[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]




 
                     SAVING TAXPAYER MONEY THROUGH
                       SOUND FINANCIAL MANAGEMENT

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 25, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-44




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                            WASHINGTON : 2003
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          CHARLES A. GONZALEZ, Texas
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California                 HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin                KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania      JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona             STEVE ISRAEL, New York
VITO FOSSELLA, New York              MIKE ROSS, Arkansas
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania        JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           ARTUR DAVIS, Alabama
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director

              Subcommittee on Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman       LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
MARK GREEN, Wisconsin                DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona             JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas                CHARLES A. GONZALEZ, Texas
SCOTT GARRETT, New Jersey            JIM MATHESON, Utah
TIM MURPHY, Pennsylvania             STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 25, 2003................................................     1
Appendix:
    June 25, 2003................................................    17

                               WITNESSES
                        Wednesday, June 25, 2003

Antonelli, Hon. Angela M., Chief Financial Officer, Department of 
  Housing and Urban Development..................................     4
Dorr, Hon. Thomas C., Under Secretary for Rural Development, 
  Department of Agriculture, accompanied by Mr. David Grahn, 
  Associate General Counsel for Rural Development................     7

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue W............................................    18
    Antonelli, Hon. Angela M.....................................    19
    Dorr, Hon. Thomas C..........................................    24

              Additional Material Submitted for the Record

Antonelli, Hon. Angela:
    Written response to questions from Hon. Sue W. Kelly.........    27
Dorr, Hon. Thomas C.:
    Written response to questions from Hon. Sue W. Kelly.........    31
Department of Housing and Urban Development, Inspector General 
  Kenneth M. Donohue, prepared statement.........................    34


                     SAVING TAXPAYER MONEY THROUGH
                       SOUND FINANCIAL MANAGEMENT

                              ----------                              


                        Wednesday, June 25, 2003

             U.S. House of Representatives,
       Subcommittee on Oversight and Investigation,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 2:13 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Sue Kelly 
[chairman of the subcommittee] presiding.
    Present: Representatives Kelly, Green, Inslee, Crowley and 
Matheson.
    Chairwoman Kelly. [Presiding.] This hearing on the 
Subcommittee on Oversight and Investigations will come to 
order.
    Without objections, all members' opening statements are 
going to be made part of the record.
    Far too often, we in Washington see much reckless and 
wasteful spending without regard for American taxpayers. I 
believe we have to carefully examine every penny the federal 
government spends to ensure that hardworking American families 
are getting the most for their tax dollars.
    The budget resolution passed by the House for the next 
fiscal year includes a pledge to search for and eliminate 
waste, fraud or misuse in federal spending. This pledge 
represents a commitment to all Americans that this Congress 
will not take their hard-earned dollars for granted. The 
subcommittee is meeting today to discuss how to fulfill this 
promise immediately.
    With the committee's encouragement, senior managers at the 
Department of Housing and Urban Development and the Rural 
Housing Service, an agency within the Agriculture Department, 
are scouring decade-old accounts and contracts under their 
control. I would like to commend both of these agencies for 
working diligently with this subcommittee to identify funds 
that are available to reduce spending needs in future years.
    After careful investigation, I am pleased to be able to 
announce that we have discovered, they have discovered for us, 
over $1 billion that were appropriated and obligated for a 
specific grant or subsidy, but for a variety of reasons the 
money was never spent and the money is no longer needed for its 
original purpose. To date, we have officially found a total of 
$1.7 billion in unspent funds at HUD that can be used to reduce 
future spending. We have also located an additional $737 
million in unspent funds at the Rural Housing Service, which 
the Agriculture Department is still investigating. To assist in 
these efforts to protect taxpayers, I would like to announce 
our request for a GAO study to determine how much of these 
funds can be recaptured.
    Today, we have with us senior officials from both agencies 
to discuss their findings and what they hope to do with the 
funds they have found. We have asked for and received a 
statement from the Inspector General of HUD, Kenneth Donohue, 
on his office's initiatives to halt waste, fraud and abuse. 
These include work to recover improper payments for housing 
assistance and a new initiative to detect and prosecute fraud 
in the Section 8 program in collaboration with HUD management.
    The subcommittee applauds these steps. By eliminating waste 
in important housing programs, Secretary Martinez and Inspector 
General Donohue are ensuring that vital program funds are spent 
to help the beneficiaries as Congress intended. I ask the 
subcommittee's unanimous consent to insert this statement into 
the record.
    I really thank the witnesses for appearing before the 
subcommittee today. I look forward to your testimony.
    I will turn now to my fellow New Yorker.
    Mr. Crowley. I thank the chairwoman. And I would like to 
read an opening statement.
    I would like to thank her for holding this hearing today in 
the Oversight and Investigations Subcommittee regarding the 
Republican directive inserted into the budget resolution for 
each committee to identify and weed waste, fraud and abuse out 
of mandatory spending. Let me begin by stating that I opposed 
the Republican budget resolution as it was, and as I believe it 
to be a sham document that cuts vital spending programs, 
including mandatory veterans benefits and discretionary housing 
accounts.
    But today we are not here to discuss the overall budget, 
again a budget that will produce well over $1 trillion in new 
deficits over the next several years, further eroding our 
nation's economy, an erosion which began in the winter of 2002 
after 8 straight years of growth and prosperity. We are here to 
discuss a specific section of that document, Section 301 of 
Title III which pertains to the weeding out of waste, fraud and 
abuse. This is one thing that should be bipartisan, with 
Democrats and Republicans working together. We are all 
taxpayers here and no one likes to see any of our taxpayer 
dollars wasted.
    But the gist of this hearing is off, in my opinion, as 
Section 301 pertains to mandatory spending programs only, not 
discretionary programs as the chairwoman is highlighting in the 
hearing today. In fact, both Section 8 and the rural housing 
programs are discretionary programs, not mandatory programs. So 
when my colleagues talk of eliminating waste, fraud and abuse 
in mandatory programs, what are they actually referring to? I 
believe they are referring to federal employee benefits, 
something I will be interested in getting the take of our two 
witnesses here today as they are both federal employees. The 
Republican Caucus I believe is referring to Medicare, 
veterans's benefits and Social Security. These are mandatory 
programs.
    In fact, with respect to the housing programs Chairwoman 
Kelly wants to have a discussion on today, I will quote budget 
chief Jim Nussle who stated that the Budget Committee, ``wants 
to put the same discipline that the appropriators put into 
their disciplinary spending process into the mandatory side,'' 
meaning we should be looking at only mandatory spending, not 
the discretionary programs that we will be discussing here 
today. In fact, Mr. DeLay says that these mandatory cuts will 
save the government over $10 billion a year, but again, what 
are the mandatory cuts? Veterans, Medicare, Social Security, 
they are not the HUD programs in question today as they are 
discretionary, as opposed to mandatory in nature.
    While I welcome the opportunity for the other side to 
finally come clean in their ultimate goal which I believe is to 
gut key social service programs like veterans's benefits, we 
must be 100 percent honest in this debate. Let us remember that 
the head of the Disabled American Veterans himself wrote to 
Speaker Hastert and called the Republican budget shameless as 
it cut disabled veterans's services and benefits. Let us also 
not forget the Administration recently moved to cut benefits 
for 164,000 veterans citing the same waste, fraud and abuse 
claims being made here today.
    These are the mandatory spending programs threatened by Mr. 
DeLay on the other side of the aisle, and this pursuit of 
destroying veterans's benefits or Medicare will not be a 
bipartisan issue.
    Moving on to the claims of waste, fraud and abuse at HUD, 
the other side cites the unobligated balances in the Section 8, 
236, and 521 programs. But these are not caused by waste, fraud 
and abuse on the part of local housing authorities, low-income 
tenants or assisted housing landlords. Such balances only come 
about through contracts entered into where all of the obligated 
funds are not needed once the long-term contract expires or is 
canceled due to prepayment. The funds are not wasted. 
Eventually, they are routinely rescinded, recaptured or 
reallocated, meaning the government takes them back and uses 
them again, either for housing or for some other purpose. In 
fact, unobligated funds are routinely used as a piggy bank so 
to speak to fund non-housing programs in supplemental spending 
bills.
    According to preliminary data provided by CBO, the Congress 
rescinded $6.8 billion in Section 8 budget authority in 
supplemental spending bills from fiscal year 1997 through 
fiscal year 2002, the overwhelming majority of which were used 
to fund non-housing expenditures, meaning the money was spent, 
not wasted as they would have many believe here today.
    More recently, Congress rescinded $300 million in Section 
236 balances in the fiscal year 2002 supplemental spending 
bill, and $100 million in fiscal year 2003 appropriations 
bills. These funds were previously earmarked by authorizing 
statute for rehabilitation of low-income housing units. Again, 
the funds went elsewhere and did not disappear into thin air. 
In fact, the rescission of unobligated Section 8 balances would 
leave a gaping hole in the HUD budget, which would require as 
much as $1 billion in additional cuts to housing program on top 
of the cuts recommended by the president's budget. This is as 
the Administration proposed to use 100 percent of the estimated 
$1 billion in unobligated Section 8 balances in fiscal year 
2004 to help cover the cost of Section 8 renewals, again seeing 
the money go back into other programs and again not wasted.
    The only real issue of accountability is whether HUD and 
RHS are properly accounting for and reporting to Congress the 
accurate level of balances in these accounts. This waste, fraud 
and abuse issue I believe is a red herring to justify further 
cuts in important housing programs.
    With that, Madam Chair, I yield back.
    Chairwoman Kelly. Thank you.
    Just to set the record straight, Mr. Crowley, the budget 
which was passed included $63.8 billion for veterans, which is 
more than they have ever allocated for the veterans issues.
    Mr. Green?
    Mr. Green. Madam Chair, thank you for adding that point of 
clarification.
    I appreciate your holding this hearing today. This hearing 
is an opportunity for good news, ways that we can make the 
taxpayer dollar go further. The opening statement from the 
gentleman from the other side did not seem to focus on that. 
Instead, tossed the usual partisan rhetoric about gutted 
programs and so on and so forth. I look forward to a hearing in 
which we find ways to make things work and find ways to make 
those dollars go further and further.
    Thank you, Madam Chair.
    Chairwoman Kelly. Thank you, Mr. Green.
    There are no more opening statements, so I will introduce 
our witnesses.
    We have with us the Honorable Angela Antonelli, who is the 
Chief Financial Officer of the Department of Housing and Urban 
Development; the Honorable Thomas Dorr is the Under Secretary 
for Rural Development at the Department of Agriculture. He is 
accompanied by David Grahn, the Associate General Counsel for 
Rural Development.
    We thank you very much for testifying before us today. I 
welcome you on behalf of the entire committee. Without 
objection, your written statements and any attachments that you 
have will be made part of the record. You will be recognized 
for a five-minute summary of your testimony. The lights in the 
box on the table will indicate, it is green when you have the 
full five minutes; within one minute of the time your time is 
ended at the end of four minutes, the yellow light will go on; 
when your time is up, the red light will go on. I want to warn 
you that I tend to keep on time because I think other people 
need to be heard. With that, we start with you, Ms. Antonelli. 
It is a great pleasure to have you here. I look forward to your 
testimony.

STATEMENT OF HON. ANGELA M. ANTONELLI, CHIEF FINANCIAL OFFICER, 
          DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Ms. Antonelli. Thank you very much.
    Chairwoman Kelly and other distinguished members of the 
House Subcommittee on Oversight and Investigations, on behalf 
of HUD Secretary Martinez, thank you for inviting the 
department to testify on the status of unexpended balances that 
remain from funds that were previously appropriated by the 
Congress for HUD programs.
    I believe that HUD's leadership has worked diligently and 
successfully to reduce unexpended balances and to ensure that 
funds reach their anticipated beneficiaries as quickly as 
possible. After all, the benefits of federal programs that are 
authorized and funded by the Congress are not realized until 
the funds are actually put to use providing assistance to low-
and moderate-income families.
    There are many who criticize HUD for what are perceived as 
very high unexpended funds balances with large savings 
potentials. At first glance, this is not an unreasonable 
criticism or reaction. At the end of May of this year, HUD had 
$108 billion in unexpended appropriated funds. However, these 
balances do not represent either an inability of HUD's 
leadership to award and obligate funds or an opportunity to 
recapture these funds and use them for other purposes because 
the program recipients no longer need them.
    Let me begin by trying to put the total unexpended balance 
of $108 billion in perspective. First, of the total balance, 
$34 billion has yet to be awarded and obligated by HUD. The 
vast majority of the funds are not obligated because Congress 
only enacted the fiscal year 2003 Appropriations Act in 
February. And because several of HUD's programs are in fact 
competitive grant programs, and given the time required to run 
a competitive funding program, those funds are often not 
obligated until late in the fiscal year or in some cases until 
the next year. This leaves a total of $74 billion in obligated 
balances yet to spend out.
    I would like to break this into two groups; first, the 
balances for terminated programs. Congress enacted long-term 
low-income assistance programs in the 1970s and 1980s, many of 
which no longer receive annual funding for new project 
activity. However, these long-term programs were either fully 
funded at their inception or sufficient funds were provided to 
obviate the need for additional appropriations for many years 
in the future. All of these funds are obligated against the 
projects and have steadily been spending out for the past two 
decades and will continue to do so for many years to come. In 
total, over $34 billion in obligated funds remain for a variety 
of programs such as the Section 236 interest rate reduction 
program, project-based Section 8 contracts, and other smaller 
programs. Although many of these programs were terminated, the 
contracts and therefore obligations have not expired and will 
continue to be expended over time.
    Should the Congress determine that these balances should be 
reduced and be used for other purposes, it must be aware that 
future appropriations will be required to complete the 
contractual obligations into which the government has entered. 
Hence, the Administration does not necessarily see these funds 
as excess and available for recapture. However, please 
understand that once these contracts do expire or for other 
reasons project owners or grantees opt out or the contract is 
terminated, HUD moves to recapture any funds that remain.
    One example is the 236 IRP program from which HUD recently 
recaptured approximately $700 million. We are now completing a 
reevaluation of the original estimate of need throughout the 
remaining active life of each contract. The president's budget 
assumes that $300 million of the $700 million recaptured will 
be available to offset the overall cost of HUD's program in 
fiscal year 2004.
    Of the balance that remains in terms of obligated balances 
in current programs, there is about $40 billion. In the case of 
the Section 8 housing choice voucher program, there are about 
$8 billion in obligated balances. However, of this amount, $6 
billion are obligations for fiscal year 2002 and 2003 
appropriations, reflecting the fact that public housing agency 
recipients have different fiscal years than the federal fiscal 
year, and there is a lag in the receipt of funds.
    These balances do not necessarily reflect a failure by PHAs 
to expend the funds properly, since they are current-year 
contracts that have not yet expired. Over the past few years, 
HUD has moved to recapture all unused tenant-based Section 8 
funds from all expired contracts with a long-term project base 
or annual tenant-based contracts. In fiscal year 2004, the 
president's budget assumes approximately $1.4 billion in fiscal 
year 2002 and prior year unused Section 8 funds will be made 
available to offset the costs of this program.
    HUD is working as hard as possible to ensure that it 
annually sweeps both the project-based and tenant-based 
programs and makes funds to offset the costs of the program. 
Thus, combined with the budget reforms enacted in 2003, we will 
ensure that future obligated balances will always be the lowest 
possible. This reform represents one of the most significant 
management improvements since the start of the Administration.
    In the case of the public housing capital fund, of the $4.4 
billion in obligated funds for modernization appropriated from 
1997 to 2002, PHAs have four years to spend the funds once they 
are obligated. HUD is working closely with Congress to enforce 
the new law that requires PHAs to spend these funds within that 
time frame or if not, Congress requires that HUD recapture the 
funds.
    We have already seen a dramatic drop in obligated balances, 
particularly for funds that are more than two years old. In the 
case of our special populations program, there are $4.4 billion 
in unexpended obligations in the case of our elderly and 
disabled housing program. Seeing such a large amount of funds 
yet to be expended may make people think that the department is 
not using its funds in a timely manner. However, the majority 
of the funds, about $2.5 billion, are associated with the 
elderly 20-year and 5-year project rental assistance contracts 
for support of completed and occupied projects.
    A recent GAO report on the elderly stated that at the end 
of September 30, 2002, only about $700 million represented 
funding for projects that remained in the pipeline. The $700 
million represents funds for some of the most difficult 
projects to bring to closure because of unanticipated issues 
with the site or litigation. However, we have made it a 
priority to clear the pipeline and have significantly reduced 
the number of projects in that pipeline.
    In conclusion, I hope that I have been able to give you a 
different perspective on what many believe are these excessive 
unexpended balances in HUD programs. I hope that I have been 
able to demonstrate that where the real excess balances do 
exist, HUD has been aggressive in recapturing those funds and 
using them to offset the costs of HUD programs or for other 
uses.
    In fiscal year 2004 alone, HUD's budget assumes that over 
$1.7 billion in recaptured balances will be used to reduce the 
overall budgetary requirements of the department. I want to 
emphasize that while it is important to recapture funds, our 
first goal at HUD is to ensure that our grantees or other 
intermediaries expend the funds as fast as possible, consistent 
with the rules Congress has enacted, so that low-income 
families and communities across the country can enjoy the 
benefits that are intended by Congress. The real success story 
at HUD is the tremendous effort that is now going into reducing 
these unexpended obligations through improved program 
performance, rather than recaptures.
    Thank you very much. I would be happy to answer any 
questions.
    [The prepared statement of Hon. Angela M. Antonelli can be 
found on page 18 in the appendix.]
    Chairwoman Kelly. Thank you very much.
    Mr. Dorr?

      STATEMENT OF THOMAS DORR, UNDER SECRETARY FOR RURAL 
 DEVELOPMENT, DEPARTMENT OF AGRICULTURE, ACCOMPANIED BY DAVID 
     GRAHN, ASSOCIATE GENERAL COUNSEL FOR RURAL DEVELOPMENT

    Mr. Dorr. Thank you, Chairwoman Kelly, members of the 
committee. Thank you for this opportunity to testify on the 
multi-family housing Section 521 rental assistance program. The 
rental assistance program currently helps 264,000 rural 
households maintain their rental residence by providing a 
subsidy to pay the difference between the basic rent for the 
apartment and up to 30 percent of an eligible tenant's income. 
Section 515 multi-family housing borrowers operate the rental 
assistance program under contract with USDA. These contracts 
consist of a commitment from the borrower to operate an 
affordable housing property to the life of the mortgage and a 
commitment from the United States Government to provide funds 
to help residents make rent payments.
    At the start of the rental assistance program in 1978 until 
1982, contracts were executed for 20 years for new construction 
projects, and five-year contracts were executed for existing 
properties. Contracts executed after that period are all five-
year contracts. All contracts continue until the obligated 
rental assistance funds are depleted. The General Accounting 
Office is reviewing the Section 521 rental assistance program 
and has raised concerns about the unliquidated balances on the 
20-year contracts and five-year contracts on which rental 
assistance payments continue to be paid on units beyond the 
original terms.
    Rural Development has determined that there is $737 million 
approximately outstanding on these active contracts that were 
obligated between 1978 and 1998. This obligated amount remains 
outstanding for several reasons. First, the 1978 to 1982 
contracts were vastly overestimated, mostly due to the newness 
of the program. Second, lower than projected rental assistance 
usage occurs as tenant income goes up and the gap narrows 
between 30 percent of income and the basic rent. As a result, 
less rental assistance is needed.
    Third, lower usage is also experienced when vacancies at 
the property are higher than expected. This reduces the number 
of occupied units and may reduce the amount of rental 
assistance used by the property. And fourth, rental assistance 
units exist in our program in perpetuity. If a property no 
longer needs rental assistance on several units, the rental 
assistance on those units is transferred to another property to 
provide rental assistance for rent-overburdened tenants. The 
usage on these units is subject to adjustment due to changes in 
tenant income and property occupancy conditions.
    Of the outstanding $737 million, and this is as of March 
11, 2003, $525 million represents unlimited authority through 
the U.S. Treasury to fund the 20-year contracts made between 
1978 through 1982. The outstanding obligations are termed 
``unliquidated obligations,'' which means unused authority to 
fund contractual obligations for that period. These are not 
dollars that rural development can access to spend to fund RA 
for new construction. These RA funds are only available for the 
current contracts or may be transferred to other units on 
existing contracts.
    Unliquidated obligations are not unique to the rental 
assistance program. Every program has obligations to be paid in 
the future by the government. The contract executed by Section 
515 borrowers identifies a specific amount of rental assistance 
obligations. Changes in use would require these contracts to be 
renegotiated with the borrowers and legislation would be needed 
to provide more flexibility in the use of these funds. This 
would allow funds set aside for RA payments in the distant 
future to be used to fund more rental assistance units today.
    We are willing to work with your committee and the 
Appropriations Committee, General Accounting Office and Office 
of Management and Budget to explore more flexibility in using 
this funding source, provided that this can be done without 
increasing the government's exposure to future unmet funding 
needs.
    The committee has inquired about the inactive contracts in 
our portfolio. Those contracts fall into three categories. 
First, contracts that have not yet started paying out because 
the contract they are replacing had not yet exhausted all 
funds. Secondly, we have contracts that have not yet started 
paying out because a new construction project has not been 
completed and started operations. And thirdly, for any property 
whose debt has been accelerated or is in foreclosure, rental 
assistance is held in abeyance until those legal actions are 
completed. On completion of these servicing actions, the rental 
assistance will begin flowing at that property or another that 
needs rental assistance. In each case, these inactive contracts 
will be started or re-started.
    Rural Development has taken steps to become more accurate 
in our projections of rental assistance, including automation 
initiatives, rental assistance review, management control 
review, and the implementation of our Regulation 3560 proposed 
changes. Rural Development will continue to work with the 
committee and other interested parties in reviewing the 
unliquidated obligations.
    Madam Chairwoman, this concludes my testimony. I would like 
to thank you for allowing me the opportunity to testify today 
and I would answer any questions you may have or the committee 
members may have.
    [The prepared statement of Hon. Thomas C. Dorr can be found 
on page 24 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Dorr. Actually, 
I do have a couple of questions.
    Of the total rental assistance contracts, what percentage 
are inactive? I didn't get that number.
    Mr. Dorr. What percentage of them?
    Chairwoman Kelly. Yes, what percentage of the rental 
assistance projects that you now have are inactive?
    Mr. Dorr. Of the contracts themselves, we have about 3.5 
percent that are inactive. Of the total dollar value of 
obligations, it amounts to about 7 percent.
    Chairwoman Kelly. About 7 percent and 3.5 percent. The 
reason for the inactivity again is?
    Mr. Dorr. Well, it is three-fold. Essentially, we have new 
construction or renewal contracts. The new construction 
contracts are contracts that have been obligated. The 
properties are not yet functioning and therefore they are not 
authorized to draw on the rental assistance. Of that 7 percent, 
about half of them are contracts that will run out of rental 
assistance this year, and we are obligating another five-year 
contract, but that has not been activated at this point. Then 
we have a third category which involves the servicing and 
transferring of certain contracts including those that have 
various legal actions pending or are in some other minor form 
of transition that is not easy to categorize. That is a small 
number of the total inactivity.
    Chairwoman Kelly. Mr. Dorr, you said in your testimony that 
changes in the use of the unliquidated obligations would 
require the renegotiation of the contracts. That is really what 
we are asking GAO to resolve with you. For the record, can you 
please specifically describe the language in the contracts that 
is at issue?
    Mr. Dorr. I would not have specific language for you today, 
but we will get that to you.
    Chairwoman Kelly. Does Mr. Grahn have that?
    Mr. Dorr. Mr. Grahn, would you care to comment? Go ahead.
    Mr. Grahn. Madam Chairwoman, the Rural Development 
Administration, and particularly at that time the Farmers Home 
Administration, entered into a series of amendments in the 
early 1990s with these contracts. If you take a look at Section 
8(a) of the amendment, it talks about the terms of the contract 
expiring upon the total disbursement or credit at the 
borrower's account. At the bottom of the amendment, it 
indicates how much money that is. So we have interpreted that 
contract to mean that the contract will run until the dollars 
are expended.
    Chairwoman Kelly. I wonder if you could provide a good copy 
of the kind of contract that is at issue here for our records, 
and a legal opinion about your interpretation. I think we would 
find that to be very helpful in understanding the questions 
about the contract. Would you do that for us please?
    Mr. Grahn. Yes.
    Chairwoman Kelly. Thank you.
    Ms. Antonelli, I really want to compliment Secretary 
Martinez and Deputy Secretary Jackson and you and the other HUD 
officials for your leadership in identifying and attempting to 
recapture these funds. I urge you to continue.
    For instance, you testified that the obligated balances in 
the public housing authorities have dropped from $3.4 billion 
in 2001 to $700 million as of this March 31. Would you please 
very briefly describe the specific procedures that you put into 
place when you arrived at HUD to try to ferret out and 
recapture unspent funds?
    Ms. Antonelli. Much of what we have done within the 
department since the beginning of this Administration has 
really been very generally focused on the entire department and 
all programs, to focus on the level of unspent balances. 
Obviously, that includes the PIH programs as well. Again, you 
are referring specifically to the comment in the testimony 
regarding the public housing capital fund. There have been 
efforts that have been put in place in terms of those programs, 
as well as other programs, to expedite the expenditure of funds 
and to streamline the processes by which those funds would be 
expended by the public housing authorities.
    I am also being told that part of the reason that we have 
been able to see the drop in the level of funding that has been 
out there is because of efforts to work with the appropriators 
to try to speed the ability to get the money out towards the 
modernization projects. So we have worked very closely, again, 
with the appropriators as well to address some of these issues, 
particularly in the area of public housing.
    Chairwoman Kelly. Thank you very much. I am out of time.
    Mr. Crowley?
    Mr. Crowley. Thank you, Madam Chair. When HUD rescinds, 
recaptures or reallocates funds from Section 8 programs, for 
example, are they lost; do these funds just disappear; or are 
they reused for other purposes, whether it be for housing or 
other governmental purposes?
    Ms. Antonelli. Most of the time, the money that is 
recaptured from tenant-based Section 8 is often put back and is 
used for Section 8. For example in the case of the president's 
fiscal year 2004 budget, as you know, there is $1 billion in 
offsets anticipated to contribute to reducing the level of 
appropriations for the Section 8 tenant-based program going 
forward.
    Mr. Crowley. Would you describe that as fraud or waste or 
abuse?
    Ms. Antonelli. Absolutely not. Obviously in terms of the 
discussion of the Section 8 program, the tenant-based program, 
there have been efforts to try to improve the utilization of 
funds within the program; the fact that every year the 
department annually recaptures a significant amount of funds 
from the tenant-based program. It is something that we have 
been working very, very hard to resolve. In the context of the 
2003 Appropriations Act, for example, we had worked very 
closely with the appropriators to make modifications that would 
allow us to begin to drop the level of recaptures over time 
that we would see in this program.
    It is certainly not waste, fraud and abuse. It reflects 
issues with regards to the management of the program and we 
need to work to improve the management of the program and have 
begun to do that in the context of 2003 with these management 
improvements to try and reduce the level of recaptures that we 
have so that the money in fact is flowing out to the public 
housing authorities and those who need them.
    Mr. Crowley. Thank you. I have a limited time for 
questions, but I appreciate your answer.
    Just let me take it one step further. The Inspector General 
is not here today. Kenneth Donohue has submitted testimony that 
will be the basis of some of my questions as well. He talked 
about contract excesses, as well as what I mentioned before in 
terms of what is rescinded or recaptured or what is reallocated 
funds. Is the same true about contract excesses in Section 8 
programs? Are they also recaptured or are they spent or are 
they lost?
    Ms. Antonelli. Again, as I mentioned, we don't necessarily 
see the funds as excess per se because, again, we have 
contractual obligations that we are legally required to uphold. 
In the case of project-based Section 8, for example, if you 
look at the funds that are there and that have not yet been 
spent, these are dollars that are attached to projects. Again, 
if those monies were to be rescinded, then ultimately it is 
entirely possible that we would have to seek additional 
appropriations in fact to meet those legal obligations. That is 
just one example of, again, we would not necessarily see these 
as excess funds.
    They are in fact funds that when these programs were 
initially created, the money was provided up front. It spends 
out over a long period of time. And again, to the extent that 
those funds would be removed, ultimately somewhere down the 
road the money would have to be appropriated again to uphold 
those legal obligations, contractual obligations.
    Mr. Crowley. Let me ask you and Mr. Dorr, if you can. If 
you could answer these questions with just one word yes or no 
answers to the first two parts of the questions. Does Congress 
allocate an annual appropriation for Section 8 and Section 238 
housing programs, as well as Section 521 of the rural housing 
programs? Does Congress make an annual allocation through the 
appropriations process towards those programs?
    Mr. Dorr. Yes, we get an annual appropriation.
    Mr. Crowley. Thank you.
    And the same would be said for HUD?
    Ms. Antonelli. Not for 236.
    Mr. Crowley. Okay, 238? Section 8?
    Ms. Antonelli. Section 8, we do have annual appropriations, 
yes.
    Mr. Crowley. Okay. Does Congress allocate an annual 
appropriation for Social Security or Medicare? To your 
knowledge, I know it is not your field, but to your knowledge, 
does Congress allocate an annual appropriation for Social 
Security or Medicare?
    Ms. Antonelli. These are mandatory programs.
    Mr. Crowley. Right. We don't allocate them, do we? We don't 
make appropriations for them, do we?
    Ms. Antonelli. You have to meet the need.
    Mr. Crowley. Right.
    The HUD programs in question are discretionary.
    Ms. Antonelli. That is correct.
    Mr. Crowley. As opposed to mandatory spending, which 
veterans' benefits, Social Security and Medicare are. I am 
holding up a copy of the Section 301 of the budget resolution 
where it stipulates that the committee needs to look into 
mandatory spending. None of the programs we are talking about 
here today are mandatory spending. They are all discretionary 
spending. Is that correct?
    Ms. Antonelli. I should just point out, we do have about 
$27 billion in mandatory obligated balances, but those are 
reserves that are in our FHA fund.
    Mr. Crowley. Is Section 8 a mandatory program or is it a 
discretionary program?
    Ms. Antonelli. No, sir, it is not. It is a discretionary 
program.
    Mr. Crowley. My feeling is here that the hearing is taking 
place. I think it is a red herring. I will say it again, 
because I think this is an attempt to make cuts in the Section 
8 program which would have a very serious effect on my city and 
my district particularly. I think it is wrong to be doing this. 
Clearly, the excess monies that are recaptured are spent again, 
either in HUD in Section 8 programs or in other programs. 
Actually, it is used by Congress for defense spending and other 
emergency spending that comes up. I think it is wrong to hold 
in the cloud of trying to find out waste, fraud and abuse, to 
have members on this side of the aisle vote against any cutting 
of Section 8, and declare that we are against waste, fraud and 
abuse. I think it is wrong to do that, and I yield back the 
balance of my time.
    Chairwoman Kelly. Mr. Crowley, I really need to remind you 
that when the budget passed, embedded in the budget was the 
mandate that every chairman of every committee who controlled 
the budget of any executive agency attempt to work with that 
agency to cut at least 1 percent out of the budget. The 
committee chairmen all accepted that challenge. These are not 
cuts that we are talking about. What we are talking about is 
streamlining things here in the effort to recapture money. That 
does not necessarily revolve around waste, fraud and abuse, but 
management problems, as Ms. Antonelli said, and if it is 
appropriate, the idea is if we need to make legislation 
available to these agencies to free up funds and allow 
flexibility so that money that is residing in those agencies 
can be used now and appropriately, rather than being held in 
accounts for 20 years because they are held up and that money 
will probably never be used, then it is important that we do 
what we can to provide flexibility and free-up these funds so 
that they are available.
    Too many programs, especially in these two areas, with 
rural housing and with HUD, don't have as much money available 
to them because there are funds frozen in various ways. That is 
exactly what I am applauding HUD about because I think the HUD 
officials have worked very hard to identify and ferret out and 
recapture these unspent funds that have been frozen in the 
agencies. So I applaud them for this and I think it is 
important that we make clear what is happening here. We are not 
worried about cuts. We are worried about making available the 
money that is there.
    Mr. Green?
    Mr. Green. Thank you, Madam Chair.
    I have listened carefully to the testimony and I will read 
the written testimony in great detail later on. I would like to 
step back and just ask a couple of general questions. First 
off, if each of you could simply bottom-line your testimony for 
us, if there is one message that you would like us to take from 
your testimony, what would it be?
    Ms. Antonelli. I am sorry, Congressman. I apologize.
    Mr. Green. No, not a problem. We have talked a lot about 
details and specifics. I would like to step back a second. What 
is the bottom line of your testimony? Can you summarize as best 
you can if there is one message that you would like us to hear 
with respect to the discussion points, what would it be?
    Ms. Antonelli. I think the most important message that we 
would like to convey from the Department of Housing and Urban 
Development is just how seriously we take our responsibilities 
in terms of being good stewards of the taxpayer dollar and 
improving the financial management of the department. As the IG 
has outlined and has the responsibility annually in terms of 
doing an audit of our financial statements, they have 
highlighted areas where we can and should be doing better.
    I think the department has already done a great deal in the 
past and will continue to do what we have been doing in terms 
of keeping track of and very carefully reviewing the level of 
unexpended funds program by program within this department. To 
the extent that we can, we will recapture those funds where we 
know that we are able to do that, and not have an impact on our 
programmatic needs. We have been very successful in doing that.
    In the context of the 2002 audit, there were some things 
that the Inspector General had highlighted in a couple of our 
programs. We are happy to work with them. We continue to work 
with them. As a result of their work, we have very detailed 
corrective action plans in place that will allow us to continue 
to do an even better job in the issue of the review of 
unliquidated obligations. So that, again, we are making the 
most effective and efficient use of the taxpayer dollars as 
Congress has allocated them to the Department of Housing and 
Urban Development.
    Mr. Green. Mr. Dorr?
    Mr. Dorr. Yes, Congressman Green, I would first of all 
generally echo what Ms. Antonelli has expressed. But in 
addition to being good stewards, I would clearly point out that 
we are very sensitive to our responsibility to provide housing 
for those elderly and single and others in rural areas who have 
diminished resources and need access to this program. If there 
is one thing that I would like you to come away with from this 
is that, first of all, we need management flexibility. In the 
long run, what we need is flexibility to administer these 
programs in a way that allows us to steward these resources 
effectively, as is what I think is the intent of this 
committee.
    In our case, we are fully engaged in an automation review 
so that our rental assistance budget forecasting mechanism is 
going to be much improved. I feel comfortable in saying that. 
We also have initiated a very aggressive internal agency review 
to find out why these obligated unliquidated balances have 
accrued; what is the cause of them. I think we are very close 
to determining that. We are also putting in place some 
management control review processes that we hope will become 
much more effective, particularly as we implement our new 
multi-family housing rules.
    In conjunction with everything that Ms. Antonelli said, 
management flexibility is clearly the one thing that would help 
us the most.
    Mr. Green. I guess you anticipated my next question. What 
are the most significant financial management challenges that 
you are facing right now? And what steps are you taking to 
address them? I suspect you have partially answered that 
question already.
    Mr. Dorr. The four things that I have outlined are clearly 
steps that we are taking to address them. Counselor Grahn 
indicated that he was going to get to you some contract 
language that I think you are interested in that may cast some 
additional light on this. And finally, I think collaboratively 
and collectively we need to review what it takes to essentially 
make a three-legged stool out of this, which involves more 
effective management, looking at our internal processes, as 
well as developing management flexibility. We generally know 
where we have to go, but I think it takes a little work to 
flesh it out in ways that make it clear and sensible to 
everyone involved.
    Mr. Green. Ms. Antonelli, my time is running out, but if 
you could address that question as well?
    Ms. Antonelli. We face a number of financial management 
challenges at the department and we are very determined to 
overcome them. Some of the management challenges that we face 
deal basically with people and systems. We have a very strong 
financial management team, first of all. That was a priority 
put in place, get some excellent people in here who could help 
us address some of our problems. Some of the priorities that I 
focused on, again, have related to our financial statements 
and, again, the proper accounting for our funds and making sure 
that we get clean audits.
    We have updated our funds control policies and procedures 
for the first time in 20 years in the department, and we have 
detailed funds control plans for every single program now in 
the department. These are annual funds control plans, and 
within those plans all of our programs have to tell us what 
they will be doing in terms of the review of their obligated 
balances so we can determine again in looking at unexpended 
funds and what we should be doing there.
    With respect to the financial audit, the Department of 
Housing and Urban Development has three material weaknesses and 
10 reportable conditions. So again, we have significant 
challenges that we have to address. We have worked very closely 
with our IG and have a very good relationship, and have worked 
with them to develop corrective action plans for the first 
time. That puts the department on a path to eliminating these 
major material weaknesses that relate to our financial systems 
and many of our reportable conditions, one of them being 
addressing the issue of the review of obligation balances.
    So we have challenges in many respects that we need to 
address. We are up to that challenge. We have detailed plans of 
actions. We are committed over the longer term by 2006 to 
significantly overhaul our financial systems. That will help us 
significantly improve the job that we are doing, to do it even 
more effectively, more efficiently, and provide better 
information in a more timely manner for Congress.
    Mr. Green. Thank you. Thank you very much. Thank you, Madam 
Chair.
    Chairwoman Kelly. Thank you.
    I would like both of you to know that I am interested in 
whether there is an unnecessary duplication in housing subsidy 
programs. I am interested in redundancy. I am interested in 
overlap, because these are also areas where we can perhaps 
recapture funds, and if we can eliminate anything that might be 
a turf battle out there, so much the better, because our desire 
here is to get federal funds to the people who truly need to 
get housing from these programs.
    Do either of you want to address that issue today, because 
I am probably going to pursue this a little bit further at some 
other venue, but if you would like to talk about that, if you 
feel prepared to do that, I would like to hear an answer.
    Mr. Dorr. Specifically with regard to the multi-family 
issues, I can honestly say that we have not pursued as 
aggressive a working relationship with HUD to tap into their 
resources or vice versa, as we have in our single-family 
programs. But I will tell you that Dr. John Weicher, the 
Commissioner for their FHA programs, and I have developed a 
very good relationship. They have been very cooperative in 
helping us to utilize some of their resources that enable us to 
automate some of our systems more cost-effectively and more 
quickly.
    There is willingness, at least on our part, I know, and I 
believe at HUD, to work and collaborate on issues that 
specifically impact us in ways that reduce or eliminate 
redundancy. There is clearly a delivery mechanism in rural 
areas that is different from HUD programs in urban areas. I am 
fairly new at this, but my sense is that some of those delivery 
mechanisms are unique to rural areas versus the urban area 
delivery mechanism. There are some things that I think are 
unique that we effectively deal with. But we are definitely not 
opposed to collaborating, cooperating and looking for ways to 
ferret out redundancy and have in fact done this already in our 
single-family area.
    Chairwoman Kelly. Good.
    Ms. Antonelli?
    Ms. Antonelli. I would just echo much of what Under 
Secretary Dorr has just said. The Department of Housing and 
Urban Development has and is more than happy and will continue 
to look at opportunities and work with the Department of 
Agriculture with respect to our programs, and again look at 
areas where we can work together more effectively, to the 
extent that that has not already been happening.
    Mr. Dorr. Madam Chairwoman, I would also like to point out 
that we just executed a memorandum of understanding between the 
U.S. Department of Agriculture and HUD with regard to 
collaborative working relationships on programs in the 
southwest border Colonias region. That was something that has 
been very effective. And we at USDA also executed an MOU with 
the National Association of Credit Unions to enhance our 
ability to finance housing and bring these opportunities more 
effectively to folks in those areas that need them.
    Chairwoman Kelly. That is wonderful news. We appreciate 
that.
    I note that some members, this is a busy day for a lot of 
people, and some members may have questions for this panel that 
they may submit in writing. So without objection, the hearing 
record will remain open for 30 days for members to submit 
written questions to these witnesses and to place their 
responses in the record.
    We thank you very much for your time. We appreciate your 
testimony. This panel is excused with our great, deep 
appreciation. I want to briefly thank the members and staff for 
their assistance in making the hearing possible.
    The hearing is adjourned.
    [Whereupon, at 3:00 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



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