specifically 
sets the objectives of what we must meet to do that.
    We have, as I said to Senator Allard before you came in, 
put in place a monthly executive staff meeting to know where we 
are. We are sharing that information on a monthly basis, not 
only with OMB, but also with GAO, and we are asking for their 
input. I do think that it is absolutely imperative.
    Senator Allard. So, Mr. Czerwinski, this is not a new 
question for you.
    Mr. Czerwinski. No. Senator Allard, I was thinking back to 
the start of this hearing when we talked about oversight not 
being glamorous. The only thing less glamorous than oversight--
--
    [Laughter.]
    --is GPRA, so thank you very much for embracing that.
    [Laughter.]
    Of course you know, GPRA is one of GAO's mantras. The 
President's current budget embraces GPRA more than any prior 
budget.
    Having said that, going to the question you asked; is GPRA 
important for an agency in transition? Absolutely. You need to 
have a vision of where you want to go, link the vision to 
specific goals that are measurable, then evaluate against those 
goals and measurable targets, and act accordingly. That is 
really what is going to drive the budgeting.
    Yes, that is crucial.
    Senator Allard. Ms. Federoff.
    Ms. Federoff. Well, one of the things that we need to keep 
in mind when we look at results is not only risk that has been 
taken, but also risk that has been avoided. I am a field 
employee and there are times when a development comes in and 
you work and you work it and then you just decide, no, this one 
we are not going to do. It just shouldn't be done. I think that 
that is also a result that should be taken into consideration 
in any review of results. Not just housing units built, but are 
they quality housing units? And were the ones that did not get 
built, in fact, should not have been built?
    Senator Allard. You do not think that GPRA is a good idea?
    Ms. Federoff. No, I think it is a fine idea. I just think 
that we have to think about results in terms of risk.
    Senator Allard. Okay. Thank you, Mr. Chairman.
    Senator Reed. Thank you very much, Senator Allard.
    For the record, there is a memorial service for Officer 
Chestnut and Detective Gibson, who gave their lives in the 
defense of the Capitol on this day in 1998. It is at 3:40 p.m. 
I want to ask a few more questions, then recess, if I may, 
attend quickly, and return.
    Let me just start our second round.
    Mr. Secretary, going back to this whole issue of using what 
you have rather than getting more. I understand that HUD hasn't 
been able to hire the 91 full-time equivalents that you are 
authorized in this year or last year's budgets, that you are 
300 short. Is this a conscious decision or is this suggesting 
the problems you face even if you had the resources to hire 
people, which begs other questions. What do we have to do to 
make this an attractive place to work?
    Mr. Jackson. I think that is a very excellent question, 
Senator. My answer to that is that, first, we have, during the 
Department realignment, that took a substantial portion of our 
time because, initially, we made some very--we made some 
mistakes in the sense that we did not initially consult with 
the union, which I think was absolutely a mistake. In the 
process, we began to consult to make sure that we get the input 
as to how best to redeploy and realign. And it took a little 
longer than we had expected.
    Second, we did not have at that time an Assistant Secretary 
for Administration in place, nor a Director for Human 
Resources.
    Going back to Ms. Federoff 's statement--nor did we have in 
place the ratio that I felt was necessary to address the needs 
of hiring up as quickly as we wanted to. We have put that 
process in place now, which will carry over to 2003. We believe 
that we will reach the 9,100 without any problems.
    I take full responsibility at that point for not being 
cognizant of the fact that during the early part of the 
process, we did not confer with the union and in the process, 
that we did not have an Assistant Secretary, nor a Director of 
Human Resources. In fact, we hired the Assistant Secretary this 
spring and we just hired within the last month a Director of 
Human Services. So, we are in the process to rectify that.
    Last, we are hiring up in human resources. And I must say 
that I was not really aware of that until it was brought to my 
attention where we were with the union.
    The union, in my case, and in the case of HUD, has been 
very helpful in making sure that we understand the problems 
that we are confronted with. I do believe that in the year we 
will do that. But we did not do it and it was not an effort on 
our part not to do it.
    Senator Reed. Thank you, Mr. Secretary.
    Ms. Federoff, before I recess for a brief interlude, do you 
have a comment?
    Ms. Federoff. Our experience with the intern program is 
that we had many, many more applicants who were interested in 
working for the Agency than we had positions available.
    Mr. Jackson. True.
    Ms. Federoff. So there is a real interest. Our concern with 
the intern program is that those employees need to be extended 
permanent positions as soon after their 1-year traditional 
probationary period as possible, so that during their second 
year, they do not spend the bulk of their time looking for 
other employment.
    Mr. Jackson. We agree with that.
    Senator Reed. At this time, I would ask that the 
Subcommittee stand in recess subject to the call of the Chair, 
and I will endeavor to come back as quickly as possible.
    Thank you.
    [Recess.]
    Senator Reed. Let me call the hearing to order and thank 
you all for your indulgence in letting me get over to the floor 
for that moment of silence.
    I have two areas of concern I want to address. I am sure, 
though, there might be other questions and the record will 
remain open for a number of days. So, you might receive some 
written requests for further information, Mr. Secretary.
    Mr. Jackson. Thank you, Mr. Chairman.
    Senator Reed. Mr. Czerwinski and Ms. Federoff.
    One of the critical issues that we all agree upon is the 
need for accountability of the consultants and contractors that 
HUD has.
    I was struck by some of the information about the single-
family program. GAO reports that HUD lost $1.9 billion in 
fiscal year 2000 on the sale of foreclosed homes that it had 
insured, greater losses than it had when HUD career employees 
were performing the function. Although it might be appropriate 
to contract out those functions, they clearly need better 
oversight.
    It has been 5 years since FHA implemented its new loss 
mitigation program. Again, what really prompts my concern is 
this has been the hottest real estate market I can remember in 
my life. I know that HUD insures properties not in the most 
affluent neighborhoods, but in some difficult neighborhoods. 
But the magnitude of this loss is quite sobering because if the 
real estate market ever started trending down, this $1.9 
billion could accelerate.
    It exemplifies the problem that we have talked about all 
afternoon. What steps are you taking to ensure that these 
contractors are doing their job and they are not causing huge 
losses that we have seen in this particular program?
    Mr. Secretary.
    Mr. Jackson. If it is fine with you, Mr. Chairman, I will 
defer that specifically to the FHA Commissioner, Mr. Weicher, 
to answer for you, please.
    Senator Reed. Sure. Commissioner.
    Mr. Weicher. Thank you, Mr. Chairman.
    We have typically had losses on our REO ranging from $1.6 
billion to $2.5 billion from year to year. The reason we have 
losses, that is why it is REO. It is not worth what we have 
insured, and so we lose money on it.
    Our loss per claim, our loss per dollar, has been dropping. 
It is now down to under 30 cents per dollar. Four or 5 years 
ago, and before that, it was running at least 39 cents a dollar 
and on up to 45 cents a dollar. The loss per claim has been 
down in the last 3 years. We are not going to break even on the 
REO ever. But we are doing a better job in minimizing the 
losses to the fund from year to year.
    Senator Reed. Thank you, Mr. Secretary.
    Mr. Czerwinski, might you comment on this whole issue of 
contractor accountability in the single-family program and the 
other programs, and the Secretary of the FHA's comments?
    Mr. Czerwinski. Yes, Mr. Chairman. The way we look at it is 
on a per-property basis. Roughly, you are talking about a 
$30,000 loss per property. FHA turns over, say, 50,000, 60,000 
properties a year. That is how you come up with approximately 
$1.9 billion.
    The key to avoiding this loss is two-fold.
    The first key is loss mitigation. If you can stop the 
properties from going into that process, you obviously are not 
going to suffer that loss. Mr. Weicher is exactly right. 
Whenever you get a property into the disposition area, you are 
going to lose money. The second key is once they get in, 
though, you want to minimize the loss.
    There are a couple ways to do that. One is incentives to 
shorten the timeframes. The longer the properties sit in 
inventory, the uglier they get and the lower they sell for. 
Also you want to maintain the properties because the better 
they look, the more money you will get for them. In addition, 
the properties that sit around, and end up contributing to 
neighborhood blight.
    The incentives to contractors should be to sell them 
quickly and to maintain them during this process.
    Mr. Jackson. We are addressing both of those issues.
    Senator Reed. That is my question. And Mr. Weicher wants to 
comment, too.
    Mr. Jackson. We are addressing both of those.
    Senator Reed. Mr. Secretary, at your discretion.
    Mr. Jackson. Please.
    Senator Reed. Around here, you cannot go wrong just calling 
for Secretary.
    Mr. Weicher. Mr. Czerwinski is right, it is important to 
get the properties out quickly, and we have been doing that. 
Three years ago, we had properties in inventory for 8 months on 
average before we sold them. Now it is down to under 6 months 
on average before we sell them.
    Three years ago, our inventory was 47,000 properties. Now 
our inventory is 29,000 properties and the inventory has not 
gone up during the recession. And that has never happened in 
the history of the Department.
    We certainly want to do as good a job as we can on our REO. 
We know that the property, as we own it and it is in a 
neighborhood and it is not helping the people in the 
neighborhood to have this. We are doing our very best to get 
that property out as quickly as we can.
    And if I might say, on loss mitigation, 3 years ago, we 
assisted 10,000 homeowners through loss mitigation. Two years 
ago, 30,000 homeowners. Last year, 50,000 homeowners. This 
year, we are on track to help 70,000 homeowners, and it is an 
extremely important tool in helping people stay in their homes 
and help the neighborhoods they live in.
    Senator Reed. Thank you. If I could just note, though, 
because Secretary Weicher made the point about it. This is a 
very unusual recession because the housing market has shown not 
only no damage, but also it seems to be bounding along.
    Mr. Secretary.
    Mr. Jackson. Mr. Chairman, this is one of the areas that, 
initially, when we started meeting with Stan and GAO, we told 
him that we were not going to debate or argue with him about. 
In fact, I could not understand why anybody was arguing.
    They were absolutely correct that the approach we had taken 
and the Assistant Secretary has taken on behalf of the 
Secretary and myself is a very proactive approach. And so, I 
will say that it was a very excellent question. But we are 
really trying to minimize as much as we can. I think that Stan 
was correct in conjunction with Assistant Secretary Weicher.
    Ms. Federoff. With your permission, Mr. Chairman.
    Senator Reed. Ms. Federoff, please.
    Ms. Federoff. Thank you. Our single-family staff would like 
to have another issue raised, which is that they see the 
properties as a resource that can be used toward affordable 
housing in this country, and is very concerned that the 
contractors at this time are, in fact, not using them as a pool 
of affordable housing that employees at one time were able to 
do better.
    So that, for example, the number of investor-owners are 
increasing over time with the use of contractors, as opposed to 
homeownership. And that is one of many issues that we have with 
this set of contracts.
    Senator Reed. Thank you very much.
    Let me move to another topic because Senator Allard is here 
for his second round, also.
    Mr. Secretary, I understand that the Department went 
through a reorganization last year, including moving the 
independent Real Estate Assessment Center, the REAC, to public 
housing, and the Enforcement Center to the Office of General 
Counsel.
    I have testimony from the GAO on REAC and the Enforcement 
Center prior to this reorganization, is as follows: The 
creation of the REAC and the Enforcement Center were positive 
developments that yielded real results.
    The GAO went on to say that the new REAC enabled HUD to 
complete its first physical and financial assessment of its 
inventory, while the creation of the Enforcement Center 
resulted in the restoration of 41,344 housing units to decent, 
safe, and sanitary conditions compared to 968 units in fiscal 
year 1999.
    The question is, these Centers seemed to be performing very 
well, what was the need to put them into a different posture 
underneath the public housing and the General Counsel's Office?
    Mr. Jackson. Well, Mr. Chairman, first of all, REAC. REAC 
does half of the work for housing, half for PIH.
    We felt that since it was doing the work, and the initial 
process was probably the correct process, but I think it had to 
be outside of those areas because it had not been working 
internally.
    We felt that, at least from my perspective, it should, in 
essence, address the issues of both of those areas. And I felt 
the best way to do that was to put it in one, house it in one 
of those areas. We chose Public and Indian Housing.
    But in the process, the Assistant Secretary for Public and 
Indian Housing, and the Assistant Secretary for Housing worked 
together and they formulated, I think, a very outstanding plan 
to make sure that REAC is working better now than it has worked 
in the past.
    The second part, as you asked, is about the Enforcement 
Center. The Enforcement Center was in the General Counsel's 
Office in the first place. It was taken out. It was taken out, 
from my understanding, and please let me say this gingerly, 
because the previous Administration was not getting the 
response that they wanted. I believe you do not remove 
organizations because you do not get the response. You make 
them better or put the right people in place.
    Right now, there has not been one step lost in the 
Enforcement Center in carrying it out back under the General 
Counsel. It is still doing the same exact response, but yet, it 
is reporting.
    I believed when I came in, and I said this, that we had a 
number of people reporting directly to the Secretary through 
the Deputy Secretary. I believe that we should not have had--I 
forget. How many people were reporting to me?
    [Pause.]
    More than 30 people were reporting to me. And if I might 
have the opportunity to use this example.
    When I ran AEP, which was a 3,000 employee operation, a $13 
billion corporation, I had two people reporting to me. They 
were Executive Vice Presidents. One was Executive Vice 
President for Administration. The other was Executive Vice 
President for Operations. They had the responsibility.
    I think that, actually, from my perspective, for a more 
streamlined approach, that only the Assistant Secretaries, 
except those that are authorized by Congress, should report 
directly to the Deputy Secretary and the Secretary. And so, we 
tried to find the best housing mechanism to make sure that we 
lost none of the importance of these agencies to respond to, 
and that is the approach that we took, strictly from a business 
approach.
    Senator Reed. Thank you, Mr. Secretary.
    Mr. Czerwinski and Ms. Federoff might have a comment. Then 
I will ask Senator Allard for his questions.
    Mr. Czerwinski. Yes, Mr. Chairman. If I could use REAC as 
an example. I believe the key is to look at what you want to 
accomplish with a function such as REAC. You are talking about 
the number and quality of inspections. You are talking about 
the condition of the property--maintaining the property in good 
shape.
    You also want to consider the analysis of what REAC could 
do to help landlords maintain their properties in good shape. 
And finally, the landlords who have defects in their properties 
need to be monitored to make sure that the corrective actions 
are taken. Those are the measures of whether REAC is working or 
not.
    We have studied REAC extensively and reported areas where 
they could do better. But overall, REAC was a significant 
improvement over HUD's capability in the past, when it really 
wasn't able to do much to determine the condition of these 
properties.
    The question becomes, with REAC responding to the Deputy 
Secretary's secretary or to PIH, whether you maintain that 
capability or not. Frankly, in our view, it is up to the 
Secretary how he wants to organize his Agency. But he better 
maintain the results in terms of the issues that we have 
raised. And that is what we would ask when requiring HUD to 
report its results along those lines.
    The final point is that, in any organizational structure, 
you have to look at what tensions and stresses there are for 
independence. If REAC is going to be delivering bad news to 
somebody who is an owner of the property or the owner of a 
program, you have to decide what that does to the program.
    If they can deliver bad news and that Assistant Secretary 
can handle that bad news and correct the problems, REAC reports 
it is fine. But if the capability is diminished, it is not 
fine.
    Mr. Jackson. I agree with Stan.
    Senator Reed. Thank you, Mr. Secretary.
    Mr. Jackson. I think that we have taken all of that into 
consideration of the process.
    What he has just stated to you, we took into consideration. 
We feel deeply that it can still do that.
    Let me say this to you, Mr. Chairman, and Senator Allard. I 
am flexible. I believe that the tenor of a good administrator 
or a good manager is to be flexible, to give an opportunity for 
programs to work. If they do not, then understand that, a year 
from the day, if it is not, or 2 years from the day, to admit 
that it hasn't. And that is one of the reasons I think it is 
important to have the oversight of not only your Committee and 
the Senate and the Congress, but also GAO, because I am of the 
hue at this point, I would much rather find a way to work with 
GAO and work with the union than to find a way to disagree with 
them.
    Because our Agency that the President has appointed the 
Secretary and I to run is in serious trouble, and I believe 
that almost everything that has been said today by both Stan 
and Carolyn, it is absolutely imperative that we all work 
together to cure these 
problems.
    I think we have worked so far to this point very well. I am 
not sure who is going to replace Stan, we have had our 
disagreements, but we have disagreed on issues. We have not 
disagreed and not spoken to each other. And I think, to me, 
that is the most imperative thing that we have today.
    I want to say this to both of the persons sitting here, and 
to you. I want to see HUD work. I believe we have to run HUD as 
a business. Some people think I am absolutely crazy, but the 
taxpayers deserve to have a well-run Government. And in 
appointing me, I think that is my task, to run it like we run a 
business, and to be accountable to you, but also be accountable 
to the taxpayers.
    I think that without the help of GAO, without the help of 
OMB, without your help, that is not going to occur because I 
think people have a tendency if they are not looked at, to 
slide; and I would prefer not to slide.
    Senator Reed. Thank you, Mr. Secretary.
    Ms. Federoff, do you have a comment on this line?
    Ms. Federoff. I am glad to hear that a cooperation plan has 
been put together for REAC staff working on the Office of 
Housing Programs while working for the Assistant Secretary of 
Public and Indian Housing. I know that employees have been 
looking forward to that plan and we are glad that that is, in 
fact, coming to pass.
    Senator Reed. Thank you very much.
    Senator Allard.
    Senator Allard. Mr. Chairman, you preempted me on that last 
question, which is all right.
    I wasn't sure that you directly answered the question that 
I am about to ask you, Stan. And that is, what are your views 
concerning this realignment decision? It sounded to me like it 
was favorable, but I am not sure we got a direct response on 
that?
    Mr. Czerwinski. Senator Allard, our view is that it really 
is the Secretary's prerogative as to how he wants his Agency to 
be structured. But there are functions that have to be 
accomplished. We would urge the Secretary to take a look at 
those realignments in the past which have worked and those 
which haven't and to take that into account.
    You asked about the Chief Procurement Office. That, as we 
know, used to be independent. It now responds through the 
Assistant Secretary for Administration.
    If contract oversight works, then that structure works. If 
there are problems with contract oversight, we need to think 
about the structure.
    One thing that we also need to think about, as I mentioned, 
is the stresses and tensions that exist in an organization.
    The Office of Administration accounts for about a third of 
HUD's contracts. So that is an issue that the Chief Procurement 
Office has to think about because they are essentially 
overseeing contracts within their own office. If they can do 
that effectively, it is fine. But it does complicate it.
    Senator Allard. Did he answer my question, Mr. Chairman?
    [Laughter.]
    Senator Reed. That is why he is being promoted. He answered 
it very well.
    [Laughter.]
    Senator Allard. You are very adept there, Mr. Czerwinski.
    [Laughter.]
    I have another question. I have also requested that GAO 
review HUD's acquisition management practices and how the 
Agency holds contractors responsible for results. And that work 
is nearing completion, it is my understanding. What can you 
tell us today about the results of that work and what HUD needs 
to do to do better management on its acquisitions?
    Mr. Czerwinski. That is a really important question because 
of the increased emphasis that HUD has placed on acquisitions.
    As I mentioned in my statement, there are three areas that 
HUD needs to focus on.
    First is the monitoring. And monitoring means getting out 
there and seeing what is happening with the contractor. 
Otherwise, you can be taken advantage of.
    That ties into the second point, which is you have to have 
people who know how to oversee and monitor contracts. And with 
HUD's reliance on contracting growing, we found that some of 
the people who are overseeing contracts do not have the right 
skills and background or training to do that. So even if they 
could get out there, they sometimes did not know what to look 
for or ask.
    The final area is information systems. HUD staff had to get 
out there because information systems weren't giving them the 
information they needed in a timely manner to assess the 
contracts.
    Senator Allard, this ties into the points that we made in 
the hearing. We have talked about human capital. We have talked 
about acquisitions. We have talked about information systems. 
Really, those are not separate issues. They are all interwoven. 
And they manifest themselves in different ways. But HUD needs a 
whole plan to make the improvements. That is the basic message 
we have on improving acquisitions.
    Did I answer your question that time?
    [Laughter.]
    Senator Allard. You did a pretty good job, Stan.
    [Laughter.]
    Mr. Jackson, I wonder, would you please describe how HUD 
fits into the President's Management Agenda, and how this will 
help HUD transform into an effective and efficient Agency?
    Mr. Jackson. There are five critical elements to the 
President's Management Agenda. And the first is human capital, 
information technology.
    When we started the process, I will tell you that--well, 
let me back up a second. The process is one of green, yellow, 
and red. It is just like the stop light.
    Senator Allard. Yes.
    Mr. Jackson. So, you know when it is red, it means you are 
not to move. And, in essence, we had inertia on our part when 
we started this process some years ago.
    We have moved in a number of the categories to green. Some 
of the categories we are still at yellow. But we feel that 
without a management structure as to denote exactly where we 
need to go to improve the agencies, we are going to be in 
serious trouble.
    The President's Management Agenda gives us that process 
that we can address the needs that are affecting HUD at this 
point in time. Plus, I think that with the information that we 
have been able to gain from GAO about the high-risk, and they 
are working with us, we have been able to address these needs.
    Now there are five, and I cannot tell you right away--I 
think she's probably giving me all five here.
    Senator Allard. Staff is helpful at times, isn't it?
    Mr. Jackson. That is right. Human capital, e-Government, 
competitive sourcing, budget and performance integration, and 
improved financial performance.
    The only one that we have vehemently disagreed with, and I 
think we have been given some dispensation, is competitive 
sourcing. We believe that we have competitively sourced too 
much out already in this Agency. And therefore, it goes back to 
what Stan has said, we are not able to manage and monitor our 
contracts in a very efficient manner.
    Second of all----
    Senator Allard. Is it too much competitive resourcing or 
just not enough management over which you have already 
competitively laid out there?
    Mr. Jackson. I think, Senator, that if we are able, as 
Carolyn has said, to do the analysis that we are presently 
doing, that will tell us whether we can do the job better in-
house than competitively sourcing out, whether it is single-
family or multifamily, we must look at that. That is something 
that, until this year, this Agency has not been able to look 
at.
    OMB has given us permission to look at it. And if we find 
that we can do it better by having workers under the Federal 
umbrella, we should do it.
    I cannot tell you right now empirically that is the case. I 
will say this to you, that I believe, and my testimony, when I 
was being asked during the process of my hearing, I feel today 
the same way.
    I think that it was a serious mistake to cut HUD of some 
8,000 workers without doing an empirical and methodical study 
as to how it should be done. And I think it has hurt the 
Agency. I do not believe it is the responsibility of the staff 
that is here now. I think that they have done everything within 
their power to do the very best job that they can do.
    But we go back to an issue that was raised early in this 
hearing by Stan. Even if they have done the best job, do we 
have enough resources to manage internally what we have? And 
also, to manage externally what we have, which is competitive 
sourcing?
    I believe not.
    Senator Allard. I think when you look at competitive, when 
you compare the public sector versus the private sector, there 
is one really distinct difference. The public sector doesn't 
pay any property taxes. They do not pay local taxes. They are 
exempt from that.
    But if you bid it out, then they pay property taxes. 
Property taxes go toward supporting eduction--if it is 
Colorado, a big chunk of that is education. And I do not know 
how you factor that in because in the way of energy saving, or 
by way of trying to save that, you can just--you have your 
employees there, Federal employees there who are using schools, 
using the facilities, but they are not paying the property 
taxes to support it.
    That is why we have things like PILT. But in most cases, 
like the programs that you have, the PILT is not big enough to 
compensate and never really gets figured into the formula. In 
certain areas they figure that in. I do not know how you figure 
that in.
    Mr. Jackson. I am not sure how you do that, either. But I 
might be able to answer you this way. When I was running the 
utility company, I paid a lot of taxes.
    Senator Allard. Sure you did.
    Mr. Jackson. I mean an awful lot of taxes. I personally 
paid an awful lot of taxes. I did not like paying the taxes. 
So, I feel that if that is the basic reason, because they pay 
taxes, I think that is important. I also think that efficiency 
and how we run our Government and how we can give our 
constituents the best service is very important. I believe that 
you and I will probably agree, if we can do it better, more 
efficient, at a cheaper price, we should do it. Especially in 
today's era, we should do it. But if it is clear that it is a 
wash, whether we do it publicly or privately, then I would say, 
yes, and it can be done just as efficiently privately, to do it 
privately, because I do think that there are benefits.
    Senator Allard. Thank you.
    Thank you, Mr. Chairman.
    Senator Reed. I have one other area I would like to explore 
and offer Senator Allard a chance----
    Senator Allard. I am finished.
    Senator Reed. If you are finished, then I will close the 
hearing.
    OMHAR was created in 1997 to bring a market approach to the 
Mark-to-Market Program, the entrepreneurial skills. People who 
are business-oriented rather than bureaucratically oriented, 
perhaps. At the request of HUD, OMHAR was put under the Office 
of Housing. GAO has reported that OMHAR's private-sector 
partners are seeing some significant problems due to the 
transition to the Office of Housing. Specifically, these 
partners cite delays in issuing guidance in the new legislative 
provisions, delays in completing certain restructurings, 
attrition in OMHAR staff, and quoting from the GAO briefing, 
``indecisiveness.'' Every decision is contingent on approval 
from the Office of Housing.
    Mr. Secretary, could you comment on that?
    Mr. Jackson. Again, if it is okay, I would like to defer to 
Mr. Weicher to comment on that.
    Mr. Weicher. Senator Reed, we have met with Stan and his 
staff on a bi-monthly basis, as you all have requested them and 
us to do. We are one under the staff ceiling for OMHAR at this 
point. The ceiling is 85. We have 84 on board. We brought on a 
director this spring, Charles Williams, known as Hank Williams 
for reasons that escape me. He doesn't carry a guitar or 
anything like that.
    [Laughter.]
    But it is his name. We left him with the ability to make 
some hiring decisions once he came on board, rather than 
filling every vacancy immediately. So for a little while, we 
were down to 80, 79.
    The deals have been going at the rate of 20 to 30 a month 
through the period since OMHAR was brought within the Office of 
Housing. We expect an increase because of some of the 
legislative authority that you gave us at the end of the year, 
we expect a one-time increase to about 30 to 40 per month for 
the next few months.
    We are continuing to do deals at a steady basis and Hank, 
Mr. Williams, is very much on top of the job and getting 
comfortable.
    Senator Reed. Well, it is my understanding that OMHAR has 
authorized 91 full-time workers and they have been waiting for 
permission to hire up to that level, even though there is 84 on 
the job now.
    Mr. Weicher. The REAP process concluded that the OMHAR's 
appropriate staffing level was 85, and as we have done 
elsewhere in the Department, we operated within those staffing 
constraints.
    Senator Reed. I am told, Mr. Secretary, 91. Let's sort this 
confusion out.
    Mr. Czerwinski, might you comment on this since it is a GAO 
briefing finding?
    Mr. Czerwinski. Yes, Mr. Chairman. My comments are 
consistent with what I have said all along. The key is having 
oversight of some areas that are important. And the success of 
OMHAR is obviously very important.
    The first step is establishing a baseline as to what 
everybody agrees should be the number of deals completed by 
OMHAR each month. The second should be the number of people 
that OMHAR needs to make the deals happen. Once we establish 
what the right number of deals is, then we can say whether the 
transition is working or not.
    Historically, OMHAR had been running, and Secretary Weicher 
can elaborate because he probably works more closely than I do 
with this, probably at a plateau of around 30 to 40 deals per 
month.
    At the transition, you would probably expect to see that 
going down, and it has. The question becomes, will it come back 
up. Will it stay back up?
    In terms of people on board, there is an allocation that 
HUD has. There is also an estimate that REAP has. Those are 
verifiable numbers. We just need an agreement as to what HUD 
will staff that office at, and then it is up to them to do it.
    Senator Reed. Thank you. Actually, I have heard comments 
about OMHAR and a lack of decisiveness through New England 
housing people. So this is an issue, I think, not just--it 
might be coincidental, but I have been hearing the same thing.
    Let me conclude by thanking everyone for their very candid 
and thoughtful testimony. I think this has been a very useful 
hearing.
    Let me also say, Senator Allard asked somewhat facetiously 
if you answered his question. Well, here is what I think you 
said vis-a-vis all these reorganizations. Is that taking these 
quasi-independent agencies and putting them back underneath 
some part of HUD raises the issue that, in fact, they have to 
bring bad news to people who are responsible for the bad news 
and have to take corrective action. That is also difficult.
    The question is whether that would inhibit REAC and the 
Enforcement Center from pulling their punches. Now, I think 
what the Secretary said is you recognize that, explicitly 
recognize that. You are watching for that and you are going to 
do everything you can to prevent that from happening.
    Mr. Jackson. Yes.
    Senator Reed. But if it begins to happen, then I think we 
have to question again the reorganization.
    Mr. Jackson. I would agree with you.
    Senator Reed. Is that the answer?
    Mr. Jackson. I would agree with you, Senator.
    Senator Reed. Thank you.
    Mr. Jackson. I would agree with you. During the 
realignment, redeployment, reorganization, I had to make some 
decisions where I had put one specific area under an area. 
Clearly, I had made a mistake. It was my understanding that we 
had the authority to do it. But it was brought to my attention 
that we did not. I had no problems removing it or putting it 
back.
    And in one area, we had the authority, but I felt just what 
you just said, that it might be inhibited from doing the kind 
of job that it should do, and I decided that it wasn't the best 
fit.
    Mr. Czerwinski. Mr. Chairman, I think you stated my answer 
very well. What I would say is that the key to making that work 
is oversight. And holding hearings just like this, where we can 
establish what the criteria are, what the performance levels 
should be, and then seeing whether it has happened.
    As I mentioned in the short statement, that is what we are 
here to help you with. I would encourage you to ask our staff 
to go in and keep looking and reporting back to you, and then 
we will have this kind of dialogue.
    Senator Reed. Thank you very much.
    Again, let me thank all of you. It is apparent, I think, 
from today's hearing that we are at a critical crossroads. HUD 
has made progress in management. But there are some significant 
challenges ahead. The potential retirement of half the 
workforce, trying to get computer systems that talk to each 
other, getting a budget that supports your plans to go forward, 
and fundamentally, getting a plan that clearly outlines the 
human capital needs, the computer needs, and the oversight 
needs of the contractors.
    Time is running out because the departure of retirees could 
be taking place in the next few months to the next 2 years, and 
the need to get on top of these programs are essential.
    So, I thank you for your candid and thoughtful discussion, 
Mr. Secretary, Mr. Czerwinski, and Ms. Federoff.
    If Members of the Subcommittee have additional questions of 
the witnesses, I will ask them to submit them no later than 
July 29. And the witnesses, I would hope, could respond within 
10 days to any written questions.
    Thank you again.
    The hearing is adjourned.
    [Whereupon, at 4:20 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
follow:]
             PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
    Mr. Chairman, I very much appreciate your calling this hearing. I 
have often said that oversight is a crucial function of the Congress, 
and I think it is very important to do a review of the agencies to make 
sure that they are meeting their responsibilities in an efficient and 
effective way.
    This is particularly true in the case of HUD, which has had ongoing 
management problems for many years. Having said that, I also want to 
note that, according to the GAO, HUD was on a positive trajectory with 
regards to its management and oversight functions. One of the things we 
emphasized to both Secretary Martinez and Deputy Secretary Jackson is 
the need to keep that positive momentum going. I think it is 
appropriate, now that the new leadership has been in place at HUD for 
over a year, to assess exactly what direction things are moving.
    Let me start by just making a few observations. HUD provides a 
broad array of services to millions of Americans, from rental 
assistance, to economic development opportunities, to capacity building 
for nonprofits, to mortgage insurance for homeowners. We ask HUD to do 
a lot, but we provide it with far too few resources. We need to work 
together to make sure that HUD is making the best use of the resources 
it does get; once we accomplish that, it will become easier to advocate 
for more funds going forward.
    For that reason, it is very important to keep an open dialogue 
among the Department, its employees, and the Committee. Unfortunately, 
that has not always been the case. For example, I was concerned that 
the Committee found out about HUD's reorganization plan late last year 
from outside parties. Even after finding out about it, the Department 
was slow in briefing our staff on the new plans.
    I am also concerned about the resistance from the Department with 
regards to meeting requests for information from the General Accounting 
Office. The Committee's oversight role is a serious responsibility; the 
GAO is our partner in this job. HUD must be cooperative in providing 
information as needed. I hope that the GAO witness, Mr. Czerwinski, 
will address this very important issue.
    Mr. Chairman, there are two other issues I want to raise briefly. 
We have to make sure that all the old Intermediary and Outreach 
Technical Assistance Grants (ITAG and OTAG) owed to small nonprofits 
working with residents around the country are paid. We were assured by 
the Secretary in February that these would be paid once it was 
determined that no Anti-Deficiency Act violation occurred. In fact, 
there was no violation, but, as of late last week, not all payments had 
been made.
    In addition, the Department should get the program up and running 
again. The OTAG and ITAG programs are important tools in helping 
assisted housing residents get organized to participate in the 
restructuring or purchase of their projects. Without this technical 
assistance money, residents will not be able to play the role forseen 
for them by the Congress.
    Finally, Mr. Chairman, I want to emphasize the importance of 
getting the Office of Multifamily Housing Assistance Restructuring 
(OMHAR) fully staffed up. This Committee moved in an expeditious 
fashion to pass legislation to ensure that OMHAR and the Mark-to-Market 
Program would be reauthorized, in no small part because the GAO 
testified about the importance of maintaining the good staff that has 
been put together. We also agreed to put the Office under the 
supervision of the Assistant Secretary of Housing. However, we 
maintained its distinctive and somewhat independent character and 
authority in order to make sure that it could continue to do its work. 
I am concerned that the OMHAR is being stifled in its 
efforts to use its flexibility to retain and hire staff, and to get its 
work done in a timely manner.
    Once again, Mr. Chairman, thank you for holding this hearing. I 
look forward to working with you and the leadership at HUD in ensuring 
that the Department continues to improve its management, and the 
delivery of its services.
                               ----------
                 PREPARED STATEMENT OF ALPHONSO JACKSON
               Deputy Secretary & Chief Operating Officer
            U.S. Department of Housing and Urban Development
                             July 24, 2002
    Chairman Reed, Ranking Minority Member Allard, and Subcommittee 
Members, I thank you for the opportunity to appear before you today to 
discuss HUD's staffing, acquisition management, and information systems 
challenges. I am happy to provide you with an update of the substantial 
progress our Administration is making to address these challenges.
    Under the leadership of Secretary Martinez, the first year of our 
new Administration was largely devoted to getting our management team 
in place, assessing HUD's management environment, and formulating 
viable strategies and plans to address the major management challenges 
and program risks still facing the Department. In formulating our 
strategies and plans, we strongly considered the input on HUD's 
management challenges and program risks from the U.S. General 
Accounting Office (GAO) and the HUD Office of Inspector General.
    I believe our management team and the GAO share a common view that 
improvements to HUD's management of its human capital, acquisitions, 
and information systems are essential to addressing HUD's remaining 
high-risk program areas--the Multifamily Rental Housing Assistance and 
Single-Family Housing Mortgage Insurance Program areas--and to 
maintaining adequate controls over other program activities previously 
considered high-risk.
    The inclusion of our management challenges and program risks in the 
President's Management Agenda is indicative of the importance placed on 
these issues. As part of GAO's Biennial Performance and Accountability 
and High-Risk Series Review for 2003, HUD already has provided the GAO 
with several reports that highlight our progress in addressing our 
management challenges, including our implementation of the President's 
Management Agenda. We welcome the GAO's independent assessment, and I 
am confident that they will see that we are moving in the right 
direction to address our management challenges, reduce our program 
risk, and improve our program performance.
Human Capital Management
    Human capital is HUD's most important asset. We have taken 
significant steps to enhance and better utilize our existing staff 
capacity, and to obtain, develop, and maintain the staff capacity 
necessary to adequately support HUD's future program delivery.
    Effective human capital management is the purview of all HUD 
managers and program areas. We view our human capital management 
challenges as consisting of: (1) The need for strategic Human Capital 
Planning to link and align our staffing with our mission, goals, and 
organizational objectives. (2) Staff shortages and skill gaps as a 
result of downsizing initiatives during the 1990's. (3) A maturing 
workforce with about half of the workforce eligible for retirement over 
the next 5 years. (4) The need for increased use of technology to 
support organizational improvements and accomplishment of goals and 
objectives.
    To meet these challenges, we have taken or we have planned a number 
of significant actions.
Management and Staffing Realignments
    The first issue I would like to address is the realignment of 
management and staffing that the Department already has undertaken.
    HUD's June 1997 management reform plans were intended to realign 
the Department along functional lines, with the separation of outreach 
from program administration, and the placement of greater reliance on 
automated tools, processing centers and contracted services. These 
planned reforms were intended to enable the Department to better 
utilize a reduced staffing capacity to more efficiently and effectively 
deliver and oversee HUD's major program activities.
    We found that the planned organizational and operational changes 
were implemented with varying degrees of success. Some of the intended 
organizational and process changes were never formally 
institutionalized with the need for delegations of authority and the 
issuance of current written policies and procedures to support staff 
training and ongoing operations. In addition, some of the 1997 
organizational and staffing realignments have proven to be an 
ineffective use of HUD's human capital.
    As a result, decisions were made and actions taken to pursue 
separate realignments of headquarters and field activities to better 
use our existing resources. At headquarters, we reduced the reporting 
relationships with the Secretary by 40 percent, including the following 
actions:

 The Departmental Enforcement Center (DEC) was placed under the 
    direction of the General Counsel to consolidate our legal resources 
    in support of a strong program enforcement effort. HUD's program 
    enforcement efforts were previously under the Office of General 
    Counsel prior to the creation of a separate DEC.

 The Real Estate Assessment Center (REAC) was placed under the 
    direction of the Assistant Secretary for Public and Indian Housing 
    (PIH), in order to improve REAC's working relationships with 
    program staff and program partners and strengthen accountability 
    for resource use and results.

 The Office of the Chief Procurement Officer (OCPO) and Office 
    of the Chief Information Officer (OCIO) were placed under the 
    direction of the Assistant Secretary for Administration/Chief 
    Information Officer, to streamline HUD's organizational structure 
    and improve service delivery to HUD's program and administrative 
    components. The former CIO is now HUD's Chief Technology Officer.

 The Office of Field Policy and Management (FPM) was 
    established as an independent office reporting to the Deputy 
    Secretary, with responsibility for oversight of HUD's field 
    management and assistance to program Assistant Secretaries in 
    meeting program goals at the field office level.

    Our field office realignment and redeployment efforts included the 
following:

 Substantial numbers of staff in the outreach function were 
    redeployed to understaffed program delivery and oversight 
    functions, where there is a critical need.

 New regional management positions were created to give HUD's 
    field operations greater operational control over the 
    administrative budget resources they need to pursue their operating 
    and program goals, and to strengthen the local focus on workload 
    management to meet national performance goals.

 All program decisions continue to be exercised by program 
    directors and managers under the direction of their respective 
    program Assistant Secretary.

    We have formalized our realigned structure, with publication of 
delegations of 
authority in the Federal Register, and are providing current operating 
policies and 
procedures to support staff training and on-going operations. These 
adjustments to HUD's operating structure will enable us to more 
efficiently and effectively utilize our available resources to 
strengthen our program delivery and oversight.
Human Capital Strategic Management Plan
    A Human Capital Strategic Management Plan was developed in February 
2002 to provide an overall framework for our human capital activities. 
An important part of this plan is our Senior Executive Steering 
Committee, chaired by the Assistant Secretary for Administration, which 
is currently developing a 5-year plan to focus on: (1) staffing 
requirements; (2) organizational de-layering; (3) supervisor to 
employee ratios; and (4) front-line service delivery. This Committee 
also will make recommendations regarding the need for new or revised 
policy guidance to support the Department's new human capital 
strategies.
Staffing Needs and Allocation of Resources
    HUD's past management of its human capital was hampered by the lack 
of a system or process for estimating and justifying its staffing 
resource needs, and allocating the staffing resources available. In 
2001, HUD completed the implementation of a new Resource Estimation and 
Allocation Process (REAP), with input from all of HUD's managers. The 
REAP was developed in conjunction with the National Academy of Public 
Administration.
    The baseline outputs of the REAP were used to assist in making 
decisions on redeploying HUD's existing staff resources to address 
priority program staffing needs in the field. The deployment of 
resources in the prior Administration left us understaffed to perform 
critical program delivery and oversight functions, while too many staff 
were devoted to outreach efforts. REAP was useful in helping to 
identify the critical staff shortages.
    We are now in the process of completing the first quarterly 
validation of the REAP staffing estimates through an assessment of 
actual staff time reporting via the implementation of the companion 
process to the REAP, the Total Estimation and Allocation Mechanism 
(TEAM). REAP and TEAM information will help HUD's management determine 
our staffing level request to Congress as part of our fiscal year 2004 
budget.
    Our fiscal year 2003 budget submission did not request the full 
staffing levels supported by the REAP for several reasons. First, we 
wanted to allow time for HUD managers to complete the initial TEAM 
validation process and to further analyze REAP and TEAM data. TEAM was 
not in place when the fiscal year 2003 budget was submitted to the 
Congress. It has since been completed and is operational. Second, 
although the REAP methodology supported a significant increase in 
staffing requirements (with a total level of 10,600 FTE's), it was not 
realistic to assume that the Department could implement that amount of 
an increase at the same time that the redeployment of existing staff 
was also taking place. Now that our redeployment of existing staff is 
completed, we have turned our attention to expediting our hiring and 
orientation processes to assure that we can fully utilize the staffing 
ceilings 
already approved by the Congress. This is the highest priority for our 
new Assistant Secretary for Administration and Director of Personnel, 
who were just recently added to our management team.
Succession Planning
    HUD has developed a Departmental Succession Planning Strategy, 
which includes procedures for workforce analyses. As a part of the 
Department's Succession Planning Strategy, we examined the top nineteen 
occupations in the Department in relation to continued need and 
potential retirements over a 5-year period. An assessment was further 
conducted in relation to HUD's four core program disciplines--in the 
Office of Housing, Office of Public and Indian Housing, Office of 
Community Planning and Development, and Office of Fair Housing and 
Equal Opportunity--to assess the impact of potential losses over the 5-
year period, and resulting skills 
imbalances. However, critical staffing needs exist throughout HUD's 
programs and the focus will be on the entire Department. The 
Presidential Management Intern Program (PMI), the new HUD Intern 
Program, the Legal Honors Program, and the SES Candidate Development 
Program (SES CDP) are being utilized to establish a pipeline of well-
qualified employees to meet staffing needs and anticipated skills 
shortages.
Training and Development
    Training and development of HUD employees is a Departmental 
priority. The HUD Training Academy has been enhanced and energized to 
move forward with a new vision for the Department's training program, 
which is focused on investing in the power and potential of HUD 
employees. Agency specific technical training and career advancement 
training are readily available to all employees. Several other 
initiatives are in place to build a new HUD culture, focused on the 
value of training and continuous professional development. For example:

 The new ``HUD Leadership and Management Curricula'' was 
    launched in April 2002, and features 38 courses, which provide a 
    comprehensive training program for supervisors, managers, and 
    executive leaders.

 The ``Operation Brain Trust Initiative'' was launched in 
    December 2001 to utilize HUD's subject matter experts as 
    ``Professors'' to develop the supervisors, managers, and 
    professionals of tomorrow through the experience of HUD's leaders 
    today.

 The ``HUD Virtual University'' is a new ``e-learning'' 
    initiative that provides on demand training, 24 hours a day--7 days 
    a week--365 days a year, with access to online technical coaches 
    and experts for a curriculum that includes 1,600 web-based courses 
    available at the desktop of every HUD employee.

    HUD's Program Assistant Secretaries have also been focused on the 
provision of updated program handbooks, guidance and training for HUD's 
monitoring staff 
and program intermediaries. These are further examples of our 
commitment to 
developing and to maintaining a competent HUD workforce and program 
delivery 
structure.
Technology Support
    The Department is acquiring an integrated human resources and 
training system entitled the HUD Integrated Human Resources and 
Training System (HIHRTS). HIHRTS replaces 17 existing systems and will 
support workforce planning, succession planning, forecasting, and 
identification of staff competencies.
Performance Management
    HUD had already been recognized for its progress in linking and 
aligning its staffing with its mission, goals, and organizational 
objectives, and we have continued and enhanced that process. Those 
linkages are made in HUD's Budget Submissions and Annual Performance 
Plans. We further use a management planning process that links field 
office and headquarters operating goals and other performance goals 
with the Department's strategic goals and objectives under the 
Government Performance and Results Act. It is important that HUD's 
managers and staff know their contributions to HUD's mission 
objectives, and are held accountable for that performance. We assess 
progress against our Management Plan goals quarterly, and annual 
accomplishments are factored into staff performance evaluations and 
awards.
Acquisitions Management
    HUD is heavily reliant on contracted services in support of its 
current operations. HUD's contracted services go well beyond facilities 
maintenance and other routine services to many core program functions. 
Given the extent and the significance of HUD's contracted services, 
HUD's acquisition management challenges consist of: (1) Assuring that 
our contract funding goes toward meeting our priority needs in a 
cost-effective manner. (2) Committing sufficient business area 
expertise to develop adequate statements of work to govern contractor 
performance. (3) Maintaining a sufficient procurement capacity to 
timely process quality procurement actions. (4) Providing adequate 
oversight of contractor compliance and performance.
    Our actions to address these acquisition management challenges 
include the following:

 Contract Management Review Board--The Department has 
    reestablished a senior-level Contract Management Review Board 
    (CMRB) to review and approve annual procurement plans for each HUD 
    component, and to approve all contract actions over $500,000. The 
    CMRB helps to assure that HUD's contract resources are used to 
    address the Department's priority service needs. The CMRB also 
    ensures the acquisition strategy is based on competition, is 
    performance-based to the greatest extent practicable, and treats 
    small businesses fairly and gives them a chance to compete.

 Integrated Program Teams--The Department is increasing the use 
    of Integrated Program Teams (IPT's) to improve the quality and 
    timeliness of procurement actions. IPT's are groups of management, 
    technical, and contracting experts assembled to accomplish a 
    mission-critical procurement objective. HUD uses IPT's to plan the 
    acquisition strategy, establish the contracting milestones, develop 
    the statement of work, manage the contracting process through 
    contract award, and monitor the contractor's performance.

 Performance-Based Contracts--One of the President's management 
    objectives is to increase the use of performance-based service 
    contracts to 20 percent of service contract awards in fiscal year 
    2002. HUD is fostering a partnership between its contracting and 
    program personnel to increase the use of performance-based service 
    contracts, and is providing classroom and ``just-in-time'' training 
    on the development of performance-based statements of work. In 
    addition, the Department has established an IPT--consisting of 
    information technology (IT), program, and contracting staff--to 
    convert existing IT systems development and maintenance contracts 
    to performance-based. These efforts are beginning to show results: 
    As of June 30, 2002, 16 percent of new service contracts were 
    performance-based.

 Small Business Utilization--The Secretary and I recognize that 
    small businesses are vitally important to job growth and the 
    economic strength of the country. The Secretary has challenged HUD 
    to award 50 percent of its contract dollars to small businesses. To 
    achieve this demanding goal, the Department sponsors small business 
    fairs and other outreach programs to publicize HUD's contracting 
    and subcontracting opportunities. Through these and other efforts, 
    the Department is well on its way to achieving this goal. As of 
    June 30, 41 percent of fiscal year 2002 contract dollars have been 
    awarded to small businesses, and I am particularly pleased that 
    women-owned small businesses have accounted for 21 percent of the 
    Department's total fiscal year 2002 awards--far surpassing the 5 
    percent goal established by Congress.

 Other Acquisition Improvement Efforts--HUD has hired a new 
    Chief Procurement Officer to lead our acquisition improvement 
    efforts. We have also approved a 50 percent increase in staff 
    resources devoted to contract award and administration and 
    increased training and development of the acquisition workforce as 
    required by the Clinger-Cohen Act.

    These changes are collectively expected to improve both customer 
service and contractor performance and to reduce the Department's 
overall cost of operation.
Information Systems Management
    Adequate automated information systems are essential to the 
effective administration of HUD's large, diverse, and complex program 
universe. However, we recognize that HUD has antiquated systems that 
are poorly integrated, inefficient, and inadequate for meeting many 
essential program management information needs. Most of HUD's systems 
support is provided through contracted services.
    HUD's major information systems challenges are to: (1) Properly 
prioritize Information Technology (IT) capital investments to meet 
HUD's most critical business needs. (2) Adequately plan systems 
development to assure effective systems integration and operation. (3) 
Provide sufficient business area support for the systems development 
efforts. (4) Improve contractor performance and HUD's systems project 
management. (5) Maintain a secure systems environment.
    Our efforts to address these challenges include the following:
IT Capital Investment Planning
    We have continued to refine and institutionalize HUD's IT 
Investment Management (ITIM) Process. Efforts were taken to seamlessly 
integrate HUD's ITIM, or IT capital planning process, with HUD's 
Enterprise Architecture (EA) and e-Government directives from the 
Office of Management and Budget, to better assure efficient resource 
use and effective business results. The IT capital planning process was 
enhanced to incorporate an EA assessment of proposed projects during 
the selection of IT projects for upcoming fiscal years. The scoring of 
initiatives is linked to HUD's e-Government Strategic Plan, the 
President's Management Agenda, material weakness and high-risk issues, 
and other Departmental priorities.
    HUD is also pursuing a performance-based, outcome-oriented 
infrastructure contract called HUD IT Services (HITS) that is expected 
to provide improved services and innovative solutions. Award is 
currently scheduled for November 2002. The 
selected HITS vendor will partner with HUD to specify, design, acquire, 
maintain, and support the IT infrastructure, ensuring that enterprise 
architecture considerations, standards, and policies are followed.
Enterprise Architecture
    HUD's Enterprise Architecture (EA) initiative is designed to 
provide Department-wide documentation of HUD's current business and 
technology systems architecture baseline, as a basis for both better 
managing HUD's current information systems and better meeting future 
information systems needs. HUD has recently completed a refreshment of 
the baseline EA in the Enterprise Architecture Management System. The 
EA team is completing work on the significant Single-Family Housing 
segment of the target architecture for future systems development in 
this high-risk 
program area.
Project Management
    We have taken actions to improve IT systems project management and 
correct past problems of projects not being completed on time, cost 
overruns, and unlimited project scope. Through the IT capital planning 
process, HUD conducts quarterly control reviews of every IT project, 
requiring projects with significant cost or schedule variances to 
develop recovery plans to get back on track. HUD also provided IT 
Investment and Project Management training to over 100 IT project 
managers and plans to offer this training as an online course later 
this year. HUD instituted project management reviews at the highest 
levels to focus executive attention on projects needing direction. As 
previously discussed, IPT's or Integrated Procurement Teams were 
created to manage and implement the transition of IT support contracts 
to performance-based contracts.
Systems Security
    We established HUD's Enterprise Security Program to provide 
protection for HUD's critical infrastructure, both physical and 
information systems. This entails developing and implementing effective 
security procedures, security awareness and training, disaster 
recovery/contingency planning, and monitoring compliance and 
effectiveness of security procedures, policies and standards. 
Significant accomplishments have been made. The HUD Office of Inspector 
General's audit of HUD's fiscal year 2001 Consolidated Financial 
Statements recognized both substantial control improvements in HUD's 
mainframe-computing environment, and considerable strides to improve 
software configuration management for both mainframe and LAN-based 
client/server applications. OCIO is responding to the Government 
Information Security Reform Act through security self assessments, 
developing and reporting on an overall HUD security plan, and providing 
a strategic Five-Year Plan for Security.
    As you can see, our efforts to meet HUD's human capital, 
acquisitions, and systems challenges have been extensive. Our efforts 
to better manage our staffing, 
acquisitions, and information systems have a direct relationship to the 
excellent progress we are making in addressing HUD's two remaining 
high-risk program areas--our Multifamily Rental Housing Assistance and 
Single-Family Housing Mortgage Insurance Program areas. We welcome the 
pending independent assessment of our progress through the GAO's 
biennial Government-wide review of major management challenges and 
high-risk programs.
    That concludes my testimony. I look forward to working with you to 
address the continuing management challenges facing HUD, and I thank 
you for your on-going support of the Department.
              PREPARED STATEMENT OF STANLEY J. CZERWINSKI
                   Director, Physical Infrastructure
                     U.S. General Accounting Office
                             July 24, 2002
    Mr. Chairman and Members of the Subcommittee: We are pleased to be 
here today to discuss the high-risk program areas and management 
challenges facing the Department of Housing and Urban Development 
(HUD). HUD's programs affect the lives of millions of Americans. HUD 
makes housing more affordable for about 4.8 million low-income 
households by insuring loans for owners of multifamily rental housing 
and providing rental assistance. It helps to revitalize America's 
communities by assisting over 4,000 localities through its community 
development programs. It encourages homeownership by providing mortgage 
insurance for about 7 million homeowners who otherwise might not have 
been able to qualify for their loans--managing about $500 billion in 
insured mortgages and $604 billion in guarantees of mortgage-backed 
securities. To accomplish its missions, HUD relies on the performance 
and the integrity of thousands of mortgage lenders, contractors, 
property owners, public housing agencies, communities, and others to 
administer its 
programs. Effective oversight and strong management are critical to 
ensure that HUD's reliance on these third parties results in the 
effective and efficient stewardship of Federal funds and the 
accomplishment of the Department's mission and program goals.
    For many years, HUD has been the subject of criticism for 
management and oversight weaknesses that have made its programs 
vulnerable to fraud, waste, abuse, and mismanagement. In 1997, HUD 
undertook the 2020 Management Reform Plan, a complex and wide-ranging 
effort designed to, among other things, refocus HUD's mission, 
strengthen accountability, and eliminate fraud, waste, abuse, and 
mismanagement from its programs. In January 2001, we recognized the 
credible progress that HUD had made in improving its management and 
operations, and we reduced the number of HUD program areas deemed to be 
high-risk to two of its major program areas--Single-Family Mortgage 
Insurance and Multifamily Rental Housing Assistance.\1\ These program 
areas comprise about two-thirds of HUD's budget. The current 
Administration has placed improving HUD's management among its highest 
priorities and has set a goal to remove the high-risk designation from 
all HUD programs by 2005. This is therefore an appropriate time to 
review HUD's progress 
toward addressing these high-risk program areas and the challenges it 
faces in sustaining the progress that has been made as HUD moves toward 
its goal to become a high performing Agency that provides quality 
service to its customers.
---------------------------------------------------------------------------
    \1\ U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Housing and Urban Development, GAO- 01-248 
(Washington, DC: January 2001).
---------------------------------------------------------------------------
    My testimony today discusses the major management challenges we see 
facing HUD, as well as the progress HUD has made over the past few 
years addressing its challenges, and the steps it is continuing to take 
to address them. First, my testimony discusses the challenges HUD faces 
improving accountability and control over its high-risk program areas. 
Second, it addresses the challenges that HUD faces that cut across all 
its program areas--especially its efforts to improve accountability and 
control over its high-risk program areas--in the areas of: (1) managing 
human capital, (2) managing acquisitions, and (3) improving 
programmatic and financial management information systems. My testimony 
today draws on a body of work, including recent reports we have issued 
on various HUD programs, our work on HUD's Human Capital Management 
that is being released today at this hearing,\2\ our assessment of 
HUD's strategic and performance plans, and a series of assignments we 
have ongoing at the request of this Subcommittee. It also draws on work 
we have done on management reform initiatives and performance-based 
organizations across both the Federal and private sectors. In summary:
---------------------------------------------------------------------------
    \2\ U.S. General Accounting Office, HUD Human Capital Management: 
Comprehensive Strategic Workforce Planning Needed, GAO-02-839 
(Washington, DC: July 24, 2002).

 HUD's Single-Family Mortgage Insurance and its Multifamily 
    Rental Housing Assistance Program areas are at high-risk of waste, 
    fraud, abuse, and mismanagement. In January 2001, we reported that, 
    while HUD had made credible progress addressing its management 
    deficiencies, significant weaknesses in these two program areas 
    remained--areas comprising about two-thirds of the Department's 
    budget. To correct weaknesses in its Single-Family Mortgage 
    Insurance Programs, we reported that HUD needed to improve, among 
    other things, its oversight of lenders and appraisers. To ensure 
    the integrity of its Multifamily Rental Housing Assistance 
    Programs, HUD needed to take actions, including ensuring that 
    providers of rental housing maintain housing that is in decent, 
    safe, and sanitary condition. The President's Management Agenda 
    contains initiatives to address these and other weaknesses; and HUD 
    has developed plans, including goals and timetables, for taking 
    action on them. In addition to our ongoing reviews of HUD's 
    programs, we plan to review these plans and monitor HUD's progress 
    in the months ahead. We will report on the results of our review in 
    January 2003, when we will assess HUD's progress as part of our 
---------------------------------------------------------------------------
    Performance and Accountability and High-Risk Series update.

 Human Capital Management--and the need for a strategic 
    approach to managing HUD's staff--is the most pressing crosscutting 
    management challenge facing HUD. HUD downsized its staff from about 
    13,500 to 9,000 over the last decade, and its human capital 
    challenges are exacerbated by demographics that suggest that by 
    August 2003, about half of its professional workforce will be 
    eligible to retire. HUD has begun the initial stages of workforce 
    planning; it has completed its resource estimation and allocation 
    process, which estimates the staff needed to handle the current 
    workload in each office, and a detailed analysis of HUD's potential 
    staff losses due to retirement. However, the Department does not 
    have a comprehensive workforce plan. Elements that we have reported 
    are necessary for comprehensive workforce planning--but are missing 
    from HUD's workforce planning--include, among other things, an 
    analysis of what work its staff should be doing; the knowledge, 
    skills, and abilities needed by the staff to do this work; 
    the appropriate staff deployment across the organization, and the 
    strategies for 
    identifying and filling gaps. Without more comprehensive workforce 
    planning, HUD is not as prepared as it could be to recruit and to 
    hire staff needed to pursue its mission.

 Effective acquisition management is of increasing importance 
    because, as HUD downsized its staff, it relied more and more on 
    outside contractors to accomplish its mission. Over a 4-year period 
    HUD's spending on outside contracting increased about 62 percent, 
    and HUD officials have estimated that the total number of 
    contractor staff assisting in delivering HUD services may nearly 
    equal its own. HUD has made progress in the past few years 
    improving its acquisition management practices; but it faces the 
    challenge of ensuring that, where it relies on contractors to 
    perform its mission, it will hold these contractors accountable for 
    results. Successfully meeting that challenge affects the successful 
    delivery of HUD's programs, the effective deployment of its staff, 
    and its ability to ensure the integrity of its Single-Family and 
    Multifamily Rental Housing Assistance Programs. Holding the 
    contractors accountable for results requires processes and 
    practices in place to effectively monitor contractors' performance, 
    an acquisition workforce with the right workload, training, and 
    tools to carry out its mission, and programmatic and financial 
    management information systems that support HUD's 
    efforts to ensure accountability in its acquisitions.

 Responsive programmatic and financial management information 
    systems are critical to HUD's ability to meet its mission, deliver 
    key services, and establish sufficient management control over its 
    programs and operations. Concerns about the weaknesses in HUD's 
    programmatic and financial management information systems are not 
    new--we first reported some of HUD's current problems in 1984--and 
    our recent work shows that these weaknesses continue to adversely 
    impact the Department's ability to monitor and effectively ensure 
    the integrity of its Single-Family Mortgage Insurance and 
    Multifamily Rental Assistance Programs. For example, to oversee 
    lenders in HUD's Single-Family Mortgage Insurance Program, staff at 
    the Department's Homeownership Centers must collect and manually 
    compile information from multiple systems to target high-risk 
    lenders--increasing the likelihood that problems will go unnoticed. 
    In addition, concerns about the ability of HUD's financial 
    management systems to effectively support the timely preparation 
    and audit of the Department's annual financial statements are long-
    standing; and as of today, HUD is still in the early stages of 
    developing a plan for resolving them. Accordingly, developing a 
    plan to substantially improve programmatic and financial management 
    information systems to meet the Department's needs and comply with 
    Federal financial system requirements is crucial to HUD's efforts 
    to successfully address its high-risk program areas.
HUD's High-Risk Areas: The Single-Family Mortgage Insurance and
Multifamily Rental Housing Assistance Programs
    HUD's Single-Family Mortgage Insurance and its Multifamily Rental 
Housing Assistance Program areas, comprising nearly two-thirds of the 
Department's budget, are at high-risk of waste, fraud, abuse, and 
mismanagement.\3\ In January 2001, we reported that, various factors, 
including a strong economy, had resulted in the accumulation of capital 
reserves of about $16.6 billion on HUD's Federal Housing Administration 
(FHA)-insured home loans. However, we also reported that the FHA lost 
about $1.9 billion during fiscal year 2000 on the sale of foreclosed 
homes that it had insured. In addition, we found other problems with 
HUD's management of its single-family program. For example, HUD was 
experiencing significant problems with the performance of contractors 
responsible for maintaining and selling the single-family properties 
HUD acquires through foreclosure. We found most of these contractors 
had trouble securing and maintaining properties in proper condition--
and HUD eventually terminated the contractor responsible for about 40 
percent of the properties. If HUD's acquired properties are not 
properly secured and maintained, they can contribute to a 
neighborhood's decay, particularly as they age.
---------------------------------------------------------------------------
    \3\ GAO - 01-248.
---------------------------------------------------------------------------
    Overall, we identified several opportunities wherein HUD could 
strengthen FHA's Single-Family Mortgage Insurance Program, including 
strengthening the integrity of the single-family loan origination 
process, promoting better monitoring of lenders, appraisers, and 
contractors, and implementing effective human capital policies to 
ensure that sufficient staff with the right skills are available to 
carry out the FHA's mission.
    For HUD's Multifamily Rental Housing Assistance Programs, we noted 
that HUD continued to face challenges in ensuring that only eligible 
families occupy housing units; that those families are paying the 
correct rents; and that providers of rental housing maintain housing 
that is in decent, safe, and sanitary condition. More recently, we have 
reported that HUD's field offices frequently did not follow the 
Department's procedures for ensuring that owners of HUD-assisted 
multifamily properties are correcting physical deficiencies identified 
in inspections by HUD's Real Estate Assessment Center (REAC). Our 
analysis focused on approximately 500 properties that REAC determined 
were in substandard condition and that HUD's field offices subsequently 
classified as repaired. On the basis of our site visits to a sample of 
these properties, we estimated that for about half of the properties 
covered by our analysis, at least 25 percent of the deficiencies that 
REAC classified as ``major'' or ``severe'' had not been corrected. This 
problem occurred because HUD staff were classifying the properties as 
repaired, without obtaining required repair plans and certifications of 
repairs from the owners and because some owners and managers reported 
completing repairs that had not been made.\4\
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    \4\ U.S. General Accounting Office, HUD Multifamily Housing: 
Improved Follow-up Needed to Ensure That Physical Problems Are 
Corrected, GAO - 01- 668 (Washington, DC: June 21, 2001).
---------------------------------------------------------------------------
    Overall, our January 2001 report concluded that, to address this 
high-risk area, HUD must continue its efforts to develop adequate 
information systems that ensure that: (1) correct rental housing 
subsidies are paid and (2) complete actions on our recommendations 
aimed at improving the quality of contractors' physical inspections of 
the condition of public and multifamily housing.
    HUD has been addressing its high-risk challenges and the 
recommendations of our earlier reports. HUD's 2020 Management Reform 
Plan has resulted in major changes throughout the Department as it 
worked to resolve its management challenges. In reviewing the progress 
of the plan in October 2001, we noted that some of HUD's initiatives 
were achieved relatively quickly and are producing results.\5\ For 
example, the consolidation of some of its oversight and processing 
functions into 
several new centers--as part of HUD's efforts to consolidate and 
streamline its operations--had perhaps been the most successful. The 
new REAC enabled HUD to complete the first physical and financial 
assessments of its assisted housing inventory, while HUD reported that 
the creation of its Departmental Enforcement Center resulted in the 
restoration of 41,344 housing units to decent, safe, and sanitary 
conditions in fiscal year 2000, compared with 968 in fiscal year 1999. 
Other efforts to improve the efficiency of HUD's operations and 
improving accountability, met with more limited success, and were 
hampered by inefficient distribution of staff and 
of workload, a lack of resources for program monitoring, problems with 
contractor 
performance and its oversight of contractors, and weaknesses in 
programmatic and financial management information systems.
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    \5\ U.S. General Accounting Office, HUD Management: Progress Made 
on Management Reforms, but Challenges Remain, GAO - 02-45 (Washington, 
DC: October 31, 2001).
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    The current Administration took office in January 2001, saying it 
was dedicated to maintaining HUD's progress, and placing improved 
management among the Department's highest priorities. Eighteen months 
ago, Secretary Martinez came before this Committee and said:

          ``My first priority will be for HUD to continue to put its 
        own house in order, so we have the institutional fortitude to 
        provide the housing and community renewal opportunities needed 
        by so many families and so many neighborhoods. The Department 
        of Housing and Urban Development must be healthy itself, if we 
        are to deal with the challenges before us. And while former HUD 
        Secretaries Kemp, Cisneros, and Cuomo have built a foundation 
        for strength, there are a great many areas of institutional 
        weakness that must be addressed. GAO and the HUD Office of 
        Inspector General have identified similar program and 
        management areas needing the most improvement, including: The 
        Federal Housing Administration's single-family mortgage 
        insurance risk; the impact and continuing evolution of HUD's 
        2020 management reform effort; and the failure to integrate 
        financial and information systems.''

    According to HUD's most recent performance plan, the Department is 
using our reports and those of its Inspector General as a ``roadmap'' 
for making management improvements. In August 2001, the Administration 
unveiled the President's Management Agenda, including a set of HUD-
specific initiatives to strengthen management of HUD's programs by, 
among other things, improving FHA's management of risks throughout the 
mortgage insurance process, improving the performance of public housing 
agencies and providers of multifamily housing, and reducing overpaid 
rent subsidies. The plan contained specific goals and timetables to, 
for example, eliminate most if not all fraud in the appraisal process, 
increase the percentage 
of HUD-assisted public housing units meeting physical standards, and 
reduce over- 
payment of rent subsidies by at least one-half. The plan also 
establishes a goal of removing our high-risk designation from all HUD 
programs by 2005.
    To further its efforts to improve its management, HUD also recently 
undertook a series of organizational realignments. According to HUD, 
these efforts are designed to streamline its organization, establish 
clear lines of responsibility and reporting, and more effectively 
administer its programs. One of the more prominent realignments 
involved moving HUD's REAC, responsible for physical and financial 
inspections of public housing and assisted multifamily properties. The 
REAC, which formerly reported to the Deputy Secretary, now reports to 
the Assistant Secretary for Public and Indian Housing. In addition, the 
Department's Enforcement Center, which formerly reported to the Deputy 
Secretary, now reports to HUD's General Counsel. Similarly, the Chief 
Procurement Officer, which formerly reported to the Deputy Secretary, 
now reports to the Assistant Secretary for Administration. In 
addition, Regional Directors in the field have been given additional 
discretion to 
redeploy staff to address workload imbalances. According to HUD 
officials, to more 
effectively administer HUD's programs, other centers and offices are 
being studied 
for elimination or consolidation.
    As I discussed earlier, clearly the creation of the REAC and the 
Enforcement Center, to name two, were positive developments that 
yielded real results.\6\ And it is worth noting that at the time HUD 
established these centers, it did so because it believed that the 
Office of Public and Indian Housing and the Office of Housing--the 
offices within HUD that were originally responsible for these 
activities--were not effectively carrying out these functions. The 
Secretary, as the leader of his organization, has the prerogative to 
align the organization as he sees fit, consistent with his vision and 
management style. But it is important that the progress made to date 
not be jeopardized. For example, regardless of how REAC is aligned, HUD 
must continue to make progress improving the physical condition of 
public and assisted multifamily housing properties. Ultimately the 
success or failure of any organizational decision will be viewed in 
that light.
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    \6\ HUD's 2020 Management Reform Plan created several new centers 
to consolidate, among other things, HUD's single-family mortgage 
insurance activities, Section 8 program financial management support, 
and the processing, reviewing, and awarding of categorical and formula 
grants for the Office of Public and Indian Housing. These centers were 
discussed in greater 
detail in our October 2001 report.
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    We are now beginning to address these realignment issues as we 
assess the progress HUD and other Federal Agencies have made as part 
our Performance and Accountability and High-Risk Series. In making our 
determination of high-risk at HUD and other Federal agencies, we will 
consider the corrective measures that agencies have planned or have 
underway to resolve their management challenges, as well as the status 
and effectiveness of these actions. Some of the key factors we will 
consider in making our high-risk determination at HUD include the 
extent to which HUD has demonstrated commitment to resolving its 
management deficiencies, strengthened controls to address its 
management deficiencies, proposed appropriate corrective action plans 
for its remaining management challenges, implemented effective 
solutions that will be substantially completed in the near term, and 
implemented solutions that get to the root cause of its management 
deficiencies.
    We will review the current status of HUD's Single-Family Mortgage 
Insurance and its Multifamily Rental Housing Assistance Program areas 
and the actions taken to address weaknesses. At that time, the Agency 
must have demonstrated concrete results, with a clear path toward 
addressing any remaining problems. To conduct our assessment of high-
risk, we will review, among other things, HUD's strategic plans, annual 
performance plans and reports, accountability reports, and audited 
financial statements. This information will be supplemented by relevant 
GAO reports, Inspector General reports, and other independent analysis. 
Finally, the ultimate determination will be based on the independent 
and objective judgment of GAO analysts.
HUD Faces Crosscutting Management Challenges
    As HUD works to improve accountability and control over its high-
risk program areas, it will find that it faces several issues that cut 
across its efforts to improve its programs. I would like to turn now to 
these management challenges and discuss with you, HUD's progress and 
challenges in the areas of: (1) human capital management, (2) 
acquisition management, and (3) programmatic and financial management 
information systems. Successfully addressing these challenges will help 
determine whether HUD can sustain the progress of its management reform 
efforts, address its high-risk program areas, and make progress toward 
its goal of becoming a high-performing organization.
Human Capital Is The Most Pressing Management Challenge Facing HUD
    Human capital permeates virtually every effort to improve HUD's 
programs, including its ability to oversee the performance of housing 
authorities and property owners, acquire needed systems, and 
successfully execute and monitor contracts. Insufficient staffing and 
inefficient distribution of workload affects HUD's ability to operate 
efficiently and ensure the accountability of its programs. It increases 
HUD's need to hire contractors to perform activities and affects its 
ability to oversee contractors and hold them accountable for 
performance. HUD has the opportunity to develop a strategic human 
capital management approach to ensure that the Department has the right 
staff in the right numbers with the right skills in the right places 
and that HUD can continue to meet its mission and goals in the future 
as large numbers of experienced employees retire. As we have previously 
reported,\7\ a comprehensive workforce plan should be linked to the 
accomplishment of an 
Agency's mission and include the following elements:
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    \7\ GAO - 02- 45.

 The kind of work its staff should be doing now and in the 
    future.
 The knowledge, skills, and abilities needed by staff to do 
    this work.
 The capabilities and developmental needs of the current staff.
 The appropriate staff deployment across the organization.
 Any gaps that exist in knowledge, skills, and abilities.
 An approach for filling the gaps in the knowledge, skills, and 
    abilities of staff through recruiting and hiring.

    While HUD has begun to do workforce planning by identifying the 
resources required to do its current work, the Department does not have 
a comprehensive workforce plan. HUD's most significant workforce 
planning activity to date has been its Resource Estimation Allocation 
Process (REAP). The purpose of REAP was to systematically estimate the 
number of employees HUD needs to do its work based on its current 
workload and operations and HUD used the results to estimate staffing 
level ceilings for the Department's fiscal year 2003 proposed budget. 
HUD's workforce planning effort is currently focused on responding to 
major human capital deficiencies that the Office of Management and 
Budget identified in a 2001 evaluation conducted as part of the 
President's Management Agenda. This effort is focused on specific 
initiatives, such as reducing the number of HUD managers and 
supervisors, and does not consider many of the elements that we have 
endorsed as necessary for comprehensive workforce planning.
    In the absence of a comprehensive workforce plan, HUD faces myriad 
human capital challenges ensuring that it has the right mix of staff 
with the requisite knowledge, skills, and abilities appropriately 
deployed across its organization. In July 2001, we reported that HUD's 
Homeownership Centers, responsible for carrying out FHA's Single-Family 
Mortgage Insurance Program, faced staffing and workload imbalances and 
lacked an adequately standardized training curriculum. It also faced 
skill mix difficulties--for example, managers at the Centers said that 
it was a challenge for their staff to shift from performing insurance 
endorsements and property disposition activities to monitoring 
contractors that now do this work for HUD. In our survey of HUD 
managers for our January 2001 report, over 70 percent stated that staff 
training needed to be increased in the areas of information systems, 
technical skills, and other areas.
    Without a comprehensive workforce plan, the Department will not be 
as prepared as it could be to recruit and hire staff needed to pursue 
its mission. During the 1990's, HUD underwent considerable downsizing, 
reducing its staff from around 13,500 to about 9,000 by March 1998. The 
need to recruit and hire is exacerbated by the upcoming wave of 
potential retirements that HUD faces. More than 80 percent of HUD's 
workforce is in the core professional grades--GS 9 through 15; and, by 
August 2003, half of this workforce will be eligible to retire. HUD has 
done little outside hiring in the last decade and some vacant positions 
have gone unfilled while others have been filled through lateral 
transfers, promotions, or the upward mobility of administrative staff 
into professional positions. HUD is delegating more hiring authority to 
its regional directors and has established an internship program that 
may help address some staffing shortages. However, the internship 
program is in the early stage of its development and does not address 
the needs for hiring at the mid-level ranks of Government that could be 
disproportionately affected by the impending wave of potential 
retirements.
Acquisition Management Challenges Remain
    A second crosscutting challenge area for HUD is its management of 
acquisitions. As you know, Mr. Chairman, by design HUD relies on the 
performance and integrity of thousands of intermediaries such as 
mortgage lenders and public housing agencies to fulfill its mission. 
But as HUD has downsized its own staff over the past few years, its 
reliance on private contractors has increased substantially. This 
reliance, as measured by contracting obligations, grew by more than 62 
percent from fiscal year 1997 to fiscal year 2000; and HUD officials 
have estimated that the total number of contractor staff assisting in 
delivering HUD services may nearly equal its own. As a result, 
effective management of acquisitions is crucial to HUD's success in 
meeting its mission and addressing its high-risk Single-Family Mortgage 

Insurance and Multifamily Rental Housing Assistance Program areas. 
Ineffective oversight of contractors adversely effects HUD's ability to 
carry out its mission and to deliver key services and exposes HUD's 
programs to the additional risk of fraud, waste, abuse, and 
mismanagement. HUD faces the challenge of ensuring that, where it 
relies on contractors to perform its mission, it will hold these 
contractors accountable for results. Holding the contractors 
accountable for results requires processes and practices in place to 
effectively monitor contractors' performance, an acquisition workforce 
with the right workload, training, and tools to carry out its mission, 
and programmatic and financial management information systems that 
support HUD's efforts to ensure accountability in its acquisitions.
    HUD has undertaken a number of actions over the past few years to: 
(1) improve the processes and practices in place to effectively monitor 
contractors' performance, (2) improve the training and professional 
development of it acquisition workforce, and (3) improve its 
contracting information systems. While progress has been made, our 
recent and ongoing work suggests that HUD is still experiencing 
difficulties in each of these areas and thus faces continued challenges 
in its ability to hold contractors accountable for results. For 
example:

 To improve monitoring, HUD provided guidance to its employees 
    to incorporate more systematic methods into its monitoring efforts, 
    including the use of risk-based assessments to focus HUD's staff 
    efforts. In fiscal year 2000--around $600 million of the almost 
    $1.3 billion in contracts were for contracts supporting HUD's 
    single-family and multifamily housing programs. On the single-
    family side, we have reported numerous problems over the past few 
    years in HUD's oversight of its contractors handling the marketing 
    and management of HUD's single-family properties,\8\ as well as 
    those performing oversight of lenders and appraisers.\9\ More 
    recently we have been examining property management contracts in 
    HUD's multifamily housing program. From our ongoing work, it 
    appears that few of 
    the staff overseeing HUD's multifamily housing program property 
    management 
    contracts use monitoring plans or employ risk-based strategies to 
    determine the 
    necessary level and frequency of monitoring. We have observed that 
    oversight and monitoring of contractors are largely remote--
    consisting mainly of e-mails, telephone calls, and reviews of 
    contractors' progress reports--and site visits to properties by HUD 
    staff do not occur routinely. Our ongoing work indicates that, 
    absent a systematic approach to monitoring and with a limited 
    amount of on-site monitoring occurring, HUD's ability to 
    effectively monitor contractors' performance and identify and 
    correct problems may be limited.
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    \8\ U.S. General Accounting Office, Single-Family Housing: Stronger 
Measures Needed to Encourage Better Performance by Management and 
Marketing Contractors, GAO/RCED-00-117 (Washington, DC: May 12, 2000).
    \9\ U.S. General Accounting Office, Single-Family Housing: Stronger 
Oversight of FHA Lenders Could Reduce HUD's Insurance Risk, GAO/RCED-
00-112 (Washington, DC: April 28, 2000); U.S. General Accounting 
Office, Single-Family Housing: Weaknesses in HUD's Oversight of the FHA 
Appraisal Process, GAO/RCED-99-72 (Washington, DC: April 16, 1999).

 To improve the training and professional development of its 
    acquisition workforce, among other things, HUD created full-time 
    Government Technical Representatives (GTR) \10\ to help oversee 
    contracts, provided this staff with new training, and required that 
    their training and qualifications be formally certified. However, 
    HUD's progress in strategically managing its acquisition workforce 
    has been slow. For example, we recently learned that HUD's managers 
    were not aware of 143 staff members who were performing the GTR 
    function and had not received the appropriate training. Our work 
    suggests that HUD's training records are poorly maintained, making 
    it difficult for its managers to know which staff have received 
    training and thus where to focus scarce resources. HUD has not yet 
    used the results of its REAP study to remedy disparities that it 
    has identified in the contracting workload within the Office of the 
    Chief Procurement Officer, and a plan to identify critical skills 
    and career paths for its acquisition workforce has been in draft 
    for over 2 years. Like HUD's overall human capital challenges, 
    HUD's ability to hold its contractors accountable for performance 
    depends, in no small part, on its success in building an 
    acquisition workforce with the right workload, training, and tools 
    to carry out HUD's mission.
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    \10\ The Government Technical Representative acts as the 
Contracting Officer's representative concerning the technical and 
performance aspects of a contract. He or she is responsible for 
ensuring that the contractor is using the most efficient and cost-
effective methods and is also the principal judge of contractor 
performance, including the quality and timeliness of work and products.

 To improve its contracting information systems HUD implemented 
    a single system--HUD's Procurement System--to track contract 
    obligations, milestones, and contractor performance. However, our 
    ongoing work suggests that this System does not adequately support 
    HUD's managers or acquisition workforce because the data it 
    contains are not complete, accurate, or consistent. As a result, 
    Mr. Chairman, staff overseeing contractors in HUD's multifamily 
    program reported relying primarily on spreadsheets and other 
    informal systems they have created and maintained in order to 
    monitor contract milestones and task orders. These informal systems 
    are not subject to HUD's internal controls, audits, information 
    security protocols, or other standards and thus expose HUD's 
    contract activity to 
    internal control weaknesses and the potential for waste, fraud, 
    abuse, and mismanagement. In addition, HUD's managers do not have 
    reliable information on the number of active contracts it is 
    managing or the amount of funds that have been obligated for them, 
    and cannot readily determine how much money HUD has spent overall 
    on its contracting activities. Finally, performance data that would 
    assist in evaluating contractor performance is not systematically 
    tracked in HUD's Procurement System, although the System allows 
    such activity. HUD's ability to manage and monitor its acquisition 
    activities is limited by weaknesses in its programmatic and 
    financial management information systems, which are needed to 
---------------------------------------------------------------------------
    ensure accountability in its acquisitions.

    At this Subcommittee's request, Mr. Chairman, we are continuing our 
work on HUD's acquisition management and will be reporting to you on 
the results of this work in September 2002. We are examining potential 
improper payments at HUD, including in its multifamily housing 
acquisition activities, and will be issuing our report on this subject 
later this year.
Programmatic and Financial Management Information Systems Challenges
Are of Long-Standing and Continuing Concern
    Finally, Mr. Chairman, the effectiveness of HUD's programmatic and 
financial management information systems continue to raise concerns. 
Responsive programmatic and financial management information systems 
are critical to HUD's ability to meet its mission, deliver key 
services, and establish sufficient management control over its programs 
and operations. As our work has shown, ineffective programmatic and 
financial management information systems adversely impact HUD's 
programs and operations and its staff 's ability to effectively monitor 
its programs, recipients, and contractors. They also limit HUD's 
ability to collect accurate information to report on program results 
and effectively manage its operations. Concerns about the ability of 
HUD's financial management systems to effectively support the timely 
preparation and audit of the Department's annual financial statements 
are long-standing, and as of today, HUD is still in the early stages of 
developing a plan for resolving them. Accordingly, developing a plan to 
acquire and implement programmatic and financial management information 
systems that meet the Department's needs and comply with Federal 
financial system requirements is crucial to HUD's efforts to 
successfully address its high-risk program areas.
    Mr. Chairman, concerns about the effectiveness of HUD's 
programmatic and financial management information systems are not new. 
We have reported that HUD lacks the programmatic and financial 
management information systems necessary to ensure accountability over 
its programs since 1984. This February, for the eleventh year in a row, 
HUD's Inspector General cited the lack of an integrated financial 
management system in compliance with Federal financial system 
requirements as a material weakness in its audit of the Department's 
financial statements. HUD is aware that its programmatic and financial 
management information systems pose serious challenges and has taken 
steps to address them. For example, HUD has undertaken extensive 
efforts to modernize both HUD's and FHA's programmatic and financial 
management information systems, improve financial reporting, institute 
a more rigorous planning and review process over its information 
technology capital investments, and bring FHA's systems into compliance 
with Federal financial systems requirements. HUD is preparing to obtain 
contractor assistance to help analyze its current status and develop 
plans for improving the Department's financial management systems and 
providing the needed support to its programs.
    Our recent work and that of the Department's Inspector General has 
shown however, that despite efforts to improve its programmatic and 
financial management information systems, serious challenges still 
exist. HUD's systems do not today fully support its programs--including 
its Single-Family Mortgage Insurance and Multifamily Rental Assistance 
Programs--nor effectively support the timely preparation and audit of 
the Department's annual financial statements. For example:

 To oversee lenders in HUD's Single-Family Mortgage Insurance 
    Program, staff at the Department's Homeownership Centers must 
    collect and manually compile information from multiple systems and 
    sources in order to target high-risk lenders for review and to 
    identify and investigate potential fraud cases. As we reported in 
    October 2001, this creates a greater risk of error and increases 
    the likelihood that problems will go unnoticed.\11\
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    \11\ U.S. General Accounting Office, Single-Family Housing: Current 
Information Systems Do Not Fully Support the Business Processes at 
HUD's Homeownership Centers, GAO - 02- 44 (Washington, DC: October 24, 
2001).

 To review and approve applications for mortgage insurance on 
    multifamily properties, HUD uses, in some cases, an expedited 
    process where lenders, rather than HUD, underwrite the loans. 
    However, our ongoing work on HUD's Multifamily Accelerated 
    Processing Program suggests that HUD's system for tracking the 
    status of multifamily loan applications does not allow it to 
    reliably track and record several key processing steps in the 
    accelerated approval process. As a consequence, HUD's field staff 
    develop and maintain spreadsheets and other informal systems to 
---------------------------------------------------------------------------
    monitor the status of HUD's actions.

 HUD's efforts to ensure that only eligible families occupy 
    housing units and that those families pay the correct rents--a key 
    component of its strategy to address its high-risk program areas--
    were, according to HUD's Inspector General, impeded by limitations 
    in its information systems. In particular, the Inspector General 
    reported that the lack of complete, current, consistent information 
    on tenants and rents limited HUD's ability to effectively conduct 
    computerized income matching--a strategy that has been used to 
    identify and deter tenants who underreport their incomes and to 
    address some of the causes of the estimated $2 billion in 
    overpayments and errors on rent subsidy calculations. For this and 
    other reasons, the Inspector General raised concerns about the 
    effectiveness of HUD's income matching program.\12\
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    \12\ Office of Inspector General, Audit of U.S. Department of 
Housing and Urban Development (HUD) Financial Statements for Fiscal 
Years 2001 and 2000, 2002-FO - 0003 (Washington DC: February 27, 2002).

 HUD continues--due in large part to deficiencies in its 
    financial management systems--to rely on extensive ad hoc analyses 
    and special projects to develop account balances and necessary 
    disclosures for the Department's annual financial statements, 
    according to HUD's Inspector General. These extensive efforts 
    indicate that HUD's financial management systems cannot currently 
    provide the day-to-day information needed by its managers to 
---------------------------------------------------------------------------
    effectively manage and monitor the Department's programs.

 HUD needs high-quality software for the systems it uses to 
    support its financial management needs, as well as its Single-
    Family Mortgage, Multifamily Rental Housing Assistance, and other 
    program needs. In September 2001, we reported that HUD's success or 
    failure in acquiring software depends largely on specific 
    individuals, rather than on well-defined and disciplined software 
    acquisition management practices. Until this is strengthened, HUD 
    is exposed to a higher risk that software intensive acquisition 
    projects will not consistently meet mission requirements, perform 
    as intended, or be delivered on schedule and within budget.\13\
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    \13\ U.S. General Accounting Office, HUD Information Systems: 
Immature Software Acquisition Capability Increases Project Risks, GAO - 
01-962 (Washington, DC: September 14, 2001).

    Mr. Chairman, we are continuing to review HUD's progress in 
improving its financial management systems and plan to report to you on 
these issues by December 2002.
    In conclusion, Mr. Chairman, HUD's management reform efforts over 
the past few years resulted in major changes throughout the Department 
as it worked to resolve its management challenges. HUD has been moving 
forward over the past few years and has made credible progress, and the 
current Administration has reaffirmed an emphasis on and commitment to 
improving management at the Department. However, despite this progress 
and renewed commitment, HUD still faces considerable challenges in 
ensuring that its continuing management reform efforts will amount to 
the sustainable improvements in performance needed to resolve 
weaknesses in its high-risk program areas. Successfully addressing the 
crosscutting challenges in the areas of human capital, acquisition 
management, and programmatic and financial management information 
systems can help determine whether HUD can sustain the progress it has 
made, meet its challenges, and make progress toward its goal of 
becoming a high-performing organization.
    This concludes my prepared statement. I will be happy to respond to 
any questions you or the other Members of the Subcommittee may have.
                               ----------
                 PREPARED STATEMENT OF CAROLYN FEDEROFF
         President, American Federation of Government Employees
                  AFL-CIO, Council of HUD Locals, 222
                             July 24, 2002
    Chairman Reed and Subcommittee Members, my name is Carolyn 
Federoff, and I am President of the American Federation of Government 
Employees, Council of HUD Locals. We represent approximately 6,500 
bargaining unit employees throughout the Department of Housing and 
Urban Development. Thank you for providing us with an opportunity to 
present the views of HUD's employees on those areas that GAO continues 
to identify as ``high-risk,'' including HUD's staffing crisis and its 
oversight of HUD's contractors.
    In addition to gathering input directly from HUD's employees, we 
have also reviewed GAO's reports on HUD's designation as ``high-risk'' 
and the Government-wide human capital management crises. Our testimony 
is presented in two parts, the first focusing on human capital 
management, and the second on HUD's oversight of its contractors in the 
single-family and rental housing assistance programs. Nonetheless, it 
should be noted that we believe that GAO's focus on improvements 
needed in the single-family and rental housing assistance programs is 
integrally related to and exacerbated by HUD's Human Capital 
Management.
Summary
    Because of the impending retirement of the Baby Boom generation, 
every American employer faces the potential for a human capital crisis. 
HUD, however, faces a crisis imposed by both demographics and politics. 
Both Agency management and Congressional critics have, in their turn, 
starved the Agency for needed staff. HUD programs are designed to be 
implemented and to operate over long periods of time--in FHA programs, 
an average of 30 to 40 years. These time periods exceed the normal 
career span of most workers. Setting these programs in motion 
necessitates a commitment to ensure quality staff will be available 
over the life of the program. Additionally, it is unacceptable to 
merely plan to contract the work out; contractors still need quality 
oversight by employees who are familiar with the program from inception 
to close.
    HUD will need to recruit. But it will also have to work hard to 
retain the employees on board. The results of a recent Office of 
Personnel Management survey reveal a HUD workforce whose morale is 
generally below that of their private sector counterparts. Only 47 
percent of responding employees are satisfied with the organization, 
compared to 63 percent in the private sector. Issues fueling 
dissatisfaction include lack of involvement with decisions affecting 
work, lack of information received from management and lack of training 
received for the job. (See attached copies of HUD intranet.)*
    We offer the following recommendations to help HUD meet its 
staffing challenges and its obligation to preserve the public trust:

 The Agency has averaged 300 FTE below ceiling for the last 
    several years. Rather than taking the staff away, Congress must 
    insist that ceiling be met.

 The Agency contracts out because of a lack of staff and 
    without regard to cost. Congress should insist that the Agency only 
    contract out when it is cost-effective and will provide equal or 
    better service. Congress must also provide budget authority to hire 
    more staff when it is cost-effective, and should reject arbitrary 
    contracting out quotas.

 The Agency largely eliminated its Human Resources capacity in 
    the field in 1995. Lack of access to Human Resources professionals 
    adversely impacts field managers and supervisors. This staff should 
    be restored.

 HUD's Human Resources staff is overly bureaucratic, failing to 
    explore innovative ways to recruit and retain staff. The Agency 
    needs to empower Human Resources staff to find solutions, not 
    roadblocks.

 HUD has little or no data about its staff--it cannot provide 
    retention data for past intern programs, nor even provide a 
    quarterly list of employees being hired into or leaving the 
    bargaining unit. It needs to restore its ability to retrieve hard 
    staffing data on a monthly basis.

 The Agency is currently relying of interns to meet hiring 
    needs. These interns are on 2-year appointments. Although the 
    Agency has verbally expressed an intent to extend permanent 
    positions to these employees, most will feel compelled to look for 
    other jobs in the last year of their appointment, because of 
    student loan debt. To retain these employees, the Agency should 
    extend permanent positions to the interns after 1-year (the 
    standard probationary time period for new employees).

 To help recruit and retain staff, the Agency should negotiate 
    with the union for quality programs such as loan forgiveness and 
    child care subsidy, and effectively implement programs already 
    negotiated such as telecommuting.

    We are pleased to testify that Secretary Martinez, through Deputy 
Secretary Jackson, has worked with us on several of these issues. He 
has expressed a commitment to reject costly contracting out, provided a 
management directive supporting implementation of telecommuting, and 
directed his staff to investigate loan forgiveness. We hope to be able 
to testify next year that, with open Congressional support, the 
Administration has made progress toward achieving the recommendations 
set forth above.
Human Capital Management:
GAO's Four Human Capital Cornerstones and HUD
    In its report ``A Model of Strategic Human Capital Management,'' 
GAO sets forth four Human Capital Cornerstones (GAO-02-373SP).* GAO 
intends these Cornerstones to provide guidance in assessing an Agency's 
Human Capital strategy. For each Cornerstone, there are two Critical 
Success Factors. The GAO report sets forth examples of behavior it 
identifies as Level 1, 2, or 3 in connection with each Critical Success 
Factor. Level 1 is the worst, while Level 3 is the optimum according to 
GAO. We address each of the four Cornerstones at they apply to HUD 
separately:
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    *Held in Committee files or available at the GAO website.
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Leadership: The Agency has a Human Capital Crisis Because Throughout 
        the 1990's
HUD Devalued Human Capital and Human Capital Resource Managers
    HUD goes through organization charts the way a person with a cold 
goes through Kleenex. On some level, this constant shifting devalues 
human capital. But between the years of 1994 and 1998, the Agency 
actively undertook reforms that exacerbated the human capital crisis 
and precipitated the virtual elimination of human capital resource 
management at HUD. We offer two examples from many:

    In 1995, the Agency reorganized the Office of Administration, 
severely slashing HUD's Human Resource Departments in the field by 
consolidating ten personnel departments into three. The goal was to 
reduce the ratio of HR staff to HUD staff from 1:60 to 1:100. Access to 
personnel specialists became more difficult for managers, supervisors, 
and employees. Personnel records have been poorly maintained. Also in 
1995, the magic 7,500 number was the focus of much attention. As 
confirmed by GAO and HUD IG reports, this number might as well have 
been drawn from a hat; the Agency had no basis for believing this was 
the optimum number of staff. The contracting out problems we face today 
are a direct result of this baseless FTE goal.

    Comparison to the GAO Critical Success Factors Table (GAO-02-373SP 
at p. 10) demonstrates that with regard to its staff, the Agency was at 
Level 1--the Agency viewed the employees as ``costs to be cut rather 
than as assets to be valued.'' The Agency was below Level 1 with regard 
to the role of the Human Capital Function--human capital management was 
so severely reduced that it could not even be described as a support 
function.
    It is our opinion that the past devaluation of the Human Capital 
Function is critically interfering with the current Administration's 
ability to evaluate and address the Human Capital crisis at HUD. Among 
other things, it interferes with recruitment and retention. For 
example, the Agency has consistently been 300 FTE below ceiling for 
several years. Despite what we generally agree are good efforts to 
recruit and hire staff, Agency projections indicate that we will 
continue to be below ceiling at the end of this fiscal year. 
Additionally, we have proposed, and the Administration has expressed 
interest in, several retention strategies such as a loan forgiveness 
program. Lack of adequate Human Resource staff has delayed rapid review 
and implementation of this and other retention programs.
    Agency managers, supervisors, and employees need a commitment from 
the Congress and the Administration to rebuild the Human Capital 
Management Function at HUD. We need Human Resource employees to 
evaluate staffing needs, actively recruit, create retention strategies, 
and to otherwise assist employees, their supervisors and managers in 
the accomplishment of HUD's mission.
Strategic Human Capital Planning: No Data To Drive Human Capital 
        Decisions
    Agency management has little or no data with which to make Human 
Capital decisions; they no longer receive staffing lists, information 
on accessions and separations, nor retention rates for special hires; 
and estimates of needed staff are suspect.
    It was not always so. Attached are excerpts from the last ``Monthly 
Staffing List'' of which I am aware. It is dated September 1990 and 
covers Region I.* It is an example of the kind of data that used to be 
routinely available and provided to field 
managers and union representatives. It includes a summary of staff on 
board, hires, separations, and projections for the coming month. It 
discloses the total number of employees authorized versus those 
actually appointed in each office and each program area. It provides 
information on total number of permanent, temporary, part-time, and 
summer help. The sample page is a detail from the Office of Counsel, 
showing total number of staff, vacancies, temporary appointments (EXC 
APPT NTE 08 -11-91), and duty stations other than Boston (D/S: 
Manchester). The total report includes similar pages for each program 
area in Region I.
---------------------------------------------------------------------------
    *Held in Committee files.
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    Sometime shortly after 1990, the Agency stopped providing the 
Monthly Staffing List. With the loss of this single report, managers in 
Region I no longer had the information necessary to firmly determine if 
staff turnover continued to be 17 percent, or one in six, as it had 
been the previous year. They would no longer clearly know that their 
ceiling had increased 20 positions since last year, or that they were 
46 employees, or 10 percent, under ceiling. Having this data helped 
managers focus on potential problem areas in Human Resource management, 
such as retention issues and recruitment needs. But this data no longer 
exists, or is no longer shared.
    We suspect that it simply no longer exists. During the past 6 
months, we have asked HUD's Labor Relations staff to please provide 
quarterly reports on accessions and separations from the bargaining 
unit. We just want to know who has joined HUD and who has left during a 
quarter. Labor Relations has been unable to meet our request, because 
the information systems do not support this simple retrieval of 
information.
    The fundamental lack of data hampers this Administration's ability 
to address the Human Capital crisis. We continue to make decisions in 
the dark.
    For example, the union has raised concerns with the dependence on 
intern programs to meet hiring needs. Based upon anecdotal evidence, we 
are concerned that interns may have lower retention rates than other 
employees hired under traditional civil service authorities. To explore 
this, we have asked the Office of Human Resources to provide data 
comparing the retention rates of the last major intern program that 
occurred in 1989 and 1990, to the retention rates for other employees 
hired through traditional means during the same time period. The Agency 
has been unable to provide this data. The Agency is putting all of its 
hiring eggs in one basket without sufficient knowledge of the strengths 
or weaknesses of that basket.\1\
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    \1\ The union is also without hard data. Nonetheless, based upon 
our interviews with interns, we believe critical to the retention of 
interns is their knowledge that they will be offered permanent 
positions well in advance of the expiration of their 2-year term. At 
the end of their first year (the standard probationary period for civil 
service employees), the Agency should decide and inform interns which 
of them will be offered permanent positions. Faced with thousands of 
dollars of student loan debt, after their first year, interns will be 
forced to actively seek other employment. We can only stem the tide by 
timely extending permanent positions.
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    At Congressional direction, the Agency is working toward better 
estimation of staffing needs. But employees, supervisors, and managers 
remain unconvinced that accurate estimations will be produced by either 
REAP or TEAM--Resource Estimation and Allocation Process and Total 
Estimation Allocation Mechanism. REAP was intended to provide a 
benchmark for staffing needs, while TEAM is intended to periodically 
update the benchmark. However, despite hours of review, many of us 
cannot understand what REAP has actually measured--does it measure what 
staff should be doing, or what staff are actually doing? The process 
for both REAP and TEAM asked staff to record what they are actually 
doing. It seems obvious that we would have enough staff to do that 
which staff are doing. But the question remains, do we have enough 
staff to do that which we are supposed to do by law, rule or 
regulation? Do we have enough staff to protect the public's interest 
and deliver the mission of the Agency? We remain unconvinced that REAP 
or that TEAM achieve this.
    To this Administration's credit, the Deputy Secretary has 
specifically advised managers to provide staffing projections based 
upon REAP or any other supportable evidence. To our knowledge, REAP is 
being used as a floor, not a ceiling. But we urge Congress to also 
consider REAP as a floor.
    Comparison to the GAO Critical Success Factors Table for this 
cornerstone (GAO-02-373SP at p. 11) indicates that the Agency is at or 
below Level 1--Agency managers and supervisors lack fundamental 
information that can help them determine human capital needs and 
strategies for effective recruitment and retention, much less how human 
capital approaches link to organizational performance objectives.
    Agency managers, supervisors, and employees need a commitment from 
Congress and the Administration to rebuild sources of data concerning 
human capital resources at HUD. Additionally, we need wide spread 
sharing of data, so that managers, supervisors, and union 
representatives can hone in on problems before they become crises.
Acquiring, Developing, and Retaining Talent:
Bureaucracy Persists in HUD's Approach to Human Resource Management
    As employees of HUD, we can commiserate with HUD's clients about 
HUD's proclivity for bureaucracy; we are its daily victims, driving 
down employee morale. Although the 1994 HUD program reorganizations 
included strategies to focus HUD employees on results not processes, on 
finding solutions not red tape, Human Resources has not consistently 
adopted this same strategy. Managers, supervisors, and employees too 
often hear, ``it can't be done that way.'' The ``can't do'' philosophy 
is at striking odds to the ``can do'' philosophy HUD employees endeavor 
to apply to HUD's programmatic work.
    A small example: Some Human Resource offices have advised 
supervisors that they may not authorize the accumulation of credit 
hours for travel.\2\ They cite restrictions on the use of overtime for 
travel, equating credit hours to overtime despite the fact that credit 
hours are specifically excluded from the definition of overtime. [See 5 
U.S.C. Section 6121(6).] Being able to authorize employees to 
accumulate credit hours helps supervisors better accomplish the 
Agency's mission while preserving resources; if a field review takes 6 
hours, and travel will take 4, a supervisor can authorize the employee 
to accomplish the work in one 10-hour day, rather than ordering the 
employee to take 2 days and authorizing the use of scarce travel 
dollars for hotel and per diem. These simple solutions, however, are 
withheld from Agency supervisors and employees.
---------------------------------------------------------------------------
    \2\ ``Credit hours'' are hours ``in excess of an employee's basic 
work requirement and which the employee elected to work so as to vary 
the length of a workweek or workday.'' See 5 U.S.C. Section 6121(4). 
Most employees at HUD work under a flexible work schedule established 
under 5 U.S.C. Section 6121.
---------------------------------------------------------------------------
    Comparison to the GAO Critical Success Factors Table for this 
cornerstone (GAO-02-373SP at p. 12) indicates that the Agency is at or 
below Level 1--the Agency has yet to explore the range of tools and 
flexibilities available under current laws and regulations.
    Agency managers, supervisors, and employees need a commitment from 
this Administration that it will bring to Human Resources the same 
``can do'' spirit other areas of HUD are encouraged to display. Working 
together, we can craft solutions that meet HUD's mission and employees' 
needs.
Results-Oriented Organizational Cultures: The Human Capital Crisis 
        Makes
It Less Likely Employees Will Focus On Results Rather Than Processes
    The GAO has identified ``empowerment and inclusiveness'' as key 
components of a results-oriented organization. The Agency took steps to 
empower and include supervisors and employees in the 1994 
reorganization. Program employees were specifically authorized to 
remove impediments to the accomplishment of organizational goals when 
the employee could determine that an alternative process would meet 
both client and Agency needs.
    Comparison to the GAO Critical Success Factors Table for this 
factor (GAO-02-373SP at p. 13) indicates that in the mid-1990's, the 
Agency hovered between Levels 2 and 3--the Agency was lessening its 
reliance on standardized approaches and was encouraging employees, 
supervisors, and managers to work together toward innovation and 
problem-solving.
    Before a person can run, however, he must first be able to walk. 
Similarly, before employees can innovate and explore alternative 
processes, they must first be adept at the current process, 
understanding the whys and wherefores. When they understand why a rule 
is in place, they can better craft a solution that meets the Agency's 
and client's needs simultaneously.
    HUD's Human Capital crisis threatens this capability. Daily, we are 
losing the employees that know the whys and wherefores. Our programs 
typically include 40-year commitments between HUD and the client. Even 
if programs are eliminated, they are only eliminated as to future 
clients. Our relationship to current clients continues for that 
program. We need staff expertise for a period of time greater than the 
normal career of any one employee. Succession planning must be the 
norm, not the exception for an Agency such as HUD.
    Additionally, the nature of HUD's programs tends to result in an 
ebb and flow of problems; if there is a problem, it is likely to 
manifest itself either at the beginning or at the end of its 40-year 
term. For example, the problems associated with a new development will 
either happen shortly after it begins renting up (for example, problems 
with projected market-share, etc.) or will happen toward the end of its 
involvement (for example, tenants need alternative affordable housing 
options, development has physical problems associated with its age, 
etc.).
    Succession planning at HUD is hard! Making sure that we always have 
the quality and quantity of staff to be results-oriented is hard! It 
takes commitment from both Congress and the Administration.
    HUD clients deserve nothing less.
HUD's Continuing ``High-Risk'' Designation in the Single-Family
And Multifamily Rental Housing Assistance Programs Relate
Directly to HUD's Human Capital Crisis
    In its January 2001 report entitled ``Major Management Challenges 
and Program Risks'' (GAO - 01-248) (hereinafter January 2001 Report),* 
GAO identifies the need for improvement to reduce HUD's Single-Family 
Mortgage Insurance risk and to 
effectively and efficiently use HUD's Multifamily Rental Housing 
Assistance Programs. We believe that HUD's Human Capital crisis has 
directly contributed to these program problems. The lack of human 
capital has prompted HUD to contract out work without regard to cost, 
effectiveness, or efficiency. Continued loss of staff capacity has lead 
to poor contractor oversight. We will consider examples of this in each 
of these programs.
---------------------------------------------------------------------------
    *Held in Committee files.
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Contracting Out Single-Family Mortgage Insurance Work:
Employee Warnings Go Unheeded
    The GAO report briefly describes the downsizing history of Single-
Family Housing; in 1994, the Agency began to consolidate its single-
family function, culminating in the 2020 Management Reform Plan 
establishment of four Homeownership Centers. This consolidation reduced 
the total staff dedicated to single-family programs by about 50 
percent. Some of this reduction was achieved through increased 
efficiencies or program changes. A significant portion was accomplished 
through contracting out. (January 2001 Report at p. 15.)
    The Office of Single Family always had a high level of contracting 
out, and most of this contracting out was appropriate. For example, 
when a bank foreclosed on a property and returned the title to HUD for 
the mortgage insurance proceeds, HUD became the property owner. As 
such, we became responsible for being a good neighbor, keeping the yard 
and house maintained while new owners were found. HUD employees agree 
that this was a positive use of contractor dollars. But even then, GAO 
and the HUD IG reported that HUD lacked staffing resources and travel 
funds to monitor its contractors. (See, for example, GAO/RECD-98-65.) 
Unfortunately, HUD was not always a good neighbor.
    How did HUD respond? Instead of increasing contractor oversight, 
HUD contracted out more functions. Previously, HUD would market the 
properties, seeking always to use this resource to further multiple 
objectives such as promoting safe neighborhoods and the affordable 
housing for working Americans (for example, the Officer Next Door 
Program), while working to maximize return on the sale of the 
properties.
    In 1999, HUD contracted out this marketing function. The result? In 
January 2001, GAO reported a projected cost of $997 million over 5 
years (at p. 14). Six months later, GAO reported that fiscal year 2000 
year cost alone was $390 million, for a projected 5-year cost of $1.9 
billion or twice as much as the original 5-year projection. (See GAO - 
01-590 at p. 3.) In exchange for the high expenditures, HUD has seen a 
mere net increase of \1/2\ percent in the recovery of sales (January 
2001 Report at p. 18). We have also seen an increase in the number of 
for-profit investor owners. Prior to 1999, we understand that HUD sales 
to owner-occupants averaged 65 percent. Since 1999, it has generally 
decreased and is now as low as 34 percent in Cincinnati. This is not a 
result of poor contractor oversight. This is the result of contracting 
out. The contractor does not have the same incentive to pursue policy 
objectives as HUD employees have. Monetary incentives cannot replace 
commitment to the mission.
    Despite contracting out and downsizing, HUD employees have been 
vigilant in protecting, or seeking to protect, the mission of the 
Agency. HUD employees advised the HUD IG of the ``flipping'' scandal 
reported by GAO in its report at page 20. HUD employees continue to 
report issues to the HUD IG about duplicate payments to contractors, 
vandalism of HUD properties, and interference with their ability to 
report fraud, waste, and abuse directly to the IG. Employees recognize 
that a change of administration results in delays in responding to the 
issues identified by employees. But it has now been 18 months, and 
employees want to know when their voices will be heard. Single-family 
employees are experiencing serious morale problems because of the loss 
of program integrity and job satisfaction.
Contracting Out Multifamily Rental Housing Assistance Oversight:
No Benefit for Tenants or Taxpayers, Only State and Private 
        Bureaucracies
    The January 2001 GAO report states that ``to ease staffing 
shortages caused by staff reductions,'' HUD contracted for third-
parties to administer project-based Section 8 housing assistance 
payments contracts (at p. 36). GAO indicates that the estimated cost 
was $200 million annually. This contract was awarded solely because of 
staffing shortages and without regard to cost. In fact, before even one 
contract was signed, HUD's IG reported that the Agency's cost 
projections were faulty and the contracts ``could adversely affect the 
integrity of the Section 8 program.'' (See HUD IG 99-PH-163-0002, at p. 
17.)
    HUD has awarded 41 of 52 available contracts. With incentives, 
these contracts cost $220 million annually--$20 million more than 
originally estimated. If the remaining contracts are awarded, the cost 
will increase by $61 million, or 40 percent more than originally 
estimated.
    But whether the cost is $200 million or $281 million, it is far in 
excess of the cost of hiring staff to meet the staffing shortages 
fueling these contract awards. According to inflated staffing figures 
rejected by HUD's Inspector General, HUD would need 1,400 staff to do 
this work (IG Report at p. 16). HUD's Office of Budget reports an 
average cost per HUD employee in 2002 is $88,000. This would put the 
maximum cost at $123 million, or less than half the cost of these 
contracts.
    Finally, the real tragedy of these contracts is borne by Section 8 
tenants and families waiting for Section 8 subsidies. The cost of these 
contracts comes from the Section 8 budget. This $158 million would fund 
an additional 31,200 Incremental Vouchers in the fiscal year 2003 
budget. And in exchange for a loss of Section 8 funds, current Section 
8 tenants are left to work with multiple bureaucracies, including HUD, 
the contractor, and in some instances, a subcontractor.
    The January 2001 GAO report focuses on the challenge HUD faces in 
closing the gap between the number of households eligible to receive 
housing assistance and the availability of assistance (at p. 27). 
Congress needs to step to the plate and provide HUD with the means to 
close the gap; Congress needs to provide HUD with the funding to hire 
the staff necessary to forego the Section 8 Contract Administration 
contracts.
    There will be mounting pressure for Congress to allow this wasteful 
spending to continue. Contractors in their States are making ludicrous 
amounts of money under these contracts. For example, MassHousing 
(formerly the Massachusetts Housing Finance Authority) makes $13 
million annually to replace the work done by 20 staff in HUD's Boston 
Office. Rather than bowing to the pressure of contractors, Congress 
should consider the 2,220 families in Massachusetts that could be 
receiving rental assistance in 2003, and the 31,200 nationwide.
Conclusion
    Frequently with Congress' support, HUD has maintained a history of 
ineffective human capital management. Consequently, the crisis that 
faces all American employers with the impending retirement of the Baby 
Boom generation is exacerbated at HUD. And because HUD's programs are 
implemented and operated over a 30- to 50-year period, HUD needs time 
for departing staff to mentor new staff. We cannot replace journey-
level experienced staff with entry-level staff. It takes years to learn 
the programs sufficiently that employees can take educated risks to 
meet 
client needs while meeting HUD's program objectives. This level of 
expertise cannot be replaced by contractors. Even if it could be 
replaced by contractors, it defies explanation to replace it at costs 
far in excess of hiring staff.
    Finally, to compete against the rest of the marketplace hungering 
for workers to replace Baby Boomers, HUD must think and act 
innovatively and flexibly by offering programs such as loan 
forgiveness, child care subsidies, and telecommuting; HUD must empower 
its employees by providing them with information, training, and 
involvement in the decisionmaking process. HUD must show that it is a 
responsive employers. And Congress must support HUD in these endeavors.
         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

                   FROM STANLEY J. CZERWINSKI

Multifamily Housing

Q.1. There have been some recent changes to the Public Housing 
Assessment System (PHAS). Can you explain why HUD has chosen to 
adjust the standards for public housing so that they are lower 
than those for assisted housing?

A.1. In 1997, as part of its 2020 Management Reform Plan, HUD 
instituted a new approach for evaluating public housing 
authorities' overall performance and for helping them improve 
their performance. HUD began collecting data for all four PHAS 
indicators in 1998, and for fiscal year 1999, it computed, for 
each housing 
authority, as core for each indicator, as well as a total PHAS 
score. HUD used these scores to test the system but not to 
classify housing authorities' performance. HUD planned to 
implement PHAS fully; however, the Congress directed HUD to 
conduct further testing and to obtain an independent evaluation 
of PHAS.
    HUD is currently revising PHAS, attempting to make it more 
responsive to the concerns of residents and the public housing 
industry, before implementing it fully. The current system is 
considered an interim system, effective for public housing 
authorities with fiscal years ending between September 30, 2001 
and September 30, 2002. As a result of these discussions with 
stakeholders regarding their concerns and possible solutions, 
and after further consideration by the Department, HUD made two 
interim scoring changes. First, under the Physical Condition 
Indicator all five areas--site, building exterior, building 
systems, common areas, and dwelling units--will be inspected, 
and the information will be captured in the system. But for 
assessment purposes, the Physical Condition score will be 
derived only from the deficiencies observed in the building 
systems and dwelling units. These two indicators were selected 
because they have the greatest impact on residents' living 
conditions. Second, HUD made some minor changes to the 
Financial Condition Indicator. During the interim period HUD 
expects to give extensive consideration to potential 
improvements to PHAS, which should result in further changes.

Q.2. You have looked at the Public Housing Assessment System 
and concluded that it is generally a good system. In GAO's 
view, should HUD implement this system?

A.2. We believe that having a system for objectively assessing 
the physical and financial condition of public and assisted 
properties is an essential step for HUD to adequately address 
its high-risk program areas. The interim PHAS assessment system 
should provide a broader and more reliable basis for evaluating 
housing authorities' performance than did the prior Public 
Housing Management Assessment Program (PHMAP). As a result, 
full implementation should increase the potential for PHAS to 
identify the authorities' problems. In addition, we believe 
that HUD should continue to evaluate PHAS and make improvements 
to arrive at a final public housing assessment system that all 
parties agree will identify and provide for the correction of 
long-standing problems at public housing authorities.

Q.3.a. The Department's workforce study shows that the OMHAR 
needs 91 full-time workers to do its work, yet it only has 80 
employees currently. There seemed to be some confusion at the 
hearing about OMHAR's staffing levels and HUD's REAP study 
results. What was the number of staff recommended by the REAP 
study for the OMHAR?

A.3.a. The Resource Allocation Estimation Process study, issued 
in July 2001, assessed the staffing needs for all departments 
in HUD. The study recommended that OMHAR have a staffing level 
of 91 full-time equivalent personnel to carry out its 
operations.

Q.3.b. How many positions are currently filled?

A.3.b. For fiscal year 2002, HUD authorized OMHAR a staffing 
level of 85 full-time equivalent personnel. As of July 2002, 
OMHAR had 82 full-time staff.

Q.3.c. What is the appropriate number of deals that should be 
restructured per year?

A.3.c. The number of deals that will be restructured in coming 
years will be based largely on the number of expiring Section 8 
contracts with above market rents. OMHAR estimates that the 
number of Section 8 contracts expiring with above-market rents 
will be 570 in fiscal year 2003, 211 in fiscal year 2004, and 
85 in fiscal year 2005. However, the number of completed 
restructurings in a year may not equal the number of expiring 
above market Section 8 contracts in a given year because of the 
length of time it takes to process the restructurings, owners 
that opt-out of the program, or other factors.
    From July 2001 through June 2002, OMHAR completed 413 
restructurings, or an average of 34 completed restructurings 
per month. OMHAR did experience a decline, however, in 
completed restructurings during the past year because, 
according to HUD, some restructurings were delayed until 
guidance was issued on new Mark-to-Market legislation. HUD 
estimates that the number of completed restructurings will 
increase now that guidance on the new legislation has been 
issued and the delayed restructurings can be processed.

Human Capital

Q.4. Was there a contract proposal for HUD to go beyond the 
REAP study to identify the number of people actually needed for 
future mission needs? What happened to that proposal?

A.4. HUD awarded a contract to develop a strategic workforce 
plan that proposed to analyze future workforce requirements, 
the skills and competencies of the HUD workforce, and the skill 
gaps and changes in skills needed in the workforce. In May 
2001, the HUD Secretary issued a memorandum terminating the 
contract for this strategic workforce planning and integrating 
the planning activities with the ongoing REAP studies. A HUD 
official told us that the contract was terminated due to budget 
constraints and that the work would be done in-house as 
resources became available. As we recommended in our July 2002 
report on HUD's Human Capital Challenges (GAO-02-839), we 
believe that it is essential that HUD move forward in assessing 
future workforce requirements, the skills and the competencies 
of its workforce, and the skill gaps and changes in skills 
needed in the workforce.

Financial Management

Q.5. We understand that GAO is currently undertaking a review 
of improper payments at HUD. Can you briefly discuss the 
implications of improper payments and the general types of 
circumstances that result in such payments?

A.5. Improper payments include errors, such as duplicate 
payments and calculation errors; payments for unsupported or 
inadequately supported claims; payments for services not 
rendered or to ineligible beneficiaries; and payments resulting 
from fraud and abuse. Such payments are often the result of 
poor or inadequate internal control.
    As you know, internal controls serve as the first line of 
defense in safeguarding assets and in preventing and detecting 
fraud, abuse, and errors. Heads of agencies are required to 
establish a system of internal control consistent with our 
Standards for Internal Control in the Federal Government.\1\ 
During our analysis of various Federal entities' payment 
processes, we identified common internal control weaknesses 
that sharply increase the Government's vulnerability to 
improper payments, including weaknesses in the review and the 
approval processes, lack of procurement training, and 
ineffective monitoring of operations, such as contractor 
performance.
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    \1\ Standards for Internal Control in the Federal Government (GAO/
AIMD-00-21.3.1), was prepared to fulfill our statutory requirement 
under the Federal Managers' Financial Integrity Act of issue standards 
that provide the overall framework for establishing and maintaining 
internal control and for identifying and addressing major performance 
and management challenges and areas at greatest risk of fraud, waste, 
abuse, and mismanagement.
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    As stated in our Standards for Internal Control in the 
Federal Government, transactions and other significant events 
should be authorized and executed only by persons acting within 
the scope of their authority. However, although the review of 
transactions by persons in authority is the principal means of 
assuring that transactions are valid, we found that certain 
review and approval processes were inadequate in all agencies 
reviewed.
    Effective management of an organization's workforce--its 
human capital--is also essential to achieving results and is an 
important part of internal control. Training is key to ensuring 
that the workforce has the skills necessary to achieve 
organizational goals. However, we found that a lack of or 
inadequate training contributed to the weak control environment 
at several agencies.
    Monitoring to assess the quality of performance in the 
course of normal operations is another essential component of 
an organization's internal control structure. Program and 
operational managers, including contact managers, should 
monitor the effectiveness of control activities as part of 
their regular duties. We found ineffective monitoring systems 
at several of the agencies we reviewed.
    Given the billions of dollars in payments made by the 
Federal Government each year to recipients nationwide and 
abroad, deficiencies in controls raise the risk that erroneous 
or fraudulent payments could make their way through agencies' 
processes without being prevented or detected.

Acquisition Management

Q.6. What mechanisms does HUD have in place to allow it to 
evaluate contractor performance?

A.6. HUD has two basic mechanisms to evaluate contractor 
performance; the first is the ongoing oversight of the contract 
and the second occurs when the contract is closed-out.
    First, HUD staff serving as Government Technical 
Representatives (GTR's) and Government Technical Monitors 
(GTM's) play a crucial role in evaluating the performance of 
contractors on an ongoing basis throughout the life of a 
contract. The GTR is often the Department's primary point of 
contact with a contractor and is the principal judge of 
contractor performance, including the quality and timeliness of 
work and products. GTM's assist, on a part-time basis, the 
GTR's on the day-to-day technical oversight of the contractors' 
performance.
    The second mechanism that HUD has in place to evaluate 
contractor performance occurs when the work under the contract 
is completed and it is administratively closed. When a contract 
is closed-out, HUD's GTR's complete a ``Contractor 
Performance'' form that scores the contractor on categories 
such as quality of performance, cost control, and timeliness. 
The scores for these categories are then averaged to obtain a 
performance score. HUD retains a copy of the form in the 
official contract file. Additionally, HUD's centralized 
contracting system was modified to track contractor 
performance; beginning January 2000, the Deputy Secretary 
required that HUD would begin entering contractor performance 
data in the system for all new contracts over $1 million.
    Our past and ongoing work on HUD's contracting practices 
suggests HUD's mechanisms for evaluating contractor performance 
may not be sufficient to ensure that contractors are held 
accountable for results. For example, few of the staff 
overseeing HUD's multifamily housing program property 
management contracts use monitoring plans or employ risk-based 
strategies to determine the necessary level and frequency of 
monitoring and that the amount of on-site monitoring is 
limited. Absent a systematic approach to monitoring and with a 
limited amount of on-site monitoring occurring, HUD's ability 
to effectively monitor contractors' performance and identify 
and correct problems is impaired. In addition, although HUD's 
centralized contracting system has the capability to track 
contractor performance, by and large it is not being 
effectively utilized for this purpose.

Q.7. It sounds like GAO is planning to highlight acquisitions 
management as a new management challenge. Why do you believe 
this is so significant?

A.7. Acquisition management is a significant issue at HUD 
because as the Department has downsized its own staff over the 
past few years, its reliance on contractors has increased 
substantially. This reliance, as measured by contracting 
obligations, grew by more than 62 percent from fiscal year 1997 
to fiscal year 2000; and HUD's officials have estimated that 
the total number of contractor staff assisting in delivering 
HUD's services may nearly equal its own. As a result, effective 
management of acquisitions is crucial to HUD's success in 
meeting its mission and addressing its high-risk Single-Family 
Mortgage Insurance and Multifamily Rental Housing Assistance 
Programs areas. Ineffective oversight of contractors adversely 
effects HUD's ability to carry out its mission and to deliver 
key services and exposes HUD's programs to the additional risk 
of fraud, waste, abuse, and mismanagement.

Reorganization

Q.8. Do you have any concerns that putting the oversight 
function under the control of the program function may 
compromise the independence of REAC?

A.8. REAC is responsible for centralizing an standardizing the 
way HUD evaluates the condition of the housing portfolio. One 
of REAC's key responsibilities is to monitor and assess the 
physical condition of properties and Public Housing Authorities 
in which HUD has a financial interest. To do this, HUD 
established a specific standard for conducting physical 
inspections: The Uniform Physical Condition Standards (UPCS). 
Independent HUD contractors perform the physical inspections. 
According to PIH and REAC officials, neither the inspections 
protocol nor the use of contractors will be changed under the 
realignment.
    As I stated in my testimony, the creation of REAC was 
clearly a positive development that has yielded real results. 
And, it is worth noting that at the time HUD established these 
centers, it did so because it believed that the Office of 
Public and Indian Housing and the Office of Housing--the 
offices within HUD that were originally responsible for these 
activities--were not effectively carrying out these functions. 
The Secretary, as the leader of his organization, has the 
prerogative to align the organization as he sees fit, 
consistent with his vision and management style. But it is 
important that the progress made to date not be jeopardized. 
For example, regardless of how REAC is aligned, HUD much 
continue to make progress improving the physical condition of 
the public and assisted multifamily housing properties. 
Ultimately the success or the failure of any organization 
decision will be viewed in that light.

Q.9. How many assets overseen by REAC are FHA assets? How many 
are public housing?

A.9. REAC assesses the physical condition of about 30,000 
multifamily housing properties that are subsidized and/or 
insured by HUD. REAC also assesses the financial condition for 
over 20,000 of these properties. In addition, REAC is 
responsible for assessing the performance of about 3,300 public 
housing authorities (PHA's). As part of the PHA's assessment, 
REAC conducts an independent physical inspection of each 
authority's properties. In total, there are about 14,000 public 
housing properties.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

                     FROM CAROLYN FEDEROFF

Human Capital

Q.1. Could you discuss the union's position on the REAP study?

A.1. We believe the methodology of REAP results in an 
underestimation of Agency staffing needs.
    The REAP study does not accurately reflect the work that 
should be done in accordance with HUD's Handbooks, regulations, 
and policies. The methodology used by the REAP consultants 
leads us to believe that they studied what people actually do, 
not what they should be doing. Therefore, if a Handbook states 
that a field review will be done every 3 years, but due to 
staffing constraints the office only conducts reviews every 5 
years, the REAP study would report staff needs based upon the 
practice of conducting field reviews every 5 years.
    The value of the REAP study remains in establishing at 
least this as a benchmark--a uniform standard of staffing for 
every office. This benchmark can help identify the inequity in 
staffing between offices. However, it is our opinion that REAP 
does not fully address the issue of staffing needs.

Q.2. Does it provide adequate information for the hiring of new 
staff ?

A.2. REAP provides useful information for hiring new staff, but 
it is not complete information.
    As set forth above, REAP can provide useful information to 
determine staffing inequities between offices. The Agency can 
use REAP to determine which offices are understaffed relative 
to each other. However, because REAP only captures what people 
actually do and not what they should be doing, REAP does not 
fully capture staffing needs. We believe REAP underestimates 
staff needs.

Q.3. What has the current Administration's response been to 
filling the 300 FTE positions still open?

A.3. In the past month, the Agency has announced a ``hiring 9/
30'' initiative. It is our understanding that this is an effort 
to fill remaining vacancies. The union is aware that the Agency 
is canceling flextime options and is introducing mandatory 
overtime for its Human Resources staff through September in 
order to complete the initiative.
    Earlier this year, the Agency embarked on an aggressive 
hiring program for interns. As stated in my earlier testimony, 
the union is concerned that these employees have been brought 
into temporary positions, as opposed to permanent positions. 
Regardless of whether an employee is brought in as temporary or 
permanent staff, all employees serve a probationary period. 
However, employees brought in as permanent focus only on their 
performance during the first year. Employees brought in as 
temporary, including interns, are forced to also focus on 
securing employment after their term ends. This creates an 
incentive to leave Government service.
    Our goal should be to foster career incentives. In an 
Agency where programs are designed to last decades, our hiring 
and retention strategies should similarly be designed to last 
decades.

Q.4a. Your testimony talks about HUD's inability to provide 
union officials with simple data about the HUD staff, such as 
retention data for past intern programs or a listing of the 
employees being hired into or leaving bargaining units. Why is 
this data important?

A.4a. There are different reasons for seeking this data. First, 
and most basic, our union has a statutory obligation to 
represent bargaining unit employees; we need to know who is in 
and out of the bargaining unit to meet this responsibility.
    Second, deductive reasoning is a generally accepted means 
of decisionmaking. Just as the oversight committee holds 
hearings to collect facts before making decisions, the Agency 
should collect human resource facts before making decisions. My 
statements above concerning the potential problems of an 
internship program are based upon an understanding of human 
nature. They are not, however, supported by any independent 
data. The Agency has participated in internship programs 
before; we believe that it would be better to assess the 
results of previous intern hiring programs to determine: (1) if 
the Agency should rely so heavily on the program this time, and 
(2) how the program can be structured to be more successful.
    But the Agency lacks the basic data to engage in deductive 
reasoning on Human Resources issues. Other areas where data 
would be useful include: Determining which locations or program 
areas have high turnover, and assessing the causes and cures; 
reviewing supervisory to staff ratios; comparing staff 
resources between offices; and more.

Q.4b. Why is this type of data not available?

A.4b. We cannot say for certainty that it is not available, or 
that it is not used. All we can say with certainty is that 
information that was generally available to field management 
and union representatives 10 years ago is no longer made 
available. When we request the kinds of information we 
routinely received 10 years ago, we do not receive it. For 
example, on April 3, 2002, we requested quarterly reports 
showing all additions to and deletions from the bargaining 
unit. More than 5 months later, we have yet to receive the 
information. Field management no longer has access to regional 
staffing reports.

Q.4c. What would HUD need to do to obtain this data?

A.4c. We suspect that as HUD has contracted out its Human 
Resources data systems, it has failed to include in the work 
specifications requirements for report and data generation. HUD 
should review these contracts and rewrite the work 
specifications to include this basic data generation (for 
example, changes to the bargaining unit and staffing reports), 
and to include the ability to search the system for more 
sophisticated data information on an as needed basis (for 
example, success of past intern programs).

Acquisition Management /Contracting

Q.5. How does contracting out HUD's functions affect employee 
morale?

A.5. Terribly. Poor performance and /or the high cost by 
contractors affect employee morale on three levels:

 As employees: It says to employees that even bad 
    contractors are better than Federal employees. It 
    identifies us as the enemy of good Government.

 As housing professionals: Poor performing contractors 
    betray our commitment to the mission of the Agency--decent, 
    safe, and sanitary housing, strong neighborhoods and 
    communities, and equal access to housing.

 As taxpayers: High-cost contractors waste our tax 
    dollars. We pay taxes, too, and knowing the profound waste 
    of taxpayers' dollars is galling.

    Over time, employees respond in one of two ways: They 
either leave because they care too much, or they stay and, to 
survive, decide they must care less. HUD creates minimalists--
employees who do the minimum to survive.
    We do not want to be minimalists. We want to be valued, and 
we want our programs to be vital and valuable. Bad contracting 
adversely affects employee morale.

Q.6. What are the downsides to contracting functions out? What 
are the benefits?

A.6. The answer to this question could involve a dissertation--
the downsides range from the obvious to the subtle. But in an 
effort to keep it simple, we will set forth a few of the 
downsides, with suggestions of where contracting is beneficial:

 The adverse impact on employee morale is described 
    above.

 Contracting out entire functions leaves the Agency 
    susceptible to crises in the event of contractor failure. 
    Crisis was narrowly averted when a Single-Family M&M 
    contractor failed early in the program only because the 
    Agency still had knowledgeable staff available to pick up 
    the pieces. With each passing year, there are fewer and 
    fewer trained employees to step in where Single-Family M&M 
    contractors fail. We recommend that no more than 60 percent 
    of a function be contracted out, so that the Agency 
    maintains a pool of trained employees.

 HUD programs are designed to last decades, but 
    contracts are for 3 to 5 years. Turnover in contractors is 
    as detrimental to HUD programs as a high turnover of HUD 
    staff. Institutional knowledge is valuable when working 
    with long-term programs. Contractors should be reserved for 
    instances when the Agency has a short-term quantifiable 
    project. For example, it is reasonable to use contractors 
    to build a database--to review HUD files, extracting 
    information for keying into a database system.

 Contractors experience a learning curve, just as HUD 
    employees do. It takes approximately 3 to 5 years for a new 
    HUD employee to move to the journey-level of their 
    position. It is reasonable to assume that it would take 
    contractor staff a similar amount of time. In the Section 8 
    Contract Administration contracts, HUD staff have been 
    providing training and guidance to contractor employees--
    but rather than paying HUD for the training, HUD pays the 
    contractors as though the contractors were fully performing 
    their duties! Employees report that in some instances, work 
    has been returned by the contractor for completion by HUD, 
    and HUD paid the contractor as though the work had been 
    performed. Contracts must be written so that any guidance, 
    even that provided as part of the oversight process, come 
    at a cost. (This may seem harsh, but if a HUD employee 
    performing a monitoring review of a contractor finds that 
    the contractor needs guidance on the proper method of doing 
    something, then it stands to reason that the contractor has 
    failed to do it properly. Therefore, the contractor should 
    forfeit some remuneration for either failing to do the work 
    correctly in the first place or for receiving instruction 
    from a HUD employee on how to do it right the next time. 
    This is doubly true if the work was returned to HUD for 
    completion by HUD.)

 HUD should not contract out functions involving the 
    oversight of clients to whom HUD has delegated independent 
    or significant autonomous authority. For example, in 
    Multifamily Housing, the Agency increasingly relies on the 
    MAP process. In this process, the mortgagee conducts the 
    appraisal, mortgage credit, and other technical reviews. 
    Currently, HUD's technical staff review and approve this 
    work in determining the maximum insurable mortgage. The 
    Agency has listed the HUD technical staff as staff whose 
    work can be contracted out. Contracting out this work would 
    result in no actual HUD oversight of the technical data 
    underlying the determination of maximum insurable mortgage. 
    (We would be very happy to discuss at greater length the 
    MAP process and the potential parallels to the former ``Co-
    Insurance'' program.) A similar situation is possible in 
    the single-family 
    direct endorsement process, where HUD is contracting out 
    the quality assurance review of mortgagees approved for 
    direct endorsement of FHA single-family insurance. In 
    essence, this results in a contractor overseeing a 
    contractor.

 Contracting can result in a release of business 
    sensitive data to industry competitors. For example, for 
    several years the Agency used ``delegated processing'' for 
    the review of documents related to mortgage insurance 
    processing. The usual contractors were 
    almost always HUD clients--so that on some deals they were 
    seeking mortgage insurance and in other deals they were 
    reviewing the mortgage insurance deals of their 
    competitors. If any of them submitted a request for 
    information under the Freedom of Information Act for the 
    details of their competitors' proposed deals, we would deny 
    the request under the business sensitivity exception; 
    however, as HUD contractors, they had full access to their 
    competitors' information. The Agency should not engage in 
    contracting that includes this potential.

 By law, the contractors cannot make policy judgments, 
    because policy judgments are inherently governmental. Yet 
    in some instances, being responsive to client needs 
    requires judgment about policy objectives. This is one of 
    employees' chief complaints about the administration of the 
    Single-Family M&M contracts. Single-family homes in HUD's 
    portfolio are a potential affordable housing asset that 
    could be used to further the mission of the Agency. But 
    this involves policy judgments that contractors cannot 
    engage in. It is noteworthy that the percentage of owner-
    occupied sales of HUD homes has decreased dramatically 
    since the M&M contracts.

 It is reasonable to contract out the care and the 
    maintenance of single and multifamily homes coming into 
    HUD's portfolio. HUD does not employ groundskeepers, 
    plumbers, and other persons 
    capable of providing this service.

Q.7. What is the best way to determine which jobs should be 
contracted out and which should be performed in-house?

A.7. The best way to determine which jobs should be contracted 
out and which should be performed in-house are:

 The contract must be cost-effective. The cost-
    effectiveness must include the cost of monitoring 
    contractors, as well as providing training and guidance to 
    contractors by HUD staff.

 Core functions--functions directly related to the 
    delivery of HUD programs--should not be contracted out more 
    than 60 percent, to ensure sufficient trained HUD staff 
    remain in the event of contractor failure.

 Jobs involving the oversight or monitoring of the 
    implementation of HUD programs, expenditure of HUD funds, 
    or processing and approval of FHA mortgage insurance should 
    not be contracted out. These are instances where HUD is 
    already relying on an intermediary between HUD and the 
    delivery of service to the intended beneficiary of the HUD 
    program. It is not reasonable to insert yet another 
    intermediary in the form of a contractor.

 Contracts that result in the release of business 
    sensitive data should be avoided, in order to preserve 
    competition in the mortgage insurance industry.

    We strongly believe, however, that if HUD conducted real 
cost-benefit analyses, most of the work currently contracted 
would be brought back in-house. HUD's contracting out is not 
cost-effective.

Q.8. Your testimony described the problem of improper payments 
to contractors. Please elaborate on this issue.

A.8. These problems have arisen in the Single-Family Home 
Ownership Centers. The best source for information on these and 
other problems in the HOC is AFGE Local 2032, President Irene 
Facha. You can reach Ms. Facha in Philadelphia at 215/656-0637 
x0139.