    [Senate Hearing 110-381]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 110-381

     DEPARTMENTS OF TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND
              RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2008

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

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                       ON

                               H.R. 3074/S. 1789

    AN ACT MAKING APPROPRIATIONS FOR THE DEPARTMENTS OF TRANSPORTATION AND
    HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES FOR THE FISCAL YEAR
               ENDING SEPTEMBER 30, 2008, AND FOR OTHER PURPOSES

                                   __________

                                     Amtrak
                  Department of Housing and Urban Development
                          Department of Transportation
                           Nondepartmental witnesses

                                   __________

             Printed for the use of the Committee on Appropriations

      Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                                   index.html

                                   __________

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    33-938                         WASHINGTON : 2008
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                          COMMITTEE ON APPROPRIATIONS

                    ROBERT C. BYRD, West Virginia, Chairman
    DANIEL K. INOUYE, Hawaii             THAD COCHRAN, Mississippi
    PATRICK J. LEAHY, Vermont            TED STEVENS, Alaska
    TOM HARKIN, Iowa                     ARLEN SPECTER, Pennsylvania
    BARBARA A. MIKULSKI, Maryland        PETE V. DOMENICI, New Mexico
    HERB KOHL, Wisconsin                 CHRISTOPHER S. BOND, Missouri
    PATTY MURRAY, Washington             MITCH McCONNELL, Kentucky
    BYRON L. DORGAN, North Dakota        RICHARD C. SHELBY, Alabama
    DIANNE FEINSTEIN, California         JUDD GREGG, New Hampshire
    RICHARD J. DURBIN, Illinois          ROBERT F. BENNETT, Utah
    TIM JOHNSON, South Dakota            LARRY CRAIG, Idaho
    MARY L. LANDRIEU, Louisiana          KAY BAILEY HUTCHISON, Texas
    JACK REED, Rhode Island              SAM BROWNBACK, Kansas
    FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado
    BEN NELSON, Nebraska                 LAMAR ALEXANDER, Tennessee

                        Charles Kieffer, Staff Director
                      Bruce Evans, Minority Staff Director
                                     ------

     Subcommittee on Transportation and Housing and Urban Development, and
                                Related Agencies

                       PATTY MURRAY, Washington, Chairman
    ROBERT C. BYRD, West Virginia        CHRISTOPHER S. BOND, Missouri
    BARBARA A. MIKULSKI, Maryland        RICHARD C. SHELBY, Alabama
    HERB KOHL, Wisconsin                 ARLEN SPECTER, Pennsylvania
    RICHARD J. DURBIN, Illinois          ROBERT F. BENNETT, Utah
    BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
    PATRICK J. LEAHY, Vermont            SAM BROWNBACK, Kansas
    TOM HARKIN, Iowa                     TED STEVENS, Alaska
    DIANNE FEINSTEIN, California         PETE V. DOMENICI, New Mexico
    TIM JOHNSON, South Dakota            LAMAR ALEXANDER, Tennessee
    FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado
                                         THAD COCHRAN, Mississippi (ex
                                             officio)

                               Professional Staff

                                  Peter Rogoff
                                William Simpson
                              Meaghan L. McCarthy
                                 Rachel Milberg
                             Jon Kamarck (Minority)
                          Matthew McCardle (Minority)
                            Ellen Beares (Minority)

                             Administrative Support

                                  Teri Curtin

                                C O N T E N T S

                                  ----------
                                                                       Page

                           Thursday, February 8, 2007

    Department of Transportation: Office of the Secretary............     1

                          Wednesday, February 28, 2007

    Amtrak...........................................................    49
    Department of Transportation:
        Federal Railroad Administration..............................    59
        Office of the Inspector General..............................    63

                            Thursday, March 15, 2007

    Department of Housing and Urban Development: Federal Housing
      Administration.................................................   107

                             Thursday, May 3, 2007

    Department of Housing and Urban Development: Office of the
      Secretary......................................................   175

                             Thursday, May 10, 2007

    Department of Transportation: Federal Aviation Administration....   221
    Nondepartmental Witnesses........................................   291

    TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES
                      APPROPRIATIONS FOR FISCAL YEAR 2008

                                  ----------

                           THURSDAY, FEBRUARY 8, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:30 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Patty Murray (chairman) presiding.
        Present: Senators Murray, Lautenberg, Bond, Bennett,
    Brownback, Stevens, Alexander, and Allard.

                          DEPARTMENT OF TRANSPORTATION

                            Office of the Secretary

    STATEMENT OF HON. MARY E. PETERS, SECRETARY
    ACCOMPANIED BY PHYLLIS F. SCHEINBERG, ASSISTANT SECRETARY FOR BUDGET
                AND PROGRAMS

                   opening statement of senator patty murray

        Senator Murray. The hearing will come to order.
        Today the Subcommittee on Transportation and Housing and
    Urban Development, and Related Agencies, is holding its first
    hearing of the year, and before we begin I do want to welcome
    four new members to the subcommittee: Senator Alexander,
    Senator Feinstein, Senator Johnson, and Senator Lautenberg. And
    I also want to give a warm welcome to our principal witness
    today, Transportation Secretary Mary Peters.
        Today's hearing comes at a very important time. While the
    official purpose of this hearing is to review the President's
    transportation budget for 2008, the reality is that Congress
    has not yet enacted a transportation budget for 2007.
        Currently pending in the Senate today is H.J. Res. 20, the
    joint funding resolution. That bill was developed by both the
    House and the Senate Appropriations Committees on a bipartisan
    basis. Its goal is to finalize the funding levels for the
    Department of Transportation and most other departments for the
    remainder of this year. It was made necessary by the fact that
    the last Congress never completed the appropriations process
    before adjourning.
        The joint funding resolution for the most part freezes
    programs across the Government at their 2006 funding level.
    Importantly, however, the bill also makes necessary funding
    adjustments to deal with critical programs that cannot and
    should not endure a funding freeze.
        In the case of the Transportation Department, we were not
    prepared to ignore our responsibility to ensure safety in our
    skies, on our highways, and on our railroads. The bill provides
    funding increases totaling more than a quarter billion dollars
    to ensure that there are adequate numbers of personnel to
    control air traffic, as well as inspect and enforce safety
    rules governing commercial airliners, trucks, railroads, and
    pipelines. Without this additional funding, the FAA
    administrator told us that she would be required to put every
    air traffic controller and every aviation inspector on the
    street for 2 weeks without pay between now and the end of
    September.
        The joint funding resolution currently before the Senate
    boosts funding for Amtrak to $1.3 billion. Under the continuing
    resolution, Amtrak's funding would remain $200 million lower
    than it was last year. That would endanger passenger rail
    service across the country, as well as the annual maintenance
    expenses that must be made to ensure safe operations in the
    Northeast Corridor.
        Finally, the bill pending before the Senate provides an
    additional $3.75 billion in additional formula funding for our
    Nation's highway and transit systems. That funding will serve
    to create almost 160,000 new jobs, while alleviating
    congestion. It will be an important infusion of cash to the
    States to help them address their most pressing bridge
    replacements, highway widenings, and safety enhancements. When
    you look at all the highway needs across my State of
    Washington, the additional $71 million the State will receive
    is urgently needed and will be put to work right away.
        The Department of Transportation, like most of the rest of
    the Government, is now operating under the terms of a
    continuing resolution that makes none of the funding
    adjustments I just talked about. It simple freezes all programs
    or cuts them to reflect the cuts that were passed in the House
    of Representatives during the last Congress. That CR will
    expire a week from today, February 15.
        Now, some of our Senate colleagues have suggested we should
    not adopt this new joint funding resolution, and have advocated
    that we extend the existing CR through the remainder of the
    year. They are saying that we should forego these desperately
    needed funds for highways and transit, that we should allow the
    FAA to furlough all its safety personnel for 2 weeks, and that
    we should allow our aviation, truck, railroad, and pipeline
    inspection work force to dwindle.
        As part of this hearing, we will learn Secretary Peters'
    views on that question. And very soon, Senators will have their
    first opportunity to vote on this question one way or another.
    Are we going to debate and pass the new joint funding
    resolution, or will we ignore our responsibility to
    transportation safety and investment for an entire fiscal year.
        Now for 2008 the President has sent us a transportation
    budget totaling just under $67 billion. That represents an
    increase of $4.6 billion above the 2007 level that we hope to
    achieve by enacting the joint funding resolution. This 7.3
    percent increase is a substantial boost, given the tight
    funding we find across the rest of the President's budget.
        My biggest concern with this budget proposal is not what it
    does do but what it doesn't do. It seeks substantial new
    resources for one critical need, alleviating highway
    congestion, while providing little growth and even less
    emphasis on an equally critical need, reducing highway
    fatalities.
        As a resident of the Puget Sound region, I can attest to
    the critical national need to address congestion. Congestion is
    keeping parents from their children and workers from their
    jobs. My State serves as a critical cargo gateway from Asia.
    Our future prosperity requires that we can get cargo out of our
    ports, onto highways and railways that are moving, not clogged
    with congestion.
        The administration's budget proposes $175 million for a
    series of new programs designed to relieve congestion. We are
    told that this investment is part of a new comprehensive,
    department-wide national strategy to reduce congestion. The
    Secretary is serious about this initiative, and I am willing to
    give it a very careful look.
        But I also have to ask, where is the new comprehensive,
    department-wide national strategy to reduce highway deaths?
    Back in early 2003, when she was serving as our Federal Highway
    Administrator, Secretary Mary Peters noted that there were
    41,000 highway-related fatalities annually and said we were
    facing a national safety crisis. She was right.
        Tragically, however, the only thing that has happened since
    then is that the number of highway fatalities have increased,
    and it's not just the number of deaths that have increased. The
    fatality rate has increased as well, and the numbers are all
    going in the wrong direction. The 41,000 fatalities that
    alarmed the Secretary back in 2003 have now grown to more than
    43,400. That is the highest number recorded in 15 years.
        The Bush administration established a performance goal for
    the Department of Transportation to reduce highway fatalities
    to 1 fatality per 100 million vehicle miles traveled by 2008.
    Unfortunately, for 2005, the most recent year for which we have
    data, the rate was 45 percent higher than that, 1.45
    fatalities.
        The administration's budget documents indicate that the
    Department, instead of redoubling itself to achieving its goal,
    is now pushing off this goal until 2011. The Bush
    administration is lowering the bar when it comes to saving
    lives, and I personally find that disappointing. The growing
    carnage on our highways cries out for national attention and
    national leadership, and instead we see resignation and
    retreat.
        The Department of Transportation has many different
    responsibilities. One of the jobs of this subcommittee is to
    make sure that the policy direction and funding we provide is
    balanced between all the transportation modes and all the
    challenges the department faces. I do commend the department
    for trying to seriously reduce congestion on a department-wide
    basis and asking for some innovative funding to back that up.
    But the department I hope also will bring an equally serious
    focus to reducing highway deaths. With the statistics moving in
    the wrong direction, one thing that is clear is that the
    current strategies are not working.
        In the next few weeks our subcommittee will have a special
    hearing on just this topic with the National Highway Traffic
    Safety Administration, the NTSB and other officials to address
    the problem, and I encourage all of our subcommittee members to
    attend that.
        With that, I would like to recognize my partner and ranking
    member, Senator Bond, for any opening remarks he would like to
    make.

                opening statement of senator christopher s. bond

        Senator Bond. Thank you very much, Madam Chair, and I
    congratulate you and wish you well on assuming the chair of
    Transportation, HUD, and Related Agencies. I congratulate you
    on your new responsibilities, and based on our good working
    relationship in THUD over the last 2 years, I know we will have
    a good relationship in balancing the many needs and the
    important issues that are within what is left of our
    jurisdiction.
        And it is with sadness that as I turn the gavel over to
    you, half the gavel is gone, with all the things that have been
    taken away from our jurisdiction. Now, it's no secret that I
    would have preferred to have remained chair, but I have the
    utmost respect for my partner from Washington's abilities and
    sensitivities to the many issues and points of controversy that
    are parts of our responsibility. We share many of the same
    concerns and objectives with regard to the programs and
    activities within the THUD subcommittee.
        Again, we appreciate the close working relationship that we
    have had and our staffs have had in crafting the THUD portion
    of this ominous--excuse me, I used to call it ``ominous''--
    omnibus appropriations bill called a CR. I'm glad we have an
    omnibus and not a CR, because a CR would have left us terribly
    underfunded, although I do share the concerns of many, my
    partner to the left, on the fact that Milcon was not funded,
    which the overall committee is going to have to address very,
    very shortly.
        And now to turn to the new Secretary, Madam Secretary,
    congratulations to you. We are absolutely delighted to see you
    back. Now that it's snowing in Phoenix, it may not be so bad to
    come back to Washington. We've worked very closely over the
    last couple of years, during the passage of SAFETEA-LU, when
    you were Administrator of FHWA, and I know that we will
    continue to have a good working relationship.
        As the chair has noted, the 2008 budget for DOT proposes
    $67 billion in gross budgetary resources. Similar to last year,
    however, the administration chose to underfund popular programs
    such as the Airport Improvement Program, Amtrak, and new
    starts. Nevertheless, Congress is not likely to provide lower
    levels of funding in 2008 than what was done under H.J. Res. 20
    covering the remainder of 2007.
        I am pleased that the administration remains committed to
    meeting the guaranteed funding levels for highways as
    authorized under SAFETEA-LU. These funds will allow an
    increased investment in key highway and transportation projects
    which will complement and assist the continuing growth of the
    economy.
        However, the administration chose to cancel the revenue-
    aligned budget authority put in place, I might add, as part of
    the Bond-Chafee amendment to a previous highway bill. I'm
    concerned over the loss of funding, since SAFETEA-LU calls for
    an upward adjustment if receipts into the Highway Trust Fund
    exceed what we had anticipated. This results in a $631 million
    loss for 2008, and as one of the original co-authors, I need to
    listen to the people in Missouri and other States to see where
    we should go in addressing our additional highway needs
    nationwide.
        The administration also proposes a rescission of the
    unobligated balance of contract authority for demonstration
    projects authorized under ISTEA in 1991. These funds will
    provide for a $175 million pilot to address congestion, which
    is, no doubt about it, a major problem for our economy and
    families across the Nation, and we see it here in Washington as
    it impacts both this city and rural and urban areas across the
    country.
        Different approaches are needed for all our modes of
    transportation, and I will carefully review the
    administration's proposals to see whether these new ideas will
    actually provide us with ideas for the future or whether we're
    just continuing down the same path where we get little bang for
    lots of bucks. I continue to believe that while congestion on
    our rail and port systems are important areas to address,
    Highway Trust Fund dollars should be used only to address
    congestion on our Nation's crumbling road structure and not on
    other modes of transportation.
        Now, Madam Chair, I'm unclear on the proposed $900 million
    for Amtrak. Amtrak will directly receive $800 million for
    capital spending grants, efficiency incentive grants, and $100
    million dedicated to issue capital matching grants to States
    for intercity passenger rail. While I remain critical about the
    expenditure, the manner of expenditure of Federal funds for
    Amtrak, I question whether this funding level will meet
    anticipated expenses for 2008, considering H.J. Res. 20
    includes $1.29 billion for Amtrak.
        I continue to look for the administration to outline a
    precise vision for Amtrak and maintain pressure for the
    organization to meet its overall objectives and goals Congress
    has set. If detailed transportation improvement plans were
    provided by Amtrak, we would be better able to understand what
    the needs are and whether or not providing additional funds for
    passenger rail service is effective and efficient.
        Another area I look forward to working with the department
    on FAA reauthorization. I know the administration is looking at
    a hybrid funding proposal involving user fees, increased fuel
    taxes, and general revenue. The details I guess we'll get next
    week. While it's too soon to pass judgment on the
    reauthorization without seeing the total picture, it's my hope
    the proposal will be fair and equitable to all parties involved
    in the aviation system: both commercial and general aviation.
        I think it's critically important we get it right when
    dealing with how to fund the next generation of our air system.
    It's obvious FAA faces major challenges adapting to future
    changes such as the expanded use of very light jets and the
    anticipated increase in overall air traffic. Couple this with
    the complex challenge of managing a modernization program as
    large as the Next Generation Air Traffic System, and it's clear
    that the department and FAA will have their hands full. I know
    that Senator Murray will conduct further hearings on the FAA,
    and we look forward to working with you, Madam Secretary, and
    Administrator Blakey.
        Another area of particular concern to me is the proper way
    to adjust the corporate average fuel economy or CAFE standards
    for passenger cars and light trucks. I was pleased to hear in
    the President's State of the Union that the administration
    proposes to reform and increase CAFE standards for passenger
    cars, using sound science and detailed cost-benefit analysis,
    and without impacting the safety of the motor vehicle fleet. In
    addition to the proposal for cars, the President supported the
    continued increase in fuel standards for light trucks and SUVs
    under an extension of the current light truck rule.
        Nevertheless, we need to ensure that we make appropriate
    CAFE reforms that will not discriminate against domestic
    automakers in favor of foreign automakers, and that is a
    concern. It's important for Members of Congress and the
    traveling public to realize that CAFE is very complex and
    requires scientific analysis. In recent studies, several
    leading engineering and highway safety organizations, including
    the National Academy of Sciences and the National Highway
    Traffic Safety Administration or NHTSA, have warned that any
    significant increase in CAFE standards could have adverse
    impacts both on safety for the traveling public and the
    economic health of an already struggling U.S. automotive
    industry.
        As one of the leaders in pushing for NHTSA to determine
    what technology is available to ensure increased fuel mileage
    without raising safety concerns, I think I should note that
    NHTSA was the one, after the first major increases in CAFE,
    that estimated that roughly 2,000 additional lives were lost on
    the highway when the original CAFE proposals led to a
    significant decrease in weight in cars without having the
    technology to achieve the greater mileage. The lighter cars did
    increase highway fatalities, a significant number of them, even
    in one-car crashes.

                               prepared statement

        But, in closing, I do have concerns about the
    administration's budget and funding proposals as proposed for
    this committee, especially the funding proposed for housing
    programs that are the safety net for many low-income families,
    including seniors and persons with disabilities, as well as
    many of the other funding proposals that are contained in the
    jurisdiction of other subcommittees. How we meet these demands
    will be a challenge for the Appropriations Committee and the
    Congress.
        Madam Chair, I thank you.
        [The statement follows:]
               Prepared Statement of Senator Christopher S. Bond
        Good morning Madam Secretary. I'm glad to see you back with the
    Department. We worked closely over the last couple of years during the
    passage of SAFETEA when you were the Administrator of the FHWA and I
    look forward to continuing our working relationship as well as hearing
    your comments today on the overall budget for all modes of
    transportation within the Department.
        I also look forward to continue working with Senator Patty Murray
    as the new chair of the Transportation, HUD and Related Agencies
    Appropriations Subcommittee. I congratulate you on your new
    responsibilities and, based on working together on THUD over the last 2
    years, I think we will continue to have a good relationship in
    balancing the many needs and important issues that are within our
    jurisdiction. While I would have preferred to remain chairman, I have
    the utmost respect for Senator Murray's abilities and sensitivities to
    the many issues and points of controversy that are part of our
    responsibilities. I know that we share similar concerns and objectives
    with regard to many of the programs and activities that are within the
    THUD appropriations subcommittee.
        The fiscal year 2008 budget for DOT proposes $67 billion in gross
    budgetary resources. Similar to last year, the administration chose to
    under fund popular programs, such as the Airport Improvement Program,
    Amtrak and the New Starts. Nevertheless, the Congress is not likely to
    provide lower levels of funding in fiscal year 2008 than what is done
    under H.J. Res. 20, covering the remainder of fiscal year 2007.
        I am pleased the administration remains committed to meeting the
    guaranteed funding levels for highways as authorized under SAFETEA.
    These funds allow an increased investment in key highway and
    transportation projects, which will complement and assist the
    continuing growth of the U.S. economy. However, the administration
    chose to cancel RABA, ``revenue aligned budget authority''. I am
    concerned over the loss of funding since SAFETEA calls for an upward
    adjustment if receipts into the Highway Trust Fund exceed what we had
    anticipated when we were drafting the bill. This results in $631
    million for fiscal year 2008. As one of the original authors of this
    concept, I will need to talk to people in Missouri and other States and
    see where we should go from here in addressing our additional highway
    needs nationwide.
        The administration also proposes a rescission of unobligated
    balances of contract authority for demonstration projects authorized
    under ISTEA in 1991. These funds are to be provided for a $175 million
    pilot to address congestion. As everyone knows, congestion is a major
    problem for both our economy and families across the Nation. Congestion
    impacts both rural and urban areas. Different approaches to addressing
    the issue are needed for all of our modes of transportation. I need to
    review carefully the administration's proposal to see whether we are
    spending these crucial dollars on pilots that will actually provide us
    with ideas for the future, or whether we are just continuing down the
    same path where we get little bang for the biggest bucks. I continue to
    believe that while congestion on our rail and port systems are
    important areas to address, highway trust fund dollars should be only
    used to address congestion on our Nation's crumbling road structure,
    and not on other modes of transportation.
        I am still unclear on the proposed $900 million for Amtrak. Amtrak
    will directly receive $800 million for Capital Spending Grants and
    Efficiency Incentive Grants and $100 million dedicated to issue capital
    matching grants to States for intercity passenger rail projects. While
    I remain critical of Federal funds for Amtrak, I question whether this
    funding level will meet anticipated expenses for fiscal year 2008
    considering H.J. Res. 20 includes $1.29 billion for Amtrak. I continue
    to expect the administration to outline a precise vision for Amtrak and
    maintain pressure for the organization to meet its overall objectives
    and goals Congress has set. If detailed transportation improvement
    plans were provided by Amtrak, we would be better able to understand
    what the needs are, and whether or not providing additional funding for
    passenger rail service is both effective and efficient.
        I look forward to working with the Department on the
    reauthorization of the FAA. I am aware that the administration is
    looking at a hybrid funding proposal involving user fees, increased
    fuel taxes and general revenue. I understand the exact details of the
    long awaited reauthorization proposal will be unveiled next week. While
    it is too soon to pass judgment on the reauthorization without seeing
    the full picture, it is my hope that the proposal will be fair and
    equitable to all parties involved in the aviation system: both
    commercial and general aviation.
        I think it is critically important that we get it right when
    dealing with how to fund the next generation of our aviation system. It
    is obvious that the FAA faces major challenges in adapting to future
    changes in aviation, such as the expanded use of very light jets and
    the anticipated increase in overall air traffic volume. Couple this
    with the complex challenge of managing a modernization program as large
    as the Next Generation Air Traffic System and it is clear that the
    Department and the FAA will have its hands full. I am certain Senator
    Murray will conduct further hearings on FAA where we can better
    understand and address these issues, and we look forward to working
    with both you and Administrator Blakey on these immense challenges.
        Another area of concern is the proper way to adjust Corporate
    Average Fuel Economy (CAFE) standards for both passenger cars and light
    trucks. I was pleased to hear in the President's State of the Union
    that the administration proposes to reform and increase CAFE standards
    for passenger cars using sound science and detailed cost/benefit
    analysis and without impacting the safety of the motor vehicle fleet.
    In addition to the proposal for cars, I was glad to hear that the
    President supports the continued increase in fuel standards for light
    trucks and SUVs under an extension of the current light truck rule.
    Nevertheless, we need to ensure that we make appropriate CAFE reforms
    that will not discriminate against domestic automakers in favor of
    foreign automakers and that appears to remain a concern under the
    proposal.
        It is important for members of Congress and the traveling public to
    realize that CAFE is a complex issue that requires much thought and
    careful scientific analysis. In recent studies, several leading
    engineering and highway safety organizations including the National
    Academy of Sciences and NHTSA have warned that any significant
    increases in CAFE standards will have adverse impacts on the both
    safety of the traveling public and the economic health of an already
    struggling U.S. automotive industry.
        I close by noting that I have many concerns about the President's
    budget and funding proposals, both as proposed for this subcommittee
    (especially the funding proposed for housing programs that are a safety
    net for many low-income families, including seniors and persons with
    disabilities) as well as many of the funding proposals that are
    contained in the jurisdiction of other subcommittees. How we meet these
    demands will be a challenge for both the Appropriations Committee and
    the Congress.
        Thank you, Madam Chair.

        Senator Stevens. Madam Chair, I have another committee. I'd
    like to submit a question for the record concerning the Indian
    Roads Program. Would you do that for me, please?

      PREPARED STATEMENTS OF SENATORS FRANK R. LAUTENBERG AND SENATOR SAM
                                   BROWNBACK

        Senator Murray. The Senator has that right, and it will be
    submitted for the record. Senator Lautenberg and Senator
    Brownback have also submitted statements for the record, which
    will be included as well.
        [The statements follow:]
               Prepared Statement of Senator Frank R. Lautenberg
        Madam Chair, statistics tell a story. When it comes to
    transportation, the story they tell is of a system that is costly to
    consumer and is not safe.
        In 2005, more than 43,000 families lost a loved one in a car crash.
    And traffic on our roads costs Americans more than $60-more billion
    dollars a year--or 2.3 billion gallons--in wasted fuel.
        In 2006, flight delays were the worst they have been in 6 years,
    according to a report released yesterday by the Department of
    Transportation. One in four flights arrived or took off late. Because
    of delays, it often takes 2 hours to fly from here to New York and New
    Jersey, and you are only airborne for 36 minutes.
        But this budget does not offer a solution solve these problems.
        This budget seems to feed our addiction to oil. President Bush
    proposes full funding of highway programs but cuts to transit funding
    by more than $300 million. Cuts to Amtrak of almost $500 million would
    tear apart the national passenger rail system or send the company into
    bankruptcy.
        Who suffers here? Not the oil companies. Last year, Exxon made some
    $40 million in profits. Working families pay the price for our failure
    to act--people who trying to get to work, or get home from work. People
    who need transit options.
        I look forward to hearing witness testimony today.
        Thank you, Madam Chair.
                   press release, thursday, february 8, 2007
        WASHINGTON, D.C.--United States Senator Frank R. Lautenberg (D-NJ)
    issued the following statement during today's hearing of the
    Appropriations Subcommittee hearing on the President's budget request
    for the Department of Transportation for fiscal year 2008.
        ``For a president who used his State of the Union Address to say
    that we are too dependent on foreign oil, it is ironic that his budget
    proposal would slash transit funding by $300 million, affecting 33
    million transit riders each weekday.
        ``Instead of making air travel safer, the President wants to leave
    old equipment in place and air traffic towers low on staff. Instead of
    giving commuters more choices by bringing Amtrak into the 21st Century,
    President Bush wants to give people fewer choices by destroying the
    nation's passenger rail system.
        ``Without adequate funding for Amtrak, rail service for New Jersey
    commuters who travel along the Northeast Corridor everyday could be in
    jeopardy.
        ``Given how crowded our skies and highways are becoming, I would
    have thought the President would propose more choices for New Jersey's
    commuters. Instead, he proposed fewer.
        ``I look forward to working with my colleagues to get this budget
    request on the right track.''
    Is The Bush Fiscal Year 2008 Budget Proposal Addicted to Oil?
        Cuts funding for transit projects by more than $300 million when
    transit ridership is growing some 33 million transit riders each
    weekday.
        Cuts funding for Amtrak by 38 persent--$500 million--which is
    insufficient to operate National Passenger Rail System.
                                     ______

                  Prepared Statement of Senator Sam Brownback
        Madame Secretary, I want to thank you for coming before this
    committee today to discuss the President's budget request for our
    Nation's transportation system. Before I go into my questions, I'd like
    to take a moment to speak on a topic that is of great importance to me
    and the people of Kansas, and that is aviation.
        You recently traveled to Wichita and made stops at some of the
    various aircraft manufacturers who call my State's largest city home.
    Kansans are proud of their legacy as the designers and producers of the
    world's finest aircraft, and the Air Capital of the World is home to
    five major aircraft manufacturers: Cessna, Spirit Aerosystems, Hawker
    Beechcraft, Boeing, and Bombardier Learjet. Last year, these companies
    employed over 31,000 people with a combined payroll of $1.65 billion.
    Additionally, they are the driving force of south-central Kansas'
    economy: they purchased over $1.9 billion in supplies from other
    Kansas-based companies. It is estimated that over 20,000 people are
    employed by subcontractors that provide services to the big five.
    Because of this, any indication of wholesale changes in the way the FAA
    does business sends shivers down the spines of thousands of my
    constituents.
        This budget, which we assume is a precursor to the administration's
    detailed plan for FAA modernization, proposes to make large changes to
    the way in which the aviation trust fund is financed. Significantly, I
    read here that the administration wants to shift from our current model
    to a user-fee based model. Also, I read that the administration will
    likely recalibrate the fuel tax rates for general aviation.
        First, I want to say that I understand the pressing need for the
    United States to update and modernize its air traffic control systems
    and get to a point at which the skies are open to fair usage by both
    airlines and private aircraft owners. However, I'm confused as to why
    the administration has linked the ability of the FAA to modernize with
    placing a greater share of the burden for paying for such updates on
    general aviation.
        Here in front of me, I have estimates that come from the
    President's fiscal year 2008 budget request, and these estimates
    indicate that over the next 5 years, the current financing structure
    for the aviation trust fund would actually result in more receipts than
    would a user-fee alternative. These estimates note that under the
    current financing structure, receipts into the trust fund would
    increase at either 5 percent or 6 percent per year until 2012,
    resulting in net receipts for those 5 years of $68 billion. These
    estimates further note that under a user-fee structure, receipts into
    the trust fund would increase anywhere from 2 percent to 8 percent per
    year with net receipts coming in at $67.1 billion. Additionally, the
    FAA's budget levels have increased at a steady rate for the past 12
    years. These numbers indicate that the FAA has been working with a
    stable increase in receipts from year to year for at least 12 years.
        If changing the financing structure of the trust would result in
    fewer receipts in the future, and the current structure has produced a
    stable funding mechanism in the past, why change it? I simply don't
    understand how the administration intends to modernize our air traffic
    control system by instituting a financing mechanism that shifts a
    greater financial burden to a marginal user of the system--general
    aviation--and results in fewer receipts into the trust fund.
        As to the budget's insinuation that the FAA will raise fuel taxes
    for general aviation, I want to remind the administration of a
    fundamental principle of economics: if you tax it, you get less of it.
    If you raise taxes on general aviation, you'll have fewer people flying
    small aircraft. General aviation users are sometimes portrayed as
    corporate fat cats who won't even notice a tax increase. However, the
    numbers tell a different story. Typically in 1 year, approximately 80
    percent of general aviation flight hours are consumed by people who are
    using single piston aircraft. In other words, these are small business
    owners and independent pilots who use only the smallest of small
    aircraft. These are the people who would be harmed the most by a tax
    increase on fuel. If a sharp tax increase becomes a reality, I'm sure
    many of them would find it uneconomical to fly.
        I hope you understand my concern with the administration's proposal
    on user fees and fuel tax increases. If instituted, they would have an
    immediate effect on my State's economy.

        Senator Murray. Senator Bond, thank you for your statement,
    and I am looking forward to getting the 2007 bill behind us and
    working together with you on this committee in a bipartisan
    way, as we have done so well in the past. I look forward to
    working with you.
        Senator Bond. Thank you.
        Senator Murray. For all the committee members, we have 21
    members on this committee, a large committee, so knowing the
    Secretary's time is concise this morning, we are going to have
    her make her statement and then we will have rounds of
    questions, 6 minutes per Senator, alternating between sides
    based on when you arrived. So we will move forward to Secretary
    Peters' opening statement and then to questions. Secretary
    Peters.

                        STATEMENT OF HON. MARY E. PETERS

        Secretary Peters. Madam Chairman and members of the
    subcommittee, I want to thank you--
        Senator Bond. Madam Secretary, could you pull that
    microphone--
        Secretary Peters. Will do, sir. Madam Chairman and members
    of the subcommittee, I want to thank you for the opportunity to
    be here with you today to share the highlights of President
    Bush's fiscal year 2008 budget plan for our Nation's
    transportation programs. Transportation, as you all know so
    well, lies at the core of the freedom we enjoy as Americans--
    freedom to go where we want, when we want; freedom to live and
    work where we choose; and freedom to spend time with our
    families.
        Our goal is to deliver a transportation system that frees
    people to make daily decisions confident that they can reach
    their destination safely, without worrying about how they will
    get there or even if they can make it on time. To reach that
    goal, the President's budget requests $67 billion for America's
    transportation network. Nearly one-third of the department's
    resources will be devoted to transportation safety.

                             TRANSPORTATION SAFETY

        Madam Chairman, you are exactly right. There is no
    acceptable fatality rate when it's our loved ones, our
    communities, who are at risk. The President's budget proposes
    resources for equipping our Nation's airports and roadways with
    new safety technologies for targeting growing problems like
    motorcycle crashes, something that I have had a little
    experience with, and for supporting aggressive inspection of
    trucks, tracks, and pipelines to ensure the highest safety
    standards are met.
        In addition to supporting our efforts to raise the bar on
    safety, the President's budget will help cut congestion and
    bring our transportation system into the 21st century. For
    those who use our aviation system, it provides a framework for
    reforming our approach to paying for the safety and technology
    improvements needed to keep air travelers, freight, and pilots
    on schedule.

                              FAA REAUTHORIZATION

        We have put together a package that will tie what users pay
    to what it costs the Federal Aviation Administration (FAA) to
    provide those services with air traffic control. Our plan puts
    incentives in place that will make the system more efficient as
    well as more responsive to the needs of the aviation community.
    Without reforms, we can all expect to spend more time waiting
    in airports or strapped in an airplane seat, sitting at the end
    of a runway.
        While we will soon announce the details of our aviation
    proposal, I can tell you that the budget targets almost $175
    million for a 21st century satellite navigation system that
    will replace the current dated air traffic control
    architecture, as well as over $900 million for additional
    capital projects that will support the move to this Next
    Generation system. For travelers, this transformation is going
    to bring greater convenience and reliability to the state-of-
    the-art technology that can safely handle dramatic increases in
    the number and the type of aircraft using our skies without
    being overwhelmed by congestion.

                               CONGESTION RELIEF

        And for drivers stuck in traffic, the budget proposes a
    record $42 billion in funding for highway and highway safety
    programs. Our budget proposes resources to help get traffic
    moving on clogged highways and city streets by directing $175
    million to support the comprehensive congestion relief
    initiative that was announced last year, and thank you, Madam
    Chairman, for recognizing that.
        This funding will help our growing metropolitan areas that
    want to lead with leading edge solutions. It will help
    distribute real-time traffic information to commuters, so that
    they will know prior to traveling when the roads are congested
    and be able to make alternative travel plans. And it will allow
    us to accelerate development of the trade and travel corridors
    that will be key to moving freight and people without
    congestion in the future, particularly at our ports of entry.
        Accessible and cost-effective transit projects also help
    fight congestion, and the budget provides $9.4 billion for
    transit programs. The funding includes $1.3 billion for major
    projects that will help provide commuter rail and other travel
    options in large urban areas, and another $100 million will
    support transit alternatives in smaller communities and in
    rural areas.

                       FUNDING TRANSPORTATION INVESTMENTS

        Even as we make these investments, we realize that a
    business-as-usual approach to funding these programs will not
    work much longer. There is, and will continue to be, money
    coming into the Highway Trust Fund from gasoline taxes, and
    revenues are growing every year, but so is spending, and at an
    even faster rate. The bottom line is that we're spending more
    than we're taking in, and we've nearly run through the balances
    that had built up in the fund.
        The highway funding problem is not going to go away, nor
    can we put it off until the last minute. So as we go through
    this budget process, I hope to start working with Congress now
    on solutions for long-term funding. In the long term, we need
    serious reform of our approaches to both financing and managing
    our Nation's transportation network to win the battle against
    congestion.
        Serious reform must include reform of the legislative
    process itself. The explosive growth of earmarks in recent
    years has hit transportation programs especially hard, and I
    sincerely appreciate the decision by this subcommittee not to
    include appropriations earmarks in the continuing resolution. I
    support President Bush's call for transparency and a 50 percent
    reduction in earmarks in the coming year. As a former State DOT
    director, I strongly support giving States the freedom to set
    priorities and use Federal dollars where they will provide the
    maximum benefits for their citizens.

                               PREPARED STATEMENT

        Madam Chairman, members of the subcommittee, thank you so
    much for giving me the opportunity to speak with you today. I
    look forward to working with each of you and the transportation
    community to ensure a safe transportation system, and to begin
    to break America free from stifling congestion. I look forward
    to answering your questions, and I am also joined here today by
    our Assistant Secretary for Budget and Programs, Phyllis
    Scheinberg. Thank you.
        [The statement follows:]
                   Prepared Statement of Hon. Mary E. Peters
        Madam Chairman, and members of the subcommittee, thank you for the
    opportunity to appear before you today to discuss the administration's
    fiscal year 2008 budget request for the U.S. Department of
    Transportation. Transportation lies at the core of the freedom we enjoy
    as Americans--freedom to go where we want, when we want . . . freedom
    to live and work where we choose . . . and freedom to spend time with
    our families. Our goal is to deliver a transportation system that frees
    all of us to make daily decisions confident that we can reach our
    destinations safely without worrying about how we will get there, or if
    we can make it on time. To reach that goal, President Bush is
    requesting $67 billion for America's transportation network in the next
    fiscal year.
        For those who fly, the President's budget includes $14 billion for
    the Federal Aviation Administration (FAA). The budget includes $175
    million to support the transition to a 21st Century satellite
    navigation system that will replace the current dated air traffic
    control architecture and over $900 million for ongoing capital projects
    that will also support the move to this Next Generation system. For the
    flying public, this investment is critical if we are to deploy the
    state-of-the-art technology that can safely handle dramatic increases
    in the number and type of aircraft using our skies, without being
    overwhelmed by congestion.
        Technology is critical, but the budget also includes significant
    resources to hire and train the people that keep the system safe. The
    fiscal year 2008 budget supports a total of 1,420 new air traffic
    controllers that will help replace controllers leaving the system due
    to retirements and other attrition. Based on our current projections
    this will result in a net gain of 144 controllers.
        Most importantly, the fiscal year 2008 budget provides the
    framework of a new proposal that the administration will announce
    shortly to tie what users pay to what it costs the FAA to provide them
    with air traffic control and other services. Our plan puts incentives
    in place that will make the system more efficient and more responsive
    to the needs of the aviation community. Without reforms to help finance
    increased air traffic control capacity and modernization, we can all
    expect to spend more time waiting in airports or strapped in an
    airplane seat, sitting at the end of a runway. We hope that there will
    be a vigorous debate about the structure of the system, and we look
    forward to working with the Congress to enact legislation later this
    year.
        For drivers, the budget proposes a record $42 billion, consistent
    with the funding envisioned in the Safe, Accountable, Flexible,
    Efficient Transportation, Equity Act: A Legacy for Users (SAFETEA-LU)
    for highway construction and safety programs.
        Building on our safety accomplishments over the last 6 years, this
    budget will allow us to target problem areas like motorcycle crashes
    and drunk driving. The President's budget includes $131 million for
    alcohol impaired driving countermeasures incentive grants as well as
    $124.5 million for Safety Belt Performance grants to encourage States
    to enact primary seat belt laws for all passenger motor vehicles.
        Crashes not only cost precious lives, but also precious time for
    everyone waiting for the road to be cleared and re-opened. So our
    budget supports aggressive development of ``Intelligent Transportation
    Systems,'' which put the latest technologies to work both to help
    eliminate crashes and to cut congestion. We believe that technology has
    a central role to play in reducing the growing costs of congestion and
    system unreliability. We are proposing $175 million to support specific
    elements of the comprehensive, department-wide National Strategy to
    Reduce Congestion announced last year. We hope to target these funds to
    support some of our most congested cities and explore cutting edge
    demonstrations of concepts such as time of day pricing, flexible
    transit systems, real-time traffic information, and improved incident
    management strategies. We also propose to accelerate development
    capacity and operations projects along our most congested trade and
    travel corridors through our Corridors of the Future program. We must
    get ahead of freight and travel trends along our most critical
    corridors to ensure that our interstate system continues to support the
    country's economic growth.
        Accessible and cost-effective transit projects also help fight
    congestion, and the budget provides $9.4 billion for transit programs.
    The President's budget includes $5.8 billion to help meet the capital
    replacement, rehabilitation, and refurbishment needs of the existing
    transit system. Also included is $1.3 billion for major projects that
    will help provide new commuter rail and other transit projects in large
    metropolitan areas. Another $100 million will be used to implement a
    new program with a simplified funding process to help provide smaller
    scale transit alternatives such as rapid transit, to relieve congestion
    in both urban and suburban locations.
        But even as we make these investments, we realize that a business-
    as-usual approach to funding these programs will not work much longer.
    There is--and will continue to be--money coming into the Highway Trust
    Fund from gasoline taxes, and the revenues are growing every year. But
    so is spending, and at an even faster rate. We are spending more than
    we take in, and we have nearly run through the balances that had built
    up in the fund.
        We continue to be concerned in particular about the solvency of the
    Highway Account in the Highway Trust Fund. Our projections suggest that
    spending may outpace receipts before the end of fiscal year 2009.
    Because we do not want to burden the trust fund further, the budget
    proposal does not include $631 million for revenue aligned budget
    authority--or RABA. As we go through this budget process, I pledge to
    keep the Congress informed of the administration's revenue projections,
    and work closely with you to ensure that we do not outspend our
    resources.
        Long-term, we need serious reform of our approaches to both
    financing and managing our transportation network to win the battle
    against congestion. We must fully explore the variety of mechanisms
    available to us to pay for transportation, as well as analyze the
    relationship between each mechanism and overall system performance.
    Serious reform must include reform of the legislative process itself.
    The explosive growth of earmarks in recent years has hit transportation
    programs especially hard. The law that funds highway, transit, and
    safety projects had over 6,000 of them, a practice that takes away from
    the freedom that States have to put the money where it will do the most
    good. I want to reiterate the President's call to cut the number and
    cost of earmarks in half this year--which is vitally important if we
    are to maintain a transportation network responsive to our customers'
    needs.
        We also urge action on making needed reforms to the Nation's
    Intercity Passenger Rail system. The President's fiscal year 2008 plan
    provides a total funding level of $900 million for intercity passenger
    rail. Included in this total is $100 million for a new matching grant
    program that will enable State and local governments to direct capital
    investment towards their top rail priorities.
        Our ``safety first'' priority includes ensuring the safe and
    dependable transport of hazardous materials throughout the
    transportation network. The President's plan provides $75 million for
    the Pipeline and Hazardous Materials Safety Administration's pipeline
    safety programs specifically for this purpose.
        Finally, we are requesting $154 million to support a fleet of 60
    vessels in the Maritime Security Program--ensuring ships and crews to
    assist the Department of Defense with mobilization needs. Our support
    is critical in supporting our military as they give so much to protect
    our way of life.
        Freedom is at the core of our American values. But we lose a little
    more freedom each time we venture into traffic. This budget proposal
    takes a big step in helping us get our freedom back.
        Thank you for the opportunity to appear before you today. I look
    forward to working with the Congress and the transportation community
    to ensure a safe transportation system that helps America break free of
    stifling congestion.

        Senator Murray. Madam Secretary, thank you for your opening
    remarks, and I look forward to working with you. Before I move
    to my questions, I just want to mention that I know that Deputy
    Secretary Maria Cino has resigned and has moved on to other
    responsibilities. She did an outstanding job for the
    Department, and I just wanted to make special recognition of
    the work she did in challenging times, moving the agency
    forward. She has now been replaced by another capable woman,
    and as my friend Senator Mikulski says, with a lot of women and
    a few good men, we'll get some things done on transportation
    this year.
        Secretary Peters. Thank you, Senator.

                     FUNDING TRANSPORTATION SAFETY PROGRAMS

        Senator Murray. So I'm delighted to be working with you.
        Madam Secretary, as I said in my opening statement, the
    joint funding resolution that is now before the Senate provides
    an increase totaling $270 million for some of the critical
    safety programs in your agency. We included in that funding
    levels the Bush administration requested for 2007 air traffic
    control, aviation safety, railroad safety, truck safety, and
    pipeline safety. Our goal in doing that was to make sure that
    inspectors and enforcement agents were on the job rather than
    having to face furloughs.
        I wanted to ask you, while you were in front of us today,
    if you could describe for us what would be the impact on your
    overall safety mission if we do not pass the joint funding
    resolution and instead freeze programs for the remainder of
    this year.
        Secretary Peters. Madam Chairman, as you indicated earlier,
    if we were funded at the 2006 levels without any opportunity
    for adjustment, it would have drastic consequences not only at
    the FAA but, as you mentioned, within other safety programs
    such as our rail safety programs, our truck inspection
    programs, and of course the air traffic controllers and safety
    inspectors of aviation maintenance facilities. We very much
    appreciate Congress considering adjustments to that process
    that would avoid these very negative consequences in our
    budget. We also would ask for, to the extent possible,
    flexibility in order to reprogram money within some of the
    funds so that we can meet these high priority safety needs.
        Senator Murray. Thank you. And we're already into the fifth
    month of the current fiscal year. I assume your administrators
    need to know when this funding is coming fairly soon?
        Secretary Peters. Absolutely, Senator.
        Senator Murray. Well, when it comes to hiring and employing
    adequate safety enforcement officials, tell me what the impact
    would be if we don't get this done by next Thursday.
        Secretary Peters. If not able to do this, we will see a
    serious decline in the number of safety inspectors, truck
    safety inspectors, rail safety inspectors, aviation inspectors,
    across-the-board in our programs. Madam Chairman, it would also
    eliminate some of our ability to work on important safety
    improvements that we need to make for the traveling public and
    those who use our aviation system.
        Senator Murray. You used to serve as a State transportation
    commissioner as well as the Federal Highway Administrator. The
    joint funding resolution proposes to boost highway formula
    spending to all 50 States by $3.4 billion. It's already well
    into February, and the States still don't know whether they're
    going to see this 9.6 percent increase. Can you describe for us
    what State transportation commissioners are saying today?
        Secretary Peters. Certainly, Madam Chairman. It is critical
    for State transportation commissioners to know how much money
    will be available to them in order to execute their capital
    improvement programs. It is especially important to those
    States who have a construction season that will be upon us very
    shortly. If they are uncertain that this funding is coming and
    unable to let contracts accordingly, we can easily miss an
    entire construction season.

                             HIGHWAY FATALITY RATE

        Senator Murray. Okay. Thank you very much for outlining
    that, and I hope that we can all work together to get this out
    soon, so that they can get to work and we don't miss that
    construction season, so thank you.
        Let me go to what I talked about in my opening statement,
    about the recent highway fatality data that has been released
    by your department. It's very disturbing, frankly. The number
    of highway fatalities grew to 43,400. That is a rate of 1.45
    fatalities per 100 million vehicle miles traveled. That figure,
    as I said, represents the highest number of fatalities since
    1990, and in real terms it means 1 life lost on our Nation's
    highways every 12 minutes.
        Given those really grim statistics, why is your Department
    actually weakening your goal of reducing the fatality rate to
    1.0 next year?
        Secretary Peters. The Department of Transportation is
    firmly committed to meeting its goal of the 1.0 fatality rate,
    but we have realized that we won't be able to achieve that goal
    by fiscal year 2008 as planned. To move the fatality rate even
    one-tenth of a point requires preventing approximately 3,000
    additional fatalities at current fatality and vehicle-miles-
    traveled (VMT) levels, but we recognize how important it is to
    do so.
        The Department has assembled a cross-modal working group to
    identify new strategies and technologies that will help reduce
    highway fatalities. The working group is analyzing trends and
    taking into account new technologies that are coming into the
    fleet such as the electronic stability control. Electronic
    stability control has the promise of saving as many lives as
    the seat belt did when it first came into prevalent use.
        We want to use these tools to establish new performance
    targets in key areas, to focus the Department's effort on the
    critical factors responsible for these highway fatalities, and
    especially this very tragic increase. These key focus areas
    include passenger vehicle occupants, non-occupants such as
    pedestrians and bicyclists, motorcycle riders, and large trucks
    and buses. These groups were chosen, in part, to cover the
    breadth of users.
        Madam Chairman, I have heard you this morning about how
    important this is, and I promise you that I will personally go
    back and redouble our efforts to work on these safety issues,
    and call upon my colleagues throughout the transportation
    community to make this a very, very important issue this year.
        Senator Murray. Well, I assume that you're not happy with
    having to move your deadline down 3 years on this.
        Secretary Peters. I'm not.
        Senator Murray. And I guess I was really disappointed.
    You've got some great, bold new proposals in your budget on
    combating congestion, which we all agree is a problem, and I
    was hoping to see some bold new proposals that could take
    effect immediately, because these numbers have been coming at
    us for some time now and it's pretty disheartening.
        So I hope that we can come back to this and talk about this
    again. And as I said, I will be having some hearings on this
    because I think it's something that we can't push down the road
    3 years from now. With that, I'm going to turn to Senator Bond,
    and I will come back to this issue again in my next round.

                               HIGHWAY TRUST FUND

        Senator Bond. Thank you, Madam Chair. And, Madam Secretary,
    we know that we've got some problems in both the funding for
    the Aviation Trust Fund and the Highway Trust Fund. We've seen
    several Highway Trust Fund runs showing a negative balance of
    approximately $200 million by 2009. This is, as I indicated,
    the first time to my knowledge that the administration has not
    proposed funding the RABA funds.
        You, as a former chair of the National Commission for the
    Future of the Highway Trust Fund, have been deeply involved in
    this question for a long time. Does the administration have a
    position on how to address the Highway Trust Fund going down,
    going into the red by 2009?
        Secretary Peters. Madam Chairman and Senator Bond, we are
    working on that as we speak. As you mentioned, I chair a
    commission that was appointed by this Congress to look at the
    future of surface transportation funding, and it's something we
    take very seriously.
        In the near term, Senator, the administration has begun to
    take action to protect the solvency of the Highway Trust Fund,
    and these actions will result in a projected $238 million
    shortfall in 2009, as opposed to the Congressional Budget
    Office (CBO) projection, which is $3.62 billion. The safeguards
    that we have taken in order to protect the solvency of the fund
    include, as you mentioned, our recommendation that we not
    include the $631 million in revenue aligned budget authority in
    the program this year.
        Another step that we have taken is a new accounting
    procedure where we use flex funding from the highway account of
    the Highway Trust Fund to the mass transit account when the
    money is actually needed for outlays, rather than in one lump
    sum when the contract authority and obligation authority are
    transferred. Because the mass transit fund outlays at a slower
    rate, there isn't any harm to the fund in our doing this.
        But, Senator, I agree with you. We have to do something,
    and we have to do something in the nearer term, not the longer
    term. And you have my commitment to work with you in the coming
    year to look at possible solutions.

                              FAA REAUTHORIZATION

        Senator Bond. We'll look forward to that. Do you have any
    idea yet how the administration's plans to deal with the
    Aviation Trust Fund will impact the funds required from general
    revenue and the trust fund in this committee for the 2008 year?
        Secretary Peters. Senator, in our budget that we have
    submitted, we have outlined some of the initial steps that we
    would like to take in order to modify and modernize funding for
    the air traffic control systems and for aviation safety in our
    Nation. I wanted to take just a moment of your time to talk
    about some of the limitations that have resulted in less than
    optimal customer service within the current system.
        Safety is, and must always be, our highest priority, but we
    have seen more delays and a lack of reliability due to capacity
    and capability of the current system. In fact, many of you,
    like myself this morning, saw this headline in our own
    Washington Post, ``Flying Late, Arriving Light.'' Too often we
    have delays in our transportation system, and we seek to remedy
    those delays within our proposed funding.
        I wanted to share with you some of the statistics that have
    alarmed me, and I think all of us, in terms of what we need to
    look to in the future. In less than 10 years the Nation's air
    space will be 30 percent more crowded than it is today.
        By 2012, FAA projects 23 percent more passengers will be
    flying, and by 2025 U.S. commercial carriers will be carrying
    1.4 billion passengers. That is nearly an 87 percent increase
    over the number of people who are flying today. In 2012, FAA
    projects that aircraft handled by FAA en route centers will be
    17.6 percent higher than in 2006, and by 2025 that demand will
    increase to 86.5 million aircraft, an increase of 87 percent.
        The current funding structure that's based largely on the
    price of a ticket provides no direct relationship between the
    taxes paid by the users and the air traffic services provided
    by the FAA. In order to meet both current and future consumer
    demand, we need to transition to a dynamic 21st century
    structure that ties the use of the system to the cost, a system
    that is equitable and a system that is responsive to demand.
        We have developed a proposal in consultation with the Joint
    Program Development Office and many of our stakeholders. That
    plan is represented in the President's budget and will also be
    in our reauthorization proposal next week.
        Senator Bond. Thank you very much, Madam Secretary. That
    headline about arriving late kind of struck home to me. Twenty
    days ago, in the middle of a snowstorm, I arrived at Reagan
    Airport in Washington, and the plane landed at 6:40. They said
    the gates were filled, so we sat on that plane, two other fully
    loaded planes, sat there during, I might add, during the first
    three quarters of the Colts-Patriots game, and we offloaded
    that plane at 9:20, 2 hours and 40 minutes later.
        Needless to say, this does not generate happy feelings
    among the flying public. I commended the attendants on board
    for being nice. The pilot was funny. But the whole problem is
    absolutely unacceptable, which I have shared with the airline
    as well. But I also, just in case anybody thought I was not
    counting, I did count the time and I do remember it.
        But I also fly, I have 1 million frequent flyer miles on
    small airplanes, and we need to find adequate funding for the
    AIP program, or the Nation's airport infrastructure is not
    going to keep up with demand. Are you going to have a proposal?
        Secretary Peters. Senator, yes, we are going to have a
    proposal. Proposed changes to the Airport Improvement Program
    (AIP) and the passenger facility charges will be forthcoming in
    our reauthorization proposal, which again, we hope to deliver
    to you next week.
        Senator Bond. Thank you very much.
        Senator Murray. Thank you, Senator Bond, for sharing.
        Senator Lautenberg.

                              AIR TRAFFIC CONTROL

        Senator Lautenberg. Thanks, Madam Chairman. This is the
    first time in 6 years that I have sat in the Transportation
    subcommittee, any subcommittee on Appropriations. In my
    previous service for 12 years I was either ranking or chairman
    of this subcommittee. I used to like that.
        And I still like it, and I hate to think that I have to
    stay another 18 years to regain that position.
        When I look at the proposal--and welcome, Madam Secretary--
    that has been offered in the President's budget, I see a lot of
    woe out there, and I don't mean W-H-O-A. I'm talking about W-O-
    E. In your testimony you introduced the fact that 1 in 4
    flights these days is either late going or late coming, but
    late, and I see it.
        I fly a lot to the New Jersey, New York airports. I live
    midway between LaGuardia and Newark Airports, depending on the
    traffic flow, and the flight is listed to be 36 to 40 minutes.
    That's after sometimes a 1-hour delay sitting on the ground or
    waiting for a gate when you finally get there. And so the
    proposal to increase the air traffic control population by 140-
    some, it's a rounded number, strikes me as being an impossible
    solution to the problem.
        We know that light jets are going to be pouring into the
    sky, purportedly 5,000 of them in the next 10 years. That's not
    going to make it easier to manage the traffic. And when you
    look at the number, you're proposing over 1,000 hires but it's
    going to be a net of 140-something with the retirees.
        How are we going to manage this traffic? We talk about
    safety being the principal factor, 45,000 people dying on the
    highways, and the delays in air travel that worry people, the
    unwillingness to finance Amtrak at a rate that makes sense. How
    do you justify that small number of additions to the controller
    population?
        Secretary Peters. Senator Lautenberg, you bring up a very
    important point, and we very much value our air traffic
    controllers who make sure that our airspace is safe.
    Accordingly, the President's budget provides funding to bring
    the total number of air traffic controllers to nearly 15,000.
        An important fact is that controllers today operate the
    same number of aircraft as controllers did in the year 2000,
    and certainly there are more controllers and more airplanes in
    the sky today. We will have our updated controller work force
    plan out in March of this year. Administrator Blakey and I
    would be happy to share it with you at that time, Senator. The
    plan will demonstrate that we are ensuring adequate numbers of
    controllers.
        Senator Lautenberg. Yes, but we're short now. It's
    estimated that there are almost 1,000 less air traffic
    controllers than 3 years ago, and the strain is obvious. So how
    do we look forward to managing what we've got? I don't see any
    way to do it, and I think the numbers are disastrously short.

                                     AMTRAK

        Let me talk for a minute about Amtrak. The company's last
    projection for fiscal year 2008 calls for almost $1.7 billion
    in Federal funding. So why does the President only request less
    than half of that, $800 million for Amtrak? Included in that,
    by the way, is a substantial amount of money owed on debt that
    must be paid each year. The number is over $285 million. What
    do we do to keep this thing going, besides going into
    bankruptcy?
        Secretary Peters. Senator, we also are concerned about
    Amtrak, and we are very pleased to have seen a lot of progress
    in the last year by the Amtrak board and the Amtrak management.
    The President's budget for 2008 does support Amtrak and
    recognizes----
        Senator Lautenberg. How much? Can you tell me?
        Secretary Peters. I'm sorry, sir?
        Senator Lautenberg. What kind of progress did we see in the
    last year?
        Secretary Peters. In terms of the Amtrak board, sir, they
    are controlling costs in a better way. They are looking at
    their operating subsidies and attempting----
        Senator Lautenberg. I'm sorry. That's a little too general
    for me. There are still empty chairs on the Amtrak board. Have
    you yet been to an Amtrak board meeting?
        Secretary Peters. Sir, I have not been to an Amtrak board
    meeting. I have, however, met with members of the board, and I
    also have met with Alex Kummant and talked with him about
    Amtrak. As I said to you in my confirmation hearing, Senator, I
    do support intercity passenger rail, and want to work with you
    and with the Amtrak board to make sure that they continue to
    provide service to Americans.
        The other factor, though, sir, is that they do have fiscal
    resources in addition to the President's budget proposal of
    $900 million. They have approximately $2 billion in normal
    operating revenue that comes in each year. They also have
    nearly $250 million in State subsidies, and with the $100
    million that we have proposed for the intercity rail grant
    program that could encourage more State participation, they
    could avail themselves of another $100 million in matching
    funds.
        Senator Lautenberg. It was said that they need $1.8 billion
    for the next year, so to come back and say, ``Well, there are
    other sources,'' the other sources are not sufficient to give
    the railroad the money it needs to improve the structure, the
    capital structure, or to support the operating losses. And at a
    time--and Madam Chair, I'm sorry--when security is so much on
    everybody's mind, here we are, we're locked into aviation, we
    spend a lot on highways, and we need a third leg on our
    transportation tripod in order for us to be able to manage.
    Heaven help if we need an evacuation in a time of trouble.
        Thank you, Madam Chairman. Thank you, Madam Secretary.
        Senator Murray. Senator Alexander, do you have any
    questions?

                               CONGESTION RELIEF

        Senator Alexander. Thank you, Madam Chairman. I look
    forward to being a member of the committee.
        Madam Secretary, thank you for being here. I'm impressed
    with the attention you're paying to surface congestion, and the
    numbers that you have in your budget are really staggering. I
    mean, we take these things for granted or we have come to
    accept them. You say 3.7 billion hours of travel delay, 2.3
    billion gallons of fuel costing $63 billion. That's a lot of
    money and time and lost productivity.
        And you list a number of things that you're encouraging to
    try to reduce traffic jams which occur in almost every major
    city in America today, but based on your own experience, what
    do you see as the most promising ideas for making a real
    difference in the traffic jams and congestion that Americans
    experience every day driving to and from work?
        Secretary Peters. Senator Alexander, thank you for giving
    me the opportunity to answer that question. Some of the most
    promising things I see in terms of relieving congestion and
    getting our transportation system to flow more smoothly are
    within the technology realm. Many of our intelligent
    transportation systems can help us manage traffic in real time.
        The sad fact is that once traffic breaks down, it takes up
    to four times longer to get that traffic moving again. So if we
    can use technology to inform us of what's happening on the
    system, to give motorists the information they need, that
    certainly is one of the most promising aspects.
        But another aspect, sir, that is very promising in terms of
    relieving congestion is using road pricing, dynamic pricing, or
    variable pricing as it's sometimes called. On roads in southern
    California that are using dynamic pricing, we have found that
    we can get up to a 40 percent increase in throughput by using a
    pricing model on the same lane configuration. An adjoining, so-
    called, free lane gets 40 percent less throughput than does the
    price lane.

                       USE OF CELL PHONES DURING FLIGHTS

        Senator Alexander. I'll switch to another subject. The
    Federal Communications Commission is currently considering
    proposals to allow passengers on airlines to use cell phones
    after takeoff. The FAA has some rules about that which limit
    the use of cell phones during flight for safety reasons.
        I can think of some other reasons that that might not be a
    good idea, that have something to do with safety. It seems to
    me that it would add to the cost of travel. I mean, you would
    have to hire more air marshals to stop the fistfights when
    people started yakking on their cell phones.
        You would have to land, have emergency landings of the
    airplane to deal with the heart attacks and the injuries that
    would occur. You would have additional stress for 2 million
    travelers, who would come home after being strapped in between
    two people talking about their love life and their office
    personnel policy as they go along.
        So I think it's cruel and unusual punishment even to think
    about the prospect of that, and I wonder what steps you're
    taking to--I wonder what the status of that is and whether we
    can expect that as we travel, that we'll be--that cell phones
    will be permitted after takeoff?
        Secretary Peters. Senator Alexander, I certainly share your
    concern about being trapped and strapped into a seat with
    someone carrying on a loud phone conversation on a cell phone
    next to me. I am not immediately aware of what the status is,
    sir, but I will look into that and get back to you as soon as
    possible.
        [The information follows:]

        The Federal Communications Commission (FCC) issued a Notice of
    Proposed Rulemaking (NPRM) on February 15, 2005 proposing to relax the
    ban on 800 MHz cell phone use on aircraft in-flight. Prior to issuance,
    the FAA had provided suggested language, which was adopted by the FCC,
    to mutually assure adequate protection of airborne and ground systems.
        The FAA position remains the same on the use of cell phones in-
    flight. Before an operator can allow the use of Portable Electronic
    Devices (PEDs), including cell phones, it must determine that device
    won't interfere with any aircraft system.
        FAA, along with the FCC, participates on the Radio Technical
    Commission for Aeronautics (RTCA) committee that was formed to develop
    the guidance procedures for PED allowance. RTCA continues to work on
    this issue.
        One of the most contentious issues regarding in-flight cell phone
    use is the ``loud-talking seat mate'' concern. FAA shares this concern
    and, if cell phone use is allowed, the FAA will continue to monitor its
    impact on a flight crew's ability to perform critical safety duties.

        Senator Alexander. I would appreciate that. We value our
    freedoms in America, but I think you put it pretty well. In
    this case we don't have a choice. We're assigned a seat, we're
    strapped in it, we don't know who is next to us. So I hope it's
    something you'll pay attention to, and I'll look forward to
    hearing from you, what you find out.
        Thank you, Madam Chairman.
        Secretary Peters. Thank you, sir. I will do so.
        Senator Murray. Senator Bennett.
        Senator Bennett. Thank you, Madam Chairman. Welcome, Madam
    Secretary.
        Secretary Peters. Thank you.
        Senator Bennett. I hadn't planned to go into this, but I'm
    stimulated by Senator Lautenberg.
        Senator Lautenberg. Thank you.
        Senator Murray. Thank you for sharing.
        Senator Lautenberg. Intellectually.
        Senator Murray. I think this committee hearing is really
    getting out of hand.

                                     AMTRAK

        Senator Bennett. As members of the committee have heard me
    say, maybe too often, I helped create Amtrak when I was serving
    at the Department of Transportation under Secretary Volpe
    during the Nixon administration, and I remember assuring the
    Congress--it was my responsibility to sell the idea to the
    Congress--I remember assuring the Congress that within 2 or 3
    years Amtrak would be a freestanding private corporation, for
    profit, and there would be no Federal money involved. We are
    decades away from that promise, and it is clearly never going
    to come to pass.
        You have talked a great deal about congestion relief, and a
    viable passenger rail, passenger system in corridors where
    there is a tremendous amount of traffic can be, should be a
    major form of congestion relief. Maybe we should be thinking
    about the Amtrak budget less in terms of, ``Gee, this is what
    they need to maintain their present relatively inadequate
    service,'' to ``This is what we need to spend to get some
    congestion relief in this area.''
        Now, the area where I part company with my friend from New
    Jersey has to do with the question of whether or not rail
    passenger should be a national system, and I have repeatedly in
    these hearings offered up Amtrak service in Utah to help get
    rid of the deficit, because the number of passengers that come
    into Salt Lake City could be handled on a single bus. One
    airplane a month, practically, if it were a 747, could fill the
    entire rail passenger usage into Utah, and the amount of money
    that is spent maintaining these long-range hauls for very few
    passengers has always struck me as being a foolish expenditure.
        I would be more than happy to have that money go into the
    Boston-Washington corridor to give reliable, fast service to
    get people off the airplanes. But when I take Amtrak to New
    York, as I have done, frankly the on-time performance of the
    Delta shuttle is a whole lot better. Even when you add showing
    up at Reagan 1 hour early to get through security, and the
    mind-boggling, harrowing taxi ride from Laguardia into town,
    and add those two time delays onto the 45-minute flight, you
    will get there faster on the airplane than you do on Acela,
    that is supposed to be the high-speed system, and it's almost
    always broken down or it runs into some other kinds of delays,
    and I very, very seldom have had an Amtrak experience that has
    been on time.
        So maybe we need a think tank of some kind within the
    Department of Transportation to say break out of the
    traditional stovepipes of saying we have this for rail traffic
    and we have this for bus traffic and we have this for airline
    traffic, and say okay, we have this many people that need to
    get across this piece of real estate, and what is the most
    efficient, rapid, logical way to move them? And then maybe we,
    in the name of congestion relief, take some money out of the
    Airport/Airways Fund--I don't know what you call it now, that's
    what we called it when we created it--and say for congestion
    relief we're going to supply Amtrak with these kinds of funds
    that will allow them to become reliable.
        I've taken an Amtrak situation, I could have gotten across
    the country in an airplane in the period of time I spent on the
    train, and cabin fever on the train gets to you after a while
    when you're constantly stopping for this or slowing down for
    that. You can only see so many back yards by the time you say,
    ``Well, the scenery doesn't excite me anymore.''
        So I just raise that. I'm a conservative Republican who
    doesn't like to spend money, but the benefit of relieving the
    congestion in this most highly populated part of our country is
    something we ought to look at. And every year we go through the
    same Kabuki dance. Every year it's, ``Why is Amtrak losing
    money?'' ``Well, we've got a new plan.'' ``Well, the board is
    being tight now.'' ``Well, we've got cost-cutting.''
        Maybe we just push all that off the table, take a clean
    sheet of paper and say we've got so many people that we have to
    move in this corridor, and what's the best way to move them?
    And if the best way to move them is by buses that are
    controlled by GPS systems and smart transportation, let's spend
    the money to do that. If the best way to move them is by train,
    and it's a high-speed train that goes at 150 miles an hour,
    let's spend the money to get track that stays up and stays
    operative at 150 miles an hour, instead of it's always down and
    always broken. And look at the whole situation, to use a term I
    learned at the department, intermodally, but perhaps with a new
    view of intermodal transportation than we ever had before.
        Could you think about putting together a group of smart
    folks and locking them in a hotel room to think about this
    until they come out with some answers?

                               SYSTEM PERFORMANCE

        Secretary Peters. Senator, I think you make a very valid
    suggestion, and I certainly will talk with people back at the
    Department and within the industry about this. It is one of the
    challenges that the Surface Transportation Policy and Revenue
    Study Commission is looking at very closely, in fact. We're
    looking at how can we meet transportation demand in better ways
    than we have in the past, both in terms of freight and in terms
    of passengers.
        It's one of the goals that I gave the President when I
    accepted the nomination, and you graciously confirmed me here
    in the Senate. I want to look at how our system is performing,
    as well as our funding and authorizing structures, and
    determine if they are meeting our needs in the way they should.
    I share your concern about the modal silos; we need to break
    those down and look more comprehensively at transportation for
    the future than we have in the past.
        Senator Bennett. Thank you. One last quick comment, Madam
    Chairman.
        Senator Murray. I've been very generous with you.
        Senator Bennett. All right. Never mind.
        Senator Murray. Senator Allard.

              DENVER SOUTHEAST CORRIDOR LIGHT RAIL PROJECT (T-REX)

        Senator Allard. Thank you, Madam Chairman. I come to this
    subcommittee as former chairman of the authorizing subcommittee
    on mass transit. It's a subcommittee on banking. And if there
    ever was an agency that overpromises and underdelivers, it's
    Amtrak. You ought to look at some of our hearings if you want
    more information on that.
        But I want to talk about a project that we have had in
    Colorado. It's called T-REX. It's a combination of rail and
    highway. I've talked to them about not overpromising to the
    Department of Transportation, certainly, and then
    underdelivering. That's very important. So I stressed it to
    them, how important it was that they keep the project on time--
    it's a huge project--and they do it within budget. They
    accomplished both those goals.
        The most discouraging thing to me is that now the Congress
    and the national Department of Transportation are not keeping
    their end of the deal, and they have not put the money into the
    project to pay for their shared cost. In fact, the local
    governments had to borrow money to cover the cost that the
    Federals should have been carrying on their share of the deal.
        I hope that when you work with local governments and States
    on these projects, that you don't overpromise and underdeliver,
    because I think that everybody's better served if we just watch
    and make sure that we don't overpromise and underdeliver.
    That's one particular case that's right in my backyard, that I
    think deserves mentioning. I think that we probably have to
    carry the message back to our States to be careful about the
    kind of project size, and make sure again that there is some
    fiscal responsibility and that it's going to serve the
    constituents and taxpayers the way it should.
        The other thing that I wanted to bring up is, you asked the
    question about or you have in the budget--and Senator Alexander
    I think talked about this, about programs that relieve
    congestion on the highways. There are a couple of programs that
    we've already put in place, we authorized.

                      TRANSIT NEW STARTS AND SMALL STARTS

        One is the new starts program, the other one is the small
    starts program. New starts was to encourage large communities,
    large cities to get into the mass transit system, and small
    starts was to go down to a smaller size city and encourage them
    to put together some mass transit systems that work. These
    programs are not being fully funded in your budget.
        Congress has already in many ways begun to address what it
    is that we can do to get people off the congested highways.
    High technology is some thing that can be done but it's going
    to have minimal effect. I think we have some programs right now
    that, if you go ahead and provide the money for them, they're
    going to help get people out of congested situations on our
    highways.
        I'd like to have you respond to those two, if you would,
    please.
        [The information follows:]

        The Full Funding Grant Agreement (FFGA) for the Denver Southeast
    Corridor, signed in November 2000, provides a total of $525 million in
    New Starts funds for fiscal year 1999 through fiscal year 2008. The FTA
    seeks the amount indicated in Attachment 6 to the FFGA, a year-by-year
    agreed upon funding commitment in the FFGA as part of the President's
    annual budget request. By the end of fiscal year 2006, $366.2 million
    had been appropriated for the T-REX project. This amount is $27.2
    million less than the Attachment 6 amounts in the FFGA for fiscal year
    1999 through fiscal year 2006. Thus, as you mentioned at the hearing,
    there is a shortfall in the amounts appropriated compared to amounts
    requested in the President's annual budgets for these years.
        The President's budget for fiscal year 2007 requested $80 million,
    the FFGA Attachment 6 amount for fiscal year 2007. I am pleased to
    inform you that the President's budget for fiscal year 2008 requests
    $78.8 million, compared with $51.6 million in the FFGA Attachment 6,
    which will make up for the shortfall that you expressed concerns about
    during the hearing. lithe fiscal year 2008 appropriations are enacted
    in accord with the President's budget request, the Denver Southeast
    Corridor project will be fully funded in accord with the Federal
    commitment originally called for in the FFGA.

                      TRANSIT NEW STARTS AND SMALL STARTS

        Secretary Peters. Senator, I certainly understand your
    concern about funding for transit in general, and the small
    starts and the new starts program specifically. Sir, we had
    some tough budget decisions to make within the administration,
    much like you do here on the Hill as well, and we endeavored to
    put as much money as we could to these programs.
        But, as has been indicated earlier, we are funding transit
    about $309 million below the fiscal year 2008 level authorized
    in SAFETEA-LU. In the President's budget, we also have put the
    brakes on the revenue aligned budget authority (RABA) for the
    highway program, to the tune of $631 million.
        But, sir, I will assure you that the President's budget has
    provided funding for every project that's ready to go in our
    fiscal year 2008 budget proposal. No projects that are ready
    for funding have been left on the table, and we have funded 11
    existing full funding grant agreements, and have sufficient
    funding for two pending and two proposed grant agreements. We
    also have set aside $72 million for six projects that aren't
    quite there yet, but we will continue to watch those projects,
    Senator, to make sure that we're not dropping funding.
        For small starts projects, we have set aside $51.8 million
    for four projects that have been approved to date and reserved
    $48.2 million for additional small starts projects. One of the
    issues with smalll starts is that the regulations governing the
    program will not be fully in place until 2008, so we don't
    believe that there will be more projects than the $100 million
    would satisfy in the near term.

                         ESSENTIAL AIR SERVICE PROGRAM

        Senator Allard. Another program I wanted to bring to your
    attention is called the Essential Air Service Program. This
    enables air carriers to provide service between selected rural
    communities and hub airports. Now, the fiscal year 2008 budget
    proposes funding of $50 million, less than half that provided
    for in the House-passed continuing resolution. Can you explain
    the impact on the program if we were to fund at less than half
    of the current level?
        Secretary Peters. Senator, I understand how important the
    Essential Air Service Program is to a number of small
    communities, and the President's budget includes $50 million to
    continue service to the most isolated communities. Clearly this
    amount of money would not meet every eligible community's
    needs.
        So our recommendation is to limit funding to those
    communities that are currently subsidized by the EAS program,
    that are more than 70 driving miles from the nearest large- or
    medium-hub airport, and the subsidy does not exceed $200 if the
    community is more than 70 miles but less than 210 miles from
    the nearest large-or medium-hub airport. We would then rank
    communities that are eligible under these criteria and allocate
    the $50 million to the most isolated communities.
        Senator Allard. With those priorities and that way of
    establishing priorities, do you think you'll have enough money,
    then, for half of the fiscal year?
        Secretary Peters. Sir, we believe we'll have about enough
    for the most isolated communities.
        Senator Allard. How is that funded? I mean, where does the
    money come from for that?
        Secretary Peters. I'm going to turn to my Assistant
    Secretary for Budget for that question.
        Ms. Scheinberg. The money comes from overflight fees that
    FAA collects.
        Senator Allard. Okay. Thank you. Thank you, Madam Chairman.
        Senator Murray. For the committee members, I've been very
    generous recognizing Senators as they come in and have not gone
    back to our side. Senator Brownback has come in. I'm going to
    allow him to speak. I will then return and reclaim my time,
    Senator Bond, and back to Senator Lautenberg.
        Senator Brownback.

                              FAA REAUTHORIZATION

        Senator Brownback. Yes, thank you, Madam Chairman. I
    appreciate that. And Madam Secretary, delighted to see you,
    glad to see you were in my State not long ago, in Wichita,
    meeting with the aircraft manufacturers. They appreciate that
    greatly, and we appreciate it. It is, as you saw, a big
    industry in our State and they're doing quite well now. That
    hasn't always been the case. Some of the changes in the tax
    laws here and the growing economy have really made a big
    difference for them, and so they're hiring and doing very
    nicely.
        One of the things they're real concerned about, and I want
    to get some of your thoughts on this, is shifting some of the
    burden on FAA modernization to general aviation. I had a group
    in my office yesterday. They, as I mentioned, they're growing.
    You saw them, what's taking place. It is a world class
    manufacturing operation. They're engaging more and more global
    competition, and they're just fearful that you're going to
    shift a bunch of the FAA costs onto general aviation.
        And so I want to get you, if you could, to address some of
    these questions and concerns. Particularly there was an article
    in the Wall Street Journal this past Tuesday where the FAA
    Administrator said this: ``I'm talking about shifting of cost,
    not increasing of cost.'' Now, we can assume that the shift in
    question would result in increasing the burden on general
    aviation, or that's what we're hearing. Now, is that the plan?
    Is it to shift it more to the general aviation manufacturers,
    or not? I'd like to hear your comments about that.
        Secretary Peters. Senator Brownback, we certainly
    appreciate the general aviation community, and they provide a
    very important service in the United States. Our
    reauthorization proposal will be out next week, and I believe
    that if we could wait until we have that document, I can more
    fully answer your question about the impacts of modernizing the
    air transportation system on various industry segments.
        Senator Brownback. Well, I appreciate that. That doesn't
    give much solace. If you were addressing the Wichita City
    Council, my guess is they would want a little more fuller
    discussion or an assurance from you that you're not going to
    shift costs to general aviation.
        I was noting in some of your budget projections that if you
    stayed within the current fee structure, you would actually
    raise more revenue than if you shifted a fee structure that's
    being projected under new user fee proposals. The current one
    would produce $68 billion and the new fee structure, $67.1
    billion.
        My point in saying this I think probably should be obvious.
    Here's an industry that's growing. It's doing well. But if you
    start putting on a 40 percent increase in general aviation fuel
    taxes, that's going to have a big hit in the system and it's
    going to drive a reduction in purchasing of the aircraft.
        I hope you can understand that these have direct
    implications. The industry took back off after we made some tax
    changes here to allow people to purchase aircraft. It really
    helped the industry. But you can also do it in reverse and hurt
    it a great deal as well.
        Are those being contemplated, increasing fuel taxes for
    general aviation?
        Secretary Peters. Senator, I know that the structure is
    being looked at. Again, not to be disrespectful of the
    question, I would prefer to answer that once the
    reauthorization proposal is out, so that I can correctly answer
    what might be included in the new funding system.
        Senator Brownback. Okay. I notice that you do have in your
    Department of Transportation budget proposal this statement:
    ``General aviation users would continue to pay a fuel tax that
    would be deposited in the Airport and Airway Trust Fund. Fuel
    tax rates will be calibrated based on the costs these users
    impose on the system.''
        That sounds like to me an increase in fees is in your base.
    Now, I don't mean to try to trick you, but that's in your base
    document.
        Secretary Peters. Senator, yes. We have heard from the
    general aviation community, and I certainly heard this when I
    had the opportunity to visit Kansas. Their preference is to pay
    through the fuel tax system as opposed to any new user fees
    that would be problematic and difficult for them to pay. That
    is the issue to which we're referring in the budget. We do plan
    to have the cost allocation study come out at the same time as
    the reauthorization proposal, which will help us see where
    costs are imposed on various industry segments of the system.

                        PROPOSED AVIATION FEE STRUCTURE

        Senator Brownback. And I would hope you would look at your
    current fee structure versus your new proposed fee structure.
    If the current one is producing more in revenues than a new
    one, that wouldn't seem to make much sense. If you're looking
    for FAA modernization and funds to be able to do the
    modernization, it doesn't seem like changing to a fee structure
    that produces less would be a wise move to go.
        Secretary Peters. Senator, one of the problems with the
    current system is that it is not dynamic and is not able to
    align costs to revenue based on system usage. Funding the Next
    Generation Air Transportation System will help us dynamically
    match the costs to system usage. But I absolutely understand
    your concerns about the general aviation community, and commit
    to you that we will look very closely at them.
        In terms of the numbers that are included in the budget
    about the difference between what the new system would collect
    versus the old system, I'll ask our Assistant Secretary to
    explain how that was calculated.
        Senator Brownback. Please. I would just note before she
    gets on and my time runs out, I have heard people talking about
    as much as a 40 percent increase in general aviation fuel tax.
    That's going to hit people when you increase at that level, and
    I really don't think that's meritorious to do. I think it's
    going to be very harmful.
        Ms. Scheinberg. Senator, I believe the numbers you're
    referring to are from a table in the President's budget. That
    table shows what revenues would be generated if the FAA user
    fees were in place in fiscal year 2008, which we're not
    planning to do until 2009, compared to the current system.
    There is a difference of about $600 million.
        What that says is that under our proposal, users will pay
    for what is needed in that fiscal year. The current system
    generates $600 million more than the budget requests for FAA in
    fiscal year 2008. This difference is one of the reasons we're
    proposing a new system that generates the amount we need rather
    than money that is in excess for the year. There could be years
    in the future when we would need more money, but right now
    we're collecting money that is not completely correlated to the
    amount that we need in the budget. That's what that table is
    trying to show.
        Senator Brownback. Thank you, Madam Secretary. Thank you,
    Madam Chairman.

                     OVERSIGHT AND CONTROL OVER FAA FUNDING

        Senator Murray. Thank you.
        Madam Secretary, let me continue on the issue of the FAA
    reauthorization. I know we're not going to see your proposal
    until next week, but there is one major issue that really
    concerns me and really should concern every member of this
    subcommittee, and that is whether or not you're going to
    propose taking funding control and oversight of the FAA away
    from this subcommittee. Some of the major airlines have
    proposed that funding for the FAA be converted from
    discretionary category to mandatory category, taking it out of
    the control and oversight of this appropriations subcommittee,
    and I wanted to ask you today if the FAA reauthorization
    proposal that you're going to present will convert any of the
    FAA's accounts to mandatory funding outside the appropriations
    process.
        Secretary Peters. Madam Chairman, no, they will not. Those
    accounts will not be mandatory, and of course they would be
    subject to annual appropriation.
        Senator Murray. Okay. Thank you very much. And even if your
    proposal finances the FAA through user fees, do you anticipate
    that this appropriations subcommittee will still set the annual
    disbursements of those funds for each program and project
    within the FAA?

                            FAA FINANCIAL MANAGEMENT

        Secretary Peters. Madam Chairman, yes.
        Senator Murray. Given the considerable problems we have had
    with FAA procurements that have come in late, have come in over
    budget, or deliver less than was originally promised, would you
    agree that the FAA's acquisition budget needs an annual review
    both by the Office of the Secretary and by this appropriations
    subcommittee?
        Secretary Peters. Madam Chairman, we know that there have
    been problems in the past, and that GAO has had some of these
    programs on its ``high risk'' list. We have made significant
    progress within FAA in improving the management of some of the
    major investments. For example, in 2006, 97 percent of the
    major capital projects, which account for 90 percent of the
    capital spending, were on schedule and within budget, and we're
    on track to meet that level this year as well. We understand
    that this has been a long-term issue, and if I may, the
    Assistant Secretary has more information on that topic.
        Ms. Scheinberg. As the Secretary mentioned, GAO has been
    looking at this for years, and they have come out with their
    most recent high-risk list. GAO reported that the FAA has done
    a number of things to improve its project management for
    capital improvements, and has given the FAA a complementary
    report. While this program is still on GAO's high-risk list,
    it's much improved according to GAO. We have spent a lot of
    time and effort inside the Office of the Secretary overseeing
    this program.
        Senator Murray. Well, as you reported, your Department, as
    you know, received a clean audit of its financial statements
    for each of the last 4 years until this year, and this year
    your auditor couldn't issue a clean audit because of
    significant accounting weaknesses at the FAA. And I understand
    that the central problem pertains to the FAA's inability to
    accurately account for the value of all of its properties.
        You stated that your authorization proposal is going to
    look at levying new user fees on the aviation industry based on
    the extent to which they use FAA services. So given that the
    FAA undermined the opportunity for a clean audit for the entire
    Department because of those accounting weaknesses, why are you
    now confident that the FAA can appropriately assess the true
    value of its services and charge user fees fairly for each of
    those services?
        Ms. Scheinberg. If I may, Madam Chairman, the issue with
    the audit had to do with past years' documentation of FAA's
    capital improvement projects. The problems are consistent with
    FAA's past problems because they are from previous years.
        The most recent years are much improved. Part of what this
    reflects is that FAA had major problems in past years. In
    current years, we have addressed the issues, but the accounting
    records go back. We need to clean up previous years as well.
    The weakness was documentation for equipment that we had
    purchased in previous years.
        As far as the cost accounting system and the cost
    allocation system, that has gone on separately, and FAA has led
    the way in the Department for being able to allocate its costs.
        Senator Murray. Well, they will be before this committee at
    some point here in the future, but it just seems to me with the
    basic accounting problems that they have, it wouldn't be
    appropriate to put their budget on automatic pilot through the
    authorization of mandatory funding. I assume you would agree
    with me on that.
        Secretary Peters. Madam Chairman, we are not doing that,
    and we would agree with you on that point.

                            PRIMARY SAFETY BELT LAWS

        Senator Murray. Thank you very much. Okay, with my minute
    left here I did want to go back to highway safety, just to
    follow up on that. I don't think that money is the answer to
    everything, obviously. None of us do. Senator Lautenberg here
    has been a champion of effective drunk driving action that has
    been mandated on the States, that has made considerable
    improvement.
        Your department has long supported the enactment of primary
    seat belt laws by our States, and those laws have been on the
    NTSB's most wanted list for a very long time, but even so, only
    half the States have enacted laws. Some of our States in fact
    have been debating this for a very, very long time. Do you
    think it is time for us to go the route of sanctioning the
    States if they don't enact primary seat belt laws?
        Secretary Peters. Madam Chairman, we prefer to use
    incentives and rewards for behavior that helps improve safety,
    as opposed to sanctions. I would point out how effective that
    has been with the seat belt laws, in terms of providing
    incentives for States that adopt those laws.
        Senator Murray. But have you personally traveled to any
    State to try and get them to enact their own laws?
        Secretary Peters. Yes, I have.
        Senator Murray. Has that worked?
        Secretary Peters. Right now 80 percent of the States have
    laws. And I would harken back to my own home State of Arizona,
    where as a State administrator I tried very hard to get them to
    adopt that law. Once the incentives were put in place they
    ultimately adopted it.
        Senator Murray. Well, I hope you and I can have this
    discussion as we go along, because it is disconcerting to me
    that only half the States yet, though the use of words, have
    used in that direction. And again, we're seeing high
    fatalities, so I think it's something we ought to take a look
    at.
        Secretary Peters. Madam Chairman, we recognize how
    important it is. In fact, I participated over the holiday
    period with a number of States on driving under the influence
    (DUI) task forces, and personally went out and spent the
    evening with them to try to tackle this drunk driving issue. We
    agree with you that it is very important.
        Senator Murray. And how about the seat belt laws?
        Secretary Peters. They're also enforcing the seat belt
    laws. Again, as you said, it's much easier to enforce a primary
    seat belt law, so an officer doesn't have to stop a motorist
    for another reason.
        Senator Murray. But only half the States have that----
        Secretary Peters. That is correct, Madam Chairman. I
    misspoke earlier. It's 80 percent seat belt use, but not all
    the States have primary seat belt laws.
        Senator Murray. Senator Bond.

                          HIGHWAY TRUST FUND REVENUES

        Senator Bond. Thank you, Madam Chair.
        Madam Secretary, we've been talking about CAFE and
    increasing the fuel mileage. I understand that hybrid cars have
    been having some impact on reducing fuel usage, and my staff
    who have hybrids are very pleased to be freed from the costs at
    the pump. But what are these reductions in fuel usage having in
    terms of an impact on the Highway Trust Fund? Do you have some
    ideas, some figures on that, and any suggestions about what if
    any remedies might be needed?
        Secretary Peters. Senator Bond, I think you're exactly
    right. We are seeing declining amounts of funding coming in
    from the gasoline taxes, or I should say a flatter portion of
    fuel taxes coming into the Highway Trust Fund. I think it's one
    of the reasons that we need to comprehensively evaluate this
    system.
        Sixty-five percent of the Highway Trust Fund revenues are
    related to gasoline and gasohol. We're seeing that the annual
    growth in the Highway Trust Fund revenues has slowed
    considerably over the last 5 years as compared to the previous
    decade. We're also seeing a slowdown in the vehicle-miles
    traveled, as well.
        These are all precursors, in our opinion, to a need to look
    comprehensively at the effect these things are having on
    funding and whether or not fuel taxes are an appropriate
    mechanism for the future.

                     CORPORATE AVERAGE FUEL ECONOMY (CAFE)

        Senator Bond. Well, I think that's appropriate to look at.
    Now, Madam Secretary, you and I know that there have been some
    very wonderful, exciting, bold proposals by those of us with
    all-knowing insight into vehicles, to propose corporate average
    fuel standards of 30, 40, 50 miles per gallon, and they are
    very ambitious. Do you have any views on why it makes sense for
    fuel economy standards to be set by DOT and NHTSA instead of
    having Congress legislate a particular numeric fuel economy
    increase?
        Secretary Peters. Senator Bond, I do. I think it's very
    important to have the opportunity to set those standards
    through a rulemaking process that considers the attributes of
    various models of vehicles that are in the fleet today. We also
    want to make sure that we look at the scientific data, the
    cost-benefit analysis, the impacts on safety, the impacts on
    the economy, and the impacts on jobs as part of setting those
    standards.
        Senator Bond. I hope you will, because Congress doesn't
    always look at them when it makes those wild proposals. And I
    would note that the automotive industry has been struggling for
    the past few years. We've had significant layoffs across the
    country, including my State of Missouri, and many stakeholder
    groups within the automotive industry, including the United
    Auto Workers, have expressed serious concerns about negative
    impacts that large CAFE increases might have on automotive
    jobs.
        I assume from your previous answer that the administration
    will be considering the negative impacts that CAFE standards
    have on U.S. automotive jobs. The current standards for
    vehicles as opposed to light trucks, sport utility vehicles
    (SUVs), might have that impact. Does the administration support
    a more targeted fuel standard based on the size of vehicles, so
    we won't disadvantage the U.S. auto industry?
        Secretary Peters. Senator Bond, we believe that we should
    use an attribute-based system which takes into account
    different vehicles that are in the fleet in establishing these
    standards. The President has laid out a very ambitious goal to
    attempt to save 8.5 billion gallons of fuel by 2015, but we
    also believe that we need to set these standards based on
    different sizes of vehicles that are in the fleet. Some
    families can't always use a small sedan, and so we have to take
    that into account as well, and not to have a disproportionate
    impact on any industry segment in the process.

                       FUNDING FOR CONGESTION MITIGATION

        Senator Bond. Thank you. I think that's very important.
        As I mentioned in my statement, we know that congestion is
    a major problem, and we've had some very innovative suggestions
    from my colleague from Utah. I will look forward to hearing
    more from him. But I want to see some more flesh on your
    congestion mitigation skeleton. Have you looked at alternative
    funding for this congestion program?
        Secretary Peters. Senator Bond, yes, we have. The SAFETEA-
    LU legislation that was enacted in 2005 provides opportunities
    for private activity bonds, which have been very helpful in
    attracting private sector investment to transportation
    infrastructure, and also by giving States the opportunity to
    use public-private partnerships more broadly than they did in
    the past.
        I had a conversation with Ric Williamson, who is the chair
    of the Texas Transportation Commission, just this week. He
    related to me how these provisions have substantially helped
    them attract additional funding for transportation. But those
    should not be the only methods that we're using, Senator. We
    need to look more broadly at available revenues for
    transportation and what the impacts of those various revenue
    sources would be.
        Senator Bond. Well, my former colleague was a very strong
    supporter of private activity bonds. We'll look forward to your
    proposals. Thank you.
        Secretary Peters. Thank you.
        Senator Murray. Senator Lautenberg.

                      INTERCITY PASSENGER RAIL AND TRANSIT

        Senator Lautenberg. Thanks, Madam Chairman.
        To my friend from Utah, for whom I have a great deal of
    respect, he has had a lot of experience with Government and
    he's a thoughtful fellow, and he was one of the 93 who voted
    for the bill in effect when it was presented. That was a good
    vote. Only six people were so conservative that they couldn't
    support it. So I thank you.
        Now, in terms of your experience, Senator, you may bring
    bad luck, because the average wait time, on-time performance on
    Acela is 90 percent, other Northeast trains, 85 percent, all
    airlines is 75 percent. So I don't think I want to travel on
    the train with you.
        Senator Bond. Senator, you probably don't want to travel on
    a plane with me, either.
        Senator Lautenberg. I know Utah fairly well. Cottonwood
    Canyon has been a favorite place of mine in the Wasach
    Mountains. I love them dearly and I've been up and down them a
    lot of times.
        And for our colleague from Missouri, my first training in
    the military was digging foxholes in the Ozarks, and I will
    tell you it's not possible, and I've seen a lot of muscle used.
        I have fond memories of that State, and that's why I was
    pleased to see that the mule train is getting reinstated, and
    that there is service that could be employed between Chicago
    and St. Louis and other cities across the country. St. Louis to
    Kansas City would also be a good one.
        In all seriousness, when we look at this energy savings, a
    passenger on Amtrak uses 2,900 Btu's per passenger mile.
    Automobiles, it's 3,500, and airlines, it's also 3,500. So the
    savings would be enormous. And I would tell you, in a very
    serious moment, I look at what happened when the Trade Centers
    went down, and railroad was the only thing operating. The
    aviation system came to a total halt. The highways were jammed.
    A country like ours ought to have a more reliable, robust rail
    system, and one of the things that we have to look at is what
    the energy savings might be.
        But I think in terms of security of this country, and I
    remember the problems with two nuclear energy plants, one built
    in Long Island and one built in New Hampshire, and the
    principal problem with one of them, total abandonment of
    billions of dollars of construction because they couldn't offer
    a decent evacuation system to get people out of there in the
    event of a problem. So I think we have to look at the system.
        And I am told, Senator Bennett, that if the train which
    passed through Salt Lake wasn't at 3 a.m. in the morning, maybe
    the traffic and service would be better. And for long-distance
    trains, the biggest problem for them is that they are often
    stuck behind freight railroads. That's tough, and they just
    can't command it.
        So I have heard many cases made for projects, but you made
    a case for capital investment in railroads such as I have never
    heard, and that is if we could be a kind of Brussels to Paris
    kind of thing, 200 miles in an hour and 20 minutes. I was in
    the cab of the engine there, and the cows were flying by. It
    was really quite an experience.
        Could you just imagine, if we could make the investment
    that we have to in Amtrak and long-distance rail, how many
    places could be improved in terms of their transportation?
    Washington State, Portland, for instance, making good use of
    rail service. Oklahoma City to Dallas, Texas would be an
    excellent corridor. So many places.
        And I would ask, Madam Secretary, passenger rail I think
    clearly holds promise for not just getting cars off the roads
    but also reduction of our Nation's reliance on foreign oil. It
    was mentioned how much is lost as a result of congestion and
    delay. Does the administration see rail as an important
    mechanism to promote energy efficiency, reducing that reliance
    on foreign oil?
        Secretary Peters. Senator Lautenberg, I see your chart, and
    it certainly makes a compelling argument about the use of oil
    and the different modes of transportation.
        Senator Lautenberg. Well, then, why aren't we getting more
    money for improving passenger rail service? You know, in Penn
    Station in New York the train traffic is equivalent to a 747
    that leaves every 30 seconds. We see what happens now. They
    recently repaired and renovated a rail line from Philadelphia,
    Pennsylvania to Harrisburg, and the ridership went up 30
    percent. That's what we're seeing. Wherever new rail systems
    are in there, transit systems, people take them out of
    necessity, to get out of the traffic and have more reliable
    arrivals when they have to go someplace.
        And, you know, I see 3 weeks after the President's State of
    the Union address he proposed cutting funding for transit
    projects by over $300 million from the congressionally
    authorized level. Now, in light of the President's environment
    and energy goals set forth in his speech, how do we justify
    these cuts for transit?
        Secretary Peters. Senator, we had some very difficult
    decisions to make in putting the President's budget together.
    We have been asked to keep non-defense discretionary spending
    down to 1 percent growth. We have actually allocated more than
    that to transit and highway programs, but we faced overall
    limitations, sir. Again, we are not leaving any transit project
    that is ready for funding on the table. All of those projects
    are funded.
        Senator Lautenberg. Return on the dollar is the fact that
    it's got to be in consideration. Thanks very much. Thanks,
    everybody, for your tolerance during my reintroduction to the
    Transportation subcommittee.
        Senator Murray. It's great to have you back.
        Senator Bennett.

                       MASS TRANSIT AND CONGESTION RELIEF

        Senator Bennett. Thank you very much, Madam Chairman. I
    will be more succinct this time. I apologize for getting
    carried away before. I do remember learning in the department
    that in order to have mass transit make sense, you have to have
    a mass that needs to be transited.
        There are those of us, you have a transit program, you talk
    about that as being funded, Salt Lake to Ogden, in my State,
    I'll defend that as vigorously as the Senator from New Jersey
    will defend Amtrak on the Northeast corridor because there is a
    mass that needs to be transited. But the mass that needs to be
    transited over the long distances of the West, to me it still
    don't make that much sense, but we'll have that debate later
    on.
        Let me go back to, you're talking about congestion relief
    and the use of technology to get there. I simply want to call
    your attention to an example that you're probably familiar with
    but may not be, and that is the experience that we had in Salt
    Lake City in the 2002 Olympics. I learned, being connected to a
    State that put on the Olympics, that the biggest challenge of
    putting on a successful Olympics is transportation. That was
    the problem in Atlanta. That was a huge problem in Athens. And
    it was a problem that got solved extremely well in Salt Lake
    City.
        A lot of folks don't realize, we had buses literally from
    all over the country, and I was in Salt Lake City and I would
    see these strange buses on the street and think that was kind
    of interesting, until I finally saw a bus that was a home town
    bus that I felt comfortable with and then did a double-take. It
    was a D.C. bus, not a Utah bus.
        The thing that made it work was the electronic gizmos that
    I think you're talking about here. Every bus driver could be
    contacted from a central facility and told, ``Avoid this
    intersection. You can get to where you want to go if you go two
    streets left. This is where we are.'' And the whole thing
    worked seamlessly by virtue of that kind of technology
    available.
        One of the key parts that made it work was the training.
    And when we got buses imported from these various cities, we
    also had the drivers imported, who were properly trained so
    that they knew the vocabulary that was coming at them either
    electronically in the form of a GPS system or by voice in the
    form of a dispatcher. They instantly knew what to do.
        And as you look at this whole question of congestion
    relief, don't just look at the technology but look at the
    training that has to go in it. Again, I'm willing to be one who
    will spend dollars for this kind of thing because of the value
    added that comes. People complain about an extra 2 or 3 cents
    on the gas tax, and then they don't realize that that 2 or 3
    cents on the gas tax is going into the trust fund that could
    produce the technological changes that could reduce congestion.
    They will get that 2 or 3 cents back in huge multiples, being
    at their office on time, being at their appointments on time,
    getting their goods on time.
        I'm glad that the overall statistics for Amtrak indicate
    that my personal experiences are not typical, but if we could
    say the value added of increasing the reliability and the speed
    of ground transportation in these areas can justify the
    additional taxes in other areas that get shared, we can make a
    case that people can be comfortable with.
        The light is still green and I'm through, Madam Chairman. I
    want the record to reflect that.
        Senator Murray. I am impressed.
        Senator Bennett. I would ask to put in for the record the
    name of the great, far-sighted CEO of the Salt Lake Olympics
    that implemented such a success, but I shall refrain from that
    because he's going to make an announcement within the next few
    days that might cause people to think this was a political
    advertisement.

                                  RAIL SAFETY

        Senator Murray. I thank you for refraining.
        I have a few more questions for you, Madam Secretary, and
    then I'll turn it over to Senator Bond.
        In drafting the joint funding resolution for 2007, our
    committee added $5 million above the freeze level for the
    Federal Railroad Administration's safety office, to get funding
    closer to the Bush administration request. Our goal really was
    to make sure that you can keep railroad inspectors and safety
    personnel on the job and enforce safety rules.
        I see that your budget would cut this account by almost $3
    million in comparison to the joint funding resolution, and in
    fact it would be a cut of about $4 million below the level that
    you requested for 2007. You announced that cut, in fact, on the
    day a train carrying hazardous materials was derailed in West
    Virginia, and less than 1 month ago another train carrying
    hazardous materials derailed in Kentucky, setting chemicals on
    fire and sending a lot of people to the hospital. Do you think
    this is the time to cut funding for your Department's rail
    safety activity?
        Secretary Peters. Senator Murray, I certainly share your
    concerns, and have talked with our Federal Railroad
    Administrator about rail safety on numerous occasions. Our
    fiscal year 2007 and 2008 budgets both assume the same staffing
    level of 449 inspectors, as well as adequate resources for
    these inspectors. We have applied cost savings to travel
    funding, not for the inspectors themselves but other travel
    funding. We have also targeted gap deficiencies within our
    inspector work force.
        Senator Murray. Well, even according to your own budget
    documents, your request is going to force the FRA to delay
    filling some of their vacancies for 6 months and hire less
    qualified candidates for safety inspections. Doesn't that
    concern you?
        Secretary Peters. Madam Chairman, that certainly would
    concern me if that were the case. My understanding is that FRA
    has offered targeted buyouts to positions where we have
    specific gap deficiencies. But if I may, I will ask the
    Assistant Secretary to speak specifically to the budget items.
        Senator Murray. Okay, but I will refer you to your own
    budget, where you say that the FRA proposes to not backfill
    vacancies for up to 6 months to achieve some of those cuts.
        Ms. Scheinberg. I believe the vacancies that they would
    delay backfilling are less critical vacancies, not the
    inspectors.
        Senator Murray. You assume that?
        Ms. Scheinberg. Yes.
        Secretary Peters. Madam Chairman, if we may, I would like
    to get back to you on the record on that point, because I do
    believe you make a very valid point.
        [The information follows:]

        FRA has offered early retirement to approximately 30 employees in a
    variety of positions. Early retirements were not offered to any of our
    critical field safety positions, such as our inspector workforce. Six
    early retirements were offered to Headquarters safety specialists, who
    did not have the most effective skill sets FRA needs to face the
    challenges of the future. The FRA buyout plan was developed after
    performing a detailed workforce analysis that identified skill gaps in
    a variety of positions. Some positions to which early retirement offers
    were made include Supervisory Industry Economists, Program Analysts,
    Administrative Officers, Administrative Assistants, Railroad Safety
    Project Coordinators, Industrial Hygienists, and IT Specialists.
    Employees who accepted these offers will retire in fiscal year 2007,
    and be replaced in either fiscal year 2007 or fiscal year 2008,
    depending on their separation date. In many cases, FRA is proposing to
    replace these employees at a lower grade than the separating employee,
    which will result in cost savings.
        The FRA is also proposing to not backfill selected non-critical
    safety positions for periods of up to six months during fiscal year
    2008 in order to achieve cost savings. This proposal will not postpone
    or delay hiring for our inspector workforce, or any other safety-
    critical positions.
        Finally, the fiscal year 2008 budget proposes filling selected
    inspector positions at the GS-5 and GS-7 levels, consistent with our
    Inspector Trainee program approved by Congress in the fiscal year 2005
    budget, which will allow us to continue to groom a diverse and robust
    inspector workforce. As explained in our fiscal year 2005 budget
    request, the ``trainees'' at this lower grade level represent fewer
    than 5 percent of our inspector workforce at any given time.
    Additionally, ``trainees'' are partnered with senior level inspectors
    to assure that inexperienced inspectors are not assigned to work
    independently until they possess the knowledge and skills necessary to
    fulfill their safety role independently.

                    FUTURE FUNDING OF THE HIGHWAY TRUST FUND

        Senator Murray. I would appreciate that very much. That is
    very disconcerting.
        Let me end by asking you about the Highway Trust Fund, a
    critical issue. Although your budget request pretty much
    follows the levels authorized, you have deviated from SAFETEA-
    LU by requesting about $630 million less than the full amount
    that's authorized. Even at those levels, it appears that your
    proposal will spend down the entire balance in the highway
    account of the Highway Trust Fund by the end of 2009.
        I am one of those who is very interested in making sure we
    have highway and highway safety programs. They are very
    critical. But I am also very worried about putting the trust
    fund into bankruptcy, and I wanted to ask you what concrete
    proposals there are in your budget to refinance the Highway
    Trust Fund so we keep it out of bankruptcy.
        Secretary Peters. Madam Chairman, as I indicated, we took
    several steps to protect the solvency of the Highway Trust Fund
    through fiscal year 2009. I absolutely agree with you that we
    need to begin to discuss how we prevent the highway account
    from going into deficit, and I look forward to working with you
    to bring forward proposals toward that end. Also, as I
    mentioned, the commission is working very hard on those issues,
    and--
        Senator Murray. When do we expect to see them?
        Secretary Peters. The commission's report, ma'am, will be
    available at the end of December of this year. I'm assuming
    that the technical corrections bill goes through. But I hope to
    bring proposals to you even sooner than that.
        Senator Murray. Well, I would hope so, because this is a
    looming crisis and we cannot delay a decision on this. The
    President's budget wasn't bashful in providing us with concrete
    proposals about extending that budget cut, so I would assume
    they should not be bashful about proposing how we handle major
    crises that are facing us like this, as well. So I hope that we
    can see something sooner than that.
        Secretary Peters. I understand, Senator.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Murray. At this point I see no other Senators
    present. Madam Secretary, I thank you for your testimony today.
    I look forward to working with you.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                  Questions Submitted by Senator Patty Murray
                                     amtrak
        Question. Madam Secretary, you are a Member of Amtrak's Board of
    Directors. Your budget is requesting $900 million for AMTRAK--the same
    amount you requested in 2007. That amount is 30 percent less than the
    level the railroad received in 2006.
        When you look into the details of your request, you're proposing to
    use $100 million of this $900 million for new matching grants to States
    to improve passenger rail infrastructure. So in terms of dollars that
    are immediately available to AMTRAK, your budget represents a cut of
    almost $500 million or 38 percent. By anyone's account, whether it be
    AMTRAK's management or the DOT Inspector General, a cut of that size
    would surely put AMTRAK into bankruptcy.
        What is the point in requesting $100 million in matching grants to
    States for improved passenger rail service if the national provider of
    passenger rail service is bankrupt?
        Answer. Over the last 30 years, the real growth in intercity
    passenger rail service has been in those corridors where States, such
    as Washington, have taken the lead in planning, designing and funding
    the service. This has happened despite the lack of the traditional
    Federal/State funding partnership for intercity passenger rail. The
    administration seeks to create that partnership in part because of the
    administration's belief that the States, and not Amtrak based in
    Washington, DC are most knowledgeable of their own mobility needs.
        Question. Your budget explains that the $100 million you have
    requested for these State grants is supposed to help the States to
    enter into partnerships to improve and expand intercity passenger rail
    service.
        Who are the States supposed to partner with to improve passenger
    rail service if AMTRAK is allowed to go under?
        Answer. Commuter rail operations across the country have
    demonstrated that there is a robust competitive market place for
    passenger rail operators--both passenger specific operators and, in
    some cases, established freight railroads. The administration would
    like to see the States receive similar benefits from a competitive
    marketplace for operators of intercity passenger rail service, a
    marketplace that would include an efficient and competitive Amtrak.
                               congestion relief
        Question. Madam Secretary, as you know, the 2007 Joint Funding
    Resolution includes no earmarks for the discretionary accounts within
    DOT. That means that, unlike in recent years, you will be awarding some
    $2.7 billion in highway and transit funds through a nationally
    competitive process.
        Given your agency's new focus on alleviating congestion, which I
    commend, will you be using the funds that have been provided in 2007 to
    target dollars on applications that alleviate congestion?
        Answer. In March 2007, shortly after the enactment of the fiscal
    year 2007 Continuing Appropriations Resolution (Public Law 110-5), the
    Federal Highway Administration (FHWA) and the Federal Transit
    Administration (FTA) published Notices of Funding Availability in the
    Federal Register, where FHWA invited States to apply for grants to fund
    projects that address statutory goals and provide significant highway
    safety and congestion relief benefits, and FTA, through its
    ``Congestion Bus Notice,'' invited applications for funding under the
    section 5309 Bus Program for projects that support the objectives of
    the National Strategy to Reduce Congestion on America's Transportation
    Network (``Congestion Initiative'').
        In line with the Department's goals to save lives and reduce
    traffic delays on highways, FHWA is making available a total of $329
    million in grant funds in an effort to target resources strategically
    across eight discretionary programs to improve safety and relieve
    congestion: Ferry Boat; Innovative Bridge Research and Deployment;
    Interstate Maintenance; Public Lands Highway; Highways for Life;
    Transportation Community and System Preservation; Truck Parking
    Facilities; and Delta Region Transportation Development Program. An
    electronic copy of the March 22 Notice is available at http://
    frwebgate.access.gpo.gov/cgi-bin/
    getdoc.cgi?dbname=2007_register&docid=fr22mr07-117.pdf.
        FTA will reserve a significant portion of the funds not
    ``earmarked'' by law and otherwise available in fiscal year 2007 under
    the section 5309 Bus Program for projects selected in accordance with
    the Congestion Bus Notice of March 23rd. By separate notice published
    in the Federal Register, FTA solicited proposals for use of those funds
    not distributed pursuant to the Congestion Bus Notice and not earmarked
    by law to support other critical investment needs in both rural and
    urban areas.
        Question. Will such applications be getting additional points or
    priority consideration as you award these funds for the current fiscal
    year?
        Answer. FHWA has solicited applications and published Notices to
    assure competition for the discretionary grants and to enhance
    transparent and merit-based determinations to achieve program
    objectives, consistent with the purpose of the statute and
    administration policy. FHWA will award funding in accordance with the
    statutory criteria for each of the discretionary programs and will
    weigh the safety and congestion reduction benefits associated with
    individual applications. As indicated in the FHWA Federal Register
    Notice, those projects that meet the statutory requirements and make
    significant impacts to safety and to reducing congestion will be given
    priority consideration. Applications for fiscal year 2007 funding
    should describe how the project, activity, or improvement relieves
    congestion in an urban area or along a major transportation corridor,
    employs operational and/or addresses major freight bottlenecks.
        On the transit side, to be eligible for funding pursuant to the
    Congestion Bus Notice, an applicant (a) must be located within a
    Metropolitan Statistical Area or Consolidated Metropolitan Statistical
    Area, as defined by the U.S. Census Bureau, which has (1) a travel-time
    index of 1.25 or greater, as reported by the Texas Transportation
    Institute (``TTI'') in its 2005 Annual Urban Mobility Report; or (2) an
    annual congestion cost per traveler of $600 or greater, as reported by
    TTI in its 2005 Urban Mobility Report; or (3) a number of hours of
    congestion per day of 7 hours or greater, as reported by TTI in its
    2005 Urban Mobility Report; and (b) the applicant proposes to use the
    funds applied for to improve existing transit service or to provide new
    transit service in a corridor or area that is part of a congestion
    reduction demonstration. Priority for funding will be given to those
    applicants that have also been selected as Preliminary Urban Partners
    through the Department's Congestion Initiative. FTA is currently
    reviewing all the applications and expects to award a significant
    portion of the available discretionary funding to targeted bus projects
    in support of the urban partnership initiative while still funding many
    meritorious projects that address bus replacement, fleet expansion, and
    facility needs in other areas.
                               motorcycle safety
        Question. Madam Secretary, as you know, there was a 13 percent
    increase in motorcycle fatalities in 2005, representing the eighth
    consecutive year that there has been a rise in motorcycle fatalities.
    Moreover, motorcycle fatalities have increased an alarming 115 percent
    since 1997. Simply put, the current approach to reducing the number of
    motorcycle fatalities isn't working.
        The Department's budget for fiscal year 2008 does propose an
    increase in funding for motorcycle safety activities, and in your
    statement you indicate that the Department is targeting this problem
    area.
        But what specific new approaches is the Department going to take in
    order to start moving those numbers in the right direction, so that we
    see fewer motorcyclists die on our Nation's highways?
        Answer. The rise of motorcycle fatalities continues to be a great
    concern to me and the Department. I am an avid rider, and I know the
    problem is multi-faceted and there is not one single silver bullet to
    solve the problem. The Department is looking at a comprehensive
    approach to motorcycle fatalities, which will include reducing the
    number of alcohol-impaired riders, decreasing the number of unlicensed
    riders and encouraging all riders to wear DOT-approved helmets.
        To address the problem of alcohol-impaired riders, the Department
    will initiate a demonstration project implementing heightened law
    enforcement and communication programs to test their effectiveness in
    reducing alcohol-related motorcycle crashes. Impaired riding messages
    will also be incorporated into the impaired driving crackdown over the
    Labor Day holiday.
        We will continue to work with State licensing agencies to implement
    programs that identify motorcycle owners that are not legally licensed
    to operate the vehicle, notify them of the licensing requirement, and
    assist them in obtaining the proper license. The Department will also
    continue to hold quarterly meetings with representatives of national
    motorcycle safety organizations to coordinate efforts to improve
    motorcycle safety.
        In addition, we continue to encourage all riders to use DOT-
    certified helmets. Our efforts to promote helmet use include print and
    web-based consumer information materials, public service announcements,
    and articles in magazines and other publications. I recently challenged
    motorcycle manufacturers to help address rising motorcycle fatalities
    by providing free or discounted DOT-certified helmets with all new
    motorcycles purchased and ensure rider training is available for all
    their customers.
        The Department will continue to implement the motorcycle safety
    programs specified in SAFETEA-LU. The Motorcyclists Safety Grant
    program will award $6 million in fiscal year 2008 to States to use to
    support rider training and motorists' awareness programs. The Federal
    Highway Administration will continue to host meetings of the
    Motorcyclists Advisory Council to improve motorcycle safety through
    infrastructure design and maintenance and sponsor the motorcycle crash
    causation research study.
                                     ______

                 Questions Submitted by Senator Byron L. Dorgan
                                     amtrak
        Question. Secretary Peters, I appreciate your offer to come to
    North Dakota and ride the Empire Builder. The Empire Builder is one of
    Amtrak's most successful long distance trains, recently reporting an
    increase in ridership in 2006 of 4.3 percent. And I appreciate the
    comments that you made during your confirmation hearing before the
    Senate Commerce Committee when you said that you agreed that we need a
    national passenger rail system.
        However, the administration continually shows its lack of
    commitment to the success of Amtrak, and in fact ignores Congress'
    stated will to keep Amtrak going. Each year the President seeks
    insufficient funding for Amtrak, and the Congress has to act to restore
    the funding.
        Can you explain to me why we must have this routine year after
    year?
        Answer. Amtrak is based upon a flawed business model that works
    against achieving the administration's goal that the limited amount of
    discretionary funds available for transportation be expended in a cost-
    effective manner that meets important mobility needs of this country.
    As an example, the administration sees no compelling public purpose in
    funding subsidies of food, beverage and first class service. In each of
    the last two Congresses, the administration submitted legislation, the
    Passenger Rail Investment Reform Act, which would address the
    fundamental problems with how this Nation provides intercity passenger
    rail service. If that bill or something similar were to be enacted, we
    would break the annual routine that you mention.
        Question. It is clear that Amtrak cannot survive on the $800
    million requested by the administration. What is the sense in asking
    for a budget that is so insufficient?
        Answer. It is true that Amtrak as presently configured and operated
    cannot operate on $800 million. That is the point. There are embedded
    inefficiencies in Amtrak's operation and items subsidized by the
    Federal Government that serve no compelling public purpose, such as its
    food and beverage service that consumed over 10 percent of Amtrak's
    total Federal subsidy in fiscal year 2006. The administration is
    unwilling to pay for inefficiency and activities not essential to basic
    transportation. The funding request puts management on notice that it
    must address these issues.
                                    aviation
        Question. Recently the Senate Commerce Committee held a hearing on
    airline mergers, and one topic that arose was whether some additional
    Government intervention was necessary for maintaining or improving air
    service to rural communities.
        Do you believe the current system is working to sufficiently
    maintain service to rural communities?
        Answer. The Essential Air Service (EAS) program was designed when
    airline rates, routes, and services were regulated as means of
    providing temporary support to some communities during the transition
    of the industry to a deregulated structure. Although the program was
    eventually made permanent, it has remained fundamentally unchanged
    since its inception. That is one reason the administration has proposed
    reforms over the last several years. We believe that the program needs
    to be targeted to serve the needs of the most truly isolated
    communities across the country, and the administration's plan offers
    specific proposals to accomplish that objective.
        Question. With the administration's budget requests consistently
    cutting the Essential Air Services Program, is there another solution
    that you believe is preferable to achieve rural air service?
        Answer. It is clear that the EAS program must be reformed or the
    costs will continue to escalate. As more and more regional carriers
    upsize their fleets to larger turboprops or even regional jets, it will
    leave more and more communities reliant upon subsidized EAS. In
    addition, as the spread of low-fare carriers continues, more local
    communities will be unable to support their local airport's service as
    travelers will drive to nearby, low-fare jet service. EAS service of
    two or three round trips a day cannot compete with low-fare jet
    service, and more and more communities are falling into this situation.
    The administration's budget request is wholly consistent with the
    notion that the most isolated communities should continue to receive
    subsidized EAS in order to keep them connected to the national air
    transportation system.
               nationwide differential global positioning system
        Question. Madame Secretary, in your testimony you spoke about the
    Department's goal of reducing traffic fatalities and congestion. These
    are important goals and I support the Department in its efforts. One of
    the tools to help address these problems is the Nationwide Differential
    Global Positioning System (NDGPS). This nationwide system provides
    accurate positioning and location information to travelers, emergency
    response units, and other customers. North Dakota invested $300,000 to
    convert a former Air Force Ground Wave Emergency Network (GWEN) station
    at Medora, ND into a NDGPS site. Another conversion is planned for a
    former GWEN site in Edinburg. In North Dakota, the system is used for
    land surveying, precision farming, utility locations, archeology
    locations, and emergency operations. In one example, a single North
    Dakota Department of Transportation official completed land surveying
    work for a highway project in 4 days using NDGPS that would have taken
    four officials 2 weeks to complete without the system.
        Some of the most exciting NDGPS uses deal with traffic congestion
    and accident prevention. Applications are being developed to provide
    drivers with information they can use to more safety navigate roads. In
    my State, NDDOT officials are researching the use of NDGPS on snowplows
    to prevent future accidents. New investment is needed to expand the
    system and to improve the stations from single to dual coverage. The
    administration moved the funding responsibility of NDGPS from the
    Federal Railroad Administration to DOT's Research and Innovative
    Technology Administration (RITA). The fiscal year 2008 budget proposes
    $5 million to ``operate and maintain'' NDGPS.
        Question. What role does NDGPS play in DOT's goal of reducing
    traffic fatalities and congestion, especially in your Intelligent
    Transportation Systems initiative?
        Answer. NDGPS is one of several enabling positioning, navigation
    and timing (PNT) services that may play a significant role in providing
    21st Century solutions for 21st Century transportation problems. We
    hope that advanced PNT services will enable us to develop and deploy
    technologies that will increase safety and reduce systemic congestion
    across all modes of transportation.
        NDGPS is one potential PNT infrastructure solution for Intelligent
    Transportation Systems (ITS) projects. ITS research has identified some
    future safety and mobility enhancing applications that would require
    PNT performance capabilities that NDGPS currently offers. Other, more
    advanced ITS applications may require additional infrastructure and
    performance upgrades to the current NDGPS system. However, ITS research
    is still on-going to determine how to best achieve the required PNT
    performance capabilities for ITS applications.
        Question. Is DOT committed to expanding and improving the system?
    If so, is DOT planning budget increases for the system?
        Answer. The Department decided to manage fiscal year 2008 inland
    NDGPS operations and maintenance expenses at a low level to preserve
    the Government investment in the system, while RITA completes a systems
    analysis and assessment of current and potential future NDGPS
    requirements for transportation and other applications. NDGPS user
    needs will be evaluated in conjunction with the National PNT
    Architecture effort to determine to what extent the NDGPS
    infrastructure can meet user needs as part of a national PNT
    architecture, before any decision on the future maintenance, operation
    or enhancement of NDGPS is made.
        The assessment is identifying other Federal and non-Federal users
    of inland NDGPS that could fund its completion and operation. The
    assessment may also point to another funding source for future
    maintenance, operation or enhancement of NDGPS, or to shared
    sponsorship. The Department has stated that if no transportation or
    other Federal user requirements are identified as a result of the needs
    assessment, DOT would plan to end support for NDGPS. If the assessment
    determines there are non-Federal users, DOT would work to develop a
    transition plan for non-Federal sponsors.
        The fiscal year 2008 budget request for NDGPS allows for continued
    operations and maintenance of the partially-deployed inland NDGPS
    segment, with no system build-out or enhancements. This request
    provides funding for DOT to continue protecting the Government assets,
    and to initiate action on the future course of inland NDGPS. The
    planned fiscal year 2008 decision could result in: continuing inland
    NDGPS system operations and maintenance; transferring sponsorship of
    inland NDGPS to another sponsor or set of sponsors; or other options
    that may be determined following the completion of the assessment.
        Question. When will dual NDGPS coverage be completed in the United
    States?
        Answer. Completion of dual NDGPS coverage depends upon the results
    of the needs assessment, and on funding decisions made by all NDGPS
    partners as a result of the assessment. At this time, approximately 92
    percent of the area of the lower 48 States (CONUS) has single coverage,
    and 65 percent has dual NDGPS coverage.
        Question. What are your plans for adding the Edinburg site into the
    system?
        Answer. The Department recognizes the strong interest that North
    Dakota has had in NDGPS, providing funding for the Medora site, and the
    State's strong desire to add the Edinburg site to complete dual NDGPS
    coverage in North Dakota. However, we do not wish to add any additional
    NDGPS sites until the needs assessment is complete, and the long-term
    future of NDGPS funding and sponsorship are resolved.
                                captive shippers
        Question. During your confirmation hearing, you heard about the
    concerns that many rail customers have about problems with a lack of
    rail competition. Many of the rail customers in my State are served by
    a single railroad. They pay exorbitant rates and receive inferior
    service. A report by the Government Accountability Office has verified
    those concerns, concluding that: (1) captive shippers pay rates that
    are three, four or even fives times as high as those of shippers with
    competitive choices, (2) the STB's rate relief processes are largely
    inaccessible and rarely used, and (3) the STB does not fully use its
    existing statutory authority to address competition issues or ensure
    reliable deliveries.
        Do you agree that the STB has existing authority to create a more
    robust and effective rate relief process? And if you agree, what steps
    do you intend to take to prompt the STB to use that authority?
        Answer. The Department agrees that the Surface Transportation Board
    (STB) has authority to adopt an effective rate relief process. In an
    ongoing rulemaking proceeding, the STB has proposed simplified, less
    costly procedures for assessing rate reasonableness in cases brought
    before it, and sought comments from stakeholders on those procedures.
    The Department has recognized this effort and submitted its views on
    the new procedures proposed.
        Question. The GAO has reported that it would be helpful for a
    Federal agency to evaluate where areas of inadequate rail competition
    exist, and where an inappropriate exercise of a railroad's market power
    might force shippers to pay inappropriately high rates. Do you agree?
    Will the Department undertake such an investigation?
        Answer. Such a study would have limited usefulness, because the
    absence of substantial rail-on-rail competition in an area is not, in
    itself, a good indication that rail competition should be introduced.
    The structure of the rail system has developed in response to varying
    levels of demand across areas and the particular economies of density
    that characterize the rail industry. As a result, some areas of low
    traffic density cannot support more than a single railroad. We do
    recognize, however, that the potential for exercise of market power in
    certain areas can lead to rate levels for which rate regulation may be
    appropriate.
        Question. According to the GAO, each rate case filed with the STB
    takes an average of 3.5 years to complete, and costs approximately $3
    million. Do you think this is an appropriate amount of time and money
    for a shipper to spend on a rate case?
        Answer. The Department has called for simplified, less costly
    procedures for adjudicating rate cases, particularly for small
    shippers. However, as the record going back to the mid-1990s of
    attempts by STB to simplify the process for small shippers has shown,
    it is not an easy determination. For example, there are trade-offs
    between simplifying the process and accurately assessing an appropriate
    rate level that is fair to both the shipper and the railroad. We
    believe progress is being made on this task, as noted above, with the
    STB's current rulemaking proceeding to simplify the process and reduce
    the cost.
        Question. Has the Department conducted any analysis on the ability
    or limitations of the rail system to deliver either feedstock or
    refined ethanol to market, or the impact of unreasonable rail rates on
    the cost of these critical domestic fuel supplies? If not, will you
    conduct such an analysis?
        Answer. We are monitoring developments in the booming ethanol
    industry closely and have discussed the issue of alternative energy
    distribution broadly with the Department of Energy, Department of
    Agriculture and the Federal Energy Regulatory Commission. We would like
    to explore the potential implications of the specialized transport and
    distribution requirements of ethanol further. Two critical needs are
    the development of a pipeline infrastructure capable of carrying
    alternative energy products and the development of unloading terminals
    in destination markets, particularly to handle ethanol unit trains.
    Another is the availability of rail tank cars to serve the industry. If
    ethanol production continues on its present growth trend, and if rail
    continues to be the dominant mode to move it, there could be a demand
    for as many as 480,000 tank car loadings by 2010. Some reports put the
    backlog at almost 4 years for delivery of new cars.
        Regarding rail rates for ethanol, we have no indication they are
    unreasonable. Ethanol is a hazardous material, and we would expect
    rates would be set high enough to cover the railroads' liability in the
    event of an accident and ethanol spill. Additionally, as with any
    commodity, rates must offer enough return to justify continued
    investment. The regulatory processes of the STB are available if a
    shipper decides to challenge an individual rate.
                                     ______

               Questions Submitted by Senator Frank R. Lautenberg
                                     amtrak
        Question. President Bush appointed you to the Board of Directors of
    Amtrak, America's National Passenger Railroad. The company's last
    projection for fiscal year 2008 calls for almost $1.7 billion in
    Federal funding. So why has the President only requested less than half
    of that--$800 million--for Amtrak?
        Answer. There are embedded inefficiencies in Amtrak's operation and
    items subsidized by the Federal Government that serve no compelling
    public purpose such as its food and beverage service that consumed over
    10 percent of Amtrak's total Federal subsidy in fiscal year 2006. The
    administration is unwilling to pay for inefficiency and activities not
    essential to basic transportation. The funding request puts management
    on notice that it must address these issues.
        Question. As a Member of the Board of Directors of Amtrak, you must
    be aware of the debt payments and liabilities of the corporation--
    likely to amount to $285 million next year. You suggest funding to pay
    for Amtrak's debt ought to be paid for out of non-Federal sources, such
    as revenues. But all revenues are used to pay for operating and capital
    needs of the corporation. Where do you propose cuts to service or
    capital be made?
        Answer. It is the administration's position that Amtrak's
    management has the responsibility for managing the Corporation in such
    a way as to live within the resources available to it.
        Question. Does the administration feel Amtrak's debts should be
    paid at all?
        Answer. The Department believes that Amtrak should meet its debt
    service obligations and makes that a condition of the grant agreements
    between the Federal Railroad Administration and Amtrak. To be clear,
    however, Amtrak's debts are the obligation of the Corporation and not
    of the Federal Government.
                          funding for transit projects
        Question. Less than 3 weeks after President Bush's ``State of the
    Union'' address, he proposes cutting funding for transit projects by
    over $300 million from congressionally authorized levels. In light of
    the President's environment and energy goals set forth in his speech,
    how can you justify these cuts for transit?
        Answer. The Federal Transit Administration's (FTA) budget requests
    $1,399.82 million in fiscal year 2008 for New Starts projects, of which
    $100 million is for Small Starts. The President's budget request sets
    priorities and keeps commitments by fully funding all existing
    construction projects, as well as funding four new, highly qualified
    projects.
        FTA's budget fully funds existing and new multi-year construction
    projects under the New Starts program. Eleven projects with existing
    full funding grant agreements (FFGAs) are recommended for funding in
    fiscal year 2008. In addition, two projects with pending FFGAs carried
    over from fiscal year 2007 are proposed in the budget. Two new projects
    are proposed for funding in the budget: New York, NY--Second Avenue
    Subway, Phase I and Seattle, WA--University Link LRT Extension, both of
    which are rated ``High'' in overall project rating. It is expected that
    these projects will receive an FFGA in fiscal year 2008. The table
    below reflects projected ridership for the two projects with pending
    FFGAs and the two projects proposed to receive FFGAs in fiscal year
    2008.

                 RIDERSHIP FORECAST FOR SELECT PROJECTS ANTICIPATED TO RECEIVE FFGAs IN FISCAL YEAR 2008
    ----------------------------------------------------------------------------------------------------------------
                                                                                            Ridership Forecast
                         City                                    Project             -------------------------------
                                                                                         Ridership     Forecast Year
    ----------------------------------------------------------------------------------------------------------------
    Pending FFGA:
        Denver, CO................................  West Corridor LRT...............          28,300            2030
        Portland, OR..............................  South Corridor I-205/Portland             46,500            2025
                                                     Mall LRT.
    Proposed FFGA:
        New York, NY..............................  Second Avenue Subway Phase I....         213,000            2030
        Seatle, WA................................  University Link LRT Extension...          40,200            2030
    ----------------------------------------------------------------------------------------------------------------

        During the November-December 2006 time frame, New Starts ratings
    and the President's fiscal year 2008 budget decisions were finalized.
    At that time, six projects were forwarded in the ``Other'' category
    that might be ready for funding or an FFGA prior to the end of the
    fiscal year (September 30, 2008). Forwarding these projects in the
    ``Other'' category of the budget demonstrates the administration's
    interest in funding them if progress toward completion of preliminary
    requirements is sufficient to support a recommendation for an FFGA
    under the New Starts evaluation and rating framework. During late
    spring and summer 2007, FTA will provide periodic updates on the
    ``Other'' category projects to appropriators to support sound
    appropriation decisions. Past experience has shown that not all of the
    projects in the ``Other'' category will be ready for funding or an FFGA
    during fiscal year 2008. FTA is confident that the amount requested for
    New Starts in total meets the demand for funding expected during fiscal
    year 2008.
        FTA requested $100 million for Small Starts in fiscal year 2008
    because there were no Small Starts projects ready in fiscal year 2007,
    and only four Small Starts projects were ready for funding when work
    was completed on the fiscal year 2008 budget. In total, those projects
    only need $52 million in fiscal year 2008 and two of those four will
    now be funded in fiscal year 2007. Thus, the Small Starts request is
    realistic and sufficient, both for these projects and for any other
    Small Start that becomes ready for funding in fiscal year 2008.
                         fewer air traffic controllers
        Question. There are still almost a thousand less air traffic
    controllers than 3 years ago, and the strain on the system is obvious,
    with delays throughout the system and a growing workload for each
    controller. How do you know that the 1,420 controllers you plan to hire
    will be enough, given that FAA has underestimated the number of
    retirements?
        Answer. At the end of September 2003, there were 15,691 controllers
    on board compared with 14,469 as of March 31, 2007, for a difference of
    1,222 controllers. This only tells part of the story, however, as the
    Federal Aviation Administration's (FAA) previous contract required the
    agency to increase staffing, even as the number of FAA-handled
    operations plummeted following the September 11, 2001, terrorist
    attacks. While the agency continued to hire, the FAA's customers in the
    aviation industry were laying off tens of thousands of employees and
    drastically scaling back operations.
        From the chart below, you can see that today headcount is still
    ahead of traffic. You can also see that through 2006, total operations
    per controller on average remain more than 6 percent below pre-
    September 11, 2001 levels.

        FAA now staffs its facilities based on traffic, with workload
    driven by the number of positions that need to be staffed due to
    forecasted traffic demands. Additional information can be found in the
    March 2007 Report, A Plan for the Future: The FAA's 10-Year Strategy
    for the Air Traffic Control Workforce. This concept of staffing to
    traffic requires the FAA to incorporate many individual facility
    characteristics. They include facility-specific traffic volumes based
    on FAA forecasts and hours of operation, as well as individualized
    forecasts of controller retirements and other attrition losses.
      --In fiscal year 2006 the FAA hired 1,116 air traffic controllers.
      --In fiscal year 2007 the FAA plans to hire more than 1,300 new air
            traffic controllers.
        Should adjustments become necessary due to changes in traffic
    volumes, retirements or other losses, the FAA will take action at the
    facility level.
                              reports to congress
        Question. When does the administration intend to submit the
    following reports, as required by law:
      --Public Law 109-115: ``Provided further, That not later than
            December 31, 2015, the owner or operator of an airport
            certificated under 49 U.S.C. 44706 shall improve the airport's
            runway safety areas to comply with the Federal Aviation
            Administration design standards required by 14 CFR part 139:
            Provided further, That the Federal Aviation Administration
            shall report annually to the Congress on the agency's progress
            toward improving the runway safety areas at 49 U.S.C. 44706
            airports.''
      --Public Law 109-59:

     SEC. 2003. HIGHWAY SAFETY RESEARCH AND OUTREACH PROGRAMS.

        (f) Refusal of Intoxication Testing.--
                (1) Study.--The Secretary shall carry out under section 403
            of title 23, United States Code, a study of the frequency with
            which persons arrested for the offense of operating a motor
            vehicle while under the influence of alcohol and persons
            arrested for the offense of operating a motor vehicle while
            intoxicated refuse to take a test to determine blood alcohol
            concentration levels and the effect such refusals have on the
            ability of States to prosecute such persons for those offenses.
                (2) Consultation.--In carrying out the study under this
            subsection, the Secretary shall consult with the Governors of
            the States, the States' Attorneys General, and the United
            States Sentencing Commission.
                (3) Report.--
                        (A) Requirement for report.--Not later than 2 years
                    after the date of the enactment of this Act, the
                    Secretary shall submit a report on the results of the
                    study to the Committee on Commerce, Science, and
                    Transportation of the Senate and the Committee on
                    Transportation and Infrastructure of the House of
                    Representatives.
                        (B) Content.--The report shall include any
                    recommendation for legislation, including any
                    recommended model State legislation, and any other
                    recommendations that the Secretary considers
                    appropriate for implementing a program designed to
                    decrease the occurrence of refusals by arrested persons
                    to submit to a test to determine blood alcohol
                    concentration levels.
        Answer. The Runway Safety Report has been completed and the Federal
    Aviation Administrator transmitted the report to Congress on May 25th.
         In December 2005, the Department met with House and Senate staff
    to discuss the timing of the alcohol testing report. We were very
    pleased when the Committees agreed to allow the deadline for this
    report to be moved until June 10, 2008. The issue of breath test
    refusals and its impact on the ability of States to prosecute impaired
    driving offenses is complex, which necessitated our request to delay
    the report. NHTSA awarded a contract in fiscal year 2006 to update an
    existing report on breath test refusals (using data from 2000) and
    added the requirement to study its impact on impaired driving
    prosecutions. The Department fully expects to meet the new deadline.
                                     ______

                   Question Submitted by Senator Ted Stevens
                            indian reservation roads
        Question. The Safe, Accountable, Flexible, Efficient Transportation
    Equity Act: A Legacy for Users (SAFETEA-LU) directs the Secretary of
    Transportation, in cooperation with the Secretary of Interior, to
    complete a comprehensive national inventory of transportation
    facilities eligible under the Indian Reservation Roads (IRR) program.
    This inventory is to be completed within 2 years of SAFETEA-LU's
    enactment. I have been contacted by tribes from across the country
    concerned their roads are not being included in the national inventory
    based on vague guidance from the Bureau of Indian Affairs (BIA) that
    varies from region to region as to what requirements must be met for a
    road to be accepted. Roads must be included in the inventory in order
    to receive funds through the IRR program
        Given that the IRR program is jointly administered by the Federal
    Highway Administration (FHWA) and the Bureau of Indian Affairs (BIA),
    what is FHWA doing to ensure clear and uniform guidance to Tribes so
    their inventories may be accepted?
        Answer. The Indian Reservation Roads (IRR) Program is jointly
    administered by the Bureau of Indian Affairs (BIA) and Federal Highway
    Administration (FHWA) and we are jointly working on the development of
    a comprehensive inventory of all facilities eligible for inclusion in
    the Program. Numerous changes to the IRR Program have taken place over
    the past few years, the most significant being the publication of the
    IRR Program Final Rule (25 CFR 170). This rule provides all of the
    regulations on how the IRR Program is to be carried out and was
    developed as a result of the negotiated rulemaking process between the
    Indian tribes and the Federal Government that was required in the
    Transportation Equity Act for the 21st Century (TEA-21).
        During the first year under these new regulations (2005), it became
    evident that the requirements to have a road or facility included in
    the IRR Program inventory needed to be clarified. The IRR Coordinating
    Committee (which also was formed as a result of the Final Rule)
    recognized this fact and worked closely with BIA and FHWA
    representatives to develop a new comprehensive list of the requirements
    needed for IRR Program Inventory submittals. This updated list was
    presented to the Department of the Interior's Assistant Secretary Cason
    for his approval and a new policy letter was published with his
    signature on June 15, 2006.
        The policy was provided to all of the BIA Regions and their
    respective tribes. Additional information and training was provided to
    the various Tribal Technical Assistance Program (TTAP) Centers
    throughout the country so that they too could provide training on this
    subject to the Tribes. As a result, the number of inventory sections
    that were submitted yet returned to the Tribes as incomplete
    substantially decreased last fiscal year and has continued to decrease
    this past year. With the ability to make the inventory system available
    to tribes directly through the Internet, we anticipate this reduction
    to continue.
        Over the past few years, the number of miles included in the IRR
    Program inventory has increased from approximately 64,000 in fiscal
    year 2003 to over 85,000 this past year. One BIA Region that has
    witnessed a substantial increase in their IRR Program inventory has
    been the Alaska Region where the number of miles in the approved IRR
    Program inventory has increased over 1,800 percent in the last 10
    years.
        Improvements to the IRR inventory process is an ongoing process in
    which the IRR Coordinating Committee, FHWA, and BIA are all jointly
    working together to develop and implement. It is well understood that
    it is in the best interest of everyone that the system be as simple as
    possible yet be carried out in a manner that is fair for all tribes.
    This is often difficult yet it is one that all of us involved are
    striving to accomplish.

                              SUBCOMMITTEE RECESS

        Senator Murray. This subcommittee stands in recess until
    Thursday, March 1.
        [Whereupon, at 11:12 a.m., Thursday, February 8, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

    TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES
                      APPROPRIATIONS FOR FISCAL YEAR 2008

                                  ----------

                          WEDNESDAY, FEBRUARY 28, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:33 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Patty Murray (chairman) presiding.
        Present: Senators Murray, Lautenberg, Bond, Specter, and
    Allard.

                                     AMTRAK

    STATEMENT OF ALEXANDER KUMMANT, PRESIDENT AND CHIEF
                EXECUTIVE OFFICER

                   OPENING STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. This subcommittee will come to order. This
    morning, the subcommittee is going to hear testimony on the
    Nation's intercity passenger railroad Amtrak. This past year,
    like the year before it, Amtrak posted a new record ridership,
    24.3 million passengers. The reasons behind Amtrak's recent
    success go right to the heart of the debate over whether we
    need a national intercity railroad.
        People boarded Amtrak in record numbers because gas prices
    were too high, because highways were too congested, because
    runways were too congested, because weather eliminated other
    travel options, and because airlines abandoned air service to
    rural communities. Amtrak certainly isn't the perfect solution
    to all these problems, but it certainly is part of the
    solution.
        Many of my congressional colleagues have sited Amtrak's
    service problems and subsidy needs and have called for dramatic
    reforms. I agree that there are opportunities for reform at
    Amtrak, but we would all do well to remember some things about
    Amtrak's history before we launch into wholesale reforms with
    unknown outcomes.
        Amtrak was created several years ago by combining the
    money-losing passenger operations of several different
    railroads. The Government didn't have the luxury of designing a
    national passenger railroad from scratch. To the contrary, with
    several railroads heading rapidly into bankruptcy, Amtrak was
    created to take over these financial liabilities and link
    together all these money-losing passenger lines. Today, Amtrak
    as we know it is still a hodgepodge. Amtrak owns its track in
    one region of the country, but not in other regions. Some
    States, like mine, pay for both the operating costs and some
    capital costs of their trains. Some States pay just a portion
    of the operating costs, and still other States pay absolutely
    nothing for their Amtrak service. Some Amtrak services run with
    equipment that is just a few years old. Some services run with
    equipment that is several decades old. Even today some of
    Amtrak's equipment dates back from before the railroad was
    founded. Some of it even dates back to before World War II.
        When you are dealing with a hodgepodge system, you need to
    be very suspicious of reforms where one size is expected to fit
    all. I believe that reforms are needed at Amtrak, but I also
    believe these reforms should not just be about cutting
    employees, cutting wages, and cutting communities off the
    national rail map.
        When it comes to cutting employees, Amtrak has already
    dropped its employee head count by almost 6,250. That is a cut
    of more than 25 percent in the last 6 years. When it comes to
    wages, most Amtrak employees haven't seen a real wage increase
    in almost 8 years. Last year, in the name of reform, Amtrak's
    Board of Directors proposed to send some Amtrak jobs overseas.
    That's right, a company that receives over $1 billion in
    taxpayer money each year would be using those tax dollars to
    send jobs overseas. Senator Byrd and I included an amendment on
    last year's appropriations bill to prohibit that. As a result,
    the Amtrak board abandoned its plan. But my point here is not
    everything that is proposed in the name of reform makes sense
    for the American people, or the taxpayers, or for Amtrak's
    passengers.
        I can think of a number of reforms at Amtrak that do make
    sense and are long overdue. They include reforming the way the
    Nation's freight railroads dispatch Amtrak trains so that the
    passengers have a fighting chance to arrive on time. Reforming
    the way Amtrak compensates its employees so they can attract
    and retain the skilled personnel they need. Reforming the way
    the Bush administration budgets for Amtrak's needs so that the
    administration and Congress can focus together on truly
    modernizing the railroad rather than battling annually over
    whether the railroad will be allowed to limp into next year.
        When you look at the recent record, Amtrak has been able to
    increase riders and revenue, not just on the Northeast
    Corridor, but on its State-supported and long-distance trains
    as well. That fact is all the more impressive when you look at
    the abysmal on-time performance on some of these trains outside
    the Northeast Corridor. Outside the corridor, Amtrak travels
    over track that is owned, maintained, and dispatched by freight
    railroads. But as a matter of Federal law, those freight
    railroads are required to give Amtrak trains preference over
    freight traffic when dispatching traffic over their rails. When
    you look at the on-time performance of many of these Amtrak
    trains you have to question whether the law is being ignored.
        There is no question we need our freight railroads to move
    cargo. Freight mobility is an essential part of our economy,
    especially in an agricultural and trade State like mine. It is
    simply not realistic to expect our freight railroads to put
    every coal and container train on a siding so passenger trains
    can breeze through. But right now, more than half of Amtrak's
    long-distance trains arrive late--many of them extremely late.
    When you review the data as to why these trains are late,
    there's one factor that outweighs all the others: interference
    with freight trains.
        More than 76 percent of the delay time that these trains
    endure is associated with problems at the host freight
    railroad. It is either interference with freight traffic, slow
    orders due to deferred maintenance, signal delays, or other
    problems. When you look at some of the Amtrak trains that are
    supported by State subsidies, the record is not much better.
        Let me just talk about two examples of States that get a
    lot of attention by this subcommittee, Washington State and
    Missouri.
        My home State does not only finance the operating losses of
    the Cascade Trains, it has even purchased some of the railcars
    for that service. But last year these trains still arrived late
    almost half the time. In Missouri, the State puts up millions
    of dollars to operate twice daily trains between Kansas City
    and Saint Louis, but last year those trains were allowed to
    arrive on time less than one-third of the time. The on-time
    performance of these trains in December was no better. It is a
    deplorable record. Given that record, it is amazing, indeed,
    that Amtrak can sell any tickets on this train. Yet here too,
    ridership has increased because people want to use the service.
        When you look at the Bush administration's budget for
    Amtrak and the separate budget request submitted by Amtrak's
    Board of Directors, there is one notable area where they are in
    agreement. Both budgets want this subcommittee to set aside
    $100 million in matching funds, for the States to launch new
    passenger corridors. When both Amtrak and the Bush
    administration agree on a budget proposal, you have to take
    notice.
        But given the problem with the on-time performance of these
    State-supported trains, I am left here asking, ``What is the
    point in providing additional funds for new State-supported
    rail services if those trains are just going to suffer the same
    congestion and dispatching problems that befall Amtrak's
    current trains?'' If we're going to put Federal tax dollars
    into capital improvements over privately-owned freight track,
    shouldn't we be focusing those on improving the current
    services, before we start paying for new services? Why should
    States like mine--States that already make substantial cash
    contributions for Amtrak service--have to put up even more
    State dollars just so that their existing trains don't arrive
    consistently late?
        That was his bell for being late.
        So, one Amtrak reform this subcommittee must look at, is
    how we can better ensure that Amtrak trains have a fighting
    chance of arriving on time. No one should expect Amtrak to
    dramatically improve their ridership and financial performance
    of the Northeast Corridor when it is more likely than not that
    those trains won't arrive on time.
        Another Amtrak reform we should look at is seeing to it
    that Amtrak has the resources that it needs to recruit and
    retain the employees they need. Amtrak and its labor unions
    have not been able to reach agreements on a new contract for 7
    years. It's time for that impasse to end. Many crafts have not
    experienced a meaningful pay increase in all of that time. The
    result has not just depressed employee morale. Amtrak is now
    facing serious shortages in a number of skill areas, because
    trained and experienced employees are taking better paying jobs
    with commuter railroads, freight railroads, or outside the
    railroad industry. Amtrak will not be able to improve its
    efficiency, safety, and service quality if it's lowest paying--
    if it is the lowest-paying competitor in the industry.
        Finally, it is my hope that we can start having a
    meaningful, fact-based dialogue with the Bush administration
    about Amtrak's real financial needs. President Bush's Federal
    Railroad Administrator will testify to us today that if we cut
    overall funding for Amtrak by almost 40 percent, Amtrak can
    stay out of bankruptcy next year. I'm not sure that any other
    witness here is going to agree with that observation.
        The DOT Inspector General has performed a valuable service
    for this subcommittee, by being an impartial monitor of
    Amtrak's financial condition. Today's witness from the
    Inspector General's office will testify that what Amtrak really
    needs is to be reauthorized. I totally agree that Amtrak
    desperately needs comprehensive legislation that addresses each
    of the challenges I have cited and many others. I sincerely
    hope this legislation is signed into law this year. This
    subcommittee's practice of providing incremental reforms
    through appropriations legislation each year is not the ideal
    way to do business. But absent the enactment of a comprehensive
    Amtrak reform bill, we will continue to do what needs to be
    done to address these areas and keep Amtrak alive for the
    steadily growing number of citizens that demand the service.
        Senator Murray. Senator Bond.

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Thank you, Madame Chair. And I join with you
    in welcoming our witnesses today, and look forward to hearing
    the differing views on each of you on the current needs of
    Amtrak and how best to meet the growing challenges that face
    intercity passenger rail. I have many concerns about Amtrak and
    look forward to an opportunity to discuss these.
        I might say, for the record, that I was for Amtrak when it
    was first cool. About a third of a century ago as Governor of
    Missouri, I recommended and signed into law the appropriations
    to provide roughly $1 million a day for Amtrak. And I enjoyed
    the service, but I have a lot of questions about the economic
    feasibility.
        Now, the good news is that my Representatives and Senators
    and Governor of Missouri have been putting about, I believe, $6
    million a year into subsidizing it. So, they see the need. But
    the question is, ``How do we make this viable for the long
    term?'' Our highways continue to become more and more
    congested, and our airports are full of passengers--snowstorms,
    they stay there in the airports and I've done that--and people
    look for alternative modes of transport.
        On the Northeast Corridor, I would love to be able to hop
    on the train to head to New York for the weekend versus trying
    to fight the traffic. But as I understand that while the
    highway traffic has increased markedly on 95, the ridership on
    Amtrak has been relatively stable. And obviously one of the
    reasons is because of the capacity constraints. So, I think
    that needs to be addressed for the Northeast Corridor.
        But again, we need also to look at the economics of east
    coast to west coast service, and how that's going to be paid
    for. We are caught in a spiral where the costs are increasing
    significantly, while overall ridership on Amtrak has gone up.
    In other areas it does not--it is not coming close to paying
    for the service.
        I, too, look forward to comprehensive legislation, but the
    measures that I've seen require significant infusions of
    additional Federal money. Given the budget constraints under
    which this committee operates, I don't see that money being
    available. So I look in the comprehensive legislation for what
    is proposed to pay for the additional costs that this
    legislation would incur.
        Now, to talk about the specific budget, while I have
    questions, I do believe that the budget provided by the
    administration did not provide the funding needed to meet
    Amtrak's anticipated expenses for fiscal year 2008. As we know,
    for this coming fiscal year, the administration recommended
    $900 million for Amtrak, $800 million directly, and $100
    million dedicated to issuing capital matching grants to States
    for intercity passenger rail projects.
        Of the $800 million provided directly to Amtrak, $300
    million is required for Amtrak's new management team to make
    the necessary decisions to act on its mandate and reshape the
    company. I expect Mr. Kummant, with Amtrak, to explain where we
    are today, where we're going, and how much it's going to cost.
        Amtrak must be able to account for its expenditures with
    long-term plans for individual capital improvement similar to
    State TIPs or Transportation Improvement Plans. If the detailed
    Transportation Improvement Plans were provided by Amtrak, we'd
    be better able to understand what unmet needs are out there.
    And we could then decide whether or not we agree with providing
    additional funding for passenger rail service.
        Currently, labor costs require 82 percent of the revenue
    generated for Amtrak, and Amtrak estimates that healthcare
    costs will total $238 million for this 2007 calendar year,
    approximately 22 percent of the total payroll. No business is
    sustainable at this level of operations, regardless of the
    amount of money put in to the efficiency incentive grant
    program.
        Amtrak estimates that the savings they could achieve with
    labor changes is between $82 million and $100 million annually.
    But, unless all options are on the table to achieve savings--as
    highlighted by Amtrak's board--we're going to be unable to
    preserve Amtrak and passenger rail service for the long term.
    As you know, Amtrak spends $2 for every $1 of revenue collected
    on food and beverage service. If you factor out the cost for
    food and beverage, every dollar of revenue equals the labor
    cost to deliver it. We have yet to see results of how Amtrak is
    dealing with this.
        I'm concerned that the budget submission we received for
    Amtrak does not include any funds for debt service payments.
    These payments are necessary, and will be paid whether they are
    a line item for debt service added by this subcommittee, or
    from the $500 million provided for capital costs. We can not
    ignore the fact that debt is there, and that there is an
    immediate and legal obligation to repay it.
        To be blunt, we need a dynamic plan and commitment that
    will transform Amtrak into a viable transportation option. We
    can not afford to tread water year after year where all funding
    basically supports the status quo, while labor costs and
    infrastructure needs continue to explode faster than the
    ridership.
        Thank you, Madame Chair.
        Senator Murray. Thank you Senator Bond.
        Senator Lautenberg, you have an opening statement?

                    STATEMENT OF SENATOR FRANK R. LAUTENBERG

        Senator Lautenberg. Thanks very much, Madame Chairman, for
    holding this hearing. I had the opportunity yesterday in the
    committee--subcommittee in commerce--we had a chance to hear
    from Mr. Kummant and Mr. Boardman, and we're pleased to have a
    chance to talk to them as well as the other witnesses today.
        In New Jersey we have enormous traffic problems, but we're
    not unique. Traffic problems across--all we have to do is look
    into Washington, DC and see how long it takes to cover routes
    that used to be 10 minute rides, like to my house--or 12
    minutes--are now a half an hour, if you're lucky. And that's
    the way it is throughout the country. It's very hard to get
    into any area that has any development associated with it,
    where the traffic doesn't overwhelm the efficiency.
        So, in New Jersey, for example, the average New Jerseyan
    spends 300 hours commuting by car each year, and 15 percent of
    that time is wasted in traffic. And, it's not simply the late
    arrivals. When you look at the problem with importing oil
    that's required to maintain those engines as they idle along,
    and the pollution that's created. Last year was the worst year
    for flight delays since 2000. One in four planes was late, and
    we expect nearly 5,000 new light jets to go into service over
    the next 10 years. The sky, we learn now, is finite, it just,
    you don't have room to put everything up there that you'd like
    to.
        With this in mind, Amtrak requested what it needed to keep
    trains running safely and reliably. And then President Bush
    went ahead and requested half as much. And yesterday, when I
    chaired that subcommittee, we discussed the bipartisan bill
    being done by Senator Lott and myself, to fully fund Amtrak and
    expand its service into more cities, because it's critical in
    the traffic movement that is required in this country.
        Last year the Senate approved our plan by a vote of 93 to
    6, because America's travelers need another choice. Now, I look
    forward to getting the same kind of response and support this
    year. In the meantime, we can not continue to let Amtrak
    deteriorate, which is what the President's budget would do.
        Now, when we look at what is spent in other countries to
    achieve first-class rail service, it dwarfs everything we do.
    Germany spent more in a year than we spend in a half a dozen
    years to get their service going. It's excellent. And you've
    got to pay for what you want. And we can not do it on skinny
    budgets that--many of which were designed to bankrupt Amtrak.
    And so I'm working with the Budget Committee to ensure that
    Amtrak gets the Federal resources it needs to provide services
    and options to our citizens.
        And in my new assignment, in this committee, I'm happy to
    work with the Chair and the ranking member to ensure that
    Amtrak is a priority.
        I heard, Madame Chairman, as you were making your
    statement, some of the equipment was as old as World War II. I
    think some of things that, during World War II, still have the
    viability as we go along, and I'm of that vintage. Thank you
    very much.
        Senator Murray. Thank you, Senator Lautenberg.
        Senator Allard.

                       STATEMENT OF SENATOR WAYNE ALLARD

        Senator Allard. Madame Chairman, thank you for holding this
    hearing. I followed Amtrak carefully, on the authorizing side
    for a number of years, so I appreciate the opportunity to be
    more involved on the budget side.
        While passenger rail has a role in efficient modern
    transportation infrastructure, I'm concerned about how Amtrak
    has performed in providing that service. As my colleagues may
    know, I'm a strong proponent of results and outcomes. Amtrak
    and other Government-funded entities should not be judged based
    upon how much they receive in Federal funding, but by the
    results that can be demonstrated by those taxpayer dollars.
        In the case of Amtrak, I'm afraid those results are not
    very impressive. In the administration's PART Assessment--
    that's their tool for evaluating the effectiveness of
    programs--Amtrak was rated as ineffective. I'm afraid that
    Amtrak's history before this Congress is plagued with
    unfulfilled promises over the years, stories of inefficiencies
    and a waste of taxpayer dollars. In fact, it was the only
    program in the entire Department of Transportation to receive
    an ineffective rating.
        I want to be clear on what this really means. From the
    administration's description, ineffective means ``programs
    receiving this rating are not using taxpayer dollars
    effectively.'' That seems pretty clear to me, and I'm pleased
    to see that the budget contains a proposal to incentivize more
    State participation.
        Nearly every other area of transportation, including
    highways, mass transit, and aviation, is a partnership between
    the Federal and State or local governments. Passenger rail
    should follow the same model. It should not be considered the
    sole jurisdiction or responsibility of the Federal Government.
        States and localities are also in a position to better
    understand the transportation needs of their citizens. Not only
    does the budget ask them to prioritize their needs, it does so
    in a meaningful way by asking them to share joint funding
    responsibilities. This will help ensure that the highest needs
    are met, rather than producing a wish list of wants.
        I am concerned however, that this change may not be enough.
    I'm unconvinced that Amtrak has completely turned the corner
    and is solidly on the path of financial soundness. I look
    forward to the opportunity to hear from the witnesses about
    this budget request and how it fits into Amtrak's future. Their
    testimony will be helpful as we move forward with the
    appropriation process.
        Thank you Madame Chairman.
        Senator Murray. Thank you, Senator Allard.
        We have five witnesses before our committee today. Mr.
    Kummant, President and CEO of Amtrak, Mr. Boardman,
    Administrator of the Federal Railroad Administration, Mr.
    Tornquist who's the Assistant Inspector General for Competition
    and Economic Analysis, Mr. Wytkind, President of Transportation
    Trades Department, and Mr. Serlin, President of Railroad
    Infrastructure Management.
        You each will be allocated 5 minutes and I ask you to keep
    your remarks within those 5 minutes, so we can get to committee
    member questions.
        And Mr. Kummant, we will begin with you.

                         STATEMENT OF ALEXANDER KUMMANT

        Mr. Kummant. Madame Chairwoman, and members of the
    subcommittee, thank you for the opportunity to testify before
    you today.
        While my testimony will primarily focus on the fiscal year
    2008 budget request, I'd like to take a few minutes to update
    you on how the company is doing. With that, I'll reiterate a
    number of the points you made in the opening comment as well.

                              AMTRAK STATUS UPDATE

        As you know, we finished the fiscal year 2006 by
    establishing new ridership and revenue records. Through
    January, we're continuing to outpace the previous with
    ridership and revenue ahead by 4 percent and 10 percent,
    respectively. The ridership increases are reflected across all
    services, and outside the Northeast Corridor ridership is up
    about 5 percent nationwide, though some corridors have seen
    double-digit growth.
        Overall, the big driver right now is, of course, the
    Northeast Corridor, and particularly the Acela service, where
    ridership is up about 19 percent over the same period last
    year. This is the result of a number of improvements to the
    onboard experience, better reliability and much better on-time
    performance. We've consistently been hovering around 90 percent
    on-time for Acela, and that's the result of having
    significantly reduced the backlog of state of good repair work,
    leaving the Northeast Corridor in the best shape it's been in
    for years.
        Our safety numbers--another key indicator--are also lower
    than last year's final numbers, and we finished this January at
    a 40 percent run-rate improvement over last year. Finally, we
    continue to pay down our debt, and have not assumed any new
    debt for 4 years in a row.
        Within the next few months, we expect to send to Congress
    an update of our multi-year strategic plan, which will
    underscore, again, the need for a fiscal year 2008 funding
    request and provide a vision of where we hope the company will
    be within the next few years.
        In summary, our vision for Amtrak is one of growth,
    particularly in corridor services, product excellence as we're
    demonstrating with Acela, and overall sound management. Looking
    forward, much of the success of passenger rail service will lie
    in the establishment of clear multi-year Federal policy,
    including a Federal-State matching program to fund corridor
    development. The other major initiative we'll have to undertake
    soon is procurement of new equipment as was also alluded to
    earlier. We have an aging fleet with little excess equipment,
    and as corridor service grows, it will be exhausted.

                        FISCAL YEAR 2008 FUNDING REQUEST

        Let me turn to the fiscal year 2008 request. On February
    15, we submitted to Congress our Grant and Legislative Request,
    which I would ask be enclosed for the record. This document
    contains both the specific request and details to explain the
    need for this funding. In short, Amtrak is requesting $1.53
    billion, which is less than last year's request of $1.598
    billion and an increase over the fiscal year 2007 enacted
    amount of $1.3 billion. The budget request breaks down as
    follows: for operating support, $485 million; capital, $760
    million; and mandatory debt service, $285 million.
        We've also suggested that Congress fund $100 million for a
    State corridor match program and an additional $50 million for
    ADA Station accessibility needs. It is worth noting that the
    administration's fiscal year 2008 budget request for Amtrak
    also recommended $100 million for State corridor match program,
    as was referenced earlier.
        With regard to our operating request, the $485 million
    continues a downward slope of operating needs over the last 10
    years. For comparison sake, in fiscal year 1996, operating
    support represented 23 percent of our total budget request. In
    fiscal year 2008, the amount now represents about 19 percent.
        This reduced operating need is accomplished in the face of
    rising costs, particularly in the areas of health and benefits,
    insurance, and fuel. Keep in mind, the absence of new labor
    agreements has certainly helped to keep the operating costs
    relatively constant.
        For our capital needs, Amtrak has requested $760 million,
    which would be used to continue state of good repair
    initiatives, including modernization of our fleet. As I said
    earlier, Amtrak has completed a substantial investment of the
    Northeast Corridor infrastructure, which we own and maintain.
    The on-time performance numbers for all users of the corridor
    reflect the benefit of these investments. For instance, on-time
    performance for New Jersey Transit, a major user of the
    Northeast Corridor, was 94 percent in fiscal year 2006.
        Finally, we continue to invest in our fleet, and expect by
    the end of fiscal year 2009 to bring the entire fleet to state
    of good repair. During the short time that I've been with
    Amtrak, I have been struck by the enthusiasm and support that
    exists for passenger rail services, particularly at the State
    and local levels. And parenthetically, too, I must say the
    energy and drive of our frontline folks, as you alluded to--in
    the face of a long time without labor settlements--is also
    impressive. I believe that we're on the verge of significant
    growth and development of our Nation's rail infrastructure, and
    the steps we're taking today are essential to meet the need for
    the eventual expansion of passenger rail service.

                               PREPARED STATEMENT

        Thank you again for the opportunity to testify today, and I
    look forward to working with you--with each of you in the
    coming months. I'd be happy to answer any question. Thank you.
        [The statement follows:]
                    Prepared Statement of Alexander Kummant
        Madame Chairwoman and members of the subcommittee, thank you for
    the opportunity to testify before the subcommittee today. While my
    testimony will primarily focus on the fiscal year 2008 budget request,
    I would like to take a few minutes to update you on how the company is
    doing.
        As you know, we finished fiscal year 2006 by establishing new
    ridership and revenue records. Through January we are continuing to
    outpace the previous year with ridership and revenue ahead by 4 percent
    and 10 percent respectively. The ridership increases are reflected
    across all services, and outside the Northeast, corridor ridership is
    up about 5 percent nationwide though some corridors have seen double
    digit growth. Overall, the big driver right now is the Northeast
    Corridor (NEC) and particularly the Acela service where ridership is up
    about 19 percent over the same period last year. This is the result of
    a number of improvements both to the onboard experience, better
    reliability and much better on time performance (OTP). We have been
    consistently hovering around 90 percent OTP for Acela, and that is the
    result of having significantly reduced the backlog of state-of-good
    repair work, leaving the NEC in the best shape it has been for years.
    Our safety numbers, another key indicator, are also lower than last
    year's final numbers and we finished this January at a 40 percent run
    rate improvement over last year. Finally, we continue to pay down our
    debt and have not assumed any new debt for 4 years in a row.
        Within the next few months we expect to send to Congress an update
    of our multi-year strategic plan which will underscore again the need
    for our fiscal year 2008 funding request and provide a vision of where
    we hope the company will be within the next few years. But, in summary,
    our vision for Amtrak is one of growth (particularly in corridor
    services), product excellence (as we are demonstrating with Acela), and
    sound management overall. Looking forward, much of the success of
    passenger rail service will lie in the establishment of clear multi-
    year Federal policy, including a Federal-State matching program to fund
    corridor development. The other major initiative we will have to
    undertake soon is procurement of new equipment. We have an aging fleet
    with little excess equipment, and as corridor service grows, it will be
    exhausted.
        Let me turn to fiscal year 2008 request. On February 15 we
    submitted to Congress our fiscal year 2008 Grant and Legislative
    request which I would ask to be enclosed for the record. This document
    contains both the specific request and details to explain the need for
    this funding. In short, Amtrak has requested $1.53 billion which is
    less than last year's request of $1.598 billion, and a slight increase
    over the fiscal year 2007 enacted amount of $1.3 billion.
        The budget request breaks down as follows:
      --Operating, $485 million;
      --Capital, $760 million; and,
      --Mandatory debt service, $285 million.
        We have also suggested that Congress fund $100 million for a State
    corridor match program and an additional $50 million for ADA station
    accessibility needs. It is worth noting that the administration's
    fiscal year 2008 budget request for Amtrak also recommended $100
    million for a State corridor match program.
        With regard to our operating request, the $485 million continues a
    downward slope of operating needs over the past 10 years. For
    comparison sake, in fiscal year 1996, operating support represented 23
    percent of our total budget request. The fiscal year 2008 amount now
    represents about 19 percent. This reduced operating need is
    accomplished in the face of rising costs particularly in the areas of
    health and benefits, insurance and fuel. Keep in mind, the absence of
    new labor agreements has helped to keep operating costs relatively
    constant.
        For our capital needs, Amtrak has requested $760 million which
    would be used to continue state of good repair initiatives including
    modernization of our fleet. As I said earlier, Amtrak has completed a
    substantial investment of the NEC infrastructure which we own and
    maintain. The on time performance numbers for all users of the corridor
    reflect the benefit of these investments to the NEC plant and
    structures. For instance, on time performance for New Jersey Transit, a
    major user of the Northeast Corridor, was 94 percent for fiscal year
    2006. Finally, we continue to invest in our fleet and expect by the end
    of fiscal year 2009 to bring the entire fleet to a state-of-good-
    repair.
        During the short time that I have been with Amtrak I have been
    struck by the enthusiasm and support that exists for passenger rail
    service, particularly at the State and local levels. I believe that we
    are on the verge of significant growth and development of our Nation's
    rail infrastructure and the steps we are taking today are essential to
    meet the need for the eventual expansion of passenger rail service.
    Thank you again for the opportunity to testify before the subcommittee
    today and I look forward to working with each of you in the coming
    months. I would be happy to answer your questions.

        Senator Murray. Thank you.
        Mr. Boardman.

                          DEPARTMENT OF TRANSPORTATION

                        Federal Railroad Administration

    STATEMENT OF HON. JOSEPH H. BOARDMAN, ADMINISTRATOR
        Mr. Boardman. Chairwoman Murray, ranking member Bond,
    Senators Lautenberg and Allard, thank you for having me here
    today. I'm here on behalf of Secretary Peters and the Bush
    administration to talk about the budget proposal for 2008.

                ADMINISTRATION FISCAL YEAR 2008 BUDGET PROPOSAL

        As you've already noted, the administration requests $800
    million in direct subsidies to Amtrak, and $100 million to fund
    a program of matching grants to the State under the capital
    investment projects for passenger rail services that the State
    believes are important.
        The request includes that $500 million in direct Federal
    subsidies for Amtrak's capital costs, and in addition--I'll
    discuss in a moment--the $100 million, 50 percent Federal match
    program with the States. With this amount, Amtrak and its State
    partners could carry out a capital improvement program that,
    when combined with other collections from Amtrak, can address
    the most pressing investment needs, and given the system today,
    is an amount that they can reasonably manage in 2008. The
    administration also requests $300 million for transitional
    operating costs. The Government Accountability Office, the DOT
    IG, the Amtrak IG, and others have recently presented options
    for achieving the savings necessary for that number.

                            STATE MATCHING PROPOSAL

        Most publicly-supported transportation in the United States
    is undertaken through a partnership between the Federal
    Government and the United States--and the States, excuse me.
    This model--which has worked well for generations for highway,
    transit, and airports--places the States--and in certain cases
    their subdivisions--in the forefront of planning and
    decisionmaking.
        States are uniquely qualified to understand their mobility
    needs and connectivity requirements through state wide and
    metropolitan area inter-modal and multi-modal transportation
    planning, funded in part by the U.S. DOT. While intercity
    passenger rail has historically been an exception to this
    application of the model, in recent years some States have
    taken an active role in their rail transportation services.
    Several States have chosen to invest in intercity passenger
    rail provided by Amtrak as part of strategies to meet their
    passenger mobility needs. And over the past 10 years, ridership
    on intercity passenger rail routes that benefit from State
    support has grown by 73 percent--over that same period,
    ridership on Amtrak routes not supported by States, only by 7
    percent.
        State involvement and planning and decisionmaking for
    intercity passenger rail identifies where mobility needs
    justify public investment. An excellent example, you've already
    identified this morning--in Washington State, which has
    invested in intercity passenger rail from Portland, Oregon
    through Seattle, to Vancouver to make this service a viable
    alternative to highway travel on the congested I-5 Corridor.
        Illinois provides another example where its recent
    investments have doubled the number of intrastate trains
    operated by Amtrak. Additionally, State involvement in planning
    and decision making helps ensure that the infrastructure such
    as stations and connectivity to other forms of transportation,
    support inter-modalism within the State. There's no better
    example for that than North Carolina.
        State involvement in funding intercity passenger rail
    service also provides an added discipline on Amtrak to
    continually seek ways to provide the highest quality of
    service. An example of that can be found in Vermont where the
    State--when presented with prospects of higher State operating
    subsidies for its current service--is working with Amtrak to
    restructure this service, which will not only drive down
    operating costs, but will also increase the frequency of
    service.
        Amtrak's own strategic reform initiative seeks to build on
    Amtrak's experience with the States. Amtrak is seeking to
    create a stronger role with the States in designing and
    supporting the services the States believe are important. The
    administration supports this aspect of Amtrak's internal
    reform.
        In discussions with interested States, the U.S. DOT has
    found that the single greatest impediment to implementing this
    initiative is the lack of Federal-State partnership, similar to
    that which exists for highways and transit. For investing in
    the capital needs of intercity passenger rail, such a
    partnership is one of the five principles of intercity
    passenger rail reform laid out by former Secretary Mineta in
    2002, and was a central element of the administration's
    Passenger Rail Reinvestment Reform legislative proposal.

                               PREPARED STATEMENT

        Therefore, the administration is proposing a capital grant
    program that will encourage State participation in its
    passenger rail service. Under the new program, a State, or
    States, would apply to FRA for a grant up to 50 percent of the
    cost of investment. Priority would be given to infrastructure
    improvements, and projects that improve the safety,
    reliability, and schedule of intercity passenger trains, reduce
    congestion on the host freight railroads where the freight
    railroads commit to an enforceable on-time performance of
    passenger trains of 80 percent or greater. Additionally, the
    specific project would have to be on the State Transportation
    Improvement Program at the time of the application.
        Thank you for the opportunity to speak.
        [The statement follows:]
                 Prepared Statement of Hon. Joseph H. Boardman
        Chairman Murray, Ranking Member Bond, I appreciate the opportunity
    to appear before you today on behalf of Secretary of Transportation
    Mary Peters and the Bush administration to discuss the President's
    budget proposal for fiscal year 2008 as it relates to the Federal
    Railroad Administration and Amtrak.
        The administration remains committed to improving the manner by
    which intercity passenger rail services are provided. This, of
    necessity, also includes improvements to how Amtrak provides this
    service and laying the groundwork for the States to have a stronger
    role in determining the important characteristics of services that
    States support financially and for the participation of other entities
    in the provision of intercity passenger rail service under contract to
    the States and/or Amtrak.
        Since 2002, the administration has drawn a distinction between
    intercity passenger rail service, a form of transportation, and Amtrak,
    the company that provides the service. The administration supports the
    form of transportation as a component of our national transportation
    system but recognizes there are shortcomings with the service provider.
    The administration's advocacy for change is beginning to see results as
    Amtrak, through its Board of Directors, has acknowledged the urgent
    need for reform and issued a Strategic Reform Initiative plan that
    mirrors major elements of the administration's plan, such as
    introducing competition; empowering States to participate in
    infrastructure decisions; reducing operating subsidies; and enabling
    management to separate Amtrak's train operations from its
    infrastructure management. There is also a new management team being
    put in place with a mandate to overhaul the company. Congress similarly
    has taken steps to encourage cost efficiency and accountability.
    Nevertheless, much more is required to resolve Amtrak's well-documented
    problems.
        For fiscal year 2008, the administration requests $800 million in
    direct subsidies to Amtrak and $100 million to fund a program of
    matching grants to the States to undertake capital investment projects
    for passenger rail services that the States believe important. This
    amount would support continued intercity passenger rail service and
    would enable Amtrak's new management team to act on its mandate to
    reshape the company. However, it would also require that Amtrak
    undertake meaningful reforms and control spending. The fiscal year 2008
    budget request marks part of a multiyear effort to reduce, and
    eventually eliminate, operating subsidies for Amtrak. Overall, this
    level of subsidy is appropriate because it will provide Amtrak
    continuing incentive to grapple with costs, rationalize its services,
    and pursue innovations. It would also expand State support for
    intercity passenger rail, thus putting more of the decisions on what
    should be operated with public subsidies in the hands of those who know
    best what intercity passenger needs exist and how best to meet those
    needs.
        Consistent with fiscal year 2006 appropriations account
    restructuring, the fiscal year 2008 budget seeks Amtrak funds through
    the Capital Grants and Efficiency Incentive Grant accounts. The
    administration agrees that using distinct budget accounts for Amtrak
    makes Federal spending more transparent. The budget also contains many
    of the stipulations included in the fiscal year 2006 appropriations
    language.
                                 capital grants
        The request includes $500 million in direct Federal subsidies for
    Amtrak capital costs. In addition, the budget, as discussed below,
    includes $100 million to fund a program of grants to States, requiring
    a 50 percent match, to fund capital costs associated with intercity
    passenger rail services that the States deem important. With this
    amount, Amtrak and its State partners could carry out a capital
    improvement program that, when combined with other collections from
    Amtrak partners, can address the most pressing investment needs on the
    Northeast Corridor infrastructure as well as essential equipment
    investments. The request represents close to the maximum capital budget
    that Amtrak could reasonably manage in fiscal year 2008, given that it
    can complete only a certain amount of work annually.
                       amtrak operating efficiency grants
        The administration requests $300 million for transitional operating
    costs. The request for operating subsidies is sufficient to avoid a
    bankruptcy, provided Amtrak acts to cut its costs by focusing on core
    services. To ensure this occurs, the administration proposes DOT be
    able to target funding based on Amtrak's progress in implementing cost-
    cutting measures. For example, the Secretary of Transportation could
    review and approve grant requests for individual train routes, or
    require Secretarial approval for the use of funds for specific
    operating expenses, such as subsidies of food and beverage service
    which, in fiscal year 2006, accounted for more than 10 percent of the
    total Federal subsidy of Amtrak. Amtrak must also improve its operating
    performance through revenue gains, debt service reductions, or other
    means. Ultimately, the $300 million request should lead to a more
    efficiently run railroad by causing Amtrak's management to explore
    opportunities for savings and for revenue gains. The Government
    Accountability Office, DOT Inspector General (IG), Amtrak IG, and
    others have all recently presented options for achieving savings.
                     intercity passenger rail grant program
        Most publicly supported transportation in the United States is
    undertaken through a partnership between the Federal Government and the
    States. This model, which has worked well for generations for highways,
    transit and airports places the States, and in certain cases their
    subdivisions, at the forefront of planning and decisionmaking. States
    are uniquely qualified to understand their mobility needs and
    connectivity requirements through Statewide and metropolitan area
    intermodal and multimodal transportation planning funded, in part, by
    the U.S. Department of Transportation.
        While intercity passenger rail has historically been an exception
    to the application of this successful model, in recent years some
    States have taken an active role in their rail transportation services.
    Several States have chosen to invest in intercity passenger rail
    service provided by Amtrak as part of strategies to meet their
    passenger mobility needs. Over the past 10 years, ridership on
    intercity passenger rail routes that benefit from State support has
    grown by 73 percent. Over that same time period, ridership on Amtrak
    routes not supported by States has increased by only 7 percent.
        State involvement in planning and decisionmaking for intercity
    passenger rail service identifies where mobility needs justify public
    investment. An excellent example can be found in Washington State,
    which has invested in intercity passenger rail from Portland, Oregon
    through Seattle to Vancouver, British Columbia, to make this service a
    viable alternative to highway travel on the congested I-5 corridor.
    Illinois provides another example, where its recent investments have
    doubled the number of intrastate trains operated by Amtrak.
        Additionally, State involvement in planning and decisionmaking
    helps assure that the infrastructure, such as stations, and
    connectivity to other forms of transportation support intermodalism
    within the State. No better example of this exists than in North
    Carolina where the State has undertaken the redevelopment of its
    intercity passenger rail stations and transformed them into multimodal
    transportation centers serving the mobility needs of the communities in
    which they are located.
        State involvement in funding intercity passenger rail service also
    provides an added discipline on Amtrak to continually seek ways to
    provide the highest quality of service. An example can be found in
    Vermont where the State, when presented with the prospects of higher
    State operating subsidies for its current service, is working with
    Amtrak to restructure the service that will not only drive down
    operating costs, but will increase the frequency of service.
        Amtrak's own strategic reform initiative seeks to build on Amtrak's
    recent experience with the States. Amtrak is seeking to create a
    stronger role for the States in designing and supporting the services
    the States believe important. The administration supports this aspect
    of Amtrak's internal reform. In discussions with interested States, the
    U.S. Department of Transportation has found that the greatest single
    impediment to implementing this initiative is the lack of a Federal/
    State partnership, similar to that which exists for highways and
    transit, for investing in the capital needs of intercity passenger
    rail. Such a partnership is one of the five principles of intercity
    passenger rail reform laid out by former Secretary Mineta in 2002 and
    was a central element of the administration's passenger rail investment
    reform legislative proposal.
        Therefore, the administration is proposing a Capital Grant Program
    that will encourage State participation in its passenger rail service.
    Under this new program, a State or States would apply to FRA for grants
    of up to 50 percent of the cost of capital investments necessary to
    support improved intercity passenger rail service that either requires
    no operating subsidy or for which the State or States agree to provide
    any needed operating subsidy. Priority would be given to infrastructure
    improvement projects that improve the safety, reliability and schedule
    of intercity passenger trains; reduce congestion on the host freight
    railroads where the freight railroads commit to an enforceable on-time
    performance of passenger trains of 80 percent or greater; commit States
    to contribute other additional financial resources to improve the
    safety of highway/rail grade crossings over which the passenger service
    operates; and protect and enhance the environment, promote energy
    conservation, and improve quality of life. To qualify for funding,
    States would have to include intercity passenger rail service as an
    integral part of Statewide transportation planning as required under 23
    U.S.C. 135. Additionally, the specific project would have to be on the
    Statewide Transportation Improvement Plan at the time of application.
        I appreciate your attention and would be happy to answer questions
    that you might have.

        Senator Murray. Thank you, Mr. Boardman.
        Mr. Tornquist.

                        Office of the Inspector General

    STATEMENT OF DAVID TORNQUIST, ASSISTANT INSPECTOR
                GENERAL FOR COMPETITION AND ECONOMIC
                ANALYSIS
        Mr. Tornquist. Thank you, Chairman Murray and members of
    the subcommittee. I appreciate the opportunity to present our
    views on Amtrak's fiscal year 2008 financial needs.

                 DOT IG FISCAL YEAR 2008 AMTRAK BUDGET PROPOSAL

        Let me begin by providing some context for our 2008 funding
    recommendation for Amtrak. The fact that Amtrak set records in
    both ridership and ticket revenue in fiscal year 2006, ended
    the year with over $200 million in the bank, and achieved $61
    million in savings from operational reforms might lead one to
    think that Amtrak has turned the corner. However, to the
    contrary, we believe that Amtrak remains in a precarious
    financial condition.
        Amtrak deserves credit for the recent progress it has made
    in providing improved service and achieving cost savings.
    However, systemwide on-time performance declined again last
    year, operating losses remained unsustainably high, the
    infrastructure still shows a toll of years of underinvestment,
    and debt service continues to significantly cut into available
    funds. While much has been done to improve Amtrak, much more
    work remains.
        Given this context, we believe Amtrak would need in fiscal
    year 2008, $465 million for cash operating losses, $600 million
    for capital spending, and $285 million for debt service to
    operate a nationwide system, while maintaining modest progress
    towards achieving a state of good repair.
        Not all of this $1.35 billion needs to come from direct
    appropriations. Some could come from Amtrak's cash balances,
    depending on its projected year-end cash position later in the
    year. The $465 million operating subsidy would enable Amtrak to
    provide nationwide passenger rail service, while focusing its
    attention on needed reform and operational improvements. We
    also recommend that Amtrak's operating subsidy be appropriated
    separately from capital and debt service, just as Congress did
    in fiscal year 2006. This would prevent the deferral of capital
    projects, in order to avoid the more difficult work of
    improving Amtrak's operating efficiency. The capital amount
    would allow modest progress for a state of good repair, and the
    debt service amount we're recommending is Amtrak's estimate of
    its fixed cost for principal and interest.
        In addition, we support--with caveats--the State capital
    matching grant program, as included in the President's fiscal
    year 2008 budget, and in S. 294, the Passenger Rail Investment
    and Improvement Act, as a means to stimulate rail corridor
    development. Rail corridors hold the greatest potential for
    future ridership growth, and steps need to be taken to begin to
    address the expected demand for these routes.

                   OIG CONCERNS WITH STATE MATCHING PROPOSAL

        Our concerns with the proposed program are as follows.
    First, we believe it must be designed to ensure the Federal
    investment leverages new State investments, and does not simply
    supplant investments the States otherwise would have made.
        Second, Amtrak must finalize and gain acceptance for its
    route restructuring, cost recovery for State services, and
    labor reforms to improve the efficiencies of its core
    operations, before turning its attention to expanding those
    operations. Put simply, Amtrak needs to get its own house in
    order before investing in another property down the street.
        And third, we recommend an 80/20 match rate similar to that
    for the Federal Highway Program--rather than the 50/50 match
    rate proposed by the administration--to put State investment in
    rail on equal footing with other transportation modes.

                             AMTRAK REFORM EFFORTS

        Increased investment in intercity passenger rail must go
    hand to hand with improved operating efficiencies. Mr. Kummant
    and his senior management team have come onboard at a critical
    time. In the ongoing efforts to instill fiscal discipline at
    Amtrak. The board and current management seem committed to
    reform. However, the real test of that commitment will come
    soon as Amtrak moves from implementing relatively easier
    reforms, to implementing the more challenging ones. As Amtrak
    stated just 1 year ago, ``The test of its reform efforts will
    be its ability to implement substantial sustainable change that
    will deliver not only ongoing financial improvement, but a new
    environment for passenger rail that moves us beyond the
    stalemate of the last 35 years.''
        Amtrak's initial set of operating reforms saved $61 million
    last year. Amtrak reduced the cost of its food and beverage
    service, improved the productivity of its train operations,
    reduced corporate overhead, and increased revenues through
    variable fares in the Northeast Corridor, and enhanced services
    on the Empire Builder. This is a commendable start. Amtrak has
    committed to saving an additional $61 million in fiscal year
    2007 and $82 million in fiscal year 2008.
        We do have some concerns regarding Amtrak's reform efforts.
    These include a concern that Amtrak may miss its reform target
    in fiscal year 2007, because some planned reforms are on hold
    while their potential to generate actual savings is being
    reevaluated. We're concerned that Amtrak has limited details on
    its planned 2008 reforms, it has only high-level long-term
    implementation plans for its planned reforms--where it has any
    long-term plans at all--and that it may be overemphasizing
    revenue enhancements instead of cost reductions.
        Over the long term, reauthorization holds the key to
    Amtrak's future. As we testified previously, our long-term
    proposal for financing intercity passenger rail would focus on
    three key goals: continuing improvement in cost effectiveness
    of services provided; devolution of power to determine those
    services to States, and adequate and stable sources of Federal
    and State funding. Absent a fundamental restructuring of the
    company through reauthorization, it will again fall to the
    Appropriations Committee to maintain fiscal discipline at
    Amtrak, specifically by limiting the funds available to
    subsidize operating losses, fencing those funds to prevent the
    shifting from capital to operating expenses, and then making
    Federal support conditional upon further operating
    restructuring.

                               PREPARED STATEMENT

        Madame Chairman, that concludes my statement. I'd be happy
    to answer any questions you might have.
        [The statement follows:]
                     Prepared Statement of David Tornquist
        Chairman Murray, Ranking Member Bond and members of the
    subcommittee, I appreciate the opportunity to present the views of the
    Office of Inspector General on Amtrak's fiscal year 2008 financial
    needs, its recent efforts to improve its financial condition, and
    alternatives for financing intercity passenger rail. My statement today
    will draw upon the Quarterly Reports on Amtrak's Savings from
    Operational Reforms your committee and your House counterparts have
    requested of our office, as well as other work we have undertaken on
    Amtrak's financial and operating performance.
        Amtrak's Condition Remains Precarious.--Amtrak set records in both
    ridership and ticket revenue in fiscal year 2006, ended the year with
    over $200 million in the bank, and achieved $61 million in savings from
    operational reforms. Does this mean Amtrak has turned the corner
    operationally and financially? No, unfortunately, it doesn't. While
    improvements have been made, we believe Amtrak's condition remains
    precarious.
        Amtrak deserves credit for the recent progress it has made in
    providing improved service and achieving cost savings. The result of
    this progress is evident in Amtrak's improved ridership and revenue.
    Nevertheless, Amtrak has a long way to go before it can reach, let
    alone turn, the proverbial corner. Systemwide, on-time performance
    declined for the fifth consecutive year, operating losses remain
    unsustainably high, the infrastructure still shows the toll of years of
    underinvestment, and debt service continues to significantly cut into
    available funds. Much has been done to improve Amtrak, but much more
    work remains.
        Amtrak Requires More in Capital and Less in Operating Subsidy in
    Fiscal Year 2008.--Based on the information available today, Amtrak
    would need $465 million available to it in fiscal year 2008 for cash
    operating losses, $600 million for capital spending, and $285 million
    for debt service to operate a nationwide system while maintaining
    modest progress towards achieving a state of good repair. As Amtrak
    revises its revenue and expense estimates during the year, our estimate
    also may change. Not all these funds need come from direct
    appropriations, some could come from Amtrak's cash balances, depending
    on its projected year-end cash position later in the year.
        A $465 million operating subsidy in fiscal year 2008 would enable
    Amtrak to provide nationwide passenger rail service, while focusing its
    attention on needed reform and operational improvements. As Congress
    did in fiscal year 2006, appropriating the operating subsidy separately
    from the capital and debt service would prevent the deferral of capital
    projects in order to avoid the more difficult work of improving
    Amtrak's operating efficiency. The capital amount will allow modest
    progress toward a state-of-good repair and the debt service amount is
    Amtrak's estimate of its fixed cost for principal and interest.
        We have testified previously that we support a State capital
    matching grant program as a means to stimulate corridor development.
    With caveats, we support the $100 million capital matching grant
    program included in the President's fiscal year 2008 budget and in S.
    294, the Passenger Rail Investment and Improvement Act. We believe this
    program must be designed to ensure the Federal investment leverages new
    State investments and does not simply supplant investments that States
    otherwise would have made. Further, Amtrak must finalize and gain
    acceptance for its route restructuring, cost recovery for State
    services, and labor reforms to improve the efficiency of its core
    operations before turning its attention to expanding those operations.
    Finally, we would support an 80/20 match rate, similar to that for
    highways, rather than the 50/50 match rate proposed by the
    administration, to put State investment in rail on an equal footing as
    other transportation modes.
        Increased Investment in Intercity Passenger Rail Must Go Hand in
    Hand With Improved Operating Efficiencies.--Amtrak's new CEO and his
    senior management came aboard at a critical time in the ongoing efforts
    to instill fiscal discipline at the corporation through operational
    reforms. Since the development of the current Strategic Reform
    Initiatives, Amtrak is on its second CEO and its Board has three new
    members. The Board and current management seem committed to reform.
    However, the real test of that commitment will come shortly as Amtrak
    moves from implementing relatively easy reforms to more challenging
    ones.
        In fiscal year 2006 Amtrak realized $61.3 million in savings from
    operating reforms by reducing the cost of its food and beverage
    service, improving the productivity of its train operations, reducing
    corporate overhead, and increasing revenues through variable fares on
    the Northeast Corridor (NEC) and enhanced service on the Empire
    Builder. Amtrak has committed to saving an additional $61 million in
    fiscal year 2007 and $82 million in fiscal year 2008 from reforms.
        Regarding Amtrak's continuing efforts to improve its financial
    condition, we are concerned that Amtrak: (1) may miss its reform
    savings target in fiscal year 2007 because some planned reforms are on
    hold while their potential to generate actual savings is being
    reevaluated; (2) has limited detail on its planned fiscal year 2008
    reforms; (3) has only high-level long-term implementation plans for its
    planned reforms, where it has any long-term plans at all; and (4) may
    be overemphasizing revenue enhancements instead of cost reductions.
    Management's goal of ``instilling a culture of continuous improvement
    throughout the organization'' is the right one. Achieving it should be
    a necessary precondition for significant new State or Federal
    investment in intercity passenger rail service.
        More work needs to be done to eliminate the losses on food and
    beverage and, in particular, first class sleeper service. Any subsidy
    of first-class passengers remains unacceptable. In July 2005, we
    reported that Amtrak could save between $75 million and $158 million in
    annual operating costs by eliminating sleeper car service, outsourcing
    food and beverage service, and eliminating other amenities on long
    distance trains. In fiscal year 2006, the operating loss on long-
    distance trains was almost $600 million with a per passenger operating
    subsidy of over $200 on three of the routes. A significant amount of
    work needs to be done to finalize and implement Amtrak's proposed route
    restructuring, state services, and labor reform initiatives, all three
    of which are critical components of Amtrak's long-term financial plan.
        Reauthorization Holds the Key to Amtrak's Long-Term Outlook.--As we
    testified previously, our proposal for financing intercity passenger
    rail service would focus on three key goals: (1) continuous
    improvements in the cost-effectiveness of services provided, (2)
    devolution of the power to determine those services to the States, and
    (3) adequate and stable sources of Federal and State funding. Our
    proposal requires a reauthorization for Amtrak.
        These goals can be achieved through six programmatic changes:
    formula grants to States for capital and operating costs of intercity
    passenger services, restoration of the forward-going system to a state-
    of-good repair, capital matching grants to States for corridor
    development, establishment of adequate Federal and State funding,
    resolution of the legacy debt issues, and resolution of NEC ownership
    and control.
        Other alternatives for financing intercity passenger rail service
    include: (1) permitting States to issue tax exempt bonds for rail
    infrastructure development and (2) turning the NEC over to private
    investors with the support of a Federal loan. Permitting States to
    issue tax exempt bonds for rail infrastructure would address a goal we
    support of providing States with greater access to capital funds.
    Regarding whether tax exempt bonds is the preferred way to make these
    capital funds available, I would note that the Congressional Budget
    Office has concluded that when tax credit bonds are used in lieu of
    Federal appropriations, the cost to the Federal Government is greater
    than it would be through conventional financing through the Department
    of the Treasury. However, carefully designed tax credit bonds could
    cost the Federal Government less per dollar of assistance provided to
    State and local governments than the Federal tax exemption accorded
    ``municipal'' bonds issued by those governments.
        Turning the NEC over to private investors has some attractive
    features, particularly adding private investment through rail-dependent
    development and proposed service improvements. However, we raised in
    the past concerns regarding proposals to separate the NEC
    infrastructure management and operations into two independent
    companies. In addition, we would have to see a more detailed financing
    proposal to determine its soundness.
        Absent a fundamental restructuring of the company through
    reauthorization, it will again fall to the Appropriations committees to
    maintain fiscal discipline at Amtrak, specifically by limiting the
    funds made available to subsidize operating losses and by making
    Federal support conditional upon further operational restructuring.
        I will now discuss these issues in greater detail.
     despite improvements, amtrak's financial condition remains precarious
        The current model for providing intercity passenger service
    continues to produce financial instability and poor service quality. We
    have seen some improvement in Amtrak's financial and operating
    performance recently, but there are limits as to how much can be done
    within the current framework.
        Operating Losses.--Amtrak continues to incur substantial operating
    losses. It ended fiscal year 2006 with a net operating loss of $1.1
    billion. On the positive side, Amtrak's net operating loss was $65
    million less than last year and its cash operating loss, excluding
    interest and depreciation, was $17 million less than the same period
    last year. Operating losses on long-distance trains, excluding interest
    and depreciation, were $440 million in fiscal year 2006. Over the last
    5 years, annual cash losses, excluding interest and depreciation, have
    fallen only modestly--a little more than 3 percent a year.

        Debt Burden.--Amtrak continues to carry a large debt burden. Its
    total debt peaked at $4.8 billion in fiscal year 2002 and has declined
    to $4.2 billion in fiscal year 2006. For the foreseeable future,
    Amtrak's annual debt service will approach $300 million, eating into
    the amount of funds potentially available for critical capital
    investments.

        Revenue and Ridership.--Passenger revenues increased to a peak
    level of $1.426 billion in fiscal year 2006, primarily as a result of
    Amtrak's systemwide general fare increases and revenue management of
    the NEC Regional and Acela Express services (Amtrak's premier service).
    Despite the fare increases, ridership increased to 24.3 million in
    fiscal year 2006. For the first 3 months of fiscal year 2007, passenger
    revenues were $36 million higher than the same period in fiscal year
    2006, mainly due to fare increases. Ridership growth during this period
    rose 3.9 percent.

        On-Time Performance.--Systemwide, on-time performance has been
    declining steadily since fiscal year 2002, from 77 percent to 68
    percent in fiscal year 2006. While Amtrak's Acela Express service
    achieved on-time performance of nearly 85 percent, long-distance trains
    averaged 30 percent last year. The poorest performing train, the Coast
    Starlight had an on-time performance of only 3.9 percent. Systemwide,
    on-time performance in the first quarter of fiscal year 2007 increased
    to 69.1 percent, compared to 65.3 percent for the first quarter of
    fiscal year 2006.

     the appropriations process can provide needed fiscal discipline over
     amtrak's operating losses while amtrak continues to address critical
                                 capital needs
        The delivery of intercity passenger rail service needs to be
    fundamentally restructured through a reauthorization. However, as we
    have seen in the past year, meaningful, but incremental, operational
    reforms are still possible in the absence of a reauthorization. The
    process established by the Appropriations Committee in fiscal year
    2006, which specifically directed Amtrak to achieve savings through
    operating efficiencies, achieved $61 million in savings in the first
    year. This process is not a substitute for reauthorization, but it is
    of considerable value nonetheless, and we strongly encourage Congress
    to continue it in fiscal year 2008. As we stated in our March 16, 2006
    testimony, a critical component is funding Amtrak at a level that
    maintains the impetus for reform. This would require that the operating
    subsidy be appropriated separately from the capital and debt service
    appropriations.
        Our recommendation of an operating grant of $465 million in fiscal
    year 2008 reflects the need to keep the process of continual
    improvement at Amtrak moving forward. It also takes into consideration
    Amtrak's better-than-expected fiscal year 2006 headcount, lower fiscal
    year 2006 expenses, and our concerns regarding the methodology Amtrak
    uses in developing its budget estimates, which we previously reported
    on. These factors led us to conclude in our January 2007 Quarterly
    Report on Amtrak's Savings from Operational Reforms that Amtrak needed
    a fiscal year 2007 operating subsidy of $470 million. (This recommended
    fiscal year 2007 operating subsidy was an increase of $37 million above
    Amtrak's actual cash operating loss in fiscal year 2006 of $433
    million.) Our lower starting point for fiscal year 2007, recent
    increases in revenue, and lower personnel costs lead us to our
    recommendation of a $465 million fiscal year 2008 operating subsidy.
        A significant unknown at this point is whether there will be labor
    settlements this year and, if they occur, what the associated costs and
    possible work rule changes may be. Agreement labor costs, including
    benefits, account for more than half of Amtrak's current cost
    structure. The net effect of a final settlement would need to be
    reflected in our recommended fiscal year 2008 operating subsidy
    recommendation.
        Amtrak estimates a backlog of approximately $5 billion in capital
    projects. Our recommendation to provide an increase in fiscal year 2008
    for capital to $600 million reflects a need to address this backlog to
    continue progress towards achieving a state-of-good repair balanced
    with practical considerations regarding how many additional capital
    projects Amtrak can take on in 1 year.
     increased investment in intercity passenger rail must go hand-in-hand
                      with improved operating efficiencies
        Amtrak achieved $61.3 million in savings from operational reforms
    in fiscal year 2006, exceeding its original savings estimate by $37.7
    million or more than 60 percent. Well over half these savings came from
    reforms that increased revenues, not reduced costs. Amtrak saved $14
    million from food and beverage service reforms, $7.6 million from
    improved train operations, $5.6 million from reduced corporate
    overhead, $5.2 million from enhanced revenue generated on long-distance
    trains, and $28.9 million from revenue enhancements and operating
    efficiencies on the NEC. This is a good start, but, in part, reflects
    reforms that were easier to implement.
        Amtrak has also taken steps to improve its oversight and management
    of reform initiatives. This includes developing a standardized project
    management approach in an effort to provide a more reliable measurement
    of cost savings, better internal oversight, and enhanced tracking and
    reporting capabilities. In addition, Amtrak is working to develop the
    appropriate links between its planning and financial systems for more
    reliable estimating and reporting of cost savings and better
    integration of these savings into the budget process.
        In fiscal year 2007 and beyond, Amtrak plans to implement
    operational reforms in eight areas: (1) improving service quality on
    long-distance trains and reducing the cost of providing food and
    beverage service; (2) improving the efficiency of Amtrak's major ticket
    sales, distribution channels, and related pricing enhancements; (3)
    improving the reliability and efficiency of Amtrak's Mechanical
    Department and materials management; (4) increasing business
    efficiencies through the development of improved Management Information
    Systems and the reduction of overhead costs; (5) improving the cost-
    effectiveness of train operations; (6) network restructuring, corridor
    development, and improved fleet and infrastructure utilization; (7)
    improved cost recovery from States for corridor services and from
    commuters on the NEC; and (8) reducing unit costs and increasing job
    flexibility by negotiating new labor agreements that will eliminate
    certain work rule and outsourcing restrictions.
        Amtrak estimates that these initiatives will save at least $320
    million in fiscal year 2012. Almost three-quarters of these savings are
    expected to come from three initiatives: food and beverage reform and
    service quality improvements, mechanical service efficiencies, and
    network restructuring and asset utilization improvement.
        There is considerable uncertainty as to whether these savings will
    be achieved. First, the savings estimates that do exist are preliminary
    and the proposals lack detailed annual program plans. Projected fiscal
    year 2012 savings have not yet been developed for the State payments
    and labor reform initiatives.
        Second, the lack of detail makes it impossible for us to assess the
    accuracy of these cost estimates. As we have seen recently with the
    sleeper car initiative, once substance is added to the proposal, the
    savings can evaporate. This proposal was originally targeted to save
    almost $20 million in fiscal year 2007. However, it is currently on
    hold as Amtrak reevaluates whether the costs saved by removing some
    sleeper cars outweighs the associated foregone revenue. It is unlikely
    that any savings will be derived from this reform in fiscal year 2007,
    if any savings are derived from it at all.
        Third, reliance on revenue enhancements to achieve savings raises
    concerns regarding their reliability over the long run. Several
    initiatives are aimed to increase ridership and ticket revenues,
    including service quality improvement, on-time performance, enhanced
    long-distance service, and market-based pricing initiatives. While we
    believe Amtrak should pursue initiatives to increase revenues, the
    long-term sustainability is subject to factors beyond their control,
    such as changing market demand, the relative cost of different travel
    modes, and competition from new air service. As such, it is more
    difficult for Amtrak to count on these savings in the long run.
        Amtrak needs to define the reform initiatives it plans to implement
    in fiscal year 2008 to achieve its stated goal of $82 million in
    savings. In addition, it needs to settle on which initiatives it is
    willing to commit to over the long run, develop detailed implementation
    plans for those initiatives, and incorporate them into its upcoming
    multi-year strategic plan.
    critical decisions are needed before implementing a state capital grant
                                    program
        Amtrak's vision for the future is based on passenger rail growth
    through State-led corridor service development, supported by a Federal
    program of State capital matching grants. We have long believed that
    corridor service, that is, routes of between 100 and 500 miles,
    represent the greatest potential for ridership growth. An obstacle to
    realizing this potential has been the significant capital investment
    needed to improve the freight-owned infrastructure to accommodate this
    expanded service. The administration's proposed $100 million State
    capital matching grant program would be an important start to new
    corridor development. A robust program that would support a reasonable
    level of new service in the long run could ultimately require this
    program to be funded at annual levels of $1.3 billion to $1.6 billion.
        Several critical issues need to be addressed before this program is
    implemented. First, the purpose of this new Federal investment must be
    to leverage an increase in total investment in rail service and
    infrastructure. There is little point to this new program if it simply
    results in supplanting existing State investments.
        Second, this program is premised on States assuming funding
    responsibility for any new service that does not cover its costs. If a
    significant Federal capital investment is going to be made to initiate
    a new service, consideration must be given to a State's commitment and
    capacity to support the operation of this service over the long run.
        Third, we believe an 80/20 matching rate, instead of the
    administration's proposed 50/50 matching rate, would provide an
    incentive for a State to take an ``ownership'' role in developing rail
    corridors on a more comparable basis with other transportation modes
    (historically, highways have used an 80/20 match). A higher match rate
    for rail infrastructure would require a State to invest more of its own
    money to obtain the same amount of Federal funds in return. As such,
    this may cause States to favor highways over rail to maximize the
    ``return'' on their State investments.
     reauthorization is a better course for reforming intercity passenger
                                  rail service
        Incremental operating savings over the next 5 or 6 years will not
    be sufficient to fund the significant increases in capital investment
    required to return the system to a state-of-good-repair and promote
    corridor development. This mismatch of funding sources and needs
    requires a long-term solution that can be achieved only by changing the
    model for intercity passenger rail.
        To create a new model for intercity passenger rail, a comprehensive
    reauthorization that provides new direction and adequate funding is
    needed. The problem with the current model extends beyond funding--
    there are inadequate incentives for Amtrak to provide cost-effective
    service; state-of-good-repair needs are not being adequately addressed;
    and States have insufficient leverage in determining service delivery
    options, in part because Amtrak receives Federal rail funds, not the
    States.
        Reauthorization should establish meaningful reforms that ensure
    greater cost-effectiveness, responsiveness, and reliability in the
    delivery of passenger rail transportation. Three central themes will
    drive successful reform:
      --Improvements in Cost-Effectiveness.--Amtrak, as the sole provider
            of intercity passenger rail service has few incentives, other
            than the threat of budget cuts or elimination, for cost control
            or delivery of services in a cost-effective way. Amtrak has not
            achieved significant costs savings since its last
            reauthorization.
      --States Need a Larger Voice in Determining Service Requirements.--
            The current model for providing intercity passenger service
            does not put States in a position to decide upon the best mix
            of service for their needs--what cities are served, schedules
            and frequency of service, and what amenities should be
            provided. Those decisions are made by Amtrak, and the choices
            Amtrak makes are not always the same as the ones the States
            would make. Intercity passenger rail would be better served
            with State-led initiatives as to where and how intercity
            passenger rail service is developed. States are best able to
            determine the level of passenger rail service required to meet
            their strategic transportation needs and State sponsorship will
            become increasingly important as they will be asked to provide
            increased operating and investment support. Capital funding
            decisions, as with mass transit, should ultimately reside with
            the Department of Transportation, based on congressional
            direction and in partnership with the States.
      --Adequate and Stable Federal Funding is Essential.--None of the
            corridors around the country, including the NEC, can provide
            the type of mobility needed without significant capital
            investment. In the NEC, this means bringing the existing
            facilities to a state-of-good-repair with no match requirement.
            In other corridors around the country, it means creating the
            infrastructure for high-frequency services in partnership with
            freight railroads and commuter authorities. A robust Federal
            program of capital matching grants will be essential if these
            corridors are to be developed. In addition, long-distance
            services that provide connections between corridors require
            recapitalization if they are to be run efficiently and are to
            provide the high quality services their passengers deserve.
            None of this, however, implies giving more money directly to
            Amtrak, especially under the current model.
        In our view, a framework for reauthorization requires the
    incorporation of six core elements:
      --Capital Matching Grants to States for Development of Corridor
            Services.--This program would give States the ability to
            improve and expand routes and service on their supported
            corridor routes through a Federal capital funding program with
            a reasonable state match requirement.
      --Formula Grants to States for Capital and Operating Costs.--This
            program would address the needs of areas served by long-
            distance routes that have little corridor development
            potential, while simultaneously creating incentives for States
            to encourage operating efficiencies from the service operator.
            Formula funds can be used for operating expenses, capital
            maintenance, and/or capital improvements at the discretion of
            the States and have no match requirement.
      --Restoration of the Forward-Going System to a State-of-Good-
            Repair.--This program would provide Federal funds, with no
            match required, to address the accumulated backlog of deferred
            investment and maintenance on the NEC and in fleet and
            facilities outside the NEC. After a state-of-good-repair has
            been achieved, capital funds with a reasonable State match
            would be available for capital maintenance.
      --Setting Federal and State Funding of These Programs at Adequate
            Levels.--Federal funding levels, along with State contributions
            have not been sufficient to subsidize operations, address
            deferred capital needs, and significantly improve service along
            the existing rail network.
      --Resolution of the Legacy Debt Issue.--This element would give the
            Secretary the authority to evaluate Amtrak's debt and to take
            action in the best interest of intercity passenger rail that is
            economically advantageous to the United States Government.
      --Resolution of Northeast Corridor Ownership.--The NEC is of
            considerable interest in reauthorization. Unlike the rest of
            the passenger rail system, Amtrak owns the infrastructure
            between Boston and Washington, DC. The Federal Government may
            decide to take on the responsibility of restoring the NEC to a
            state-of-good-repair, and its debt--if it is determined to be
            in the public's interest to do so. Once the NEC is returned to
            a state-of-good-repair, the States can take a larger
            responsibility in directing and managing ongoing operations and
            maintenance. In return for fully funding the corridor, the
            Federal Government may decide to take title to Amtrak's assets.
            Although Amtrak may very likely remain the operator for the
            NEC, we will be in a better position to decide what is the best
            use and ownership structure of the NEC assets by the end of the
            reauthorization period.
        This framework would require cost efficiencies as Federal funds
    available to cover operating losses would decline over the 5-year
    reauthorization period. Specifically, it would give States greater
    responsibility for passenger rail investments with oversight of capital
    investment vested in the department. Additionally, it would focus
    Federal funding on stable and robust capital investment programs that
    would bring the system to a state-of-good-repair, maintain it in that
    condition, and provide for the development of corridors throughout the
    country.
        Madame Chairman, this concludes my statement. I would be happy to
    answer any questions at this time.

        Senator Murray. Thank you, Mr. Tornquist. We're going to
    turn to Senator Spector for a short quick statement. He has to
    return to another committee.

                       STATEMENT OF SENATOR ARLEN SPECTER

        Senator Specter. Thank you, Madame Chairperson.
        I wanted to comment, very briefly, about my support for a
    much larger allocation than the appropriation than the
    administration has requested. I think we will work it through
    in the Congress, as we have in prior years.
        I regret that I can not stay for the hearing. The Judiciary
    Committee, where I'm ranking, is conducting hearings on
    immigration, and I have to be there. But, my staff will be
    present and we'll examine the transcript, and submit some
    questions to you gentlemen, but you have my support for a very
    substantial increase above what the administration is asking
    for.
        Thank you very much for permitting the interjection.
        Senator Murray. Thank you, Senator Specter.
        Senator Murray. Mr. Wytkind.

                           NONDEPARTMENTAL WITNESSES

    STATEMENT OF EDWARD WYTKIND, PRESIDENT, TRANSPORTATION
                TRADES DEPARTMENT, AFL-CIO
        Mr. Wytkind. Madame Chair, thank you for inviting
    Transportation and Labor, on behalf of our 32 member unions, to
    participate in today's hearing.
        I think a lot has been said this morning about Amtrak and
    its financial needs, but obviously the 20,000 workers--that we
    represent a substantial majority of--have a vested interest in
    the outcome of this debate. Amtrak workers know, better than
    anyone, how difficult it is to operate and maintain the
    national Amtrak network without sufficient resources. These
    workers have seen and felt the effects of neglect and
    underfunding for too many years. They've been forced to do more
    with less, due to the Federal Government's lack of attention to
    the severe financial needs of Amtrak, and the needs of the
    cities and the States, who--under the administration's
    proposal--would be really forced to fend for themselves.
        Amtrak workers constantly read about Amtrak teetering on
    the edge of financial insolvency. Not because Americans do not
    want passenger rail service and Amtrak service, but because of
    an administration that has refused to support funding for a
    first-class national passenger railroad.
        Fortunately, in the absence of administration leadership
    the Congress and especially key members of this subcommittee
    has stepped in to provide funding that has averted a financial
    collapse, year in and year out. A collapse, I might add, that
    would have occurred had the administration--over the last few
    years--had its way during debates over appropriations.
        It is extremely disappointing to appear before you, and
    again have to comment on a Bush proposal, Bush administration
    proposal that frankly we view as a shut-down budget for 2008. A
    budget that leaves States, again, to fend for themselves, and a
    budget that leaves an already teetering system on the edge of
    probably insolvency, leaving 20,000 workers potentially out of
    work.
        It is also disturbing that the administration has recycled
    old ideas that may sound different from past renditions, but in
    the end, amount to the privatization and breakup as Amtrak as
    we know it. It seems to us that the administration's learned
    nothing from the British rail privatization debacle, that we
    all read so much about in the late 1990s.
        The fact is that our national approach to Amtrak must
    change. Forcing Amtrak to limp from one financial crisis to the
    next, with no long-term funding plan, is a recipe for failure.
    Deferred maintenance, unmet security needs since 9/11, outdated
    cars and equipment, poor training, and unfairly treated and
    unfairly compensated workers, whose morale has reached an all
    time low, are now the norm. And we must break this cycle.
        Amtrak is a part of a vast network of publicly supported
    transportation services. No mode of transport in America can
    succeed without some form of public subsidy. This is the
    standard world-wide. As economic powers and emerging nations--
    as Senator Lautenberg alluded to, including Germany--spent
    literally billions to rebuild and expand their passenger rail
    systems. And yet, there are those who believe Amtrak should be
    a profitable enterprise.
        This is pure fantasy, no matter Wall Street financiers and
    lawyers will tell you. Some believe Amtrak is better off if we
    sever it into pieces, and possibly spin off the Northeast
    Corridor into a separate entity controlled by private
    interests. Interestingly, the advocates of this approach want
    the Federal Government to back a $17.5 billion loan, permit
    payback of the loan, interest-free over 50 years.
        Now, I can't speak for Amtrak's CEO, or anyone of that
    company, but maybe we should ask Amtrak if it could use such
    favorable financing tools to build and rebuild its system and
    infrastructure, before we venture into any sort of breakup
    Amtrak plans.
        Finally, it is no secret that labor/management relations at
    Amtrak have eroded significantly. Most Amtrak workers are now
    in their eighth year without a general wage increase. I believe
    this is simply outrageous. Working people in this country can
    not live and make the ends meet under an 8-year wage freeze,
    which is what they've faced over the past decade. Amtrak's
    negotiators have used one delay tactic after another, have used
    the appropriations battles on Capital Hill, have used every
    possible excuse to deny workers what the new CEO of Amtrak--
    which we're pleased to hear--has referred to as a need for
    reasonable wage increases.
        The result is that Amtrak workers are rated the lowest-paid
    in the industry, continue to fall further behind freight and
    commuter rail workers who earn up to 20 percent more in similar
    jobs. It is obviously unfair for Amtrak to continue to solve
    its financial shortfalls on the backs of its employees.
    Ultimately, should this trend continue, it will lead to more
    and more experienced Amtrak workers leaving their jobs for
    better paying, more stable opportunities with the freights and
    commuters.
        We are heartened by the comments of Mr. Kummant, who has
    formally declared settlement of these long overdue contracts
    one of the company's seven objectives. Obviously, Mr. Kummant
    has inherited badly ruptured labor management relations that
    didn't occur on his watch. A product of poor management
    decisions by the Amtrak Board and poor decisions by previous
    managements. And while Mr. Kummant's public position is a
    welcome departure from past Amtrak leaders, it is time to move
    beyond the rhetoric and finally resolve a bargaining stalemate
    that is making it impossible for labor and management to work
    together to solve problems at Amtrak, to rebuild the system and
    to make it the finest transportation system in the world.

                               PREPARED STATEMENT

        In closing, it is time for Amtrak to receive the resources
    it needs, not merely enough to survive. The political games
    that have repeatedly put Amtrak on the brink of collapse must
    end. And the much needed long-term investment must recognize
    that the cost of doing business as our national passenger
    railroad includes treating, and compensating, the employees
    fairly.
        I appreciate the opportunity to testify and thank you for
    letting us participate in today's hearing.
        [The statement follows:]
                      Prepared Statement of Edward Wytkind
        On behalf of the 32 member unions of the Transportation Trades
    Department, AFL-CIO (TTD) and specifically the 10 unions that make-up
    our Rail Labor Division (RLD), thank you for inviting us to testify
    this morning on Amtrak's financial needs for fiscal year 2008.\1\ I
    must point out that we would not be talking today about Amtrak's
    financial needs for 2008 without this subcommittee--we wouldn't be
    talking about it because without your work Madame Chair, and the work
    and support of the other members of this subcommittee, Amtrak would be
    on the brink of collapse.
    ---------------------------------------------------------------------------
        \1\ Attached is a list of TTD member unions.
    ---------------------------------------------------------------------------
        While its proposals have taken various forms, year after year the
    administration has sought to shut down Amtrak or subject the company to
    reckless privatization initiatives. By offering a zero budget for
    Amtrak in fiscal year 2006, the White House demonstrated its gross lack
    of understanding of Amtrak's importance to our transportation system
    and our economy. By attempting to dismantle Amtrak as a national system
    and downsize or eliminate its long distance service, the administration
    demonstrated it does not understand the importance of Amtrak to the
    cities and States that are clamoring for more, not less, transportation
    choices for its citizens. And by shortchanging Amtrak every fiscal
    year, the administration has forced the company to defer much needed
    security and safety upgrades because it simply does not have the
    resources.
        Fortunately, Congress--and specifically this subcommittee--has
    rejected the administration's various plans and for this Americans owe
    you a debt of gratitude. This subcommittee, without the benefit of an
    authorization since 2002, has come forward and funded our national
    passenger railroad each and every year at levels adequate to avoid the
    catastrophe of bankruptcy and done so under extremely tight budget
    conditions. So on behalf of the men and women we represent, and the
    millions of passengers that use this vital service, I want to again
    thank you for your leadership and acknowledge the hard work that you
    have done on behalf of Amtrak.
        For fiscal year 2008, the administration has once again submitted a
    budget request, at $800 million, that is nothing more than a shut down
    number. As members of this committee have already observed, this is
    asking the carrier to do the impossible and should be rejected.
    Furthermore, the administration has again attached destructive and
    disingenuous conditions to this meager request. For example, the budget
    request states that ``within 30 days of the enactment of this Act, the
    Corporation shall produce a comprehensive corporate-wide competition
    plan that will identify multiple opportunities for public and private
    entities to perform core Corporation functions, including the operation
    of trains.'' Let's be clear--the administration would expect Amtrak to
    find others, including private entities, to provide the service that
    Amtrak is currently charged with providing. This isn't a funding plan--
    it's a path to privatization and ultimately destruction of Amtrak as we
    know it.
        The fact is we need to change the way we look at and fund Amtrak.
    Forcing the carrier to limp from one financial crisis to the next with
    no long-term funding plan is simply a recipe for failure that can no
    longer be tolerated. Deferred maintenance, unmet security needs,
    outdated cars and equipment and unfairly treated and compensated
    employees whose morale has reached an all-time low are now the norm.
    First-class rail service that needs to be customer-sensitive cannot
    succeed in this environment. And we would submit that a portion of
    Amtrak's security needs should be borne by the Department of Homeland
    Security. Americans expect leaders of government responsible for our
    homeland security to ensure that our passenger rail system receives the
    Federal resources it needs to address security threats and
    vulnerabilities. A cash-starved Amtrak cannot meet these important
    homeland security objectives without adequate Federal assistance.
        Labor-management relations at Amtrak have eroded significantly.
    Most of Amtrak's employees are now entering their eighth year without a
    general wage increase and have seen their employer, especially its
    Board of Directors, turn on them repeatedly. Meanwhile, because of the
    processes under the Railway Labor Act (RLA), collective bargaining
    agreements do not expire but become amendable at a certain date. In
    other words, if no new agreement is entered into by labor and
    management, the current contract remains in place interminably. That is
    exactly what has happened at Amtrak and, frankly, the company's
    negotiators have stonewalled and refused to engage in any meaningful
    negotiations. The result is that Amtrak workers, already the lowest
    paid in the industry, continue to fall further behind their
    counterparts in the freight and commuter railroads who make up to 20
    percent more in comparable jobs.\2\ Members of the committee, I am
    concerned that if this trend continues we will see more and more Amtrak
    employees leave their positions for more attractive jobs with the
    freight and commuter carriers.
    ---------------------------------------------------------------------------
        \2\ In 2003, the rail unions released a study on Amtrak wage data
    prepared by expert labor economist Thomas Roth. It definitively showed
    that labor costs at Amtrak, including wages and benefits, have remained
    constant over 21 years and have actually declined in real dollars;
    wages have also been well below the prevailing rates of those working
    in the freight and commuter rail industry.
    ---------------------------------------------------------------------------
        I am heartened by the public comments of the new Amtrak President
    and CEO who has formally declared (in Amtrak's budget submission to
    Congress) that the settlement of collective bargaining agreements is
    one of his seven priorities for the coming year. Hopefully, Mr. Kummant
    will repair the badly ruptured labor-management relations he inherited
    last year when he accepted the CEO position. While Mr. Kummant's public
    position is a welcome departure from past Amtrak management teams, it
    is time to move beyond the rhetoric and finally resolve the bargaining
    stalemate that is making it nearly impossible for labor and management
    to work together towards making Amtrak the world's finest passenger
    rail system. We hope this committee will insist that new contracts get
    settled and that Amtrak stop this cycle of securing Federal funding but
    refusing to provide its workforce with--as Mr. Kummant wrote--
    ``reasonable wage increases.''
        There have also been attempts over the years to contract-out jobs
    at Amtrak to the lowest-bidder with little regard for the impact such a
    move would have on delivery of vital services. There are also safety
    and security questions raised when on-board positions and maintenance
    posts are targeted by the drive to outsource. And history is replete
    with examples of badly botched contracting out plans that paint a sad
    picture of incompetence, mismanagement and shabby service. In last
    year's committee passed bill, Senators Murray and Byrd inserted
    language that would have prevented Amtrak from using Federal money to
    outsource work overseas. We supported this language but more broadly
    would urge the committee to monitor closely any attempts by Amtrak to
    pursue reckless outsourcing initiatives that jeopardize service,
    security, safety and jobs.
        Of course, there are those that still believe Amtrak should somehow
    ``turn a profit'' or only offer service that is ``commercially
    responsible.'' Others believe private companies should be permitted to
    cherry-pick the most lucrative parts of Amtrak's national system such
    as its Northeast Corridor, jettison the rest and leave the States to
    fend for themselves. Great Britain tried this approach and failed
    miserably. We reject these propositions and fortunately, so do a
    substantial majority in Congress.
        As public transportation privatization scholar Elliot Sclar wrote:
        Proposals to privatize Amtrak rest on hopes that its deficits can
    be eliminated. But privatization will not cut the operating deficit
    unless it shrinks passenger rail service. And far from yielding more
    efficient operation, privatization will make Amtrak more cumbersome.
    That is the primary lesson of Great Britain's recent experience with
    privatization and reorganization.\3\
    ---------------------------------------------------------------------------
        \3\ Amtrak Privatization: The Route to Failure. Elliot D. Sclar.
    2003. Economic Policy Institute.
    ---------------------------------------------------------------------------
        Amtrak is part of our vast network of publicly supported
    transportation services. No mode of transport in America can succeed
    without some form of public subsidy. This is the standard worldwide.
    Economic powers and emerging nations around the globe spend billions on
    passenger rail because they know that a strong economy is dependent on
    a strong transportation system and infrastructure. There is no
    substitute for a transportation system that can move our people and
    goods safely and efficiently.
        Amtrak should be efficient, it should recover as much as possible
    from the fare-box (which it does), and it should offer the best service
    at the most reasonable price. But in the end, Amtrak will always need
    substantial public support--as does our aviation and air traffic
    control system, our mass transit and commuter rail systems, our ports
    and our highways, and America's entire public infrastructure.
        It is time for Amtrak to receive the resources it needs to succeed.
    And that investment must recognize that the cost of doing business as
    America's national passenger railroad includes paying fair wages to
    Amtrak's 20,000 workers.
        Thank you for the opportunity to testify this morning. TTD and our
    members unions look forward to working with you throughout the fiscal
    year 2008 appropriations process. I would be happy to answer any
    questions the committee may have.
                         attachment--ttd member unions
        The following labor organizations are members of and represented by
    the TTD:
        Air Line Pilots Association (ALPA); Amalgamated Transit Union
    (ATU); American Federation of State, County and Municipal Employees
    (AFSCME); American Federation of Teachers (AFT); Association of Flight
    Attendants-CWA (AFA-CWA); American Train Dispatchers Association
    (ATDA); Brotherhood of Railroad Signalmen (BRS); Communications Workers
    of America (CWA); International Association of Fire Fighters (IAFF);
    International Association of Machinists and Aerospace Workers (IAM);
    International Brotherhood of Boilermakers, Blacksmiths, Forgers and
    Helpers (IBB); International Brotherhood of Electrical Workers (IBEW);
    International Federation of Professional and Technical Engineers
    (IFPTE); International Longshoremen's Association (ILA); International
    Longshore and Warehouse Union (ILWU); International Organization of
    Masters, Mates & Pilots, ILA (MM&P); International Union of Operating
    Engineers (IUOE); Laborers' International Union of North America
    (LIUNA); Marine Engineers' Beneficial Association (MEBA); National Air
    Traffic Controllers Association (NATCA); National Association of Letter
    Carriers (NALC); National Conference of Firemen and Oilers, SEIU (NCFO,
    SEIU); National Federation of Public and Private Employees (NFOPAPE);
    Office and Professional Employees International Union (OPEIU);
    Professional Airways Systems Specialists (PASS); Sailors' Union of the
    Pacific (SUP); Sheet Metal Workers International Association (SMWIA);
    Transportation-Communications International Union (TCU); Transport
    Workers Union of America (TWU); United Mine Workers of America (UMWA);
    United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied
    Industrial and Service Workers International Union (USW); United
    Transportation Union (UTU).

        Senator Murray. Thank you.
        Mr. Serlin.
    STATEMENT OF ROBERT SERLIN, PRESIDENT, RAIL
                INFRASTRUCTURE MANAGEMENT, LLC
        Mr. Serlin. Thank you.
        Madame Chairman, Ranking Member Bond, distinguished
    committee members. Thank you for inviting me to testify.
        Recently the IMO plan, the Infrastructure Management
    Organization Plan, received a wonderful criticism. I was told
    the plan sounds too good to be true. I'm here today to tell you
    the plan is good, and that it is true. I'm also here to free up
    for you, and your committee, more than $1 billion, this year,
    and for each of the next 50 years.
        Instead of Amtrak requiring appropriations for its own
    infrastructure, the private sector is willing to fund it.
    Bridges and tunnels will be constructed, tracks will be laid,
    14 new stations and parking will be built.
        Under the IMO Plan, Amtrak's owned infrastructures will be
    spun off into a federally owned company. The right to manage
    that company for a 50-year period will be granted to a private
    entity through an open, transparent, public solicitation, run
    by the Surface Transportation Board.
        The IMO Plan is a win, win, win solution. The Federal
    Government, taxpayers, Amtrak, the States, labor, and--most
    importantly--the traveling public, will all come out ahead.
    Your subcommittee and the taxpayers will come out ahead, being
    relieved of the obligations to fund Amtrak's own
    infrastructure. And Amtrak's required ongoing subsidy should
    only be around $500 million.
        Amtrak comes out ahead. Amtrak is a minority user of its
    own corridor, yet it is funding all of the corridor's
    infrastructure costs. This allows other users to pay only the
    avoidable costs. Under the IMO Plan, Amtrak would have no
    infrastructure cost and would simply pay, as it already does on
    98 percent of its route miles, a track usage fee. By
    implementing the IMO Plan, Amtrak can focus on providing rail
    passengers transportation services.
        The Northeast Corridor States come out ahead. For the first
    time ever, infrastructure investment is guaranteed at a minimum
    level of $600 million per year, or more than 2.5 times what is
    currently being invested. And this entire amount from the $17.5
    billion RRIF loan--the repayment of which is fully secured--
    therefore, to the Federal Government, it's a risk-free
    undertaking.
        The Northeast Corridor commuter carriers are protected,
    because all preexisting contracts and agreements are
    transferred to--and must be honored by--the IMO. Additionally,
    as in the Lautenberg-Lott bill, the Northeast Corridor States
    will gain a stronger voice and role through the reconstituted
    Northeast Corridor Coordination Board and Northeast Corridor
    Safety Committee.
        The non-Northeast Corridor States come out ahead, because
    Amtrak's Northeast Corridor infrastructure costs will no longer
    show up in the financial accounts of trains going through their
    States. This makes the operating costs of the Empire Builder--
    serving Senator Murray's Washington or Kansas City Mule going
    through Senator Bond's Missouri--more transparent, because it
    will no longer reflect the Northeast Corridor-infrastructure
    incurred costs.
        Labor comes out ahead. Under the IMO Plan, the IMO is
    required to offer employment to all Amtrak employees performing
    infrastructure work. The IMO is also required to honor existing
    collective bargaining agreements and rights, and it is
    obligated to fund the back pay requirement for all Amtrak
    employees. If RIM, my company, is awarded the right to be the
    IMO, we intend to immediately negotiate higher rates of pay for
    those employees agreeing to work with us.
        As Senator Murray said, we can not pay significantly less
    than the regional and commuter carriers, and still retain the
    quality workforce we require. We will also offer employees
    signing bonuses and back pay effective to the year 2000. This
    translates into a payment ranging from $10,000 to $25,000 per
    employee. In addition, RIM will contribute sufficient monies to
    a trust fund to settle Amtrak's full back pay obligation to
    those employees remaining with Amtrak. RIM believes that in the
    long run, paying more will cost less.
        And finally, the traveling public comes out ahead. Under
    the IMO plan, train riders will enjoy more frequent service,
    increased travel options, new city pairs, and very likely lower
    prices, which is exactly the vision Senator Lautenberg
    expressed yesterday at his hearing.
        Reliability and security redundancy will be increased,
    while trip times will be reduced, as the IMO addresses deferred
    maintenance, and makes major new capital investments.
    Washington-New York trip times will be reduced from roughly 3
    hours to roughly 2 hours as Acela trains finally achieve their
    150-mile-per-hour top speeds.
        Senator Murray. Mr. Serlin, if you can summarize quickly
    that would be great.

                               PREPARED STATEMENT

        Mr. Serlin. Sure.
        Ultimately, the IMO Plan is about growth. This means
    providing an infrastructure base that allows more reliable
    service at higher speeds and lower prices. We are convinced
    this plan will work. We're willing to bet our own money on it.
    The business model is simple. The more riders, equal more
    trains, equal success for the IMO, and this is what attracts
    investors, and what will attract Wall Street.
        [The statement follows:]
                      Prepared Statement of Robert Serlin
        Madame Chairman, Ranking Member Bond, and distinguished committee
    members, my name is Robert Serlin. I have, for over 20 years, developed
    business solutions to revitalize capital-intensive transportation and
    basic commodity companies. I am President of RIM Services, LLC.
        Thank you for inviting me to comment on Amtrak's financial
    condition, efforts Amtrak has made to improve its financial condition,
    and Amtrak funding options. I will limit my comments to--
      --exploring a new Amtrak funding option that can revitalize Amtrak's
            owned rail properties in the Northeast and Midwest;
      --eliminating much of Amtrak's private-sector debt; and
      --giving this subcommittee a means to reallocate limited
            transportation budget dollars to other priorities, including
            enhanced rail passenger service.
        In 1997, JP Morgan--currently the third largest bank in the United
    States--invited me to assemble a group of experienced rail industry
    professionals and companies to develop a plan to address Amtrak's
    recurrent funding problem. Ultimately, using techniques from existing
    legislation and Federal programs, a method to inject significant non-
    appropriated funds into Amtrak and its owned infrastructure was
    identified. The solution was embodied in the Infrastructure Management
    Organization (``IMO'') Plan.
        The IMO Plan, developed as a direct result of numerous meetings
    with stakeholders interested in better intercity rail service--
      --preserves Amtrak as our country's single national passenger rail
            carrier;
      --keeps all of Amtrak's assets under Federal ownership and oversight;
      --frees monies to this subcommittee to appropriate as the Federal
            share under Lautenberg-Lott; and, most importantly,
      --provides a platform to grow train services and rail industry
            employment.
                                   background
        Amtrak is active in two different businesses: furnishing rail
    transportation services, and owning and operating rail infrastructure.
      --The rail transportation services business is a variable cost
            business. New train services can be added and existing train
            services dropped or modified on short notice with few drastic
            or unforeseeable financial consequences.
      --The rail infrastructure business, in contrast, is a fixed cost
            business. Infrastructure projects take years, sometimes
            decades, to implement. During the implementation period, there
            is very little to show other than large front-loaded outlays.
            Furthermore, once completed, those formerly new infrastructures
            must be repaired, maintained and upgraded--invisible tasks, for
            which the public has little appreciation, and consequently, for
            which it has proven not possible to appropriate funds.
        Amtrak's owned rail infrastructure is the overwhelming problem.
    Though it has been recognized for decades as the part of Amtrak that
    singularly requires the most funds, this is a truth no one dares to
    speak. Amtrak cannot live without using its owned infrastructure, but
    it also cannot afford to keep it.
        While Amtrak operates passenger trains over roughly 23,000 route-
    miles, it owns and is responsible for only about 2 percent or 600
    route-miles (about 500 route-miles in the Northeast and about 100
    route-miles primarily in Michigan).
        Former Amtrak President David Gunn stated in a Railway Age article
    that it is a myth that Amtrak's long-distance trains are the primary
    source of Amtrak's losses. ``Out of our current year Federal subsidy of
    $1.05 billion, only $300 million will go to covering the operating loss
    of long-distance trains.'' \1\ Kenneth Mead, former Inspector General,
    U.S. Department of Transportation, found that eliminating long distance
    trains would only reduce operating losses by $300 million.\2\ In 2003,
    Amtrak lost approximately $1.3 billion.\3\ Consequently, losses of
    about $1 billion must be attributable primarily to Amtrak's owned
    infrastructure.
    ---------------------------------------------------------------------------
        \1\ David Gunn, Separating Fact from Fiction, Railway Age (May
    2003).
        \2\ Hearing Before the Subcomm. on Railroads, Transp., H. Comm. on
    Trans. And Infrastructure, 109th Cong., 1st Sess., Dep't of Transp.
    Doc. No. CC-2005-070, at 8 (2005) (statement of Kenneth M. Mead,
    Inspector General, Department of Transportation) [hereinafter IG
    Testimony].
        \3\ See Nat'l R.R. Passenger Corp., 2003 Consolidated Financial
    Statement, Consolidated Statement Of Operations (2004).
    ---------------------------------------------------------------------------
        A previous Amtrak President, W. Graham Claytor, Jr., once said
    Amtrak would be unfundable were the country to recognize that the great
    majority of Amtrak's annual appropriations went into Amtrak-owned rail
    infrastructure in just a few Northeastern States. On a route-mile
    basis, two States alone account for over 50 percent of Amtrak's owned
    Northeast Corridor infrastructure.
        Even without political considerations, it is inherently harder to
    secure public support for infrastructure projects than for
    transportation services. Infrastructure investment benefits are not
    immediately, publicly apparent and can easily be delayed with few
    immediately visible consequences. Yet, infrastructures must be funded.
    Without continuous funding, infrastructure will deteriorate to the
    point of being unusable.
        Since 1997, the Department of Transportation's Inspector General,
    the Government Accountability Office and, most recently, numerous
    members of Congress have reached the conclusion: the status quo is not
    sustainable and change is necessary.
        Ken Mead, the former Department of Transportation Inspector General
    put it most succinctly on September 21, 2005 when, before the House
    Committee on Transportation and Infrastructure, Railroads Subcommittee
    he stated: ``We have testified numerous times since Amtrak's
    authorization expired in 2002 that the current model is broken. Amtrak
    continues to incur unsustainably large operating losses, provide poor
    on-time performance, and bear increasing levels of deferred
    infrastructure and fleet investment on its system.'' \4\ Infrastructure
    degradation reduces service reliability, and jeopardizes all of Amtrak
    and its national rail system.
    ---------------------------------------------------------------------------
        \4\ IG Testimony at 1.
    ---------------------------------------------------------------------------
        The IMO Plan offers a solution both to Amtrak's short-term funding
    requirements and the two-pronged challenge of Amtrak's infrastructure
    needs--injecting new current maintenance funds annually into Amtrak's
    owned Midwest and Northeast infrastructures, and addressing Amtrak's
    looming $9 billion deferred maintenance liability.
        Under the IMO Plan, the IMO--
      --makes a one-time payment of about $2.0 billion to Amtrak;
      --assumes from Amtrak almost $750 million in infrastructure-secured
            debt;
      --funds the back pay for Amtrak employees (estimated by Amtrak to be
            about $200 million); and
      --invests not less than $600 million annually in Amtrak's owned
            Midwest and Northeast infrastructures.
                                  the imo plan
        The IMO Plan separates Amtrak into two federally-owned entities.
        The first Federal entity, Amtrak, continues its primary
    responsibility as a transportation service provider. It retains the
    reservations system, locomotives, passenger cars, maintenance of
    equipment workshops, and operating rights on the Nation's rail network.
    It continues to operate all of its current intercity, Northeast
    Corridor and contract commuter trains.
        By separating Amtrak's train operating functions from its owned
    infrastructure, William Crosbie, Amtrak's Senior Vice President of
    Operations estimated that the current 46-State network can be sustained
    on an annual appropriation of under $500 million \5\--significantly
    less than the $1.5 billion that Amtrak is requesting for fiscal year
    2008.
    ---------------------------------------------------------------------------
        \5\ William Crosbie, Senior Vice President of Operations, National
    Rail Passenger Corporation, Remarks at Railway Age Conference (October
    17, 2006).
    ---------------------------------------------------------------------------
        The second Federal entity owns the 600 route-miles of Amtrak
    infrastructure, passenger stations on that infrastructure, and overhead
    wires that power the trains. The Surface Transportation Board (STB), in
    a process similar to its existing ``directed service'' authority, would
    conduct a public solicitation and select a private sector IMO from
    among the qualified applicants.
        The IMO, for a period of 50 years, is responsible for managing and
    funding all rail infrastructure operations and improvements. This time
    period is necessary due to the very high level of front-end loaded
    investments--it is projected that the IMO will require about 15 years
    to generate enough revenue to break even. Each improvement becomes the
    property of the Federal Government as it is made. At the end of the 50
    years, the Federal Government can either re-bid the management
    concession or operate the infrastructure itself. At any time during the
    concession, the designation of the IMO is revocable for cause.
                               funding structure
        The IMO is financed using the existing Railroad Rehabilitation
    Infrastructure Financing (``RRIF'') loan program. Under the Safe,
    Accountable, Flexible, and Efficient Transportation Equity Act of 2005
    (SAFETEA-LU), RRIF program authorization was increased to $35 billion.
        The IMO would be allowed to borrow up to $17.5 billion under the
    RRIF program, after having given the United States Treasury a repayment
    guarantee issued by an investment-grade third party in the amount of
    the full $17.5 billion.
        As interest on the loan, the IMO is required to invest a minimum
    average of $600 million annually in the Federal Government's owned
    infrastructure. This ``payment-in-kind'' has been successfully used in
    other Federal Government initiatives in defense and power generation.
    On average, this statutory minimum investment exceeds by more than 200
    percent the amount Amtrak currently spends annually on its owned
    infrastructure.\6\ If my company--RIM--is designated the IMO by the
    STB, we foresee laying out in excess of $1 billion annually.
    ---------------------------------------------------------------------------
        \6\ Right-of-way and Other Properties and Leasehold Improvements
    increased just $254.4 million in 2005. See Nat'L R.R. Passenger Corp.,
    2004-2005 Consolidated Financial Statements, Consolidated Balance
    Sheets (2006).
    ---------------------------------------------------------------------------
        The IMO Plan does more than just shift the financial burden of
    Amtrak's owned infrastructure from Congress to the private sector; it
    provides natural incentives to increase capacity, services, reliability
    and safety. It is the IMO's responding to these incentives that
    translate into an increase in the number of passengers carried by all
    transportation service providers and, in turn, into new revenues for
    the IMO. Revenue increases come from new train services that pay track-
    mileage fees to the IMO and from which the IMO pays for infrastructure
    improvements.
                              stakeholder benefits
        The IMO Plan creates a platform upon which new and exciting rail
    services can be launched by Amtrak, existing commuter operators, or new
    transportation service providers, while the IMO, which is prohibited
    from operating trains, focuses on infrastructure management and
    improvements. The result will be more service options with greater
    access to both the Northeastern and Midwestern rail networks, allowing
    more passengers to enjoy the efficiencies and benefits of rail travel.
        The Plan forces the IMO to innovate by developing new opportunities
    for transportation service providers. To meet these goals, the IMO must
    be a truly neutral party. This is achieved by not permitting the IMO to
    operate its own trains. The IMO may not compete with its customers--the
    users of the infrastructure it manages. The only way the IMO should
    succeed is if its customers succeed.
        This vision of rail passenger service can be reached. The IMO Plan
    is the route:
      --High-speed train trip-times between New York and Washington will be
            reduced from close to 3 hours to roughly 2 hours through
            capital expenditures that eliminate choke points and provide
            infrastructure redundancy.
      --Commuter carriers will be able to integrate their services by
            operating new run-through trains, as the IMO adds
            infrastructure capacity, instead of being confined to historic
            geographic areas. For example, New Jersey Transit and SEPTA
            will each be able to save millions of dollars and be able to
            offer faster and more attractive travel options by instituting
            a pooled New York-Philadelphia service, instead of forcing all
            passengers to change trains at Trenton, NJ.
      --New city pair combinations will be encouraged to permit rail
            passenger traffic to expand meaningfully. For example,
            Princeton Junction, NJ has sufficient population and business
            activity to support multiple direct trains daily to Baltimore
            and Washington. New riders will be attracted by convenient and
            faster direct trains offering expanded travel options.
      --Building 14 new stations in the first 20 years at rail/highway
            intersections will attract more travelers though more
            convenient access.
      --Dedicated airport express train services will help speed travelers
            to airline check-in while reducing airport overcrowding.
      --Redundancy of infrastructure will provide more security and
            reliability.
      --More employment will be created to build and maintain the enhanced
            infrastructure.
      --Further employment will be created to staff and operate added train
            services.
      --Carbon emissions will be reduced by seamlessly shifting travelers
            from automobiles to electrically powered trains.
                            stakeholder protections
        Addressing the needs of principal stakeholders is a key element of
    the IMO Plan's win-win solution.
    Federal Government
        The RRIF loan principal is never at risk because it is fully
    secured by an investment-grade third-party guarantee in the full amount
    of the RRIF loan.
        The Inspector General of the Department of Transportation is vested
    with the authority to certify compliance with the terms of the
    legislation. The IMO is also required to file with the Secretary of
    Transportation and Congress annual reports both of its audited
    financial results and its operations, thus ensuring accountability to
    the public and to Congress.
        To align the long-term interests of the owners of the IMO to those
    of the Federal Government, ownership of the IMO is non-transferable for
    the full 50-year management concession term.
        Under the IMO Plan, Congress continues to maintain oversight over
    both Amtrak and Amtrak's owned infrastructure, yet is relieved of the
    burden of funding Amtrak's owned infrastructure since the IMO, using
    non-appropriate funds, is now responsible. It frees Congress to focus
    more on transportation services that constituents demand, and that
    States and other governmental entities desire.
    States
        The States will gain a stronger voice and role in infrastructure
    investment through the reconstituted Northeast Corridor Coordination
    Board and the Northeast Corridor Safety Committee.
        Multi-State compacts are not required and States are not obligated
    to fund the maintenance of or capital expenditures in the Government's
    owned infrastructure. Under the IMO Plan, State-requested projects may
    be expedited either by the IMO advancing funds to a State or the
    Department of Transportation providing funds to a State under a grant
    program.
    Amtrak
        The IMO Plan improves Amtrak's financial statements by--
      --transferring $2 billion to Amtrak;
      --assuming from Amtrak up to $750 million in infrastructure-secured
            debt; and
      --relieving Amtrak of its responsibility for the roughly $1 billion
            in annual losses attributable to Amtrak's owned infrastructure,
            most of which are incurred in just 5 Northeastern States.
    Commuter Carriers and Freight Railroads
        Vested commuter carriers and freight railroads with operating
    rights must also be protected. All pre-existing contracts and
    agreements are transferred to and honored by the IMO, including the
    commuter carriers' ``avoidable cost'' access fee structure codified in
    Title 49, United States Code.\7\
    ---------------------------------------------------------------------------
        \7\ See 49 U.S.C.  10904.
    ---------------------------------------------------------------------------
        This furnishes Amtrak the means and allows it the time to address
    the needs of its entire 46-State system, including the need to acquire
    new passenger cars and locomotives.
    Labor
        The existing Amtrak employees are a great and irreplaceable
    resource. Labor must be treated fairly and equitably in order to assure
    the success of the IMO. Wages must be increased to be competitive in
    the region.
        Under the IMO Plan, the IMO is required to offer employment in
    seniority order to all Amtrak employees performing infrastructure work
    to be performed by the IMO. The IMO is also required to honor existing
    collective bargaining agreements. If RIM is awarded the right to be the
    IMO, it intends to negotiate Northeast-competitive rates of pay and
    working conditions for those employees to whom it offers employment.
        Many of Amtrak's employees have been working for over 7 years
    without contract base rate increases. As a result, there is pressure on
    many of these highly qualified workers to join commuter carriers or
    retire early. This potential loss of experience would be highly
    detrimental to the development of improved passenger services.
        To assure the future integrity of both Amtrak and its owned
    infrastructure, I personally believe that a fair wage settlement,
    including full back pay for the IMO's employees must be implemented
    quickly. To encourage Amtrak employees to accept employment with RIM,
    RIM will also offer signing bonuses. This translates into payments
    (signing bonuses and back pay) in amounts ranging from $10,000 to
    $25,000 per employee. In addition, RIM is prepared to contribute
    sufficient monies to a trust fund to settle Amtrak's full back pay
    obligation to those employees remaining with Amtrak.
        If RIM is awarded the right to be the IMO, with regard to the IMO's
    employees, it intends to--
      --resolve outstanding proposed contract changes by offering rate
            increases to make wages competitive with the commuter carriers
            in the area and by paying full back wages from January 1, 2000;
      --withdraw Amtrak's proposed concessionary contract changes,
            including Amtrak's proposal that employees pay a portion of
            their health and welfare premiums; and
      --negotiate for working conditions that provide quality of life
            improvements without adversely effecting productivity.
        In a more general vein, the IMO Plan--
      --furnishes incentives to resolve the outstanding section 6 contract
            notices;
      --preserves collective bargaining agreements and rights, including
            labor representation for IMO employees;
      --makes the IMO subject to the Railway Labor Act, the Railroad
            Retirement and Unemployment Insurance Acts, FELA, and all rail
            safety legislation and FRA regulations; and
      --protects employees affected by the transfer.
    The Traveling Public
        For the traveling public, reliability and security redundancy will
    increase, while trip-times will be reduced by the IMO's addressing
    deferred maintenance through aggressive engineering and construction,
    and major new capital investments. Train riders will also enjoy more
    frequent service, increased travel options, new city pairs, and--very
    likely--lower prices.
        The traveling public is looking for transportation options. RIM
    believes that rail can offer such options, but it requires a new
    vision. In 1974, at the high of the first energy crisis, Amtrak
    reported carrying approximately 10.9 million Northeast Corridor riders,
    compared to approximately 11 million riders in 2005. Despite the fact
    that the number of I-95 automobile trips more than doubled over the
    same period of time, \8\ Amtrak's ridership remained flat. The
    following graph shows this long-term divergence.
    ---------------------------------------------------------------------------
        \8\ Amtrak--1972: ICC freight railroad filings; 1973: Nat'l R.R.
    Passenger Corp., 1973 Consolidated Financial Statement (1974)
    extrapolated; 1974, 1976-1978, 1980-1986: former Amtrak personnel;
    1975, 1979, 1986-2000: Nat'l R.R. Passenger Corp., 1975, 1979, 1986-
    2000 Consolidated Financial Statements (1976, 1980, 1987-2001); 2001,
    2002: extrapolated; 2003-2005: 2003-2005 Consolidated Financial
    Statements (2004-2006). Highway--Maryland Department of Transportation,
    State Highway Administration.

        RIM believes that Amtrak, unburdened by infrastructure ownership,
    can fulfill the new vision.
              the status quo has failed--amtrak's hidden liability
        Amtrak's owned infrastructure, particularly its Northeast Corridor,
    suffers from many years of deferred maintenance and depreciated assets.
    Major infrastructure components, renewed in the early 1980's, are now
    approaching the end of their useful and reliable lives, and will soon
    have to be replaced.
        According to Kenneth Mead, former Inspector General, U.S.
    Department of Transportation, ``Amtrak [had in 2002] an estimated $5
    billion backlog of state-of-good-repair investments, and
    underinvestment is becoming increasingly visible in its effects on
    service quality and reliability.'' \9\ Due to the continued inability
    of Amtrak to maintain its infrastructure and construction project
    inflation over the last 5 years, RIM estimates this liability today to
    be around $9 billion.
    ---------------------------------------------------------------------------
        \9\ IG Testimony at 7.
    ---------------------------------------------------------------------------
        If Amtrak's deferred maintenance is not addressed in a timely
    manner, the integrity of the Federal Government's owned infrastructure
    will be in jeopardy. Trip-times will be increased. Service will be
    degraded. Safety could be compromised.
        The General Accounting Office (now Government Accountability
    Office) defines ``state-of-good-repair'' to be a condition requiring
    only cyclical maintenance. The last time the Northeast Corridor was in
    a state of good repair, was in 1981 at the conclusion of the Northeast
    Corridor Improvement Project.\10\
    ---------------------------------------------------------------------------
        \10\ Briefing Report to the Chairman, Subcomm. on Surface Transp.
    and Merchant Marine of the S. Comm. on Commerce, Science and Transp.,
    104th Cong. 1st Sess., Gen. Accounting Office Doc. No. RCED-95-151BR,
    at 47 (1995).
    ---------------------------------------------------------------------------
        If all we do today is desire to bring the corridor up to a state-
    of-good-repair, we are aspiring to return it to its state in 1981. Is
    that our goal in 2007, to return the corridor to its condition in 1981?
        RIM's answer is: No! RIM believes that the Northeast Corridor
    should move into the 21st century and is prepared to make the
    investments to bring it there.
        Through enactment of the IMO Plan, the repair, operations, and
    improvement of Amtrak's owned infrastructure is fully funded using non-
    appropriated funds.
        The following graph shows the positive effects of transferring the
    Federal Government's infrastructure liability to the private sector and
    of reducing--by about two-thirds--Amtrak's required annual
    appropriations.

                            appropriation challenges
        The Federal Government is able to fund Amtrak's annual operating
    budget. Amtrak's transportation services-related commitments (whether
    capitalized or expensed) tend to be completed in less than 1 year--a
    time period that corresponds to an appropriation cycle. Those outlays
    are expended throughout the 46 States through which Amtrak operates.
        The Federal Government has been unsuccessful at funding all of
    Amtrak's capital improvements and infrastructure investments.
    Infrastructure undertakings tend to be multi-year in nature and, to be
    implemented efficiently and cost-effectively, require multi-year
    funding commitments. They, by their very nature, do not conform to the
    appropriations process. This has resulted in the massive and increasing
    deferred maintenance liability shown above.
        On January 16, 2007, Senators Lautenberg and Lott, joined by other
    members of this subcommittee, introduced S. 294--the Passenger Rail
    Investment and Improvement Act of 2007 (PRIIA). The IMO Plan is highly
    complementary with PRIIA.
                                solution at hand
        By increasing the RRIF loan authority in 2005, Congress expanded a
    loan program that enables the private sector to fund our Nation's rail
    infrastructure multi-year investments. The vehicle to achieve this is
    the IMO Plan--a Plan that benefits labor, the Federal Government,
    States, the commuter carriers, and Amtrak.
        By passing the IMO Plan, Amtrak's infrastructure improvements and
    debt repayment appropriation-requirements will be reduced by over $1
    billion annually. And, that $1 billion will be available to this
    subcommittee to allow Federal funds to focus on providing enhanced
    passenger rail service to the United States.
        The IMO Plan is a win-win opportunity for the Nation's rail
    passenger stakeholders--labor, the States, rail passengers,
    transportation service providers, Amtrak. It provides a solid base upon
    which to build the modern rail passenger network that government
    leaders and travel advocates have championed for the past 30 years.
        Thank you for providing me the opportunity to testify, and I
    welcome questions you might have.

                             Supplemental Statement
        Under the Infrastructure Management Organization (``IMO'') Plan,
    the Federal Government continues to own all of Amtrak and all of the
    real property Amtrak owns today, including all of Amtrak's owned rail
    infrastructure (``AOI''). The IMO, an entity selected by the Surface
    Transportation Board from a pool of competing applicants, will upgrade
    and maintain AOI on behalf of the Federal Government for a period of 50
    years. During this period, neither the States nor the Federal
    Government is obligated to fund the maintenance of or capital
    expenditures on Amtrak's owned infrastructure. If selected, my
    company--RIM--anticipates spending more than $1 billion annually on AOI
    for each of the 50 years that it will be the IMO.
        The IMO Plan provides a zero scoring funding mechanism to maintain
    and expand Amtrak's owned infrastructure, while providing Amtrak with a
    one-time payment of $2 billion of non-appropriated funds and relieving
    it of almost $750 million in infrastructure-secured debt.
        Under the IMO Plan, labor is protected: the mechanism is
    established to settle all section 6 notices; back pay to all Amtrak
    employees, including those who remain with Amtrak, is paid in full from
    funds furnished by the IMO; and the IMO offers employment--in seniority
    order, under existing contracts and representation--to all current
    Amtrak infrastructure employees. The IMO will be subject to the Railway
    Labor Act, FELA, the Railroad Unemployment Insurance Act and Railroad
    Retirement. The enabling legislation will also provide for expedited
    claim settlements for infrastructure employees.
        The IMO Plan allows Amtrak to improve its balance sheet, so that it
    can operate its entire existing 46 State national passenger rail system
    on a subsidy of about $500 million annually. Amtrak receives more
    money, more quickly than any other plan being discussed.

        Senator Murray. Thank you very much.

                            AMTRAK'S OPERATING COSTS

        Mr. Boardman, the Bush administration's budget that you
    sent us is, again, proposing a drastic funding cut to Amtrak.
    And once you set aside that $100 million that you're proposing
    for State grants for our new passenger corridors, your budget
    request cuts direct support for Amtrak by almost 40 percent.
        In your written testimony you said, ``The request for
    operating subsidies is sufficient to avoid a bankruptcy
    provided Amtrak acts to cut costs by focusing on core
    services.'' So, Mr. Kummant, I wanted to ask you, can your
    railroad avoid bankruptcy if we accept the administration's
    proposal to cut funding by 40 percent, and limit your operating
    support to $300 million?
        Mr. Kummant. Well, we would have to go through and
    drastically reduce services overall. We certainly haven't run
    scenarios on that. There are also a lot of payments that go to
    employees if the work is terminated. So, in other words, legacy
    costs continue for some time if, in the extreme case, for
    example, if you would shut down today, in total there'd be a
    whole stream of costs associated with existing contracts, as
    well as honoring labor commitments. So it would be very, very
    difficult.
        Let me say this though, I guess I take the administration's
    statement as, in a sense, a philosophical challenge or
    statement for us to continue work on reduction, on continuous
    improvement, and really change the culture of the organization
    to be far more motivated in that direction. I take that as a
    philosophical challenge, and I think that's what our newly
    constituted management team is about.
        The specific number is obviously very difficult to achieve,
    but again on a philosophical point, I would say that we embrace
    the challenge.
        Senator Murray. So it's a nice talking point, but you
    expect us to provide the dollars--otherwise, bankruptcy.
        Mr. Kummant. Perhaps your words not mine, but I think it
    would be very, very difficult to function under that specific
    financial scenario.
        Senator Murray. Mr. Tornquist, let me ask you. The
    Inspector General's office has consistently advocated efforts
    by Amtrak to reduce its operating costs. Do you see a way that
    Amtrak could avoid bankruptcy if we enacted the President's
    proposed budget?
        Mr. Tornquist. No, we don't believe that Amtrak would
    remain viable at the President's request level. We have
    recommended ways that they could save money, but it seems a bit
    aggressive to assume they're going to save all that money in 1
    year.
        Senator Murray. So, you don't see any way they can cut
    their budget that dramatically?
        Mr. Tornquist. I don't see how they could cut their staff
    and their budget quickly enough to live within the President's
    request.
        Senator Murray. Mr. Boardman, I think if I heard you
    correctly, you said the GAO and IG have endorsed your proposal
    to cut Amtrak operating figures to $300 million--maybe I should
    ask Mr. Tornquist--have you endorsed that proposal?
        Mr. Tornquist. We haven't endorsed it, if I remember Mr.
    Boardman's statement, he said that we had suggested ways that
    Amtrak could save money and GAO might have suggested similar
    ways, and we have suggested ways, but not in the amounts in the
    time frame that the administration is talking.
        Senator Murray. Mr. Boardman, did I hear you?
        Mr. Boardman. No, I didn't say they endorsed, Madame
    Chairman. What I said was that the Government Accountability
    Office, the IGA, and others have recently presented options for
    achieving savings.
        Senator Murray. Okay, I thought I heard you say endorsed
    and I wanted to find out where the GAO had endorsed that, as
    well. So, you're telling me that's not what you said.
        Mr. Boardman. If I used the word, it was inappropriate, I
    didn't mean it.
        Senator Murray. Okay, Mr. Wytkind, there is a footnote in
    your testimony that states that wages at Amtrak are now well
    below the prevailing rates and the freight and commuter
    railroads. Mr. Kummant, do you agree with that observation?
        Mr. Kummant. Yes, we have big gaps that certainly have
    opened up, and many of the proposals we have on the table have
    closed those gaps, but the way the current status is, that is
    true.
        Senator Murray. What impact do those wage differences have
    on your ability to retain skilled craft people?
        Mr. Kummant. Oh, it's certainly a problem, particularly in
    the high skilled areas. We're very challenged with
    electricians, for example, who can command good wages
    elsewhere, and a number of skilled positions. So it's certainly
    a core issue for us.
        Senator Murray. Mr. Wytkind do you want to comment on that?
        Mr. Wytkind. Yes, it's really quite astounding that we're
    in the position we're in, having employees have to wait 8
    years--and potentially more--to have general wage increases,
    ends up creating this mass exodus environment. I can't give you
    specific data today, but it's very clear that, you know,
    American workers are smart. If they see better opportunities in
    other employment venues, they will pursue them. So this
    shortage that Mr. Kummant refers to, I believe, becomes
    exacerbated over the next several months and years if we don't
    resolve these issues. We have workers that are making as much
    as 20 percent less than their counterparts in the commuters and
    the freights. And in the event the freight collective
    bargaining agreements get achieved in the coming weeks or
    months, that will again further bump those workers even further
    ahead of Amtrak workers. So, it's a real problem that needs to
    be resolved.
        Senator Murray. You talked in your testimony about getting
    a contract nailed down affecting morale and other things. Do
    you see any other ways in which Amtrak's Board of Directors or,
    and the labor force might work together more cooperatively?
        Mr. Wytkind. Well, I think it's very clear that the
    employees of this company during these very difficult years
    have really been at the front line of keeping this company
    operating. Mr. Kummant has, you know, in various ways basically
    said that, without these employees this company would have a
    very difficult time succeeding. And, yeah, we could cooperate
    more. We could work up here on Capitol Hill to find real sound
    reforms, and maybe we could work together to adopt many of the
    reform planks that you've articulated today in your opening
    comments, which I wholeheartedly embrace.
        I think there is a way to work on it, but we will not get
    to that point if Amtrak continues to ignore the needs of its
    employees. Because our employees morale is as low as it's ever
    been, and more importantly, they're not going to continue to
    support and work with a company that continues to turn on them.
        Senator Murray. Mr. Kummant, you want to make a comment?
        Mr. Kummant. I don't have that much issue really with Mr.
    Wytkind's words. In fact, we spent a lot of time together, and
    are on the phone a lot. I have probably, personally, along with
    my VP of Labor Relations, done more personal outreach in the
    last 6 months than my predecessors have in the last several
    years. It's a thorny issue, it's a tough issue. One of the
    first objectives is to build trust, and to build an environment
    where dialogue is possible.
        I do think going forward if the freight railroads do settle
    here shortly that will, in a sense, clear out some of the
    underbrush. It will likely set a pattern of sorts in a number
    of the areas that I think may give us another basis for going
    forward.
        Senator Murray. Okay, thank you very much.
        And Senator Bond I will turn to you.

         MULTI-YEAR CAPITAL INVESTMENT PLAN AND THE NORTHEAST CORRIDOR

        Senator Bond. Thank you, Madame Chair.
        I have asked year after year for a detailed multi-year
    capital investment plan from Amtrak, and to my knowledge we've
    not seen it in Congress. I note on page 2 of your testimony and
    your statement that you will send to Congress a multi-year
    strategic plan on which we can base our decisions. When do you
    expect to send that to us?
        Mr. Kummant. First, let me say I think we could give you
    very specific numbers on the Northeast Corridor over--in terms
    of capital needs over the coming years--we could deliver that
    to you in short order. We expect to have a broader strategic
    plan relative to expenditures across the country, probably in
    the April timeframe.
        Senator Bond. Speaking of the Northeast Corridor, I have a
    chart here that shows State payments to Amtrak for train
    operations. It says that it's incomplete, but I note that
    Washington contributes $11.2 million, Missouri contributes $6.6
    million for our humble little operations, but when I look down
    the list I see New York contributing $3.8 million, but I don't
    see any numbers for Maryland, New Jersey, Connecticut,
    Massachusetts--what are their contributions?
        Mr. Kummant. Yes, I was just handed a chart. First, let me
    make the general point that we are really working through a
    process, top to bottom, to address all those issues. There are
    system trains where States don't pay. There are variable
    payment structures in terms of the history of the services. And
    as we rotate the whole organization to face the States and
    build that organization that's fundamentally an issue we need
    to clarify and, in fact, create an equity across. We need to
    have a very clear funding structure, almost a menu approach on
    services.
        So, I don't have the numbers at my fingertips to respond to
    the specific question, other than that equity and clarity of
    those structures is one of the key goals of one of the
    executives, in fact, we recently brought in.
        Senator Bond. Mr. Tornquist, have you looked into that?
        Mr. Tornquist. We haven't specifically looked at it, but
    Mr. Kummant is right, that there is an equity issue across
    States. Some of the States don't pay for their service, some
    States do, some pay operating costs, some pay capital, some pay
    a combination. One of their reforms is to have a new State
    pricing policy. One of the issues that we've raised is the need
    to move ahead, some definition on that policy and get an
    implementation plan that is accepted by the stakeholders.
        Senator Bond. We look forward to seeing it. Mr. Kummant,
    your discussion about the pay--and the inadequacy of pay--are
    there work rule changes which could enable Amtrak to operate
    safely and more efficiently, and be able to pay your skilled
    employees more?
        Mr. Kummant. Sure, let me be very direct. Clearly, moving
    forward, the two fundamental issues on the table will be some
    sort of upfront bonus payment or back pay in Mr. Wytkind's
    terms, as well as workplace flexibility. We do need, in
    Amtrak's view, a more flexible workforce to build the
    groundwork for a 21st century operation.
        I still believe that that's possible for us to jointly work
    on. I think we can get there, but it's thorny, it's tough, it
    clearly runs into the craft tradition, which is the cornerstone
    of the union structure. But yes, we do need to reform workplace
    flexibility issues, some of which date back many, many years.
        Senator Bond. Mr. Wytkind, you probably have a comment on
    that.
        Mr. Wytkind. Well, I would say, I'm not going to comment
    specifically on each craft in the railroad industry because I'm
    certainly not the chief negotiator for each union. But, I've
    always viewed this workplace reform issue in the context of the
    Washington debate on what we do with Amtrak and its future
    funding needs as a bit of a red herring. The reality is that
    the employees of Amtrak over the years have gone through
    numerous renditions of a reform. Many of the reforms that the
    company insisted on in the 1980s and 1990s, they then came back
    to the bargaining table and said, ``Oops, those didn't work
    very well, we want to retrieve those.'' And I could give you
    all kinds of good examples that have been submitted to the
    authorizing committee, which I could send you copies of, that
    explain some of the various reforms that have been tried, say
    on on-board service employees.
        The history is filled with attempts to deal with
    ``reforms,'' and at the end of the day reforming the workplace
    is not going to save this company from getting 40, 50 percent
    less than it needs from year in and year out, other than the
    fact that this committee has saved Amtrak from those funding
    crisis.
        What's going to solve it is, labor and management working
    together and trying to find a way to cooperate on issues that
    modernize this company in a way that makes it effective and
    successful. But to just deal with these workplace issues as if
    they're going to solve Amtrak's problems, I think, is really
    frankly not going to work and is going to be disingenuous in
    terms of getting into this debate.
        Senator Bond. Mr. Wytkind, I am disappointed in that
    because we are going to provide more money for Amtrak, we are
    demanding from Amtrak a comprehensive plan for the future. We
    have heard in many instances--Mr. Kummant said that there must
    be flexibility which would enable paying the workers more, and
    I would hope in--your negotiating posture, I understand--but we
    expect to see results because there are many areas in which we
    need not only to provide more money for Amtrak, but see reforms
    and see a clear vision for how it's going to work in the
    future.
        Thank you, Madame Chairman.
        Senator Murray. Senator Lautenberg.
        Senator Lautenberg. I listen with great attention to the
    testimony of the witnesses, and I thank each one of you for
    your participation. I don't understand, I must tell you, why it
    is that we don't lay out the urgency of doing something about
    this, instead of lame reviews of what didn't take place in the
    past.
        And I ask you, Mr. Boardman, and I quote from your
    statement yesterday in front of my other committee. ``Amtrak is
    an outdated monopoly that is on a flawed business model,''--I
    take it Mr. Serlin would like to become the monopoly, you
    didn't say that, I said it--``it does not provide an acceptable
    level of service, nor has it been able to control the
    finances.''
        How long have you been on the board of the company?
        Mr. Boardman. Three months now, sir.
        Senator Lautenberg. Three months. But you've represented,
    you're representing the interests and the views of the
    administration, are you not?
        Mr. Boardman. Yes, sir.
        Senator Lautenberg. Did you fight back when they offered
    this budgetary plan for 2008?
        Mr. Boardman. We had discussions, they were lively
    discussions----
        Senator Lautenberg. No, no, no.
        Mr. Boardman [continuing]. About what it is.
        Senator Lautenberg. But the lively discussions, I had
    those. I used to run a very large company. The company has
    46,000 employees today; a company I started called ADP with two
    other guys. So I know something about the corporate world.
    Lively discussions had to have a termination point, just like
    the railroad has. Are you satisfied with what you've presented
    here today?
        Mr. Boardman. We believe that it continues to provide the
    incentive for Amtrak to improve, and to reduce its costs. We
    believe that--when combined with the $2 billion that Amtrak has
    now in terms of revenue--the probably $200 million of cash
    reserves at the end of last year, that it continues to provide
    some difficult decisions that would have to be made to operate
    Amtrak next year.
        Senator Lautenberg. I'm glad I'm not the patient and you're
    my doctor telling me what my condition is, Mr. Boardman.
        What amazes me is that the Secretary of Transportation
    never went to a board meeting. Do you know whether Mr. Sosa has
    yet taken a ride on an Amtrak train?
        Mr. Boardman. You would have to ask Mr. Sosa that. I do not
    know, sir.
        Senator Lautenberg. Has he?
        Mr. Kummant. Yes.
        Senator Lautenberg. You know when, and how often?
        Mr. Kummant. I can't give you the details, but he
    certainly----
        Senator Lautenberg. Because when he was being promoted for
    membership he had never been on an Amtrak train, and I think
    it's a worthwhile experience. And I submit to my friend from
    Missouri that New Jersey put $1.6 billion over the last decade
    in Amtrak for capital improvements. And a bill that Senator
    Lott and I have proposed, would require all Northeast Corridor
    States and Amtrak to revise the funding formula for those
    States just as the non-Northeast Corridor States are doing. So
    we're paying pretty much as we go. I'm sorry?
        Senator Bond. I asked a question about how much the other
    States were providing?
        Senator Lautenberg. How much are we providing? We're
    providing--the question is opening, we're talking about a
    formula, developing a formula for these States. So that, we
    know that we have to make contributions. As a matter of fact,
    we do make significant contributions, because the value of the
    travel that comes to the Northeast Corridor is manifested in
    every part of the county, every State of the country, to the
    world's financial center, and we provide the skills and the
    persons to do this. And they typically use Amtrak tracks to get
    from New Jersey to New York, and it's a very high level of use
    that is required.
        And when we look back at the experience that we had not too
    many years ago, 9/11, a building in which I had an office and
    saw 50,000 people come to work everyday like one city, and
    Amtrak was the only thing that was able to transport people.
    Aviation was shut down, the highways were jammed and I don't
    understand, honestly, why it is that we argue about whether or
    not this cow that has never been fed properly doesn't give
    enough milk.
        It just doesn't work, Mr. Boardman. And the request, I am
    shocked to hear what you say about this, about the condition of
    things, without acknowledging that there was total lack of
    interest by the President, and the administration, in having
    that board functioning in a way--because they were the ones on
    the job during this period of terrible performance that you
    talk about. Where was the Board of Directors as this failure,
    that you call it, was taking place? I don't get it.
        So you voted to approve the funding that's presented here,
    in the President's budget?
        Mr. Boardman. In the President's budget we--I support the
    decision that was made.
        Senator Lautenberg. So you don't believe this, these things
    about the inevitability of bankruptcy at this funding level?
        Mr. Boardman. I did not believe in bankruptcy when David
    Gunn said it. I think there are decisions that have to be
    made--difficult ones. And you have to make them early not to
    have a bankruptcy.
        But I do understand your point. And if I could just add,
    for your benefit and the effort that went on, on the access
    fees last year, Senator Bond, that we determined at that time--
    and I was in the middle of that--that the States on the
    Northeast Corridor were contributing, and in fact, were
    contributing more than what was necessary.
        Where Mr. Gunn again, I guess--and again I was in New York
    State--said that some States had a free ride. The State he was
    talking about at the time was New York State. New York State
    has the system trains that Mr. Kummant's talking about. New
    York should be paying between $20 and $30 million a year for
    those system trains. And I think that's the frustration and
    difficulty that comes from--whether it's Washington or Missouri
    and others. But in the middle of that we were negotiating with
    an Amtrak that could not complete our Turbo Program and we did
    not agree to the kind of things they needed.
        And I think that's important for this debate, that we are,
    in fact, and have received the kinds of investments in the
    Northeast Corridor from the States in the Northeast Corridor
    that I think you're relating to.
        And I thank you for that opportunity.
        Senator Lautenberg. Thank you.

                              SEPARATION PROPOSAL

        And Madame Chairman, forgive me for just a couple of
    seconds more, maybe a minute or so, if it's all right.
        I listen with interest to Mr. Serlin's proposal, and I'm
    determined to be here when that loan is paid off that you want,
    that $17 billion. It means I have to run 6.5 more times.
        We've seen the results of what happened in the United
    Kingdom, which is held out as an example of what you're
    proposing. Separating the infrastructure from the operating
    structure is quite a deal, because if you have the
    infrastructure available, you can build buildings, sell papers,
    do all kinds of things with those installations and take money
    in, but that doesn't mean that the railroad operates any more
    efficiently. You are going to call on rail professionals to run
    it, but it's quite a revelation when we see that this--
    Secretary Grayling said we think that--he's British
    Conservative Party--admits flawed rail privatization. ``We
    think the separation has helped push up the cost of running the
    railroad, hence fares, have slowed decisions about capacity
    improvement. Too many people in organizations are now involved
    in getting things done so nothing happens.''
        Mr. Serlin, it's, I'm not sure that your proposal adds much
    to the debate here, because it ain't going to happen. That's
    the way it's going to be. This railroad is like all other
    railroads in other countries. It needs subsidy. It operates, it
    makes money during 2, 3 hours a day and the rest of the day you
    can't get by. So maybe we can send the workers home and have
    them come back for a couple of hours every day, Mr. Serlin.
    Thank you. Otherwise that doesn't bother me.
        Senator Murray. Senator Lautenberg, thank you so much for
    you passion on this issue. We all appreciate it.

                          AMTRAK'S ON-TIME PERFORMANCE

        As I talked about in my opening statement the on-time
    performance of many of Amtrak's trains really is disappointing.
    And sometimes the fault lies with Amtrak itself, but most of
    the time it really relates to the congestion with the freight
    traffic.
        And Mr. Boardman, I wanted to ask you what measures have
    you taken, as the administration's top railroad official, to
    try and improve Amtrak's on-time performance over freight on
    track?
        Mr. Boardman. Thank you, Senator. I think on-time
    performance is probably my--one of my top priorities outside of
    safety itself, which I think Alex has figured out in the board
    meetings that I have attended. And, one of the things I
    understood as you gave your opening statement is that there
    wasn't necessarily an understanding at this point in time, that
    the capital program that we would propose wouldn't benefit
    existing corridors. Rather than putting in an entirely new
    corridor online, what we're really looking for is for States to
    start planning all of their transportation--whether it's
    highways, or rail, or whether it's aviation, or whatever it
    is--as a transportation plan in their States. And part of that
    would be to improve that corridor, the I-5 corridor.
        And the way that you would do that--and one of the things I
    began to understand is--that a lot of times you get caught
    behind a freight train because the freights never intended to
    pass each other, they intended to be able to get by each other
    when they meet, rather than to have the ability to pass. So
    some of the improvements that could be made for the future
    using that capital program, could be passing sidings to allow
    an Amtrak train to get by instead of caught behind it.
        I meet with every major class I railroad every year to talk
    about safety, but one of the things on the agenda is the
    importance for on-time performance that I expect them to have.
        Senator Murray. Well, let me ask you, do you think the
    freight railroads are uniformly complying with both the letter
    and spirit of the law, in granting Amtrak trains preference?
        Mr. Boardman. I don't think there's uniformity in terms of
    the importance of this among the class 1 railroads. I think
    there has been difficulty explaining the importance of how we
    see that work for the future.
        And I took a particular case example of the Southeast
    Corridor where there are the Silver Services, the Palmetto, the
    AutoTrain, and I know that Amtrak has as well. And even if you
    look on our website today, you'll find a linkage to the
    Southeast Corridor, where we're really trying to make a change
    in how we would manage that particular service. And the reason
    is--and I don't want to take up too much time--but the reason
    is because CSX operates on that corridor. Their main interest
    is their juice train and their UPS train. They don't have coal
    on that corridor, like so many of the difficulties we have
    across the country.
        I think there's a new model that we can work out. I guess
    my point is, that we're trying to apply both the grant
    pressure, we're trying to--I'm trying to work with Amtrak
    itself, and with the freight railroads, to improve on-time
    performance.
        Senator Murray. Under the law, freight railroads can apply
    to DOT for an exception from the requirement to provide
    preference to Amtrak trains. Has this administration ever
    received any applications from freight railroads for an
    exception?
        Mr. Boardman. I don't have an answer to that, I'll get you
    an answer to that. They haven't spoken to me since I've been
    here.
        Senator Murray. Okay, I'd like to know that.
        [The information follows:]

        No, FRA has not received any applications under 49 U.S.C. 24308(c)
    from freight railroads seeking a Secretarial determination that the
    passenger preference should not be granted at a specific location.

                             STATE MATCHING GRANTS

        Senator Murray. You talked a minute ago about the $100
    million for State matching grants for the development of new
    passenger corridors and let me go into that a little bit more.
    Before we grant new money to leverage more State contributions
    I do think we have to look at the service the States are
    getting for their current contributions. You heard several
    times up here my State gets $11 million and Senator Bond's
    State gets about $6.5 million.
        I'd like to ask, Mr. Boardman and Mr. Kummant, if you
    believe new money is part of the solution to easing freight
    congestion, shouldn't we focus some of our new dollars on
    improving current services before we try to launch new
    services? Maybe Mr. Kummant, if I could start with you.
        Mr. Kummant. I don't disagree with that. I mean these
    problems are very thorny, and they are really grinding things
    out day by day. And as Mr. Boardman suggested, even looking at
    small projects; a siding, a signaling change, a crossover, to
    really opening things up. I do think we need to tie those
    expenditures to very specific gains to be made, and in some
    cases on existing services.
        I would like to see some of those dollars, if possible,
    float toward equipment, as well, because I think that could
    have a fairly dramatic effect on the overall service, and
    perception of the service. But, again, the whole on-time
    question is as much about investment. I do think there are
    gains to be made in dispatching, and again it's a gut feel
    number, but perhaps 5 to 10 points of on-time performance, but
    not 30 or 40. And so it really in the end is about capital.
        And--if I may say--it's almost a personal mission of mine
    to really build a different relationship between Amtrak and the
    freight railroads. And I've just completed a cycle of meeting
    all the U.S. CEOs, I'll meet the Canadians. And I think part of
    it is really just sitting down and getting everybody to agree
    that we are living in a different world than we did 10 years
    ago, and it has to be some commitment on their part at just a
    very personal level.
        Senator Murray. Mr. Boardman.
        Mr. Boardman. I think I agree with you. I think we need to
    improve the existing corridors first. I think we would be
    looking at that from terms of, a priority as they would come to
    the FRA. When they had to put their projects on the STIP in the
    States I think they would have to evaluate that.
        I think a more difficult problem, you almost related to it,
    is a lot of the States such as yourself that have made major
    investments, could be somewhat frustrated by the fact that,
    ``Hey, we've gone ahead and made these investments and now
    we're being asked to put money on the table to make future
    investments.'' And I wondered about that myself.
        If you look back at the interstate system, one of the
    things that New York always felt bad about was that they made
    this major investment in the New York State thruway and then,
    along comes the interstate highway system, which was providing
    the money necessary for the future. And my thought was that one
    of the ways that that got treated at the time was that there
    were credits given for the thruway that you could use as part
    of the matching requirement.
        So, I don't think we've gone in far enough to understand
    that, how we would do that for the future, but certainly we're
    open to discussing that kind of thing.
        Senator Murray. Okay. Well let me ask you one other
    question. Your proposed State-matching grant program only funds
    projects when the host freight railroad commits itself to 80
    percent on-time performance for new train service. It makes
    sense to have a minimum on-time performance for new Amtrak
    services. Why hasn't the administration pushed for minimum on-
    time for current State-subsidized Amtrak services?
        Mr. Boardman. I don't have an off-the-top answer for that,
    but I'll get you one. I think we've tried to use different
    methodology and this just kind of tightens it up tighter.
        [The information follows:]

        This is a complex issue that the administration has been trying to
    tackle for some time. As the chairman noted in her opening remarks, the
    solution to this problem lies not only with Amtrak, but also with the
    host freight railroads whose track Amtrak operates over. The
    administration, through the FRA, has been trying for some time to
    influence the debate and push for safer and more reliable service for
    all railroads. In many instances, however, extensive capital investment
    is required in order to make the infrastructure improvements required
    to expand capacity, increase reliability and ensure safer operations.
    Host freight railroads have not always been willing or able to make
    those improvements. The $100 million grant program included in the
    administration's fiscal year 2008 Budget Proposal would help facilitate
    those infrastructure improvements.

                      VOLUME: AMTRAK VS. FREIGHT RAILROADS

        Senator Murray. Okay, well when you look at Amtrak's on-
    time performance report, you see some extraordinary differences
    in the way different freight railroads treat Amtrak trains. We
    have two major freight railroads serving the western United
    States. We've got UP and BNSF. Somehow looking at this, Amtrak
    trains running over the Union Pacific are encountering twice
    the volume of delays for the same amount of train miles that
    are encountered by BNSF. What do you think explains that
    differing treatment?
        Mr. Boardman. I think there are probably various reasons.
    Certainly the Coast Starlighter, I don't have all the reasons
    to that. The most recent ones, though, were some rebuilding of
    track, and perhaps Alex can supplement what I'm about to say
    here, I don't have as good an understanding of that.
        I know that it's extremely difficult to run trains through
    the coal chute--which I call the coal chute--through Nebraska
    and out on the California Zephyr has been a real difficulty.
    That's a UP. And when you see the Empire Builder, which is at
    about 74 percent, and Southwest Chief, I think, which is also
    run by the BNSF, you have much better numbers. I don't know
    Alex whether you might add to that for me.
        Senator Murray. I think you used to work for UP.
        Mr. Kummant. Yes, I guess I have to not sound not like an
    apologist in that sense, but let me make a couple of comments.
    BNSF does do a very nice job. Take, for example, when they run
    on their major Transcon route. There's some mix, but a very
    large amount of that traffic is inter-modal traffic that itself
    moves at 60 or 70 miles an hour. So it is easier for us to mix
    into that than in other traffic. Senator Bond and I chatted a
    little before the hearing--I used to actually run the River
    Sub, which is between Kansas City and Missouri and a tremendous
    amount of UP coal traffic goes across there and it's just a
    brutal thing to run. Some of it's single tracked, ice storms in
    the winter, mud slides in the spring, floods in the summer, and
    the operational performance there is just incredibly difficult.
        So, in the end you have to go back and look at what
    commitment did we really make, but it's really a hand-over-hand
    climb on taking slow orders off, on undercutting, on adding
    those sidings. UP also has a very, very difficult time,
    obviously on the Sunset route, which is not fully double-
    tracked yet. And on the north-south Coast Starlight, a
    tremendous amount of slow orders. That being said, they have a
    huge capital program going forward, and we expect, for example,
    that we may be--in a sense from a marketing point of view--
    relaunching the Coast Starlight at the end of this summer when
    they're through with that work.
        On the long distance trains there is some good news,
    although the absolute numbers are still low, we are actually
    up, year-over-year in 13 of the 15 long distance trains. Where
    we really need to focus, though, is on the State corridors,
    because on those shorter routes the on-time performance is all
    the more critical. So we're up only in 9 out of 15 and we're
    down in 6 out of 15. So there are no easy answers, except for
    grinding it out and UP still has tremendous amount of slow
    orders out there, and catch-up maintenance work that they're
    doing this year.
        Senator Murray. Okay.

                          AMTRAK SERVICE TERMINATIONS

        There are no other members present. I have a couple more
    questions, and appreciate all of your patience. Mr. Kummant, I
    wanted to ask you. Your formal grant request for the coming
    year for you long distance services, you say you may be
    implementing selected route adjustments? I wanted to ask you if
    those selected route adjustments are another name for service
    terminations?
        Mr. Kummant. No, I think what we'll look at, there may be
    one long-distance route that we look at converting into a
    series of State corridors and have a multi-year plan to do
    that. We have absolutely no plans for wholesale service
    terminations, but the strategy that we're developing--and we'll
    be speaking about in April/May timeframe--will be looking at
    long term. Where do the State corridors really grow, and where
    are they dominant, and particularly where they overlay long
    distance routes. We ask ourselves, does it make sense perhaps
    to find some ways to focus on those segments and to grow those
    segments and perhaps then adjust the service into a series of
    State corridors, rather than a long distance piece?
        Senator Murray. Do you anticipating any communities in
    this, in the rail service?
        Mr. Kummant. Any communities?
        Senator Murray. Are you going to eliminate any communities
    from your rail service?
        Mr. Kummant. It could be. We may have to face some of that.
    We do know, for example, that we haven't run the eastern
    portion of the Sunset since Katrina. It is an example of what
    we're working through. It was not a great service to start
    with. It hit a number of communities late at night only three
    times a week. However, we'd like to look at some State corridor
    alternatives in that area. That decision hasn't been made, but
    that's an example. So selectively, yes, if those decisions are
    made there may be some communities affected.
        Senator Murray. Mr. Tornquist, would you like to comment on
    Amtrak's need to implement route cuts?
        Mr. Tornquist. Sure.
        There is little secret that there are several routes in
    Amtrak's system that lose substantial amounts of money both in
    total and on a per person, per rider basis. There's only a
    limited amount that Amtrak can do to make those operations more
    efficient. They have a long-term goal, which we would agree to,
    of running an efficient system. Amtrak needs to look at its
    routes in light of the issues Mr. Kummant mentioned. This is
    something the Board has been looking at for the last year.
    Specifically, where does the service make sense, both in terms
    of the transportation standpoint and an economic standpoint?
    Amtrak then should determine where they can augment the service
    cost effectively through corridor route development and where
    they can make a net savings to the company by altering the
    service.
        They have gone through a very deliberative process. We've
    met with their consultants who have done some modeling for
    them. We don't have any problems with the methodology they're
    looking at, and we're eager to see what they come up with.
    Right now we're waiting for Amtrak to figure out what their
    final proposal is going to be and what criteria they are going
    to apply to each route.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Murray. Well, thank you very much.
        And I appreciate all of your testimony. Obviously, our
    committee will be waiting to get our allocation and once again
    looking at the administration's request and trying to figure
    out how we can balance the incredible needs to make sure we
    keep this service running.
        [The following questions were not asked at the hearing, but
    were submitted to the agencies subsequent to the hearing:]
                    Questions Submitted to Alexander Kummant
                  Questions Submitted by Senator Patty Murray
        Question. Can Amtrak really grow ridership over congested
    corridors?
        Mr. Kummant, you have stated that, through the initiation of a
    Federal-State capital grant program, Amtrak will be able to double its
    ridership in the next 15-20 years.
        Realistically, will you be able to achieve that goal if the
    Government and freight railroads don't take a more aggressive posture
    on delivering Amtrak trains on time?
        Answer. Ideally, capital investment and more aggressive on-time
    performance (OTP) measures should go hand-in-hand, in order to improve
    reliability for current and future services. Host railroads are
    responsible for most delays to Amtrak trains--75 percent of minutes-of-
    delay in fiscal 2006, compared to 18.7 percent from Amtrak-related
    causes (mechanical issues, connections, etc.) and 6.3 percent from
    other causes (weather, trespassers, etc.).
        Traffic congestion accounts for just over half of all host-railroad
    delays, i.e., 38.6 percent of all delays to Amtrak trains. While some
    of that could be improved by better dispatching practices, we believe
    most of it arises from too much traffic using too little rail capacity.
    According to the Association of American Railroads, from the time that
    the freight rail industry was deregulated in 1980 through 2005, track-
    miles among the Class I (major) freight railroads decreased 39 percent,
    but traffic (ton-miles) increased by 85 percent and is expected to keep
    growing. In other words, compared to years past, there now is
    significantly more traffic competing for space on fewer miles of track.
    Another 16.9 percent of all delays to Amtrak trains results from track-
    related speed restrictions on host railroads. Targeted infrastructure
    investment will go a long way toward reducing delays due to host
    railroad congestion and track condition.
        While we want to retain and improve the quality of today's long-
    distance train network, the greatest potential for ridership growth
    lies in corridor development. Already, corridors make up a large
    majority of Amtrak's ridership. In fiscal 2006, the Northeast Corridor
    spine accounted for 38.8 percent of the total ridership of 24.3
    million; other short-distance services accounted for 45.8 percent of
    the total, and long-distance services accounted for 15.4 percent.
        Generally, OTP is a greater issue for long-distance trains than it
    is for corridors. In fiscal 2006, where systemwide OTP was 67.8
    percent, it was just 30.0 percent on long-distance trains, with a
    couple, individual services below 10.0 percent. Aside from Northeast
    Corridor services, where OTP was in the 78-86 percent range, OTP on
    short-distance services averaged 67.3 percent. However, there was a
    wide range of results for those services, from 17.0 percent for the
    Carolinian (a 704-mile ``short-distance'' route with a long run on a
    congested CSX line) to 89.7 percent for the Hiawathas (at 86 miles from
    Chicago to Milwaukee, the shortest route).
        As we have said, corridor development will depend on a Federal-
    State partnership for infrastructure. This partnership will lead to
    investment aimed at rolling stock acquisition, station improvements or
    development, signal improvements, track improvements, and track
    capacity expansion, where needed to meet the development objectives of
    each individual corridor. Of those items, the ones involving signals
    and track should be designed and implemented in such a way as to not
    only allow for higher speeds and frequencies, but also to minimize
    conflict with anticipated freight traffic levels. The freight railroads
    will have to be part of this process, so that infrastructure
    improvements meet the needs of all parties involved. If this is done
    successfully, the resulting service should be reliable and attract
    ridership with the aim of doubling our systemwide ridership in the next
    15-20 years.
        Question. Mr. Tornquist included in his testimony a chart
    indicating that Amtrak carried over a cash balance of $215 million into
    2007. That level was well above its cash balance of $75 million carried
    over into 2006, but well below the $247 million it carried into 2005.
    Some people have argued that Amtrak can endure a cut in its subsidy
    because of this $250 million cash balance.
        Mr. Kummant, does this cash balance represent excess funds that the
    corporation does not need? What is the rational for maintaining this
    cash balance?
        Answer. We suggest that a company of the size of Amtrak, with over
    $3 billion per year of cash outlays, and with extraordinary funding
    uncertainties, prudently requires cash working capital of at least $200
    million, the approximate amount in place at the end of fiscal year
    2006. Unlike other companies, Amtrak cannot obtain a short term line of
    credit on which to draw in the event that its operating cash balance is
    insufficient to continue operations. Amtrak's only alternatives are to
    rely on its cash working capital, obtain emergency Federal funding, or
    become insolvent.
        Amtrak's Federal funding requirement has been averaging slightly
    more than $100 million per month. But Amtrak's actual cash usage varies
    widely because of structural reasons like seasonality in revenue,
    capital expenditures, and debt service payments. For example, this past
    January, Amtrak used $177 million of its cash balance because of
    seasonally low revenue and high principal and interest payments.
    Therefore, with a cash balance of $200 million, the Company should be
    able to meet its cash requirements for at least a month; at $100
    million, the Company has 2 to 4 weeks of cash remaining; and lesser
    amounts become critical.
        The risk to Amtrak's cash is increased further by the uncertainties
    in amount and timing of Continuing Resolutions and appropriations as
    well as an unexpected service interruption, economic event, or security
    issue affecting ridership and revenue. These factors are among the few
    events affecting cash flow management that we cannot predict in our
    annual financial planning cycle, though delays to the appropriations
    process are most likely to affect us in the early months of a given
    fiscal year.
                                     ______

                  Question Submitted by Senator Arlen Specter
        Question. Amtrak and the Commonwealth of Pennsylvania recently made
    $145 million worth of improvements to the Keystone Corridor from
    Harrisburg to Philadelphia. Has this investment translated into service
    and revenue improvements?
        If so, in what other corridors might similar investments also
    benefit the corporation?
        Answer. The heart of our Keystone Corridor is the Harrisburg-
    Lancaster-Philadelphia segment. Some Keystone trains also extend beyond
    Philadelphia to New York. At Philadelphia, Keystone passengers also may
    connect to other north-south Amtrak services and to SEPTA and New
    Jersey Transit commuter services.
        Investments in the line that were made jointly by Amtrak and the
    Commonwealth from 2004 through 2006 included conversion of 57 miles of
    track from wood to concrete ties, renewal of 75 miles of track with new
    wood ties, installation of 28 new wayside concrete turnout switches,
    installation of 5 miles of new signal cable, installation of 43
    instrument houses, installation of 26 new breakers, brush and tree
    cutting along 90 miles of track, and improved drainage. Some track work
    has continued into 2007.
        The Keystone Corridor schedules that took effect with our general
    timetable change of October 30, 2006, reflect the improvements that
    were made possible by the joint investment. At that time, Amtrak
    increased weekday train service west of Philadelphia from 11 to 14
    trains each way. We reduced express train travel times from
    Philadelphia to Harrisburg from 120 to 95 minutes. We restored all-
    electric operation of these trains, where we had been running diesel
    service west of Philadelphia for a number of years. Top speeds west of
    Philadelphia were increased from 90 to 110 mph.
        Even with shorter schedules, on-time performance (OTP) has
    improved. For all of fiscal 2006, 83.1 percent of Keystone trains were
    on-time (within 10 minutes). While we had initial delay challenges
    after the new schedule took effect, with Keystone OTP dropping to 65.2
    percent in November 2006, it has since recovered, increasing to 87.2
    percent in April 2007 and 92.3 percent in May 2007.
        Keystone ridership in the first 7 months of fiscal 2007 (October
    2006 through April 2007) was 552,674, an increase of 17.1 percent over
    the same period in fiscal 2006. Ridership in all of fiscal 2006 was
    823,097, but in the current year, at the current rate of growth, could
    surpass 950,000. Revenues so far in fiscal 2007 are $11.5 million, an
    increase of 23.4 percent over the same period in fiscal 2006.
        Comparisons of the Keystone Corridor to others that await
    development can be only approximate due to the unique history of this
    route. Because of infrastructure investments made by the Pennsylvania
    Railroad through the 1930's, the Keystone Corridor was second only to
    the Northeast Corridor in terms of track capacity, electric propulsion,
    top speeds, and other factors. That gave Amtrak and the Commonwealth a
    good base for the improvements that were made after 2002.
        That said, other corridor partnerships under discussion include
    Raleigh-Charlotte ($189 million to double frequencies and cut travel
    time by 15 percent); Chicago-Milwaukee-Madison ($351 million to
    increase Chicago-Milwaukee service and start Milwaukee-Madison
    service); Chicago-St. Louis ($164 million to cut travel time by 15
    percent); Eugene-Portland ($60 million to increase frequencies by 50
    percent); Seattle-Portland ($552 million to increase frequencies by 67
    percent and cut travel time by 5 percent); San Diego-Los Angeles-San
    Luis Obispo ($756 million to reduce travel times by 21 percent); San
    Jose-Oakland-Sacramento ($89 million to reduce travel times by 8
    percent); and Bakersfield-Oakland/Sacramento ($203 million to reduce
    travel times by 11 percent). (Figures from appendix A-21 of Amtrak
    Strategic Plan Fiscal Year 2005-09.)
                                     ______

                 Question Submitted by Senator Pete V. Domenici
        Question. Passenger rail service is important to New Mexico,
    especially to the communities along the Southwest Chief and the Sunset
    Limited lines that depend on its services. For example, the Philmont
    Boy Scout Ranch hosts over 20,000 scouts per year and many arrive via
    Amtrak's Raton stop. Like many other policy makers, I am concerned
    about the continued service to New Mexico and other regions of the
    country. It is my understanding that Amtrak has cut its expenses and
    trimmed its workforce, while achieving increased rider numbers.
        How do we keep Amtrak viable and still have Amtrak provide service
    to rural areas like New Mexico?
        Answer. Though we believe that the greatest potential for growth
    and for Federal-State partnerships lies in expanded corridor services,
    we are committed to retaining a network of long-distance train services
    that connect the corridors and regions of the country. We believe that
    there are opportunities to make further efficiencies and improvements
    to the long-distance services, and at the direction of our Board of
    Directors, we are in the process of evaluating the entire long-distance
    network to look for such opportunities. We will keep all stakeholders,
    including Members of Congress, informed of our findings. However,
    though the make-up of the long-distance network may change somewhat as
    a result of this work, in the end there still will be a long-distance
    network.
        That said, our goal of maintaining a nationwide system of trains
    rests on our ability to provide our services and make various strategic
    changes within the scope of the revenues we earn and the funding we are
    provided. Our funding request for fiscal 2008 will allow us to move
    forward in these areas. We look forward to working both with
    appropriators and authorizers on issues of funding and overall policy.
                                     ______

                 Questions Submitted to Hon. Joseph H. Boardman
                   Question Submitted by Senator Patty Murray
        Question. Can Amtrak Really Grow Ridership Over Congested
    Corridors?
        Mr. Kummant has stated that, through the initiation of a Federal-
    State capital grant program, Amtrak will be able to double its
    ridership in the next 15-20 years. I am concerned that Amtrak will not
    be able to achieve that goal if the Government and the freight
    railroads don't take a more aggressive posture on delivering Amtrak
    trains on time.
        Mr. Boardman, do you have view on that question?
        Answer. Ridership growth is possible. It is all about providing a
    high quality and reliable service that meets the traveler's needs and
    expectations. A high level of on-time performance is an important part
    of that equation. That is why the administration's proposed grant
    program would permit States to fund the elimination of bottlenecks on
    freight railroads that create on-time performance problems for
    passenger trains and capacity constraints for freight trains if the
    freight railroad commits to an enforceable passenger train on-time
    performance of 80 percent or higher.
                                     ______

                  Questions Submitted by Senator Arlen Specter
        Question. What level of funding remains necessary to bring the
    Northeast Corridor to a state of good repair, and when can this be
    accomplished?
        Answer. There are multiple estimates of the cost of returning the
    Northeast Corridor to a state of good repair. That is why I directed
    Amtrak, as a condition of its fiscal year 2006 grant, to undertake a
    comprehensive assessment of NEC capital investment needs in cooperation
    with the States and other users of the rail line. While that effort has
    not moved as quickly as I would have liked, I hope that more reliable
    estimates will be available within the next 12 months.
        Question. Can the development of passenger rail service contribute
    to reducing our Nation's dependency on foreign oil, a goal that was
    emphasized in the President's State of the Union address?
        Answer. Some Amtrak services certainly can contribute to reducing
    our Nation's dependency on foreign oil. The Northeast Corridor, which
    has high load factors and is powered by electricity, is the best
    example. However, this is not true of all of Amtrak's routes. Indeed
    services that involve two locomotives and six cars but have an average
    patronage of 100 passengers or fewer do not represent a particularly
    effective use of petroleum based fuel.
        Question. Similarly, can increased rail service significantly
    reduce highway congestion and automobile emissions?
        Answer. Well-patronized passenger services in relatively short
    intercity rail corridors can contribute to lessening highway
    congestion, but the impact of long distance trains on highway
    congestion and automobile emissions is negligible.
                                     ______

                     Questions Submitted to David Tornquist
                   Question Submitted by Senator Patty Murray
        Question. What is the appropriate working capital level Amtrak
    should have?
        Mr. Tornquist, in your testimony you included a chart indicating
    that Amtrak carried over a cash balance of $215 million into 2007. That
    level was well above its cash balance of $75 million carried over into
    2006, but well below the $247 million it carried into 2005. Some people
    have argued that Amtrak can endure a cut in its subsidy because of this
    $250 million cash balance.
        Mr. Tornquist, what do you think is the appropriate level of cash
    that the company should have on hand at any given time?
        Answer. We believe that Amtrak's fiscal year 2008 appropriation
    could be reduced to create a start of year cash balance of $75 million.
    Amtrak has previously argued that it required a cash balance or working
    capital fund of $250 million. However, Amtrak was willing to increase
    its spending and live with in an end-of-year cash balance of $103.9
    million, an amount not materially different than $75 million. We take
    Amtrak's actions to spend down its cash balance as a better indicator
    than its rhetoric of what constitutes an acceptable cash balance. The
    risk associated with this lower cash balance is minimized by the
    approximately $60 million in unspent Efficiency Grants which can
    provide a further cushion against unforeseen cash flow problems.
    However, in deciding whether to offset Amtrak's subsidy with a portion
    of its cash balance, Congress should consider the likelihood of a labor
    settlement in the near-term and how the associated increased costs
    should be funded.
                                     ______

                  Questions Submitted by Senator Arlen Specter
        Question. Can food and beverage service on Amtrak play a role in
    attracting passengers, thereby offsetting its costs?
        Answer. We believe that intercity rail passengers expect access to
    food service, particularly on long-distance trips. Ridership and
    revenues would undoubtedly drop dramatically if passengers were
    expected to spend 10-12 hours on a train without food. In that context,
    it could be argued that Amtrak's food and beverage service would likely
    attract enough passenger revenue to offset its costs. The same argument
    could be made for other basic services, such as restrooms and running
    water. Few people would ride intercity trains without them, therefore,
    it could be argued that the same passenger revenues are attributable to
    these basic services.
        We are unaware of any proposals to run long distance service
    without providing access to some level of food service. Therefore, the
    comparison of trains with food service to those with no food service
    does not appear to be relevant or meaningful at this time.
        A more relevant, but more difficult question, is whether the cost
    of providing an enhanced food service above a basic level generates
    sufficient revenues from sales and additional ticket revenue to offset
    its fully-allocated costs. Determining whether this was the case would
    require very complex modeling attempt to isolate the revenues derived
    from food and beverage service. We have seen studies that purport to
    address this issue, but have not seen any such studies supported by the
    analysis that would be required to properly answer the question.
        Rather than trying to isolate the revenues related to food service,
    we have recommended previously that Amtrak pilot different levels of
    amenities on its trains, including different food service options, to
    determine which option maximizes net revenues for the train as a whole.
    At the same time, the net revenues from food sales is a reasonable
    measure for Amtrak managers to use to measure the day-to-day
    performance of Amtrak's food and beverage service. It would be
    impractical to try to use models of marginal revenue changes to manage
    food service on a day-to-day basis.
        Question. By granting more decisionmaking authority to States with
    regard to rail service, do we run the risk of developing a patchwork
    system of routes that do not promote connectivity across state borders
    and transportation corridors?
        Answer. The risk of developing a patchwork system of routes that do
    not promote connectivity across State borders and transportation
    corridors by granting more decisionmaking authority to States with
    regard to rail service is minimal. If given the authority to do so,
    States could conceivably choose different operators or service levels
    on segments of multi-State routes, thereby curtailing connectivity.
    However, this presumes a State would actively decide to inconvenience
    its own citizens, which we believe is not likely to happen. States
    already have experience working together through the Federal-aid
    highway program on multi-State surface transportation issues. In the
    near term, Congress is considering proposals that would provide States
    capital grants for corridor development, i.e., routes of up to 500
    miles. These grants would be awarded by the Secretary of Transportation
    based on applications from one State or a group of States. We would
    expect the Secretary to take connectivity into consideration when
    awarding these grants.
                                     ______

                      Question Submitted to Edward Wytkind
                  Question Submitted by Senator Arlen Spector
        Question. What are your unions seeking in their contract
    negotiations with Amtrak?
        Answer. The Transportation Trades Department, AFL-CIO (TTD)
    represents 10 of the 14 unions at Amtrak and a majority of Amtrak's
    nearly 20,000 employees. However, let me clarify that TTD is not the
    collective bargaining representative for these unions nor is it
    directly involved in contract negotiations. Amtrak and its workgroups
    have 24 separate collective bargaining agreements. Some unions
    represent more than one bargaining unit and some unions bargain
    jointly. As you are aware, the collective bargaining process at Amtrak
    is governed by the Railway Labor Act under which contracts do not
    expire, but rather become amendable. A large number of Amtrak's
    employees are working under contracts that have not been updated in
    nearly 8 years.
        With a few exceptions, most bargaining units have been at impasse
    for years. In short, the process for all practical purposes has
    stopped. Employee representatives have been frustrated that Amtrak,
    when it does come to the table, is simply unwilling to negotiate. For
    one union, the Brotherhood of Railroad Signalmen, for example, Amtrak
    has placed the same proposal on the table since negotiations started in
    2000. The company's negotiators have made no meaningful effort to
    engage in good faith bargaining. As a result, the vast majority of
    Amtrak's employees have gone more than 7 years without a general wage
    increase. Meanwhile, Amtrak has found the resources to institute,
    effective June 4, 2007, a 10 percent Premium Pay Plan for managers in
    certain geographic areas and in ``hard-to-fill'' positions. This
    program represents a slap in the face to the rank-and-file employees
    whose needs are being ignored as management employees prosper.
        Other unions have been in mediation for years with no prospects for
    either resolution or release by the National Mediation Board. In
    summary, negotiations are hopelessly deadlocked due mostly to Amtrak
    management's refusal to enter into serious negotiations and its
    tactical decision to use the uncertainty of Federal funding as a
    strategic ploy to evade its obligations to the employees. And
    meanwhile, there is no serious mediation taking place as the NMB
    majority has refused to carry out its duties responsibly.
        As you know, Amtrak employees have played a major role in keeping
    Amtrak running despite anemic Federal investment and continuous
    attempts by this administration to grossly under-fund Amtrak. Amtrak
    CEO Alexander Kummant has conceded that Amtrak workers are paid
    significantly less than their counterparts in the freight and commuter
    industries and that this reality is making it difficult for Amtrak to
    remain competitive in retaining its workforce. In sum, Amtrak workers
    are expecting equity for the years they have put in supporting our
    national passenger railroad without being compensated fairly. Employees
    also are opposed to changes in benefits to the health and welfare
    system. Amtrak's workers intimately understand the budgetary
    constraints under which Amtrak operates and, indeed, it is the driving
    force behind rail labor's collective efforts in favor of Amtrak funding
    year after year. However, Amtrak workers are having a difficult time
    making ends meet. Amtrak workers are highly-skilled and dedicated
    employees who are responsible for the safe transportation of millions
    of Americans nationwide. It is unconscionable that Amtrak refuses to
    negotiate collective bargaining agreements with these workers.
        If you have specific questions about the status of bargaining by
    individual union, please don't hesitate to contact me and I will be
    pleased to put you in contact with the appropriate union officer or
    representative. We greatly appreciate your interest in this area and
    are thankful for your forceful voice in support of Amtrak employees.
                                     ______

                      Questions Submitted to Robert Serlin
                  Questions Submitted by Senator Arlen Specter
        Question. Can you explain the accountability measures that would be
    put in place for the Infrastructure Management Organization under your
    proposal?
        Answer. Under the IMO Plan numerous accountability measures would
    be put in place.
        Safety is first and foremost. The IMO would be a statutory railroad
    subject to all present and future Federal safety laws and regulations.
    The IMO would be subject to enforcement by the Federal Railroad
    Administration.
        The IMO would be required to report annually its financial and
    operating performance to Congress and the Executive Branch in the same
    manner and timeframe as is statutorily required of Amtrak. The IMO's
    and Amtrak's parallel reporting would permit the Government to review
    concurrently and overlay the performance of Amtrak and the IMO. The
    IMO's financial reports would be required to be GAAP compliant and
    audited by an independent certified public accountant.
        To assure Congress and the administration that the IMO is
    fulfilling its annual investment in AOI requirement, the Department of
    Transportation's Inspector General would be designated to oversee and
    certify lease compliance by the IMO. The DOT IG would also have the
    authority to review the IMO's use of Federal funds and compliance with
    Federal laws and regulations.
        The Secretary of Transportation would be required to review and
    approve the IMO's disposal of AOI fixed assets above $500,000 as well
    as approve IMO related-party transactions.
        The IMO's investment plan would be reviewed by the reconstituted
    Northeast Corridor Coordination Board--a body composed of AOI States
    and rail carrier user representatives. The IMO would be obligated to
    publish annually a rolling five-year capital plan that incorporated not
    only the IMO's planned capital expenditures, but also those requested
    by AOI States and users. The Northeast Corridor Coordination Board
    would review and determine that capital expenditure projects are
    integrated and consistent with the balanced transportation needs of the
    region.
        The IMO Plan is fully accountable to labor--both infrastructure and
    non-infrastructure labor.
        Under the IMO plan, the IMO would be required to offer employment
    in seniority order to all Amtrak employees performing infrastructure
    work to be performed by the IMO. The IMO would also be required to
    honor existing collective bargaining agreements for the Amtrak
    employees it hires. Were RIM awarded the right to be the IMO, it would
    resolve infrastructure employees pending section 6 notices by
    withdrawing both Amtrak's health and welfare contribution demand and
    its concessionary rule-change demands, and by negotiating Northeast-
    competitive wage rates and working conditions for those employees to
    whom it offers employment. RIM would pay full back pay and signing
    bonuses (between $10,000 and $25,000 per employee).
        Non-infrastructure labor's pending section 6 notices would be
    partially resolved through mandated arbitration of back pay disputes
    were such disputes not resolved within 6 months of the IMO becoming the
    IMO. Non-infrastructure back pay payments would be funded by the IMO
    escrowing the funds from which Amtrak would meet its back pay
    obligations.
        The IMO Plan would do much to help Amtrak's non-infrastructure
    employees by strengthening Amtrak as the sole national passenger rail
    carrier. Employment at Amtrak would be more secure since Amtrak would
    be more fundable, having been relieved of AOI operating losses.
    Expanded employment opportunities on the IMO and on Amtrak would
    generate more operating, clerical and shop craft employment as
    transportation demand over AOI grew. New jobs would be filled very
    quickly from union training facilities and union operated hiring halls.
    Finally, the IMO Plan is a corridor development model, which can
    increase rail employment throughout country.
        The IMO would also be held fully accountable to repay any
    Government funds made available to it. Prior to the IMO being eligible
    to draw upon a Government loan (``RRIF loan''), the IMO would have to
    furnish an investment grade, third-party, irrevocable full principal
    repayment guarantee that would also function as a risk premium payment.
    The private sector owners of the IMO would be obligated to guarantee
    jointly and severally payment of the RRIF loan interest. The IMO's
    owners would also be required to consolidate fully the financial
    results of the IMO into their public disclosures. Publicly traded
    owners of the IMO would be subject to oversight by the Securities and
    Exchange Commission. Full accountability is ultimately derived from the
    estimated $2 billion in equity the owners of the IMO would be required
    to invest in the IMO and the non-transferability of IMO ownership for
    the full 50-year concession-term. The IMO's investors and owners will
    have to believe in the long-term competitiveness of the rail mode.
        The IMO, as a railroad, would be subject to Surface Transportation
    Board jurisdiction and be required to deal fairly with the carriers
    operating over AOI. In the event of an operating or compensation
    dispute, the IMO would be subject to orders issued by the Board.
        Question. Would service under your proposal be consistent with the
    level of service we see today?
        Answer. The IMO Plan leaves the transportation service provider
    (``TSP'') component of Amtrak untouched and, as a result of the
    transfer of $2 billion to it and assumption of up to $750 million in
    debt from it, significantly better capitalized than today. Amtrak's
    train service levels would remain as they were prior to the adoption of
    the IMO Plan. Amtrak would continue to operate its Northeast Corridor
    and national network of intercity trains, subject only to existing
    agreements and contracts.
        TSPs operating over AOI when the IMO Plan takes effect would be
    granted ``vested carrier'' status. This would entitle each of them to
    current service pattern protections on AOI. Amtrak and commuter
    carriers would be encouraged to improve service levels by offering more
    ``one-seat'' rides. Commuter carriers could do this by combining
    operations and operating outside their historic service areas. An
    example of this would be SEPTA and New Jersey Transit pooling their
    equipment and operating New York/Philadelphia without requiring
    passengers to change trains at Trenton.
        Amtrak's operating rights over the freight carrier network are not
    altered, and are subject to existing and future contracts that Amtrak
    may negotiate.
        Key to the success of the IMO Plan is improving the Northeast
    Corridor (``NEC'') and increasing its capacity through investments of,
    were RIM to be selected the IMO, more than $1 billion annually. These
    investments would enable Amtrak, the commuter carriers and new
    intercity TSPs to expand transportation offerings and increase service
    levels. This can only be achieved by an independent infrastructure
    manager actively promoting new options. With an upgraded infrastructure
    and reduced travel times, the railroad mode will be able to increase
    its market share as new services are created, which are time-
    competitive with highway and aviation.
        The NEC is the most densely populated, most affluent corridor in
    the world--bar none. RIM believes that the only way that the NEC can be
    made to prosper is by increasing the level of service.

                              SUBCOMMITTEE RECESS

        Senator Murray. So, thank you to all of you. This
    subcommittee will stand in recess until Thursday, March 8, when
    we will take in testimony on the administration's recent
    announced plans for cross-border trucking with Mexico.
        [Whereupon, at 12:05 p.m., Wednesday, February 28, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

    TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES
                      APPROPRIATIONS FOR FISCAL YEAR 2008

                                  ----------

                            THURSDAY, MARCH 15, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:30 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Patty Murray (chairman) presiding.
        Present: Senators Murray and Bond.

                  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                         Federal Housing Administration

    STATEMENT OF HON. BRIAN D. MONTGOMERY, ASSISTANT
                SECRETARY FOR HOUSING AND FEDERAL HOUSING
                COMMISSIONER
    ACCOMPANIED BY:
            HON. KENNETH M. DONOHUE, INSPECTOR GENERAL, OFFICE OF INSPECTOR
                GENERAL
            WILLIAM B. SHEAR, DIRECTOR, FINANCIAL MARKETS AND COMMUNITY
                INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE

                   OPENING STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. This subcommittee will come to order. This
    morning, this subcommittee will hear testimony on the Federal
    Housing Administration. We will discuss the overall solvency of
    its mortgage lending program as well as the administration's
    proposal for reforming the FHA.
        I am pleased that our Federal Housing Commissioner, Brian
    Montgomery, is here. He is joined by HUD Inspector General
    Kenneth Donahue and witnesses from the GAO, Mortgage Bankers
    Association and the National Association of Realtors.
        Over the last 73 years of its existence, the FHA has served
    as a powerful engine to expand home ownership across the
    country. It has played a critical and essential role in
    providing access to capital for low-and-moderate income
    families. Most recently, however, the FHA has come to look more
    and more like an anachronism. Critics have said that they are
    out of touch with the marketplace, their mortgage products are
    outdated, they are a technological dinosaur and they are hard
    to do business with.
        In recent years, the FHA has captured a smaller and smaller
    percentage of the overall mortgage market and its decline has
    been a rapid one. In my State, we have the Washington State
    Housing Finance Commission, whose mission, like the FHA's, is
    to serve low-and-moderate income homebuyers. The Commission's
    Executive Director recently told me that in my State, the FHA's
    role in his efforts have been turned upside down in just the
    last 10 years. A decade ago, FHA covered 80 percent of the loan
    activity in his agency. Today, it only covers 20 percent.
        When you look at all mortgage lending, FHA now represents
    roughly 3 percent of total mortgage volume nationwide. Now,
    some observers like to argue that whenever the private sector
    can replace the government in providing essential services,
    it's a good thing. In this case, I'm not so sure.
        The FHA's loan products have fallen out of favor in part
    because private lenders have aggressively marketed subprime
    loans to high-risk borrowers. Some of these lenders have used
    temporary rate discounts or teaser rates, to push low-income
    borrowers into exotic loans with high fees and penalties that
    they can barely understand, much less afford. Some of these
    lenders have been boosting loan volume by taking credit
    standards to new lows and demanding almost no proof of income
    or credit worthiness.
        As a result, we are now seeing rapidly rising foreclosures
    and some of the most aggressive subprime lenders are shuttering
    their operations. Just 2 days ago, the Mortgage Bankers
    Association released their updated survey on mortgage
    delinquencies. It revealed that foreclosures of subprime
    mortgages had reached a record high. The share of subprime
    borrowers making late payments rose to more than 13.3 percent.
        That same day, the second largest subprime mortgage lender,
    New Century Financial, was de-listed from the New York Stock
    Exchange and announced that it had received criminal inquiries
    from both the Securities and Exchange Commission and State
    regulators. Those announcements sent the stock market into a
    tailspin. By the end of the day, the Dow Jones Industrial
    Average had dropped nearly 250 points or almost 2 percent.
    Financial stocks dropped even faster, falling almost 3.3
    percent for the day.
        The collapse of the subprime mortgage market has elicited
    warnings from Federal Reserve Board Chairman. Some economists
    have even predicted that the ripple effects of this collapse
    could eventually trigger a recession. These dire predictions
    should worry us all but should surprise no one.
        It is estimated that one in five new mortgages written in
    recent years fell into the subprime category--one in five. This
    year alone, some $1.2 trillion in mortgages will have their
    interest rate reset upward. Some borrowers took out these
    adjustable rate loans banking on the fact that they would have
    an opportunity to either refinance their loan or if necessary,
    sell their home. Now the prepayment penalty is built into many
    of these loans as well as the overall downturn in home prices,
    means these opportunities have disappeared.
        Many economists have said that our mortgage markets are in
    for a very rough road ahead. There is concern that this market
    upheaval could trigger a market over-reaction, where the
    availability of mortgage loan capital for working families
    tightens dramatically or just evaporates. If the mortgage
    market overreacts and working families need help, they may have
    to rely on the FHA. That means we need to make sure the FHA is
    strong and effective.
        Today, the FHA's overall financial picture is weak. Absent
    the enactment of reform legislation this year, we are told that
    for the first time in its history, the FHA could require a
    direct appropriation to subsidize loan operations. This
    subcommittee could be required to appropriate $143 million in
    2008, just to keep FHA's loan activities in the black. That is
    $143 million we won't be able to put toward section 8
    recipients, homeless programs and other HUD programs serving
    needy citizens.
        Currently, a growing percentage of the FHA's loan volume is
    not for traditional home mortgages for new homeowners. Rather,
    an increasingly popular FHA product appears to be reverse
    mortgages for elderly homeowners. This is a worthwhile program
    that keeps elderly families with fixed incomes in their homes.
    But getting younger Americans into their first home has always
    been central to FHA's historical mission. And in these
    tumultuous times, I think we need to work to make sure that the
    FHA can once again be relevant in that market.
        This subcommittee continues to receive reports from the
    Government Accountability Office and the Inspector General
    indicating continuing problems with the currency of FHA's data,
    the sufficiency of its underwriting and the agency's
    technological obsolescence. The Bush administration put forward
    a reform proposal for the FHA in the last Congress. We expect
    it to be resubmitted in this Congress. Enactment of this FHA
    reform, we are told, should eliminate the need for any
    appropriated subsidy and make the FHA more competitive with the
    private market.
        But this subcommittee and the rest of Congress need to look
    at these proposals very carefully. We need to make sure that we
    are not encouraging FHA to engage in some of the same high-
    risk, high-cost lending practices that are now upsetting the
    markets and putting relatively new homeowners out of their
    homes. The FHA is the taxpayers' mortgage lender. As such, it
    has an obligation to protect consumers. The FHA has specific
    statutory mandates to employ measures to keep families in their
    homes. These are requirements and obligations that private
    lenders do not have.
        If the recent upheaval in mortgage lending means that
    private loan capital dries up for our working class families,
    we must make sure that the FHA is poised to keep the dream of
    home ownership alive. But the FHA must re-establish itself as
    America's mortgage lender, not by imitating the marketing and
    underwriting practices of New Century Financial. Rather, they
    must work to ensure that working families are getting into
    homes with loans that they can fully understand and afford.
        With that, I would like to recognize my ranking member,
    Senator Bond.

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Thank you very much, Madam Chair and a warm
    welcome to our witnesses for this important hearing on the FHA.
    We are focused primarily today on the single-family insured
    programs under the Mutual Mortgage Insurance Fund.
        Madam Chair, you've done a very good job of outlining all
    of the challenges and the problems but since this is the
    Senate, it's not enough that you have said it. I'm going to say
    it, too. So if you'll bear with me.
        As I said, we have a wide cross-section of witnesses who I
    expect can give us their views and positions, which should help
    provide a foundation for meaningful and comprehensive FHA
    reform. FHA has been enormously successful in assisting
    millions of Americans realize the dream of home ownership and I
    credit FHA's professional workforce and its leadership for
    these accomplishments.
        However, FHA's history is also marked by longstanding
    challenges in balancing risk against expanding home ownership,
    especially for low income and first time homebuyers. Not too
    long ago, FHA was operating at record profit levels for the
    Federal Government. Now, FHA is at a serious crossroads and the
    question today is, how do we move forward in the best interests
    of the American taxpayer and those who wish to pursue home
    ownership?
        In fairness, the Appropriations Committee should follow the
    lead of the Banking Committee in addressing FHA. Nevertheless,
    our committee has a substantial interest in the financial
    stability and solvency of FHA, since potential cost savings
    from FHA reform legislation could be used to support funding
    the needs of a number of popular housing programs.
        In fact, the committee has been instrumental in some of the
    most recent significant FHA legislative changes, from raising
    the loan limits in 1988, which this committee did, when I was
    chair and working with Senator Mikulski on the VA/HUD
    Subcommittee, to increasing access to the reverse mortgage
    program and we've been able to reinvest those cost savings from
    the reforms to address other critical housing needs.
        On the other side, if FHA needs an appropriation, that will
    take away from some of our ability to fund other needed housing
    assistance programs. Regardless of the outcome, we have to find
    a way to make these programs work and fund them adequately.
        There are also a number of philosophical and practical
    issues surrounding FHA reform. We must consider to what extent
    FHA is still relevant or needed in the home ownership
    marketplace. If needed and relevant, Congress must consider how
    to ensure it can become and continue to be a viable player in
    the marketplace.
        In addition to its loan products, we should examine changes
    to FHA's structure so it has the tools to operate competitively
    and efficiently as any other large financial institution. For
    example, I'm interested in converting FHA into a quasi-
    governmental entity so that it can hire and retain highly
    skilled people and it can keep pace with technological
    advances.
        Finally, we must examine whether FHA can properly balance
    the risks and benefits of home ownership so that the interest
    of the borrower and the American taxpayer are adequately
    protected. It's clear that something must be done, since FHA
    seems to be cracking. In recent years, FHA has been plagued by
    rising default rates, higher than expected program costs and a
    sharp decline in program participation. In fact, the Mortgage
    Bankers Association's most recent survey reported record
    delinquency rates for FHA loans.
        More disturbing is MBA's finding that FHA delinquency rates
    were similar, if not higher, than subprime loans. Further,
    FHA's share of the single-family market dropped by 40 percent
    in fiscal year 2005, with it's overall market share dropping
    from 12 percent in fiscal year 2002 to less than 4 percent in
    2006 and this decline occurred during a period when overall
    home sales were increasing.
        To be blunt, in every HUD budget hearing over the last few
    years, I have raised concerns about the viability and future of
    FHA. Nevertheless, it has been business as usual and Congress
    was advised that the FHA's future was bright. But the facts
    obviously indicate otherwise. The situation is now so dire that
    without any significant changes and reforms, FHA's MMI fund is
    projected to operate at a net loss in 2008, requiring a
    positive credit subsidy--a direct appropriation from this
    committee, for the first time in history.
        This would be tragic, since other HUD programs are already
    being severely squeezed by budget constraints. The budget
    request, however, does not propose any appropriation to cover
    the positive credit subsidy and instead, the FHA Commissioner
    will raise premiums to ensure FHA's solvency. HUD's hope for
    improving FHA's long-term health is tied to the proposed reform
    legislation, which is assumed in the administration's 2008
    budget request. It's always a risky matter to assume that
    Congress will get something done. That's our problem, not
    yours. But it is a problem for all of us.
        HUD expects the legislation will grow FHA's receipts by
    increasing its mortgage loan limits as well as by implementing
    a new risk-based pricing and flexible down payment system.
    HUD's optimism depends on its ability to implement quickly and
    effectively the legislation. As we know, HUD does nothing
    quickly, since most proposals get caught up in an inflexible
    and multi-layered bureaucracy that can take years to act and
    that, again, is demonstrated by past experience.
        To me, the most troubling provision is the zero down
    payment program. This could pose substantial risk to the MMI
    fund because these homebuyers have no financial stakes in their
    homes and have little financial ability to pay for any big
    ticket repair item, such as a failed furnace or a leaky roof.
    Historically, FHA suffered substantial losses in the late
    1980's due to defaults by families with high loan-to-value or
    LTV ratios. Not only did the practice of high LTV loans damage
    the credit-worthiness of families who defaulted on their
    mortgages but equally troubling, as again our former committee
    colleague, Senator Mikulski pointed out, the defaults drove
    down the value of other housing in the neighborhood and
    transformed the neighborhoods into severely distressed and
    blighted areas. Sadly, some of these neighborhoods still suffer
    from those past mistakes.
        Many in Congress support the administration's proposal but
    I question the practical impact of these proposals since they
    do not appear to address adequately the financial solvency of
    FHA or its underlying operational problems. Providing FHA with
    new loan products will have questionable impact since FHA
    continues to struggle in managing risk and ensuring
    accountability for its existing programs.
        But don't just take that from me. Take this from Congress's
    official budget scorekeeper, the Congressional Budget Office.
    CBO last year estimated FHA's legislative reform package would
    result in a cost savings of about $2.3 billion over 5 years.
    However, about $2.2 billion or 95 percent of those savings were
    attributed to what is basically an accounting maneuver. Moving
    the successful FHA program, the home equity conversion mortgage
    or reverse mortgage program, from the GI/SRI fund account to
    the MMI fund account. Now, back when I used to play sports, we
    were always on the lookout for some guy who would change the
    score on the scorebooks when it wasn't that way in the field.
    We used to call that pencil-whipping and I am not a golfer but
    I understand that sometimes occurs in golf. Well, to me, this
    is the equivalent of pencil-whipping in government accounting
    and I have a minimum amount of high enthusiasm for that. That
    does not meet the ``show me'' test for Missouri.
        The key elements of the administration's reform package,
    increasing loan limits and implementing a new risk based
    pricing system, will not significantly increase FHA's business
    and will not result in significant cost savings, according to
    CBO. Preliminary estimates of CBO's updated analysis will show
    almost no cost savings from these provisions. Frankly, we're
    facing a positive credit subsidy mainly due to FHA's self-
    inflicted wounds.
        The GAO's testimony indicates that a large factor in the
    FHA recent financial problems is due to high claim and loss
    rates for seller financed down payment assistance loans, many
    of which were financed by nonprofit organizations. Thankfully,
    the Internal Revenue Service issued a ruling last May that may
    stem this practice. IRS is examining 185 of these organizations
    on their 501(c)3 status but I strongly urge FHA to take its own
    actions in addressing this matter.
        I also remind you that this down payment practice is
    similar and is identical in practical impact to the zero down
    payment proposal where the homeowner has no real stake in his
    or her new home. There is a history lesson to be learned here
    and I surely hope we've learned from our mistakes.
        I trust this hearing is just the beginning of a real debate
    on FHA reform. If we do reform and revitalize FHA, we must
    fully understand the financial risks of any legislation as well
    as understand what steps HUD has taken and plans to take to
    reduce the risk of fraud and abuse in its FHA mortgage
    programs.
        I thank you for your tolerance in letting me get it off my
    chest and I return to the chair.
        [The statement follows:]
               Prepared Statement of Senator Christopher S. Bond
        Good morning and thank you, Madame Chair, for calling this
    important hearing on the Department of Housing and Urban Development's
    (HUD) Federal Housing Administration (FHA). Today, we primarily are
    focused on FHA's single-family programs insured under the Mutual
    Mortgage Insurance (MMI) Fund. This is a timely hearing given the
    declining state of FHA and the recent woes in the mortgage market
    driven by the crash of the subprime market.
        We are fortunate to have a broad range of witnesses before us
    today. I expect to hear a wide variety of views and positions, which
    should help provide a foundation for meaningful and comprehensive FHA
    reform.
        FHA has been enormously successful in assisting millions of
    Americans realize the dream of homeownership and I credit FHA's
    professional workforce and its leadership for these accomplishments.
    However, FHA's history also is marked by long-standing challenges in
    balancing risk against expanding homeownership, especially for low-
    income and first-time homebuyers. Not too long ago, FHA was operating
    at record profit levels for the Federal Government. Now, FHA is at a
    serious crossroads and the question today is how do we move forward in
    the best interests of the American Taxpayer and those who still wish to
    pursue homeownership?
        In fairness, the Appropriations Committee should follow the lead of
    the Banking Committee in addressing FHA. Nevertheless, our committee
    has substantial interest in the financial stability and solvency of FHA
    since potential cost savings derived from FHA reform legislation could
    be used to support the funding needs of a number of popular housing
    programs. In fact, this committee has been instrumental in some of the
    most recent significant FHA legislative changes--from raising the loan
    limits in 1998, which I did as chair of the VA-HUD Subcommittee, to
    increasing access to the reverse mortgage program--and we have
    reinvested the cost savings from those reforms to address other
    critical housing needs. Regardless of the outcome of FHA reform
    legislation, we must find a way to fund adequately these programs.
        There also are a number of philosophical and practical issues
    surrounding FHA reform. We must consider to what extent FHA is still
    relevant or needed in the homeownership marketplace. If needed and
    relevant, Congress should consider how to ensure it can become and
    continue to be a viable player in the marketplace. In addition to its
    loan products, we should examine changes to FHA's structure so that it
    has the tools to operate competitively and efficiently as any other
    large financial institution. For example, I am interested in converting
    FHA into a quasi-governmental entity so that it can hire and retain
    highly-skilled people and it can keep pace with technological advances.
    Finally, we must examine whether FHA can properly balance the risks and
    benefits of homeownership so that the interests of the borrower and the
    American Taxpayer are adequately protected.
        It is clear that something must be done since the FHA seems to be
    cracking. In recent years, FHA has been plagued by rising default
    rates, higher than expected program costs, and a sharp decline in
    program participation. In fact, the Mortgage Bankers Association's most
    recent survey reported record delinquency rates for FHA loans. More
    disturbing is MBA's finding that FHA delinquency rates were similar if
    not higher than subprime loans! Further, FHA's share of the single
    family market dropped by 40 percent in fiscal year 2005 with its
    overall market share dropping from 12 percent in fiscal year 2002 to
    less than 4 percent in fiscal year 2006. And this decline occurred
    during a period when overall home sales were increasing.
        To be blunt, in every HUD budget hearing over the last few years, I
    have raised concerns about the viability and future of FHA.
    Nevertheless, it has been business as usual and the Congress was
    advised that FHA's future was bright. But the facts obviously indicate
    otherwise. The situation is now so dire that without any significant
    changes and reforms, FHA's MMI Fund is projected to operate at a net
    loss in fiscal year 2008, requiring a positive credit subsidy--meaning
    a direct appropriation--for the first time in history. This would be
    tragic since other HUD programs are already being severely squeezed by
    budget constraints. The budget request, however, does not propose any
    appropriation to cover the positive credit subsidy and instead, the
    Commissioner will raise premiums to ensure FHA's solvency.
        HUD's hope for improving FHA's long-term health is tied to proposed
    reform legislation, which is assumed in the administration's fiscal
    year 2008 budget request. HUD expects this legislation will grow FHA
    receipts by increasing its mortgage loan limits as well as by
    implementing a new risk-based pricing and flexible down-payment system.
    HUD's optimism depends on its ability to implement quickly and
    effectively the legislation. As we know, HUD does nothing quickly since
    most proposals get caught up in an inflexible and multi-layered
    bureaucracy that can take years to act.
        The most troubling provision is a new zero-down-payment program.
    This could pose substantial risks to the MMI Fund because these
    homebuyers have no financial stake in their homes and have little
    financial ability to pay for any big ticket repair item such as a
    failed furnace or a leaky roof. Historically, FHA suffered substantial
    losses in the late 1980s due to defaults by families with high loan-to-
    value (LTV) ratios. Not only did the practice of high LTV loans damage
    the creditworthiness of families who defaulted on their mortgages but,
    equally troubling, the defaults drove down the value of other housing
    in the neighborhood and transformed the neighborhoods into severely
    distressed and blighted areas. Sadly, some of these neighborhoods still
    suffer from those past mistakes.
        Many in Congress support the administration's proposals but I
    question the practical impact of these proposals since they do not
    appear to address adequately the financial solvency of FHA or its
    underlying operational problems. Providing FHA with new loan products
    will have questionable impact since FHA continues to struggle in
    managing risk and ensuring accountability for its existing programs.
    But don't just take this from me. Take this from Congress's official
    budget scorekeeper, the Congressional Budget Office (CBO). Last year,
    the CBO estimated FHA's legislative reform package would result in a
    cost savings of about $2.3 billion over 5 years. However, about $2.2
    billion or 95 percent of the savings were attributed to what is
    basically an accounting maneuver--moving the most successful FHA
    program, the Home Equity Conversion Mortgage or ``reverse'' mortgage
    program from the GI/SRI Funds account to the MMI Fund account.
        The key elements of the administration's reform package--increasing
    loan limits and implementing a new risk-based pricing system--will NOT
    significantly increase FHA's business and will NOT result in
    significant cost savings according to CBO. Preliminary estimates of
    CBO's updated analysis will show almost NO cost savings from these
    provisions.
        Frankly, we are facing a positive credit subsidy mainly due to
    FHA's self-inflicted wounds. The GAO's testimony indicates that a large
    factor in FHA's recent financial problems is due to high claim and loss
    rates for seller-financed down-payment assistance loans--many of which
    were financed by non-profit organizations. Thankfully, the Internal
    Revenue Service (IRS) issued a ruling last May that may stem this
    practice. IRS is examining 185 of these organizations on their
    501(c)(3) status but I strongly urge FHA to take its own actions in
    addressing this matter. I also remind you that this downpayment
    practice is similar to the zero down-payment proposal where the
    homeowner has no real stake in his new home. There is a history lesson
    to be learned here and I strongly hope we will have learned from our
    mistakes.
        I trust this hearing is just the beginning of a real debate on FHA
    reform. If we do reform and revitalize the FHA, we must fully
    understand the financial risks of any legislation as well as understand
    what steps HUD has taken and plans to take to reduce the risk of fraud
    and abuse in its FHA mortgage programs.
        Thank you, Senator Murray.

        Senator Murray. Thank you very much, Senator Bond.
        I want to turn to our witnesses. Welcome all of you today.
    Thank you so much for coming and giving us your input today. We
    have in front of us, Brian Montgomery, who is the Assistant
    Secretary for Housing; Kenneth Donohue, the Inspector General
    from the Department of Housing and Urban Development; William
    Shear, who is Director of Financial Markets and Community
    Investment with GAO; JoAnne Poole, with the National
    Association of Realtors; and John Robbins with the Mortgage
    Bankers Association. Welcome, all of you. We would ask that
    each one of you limit your remarks to 5 minutes. I will let you
    know when the time is up. All of your testimony will be
    submitted for the record. We all have it and we will make sure
    all of our committee members have it as well. So we will be
    limiting you to 5 minutes so that we can get to our questions
    and answers today.
        Mr. Montgomery, we will begin with you.

                     STATEMENT OF HON. BRIAN D. MONTGOMERY

        Mr. Montgomery. Thank you, Chairwoman Murray and ranking
    member Bond for inviting me here today. Our hard work on FHA
    reform during the 109th Congress paid off to the tune of 107
    co-sponsors, nearly evenly split from both sides of the aisle,
    I might add in a resounding 415 to 7 vote on the floor of the
    House as well as a separate 412 to 4 vote on the manufactured
    housing reforms.
        Keeping that in mind, I would like to emphasize that our
    priorities for FHA legislation have not significantly changed
    from last year. As was our goal 1 year ago, we are striving to
    provide lower income families safe, secure home ownership
    opportunities. The simplicity lies with our mission, to provide
    underserved Americans a safe housing product at a fair price.
    As this committee is well aware, many first-time and minority
    homebuyers face significant challenges when trying to purchase
    a home. In recent years, such difficulties have resulted in
    many of these individuals assuming risky, adjustable rate,
    subprime loans.
        The impact on African American and Latino borrowers has
    been especially profound. For instance, according to the 2004
    HUMDA data, 40 percent of African Americans and 23 percent of
    Latinos pay an interest rate 3 percentage points higher than
    the market rate. When these homebuyers signed off on their
    loans, the built-in resets and rate increases seemed like a
    lifetime away. Today, however, many of these borrowers face a
    different reality.
        According to mortgage strategists, some $2 trillion of U.S.
    mortgage debt or about a quarter of all mortgage loans are due
    for interest resets in 2007 and 2008. While some borrowers will
    make the higher payments, many will struggle.
        The second component to our approach is that it is
    comprehensive. In light of recent housing market shifts and the
    departure of a strong subprime presence, due in large part to
    the resets I just mentioned, many lending institutions are
    simply turning their backs on lower income borrowers.
        And just as the national housing market is tightening, so
    too are borrower requirements. In order to offset this
    tightening of credit, there needs to be a mortgage alternative,
    which will provide a wide slough of borrowers and
    simultaneously provide them with the loan options they require
    and that is a new and invigorated FHA.
        As I've already mentioned, the changes we are proposing are
    not new. For one, we're proposing to eliminate our complicated
    down payment formula, our 3 percent minimum cash investment and
    before the rest of the market began offering low down payment
    loans, we were the best option for first time homebuyers
    because we required only a minimal down payment. But as many of
    you are aware, the market passed FHA by and as reported by the
    National Association of Realtors, last year 43 percent of first
    time homebuyers purchased their homes with no down payment. Of
    those who did put money down, the majority put down 2 percent
    or less.
        The down payment is the biggest barrier to home ownership
    in this country, especially for lower income families. But we
    have no way to address that barrier without changes to our
    statute. The FHA Modernization Act would permit borrowers to
    choose how much to invest, from almost no money down to 1 or 2
    or even 10 percent. The bill also provides FHA the flexibility
    to set the insurance premiums commensurate with the risk of a
    loan. We would charge lower credit risk borrowers a lower
    premium than they would get today and higher credit risk
    borrowers, many of whom we are unable to reach today, would be
    charged a slightly higher premium. In so doing, we could reach
    deeper into the pool of prospective borrowers while protecting
    the financial soundness of the MMI fund.
        A slightly higher premium would increase a borrower's
    monthly payment only minimally. For example, the average FHA
    loan in 2006 is only $128,000. On a monthly basis, this loan
    would cost the borrower $7.96 at 1 percent, $16 at 2 percent
    and only $24 at 3 percent. Clearly, this high premium is still
    affordable.
        Now, compare this modest premium to the average subprime
    loan made on a $225,000 home purchase and the numbers become
    far more meaningful. On average, subprime borrowers pay an
    interest rate three points higher than conventional borrowers
    and this rate hike translates into an additional $300 per
    month, which is $137,000 over the life of a loan.
        Another piece of the legislation I'd like to mention is the
    proposed increase to our loan limits. By increasing the loan
    limit to 65 percent and 100 percent of the conforming loan
    limit, we would once again be a player in high cost states,
    regions that have previously been out of play, such as the
    entire State of California and most of the Northeast.

                               PREPARED STATEMENT

        What's more, raising the floor to 65 percent of the
    conforming loan limit has the added benefit of again giving
    families better access to newly constructed housing, which is
    on average, more costly.
        I look forward to answering your questions. Thank you.
        [The statement follows:]
                 Prepared Statement of Hon. Brian D. Montgomery
        Thank you Chairwoman Murray and Ranking Member Bond for inviting me
    to testify on the administration's proposed FHA Modernization. We plan
    to submit legislation soon that would implement the proposals included
    in the 2008 budget.
        We all worked hard in the 109th Congress with many of you here
    today, and our message was well received. I hope our collaborative
    efforts on behalf of low- and moderate-income families can be a model
    for the 110th Congress.
        As you are all aware, the Federal Housing Administration was
    created in 1934 to serve as an innovator in the mortgage market, to
    meet the needs of citizens otherwise underserved by the private sector,
    to stabilize local and regional housing markets, and to support the
    national economy. This mission is still very relevant, perhaps now more
    so than ever.
        Moreover, the FHA model represents the very best of what a
    government working with the private sector can and should do. Since its
    inception, FHA has helped more than 34 million Americans become
    homeowners. By operating through a private sector distribution network,
    FHA efficiently reaches families in need of safe and affordable home
    financing. Simply put, FHA insurance protects lenders against loss,
    enabling these private sector partners to offer market-rate mortgages
    to homebuyers who would otherwise remain unserved or underserved.
        FHA also protects the homebuyer. FHA offers foreclosure prevention
    alternatives that are unparalleled in the industry. In fiscal year 2006
    more than 75,000 FHA insured borrowers facing serious default were able
    to retain homeownership through FHA's toolbox of foreclosure prevention
    options. In an environment of increasing defaults, FHA's foreclosure
    rate actually decreased last year. This protection against foreclosure
    is good for families and good for communities. It also resulted in $2
    billion in loss avoidance for the Insurance Fund, which illustrates our
    commitment to sound financial management.
        We believe that FHA should continue to play a key role in the
    national mortgage market and I'm here today to make the case for
    changes to the National Housing Act that will permit us to continue to
    fulfill our critical mission.
        Allow me to explain. In recent years, FHA's outdated statutory
    authority has left the agency out of synch with the rest of the lending
    industry. Over the last decade, the mortgage industry transformed
    itself, offering innovative new products, risk-based pricing, and
    faster processing with automated systems. Meanwhile, FHA continued to
    offer the same types of products with the same kinds of pricing,
    becoming less attractive to lenders and borrowers alike.
        As a result, FHA's volume has dropped precipitously in housing
    markets all across the Nation. For example, in Chairwoman's Murray's
    home State of Washington, FHA's volume has dropped from 16,806 loans in
    2000 to 6,477 loans in 2006 (a decline of 61 percent or almost $1.2
    billion). For Ranking Member Bond, during that same time period, FHA's
    volume in Missouri dropped from 15,172 to 8,979 loans (a decline of 41
    percent or $262 million).
        But the most troublesome statistic of all comes from Senator
    Feinstein's home State of California. There, FHA saw its volume drop
    from 109,074 in 2000 to just 2,599 in 2006--an astonishing decline of
    98 percent in just 6 years.
        These statistics suggest that tens of thousands of low- and
    moderate-income families who would have chosen FHA turned to
    alternative methods of mortgage finance. While many of them were well-
    served, some were not and turned to expensive and sometimes risky
    exotic loans. We see today the unfortunate outcomes such families
    across the Nation are experiencing.
        To offer a better and more attractive mortgage product, over the
    last 18 months we have made significant administrative changes to FHA,
    streamlining and realigning operating procedures. While these changes
    are good and were long overdue, they are not enough, a point our
    industry partners have clearly conveyed to us and to you. That is why
    last year FHA requested that Congress amend the National Housing Act to
    give it the flexibility it needs to fulfill its original mission in
    today's ever changing marketplace.
        As the dynamic mortgage market passed FHA by, many homebuyers,
    especially those living in higher cost States such as California, New
    York, and Massachusetts, to name a few, purchased mortgage products
    with conditions and terms they would not be able to meet.
        Some homebuyers turned to high-cost financing and nontraditional
    loan products to afford their first homes. While low initial monthly
    payments may have seemed like a good thing at the time, the reset rates
    on some interest-only loans are substantial and many families have been
    and will continue to be unable to keep pace when the payments increase.
    In addition, prepayment penalties often times make refinancing cost-
    prohibitive. According to Mortgage Strategist, more than $2 trillion of
    U.S. mortgage debt, or about a quarter of all mortgage loans
    outstanding, is due for interest rate resets in 2007 and 2008. While
    some borrowers will make the higher payments and many others will
    refinance, some will struggle and some will be forced to sell or lose
    their homes to foreclosure. I'm sure it comes as no surprise to the
    people in this room that the foreclosure rate for subprime loans is
    higher than that of FHA loans. And I think we can all agree that
    foreclosures are bad for families, bad for neighborhoods, and bad for
    the economy as a whole.
        In the context of this economic environment, we see FHA
    Modernization as part of the solution. FHA reform is designed to
    restore a choice to homebuyers who can't qualify for prime financing
    and more options for all potential FHA borrowers.
        Moreover, the FHA bill proposes changes that will strengthen FHA's
    financial position, improving FHA's ability to mitigate and compensate
    for risk. The proposed changes would permit FHA to operate like every
    other insurance company in the Nation, pricing its products
    commensurate with the risk, as opposed to having some clients pay too
    much and some too little. Imagine if a car insurance company charged
    all clients the same premium--the 17-year-old teenager and a 40-year-
    old adult would pay the same rate. Is that fair? With a blended rate,
    those who know they're paying too much switch to another insurance
    company. That leads to a portfolio that is increasingly lopsided: too
    many riskier borrowers, too few safer borrowers, and collectively poses
    greater risk to an insurance fund. This scenario, known as adverse
    selection is exactly what happened to FHA over the last decade. Those
    who were lower credit risks went elsewhere. The premium changes
    proposed in the administration's proposal will restore balance to the
    FHA funds, providing appropriate levels of revenue to operate in a more
    fiscally sound manner.
        While we are on the topic of the soundness of the insurance fund, I
    am proud to report that the OIG found no material weaknesses in its
    fiscal year 2006 audit of the FHA, and that in January 2007, the GAO
    removed FHA's single family mortgage insurance programs from its high
    risk list. Both of these developments reflected improvements that HUD
    has made in recent years in its management of property disposition
    contractors, its oversight of lenders, its implementation of a mortgage
    scorecard, and its ability to predict claims and estimate credit
    subsidy costs.
        I know my introduction was lengthy, but I want you to understand
    how important FHA reform really is--for FHA, for the homebuyers we
    serve, and for the industry as a whole. FHA's private sector partners--
    the lenders, the realtors, the brokers, the home builders--want to tell
    their clients about the FHA alternative. They want low- to moderate-
    income homebuyers to have a safer, more affordable financing option.
    They want FHA to be a viable player again.
        Now let me explain a little bit about the simple changes we're
    proposing. For one, we're proposing to eliminate FHA's complicated
    downpayment calculation and 3 percent cash investment requirement.
    Before the rest of the market began offering low downpayment loans, FHA
    was often the best option for first-time homebuyers because it required
    only a minimal downpayment. But, as I said before, the market passed
    FHA by. According to the National Association of Realtors, last year,
    43 percent of first-time homebuyers purchased their homes with no
    downpayment. Of those who did put money down, the majority put down 2
    percent or less.
        The downpayment is the biggest barrier to homeownership in this
    country, but FHA has no way to address the barrier without changes to
    its statute. FHA Modernization would permit borrowers to choose how
    much to invest, from no money down to 1 or 2 or even 10 percent and to
    be charged appropriate premiums for the size of the downpayment they
    make.
        The proposal also provides FHA the flexibility to set the FHA
    insurance premiums commensurate with the risk of the loans. For
    example, no downpayment loans would be priced slightly higher, yet
    appropriately, to give homebuyers a fairly-priced option and to ensure
    that FHA's insurance fund is compensated for taking on the additional
    risk. FHA would also consider the borrower's credit profile when
    setting the insurance premium. FHA would charge lower-credit risk
    borrowers a lower insurance premium than it does today, and higher-
    credit risk borrowers would be charged a slightly higher premium. In so
    doing, FHA could reach deeper into the pool of prospective borrowers,
    while protecting the financial soundness of the FHA Fund and creating
    incentives for borrowers to achieve good credit ratings and save for
    downpayments.
        A slightly higher premium would increase a borrower's monthly
    payment only minimally. For example, on a $225,000 loan, a 1 percent
    upfront premium financed into the loan would cost the borrower $13.97
    per month; a 2 percent premium would cost $27.94 and a 3 percent
    premium, $41.90. Clearly, this higher premium is still affordable.
    Moreover, it's a smart investment, because the borrower is paying for
    the FHA insurance to obtain a market rate loan.
        Some say that with a risk-based pricing approach FHA will target
    people who shouldn't be homebuyers and charge them more than they
    should pay. I want to address these concerns directly. Our goal is to
    reach families who are capable of becoming homeowners and to offer them
    a safe and fairly-priced loan option.
        With a risk-based premium structure, FHA can reach hard-working,
    credit-worthy borrowers--store clerks, bus drivers, librarians, social
    workers--who, for a variety of reasons, do not qualify for prime
    financing. Some have poor credit scores due to circumstances beyond
    their control, but have put their lives back together and need a second
    chance. For some, the rapid appreciation in housing prices has simply
    outpaced their incomes. Many renters find it difficult to save for a
    downpayment, but have adequate incomes to make monthly mortgage
    payments and do not pose a significant credit risk. They simply need an
    affordable financing vehicle to get them in the door. FHA can and
    should be there for these families.
        If granted, FHA's new legislative authorities would save homeowners
    a lot of money, because FHA's loan product would carry a lower interest
    rate than a non-prime loan product. The higher premiums that FHA will
    charge some types of borrowers are still substantially lower than they
    would pay for subprime financing. For example, if FHA charged a 3
    percent upfront insurance premium for a $225,000 loan to a credit-
    impaired borrower versus that same borrower obtaining a subprime loan
    with an interest rate 3 percent above par, the borrower would pay over
    $300 more in monthly mortgage payments with the subprime loan and over
    $137,000 more over the life of the loan. In addition, FHA borrowers do
    not have to be concerned about teaser rates, unmanageable interest rate
    increases or prepayment penalties.
        Moreover, FHA intends to lower the insurance premium for many
    borrowers. FHA will charge lower-risk borrowers a substantially lower
    premium than these types of borrowers pay today. For example,
    homebuyers with higher credit scores who choose to invest at least 3
    percent in a downpayment may pay as little as .075 of a percent upfront
    premium.
        So while FHA may charge riskier borrowers more (and safer borrowers
    less) than it does today, the benefit is four-fold. First, FHA will be
    able to reach additional borrowers the agency can't serve today.
    Second, many borrowers will pay less with FHA than with a subprime
    loan. Third, the FHA Fund will be managed in a financially sound
    manner, with adequate premium income to cover any expected losses.
    Finally, borrowers will be rewarded for maintaining good household
    financial practices that lead to good credit ratings and higher savings
    for a downpayment.
        Another change proposed in FHA Modernization is to increase FHA's
    loan limits. Members of Congress from high-cost states have repeatedly
    asked FHA to do something about our antiquated loan limits. This
    proposal answers those concerns. FHA's loan limit in high-cost areas
    would rise from 87 to 100 percent of the GSE conforming loan limit; in
    lower-cost areas, the limit would rise from 48 to 65 percent of the
    conforming loan limit. In between high- and lower-cost areas, FHA's
    loan limit will increase from 95 to 100 percent of the local median
    home price. This change is extremely important and crucial in today's
    housing market. In many areas of the country, the existing FHA limits
    are lower than the cost of new construction. Buyers of new homes can't
    choose FHA financing in these markets. In other areas, most notably
    California, FHA has simply been priced out of the market.
        Finally, FHA Modernization offers some changes to the Home Equity
    Conversion Mortgage (HECM) program, which enables senior homeowners,
    aged 62 years or older, to tap into their home equity to live
    comfortably in their golden years. The proposal eliminates the cap on
    the number of loans FHA can insure; it sets a single, national loan
    limit; and it creates a new HECM for Home Purchase product to permit
    seniors to move from the family home to more suitable senior housing
    and convert the purchase loan into a HECM in a single transaction.
    Today, seniors who want to move, but need additional cash flow to pay
    their living expenses, must purchase a new home and take out a HECM in
    two distinct transactions, resulting in two sets of loan fees and
    charges.
        Let me repeat a point I made earlier in the testimony. I want to
    assure you that the changes we are proposing will not impose any
    additional budgetary cost. We are proposing to manage the Fund in a
    financially prudent way, beginning with the change in FHA pricing to
    match premiums with risk. This will avoid FHA being exposed to
    excessive risk, as it is today, because some borrowers who use FHA are
    under-charged for their risk to the Fund while those who are
    overcharged are fleeing from the program. Of course, we will continue
    to monitor the performance of our borrowers very closely, and make
    adjustments to underwriting policies and/or premiums as needed.
        I know I've talked a lot here today, but I want to convey to you
    how passionate I am about the proposed changes. I believe we have an
    opportunity to make a difference in the lives of millions of low- and
    moderate-income Americans. We have a chance to bring FHA back into
    business, to restore the FHA product to its traditional market
    position. To all those families who can buy a home with prime
    conventional financing, I say, ``Go for it!'' They're fortunate and
    they should take full advantage of that product. But for those who
    can't, FHA needs to be a viable option. And when people ask me why we
    are proposing these changes, I tell them these exact words: ``Families
    need a safe deal, at a fair price. Families need a way to take part in
    the American Dream without putting themselves at risk. Families need
    FHA.''
        I want to thank you again for providing me the opportunity to
    testify here today on modernizing the Federal Housing Administration. I
    look forward to working with all of you to make these necessary reforms
    a reality.

        Senator Murray. Thank you very much. Mr. Donohue.

                      STATEMENT OF HON. KENNETH M. DONOHUE

        Mr. Donohue. Chairman Murray, ranking member Bond and the
    members of the subcommittee, thank you for inviting me here to
    testify today. In January, the GAO announced the results of its
    high-risk series review. I want to commend the Department and
    FHA for the removal of its rental housing assistance and the
    single-family mortgage insurance program from the high-risk
    list, which they had been on since 1994.
        This resolution, in part, is a result of ongoing dialogue
    between FHA and the OIG and is an excellent example of good
    government and positive change.
        I come to you today with a note of warning for the FHA.
    There have been a lot of articles lately comparing the fall of
    the subprime lending market to that of the failed savings and
    loan institutions of the 1980's. I spent 7 years of the
    Resolution Trust Corporation uncovering the fraud and abuse
    among directors of failed savings and loans. I have seen first
    hand the damaging results of an unregulated and solely profit
    driven industry, results that ultimately cost the American
    taxpayer billions of dollars.
        Whether we are just starting to see the tip of the iceberg
    today or actually seeing the iceberg in the subprime lending
    market remains to be seen. But unlike the savings and loan
    crisis, it will have a social impact as many honest,
    hardworking individuals may lose their homes. The mortgage
    industry has said they have increased home ownership, however,
    at what cost to the American people?
        Relaxed underwriting practices instituted by unscrupulous
    subprime lenders, the usage of riskier products, like
    adjustable rate and interest only loans, coupled with appraisal
    fraud and lack of understandable disclosure of loan terms have
    made it easier for those who do not quality for prime loans to
    purchase homes but not retain them. In addition, while it might
    have been a splendid idea to help the troubled borrowers with
    low mitigation programs, it is worth remembering that the
    rollover non-performing loans added to the savings and loan
    mess of the 1990's.
        With the current trend of interest rates in flux, the
    resulting payment shock and low home appreciation, due in part,
    to over building, we have seen States such as Colorado and we
    will probably continue to see increased delinquencies and
    foreclosure rates. Further, a number of these borrowers fell
    subject to additional hardship as predatory lenders applied
    aggressive sales tactics and outright fraud to finance the
    subprime loans. I am concerned as to whether FHA is headed in
    the same direction as the subprime market with a seemingly
    continued deregulation and introduction of riskier products as
    part of its proposed reform.
        A chart produced by the Mortgage Bankers Association survey
    shows how closely the FHA delinquency rate follows that of the
    subprime market. We have an industry that is generally profit
    driven. However, with that should come responsibility. Unlike
    the mortgage industry, the FHA is mission driven. The FHA
    Single Family lending has experienced a market drop in
    insurance volume as subprime lending spiked and mortgage
    interest rates increased.
        The numbers are disconcerting. In fiscal year 2006,
    insurance endorse was down 8 percent; new endorsements were off
    17 percent and delinquent and default rates inched upward.
    History will actually reflect that FHA was spared the impact of
    the subprime prices because it did not contain these in its
    portfolio.
        The FHA 2008 budget submission suggests that costs will
    exceed receipts. FHA may really be left with only two choices--
    to request a credit subsidy by means of appropriations or to
    increase the premiums to avoid a shortfall. Reform packets,
    which include risk based premiums, zero down payment loans and
    higher mortgage limits seems to be partly directed at high
    income housing markets to the possible detriment of first time
    homebuyers and minority customers.

                               PREPARED STATEMENT

        I also want to stress, the proposed reform bill is silent
    on strengthening controls and enforcement action in preventing
    future fraud. As to our record, over the past 3 years, HUD/OIG
    has issued 190 auto reports to the area of FHA. These are
    reports that identified $1.1 billion in questionable costs and
    funds that could be put to a better use. During the same time
    period, the HUD/OIG had over 1,350 indictments and $1.3 billion
    in court-ordered restitutions. I cannot say the reform
    legislation is the answer and I recognize that some change is
    necessary. There are great challenges confronting the FHA
    programs; nevertheless, aggressive oversight and enforcement is
    crucial to prevent a reoccurrence of what we are witnessing in
    the subprime market today and the savings and loan industry in
    the past year. Clearly, there are lessons to learn from the
    repeat of history. Thank you.
        [The statement follows:]
                 Prepared Statement of Hon. Kenneth M. Donohue
        Chairman Murray, Ranking Member Bond, and members of the
    subcommittee, thank you for inviting me to testify today.
                                   background
        The U.S. Department of Housing and Urban Development (HUD)
    Inspector General is one of the original 12 Inspectors General
    authorized under the Inspector General Act of 1978. The Office of
    Inspector General (OIG) has forged a strong alliance with HUD personnel
    in recommending ways to improve departmental operations and in
    prosecuting program abuses. OIG strives to make a difference in HUD's
    performance and accountability. OIG is committed to its statutory
    mission of detecting and preventing fraud, waste, and abuse and
    promoting the effectiveness and efficiency of government operations.
    While organizationally located within the Department, OIG operates
    independently with separate budget authority. This independence allows
    for clear and objective reporting to the Secretary and the Congress.
        The Department's primary challenge is to find ways to improve
    housing and to expand opportunities for families seeking to improve
    their quality of life. HUD does this through a variety of housing and
    community development programs aimed at helping Americans nationwide
    obtain affordable housing. These programs, which include Federal
    Housing Administration (FHA) mortgage insurance for Single Family and
    Multifamily properties, are funded through a $30+ billion annual budget
    and, in the case of FHA, through mortgage insurance premiums. At the
    end of fiscal year 2006, FHA's outstanding mortgage insurance portfolio
    was about $396 billion.
        Each year in accordance with the Reports Consolidated Act of 2000,
    HUD OIG is required to submit a statement to the Secretary with a
    summary assessment of the most serious challenges facing the
    Department. OIG submitted its latest assessment on October 19, 2006.
    The Department has notably and laudably made progress in its efforts to
    correct its serious challenges. However, continued progression in the
    integration of FHA's financial management systems, and strengthening of
    lender accountability and enforcement against program abusers is still
    needed.
        FHA is the largest mortgage insurer in the world, providing
    coverage to over 34 million home mortgages and 47,205 multifamily
    projects since 1934. FHA insurance protects HUD-approved lenders
    against losses should a homeowner or project owner default on their
    mortgage loans. FHA insures a wide spectrum of loans. Its single family
    programs include insuring mortgage loans to purchase new or existing
    homes, condominiums, manufactured housing, houses needing
    rehabilitation, as well as reverse equity mortgages to elderly
    homeowners. Its multifamily programs provide mortgage insurance to
    facilitate the construction, substantial rehabilitation, purchase and
    refinancing of multifamily housing projects and healthcare facilities.
        On January 31, 2007, the Government Accountability Office (GAO)
    announced the results of its biennial ``high-risk'' series review. We
    commend the Department for the removal of its rental housing assistance
    and the single family mortgage insurance programs, which have been on
    GAO's risk list since 1994.
                                 the challenge
        Chairman, ranking member, and members of the subcommittee, you have
    probably read or seen a number of articles of late comparing the fall
    of the subprime lending market to that of the failed savings and loan
    institutions of the 1980's. I spent 7 years at the Resolution Trust
    Corporation as Assistant Director for Investigations, uncovering the
    fraud and abuse among directors of the failed savings and loan
    institutions. I have seen first hand the damaging results of a solely
    profit-driven industry, which ultimately cost the American taxpayer
    billions of dollars.
        Whether we are just starting to see the ``tip of the iceberg''
    today or are actually seeing the iceberg in the subprime lending market
    remains to be seen, but like the savings and loan crisis, it will not
    only have a financial impact but a social impact as many honest, hard
    working individuals may lose their homes. The mortgage industry has
    said they have increased homeownership; however, at what cost to the
    American people?
        The Senate Committee on Banking, Housing and Urban Affairs recently
    held a hearing on subprime lending. The testimony included estimates
    that as many as 2.2 million families may lose their homes to
    foreclosure--foreclosures that were often predictable or avoidable
    through responsible lending. We see this today in the State of
    Colorado, where it is estimated that two out of every five home loans
    is a subprime loan. Colorado has not only ranked among the top States
    for mortgage fraud during the last 2 years, but has held the highest
    foreclosure rate in the Nation for most of 2006.
        Relaxed underwriting practices instituted by unscrupulous subprime
    lenders, the usage of ``riskier'' products (e.g., adjustable-rate and
    interest-only loans)--coupled with appraisal fraud--and lack of
    understandable disclosure of loan terms have made it easier for those
    who do not qualify for prime loans to purchase homes but not retain
    them. With the current trend of rising interest rates and the resulting
    payment shock, and low home appreciation--due in part to overbuilding
    that we have seen in States, such as Colorado--we will probably
    continue to see increasing delinquency and foreclosure rates. Further,
    a number of these borrowers may fall subject to additional hardship as
    their subprime loans are refinanced by predatory lenders who apply
    aggressive sales tactics and outright fraud.
        I am concerned as to whether FHA is headed in the same direction as
    the subprime market with its seemingly continued de-regulation and
    introduction of ``riskier'' products as part of its proposed reform. A
    chart produced by the Mortgage Bankers Association National Delinquency
    Survey shows how closely the FHA delinquency rate--as a loan type--
    follows that of the subprime market. To further illustrate in the third
    quarter of 2006, delinquencies for subprime past due loans were at
    12.56 percent (up 7 percent from the second quarter of 2006 and up 17
    percent from the third quarter in 2005), while total delinquencies for
    all past due loans were at 4.67 percent. Ninety-day delinquencies for
    subprime loans stood at 2.96 percent, while all other loans were at
    0.94 percent. Foreclosure starts for subprime loans was at 1.82
    percent, while for all other loans only 0.46 percent began foreclosure
    in the third quarter of 2006.
        We have an industry that is generally profit-driven, and primarily
    concerned with the bottom line; however, with that should come
    responsibility. Unlike the mortgage industry that is primarily profit
    driven, the FHA is mission driven.
                                    fha risk
        FHA single family lending has experienced a marked drop in
    insurance volume, as subprime lending spiked and mortgage interest
    rates increased. The numbers are disconcerting: in fiscal year 2006
    insurance in force (active mortgages) was down 8 percent, new
    endorsements were off 17 percent, and delinquency and default rates
    inched upward. Does this scenario mean FHA faces a financial crisis?
    Not based on the recent actuarial findings that estimate a capital
    ratio of 6.82 percent for the Mutual Mortgage Insurance (MMI) fund that
    well exceeds the 2 percent capital ratio mandated by the 1990 Cranston-
    Gonzalez National Affordable Housing Act. FHA actuaries found the MMI
    fund to be adequately capitalized to defray expected claims cost over
    the next decade including losses from the hard hit Gulf coast region,
    which is estimated at $613 million. Revenue shortfalls from insurance
    premiums were predicted, but they were offset by expected interest
    income from Treasury investments.
        FHA's fiscal year 2008 budget submission casts a somewhat different
    light as it concerns the risk of the MMI fund. It states: ``Because of
    adverse loan performance and improved estimation techniques, the base
    line credit subsidy rate for FHA's single family program--assuming no
    programmatic changes--is positive, meaning that total costs exceed
    receipts on a present value basis, and therefore would require
    appropriations of credit subsidy budget authority to continue
    operation. The 2008 baseline includes no budget authority to cover
    these costs and assumes FHA would use its existing authorities to
    increase premiums to avoid the need for credit subsidy appropriations.
    Under the Budget's proposals, FHA will be able to set premiums that are
    based on risk and are sufficient to avoid the need for credit subsidy
    appropriations.'' (emphasis added)
        Simply, FHA may be really left with only two choices, to request a
    credit subsidy by means of appropriations or increase its premiums to
    avoid an estimated shortfall of $143 million in fiscal year 2008. One
    FHA response to this impending predicament is through the passage of
    ``The Expanding American Homeownership Act.'' In his June 20, 2006
    testimony, the FHA Commissioner stated, ``. . . the FHA bill proposes
    changes that will strengthen FHA's financial position, improving FHA's
    ability to mitigate and compensate risk. The proposed changes would
    permit FHA to operate like every other insurance company in the Nation,
    pricing its products commensurate with the risk, as opposed to having
    some clients pay too much and some too little.'' Regardless of whether
    the FHA reforms are enacted, as FHA takes on more risk--as has been the
    trend in recent years--we believe premiums will also need to increase
    or Congress may have to subsidize the program.
        Moreover, I remain somewhat concerned over the proposed
    modernization of FHA and whether the reforms will provide a panacea to
    its ``loss of market'' woes and ensure the future solvency of the MMI
    fund. The reform package--which includes risk-based premiums, zero-
    downpayment loans, and higher mortgage limits--seems to be partially
    directed at expanding FHA's reach to the higher income housing market
    to the possible impact on its traditional first-time homebuyer and
    minority customers. These reform package proposals merit further
    discussions, including the following:
    Risk-Based Premiums
        Moving to a mixed price premium structure: (1) could by its very
    complexity require increased budget authority to make FHA system
    modifications and impose new administrative/cost burdens on originating
    and servicing lenders; and (2) potentially expose the FHA Single Family
    insurance program to fair housing questions and accusations of ``red-
    lining'' unless the decision matrix for pricing is unquestionable.
        FHA customers traditionally have been first-time homebuyers and
    minorities, some with incomplete or flawed credit histories and
    marginal reserves to avoid default when facing financial stress. FHA
    reform will require these higher risk borrowers to pay higher premiums.
    Risk-based pricing, therefore, may increase the mortgage carrying costs
    of FHA borrowers that are the least able to afford them.
    Zero Down Payment
        As the actuaries have pointed out, FHA is currently experiencing
    higher default and claim rates on seller-funded nonprofit down payment
    assisted loans, which are effectively zero down payment loans (100
    percent loan-to-value). GAO reported in 2005 the probability of such
    loans resulting in an insurance claim was 76 percent higher than
    comparable loans without such assistance. It is reasonable to conclude
    that zero down payment loans would represent a comparable insurance
    risk. Additionally, in light of current congressional and GSE (Freddie
    Mac and Fannie Mae) concerns over the growth of subprime lending and
    growing default rates, FHA should be wary of inviting future claim
    risks by insuring 100 percent and greater (after financing closing
    costs and insurance premiums) loan-to-value loans.
    Higher Mortgage Limits
        FHA should determine mortgage loan limits consistent with its
    mission to serve underserved borrowers and communities, particularly
    first-time homebuyers and minorities. Raising the loan limits to GSE
    conforming maximums may serve to attract borrowers who have access to
    conventional financing, and do not need a government program to acquire
    homeownership.
        Raising FHA area loan limits, especially the high-cost area ones,
    will not necessarily help low- and moderate-income families become
    homeowners. In some markets, raising the base limit would mean that FHA
    would insure homes well above the median house price statewide, further
    distancing FHA from its mission, and potentially exposing the MMI fund
    to increased risk from regional economic downturns. If the limits for
    2-4 unit properties are also included, FHA will be assuming even
    greater financial risk on what are essentially investment properties.
        Unless there is evidence to show otherwise--the reforms may
    actually increase the mortgage burden of the qualified, but less
    creditworthy borrowers and reward those with greater financial
    stability. And one could argue that FHA appears to be strategizing to
    capture some share of the prime market and borrowers already served by
    conventional lending.
        Moreover, the proposed reform is silent on strengthening controls
    and enforcement actions and preventing future fraud. As we have seen
    over the last 2 years, FHA has made changes to its operations, which in
    some instances has included de-regulation--without seemingly proper
    risk analysis--out of concern over retaining market share. However,
    there has been some change; most notably the Deputy Secretary recently
    supported our recommendation that Housing (FHA) rescind the issuance of
    Mortgagee Letter 2005-23, which removed the ``. . . six-month payment
    history requirement for loans submitted late for endorsement.'' Our
    audit found that loans with an unacceptable payment history--within the
    prior 6 months to submission--were at least 3.5 times higher risk of
    claims to the MMI fund.
        The OIG recognizes that there is an important call for action to
    avoid the need for the Congress to subsidize the program; however, the
    introduction of ``riskier'' products through reform must be balanced
    with more effective program fraud controls to mitigate future insurance
    losses and ensure oversight of lenders that violate established
    requirements. For example, our recent audit of the single family
    mortgage insurance claim process determined that, prior to paying
    billions of dollars in single family insurance claims, FHA did not
    independently ascertain whether loans insured under the MMI fund met
    program requirements. Housing disagreed with our recommendations which
    included FHA establishing a risk-based post claim review process and
    seeking recovery or adequate support for final HUD costs for 44
    unsupported claims identified in our sample totaling over $1.3 million
    in losses.
        The private sector has pointed to one remedy to reduce fraud in
    mortgage loan programs. Mortgage bankers are beginning to use
    predictive models that screen loan applications for fraud at pre-
    funding. FHA needs to move beyond post endorsement monitoring and
    embrace this new technology through policy and programmatic changes, as
    part of FHA reform.
        Lastly, the actuaries did not evaluate MMI fund solvency, assuming
    the proposed FHA reform became law. It would seem prudent for FHA to
    have its actuaries prepare another study to reflect likely performance
    scenarios before introducing the reforms to the mortgage market.
        In spite of these differences, we are encouraged to work
    collectively with FHA. In 2006, the Mortgage Bankers hosted a fraud
    symposium, which we attended and were an active participant. We hope
    such collaboration can serve as a model for all our future cooperative
    efforts including those with the FHA.
                        continuing oig areas of concern
        Even though the Department has notably made progress in its efforts
    to correct its serious challenges--supported by recent removal from
    GAO's high-risk list--as GAO cautions, HUD needs to manage new risks
    and accurately estimate the costs of program changes. The following are
    continuing areas of concern that we have identified through our audit
    and investigative efforts over the FHA single family and multifamily
    insurance programs.
    Down Payment Assistance
        Until recently, HUD has not been responsive to the universal
    concern that seller-funded nonprofit down payment assistance providers
    inflate real estate prices and increase the risk of default. OIG's
    concerns with down payment assistance from seller-funded nonprofits
    have been long-standing and are consistent with concerns raised by
    others. The FHA was not responsive to our concerns and that of the GAO
    until the Internal Revenue Service issued a revenue ruling making it
    clear that seller funded down payment assistance providers are not
    charities as they do not meet the requirements of 26 U.S.C.
    501(c)(3). This ruling enabled us to convince the Department to compel
    FHA to issue a rule that will establish specific standards regarding
    borrower investments in a mortgage property when a gift is provided by
    a nonprofit organization.
        The Department has committed to a schedule that will result in a
    final rule being issued next summer. However, it is important to note
    that until this rule is issued, the status quo remains the same and
    nonprofit down payment assisted loans will continue to have a negative
    impact on the economic value of the MMI fund.
    Loan Case Binder Access
        FHA has adopted an ill-advised policy that permits those with the
    potential to perpetrate fraud upon the insurance fund to maintain the
    original records/certifications associated with their fraud. Through
    the issuance of Mortgage Letter 2005-36, the Lender Insurance (LI)
    Program enables certain FHA-approved Direct Endorsement lenders to
    endorse FHA loans without a pre-endorsement review and generally
    relieves LI lenders from the responsibility of submitting loan
    originations case binders to FHA.
        We expressed our concerns over the various LI Program provisions
    that may adversely impact the ability to investigate and prosecute
    fraud perpetrated upon FHA. Also, we obtained a letter of opposition
    from the FBI, alerted OMB to the issuance of the mortgagee letter,
    apprised Senate and House oversight staff, and gained support of the
    Office of General Counsel (OGC). In spite of the best efforts of many,
    FHA implemented the program; with assurances to the OGC and us that it
    would collaborate with interested parties to make technical corrections
    once the program was implemented. More than 1 year later, FHA has yet
    to schedule the first meeting to discuss needed technical corrections.
    Single Family Fraud
        In my experience, over 99 percent of people are honest, while less
    than 1 percent is intent on defrauding others. Their impact can be,
    however, quite detrimental. Organized groups or individuals driven by
    the bottom line are defrauding consumers and FHA, at the same time that
    FHA is seemingly pursuing a policy of de-regulation. We continue to
    compile evidence through our audit and investigative activities of
    organized groups and individuals who conspire to take advantage of
    first-time homebuyers and minority customers. These groups and
    individuals conspire, with or without the borrowers' knowledge, to
    provide materially false applications, documents and statements to
    obscure information that would otherwise demonstrate that borrowers do
    not qualify for the loans they seek or that the property in question
    does not meet FHA insurance guidelines.
        OIG is also seeing a trend with organized groups in some parts of
    the country recruiting illegal aliens to purchase FHA-insured homes.
    Illegal aliens are not qualified to purchase FHA-insured homes due to
    their immigration status. As a result, this group is often preyed upon
    by unscrupulous mortgage professionals who assist illegal aliens in
    obtaining fraudulent and stolen social security numbers, tax documents,
    and employment documents. All too frequently these borrowers soon
    realize that they are unable to bear the periodic costs associated with
    homeownership and default on their loan. In turn, these ever increasing
    defaults degrade entire communities where the organized groups target
    their efforts. As a result of FHA's continued pattern of de-regulation
    or inconsistent enforcement of established regulations, single family
    loans remain vulnerable to fraud.
    Multifamily Fraud
        FHA does not have adequate controls to prohibit equity skimming in
    nursing homes. In consideration for endorsement for insurance by FHA,
    prospective nursing home mortgagor/owners are required to execute a
    regulatory agreement. The regulatory agreement is FHA's chief vehicle
    to protect its financial and programmatic interests in the mortgaged
    property. Typically, the mortgagor/owner does not ``operate'' the
    nursing home and leases the property to a lessee/operator that executes
    a separate and less comprehensive regulatory agreement. Numerous OIG
    audits have determined that FHA does not have adequate controls in
    place to ensure program objectives are accomplished.
        Among the significant control weaknesses identified by the OIG is
    that the regulatory agreement used for the lessee/operator-managed
    nursing homes lacks certain requirements contained in the regulatory
    agreement applicable to mortgagor/owner-managed nursing homes. The
    regulatory agreement used for lessee/operator-managed nursing homes
    does not preclude the lessee/operator from diverting all or any portion
    of the income generated by the property to non-property purposes to the
    detriment of the elderly tenants, and HUD who is subject to the payment
    of an insurance claim to the lender due to the mortgagor/owner's
    default on the FHA-insured loan.
    Gulf Coast
        Congress estimates that damage to residential structures will range
    from $17 to $33 billion. In the Presidentially Declared Disaster Areas,
    HUD's FHA single family insurance fund insured more than 328,000
    mortgages having an unpaid principal balance of $23 billion. FHA's
    multifamily program in the Presidentially Declared Disaster Areas
    insured 528 projects with an amortized principal balance of $3 billion.
    Of these, 112 or 21 percent sustained more than minor damage, resulting
    in significant potential losses. Further, the actuaries have estimated
    the expected claim losses caused by the hurricanes to be $613 million.
        The devastation caused by Hurricanes Katrina and Rita, and more
    importantly the unprecedented volume of Federal assistance provided in
    reaction to the hurricanes, has created an environment ripe for fraud.
    OIG will continue to focus, to the greatest extent possible, on the
    ultimate disposition and accountability of these funds.
                                   the record
        Pursuant to goal number 1 of HUD-OIG's Strategic Plan, to help HUD
    resolve its major management challenges by being a relevant and
    problem-solving advisor to the Department, we continue to focus our
    audit and investigative efforts on FHA to include both single family
    and multifamily insurance programs. Over the past 3 years, HUD OIG has
    issued 190 audit reports in the area of FHA. These FHA-related audit
    reports identified over $1.1 billion in questioned costs and funds that
    could be put to better use. During the same time period, the HUD OIG
    had 1,078 cases opened. The following are examples of our audit and
    investigative activities.
    Office of Audit
                Single Family
        We audited a San Antonio, Texas financial firm because of an
    unusually high ratio of defaults. We found that 47 percent of its
    defaults involved one seller, who owned 50 percent of the lender. OIG
    reviewed 51 of the defaulted loans that involved the seller. The lender
    approved mortgages on overvalued properties because the lender allowed
    an identity-of-interest seller to add ineligible and unsupported
    construction costs and inadequately reviewed the appraisals. Also, the
    lender did not adequately document analyses of borrowers' credit.
    Further, the lender's processing had technical difficulties.
    Consequently, HUD and the borrowers unnecessarily incurred increased
    risks through higher insurance exposure and higher mortgage payments as
    evidenced by the borrowers defaulting on their mortgages.
        HUD OIG audited a Miamisburg, Ohio lender approved to originate,
    underwrite, and submit insurance endorsement requests under HUD's
    single family direct endorsement program. We selected it for audit
    because of its high late endorsement rate. This lender submitted 2,071
    late requests for endorsement out of 68,730 loans tested. The loans
    were either delinquent or otherwise did not meet HUD's requirement of
    six consecutive timely payments after delinquency but before submission
    to HUD. It also incorrectly certified that both the mortgage and escrow
    accounts for 133 loans and the escrow account for taxes, hazard
    insurance premiums, and mortgage insurance premiums for 497 loans were
    current.
        HUD OIG audited a Phoenix, Arizona mortgage company's insured loan
    originations due to high default and claim rates. It did not originate
    the 19 loans reviewed in compliance with HUD requirements or prudent
    lending practices. All 19 loans involved origination deficiencies that
    should have precluded their approval, including false employment data,
    overstated income, understated liabilities, unacceptable credit
    histories, improper treatment of downpayment gifts and/or interest rate
    buydowns resulting in over insured mortgages, inaccurate or excessive
    qualifying ratios without compensating factors, and borrower
    overcharges for unsupported or unallowed fees. As a result, it placed
    HUD's single family insurance fund at risk for 19 unacceptable loans
    with original mortgages totaling more than $2.5 million, and borrowers
    were overcharged $9,400. HUD remains at risk and/or has incurred losses
    totaling more than $1.2 million related to 15 of the 19 loans.
                Multifamily
        HUD OIG audited six housing projects in Los Angeles, California, to
    assess HUD's concerns over inappropriate disbursements and determine
    whether the projects were administered in compliance with HUD
    requirements. The owner and identity-of-interest management agent used
    project funds to pay more than $2.6 million in ineligible and
    unsupported costs, including excessive and unreasonable charges by an
    identity-of-interest maintenance contractor, excessive charges for the
    management agent's president, unsupported rent charges and capital
    improvement expenses for the management agent's office, and ineligible
    ownership expenses. OIG anticipates similar additional questionable
    costs continued after the end of the audit period that could cost the
    projects another $457,000. OIG's building inspections identified more
    than 240 health or safety violations, which resulted in more than
    $561,000 in housing assistance payments for units and buildings that
    were not decent, safe, and sanitary. In addition, the owner and
    identity-of-interest management agent did not effectively manage the
    projects, to include not accurately calculating, reporting, and
    resolving more than $655,000 in project liabilities.
        In Bethany, Oklahoma we audited a HUD-insured nursing home to
    determine whether it complied with the regulatory agreement and HUD
    requirements when disbursing project funds. We found its officials used
    $2.3 million for ineligible costs, such as loan repayments and late
    fees, and could not support $4.5 million in expenditures. Further,
    these officials did not provide documentation to support the use of
    revenue amounting to nearly $12 million. This ultimately resulted in
    mortgage default and closure of the nursing home.
        We completed an audit of a rehabilitation center in Carmichael,
    California. We found that the owner incorporated the project in its
    petition for bankruptcy and then defaulted on the project's mortgage.
    In addition, the owner disbursed $3.7 million in project funds through
    ineligible cash distributions and expenses. These activities resulted
    in increased risk to HUD, the assignment of the mortgage note to HUD,
    and HUD's resulting loss of $323,000 on the sale of the note.
    Office of Investigation
                Single Family
        Seven Charlotte, NC residents were indicted by a Federal grand jury
    on 66 counts alleging conspiracy, wire fraud, bank fraud, making false
    statements and entries, and money laundering. The Defendants owned and
    operated a mortgage brokerage corporation. The scheme entailed
    defrauding HUD and the Government National Mortgage Association (GNMA)
    whose mission is to support affordable home ownership in America by
    providing an efficient government secondary market vehicle to link the
    capital and Federal housing markets. A bundle of loans, usually
    totaling $1 million, is packaged by a lender and sold to investors as a
    pool for which it is required that an actual existing dwelling is
    constructed and that a homeowner is submitting monthly mortgage
    payments. GNMA is the final guarantor of the loan pools and mortgage-
    backed securities and will fully reimburse the investors should the
    need arise.
        The Defendants are alleged to have devised and executed an
    elaborate mortgage fraud scheme to generate over 100 loans that were
    purported to be FHA-insured loans on nonexistent properties that were
    ultimately resold to investors in mortgage pools backed by GNMA, as
    well as the Federal National Mortgage Association (FNMA). GNMA was
    required to make the investors whole when the fraud was discovered. The
    defendants would recruit strawbuyers to secure fraudulent FHA-insured
    home loans through a builder and these loans, in most cases, were
    secured by properties that were vacant lots or for homes belonging to
    legitimate homeowners. The Defendants allegedly received the loan
    proceeds and used the money for their personal benefit and to advance
    the fraud scheme.
        As a result of the fraud, the Defendants obtained more than $5
    million from FNMA and more than $26 million from GNMA. The
    investigation was initiated based on GNMA having discovered
    irregularities during an audit of the builder. The GNMA losses are
    based on the cost to repurchase each fraudulent loan from GNMA
    investors. The defendants also fraudulently obtained a $5 million line
    of credit with a banking and trust company by submitting straw
    mortgages and false documents. This investigation has resulted in the
    seizure of assets worth $8 million.
        OIG investigated a large mortgage company in Detroit, Michigan and
    confirmed that it submitted to FHA as many as 28,000 loans with
    underwriter's certifications purportedly signed by one of two FHA-
    approved underwriters. In actuality, however, these loans had been
    underwritten by other staff, who had not received FHA-approval and who
    merely signed the FHA-approved underwriters' names on the
    certifications. OIG referred the matter to the United States Attorney's
    Office for the Eastern District of Michigan, which entered into a civil
    settlement valued at in excess of $40 million. This figure covered
    FHA's experienced and forecast losses on the loans, and included a
    penalty.
        Four defendants were charged in a scheme in Colorado for assisting
    unqualified and undocumented immigrants in obtaining more than 300 FHA-
    insured loans valued in excess of $61 million. As a result of
    foreclosures, HUD realized losses of $2.3 million.
                Multifamily
        The owner of a mortgage company and four HUD-insured nursing homes
    located in Rhode Island and the administrator of the nursing homes, and
    others, illegally diverted income or funds from the nursing homes to
    themselves or identity-of-interest companies authorizing payments for
    unwarranted services while the properties were in a non-surplus-cash
    position, a violation of their HUD regulatory agreement. As a result of
    their actions, HUD realized a loss of $14 million when the owner
    defaulted on the HUD-insured mortgages for 2 of the nursing homes. For
    the remaining 2 nursing homes, HUD continues litigation over the $13
    million insurance payment of one nursing home and continues operations
    of the other--which is listed for sale--with a $9.7 million FHA-insured
    mortgage. In addition, the portfolio contains approximately 57 FHA-
    insured loans estimated at $314.3 million, all of which are considered
    at risk.
                               continued support
        We continue to support the Department and FHA's mission and will
    also continue to increase our efforts to ensure the administrative
    health and vitality of HUD's programs and activities. I know that with
    the hard work of staff, we will persist in a pattern of improved
    oversight and enforcement and I look forward to working with the
    Department to come up with common and workable solutions. I would like
    to mention the notable remarks made by the Secretary in recent
    testimony on March 1, 2007, that borrowers should be paying a portion
    of the downpayment when obtaining an FHA-insured loan. As we know,
    without a financial stake in a home, borrowers have less incentive to
    be responsible homeowners making it easier to default and walk away.
        That is where HUD comes in, to ensure Americans are given the
    opportunity to obtain and retain affordable housing. However, this
    cannot be driven solely by the Federal Government, but must also be
    done through a collective effort that combines the expertise of the
    housing industry of both the public and private sector.
        I cannot say that the reform legislation is the answer and I
    recognize that some change is necessary. There are great challenges
    confronting FHA programs. Nevertheless, aggressive oversight and
    enforcement is crucial to prevent a recurrence of what we are
    witnessing in the subprime market today and the savings and loan
    industry in years past. Clearly, there are lessons learned from repeats
    of history.
                                   conclusion
        That concludes my testimony and I thank the subcommittee for
    holding this hearing and I look forward to answering questions that
    members may have.

        Senator Murray. Mr. Shear.

                         STATEMENT OF WILLIAM B. SHEAR

        Mr. Shear. Thank you. Madam Chairman, Senator Bond and
    members of the subcommittee, it is a pleasure to be here this
    morning to share information and perspectives as the committee
    examines issues concerning the financial performance of FHA.
        Although the program currently operates with a negative
    subsidy, the risks FHA faces in today's mortgage market are
    growing. Because of the worsening performance of the mortgages
    it insures, FHA has estimated that the program would require a
    positive subsidy--that is, an appropriation of budget
    authority--in fiscal year 2008 if no program changes were made.
        To help FHA adapt to market changes, HUD has proposed a
    number of changes to the National Housing Act that would
    provide FHA flexibilities. A major theme of our testimony today
    is that whether under its existing authority or using any
    additional flexibility that Congress may grant, FHA's ability
    to manage both risk and program changes will affect the
    financial performance of the insurance program.
        Our testimony discusses four reports that we have issued
    since 2005, plus some related information from ongoing work
    we're conducting at the request of Senators Allard and Shelby.
        In summary, our work identified a number of weaknesses in
    FHA's ability to estimate and manage risk that may affect the
    financial performance of the insurance program.
        First, FHA has not developed sufficient standards and
    controls to manage risks associated with a substantial
    proportion of loans with down payment assistance, including
    assistance from nonprofit organizations funded by home sellers.
    According to FHA, high claim and loss rates for loans with such
    assistance were major reasons for the estimated positive
    subsidy cost for fiscal year 2008, absent any program changes.
        Second, FHA has not consistently implemented practices,
    such as stricter underwriting or piloting used by other
    mortgage institutions to help manage the risks associated with
    new product offerings. Although FHA has indicated that it would
    impose stricter underwriting standards for a no-down-payment
    mortgage if the legislative changes were enacted, it does not
    plan to pilot the product.
        Third, the way that FHA developed its mortgage scorecard,
    while generally reasonable, limits how effectively it assesses
    the default risk of borrowers. With increased competition from
    conventional mortgage providers, limitations in its scorecard
    could cause FHA to insure mortgages that are relatively more
    risky. Our ongoing work indicates that FHA plans to use the
    scorecard to help set insurance premiums if legislative changes
    are enacted. Accordingly, any limitations in the scorecard's
    ability to predict defaults could result in FHA mispricing its
    products.
        Fourth, although FHA has improved its ability to estimate
    the subsidy costs for its single-family insurance program, it
    generally has underestimated these costs. Increases in the
    expected level of claims were a major cause of a particularly
    large re-estimate that FHA submitted as of the end of fiscal
    year 2003.
        We have made several recommendations in our recent reports,
    including that FHA: (1) incorporate the risk posed by down
    payment assistance into its scorecard; (2) study and report on
    the impact of variables not in its loan performance models that
    have been found to influence credit risk; and (3) consider
    piloting new products.

                               PREPARED STATEMENT

        FHA has taken actions in response to our recommendations,
    but continued focus on risk management will be necessary for
    FHA to operate in a financially sound manner in the face of
    market and program changes.
        Madam Chairman, I would be happy to answer any questions at
    this time.
        [The statement follows:]
                     Prepared Statement of William B. Shear
        Madam Chairman and members of the subcommittee, I am pleased to
    have the opportunity to share information and perspectives with the
    committee as it examines issues concerning the financial performance of
    the Department of Housing and Urban Development's (HUD) Federal Housing
    Administration (FHA). FHA provides insurance for single-family home
    mortgages made by private lenders. In fiscal year 2006, it insured
    about 426,000 mortgages, representing $55 billion in mortgage
    insurance. According to FHA's estimates, the insurance program
    currently operates with a negative subsidy, meaning that the present
    value of estimated cash inflows (such as borrower premiums) to FHA's
    Mutual Mortgage Insurance Fund (Fund) exceeds the present value of
    estimated cash outflows (such as claims).
        But, the risks FHA faces in today's mortgage market are growing.
    For example, the agency has seen increased competition from
    conventional mortgage and insurance providers, many of which offer low-
    and no-down-payment products, and that may be better able than FHA to
    identify and approve relatively low-risk borrowers. Additionally,
    because of the worsening performance of the mortgages it insures, FHA
    has estimated that the program would require a positive subsidy--that
    is, an appropriation of budget authority--in fiscal year 2008 if no
    program changes were made.
        To help FHA adapt to market changes, HUD has proposed a number of
    changes to the National Housing Act that, among other things, would
    give FHA flexibility to set insurance premiums based on the credit risk
    of borrowers and reduce down-payment requirements from the current 3
    percent to potentially zero. Whether under its existing authority or
    using any additional flexibility that Congress may grant, FHA's ability
    to manage risks and program changes will affect the financial
    performance of the insurance program.
        My testimony today discusses 4 reports that we have issued since
    2005 on different aspects of FHA's risk management, as well as ongoing
    work we are conducting on FHA's proposed legislative changes and the
    tools and resources it would use to implement them, if passed. This
    body of work addresses a number of issues relevant to FHA's financial
    performance. Specifically, I will discuss: (1) weaknesses in how FHA
    has managed the risks of loans with down-payment assistance; (2)
    practices that could be instructive for FHA in managing the risks of
    new mortgage products; (3) FHA's development and use of a mortgage
    scorecard; and (4) FHA's estimation of subsidy costs for its single-
    family insurance program.
        In conducting this work, we reviewed and analyzed information
    concerning the standards and controls FHA uses to manage the risks of
    loans with down-payment assistance; steps mortgage industry
    participants take to design and implement low- and no-down-payment
    mortgage products; FHA's approach to developing its mortgage scorecard
    and the scorecard's benefits and limitations; FHA's estimates of
    program costs and the factors underlying the agency's cost reestimates;
    and FHA's plans and resources for implementing its proposed legislative
    changes. We interviewed officials from FHA, the U.S. Department of
    Agriculture, and U.S. Department of Veterans Affairs; and staff at
    selected private mortgage providers and insurers, Fannie Mae, Freddie
    Mac, the Office of Federal Housing Enterprise Oversight, selected State
    housing finance agencies, and nonprofit down-payment assistance
    providers. We conducted this work from January 2004 to March 2007 in
    accordance with generally accepted government auditing standards.
        In summary, our work identified a number of weaknesses in FHA's
    ability to estimate and manage risk that may affect the financial
    performance of the insurance program:
        FHA has not developed sufficient standards and controls to manage
    risks associated with the substantial proportion of loans with down-
    payment assistance. Unlike other mortgage industry participants, FHA
    does not restrict homebuyers' use of down-payment assistance from
    nonprofit organizations that receive part of their funding from home
    sellers. However, our analysis of a national sample of FHA-insured
    loans found that the probability of loans with this type of down-
    payment assistance resulting in an insurance claim was 76 percent
    higher than comparable loans without such assistance. Additionally, the
    financial risks of these loans recently have been realized in effects
    on the credit subsidy estimates. According to FHA, high claim and loss
    rates for loans with this type of down-payment assistance were major
    reasons why the estimated credit subsidy rate--the expected cost--for
    the single-family insurance program would be positive, or less
    favorable, in fiscal year 2008 (absent any program changes).
        Some of the practices of other mortgage institutions offer a
    framework that could help FHA manage the risks associated with new
    products such as no-down-payment mortgages. For example, mortgage
    institutions may limit the volume of new products issued--that is,
    pilot a product--and sometimes require stricter underwriting on these
    products. While FHA has utilized pilots or demonstrations when making
    changes to its single-family mortgage insurance, it generally has done
    so in response to a legislative requirement and not on its own
    initiative. Moreover, FHA officials have questioned the circumstances
    under which pilot programs were needed and also said that they lacked
    sufficient resources to appropriately manage a pilot. However, FHA
    officials have indicated that they would institute stricter
    underwriting standards for any no-down-payment mortgage authorized by
    their legislative proposal.
        While generally reasonable, the way that FHA developed its mortgage
    scorecard--an automated tool that evaluates the default risk of
    borrowers--limits the scorecard's effectiveness. More specifically, FHA
    and its contractor used variables that reflected borrower and loan
    characteristics to create the scorecard and an accepted modeling
    process to test the variables' accuracy in predicting default. But, the
    data used to develop the scorecard were 12 years old by the time that
    FHA began using the scorecard in 2004, and the market has changed
    significantly since then. In addition, the scorecard does not include
    all the important variables that could help explain expected loan
    performance such as the source of the down payment. With competition
    from conventional providers, limitations in the scorecard could cause
    FHA to insure mortgages that are relatively more risky. Our ongoing
    work indicates that FHA plans to use the scorecard to help set
    insurance premiums if legislative changes are enacted. Accordingly, any
    limitations in the scorecard's ability to predict defaults could result
    in FHA mispricing its products.
        Although FHA has improved its ability to estimate the subsidy costs
    for its single-family insurance program, it generally has
    underestimated these costs. To meet Federal requirements, FHA annually
    reestimates subsidy costs for each loan cohort.\1\ The current
    reestimated subsidy costs for all except the fiscal year 1992 and 1993
    cohorts are less favorable--that is, higher--than originally estimated.
    Increases in the expected level of insurance claims--potentially
    stemming from changes in underwriting guidelines, among other factors--
    were a major cause of a particularly large reestimate that FHA
    submitted as of the end of fiscal year 2003.
    ---------------------------------------------------------------------------
        \1\ Essentially, a cohort includes the loans insured in a given
    year.
    ---------------------------------------------------------------------------
        On the basis of our findings from the reports I have summarized, we
    made several recommendations designed to improve FHA's risk management.
    For example, to improve its assessment of borrowers' default risk, we
    recommended that FHA develop policies for updating the scorecard,
    incorporate the risks posed by down-payment assistance into the
    scorecard, and explore additional uses for this tool. To more reliably
    estimate program costs, we recommended that FHA study and report in the
    annual actuarial review of the Fund the impact of variables not in the
    agency's loan performance models (the results of which are used in
    estimating and reestimating program costs) that have been found in
    other studies to influence credit risk.\2\
    ---------------------------------------------------------------------------
        \2\ Since 1990, the National Housing Act has required an annual and
    independent actuarial analysis of the economic net worth and soundness
    of the Fund. 12 U.S.C. section 1711(g).
    ---------------------------------------------------------------------------
        FHA has taken actions in response to some of our findings and
    recommendations. For example, FHA has developed and begun putting in
    place policies for annually updating the scorecard and testing
    additional predictive variables. To more reliably assess program costs,
    an FHA contractor incorporated the source of down-payment assistance
    and borrower credit scores in recent actuarial reviews of the Fund.
        While these actions represent improvements in FHA's risk
    management, sustained management attention to the issues that we have
    identified and continued congressional oversight of FHA will play an
    important role in ensuring that FHA is able to expand homeownership
    opportunities for low- and middle-income families while operating in a
    manner that is financially sound.
                                   background
        Congress established FHA in 1934 under the National Housing Act
    (Public Law 73-479) to broaden homeownership, protect lending
    institutions, and stimulate employment in the building industry. FHA's
    single-family programs insure private lenders against losses (up to
    almost 100 percent of the loan amount) from borrower defaults on
    mortgages that meet FHA criteria. In 2005, more than three-quarters of
    the loans that FHA insured went to first-time homebuyers, and about
    one-third of these loans went to minorities. From 2001 through 2005,
    FHA insured about 5 million mortgages with a total value of about $590
    billion. However, FHA's loan volume fell sharply over that period, and
    in 2005 FHA-insured loans accounted for about 5 percent of single-
    family home purchase mortgages, compared with about 19 percent in
    2001.\3\ Additionally, default rates for FHA-insured mortgages have
    risen steeply over the past several years, a period during which home
    prices have generally appreciated rapidly.
    ---------------------------------------------------------------------------
        \3\ These figures represent mortgages for owner-occupied homes
    only.
    ---------------------------------------------------------------------------
        FHA determines the expected cost of its insurance program, known as
    the credit subsidy cost, by estimating the program's future
    performance.\4\ Similar to other agencies, FHA is required to
    reestimate credit subsidy costs annually to reflect actual loan
    performance and expected changes in estimates of future loan
    performance. FHA has estimated negative credit subsidies for the Fund
    from 1992, when Federal credit reform became effective, through 2007.
    However, FHA has estimated that, assuming no program changes, the loans
    it expects to insure in fiscal year 2008 would require a positive
    subsidy, meaning that the present value of estimated cash inflows would
    be less than the present value of estimated cash outflows. The economic
    value, or net worth, of the Fund that supports FHA's insurance depends
    on the relative size of cash outflows and inflows over time. Cash flows
    out of the Fund for payments associated with claims on defaulted loans
    and refunds of up-front premiums on prepaid mortgages. To cover these
    outflows, FHA receives cash inflows from borrowers' insurance premiums
    and net proceeds from recoveries on defaulted loans. An independent
    contractor's actuarial review of the Fund for fiscal year 2006
    estimated that the Fund's capital ratio--the economic value divided by
    the insurance-in-force--is 6.82 percent, well above the mandated 2
    percent minimum.\5\ If the Fund were to be exhausted, the U.S. Treasury
    would have to cover lenders' claims directly.
    ---------------------------------------------------------------------------
        \4\ Pursuant to the Federal Credit Reform Act of 1990, HUD must
    annually estimate the credit subsidy cost for its mortgage insurance
    programs. Credit subsidy costs are the net present value of estimated
    payments HUD makes less the estimated amounts it receives, excluding
    administrative costs.
        \5\ In fiscal year 2006, the Fund's estimated economic value was
    $22 billion and the unamortized insurance-in-force was $323 billion.
    ---------------------------------------------------------------------------
        Two major trends in the conventional mortgage market have
    significantly affected FHA.\6\ First, in recent years, members of the
    conventional mortgage market (such as private mortgage insurers, Fannie
    Mae, and Freddie Mac) increasingly have been active in supporting low-
    and even no-down-payment mortgages, increasing consumer choices for
    borrowers who may have previously chosen an FHA-insured loan. Second,
    to help assess the default risk of borrowers, particularly those with
    high loan-to-value ratios (loan amount divided by sales price or
    appraised value), the mortgage industry has increasingly used mortgage
    scoring and automated underwriting systems.\7\ Mortgage scoring is a
    technology-based tool that relies on the statistical analysis of
    millions of previously originated mortgage loans to determine how key
    attributes such as the borrower's credit history, property
    characteristics, and terms of the mortgage affect future loan
    performance. As a result of such tools, the mortgage industry is able
    to process loan applications more quickly and consistently than in the
    past. In 2004, FHA implemented a mortgage scoring tool, called the FHA
    Technology Open to Approved Lenders (TOTAL) Scorecard, to be used in
    conjunction with existing automated underwriting systems.
    ---------------------------------------------------------------------------
        \6\ Conventional mortgages do not carry government insurance or
    guarantees.
        \7\ Underwriting refers to a risk analysis that uses information
    collected during the origination process to decide whether to approve a
    loan.
    ---------------------------------------------------------------------------
        Partly in response to changes in the mortgage market, HUD has
    proposed legislation intended to modernize FHA. Provisions in the
    proposal would authorize FHA to change the way it sets insurance
    premiums and reduce down-payment requirements. The proposed legislation
    would enable FHA to depart from its current, essentially flat, premium
    structure and charge a wider range of premiums based on individual
    borrowers' risk of default. Currently, FHA also requires homebuyers to
    make a 3 percent contribution toward the purchase of the property.
    HUD's proposal would eliminate this contribution requirement and enable
    FHA to offer some borrowers a no-down-payment product.
      fha has not implemented sufficient standards and controls to manage
             financial risks of loans with down-payment assistance
        In our November 2005 report examining FHA's actions to manage the
    new risks associated with the growing proportion of loans with down-
    payment assistance, we found that the agency did not implement
    sufficient standards and controls to manage the risks posed by these
    loans.\8\ Unlike other mortgage industry participants, FHA does not
    restrict homebuyers' use of down-payment assistance from nonprofit
    organizations that receive part of their funding from home sellers.
    According to FHA, high claim and loss rates for loans with this type of
    down-payment assistance were major reasons for changing the estimated
    credit subsidy rate from negative to positive for fiscal year 2008 (in
    the absence of any program changes). Furthermore, incorporating the
    impact of such loans into the actuarial study of the Fund for fiscal
    year 2005 resulted in almost a $2 billion (7 percent) decrease in the
    Fund's estimated economic value.
    ---------------------------------------------------------------------------
        \8\ GAO, Mortgage Financing: Additional Action Needed to Manage
    Risks of FHA-Insured Loans with Down Payment Assistance, GAO-06-24
    (Washington, DC: Nov. 9, 2005).
    ---------------------------------------------------------------------------
    Loans With Down-Payment Assistance Are a Substantial Portion of FHA's
            Portfolio and Pose Greater Financial Risks Than Similar Loans
            Without Assistance
        Homebuyers who receive FHA-insured mortgages often have limited
    funds and, to meet the 3 percent borrower investment FHA currently
    requires, may obtain down-payment assistance from a third party, such
    as a relative or a charitable organization (nonprofit) that is funded
    by the property sellers. The proportion of FHA-insured loans that are
    financed in part by down-payment assistance from various sources has
    increased substantially in the last few years, while the overall number
    of loans that FHA insures has fallen dramatically. Money from
    nonprofits funded by seller contributions has accounted for a growing
    percentage of that assistance. From 2000 to 2004, the total proportion
    of FHA-insured purchase loans that had a loan-to-value ratio greater
    than 95 percent and that also involved down-payment assistance, from
    any source, grew from 35 percent to nearly 50 percent. Approximately 6
    percent of FHA-insured purchase loans in 2000 received down-payment
    assistance from nonprofits (the large majority of which were funded by
    property sellers), but by 2004 nonprofit assistance grew to about 30
    percent. The corresponding percentages for 2005 and 2006 were about the
    same.
        We and others have found that loans with down-payment assistance do
    not perform as well as loans without down-payment assistance. We
    analyzed loan performance by source of down-payment assistance, using
    two samples of FHA-insured purchase loans from 2000, 2001, and 2002--a
    national sample and a sample from three metropolitan statistical areas
    (MSA) with high rates of down-payment assistance.\9\ Holding other
    variables constant, our analysis indicated that FHA-insured loans with
    down-payment assistance had higher delinquency and claim rates than
    similar loans without such assistance. For example, we found that the
    probability that loans with nonseller-funded sources of down-payment
    assistance (e.g., gifts from relatives) would result in insurance
    claims was 49 percent higher in the national sample and 45 percent
    higher in the MSA sample than it was for comparable loans without
    assistance. Similarly, the probability that loans with nonprofit
    seller-funded down-payment assistance would result in insurance claims
    was 76 percent higher in the national sample and 166 percent higher in
    the MSA sample than it was for comparable loans without assistance.
    This difference in performance may be explained, in part, by the higher
    sales prices of comparable homes bought with seller-funded down-payment
    assistance. Our analysis indicated that FHA-insured homes bought with
    seller-funded nonprofit assistance were appraised and sold for about 2
    to 3 percent more than comparable homes bought without such assistance.
    The difference in performance also may be partially explained by the
    homebuyer having less equity in the transaction.
    ---------------------------------------------------------------------------
        \9\ The data (current as of June 30, 2005) consisted of purchase
    loans insured by FHA's 203(b) program, its main single-family program,
    and its 234(c), condominium program. The three MSAs were Atlanta,
    Indianapolis, and Salt Lake City.
    ---------------------------------------------------------------------------
    Stricter Standards and Additional Controls Could Help FHA Manage the
            Risks Posed by Loans With Down-Payment Assistance
        FHA has implemented some standards and internal controls to manage
    the risks associated with loans with down-payment assistance, but
    stricter standards and additional controls could help FHA better manage
    the financial risks posed by these loans while meeting its mission of
    expanding homeownership opportunities. Like other mortgage industry
    participants, FHA generally applies the same underwriting standards to
    loans with down-payment assistance that it applies to loans without
    such assistance. One important exception is that FHA, unlike others,
    does not limit the use of down-payment assistance from seller-funded
    nonprofits. Some mortgage industry participants view assistance from
    seller-funded nonprofits as a seller inducement to the sale and,
    therefore, either restrict or prohibit its use. FHA has not treated
    such assistance as a seller inducement and, therefore, does not subject
    this assistance to the limits it otherwise places on contributions from
    sellers.
        Concerns about loans with nonprofit seller-funded down-payment
    assistance have prompted FHA and IRS to initiate steps that could curb
    their use. For example, FHA has begun drafting a proposed rule that, as
    described by FHA, would appear to prohibit down-payment assistance from
    seller-funded nonprofits. FHA's legislative proposal could also
    eliminate the need for such assistance by allowing some FHA borrowers
    to make no down payments for an FHA-insured loan. Finally, in May 2006,
    IRS issued a ruling stating that organizations that provide seller-
    funded down-payment assistance to home buyers do not qualify as tax-
    exempt charities. FHA permitted these organizations to provide down-
    payment assistance because they qualified as charities. Accordingly,
    the ruling could significantly reduce the number of FHA-insured loans
    with seller-funded down payments. However, FHA officials told us that
    as of March 2007, they were not aware of IRS rescinding the charitable
    status of any of these organizations.
        Our report made several recommendations designed to better manage
    the risks of loans with down-payment assistance generally, and more
    specifically from seller-funded nonprofits. Overall, we recommended
    that in considering the costs and benefits of its policy permitting
    down-payment assistance, FHA also consider risk-mitigation techniques
    such as including down-payment assistance as a factor when underwriting
    loans or more closely monitoring loans with such assistance. For down-
    payment assistance providers that receive funding from property
    sellers, we recommended that FHA take additional steps to mitigate the
    risks of these loans, such as treating such assistance as a seller
    contribution and, therefore, subject to existing limits on seller
    contributions. In response, FHA agreed to improve its oversight of
    down-payment assistance lending by: (1) modifying its information
    systems to document assistance from seller-funded nonprofits; and, (2)
    more routinely monitoring the performance of loans with down-payment
    assistance. Also, as previously noted, HUD has initiated steps to curb
    and provide alternatives to seller-funded down-payment assistance.
     practices that other mortgage institutions use could help fha manage
                  risks from low- or no-down-payment products
        If Congress authorized FHA to insure mortgages with smaller or no
    down payments, practices that other mortgage institutions use could
    help FHA to design and manage the financial risks of these new
    products. In a February 2005 report, we identified steps that mortgage
    institutions take when introducing new products.\10\ Specifically,
    mortgage institutions often utilize special requirements when
    introducing new products, such as requiring additional credit
    enhancements (mechanisms for transferring risk from one party to
    another) or implementing stricter underwriting requirements, and
    limiting how widely they make available a new product. By adopting such
    practices, FHA could reduce the potential for higher claims on products
    whose risks may not be well understood.
    ---------------------------------------------------------------------------
        \10\ GAO, Mortgage Financing: Actions Needed to Help FHA Manage
    Risks from New Mortgage Loan Products, GAO-05-194 (Washington, DC: Feb.
    11, 2005).
    ---------------------------------------------------------------------------
    Mortgage Institutions Require Additional Credit Enhancements, Stricter
            Underwriting, and Higher Premiums for Low- and No-Down-Payment
            Products
        Some mortgage institutions require additional credit enhancements
    on low- and no-down payment products, which generally are riskier
    because they have higher loan-to-value ratios than loans with larger
    down payments. For example, Fannie Mae and Freddie Mac mitigate the
    risk of low- and no-down payment products by requiring additional
    credit enhancements such as higher mortgage insurance coverage.
    Although FHA is required to provide up to 100 percent coverage of the
    loans it insures, FHA may engage in co-insurance of its single-family
    loans. Under co-insurance, FHA could require lenders to share in the
    risks of insuring mortgages by assuming some percentage of the losses
    on the loans that they originated (lenders would generally use private
    mortgage insurance for risk sharing).
        Mortgage institutions also can mitigate the risk of low- and no-
    down-payment products through stricter underwriting. Institutions can
    do this in a number of ways, including requiring a higher credit score
    threshold for certain products, requiring greater borrower reserves, or
    requiring more documentation of income or assets from the borrower.
    Although the changes FHA could make are limited by statutory standards,
    it could benefit from similar approaches. The HUD Secretary has
    latitude within statutory limitations to change underwriting
    requirements for new and existing products and has done so many times.
    For example, FHA expanded its definition of what could be included as
    borrower's effective income when calculating payment-to-income ratios.
    In commenting on our February 2005 report, FHA officials told us that
    they were unlikely to mandate a credit score threshold or borrower
    reserve requirements for a no-down-payment product because the product
    was intended to serve borrowers who were underserved by the
    conventional market, including those who lacked credit scores and had
    little wealth or personal savings. However, in the course of our
    ongoing work on FHA's legislative proposal, FHA officials indicated
    that they would likely set a credit score threshold for any no-down-
    payment product.
        Finally, mortgage institutions can increase fees or charge higher
    premiums to help offset the potential costs of products that are
    believed to have greater risk. For example, Fannie Mae officials stated
    that they would charge higher guarantee fees on low- and no-down
    payment loans if they were not able to require higher insurance
    coverage.\11\ Our ongoing work indicates that FHA, if authorized to
    implement risk-based pricing, would charge higher premiums for loans
    with higher loan-to-value ratios, all other things being equal.
    ---------------------------------------------------------------------------
        \11\ Fannie Mae and Freddie Mac charge fees for guaranteeing timely
    payment on mortgage-backed securities they issue. The fees are based,
    in part, on the credit risk they face.
    ---------------------------------------------------------------------------
        We recommended that if FHA implemented a no-down-payment mortgage
    product or other new products about which the risks were not well
    understood, the agency should: (1) consider incorporating stricter
    underwriting criteria such as appropriate credit score thresholds or
    borrower reserve requirements; and, (2) utilize other techniques for
    mitigating risks, including the use of credit enhancements. In
    response, FHA said it agreed that these techniques should be evaluated
    when considering or proposing a new FHA product.
    Before Fully Implementing New Products, Some Mortgage Institutions May
            Limit Availability
        Some mortgage institutions initially may offer new products on a
    limited basis. For example, Fannie Mae and Freddie Mac sometimes use
    pilots, or limited offerings of new products, to build experience with
    a new product type. Fannie Mae and Freddie Mac also sometimes set
    volume limits for the percentage of their business that could be low-
    and no-down-payment lending. FHA has utilized pilots or demonstrations
    when making changes to its single-family mortgage insurance but
    generally has done so in response to legislative requirement rather
    than on its own initiative. For example, FHA's Home Equity Conversion
    Mortgage insurance program started as a pilot that authorized FHA to
    insure 2,500 reverse mortgages.\12\ Additionally, some mortgage
    institutions may limit the origination and servicing of new products to
    their better lenders and servicers. Fannie Mae and Freddie Mac both
    reported that these were important steps in introducing a new product.
    ---------------------------------------------------------------------------
        \12\ Under this program, homeowners borrow against equity in their
    home and receive payments from their lenders.
    ---------------------------------------------------------------------------
        We recommended that when FHA releases new products or makes
    significant changes to existing products, it consider similar steps to
    limit the initial availability of these products. FHA officials agreed
    that they could, under certain circumstances, envision piloting or
    limiting the ways in which a new product would be available, but
    pointed to the practical limitations of doing so. For example, FHA
    officials told us that administering the Home Equity Conversion
    Mortgage pilot program was difficult because of the challenges of
    equitably selecting a limited number of lenders and borrowers. FHA
    generally offers products on a national basis and, if they did not,
    specific regions of the county or lenders might question why they were
    not able to receive the same benefit. FHA officials told us they have
    conducted pilot programs when Congress has authorized them, but they
    questioned the circumstances under which pilot programs were needed,
    and also said that they lacked sufficient resources to appropriately
    manage a pilot. Consistent with these views, FHA officials told us more
    recently that they would not limit the initial availability of any
    products authorized by its legislative proposal. However, if FHA does
    not limit the availability of new or changed products, the agency runs
    the risk of facing higher claims from products whose risks may not be
    well understood.
      the way fha developed total limits the scorecard's effectiveness in
                    assessing the default risk of borrowers
        A primary tool that FHA uses to assess the default risk of
    borrowers who apply for FHA-insured mortgages is its TOTAL scorecard.
    TOTAL's capabilities are important, because to the extent that
    conventional mortgage lenders and insurers are better able than FHA to
    use mortgage scoring to identify and approve relatively low-risk
    borrowers and charge fees based on default risk, FHA may face adverse
    selection. That is, conventional providers may approve lower-risk
    borrowers in FHA's traditional market segment, leaving relatively high-
    risk borrowers for FHA. Accordingly, the greater the effectiveness of
    TOTAL, the greater the likelihood that FHA will be able to effectively
    manage the risks posed by borrowers and operate in a financially sound
    manner.
        In reports we issued in November 2005 and April 2006, we noted that
    while FHA's process for developing TOTAL generally was reasonable, some
    of the choices FHA made in the development process could limit the
    scorecard's effectiveness.\13\ FHA and its contractor used variables
    that reflected borrower and loan characteristics to create TOTAL, as
    well as an accepted modeling process to test the variables' accuracy in
    predicting default. However, we also found that:
    ---------------------------------------------------------------------------
        \13\ GAO, Mortgage Financing: HUD Could Realize Additional Benefits
    from its Mortgage Scorecard, GAO-06-435 (Washington, DC: Apr. 13, 2006)
    and GAO-06-24.
    ---------------------------------------------------------------------------
        The data used to develop TOTAL were 12 years old by the time FHA
    implemented the scorecard. Specifically, when FHA began developing
    TOTAL in 1998, the agency chose to use 1992 loan data, which would be
    old enough to provide a sufficient number of defaults that could be
    attributed to a borrower's poor creditworthiness. However, FHA did not
    implement TOTAL until 2004 and has not subsequently updated the data
    used in the scorecard. Best practices of private-sector organizations
    call for scorecards to be based on data that are representative of the
    current mortgage market--specifically, relevant data that are no more
    than several years old. In the past 12 years, significant changes--
    growth in the use of down-payment assistance, for example--have
    occurred in the mortgage market that have affected the characteristics
    of those applying for FHA-insured loans. As a result, the relationships
    between borrower and loan characteristics and the likelihood of default
    also may have changed.
        TOTAL does not include certain key variables that could help
    explain expected loan performance. For example, TOTAL does not include
    a variable for the source of the down payment. However, FHA
    contractors, HUD's Inspector General, and our work have all identified
    the source of a down payment as an important indicator of risk, and the
    use of down-payment assistance in the FHA program has grown rapidly
    over the last 5 years. Further, TOTAL does not include other important
    variables--such as a variable for generally riskier adjustable rate
    loans--included in other scorecards used by private-sector entities.
        Although FHA had a contract to update TOTAL, the agency did not
    develop a formal plan for updating TOTAL on a regular basis. Best
    practices in the private sector, also reflected in bank regulator
    guidance, call for having formal policies to ensure that scorecards are
    routinely updated. Without policies and procedures for routinely
    updating TOTAL, the scorecard may become less reliable and, therefore,
    less effective at predicting the likelihood of default.
        To improve TOTAL's effectiveness, we recommended, among other
    things, that HUD develop policies and procedures for regularly updating
    TOTAL and more fully consider the risks posed by down-payment
    assistance when underwriting loans, such as including the presence and
    source of down-payment assistance as a loan variable in the scorecard.
    In response, FHA has developed and begun putting in place policies and
    procedures that call for annual: (1) monitoring of the scorecard's
    ability to predict loan default; (2) testing of additional predictive
    variables to include in the scorecard; and, (3) updating the scorecard
    with recent loan performance data.
        We also recommended that HUD explore additional uses for TOTAL,
    including using it to implement risk-based pricing of mortgage
    insurance and to develop new products. These actions could enhance
    FHA's ability to effectively compete in the mortgage market and avoid
    adverse selection. Our ongoing work indicates that FHA plans to use
    borrowers' TOTAL scores to help set insurance premiums. Accordingly,
    any limitations in TOTAL's ability to predict defaults could result in
    FHA mispricing its products.
     fha's current reestimated subsidy costs are generally less favorable
                          than its original estimates
        As previously noted, FHA, like other Federal agencies, is required
    to reestimate credit subsidy costs annually to reflect actual loan
    performance and expected changes in estimates of future loan
    performance. In doing so, FHA reestimates subsidy costs for each loan
    cohort.
        As we reported in September 2005, FHA's subsidy reestimates
    generally have been less favorable (i.e., higher) than the original
    estimates since Federal credit reform became effective in 1992.\14\ The
    current reestimated subsidy costs for all except the fiscal year 1992
    and 1993 cohorts are higher than the original estimates. For example,
    the current reestimated cost for the fiscal year 2006 cohort is about
    $800 million less favorable than originally estimated.
    ---------------------------------------------------------------------------
        \14\ GAO, Mortgage Financing: FHA's $7 Billion Reestimate Reflects
    Higher Claims and Changing Loan Performance Estimates, GAO-05-875
    (Washington, DC: Sep. 2, 2005).
    ---------------------------------------------------------------------------
        With respect to reestimates across cohorts, our report examined
    factors contributing to an unusually large $7 billion reestimate (more
    than twice the size of other recent reestimates) that FHA submitted as
    of the end of fiscal year 2003 for the fiscal year 1992 through 2003
    cohorts. These factors included increases in estimated claims and
    prepayments (the payment of a loan before its maturity date). Several
    policy changes and trends may have contributed to changes in the
    expected claims. For example:
        Revised underwriting guidelines made it easier for borrowers who
    were more susceptible to changes in economic conditions--and therefore
    more likely to default on their mortgages--to obtain an FHA-insured
    loan.
        Competition from conventional mortgage providers could have
    resulted in FHA insuring more risky borrowers.
        FHA insured an increasing number of loans with down-payment
    assistance, which generally have a greater risk of default.
        FHA's loan performance models did not include key variables that
    help estimate loan performance, such as credit scores, and as of
    September 2005, the source of down payment.
        The major factors underlying the surge in prepayment activity were
    declining interest rates and rapid appreciation of housing prices.
    These trends created incentives and opportunities for borrowers to
    refinance using conventional loans.
        To more reliably estimate program costs, we recommended that FHA
    study and report on how variables found to influence credit risk, such
    as payment-to-income ratios, credit scores, and down-payment assistance
    would affect the forecasting ability of its loan performance models. We
    also recommended that when changing the definitions of key variables,
    FHA report the impact of such changes on the models' forecasting
    ability. In response, HUD indicated that its contractor was considering
    the specific variables that we had recommended FHA include in its
    annual actuarial review of the Fund. The contractor subsequently
    incorporated the source of down-payment assistance in the fiscal year
    2005 actuarial review and borrower credit scores in the fiscal year
    2006 review.
        Madam Chairman, this concludes my prepared statement. I would be
    happy to answer any questions at this time.

        Senator Murray. Thank you very much. Ms. Poole.
    STATEMENT OF JOANNE POOLE, COMMITTEE LIAISON, NATIONAL
                ASSOCIATION OF REALTORS
        Ms. Poole. Good morning, Madam Chairman and Ranking Member
    Bond and members of the subcommittee. I am the broker/owner of
    Poole Realty, located in Glen Burnie, Maryland. I have been a
    realtor for 21--sorry.
        I am the broker/owner of Poole Realty in Glen Burnie,
    Maryland and I have been a realtor for 21 years and I am
    currently part of the National Association of Realtors'
    Enlarged Leadership Team. I am here today to present the views
    of the National Association of Realtors' 1.3 million realtor
    members on the need to reform the FHA program.
        The current increase in foreclosures is troubling to all of
    us. Predatory lending, exotic mortgages and a dramatic rise in
    subprime lending, coupled with the slowing of the home price
    appreciation, have all contributed to this crisis.
        In 1934, the Federal Housing Administration was established
    to provide consumers an alternative during a similar lending
    crisis. At that time, short term, interest only and balloon
    loans were prevalent. As conventional and subprime lenders have
    expanded their repertoire of loan products, FHA has remained
    stagnant. As a result, a growing number of homebuyers have
    turned to subprime and nontraditional mortgages. While subprime
    loans have a very important role for certain borrowers, there
    are many consumers who have taken out subprime loans when they
    would have easily qualified for FHA at a lower overall cost.
        More troubling are the families who have explored
    nontraditional mortgages such as interest-only and option ARMs.
    For some of these borrowers, monthly payments will become
    impossible as payments increase by as much as 50 percent or
    more when the introductory periods end or when their loan
    balances get larger and larger each month instead of smaller.
        To enhance FHA's viability, the administration has proposed
    a number of important reforms to the FHA Single Family
    Insurance program that NAR believes will greatly benefit
    homebuyers by improving access to FHA's safe and affordable
    credit.
        As an example, the National Association of Realtors
    projects that in Washington State, where less than 6,500
    homeowners used FHA for financing in 2005, the reforms proposed
    could increase the number of FHA homebuyers by more than 62
    percent, saving those borrowers $20.9 million over what they
    would have paid with a subprime loan. Also based on NAR's
    research, we believe that in Missouri, the FHA borrowers would
    have increased by 50 percent for a savings of $18.1 million.
        Eliminating the statutory 3 percent minimum cash investment
    in down payment calculation will provide consumers a safe
    option away from the nontraditional products. Differing
    premiums based on the risk of the borrower, would allow FHA a
    balanced risk. Risk based pricing is accepted practice in the
    private market; it should be for FHA as well.
        The administration also proposes combining all Single
    Family programs into the Mutual Mortgage Insurance fund. It
    simply makes good business sense to combine these programs. The
    administration also proposes increasing FHA's loan limits, not
    in just high cost areas but nationwide. Such increases are
    critical to FHA to assist homebuyers in places like California
    but also areas where home prices exceed the current maximum of
    $200,160 but are not defined as high cost areas, such as
    Washington, Pennsylvania and Colorado.
        The universal and consistent availability of FHA loan
    products is the principle hallmark of the program that has made
    mortgage insurance available to individuals regardless of their
    racial, ethnic or social characteristics during periods of
    economic prosperity and economic depression. This will be
    especially important today.
        By offering access to prime rate financing, FHA provides
    borrowers a means to achieve lower monthly payments without
    relying on interest only or optional payment schemes. FHA
    products are fairly priced without resorting to teaser rates or
    negative amortization but provides safe and appropriate
    underwriting and loss mitigation programs.
        FHA's loss mitigation program authorizes lenders to assist
    borrowers in default. In the year 2004 alone, more than 78,000
    borrowers were able to retain their home through FHA's loss
    mitigation program and 2 years later, nearly 90 percent of
    those borrowers are still in their homes.
        By encouraging lenders to participate in loss mitigation
    efforts and penalizing those who don't, FHA has successfully
    helped homeowners keep their homes and reduce the level of
    losses to FHA fraud.

                               PREPARED STATEMENT

        FHA is often criticized--yes. Without the reforms to the
    FHA program first time homebuyers, minorities and homebuyers
    with less than perfect credit will continue to see fewer and
    fewer safe, affordable mortgage options. The National
    Association of Realtors really believe that this is a program
    that needs to be revamped and have partnered with the Federal
    Housing Administration to produce a booklet, which I would ask
    be admitted into testimony, FHA Improvement Benefits to You and
    the Homeowner.
        [The information follows:]
                       Prepared Statement of JoAnne Poole
        Madam Chairman, Ranking Member Bond, thank you for this opportunity
    to testify before you. My name is JoAnne Poole and I am the broker/
    owner of Poole Realty in Glen Burnie, Maryland. I have been a realtor
    for 21 years, and am currently part of NAR's Enlarged Leadership Team,
    and serve as a 2007 Liaison.
        I am here to testify on behalf of 1.3 million members of the
    National Association of REALTORS. We thank you for the opportunity to
    present our view on the FHA program and the need for reform. NAR
    represents a wide variety of housing industry professionals committed
    to the development and preservation of the Nation's housing stock and
    making it available to the widest range of potential homebuyers. The
    Association has a long tradition of support for innovative and
    effective Federal housing programs and we have worked diligently with
    the Congress to fashion housing policies that ensure Federal housing
    programs meet their mission responsibly and efficiently.
                                  need for fha
        The current increase in foreclosures is troubling to all of us. In
    2006, 1.2 million families entered into foreclosure, 42 percent more
    than in 2005.\1\ Predatory lending, exotic mortgages and a dramatic
    rise in sub-prime lending--coupled with slowing home price
    appreciation--have all contributed to this crisis.
    ---------------------------------------------------------------------------
        \1\ A Flood of Foreclosures, But Should You Invest?, Market Watch,
    February 18, 2007.
    ---------------------------------------------------------------------------
        In 1934 the Federal Housing Administration was established to
    provide consumers an alternative during a similar lending crisis. At
    that time, short-term, interest-only and balloon loans were prevalent.
    Since its inception, FHA has insured more than 34 million properties.
    However, because it hasn't evolved, FHA's market share has been
    dropping. In the 1990's FHA loans were about 12 percent of the market.
    Today, that rate is less than 3 percent. This statistic is unfortunate
    given that FHA is needed now as much as it was in 1934. At the same
    time, the sub-prime market has skyrocketed. In 2003, the sub-prime
    market share was 8.5 percent by 2005 it was at 20 percent. In 2006,
    FHA/VA market share dropped 37.8 percent; conventional loans dropped
    9.8 percent; while sub-prime loans increased another 15.7 percent.
        When formed, FHA was a pioneer of mortgage products. FHA was the
    first to offer 30-year fixed-rate financing in a time when loans were
    generally for less than 5 years. Unfortunately, FHA has not changed
    with the times. Where they were once the innovator, FHA has become the
    lender of last resort. As conventional and sub-prime lenders have
    expanded their repertoire of loan products, FHA has remained stagnant.
    As a result, a growing number of homebuyers are deciding to use one of
    several new types of non-traditional mortgages that let them
    ``stretch'' their income so they can qualify for a larger loan.
        Non-traditional mortgages often begin with a low introductory
    interest rate and payment--a ``teaser''--but the monthly mortgage
    payments are likely to increase significantly in the future. Some of
    these loans are ``low documentation'' mortgages that provide easier
    standards for qualifying, but also feature higher interest rates or
    higher fees. Mortgages such as interest-only and option ARMs can often
    be risky propositions for some borrowers. These products pose severe
    risk for consumers who may be unable to afford their mortgage payments
    when monthly payments increase by as much as 50 percent or more when
    the introductory periods end, or when their loan balances get larger
    each month instead of smaller. Mortgage experts estimate that
    approximately $1.5 trillion worth of adjustable mortgages will reset by
    the end of 2007.\2\ While some borrowers may be able to make the new
    higher payments, many will find it difficult, if not impossible.
    ---------------------------------------------------------------------------
        \2\ Homeowners Brace For ARMs' New Rates, The Seattle Times,
    February 17, 2007.
    ---------------------------------------------------------------------------
        As the market has changed, FHA must also change to reflect consumer
    needs and demands. If FHA is enhanced to conform to today's mortgage
    environment, many borrowers would have available to them a safer
    alternative to the riskier products that are currently marketed to
    them.
                              fha reform proposals
        To enhance FHA's viability, the administration has proposed a
    number of important reforms to the FHA single-family insurance program
    that NAR believes will greatly benefit homebuyers by improving access
    to FHA's safe and affordable credit. By way of an example, NAR projects
    that in Washington State, where less than 6,500 homeowners used FHA for
    financing in 2005, the reforms proposed could increase the number of
    FHA homebuyers by more than 62 percent, saving those borrowers $20.9
    million over what they would pay for a sub-prime loan.
        FHA is proposing to eliminate the statutory 3 percent minimum cash
    investment and downpayment calculation, allow FHA flexibility to
    provide risk-based pricing, move the condo program into the 203(b)
    fund, and increase the loan limits. The National Association of
    REALTORS strongly supports these reform provisions.
        Down Payment Flexibility.--The ability to afford the downpayment
    and settlement costs associated with buying a home remains the most
    challenging hurdle for many homebuyers. Eliminating the statutory 3
    percent minimum downpayment will provide FHA flexibility to offer
    varying downpayment terms to different borrowers. Although housing
    remains strong in our Nation's economy and has helped to increase our
    Nation's homeownership rate to a record 69 percent, many deserving
    American families continue to face obstacles in their quest for the
    American dream of owning a home. Providing flexible downpayment
    products for FHA will go a long way to addressing this problem.
        In 2005, 43 percent of first-time homebuyers financed 100 percent
    of their home. NAR research indicates that if FHA were allowed to offer
    this option, 1.6 million families could benefit. According to NAR's
    Profile of Homebuyers, 55 percent of homebuyers who financed with a
    zero-downpayment loan in 2005, had incomes less than $65,000; 24
    percent of those who used a zero-downpayment product were minorities;
    and 52 percent of people who financed 100 percent of their home
    purchased homes priced at less than $150,000. It is important to note
    that FHA will require borrowers to have some cash investment in the
    home. This investment can be in the form of payment of the up-front
    premium or closing costs. No loan will be made for more than 103
    percent the value of the home.
        Loan Limits.--FHA mortgages are used most often by first-time
    homebuyers, minority buyers, and other buyers who cannot qualify for
    conventional mortgages because they are unable to meet the lender's
    stringent underwriting standards. Despite its successes as a
    homeownership tool, FHA is not a useful product in high cost areas of
    the country because its maximum mortgage limits have lagged far behind
    the median home price in many communities. As a result, working
    families such as teachers, police officers and firefighters are unable
    to buy a home in the communities where they work. Even in your home
    State of Washington, Madam Chairman, the median home price exceeds
    FHA's current limit of $200,160.
        This is why NAR strongly supports proposals to change the FHA loan
    limits. Under the administration's plan, FHA's limits for single unit
    homes in high cost areas would increase from $362,790 to the 2006
    conforming loan limit of $417,000. In non-high cost areas, the FHA
    limit (floor) would increase from $200,160 to $271,050 for single unit
    homes. This increase will enhance FHA's ability to assist homebuyers in
    areas not defined as high-cost, but where home prices still exceed the
    current maximum of $200,160. This includes States like Arizona,
    Colorado, Florida, Georgia, Illinois, Maine, Minnesota, Nevada, North
    Carolina, Ohio, Oregon, Pennsylvania, Utah, Vermont, and Washington.
    While none of these States is generally considered ``high cost'', all
    have median home prices higher than the current FHA loan limit.
        Risk-based Pricing.--Another key component of the administration's
    proposal is to provide FHA with the ability to charge borrowers
    different premiums based on differing credit scores and payment
    histories. Risk-based pricing of the interest rate, fees and/or
    mortgage insurance is used in the conventional and sub-prime markets to
    manage risk and appropriately price products based on an individual's
    financial circumstances. Currently, all FHA borrowers, regardless of
    risk, pay virtually the same premiums and receive the same interest
    rate.
        The legislation will allow FHA to differentiate premiums based on
    the risk of the product (e.g. amount of cash investment) and the credit
    profile of the borrower. These changes will enable FHA to offer all
    borrowers choices in the type of premium charged (e.g. annual, upfront
    or a hybrid). In addition it will permit FHA to reach higher risk
    borrowers (by charging them a premium amount commensurate with risk),
    while continuing to attract the better credit risks, by charging them
    less. FHA financing, with risk-based premium pricing, will still be a
    much better deal for borrowers with higher risk characteristics than is
    currently available in the ``near prime'' or sub-prime markets. Risk-
    based pricing makes total sense to the private market, and should for
    FHA as well.
        It is also important to note that, while FHA has had the authority
    to charge premiums up to 2.25 percent, they have not done so. FHA
    currently charges 1.5 percent. The FHA Fund is strong and has continued
    to have excess revenue, so there has not been a need to increase the
    premiums. However, due to its markedly decreased market share, FHA may
    have to increase premiums on borrowers in 2007 and in future years.
    Unless the program is reformed to make it more consumer-friendly, FHA
    will need to generate more revenue to cover its losses.
        Giving FHA the flexibility to charge different borrowers different
    premiums based on risk will allow FHA to increase their pool of
    borrowers. If FHA is also given authority to provide lower downpayment
    mortgages, premium levels will need to reflect the added risk of such
    loans (as is done in the private market) to protect the FHA fund.
        Changes to the Fund Structures.--The administration also proposes
    to combine all single-family programs into the Mutual Mortgage
    Insurance Fund. The FHA program has four funds with which it insures
    its mortgages. The Mutual Mortgage Insurance (MMI) Fund is the
    principal funding account that insures traditional section 203b single-
    family mortgages. The Fund receives upfront and annual premiums
    collected from borrowers as well as net proceeds from the sale of
    foreclosed homes. It is self-sufficient and has not required taxpayer
    bailouts.
        The Cooperative Management Housing Insurance Fund (CMHI), which is
    linked to the MMI Fund, finances the Cooperative Housing Insurance
    program (section 213) which provides mortgage insurance for cooperative
    housing projects of more than 5 units that are occupied by members of a
    cooperative housing corporation.
        FHA also operates Special Risk Insurance (SRI) and General
    Insurance (GI) Funds, insuring loans used for the development,
    construction, rehabilitation, purchase, and refinancing of multifamily
    housing and healthcare facilities as well as loans for disaster
    victims, cooperatives and seniors housing. Currently, the FHA
    condominium loan guarantee program and 203k purchase/rehabilitation
    loan guarantee program are operated under the GI/SRI Fund.
        NAR strongly supports inclusion of the FHA condominium loan
    guarantee program and the 203k purchase/rehabilitation loan guarantee
    program in the MMIF. Both of these programs provide financing for
    single family units and have little in common with multifamily and
    health facilitates programs covered by the SRI and GI funds. In recent
    years programs operating under the GI/SRI funds have experienced
    disruptions and suspensions due to funding commitment limitations.
    Maintaining the single family condo and purchase/rehabilitation
    programs under the GI/SRI funds exposes these programs to possible
    future disruptions. Thus, from a conceptual an accounting standpoint,
    it makes sound business sense to place all single-family programs under
    the MMIF.
        Program Enhancements.--As well as combining the 203(k) and
    condominium programs under the MMIF, NAR also recommends key
    enhancements to increase the programs' appeal and viability.
    Specifically, NAR recommends that HUD be directed to restore investor
    participation in the 203(k) program. In blighted areas, homeowners are
    often wary of the burdens associated with buying and rehabilitating a
    home themselves. However, investors are often better equipped and
    prepared to handle the responsibilities related to renovating and
    repairing homes. Investors can be very helpful in revitalizing areas
    where homeowners are nervous about taking on such a project.
        We also recommend that HUD lift the current owner-occupied
    requirement of 51 percent before individual condominium units can
    qualify for FHA-insured mortgages. The policy is too restrictive
    because it limits sales and homeownership opportunities, particularly
    in market areas comprised of significant condominium developments and
    first-time homebuyers. In addition, the inspection requirements on
    condominiums are burdensome. HUD has indicated that it would provide
    more flexibility to the condo program under the MMIF. We strongly
    support loosening restrictions on FHA condo sales and 203k loans to
    provide more housing opportunities to homebuyers nationwide.
                            borrower benefits of fha
        The universal and consistent availability of FHA loan products is
    the principal hallmark of the program that has made mortgage insurance
    available to individuals regardless of their racial, ethnic, or social
    characteristics during periods of economic prosperity and economic
    depression.
        The FHA program makes it possible for higher-risk, yet credit-
    worthy borrowers to get prime financing. According to a recent Federal
    Reserve Bank review,\3\ the average credit score for sub-prime
    borrowers was 651. This is higher than FHA's median credit score
    borrower, which demonstrates that these borrowers are likely paying
    more than they need to pay. By offering access to prime rate financing,
    FHA provides borrowers a means to achieve lower monthly payments--
    without relying to interest-only or ``optional'' payment schemes. FHA
    products are safe, thanks to appropriate underwriting and loss-
    mitigation programs, and fairly priced without resorting to teaser
    rates or negative amortization.
    ---------------------------------------------------------------------------
        \3\ Federal Reserve Bank of St. Louis Review--January-February
    2006.
    ---------------------------------------------------------------------------
        When the housing market was in turmoil during the 1980s, FHA
    continued to insure loans when others left the market; following 9/11,
    FHA devised a special loan forbearance program for those who
    temporarily lost their jobs due to the attack; after Hurricanes Katrina
    and Rita, FHA provided a foreclosure moratorium for borrowers who were
    unable to pay their mortgages while recovering from the disaster. FHA's
    universal availability has helped to stabilize housing markets when
    private mortgage insurance has been nonexistent or regional economies
    have faltered. FHA is the only national mortgage insurance program that
    provides financing to all markets at all times. Simply put, FHA has
    been there for borrowers.
        Now, more than ever, FHA needs to be strengthened to continue to be
    available to borrowers. In just the past few months, at least 25 sub-
    prime lenders have exited the business, declared bankruptcy, announced
    significant losses, or put themselves up for sale.\4\ After making
    record profits, these lenders are simply bailing as the bad loans they
    made begin to fail. FHA, who is more careful with its underwriting
    standards, can be a safe alternative for buyers who have been lured
    into unnecessary sub-prime loans.
    ---------------------------------------------------------------------------
        \4\ The Mortgage Mess Spreads, BusinessWeek.com, March 7, 2007.
    ---------------------------------------------------------------------------
        FHA is a leader in preventing foreclosures. FHA's loss mitigation
    program authorizes lenders to assist borrowers in default. The program
    includes mortgage modification and partial claim options. Mortgage
    modification allows borrowers to change the terms of their mortgage so
    that they can afford to stay in the home. Changes can include extension
    of the length of the mortgage or changes in the interest rate. Under
    the partial claim program, FHA lends the borrower money to cure the
    loan default. This no-interest loan is not due until the property is
    sold or paid off. In the year 2004 alone, more than 78,000 borrowers
    were able to retain their home through FHA's loss mitigation program;
    and 2 years later, nearly 90 percent of these borrowers are still in
    their homes. By encouraging lenders to participate in these loss
    mitigation efforts and penalizing those who don't, FHA has successfully
    helped homeowners keep their homes and reduced the level of losses to
    the FHA fund.
                          solvency and strength of fha
        Critics of the reform proposals have argued that FHA isn't
    positioned to handle changes to the program. We respectfully disagree.
    Despite FHA's falling market share, the FHA fund is healthy and strong.
    Congress has mandated that FHA have a capitalization ratio of 2 percent
    to insure fiscal solvency. In 2006, the FHA cap ratio was far above
    that figure at 6.82 percent--despite being the lender of last resort in
    today's marketplace. FHA's current economic value is over $22 billion.
    In simple terms, this indicates that if the MMIF stopped operations
    today, the current portfolio would be expected to generate $22 billion
    dollars over the remaining life of the loans in the portfolio above
    what it would pay out in claims. Since its inception in 1934, FHA has
    never needed a Federal bailout, and has been completely self-
    sufficient. In fact, FHA has contributed a significant amount of money
    to the Federal Treasury each year. However, due to the dramatic loss in
    volume, FHA has estimated that it will need to increase premiums if
    reforms are not implemented that increase usage of FHA.
        If FHA is allowed to adjust premiums based on risk, it will operate
    even more soundly than it does today. If FHA is to thrive and fully
    perform its intended function, a change to risk-based pricing is
    necessary. Average pricing in the portion of the credit spectrum where
    FHA operates is crucial if FHA is to sustain its operations in a
    financially solvent manner. Absent risk-based premiums, the risk
    profile FHA borrowers can decrease, causing either an increase in the
    average price or an ultimate shortfall in the insurance fund. This is
    why FHA has estimated that it will need to increase premiums if reforms
    are not implemented that increase usage of FHA.
        FHA is often criticized for its default and foreclosure rate. That
    criticism is unwarranted, as FHA's mission is to serve people that
    aren't served by the conventional market, and therefore are more risky.
    However, FHA's foreclosure rate is substantially better than the sub-
    prime market, where many FHA-eligible borrowers currently have loans. A
    recent study by the Center for Responsible Lender reported that ``FHA
    and sub-prime loans have quite different foreclosure rates. For
    example, sub-prime loans originated in 2000 in our sample had a 12.9
    percent foreclosure rate within 5 years. In contrast, . . . FHA loans
    originated in 2000 had a 6.29 percent foreclosure rate by year-end
    2005.'' \5\
    ---------------------------------------------------------------------------
        \5\ Losing Ground:Foreclosures in the Subprime Market and Their
    Cost to Homeowners, Center for Responsible Lending, December 2006, page
    26.
    ---------------------------------------------------------------------------
        When FHA has seen problems with their default rates, they have
    tried to remedy them. FHA noticed that loans which utilized a gift
    downpayment had a higher default rate. These gifts included seller-
    funded downpayment assistance. FHA attempted to eliminate this program
    and faced legal challenges. At that time Congress supported downpayment
    gift providers, and challenged HUD's attempt to shut them down. Studies
    done by the Government Accountability Office and others determined that
    this form of downpayment assistance in fact drove up the costs of
    homeownership, and generally made the loan a bigger risk. Although the
    IRS recently ruled that many seller-funded downpayment programs would
    lose their charitable tax status, they have yet to change the status of
    any organization. To avoid further delay, FHA announced plans to
    publish a notice prohibiting gift downpayment loans from FHA
    eligibility. Such a prohibition should greatly improve FHA's default
    rate. It has been estimated that 29 percent of FHA borrowers in 2005
    used seller-funded downpayment assistance.
        Instead, by providing FHA the ability to offer flexible down
    payments, homeowners won't bear the increased home price costs and the
    loans will be safer. Allowing FHA to price low downpayment loans
    according to risk, they would be more in line with the conventional
    market. This will greatly increase FHA's default rate.
        Furthermore, FHA's operations have improved dramatically in the
    last several years. In 1994, HUD was designated as ``high risk'' by the
    Government Accountability Office, a longtime critic of the Department.
    Last month, that designation was removed. GAO said that ``HUD had
    improved its oversight of lenders and appraisers and issues or proposed
    regulations to strengthen lender accountability and combat predatory
    lending practices.'' \6\ HUD has also demonstrated their ability to
    estimate program costs and oversight for mortgage underwriting.
    ---------------------------------------------------------------------------
        \6\ GAO, High Risk Series: An Update, GAO-07-310 (Washington, DC.:
    January, 2007)
    ---------------------------------------------------------------------------
                                   conclusion
        Thank you again for the opportunity to testify on this important
    issue. Now is the time when the country needs FHA. As sub-prime loans
    reset and real estate markets are no longer experiencing double digit
    appreciation; a reformed FHA would be perfectly positioned to offer
    borrowers a safer mortgage alternative and bring stability to local
    markets and local economies. The National Association of REALTORS
    stands ready to work with the Congress on passage of FHA reform.
                                     ______

                          Attachment 1.--FHA Brochure
             Shopping for a Mortgage? FHA Improvements Benefit You
    FHA Insured Mortgages
    Realtors and FHA: Partners in Homeownership
    realtors and fha--working together to help people fulfill the american
                                     dream
        REALTORS and the Federal Housing Administration (FHA), which is
    part of the U.S. Department of Housing and Urban Development (HUD),
    have been partners in creating homeownership opportunities for more
    than 70 years. Since FHA was created in 1934, it has helped more than
    34 million families become homeowners, many by working with their
    REALTORS to achieve their dream of homeownership.
        This brochure illustrates improvements in FHA programs that will
    benefit you. Many aspects of the FHA mortgage application process have
    been streamlined to make the process more user-friendly and efficient.
    Upon reading this brochure, you will see that FHA programs are a
    valuable asset to REALTORS, other real estate professionals, and most
    importantly, those seeking to own a home.
        Backed by the full faith and credit of the Federal government, FHA-
    insured mortgages are one of the safest and most affordable types of
    mortgages available to homebuyers. Working together, REALTORS and FHA
    help millions of families come home.
                        what is fha mortgage insurance?
        The Federal Housing Administration (FHA) insures mortgages offered
    by banks, savings associations, and other financial institutions. An
    FHA-insured mortgage is backed by the full faith and credit of the
    United States government. While FHA does not make loans, it benefits
    the homebuyer by providing mortgage insurance which encourages
    financial institutions to make affordable financing available.
                   what are the benefits of an fha mortgage?
        FHA offers low down payment options, eligibility with less than
    perfect credit, a loan at a reasonable cost, and help if there is ever
    trouble making the mortgage payment. Because an FHA mortgage insures
    the lender against loss, an FHA mortgage typically has an interest rate
    that is competitive with the best in your market and lower than the
    rates charged for subprime and other non-prime mortgages.
        FHA not only helps people buy a home, but helps them keep it as
    well. In return for protecting lenders against loss, FHA requires
    financial institutions to offer assistance to borrowers experiencing
    difficulty making mortgage payments.
                            what about eligibility?
        In order to be eligible for an FHA-insured mortgage, a borrower
    must:
      --Occupy the property as the principal residence;
      --Possess a valid Social Security Number;
      --Have a two-year employment history;
        --School and military service count towards this two-year
                requirement.
      --Not be delinquent on any Federal debt such as a student loan or
            other FHA-insured mortgage; and
      --Meet flexible credit requirements.
      there are several other features worth knowing about an fha-insured
                                   mortgage:
      --FHA adopted the industry appraisal standards permitting the use of
            the Fannie Mae appraisal forms with no additional specialized
            documentation, no Valuation Conditions form or Homebuyer
            Summary.
      --FHA has eliminated unnecessary requirements to make minor repairs.
      --The homebuyer and the seller, individually or jointly, can pay
            closing costs as agreed to in the sales contract. FHA no longer
            limits what closing costs the homebuyer is permitted to pay.
      --Caps on payment and debt-to-income ratios are more generous than
            most standard conforming mortgage products. The payment-to-
            income ratio may not exceed 31 percent and the debt-to-income
            ratio may not exceed 43 percent.
      --A minimum credit score is not required. In fact, one may not be
            turned down for an FHA mortgage solely for lack of credit
            history.
      --The buyer's entire cash investment--as little as three percent--can
            be a gift from a family member, employer, charitable
            organization or local government entity.
      --The seller can contribute up to 6 percent of the home's price
            toward closing costs through a seller's concession.
      --There are no prepayment penalties on FHA-insured mortgages.
      --U.S. citizenship is not required but, for those who are not
            citizens, they must be lawful permanent or non-permanent
            resident aliens with a valid Social Security Number.
              how else can fha assist in achieving homeownership?
        In addition to its standard Section 203(b) Mortgage Insurance
    Program, FHA has a number of other valuable programs designed to
    facilitate homeownership.
    FHA Adjustable Rate Mortgage (ARM) Products
      --FHA offers a standard 1-year adjustable rate mortgage (ARM) as well
            as 3, 5, 7, and 10-year ARM options.
      --ARM products may be good options for those who plan to own the home
            for only a few years, expect an increase in future earnings, or
            expect a decrease in interest rates.
    FHA's Limited Repair Program
      --FHA's Section 203(k) Limited Repair Program is an excellent
            financing option for you whether buying or selling homes--
            especially when repairs are identified during a home inspection
            or appraisal--because it gives buyers the ability to make
            repairs after closing.
      --Buyers can finance up to an additional $35,000 into their mortgage
            to pay for minor remodeling such as replacing flooring,
            installing new appliances, and painting the interior and/or
            exterior of the home.
         in addition to fha, the u.s. department of housing and urban
                   development (hud) offers these resources:
    HUD Homes
        The Department has single-family homes in hundreds of communities
    available for sale to the public. How do you benefit from purchasing a
    HUD Home?
      --Many HUD homes are available with FHA financing, making it easier
            to purchase a home.
      --The Department pays the real estate commission, if it is included
            in the contract.
      --Only a real estate professional licensed by the state and
            registered with HUD can sell HUD homes.
        For more information on available HUD homes, please visit:
    www.homesales.gov.
        For more information on selling HUD homes, please visit:
    www.hud.gov/groups/brokers.cfm.
    HUD-Approved Housing Counseling Agencies
        Homebuyers often have a lot of questions about getting an FHA-
    insured mortgage and about the home buying process in general. HUD-
    approved Housing Counseling Agencies provide buyers the opportunity to
    get the answers they need by meeting with a housing counselor at a HUD-
    approved agency in their community. These agencies offer homeownership
    counseling and financial literacy training at little or no cost. To
    find a counselor in your neighborhood, call 1-800-569-4287 or visit
    http://www.hud.gov/buying/index.cfm and click on ``find a housing
    counselor'' on the right under ``counseling and education.''
        To learn more about these products or to find out if there are
    homeownership programs sponsored by your state or local governments and
    other community organizations, please visit FHA's website at
    www.fha.gov or call 1.800 CALL FHA.
        For more information about the National Association of REALTORS
    and how we work with you, visit our website at www.REALTOR.org.
        The National Association of REALTORS, ``The Voice for Real
    Estate,'' is America's largest trade association, representing more
    than 1.3 million members involved in all aspects of the residential and
    commercial real estate industries. For more information, please visit
    www.REALTOR.org.
        The Federal Housing Administration (FHA)--which is part of the U.S.
    Department of Housing and Urban Development--has been helping people
    become homeowners since 1934. FHA insures the loan, so lenders can
    offer you a better deal. FHA offers loans with low down payments that
    are easier to qualify for, and can cost less than conventional loans.
    For more information, please visit www.fha.gov.
        October 2006, Item# 126-128. National Association of REALTORS, 500
    New Jersey Avenue, NW, Washington, DC, 20001. Federal Housing
    Administration, U.S. Department of Housing and Urban Development, 451
    7th Street, SW, Washington, DC, 20410.

        Senator Murray. Thank you very much. Mr. Robbins.
    STATEMENT OF JOHN M. ROBBINS, CHAIRMAN, MORTGAGE
                BANKERS ASSOCIATION
        Mr. Robbins. Good morning, Chairwoman Murray and Ranking
    Member Bond. Thank you for holding this hearing and inviting me
    to share MBA's views on reforming the FHA.
        I have spent over 36 years working with FHA and I have made
    billions of dollars in loan originations to families who have
    achieved the dream of home ownership through FHA's programs.
    When I started in the mortgage business, FHA programs helped us
    serve many borrowers who otherwise would not get a loan.
        Today, the story is very different. In 2003, FHA made up
    approximately 16 percent of my company's overall production.
    Last year, only a little more than 1 percent of our business
    went to FHA.
        While the mortgage market has grown significantly, our use
    of the FHA program has dropped precipitously. Lenders have
    progressed, reacting to quickly changing and efficient
    technology. Unfortunately, FHA has not. While the needs of low-
    and-moderate income homebuyers, first time homebuyers and of
    senior homeowners have changed, FHA has not followed its
    historic path of adopting to meet borrowers' changing needs.
        MBA strongly supports FHA and believes it still plays a
    critical role in today's marketplace. Most of FHA's business is
    directed toward low-and-moderate income and minority borrowers,
    the very strata that is most challenged to be part of the
    American dream. At the same time, we have watched with growing
    concern as FHA has steadily lost market share over the past
    decade, potentially threatening its long-term ability to help
    underserved borrowers.
        As the market continues to evolve around FHA, the great
    fear is that many aspiring homeowners will either be left
    behind or forced into higher cost alternatives.
        MBA notes with great concern that the administration's
    fiscal year 2008 budget proposal estimates the FHA Mortgage
    Insurance Fund will go into the red next year unless changes to
    the existing program are made or additional appropriations are
    provided. MBA agrees with the administration that FHA's Mutual
    Mortgage Insurance Fund would run in the black with little or
    no premium increase necessary if FHA reform proposals were
    passed this year.
        In fact, in casual calculation--back of the envelope--not
    at this point supported by MBA institutional research, I
    suggest if FHA were to regain its market share back to its 1990
    level of 10 percent, the U.S. Treasury would receive an
    additional $3 billion a year in revenue from expanded use of
    this program. We believe Congress should empower FHA to allow
    it to meet today's needs and anticipate tomorrow's.
        MBA believes changes should be made in three areas. FHA
    needs more flexibility to introduce innovative new products,
    invest in new technology and manage their human resources. MBA
    supports changes to FHA's loan limits. FHA's down payment
    requirements, including the elimination of the complicated down
    payment formula and down payment flexibility. The down payment
    is one of the primary obstacles for first-time minority and
    low-income borrowers.
        Finally, MBA also supports changes to the Home Equity
    Conversion Mortgage Program. MBA's surveys show that FHA's
    hack' em-up product comprises 95 percent of all reverse
    mortgages and is thus, tremendously important for our senior
    homeowners.
        In conclusion, FHA has an important role to play in the
    market, in the expanding, affordable home ownership
    opportunities for the underserved and addressing the home
    ownership gap. For low-and-moderate income families, FHA should
    be the financing considered first because it has the lowest
    rate and provides borrowers the best opportunity to become a
    successful homeowner.

                               PREPARED STATEMENT

        However, the current loss of market presence means we are
    losing FHA's impact. The result is that some families are
    either turning to more expensive financing or giving up. I urge
    Congress to enact legislation to reform FHA, to increase its
    availability to homebuyers, promote consumer choice and ensure
    its ability to continue serving American families. MBA stands
    ready to work with you on this important issue.
        [The statement follows:]
                     Prepared Statement of John M. Robbins
        Thank you for holding this hearing and inviting the Mortgage
    Bankers Association (MBA) \1\ to share its views with the subcommittee
    on the solvency and reform proposals for the Federal Housing
    Administration (FHA). My name is John Robbins and I am Co-Head and
    Special Counsel of American Mortgage Network, and Chairman of the
    Mortgage Bankers Association (MBA). Formerly, I was Chief Executive
    Officer of American Mortgage Network (AmNet), a wholesale mortgage bank
    I co-founded which is based in San Diego. AmNet was bought by Wachovia
    Bank in 2005. I am here today because MBA believes Congress must act to
    make important legislative changes to the National Housing Act if the
    Federal Housing Administration (FHA) is to continue to be a financially
    sound tool for lenders to use in serving the housing needs of American
    families who are unserved or underserved by conventional markets.
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        \1\ The Mortgage Bankers Association (MBA) is the national
    association representing the real estate finance industry, an industry
    that employs more than 500,000 people in virtually every community in
    the country. Headquartered in Washington, DC, the association works to
    ensure the continued strength of the Nation's residential and
    commercial real estate markets; to expand homeownership and extend
    access to affordable housing to all Americans. MBA promotes fair and
    ethical lending practices and fosters professional excellence among
    real estate finance employees through a wide range of educational
    programs and a variety of publications. Its membership of over 3,000
    companies includes all elements of real estate finance: mortgage
    companies, mortgage brokers, commercial banks, thrifts, Wall Street
    conduits, life insurance companies and others in the mortgage lending
    field. For additional information, visit MBA's Web site:
    www.mortgagebankers.org.
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        When I started in the mortgage business, the programs of FHA were
    invaluable in enabling us to serve families who otherwise would have no
    other affordable alternative for financing their home. I spent over 36
    years working with FHA and have made millions of dollars in loan
    originations to families who have become homeowners as a result of
    FHA's programs. We worked hard to be a good partner with FHA in
    administering its programs and, together, FHA and AmNet enabled
    thousands of families to purchase their first home.
        Today, though, the story is very different. While AmNet has grown
    significantly, our ability to use the FHA program has declined
    precipitously. In 2003, FHA made up approximately 16 percent of our
    overall production. Last year, however, only a little more than 1
    percent of our business went to FHA.
        While AmNet has been able to adapt to changes in the mortgage
    markets, FHA has been prevented from doing so. The needs of low- and
    moderate-income homebuyers, of first-time homebuyers, of minority
    homebuyers, and of senior homeowners have changed. FHA's programs
    though, have not followed their historic path of adaptation to meet
    these borrowers' changing needs.
        The numbers are troublesome. In 1990, 13 percent of total
    originations in the United States were FHA-insured mortgages.
    Currently, that number has dropped to under 3 percent.\2\ More
    importantly, in 1990, 28 percent of new home sales (which are typically
    a large first-time homebuyer market) were financed through programs at
    FHA or the Department of Veterans Affairs (VA); today that number has
    dropped to under 12 percent.
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        \2\ Source: Inside Mortgage Finance, March 2, 2007.
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        MBA cites these numbers not because we believe that there is a
    certain market share that FHA should retain, but rather because these
    numbers are consistent with many lenders' views that FHA has not kept
    up with changes in the market. These numbers point to a decline, not
    just in market share, but in FHA's potential to positively impact
    homeownership. This loss of impact does not stem from the fact that FHA
    is no longer relevant, but rather that statutory constraints prohibit
    FHA from adapting its relevance to consumer needs today.
        A recent anecdote illustrates this point very well. A story ran in
    RealtyTimes almost 2 years ago, on June 21, 2005, in which a
    Baltimore, MD real estate agent unabashedly advises homebuyers to avoid
    FHA financing. The agent states: ``Approved FHA loan recipients, same
    notice to you, don't bother bringing it to the table during a sellers
    market. More times than not, your offer will be rejected. We know that
    VA and FHA loans allow you the means of purchasing more home for the
    mortgage, but it only works if you are the only game in town.'' His
    advice was based on the often true notion that FHA-insured financing is
    slower and more laborious than conventional financing, which means
    FHA's valuable programs are not reaching the people they should.
                                 fha background
        FHA was created as an independent entity by the National Housing
    Act on June 27, 1934, to encourage improvement in housing standards and
    conditions, to provide an adequate home financing system by insurance
    of housing mortgages and credit and to exert a stabilizing influence on
    the mortgage market. FHA was incorporated into the newly formed U.S.
    Department of Housing and Urban Development (HUD) in 1965. Over the
    years, FHA has facilitated the availability of capital for the Nation's
    multifamily and single-family housing market by providing government-
    insured financing on a loan-by-loan basis.
        FHA offers multifamily and single-family insurance programs that
    work through private lenders to extend financing for homes. FHA has
    historically been an innovator. Over the past several decades, the
    mission of FHA's single-family programs have increasingly focused on
    expanding homeownership for those families who would otherwise either
    be unable to obtain financing or obtain financing with affordable
    terms. FHA's multifamily programs have allowed projects to be developed
    in areas that otherwise would be difficult to finance and provides
    needed rental housing to families that might otherwise be priced out of
    a community.
        Additionally, the FHA program has been a stabilizing influence on
    the Nation's housing markets due to the fact that it is consistently
    available under the same terms at all times and in all places. FHA does
    not withdraw from markets.
                      the need for fha today and tomorrow
        The FHA single-family programs are vital to many homebuyers who
    desire to own a home but cannot find affordable financing to realize
    this dream. While the FHA has had a number of roles throughout its
    history, its most important role today is to give first-time homebuyers
    the ability to climb onto the first rung of the homeownership ladder
    and to act as a vehicle for closing the homeownership gap for
    minorities and low- and moderate-income families.
        Despite this country's recent record high levels of homeownership,
    not all families share in this dream equally. As of the first quarter
    of 2006, the national homeownership rate stood at 68.5 percent, but
    only 51 percent of minorities owned their own home. Only 48 percent of
    African-Americans and 49.4 percent of Latinos owned their own homes.
    This compares with 75.5 percent of non-Hispanic white households.
        By the end of 2005, 84.3 percent of families earning more than the
    median income owned their own home, while only 53.1 percent of families
    below the median income owned their own home.
        These discrepancies are tragic because homeownership remains the
    most effective wealth-building tool available to the average American
    family.
                                  fha's record
        More than any other nationally available program, during the 1990s,
    FHA's impact focused on the needs of first-time, minority, and/or low-
    and moderate-income borrowers.
        In 1990, 64 percent of FHA borrowers using FHA to purchase a home
    were first-time homebuyers. Today, that rate has climbed to about 80
    percent. In 1992, about 1-in-5 FHA-insured purchase loans went to
    minority homebuyers. That number in recent years has grown to more than
    one-in-three. Minorities make up a greater percentage of FHA borrowers
    than they do conventional market borrowers.
        FHA is particularly important to those minority populations
    experiencing the largest homeownership gaps. Home Mortgage Disclosure
    Act (HMDA) data reveal that in 2004, 14.2 percent of FHA borrowers were
    African-Americans, compared with 5.4 percent of conventional borrowers.
    Hispanic borrowers made up 15.3 percent of FHA loans, while they only
    were 8.9 percent of the conventional market. Combined, African-American
    and Hispanic borrowers constituted 29.5 percent of FHA loans, doubling
    the conventional market's rate of 14.3 percent. In fact, in 2004, FHA
    insured nearly as many purchase loans to African-American and Hispanic
    families as were purchased by Fannie Mae and Freddie Mac combined.
        The same data demonstrates FHA's tremendous service to those
    American families earning near or below the national median income.
    Over 57 percent of FHA borrowers earned less than $50,000, which is
    more than double the rate of the conventional market, where fewer than
    28 percent of borrowers earned less than $50,000.
        Ironically, as the above numbers reveal, FHA's mission to serve
    underserved populations has become increasingly focused during the same
    period as the decline in FHA's presence in the market. FHA's impact is
    being lost at the very time when it is needed most. The result is that
    American families are either turning to more expensive financing or
    giving up.
        It is crucial that FHA keep pace with changes in the U.S. mortgage
    markets. While FHA programs can be the best and most cost-effective way
    of expanding lending to underserved communities, we have yet to unleash
    the full potential of these programs to help this country achieve
    important societal goals.
        To be effective in the 21st century, FHA should be empowered to
    allow it to develop products and programs to meet the needs of today's
    homebuyers and anticipate the needs of tomorrow's mortgage markets,
    while at the same time being fully accountable for the results it
    achieves and the impact of its programs.
        Under the strong leadership of its current Commissioner, Brian
    Montgomery, FHA has undertaken significant changes to its regulations
    and operations in a very short time. In just a little more than 1 year,
    FHA has streamlined the insurance endorsement process, improved
    appraisal requirements and removed some unnecessary regulations. By
    doing so, Commissioner Montgomery has also instilled a spirit of change
    and a bias for action within FHA.
        MBA compliments the Commissioner on his significant accomplishments
    to date, though we recognize that more work lies ahead. Lenders still
    report that FHA is difficult to work with and that oversight activities
    often focus on minor compliance deficiencies in a loan file rather than
    focusing on issues of true risk to FHA's insurance funds. FHA is
    designed to serve higher risk borrowers and MBA believes that those
    auditing FHA lenders must understand this and be able to differentiate
    this aspect of the program from intentional abuse.
        MBA is confident in the Commissioner's ability to address these and
    other issues that are within his control. There is much though, that is
    beyond FHA's control and needs Congressional action.
        Single-family FHA-insured mortgages are made by private lenders,
    such as mortgage companies, banks and thrifts. FHA insures single-
    family mortgages with more flexible underwriting requirements than
    might otherwise be available. Approved FHA mortgage lenders process,
    underwrite and close FHA-insured mortgages without prior FHA approval.
    As an incentive to reach into harder-to-serve populations, FHA insures
    100 percent of the loan balance as long as the loan is properly
    underwritten.
        FHA has a strong history of innovating mortgage products to serve
    an increasing number of homebuyers. FHA was the first nationwide
    mortgage program; the first to offer 20-year, 25-year, and finally 30-
    year amortizing mortgages; and the first to lower downpayment
    requirements from 20 percent to 10 percent to 5 percent to 3 percent.
    FHA has always performed a market stabilizing function by ensuring that
    mortgage lending continued after local economic collapses or regional
    natural disasters when many other lenders and mortgage insurers pulled
    out of these markets.
        FHA's primary single-family program is funded through the Mutual
    Mortgage Insurance Fund (MMIF), which operates similar to a trust fund
    and has been completely self-sufficient. This allows FHA to accomplish
    its mission at little or no cost to the government. In fact, FHA's
    operations transfer funds to the U.S. Treasury each year, thereby
    reducing the Federal deficit. FHA has always accomplished its mission
    without cost to the taxpayer. At no time in FHA's history has the U.S.
    Treasury ever had to ``bail out'' the MMIF or the FHA.
                        the fha budget forecast for 2008
        The Federal assistance that FHA provides to low- and moderate-
    income households provides critical support for extending homeownership
    possibilities that the private market cannot fully address. MBA notes
    with great concern the administration's fiscal year 2008 budget
    proposal released last month which estimates that the FHA mortgage
    insurance fund will go into the red in fiscal year 2008 unless changes
    to the existing program are made or budget authority to provide
    additional credit subsidy is given to the Agency. Since no additional
    budget authority to cover these costs were included in the budget, the
    FHA would need to either raise premiums, curtail credit to some
    borrowers who today could get loans, or some combination.
        To cover the expected increased costs associated with higher
    defaults and lower originations, the administration projects increases
    in the up-front mortgage insurance premium (MIP) from 150 basis points
    (1.5 percent) to 166 basis points will be needed. In addition, the
    annual MIP is assumed to increase from 50 basis points to 55 basis
    points. On a $200,000 loan, this is an extra $320 (from $3,000 to
    $3,321) due at the closing table and an additional $100 (from $1,000 to
    $1,100) the borrower must pay each year for the same loan. This may not
    seem like a lot of money, but for your typical FHA borrower--who is
    likely to be trying to get in their first home and may not have much in
    the way of a savings--this could be the difference between owning a
    home or continuing to sit on the sidelines of homeownership.
        MBA agrees with the administration that the FHA's mutual mortgage
    insurance fund would run in the black, and little or no premium
    increases would be necessary, if FHA reform proposals were passed in
    Congress this year. MBA believes unlocking FHA's potential in the
    marketplace is the right solution in the face of the Agency's systemic
    inability to modernize itself, and now faces the prospect of raising
    fees to maintain its diminished presence in the marketplace. We urge
    Congress to consider solutions that will enable FHA to serve more
    potential homeowners.
                           unleashing fha's potential
        In reviewing the status of FHA over the past decade, MBA has come
    to the conclusion that FHA faces severe challenges in managing its
    resources and programs in a quickly changing mortgage market. These
    challenges have already diminished FHA's ability to serve its public
    purposes and have also made it susceptible to fraud, waste, and abuse.
    Unaddressed, these issues will cause FHA to become less relevant, and
    will leave families served by its programs with no alternative for
    homeownership or affordable rental housing.
        In the fall of 2004, MBA formed a FHA Empowerment Task Force
    comprising of MBA member companies experienced in originating single-
    family and multifamily FHA loans. The Task Force discussed the long-
    term issues confronting FHA with the goal of developing legislative
    proposals that would empower it to manage its programs and policies
    more effectively.
        The Task Force identified FHA's higher costs of originations,
    lessening prominence in the market, out-dated technology, adverse
    selection, and the inability to efficiently develop products as
    problems for FHA. Per the Task Force's recommendations, MBA proposed
    the following three steps to unleash FHA from overly burdensome
    statutory processes and restrictions, and to empower FHA to adopt
    important private sector efficiencies:
      --FHA needs the ability to use a portion of the revenues generated by
            its operations to invest in the upgrade and maintenance of
            technology to adequately manage its portfolios and interface
            with lenders.
      --FHA needs greater flexibility to recruit, manage and compensate
            employees if it is to keep pace with a changing financial
            landscape and ensure appropriate staffing to the task of
            managing $450+ billion insurance funds.
      --FHA needs greater autonomy to make changes to their programs and to
            develop new products that will better serve those who are not
            being adequately served by others in the mortgage market.
    Ability to Invest Revenues in Technology
        Technology's impact on mortgage markets over the past 15 years
    cannot be overstated. Technology has allowed the mortgage industry to
    lower the cost of homeownership, streamline the origination process,
    and has allowed more borrowers to qualify for financing. The creation
    of automated underwriting systems, sophisticated credit score modeling,
    and business-to-business electronic commerce are but a few examples of
    technology's impact.
        FHA has been detrimentally slow to move from a paper-based process,
    and it cannot electronically interface with its business customers in
    the same manner as the private sector. During 2004 and 2005, over 1.5
    million paper loan files were mailed back and forth between FHA and its
    approved lenders and manually reviewed during the endorsement process.
    Despite the fact that FHA published regulations in 1997 authorizing
    electronic endorsement of loans, FHA was not able to implement this
    regulation until this past January, 8 years later. This delay occurred
    despite the fact that over the same 8 years, FHA's operations generated
    billions of dollars in excess of program costs that was transferred to
    the U.S. Treasury.
        MBA believes FHA cannot create and implement technological
    improvements because it lacks sufficient authority to use the revenues
    it generates to invest in technology.
        MBA proposes the creation of a separate fund specifically for FHA
    technology, funded by revenues generated by the operation of the MMIF.
    MBA suggests the establishment of a revenue and a capital ratio
    benchmark for FHA, wherein, if both are exceeded, FHA be authorized by
    Congress to use a portion of the excess revenue generated to invest in
    its technology. Such a mechanism would allow FHA to invest in
    technology upgrades, without requiring additional appropriations from
    Congress.
        Improvements to FHA's technology will allow it to improve
    management of its portfolio, garner efficiencies and lower operational
    costs, which will allow it to reach farther down the risk spectrum to
    borrowers currently unable to achieve homeownership. MBA believes that
    such an investment would yield cost savings to FHA operations far in
    excess of the investment amount.
    Greater Control in Managing Human Resources
        FHA is restricted in its ability to effectively manage its human
    resources at a time when the sophistication of the mortgage markets
    demands market participants to be experienced, knowledgeable, flexible,
    and innovative. To fulfill its mission, FHA needs to be able to attract
    the best and brightest. Other Federal agencies, such as the Federal
    Deposit Insurance Corporation (FDIC), that interface with and oversee
    the financial services sector are given greater authority to manage and
    incentivize their human resources. MBA believes that FHA should have
    similar authority if it is to remain relevant in providing
    homeownership opportunities to those families underserved by the
    private markets. FHA should have more flexibility in its personnel
    structure than that which is provided under the regular Federal civil
    service rules. With greater freedom, FHA could operate more efficiently
    and effectively at a lower cost. Further, improvements to FHA's ability
    to manage its human capital will allow FHA to attract and manage the
    talent necessary to develop and implement the strategies that will
    provide opportunities for homeownership to underserved segments of the
    market.
    Flexibility to Create Products and Make Program Changes
        FHA programs are slow to adapt to changing needs within the
    mortgage markets. Whether it is small technical issues or larger
    program needs, it often takes many years and the expenditure of great
    resources to implement changes. This process overly burdens FHA from
    efficiently making changes that will serve homebuyers and renters
    better and protect FHA's insurance funds. Today's mortgage markets
    require agencies that are empowered to implement changes quickly and to
    roll-out or test new programs to address underserved segments of the
    market.
        A prime example of this problem can be found in the recent
    experience of FHA in offering hybrid Adjustable Rate Mortgage (ARM)
    products. A hybrid ARM is a mortgage product which offers borrowers a
    fixed interest rate for a specified period of time, after which the
    rate adjusts periodically at a certain margin over an agreed upon
    index. Lenders are typically able to offer a lower initial interest
    rate on a 30-year hybrid ARM than on a 30-year fixed rate mortgage.
    During the late 1990's, hybrid ARMs grew in popularity in the
    conventional market due to the fact that they offer borrowers a
    compromise between the lower rates associated with ARM products and the
    benefits of a fixed rate period.
        In order for FHA to offer this product to the homebuyers it serves,
    legislative approval was required. After several years of advocacy
    efforts, such approval was granted with the passage of Public Law 107-
    73 in November 2001. Unfortunately, this authority was not fully
    implemented until the Spring of 2005.
        The problem began when Public Law 107-73 included an interest rate
    cap structure for the 5/1 hybrid ARMs that was not viable in the
    marketplace. The 5/1 hybrid ARM has been the most popular hybrid ARM in
    the conventional market. As FHA began the rulemaking process for
    implementing the new program, they had no choice but to issue a
    proposed rule for comment with a 5/1 cap structure as dictated in
    legislation. By the time MBA submitted its comment letter on the
    proposed rule to FHA, we had already supported efforts within Congress
    to have legislation introduced that would amend the statute to change
    the cap structure. MBA's comments urged that, if passed prior to final
    rulemaking, the 5/1 cap fix be included in the final rule.
        On December 16, 2003, Public Law 108-186 was signed into law
    amending the hybrid ARM statutes to make the required technical fix to
    the interest rate cap structure affecting the 5/1 hybrid ARM product.
    At this point, FHA was ready to publish a final rule. Regardless of the
    passage of Public Law 108-186, FHA was forced to go through additional
    rulemaking in order to incorporate the fix into regulation. Thus, on
    March 10, 2004, FHA issued a Final Rule authorizing the hybrid ARM
    program, with a cap structure that made FHA's 5/1 hybrid ARM unworkable
    in the marketplace. It was not until March 29, 2005 that FHA was able
    to complete rulemaking on the amendment and implement the new cap
    structure for the 5/1 hybrid ARM product.
        The hybrid ARM story demonstrates well the statutory straitjacket
    under which the FHA operates. A 4-to-6-year lag in introducing program
    changes is simply unacceptable in today's market. Every month that a
    new program is delayed or a rule is held up, means that families who
    could otherwise be served by the program are prevented from realizing
    the dream of homeownership or securing affordable rental housing.
        MBA believes the above three changes will allow FHA to become an
    organization that can effectively manage risk and self-adapt to
    shifting mortgage market conditions while meeting the housing needs of
    those families who continue to be unserved or underserved today.
                   legislative activity in the 109th congress
        MBA supported much of the legislation before the last Congress, and
    I would like to take a moment to offer our perspective on various
    provisions.
        MBA supported the Expanding American Homeownership Act of 2006,
    H.R. 5121, a bipartisan bill which marked the first time FHA was looked
    at by Congress in a comprehensive way in over 10 years. In general,
    H.R. 5121 would have significantly streamlined and modernized the
    National Housing Act and unleashed FHA from a 74-year-old statutory
    regime that constricts its effectiveness.
        Among other things, H.R. 5121 would have provided for flexible down
    payments, flexible risk-based premiums, an increase in mortgage limits,
    an extension of mortgage terms, reform of FHA's condominium program,
    and changes to the Home Equity Conversion Mortgage (HECM) program. MBA
    would like to review a number of provisions that were a part of that
    legislation.
    Downpayment Requirements
        MBA supports the elimination of the complicated formula for
    determining the downpayment that is currently detailed in statute. The
    calculation is outdated and unnecessarily complex. The calculation of
    the downpayment alone is often cited by loan officers as a reason for
    not offering the FHA product.
        MBA supports improving FHA's products with downpayment flexibility.
    Independent studies have demonstrated two important facts: first, the
    downpayment is one of the primary obstacles for first-time homebuyers,
    minorities, and low- and moderate-income homebuyers. Second, the
    downpayment itself, in many cases, is not as important a factor in
    determining risk as are other factors. Many borrowers will be in a
    better financial position if they keep the funds they would have
    expended for a large downpayment as a cash reserve for unexpected
    homeownership costs or life events.
        We believe that FHA should be empowered to establish policies that
    would allow borrowers to qualify for FHA insurance with flexible
    downpayment requirements and decide the amount of the cash investment
    they would like to make in purchasing a home.
    Adjusting Mortgage Insurance Premiums for Loan Level Risk
        MBA believes that FHA would be able to serve more borrowers, and do
    so with lower risk to the MMIF, if they are able to adjust premiums
    based on the risk of each mortgage they insure. A flexible premium
    structure could also give borrowers greater choice in how they utilize
    the FHA program.
        It is a fact that some borrowers and loans will pose a greater risk
    to FHA than others. At some level, FHA should have the authority to
    adjust premiums based upon some borrower or loan factors that add risk.
    Such adjustment for risk need not be a complicated formula. MBA
    believes FHA could significantly mitigate the risk to the MMIF by
    selecting a small number of risk factors that would cause an adjustment
    from a base mortgage insurance premium (MIP).
        A current example of this would be the fact that borrowers
    receiving a gift of the downpayment on a FHA-insured mortgage is
    charged the same premium as a borrower who puts down 3 percent of their
    own funds, despite the fact that the former represents a higher risk
    loan. FHA could better address such a risk in the MMIF by charging a
    higher MIP to offset some of the additional risk that such a borrower
    poses. In this manner, while a borrower receiving a gift of funds for
    the downpayment will still receive the benefits of FHA financing, they
    themselves would share some of the risk, rather than having the risk
    born solely by those making a 3 percent downpayment.
        Creating a risk-based premium structure will only be beneficial to
    consumers, though, if FHA considers lowering current premiums to less
    risky loans. We would not support simply raising current premiums for
    higher risk borrowers.
    Raising Maximum Mortgage Limits for High Cost Areas
        MBA supports the proposal to raise FHA's maximum mortgage limits to
    100 percent of an area's median home price (currently pegged at 95
    percent) and to raise the ceiling to 100 percent of the GSEs'
    conforming loan limits (currently limited to 87 percent) and the floor
    to 65 percent (currently 48 percent). There is a strong need for FHA
    financing to be relevant in areas with high home prices. MBA believes
    raising the limits to the GSEs' conforming limits in these areas
    strikes a good balance between allowing FHA to serve a greater number
    of borrowers without taking on additional risk.
        Additionally, in many low cost areas, FHA's loan limits are not
    sufficient to cover the costs of new construction. New construction
    targeted to first-time homebuyers has historically been a part of the
    market in which FHA has had a large presence. MBA believes raising the
    floor will improve the ability of first-time homebuyers to purchase
    modest newly constructed homes in low-cost areas since they will be
    able to use FHA-insured financing.
    Lengthening Mortgage Term
        MBA supports authorizing FHA to develop products with mortgage
    terms up to 40 years. Currently, FHA is generally limited to products
    with terms of no more than 30 years. Stretching out the term will lower
    the monthly mortgage payment and allow more borrowers to qualify for a
    loan while remaining in a product that continues to amortize. We
    believe FHA should have the ability to test products with these
    features, and then, based on performance and homebuyer needs, to
    improve or remove such a product.
    Improvements to FHA Condominium Financing
        MBA supports changes to FHA's condominium program that will
    streamline the process for obtaining project approval and allow for
    greater use of this program. It is unfortunate to note that FHA
    insurance on condominium units has dropped at a higher rate than the
    overall decline in FHA's originations. This decline contradicts the
    fact that in costly markets, condominium units are typically the
    primary type of housing for first-time homebuyers. FHA should have a
    much bigger presence in the condominium market.
    Improvements to the Reverse Mortgage Program
        MBA unequivocally supports all proposals to change the FHA's Home
    Equity Conversion Mortgage (HECM) program: the permanent removal of the
    current 250,000 loan cap, the authorization of HECMs for home purchase
    and on properties less than 1 year old, and the creation of a single,
    national loan limit for the HECM program.
        The HECM program has proven itself to be an important financing
    product for this country's senior homeowners, allowing them to access
    the equity in their homes without having to worry about making mortgage
    payments until they move out. The program has allowed tens of thousands
    of senior homeowners to pay for items that have given them greater
    freedom, such as improvements to their homes that have allowed them to
    age in place, or to meet monthly living expenses without having to move
    out of the family home.
        MBA believes it is time to remove the program's cap because the cap
    threatens to limit the HECM program at a time when more and more
    seniors are turning to reverse mortgages as a means to provide
    necessary funds for their daily lives. MBA further believes that the
    HECM program has earned the right to be on par with other FHA programs
    that are subject only to FHA's overall insurance fund caps.
    Additionally, removing the program cap will serve to lower costs as
    more lenders will be encouraged to enter the reverse mortgage market.
        Additionally, authorizing the HECM program for home purchase will
    improve housing options for seniors. In a HECM for purchase
    transaction, a senior homeowner might sell a property they own to move
    to be near family. The proceeds of the sale could be combined with a
    reverse mortgage, originated at closing and paid in a lump sum, to
    allow a senior to purchase the home without the future responsibility
    of monthly mortgage payments. Alternatively, a senior homeowner may
    wish to take out a reverse mortgage on a property that is less than 1
    year old, defined as ``new construction'' by FHA.
        Finally, the HECM program should have a single, national loan limit
    equal to the conforming loan limit. Currently, the HECM program is
    subject to the same county-by-county loan limits as FHA's forward
    programs. HECM borrowers are disadvantaged under this system because
    they are not able to access the full value of the equity they have
    built up over the years by making their mortgage payments. A senior
    homeowner living in a high-cost area will be able to access more equity
    than a senior living in a lower cost area, despite the fact that their
    homes may be worth the same and they have the same amount of equity
    built up. Reverse mortgages are different than forward mortgages and
    the reasons for loan limits are different, too. FHA needs the
    flexibility to implement different policies, especially concerning loan
    limits.
        MBA also supported a bill Senator Hillary Clinton (D-NY) introduced
    in the 109th Congress, the ``21st Century Housing Act.'' The bill
    contained the following positive provisions:
    Investment in FHA Infrastructure--Human Resources
        MBA supported authorizing the Secretary of HUD to appoint and fix
    the compensation of FHA employees and officers. The bill would have
    called on the Secretary to consult with, and maintain comparability
    with, the compensation of officers and employees of the Federal Deposit
    Insurance Corporation. This provision can be carried out by excess
    revenue derived from the operation of FHA's insurance funds, beyond
    that which was estimated in the Federal budget for any given year.
    While MBA had some questions as to the funding mechanism detailed in
    the bill for this provision, we firmly believe that giving FHA greater
    flexibility in investing in its human capital is critical if it is to
    attract and retain the talent it needs to become a stronger and more
    effective program serving the needs of our Nation's homeowners and
    renters.
    Investment in FHA Infrastructure--Information Technology
        MBA strongly supported this provision which would have funded
    investment in FHA's information technology. This provision contemplated
    that excess funding derived from the operation of FHA's insurance
    funds, beyond that which was estimated in the Federal budget for any
    given year, would be used to carry out this provision. While MBA had
    some questions as to the funding mechanism detailed in the bill for
    this provision, MBA believes that upgrading FHA's technology is
    critical to improving FHA's management of its portfolio and lowering
    its operational costs. MBA also believes that such an investment will
    allow FHA to reach farther down the risk spectrum to borrowers
    currently unable to achieve homeownership.
          other fha issue--treatment of fha non-conveyable properties
        The Federal Housing Administration (FHA) provides credit insurance
    against the risk of foreclosure losses associated with loans originated
    according to FHA standards. FHA generally pays an insurance claim when
    it takes title (conveyance) to a property as a result of foreclosure.
    To convey a property and receive insurance benefits, however, FHA
    requires that the property be in ``conveyance condition'' (i.e.,
    repaired and saleable condition). Properties that have sustained damage
    attributable to fire, flood, earthquake, tornado, hurricane, boiler
    explosion (for condominiums), or the lender's failure to preserve and
    protect the property are not eligible for insurance benefits unless
    they are repaired prior to conveyance of the property to the FHA. While
    HUD has in the past accepted properties in ``as is'' (damaged)
    condition on a case-by-case basis, this is rarely done. Moreover, HUD
    will deduct from the ``as is'' claim the estimated cost of repair. HUD
    should accept conveyance of damaged properties and not adjust the claim
    for the cost of repair when there was no failure on the part of the
    servicer to obtain hazard or flood insurance pursuant to Federal law.
    In addition, to the extent that a property is not conveyable or has
    other problems (i.e., condemned, demolished by local, State, or Federal
    Government or there is concern about environmental issues that preclude
    a private servicer from taking title to the property), HUD should be
    permitted to pay the full claim without the servicer taking conveyance
    of the property or HUD taking conveyance of the property. At this time,
    MBA does not believe HUD has the statutory authority to manage claims
    in this manner.
                            fha multifamily programs
        While this hearing is to focus attention on FHA's single-family
    programs, it is important to underscore the critical role of FHA's
    multifamily programs in providing decent, affordable rental housing to
    many Americans. Approximately 30 percent of families and elderly
    citizens either prefer to rent or cannot afford to own their own homes.
    FHA's insurance of multifamily mortgages provides a cost-effective
    means of generating new construction or rehabilitation of rental
    housing across the Nation. As well, FHA is one of the primary
    generators of capital for healthcare facilities, particularly nursing
    homes.
        While the FHA has implemented a number of significant improvements
    to its single-family program over the last year, the same focus needs
    to be applied to improving the multifamily programs. MBA hopes that
    process improvements on the multifamily side of FHA will soon be
    discussed and implemented.
        Additionally, I must voice MBA's strong opposition to the proposal
    in the administration's 2008 budget proposal to increase the insurance
    premiums on multifamily projects far above that necessary to operate a
    financially sound program. The net effect of this proposal will be to
    cause many affordable rental properties not to be built or
    rehabilitated and to raise rents on those families and elderly
    households on the projects that still go through.
        There is no rationale for this fee increase except to generate
    additional revenue for the Federal Government as these programs are
    already priced to cover their costs in accordance with the Federal
    Credit Reform Act of 1990. We urge the committee to prohibit FHA from
    implementing this fee increase.
                                   conclusion
        FHA's presence in the single-family marketplace is smaller than it
    has been in the past and its impact is diminishing. Many MBA members,
    who have been traditionally strong FHA lenders, have seen their
    production of FHA loans drop significantly. This belies the fact that
    FHA's purposes are still relevant and its potential to help borrowers
    is still necessary.
        I would like to conclude my testimony by highlighting two issues
    which make passing FHA legislation particularly urgent this year.
    First, hurricane season will again be soon upon us. The disasters of
    Hurricanes Katrina and Rita point to the need for a financially solvent
    FHA that is not restricted by onerous processes and procedures. The FHA
    program must be ready to assist homeowners and renters who lost
    everything amid the destruction of the hurricanes. It must have the
    necessary wherewithal to step in and help work out the existing
    mortgages in disaster areas. FHA must have the programs necessary to
    meaningfully assist in the rebuilding effort. Giving FHA the mechanisms
    to fund adequate technology improvements, flexibilities in managing
    human resources, and greater authority to introduce products will
    ensure FHA can step in to help communities when disasters occur.
        Secondly, without congressional action this year, many families
    face a serious risk of being unable to access FHA financing due to a
    recent ruling passed down by the Internal Revenue Service (IRS). On May
    4, 2006, the IRS released Revenue Ruling 2006-27, which may lead the
    IRS to rescind the nonprofit status of a large number of nonprofits who
    receive funding from property sellers in providing downpayment
    assistance to FHA borrowers. FHA regulations require that nonprofits
    providing a downpayment gift have an IRS nonprofit exempt status. Due
    to the ruling, the IRS has indicated that it is investigating 185
    organizations which provide downpayment assistance.
        MBA expects this ruling to have a dramatic effect on FHA's purchase
    production. Before the ruling, more than one-third of FHA purchase
    loans had some type of downpayment assistance. Such programs currently
    serve tens of thousands of FHA's primary clientele: first-time
    homebuyers, low- and moderate-income families and minorities.
        Clearly, congressional action on FHA reform this year is vital.
        On behalf of MBA, I would like to thank the subcommittee for the
    opportunity to present our views on the important programs offered by
    FHA. MBA looks forward to working with Congress and HUD to improve
    FHA's long-standing mission and ability to serve aspiring homeowners
    and those seeking affordable rental housing.

        Senator Murray. Thank you very much. And thank you to all
    of you for your testimony. It will all be placed in the record
    of this committee and all members will receive a copy.
        Mr. Montgomery, let me start with you. The rising defaults
    and foreclosures in the subprime market did not just start this
    past Tuesday. The foreclosure data that was released by Mr.
    Robbins' association on Tuesday just indicated to us that the
    situation is worsening. For a great many years, the subprime
    market was taking market share away from the FHA. Do you think
    the recent upset in the markets is likely to reverse that
    trend?
        Mr. Montgomery. Thank you very much for your question. We
    did an historical analysis, looking at the HUMDA data and why
    FHA was losing market share and you can look at how our market
    went down and look how the subprime market went up. It became
    very obvious to us that we were losing a lot of our traditional
    borrowers, if you will, to a subprime product.
        Yes, we are very concerned about the delinquency, the
    serious delinquency rates that were released yesterday relative
    to the subprime. Speaking for FHA, yes, we are concerned about
    that but I do want to note that during that timeframe--this is
    the most recent data just released yesterday--that our
    foreclosure rate actually went down, which it hadn't done in
    several months and the foreclosure rate for the subprime market
    is about twice that of FHA. While our 30-day delinquency number
    did go up, our 90-day delinquency number did go down as well.
    And that's about 30 percent below that of the subprime market.
        So yes, we are concerned about the rise of the subprime
    market, what's been happening there but in many cases, a lot of
    those borrowers would have faired much better had they had an
    FHA loan and this is one of the things that we've been talking
    about at great length at FHA for the 18 months that I've been
    there, saying we need a reinvigorated FHA to be there for
    families who have a couple of blemishes on their credit and
    perhaps don't have a lot of money for a down payment.
        Senator Murray. Well, HUD has made a claim for over 1 year
    that if the reform package is enacted by Congress, that the FHA
    market share will double in 2012. That will bring your market
    share from 3 percent to 6 percent. Given the recent market
    uncertainties, do you believe that your market share might grow
    beyond your 6 percent target?
        Mr. Montgomery. Well, let me answer that this way. We're--
    we're not a private corporation so the degree of our success is
    not necessarily market share. I do want to get that point out.
    However, it is important that a reinvigorated, modern FHA be
    there for lenders and brokers--we're not a bank, as you know,
    so that they can best decide which is the product that fits a
    particular family's situation.
        For a long time, FHA did not necessarily, as we know, fill
    that void for the reasons that we've all gone into today. So
    yes, we think a new reinvigorated FHA would make us a better
    product and we think that as a result of that, more lenders,
    more realtors, will be inclined to recommend us to their
    clients.
        If I could add one other point to that, I can't stress
    enough, when I first got there and talking to all the trade
    association members and even some other groups, that we were--
    and still are--a tough place to deal with. We were the slowest
    game in town. Our IT systems remain antiquated, although we've
    made some improvements and these are some of the same things I
    mentioned last year and some of our processes were outdated. We
    were one of the last organizations to electronically submit
    loan documents. By the way, this is something our sister
    agency, VA, had been doing since 1999. Some of our appraisal
    requirements just didn't make sense so we needed, before we
    even looked at improving the products that we had to improve
    our processes as well, to make us a product that our partners
    out in the field would want to use.
        Senator Murray. Mr. Montgomery, you gave a speech last
    month before the National Association of Homebuilders and
    indicated that you thought the FHA could provide cheaper loan
    rates to the very same borrowers that are currently loaded into
    subprime mortgages. Is this the state of affairs today or will
    this only be the case if FHA reform legislation is enacted?
        Mr. Montgomery. It's a key distinction to make. Just
    because we serve many of the same types of borrowers as the
    subprime market, we are not a subprime product. We don't have
    any teaser rates. We don't have any prepayment penalties. We
    are basically a 30-year, fixed rate product. There are no
    surprises at the end of an ARM period. Even the ARM that we
    have is indexed at a much lower rate so that families avoid
    balloon payments. So there is really no comparison between the
    two types of products.
        But let me also say that there is nothing, from our
    standpoint, to prevent some current subprime borrowers from
    refinancing perhaps into an FHA loan. Our eligibility criteria,
    though, they have to meet. That will not change with these
    improvements and yes, we do think that some subprime borrowers
    could and will fare better with an FHA product.
        Senator Murray. So if the FHA has the ability to provide
    these borrowers with better rates today, why are these
    borrowers going elsewhere?
        Mr. Montgomery. Well, that's a tough one, Senator. I would
    say in many cases, what I've read, what I've been told, some
    subprime borrowers, not all, totally blurred the line between a
    conventional loan and a subprime loan. There have been court
    settlements involved with lenders that we're all aware of,
    where there were cases--in one case, some 750,000 cases of
    perhaps predatory lending involved.
        So I--many times when I talk about why some families went
    subprime, I use the term, steered toward, because I think
    that's exactly what happened and way too many families were
    taken advantage of. All the while, you have a slow to adapt,
    less than nimble FHA sitting there, going what about us? We had
    no money to make people aware of our product, no money for
    consumer awareness. So it was kind of a perfect storm of a
    treading in the water FHA and large subprime lenders with a lot
    of marketing dollars coming in there and in many cases--not
    all--there is a place for the subprime product--but in many
    cases, totally blurring that line. And now, I think,
    unfortunately for many families, we are seeing what is going to
    happen as a result of some of those decisions.
        Senator Murray. Do you have any idea what percentage of
    current subprime borrowers you believe would be found
    creditworthy under FHA's criteria?
        Mr. Montgomery. It's a hard number to quantify, Senator but
    some of our internal discussions, we think it would be in
    probably the hundreds of thousands.
        Senator Murray. Ms. Poole and Mr. Robbins, do you think the
    rising foreclosures in the subprime market will necessarily
    have an impact on the business that is handled by FHA? Mr.
    Robbins.
        Mr. Robbins. Let me take you through a couple of
    statistics, which would outline the foreclosure issue and in
    the subprime market. The U.S. population of mortgages is about
    $50 million in total. The subprime represents about 13.5
    percent of that number or $6,750,000. Currently, the MBA
    announced that loans in foreclosure were about 4.53 percent in
    the subprime, which is actually half of its peak, which was in
    the year 2000, when it hit 9.35 percent at that time.
        Of that group of loans, through loss mitigation techniques,
    about half don't complete the foreclosure process. So that
    would leave about 335,000 loans that would ultimately face
    foreclosure that had been in the subprime area. We note with
    great interest that FHA's foreclosure ratio is less than half
    of the subprime because--again, because of outstanding loss
    mitigation techniques that are employed by the Federal Housing
    Administration versus those of subprime companies.
        It's the MBA's feeling that without question, that vast
    numbers of subprime borrowers would benefit significantly from
    FHA financing. In the past, it takes approximately 70 percent
    longer to process and underwrite a FHA loan versus a subprime
    loan. The market moved toward the efficient alternative,
    inappropriately in some cases, using very lax underwriting. We
    feel, with FHA modernization, that they could be a formidable
    competitor in the low to moderate income lending world. They
    could restore their market share relatively quickly because of
    the fact that with the full faith in credit of the United
    States Government in the guarantee portion of that, that the
    lowest interest rate would induce a significant number of
    borrowers and a short time processing frame, bridge the
    efficiency gap that was created. So we feel that these changes
    have an enormous and a very positive effect on future
    homeowners.
        Senator Murray. Ms. Poole, do you care to comment?
        Ms. Poole. Yes. One of the things I'd like to make sure we
    note is that many more homebuyers could have been and could, in
    the future, use the FHA product. But one of the things that
    should be noted is the loan limits that are attached to the FHA
    product, which puts a lot of borrowers out of the market and
    sends them into the subprime and exotic mortgages.
        I, as a practitioner, am actually facing a lot of borrowers
    who are now homeowners, who are facing possible foreclosures,
    simply from purchasing over the last couple of years and they
    are in upside down mortgages that they did not know they were
    in. As a practitioner, when talking with a lender, I was
    sometimes not actually given all the information the borrower
    was given because the borrower and lender work together.
        So when you get to a point of saying, I don't know how this
    happened, the fact is, it happened. And so I'm looking at it
    saying, you know, if there had been a FHA product that would
    have been available for the price range that they were
    purchasing in, it would have given me an opportunity to help
    them that way. But without it being there and no matter who you
    are, what you want to do in the market that I work, is to own a
    home. So all the promises and pie in the sky seem okay because
    I can afford the monthly payment but not looking at the long-
    term effect.
        Senator Murray. Thank you very much. Senator Bond.
        Senator Bond. Thank you, Madam Chair. Commissioner
    Montgomery, you have certain authorities to ensure the FHA MMI
    fund is solvent and doesn't require a bailout from Congress and
    in fact, the administration's 2008 budget request assumes that.
        No. 1, can you give us your personal and the
    administration's commitment that you will not allow MMI fund's
    credit subsidy to go positive in 2008 and second, GAO's
    testimony states that high claim and loss rates for loans with
    down payment assistance financing were major reasons why the
    estimated credit subsidy rate for MMI is projected to be
    positive. If that statement is accurate, why do you continue to
    insure these high-risk loans that may jeopardize the health of
    FHA?
        Then I'll ask Mr. Donohue and Mr. Shear to comment on that,
    please.
        Mr. Montgomery. Do you want me to go first, Senator?
        Senator Bond. Yes. I want you to lay it out and then we'll
    slice it.
        Mr. Montgomery. I just wanted to confirm that, sir. Sir,
    yes, while I am FHA Commissioner, the MMI fund will not go to a
    positive credit subsidy. We have a fallback position. We're
    working very hard to get FHA modernization and if you look at
    how we think volume would increase and thus, receipts and that
    would keep the credit subsidy negative, which as we all know in
    government, is a good thing.
        However, let me just reiterate, while I am Commissioner,
    our fallback position would be to raise the upfront premiums
    modestly from 1.5 to 1.66, .016 of a percentage and a small
    increase in the annuals to keep that from happening.
        Second, sir, on the gift down payment programs, we have
    worked with the Internal Revenue Service, starting gosh,
    probably about 1 year, year and a half ago, when they
    approached us about some of their concerns. I don't want to
    speak for the IRS but just summarizing some of their concerns,
    whether some--not all--of the seller funded gift down payment
    programs met through detached and disinterested clause for bona
    fide 501(c)3s. And there are some 185 or so, sir, that we're
    aware of. They had a revenue ruling as we're all aware of, in
    May of last year, saying--putting on notice, seller funded down
    payment programs that if you don't meet these criteria then you
    could be in jeopardy of losing that status.
        Now, I don't want to speak ill of the IRS for a number of
    reasons but as we all know----
        Senator Bond. During that time when we're all subject to
    them----
        Mr. Montgomery. Yes, sir. But I know they have their hands
    full and they are moving a little slower than we anticipated in
    this area. So HUD also is and has moved toward rulemaking in
    this area and the rule currently is over at the Office of
    Management and Budget for their review.
        But yes sir, the FHA guidelines state that as long as
    someone is a 501(c)3, because you have to be a nonprofit to
    participate in the down payment programs, then we have to
    continue accepting them. We are not in the business of making
    the determination as to who is a 501(c)3; that is the IRS's
    purview.
        Senator Bond. Well, I agree with the fact that the 501(c)3
    determination is properly the jurisdiction of the IRS. What I'm
    concerned about is the impact of these gift down payments on
    the exposure of FHA. That's why we expect to see something and
    I'd like to hear Mr. Donohue and Mr. Shear talk about that.
        Mr. Donohue. I'm sorry, mention about the reduction of FHA
    lower--at least, in part, the foreclosure is partly due to loss
    mitigation and also, I believe, the foreclosure--moratorium in
    the gulf--but I want to get back, sir, to your question. I mean
    it, I get nervous when I hear things about efficiency and
    modernization, even though I support it. I really do. In my
    opinion, a lot of money was made here the last couple of years
    and what I do is I see where enforcement and oversight is not
    applied in cases.
        Senator, you mentioned about this pencil-whipping. Where I
    come from, they talk about a three-card Monty. This seller down
    payment assistance, I saw first hand several years ago and as
    far as I'm concerned is a three-card Monty, the way it was
    designed. Going back and giving money from the builder back to
    the lender to come up with the down payment and then what
    happened? It had direct results--it caused spec house--the
    increase in value unofficially. The next thing you know, those
    owners would come back and get hit with a tax bill when the
    land was re-evaluated and insurance and so many of them move
    out of the house.
        I took that to the FHA and I brought this attention to them
    and there was great reluctance on their part. In fact, my guess
    is, I probably upset a lot of the Mortgage Bankers
    Associations. When I first came on 5 years ago, I used to get
    invited to a lot of their functions. That seems to have dropped
    off significantly the last couple of years.
        But I think this--when the Commissioner speaks about
    modernization, I'm drawn upon to a particular matter we dealt
    with and this had to do with loan binders. Loan binders are the
    files that are kept with regard to loans executed by FHA. There
    was a modernization designed for those binders to be retained
    by the lending organizations. I have concern about that. I went
    to the FBI and asked them their opinion and they supported me
    with regard to the very concern is simple. I was in
    investigations for 31 years. I get real nervous when I'm going
    back and talking to a particular lender that might have done
    wrong and the very information I have, the investigation file
    that I have to recover to look at is maintained by them. I'd
    hate to think what they might do with if they really are
    fraudulently aggressive.
        But the fact is, this was a situation that I had to
    challenge and the FHA Commissioner went ahead anyway and
    administered that modernization plan. I think it's all about
    aggressive enforcement over sites served.
        Senator Bond. Then Mr. Shear and then I'm going to have,
    since we've mentioned Mortgage Banking Associations, I'm sure
    that Mr. Robbins may have a view on that. So let me hear from
    Mr. Shear.
        Mr. Shear. Thank you, Senator Bond. First, you said
    something about the subsidy rates and whether a positive
    subsidy would be required. Over the last few years, part of the
    improvements that we have noted with FHA is their ability to
    improve their models for estimation purposes. At the same time,
    we're trained to be skeptical, and when you see underestimated
    costs year after year, we still have a reason for some pause.
    But by the same token, these models have improved. I would
    expect as the Commissioner has said, with an increase in
    premiums under current statutory authority, that the program
    can be made a negative subsidy program in fiscal year 2008.
        On the second issue of down-payment assistance, even though
    we have monitored developments at the IRS, we haven't conducted
    audits of IRS. Our audit has been of FHA and we have
    recommended that the seller-funded down payment assistance that
    has become such a major share of FHA's portfolio, be treated as
    a seller inducement. At the time we made that recommendation,
    the response from FHA was that FHA was bound by a HUD Office of
    General Counsel legal opinion that said that this couldn't be
    treated as a seller inducement. We don't have a legal opinion
    about the legal opinion but as a matter of policy, we continue
    to believe FHA has to take action to deal with seller-funded
    down payment assistance.
        Senator Bond. Mr. Robbins.
        Mr. Robbins. The down payment assistance program makes up
    about a third of FHA's current business and its our position
    that allowing a flexible down payment will effectively do away
    with abuses in the program and so the answer to that is a more
    flexible down payment program.
        Senator Bond. Tell me how that--what do you mean by a
    flexible down payment program? I don't really understand what
    that flexible----
        Mr. Robbins. Doing away with the formula driven down
    payment program that is today providing a real zero down
    program that we can introduce to borrowers. We're not in the
    business of developing down payment assistance programs, the
    Mortgage Bankers Association is not. And we are in the business
    of opining that we want a safe and sound and healthy Federal
    Housing Administration and support proposals that keep it
    actuarially sound. But we also are aware that the FHA down
    payment assistance or the down payment assistance program is
    being used, principally by low-income and minority buyers in
    order to get into their house and what we have found is you
    have seen in traditional marketplace--43 percent of first time
    homebuyers last year used a zero down payment program. If we
    were able to adopt a similar kind of program through FHA on a
    direct program, it would do a lot to go to--to curb the abuses
    in the DAP program that you see today.
        Senator Bond. The public policy goal of getting people into
    first time houses is extremely important but I am very much
    concerned about the historical evidence that we've seen that
    when you don't have skin in the game, when you haven't put
    something up, when there is no equity value in the home, this
    puts the homeowner too often in a squeeze where something comes
    along, a furnace breaks down, a roof leaks, there is no
    headroom in it. So is this not a problem?
        Mr. Robbins. You know, to me, it depends on how the
    borrower is underwritten and there is nothing that takes the
    place of good old common sense. I mean, there are situations
    where 100 percent loan to value program is fine for a borrower,
    properly underwritten. There are some cases where the borrower,
    with a no-down product is not ready for home ownership yet. And
    my belief is that a well applied underwriting program adopted
    by the FHA under that program with the appropriate risk pricing
    behind that, would go a long way to benefit the homeowners who
    need that kind of financing and in fact, quality for it versus
    them using a subprime alternative.
        Senator Bond. Ms. Poole, did you want to comment on that?
        Ms. Poole. I sure would. There are a couple of things that
    I think come into play. One of things is that with the seller
    funded down payment assistance, it really increases home
    prices, which start to price people, especially first time
    homebuyers, out of the market. So we have to keep that in mind.
        Flexible down payment would not have the same impact. But
    flexible down payments are based on credit scores, it's based
    on credit histories and how a person handles themselves credit-
    wise.
        So the zero down is not something that is even being talked
    about for everyone. It's on a sliding scale, depending upon
    where you are and what you're doing. Again, as a practitioner,
    I work with mostly first time homebuyers and I would say that
    every time they make a monthly payment, to them, they have
    invested into that home. Rather they didn't put it all in
    upfront or with the 3 percent or whether they are doing 80/20,
    it's when they make that first payment that they feel as though
    I have vested interest in how this works.
        One of the most important things that I think has to be
    talked about and has to be considered is the education portion
    that comes into play when people, first time homebuyers buy
    homes. Without the education piece, sometimes people can get in
    to situations that they are not prepared for and as for the
    National Association of Realtors, we are 100 percent in
    agreement that people need to be educated in the home-buying
    process long before they decide to make that first home
    purchase.
        Senator Bond. Thank you very much. Madam Chair, I will have
    other questions for the record but I have another commitment.
        Senator Murray. Okay, very good.
        Senator Bond. I thank the witnesses and you've given some
    enlightenment and a little bit of confusion on a very important
    subject and we appreciate your efforts to help us straighten it
    out.
        Senator Murray. Thank you very much, Senator Bond. We will
    make sure your questions get submitted to the record and ask
    that everyone give their responses back to us.
        I do have a few more questions I want to ask and I'll start
    with you, Mr. Montgomery. Two weeks ago, Secretary Jackson
    testified before the House Appropriations Committee and said
    that HUD had changed its position about allowing FHA to offer
    mortgages with a zero down payment and he went on to say he was
    not opposed to requiring a 1 or 2 percent down payment
    requirement. But since that hearing, now HUD has indicated you
    do not intend to change your reform proposal and zero down
    payment mortgages will still be permitted. What exactly is the
    administration's position on this?
        Mr. Montgomery. Right now we have a standard minimum 3
    percent cash requirement and that can take many different
    shapes and forms. We are asking and we haven't transmitted a
    bill but again, it will look very similar to last year's bill,
    the ability to do away with the requirement of the 3 percent.
    Now that may mean that either through closing costs assistance
    or the person finances the upfront mortgage insurance premium
    and puts some money down that there is some cash in the game.
    It may be at 99.95 LTV loan but there will be some minimum cash
    investment on the part of the borrower. It may be that the down
    payment is a very small number but their cash contribution
    comes from elsewhere.
        Senator Murray. But will you be asking for authority for
    zero down payment mortgages?
        Mr. Montgomery. We will be asking authority for flexibility
    in the cash requirement to include the down payment assistance,
    to include other cash participation the borrower may do. I also
    want to say that we do need some flexibility in that area
    because it's just too difficult. There are a lot of borrowers
    who would qualify but just don't have the cash and they are
    creditworthy low-income borrowers and for many of them, they
    turn to the subprime product, many of them turn to the gift
    down payment programs. So yes, we do need some flexibility in
    that requirement.
        Senator Murray. Well, Ms. Poole, in her formal testimony,
    said that 43 percent of all mortgages to first time homebuyers
    in 2005 involved no down payment. And now we're seeing this
    alarming increase in delinquencies and foreclosures in the
    subprime market that involve these no down payments. So the
    administration's FHA reform proposal that would essentially
    allow no down payments, zero down payments, how are you going
    to ensure, under this proposal if you move toward that, it
    won't suffer the same fate as the subprime?
        Mr. Montgomery. I can't speak for the subprime but I can
    speak for FHA and no, ma'am, it will not. Our eligibility
    criteria will not change. If anything, when a borrower chooses
    to put less cash down in the transaction, the eligibility
    criteria will strengthen. I have an obligation to this
    committee, to this body, to the taxpayers, to make sure the FHA
    fund is operated in a financially sound manner. So as a result
    of that, we will not change that criteria. It is not our intent
    to make homeowners out of families who are not ready to become
    homeowners. But I would submit that there are working families
    out there, whether they are social workers, librarians or
    mechanics, who save a little here and there for a down payment.
    They are good, creditworthy, hardworking families but they have
    a little bump in the road, the transmission goes out on the
    car. You name it and there goes the cash savings. I would
    submit that there are tens if not hundreds of thousands of
    families like that, who don't want a handout. They just need a
    hand, because they pay for this premium. It's not a Government
    handout. So those are those hardworking, creditworthy, low-
    income borrowers that we are trying to reach.
        Senator Murray. Have you done a thorough analysis that will
    tell us that we'll be able to guarantee these zero down
    payments that you could share with the committee?
        Mr. Montgomery. We have done actuarial reviews of all our
    products and since we haven't transmitted the bill yet, we have
    a whole pricing structure that we're still reviewing. But bare
    in mind, we would price the product with FHA reform,
    commensurate with the risk. So any borrower again, who might be
    a higher risk and is choosing to put lower down, will pay for
    that privilege, if you will. But look at what they get in
    return. They get a fixed rate loan over a longer period. They
    have no teaser rates that they have in the subprime, which for
    many of them, is their only option today and they have no
    prepayment penalties. The FHA is a fully amortizing product. So
    I would say it is a far, far better option for many of those
    families.
        Senator Murray. Mr. Shear and Mr. Robbins, do you have any
    comments on that?
        Mr. Shear. On the zero-down product, one of the things that
    we found from our work, which is consistent with other
    research, is that a zero-down product does carry higher risk,
    higher risk of default. And while it is a congressional
    prerogative whether to allow FHA to have a zero-down product,
    we believe it should be provided on a pilot basis. When you
    look at other mortgage providers, when they offer a zero- or
    low-down product, they always pilot the program because it is
    very risky to go into an activity if you don't understand the
    risks of that activity and pilot programs allow that
    understanding to occur.
        So that is basically our position. It isn't one of whether
    to allow zero down or not, but if Congress were going to allow
    it, it should be a pilot program.
        Senator Murray. Dr. Donohue?
        Mr. Donohue. Senator, the seller down payment is twice the
    default rate and I look forward to hearing more from FHA with
    regard to how they can ensure that will not have an adverse
    effect on the FHA.
        But I want to say one last thing and that's the fact is, my
    concern remains with the relationship between FHA and the
    lenders. I think without aggressive enforcement and I'm
    concerned about what I've seen, aggressive enforcement, I
    think--that's where I think a lot of problems might exist with
    regard to what I see in the future. Thank you.
        Senator Murray. Mr. Robbins.
        Mr. Robbins. A couple of comments. The lower down payment
    program would be offset by higher risk premiums that are
    charged. I don't think you can compare a subprime, no income,
    no asset loan to a fully documented FHA loan. The underwriting
    process is completely different and a substantial amount of the
    loss mitigation would be seen under an FHA program because they
    are really documenting every aspect of a borrower's assets and
    income, where obviously, under a subprime, no income, no asset
    loan, that responsibility would be abdicated.
        Here is my basic concern, being a lender and having been
    one for many, many years and having experienced and done
    literally billions of dollars of first time homebuyer loans.
    We're looking at a market that will grow from $10 trillion in
    outstanding mortgage debt today to $20 trillion estimated
    within the next two decades, in less than two decades.
    Harvard's Joint Center for Housing Studies has said that during
    that period of time, because of the changing demographics of
    this country, that 66\2/3\ percent of first time homebuyers
    will be minority Americans buying their first house. We have to
    have programs that meet that demand. We have a tidal wave of
    opportunity that is occurring in this country, to convert
    people and give them their share of the American dream and let
    them put their stake in the ground in home ownership. We have
    to have the programs to meet that demand and a well-founded FHA
    with solid underwriting is going to allow us to do that.
        Senator Murray. Thank you very much. I do have one other
    question. Senator Bond put language in our 2007 appropriations
    bill that would clamp down on fraudulent gift down payment
    assistance programs. Mr. Donohue and Mr. Shear, do you think
    that language--I don't know if you're familiar with it but do
    you think that would adequately get at the crooked actors
    without harming the real nonprofits that are trying to get
    people into homes?
        Mr. Donohue. Senator, I support that. I think that
    currently, with the best intentions and the review that is
    underway, the seller down payment assistance program is still
    going on. And I'd like to see it end as quickly as possible so
    I support any notion of that type.
        Senator Murray. Mr. Shear.
        Mr. Shear. I'm not familiar with the provisions related to
    this but certainly, it sounds promising and for us, again, the
    reason we think FHA should treat it as a seller inducement is
    because, for all practical purposes, it is. And just to make
    clear, even though we found that loans with more traditional--
    what I'll call the old fashioned kind of down payment
    assistance, where it comes from a charity, from a foundation,
    where there is real equity created in a home because of the
    down payment assistance--even though the performance of those
    loans wasn't quite as good as other loans, our concern isn't
    with the more traditional down payment assistance. It's with
    this particular mechanism of seller-funded assistance that has
    become such a large share of FHA's portfolio.
        Senator Murray. Mr. Montgomery.
        Mr. Montgomery. I just want to make sure that we understand
    there is a wide difference between a seller-funded gift down
    payment and a zero-down product. In many cases, the cost of the
    down payment, if you will, for the seller funded, the
    charitable one, if you will, is put on at the end of the loan
    and along with other costs that a borrower may have, they could
    be in a higher than 100 percent LTV posture, whereas a
    traditional down payment, you don't have that. It's not a loan
    you're paying back. You are putting some money in the game so
    there is a big difference between the two products.
        But again, just to reiterate the point I made earlier, we
    have been working with the IRS. We have been working on a rule
    and I understand Mr. Donohue's frustration with that but we've
    moved closer to that point than probably any previous
    Commissioner and these are not new products. These gift down
    payments have been around since the late 1990's.
        Senator Murray. And do you have a comment on Senator Bond's
    language in the appropriations bill?
        Mr. Montgomery. I think if that is what it gets to, then
    that's the way we would go but I would add again, that the IRS
    has a revenue ruling out. HUD is moving, FHA may be moving a
    rule and is currently at OMB.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Murray. That is all the questions I have at this
    point. I believe we have some questions from other members that
    we will submit for the record. If you would respond back, I
    would appreciate it.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                Questions Submitted to Hon. Brian D. Montgomery
               Questions Submitted by Senator Christopher S. Bond
                          downpayment assistance loans
        Question. Do you support the elimination of these loans? Are you
    committed to implementing the GAO's recommendations and stopping the
    practice of insuring these types of high-risk loans? When do you expect
    your proposed ruling to be implemented?
        Answer. Last year HUD published a rule that would eliminate these
    high-risk loans, however implementation has been delayed due to
    litigation. We are currently awaiting a court ruling on how to proceed.
        Question. Would you support a legislative provision in the THUD
    appropriations bill that prohibits FHA from engaging in this activity?
        Answer. The fiscal year 2009 budget proposes new risk categories
    for these high risk loans. This risk category bears a positive subsidy
    rate of 6.35 percent. Should Congress wish FHA to continue to insure
    these loans, we will require an appropriation to cover the very
    substantial anticipated cost to the Government of such loan guarantees.
                                fha's structure
        Question. It is my belief that FHA reform be comprehensive and
    address some of the structural issues that have impeded FHA's ability
    to manage effectively the risk of its insured mortgages. I believe
    having some flexibility in hiring (possibly similar to the FDIC and
    other quasi-governmental entities) and purchasing authority can help
    the FHA function more like a business.
        Can you comment on how the current structure impacts FHA's
    operations and what types of flexibility you need to ensure FHA can be
    more responsive and accountable? In terms of your workforce, are you
    currently facing a large number of retirements like the rest of the
    Federal Government and how will that impact FHA?
        Answer. For now, we believe that flexibility to increase the FHA
    funding used for information technology systems would help. We are also
    attempting to bring new employees on board so they can be trained
    before experienced staff retires. We do believe these measures will
    allow us to meet both the challenges of implementing the new
    legislation and to deal with the very dynamic home mortgage market.
                           asset control area program
        Question. In the fiscal year 1999 VA-HUD Appropriations Act, the
    Congress created the Asset Control Areas (ACA) to address the growing
    number of FHA-foreclosed homes in distressed communities and to promote
    homeownership to stabilize these neighborhoods. Our intent was for HUD
    to work with nonprofits and local governments in implementing this
    program.
        Can you give me an update on the program, in terms of how many new
    contracts have been approved in the last year? How long does it
    typically take HUD to approve these contracts?
        Answer. In fiscal year 2007 one new agreement was approved and one
    was renewed. Once the ACA participant submits a completed package and
    accepts the terms of the model agreement, the package is approved
    within 30-45 days.
                           impact of subprime market
        Question. There has been a lot of attention to the subprime market
    and its recent problems as thousands of subprime loans are going into
    default and foreclosure. The Federal Reserve chairman recently
    suggested that the subprime problems could have broader economic
    consequences and some on Wall Street fear that it will spread to the
    prime market and to corporate credit.
        How has the subprime market affected FHA's business and market-
    share over the past several years? In other words, did the subprime
    market attract borrowers who would have traditionally been served by
    FHA? Second, looking forward, since the subprime market is imploding,
    will many borrowers return to FHA? Do you see an increase in business
    happening? Lastly, with many of the subprime mortgages likely to end up
    in foreclosure, will it cause a domino effect on homes insured by FHA?
        Answer. Subprime lenders attracted a significant number of
    borrowers who would have qualified for, and likely used, FHA. Many of
    these borrowers are expecting to refinance out of their subprime loans
    before they reset to a higher interest rate. As with the FHA Secure
    initiative announced last year, we are exploring ways to assist these
    families, so we do expect an increase in business. Our borrowers
    continue to be required to meet FHA's underwriting standards before any
    loan is insured. Consequently, with the exception of the gift
    downpayment loans, we do not expect an increase in claims.
                                 managing risk
        Question. The GAO has raised several concerns with FHA's ability to
    manage risk and that it could impact its ability to manage new products
    such as the proposed no down-payment mortgage product.
        Given the GAO and IG's concerns, the downturn in the housing
    market, and the record delinquency rate of FHA loans, what safeguards
    or limitations would FHA place on its risk-based premium and low to
    zero down-payment products? How will you ensure that borrowers will not
    be put at risk of owing more than the value of the home? What are your
    thoughts on piloting a program as suggested by the GAO?
        Answer. With the exception of seller financed gift downpayment
    loans, we do not anticipate large numbers of FHA borrowers being put in
    a position of owing more than their homes are worth, aside from
    widespread declines in market values that adversely affect all
    borrowers. We believe the serious problems confronting the housing
    market as a whole are not appropriate for a limited demonstration, but
    rather require a program available to all who need it and who qualify.
                costs of implementing risk-based pricing system
        Question. The IG's testimony states that moving to a risk-based
    premium pricing structure could require additional budget authority
    funding to make FHA system modifications. Further, this new pricing
    system could impose new administrative/cost burdens on originating and
    servicing lenders, according to the IG.
        Does your budget request include funding to address the system
    modifications suggested by the IG? If so, how much would it cost in
    fiscal year 2008 and in the out years? Have you analyzed the potential
    administrative/cost impact of the proposed risk-based pricing structure
    on lenders?
        Answer. The modifications to FHA systems have been completed. We
    don't anticipate increased annual requirements solely because of the
    implementation of risk-based pricing. At the same time, however, FHA
    systems are as much as 27 years old. They all need to be upgraded or
    replaced.
                 fair housing concerns with risk-based pricing
        Question. The IG's testimony raises fair housing and red-lining
    concerns with the administration's risk-based pricing proposal. How are
    you addressing these concerns?
        Answer. The Department does not believe that the risk-based pricing
    will have a discriminatory effect on minority households or
    neighborhoods. Quite to the contrary, risk-based pricing will allow FHA
    to more effectively carry out its mission of promoting home ownership
    by lower income families, especially minorities and first-time
    homebuyers. With greater pricing flexibility, FHA will be able to reach
    more families and offer more financing options at more affordable cost.
                                   fha fraud
        Question. The IG's testimony listed a number of areas of continuing
    concern related to FHA fraud. One area of concern was FHA's adoption of
    a new policy dealing with the Lender Insurance Program. FHA implemented
    the new policy to this program despite opposition from the FBI and
    HUD's OGC but committed to making technical corrections to the new
    policy after implementation. What sort of progress have you made in
    making technical corrections to this program?
        Answer. The Lender Insurance (LI) program is a process that allows
    for insurance of loans by lenders without prior review by HUD staff. LI
    loans are subject to the same Direct Endorsement standards with the
    exception of those requirements that are unique to the LI process. Risk
    management controls for all Direct Endorsement loans include Social
    Security Number validation, property flip check of all purchase
    mortgage loans, electronic review of all insuring data prior to
    endorsement, analysis of all closed loans to select high risk loans for
    review, analysis of all lenders to identify the high risk lenders for
    review, electronic monitoring of each lender's claim and default rates
    in Neighborhood Watch to determine compliance with FHA approval
    standards and termination of a lender's origination or underwriting
    approval for poor performance under Credit Watch Termination.
        FHA is working with Regulation Division attorneys on two revisions
    to current HUD single-family regulations. The first revision would
    revise the regulations to provide a definition of the term
    ``origination'' and clarify that LI is a process and that loans insured
    under this process are subject to the current Direct Endorsement
    statutes, regulations and policies.
        FHA, under existing regulatory authority to hold program
    participants fully accountable for their actions, has adopted
    procedures for dealing with any LI lender that fails to produce a case
    binder when requested, which is the major source of OIG's concern. The
    second revision would revise the regulations to require that lenders
    indemnify HUD for failure to submit a case binder when requested or for
    failure to submit a case binder with sufficient documentation to
    determine eligibility of Federal Housing Administration (FHA) mortgage
    insurance. This revision enhances existing regulatory authority and
    procedures for dealing with a LI lender who fails to produce a case
    binder when requested.
        FHA would also like to point out that, despite OIG's concerns,
    those lenders making loans under the LI program have a better record of
    loan performance than do those lenders that still submit binders to FHA
    for insuring purposes. LI is a privilege and not a right and LI lenders
    are abiding by FHA's requirements.
                                  respa reform
        Question. A few years ago, the administration proposed reforms to
    the Real Estate Settlement Procedures Act (RESPA) to simplify the
    mortgage process and to provide certainty to borrowers about their
    costs. The proposed rule, however, was withdrawn. Does the
    administration have any plans to reform RESPA?
        Answer. Yes, the Department looks forward to publication of the
    rule and public comment very soon. The Department will work with
    Congress on this very important rule. The goals are to simplify and
    improve the disclosure requirements for mortgage settlement costs under
    RESPA, and to protect consumers by making it possible for consumers to
    shop for the loan and settlement services that best meet their needs.
                                     ______

                  Questions Submitted by Senator Arlen Spector
                               risk-based pricing
        Question. Risk-based pricing may increase the mortgage carrying
    costs of those FHA borrowers that are least able to afford them and
    there is a greater risk of default on zero downpayment loans. How do
    you plan to prepare for and protect against these risks and ensure that
    low-income families are not led to greater financial instability?
        Answer. FHA will continue to use its very effective underwriting
    process to ensure that families qualify for and can afford the
    mortgages they are seeking.
                                fha loan limits
        Question. Raising FHA area loan limits could distance FHA from the
    lower-income families it was established to serve. How will raising the
    loan limits help the lowest-income families who have the fewest
    alternative options?
        Answer. We have effectively been eliminated as an option for low-
    income families in high cost areas such as California and New York.
    Raising the limits will allow FHA to once again serve low-income and
    first-time homebuyers in these areas.
                                     ______

                 Questions Submitted to Hon. Kenneth M. Donohue
               Questions Submitted by Senator Christopher S. Bond
                                   fha fraud
        Question. Your testimony listed a number of areas of continuing
    concern related to FHA fraud. One area of concern was FHA's adoption of
    a new policy dealing with the Lender Insurance Program.
        What is the significance of this problem?
        Answer. The Lender Insurance Program allows certain FHA-approved
    direct endorsement lenders to endorse FHA insured loans without a pre-
    endorsement review and generally relieves the submission of loan
    origination case binders to FHA. OIG expressed concern that relieving
    Lender Insurance Program lenders from the responsibility of submitting
    loan origination case binders to FHA may adversely impact the ability
    to investigate and prosecute fraud perpetrated upon FHA.
                                fha's structure
        Question. As I stated in my opening statement, I strongly believe
    that FHA reform should address some of the structural issues with FHA
    that has impeded its ability to manage effectively the risk of its
    insured mortgages. I believe having some flexibility in hiring
    (possibly similar to the FDIC and other quasi-governmental entities)
    and purchasing authority can help the FHA function more like a
    business.
        Do you believe that FHA's current structure impedes their ability
    to perform their mission in a sound and effective manner?
        Answer. The OIG has not independently assessed whether FHA's
    current structure impedes its ability to perform its mission in a sound
    and effective manner. However, based on our audit and investigative
    activities we are concerned with the ability of FHA's staff and its
    current systems (i.e., reliability) to implement and manage the various
    new programs/products proposed as part of FHA reform.
        Since fiscal year 1991, we have reported annually on the
    Department's lack of an integrated financial system in compliance with
    all Federal financial management systems requirements, including the
    need to enhance FHA's management controls over its various insurance
    and other financial systems. Organizational changes and human capital
    management have not only been a challenge to FHA, but the Department as
    a whole for many years. As such, FHA has contracted out a number of its
    functions that are essential to the accomplishment of its overall
    mission.
        The Department has made progress in implementing a new financial
    system at FHA, but continued progression in the integration of FHA's
    financial management systems, and strengthening of lender
    accountability and enforcement against program abuses is still needed.
                            high-risk status of fha
        Question. The GAO recently removed the high-risk designation for
    FHA's single-family programs because of the agency's progress in
    addressing its long-standing problems. However, the GAO warns that
    FHA's proposed changes to raise its loan limits, implement a new risk-
    based premium system, and reduce down-payment requirements, could
    introduce new risks and oversight challenges to FHA.
        Despite the removal of GAO's high-risk designation, is FHA still
    vulnerable to waste, fraud, and abuse?
        Answer. The Department has made progress in its efforts to correct
    some of its challenges and we commend the removal of FHA's single-
    family programs from GAO's high-risk list. However, FHA is still
    vulnerable to waste, fraud, and abuse, especially with the changes
    proposed as part of FHA reform.
        We are concerned with the soundness of the front-end risk
    assessments performed by or on behalf of the Department for the various
    proposed operational and programmatic changes that are part of or
    related to FHA reform. Therefore, we have begun an audit of FHA's
    control structure, which includes a review of its front-end risk
    assessment process, to ensure cost/performance effective actions are
    taken to minimize undesired outcomes and maximize the likelihood of
    desired outcomes.
        Additional risk is inherent with the introduction of any new
    program/product and it must be balanced with a commensurate increase in
    oversight and enforcement, which was lacking from the various FHA
    reform proposals. Without such protections to mitigate future insurance
    losses one cannot ensure the effectiveness of FHA in meeting its
    overall mission, which includes maintaining and expanding
    homeownership. The OIG is committed to continuing its work with the
    Department to ensure the integrity of FHA's single-family insurance
    programs.
                                     ______

                    Questions Submitted to William B. Shear
               Questions Submitted by Senator Christopher S. Bond
        Question. The GAO recently removed the high-risk designation for
    FHA's single-family programs because of the agency's progress in
    addressing its long-standing problems. However, the GAO warns that
    FHA's proposed changes to raise its loan limits, implement a new risk-
    based premium system, and reduce down-payment requirements, could
    introduce new risks and oversight challenges to FHA.
        Despite the removal of GAO's high-risk designation, do you believe
    FHA is still vulnerable to waste, fraud, and abuse? Will FHA's proposed
    new loan products potentially expose FHA to more risk and if not
    managed adequately, is it possible for FHA to be placed back on the
    high-risk list?
        Answer. We removed the high-risk designation in January 2007
    because of the progress FHA had made in addressing weaknesses we had
    identified in its risk management, including improvements in lender
    oversight and loan performance modeling.\1\ Because of this progress,
    we believe that FHA is less vulnerable than it has been in the past to
    risks that could undermine the efficiency and effectiveness of its
    single-family mortgage insurance programs. However, as we noted in our
    High-Risk Update and our June 2007 report on FHA's modernization
    efforts, some of FHA's proposed program changes could introduce new
    risks and challenges.\2\ FHA's proposal to offer products with lower
    down-payment requirements is of particular concern given the greater
    default risk of low-down-payment loans, housing market conditions that
    could put borrowers with such loans in a negative equity position, and
    the difficulty of setting prices for new products whose risks may not
    be well understood. Due partly to these risks and challenges, we
    included FHA's single-family insurance programs on a list of suggested
    areas for oversight that we provided to Congress in November 2006.\3\
    To make any future decisions about the high-risk status of this program
    area, we would use published criteria that encompass a number of
    quantitative and qualitative factors.\4\ Additionally, we would review
    a wide range of data and documentation, including information on FHA's
    ability to manage the risks of any new mortgage products it is
    authorized to offer.
    ---------------------------------------------------------------------------
        \1\ GAO, High-Risk Series: An Update, GAO-07-310 (Washington, DC:
    January 2007).
        \2\ GAO, Federal Housing Administration: Modernization Proposals
    Would Have Program and Budget Implications and Require Continued
    Improvements in Risk Management, GAO-07-708 (Washington, DC: June 29,
    2007).
        \3\ GAO, Suggested Areas for Oversight for the 110th Congress, GAO-
    07-235R (Washington, DC: Nov. 17, 2006).
        \4\ GAO, Determining Performance and Accountability Challenges and
    High Risks, GAO-01-159SP (Washington, DC: November 2000).
    ---------------------------------------------------------------------------
        Question. In your testimony, you state that high claim and loss
    rates for loans with down-payment assistance financing were major
    reasons why the estimated credit subsidy rate for the FHA MMI Fund is
    projected to be positive for fiscal year 2008. HUD has recently
    developed a proposed rule to address these types of loans.
        Can you elaborate on why these types of loans perform so poorly and
    what specific recommendations you have made to address these problems?
    How do these loans perform compared to subprime loans? Do you believe
    HUD's proposed rule adequately addresses your concerns and
    recommendations?
        Answer. Our testimony focused specifically on the high claim and
    loss rates for loans with down-payment assistance from nonprofit
    organizations that received at least part of their funding from
    property sellers (seller-funded nonprofits). These loans are
    problematic because property sellers that provide down-payment
    assistance through nonprofits often raise the sales prices of the homes
    involved in order to recover the required payments to the nonprofits.
    For example, in November 2005, we reported that FHA-insured homes
    bought with seller-funded nonprofit assistance appraised at and sold
    for about 2 to 3 percent more than comparable homes bought without such
    assistance.\5\ The weaker performance of loans with seller-funded down-
    payment assistance may be explained, in part, by the higher sales
    prices and the homebuyer having less equity in the transaction. Seller-
    funded down-payment assistance effectively undercuts FHA requirements
    that help to ensure that FHA homebuyers obtain a certain amount of
    ``instant equity'' at closing. That is, when the sales price represents
    the fair market value of the house, and the homebuyer contributes 3
    percent of the sales price at the closing, the loan-to-value ratio
    (i.e., the ratio of the amount of the mortgage loan to the value of the
    home) is less than 100 percent. But when a seller raises the sales
    price of a property to accommodate a contribution to a nonprofit that
    provides down-payment assistance to the buyer, the buyer's mortgage may
    represent 100 percent or more of the property's true market value. In
    prior work, we found that, controlling for other factors, high loan-to-
    value ratios lead to increased insurance claims.
    ---------------------------------------------------------------------------
        \5\ GAO, Mortgage Financing: Additional Action Needed to Manage
    Risks of FHA-Insured Loans with Down Payment Assistance, GAO-06-24
    (Washington, DC: Nov. 9, 2005).
    ---------------------------------------------------------------------------
        Our 2005 report made recommendations designed to better manage the
    risks of loans with down-payment assistance generally and from seller-
    funded nonprofits specifically. We recommended that FHA consider risk
    mitigation techniques such as including down-payment assistance as a
    factor when underwriting loans. We also recommended that FHA take
    additional steps to mitigate the risk associated with loans with
    seller-funded down-payment assistance, such as treating such assistance
    as a seller inducement and therefore subject to the prohibition against
    using seller contributions to meet the 3 percent borrower contribution
    requirement. Consistent with the first recommendation, FHA is testing
    additional predictive variables, including source of the down payment,
    for inclusion in its mortgage scorecard (an automated tool that
    evaluates the default risk of borrowers). HUD's proposed rule to
    prohibit seller-funded down-payment assistance is responsive to the
    second recommendation.
        It is difficult to compare the performance of FHA-insured loans
    with seller-funded down-payment assistance to subprime loans because of
    differences in the way performance data are reported. (For example, FHA
    measures the percentage of loans, by origination year, that completed
    the foreclosure process and resulted in an insurance claim. In
    contrast, the Mortgage Bankers Association's National Delinquency
    Survey--which provides data on prime, subprime, and government-insured
    loans--measures the percentage of loans being serviced, regardless of
    origination year, that were in any stage of the foreclosure process.)
    FHA has reported that, as of January 2007, 15.6 percent of fiscal year
    2000 loans with down-payment assistance from nonprofits (the large
    majority of which received funding from property sellers) had resulted
    in an insurance claim. For this and more recent books of business, the
    claim rates for loans with this type of assistance were at least twice
    as high as the claim rates for all FHA-insured purchase loans.
        Question. As I stated in my opening statement, I strongly believe
    that FHA reform should address some of the structural issues with FHA
    that has impeded its ability to manage effectively the risk of its
    insured mortgages. I believe having some flexibility in hiring
    (possibly similar to the FDIC and other quasi-governmental entities)
    and purchasing authority can help the FHA function more like a
    business.
        Do you believe that FHA's current structure impedes their ability
    to perform their mission in a sound and effective manner?
        Answer. In our June 2007 report on FHA's modernization efforts, we
    discussed options that FHA and Congress could consider to help FHA
    adapt to changes in the mortgage market and the pros and cons of these
    options.\6\ Some of these options could help the agency perform its
    mission more effectively by increasing its operational flexibility. For
    example, we noted that mortgage industry participants and researchers
    had indicated that Congress could consider granting FHA additional
    authorities to invest in staff and technology. Specifically, Congress
    could allow FHA to manage its employees outside of Federal pay scales.
    Some Federal agencies, such as the Securities and Exchange Commission,
    the Office of Thrift Supervision, and the Federal Deposit Insurance
    Corporation, are permitted to pay salaries above normal Federal pay
    scales in recognition of the special skills demanded by sophisticated
    financial market operations. The Millennial Housing Commission and
    mortgage industry officials have suggested that FHA be given similar
    authority.\7\ This option could help FHA to recruit experienced staff
    to help the agency adapt to market changes and could be funded with the
    Mutual Mortgage Insurance Fund's current resources--that is, negative
    subsidies that accrue in the Fund's reserves. However, the Fund is
    required by law to operate on an actuarially sound basis. Because the
    soundness of the Fund is measured by an estimate of its economic
    value--an estimate that is subject to inherent uncertainty and
    professional judgment--the Fund's current resources should be used with
    caution. Spending the Fund's current resources would lower the Fund's
    reserves, which in turn would lower the economic value of the Fund. As
    a result, the Fund's ability to withstand severe economic conditions
    could be diminished. Also, using the Fund's current resources would
    increase the Federal budget deficit unless accompanied by corresponding
    reductions in other government spending or an increase in receipts.
    ---------------------------------------------------------------------------
        \6\ GAO-07-708.
        \7\ The Millennial Housing Commission, established by Congress in
    2000, studied the Federal role in meeting the Nation's housing
    challenges and issued a report in 2002, which included recommendations
    for a variety of reforms to Federal housing programs. See Meeting Our
    Nation's Housing Challenges: Report of the Bipartisan Millennial
    Housing Commission (Washington, DC: May 30, 2002).
    ---------------------------------------------------------------------------
        Question. The GAO has raised several concerns with FHA's ability to
    manage risk and that it could impact its ability to manage new products
    such as the proposed no down-payment mortgage product. And now, the
    delinquency rate for FHA loans are at a new record level according to
    the latest Mortgage Bankers Association's Delinquency Survey. In fact,
    MBA's data seems to indicate that FHA loans are as risky, if not more
    risky, than subprime loans.
        Given FHA's track record in managing its existing portfolio of
    loans and risky loans such as those with high loan-to-value ratios,
    should we be concerned about FHA's ability to manage effectively its
    proposed no- or low-down-payment loan programs?
        Answer. In our June 2007 report on FHA's modernization efforts, we
    expressed concerns about the proposal to lower down-payment
    requirements potentially to zero given the greater default risk of
    loans with high loan-to-value ratios, policies that could result in
    effective loan-to-value ratios of over 100 percent, and housing market
    conditions that could leave borrowers with such loans with negative
    equity.\8\ We noted that sound management of very low or no-down-
    payment products would be necessary to help ensure that FHA and
    borrowers do not experience financial losses. Piloting or otherwise
    limiting the availability of new products would allow FHA the time to
    learn more about the performance of these loans and could help avoid
    unanticipated insurance claims. Despite the potential benefits of this
    practice, FHA generally has not implemented pilots, unless directed to
    do so by Congress. We have previously indicated that, if Congress
    authorizes FHA to insure new products, Congress and FHA should consider
    a number of means, including limiting their initial availability, to
    mitigate the additional risks these loans may pose. We continue to
    believe that piloting would be a prudent approach to introducing the
    products authorized by FHA's legislative proposal.
    ---------------------------------------------------------------------------
        \8\ GAO-07-708. Loans with low or no down payments carry greater
    risk because of the direct relationship that exists between the amount
    of equity borrowers have in their homes and the risk of default. The
    higher the loan-to-value ratio, the less cash borrowers will have
    invested in their homes and the more likely it is that they may default
    on mortgage obligations, especially during times of economic hardship
    or price depreciation in the housing market.
    ---------------------------------------------------------------------------
        Question. Your testimony notes that FHA has generally
    underestimated the subsidy costs for its single-family program based on
    the annual re-estimates it conducts. In fact, FHA had a $7 billion re-
    estimate in 2003 due to various reasons.
        Given this history, what level of confidence do you have that FHA's
    credit subsidy estimate for fiscal year 2008 is accurate? Is it
    unreasonable to assume that the credit subsidy situation is worse than
    projected by FHA? Do you believe that the credit subsidy estimate for
    fiscal year 2007 may change?
        Answer. Although credit subsidy estimates by their nature have a
    degree of uncertainty, FHA's estimates, including those for fiscal year
    2008, should be viewed with particular caution given the agency's track
    record. In recent years, FHA has taken a number of steps to improve its
    subsidy estimates such as including the source of down payment and
    borrower credit scores in its loan performance models (the results of
    which are used to estimate credit subsidy costs). However, FHA's
    current reestimates of subsidy costs are generally less favorable than
    the original estimates, even for recent books of business. For example,
    the current reestimated cost for the fiscal year 2006 book of business
    is about $800 million higher than originally estimated.
        Annual estimates of a program's lifetime credit subsidy costs can
    change from year to year as a result of changes in estimation
    methodology, economic assumptions, and program policies. Furthermore,
    each additional year provides more historical data on loan performance
    that may influence subsidy estimates. As a result, it is likely that
    FHA's credit subsidy estimate for fiscal year 2007 (and for other
    years) will change to some degree. However, it is difficult to predict
    the size and direction of those changes.
                                     ______

                  Question Submitted by Senator Arlen Specter
        Question. According to GAO's analyses, will FHA's modernization
    proposals make FHA more financially sound? What is the most crucial
    change for FHA to implement to improve its risk management?
        Answer. As we reported in June 2007, FHA has estimated that its
    three major legislative proposals (instituting risk-based pricing,
    raising loan limits, and lowering down-payment requirements) would have
    a beneficial impact on HUD's budget due to higher estimated negative
    subsidies.\9\ According to the President's fiscal year 2008 budget, the
    credit subsidy rate for FHA's Mutual Mortgage Insurance Fund (which
    supports FHA's single-family insurance programs) would be more
    favorable if the legislative proposals were enacted. Absent any program
    changes, FHA estimates that the Fund would require an appropriation of
    credit subsidy budget authority of approximately $143 million. If the
    legislative proposals were not enacted, FHA would consider raising
    premiums to avoid the need for appropriations. If the major legislative
    proposals were passed, FHA estimates that the Fund would generate $342
    million in negative subsidies. Although credit subsidy estimates by
    their nature have a degree of uncertainty, FHA's estimates, including
    those for fiscal year 2008, should be viewed with particular caution
    given the agency's track record. FHA's current reestimates of subsidy
    costs are generally less favorable than the original estimates, even
    for recent books of business. For example, the current reestimated cost
    for the fiscal year 2006 book of business is about $800 million higher
    than originally estimated.
    ---------------------------------------------------------------------------
        \9\ GAO, Federal Housing Administration: Modernization Proposals
    Would Have Program and Budget Implications and Require Continued
    Improvements in Risk Management, GAO-07-708 (Washington, DC: June 29,
    2007).
    ---------------------------------------------------------------------------
        A major reason why FHA has estimated a need for appropriations in
    fiscal year 2008 (absent program changes) is the poor performance of
    loans with down-payment assistance from nonprofits that receive funding
    from property sellers. Accordingly, we believe it is critical that FHA
    develop sufficient standards and controls to manage the risks
    associated with these loans. These loans are problematic because
    property sellers that provide down-payment assistance through
    nonprofits often raise the sales prices of the homes involved in order
    to recover the required payments to the nonprofits. For example, in
    November 2005, we reported that FHA-insured homes bought with seller-
    funded nonprofit assistance appraised at and sold for about 2 to 3
    percent more than comparable homes bought without such assistance.\10\
    The weaker performance of loans with seller-funded down-payment
    assistance may be explained, in part, by the higher sales prices and
    the homebuyer having less equity in the transaction.
    ---------------------------------------------------------------------------
        \10\ GAO, Mortgage Financing: Additional Action Needed to Manage
    Risks of FHA-Insured Loans with Down Payment Assistance, GAO-06-24
    (Washington, DC: Nov. 9, 2005).
    ---------------------------------------------------------------------------
        Our 2005 report made recommendations designed to better manage the
    risks of loans with down-payment assistance generally and from seller-
    funded nonprofits specifically. We recommended that FHA consider risk
    mitigation techniques such as including down-payment assistance as a
    factor when underwriting loans. We also recommended that FHA take
    additional steps to mitigate the risk associated with loans with
    seller-funded down-payment assistance, such as treating such assistance
    as a seller inducement and therefore subject to the prohibition against
    using seller contributions to meet the 3 percent borrower contribution
    requirement. Consistent with the first recommendation, FHA is testing
    additional predictive variables, including source of the down payment,
    for inclusion in its mortgage scorecard (an automated tool that
    evaluates the default risk of borrowers). Additionally, HUD has
    proposed a rule to prohibit seller-funded down-payment assistance.
    However, implementation of the rule has been delayed due to a legal
    challenge from certain nonprofit down-payment assistance providers.

                              SUBCOMMITTEE RECESS

        Senator Murray. Thank you to all of you for coming forward
    today and your testimony. It's been very helpful to this
    committee. With that, this subcommittee will stand in recess,
    subject to the call of the Chair.
        [Whereupon, at 10:50 a.m., Thursday, March 15, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

    TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES
                      APPROPRIATIONS FOR FISCAL YEAR 2008

                                  ----------

                             THURSDAY, MAY 3, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Patty Murray (chairman) presiding.
        Present: Senators Murray, Lautenberg, Bond, and Allard.

                  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                            Office of the Secretary

    STATEMENT OF HON. ALPHONSO JACKSON, SECRETARY
    ACCOMPANIED BY:
            ORLANDO J. CABRERA, ASSISTANT SECRETARY, OFFICE OF PUBLIC AND
                INDIAN HOUSING
            KENNETH M. DONOHUE, INSPECTOR GENERAL

                   OPENING STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Good morning. This subcommittee will come
    to order. I'm going to be joined by Senator Bond in just a
    minute, but we have a vote in about 40 minutes, so we're going
    to go ahead and get started with this hearing.
        Housing is one of the most important, but least talked
    about, challenges across our country today. People don't want
    to talk about how close they are to losing their homes or not
    being able to afford their rent. I think there's something in
    our society that makes people feel like they've somehow failed
    if they can't afford housing.
        But with housing prices on the rise, it is a challenge
    facing more and more American families. In fact, housing has
    become the silent epidemic facing far too many communities
    across our country.
        The reach of this epidemic was reinforced, for me, last
    month, when I convened a roundtable on affordable housing in
    the Puget Sound region of my State. I brought together
    realtors, bankers, along with representatives from public
    housing agencies and transit agencies. Together, we discussed
    the extraordinary financial pressures being placed on working
    families in the Puget Sound, and how we might address them.
        As families are forced to move away from their jobs in
    order to obtain affordable housing, citizens in a great many
    cities across the Nation are spending an inordinate number of
    hours commuting from their neighborhood to their workplace and
    back. These are hours that they can't spend with their children
    and their families. These are hours when parents could be
    supervising homework or watching a little league game. Instead,
    they're spent crawling through punishing traffic jams.
        Swedish Hospital is one of the premier medical centers in
    downtown Seattle in my home State of Washington. The
    recruitment director at Swedish Hospital recently told the
    Seattle newspaper that more than one-half of the employees
    don't actually live in Seattle proper, and it's typical for
    their employees to commute for at least a full hour to a home
    or a rental property they can afford.
        It's not just young families seeking to own a home that
    can't find affordable housing. HUD section 8 voucher recipients
    struggle to find affordable rental units, and landlords that
    will take vouchers. That means endless hours, often on public
    transportation, just to get to and from work. As a result,
    Seattle continues to rank as one of the most congested cities
    in the country, and we have a great many cities facing the
    identical mix of challenges across the country.
        The congestion problem has gotten so troubling that our
    Transportation Secretary, Mary Peters, has made funding for a
    number of new congestion mitigation initiatives the cornerstone
    of her 2008 budget. However, as I review Secretary Jackson's
    2008 budget for the Department of Housing and Urban Development
    (HUD), I do not see the same sense of urgency or importance
    being devoted to the problem of affordable housing. Instead,
    what I see is a budget that abdicates responsibility and
    shortchanges programs that serve some of our most--neediest
    citizens.
        Despite the strong support by Republican and Democratic
    mayors and Governors across the country, President Bush's
    housing budget again proposes to slash the Community
    Development Block Grant Program. This year, it's a cut of 20
    percent, a reduction of almost three-quarters of $1 billion.
    The President's budget fails to provide even an inflation
    adjustment for the section 8 tenant-based housing assistance
    program. That means that as rents rise, public housing agencies
    will have to trim the ranks of their section 8 recipients,
    potentially throwing some of them into homelessness.
        HUD's program for housing the elderly is cut by 22 percent.
    That is a reduction of $160 million, despite the fact that the
    number of needy seniors continues to rise.
        And HUD's program to house citizens with disabilities is
    slashed by 47 percent, almost in half, a cut of almost $110
    million.
        Funds to ensure that public housing is maintained and
    brought up to safety codes, slashed by 17 percent, $415
    million.
        Even programs designed to remove lead paint from low-income
    housing units with children, cut by 23 percent.
        And the HOPE VI program that has allowed us to tear down
    some of the most dilapidated public housing and replace it with
    modern mixed-income units is proposed for complete elimination.
        In fact, the President wants this subcommittee to go a step
    further when it comes to HOPE VI by reopening the
    appropriations bill that he already signed for 2007, so we can
    eliminate the funding we provided for HOPE VI for this current
    fiscal year.
        The President's budget for HUD is irresponsible and
    unacceptable on its face, but it is all the more startling
    considering his investment in housing infrastructure in Iraq.
    Over the past 4 years, the President has asked American
    taxpayers to spend almost $36 billion on building housing and
    utilities and other necessary infrastructure in Iraq.
        Unfortunately, the Special Inspector General for Iraq
    Reconstruction has reported to us that a frightening percentage
    of that $36 billion has been wasted or stolen. Despite these
    reports, the President has sought, and received, an additional
    $2 billion to rebuild Iraq in the supplemental appropriations
    bill he vetoed 2 days ago.
        The President sees no problem in investing up to $38
    billion to rebuild the nation of Iraq, but when it comes to
    rebuilding America's struggling communities through the
    Community Development Block Grant Program, the President is
    calling for a cut of three-quarters of $1 billion. In fact, the
    President is unwilling to provide even 10 percent of what we've
    invested in Iraq's reconstruction to rebuild and provide some
    hope to the rundown neighborhoods right here at home.
        The President's budget and supplemental request are a clear
    statement of his priorities. Unfortunately, far too frequently
    these priorities are out of step with the American people. As
    chair of this subcommittee, I will work to put our budgets and
    priorities back on track.
        Earlier this year, we held a hearing with Secretary
    Jackson's Federal Housing Commissioner, Brian Montgomery.
    During that hearing, it became clear that at a time when we are
    facing an historic level of foreclosure and a potential crisis
    in the availability of loan capital for low- and middle-income
    homebuyers, the Federal Housing Administration (FHA) has become
    an increasingly irrelevant player in the market.
        In my home State of Washington, while the FHA covered 80
    percent of the home loan activity of the Washington State
    Housing Finance Commission some 10 years ago, it covers only 20
    percent today. Nationwide, it represents only 3 percent of
    total mortgage volume.
        I believe it's essential that we revive the FHA and make it
    a relevant player in the market again, especially now, when we
    have a great many families facing foreclosure because of the
    upheaval in the subprime market. I look forward to discussing
    with Secretary Jackson this morning how the FHA might develop
    solutions to keep these families in their homes.
        I also want to talk about how the FHA can get back to the
    business of providing access to first-time homebuyers who want
    to live near where they work, who want to spend time with their
    families, rather than in ever-worsening traffic jams.
        And, finally, I'd like to examine with the Secretary what
    HUD is doing to address the housing crisis that faces the
    communities that were devastated by Hurricanes Katrina and
    Rita. For weeks, Americans across the country were glued to
    their televisions, simply overwhelmed by the pictures of
    tremendous devastation and unfathomable suffering of so many of
    our fellow Americans. The images were too much to bear,
    watching families without food and water, people trapped on
    their roofs and searching for their loved ones. And although
    the TV cameras have left the gulf coast, for far too many the
    suffering continues still.
        Damage estimates indicate that over 300,000 homes were
    damaged or destroyed by those hurricanes, at a cost of over $67
    billion. Mr. Secretary, this is arguably the biggest housing
    crisis of the modern era. This subcommittee invested an
    unprecedented level of resources to rebuild the housing stock
    and assist in that region in their recovery. I want to hear
    from you how the resources and legal authorities that we
    granted HUD are being used now to improve the lives and
    communities of our gulf coast residents.
        With that, I will turn it over to Senator Bond for his
    opening statement.

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Thank you very much, Madam Chair, for calling
    this important hearing on the budget for fiscal year 2008 of
    the Department of Housing and Urban Development.
        And I welcome my old friend, Secretary Jackson, back to
    this----
        Secretary Jackson. Thank you.
        Senator Bond. [continuing]. Subcommittee. You're playing a
    very difficult hand, and this budget that the Office of
    Management and Budget (OMB) has given us is not adequate in
    many areas. I share the concerns raised by the chair of this
    subcommittee. But since this is the Senate, and even though
    it's already been said, I'm going to say, essentially, many of
    the same things as she has said.
        The subcommittee's already held an in-depth hearing on the
    state of HUD's FHA mortgage insurance programs, where serious
    concerns were raised about the FHA's challenges in meeting the
    needs of new homeowners, and the implication of certain reforms
    to address the FHA mortgage insurance problems.
        Today's hearing should provide us insights into the
    remainder of HUD's programs, including the reforms in funding
    needed to ensure that our Nation's affordable housing and
    community development needs are being adequately met.
        Secretary Jackson has been a good friend and a strong and
    committed advocate of housing. He served this administration
    first as Deputy Secretary and now as HUD Secretary. Prior to
    that, Secretary Jackson served as president and chief executive
    officer (CEO) of the housing authority of the city of Dallas,
    Texas, and as executive director of the St. Louis Housing
    Authority, where I came to know and respect his good work. And
    I think his past experience has contributed significantly to
    his work in the very challenging structure, both legally and
    bureaucratic, of HUD.
        Before I discuss this budget and other matters, I would
    like to express my strong appreciation for Mr. Robert Kenison,
    who recently retired from HUD after 40 years of dedicated
    public service as the dean of HUD lawyers. Mr. Kenison
    contributed positively to almost every housing and community
    development legal issue. He's known for a bright, inquisitive,
    and creative mind. To say that he will be sorely missed is a
    major understatement, due, not only to his legal insights, but
    his contributions to the always growing body of housing and
    community development law, but also for the many friends he
    leaves behind at HUD, and I personally wish Bob and his family
    all the best in his retirement.
        Secretary Jackson. Thank you.
        Senator Bond. Now, in terms of this budget, we begin the
    appropriations process being hamstrung by OMB's apparent
    mission to underfund most HUD programs. This is not new,
    unfortunately. We have seen this in administration after
    administration, and this budget request is simply a rerun of a
    bad budget movie that I'm tired of watching. Frankly, it has
    become predictable and frustrating because of its potential
    negative impact on our most needy Americans in communities
    across the Nation.
        Unfortunately, nondefense discretionary shortfalls are more
    problematic than in just Transportation/HUD appropriations.
    This is a challenge I think Congress is recognizing, as evident
    in the budget resolutions recently passed by the House and
    Senate. Nevertheless, I know that Chair Murray shares these
    concerns, as she's already outlined. I look forward to working
    with her, the chairman--and the chairman and the ranking member
    of the House Appropriations Subcommittee to fund, adequately,
    the needs of HUD.
        Let me highlight a few areas of concern. My first area of
    concern is the HOPE VI program, which the administration,
    again, proposes to zero out. The administration didn't propose
    it. The past administration didn't propose it. And nobody in
    the administration seems to support it. But I strongly support
    HOPE VI, which Senator Mikulski, a previous partner on the VA/
    HUD Appropriations Subcommittee, and I helped initiate. As the
    HOPE VI program demonstrates, it has helped to rebuild and
    transform blighted communities by leveraging other funding and
    program commitments. This has resulted in stable and safe
    communities and new homes, increased tax bases for these
    communities and new job opportunities.
        A second area of concern is the proposed elimination of the
    Bond-Mikulski Lead Hazard Reduction Demonstration Program. It
    is absolutely unforgivable that we have a significant health
    threat to a whole generation of young people because of lead
    based paint hazards that can be resolved fully, in particular,
    this program has made substantial inroads against the hazards
    of lead-based paint, which has placed many children in
    situations constituting unacceptable health risks, including
    diminished IQs, brain damage, and sometimes health impacts that
    are even worse.
        My most significant concern, however, is the Section 8
    Project-based Rental Assistance Program. Frankly, I am
    extremely troubled. Based on a reasonable assumption, my staff
    has calculated that the budget request underfunds section 8
    project renewals by almost $1.2 billion. We're not talking
    about a simple rounding error here. We're talking about a major
    funding gap which could impact some 176,000 affordable housing
    units. I'm not here to point fingers, but I emphasize the
    shortfall is unacceptable, and I expect resolution.
        I recall an incident several years ago, when the HUD
    Secretary at that time contacted the then-chair of the VA/HUD
    Appropriations Subcommittee on the eve of the bill's markup to
    inform us that HUD had underestimated section 8 funding by over
    $1 billion. Let's just say that that HUD Secretary did not get
    a very pleasant reception. I hope history is not repeating
    itself, and that the administration plans to address this
    matter in the very near future.
        I'm equally troubled by the administration's proposal for
    tenant-based section 8 programs. Under this proposal, the
    administration proposed to lift the cap on the number of
    section 8 vouchers that can be utilized by public housing
    authorities.
        The budget request for fiscal year 2008 for the tenant-
    based section 8 program appears to rely on the fact that a
    number of public housing authorities (PHA) are sitting on some
    $1.3 billion in section 8 reserves. Under HUD's proposal, PHAs
    with reserves would be permitted to use these funds for
    vouchers in excess of their authorized level. Unfortunately,
    PHAs without reserves would not appear to receive funding for
    additional vouchers, regardless of need or the effectiveness of
    their section 8 program. This seems both inequitable and
    counter-intuitive; PHAs which have done a good job should not
    be penalized but should be rewarded, assuming there is adequate
    funding. This is a complex and sensitive issue, and any
    decision on the use of the excess reserves will have a
    significant impact on PHAs throughout the Nation.
        I'll not get into questions I have about this proposal
    right now. But I emphasize the fact that PHAs must be treated
    fairly, and that any new vouchers, or use of vouchers, must be
    implemented with criteria that is objective, balanced, and
    equitable in the allocation of any new vouchers.
        Other areas of concern of mine include the section 202
    Elderly Housing Program, and the section 811 Housing for the
    Disabled Program, which are both severely underfunded. This is
    not the time to cut the development of housing for seniors and
    those with disabilities. Their needs are significant, and
    cutting programs for these vulnerable citizens is simply harsh.
        Finally, I emphasize my strong objection to the proposed
    cuts to the Community Development Block Grant Program, or CDBG,
    and the elimination of the Rural Housing and Economic
    Development Program. Despite criticism of the effectiveness of
    CDBG, it remains a critical resource for leveraging other
    public and private dollars for local affordable housing and
    economic development process.
        In addition to my concerns about HUD funding, I highlight
    HUD's efforts in the rebuilding of the gulf coast region that
    were devastated by Hurricanes Katrina, Rita, and Wilma. Despite
    the negative press and criticism from some on Capitol Hill, it
    appears that real progress is being made, and much of the
    success is the result of funding made available under the
    emergency CDBG Program, the Public Housing Program, and section
    8. It's important that we understand how these funds are being
    used, any mistakes that have been made, and the success
    stories. This is important, because any misuse or fraud in the
    use of Federal funding undermines the credibility of any future
    request for Federal funds.
        While I acknowledge that full recovery will take several
    years and significant challenges remain, I still have optimism
    that we are beginning to make some real progress in these
    areas.
        I'll not belabor my concerns about FHA today, which I laid
    out in detail at a FHA hearing in March. I support reforming
    FHA if the reforms are tied to benchmarks that measure the
    success of the reforms while preventing fraud and abuse.
    However, I consider proposals like zero downpayment to be a
    nonstarter, because these types of products are marked by
    historically high rates of default, substantial losses to FHA,
    damage to creditworthiness of families in default, and a
    negative impact on the community where there are large numbers
    of defaults, leading to severe community problems, not just for
    the families affected. FHA reform must balance the risk and
    benefits of homeownership so that the interests of the
    borrower, the American taxpayer, and the communities affected
    are adequately protected.
        Before I close, however, I want to make sure there's no
    confusion by the media, by saying that I do not blame you, Mr.
    Secretary, for the funding gaps in the budget request. I am
    assuming that you fought hard on behalf of many of these
    programs, and I will expect you to work with Senator Murray and
    I throughout the appropriations process to assure that HUD
    programs are adequately funded and implemented.
        Further, you've not gotten the credit you deserve in some
    areas of housing. I believe your most notable achievement in
    housing has been in the area of homelessness. I'm proud of the
    efforts to end chronic homelessness and the results we are
    beginning to see across the Nation, including in my own home
    State of Missouri, in St. Louis, where homelessness has
    decreased by 34 percent over the past 2 years. These results
    demonstrate that homelessness can be solved if properly
    addressed.
        Last, I credit you, Mr. Secretary, and your senior
    management team, led by your Deputy Secretary, CFO, and CIO,
    for the management reforms and improvements over the past
    several months. For years, I and others on Capitol Hill have
    railed mercilessly on the longstanding and seemingly
    intractable management problems at the Department. But I give
    credit where credit is due, and I believe you and your team
    have made some significant progress and deserve credit for that
    progress.
        Despite this progress, I still believe the Department has
    many challenges to overcome. Unfortunately, many of HUD's
    challenges are tied to inadequate budget funding. This is a
    failure that is largely the responsibility of the
    administration and its fiscal year 2008 budget. And without
    adequate funding of HUD programs, there cannot be true success.
        Thank you very much, Senator Murray.
        Senator Murray. Senator Lautenberg, do you have a
    statement?

                    STATEMENT OF SENATOR FRANK R. LAUTENBERG

        Senator Lautenberg. Thank you very much, Madam Chairman.
        This subject is such an important one, Mr. Secretary. And
    you have an enormous responsibility. But we're concerned about
    the availability of affordable housing. When you see the
    definition of what constitutes affordable housing in our State,
    and with a 30-percent maximum cost for housing, the income of a
    family's got to be $44,000. Well, $44,000 is in the middle-
    class category. And it's very hard to be spending $3,600 a year
    on rent. And, you know, I don't understand where the numbers
    have come from that deal with inflation, cost of living, et
    cetera, these very modest gains in the index for inflation.
    They don't seem to stand up in the real world. If you look at
    gasoline, if you look at other things, things that are included
    in the calculations belie the fact that inflation has been so
    modest, except, frankly, in wages for working people across the
    country.
        And, above all, we have to be certain, Mr. Secretary, that
    when we award contracts for Government work, that they're done
    without any bias at all, that they're done--contracts given to
    the most efficient, best price that we can find in the market,
    and without any hint of any other suggestions involved that
    say, ``Well, we'll give it to these guys because they smile
    right,'' or, ``give it to these people for other reasons.''
        One of the things, in particular, that came up in your
    remarks in April of last year, when you posed the question,
    ``Why should I reward someone who doesn't like the President,
    so they can use funds to try to campaign against the President?
    Logic says they don't get the contract. That's what I
    believe.'' Your statement. Do you still believe that contract
    awards should be--contain a political calculation when awarding
    that contract?
        Secretary Jackson. Are you asking me to answer that now?
        Senator Murray. Senator Lautenberg, we're going to let the
    Secretary make his opening statement----
        Senator Lautenberg. Oh, I'm sorry.
        Senator Murray [continuing]. And then we'll move to----
        Senator Lautenberg. Forgive me. Okay.
        Senator Murray. We'll let you ask your questions----
        Senator Lautenberg. Forget I asked the question----
        Senator Murray. Yes, well, we'll----
        Senator Lautenberg [continuing]. Mr. Secretary.
        Senator Murray [continuing]. We'll come back to our----
        Senator Lautenberg. I'm sorry.
        Senator Bond. He got the first question in.
        Senator Lautenberg. I didn't mean to do that.
        Senator Murray. All right. No problem.
        We're going to go ahead and let the Secretary give his
    opening statement. And, again, we have a vote very shortly, so
    we would like you to----
        Secretary Jackson. All right.
        Senator Murray [continuing]. Keep it to 5 minutes. We do
    have your written statement, so we'll make sure that all
    members of the subcommittee have that. So, if you can keep it
    to 5 minutes, I'd appreciate it.
        Secretary Jackson. First of all, thank you very much,
    chairlady, Ranking Member Bond, and other members of the
    subcommittee.

                               PREPARED STATEMENT

        What I would like to do so that we can get right to the
    point is to submit my oral statement also and give you all the
    opportunity, since you will have a vote, to ask questions of
    me.
        Senator Murray. Thank you, we will put that in the record.
        [The statement follows:]
                  Prepared Statement of Hon. Alphonso Jackson
        Chairwoman Murray, Ranking Member Bond, distinguished members of
    the committee: The President's proposed fiscal year 2008 budget will
    address our Nation's housing, economic, and community development
    needs. HUD's $35.2 billion fiscal year 2008 budget request--an increase
    of $1.6 billion more than last year's request--ensures that our
    Department can build on our success in helping low-income and minority
    families achieve the dream of homeownership, ensure equal opportunity
    in housing, and lend a compassionate hand to Americans in need, while
    using taxpayer money more wisely and reforming programs in need of
    improvements. The President's fiscal year 2008 budget request will
    allow the Department to build upon those successes by advancing the
    core mission given to HUD by Congress.
        In formulating HUD's fiscal year 2008 budget, HUD examined its
    funding priorities to ensure that the resources were used for those
    most in need. The fiscal year 2008 HUD budget also requests needed
    reforms in multiple program areas, notably FHA, CDBG, and Public
    Housing.
       promoting economic and community development through homeownership
        The President's vision of an ownership society has been a central
    theme of his administration, and correctly focuses on the reality that
    ownership--and homeownership in particular--is the key to financial
    independence, wealth building, and stronger, healthier communities.
        Under President Bush's leadership, this administration has achieved
    new records in the rate of homeownership. Today, more than 75 million
    families, or nearly 70 percent of all Americans, are homeowners--the
    largest number of Americans to ever own their own homes. Despite having
    achieved record-level homeownership rates, minorities in America remain
    less likely than non-Hispanic whites to own their homes. To close this
    gap, President Bush challenged the Nation to create 5.5 million new
    minority homeowners by the end of the decade, and to date 3.5 million
    minority families have joined those ranks. President Bush and I are
    pleased that we are making progress ahead of schedule. But we will not
    rest until the goal has been fully met, and we are asking Congress to
    help us do more to close the minority gap.
        The President's proposed budget will help HUD to further that
    mission by transforming the Federal Housing Administration (FHA) so
    that it can expand homeownership opportunities for low- and moderate-
    income families; spur Fannie Mae and Freddie Mac to lead the market to
    create more affordable homeownership opportunities; help more of the
    lowest-income Americans make downpayment and closing costs through the
    HOME Investment Partnerships program (HOME) and American Dream
    Downpayment Initiative (ADDI) and increase the level of housing
    counseling that has been so useful in helping families prepare for
    homeownership, avoid predatory lending practices, and avoid default on
    their homes. Let me explain each of these areas further.
                               fha modernization
        Since its inception in 1934, FHA has helped more than 34 million
    Americans become homeowners. In recent years, however, FHA's outdated
    statutory authority has made it difficult to keep pace with the
    changing financial needs of those families who traditionally
    participated in the programs. Through the Expanding American
    Homeownership Act of 2006, HUD sought to provide workable solutions for
    borrowers, including homebuyers who do not qualify for prime financing.
    This will give borrowers more affordable and safer ways to achieve the
    American Dream and reward them for having good household financial
    management. The key components of the legislative proposal, which has
    been reintroduced in this Congress, will: provide greater flexibility
    to the current statutory 3 percent minimum downpayment, reducing a
    significant barrier to homeownership; create a new, risk-based
    insurance premium structure for FHA that would match the premium amount
    with the credit profile of the borrower; and increase and simplify
    FHA's loan limits.
        Modernizing FHA will give it the tools it needs to again meet its
    legislative mandate: offering hard-working, credit-worthy borrowers,
    including those who cannot qualify for prime financing, the opportunity
    to obtain financing on reasonable terms at a cost they can afford.
        using home to help more low-income families own their own homes
        The HOME Investment Partnerships program is the largest Federal
    block grant program specifically focused on creating affordable
    housing. Since 1992, more than 600 communities have completed building
    almost 762,000 affordable housing units, including more than 319,000
    for new homebuyers. In addition, more than 160,000 tenants have
    received direct rental assistance. The administration proposes to
    increase the HOME program to $1.97 billion in 2008, $50 million over
    the fiscal year 2007 request and $210 million above 2007 enacted.
        For many low-income Americans, the single greatest obstacle to
    homeownership is the cash requirement for downpayment and closing
    costs. Within the HOME allocation, American Dream Downpayment
    Initiative or ADDI funds have assisted 21,000 families to purchase
    their first home--of which approximately 50 percent were minorities.
    The fiscal year 2008 budget requests $50 million to continue funding
    the ADDI--double the fiscal year 2007 enacted--to help provide grants
    to low-income families to help purchase their first homes. Further, the
    administration plans to submit re-authorization for ADDI in the coming
    months to continue this effort.
                  self-help homeownership opportunity program
        SHOP grants are another important program to boost homeownership
    among low-to-moderate income Americans. These grants are provided to
    national and regional non-profit organizations, like Habitat for
    Humanity, that are experienced in providing self-help housing. The
    fiscal year 2008 budget seeks $40 million for the SHOP Program. An
    additional $30 million under this account is also proposed for the
    National Community Development Initiative (NCDI). This funding will be
    used by intermediaries--Enterprise Community Partners, Inc., and Local
    Initiatives Support Corporation (LISC)--to develop the capacity and
    ability of nonprofit community development corporations to undertake
    community development and affordable housing projects.
                  counseling our way to greater homeownership
        Housing counseling is an extremely important tool to help Americans
    purchase and keep their homes. The fiscal year 2008 budget proposes $50
    million for housing counseling, $5 million over the fiscal year 2007
    request, in order to prepare families for homeownership, help them
    avoid predatory lending practices, and help current homeowners avoid
    default. In partnership with faith-based and community organizations,
    HUD will assist approximately 600,000 families to become homeowners or
    avoid foreclosure in fiscal year 2008. More than ever, potential
    homebuyers need assistance to make smart homeownership choices. Housing
    counseling is the most cost-effective way to educate individuals and
    arm them with the knowledge to make informed financial choices and
    avoid high risk, high cost loans, and possible default and foreclosure.
                             combating homelessness
        While helping homeowners and renters to a better way of life, HUD
    remains committed to the goal of ending chronic homelessness, and has
    aggressively pursued policies to move more homeless families and
    individuals into permanent housing. While persons experiencing periods
    of long-term homelessness frequently get temporary help, they often
    return to a life on the streets. New data from the Annual Homeless
    Assessment Report indicates that 20 percent of the homeless experience
    chronic homelessness. Persons with disabilities who are homeless for
    extended periods of time, often referred to as the chronically
    homeless, consume a disproportionate share of available resources
    (psychiatric facilities, jails, detox centers, hospitals, emergency
    shelters, etc.) without having their basic needs appropriately
    addressed. Housing this population will free up Federal, State, and
    local emergency resources for families and individuals who need
    shorter-term assistance.
        In July 2002, the President reactivated the Interagency Council on
    Homelessness (ICH) for the first time in 6 years, bringing together 20
    Federal entities involved in combating homelessness. Since its
    inception, the ICH has helped State and local leaders across America
    draft plans to move chronically homeless individuals into permanent
    supportive housing, and to prevent individuals from becoming
    chronically homeless. As HUD Secretary, I currently chair the ICH.
        In 2003, the Federal Collaborative Initiative to End Chronic
    Homelessness, through HUD, Health and Human Services, and Veterans
    Affairs, funded 11 grantees across the country.
        The fiscal year 2008 Budget provides a record level of resources to
    address the housing needs of homeless persons living on the streets of
    this Nation. The fiscal year 2008 Budget provides $1.586 billion for
    Homeless Assistance Grants. In addition to requesting a record level of
    funding, the administration also proposes to consolidate the various
    competitive homeless programs into a single Continuum of Care grant
    program that would greatly simplify the local administration of HUD's
    homeless resources which benefit over 3,800 cities and counties.
                    increasing access to affordable housing
        While homeownership is one of President Bush's top priorities, the
    President and I realize that it is not a viable option for everyone.
    The largest component of HUD's budget promotes decent, safe, and
    affordable housing for families and individuals who may not want to
    become homeowners or who may not yet be ready to purchase a home.
                     assisting the most families--section 8
        HUD's Housing Choice Voucher Program provides approximately 2
    million low-income families with subsidies that help them obtain
    decent, safe, sanitary, and affordable homes. In the fiscal year 2008
    budget request, the President is asking for $16 billion, nearly $100
    million over the fiscal year 2007 request. The administration is also
    proposing several changes to the Housing Choice Voucher Program that
    would allow the 2,400 Public Housing Authorities (PHAs) that administer
    the program to assist even more families. The administration is
    proposing that Congress eliminate current appropriations language that
    imposes a cap on the number of families each PHA is allowed to assist.
    Many PHAs that have reached their caps have additional funds that they
    are unable to use to assist additional households. In addition,
    administrative fees would again be tied to the number of households
    assisted, encouraging PHAs to assist more families. By better utilizing
    all appropriated funds, the Housing Choice Voucher Program would assist
    thousands of additional families.
                     making improvements to public housing
        For fiscal year 2008, the Department will continue its efforts to
    transition Public Housing Agencies to asset management, which will
    result in improvements in public housing management and financial
    accountability.
                             public housing funding
        The fiscal year 2008 budget for the Public Housing Operating Fund
    provides $4 billion, which is the highest funding level ever in the
    history of the program, up from $3.6 billion in the fiscal year 2007
    request. This funding will assist PHAs in the second year of transition
    to the new operating formula and will help pay for utility/energy and
    other cost increases. Additionally, HUD will continue its successful
    implementation of the Public Housing Capital Fund Financing Program.
    This program allows PHAs to borrow from banks or issue bonds using
    future Capital Fund grants as collateral or debt service, subject to
    annual appropriations. In this way, PHAs can leverage their Capital
    Funds to make improvements. The President's fiscal year 2008 budget
    request maintains the overall Capital Fund Account funding at the $2
    billion level.
                  management accountability of public housing
        The Department continues to place great emphasis on the physical
    condition of public housing properties, and the financial status and
    management capabilities of PHAs. The Department will continue providing
    technical assistance to PHAs and rating the effectiveness of PHAs
    through the Public Housing Assessment System (PHAS). PHAs with
    consistently failing scores may be subject to an administrative or
    judicial receivership. The Department will continue to utilize other
    tools such as Cooperative Endeavor Agreements with local officials,
    Memoranda of Agreements, and increased oversight, in order to correct
    long-standing deficiencies with PHAs.
                       indian housing loan guarantee fund
        HUD is also working to improve housing for Native Americans. The
    U.S. Government holds much of the land in Indian country in trust. Land
    held in trust for a tribe cannot be mortgaged, and land held in trust
    for an individual must receive Federal approval before a lien is placed
    on the property. As a result, Native Americans historically have had
    limited access to private mortgage capital. The section 184 program
    addresses this lack of mortgage capital in Indian country by
    authorizing HUD to guarantee loans made by private lenders to Native
    Americans. The President's budget proposes $367 million in section 184
    loan guarantees under the Indian Housing Loan Guarantee Program for
    homeownership in tribal areas, which represents a more than $251
    million increase over the enacted fiscal year 2006 budget and $116
    million over the fiscal year 2007 request.
                     elderly and persons with disabilities
        The fiscal year 2008 budget will provide $575 million in funding
    for the Supportive Housing for the Elderly (section 202) Program--a net
    increase of $30 million over the fiscal year 2007 request. This funding
    level covers all operating costs for existing section 202 housing and
    supports construction of about 3,000 new units. In the section 202
    program, funding for housing for the elderly is awarded competitively
    to non-profit organizations that develop these facilities. The
    facilities are also provided with rental assistance subsidies, enabling
    them to accept very low-income residents. Many residents live in the
    facilities for years, and over time, they often become frail and less
    able to live without some additional services. Therefore, the budget
    allocates up to $25 million of the grants to fund the conversion of all
    or part of existing properties to assisted-living facilities, enabling
    these elderly residents to remain in their units. In addition, up to
    $71 million--an increase of $11 million over the fiscal year 2007
    request--of the grant funds will be targeted to funding the service
    coordinators who help elderly residents obtain supportive services from
    the community.
        The fiscal year 2008 budget proposes $125 million for Supportive
    Housing for Persons with Disabilities (section 811), a $6 million
    increase over the 2007 budget request. The section 811 program will
    also continue to set aside funds to enable persons with disabilities to
    enjoy independent lifestyles. In fiscal year 2008, up to $75 million of
    the grant funds will be used to renew Mainstream section 8-type
    vouchers so that individuals can continue to use their vouchers to
    obtain rental housing.
        The Department is proposing financing demonstration projects in
    both section 202 and section 811: $25 million is requested for section
    202 and $15 million is requested for section 811. A key priority is to
    increase the production of units serving these special needs
    populations by removing the barriers that discourage tax credit
    applicants from utilizing sections 202 and 811. In developing the
    program, the Department will consider mixed-finance arrangements
    including low-income housing tax credits and other creative financing
    options for development of additional housing units and/or rental
    operating assistance.
              housing opportunities for persons with aids (hopwa)
        The HOPWA program provides formula grants to states and localities
    for housing assistance for low-income persons living with HIV/AIDS. The
    program helps maintain stable housing arrangements that improve access
    to health care and other needed support. The program also provides
    competitive grants to government agencies and nonprofit organizations
    that serve as Special Projects of National Significance due to their
    model or innovative qualities. HOPWA also provides grants to
    governmental agencies in areas that do not qualify for formula funds.
        In fiscal year 2008, HOPWA will fund an estimated 26 competitive
    grants to renew expiring permanent housing projects and use the
    remaining funds to select new model projects. HUD will also provide
    HOPWA formula funding to an estimated 122 jurisdictions. Grant
    recipients will collaborate with over 700 non-profit and local agencies
    to subsidize housing for an estimated 67,000 households. In fiscal year
    2008, HUD will proposes to provide $300 million in new grant funds for
    housing assistance and related supportive services for low-income
    persons with HIV/AIDS and their families.
        The administration is proposing legislation to update the HOPWA
    allocation formula. The revised formula will more accurately reflect
    the current housing needs of persons living with AIDS in this country.
            reforming the community development block grant program
        It has been more than 30 years since President Gerald Ford and
    Congress created the Community Development Block Grant (CDBG) Program
    to address the community needs. Since 1974, CDBG has been an important
    tool for cities, counties and States, allocating more than $116 billion
    to help them to target their own community development priorities. The
    fiscal year 2008 budget proposes funding CDBG's formula program at
    $2.775 billion.
        CDBG's underlying formulas have remained essentially the same since
    1978 while the Nation's demographics have changed significantly. It has
    becoming increasingly clear that an outdated formula that once measured
    the needs of urban America no longer reflects the modern needs of
    today's cities, larger urban counties and States. Some high-need areas
    receive smaller grants than they should, some low-need areas receive
    larger grants than they should; and some communities with similar needs
    receive different per capita grant amounts.
        The Department will continue to pursue ``formula fairness'' by
    appealing to Congress to authorize a new formula that will more
    effectively target CDBG funding to areas of greatest need in 21st
    Century America. A second key part of the President's proposal is the
    $200 million Competitive Challenge Grant. The Challenge Fund will award
    ``bonus grants'' to distressed communities that target and leverage
    funds to the most distressed areas within the community. In addition,
    HUD will work to boost performance measurements within CDBG to ensure
    these critically needed dollars produce the results the program was
    designed to achieve.
                     healthy homes and lead hazard control
        HUD's Lead Hazard Control program is the central element of the
    President's effort to eradicate childhood lead-based paint poisoning.
    In fiscal year 2008, proposed funding for the Lead Hazard Control
    Program will be $116 million, continuing the substantial progress to
    date in eliminating lead hazards to all children. Grant funds are
    targeted to low-income, privately owned homes that are most likely to
    have children exposed to lead-based paint hazards.
        The program conducts public education, compliance assistance, and
    regulatory enforcement to prevent childhood lead poisoning. New
    estimates from the Centers for Disease Control and Prevention (CDC)
    show that the program has helped to reduce the number of children at
    risk by 65 percent, but more than 250,000 children still have dangerous
    levels of lead in their bodies.
              continuing the fight against housing discrimination
        The Bush Administration is committed to the vigorous enforcement of
    fair housing laws in order to ensure that equal access to housing is
    available to every American. Fair housing enforcement and education
    activities are pivotal in achieving the administration's goal to
    increase minority homeownership by 5.5 million by 2010.
        The intent of HUD's fair housing programs is to bring about equal
    opportunities in housing by protecting the right of families and
    individuals to live where they choose, free from discrimination. HUD
    accomplishes this goal by aggressively enforcing the Nation's fair
    housing laws and by educating the public and the housing industry about
    their fair housing rights and responsibilities. HUD also furthers fair
    housing by funding housing activities through two programs: the Fair
    Housing Assistance Program (FHAP) and the Fair Housing Initiatives
    Program (FHIP).
        The fiscal year 2008 budget will provide $25 million through FHAP
    for State and local jurisdictions that administer laws substantially
    equivalent to the Federal Fair Housing Act. The Department supports
    FHAP agencies by providing funds for capacity building, complaint
    processing, administration, training, and the enhancement of data and
    information systems.
        The fiscal year 2008 budget will also provide $20 million to help
    private, non-profit FHIP agencies across the Nation combat
    discrimination through an array of targeted education and outreach and
    enforcement activities.
        Additionally, the requested amount would support the Department's
    ongoing efforts to address fair housing concerns in areas affected by
    Hurricanes Katrina and Rita. The efforts would include support for fair
    housing enforcement efforts in the gulf coast, bilingual public service
    announcements, printed advertisements, and training events. Protecting
    the fair housing rights of persons with disabilities is a Departmental
    priority. As such, the Department would continue to provide technical
    assistance to builders, architects, and housing providers on
    disability-accessibility requirements through its Accessibility FIRST
    program to ensure that newly constructed housing units are accessible
    to persons with disabilities.
                       increasing operational efficiency
        Over the past several years, HUD has taken many notable steps to
    improve its management and performance, and the President's new budget
    request strengthens these efforts.
        In fiscal year 2006, HUD received a clean financial audit for the
    seventh consecutive fiscal year, and for the first time ever had no
    auditor-reported material internal control weakness issues.
        In January 2007, the Government Accountability Office (GAO) removed
    HUD from its watch list of high-risk government programs. It marked the
    first time since 1994 that no HUD programs were on the list,
    demonstrating HUD's effective implementation of the President's
    Management Agenda to improve our fiscal house and program results.
        Improved information technology systems are enabling HUD and its
    program partners to more efficiently and effectively deliver HUD's
    program resources, and more can be accomplished with the funding
    increases proposed for the Working Capital Fund that supports the
    Department's information technology infrastructure and systems
    applications.
        In Conclusion, Madam Chairwoman, the President's proposed fiscal
    year 2008 budget makes good progress toward successfully realigning
    Federal Government priorities according to our Nation's current needs.
    The HUD portion of that budget will help promote economic and community
    development through increased opportunities for homeownership and
    affordable rental housing, free from discrimination; it will also lay
    the groundwork for reform by focusing community development funding
    more carefully toward those most in need; and it will enable HUD to
    continue along the path to greater Departmental efficiency and
    effectiveness.
        This is a good budget, Madam Chairwoman, and I respectfully urge
    the Congress to adopt it. I am now available to answer any questions
    that you, or other members of the committee, may have.

        Senator Murray. So, you're ready for a question?
        Secretary Jackson. We're ready.
        Senator Murray. Okay. Well, very good, we'll do that, then.
    I will ask a couple of questions. I'll turn it over to Senator
    Bond. He's going to ask his questions and then go to the floor
    and vote and come back. So--all right.
        Mr. Secretary, let me just ask you, really quickly, before
    I turn to Senator Bond, for the cost to renew the 2 million
    section 8 vouchers that are currently in use, your 2008 budget
    request asks for an increase of only $9 million above the level
    that we provided for the current year. That is an increase of
    less than six one-hundredths of 1 percent. And, at the same
    time, as we all know, rents across this country are growing by
    4.6 percent.
        Where I live, in Puget Sound, it's even more than that,
    it's 7 percent. What--how is your requested funding increase of
    just six one-hundredths of 1 percent supposed to be sufficient
    to ensure that our public housing authorities across the
    country are able to even keep all the current tenants that they
    do have?
        Secretary Jackson. Chairlady, I would say this, that if we
    would carry out the reforms and deal with section 8 on a budget
    base rather than a unit base, we have ample monies. And I
    thought that I had an agreement 2 years ago, when I went and
    got a little over $1 billion for the industry in section 8 that
    we would go toward budget-base allotment. They have not carried
    out their part of the agreement. So, if you're saying, If we're
    still using unit-base, will that cover the process? Probably
    not. But we would like to see the reforms enacted, and I
    thought I had an agreement to enact those reforms.
        Senator Murray. Your agreement with who?
        Secretary Jackson. With the industry, whether it be CLPHA,
    PHADA, NAHRO.
        Senator Murray. Well, so knowing that that's not happening,
    isn't it your responsibility to ensure that the section 8
    housing authorities are able to keep their current tenants?
        Secretary Jackson. Well, we believe that by lifting the
    cap, they will be able to keep that commitment. That will be
    some $600 million more to meet the process. So, yes, I think
    the budget is--for the section 8 tenant base is fair. We've
    lifted the cap so they can utilize their monies to help house
    probably about 170,000 more people.
        Senator Murray. Yes, I know that you believe that some of
    them have reserves, but even your own data says that about one-
    third of all the public housing authorities have no reserves,
    or a reserve that's lower than inflation costs for a full year.
    So, how are all of they--how are all of them going to be able
    to provide additional--or to even keep their own section 8?
        Secretary Jackson. From our perspective, we believe that
    each housing authority will be able to address their section 8
    needs. And we think the budget clearly amplifies that.
        Senator Murray. So, you don't think there's any out there
    without reserves that would be put in jeopardy?
        Secretary Jackson. Well, there are some without reserves,
    but I don't think that many of those that are without reserves
    will be hit the hardest. It's those large housing authorities
    in many of the major cities that, really, the $600 million will
    address the issues of the shortfall.
        Senator Murray. Well, if they don't have the reserves, then
    they're going to have to put people out on the street.
        Secretary Jackson. No, that's not necessarily true.
        Senator Murray. How do you see that----
        Secretary Jackson. I just--I don't see the same thing you
    see. I think we do have enough within our budget to address the
    needs of those tenant-based vouchers, clearly.
        Senator Murray. Where I live, we saw, on average, rent
    increase by 6.4 percent in Seattle, at an average unit cost of
    $900 a month. And, like I said, the Bureau of Labor Statistics
    (BLS) is reporting that for the 1-year period that ended in
    March, rents across the country are being increased by 4.6
    percent. So, knowing that that rent increase is out there, how
    can you make that----
        Secretary Jackson. I still believe that the budget that we
    submitted for the tenant-based section 8 program is absolutely
    well enough to make sure that those persons who today have
    vouchers will keep those vouchers.
        Senator Murray. I find that hard to believe, with what we
    have, and it's certainly not what we're hearing from on the
    ground.
        But, with that, I will turn it over to Senator Bond to ask
    his questions, and head over to the floor.
        Senator Bond. Thank you very much, Mr. Secretary.
        Continuing on the section 8 tenant-based ones, I understand
    we do have a budget-based approach for section 8 vouchers,
    subject to the authorized level. But, as the chair mentioned,
    there are some PHAs who have no reserves, and may have greater
    needs. You talked about the amount of excess reserves in
    certain PHAs. How will you ensure that those reserve funds and
    any other funds are adequately and equitably allocated to PHAs
    which may have done a very good job----
        Secretary Jackson. Right.
        Senator Bond [continuing]. In spending, but do not have
    sufficient funds in the budget proposal to meet section 8
    housing needs.
        Secretary Jackson. Ranking member, as I said to the
    chairlady, I think there are a number of things that can be
    done, and I do think that the budget is still ample for this
    process. Housing authorities have the ability to modify the
    payment standards. They can aggressively negotiate with
    landlords on rent. And they can charge a minimum rent.
        Now, in many cases, I think you know, as I know, since we
    have that 75 percent of those vouchers must be for persons 30
    percent less than median, we're ending up, in many cases, not
    serving more people, serving the same people over and over.
    Pre-1998, the average stay of a voucher was about 3\1/2\ years.
        Today, it's about 8, because of the standards that we've
    set up. So, my position is, clearly--or, you know, 2 years ago,
    when I went and got the extra--a little over $1 billion, that
    we would go to basically a leave unit base and go to a project-
    based budget. If we go to that immediately, yes, I think we
    have more than ample money. And even now, with the three
    standards that I just gave you, I still think it's ample money
    to carry out the program.
        Senator Bond. Turning now to the project-based section 8,
    my staff analysis suggests that the current budget is about
    $1.2 billion short. Have you and the Department done a thorough
    examination of the needs for project-based section 8? And have
    you done that? Can you give me a figure on what the shortfall
    is?
        Secretary Jackson. What we are doing now is going contract
    by contract. We expect to have that finished by the end of the
    summer to make sure that we have the ample resources. We will
    be able to submit that to you in--probably by September, the
    raw data; and probably sometime in November, we will have it
    all calculated. But we truly believe that the project-based
    contracts will be fine. But we have to make an evaluation. And
    we've never had an evaluation of these contracts. Each year, we
    have been piecemealing, and now I think it's important to have
    an evaluation of them.
        Senator Bond. Mr. Secretary, I couldn't agree with you
    more. Now, I'm not one who believes in artificial timelines in
    certain other areas, but we have a legislative timetable, and
    we hope to be passing this bill in the latter part of July. So,
    if you could move up that analysis----
        Secretary Jackson. Okay
        Senator Bond [continuing]. And give us some idea----
        Secretary Jackson. I will----
        Senator Bond [continuing]. Before we get this bill done,
    and I also would like your assurance that if you see a
    shortfall, you will go back to OMB and suggest that they are
    not to throw people out of project-based section 8, that a
    budget amendment is needed. And I hope that you will consider
    that, and help us, because right now it looks like a
    significant shortfall to us that is unacceptable.
        Secretary Jackson. Okay. I will do my very best, I can
    assure both of you--all three of you all, to make sure that we
    can get you an answer as--before July.
        Senator Bond. Thank you, Mr. Secretary.
        Madam Chair, we are hoping that we are going to have a vote
    here very shortly, so I will go over and get aligned and ready
    to vote as soon as it occurs, and look forward to a significant
    number of questions when I get back.
        Senator Murray. Very good. All right.
        Senator Lautenberg.
        Senator Lautenberg. Thank you. Once again, I apologize for
    my jumpstart.
        But, Mr. Secretary, you heard where my inquiry was going.
    And I'll repeat it, just to make sure that I'm not missing
    anything or that I'm not misquoting you. And you say, ``Why
    should I reward someone who doesn't like the President, so they
    can use funds to try to campaign against the President? Logic
    says they don't get the contract. That's what I believe.''
        Now, the question, Mr. Secretary--and I commend you for the
    work that you do, but I think that what took place there needs
    explanation. So, do you still view that position, that contract
    awards should be based on political favoritism?
        Secretary Jackson. First of all, let me say this to you,
    Senator. The inspector general did a thorough investigation and
    found that I had not tampered, nor touched any contract. In
    fact, because of what the Government Accountability Office
    (GAO) said, and the inspector general said, I set up a Contract
    Review Board. I do not interfere with any contract that is
    given in HUD, period. That's a fact. And the inspector general
    looked at every contract that had been given out at HUD, and I
    didn't touch it.
        Now, if you're asking me about my personal opinion, the
    President is my friend, and I care a great deal about him. But
    it doesn't mean that I'm going to interfere with contracts
    because I think that people might not like him. What I said,
    when this guy approached me in the hallway, is that, ``He must
    be out of his mind if he's going to attack me and attack the
    President, and think I'm going to help him.'' I'm not going out
    of my way to help him, but I didn't go out of my way to hurt
    him, either.
        Senator Lautenberg. Well--so, was the quote accurate?
        Secretary Jackson. Which quote?
        Senator Lautenberg. The one I gave you, ``Why should I
    reward someone who doesn't like the President,'' et cetera,
    ``so they can use funds to campaign against him? Logic says
    they don't''----
        Secretary Jackson. Well, first of all----
        Senator Lautenberg [continuing]. ``That's what I believe.''
    Did you say that?
        Secretary Jackson. First of all--yes--first of all, I don't
    touch contracts.
        Senator Lautenberg. But you said it, Mr.----
        Secretary Jackson. Yes, I said it, but I don't touch
    contracts. I set up a Contract Review Board.
        Senator Lautenberg. But you're stating a view that I think
    poisoned the--poisons the atmosphere. You----
        Secretary Jackson. I disagree with you. I don't think I----
        Senator Lautenberg. You disagree----
        Secretary Jackson [continuing]. Poison the atmosphere.
        Senator Lautenberg [continuing]. With me?
        Secretary Jackson. Yes.
        Senator Lautenberg. So, you think, then, that it's
    appropriate----
        Secretary Jackson. No, I don't think it's appropriate. I
    said----
        Senator Lautenberg [continuing]. If I said----
        Secretary Jackson [continuing]. I said what I said.
        Senator Lautenberg. Why did you say it, if you don't----
        Secretary Jackson. Because----
        Senator Lautenberg [continuing]. Think it's appropriate?
        Secretary Jackson [continuing]. I was speaking----
        Senator Lautenberg. Why are you defending it now? That, I
    don't understand, altogether. I mean, you're saying, ``Well,
    yeah''----
        Secretary Jackson. I have not touched----
        Senator Lautenberg [continuing]. ``It's true, but I''----
        Secretary Jackson. Senator, I have not touched one
    contract. Not one. Now, if you can prove that I have interfered
    with a contract, then you should do that.
        Senator Lautenberg. Mr. Secretary, we're spinning words
    here.
        Secretary Jackson. No, I'm not spinning words, Senator. I
    have not touched a contract.
        Senator Lautenberg. But if you said it, then we shouldn't
    believe what you said is what you're----
        Secretary Jackson. It----
        Senator Lautenberg [continuing]. What you're saying.
        Secretary Jackson. Absolutely, then, if that's----
        Senator Lautenberg. We should not----
        Secretary Jackson [continuing]. That's right.
        Senator Lautenberg [continuing]. Believe what you said.
        Secretary Jackson. Because I have not touched a contract.
        Senator Lautenberg. Too bad.
        In New Jersey, the HOPE VI program successfully generated
    over $1 billion to revitalize distressed public housing, yet
    the President's 2008 proposes to totally eliminate the program.
    Wouldn't funding programs like this pay big dividends on our
    communities, helping poor and middle-class families to----
        Secretary Jackson. I will----
        Senator Lautenberg [continuing]. Obtain----
        Secretary Jackson. Sorry. I would agree with you. I sat on
    the National Commission for Severely Distressed Housing, which
    the HOPE VI came out of--I agree that HOPE VI, when it's
    performed well, it's a great program. I've never said that it
    wasn't. Of the 237 awards, Senator, that we have made, only 65
    have been completed. If we look from 1994 to 2000, we still
    have over $500 million outstanding, where nothing has been done
    on those HOPE VI funds. And of all the money that's
    outstanding, about a million--$1.8 billion is still
    outstanding.
        So, I don't believe that we should continue to fund a
    program, when you have less than 30 percent of the projects
    completed since the beginning of the program. Sixty-five of 237
    projects, that's all we've completed since HOPE VI started in
    1992. And this is 2007.
        Senator Lautenberg. Why is that? Why haven't we done better
    in completion?
        Secretary Jackson. I really think that one of the things we
    have done lately with the HOPE VI program is required that the
    housing authorities come in with a developer who can leverage
    the money. And in the process of leveraging the money, we're
    able to develop much better. The initial HOPE VI were not that
    way. Many of the housing authorities took those HOPE VI
    themselves, and they used the administrative authority that
    they had, and used it up with architectural engineering
    drawings and pulled down the money.
        So, they still have money to develop, but they don't have
    the necessary plans to move forward. So, we have suggested that
    we look at those housing authorities, Senator, who have not
    performed, and try to recapture some of that money to send it
    to housing authorities that are performing. It's not that I
    believe the program is bad. That's not the issue. The issue is,
    we have so much money outstanding.
        Senator Lautenberg. Yes. I assume that the red light
    indicates that my time is used, Madam Chairman.
        I would close, and ask that the questions that I'll submit
    after the hearing be promptly responded to.
        But I would say that if you believe in the program, and you
    don't--and you're looking for contractors who can leverage the
    money, there's a mix in language there that I, frankly, don't
    get, because housing doesn't take overnight to build.
        But, thank you, Mr. Secretary. Thank you----
        Secretary Jackson. Thank you, Senator.
        Senator Murray. Thank you, Senator Lautenberg. And your
    questions will be submitted to the Secretary for responses for
    the record. So, thank you.
        Mr. Secretary, this is the third year in a row that your
    budget is proposing to slash funding for the CDBG program while
    arguing that the program needs to be reformed. You are, again,
    arguing that this program needs to be better targeted to
    eliminate funding from thousands of communities you consider to
    be too affluent. Over the last 3 years, has any subcommittee
    ever scheduled a markup to consider that proposal?
        Secretary Jackson. Not--I don't think so, Senator--I mean--
    --
        Senator Murray. Has any----
        Secretary Jackson [continuing]. Chairlady.
        Senator Murray. Yes. Has any member of the House or the
    Senate ever introduced your legislative proposal?
        Secretary Jackson. No, they have not.
        Senator Murray. Well, there are sections of King County,
    Washington that are affluent, and that is partly why working
    families have such a hard time finding affordable housing
    there. Let me tell you where King County spent the vast
    majority of their CDBG funds last year. They developed 637 new
    affordable units, they rehabilitated another 150 affordable
    units, they provided 442 households with homeless prevention
    service, they created 487 permanent supportive housing units,
    they constructed 33 new affordable homes, and they repaired
    another 500 homes occupied by low- and moderate-income
    residents--that were repaired. Those funds weren't spent for
    amenities on the wealthy. And under your budget proposal, King
    County would see its CDBG funds slashed by 20 percent.
        So, can you tell me how your budget proposal reforms would
    alleviate the shortage of affordable housing in places like
    King County?
        Secretary Jackson. I think it's going to be very difficult
    in places, in my estimate, west of Utah, east of Virginia.
    These are very, very high-price areas. And it's going to be
    very difficult, even when we target the money to certain
    cities, counties, or areas, to address affordable housing in
    many places. So, I can't tell you that we're going to be able
    to address affordable housing all over this country because I
    don't think that is the case. We will do everything in our
    power within the budget construct and within the way we put our
    formula in place, to address those cities that are most in
    need. And if we can address those cities that are most in need,
    I think we can make a substantial impact.
        Senator Murray. Well, when you announced your reform, you
    published the formula that you'd use for distributing those
    funds, on your web site. I'm told that when you use your own
    formula at the reduced funding level, it really doesn't help
    the poorest communities across the Nation, because the funding
    is slashed so severely. So, I wanted to ask you, does your
    proposal provide any additional help to the poorest
    communities?
        Secretary Jackson. Yes. I think that what we have
    calculated is, at the--the lowest-income cities, counties, will
    be addressed. Second----
        Senator Murray. How is that?
        Secretary Jackson. Because we think we have enough money
    within our budget to address them, if the formula is approved.
        Senator Murray. Well, I don't see how that's going to
    happen, when you're cutting funding for everybody. And, you
    know, the other thing, I heard you last year when you were
    here, you talked about the affluent companies that shouldn't
    receive any funding, and you're trying to devise this formula
    that somehow does that. And one of the cities you talked about
    last year was in my home State of Bellevue, Washington, that
    you defined as affluent. Yet, even in these so-called affluent
    communities, funding under the current formula is targeted by
    law--by law--on assisting low- and moderate-income individuals.
        So, I went back and looked at you--at how Bellevue used
    their funding, and they used it to rehabilitate owner-occupied
    units, to upgrade a center for the disabled and the
    handicapped, they built a facility for the homeless, and they
    built a facility for abused and neglected children. Wouldn't
    you agree that those uses of funding are within the goals of
    CDBG?
        Secretary Jackson. Yes, I would.
        Senator Murray. Well--so, when you define Bellevue as
    affluent, which many would disagree with you, because of the
    price of living there, you take away funding to do that. So, I
    don't understand how your funding formula helps communities----
        Secretary Jackson. Well, I----
        Senator Murray [continuing]. Deal with these issues.
        Secretary Jackson. I'm sorry. Well, I think that Bellevue
    is an affluent community. And I think that in many of those--in
    many of those--the problems that you have just----
        Senator Murray. Have you--I'm sorry----
        Secretary Jackson [continuing]. You've just talked about--
    --
        Senator Murray [continuing]. When was the last time you
    were in Bellevue?
        Secretary Jackson. Probably a couple of years ago.
        Senator Murray. Where did you go?
        Secretary Jackson. I can't remember where I went. I was
    in--I was in the city.
        Senator Murray. I mean, this--somehow, just to describe
    Bellevue as affluent is to not know the community that has
    changed dramatically in the past 5 years. And, again, what your
    formula does is, says to Bellevue, ``You're going to have to
    raise your own taxes to pay for the cost of providing the
    services that are dramatically needed.'' And I would urge you
    to go back and take a look at the demographics of that city
    again, and you might----
        Secretary Jackson. I'll be happy to do that for you.
        Senator Murray [continuing]. Be surprised. But your funding
    formula impacts a community that is really a diverse community
    that is trying desperately to deal with some really difficult
    challenges that they're facing today.
        I believe Senator Bond's going to be back in just a minute,
    but let me go to another topic----
        Secretary Jackson. Surely.
        Senator Murray [continuing]. Before he returns.
        This subcommittee held a hearing earlier this year, that
    you may have been aware of, with your FHA Commissioner, Brian
    Montgomery. We talked at length of what role, if any, the FHA
    can play in helping families that are facing foreclosure
    because of the crisis in the subprime lending market. Have you
    already seen FHA activity increase as a result of the shakeup
    in the subprime lending market?
        Secretary Jackson. We really have not, at this point. What
    I have said to you and to Senator Bond is that I believe that
    if we can get the FHA modernization legislation passed, that we
    can make a great impact. We cannot help everyone that's in the
    foreclosure area--there's no question we can't--because some of
    the people are--income is really out of reach. But there are a
    number of people that we can help. And I know a lot of times
    we've had studies that say, ``Well, HUD has got a 12, 13
    percent foreclosure rate.'' We don't go by 30 days, we usually
    go by 90 days, and we do everything in our power for those
    persons to make sure they keep their homes. And I will continue
    to do that.
        And one of the criteria that I talked with Senator Bond
    about was that--the zero downpayment. I agreed with him that a
    cash installment by everybody should be made, because they have
    an investment, to make sure that they've invested in their own
    home. So, I don't disagree with him. But we will do everything
    in our power, if the modernization legislation is passed, to
    try to prevent foreclosure and to try to address low- and
    moderate-income people who are right now in the process of
    being foreclosed on.
        Senator Murray. Do you believe that many of the borrowers
    that were enticed into that subprime loan are now facing--and
    are now facing high interest rates and penalties would be
    eligible to refinance with FHA?
        Secretary Jackson. Some of them--some of them would. Some
    of the exotic loans that were made to--to even some members of
    our staff at the housing authority, their income would probably
    be out of reach. But for low- and moderate-income people, yes,
    I think we would--we would make every effort to work with them.
        Senator Murray. Okay. And I believe Senator Bond will have
    more questions on that as well.
        So, before he returns--and I'm going to have to leave in
    just a minute to vote--I did want to ask you about the gulf
    region, as I mentioned----
        Secretary Jackson. Sure.
        Senator Murray [continuing]. In my opening statement.
        Payments to homeowners have been very, very slow to arrive.
    It's been very painful. And there's little to no evidence that
    public housing units are being rebuilt. Of the $16.7 billion
    which this subcommittee provided to help rebuild the gulf, only
    12 percent, or about $2 billion, has been sent. Can you tell us
    why, 2 years after this disaster, that this activity's been so
    slow?
        Secretary Jackson. When we allocated the money to the gulf
    coast--specifically, Mississippi and Louisiana--they submitted
    a plan to us of how the money was going to be spent. Each plan
    was basically a compensation plan that they would allocate
    monies to a certain level to persons, based on the damage of
    their homes. About 1 month ago, we had a hearing with Chairman
    Frank and Chairlady Waters. An issue was brought up, Are they
    spending the monies the way that they should be spending the
    monies? And I asked our staff, at the request of Chairman--
    Chairlady Waters, I asked our staff to go back to make sure
    that Louisiana was complying with the compensation program. We
    realized----
        Senator Murray. Mr. Secretary, I'm going to miss the vote
    if I don't go.
        Secretary Jackson. Okay.
        Senator Murray. So, I'm--I want to get back to this
    question----
        Secretary Jackson. I'll----
        Senator Murray [continuing]. And--I'm going----
        Secretary Jackson. I'll wait for you.
        Senator Murray [continuing]. To go vote, and return. We
    will recess, shortly. And when Senator Bond returns, he is
    going to call the meeting back to order, and return with his
    questions.
        Secretary Jackson. Thank you.
        Senator Murray. I will be right back.
        Senator Bond. [presiding] Gentlemen, ladies, recess is
    over.
        My apologies. The Secretary is sufficiently familiar with
    how this place works, or doesn't work, to know what's
    happening. But, again, we appreciate your indulgence.
        And I want to go back, Mr. Secretary, to the discussion of
    section 8 vouchers, which----
        Secretary Jackson. Right.
        Senator Bond [continuing]. Appears to go back to the
    administration's Section 8 Block Grant Program, whereby PHAs
    would adjust rents down to meet their budget. Now, this appears
    to be a reversal of some 20-plus years of housing policy, where
    the Federal Government has sought to reduce the concentration
    of low-income families in the worst neighborhoods. However,
    with the lower rents, HUD and the PHAs will be pushing a policy
    whose necessary result would be to move the poorest into the
    worst neighborhoods, neighborhoods without jobs, good schools,
    and amenities. And this almost is a return to redlining. So,
    when we talk about budget-based vouchers for PHAs, I think we
    lose sight of the fact that the objective should be, as you
    indicated, to get people in homes where they move from publicly
    assisted housing into market-based housing, because of having
    access to jobs. And I thought you might want to comment on that
    and in light of my further questions about what we see to be
    the $1.2 billion shortfall.
        Secretary Jackson. Senator, I agree with you, in the sense
    that we do not want to redline or re-segregate. And I do
    believe that if the housing authorities in this country--and I
    did it with three housing authorities--if they negotiate with
    landlords, if they charge a minimum rent, if they even put a
    timetable on the time that a person can keep a voucher, I do
    believe that we can move people into very, very good areas. And
    in Dallas, that's what we did.
        In St. Louis, that's what we did. It's whether you really
    want to take the time to negotiate and to make sure that there
    is fair treatment of the residents. And I did it, and I think
    it should be done. And I do think that if we can go to project
    base, it gives the housing authorities incentives to negotiate,
    and to get the best deal that they can. But as long as we're
    unit base, they have no incentives, period. Persons can stay on
    the voucher as long as they want.
        I'm just one that believes that there should be a timetable
    for these vouchers. I don't think people should be on these
    vouchers, Senator, in perpetuity.
        Section 8, from its inception, was to transition from
    public housing to market-rate housing. That was the intent of
    it. But it has become a secondary system for public housing
    today. And I think that the 1998 legislation was a mistake,
    when we said that 75 percent of those vouchers should be for 30
    percent of less than medium. I think we should all go up to 60
    percent of medium and help people transition. That's my belief.
        But I do not want people--any person to be re-segregated.
    And I think we did a very excellent job in Dallas making sure
    that we disbursed those vouchers into middle- and upper-middle
    class areas.
        Senator Bond. But, still, wouldn't that require additional
    resources, if you're going up to a larger population?
        Secretary Jackson. I think that, Senator, when--I entered
    into an agreement with the industry 2 years ago, that I went
    and made a major case to OMB to increase the section 8 tenant-
    based budget by $1.1 billion, I think, that in the final
    analysis we would go to project base. Have we done that? Yes,
    clearly. And I still think, if we go to it today, that we can
    cover the cost of the vouchers. But--and that's why we removed
    the cap, so that they would have additional money to carry it
    out.
        Senator Bond. Well, if you have further legislative
    proposals, obviously you should take that to the Banking
    Committee first, but share a copy with us, because we may get
    it--we may help them on that issue, if there is a good
    rationale for it.
        Secretary Jackson. I do think--let me say this--I do think
    there is a good rationale for it, Senator. Pre-1998, we were on
    the budget base budget. We got a budget. That's what I did. I
    got a budget. And I stretched that budget as far as I could to
    make sure that as many people were served as could be served.
        Now, in--after 1998, we went to unit base, and, in that
    process, we have--we have not served more people. That's what
    most of us don't understand. The price has increased
    significantly for the program, but we're not serving a greater
    group of people, because the housing authorities basically have
    no incentives to make sure they stretch the dollar as far as it
    can go. And as long as they don't have those incentives,
    they're not going to do what they should be doing.
        Now, some housing authorities are doing better than others.
        Senator Bond. Well, I was going to say, couldn't they do
    that now, with----
        Secretary Jackson. Yes.
        Senator Bond. They could do that now, and they're not doing
    it.
        Secretary Jackson. They're not doing it. It's unit base.
    And they're--they get the administrative fee, whether they
    house or don't house. I think we should give them some
    incentive to work hard. I had no problem housing people when I
    was at the Dallas Housing Authority or when I was at St. Louis
    or when I was in Washington. And they were all based on budget
    base. That's what it was before 1998.
        Senator Bond. Well, that's something we need to discuss
    with you further.
        Let me talk about--for a minute about----
        Secretary Jackson. I appreciate that.
        Senator Bond [continuing]. The FHA modernization. It
    appears that FHA's business is already doing better than last
    year, with tens of thousands of homeowners with conventional
    loans coming in to FHA through refinancing, which is up 94
    percent this year. Do you think that some of this growth is
    attributed to the problems with subprime borrowers?
        Secretary Jackson. I really do think that it is. And we are
    up. But I also think that's what's important is that if we can
    get this modernization legislation done, we can make
    significant strides and changes low- and moderate-income
    persons. And you and I both agree to--some months ago, when we
    were in Kansas City, one of your major concerns--I agree with
    you that there must be a cash investment. We cannot go zero
    downpayment.
        So, I believe that if we can get this legislation done, we
    can. And I can tell you, the refinancing in FHA has been at 94
    percent since last year. And we're doing everything in our
    power, as I just was going to address to the chairlady, to help
    those low- and moderate-income people who are facing
    foreclosure. We can't help certain groups, because their income
    is too high. But for those that we can help, we will do
    everything in our power to make sure that they keep their
    homes. Because, in my mind, this was not a case where you had
    bad borrowers.
        People were trying to get into a home. But what I saw was,
    you had--people got into really bad products, and there were
    people who were pushing these products, and the people did not
    really read the fine print. And we just had a case that we
    resolved for them--Congressman Scott, in Georgia--where these
    people really didn't understand what they were getting into.
    But we got it resolved. And so, I think that--I don't want
    anyone to leave here saying that, ``Well, these people who
    borrowed was bad.'' It's not that. They wanted a home, like
    everybody else in this room, but they got into a bad product.
    And if we can help some of them get out of that bad product,
    we'll do it.
        Senator Bond. With respect to the modernization, the
    Congressional Budget Office (CBO), the GAO, and the HUD
    Inspector General have all expressed concerns about the
    proposal. And the CBO expects that developing and maintaining
    the appropriate systems for managing a risk-based pricing
    system would take FHA several years to implement. In other
    words, there would be, potentially, a chaotic situation. How do
    you respond to these concerns?
        Secretary Jackson. First of all, I guess, Senator, I don't
    want to get into a debate with GAO or the inspector general. I
    believe in this product. I believe that, yes, we're going to
    have a transition period.
        I believe that clearly we can make this transition period--
    we can do it very quickly--much quicker than 7 years. I think
    we're going to have to look at the risk-based factor in this
    process, and we will look at that risk-based factor. But I
    don't want us to connect subprime lending with FHA. There are
    so many more steps in FHA that will stop the subprime area. And
    we will do everything in our power to do that.
        So, I believe that the GAO, the inspector general, have
    their opinions. And I'm not here to debate their opinions. I'm
    here to tell you that I believe that this product can work. I'm
    convinced that if we get to modernization, we can save a lot of
    foreclosures and we can help a lot of low- and moderate-income
    people.
        Will we put the checks and balance in place? Yes. In fact,
    I met with the--I guess it was last week or week before last--
    with our inspector general, and I said that I wanted him to
    meet with our FHA Commissioner, and I said, ``Put all your
    concerns on the table so we can address your concerns, because
    if you have concerns, I want to address them. I don't want to
    leave them out there, where he'll come before--and said, `I
    gave them suggestions, but nothing was done.' '' So, if GAO has
    it, we're taking those concerns into study, too.
        Senator Bond. Well, we'd like to be either part of those
    discussions or kept advised of those discussions, because when
    these are credible--creditable entities, and if they've got
    concerns, we want to see how those concerns are addressed. So,
    we're--we'll be very interested to see how that works.
        Secretary Jackson. And I will.
        Senator Bond. Now let's turn to another area of interest
    and excitement for the--for HUD. And that's the Housing
    Authority of New Orleans (HANO) after Hurricane Katrina. How
    many units are habitable now, and how many tenants have
    returned to the HANO?
        Secretary Jackson. We have, habitable units, almost 2,000.
    We've had about 1,600 families to return. We are still trying
    to get families to return. We have done surveys. We've been to
    Houston, to Atlanta, to other places. In fact, what has
    occurred is--Senator Bond, is, I've gotten a number of letters
    from public housing directors telling us to stop scaring the
    people. Many of the people don't want to return. People don't
    like for me to say that, but that's a fact. And so, I have to
    take in consideration, when I get these letters from these
    directors, they're saying, ``You're really scaring many of
    these people, because they're satisfied, they're living better,
    they have a better job,'' and I have to take that in
    consideration, too. So, those persons who are saying, ``Oh, he
    does not want people to return to New Orleans,'' that's not
    true.
        We're doing everything in our power. But, at the same time,
    I think I must in consideration--because I once ran a housing
    authority, the concerns of those people who are running housing
    authorities, who have provided decent, safe, and sanitary
    housing for people--if the persons want to stay, let them stay.
        Senator Bond. Well, I think--I think you make a good point,
    if somebody doesn't want to go back. But, then again, I think
    we all recognize that the more tenants a PHA director has, the
    more administrative fees they receive. So, I----
        Secretary Jackson. Sure.
        Senator Bond [continuing]. Think that needs to be weighed
    in with the--in the considerations.
        Secretary Jackson. I agree.
        Senator Bond. I know there's been a lawsuit delaying the
    development of HANO. And I'd like to know what efforts you're
    making to resolve it, when are you expected to have that
    lawsuit resolved. And will resolving that lawsuit clear the way
    for any additional residents who wish to return?
        Secretary Jackson. Yes. Let me say this. The lawsuit is an
    impediment. We have gotten significant low-income tax credits
    from the State of Louisiana. We've got funds allocated, of $500
    million, to totally redo most of the public housing in New
    Orleans. It's baffling to me for people to say, ``It's okay for
    low-income people to live in the squalor that they were living
    in.'' I find that very abhorring.
        Senator Bond. I agree.
        Secretary Jackson. If we can change the quality of life,
    and make it better, we should do it. We didn't have the
    resources, before, to do it. We have the resources now. But
    that lawsuit is standing in the way. I was very pleased with
    the ruling of the judge, but we're still going to have to have
    a hearing when--on this process. We have people like the
    Enterprise Foundation, Catholic Charity, ready to go to work to
    redevelop housing in this country--I mean, in New Orleans. But
    we have a lawsuit pending, with----
        Senator Bond. What does that lawsuit--how are you trying to
    resolve that lawsuit? That was my question.
        Secretary Jackson. Well, we're trying to work it out. I've
    been working with Chairlady Waters to try to get them to come
    to some agreement. One of the agreements that we came to is to
    have 2,000 units--2,500 units by September. Well, we have
    2,000, but we still have not got any actions from the
    plaintiffs. I mean, they're continuing to talk about, ``People
    should go back into the present situation that exists.''
        Senator Bond. Well, I would--I would think that those--I
    don't know if any of those housing units were in the very
    lowest areas, the low-lying areas, which are most flood-prone,
    and I certainly think it serves anybody's interest to put them
    more at risk.
        Secretary Jackson. I agree.
        Senator Bond. And I will--I'm now going to defer to my
    colleague from Colorado, but, afterwards, I'd like to call on
    the inspector general to provide any insights he has. So, if he
    would be ready to step up.
        But, Senator Allard, we'll now turn to you.

                               PREPARED STATEMENT

        Senator Allard. Well, thank you very much.
        And, first of all, I have a full statement I'd like to make
    a part of the record.
        Senator Bond. We would be delighted to make it part of the
    record.
        [The statement follows:]
                   Prepared Statement of Senator Wayne Allard
        I would like to thank Chairman Murray and Ranking Member Bond for
    holding this hearing to review the fiscal year 2008 budget of the
    Department of Housing and Urban Development. I would also like to
    welcome Secretary Jackson to the subcommittee. Secretary Jackson, we
    appreciate you making time in your busy schedule to be here.
        HUD has a long history of problems; for years it was the only
    cabinet level agency on GAO's high risk list. However, I want to take
    this opportunity to publicly commend Secretary Jackson for his progress
    on this point; earlier this year the remaining HUD programs were
    removed from GAO's high risk list. This is a tremendous accomplishment
    and represents a great deal of work. I would encourage Secretary
    Jackson and all the dedicated staff at HUD to remain focused on
    maintaining this direction.
        Certainly one of the biggest challenges HUD faces is the tight
    fiscal scenario. This is a constraint shared by nearly all agencies. No
    one denies that the budget for HUD, or any other agency for that
    matter, is insufficient to meet every single perceived need in this
    country; increasingly, the definition of need seems to be a bottomless
    well.
        I believe, though, that this budget strikes a reasonable balance at
    meeting the most pressing needs, while still being responsible. I
    support the administration's decision to pursue fiscal responsibility
    in these times. It would be irresponsible to continue to overspend and
    leave a mounting debt for future generations.
        It is easy to look at the proposed HUD budget and complain that it
    lacks money. Certainly, needs are great, and in a perfect world we
    would have the money to meet all needs. However, the administration has
    had to make some very difficult choices, and the choices at HUD were,
    I'm sure, no exception in their difficulty. This budget is evidence of
    those difficult choices, and I commend the administration for facing
    reality and not simply taking the easy way out.
        I want to reiterate a position that I have put forward at previous
    hearings: HUD's success as an agency is not defined by a budget number.
    More money does not necessarily mean more people are served or that
    people are served any better. This would seem to be especially true
    when reviewing the effectiveness of HUD's programs as determined under
    the PART analysis. In 40 percent of the programs we either know that
    they are failing to produce results or we have no way to tell whether
    they are producing any results. Why do we talk at such length about the
    dollars going to HUD, but fail to look at what is coming out on the
    other side? I, for one, intend to keep looking at BOTH sides of the
    equation.
        I appreciate the opportunity to do so at this hearing. Mr.
    Secretary, your testimony will helpful as this subcommittee begins to
    write the appropriations bill for fiscal year 2008. Thank you.

        Senator Allard. And I also just would like to congratulate
    Secretary Jackson. When his confirmation came before me on the
    Banking Committee and whatnot, GAO had HUD on the risk list,
    and now you're off of that.
        Secretary Jackson. Yes.
        Senator Allard. And I'm very pleased to see that happening,
    because that brings accountability, as you know, to the
    process. I know how difficult it is to get the Government
    Performance and Results Act, you know, implemented, and then
    each year you get more comfortable with it and----
        Secretary Jackson. Right.
        Senator Allard [continuing]. Things keep moving along. And
    so, I want to compliment you for that effort.
        I think HUD's success as an agency isn't going to be
    defined by the budget number. More money doesn't necessarily
    mean more people are served, and the people are served any
    better. I think, with what you've put in, then I think we can
    feel much more comfortable about what's happening there at HUD.
        The first question I'd have, Secretary Jackson is--it's an
    issue that you and I have explored at past--previous hearings.
    According to a recent article, Deputy Secretary Bernardi had
    indicated that you plan to issue a RESPA rule proposal by
    September 30, and possibly as early as this summer. Will you
    please comment on your intentions? And what is your timeframe
    for action on RESPA?
        Secretary Jackson. The Deputy Secretary is correct.
    Hopefully, by September. But it's going to be clearly
    transparent. We learned our lesson last time around about not
    being transparent with this rule. We will continue--we will not
    put the rule into effect until we have discussed it with--for
    the final time with the industry groups, with the subcommittee
    here, with the subcommittee in the House. We realize that, in
    the final analysis, that we really need a consensus. You know,
    I like to use the analogy, Senator Allard, like last time,
    it's--I was a sprinter, an all-American, and I ran on the 400-
    by-100 relay. And if you don't have anybody to hand----
        Senator Bond. Good training for your current position, I
    would say.
        Secretary Jackson [continuing]. If you don't have anybody
    to hand the baton off to, you're not going to be four other
    people running by yourself. That's the situation we were in.
    And I think you made it clear. I think Senator--Congressman
    Manzullo made it clear. And so, we don't want to do anything
    haphazardly this time. We want the rule to be acceptable to a
    consensus of the people. So, we will not be moving the rule.
    And I have not moved it very quickly. There are some people who
    say we should get it out quickly. No, we're still discussing
    it, and we hope to have a consensus.
        Senator Allard. So, what we're going to be seeing in
    September is a proposed rule, it's not going to be a final rule
    by----
        Secretary Jackson. That's correct.
        Senator Allard [continuing]. And so, we're just getting the
    process started.
        Secretary Jackson. That's correct.
        Senator Allard. Okay. And are you going to--what role do
    you see Congress playing in this process? Any at all? Or are
    you just going to expect Members of Congress to drop in on
    public comment?
        Secretary Jackson. No, I think that when you see the
    proposed rule, I would think that you would give us suggestions
    as to how you think the final rule should be made.
        Senator Allard. Well, you know, I think that's nice, but I
    also do think we need to work with the affected parties, you
    know----
        Secretary Jackson. Right.
        Senator Allard [continuing]. And so, like I say, I
    appreciate the way you've been doing business, and--but I felt
    like I needed to ask that question, because it does tend to be
    controversial.
        Secretary Jackson. Surely.
        Senator Allard. Now, your 2008 budget assumes enactment of
    a number of legislative proposals. How would funding and staff
    needs change should those proposals, particularly the FHA
    reform package, not be enacted?
        Secretary Jackson. Well, we believe that if we can enact
    the FHA modernization legislation, we would probably need
    additional staff, but that's because, I think, that we have
    lost a significant number of persons who want to deal with FHA.
    If--you know, if I were a low- or moderate-income person with
    all of the paperwork that they have to go through, I wouldn't
    deal with FHA.
        I think the key to it is to modernize it, but, at the same
    time, not lower our standards, and make sure that, in the final
    analysis, that we can document everything that we're doing, and
    that we, even in the risk-based premium part, make sure that
    we're doing everything we should be doing.
        Senator Bond asked a question a few minutes ago and I
    agreed with him, it's going to take a transition, it's not
    going to be done overnight. I don't think that it will take
    several years. I really don't think that. I think we've got
    competent staff. So, I think that if we can get this
    legislation passed by this summer, we can help a lot of low-
    and moderate-income people, and we can help a number of people
    who are facing foreclosure today.
        Senator Allard. Mr. Chairman, may I--or you're--I guess
    you're the acting chairman--I'll keep going, if that's okay.
        Senator Bond. That's fine.
        Senator Allard. Okay.
        Also, Secretary Jackson, you've been dealing with some
    issues, as far as waste and--wasteful spending. And I want to
    commend you, again, for correcting some of the practices that
    we have there. Can you describe your efforts to end improper
    payments, and update us on your progress?
        Secretary Jackson. Yes. We have done extremely well with
    the improper payments. I would let Assistant Secretary Cabrera
    answer that question, because he's dealt with it firsthand.
        Senator Allard. Mr. Cabrera?
        Mr. Cabrera. For the record, Senator Allard, Orlando
    Cabrera, Assistant Secretary for Public and Indian Housing at
    the Department of Housing and Urban Development.
        We've had enormous success, due to the Secretary's efforts
    and our staff's effort. And what we have done is essentially
    work with other agencies in order to acquire data. That has
    minimized, to a great extent, improper payments. They are down
    to, as I recall, about $1.2 billion, from $3.1 billion, through
    the end of the--through the end of the last fiscal. And I don't
    have the most current data, but my expectation would be that it
    would be even less than that now. And that's in a 2-year
    period, I believe.
        Senator Allard. Thank you for your response.
        Mr. Cabrera. You're welcome.
        Senator Allard. Now, one of the--go ahead.
        Secretary Jackson. Senator, what I was going to say is that
    when I became Secretary, one of the things that I committed to
    the President and to the people is that we would correct a
    number of the problems, the improper payments, and we would get
    off of the high-risk list. And I'm glad that we've done both of
    those. And--but I could not have done it--it was a great team
    effort, not only from the Deputy Secretary and all the
    Assistant Secretaries, but, also, OMB helped us tremendously.
    So, I am very proud that we did that.
        One of the major issues was FHA. I would not be here asking
    for FHA modernization if we were still on the high-risk list.
    It would be very difficult to ask, until we got ourselves in
    order. And the single-family and others have been very positive
    to date.
        Senator Allard. Good.
        Now, you--a lot of businesses and whatnot are experiencing
    an aging workforce. In your agency, I think yours might be as
    acute as any, as I understand it.
        Secretary Jackson. I'm sorry, I didn't hear you.
        Senator Allard. Businesses all over the country are facing
    some problems with an aging workforce.
        Secretary Jackson. Yes.
        Senator Allard. The agencies in the Government are no
    exception. Your agency, HUD, has the highest risk on an aging
    workforce, in that many of them are coming up for retirement in
    2006 and 2008. That is something you can plan for and look
    into. Could you give us some--what you're doing about
    addressing that potential problem, where you're going to have
    your forces coming up for a mass retirement, so to speak, in a
    couple of years?
        Secretary Jackson. In all honesty, it's very scary. It's
    very scary, because unlike when I was running American Electric
    Power--we had a succession program, where, if we knew that an
    engineer was leaving, we could bring one on for the next 90
    days so this--and, you know, you could train--there is
    basically no succession policy in Government. I mean, until the
    person leaves, we can't hire, because we have 9,000 full-time
    equivalents (FTEs), and we can't bring somebody in to a slot
    based on the person leaving in 60 days or 90 days. So, it's
    very difficult. And about 67 percent, I think--Dave can help
    me; he's sitting behind you. I think about 67 percent of our
    population that's at HUD can leave right now. It's very
    devastating. And I can tell you, on a number of occasions I've
    asked at least 30 people to stay, because we didn't know--in
    fact, Ranking Member Bond, I asked Attorney Kenison to stay,
    but he said he had 40 years, and he was ready to go. But that's
    a huge void that we have right now, because he was really a
    senior attorney and knew a lot.
        So, I will tell you, my best answer is I'm afraid that if
    we have a mass exodus, we're going to have a serious problem.
        Senator Allard. Madam Chairman, I've finished--well, I have
    some more questions, but----
        Senator Murray [presiding]. Thank you very much.
        And, Mr. Secretary, thank you for your patience as we've
    bopped in and out, here.
        When I had to leave, I was asking you about the money to
    the gulf region, and wanted to ask you, in particular, about
    the $2 billion, the vast majority of which has been spent on--
    focused on homeowner assistance, not on rental housing. This
    subcommittee included statutory mandate in June, 1 year ago
    that required at least $1 billion of the $5.5 billion we
    provided at that time to be used for repair, rehabilitation,
    and reconstruction of affordable rental housing stock in the
    impacted areas. How many projects, can you tell us, have been
    rebuilt or repaired as a result of that funding? And how many
    tenants have now been able to reoccupy those facilities?
        Secretary Jackson. Yes, I will. Let me say this, that in
    Mississippi they've moved expeditiously to do exactly what you
    said. In Louisiana, I must tell you, we have been disappointed.
    In fact, I can't pinpoint exactly what has occurred to rehab
    units for rental, at this point, in Louisiana, because most of
    the monies that have been spent, it's been spent basically on
    paying a vendor, which was--who headed the program, ICF.
        We have been very slow in awarding the compensation grants
    to the people who lost their home. We met with the Governor--I
    shouldn't say the Governor--the Governor's staff, about 1 month
    ago, and told her that it was totally unacceptable at the rate
    that they were spending to--spending the money, and the rate
    that they were giving people compensation or rehabbing housing.
        Now, I think if you look at the legislation, chairlady, the
    first $6.5 billion to Louisiana, we have very little control
    over. The second part, we have a lot of control over. And so,
    with that, we can either say, ``You're not doing an acceptable
    job''--but the leverage is not there.
        So, I will tell you that I'm not pleased with the progress
    that's been made. I'm just not----
        Senator Murray. So, you can't give me the number that have
    been repaired or rebuilt?
        Secretary Jackson. I will look and find out, but I don't
    think it's very many. So, I don't want to give you a faulty
    number today, but I will get it to you immediately after this.
        Senator Murray. Okay. I would appreciate that.
        [The information follows:]
         Public Law 109-234--Requirement for Affordable Rental Housing
        Public Law 109-234 appropriated a total of $5.173 billion in
    supplemental CDBG disaster recovery grant funds to the five gulf States
    affected by Hurricanes Katrina and Rita.
    The fifth proviso stated:
        ``Provided further, That not less than $1 billion from funds made
    available on a pro-rata basis according to the allocation made to each
    State under this heading shall be used for repair, rehabilitation, and
    reconstruction (including demolition, site clearance and remediation)
    of the affordable rental housing stock (including public and other HUD-
    assisted housing) in the impacted areas:''
        On October 30, 2006, HUD published in the Federal Register the
    five-State allocations, waivers and requirements. In particular, HUD
    published the following provision to implement the statutory
    requirement for the $1 billion to be spent for affordable rental
    housing stock:
        ``Also as required by the law, not less than $1 billion of the $5.2
    billion appropriation less $27 million in administrative set-asides
    (which computes to 19.3311 percent of any State's allocation) shall be
    used for repair, rehabilitation, and reconstruction (including
    demolition, site clearance and remediation) of the affordable rental
    housing stock (including public and other HUD assisted housing) in the
    impacted areas. Therefore, HUD is requiring that not less than 19.3311
    percent of each State's grant be used for these activities.''

    ------------------------------------------------------------------------
                                                        Minimum amount for
                         State                          affordable rental
                                                             housing
    ------------------------------------------------------------------------
    Alabama........................................               $4,103,146
    Florida........................................               19,344,001
    Louisiana......................................              811,907,984
    Mississippi....................................               81,777,703
    Texas..........................................               82,867,166
                                                    ------------------------
        Total......................................            1,000,000,000
    ------------------------------------------------------------------------

        The five States have submitted Action Plans for the required
    housing that HUD has accepted.
        The amounts budgeted for affordable rental housing is as follows:

    ------------------------------------------------------------------------
                                                                  Amount
    ------------------------------------------------------------------------
    Alabama: Unspecified projects for affordable rental           $4,103,146
     housing................................................
    Florida: Multifamily Housing Repair and Mitigation......      20,013,304
                                                             ===============
    Louisiana:
        Piggyback/LIHTC Affordable Multifamily Rental            593,970,000
         Development, 18,000 units proposed.................
        Small Rental Development--10,000 units proposed.....     492,700,000
                                                             ---------------
          Subtotal..........................................   1,086,670,000
                                                             ===============
    Mississippi; Small Rental (1-4 units) Assistance Program     262,000,000
                                                             ===============
    Texas:
        Assistance to Multifamily properties (16+ units) in       82,866,984
         areas damaged by Hurricane Rita....................
        Rehabilitation of Multifamily Apartments in Houston/      20,000,000
         Harris County where large numbers of evacuees live.
                                                             ---------------
            Subtotal........................................     102,866,984
                                                             ===============
            Grand Total.....................................   1,475,653,434
    ------------------------------------------------------------------------

        The above programs are in various stages of program design and
    implementation. The States are at the forefront of implementing their
    program designs which took time to develop and institute. We anticipate
    future progress reports will capture the activity and commitment of
    each State. Louisiana has been accepting applications from prospective
    apartment owners as well as projects for the Affordable Multifamily
    Rental Development program. Mississippi has rolled out its program and
    applications are available on-line.
        The CDBG disaster grant funds currently budgeted for affordable
    housing exceeds the statutory minimum by over 47 percent. Not counted
    in these amounts are funds the States have budgeted from the CDBG
    disaster supplemental appropriated under Public Law 109-148. Funds
    budgeted by the States from this appropriations exceeds an additional
    $500 million. In all, total resources committed to affordable housing,
    public housing and supportive and housing for the homeless is
    approximately $2 billion. At the moment there is limited progress as
    the States are in the initial stages of operationalizing their programs
    or undergoing the application phase.

        Senator Murray. And the administration asked us, and we
    approved, a provision that allows the PHAs in the most heavily
    impacted areas in Mississippi and Louisiana flexibility to
    combine their funding streams from all the Federal resources to
    assist tenants in a lot of ways in reconstructing damaged or
    destroyed housing. You kind of alluded to this, but the Housing
    Authority of New Orleans, which is under your exclusive
    control, is now sitting on over $95 million in Federal funds,
    and doesn't have a lot of activity to show for it. Can you tell
    us why--this is under your control--can you tell us why those
    Federal dollars are not being spent?
        Secretary Jackson. You mean in Louisiana?
        Senator Murray. It's the Housing Authority of New Orleans.
        Secretary Jackson. The dollars are being spent. We are
    moving expeditiously. As the ranking member asked, we have
    completely rehabbed 2,000 units. We have committed to rehab
    2,500 units. We--to date, we've housed 1,600 people. And I will
    give you the same answer that I gave the Senator, we're trying
    to entice people to come back and occupy those units, but we
    have not been very successful, because many of the people are
    pleased with where they are. But the units are online, and we
    committed to the court and to Chairlady Waters on the House
    side, that we would have 2,500 units for occupancy by
    September, and we will keep that commitment.
        Senator Murray. We're seeing $95 million sitting on the
    books. Is that inaccurate?
        Secretary Jackson. I will find out. I don't think there's
    $95 million sitting on the books that's not being spent. If it
    is, I will get back to you.
        [The information follows:]

        On December 7, 2006 HANO, in accordance with Federal Register
    Notice No. 145 Vol. 71, submitted a fungibility plan to the Department
    of Housing and Urban Development (HUD). Under this plan, HANO was
    allowed to combine its Operating Fund, section 8, and Capital Fund/RHF
    funds under one plan to provide for the development and revitalization
    of its public housing stock. The following summarizes HANO's financial
    position at September 21, 2007 in relation to its 2006 fungibility
    plan:
        Summary of HANO 2006 fungibility dollars, amounts expended and/or
    committed, and remaining 901 funds:

    ------------------------------------------------------------------------
                                                                 Amount
    ------------------------------------------------------------------------
    2006 Fungible Dollars (Operating Fund, Capital Fund,       $121,586,296
     and section 8)......................................
                                                          ==================
        Expended on rehab of reoccupancy units at                (1,468,875)
         Iberville.......................................
        Expended on security for vacant sites............        (2,666,354)
        Expended on Lafitte Pre Development Costs........        (3,226,893)
                                                          ------------------
          Total 2006 Fungible Dollars Expended...........        (7,362,122)
                                                          ==================
    Obligated for the demolition and infrastructure of          (33,527,103)
     properties slated for redevelopment.................
    Obligated for pre construction loans on mixed finance       (18,688,000)
     projects............................................
                                                          ------------------
          Total 2006 Fungible Dollars Obligated..........       (52,215,103)
                                                          ==================
          Total 2006 Fungible Dollars Expended and              (59,577,225)
           Obligated.....................................
              2006 Fungible Dollars net of expended and          62,009,071
               obligated balances........................
                                                          ------------------
              Interest earned on 901 funds held in                1,087,654
               depository accounts.......................
                                                          ==================
                Net Currently Available..................        63,096,725
    ------------------------------------------------------------------------

        Although HANO has not expended a majority of the 2006 funds
    available, nearly 50 percent has been obligated. This delay between
    obligation and expenditure is typical of redevelopment projects. In the
    case of HANO, delays in redevelopment have been caused by external
    factors such as environmental reviews, including protracted historic
    negotiations with the State Historic Preservation Office (SHPO) and the
    Advisory Council on Historic Preservation (ACHP) requiring the
    finalization of Memoranda of Understanding (MOA) with multiple
    consulting partners. Additional delays resulted from litigation and
    time required to select developer partners. Recently, several approvals
    have been obtained. HUD has approved the demolition and disposition of
    four major public housing sites and predevelopment agreements have been
    signed with the developers of the four sites. HANO intends to obligate
    the remaining funds for redevelopment of public housing within 6
    months.

        Secretary Jackson. I--in fact, one of the issues that we
    are facing is that we have been told by the accountant that's
    in the housing authority, that we have a shortage of funds. And
    I've asked Scott Keller, who's the Deputy Chief of Staff, to
    make sure that we have ample funds to carry out the
    responsibilities.
        So, if we have $95 million, I will surely get back to you,
    because I really don't--I really don't know, at this point.
        Senator Murray. Okay. I have one other area that I wanted
    to just quickly ask you about, and that is the issue of the men
    and women coming home from serving us in the armed services. We
    are hearing a lot about the homelessness issue that is facing
    these veterans when they return, their ability to get in, and
    stay in, housing. And I wanted to ask you what HUD is doing
    specifically to meet some of the challenges of our returning
    veterans.
        Secretary Jackson. We have been working with Secretary
    Nicholson, because he has the same concern. And we're doing
    everything in our power with our vouchers with public housing
    to house many of these people. I'm totally in agreement with
    you, they should not come back and not be housed. And I will do
    everything--I won't say ``I'll do''--I'll continue to do
    everything in my power to make sure that they're housed.
        Senator Murray. Well, I'm familiar with the HUD-VASH
    program----
        Secretary Jackson. Right.
        Senator Murray [continuing]. May have been what you're
    referring to--that combines HUD section 8 with some supportive
    services. We know that, since 1992, only 1,780 of those
    vouchers have been issued. Is this a program that HUD still
    supports?
        Secretary Jackson. Yes, we do. And what we--we're doing--
    whenever vouchers are available--and I promised Secretary
    Nicholson this--we will allocate it to the program up to the
    number that we should require. Back in 1996 or 1997, they
    stopped allocating the vouchers and began to allocate them
    outwardly. We should have never allocated those vouchers that
    were set out for veterans. And we're trying to recapture them.
    We have--I think we--to date, we've gotten about 200 back. It's
    very difficult to get the vouchers back once they're out there.
        Senator Murray. Have you had a personal discussion with
    Secretary Nicholson about this program?
        Secretary Jackson. Yes, I have.
        Senator Murray. Okay. Well, I would like to find some
    answers back, and I'd hope that you can really focus on this.
    It is a growing concern out there, and, I think, one that we
    all need to----
        Secretary Jackson. And I agree with you, wholeheartedly.
        Senator Murray. Okay, thank you very much.
        Senator Bond.
        Senator Bond. Thank you very much, Madam Chair.
        And I said I'd like to call up Mr. Donohue. While he's
    taking his seat, I want to call to your attention, Mr.
    Secretary, a problem that was highlighted in the May 2 Post-
    Dispatch. And I know you're familiar with that paper, having
    lived and worked in St. Louis.
        There is a tragic situation at Centenary Housing, a company
    of Portland, Maine, that acquired property and--it's a public/
    private venture that, according to this paper, and from our
    information, allowed the housing to lapse into a state of
    disrepair and chaos. The elderly and disabled residents are
    being forced out of their homes, and it is another serious
    situation. And I'd ask that you make a personal commitment to
    have somebody look into it to ensure that these residents are
    not harmed and their needs are addressed. Apparently, there has
    been a tremendous number of police calls over the last 2
    months, some 1,151 calls for police support. So, something is
    going drastically wrong there. So, I would like----
        Secretary Jackson. Well, I'll say this. I think, as of last
    evening, we had found vouchers and housed about 60 of the 97
    people. I will be making a trip out to St. Louis early next
    week to make sure that many of the elderly and the disabled
    issues related to housing is addressed, because I'm very, very
    concerned when they're elderly and disabled.
        Senator Bond. Well, thank you. We are, too. And I
    appreciate your personal attention.
        Now, turning to Mr. Donohue, I would like to get your views
    and assessment on the HUD funding, addressing the devastation
    caused by Katrina. And I would like your assessment of what the
    key concerns are and how well Mississippi and Louisiana are
    implementing the use of emergency CDBG funds. Are they being
    allocated quickly and effectively? Has--have you seen any
    evidence of fraud and abuse in these programs?
        Mr. Donohue. Yes--Kenneth M. Donohue, D-o-n-o-h-u-e,
    Inspector General, Housing and Urban Development. Thank you,
    Senator.
        We--as far as the disbursement of funds, I have some notes
    here--Louisiana, 129,260 applications; grants paid out is
    $12,681.
        Senator Bond. So, that's 10 percent?
        Mr. Donohue. That's about right, sir.
        Mississippi is 18,753; grants paid is $12,413.
        Senator Bond. So, that's about 67 percent.
        Mr. Donohue. Yes, sir.
        Senator Bond. My math is a little--my horseback math is a
    little shaky, but, I think, just for the sake of comparison,
    it's--it would be helpful to know.
        Mr. Donohue. I think--as far as our patterns are concerned
    with regard to Louisiana, I think what we're seeing is that the
    applications are slow in the process. And the fact is, I think
    what we're finding is a lot of homeowners are trying to make a
    determination as to whether they want to return or rebuild. And
    I think part of that reason is the fact--is whether the
    infrastructure--education programs and hospitals and so on--are
    enough there to support the efforts that they want to return
    to. But it has been quite slow, and we continue to watch it
    closely.
        Senator Bond. Are you seeing--are the funds--the funds that
    are being allocated, are they being effectively allocated? Have
    you come across any fraud and abuse in either of these two
    States?
        Mr. Donohue. We certainly do, sir. We--as I told you that
    we've tried to take a very proactive approach to our efforts.
    We have several ongoing audits. I've expanded my offices to
    include several locations in Mississippi--Hattiesburg and
    Jackson, Mississippi, increased my staff in New Orleans. We
    have, at this point, about--in the criminal side, about 123
    cases, fraudulent applications.
        Senator Bond. Where are those cases, mostly?
        Mr. Donohue. They were both in Mississippi and Louisiana.
    We had a recent announcement, on April 16, where we indicted
    ten people in Mississippi, primarily with grand fraud. What
    we're seeing, Senator, is, we're seeing a movement from grand
    fraud now to move contract or public corruption cases. And we
    think that will continue on as more contracts are awarded.
        Senator Bond. That's an unfortunate--that's an unfortunate
    result of it, and we appreciate very much you staying on top of
    it. Any other problems on how HUD's dealing with the
    rebuilding, or any major problems facing HUD in rebuilding the
    low-income housing stock?
        Mr. Donohue. Well, just a few things are--I think that one
    of the things we've found is that the Privacy Act issues with
    regard to transferring--doing data matching between Government
    agencies--we'd like to see--and I believe--I would suggest that
    when we have disaster of this type, there are issues that have
    to be addressed in the privacy issues so Government agencies
    can share information with each other more easily.
        The other thing I've seen is--with the Department, is
    communications. And I think--what I mean, between the program
    areas themselves, and also communications with the local
    offices and headquarters. I'm pleased to have learned that the
    Deputy Secretary has--and the Secretary--have announced naming
    a person in charge of the department that'll oversee the entire
    efforts in the gulf States area, and I applaud that effort.
        Senator Bond. Thank you very much, Mr. Donohue.
        Thank you, Madam Chair.
        Senator Murray. Do you have any other questions?
        Senator Bond. Well, I'll--I have just two more, but I'll
    let you and Senator Allard go forward.
        Senator Murray. Senator Allard.
        Senator Allard. Thank you, Madam Chairman.
        Mr. Secretary, as you may well be aware of, I pay close
    attention to the President's PART program. This is made
    possible through legislation we passed over a decade ago, where
    the Congress asked for the agencies to establish a Government
    Procedures and Results Act--I guess it's Performance and
    Results Act.
        Secretary Jackson. Right.
        Senator Allard. And I watch that fairly closely. And I
    notice that you have some agencies there--four, I believe--that
    are rated as ineffective. They have eight or so that are rated
    as ``no results demonstrated.'' And rating on that is: no
    results demonstrated, ineffective, moderately effective, or
    effective.
        And what is it that you're doing to address these agencies
    that refuse to try and do anything, or, for some reason or
    other, are unable to, and then those that are also rated
    ineffective? In my way of thinking, the most egregious one are
    those that absolutely aren't trying. And then, those that are
    ineffective would be next to the bottom. So, I just wondered
    what you're doing, when you look at the results of that, to
    correct those problems.
        Secretary Jackson. Two things. First of all, as I said, we
    are making every effort to do what we did with FHA in the
    public integrity issue with undercounting. I believe that,
    clearly, getting off the high-risk list was extremely important
    to us. One of the things that we have stressed--and, I mean,
    when--I said ``we,'' because I don't like the term ``I''--we
    have stressed--that means the Deputy Secretary and the
    Assistant Secretaries--is performance. And I must tell you,
    working with Clay Johnson, over at OMB, who is a performance
    expert, we have begun to move quickly, programs that were
    ineffective to effective programs.
        Second, when we hired our Chief Information Officer, we had
    so many computer systems, Senator Allard, that did not talk to
    each other, it was unbelievable. She has done--we've gone from
    an F to an A, because we have integrated those systems and cut
    out a lot of those systems. So, we're making tremendous
    strides, because I think that if we don't make those strides,
    then clearly we will find ourselves back on the GAO list again,
    and I don't want to be back on that list.
        Senator Allard. Well, good for you. What are your--getting
    to your budget--I think, 6 years ago, you were carrying--the
    HUD was carrying somewhere--about $12 billion unallocated and
    unspent balances. Are you carrying any unallocated--I assume
    you're carrying some unspent balances and some unallocated--do
    you have any idea what that figure is?
        Secretary Jackson. I will get it for you. I don't, today.
        Senator Allard. Okay.
        Secretary Jackson. If we have it, I will get it.
        Senator Allard. I would like to--I'd like to have that
    information----
        Secretary Jackson. Sure.
        Senator Allard [continuing]. If you would, please.
        [The information follows:]
                      Unobligated and Unexpended Balances
        At the end of fiscal year 2001, The Department carried over $10.99
    billion in unobligated balances into fiscal year 2002. At the same
    time, the unexpended balances for the Department were $103.26 billion.
    At the end of fiscal year 2006, the most recently completed fiscal
    year, the Department carried over $13.69 billion into fiscal year 2007,
    while the unexpended balances were $85.35 billion. Although the amount
    of unobligated balances increased by $2.7 billion, this is largely
    attributable to the emergency supplemental funds appropriated in
    response to Hurricanes Katrina, Wilma, and Rita. During this same
    timeframe, the Department was continuing the successful efforts to
    expend funds more efficiently and expeditiously as demonstrated by the
    $17.9 billion reduction in unexpended balances.

        Senator Allard. And then, finally, as far as I'm concerned,
    on the multifamily mortgage insurance premium, I see that--in
    the budget there, that you're asking for an increase in that.
    The past years, that's been highly controversial. What--are
    there other ways? I mean, why are--why do you include that in
    your budget when it's--in your appropriation--when it's so
    controversial?
        Secretary Jackson. Well, let me have--I can give you an
    answer, a generic answer, but let me have Brian Montgomery--
    Brian is not here? Oh.
        Senator Allard. Well, he can give me a written response.
        Secretary Jackson. I will give you a written response, very
    quickly.
        Senator Allard. Okay.
        Thank you, Madam Chairman.
        Senator Murray. Thank you.
        [The information follows:]
                Multifamily Mortgage Insurance Premium Increase
        The proposal to raise the annual insurance premiums on multifamily
    housing projects was prompted by the outcome of an evaluation of the
    program using OMB's Program Assessment Rating Tool (PART). That
    evaluation raised questions concerning program targeting and its
    overall efficiency. While we intend to review the program to determine
    whether or not changes need to be made, let me assure you that no
    actions--including raising the premiums--will be taken until they are
    fully discussed with all interested stakeholders, especially Congress.
        The annual premium increases impact only the following multifamily
    products. Projects that use Low-Income Housing Tax Credits are exempt
    from this increase:

    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Description                              Fiscal year 2007          Fiscal year 2008
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    221d4.................................  FHA New Construction/Substantial Rehab Apartments...........  45 basis points.........  61 basis points.
    223a7.................................  Refinancing of Apartments...................................  45 basis points.........  61 basis points.
    223f..................................  Refinancing/Purchasing of Apartments........................  45 basis points.........  61 basis points.
    --------------------------------------------------------------------------------------------------------------------------------------------------------

        Senator Murray. Mr. Secretary, I do have some questions
    that I'm going to submit for the record that I hope that you
    will respond with, and I will leave the record open for any
    other members who have questions, as well.
        Senator Bond, did you have anything else you wanted to ask
    now?
        Senator Bond. Thank you, Madam Chair.
        Yes, I'll have a few, just to make sure that we keep the
    Secretary busy. But I do want to ask a question about housing
    for the disabled. The 811 budget request assumes a new $15
    million demonstration program, and I'm curious what the logic
    is behind requesting funds for the demonstration, while
    drastically cutting the overall program. I'm especially
    troubled that HUD recommends that $75 million, of the $125
    million requested, be targeted solely to tenant-based vouchers.
    This continues a trend against, apparently, new housing for
    persons with disabilities. And what's the definition for going
    tenant-based without providing some incentive for construction
    or rehab for--of facilities for persons with disabilities?
        Secretary Jackson. Senator, we believe that, as we do with
    HOME dollars, that we should begin to leverage the dollars,
    find developers to develop housing for disabled, for the
    elderly, and do all--and do as much as we can to create more
    housing. We have strictly been building housing with 202 and
    811, but we have not been building it in a quick or judicious
    fashion. We really haven't. And I think that if we can find an
    interim area where we can do it--and that's for the
    demonstration program--then I clearly believe that I will come
    back and ask for more monies. But we've got to build the
    house--housing quickly.
        Now, I know the question becomes, ``Well, if you will ask
    if it's done, what happens to the--to many of the people who
    are disabled?'' That's why we've increased the vouchers,
    because we find that much quicker to be used. They can get an
    apartment much quicker, or get a home much quicker than we can
    build it. So, we're trying to accommodate as many disabled and
    elderly as we can, and that's the reason why we went to the
    demonstration program.
        Senator Bond. Well, it would seem to me that, rather than
    cutting the overall 811 program, that perhaps project-based,
    along with the demonstration program, would begin to provide
    the facilities that we need that are in--truly wanting in many
    areas. So, I question--have you worked with the disabled
    community? And do you expect any legislative proposals to be
    submitted to Congress?
        Secretary Jackson. Yes, I just met with ADAPT--today is
    Thursday--on Monday, when there were about 500 disabled persons
    in town. I went to see them. And clearly their concern is the
    concern that you've raised, not only for veterans, but for
    disabled--not only for disabled veterans, but disabled people,
    period, and especially those persons in nursing homes. And I
    agreed with them that we would work with them to try to create
    legislation that could be presented to you all. And I have my
    staff working with their executive board or committee, whatever
    they're called, to see exactly what it is that they want, and
    to have us introduce legislation.
        Senator Bond. We'll look forward to that proposal.
        Finally, saving some of the best for submission for the
    record, on the question of homeless, as I said in my opening
    statement, I think you've made great progress, and I support
    your--the administration's focus on the chronic homelessness
    and the goal to provide 150,000 units. How close are we to
    meeting this goal? And, after that goal is met, what are your--
    what are the next steps to addressing other types of
    homelessness, especially family homelessness? Do you have a
    long-term strategy?
        Secretary Jackson. Yes. You know, I visited a number of
    homeless organizations, and I think the model that I've seen
    that works best is the model out in Los Angeles called PATH.
    And I don't know exactly what the acronym--what they do--and
    that's one of the reasons we increased the budget by $1.6
    billion--they first take the person off the street, then they
    clean up the person, then they have the person go through both
    physical and psychological evaluation, then they begin to train
    the persons in job classifications, and then they monitor the
    person for the next 18 months after they leave. To me, that is
    the way we should be addressing the homeless, not putting a
    person in a shelter because it's cold that one night. And
    that's traditionally what we have been doing. So, what we're
    trying to do is replicate PATH around this country, because if
    they can do it, other cities can do it.
        I think you have made great strides in St. Louis, too,
    addressing the homeless.
        Senator Bond. I'm proud of what's going on there.
        Secretary Jackson. Very much so. But there are other
    cities--and I like to use the city that I'm from--like Dallas,
    that has not made great strides. They still think that the most
    important thing is to house a person for a night. And I don't
    think that's the approach that the President wants to take, or
    I want to take. Once a person is on the streets for 90 days or
    more, they're going to need tremendous help not to go back to
    the street. And I would prefer see them--seeing them not go
    back to the street. I look out, every day, at my window at HUD,
    and there are people sleeping under the freeway. And that is
    unacceptable. And they've been there for 3 or 4 weeks. So,
    clearly, we should be addressing their needs to get them off
    the streets.
        Senator Bond. Well, thank you very much. Mr. Secretary, the
    only thing I'd disagree with, I still think you ought to claim
    St. Louis as your roots, but----
        Secretary Jackson. Well, St. Louis is--let me say this to
    you, Senator. I was born in Dallas, Texas, but I lived most of
    my----
        Senator Bond. You didn't have a choice about that.
        Secretary Jackson. That's right. But I lived most of my
    adult life in St. Louis, and St. Louis is like my home.
        Senator Murray. Okay.
        Senator Bond. Keep the faith in the Cardinals.
        Thank you very much.
        Secretary Jackson. And they are my team, too----
        Senator Murray. But we're not----
        Secretary Jackson [continuing]. The St. Louis Cardinals.
        Senator Murray [continuing]. Going to go there.
        Well, thank you very much, Senator Bond.
        And, Mr. Secretary, I want you to get back to us on a
    number of questions that were raised here today. I especially
    want to find out about the $95 million that the Housing
    Authority of New Orleans--your Assistant Secretary is the one
    who gave us the number----
        Secretary Jackson. Okay.
        Senator Murray [continuing]. That it is sitting there, it
    is available for reconstruction now. So, we want to find out--
    --
        Mr. Cabrera. Who is it? I can talk--I can speak----
        Secretary Jackson. He can speak to it, if you want him----
        Senator Murray. I would like a question back in----
        Secretary Jackson. Okay.
        Senator Murray [continuing]. Response.
        Secretary Jackson. I didn't know he had given you the
    number.
        Senator Murray. Actually, we'll get a response back from
    you in writing, if--and not in testimony today, because we do
    need to move on. But I appreciate your being here today. But I
    want to----
        Mr. Cabrera. Can we give a quick----
        Senator Murray. If you can give a 30-second response, we
    have a vote we have to get back----
        Mr. Cabrera. Absolutely, Madam Chair. Orlando Cabrera, for
    the record, once again.
        The $95 million is a reserve number that allows for the
    fungibility that Congress provided in section 901 of the
    supplemental. And so, the reason that it's not--the reason it's
    there is because currently HANO, HUD, and others are being
    sued, and that's impeding development. The purpose of that
    money is to redevelop. And so--but there is--that's composed of
    section 8, operating fund----
        Senator Murray. Right.
        Mr. Cabrera [continuing]. And it includes capital fund,
    even though that determination is a little bit unclear. It's
    actually $81 million plus $14 million----
        Senator Murray. Right.
        Mr. Cabrera [continuing]. But there's an interpretive issue
    as to whether that $14 million is inclusive. And so, that's
    what--that's what the $95 million is.
        Secretary Jackson. And we will still get you a written
    response.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Murray. I--and I very much appreciate that, thank
    you.
        Secretary Jackson. Okay.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                    Questions Submitted by Senator Herb Kohl
                           cuts in the operating fund
        Question. The Milwaukee Public Housing authority recently told me
    that they are being restricted from using a portion of their capital
    fund to off set some of their operating costs. Specifically, they use
    capital fund money to pay for their Public Safety program, which
    provides security and intervention services for seniors, disabled
    individuals, families and veterans in public housing. They are very
    concerned because current law allows them to use up to 20 percent of
    their capital fund to cover certain operational costs, however, HUD
    issued guidance that would eliminate this flexibility. This rule would
    force the Milwaukee PHA to lay off 35 employees who administer evening
    and weekend security. It is unclear why HUD would eliminate PHAs
    flexible use of the Capital fund given the constraints on the operating
    fund. Why would HUD issue this guidance and will you withdraw the
    provision?
        Answer. The Department has not implemented any restriction on the
    ability of a PHA to use 20 percent of its Capital Fund Program to
    support the ``operations'' of a project. In the case of the Milwaukee
    Housing Authority, security expenses are an ``operating'' cost of each
    project. Hence, the PHA can continue to use the Capital Fund (up to the
    20 percent permitted by statute) to fund its security program.
                              sec. 202/811 funding
        Question. The section 202 program provides capital to non-profits
    to develop and maintain housing for low-income seniors and section 811
    helps develop housing for disabled individuals. Both programs couple
    housing with supportive services to allow these individuals to live
    independently and participate in the surrounding community. The
    administration has proposed deep cuts to both programs. In 2005, in
    Wisconsin, there were only three new housing developments, totaling 41
    units, to serve these populations. If the administration's proposed
    cuts were accepted, it would result in approximately only 150 new units
    across the country. For every section 202 housing unit, there are
    around 10 seniors on the waiting list and the number of disabled adults
    living with their aging parents is close to 700,000. With these two
    populations growing and housing resources becoming more scarce, how can
    you justify cutting these very valuable programs?
        Answer. The Department's first priority is to provide for the
    increased costs associated with serving the roughly 3.4 million
    families currently receiving section 8 rental assistance. This required
    that the Department make some very difficult funding decisions.
    However, despite the fact that section 8 renewal funding absorbed a
    major part of the Department's budget, we are able to direct
    significant funding in the budget to the section 202 program to provide
    for: (1) funding to convert projects to assisted living; $390.5 million
    for the construction of new units; (2) funds to renew and amend
    existing contracts (Our estimate is that the requested budget funding
    will produce several thousand units nationwide); (3) congregate
    services; and (4) service coordinators.
        In addition, we proposed sufficient funding for the section 811
    program providing for: (1) funds to renew and amend existing contracts;
    (2) $14.5 million for the construction of additional new units; and (3)
    continued financial support for projects under payment and in the
    construction pipeline.
                                     ______

               Questions Submitted by Senator Frank R. Lautenberg
                           funding for public housing
        Question. Many housing authorities in New Jersey have told me that
    public housing is in crisis. Yet, President Bush's proposed budget for
    fiscal year 2008 falls $700 million short of what is needed to fully
    fund the HUD operating fund. How are public housing authorities
    supposed to provide the affordable housing thousands of people need
    without full funding?
        Answer. At the end of fiscal year 2006, nationwide, PHAs had
    approximately $2.7 billion in reserves that can be used to support the
    operation and maintenance of low-income housing. Additionally, PHAs are
    allowed to retain all of the income they receive from investments and
    other non-dwelling rental income, such as income from rooftop antennas,
    laundry receipts, etc. In 2006, this other income accounted for $349
    million. Further, for the purposes of subsidy calculation, rental
    income is frozen at 2005 levels, which means that any increase in
    rental income does not decrease the amount of subsidy that the PHA will
    receive in 2007 and 2008.
        Through a variety of initiatives, the Department has encouraged
    PHAs to look at their inventory and make informed management decisions
    about the housing stock. Steps that PHAs have taken include demolishing
    the worst, and often most expensive, housing stock, entering into
    energy performance contracts to reduce the cost of utilities, and
    switching to tenant-paid utilities.
                              at-risk republicans
        Question. Last month, the Bush Administration admitted conducting
    political briefings with your agency on Republican candidates that were
    at risk of not being re-elected. Was such a briefing given to your
    agency? If so, did your agency award any contracts or take any specific
    action to assist vulnerable Republicans gain re-election?
        Answer. White House personnel conducted briefings for various HUD
    employees to provide overviews of the national electoral landscape. At
    those briefings, there were no discussions of HUD assisting any
    individual candidates, and HUD did not award any contracts or take any
    specific action to assist vulnerable Republicans gain re-election as a
    result of any of those briefings.
                                     ______

                  Questions Submitted by Senator Arlen Specter
                                asset management
        Question. The fiscal year 2008 budget requests funding at $4.0
    billion for the Public Housing Operating Fund. According to your
    agency, this level of funding would represent only 85 percent of actual
    operating subsidy needed for fiscal year 2008 as housing authorities
    convert to asset-based management.
        Given the anticipated shortfall, how will housing authorities be
    able to meet their operating needs, without cutting vital services and
    security, and covert to asset management?
        Answer. At the end of fiscal year 2006, nationwide, PHAs had
    approximately $2.7 billion in reserves that can be used to support the
    operation and maintenance of low-income housing. Additionally, PHAs are
    allowed to retain all of the income they receive from investments and
    other non-dwelling rental income, such as income from rooftop antennas,
    laundry receipts, etc. In 2006, this other income accounted for $349
    million. Further, for the purposes of subsidy calculation, rental
    income is frozen at 2005 levels, which means that any increase in
    rental income does not decrease the amount of subsidy that the PHA will
    receive in 2007 and 2008.
        Through a variety of initiatives, the Department has encouraged
    PHAs to look at their inventory and make informed management decisions
    about the housing stock. Steps that PHAs have taken include demolishing
    the worst, and often most expensive, housing stock, entering into
    energy performance contracts to reduce the cost of utilities, and
    switching to tenant-paid utilities.
                                    hope vi
        Question. HOPE VI enhances communities by decentralizing poverty
    and giving families an opportunity to live in mixed-income
    neighborhoods with better educational and employment opportunities. I
    have visited HOPE VI sites throughout Pennsylvania and have discovered
    the critical impact that reconstruction in these public housing
    developments has on revitalizing neighborhoods.
        As HOPE VI has accomplished one of its goals of demolishing 100,000
    severely distressed units--which suggests to me that the program has
    been effective--how does HUD propose to accomplish the necessary level
    of reconstruction in the future if HOPE VI is eliminated?
        Answer. The Department recognizes the importance of addressing the
    current capital backlog within the public housing inventory. In most
    cases, this need can be more appropriately met through other
    modernization and development programs operated by the Department,
    e.g., the Capital Fund, the Capital Fund Financing Program, non-HOPE VI
    mixed-finance development including leveraging private capital
    investment, required and voluntary conversion, section 30, and use of
    tax credits. The Department will encourage housing authorities in need
    of this assistance to submit proposals under these programs.
                                     ______

                Questions Submitted by Senator Pete V. Domenici
                          cuts in section 811 funding
        Question. Secretary Jackson, I was disappointed to see that for the
    third year in a row, the Department of Housing and Urban Development is
    seeking a huge cut in funding for the section 811 Supportive Housing
    for Persons with Disabilities programs. This year you requested only
    $125 million for a program that is currently funded at $237 million. In
    each of the last 2 years, Congress--including this subcommittee with
    bipartisan support--has restored these funds. Why does HUD continue to
    seek cuts to this program?
        Answer. The fiscal year 2008 budget request of $125 million is $6.2
    million greater than the $118.8 million requested in fiscal year 2007.
    Despite the fact that we are required to provide funding for renewals
    and amendments, we were able to provide additional funding for new
    production in the fiscal year 2008 request. This includes $14.5 million
    for new capital grants and associated Project Rental Assistance
    Contracts (PRAC). The Department has proposed $15 million for a
    Leverage Financing Demonstration. The Department is committed to fully
    funding all the projects in the construction pipeline.
        Question. All of the cuts you have proposed in the section 811
    programs would come from the capital advance-project-based side of the
    program that helps produce new units. These units help individuals with
    more severe disabilities that have higher support needs and face an
    enormous struggle in trying to find housing. These units also help
    provide a direct link to supportive services such as medical care,
    transportation, and employment. Why is HUD requesting a cut of $112
    million (70 percent) for these programs which fall under your own
    budget title of ``Serving Those Most In Need?''
        Answer. The Department remains committed to serving this vulnerable
    population. There are approximately 250 projects in the development
    pipeline that the Department will continue to work with sponsors to
    develop. The Department will provide additional funding for new capital
    grants and PRAC in fiscal year 2008. HUD also proposed the new Leverage
    Financing Demonstration to investigate more efficient means of bringing
    additional resources to support the program and its participants.
        Question. The administration's request for fiscal year 2008 for
    section 811 includes a proposed $15 million demonstration program that
    would allow funding from the Low-Income Housing Tax Credit (LIHTC)
    program. When do you anticipate having this demonstration proposal
    ready for Congress?
        Answer. Neither the House nor the Senate included the Demonstration
    in their fiscal year 2008 appropriations bills. We estimate that we
    would have a proposal for Congressional consideration 90 days after
    approval.
        Question. How many permanent supportive housing units do you
    anticipate this demonstration proposal to produce in fiscal year 2008?
        Answer. It is unlikely that funding will be available in time to
    produce any units in 2008.
        Question. Do you anticipate this demonstration proposal requiring
    any waivers or exceptions to current statutory or regulatory standards
    in the current 811 program?
        Answer. We are in the process of developing the detailed features
    of this demonstration and have not yet identified any specific
    statutory or regulatory impediments.
        Question. If any such waivers or exceptions are needed, would this
    require a change to the current 811 statute?
        Answer. This will be determined after the completion and evaluation
    of the Demonstration program.
        Question. In March, HUD issued the fiscal year 2007 Super Notice of
    Funding Availability (SuperNOFA) for a range of programs. For section
    811, the SuperNOFA makes available only $88.3 million for the new
    capital advance-PRAC grant competition. This is substantially below
    what was assumed in the fiscal year 2007 ``continuing resolution'' that
    was enacted by Congress back in February (H.J. Res 20). H.J. Res 20
    assumed a freeze at the fiscal year 2006 level of $145.87 million. In
    order for this reduction to be explained by increased demand for 811
    tenant-based renewals, the percentage of renewals would have to have
    increased by 120 percent. What happened to this funding for section
    811?
        Answer. The total new appropriation in fiscal year 2007 was $236.6
    million and the total amount allotted in fiscal year 2007 amounted to
    $158,697,000 exclusive of $77.5 million for Mainstream Vouchers and
    $396,000 for the Working Capital Fund. The table below reflects the
    fiscal year 2007 allotment by funding category including the new
    capital advance funding of $113.6 million and PRAC renewals of $16.9
    million.

    ------------------------------------------------------------------------
                                                                Allotment
    ------------------------------------------------------------------------
    Capital Advance Inspection Fees.......................     $1,000,000.00
    PRAC Renewals.........................................     16,943,000.00
    Initial PRAC Awards...................................     11,436,600.00
    Capital Advance Amendments............................     11,590,759.00
    PRAC Amendments.......................................      3,542,623.00
    Initial Capital Advance Awards........................    113,575,425.00
    Technical Assistance..................................        608,593.00
                                                           -----------------
          Total...........................................    158,697,000.00
    ------------------------------------------------------------------------

        Question. Between fiscal year 1997 and fiscal year 2002, Congress
    annually appropriated funding for tenant-based rental assistance for
    non-elderly people with disabilities adversely impacted by the
    designation of public and assisted housing as ``elderly only.'' There
    are approximately 62,000 of these non-elderly disabled vouchers--also
    known as Frelinghuysen vouchers--in use. Unfortunately, HUD was slow to
    develop a tracking system to ensure that these vouchers continue to be
    targeted to the population for which Congress intended. In February
    2005, the Office of Public and Indian Housing (PIH) issued Notice 2005-
    5 relating to issuance and preservation of these vouchers. This PIH
    Guidance also covers ``mainstream'' tenant-based rental assistance for
    non-elderly people with disabilities funded under the section 811
    program.
        However, due to the lack of guidance until 2005, there is
    considerable uncertainty as to how many of these vouchers remain
    targeted to non-elderly people with disabilities as Congress originally
    intended.
        Can you please provide the subcommittee with estimates of how both
    the Frelinghuysen vouchers and 811 ``mainstream'' tenant-based
    assistance has been targeted--and is remaining targeted to--the
    intended population?
        Answer. PIH Notice 2005-5 issued implementation guidance to enable
    PHAs and HUD field staff on initiatives to assist non-elderly people
    with disabilities in their search for housing under the Housing Choice
    Voucher Program. In addition, this notice clarifies issues related to
    issuance and preservation of certain types of special purpose vouchers,
    i.e. Frelinghuysen and 811 Mainstream Vouchers. By requiring PHAs to
    electronically report using the Form HUD-50058, HUD monitors these
    vouchers to ensure they are targeted to the intended population. The
    Department continues to work with these agencies to ensure that all
    special purpose vouchers are used for their intended purpose. In fiscal
    year 2007, the Department had 50,533 Housing Choice vouchers, and
    14,836 section 811 vouchers reserved for individuals with disabilities.
        Question. Can you please update the subcommittee on steps that PIH
    has taken to ensure housing agencies that have these non-elderly
    disabled vouchers are meeting their obligations under PIH Notice 2005-
    5?
        Answer. To ensure that non-elderly vouchers are meeting their
    obligations under PIE Notice 2005-5, HUD is tracking monthly the usage
    of these non-elderly vouchers through its Voucher Management System
    (VMS). The Department is also working with the PHAs to ensure that all
    special purpose vouchers are used for their intended purpose. Failure
    to serve disabled families as required will result in forfeiture of the
    vouchers.
                                     ______

                   Question Submitted by Senator Wayne Allard
                                 human capital
        Question. The Government cannot function without human capital, yet
    human capital has been a challenge for most agencies. This is
    particularly true at HUD, which has on average the oldest workforce. In
    fact, HUD is at risk of losing half its employees to retirement between
    fiscal years 2006 and 2008. What are you doing to address this
    challenge?
        Answer. HUD has taken significant steps to better utilize existing
    staff capacity, and to obtain, develop, and maintain the capacity
    necessary to adequately support HUD's future mission-critical program
    delivery. The Department's 5-year Human Capital Management Strategy
    seeks to ensure that: (1) HUD's organizational structure is optimized;
    (2) succession strategies are in place to provide a continuously
    updated talent pool; (3) performance appraisal plans for all managers
    and staff ensure accountability for results and a link to the goals and
    objectives of HUD's mission; (4) diversity hiring strategies are in
    place to address under-representation; (5) skills gaps are assessed and
    corrected; and (6) human capital management accountability systems are
    in place to support effective management of HUD's human capital.
    Further, in fiscal year 2006, HUD developed and officials approved the
    Human Capital Vision Plan, and developed a Leadership Succession Plan
    and set targets for leadership bench strength through 2009. This
    document is currently being updated. Collectively, these actions are
    better enabling HUD to recruit, develop, manage, and retain a high-
    performing workforce that is capable of effectively supporting HUD's
    program delivery and mission.'' Following this, each program office
    within the Department was asked to develop a succession plan for their
    organization that identifies succession targets and strategies to
    ensure that HUD's talent pool is secure.
        Additionally, HUD is making great use of intern recruitment
    opportunities to support succession planning. In fiscal year 2004, the
    Department launched and enhanced the HUD Intern Program with several
    hires of Federal Career Interns (FCIs) and Presidential Management
    Fellows (PMFs). In fiscal year 2006, this program was renamed the ``HUD
    Fellows Program'' and a new Masters of Business Administration Fellows
    (MBAFs) was added in fiscal year 2007. In fiscal year 2007, there were
    a total of 58 PMFs and FCIs on board. By the end of fiscal year 2007,
    HUD recruited and hired 50 additional PMFs, MBAs, and FCIs; and for
    fiscal year 2008, an additional 100 Interns will be hired. The
    Department also developed a Recruitment and Retention Plan of Action
    for PMFs, MBAFs, and FCIs in accordance with succession planning
    recommendations made by the Workforce Planning Task Force that were
    approved by the Deputy Secretary on October 12, 2006. The Assistant
    Secretary for administration was authorized to establish a formal 2-
    year program for all Fellows, with consultation and input from the
    major program offices.
        In addition to the recruitment efforts, HUD is also using retention
    strategies to support succession planning. In fiscal year 2005, HUD
    developed and launched the Student Loan Repayment Program (SLRP) to
    strengthen and support recruitment and retention efforts. Since
    launching of this program, the Department has reimbursed the following
    amounts to employees participating in the SLR program: fiscal year 2007
    ($604,343); fiscal year 2006 ($410,868); fiscal year 2005 ($399,993);
    and fiscal year 2004 ($275,701). The number of HUD employees who have
    received reimbursements under this program is as follows: fiscal year
    2007 (179); fiscal year 2006 (253); fiscal year 2005 (178); and fiscal
    year 2004 (69). We expect to have more than $600,000 available for this
    program for fiscal year 2008. In addition to increasing the amount
    available for the program each year, the SLRP program has been
    automated. Employees can now submit their applications electronically
    to their supervisor and continue the approval process on-line through
    HR staff, the Office of the Chief Financial Officer, and ultimately the
    Employee Service Center for processing. This program is an attractive
    retention tool for new intern hires and top employees throughout the
    Department. In appropriate situations, HUD has also utilized retention
    and relocation incentives to help retain top employees.

                              SUBCOMMITTEE RECESS

        Senator Murray. This subcommittee now stands in recess
    until Thursday, May 10, when we will take testimony from the
    FAA Administrator and the DOT Inspector General.
        [Whereupon, at 11:40 a.m., Thursday, May 3, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

    TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES
                      APPROPRIATIONS FOR FISCAL YEAR 2008

                                  ----------

                             THURSDAY, MAY 10, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:30 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Patty Murray (chairman) presiding.
        Present: Senators Murray, Lautenberg, Bond, Specter,
    Stevens, and Allard.

                          DEPARTMENT OF TRANSPORTATION

                        Federal Aviation Administration

    STATEMENT OF HON. MARION C. BLAKEY, ADMINISTRATOR
    ACCOMPANIED BY HON. CALVIN L. SCOVEL III, INSPECTOR GENERAL

                   OPENING STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. The subcommittee will come to order. I want
    to welcome my witnesses this morning, FAA Administrator Marion
    Blakey and DOT Inspector General Calvin Scovel.
        Over the next 8 years, it is estimated that the number of
    air passengers will grow by 40 percent. That's pretty good news
    for our country, but it's also good news for my region, because
    we build the best airplanes in the world, and we are a gateway
    to our biggest trading partner in Asia.
        But all those new aircraft will do little to expand our
    economy if we don't have a modern air traffic control system to
    move those planes safely and with maximum efficiency. If we
    fail to modernize that system and soon, it will not just be a
    drag on the economy of my region, it's going to be a drag on
    the entire global economy.
        Unfortunately, we are years behind in this effort. We are
    years behind because just 3 years ago, the Bush administration
    and Administrator Blakey successfully advocated a cut to our
    annual investment in their traffic modernization funding by
    more than $400 million, and the program has been funded roughly
    at that reduced level every year since.
        That represents a loss of more than $1.2 billion from the
    baseline that we established back in 2004. We are years behind
    because well over a decade ago, the FAA's modernization effort
    got seriously derailed as the agency wasted billions of dollars
    in a failed effort known as the Advanced Automation System.
        That debacle was characterized by the FAA constantly
    changing its requirements and throwing good money after bad
    through undefined, open-ended contracts.
        Today, in 2007, we are still paying to replace systems that
    were slated to be fixed in the 1980s and 1990s as part of that
    failed effort. Back then, the FAA was not up to the task of
    rapidly and efficiently modernizing the system. I'm worried
    that the FAA may still not be up to the task today.
        Just last month, Administrator Blakey gave a speech that
    included the following passage. And I quote: ``It stings when I
    listen to criticisms about the FAA that are based on something
    that happened 10 or 20 or 30 years ago. In the last few years,
    we have achieved enormous management efficiencies, and at the
    end of fiscal year 2006, 97 percent of our major capital
    projects were on time and on budget.''
        The Administrator has made similar statements before
    several House and Senate committees. I don't disagree with the
    Administrator that things have improved since the bad old days
    of the Advanced Automation System, but I do have to question
    whether it's appropriate or accurate to claim that the
    overwhelming majority of FAA's capital projects are progressing
    along just fine.
        Part of my goal for this morning's hearing is to scratch
    under the surface of that claim. From my perspective, we still
    see too many examples where the FAA has signed contracts with
    under-defined requirements, and countered sizable cost overruns
    that get handed right back to taxpayers, purchased equipment
    that could not provide all the functions promised, and failed
    to produce all the operating savings that have been promised.
        Now, I'm not talking today about examples from 10 or 20 or
    30 years ago; I'm talking about examples in the last 5 years.
    I'm talking about programs that we are paying for right now,
    and I'm talking about programs for which the Administrator is
    seeking more money in 2008.
        So how can we have all of those procurement delays and cost
    overruns, but have the FAA claiming that almost all of its
    programs were on time and on budget? Well, the answer lies in a
    process known as re-baselining.
        This is a process required by OMB for major procurements
    throughout our government. When a program appears to be
    exceeding its targeted cost or failing to deliver its intended
    product, that agency is required to re-baseline the program.
        That means the agency must re-estimate the cost, schedule,
    and benefits, and decide if it still makes sense to move
    forward. As we will hear today from the Inspector General, the
    FAA has been required to re-baseline a significant number of
    programs because of substantial cost overruns and schedule
    slips.
        Let me be clear. I do not question that the FAA did the
    right thing in re-baselining these programs. What I do question
    is whether the agency is being honest with the system's users,
    Congress, and taxpayers when it establishes a new, higher cost
    estimate, a later delivery date, or a weaker performance goal,
    and then continues to proclaim that the program is on time and
    on budget.
        As the IG says in his formal testimony today, ``This re-
    baselining process explains why the Wide Area Augmentation
    System, according to the FAA's logic, is still on budget, even
    though its costs have grown from $892 million to over $3
    billion since 1998.
        That's right, a program that has experienced cost growth of
    233 percent is still considered to be on budget by the FAA, and
    this is yet another program that will not produce all of the
    benefits that were originally promised, but that is how the
    Administrator can claim that 97 percent of her major capital
    programs are doing just fine.
        So it appears to me that things are not all on track at the
    FAA. I want to share a couple of examples of programs that FAA
    has re-baselined but that it still considers on time and on
    budget. The Integrated Terminal Weather System costs have grown
    by $10 million, and the schedule has been extended by nearly 6
    years, yet the FAA says they are on time and on budget. I think
    the taxpayers wouldn't agree.
        Or look at the ASR-11 radars. Instead of installing 112,
    they slashed it down to 66 units, and the schedule has been
    extended by 4 years. That doesn't sound like on track to me.
        Another worrisome case of this re-baselining process has
    been the so-called ASDE-X programs. This program is designed to
    address perhaps the greatest safety threat in our current
    commercial aviation system, which is runway incursions. It's
    designed to ensure that aircraft operating on the ground do not
    collide with other planes or vehicles on the airfield.
        These are not hypothetical threats. This past summer, two
    aircraft at O'Hare missed each other by 35 feet. As the
    Administrator knows, improved measures to prevent runway
    incursions have been on the National Transportation Safety
    Board's Most Wanted List since 2001.
        This program was re-baselined in September 2005 and as a
    part of that process, the FAA substantially changed its goals
    and reduced the number of airports to be served by 25 percent.
        The FAA also admitted that the cost of the program had
    grown from roughly $500 to $550 million, and the completion
    date would slip from 2007 to 2011. Ever since that re-
    baselining took place, this program has been declared as being
    on time and on budget.
        In Administrator Blakey's formal testimony, she points with
    pride that the FAA installed five of these systems in 2006, but
    she fails to mention that the agency schedule called for seven
    systems to be installed this year--that year.
        Today, the IG will report to us that since that initial re-
    baselining, the program's costs have grown by another $100
    million, and the program has gotten further behind schedule.
        Even more disturbing, the IG will testify that at present,
    the new systems are not delivering the safety benefits that
    were promised. Central to the FAA's decision to pursue this
    program was the plan to install new software upgrades that
    would greatly improve the equipment's ability to warn
    controllers of impending collisions between aircraft operating
    on converging runways.
        From my region of the country, the upgrades are necessary
    for--so that equipment can perform in rainy and foggy
    conditions, but controllers at SeaTac Airport tell me that when
    it rains, they observe so many false targets and hear so many
    false alarms that they have to turn the system down to its most
    limited setting, and use just 10 percent of its capability.
        It is precisely when the weather is bad that this
    technology is needed the most, but instead of getting the
    service promised on foggy days, the controllers have to send
    out a vehicle to the end of the runway to see whether the
    target they see on the ASDE screen is real aircraft, or just
    another false target.
        Every time they have a false target or a false alarm, the
    controllers have to fill out reports, and in the last 15
    months, they filled out more than 480 reports, including 25
    false alarms. That is more than 30 reports a month, roughly one
    false target alarm for every day of operation.
        Many incidents are now going unreported, because
    controllers are getting tired of filling out the forms. You
    don't have to use that airport every week like I do to know
    that in the Pacific Northwest, we do get a lot of rain.
        Madam Administrator, it shouldn't be a surprise to the FAA
    that safety technologies that don't work in the rain do not
    provide safety in my part of the country. Right now, the FAA is
    struggling to get those functions to work. Hopefully, they will
    succeed, but in the meantime, the rising costs are being passed
    along to taxpayers.
        That is because once again, according to the IG, the FAA's
    contract with the vendor does not have all the necessary
    taxpayer safeguards in place. The contract has a number of
    undefined requirements that are allowing costs to pile up while
    the system struggles to perform as promised.
        Now, I'm not talking about a contract from 20 years ago;
    I'm talking about a contract that is less than 2 years old. It
    is important to point out these problems persist at the FAA at
    the same time that Congress is considering a legislation to
    substantially alter how the FAA is funded.
        I view my mission as part of this reauthorization process,
    to ensure that this subcommittee continues to exercise
    appropriate oversight and budgetary control. These ongoing
    procurement problems at the FAA must not escape notice. Elected
    officials must continue to have the opportunity to withhold or
    redirect funding when the agency is not performing.
        Back during the failed Advanced Automation System, it was
    this subcommittee that began withholding funds, long before the
    FAA was prepared to recognize the extent of the failure.
    Continuing budgetary oversight is essential, whether we're
    talking about funds that are directly appropriated or funds
    that are borrowed under the administration's new proposed
    borrowing authority.
        I want to be clear. The role of this subcommittee is not
    just to cut budgets once funds are being wasted. To the
    contrary, in many critical aviation areas, this subcommittee
    has taken the lead in funding initiatives well before the FAA
    has decided they are a priority.
        I'll give you an example. For 3 of the last 6 years, this
    subcommittee has included funding well above the President's
    request to boost the number of FAA air safety inspectors.
        As the IG will testify this morning, the FAA still has a
    long way to go to ensure that the FAA's safety inspection force
    is adequately trained and deployed to deal with a growing
    amount of major aircraft maintenance that is being conducted
    overseas.
        The FAA has been losing their safety inspectors to
    retirement at a very rapid rate. If this subcommittee had not
    provided funding above the administration's request for these
    inspectors, the situation would be even more dire today.
        Similarly, the Administrator has requested funds in her
    2008 budget for both the ADS-B program and the SWIM program.
    These are critically important technologies that are needed if
    we're really going to launch the next generation of air traffic
    modernization.
        There are also two programs where this subcommittee has
    provided resources before the administration ever got around to
    asking for them. As a result, these programs are further along
    today because this subcommittee rejected the administration's
    request and funded them on our own.
        So I look forward today to discussing with the
    Administrator not just how the subcommittee will have control
    to stop wasteful programs, but also how this subcommittee will
    have the ability under the new funding regime to have funds
    that the agency desperately needs.
        The need to modernize our air traffic control system could
    not be more urgent. We have lost precious time and precious
    dollars, but given the daunting cost and urgency of this
    challenge, we must not throw dollars at programs without
    adequate oversight or fiscal control.
        We have to make sure that the taxpayer is getting what it
    pays for, and we have to quit saying that all programs are
    performing well when they're not.
        I look forward to working with the Administrator to make
    air traffic control modernization a near-term reality, and I
    know that Ranking Member Senator Bond does, as well. Senator
    Bond?

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Thank you very much, Madam Chair, and good
    morning, and welcome, Marion Blakey, Administrator, and Mr.
    Scovel, Inspector General of the Department of Transportation.
    We look forward to receiving your testimony.
        I must apologize in advance. If you know the Senate
    schedule, chaos, as always, is the rule for the day, and I am
    going to leave immediately to vote, and try to return so we can
    keep the hearing going. I'm sure you won't miss me, but I will
    look forward to reading your testimony.
        Administrator Blakey, I know your term as an administrator
    expires in September, and I appreciate the opportunity to thank
    you for your hard work and dedication in ensuring the United
    States' continuing leadership in maintaining a world-class
    commercial aviation industry.
        Before I discuss the budget, I acknowledge we're at a
    critical juncture in the future of the aviation industry. Not
    only is the current authorization for aviation programs and
    Vision 100, the Century of Aviation Reauthorization Act, set to
    expire, but the current tax authority that funds the Airport
    and Airway Trust Fund also expires at the end of the fiscal
    year.
        At this point, we're looking at at least two different
    versions of FAA reauthorization, the administration-proposed
    bill, and a draft bill proposed by the Senate Commerce
    Committee, which is, I gather, expected to be marked up over
    the next several weeks. I expect the House Transportation and
    Infrastructure Committee to draft and pass its own version of
    legislation.
        In any event, any FAA reauthorization must respect the
    existing role and jurisdiction of the Appropriations Committee,
    which has played, as the Chair has indicated, a critical role
    in the oversight of FAA programs, including the prevention of
    fraud and abuse, and ensuring that heartily needed, but under-
    requested funding, is provided.
        I think the most significant controversial issue facing us
    will be the amount and sources of funding that will be made
    available to support FAA programs under the reauthorization.
        In particular, the administration is proposing to establish
    new sources of income for financing aviation operations and
    capital improvements that moves away from relying primarily on
    ticket tax revenues and certain excise taxes, to a new system
    which includes revised user fees for commercial aviation and
    increased fuel taxes for general aviation, and reforms to the
    passenger facility charge program, and new bond financing
    through the Department of the Treasury.
        While I've not had an opportunity to examine adequately the
    administration's proposal, a reauthorization must provide a
    balanced system of funding to ensure the FAA and the aviation
    industry has an adequate, stable, and reliable stream of
    funding that will support the current and future needs of the
    aviation industry.
        It's especially important that we have adequate funds to
    support the NextGen Air Transportation System, which is
    intended to replace the 40- to 50-year-old system of radar and
    IT backbone with technology that will allow for some 3 times
    the current air traffic capacity.
        Finally, much of the initial debate over the
    reauthorization legislation resulted from FAA's belief that the
    Trust Fund was going bankrupt. However, the drop in revenues in
    the Trust Fund was largely due to a steep drop-off in passenger
    volume after 9/11.
        Increased confidence in aviation safety and the Nation's
    surging economy has resulted in increased passenger levels
    approaching the pre-9/11 levels, with continued growth likely.
    As a result, CBO projects the current system of taxation will
    be adequate to sustain the Trust Fund and associated funding
    needs for the foreseeable future.
        So I support a more balanced approach to the funding needs
    of FAA and its programs. There does not appear to be an
    immediate crisis that demands rapid legislative action. As for
    the FAA budget for 2008, the administration proposes $14.077
    billion in new spending commitments, a $404.5 million reduction
    from the 2007 level.
        At the same time, the FAA is proposing a new account
    structure, consistent with the anticipated passage of the
    administration's proposed new legislation.
        Let us leave aside a discussion of the desirability of the
    new account structure. The key funding issue in the budget
    request includes an increase of $352 million, or 4.2 percent,
    in operations; an increase of $8.37 billion in 2007 to $8.73
    billion in 2008; and a reduction of some $651 million, or 19
    percent, in the AIP program, from $3.4 billion to $2.75 billion
    in 2008.
        While I support the FAA operations increase necessary to
    fund additional air traffic controllers and air inspectors, I'm
    very concerned over the substantial cut to Federal investment
    in airport construction, most especially the funding reductions
    in the AIP.
        As the administration knows, the AIP program is critical to
    the future of commercial aviation in the Nation, and any
    shortfall in funding could undermine the infrastructure needs
    of airports, and most importantly, the funding needs of
    NextGen.
        In particular, the IG testimony indicates that the aviation
    industry serves some 700 million passengers per year, and
    projects this number to grow to over 1 billion passengers in
    2015.
        At the 35 busiest airports in the Nation, total operations
    are expected to grow by more than a third by 2020.
    Consequently, we cannot afford to nickel and dime our aviation
    needs, whether related to safety issues or infrastructure
    investments.
        The FAA is facing many other important issues regarding its
    oversight and administration of a number of its contracts
    designed to modernize FAA equipment.
        These issues include continued controversy over the NATCA
    contract, as well as issues related to cost, savings, and
    delays in programs, such as the Airport Surveillance Detection
    Equipment-X Program, the STARS program, FAA Telecommunications
    Infrastructure, or FTI program, and others.
        Also, as I discussed last year, the IG, in 2005, reviewed
    some 16 major acquisitions and found that FAA projects
    experienced a cost growth of over $5.6 billion, from $8.9
    billion to $14.5 billion, as well as significant delays in many
    of these programs.
        However, as the Chair has indicated, the FAA since has
    implemented a system of re-baselining its programs that have
    had delays or cost overruns. As a result, it's very difficult
    to examine adequately the programs as to projected cost savings
    and implementation dates.
        Instead of shortfalls and delays, the programs, for the
    most part, now appear to be meeting all implementation and
    funding requirements, regardless of prior problems or other
    concerns.
        Let's be clear. I'm concerned about this approach, since it
    has the feel of a three-card Monte game, where a sleight of
    hand guarantees the dealer wins. I'm sorry, but that is what it
    looks like to me.
        I'm disturbed the FAA appears to be using re-baselining to
    meet time and cost requirements. We have to have a complete and
    true understanding of the real cost of FAA programs, the amount
    of savings, any delays, and what those delays mean to cost and
    on-time requirement of related programs.
        This information is critical, since it will provide us with
    the necessary and real cost information that should be driving
    our appropriations decisions.
        I thank you, Madam Chair, and our witnesses. I look forward
    to coming back and pursuing these in the question and answer
    session. Thank you.
        Senator Murray. Senator Lautenberg.

                    STATEMENT OF SENATOR FRANK R. LAUTENBERG

        Senator Lautenberg. Thank you, Madam Chairman. Not only is
    the situation puzzling, because it never ceases to amaze me
    that despite the enormous growth in air travel, we're not
    matching it by acknowledgement that we need better planning and
    more resources to continue to meet these greatly expanding
    needs.
        In order to maintain a level of safety, we've got to hear
    FAA plans to meet these obligations, and realistic financing
    requests to match it. The FAA's greatest assets are its loyal,
    capable people. Thank goodness we have them. But in many cases,
    we don't have enough of them.
        Now, although we've experienced an excellent period of
    safety for aviation, I'm concerned that the Bush administration
    is reducing the safety levels because of structures in place
    that call for cuts in funding. Many of the air traffic control
    facilities are understaffed, and we need a surge of
    controllers, in my view.
        Safety inspectors are overextended, and cannot adequately
    oversee this industry properly, especially in non-certified
    repair stations. With one in four flights running late, the
    delays are overpowering the system, and it's time to upgrade
    the 1970s-era equipment.
        Now, I come from the corporate world. I ran a large
    company, we continuously modernized our computer systems. That
    was our basic business. As a matter of fact, I was in shock
    when I came here just over 20 years ago to see that the
    equipment being used by the FAA was impossible to give away,
    because the maintenance costs were more than the value of the
    equipment itself.
        So when I see what is being proposed--to divide the
    research and development functions of FAA--I don't think it's a
    smart move.
        At the FAA Tech Center in Pomona, New Jersey, so much
    aviation research gets done, but it's funded through different
    stovepiped programs. The budget would further divide and
    potentially even duplicate research functions by combining the
    facilities and equipment budget with the operations budget.
        Also, as President Bush continues to propose cuts to the
    Airport Improvement Program, he's got to know that, by now,
    this proposal will not fly in the Congress. The skies are ever
    more crowded, and even if you depart on time, in many
    instances, when you get to the destination, there are no gates.
    There's no opportunity to move air traffic expeditiously.
        So, Madam Chairman, we've had a good safety period, and we
    commend FAA and those involved in the management of the system,
    but we cannot cut important safety projects that are funded
    through AIP, like runway safety area upgrades. The list goes on
    with controller shortages, and this Bush budget proposal
    doesn't match with the realism that we're looking at with the
    expansion of passenger traffic in the years ahead.
        So I look forward to this appropriations examination. It's
    clear that Congress needs to maintain a strong oversight review
    of what is taking place in FAA, and Madam Chairman, I think
    we're doing exactly that, and I commend you for it.
        Senator Murray. Senator Stevens.

                        STATEMENT OF SENATOR TED STEVENS

        Senator Stevens. Thank you very much, Madam Chair. I think
    this bill shows the ludicrous problem of the battle of the
    earmarks. If I understand right, this bill started off in March
    2006 with a request for planning for 2008. The President gave
    us a budget in February of this year. We're going to pass it in
    September of this year, and it's supposed to carry the monies
    for the period from September or October of this year until
    September of next year.
        Now, the difficulty is, and particularly in the field of
    aviation, the scenery is changing, and it is changing very
    rapidly. The demands for modernization are there. The costs of
    planning for the next generation are just overwhelming.
        I wish that the Administrator had your immunity, Mr.
    Inspector General, because you have the luxury of looking at
    the way things are done without the burden of deciding how the
    money is going to be spent and who's going to meet the
    emergencies, and whether or not you have to short one area in
    order to take care of the hurricanes, typhoons, earthquakes,
    fires, and really, this rapid demand for change.
        As a matter of fact, several of the things that's been
    mentioned here this morning came about because of earmarks.
    During the process of the last few years: ADS-B, Capstone, a
    lot of the other things, even the money to start the
    modernization program came from earmarks.
        So I hope the President will ask you to stay. We're in the
    middle of a modernization, in the middle of change. We're in
    the middle of reauthorization. I think it would be a travesty
    if we had to try to figure out how we can get your successor
    confirmed and through this period that we're in.
        I do hope that we can act on the bill that is before our
    authorization committee. Many of us are on that one, too, but
    as a practical matter, there are some serious problems there,
    and I'm not sure we won't end up with just what we did before,
    which was a 2-year extension until we worked it out.
        I hope we can avoid that, but that is what happened last
    time, and with a different administration and a different
    control of Congress. So it is not something that is political.
    It's something that's just a problem of the way we do
    oversight.
        But I am here to thank you very much. No state has more
    impact from FAA than mine. Seventy percent of the people who go
    home in my state go home by air. You can't get there year-round
    any other way.
        Without the FAA, without the safety that is involved,
    without the programming that you give us, and without really
    the willingness to modernize--ADS-B started in Alaska. Capstone
    started in Alaska. The whole concept of modernization started
    in Alaska, because there's a need for it, but there wasn't any
    money in the budget.
        So I hope people keep that in mind as we go through this.
    This budget may be changed, but it's going to be awfully
    difficult to put other things in the bill, as I understand, the
    penchant of some people to impose earmarks. Without earmarks,
    the modernization of the FAA is going to be 4 or 5 years
    behind, because we cannot have the President anticipating a
    year and a half in advance on what to put in a bill that takes
    us almost a year to pass.
        Now, I think it's time for us to wake up and do the job
    right, and stop these people from screaming about earmarks,
    because this bill--this agency won't survive without earmarks.
    Thank you very much.
        Senator Murray. Senator Allard.

                       STATEMENT OF SENATOR WAYNE ALLARD

        Senator Allard. Well, first of all, Madam Chairman, I want
    to thank you for holding this hearing. We've got a great record
    on aviation. We've got the most advanced aviation system in the
    world. We're recognized for that. We have the safest.
        The challenge is to keep that record up, keep it
    economically feasible, flexible, and friendly, and still
    maintain that safety record. I would caution the Administrator,
    as well as the Inspector General, against getting so bogged
    down in procedure that we actually miss out on some new
    technology with the potential to enhance safety.
        I'm very much aware of new technology that is being used in
    other places in the world, in France, in Germany, in Hong Kong,
    but we're not able to use it in our airports, which will help
    us make those airports safer. And I happen to feel that it's
    proving itself.
        And, as you know, we obviously need to bring on new
    technology. We need to constantly be working to be aware of
    these new technologies and bring them on as soon as possible,
    because any unnecessary delay could lead to increased risk to
    passenger flight. On the other hand, if you move it in too
    fast, there's a risk there, too. So we have to reach a proper
    balance.
        But when we have technology that's being used in other
    countries at very busy airports, and we haven't yet accepted
    into our system, I think we really ought to take a very, very
    serious look at it, because it's beginning to prove itself.
        So again, we have challenges with upgrading, expanding, and
    maintaining what we have. We want to make sure that we have the
    concerns of the public in mind. You know, there's various
    interests in aviation.
        You have the private interest, you have the public
    transportation interest, and a lot of local interest. But we
    need to make sure that we don't lose sight of new technology as
    it comes along, and hopefully, in this particular piece of
    legislation, we can recognize that.
        Thank you very much for both of you for coming and
    testifying here, Administrator Blakey and Inspector General
    Scovel. I look forward to your testimony.
        Senator Murray. Thank you very much. We obviously have a
    vote on. We're going to be transferring hats back and forth
    here as we try and balance getting to the floor.
        So Administrator Blakey, I'll have you go ahead and begin
    your testimony. Hopefully, Senator Bond will be back. I'm going
    to go to vote as soon as he returns, and I will be delayed
    coming back. We will try and continue having questions, and may
    have to go into a short recess until I return, if we don't have
    any other members here. I ask all the witnesses to bear with us
    as we get through this, but I appreciate your patience.
        Administrator Blakey, we'll start with you.

                       STATEMENT OF HON. MARION C. BLAKEY

        Ms. Blakey. Good morning, and thank you, Chairman Murray,
    and I appreciate the opportunity to testify before you, and to
    address the FAA's 2008 budget request.
        Our goal is, as always, to provide the world's safest air
    transportation system and to use the taxpayer's investment
    wisely. As always, we appreciate the wisdom, insight, and
    guidance that this committee provides, because this is a
    historic time for aviation. It is the golden age of safety.
        Commercial aviation has never been more safe, and it
    continues to get safer still. But this period is historic, as
    well, because we have the opportunity to reshape the FAA's
    funding stream.
        The bill before the Senate represents an opportunity for
    FAA's funding mechanism to switch from one that is patched
    together and instead become a dependable, consistent stream on
    which businesslike investments can be made.
        In the mid-1990s, Congress made it clear that the FAA
    needed to drop the blank check mentality. We made sweeping
    changes in our hiring and acquisition practices. We've taken
    what was a mess of redtape, and transformed it into a bottom-
    line organization.
        A hundred percent of our major capital programs are right
    now on time and on budget. The criticisms of the past are no
    longer the case. We're spending wisely, and the beneficiary is
    the taxpayer.
        With delays setting records, and airlines, passengers,
    pilots, controllers, lining up to emphasize the need for
    modernization, there's little question that the solution is the
    Next Generation Air Transportation System.

                    THE NEXTGEN FINANCING REFORM ACT OF 2007

        The NextGen Financing Reform Act of 2007 is the vehicle
    that will allow us to free up gridlock in our skies and on our
    runways. The act's linchpin is financing reform. Without this
    financing reform, NextGen simply will not happen on time, and
    the longer we take to put NextGen in place, America's economy
    will suffer.
        As you know, the FAA's current revenue stream has no direct
    link to our costs. We also have major inequities between what
    users pay and the services that they receive.
        The Financing Reform Act will tie cost directly to revenue,
    and give us the funding we need for the NextGen system, while
    maintaining the congressional oversight that the public and we
    expect. All revenues we collect will continue to be subject to
    appropriations.
        There's a larger issue here, as well. U.S. leadership in
    aviation is in jeopardy. Europe is moving full steam ahead with
    its modernization plan. Japan, India, Mexico, Canada, are all
    moving forward aggressively with the latest in satellite
    technology.
        Getting bogged down in a protracted debate over who pays
    for the NextGen system will prevent us from actually deploying
    one, ceding our place as the world leader in aviation.
        We're already working to leverage FAA resources. As I said,
    100 percent of our major capital programs are on schedule and
    on budget. We ended fiscal year 2007 at 97 percent. We've
    reduced layers of management and consolidated facilities,
    focusing our resources on providing service to our customers.
        Our safety metrics speak for themselves. Four errors per
    million air traffic activities, making the safest mode of
    travel even safer.
        It's a track record I think we are very justifiably proud
    of together, and while we're confident that our fiscal year
    2008 budget request hits the mark, we have changed the funding
    lines, so Operations and F&E have been replaced with a Safety
    and Operations account, and an Air Traffic Organization
    account, both of which will closely match our lines of
    business.

                            FISCAL YEAR 2008 REQUEST

        Under our reformed proposal, these accounts would be funded
    by a combination of fees, taxes, and a significant general fund
    contribution. Our 2008 request provides almost $2 billion for
    Safety and Operations. The bulk of that is directed to our
    aviation safety efforts and workforce, and would increase our
    inspector workforce by 177.
        Our Air Traffic Organization budget provides $7 billion for
    operating expenses. This will fund 1,420 new air traffic
    controllers. We have no shortage of recruits--far from it. This
    budget request makes sure that we'll have the right number of
    controllers working in the right place at the right time.
        The budget request provides unprecedented levels of funding
    for the NextGen system. Capital funding would increase by over
    40 percent, from $2.5 billion in fiscal year 2008 to $3.5
    billion by 2012.
        Our proposal would also grant the administration authority
    to borrow up to $5 billion from the Treasury starting in 2013.
    The funds would be dedicated to making capital investment in
    NextGen related equipment and facilities.
        This would leverage our limited resources to transition to
    the NextGen system. The proposal allows us to take on major new
    investments, while spreading the cost to our users over a 5-
    year period, making it easier to afford.
        Satellites will be the linchpin for the next generation of
    aviation. Specifically, ADS-B. ADS-B and SWIM are very critical
    technologies, as all who have supported them already know.
        Senator Murray. Administrator Blakey, if I could have you
    sum up real quick, I'm going to have to recess and get to the
    vote. Hopefully, Senator Bond will be back.
        Ms. Blakey. I'll be happy to. Our proposal also provides
    $2.75 billion for airports in grants and aid, and funds all of
    the high-priority safety and capacity projects. There's also
    $140 million for research engineering, and we are working in
    advanced areas like synthetic jet fuel.
        But with all of that said, the system is safer than ever.
    The capacity of our airports, our runways, and our skies is
    still stretched thin. So if we fail to take action, we believe
    that the record we set last year for delays will be eclipsed
    again and again.

                               PREPARED STATEMENT

        Therefore, we're going to have to move to address these
    issues with the NextGen system. Thank you very much.
        [The statement follows:]
                  Prepared Statement of Hon. Marion C. Blakey
        Good morning, Chairwoman Murray, Senator Bond and members of the
    subcommittee, I am delighted to be here today and am deeply
    appreciative for the opportunity to talk to you about the Federal
    Aviation Administration's (FAA) budget request. It is a pleasure to
    appear before you on behalf of the 44,000 men and women of the FAA to
    discuss our fiscal year 2008 budget request. As this is my first
    appearance before you in the 110th Congress, I would like to take this
    opportunity to acknowledge the new chairman and ranking member of the
    subcommittee and say that I look forward to working with you on what
    I'm sure will be a broad range of aviation issues. I also would like to
    thank you for your actions on our behalf during the full length
    continuing resolution which has allowed us to ensure continued safety
    and efficiency of our services on behalf of the flying public.
        Before discussing next year's budget, I would like to briefly
    mention the administration's reauthorization proposal introduced as S.
    1076--``Next Generation Air Transportation System Financing Reform Act
    of 2007.'' The simultaneous expirations at the end of September of the
    funding authorization for the FAA's current programs as well as the 10-
    year term for existing taxes that fund the Airport and Airway Trust
    Fund (Trust Fund) present us with a unique opportunity.
        Let me just emphasize how important I believe it is to move toward
    a stable, cost-based funding structure to ensure that FAA's costs and
    revenues are better aligned and that our stakeholders are treated
    equitably and reap the benefits of their investments in the system. S.
    1076 offers a simple, transparent, and repeatable methodology to
    equitably allocate and recover the FAA's costs among aviation users. It
    also contains other needed programmatic reforms that provide airports
    with greater financing flexibilities and addresses environmental and
    congestion challenges.
        While S. 1076 has generated some debate already, I think we can all
    agree that we share two fundamental goals for reauthorization: first,
    that we continue to keep our air transportation as safe as we possibly
    can; and second, that we have the ability to grow the system to meet
    our Nation's future air transportation needs--both in the short and
    long term supported by a predictable funding system.
                            fiscal year 2008 budget
        I will now turn to the issue at hand. The fiscal year 2008 budget
    requests a total of $14.1 billion to improve safety, reduce congestion,
    and improve global connectivity. The request supports our financing and
    programmatic reforms and focuses on accountability and performance. For
    several years, we have pushed to manage more effectively, rein in
    costs, and better respond to our customers' needs.
        As always, safety is FAA's primary concern. Our collaboration with
    industry speaks for itself: we are enjoying the safest period in
    aviation history. At the same time, the demand for FAA services has
    never been greater. We oversee about 50,000 flights per day. In 1995,
    the system supported about 545 million passengers. In 2005, it was 739
    million. Forecasts estimate one billion passengers annually by 2015.
        Given the anticipated growth--both in terms of passengers, and,
    critically, in the number of aircraft operations--we know that our
    services must adapt to meet the demand. We also know that the
    complexity of the future operating environment--with evolving fleet
    mixes, new aircraft technology, and environmental constraints--must be
    approached in partnership with our customers. This budget demonstrates
    a long-term commitment to the Next Generation Transportation System
    (NextGen), not as a pie-in-the-sky vision, but as embodied by tangible
    systems, processes, and capital projects that will lead us to the
    future.
        For fiscal year 2008, FAA has prepared the budget in a new account
    structure that aligns with the financing reform proposal and the
    services that we provide. While the Grants-in-Aid for Airports (AIP)
    and Research, Engineering, and Development (R, E, & D) accounts remain,
    the Operations and Facilities and Equipment accounts have been replaced
    with two new accounts. There is a Safety and Operations account and an
    Air Traffic Organization (ATO) account that align with our lines of
    business. Under our reauthorization proposal, beginning in fiscal year
    2009 these accounts would be funded by a combination of user fees,
    taxes and general fund contributions. The General Fund contributions
    for each account covers specific activities that benefit the public,
    such as safety oversight and public sector use of air traffic control
    services. We consider this structure to be more consistent with and
    supportive of our business-like approach by expanding our comprehensive
    pay-for-performance programs, consolidating operations, improving
    internal financial management, and delivering benefits to our
    customers.
                             safety and operations
        The fiscal year 2008 budget requests $2 billion for Safety and
    Operations. Most of the funds requested for Safety and Operations in
    fiscal year 2008 support maintaining and increasing aviation safety and
    efficiency, reflecting the President's commitment in this area. Of this
    request, $1.1 billion is for the agency's Aviation Safety (AVS) office.
    This level supports increasing the AVS safety workforce by 87
    inspectors and 79 other safety staff.
        The fiscal year 2008 budget requests $12.8 million for Commercial
    Space Transportation to continue its commitment to timely and
    responsive licensing and regulatory processes designed to enable a
    safe, secure, efficient, and internationally competitive U.S. space
    transportation industry. Commercial space transportation is an exciting
    area, and we are committed to supporting its continued growth.
        The Budget also requests $758 million for Staff Offices to fund
    administrative and managerial costs for FAA's international,
    engineering, and development programs, as well as policy oversight and
    management functions.
                            air traffic organization
        As a Performance Based Organization, the Air Traffic Organization
    (ATO) continues to provide safe, secure, and cost effective air traffic
    services. The budget requests $7 billion for ATO operating expenses. In
    fiscal year 2008, this will fund 1,420 new air traffic controllers to
    both address the projected 1,276 controller losses next year, and to
    fund a net increase of 144 controllers to meet increased demand for air
    travel.
        Recently, there has been a great deal of misinformation generated
    regarding controller staffing levels, and our recently updated
    controller staffing plan. Let me take this opportunity to assure you
    that our 10-year plan recognizes the dynamics of staffing to steady
    increases in overall traffic as well as accounting for workloads at
    individual facilities. We are planning for an average net increase of
    148 controllers every year for the next 10 years, resulting in a total
    count of about 16,000 controllers by 2015. FAA's goal is to have the
    right number of people in the right facilities at the right time. This
    includes using overtime more strategically. The overtime levels for
    controllers are trending downward. The overtime rate in fiscal year
    2007 to date is 0.9 percent, which is down from 1.1 percent in fiscal
    year 2006 and 1.6 percent in fiscal year 2005.
        FAA is meeting its recruiting needs, with new people coming into
    the applicant pool on a daily basis. We have actually selected and
    filled all en route controller slots for fiscal year 2007 and
    tentatively selected the majority of terminal controllers for fiscal
    year 2007. Our plans are already progressing for filling specific
    controller slots in fiscal year 2008. We have targeted vacancy
    announcements in cities around the country to ensure we have sufficient
    applicants in areas where we expect to need controllers in the future.
        Most importantly, the system is safe. In fiscal year 2006, we
    achieved our performance safety metric on operational errors which was
    down to 4.11 errors per million activities. In fiscal year 2007, the
    operational error rate is tracking even lower.
        In October 2005, ATO completed the largest non-military A-76
    competition in history. That action will save the agency $51.7 million
    in fiscal year 2008, with a 10 year projected savings and cost
    avoidance totaling almost $2.2 billion. The contract not only saves
    money, it also commits the vendor to modernize and improve the flight
    services we provide to general aviation pilots. In addition, the
    employees who left Federal service as a result of this transition were
    given offers to work for Lockheed Martin, the successful bidder of the
    contract.
        In fiscal year 2006, ATO consolidated its administrative and staff
    support functions from 9 service areas to 3. This will allow us to
    provide better service to customers while saving an estimated $360 to
    $460 million over the next 10 years. In fiscal year 2008, we anticipate
    savings of $29 million from Service Area Consolidation.
                           nextgen and capital needs
        The fiscal year 2008 budget requests $2.3 billion for ATO capital
    programs and more than $100 million for Safety and Operations capital
    programs. Much of this request will support the ultimate NextGen
    vision--with $173 million requested for the transformational NextGen
    activities detailed below, and over $950 million for current programs
    that contribute to the NextGen effort. The request also supports the
    investments needed to keep the current National Airspace System (NAS)
    functioning. We know that it will take not only funding, but new
    management approaches, to transform today's aviation system to meet
    tomorrow's needs. We have done much in recent years to break down
    stovepipes and plan in a more integrated manner, but NextGen requires
    us to go further. The new OEP--formerly the Operational Evolution Plan,
    and now the Operational Evolution Partnership--is a big step in the
    right direction. OEP has gone from a 10 year rolling plan to a more
    comprehensive roadmap for how we get to NextGen. The emphasis is on
    ``partnership''--within and between major FAA organizations, with the
    Joint Planning and Development Office (JPDO) and its other partner
    agencies, the private sector, and, of course Congress.
        One of our greatest challenges is our ability to define what the
    future system will look like. What technologies will the future system
    be comprised of ? In the coming months, the JPDO will publish the first
    official NextGen Enterprise Architecture and Concept of Operations. The
    significance of these foundational documents should not be understated.
    They are essential to understanding the transformed operational
    environment, which will allow us to more precisely develop a plan for
    achieving it, and will provide the basis for architecture-based,
    quantitative resource planning. Our reauthorization proposal is
    designed to strengthen the key linkages needed to implement NextGen,
    and to deliver those resources when they are needed.
        Given demand growth, we know it is essential to improve operations
    well in advance of 2025. To do so, we are requesting funding to stage
    demonstrations and develop critical infrastructure that will better
    define how we can move to trajectory-based operations and identify
    opportunities for early implementation of promising technologies and
    practices. The demonstrations will also help us to eliminate certain
    concepts and technologies from further consideration, thereby allowing
    us to focus our resources more effectively going forward. Ultimately,
    trajectory-based operations will allow pilots to select the most cost-
    effective, fuel-efficient routes, achieving substantial cost and time
    savings for our customers, while maintaining the highest levels of
    safety. In addition to these demonstration projects, our capital
    request funds a growing list of NextGen transformational technologies.
    Most significantly, these include Automatic Dependent Surveillance-
    Broadcast (ADS-B), the next generation of satellite-based surveillance
    technology; System-Wide Information Management (SWIM), which will
    provide a broad range of real-time information to users of the National
    Airspace System; and NextGen Network Enabled Weather, which will
    improve forecasting and information sharing and enhance safety.
        We are again requesting research funds to continue supporting the
    JPDO. As the unit that spearheads NextGen for the federal government,
    JPDO will continue defining the future operating environment,
    identifying demonstration opportunities, and working with the relevant
    agencies to implement them. We are also requesting funds to support
    wake turbulence research, the results of which will help us increase
    capacity while maintaining safety. In addition, research funds would be
    directed to environmental research, especially noise and emission
    control, critical to the design of the future system. And finally, we
    would fund further research on unmanned aircraft systems, a likely
    addition to the future fleet mix.
                        grants in aid for airports (aip)
        The FAA is committed to a healthy national air transportation
    system. Airports are a key part of the system, and that includes small
    airports that rely most on AIP funding to help meet their capital
    needs.
        We have proposed changes to the Federal funding programs, which
    will stabilize and enhance these funding sources for airports. With our
    proposed programmatic changes, the $2.75 billion requested in our
    budget will be sufficient to finance airports' capital needs and meet
    national system safety and capacity objectives. These changes will
    assure that the small airports continue to benefit from the funding
    formulas currently in place, and provide FAA and States with the level
    of discretionary AIP funds we need to finance our critical safety,
    capacity and security requirements. In addition, the proposed increase
    in the maximum passenger facility charge from $4.50 to $6.00 will
    provide commercial airports of all sizes with additional local revenues
    to meet their capital needs. This proposal would bring an additional
    $1.5 billion annually to commercial airports, with $1 billion going to
    large airports and $500 million going to small airports.
               research, engineering, and development (r, e, & d)
        The fiscal year 2008 request for R, E, & D is $140 million. The
    request includes $91.3 million for continued research on aviation
    safety issues. The remaining research funding is for reduced congestion
    and environmental issues, including $14.3 million for the JPDO to
    continue defining and facilitating the transition to NextGen. An
    additional $3.5 million in support for JPDO is contained in the ATO
    capital request, related specifically to the work on the demonstration
    projects.
                             flight plan 2007-2011
        The Flight Plan is FAA's rolling 5-year strategic plan that we
    first undertook in 2004. As scheduled, we updated it last fall, with
    input from our internal and external stakeholders. The Flight Plan is
    organized around the agency's primary goals: increased safety, greater
    capacity, international leadership, and organizational excellence. The
    Flight Plan is our blueprint for managing the agency. It has made FAA
    more business-like, performance-based, and customer-focused.
        As part of our Flight Plan, each FAA organization now has its own
    individual business plan. Each of these plans is linked to the Flight
    Plan, budgeted and tied to what the customers need. The agency's
    business plan goals have been built into a performance-based tracking
    system that is posted to the FAA website each quarter. It lists each of
    the agency's goals, performance targets, who is responsible, and the
    status of each. Using this data, the senior management team conducts a
    monthly review of our performance. When used with other cost and
    performance data, the Flight Plan information clearly and precisely
    identifies the effectiveness of a program across the entire agency.
    With this perspective, the agency is able to capitalize on successful
    strategies. Let me address our performance and requests under each of
    our goals.
                                increased safety
        At FAA, safety is our top priority, and approximately 66 percent of
    our budget request, $9.4 billion, supports this goal. Over the last
    three years, the accident trends in both commercial and general
    aviation have been at all-time lows. Commercial space transportation
    continues its remarkable safety record, without a fatality, injury, or
    any significant property damage to the public. The Flight Plan
    continues our commitment to reduce commercial and general aviation
    fatal accidents. We continue to strive toward a 3-year rolling average
    for our commercial airline fatal accident rate of 0.010 fatal accidents
    per 100,000 departures or below.
        We have achieved the highest safety standards in the history of
    aviation. Even so, our goal is--as always--to continue to improve
    safety. We address our operational vulnerabilities to reduce risk. One
    major key to our successful safety efforts is cooperation among our
    stakeholders. We constantly work with our stakeholder groups to meet
    our safety goal. Each group helps us with technology, communications,
    and its own unique expertise. In our responsibility for safety
    oversight, we work with them to establish their own safety management
    systems to identify potential areas of risk. Then we work together to
    address these risk areas.
        To help reduce runway incursions, we deployed the Airport Surface
    Detection Equipment-Model X (ASDE-X) warning system at 5 major airports
    in fiscal year 2006. We also strengthened the airfield paint markings
    standard for taxiway centerlines at 72 large airports to alert pilots
    when they are approaching hold short lines so they won't inadvertently
    enter a runway without a clearance.
        Our efforts also are helping controllers do their jobs more safely,
    especially when it comes to tracking and eliminating operational
    errors. In response to a long-standing recommendation by the Department
    of Transportation Inspector General and the National Transportation
    Safety Board to improve reports of operational errors, we've added a
    new initiative to automate data collection. The Traffic Analysis and
    Review Program--known as ``TARP''--is a state-of-the-art traffic
    analysis and playback system that will improve operational error
    identification and quality assurance. We're putting the software in
    place for use next year, with all installations complete by 2011. The
    high-fidelity, near-real time playback feature of TARP will also
    support more effective and efficient air traffic controller training.
        At airports, over 48 percent of our AIP grants go to safety-related
    projects, such as upgrades to runway safety areas, runway safety action
    team recommendations, purchase of airport rescue and fire fighting
    vehicles, and airfield signing, marking and lighting. AIP also supports
    projects that reduce runway incursions. For example, end-around
    perimeter taxiways at Atlanta and Dallas-Fort Worth will not only
    increase capacity, but will also reduce the risk of runway incursions
    by substantially reducing the number of runway crossings.
        The work of the Commercial Aviation Safety Team (CAST), which
    includes representatives from government, industry, and employee
    groups, has been instrumental in using data to drive decisions. The
    team's disciplined and focused approach to analyzing accidents and
    incidents, identifying precursors, and developing targeted
    implementation strategies helped to reduce the risk of an airline fatal
    accident rate by 60 percent in the last 10 years. We are also working
    with this team to develop new metrics and goals to more effectively
    measure performance in commercial aviation safety.
        Finally, we continue our work to expand the growing field of
    commercial space transportation. In 2006, there were seven commercial
    launches. We are issuing experimental permits and are now ready to
    grant safety approvals of commercial space launch and reentry vehicles,
    safety systems, processes, services and personnel. We met our
    commercial space launch target and continued improvement of internal
    processes and partnerships with the Air Force, other government
    agencies, and the commercial space transportation industry.
                              increasing capacity
        While safety is always our primary concern, our mission includes
    expanding capacity throughout the aviation system--both in the air and
    on the ground. The fiscal year 2008 budget requests $3.6 billion to
    support expansion of capacity on the ground, in the form of new
    runways, and the continued deployment of new technologies that allow
    more efficient use of the system. Given the anticipated growth--both in
    terms of passengers, and, critically, in the number of aircraft
    operations--we know that our services must adapt to meet the demand. We
    also know that the complexity of the future operating environment--with
    evolving fleet mixes, new aircraft, technology, and environmental
    constraints--must be approached in partnership with our customers.
        Since fiscal year 2000, FAA has provided approximately $1.7 billion
    in AIP funding to increase capacity and decrease delays at the most
    congested airports in the country. These 13 new runway projects have
    provided these airports with the potential to accommodate 1.6 million
    more annual operations. In addition, funding is being provided to two
    of the busiest airports in the United States (Atlanta and Dallas-Fort
    Worth) to construct end around taxiways which improves efficiency, but
    eliminates runway crossings that improve airfield safety.
        Every day, our capacity accomplishments, such as Domestic Reduced
    Vertical Separation Minimum (DRVSM), help provide more economical and
    efficient aircraft operations. DRVSM created an additional six layers
    of cruise levels at higher altitudes enabling aircraft to operate at
    more fuel-efficient cruising altitudes while also increasing system
    capacity. Implemented in fiscal year 2005, DRVSM was estimated to yield
    over $5.3 billion in savings from fiscal year 2005 through fiscal year
    2016, but with the rise in jet fuel prices, the savings will exceed
    $13.4 billion, a 152 percent increase.
        Advanced Technologies and Oceanic Procedures (ATOPs) are now
    available in 24 million square miles of airspace. ATOPs set the stage
    for reducing aircraft separation from 100 nautical miles to 30. ATOP
    modernizes the systems and facilities we use to manage over 24 million
    square miles of airspace over the Atlantic and Pacific Oceans. Using
    ATOPs, the Atlantic routes will save airlines 6.5 million pounds of
    fuel and $8 million per year.
        Three operating capabilities are key to handling the traffic demand
    forecast for 2025 and beyond: Navigation, Communications, and
    Surveillance. We have already developed design criteria as well as
    aircraft and operator requirements for Required Navigation Performance
    (RNP) approaches--a critical element of NextGen's near term operational
    environment. We published 6 special RNP approaches in 2005, 28 in 2006,
    and set a goal of 25 each for fiscal year 2007 and fiscal year 2008. In
    addition to its safety benefits, we expect RNP to help keep runways
    accessible and that could mean fewer canceled or diverted flights,
    thereby saving time and money.
                            international leadership
        The United States established world leadership in aviation with a
    consistent commitment to make safety our most important export. Today,
    FAA has operational responsibility for about half of the world's air
    traffic, certifies more than two-thirds of the world's large jet
    aircraft, and provides technical assistance to more than 100 countries
    to improve their aviation systems. In fiscal year 2006 alone, FAA
    provided technical guidance and training to 66 countries and 5
    international organizations. The fiscal year 2008 budget requests $78
    million for global connectivity activities so FAA can be even more
    globally focused, helping to ensure that U.S. citizens can travel as
    safely and efficiently around the world as they do at home, and
    strengthen America's aviation leadership role in both safety and air
    traffic control.
        We cooperate with bilateral and multilateral partners in Europe and
    Asia to negotiate executive agreements and implementation procedures
    supporting the transfer of aviation products to help lower accident
    rates in areas that are experiencing substantial growth in operations.
    We have also developed initiatives to collaborate with key
    international partners to implement NextGen technologies globally as
    they become available to improve aviation safety and capacity. Last
    June, FAA entered into a cooperative agreement with European aviation
    organizations to participate in each other's air traffic management
    modernization programs to harmonize operations. These efforts are
    essential to seamless operation of aircraft.
        We are also leading the world in the development of both private
    human spaceflight and commercial spaceports.
                           environmental stewardship
        The FAA is committed to managing aviation's growth in an
    environmentally sound manner. Indeed, NextGen recognizes the need to
    develop and insert technology to reduce levels of aviation noise and
    emissions, thereby reducing environment as a constraint on capacity.
    The fiscal year 2008 budget requests $354 million to support
    environmental stewardship for noise mitigation, air and water quality,
    fuel efficiency, environmental streamlining, and facility remediation.
    We are on track to reduce the impacts of airport noise on more than
    100,000 people over the next 5 years through AIP grants in our fiscal
    year 2008 budget.
        In April 2006, the Office of Airports issued its revised
    environmental guidance handbook. This handbook is the most recent
    product in our continuing efforts to meet the streamlining goals of
    Vision 100 and the President's Executive Order (13274) on environmental
    stewardship and streamlining of transportation infrastructure projects.
    Recent environmental review for capacity enhancing projects at O'Hare,
    Dulles, and Philadelphia Airports demonstrated that this integration
    process produces meaningful results.
        We are also working with our Center of Excellence for Aircraft
    Noise and Aviation Emissions Mitigation to foster breakthrough
    scientific, operations, and program advances. We call the Center
    ``PARTNER'', and it truly is an excellent partnership of government,
    academic, and industry participants--led by MIT. Our work this year
    includes Continuous Descent Approaches to airports that can reduce
    noise, emissions, and fuel use; the feasibility of alternative fuels
    for aircraft; and assessing fuel burn reduction through en route
    optimization. In fiscal year 2008, with our reauthorization and budget
    request, we plan to expand PARTNER's work to develop and certify lower
    energy, emissions, and noise engine and airframe technology over the
    next 10 years.
                                    security
        While the U.S. Department of Homeland Security's Transportation
    Security Administration (TSA) has primary responsibility for
    transportation security, FAA also works closely with TSA and other
    federal agencies to support aviation security, transportation security,
    and other national security matters. FAA also has responsibility for
    the security of its personnel, facilities, equipment and data. FAA
    ensures the operability of the national airspace, which is essential to
    the rapid recovery of transportation services in the event of a
    national crisis. The budget request includes $246 million to continue
    upgrading and accrediting facilities, procure and implement additional
    security systems, enhance IT security, and upgrade Command and Control
    Communications equipment to meet the increased national security
    demands that have resulted since the September 11 attacks.
                           organizational excellence
        The budget requests $384 million to support our organizational
    excellence initiatives. FAA's progress over the past four years has
    been steady, as we've embraced the vision of the President's Management
    Agenda (PMA) and its strategy to improve management throughout the
    Federal Government. Through the Flight Plan and PMA, we've made
    significant management gains relating to human capital, competitive
    sourcing and consolidations, financial performance--including
    controlling costs; and, in terms of accountability to Congress, the
    taxpayers, and our customers.
       controlling labor costs/pay-for-performance--human capital reform
        We know that labor costs drive a significant share of our budget,
    and we have been working to slow the rate of growth of these costs, as
    was evidenced by our efforts in the recent controller negotiations.
    We're also increasing workforce productivity in several ways and we are
    on track to achieve cost efficiencies of 10 percent by fiscal year 2010
    in controller staff costs. We achieved the first 5 percent of this goal
    in fiscal years 2005-2006 by staffing our facilities based on traffic
    levels and controller workload, and through imposing greater scrutiny
    of controller duties that take them away from controlling traffic. Our
    budget request assumes we will achieve controller productivity
    improvements of 2 percent in both fiscal years 2007 and 2008.
        Our improved oversight and proactive management of our worker's
    compensation caseload resulted in a cost avoidance of $5.5 million in
    fiscal year 2005 and $7 million in fiscal year 2006. The estimated cost
    avoidance for fiscal year 2007 is $7 million.
        I have mentioned in the past of ATO's efforts to streamline its
    organization. Over the last several years, ATO reduced its overhead
    expenses by cutting multiple levels of senior management, reducing its
    executive ranks by 20 percent. In addition to the Service Area
    Consolidation noted above, ATO has used Activity Value Analysis to help
    streamline its operations, and eliminate and consolidate administrative
    staffs and support functions. Since fiscal year 2003, ATO non-safety
    workforce was reduced by 16 percent.
        Many of the efficiencies I've noted are the result of the personnel
    reform that was granted to the agency in 1996. It has enabled FAA to
    transition from the traditional General-Schedule pay system to pay-for-
    performance. Accountability for results is systemic throughout our
    organization, with 80 percent of our employees on a pay-for-performance
    system, including our executives. Flight Plan performance targets must
    be achieved before annual pay raises are calculated. The system
    provides discretion to reward high-performing employees, and incentives
    are available to ensure that quality work and innovation are rewarded.
        In December 2003, we strengthened the approval process for
    negotiated agreements by requiring, among other things, an analysis of
    the budget impact of all proposed agreements.
          smarter capital investment choices and improved performance
        A capital investment team was created in 2004 to review financial
    and performance data. The team completes an evaluation of baseline
    performance and includes associated variances, obligations, schedule
    milestones and earned value management (EVM) data. EVM will provide an
    early warning for potential and actual variances as well as help the
    program manager develop corrective actions. The members of this team
    apply a business case approach to each project as the program is
    assessed. Since April 2004, over 100 projects have been reviewed. Seven
    major projects (a total of $60 million) have been significantly
    restructured and segmented. Three projects were terminated. These
    changes alone resulted in $460 million in lifecycle savings to FAA. In
    the fiscal year 2006 Flight Plan, all of our major capital programs
    were on schedule and we missed only a single program milestone. As we
    move to the NextGen environment, it will be critical to maintain
    rigorous oversight of our capital investments.
                                     saves
        The Strategic Sourcing for the Acquisition of Various Equipment and
    Supplies (SAVES) initiative is an ambitious effort begun in fiscal year
    2006 to implement best practices from the private sector in the
    procurement of administrative supplies, equipment, and IT hardware. It
    is expected to achieve $5 million in savings in fiscal year 2007 and
    annualized savings of $6 million thereafter.
                   improved financial management performance
        We're making significant strides in improving our financial
    management. The Government Accountability Office (GAO) removed us from
    its high-risk list in 2006, a particular accomplishment since FAA
    Financial Management had been a high-risk item since 1999. We also
    received, for the third year in a row, the Association of Government
    Accountants' prestigious Certificate of Excellence in Accountability
    Reporting (CEAR) for our 2005 Performance and Accountability Report.
                                    closing
        I'll end where I began. At FAA, our top priority is safety. Because
    of the growth forecasted in air traffic, however, we must also focus
    significant energy on training and transitioning to a NextGen air
    transportation system. Even with new efficiencies, the current system
    cannot meet future demand. America's ability to launch NextGen depends
    on the enactment of FAA's reauthorization proposal and our fiscal year
    2008 budget request which supports it. I thank you for your time and
    look forward to discussing this legislation and our budget request in
    greater detail today and in the coming weeks.

        Senator Murray. Thank you very much. Inspector General
    Scovel, I'm going to take a short recess. I believe Senator
    Bond should be here in just a minute, and we will take your
    testimony, and then we'll move to questions. We'll go into a
    recess for a few minutes.
        Senator Bond [presiding]. The hearing will resume. Senator
    Murray has passed the baton to me, and I apologize. I'm slowing
    down as I get older. It takes me longer to run and get back.
        All right. We are now ready to hear the testimony from the
    Inspector General. Mr. Scovel?

                     STATEMENT OF HON. CALVIN L. SCOVEL III

        Mr. Scovel. Madam Chairman, Ranking Member Bond, members of
    the subcommittee, we appreciate the opportunity to testify
    today regarding the Federal Aviation Administration's fiscal
    year 2008 budget request. FAA is presenting its $14.1 billion
    budget request in a new format and structure that mirror its
    plans to reform how the agency is financed.
        FAA has proposed changing the existing revenue stream to
    one that is based primarily on user fees, and Congress is
    currently deliberating on that proposal.
        However, regardless of the funding mechanism ultimately
    decided upon by Congress, there are a number of front and
    center issues that demand attention and will shape FAA's
    requirements over the next several years.
        We see three key areas. First, keeping existing
    modernization efforts on track and reducing risks with NextGen.
    Currently, we are reviewing the progress of 18 projects with a
    combined cost of $17 billion. Overall, we have not seen the
    massive cost growth and schedule slips that we did in the past
    with FAA's major acquisitions. This is due to FAA's efforts to
    re-baseline major efforts and segment investment decisions.
        However, there are projects, such as FAA's
    Telecommunications Infrastructure Program, that are at risk of
    not achieving expected cost savings and benefits because of
    schedule slips.
        ASDE-X, we're also concerned about further cost increases
    and schedule slips with the Airport Surface Detection Equipment
    Model-X, an important program to reduce the risk of accidents
    on runways. ASDE-X was initially designed to provide a low-cost
    alternative to FAA's ASDE-3 radar systems, but has now evolved
    into essentially a replacement system for ASDE-3.
        In September 2005, FAA increased ASDE-X costs from $505
    million to $550 million, and extended the completion date from
    2007 to 2011. As of March 2007, FAA had commissioned only 8 of
    the 35 ASDE-X sites. Further, it's uncertain when key safety
    features will be delivered.
        For example, FAA has yet to commission an ASDE-X system
    that can alert controllers of potential collisions on
    intersecting runways or converging taxiways. Because of these
    issues, we believe the program is at risk of not meeting its
    current cost and schedule plans to deliver all 35 ASDE-X
    systems by 2011. We are reviewing ASDE-X and will issue a
    report later this year.
        NextGen. A central question in the debate about financing
    FAA is what it will cost to develop and implement NextGen. The
    most current estimates suggest the agency will require $15.4
    billion for capital projects between 2008 and 2012, which
    includes $4.6 billion for NextGen initiatives.
        However, there are still unknowns with respect to
    requirements for new software, intensive automation systems,
    and data communications. Considerable development will be
    required to refine these concepts.
        We've recently made a number of recommendations to FAA
    aimed at reducing the risks associated with NextGen. Those
    included providing Congress with costs along three vectors: the
    research and development, adjustments to existing projects, and
    funds for new initiatives.
        Second, addressing attrition in FAA's critical workforces.
    FAA is facing significant attrition issues within two of its
    most critical workforces, air traffic controllers and aviation
    safety inspectors. Through 2016, FAA must hire and train over
    15,000 new controllers, as controllers hired after the 1981
    strike begin to retire.
        In December 2004, FAA developed a comprehensive workforce
    plan to address this challenge. This past February, we
    completed our review of FAA's progress to implement its
    controller workforce plan.
        Overall, we found that FAA continues to make good progress
    to implement key aspects of the plan. However, further progress
    is still needed in several areas, including completing actions
    to validate its facility level staffing standards, and
    continuing efforts to reduce the time and costs associated with
    controller on-the-job training.
        FAA concurred with our recommendations. This issue will
    remain a high priority for FAA and Congress over the next 10
    years, and we will continue to monitor and report on FAA's
    efforts.
        Inspectors. Like its controller workforce, FAA is facing
    significant attrition among its aviation safety inspectors. As
    of May 7, FAA currently had 3,821 inspectors to oversee foreign
    and domestic aspects of the NAS.
        Clearly, FAA will never have an inspection workforce that
    is large enough to oversee all aspects of aviation operations,
    so it's important that inspectors are located where they're
    most needed.
        The National Research Council recently completed its study
    of FAA's methods of allocating inspector resources, and
    concluded that the agency's current model is ineffective.
        Ranking Member Bond, with your permission, if I may have
    another minute or two to wrap up?
        Senator Bond. Under the circumstances, you can have two, if
    you wish.
        Mr. Scovel. Thank you. Thank you very much. FAA must
    develop a reliable staffing model to ensure that it has the
    right number of inspectors at the right locations. However,
    completion of the model is likely years away, and we will
    continue to monitor and report on FAA's efforts here, as well.
        Finally, determining the appropriate amount of airport
    funding. Over the last 2 years, FAA's budget requests for the
    AIP have been significantly less than authorized levels.
    However, Congress has provided FAA with close to the authorized
    amounts each year. For fiscal 2008, FAA has requested nearly $1
    billion less than 2007 levels.

                               PREPARED STATEMENT

        With growing demands for airport improvement projects and
    potentially less AIP funding available, AIP funds must be
    directed to the Nation's highest priority projects, while
    meeting the unique needs of small airports.
        That concludes my statement. I'll be happy to answer any
    questions you and other members of the subcommittee may have.
        [The statement follows:]
                Prepared Statement of Hon. Calvin L. Scovel III
        Chairman Murray, Ranking Member Bond, and members of the
    subcommittee: We appreciate the opportunity to testify today regarding
    the Federal Aviation Administration's (FAA) fiscal year 2008 budget
    request. Our testimony will focus on the key issues that will frame
    FAA's financial requirements over the next several years.
        A significant challenge facing FAA today is how to move forward
    with the next generation air transportation system. The current system
    handles over 700 million passengers per year, a number that will grow
    to over 1 billion travelers by 2015. This system must also be poised
    for the introduction of thousands of very light jets \1\ during the
    same timeframe. This influx of new aircraft will strain the Agency's
    air traffic control systems and its inspection and certification
    workforces.
    ---------------------------------------------------------------------------
        \1\ These are small, ``affordable'' aircraft that will carry up to
    six passengers. Priced as low as $1 million per aircraft, very light
    jet manufacturers anticipate that these aircraft will find a niche
    among corporate and private owners and as on-demand air taxi services.
    According to FAA, up to 5,000 very light jets will vie for airspace by
    2017.
    ---------------------------------------------------------------------------
        FAA oversees the busiest and most complex aviation system in the
    world. In 2006, FAA enroute centers--facilities that manage high-
    altitude traffic--handled 46 million operations, which approximated the
    activity levels in 2000. However, with respect to delays, operational
    performance of the National Airspace System (NAS) slipped slightly in
    2006 with one in four flights arriving late, the worst level since
    2000.
        It is against this backdrop that we would like to discuss FAA's
    fiscal year 2008 budget request. FAA is presenting its $14.1 billion
    budget request in a new format and structure that mirror its plans to
    reform how the Agency is financed. Currently, FAA is financed by two
    mechanisms: excise taxes (primarily those from ticket taxes on airfare)
    and a contribution from the General Fund. FAA has proposed changing
    that revenue stream to one that is based primarily on user fees;
    Congress is currently deliberating that proposal.
        The focus of our testimony today, Madam Chairman, is that
    regardless of the funding mechanism ultimately decided upon by
    Congress, a number of ``front-and-center'' issues demand attention and
    will shape FAA's requirements over the next several years. These
    include the following:
        Keeping Existing Modernization Efforts on Track and Reducing Risks
    With the Next Generation Air Transportation System (NextGen).--FAA is
    requesting $2.46 billion for its capital programs in fiscal year 2008,
    the majority of which is for the Air Traffic Organization's capital
    efforts. The fiscal year 2008 request also includes funding for key
    NextGen initiatives, such as the Automatic Dependent Surveillance-
    Broadcast Program (ADS-B) and the System Wide Information Management
    Program (SWIM), and for demonstration projects.
        Currently, we are reviewing the progress of 18 projects with a
    combined cost of $17 billion. We do not see the massive cost growth and
    schedule slips that we have in the past with FAA's major acquisitions.
    This is due to FAA's efforts to re-baseline major efforts and segment
    investment decisions. However, there are projects, such as FAA's
    Telecommunications Infrastructure program, that are at risk of not
    achieving expected cost savings and benefits because of schedule slips.
        We are also concerned about further cost increases and schedule
    slips with the Airport Surface Detection Equipment Model-X (ASDE-X),
    which is an important program to reduce the risks of accidents on
    runways. It is planned to improve airport safety by operating in all-
    weather and low-visibility conditions (e.g., fog, rain, and snow) when
    controllers cannot see activity on ramps, runways, and taxiways. ASDE-X
    was initially designed to provide a low-cost alternative to FAA's ASDE-
    3 radar systems but has evolved into a different program. In September
    2005, FAA increased ASDE-X costs from $505.2 million to $549.8 million
    and extended the completion date from 2007 to 2011. In addition, the
    cost to acquire and install some key ASDE-X activities has increased by
    $94 million since the 2005 re-baseline. To stay within the revised
    baseline, FAA offset this cost by decreasing funds for seven program
    activities, such as construction for later deployment sites.
        As of March 2007, FAA had commissioned only 8 of the 35 ASDE-X
    sites. Of the seven sites planned for fiscal year 2006, FAA only
    commissioned four. Further, it is uncertain when key safety features
    will be delivered. For example, FAA has yet to commission an ASDE-X
    system that can alert controllers of potential collisions on
    intersecting runways or converging taxiways. Because of these issues,
    the program is at risk of not meeting its current cost and schedule
    plans to deliver all 35 ASDE-X systems by 2011. We are reviewing ASDE-X
    and will issue a report later this year.
        A central question in the debate about financing FAA is what it
    will cost to develop and implement NextGen. The most current estimates
    suggest that the Agency will require $15.4 billion for capital projects
    from fiscal year 2008 to fiscal year 2012. This includes $4.6 billion
    for NextGen initiatives ($4.3 billion from the capital account and $300
    million from the Research Engineering and Development account).
    However, we caution that there are still unknowns with respect to
    requirements for new software, intensive automation systems, and data
    communications. Further, considerable development will be required to
    refine these concepts and determine how systems can be certified as
    safe.
        We recently made a number of recommendations \2\ aimed at reducing
    risk with NextGen, a multibillion-dollar effort that will dominate
    FAA's capital account. We recommended that FAA provide Congress with
    costs along three vectors--research and development, adjustments to
    existing projects, and funds for new initiatives. This will help
    decision makers understand the magnitude of the effort and how
    additional funds will be used. Given the high-risk nature of NextGen,
    we also recommended that FAA articulate a strategy for how this
    extraordinarily complex effort will be managed (beyond conducting
    demonstration projects) and what expertise will be required to prevent
    past problems and successfully deliver new capabilities. FAA concurred
    with our recommendations.
    ---------------------------------------------------------------------------
        \2\ OIG Report Number AV-2007-031, ``Joint Planning and Development
    Office: Actions Needed To Reduce Risks With the Next Generation Air
    Transportation System,'' February 12, 2007. OIG reports and testimonies
    can be found on our website: www.oig.dot.gov.
    ---------------------------------------------------------------------------
        Addressing Attrition in FAA's Critical Workforces.--FAA is facing
    significant attrition issues within two of its most critical
    workforces--air traffic controllers and aviation safety inspectors.
    Ensuring that there are enough adequately trained and certified
    professionals in these two fields is critical to the safety and
    efficiency of the NAS and will remain a high priority for FAA and
    Congress over the next 10 years.
        Through 2016, FAA must hire and train over 15,000 new controllers
    as controllers hired after the 1981 strike begin retiring. In December
    2004, FAA developed a comprehensive workforce plan to address this
    challenge and issued the first in a series of annual reports to
    Congress. FAA issued its first update to the plan in June 2006 and its
    second update in March 2007.
        In February, we issued the results of our review of FAA's progress
    in implementing its controller workforce plan.\3\ Overall, we found
    that FAA continues to make progress in implementing a comprehensive
    staffing plan to address the surge in retirements. For example, we
    found that FAA has significantly improved its hiring process and has
    made progress in reducing the time and costs to train new controllers.
    However, further progress is still needed in key areas. Those include:
    ---------------------------------------------------------------------------
        \3\ OIG Report Number AV-2007-032, ``FAA Continues To Make Progress
    in Implementing Its Controller Workforce Plan, but Further Efforts Are
    Needed in Several Key Areas,'' February 9, 2007.
    ---------------------------------------------------------------------------
      --Completing validation of accurate facility-level staffing standards
            (a critical component because FAA has over 300 air traffic
            facilities with significant differences in air traffic levels
            and complexity);
      --Continuing efforts to reduce the time and costs associated with on-
            the-job training (the longest and most expensive portion of new
            controllers' training);
      --Establishing baseline metrics to measure the effectiveness of
            controller productivity initiatives (FAA must ensure that
            reductions in staffing are a result of increased productivity
            and not simply fewer controllers controlling more traffic); and
      --Identifying the estimated total costs of the plan (which will
            significantly impact FAA's operating cost requirements over the
            next 10 years).
        We recommended that FAA include the progress made in validating
    facility staffing standards in the next update of the plan along with
    the plan's total estimated costs. FAA concurred with our
    recommendations and included interim staffing ranges for all facilities
    in its March 2007 update to the plan as well as the expected additional
    personnel and compensation costs that it will incur for new controllers
    in training each year through 2016. However, the actions needed to
    address this issue are ongoing and, in some cases, it may be years
    before they are fully implemented. We will continue to monitor and
    report on FAA's efforts in addressing this challenge.
        Like its controller workforce, FAA is facing significant attrition
    among its aviation safety inspectors. FAA currently has 3,865
    inspectors to oversee domestic and foreign aspects of the largest, most
    complex aviation system in the world. Over one-third of these
    inspectors (44 percent) will be eligible to retire by 2010.
        FAA will never have an inspection workforce that is large enough to
    oversee all aspects of aviation operations, but it is important for the
    agency to ensure that its inspectors are located where they are most
    needed. The National Research Council recently completed its study \4\
    of FAA's current methods of allocating inspector resources and
    concluded that the Agency's current model is not effective. FAA must
    develop a reliable staffing model to ensure that it has the right
    number of inspectors at the right locations. FAA advised us that it
    intends to implement the Council's recommendations and has procured the
    services of an independent contractor to obtain the most effective
    staffing mechanism. However, completion of this process is likely years
    away.
    ---------------------------------------------------------------------------
        \4\ Study completed by the National Research Council of the
    National Academies, ``Staffing Standards for Aviation Safety
    Inspectors,'' September 20, 2006.
    ---------------------------------------------------------------------------
        Determining the Appropriate Amount of Airport Funding.--The Airport
    Improvement Fund (AIP) supports the airport system by providing funds
    to primarily enhance safety and security, maintain the infrastructure,
    increase capacity, and mitigate airport noise in surrounding
    communities. Over the last 2 years, FAA's budget requests for the AIP
    have been significantly less than authorized levels. However, Congress
    has provided FAA with close to the Vision 100 \5\ authorized amounts in
    fiscal year 2005 and fiscal year 2006.
    ---------------------------------------------------------------------------
        \5\ Vision 100--Century of Aviation Reauthorization Act, Pub. L.
    No. 108-176 (2003).
    ---------------------------------------------------------------------------
        In fiscal year 2007, the AIP is funded at the 2006 level of $3.5
    billion, which is a $200 million reduction from the fiscal year 2007
    authorized level. For fiscal year 2008, FAA has requested $2.75 billion
    for the AIP--$950 million less than the fiscal year 2007 Vision 100
    authorized level.
        With growing demands for airport improvement projects and
    potentially less AIP funding available, AIP funds must be directed to
    the Nation's highest priority projects while meeting the unique needs
    of small airports. Given the growth in projected passenger traffic and
    the Department's commitment to accelerate major airport infrastructure
    projects by giving priority treatment and resources to capacity
    projects, it may be time to re-examine AIP funding levels and the type
    of projects funded.
        For example, we found that under current AIP Military Airport
    Program set-aside requirements, low-priority projects could be funded
    at an airport that meets set-aside requirements while higher-priority
    projects at other airports could go unfunded. We will report on FAA's
    prioritization of AIP funds later this year.
        Another important funding mechanism for airports are passenger
    facility charges (PFC). PFCs have become an important funding mechanism
    for airports--between 1992 and 2006, FAA approved the collection of
    $57.3 billion in PFCs. Of this amount, airports have collected
    approximately $22 billion, with another $2.6 billion anticipated for
    2007. Currently, PFCs are capped at $4.50 per segment of flight (a
    maximum of $18.00 on a round trip). Over 75 percent (248 of 328
    airports) of the airports collecting a PFC charge the maximum amount.
    The current cap on PFCs has significant implications for major
    airports' capital expenditure plans because over 75 percent of the
    airports collecting PFCs are already charging the maximum amount, and
    some airports are anticipating an increased PFC as part of major
    capital improvement financing plans.
        I would now like to discuss FAA's fiscal year 2008 budget request
    and these three areas in greater detail. I will also provide our
    observations on FAA acquisition and contracting issues.
                         faa's fiscal year 2008 budget
        FAA is requesting $14.1 billion for fiscal year 2008, a reduction
    of nearly $460 million from the fiscal year 2007 enacted levels, and
    $233 million from the fiscal year 2006 actual levels. FAA is presenting
    its budget request in a new format and structure that mirror its plans
    to shift from the current excise taxes to a structure that relies on,
    among other things, cost-based user fees. FAA anticipates that the new
    financing system will be implemented in fiscal year 2009.
        For fiscal year 2008, FAA has realigned its four accounts to better
    reflect its lines of business and proposed financing system. The budget
    request shows the Operations and Facilities & Equipment (F&E) accounts
    realigned into two new accounts. The first account combines the
    Agency's safety oversight, Commercial Space Transportation, and staff
    offices into a single account called Safety and Operations. The second
    account combines most of the Facilities and Equipment account with the
    Air Traffic maintenance and other Operations account functions into the
    Air Traffic Organization (ATO) account. The Airport Improvement Program
    and the Research, Engineering, and Development (RE&D) accounts remain
    the same. FAA's budget funds these four accounts as follows:
      --For the Safety and Operations account, FAA is requesting $1.88
            billion (13 percent of FAA's total budget), an increase of $102
            million over last year's enacted amount for comparable
            functions. For safety-related functions, such as safety
            inspectors and certification activities, FAA is requesting
            $1.11 billion, an increase of $105 million from last year's
            enacted amount.
      --For the ATO account, FAA is requesting $9.3 billion (66 percent of
            FAA's total budget), an increase of $184 million over
            comparable functions in the fiscal year 2007 enacted budget.
            For the operation and maintenance of the air traffic control
            system, the Agency is requesting $6.96 billion, an increase of
            $225 million over last year's amount. FAA is also requesting
            $2.34 billion in capital program funds for the ATO, a decrease
            of $41 million from last year's enacted amount. Capital
            projects associated with other functions, such as safety, are
            now included in the Safety and Operations account.
      --For the AIP account, FAA is requesting $2.75 billion (20 percent of
            FAA's total budget). This represents a $765 million decrease
            from the amounts provided in fiscal year 2007. To put this
            figure into context, since fiscal year 2001, the AIP account
            has been authorized at $3.2 billion or higher each year.
      --Finally, FAA is requesting $140 million for the RE&D account (1
            percent of FAA's total budget), an increase of $10 million from
            the fiscal year 2007 enacted level.
        To demonstrate in terms of the old and new budget presentation,
    table 1 summarizes the fiscal year 2008 budget request in last year's
    four-account format.

         TABLE 1.--FAA BUDGETS FISCAL YEAR 2006 THROUGH FISCAL YEAR 2008
                            (In millions of dollars)
    ------------------------------------------------------------------------
                                                    Fiscal Year  Fiscal Year
                 Account               Fiscal Year      2007       2008 \1\
                                       2006 Actual    Enacted      Request
    ------------------------------------------------------------------------
    Operations.......................        8,104        8,374        8,726
    Facilities & Equipment...........        2,555        2,518        2,462
    Airport Improvement Program......        3,515        3,515        2,750
    Research, Engineering, and                 137          130          140
     Development.....................
                                      --------------------------------------
        Total........................       14,310       14,537       14,077
    ------------------------------------------------------------------------
    \1\ We summarized FAA's fiscal year 2008 budget request using the
      previous format for comparative purposes.

    Note: Figures may not add up exactly due to rounding.
    Source: FAA's fiscal year 2008 budget request and FAA's Office of the
      Budget.

        The fiscal year 2008 budget would be financed by the two mechanisms
    currently used to fund FAA: excise taxes deposited into the Airport and
    Airway Trust Fund and a General Fund contribution. The Trust Fund,
    which was created in 1970, provides FAA with a dedicated revenue source
    for funding aviation programs.
        Initially envisioned as a means to fund the infrastructure and
    modernization needs of the NAS, the Trust Fund also pays for large
    portions of FAA's operating budget, the Essential Air Service Program,
    and one-time items (e.g., security funding after the September 11,
    2001, attacks). The General Fund is used to make up the difference
    between Trust Fund revenues and the unfunded portion of FAA's budget.
        For fiscal year 2008, FAA expects the Trust Fund to contribute
    $11.5 billion, or 81 percent, toward its total budget and the General
    Fund to contribute $2.6 billion, or 19 percent. These amounts are
    similar to what has been budgeted in the previous 4 years. Table 2
    shows the contribution from each of the funding sources toward FAA's
    proposed new accounts.

                                         TABLE 2.--FUNDING SOURCE CONTRIBUTIONS
                                                  (Dollars in millions)
    ----------------------------------------------------------------------------------------------------------------
                                            Airport and Airway Trust Fund           General Fund
                   Account                ----------------------------------------------------------------   Total
                                               Amount          Percent         Amount          Percent
    ----------------------------------------------------------------------------------------------------------------
    Air Traffic Organization.............          $7,915              85          $1,393              15     $9,308
    Safety and Operations................             672              36           1,208              64      1,879
    Airport Improvement Program..........           2,750             100  ..............               0      2,750
    Research, Engineering, and                        123              88              17              12        140
     Development.........................
                                          --------------------------------------------------------------------------
        Total............................          11,459              81           2,618              19     14,077
    ----------------------------------------------------------------------------------------------------------------
    Note: Percentages in table are toward the total budget.
    Note: Figures may not add up exactly due to rounding.
    Source: FAA's fiscal year 2008 budget submission to Congress.

    keeping existing modernization efforts on track and reducing risks with
                                    nextgen
        FAA faces challenges in maintaining existing systems while
    developing and implementing new capabilities to meet the anticipated
    demand for air travel. For fiscal year 2008, FAA is requesting $2.46
    billion in capital funds, the majority of which ($2.3 billion) is for
    Air Traffic Organization (ATO) efforts to modernize the NAS. Over the
    last several years, increasing operating costs have crowded out funds
    for the capital account. Since fiscal year 2005, capital funding
    requests have leveled off, falling within the range of $2.4 billion to
    $2.5 billion, well below the levels authorized in the Vision 100 Act.
    Another trend has been FAA's decision to cancel, defer, and segment
    acquisitions while the capital budget stayed essentially flat. Further,
    only about 50 percent of FAA's capital budget goes to air traffic
    systems; the remainder goes to personnel, mission support, and
    facilities (i.e., sustainment). Although a large portion of FAA's
    capital funds will go toward sustainment, FAA is requesting additional
    funds for key technologies for NextGen. These include the following:
      --Automatic Dependent Surveillance-Broadcast (ADS-B) \6\ is a
            satellite-based technology that allows aircraft to broadcast
            their position to others. FAA requested $80 million in fiscal
            year 2007 for this satellite-based technology. For fiscal year
            2008, it is requesting $85.7 million. FAA expects to award a
            contract for the installation and maintenance of the ADS-B
            ground infrastructure in 2007. However, a number of challenges
            must be addressed. These include conducting human factors work
            and determining how air and ground elements will be certified
            as safe. FAA may have to rely on a rulemaking initiative to
            help speed ADS-B airspace user equipage. The current cost
            estimate for ADS-B is approximately $1.2 billion, and FAA is
            planning to re-baseline the ADS-B costs this summer.
    ---------------------------------------------------------------------------
        \6\ The first phase of ADS-B implementation, known as ADS-B out, is
    expected to replace many ground radars that currently provide aircraft
    surveillance with less costly ground-based transceivers. Aircraft would
    be equipped with ADS-B out, which broadcasts a signal to these
    transceivers. However, implementing ADS-B out is just the first step to
    achieving the larger benefits of ADS-B, which would be provided by ADS-
    B in. ADS-B in would allow aircraft to receive signals from ground-
    based transceivers or directly from other aircraft equipped with ADS-B.
    This could allow pilots to ``see'' nearby traffic and, consequently,
    transition some responsibility for maintaining safe separation from the
    air traffic controllers to the cockpit.
    ---------------------------------------------------------------------------
      --System Wide Information Management (SWIM) is a new information
            architecture that will allow airspace users to securely and
            seamlessly access a wide range of information on the status of
            the NAS and weather conditions. It is analogous to an internet
            system for all airspace users. FAA requested $24 million for
            this program in fiscal year 2007. For fiscal year 2008, it is
            requesting $21.3 million. The cost to fully implement SWIM is
            unknown, and we note that SWIM is scheduled to be reviewed by
            FAA's Joint Resources Council this June.
        In its fiscal year 2008 budget submission, FAA is requesting funds
    for new NextGen initiatives, such as NextGen Data Communication ($7.4
    million), NextGen Network Enabled Weather ($7 million), and a new
    National Airspace System Voice Switch ($3 million). FAA is also
    requesting $50 million for demonstration and infrastructure projects.
        We are tracking 18 programs with a combined acquisition cost of $17
    billion. Today, we will highlight (1) FAA's progress and problems with
    key modernization efforts and (2) FAA actions needed to reduce risk
    with NextGen.
    FAA's Progress and Problems With Ongoing Modernization Projects
        We do not see the massive cost growth that we have in the past with
    FAA acquisitions. This is due to FAA's efforts to re-baseline programs
    and segment investment decisions. However, we found that several
    projects (totaling of $6 billion in capital investment costs) will
    require significant attention and oversight because of their size,
    diminishing benefits, potential cost and schedule problems, or
    importance to the NextGen transition. These are discussed below.
        En Route Automation Modernization (ERAM).--This program is intended
    to replace the ``Host'' computer network--the central nervous system
    for facilities that manage high-altitude traffic. FAA requested $375.7
    million for ERAM in fiscal year 2007. For fiscal year 2008, it is
    requesting $368.8 million. The first ERAM system is scheduled to be
    fielded by December 2009. While providing some enhancements, ERAM is
    essentially a one-for-one replacement for the existing ``Host''
    computer system. As currently structured, ERAM will have two follow-on
    software releases (releases 2 and 3) valued at $83 million; these are
    still undefined. ERAM is expected to provide the basic platform for
    NextGen's automated capabilities.
        With an acquisition cost of $2.1 billion and a monthly expenditure
    or ``burn rate'' of $31 million, this program continues to be one of
    the most expensive and complex acquisitions in FAA's modernization
    portfolio. While currently on track, considerable testing and
    integration work lies ahead. The next major milestone is completion of
    Factory Acceptance Testing,\7\ which is planned for June 2007. Any ERAM
    cost increase or schedule slip will have an impact on other capital
    programs and could directly affect the pace of the overall transition
    to NextGen.
    ---------------------------------------------------------------------------
        \7\ Factory Acceptance Testing is defined by FAA as formal testing
    conducted by the contractor to verify that the production item conforms
    to all contract specifications, is free from manufacturing defects, and
    meets all system requirements.
    ---------------------------------------------------------------------------
        Federal Aviation Administration Telecommunications Infrastructure
    (FTI).--The FTI program is to replace seven FAA-owned and -leased
    telecommunications networks with a single network that will provide FAA
    with telecommunications services through 2017. FAA expects that FTI
    will significantly reduce its operating costs after the new network is
    completed. In fiscal year 2007, FAA requested $28 million for the FTI
    program. For fiscal year 2008, it is requesting $8.5 million. The vast
    majority of FTI, however, is funded out of the Operations Account as
    opposed to the Facilities and Equipment account, which funds most
    acquisitions. For fiscal year 2008, FAA estimates that it will need
    $210 million to support FTI operations. Additionally, FAA is planning
    to request another $91 million to maintain legacy network operations
    until the FTI transition is complete.
        In April 2006, we reported \8\ that FTI was a high-risk and
    schedule-driven effort that was unlikely to meet its December 2007
    completion date. We found that FAA needed to improve management
    controls over FTI by developing a realistic master schedule and an
    effective transition plan. Since our report, the Agency has extended
    the FTI completion date to December 2008; this represents a 1-year
    schedule delay. In May 2006, we began a follow-up review of FTI. To its
    credit, FAA is making significant progress in delivering FTI services.
    As of March 31, 2007, 10,973 of about 21,820 services were operating on
    FTI.
    ---------------------------------------------------------------------------
        \8\ OIG Report Number AV-2006-047, ``FAA Telecommunications
    Infrastructure Program: FAA Needs To Take Steps To Improve Management
    Controls and Reduce Schedule Risks,'' April 27, 2006.
    ---------------------------------------------------------------------------
        As a result of the delay, FAA's Joint Resources Council approved a
    new cost baseline for FTI in August 2006. FAA increased its acquisition
    costs to develop the FTI network by an additional $8.6 million (from
    $310.2 to $318.8 million) and increased its overall operations costs to
    support FTI network and legacy networks by about $100 million (from
    $3.0 to $3.1 billion).
        We also continue to see an erosion of expected FTI cost savings.
    For example, in October 2005, the Program Office reported a reduction
    in the benefit estimate from $820 million to $672 million. By the end
    of fiscal year 2006, we estimate that FTI cost savings decreased from
    $672 million to $442 million, including sunk costs. Moreover, since FAA
    has not yet validated the FTI cost and benefits estimates that were
    approved in August 2006--an action that we recommended and that FAA
    agreed to take--the true FTI costs and benefits remain unknown.
        FAA continues to face challenges in making the transition to FTI.
    For instance, FAA currently has a large backlog of FTI services
    (averaging about 1,800 services over the last 3 months) that need to be
    addressed. The backlog includes failed transitions, on-hold services,
    misconfigured [sic] equipment, and obsolete services. Additionally, the
    transition of digital services, such as critical radar and flight data,
    to FTI continues to be problematic. Some digital services were placed
    on ``national hold'' while engineering solutions could be developed.
        In addition, FAA needs to ensure that it has an effective strategy
    to address FTI reliability and customer service problems. For example,
    many FTI services are not meeting reliability standards and are not
    being restored to service within contractual timeframes after outages.
    These problems led to unscheduled outages of both primary and back-up
    services, which led to flight delays. For example, on January 9, 2007,
    the Salt Lake City en route center experienced a 3-hour outage that
    caused 90 departure delays due to an FTI maintenance contractor trying
    to upgrade operational FTI equipment.
        Overall, key watch items for FTI include addressing the backlog of
    services, improving FTI reliability and customer service, stopping the
    erosion of expected cost benefits, and validating costs. Recently, FAA
    completed negotiations with Verizon Business to extend LINCS \9\ (FAA's
    largest and costliest existing network to be replaced by FTI), which
    expired in April 2007. FAA has agreed to a $92 million ceiling price to
    extend LINCS until April 2008. We will be reporting on the FTI program
    later in the year.
    ---------------------------------------------------------------------------
        \9\ In March 2007, about 43 percent of LINCS A-nodes had been
    decommissioned.
    ---------------------------------------------------------------------------
        Airport Surface Detection Equipment-Model X (ASDE-X).--ASDE-X is an
    important safety initiative planned to reduce the risks of accidents on
    runways. In fiscal year 2007, FAA requested $63.6 million for the ASDE-
    X program. For fiscal year 2008, it is requesting $37.9 million.
        ASDE-X is FAA's latest effort designed to provide controllers with
    positive identification of aircraft and vehicle positions on the
    airport surface. It is planned to improve airport safety by operating
    in all-weather and low-visibility conditions (e.g., fog, rain, and
    snow) when controllers cannot see surface movement on ramps, runways,
    and taxiways.
        ASDE-X was initially designed to provide a low-cost alternative to
    FAA's ASDE-3 radar systems for small- to medium-sized airports but has
    evolved into a different program. FAA made a significant change to the
    scope of the program in September 2005 and now intends to upgrade ASDE-
    3 systems with ASDE-X capabilities at 25 large airports and install the
    system at 10 other airports that currently lack surface surveillance
    technology. In September 2005, FAA increased ASDE-X costs from $505.2
    million to $549.8 million and extended the completion date from 2007 to
    2011.
        We are concerned about further cost increases and schedule delays
    with this program since the cost to acquire and install some ASDE-X
    activities has increased by $94 million since the 2005 re-baseline. To
    stay within the revised baseline, FAA offset this cost by decreasing
    planned expenditures funds for seven other program activities, such as
    construction for later deployment sites.
        We are also concerned that the ASDE-X schedule is not realistic. As
    of March 2007, FAA had commissioned only 8 of the 35 ASDE-X sites. Of
    the seven sites planned for fiscal year 2006, FAA only commissioned
    four. Further, it is uncertain when key safety features will be
    delivered. For example, FAA has yet to commission an ASDE-X system that
    can alert controllers of potential collisions on intersecting runways
    or converging taxiways. Because of these issues, the program is at risk
    of not meeting its current cost and schedule plans to deliver all 35
    ASDE-X systems by 2011. We are reviewing ASDE-X and will issue a report
    later this year.
        Air Traffic Management (ATM).--ATM includes the Traffic Flow
    Management-Modernization (TFM-M) program and the Collaborative Air
    Traffic Management Technologies (CATMT) program. TFM-M modernizes the
    TFM system, which is the Nation's single source for capturing and
    disseminating air traffic information to reduce delays and make maximum
    use of system capacity. CATMT provides new decision support tools to
    deliver additional user benefits and increase effective NAS capacity.
    At a cost of $450 million, these are two key efforts for coordinating
    air traffic across the NAS and managing the adverse impacts of bad
    weather. In fiscal year 2007, FAA requested $79 million for ATM
    programs. For fiscal year 2008, it is requesting $91 million.
        Although the TFM-M effort has not experienced cost increases or
    schedule delays, we are concerned about risks and what will ultimately
    be delivered. Our concerns are based on the fact that FAA and the
    contractor significantly underestimated the size and complexity of TFM-
    M software development. FAA was pursuing TFM-M through a cost-
    reimbursable agreement, meaning that all risk for cost growth rested
    with the Government. FAA has modified the contract and adjusted the
    scope of work. The current risks for TFM-M focus on developing complex
    software, integrating TFM-M with other NAS systems, and stabilizing
    requirements.
        Terminal Modernization and Replacement of Aging Controller
    Displays.--FAA's fiscal year 2008 budget request calls for $40 million
    for efforts aimed at modernizing controller displays and related
    automation systems at terminal facilities. FAA's budget states that
    three-fourths of the fiscal year 2008 funds will be used for the
    Standard Terminal Automation Replacement System (STARS) ``technology
    refresh'' (i.e., replacing obsolete components) and software
    enhancements.
        FAA's past modernization efforts have focused exclusively on STARS.
    In 2004, faced with cost growth in excess of $2 billion for STARS, FAA
    rethought its terminal modernization approach and shifted to a phased
    process. FAA committed STARS to just 50 sites at an estimated cost of
    $1.46 billion as opposed to the original plan to deploy STARS at 172
    sites at a cost of $940 million.\10\
    ---------------------------------------------------------------------------
        \10\ OIG Report Number AV-2005-016, ``Terminal Modernization: FAA
    Needs To Address Its Small, Medium, and Large Sites Based on Cost,
    Time, and Capability,'' November 23, 2004.
    ---------------------------------------------------------------------------
        In 2005, FAA renamed this modernization effort the Terminal
    Automation Modernization-Replacement (TAMR) initiative and approved
    modernizing five additional small sites with STARS and replacing the
    aging displays at four large, complex facilities at a cost of $57
    million. This leaves over 100 sites that still need to be modernized.
    Although FAA has not decided on how it will modernize these 100 sites,
    its budget submission indicates that this effort could cost over $1
    billion.
        There is no current defined ``end state'' for terminal
    modernization, and past problems with developing and deploying STARS
    leave FAA in a difficult position to begin transitioning to NextGen
    capabilities. Future costs will be shaped by (1) NextGen requirements,
    (2) the extent of FAA's terminal facilities consolidation, and (3) the
    need to replace or sustain existing (or legacy) systems that have not
    yet been modernized.
        Without question, the most urgent concern facing terminal
    modernization is how quickly FAA can replace aging displays at the four
    large sites that are particularly critical to the NAS--Chicago,
    Illinois; Denver, Colorado; St. Louis, Missouri; and Minneapolis,
    Minnesota. FAA chose not to compete this work based on a joint proposal
    from two contractors and instead decided to modify the current STARS
    contract to include the work. This was expected to expedite replacement
    of the aging displays, but the time spent revising the contract to
    establish cost, schedule, and design parameters caused FAA to lose the
    time advantage from foregoing competition. As a result, the aging
    displays will not be replaced until 2008. We recommended action on this
    matter over 2 years ago in November 2004.
        Advanced Technology and Oceanic Procedures (ATOP).--FAA requested
    $31.4 million in fiscal year 2007. For fiscal year 2008, it is
    requesting $53.1 million. ATOP is FAA's $548 million effort to
    modernize how controllers manage oceanic flights. FAA now has ATOP in
    use at Oakland, California; New York, New York; and Anchorage, Alaska.
        Since September 2005, FAA controllers have experienced recurring
    failures (loss of data-link communication with aircraft and aircraft
    position jumps) with the new ATOP system at the Oakland site. These
    problems directly limit the potential capacity and productivity
    benefits from the new automation system. This could impact FAA's plans
    for using ATOP to demonstrate NextGen capabilities.
        According to controllers, these incidents represent potentially
    hazardous safety conditions that need to be resolved. The larger
    separation distances required between aircraft over the oceans than for
    those in domestic airspace have allowed controllers to manage these
    problems. However, benefits from the new automation system, such as
    reduced separation, have not been fully realized. Problems persist in
    ATOP, as evidenced by two operations bulletins (on aircraft altitude
    changes and detecting conflicts between aircraft) issued by the Oakland
    facility in April. FAA needs to resolve the problems that it has
    identified with communication service providers and aircraft avionics
    and adjust ATOP software as needed to realize expected benefits.
    Perspectives on FAA's Metrics for Measuring Progress With Major
            Acquisitions
        FAA reports in its fiscal year 2007 Flight Plan and the most recent
    Performance and Accountability Report that 100 percent of its critical
    acquisitions were within 10 percent of budget estimates and 97 percent
    were on schedule for 2006. FAA is currently tracking about 29
    acquisitions, such as the acquisition of new radars. FAA's cost and
    schedule metrics are worthwhile tools for Agency management and
    oversight of major acquisitions--a step we called for a number of years
    ago. However, these metrics have limitations that need to be understood
    by decision makers in order to properly assess the overall status of
    FAA's acquisition portfolio.
        First, FAA's cost and schedule metrics are snapshots in time. They
    are not designed to address changes in requirements, reductions in
    procured units, or shortfalls in performance that occur over time.
    Second, FAA's budget metrics involve comparisons of cost estimates
    taken during the fiscal year. These estimates involve the updated,
    ``re-baselined'' cost figures--not estimates from the original
    baseline. This explains why the Wide Area Augmentation System (a
    satellite-based navigation system) is considered ``on budget'' even
    though costs have grown from $892 million to over $3 billion since
    1998. ``Re-baselining'' a project is important to get realistic cost
    and schedule parameters and is consistent with Office of Management and
    Budget (OMB) guidance and the Agency's own Acquisition Management
    System. The revised baselines are used for justifying budgets and
    making investment decisions, i.e., ensuring that major acquisitions are
    still cost beneficial. We note that OMB allows FAA to measure
    deviations from the new baselines once they have been approved.
    Nevertheless, such comparisons of revised program baselines--absent
    additional information--fail to provide an accurate picture of a
    program's true cost parameters.
        Finally, FAA's schedule metrics used for assessing progress with
    several programs in 2006 were generally reasonable, but focused on
    interim steps or the completion of tasks instead of whether systems met
    operational performance goals. For example, ASDE-X metrics focused on
    delivery of two systems. This metric does not relate to whether systems
    entered service or met operational performance expectations. We note
    that there are no written criteria for selecting or reporting the
    milestones. Table 3 provides information on some of the metrics used
    for measuring progress in acquisitions in fiscal year 2006.

                                   TABLE 3.--METRICS USED TO MEASURE PROGRAMS IN 2006
    ----------------------------------------------------------------------------------------------------------------
                   Program                         Metric                Planned Date              Actual Date
    ----------------------------------------------------------------------------------------------------------------
    Airport Surface Detection Equipment   Deliver two systems....  February 2006...........  February 2006
     Model-X.
    Standard Terminal Automation          Deliver to one site....  February 2006...........  January 2006
     Replacement System.
    Air Traffic Management..............  Conduct Detailed Design  August 2006.............  March 2006
                                           Review.
    Precision Runway Monitor............  Complete Factory         April 2006..............  April 2006
                                           Acceptance Testing for
                                           Atlanta.
    Wide Area Augmentation System.......  Complete initial         September 2006..........  May 2006
                                           installation of two
                                           reference stations.
    ----------------------------------------------------------------------------------------------------------------
    Source: FAA ATO-F Capital Expenditures Program Office.

        As FAA's former chief operating officer stated, simply measuring
    cost and schedule may not be sufficient in evaluating NextGen
    initiatives. We agree and believe it will be important to focus on the
    promised capability and benefits of new initiatives, particularly those
    associated with the goals of enhancing capacity, boosting productivity,
    and reducing Agency operating costs. Therefore, FAA should explore a
    wider range of metrics to measure--and report on--progress with NextGen
    efforts.
    FAA Actions Needed To Reduce Risks With the Next Generation Air Traffic
            Management System
        The transition to NextGen is an extraordinarily complex, high-risk
    effort involving billion-dollar investments by the Government and
    airspace users. We have made a series of recommendations specifically
    aimed at reducing risk and facilitating the shift from planning to
    implementation.
        FAA needs to develop realistic NextGen cost estimates, quantify
    expected benefits, and establish a road map for industry to follow.--A
    central question in the current debate on financing FAA is what the
    costs associated with developing and implementing NextGen will be.
    Figure 1 illustrates FAA's most recent cost estimates.

        FAA estimates suggest that the agency will require $15.4 billion
    for capital projects from fiscal year 2008 to fiscal year 2012. This
    includes $4.6 billion for NextGen initiatives ($4.3 billion from the
    capital account and $300 million from the RE&D account).
        We note that the bulk of NextGen funds will be allocated to
    developmental efforts, including demonstration projects. There are
    unknowns with respect to performance requirements for new automation
    systems and data-link communications. The development of new automation
    systems is a particular concern given their complexity and the fact
    that almost flawless performance will be required. FAA will not have a
    firm grasp on costs until it has a mature enterprise architecture and a
    NextGen R&D plan that clearly indicates the contributions of other
    agencies.
        The costs for airspace users to equip with new avionics will be
    significant. The Joint Planning and Development Office's (JPDO) most
    recent progress report estimates the cost for airspace users to be
    between $14 billion and $20 billion for the long term. This underscores
    the need for FAA to have a clear understanding of complex transition
    issues and what will be required to get expected benefits. Another cost
    driver focuses on the extent to which FAA intends to consolidate
    facilities based on modern technology. We recommended that when FAA
    reports NextGen costs to Congress, it should do so along three
    vectors--research and development needed, adjustments to existing
    projects, and costs for new initiatives. FAA agreed and stated that it
    will build a comprehensive cost estimate this year.
        More work remains to set expectations, requirements, and
    milestones--or ``transition benchmarks''--for developing when new
    procedures, new ground systems, and aircraft need to be equipped to
    realize benefits. During an April 2006 workshop, industry participants
    asked FAA for a ``service roadmap'' that (1) specifies required
    aircraft equipage in specific time increments, (2) bundles capabilities
    with clearly defined benefits and needed investments, and (3) uses a 4-
    to 5-year equipage cycle that is coordinated with aircraft maintenance
    schedules. Once concepts and plans have matured, it will be important
    for FAA to provide this information to industry.
        FAA and the JPDO need to develop approaches for risk mitigation and
    systems integration.--FAA and the JPDO must articulate how they will do
    things differently to avoid problems that affected modernization
    efforts in the past (such as cost growth, schedule slips, and
    performance shortfalls). Developing and implementing NextGen will be an
    enormously complex undertaking. As the JPDO notes in its December 2004
    Integrated Plan,\11\ ``there has never been a transformation effort
    similar to this one with as many stakeholders and as broad in scope.''
    The central issue is determining what will be done differently from
    past modernization efforts with NextGen initiatives (other than
    conducting demonstration projects) to ensure success and deliver much
    needed benefits to FAA and airspace users.
    ---------------------------------------------------------------------------
        \11\ JPDO ``Next Generation Air Transportation System--Integrated
    Plan,'' December 2004.
    ---------------------------------------------------------------------------
        FAA's decision to use the Operational Evolution Plan (the Agency's
    blueprint for capacity) to help implement NextGen is a good first step.
    Nevertheless, the transition to NextGen will pose complex software
    development and integration problems and will require synchronized
    investments between FAA and airspace users over a number of years.
        To maintain support for NextGen initiatives, we recommended that
    the JPDO and FAA articulate how problems that affected past
    modernization efforts will be mitigated and what specific skill sets
    with respect to software development and system integration will be
    required. This will help reduce cost and schedule problems with NextGen
    initiatives. FAA concurred with our recommendations and stated that it
    will form a panel of experts to examine the issues we raised.
        FAA is requesting $50 million in its fiscal year 2008 budget for
    demonstration projects, which are important opportunities to reduce
    risk. In the past, FAA has experienced problems with certifying systems
    as safe, which led to cost growth and schedule slips. Therefore, we
    recommended, and FAA agreed, that planned NextGen demonstration
    projects should develop sufficient data to establish a path for
    certifying new systems and identify the full range of adjustments to
    policies and procedures needed for success.
        FAA needs to review ongoing modernization projects and make
    necessary cost, schedule, and performance adjustments.--As FAA's budget
    request points out, 29 existing capital programs serve as ``platforms''
    for NextGen. We recommended that FAA review ongoing modernization
    programs to determine what adjustments in cost, schedule, and
    performance will be required. This is critical because NextGen planning
    documents suggest that billions of dollars will be needed to adjust
    ongoing programs, like ERAM and TFM-M.
        During fiscal year 2007 through fiscal year 2008, over 25 critical
    decisions must be made about ongoing programs. These decisions will
    directly impact how quickly new capabilities can be deployed and will
    involve establishing requirements for future ERAM software releases,
    making investments to support existing radars, and incorporating
    weather information into SWIM.
               addressing attrition in faa's critical workforces
        Controlling operating cost growth will remain a significant
    challenge for FAA as it faces several workforce challenges in the
    coming year. Our office has an extensive body of work regarding cost
    control and financial issues within FAA. For example, in 1999, we
    reported \12\ that persistent cost growth in the agency's operating
    account (primarily salary-driven) was ``crowding out'' critical capital
    investments in the agency's modernization account. This is still a
    challenge today. As FAA focuses on increasing workforce productivity
    and decreasing costs, it must also continue to address the expected
    increase in air traffic controller and safety inspector retirements and
    ensure that it has the right number of controllers and inspectors at
    the right locations.
    ---------------------------------------------------------------------------
        \12\ OIG Report Number AV-1999-066, ``Federal Aviation
    Administration's Financing and Cost Control,'' March 22, 1999.
    ---------------------------------------------------------------------------
    FAA Continues To Make Progress in Implementing Its Controller Workforce
            Plan, but Further Efforts Are Needed in Several Key Areas
        In December 2004, FAA issued the first in a planned series of
    congressionally directed annual reports that outline the agency's plans
    for hiring new controllers to replace those expected to leave over the
    next 10 years. The 2004 plan also outlined various initiatives for
    increasing controller productivity and for decreasing on-the-job
    training (OJT) time and costs. FAA updated the 2004 plan in June 2006
    and again in March 2007.
        In February 2007, we reported on the results of our review of FAA's
    progress in implementing key initiatives of its controller workforce
    plan. Overall, we found that FAA continues to make progress in
    implementing a comprehensive and complex staffing plan. For example, we
    found that FAA made significant improvements by centralizing many
    aspects of its hiring process. We also found that FAA made progress in
    reducing the time and costs to train new controllers, primarily through
    greater use of simulator training at the FAA Training Academy, and
    implemented a new national database to track on-the-job training
    statistics. Further progress is needed, however, in several key areas.
        First, FAA is still in the process of validating facility-level
    staffing standards, which are a foremost necessity in effectively
    placing newly hired controllers where they are most needed. Planning by
    location is critical because FAA has over 300 terminal and en route air
    traffic control facilities with significant differences in the types of
    users served, the complexity of airspace managed, and the levels of air
    traffic handled. Without accurate facility-level planning, FAA runs the
    risk of placing too many or too few controllers at these locations.
        FAA is aware of this concern and is validating its facility
    staffing standards down to the sector and position level for each
    location in order to develop accurate staffing ranges for all of its
    facilities. FAA expects to complete this assessment for its 21 en route
    centers (its largest facilities) by the end of this year. However, FAA
    does not expect to complete the entire project, including terminal
    facilities, until late 2008. In the interim, FAA established staffing
    ranges by facility, which take into account the existing staffing
    standard models but also include facility manager input and expected
    productivity improvements. Although these ranges are a step toward more
    accurate controller levels, they are not a replacement for a facility-
    level staffing range based on validated staffing standard models.
        We recommended that FAA report the progress made in validating
    facility staffing standards in its next annual update to the workforce
    plan, including the number of facilities completed, the staffing ranges
    established for each location, and the estimated completion date for
    all remaining facilities. FAA concurred with our recommendation and
    included the interim staffing ranges for all facilities in its March
    2007 update.
        Second, FAA reached its goal of reducing controller staffing by 3
    percent relative to its national staffing standard for fiscal year
    2005, but it is unknown whether the initiatives established in the 2004
    plan were effective in helping achieve that reduction. FAA introduced
    several initiatives in the 2004 plan intended to improve workforce
    efficiency and controller productivity. Those initiatives include
    efficiencies such as reducing the use of sick leave by 8 percent,
    ensuring appropriate use of workers' compensation benefits, and
    increasing scheduling efficiencies.
        FAA achieved a 3-percent productivity gain in fiscal year 2005 by
    decreasing total controller staffing by 3 percent relative to its
    national staffing standard, a goal established in the 2004 plan.
    However, it is unclear what, if any, additional impact FAA's
    productivity initiatives had on controller productivity because FAA did
    not establish baseline metrics for measuring their effectiveness. We
    recommended that FAA establish baseline metrics for the initiatives and
    update the plan annually to reflect actual progress in achieving each
    initiative and, ultimately, in accomplishing its goal to reduce
    controller staffing by 10 percent. FAA agreed to continue providing
    status updates for the initiatives but stated that estimating the
    contribution of each initiative would be labor intensive and costly and
    would divert resources.
        We believe that FAA should reconsider its position. FAA runs the
    risk of simply having fewer controllers controlling more traffic
    without the benefit of metrics to determine if the productivity
    initiatives are driving the reductions in staffing. This is important
    given that the agency is still validating its staffing needs at the
    facility level. FAA's 2007 update did not include an update on its
    productivity goals.
        We also recommended that FAA identify the annual and total costs
    for hiring, training, and certifying new controllers to meet future
    requirements. The cost of hiring and training over 15,000 new
    controllers will be substantial, particularly since it currently takes
    2 to 5 years for new controllers to become fully certified. During that
    time, FAA incurs the cost of the trainee's salary and benefits as well
    as the cost of the salaries and benefits of the certified controllers
    who instruct trainees individually. FAA concurred with our
    recommendation and included estimates for the salary and benefit costs
    of newly hired controllers each year through 2016 in its March 2007
    update to the plan.
    An Evolving Aviation System Requires That FAA Maintain a Sufficient
            Number of Safety Inspectors Positioned in the Right Locations
        Safety is and must remain FAA's highest priority. Although
    accidents have occurred in recent years, the United States continues to
    maintain the safest aviation system in the world. While much credit is
    due to safety systems that air carriers have built into their
    operations, FAA regulations and inspectors play an important role in
    providing an added layer of safety oversight. As shown in table 4, this
    oversight covers a vast network of operators and functions, which make
    up the largest, most complex aviation system in the world.

                        TABLE 4.--FAA INSPECTORS' WORKLOAD
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
    Commercial Air Carriers....................................          123
    Flight Instructors.........................................       90,555
    Repair Stations............................................        4,927
    FAA Designee Representatives...............................       11,000
    Active Pilots..............................................      744,803
    Aircraft...................................................      347,326
    Approved Manufacturers.....................................        1,738
    FAA-Licensed Mechanics.....................................      320,293
    ------------------------------------------------------------------------
    Source: FAA.

        FAA's 3,865 inspectors must oversee both domestic and foreign
    aspects of these operations--a task made more difficult by the rapidly
    changing aviation environment. To ensure that the system remains safe,
    FAA must maintain a sufficient number of inspectors.
        FAA needs effective oversight systems to maximize inspector
    resources.--FAA will never have an inspection workforce that is large
    enough to oversee every aspect of aviation operations. As a result, FAA
    is working toward using risk-based safety oversight systems--that is,
    systems that target inspection resources to areas of greatest risk.
        Without question, risk-based oversight is the best approach;
    however, our past reports have identified a wide range of areas in
    which FAA should strengthen its inspector oversight. For example, air
    carriers continue to increase their use of external maintenance
    facilities, but FAA still needs to implement better processes to
    determine where air carriers send their critical maintenance. In
    December 2005, we reported \13\ that FAA must understand the full
    extent and type of work that is being performed by non-certificated
    repair facilities. These facilities are not licensed or routinely
    visited by FAA inspectors but perform critical maintenance, such as
    engine replacements. FAA has yet to develop a process to determine
    which non-certificated repair facilities perform this type of
    maintenance for air carriers. Until FAA knows where critical
    maintenance is performed, it cannot ensure that it has focused its
    inspection resources to areas of greatest risk.
    ---------------------------------------------------------------------------
        \13\ OIG Report Number AV-2006-031, ``Review of Air Carriers' Use
    of Non-Certificated Repair Facilities,'' December 15, 2005.
    ---------------------------------------------------------------------------
        FAA developed a risk-based oversight system for FAA-certified
    repair stations; however, it only recently completed full
    implementation of the system. If used effectively, the new repair
    station oversight system should significantly improve FAA's ability to
    target resources to areas of higher risk in this growing segment of the
    aviation industry.
        A changing aviation environment requires strategic inspector
    placement.--The pace at which changes are occurring in today's aviation
    environment makes it imperative that FAA place sufficient resources in
    areas where they are most needed. FAA has made at least two attempts to
    develop a staffing model to determine the number of inspectors needed
    and the best locations for placement. Neither model, however, provided
    FAA with an effective approach to allocate inspector resources. In
    September 2006, the National Research Council completed a study of
    FAA's current methods for allocating inspector resources. This study
    validated a concern that we have also reported--that FAA's current
    method of allocating inspectors is antiquated and must be redesigned to
    effectively target inspectors to those areas of higher risk.
        In particular, the Council reported that the changing U.S. and
    global aviation environments have important implications that will be
    key drivers of future inspector staffing needs. For example, airlines'
    outsourcing of aircraft maintenance, FAA's shift to a system safety
    oversight approach, and safety inspectors' attrition and retirement are
    all important changes that must be considered in determining staffing
    needs. This year, 28 percent (1,085 of the 3,865) of the current
    inspector workforce will be eligible to retire. By 2010, 44 percent of
    the workforce will be eligible to retire.
        Unless FAA develops an effective staffing model, however, it will
    not be able to make effective use of the resources that it obtains.
    Further, the Council stressed that FAA must ensure that its safety
    inspectors are sophisticated database users, with knowledge of system
    safety principles and an analytical approach to their work. In
    addition, inspectors must maintain their capabilities to conduct
    thorough on-site inspections of air carrier, aircraft maintenance, and
    aircraft manufacturer operations.
        At the same time, FAA must prepare for emerging safety issues, such
    as very light jets and unmanned aerial vehicles. For example, by 2017,
    approximately 5,000 new aircraft known as very light jets will be an
    integral part of the U.S. aviation system. These aircraft will be flown
    by a new class of pilots with mixed levels of expertise and will vie
    for airspace with commercial jets. Three models of very light jets were
    certified in 2006 for operation. As these become operational, FAA
    inspectors will face new oversight challenges in every aspect of FAA's
    operations, including inspector oversight of pilot training and
    aircraft maintenance and air traffic control.
             determining the appropriate amount of airport funding
        In the months following the release of FAA's reauthorization
    proposal, Congress, FAA, and aviation stakeholders have been discussing
    important questions about how to fund airport improvement projects. Key
    issues for the reauthorization debate will be the fiscal year 2008 AIP
    and PFC funding levels, project priorities, and project eligibility.
    Airport Improvement Program
        FAA is requesting $2.75 billion for the AIP in fiscal year 2008.
    Since the current authorization, Vision 100, expires in fiscal year
    2007, no AIP authorization target exists for fiscal year 2008. However,
    the fiscal year 2008 request is a substantial reduction over the fiscal
    year 2007 authorized level in Vision 100.
        The AIP supports the airport system by providing funds to primarily
    enhance safety and security, maintain the infrastructure, increase
    capacity, and mitigate airport noise in surrounding communities. AIP
    authorized funding has steadily increased over the last 9 years. As
    shown in figure 2, authorized funding increased by approximately 54
    percent from 1999 to 2007. Since 2001, the AIP has been authorized at
    $3.2 billion or higher in funding each year.

        As shown in table 5 below, 2 of the last 3 years' budget requests
    have been significantly less than authorized levels. The fiscal year
    2007 budget request for AIP funding of $2.75 billion was nearly $1
    billion less than authorized under Vision 100 for fiscal year 2007.

                         TABLE 5.--AIP AUTHORIZED AND BUDGET REQUEST FUNDING LEVELS 2005 TO 2007
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                               Fiscal Year                              Authorized    Budget Request   Funding Level
    ----------------------------------------------------------------------------------------------------------------
    2005 (Vision 100)...............................................           3,500           3,500           3,500
    2006 (Vision 100)...............................................           3,600           3,000           3,500
    2007 (Vision 100)...............................................           3,700           2,750          3,500
    ----------------------------------------------------------------------------------------------------------------
    Source: FAA budget submissions from fiscal year 2005 through fiscal year 2007.

        However, Congress has provided FAA with close to the Vision 100
    authorized amounts in fiscal year 2005 and fiscal year 2006. For fiscal
    year 2007, the AIP is funded at $3.5 billion, which is only a $200
    million reduction from the fiscal year 2007 authorized level, not the
    nearly $1 billion reduction requested in FAA's fiscal year 2007 budget.
        With the potential decrease in available AIP funds, FAA must take a
    more proactive role in managing and overseeing airport grants. Since
    the early 1990s, we have identified hundreds of millions of dollars in
    airport revenue diversions--revenues that should have been used for the
    capital or operating cost of an airport but were instead used for non-
    airport purposes. In the last 4 years, we reported on revenue
    diversions of more than $50 million at seven large airports, including
    one airport whose sponsor--a local government agency--diverted about
    $40 million to other projects not related to the airport.
        FAA is now taking a more active role to identify airport revenue
    diversions, but airports must do their part to ensure that airport
    revenues are not used for non-airport purposes. Similarly, as we
    testified last year,\14\ ensuring that airports dispose of land
    acquired for noise mitigation purposes when the land is no longer
    needed for noise compatibility purposes or airport development would
    also provide additional funds for airport projects. Our review \15\ in
    2005 of 11 airports identified approximately $242 million that could be
    used for other noise mitigation projects at the respective airports or
    returned to the Trust Fund.
    ---------------------------------------------------------------------------
        \14\ OIG Report Number CC-2006-027, ``Perspectives on FAA's fiscal
    year 2007 Budget Request and the Aviation Trust Fund,'' March 28, 2006.
        \15\ OIG Report Number AV-2005-078, ``Audit of the Management of
    Land Acquired Under the Noise Compatibility Program,'' September 30,
    2005.
    ---------------------------------------------------------------------------
        With growing demands for airport improvement projects and
    potentially less AIP funding available, AIP funds must be directed to
    the Nation's highest priority projects while meeting the unique needs
    of small airports. During our current review of the AIP, we found that
    FAA policies and procedures, for the most part, ensure that these high-
    priority projects are funded with AIP funds. We also found, however,
    that the AIP Military Airport Program set-aside \16\ (MAP) can result
    in low-priority projects being funded at an airport that meets set-
    aside program requirements while higher-priority projects at other
    airports could go unfunded.
    ---------------------------------------------------------------------------
        \16\ Under Vision 100, the AIP discretionary fund is subject to
    three statutory set-aside programs that benefit (1) noise compatibility
    planning to mitigate airport noise in surrounding communities, (2) the
    Military Airport Program to convert former military fields to civilian
    airfields, and (3) certain reliever airports.
    ---------------------------------------------------------------------------
        In order to meet the required level of MAP set-aside funding of
    approximately $34 million per year, the majority of projects being
    funded are comprised of lower-priority projects as rated under FAA's
    numerical rating system. FAA ranks projects on a scale of 0 to 100.
    Projects rated at 40 or above are generally funded by FAA. However, in
    fiscal year 2006, 17 of 25 (68 percent) MAP projects with ratings
    ranging from 17 to 36 were funded at an estimated cost of $31 million,
    as a result of the MAP set-aside funding requirements. For example, one
    project with a rating of 19 was funded at a cost of more than $2.2
    million to rehabilitate a parking lot.
        Given the growth in projected passenger traffic and the
    Department's commitment to accelerate major airport infrastructure
    projects by giving priority treatment and resources to capacity
    projects, it may be time to re-examine AIP set-aside funding levels and
    the type of projects funded. We will report on FAA's prioritization of
    AIP funds later this year.
    Passenger Facility Charges
        In addition to AIP funds, PFCs have become an important funding
    mechanism for airports. For instance, between 1992 and 2006, FAA
    approved the collection of $57.3 billion in PFCs. Of this amount,
    airports have collected approximately $22 billion, with another $2.6
    billion anticipated for 2007. In comparison, airports received about
    $35.2 billion in AIP grants between 1992 and 2006, with FAA requesting
    another $2.75 billion for 2007. Overall, airports anticipate using 34.7
    percent of PFC collections to finance landside projects (e.g.,
    terminals, security, and land), another 31.5 percent for bond interest
    payments, 16.7 percent for airside projects (e.g., runways, taxiways,
    and equipment), 6.8 percent for access roadways, 4.8 percent for noise
    abatement, and 5.5 percent for the Denver International Airport (see
    figure 3).\17\
    ---------------------------------------------------------------------------
        \17\ FAA tracks Denver's PFC separately due to its large size and
    because it was used to fund the new airport, not specific projects.

        Currently, PFCs are capped at $4.50 per segment of flight (a
    maximum of $18.00 on a round trip). The current cap on PFCs is an
    important matter for this Committee and has significant implications
    for major airports' capital expenditure plans. Over 75 percent (248 of
    328 airports) of the airports collecting a PFC charge the maximum
    amount. The current cap has led some airports to collect PFCs for
    extremely long periods of time in order to cover the cost of their
    projects, including: Clarksburg, West Virginia (50 years); Miami,
    Florida (34 years); Detroit, Michigan (25 years); and Denver, Colorado
    (25 years). Overall, 45 percent of airports collecting a PFC have set
    collection periods longer than 10 years. Other airports such as Chicago
    O'Hare International, are anticipating future increases in the cap as
    part of their financing plans. The funding of future airports projects
    and the level of AIP funding and PFC charges will be important issues
    as Congress decides how best to finance FAA.
        An important issue regarding PFCs is FAA's reliance on airport
    sponsors for PFC oversight. Unlike AIP grants, DOT and FAA officials
    have concluded that the agency lacks clear authority to prevent
    airports from contracting with suspended or debarred companies for
    projects funded by PFCs. This is significant because, of the 838
    projects that FAA approved in fiscal year 2006 to receive PFC funding,
    194 are to be funded solely by PFCs. Ninety-three others will be funded
    via PFCs and other non-AIP funding sources. Moreover, of the associated
    $2.7 billion in approved PFC collections, an estimated $1.8 billion (67
    percent) will go for projects funded solely by PFCs or a combination of
    PFC and other non-AIP funding sources. According to FAA, however,
    companies suspended or debarred for committing fraud on other
    Government contracts cannot be excluded from projects funded solely
    with PFCs. Congress should consider legislation to address this risk
    area.
                       acquisition and contracting issues
        Providing increased attention to ensure that procurement and
    acquisition activities are conducted in an efficient and effective
    manner and that taxpayer dollars are protected from fraud and abuse is
    a Government-wide priority, and we have focused significantly more
    audit and investigative resources on procurement and acquisition
    issues. In our testimony today, we would like to highlight two specific
    watch areas for FAA: support services contracts and the transition of
    flight services to contract operations.
    Support Services Contracts
        FAA faces challenges for each phase of the acquisition cycle,
    including planning, awarding, and administering support services
    contracts. In fiscal year 2006, FAA obligated about $930 million for
    support services using numerous contracts and three multiple-award
    ``umbrella'' procurement programs.
        In September 2006, we issued a report \18\ on our review of the
    RESULTS program (one of the three multiple-award programs), for which
    FAA has awarded about $543 million since program inception. We found
    that the program was not properly established or managed. Continued use
    of this program would cost FAA tens of millions of dollars in higher
    costs. FAA terminated this procurement program in 2006 and started
    strengthening oversight of all support service contracts. FAA needs to
    pay special attention to the following.
    ---------------------------------------------------------------------------
        \18\ OIG Report Number FI-2006-072, ``Audit of the Federal Aviation
    Administration's RESULTS National Contracting Service,'' September 21,
    2006.
    ---------------------------------------------------------------------------
        Verification of Labor Qualification and Rates.--Labor costs
    generally account for the largest portion of support service contract
    costs. Our RESULTS audit and FAA's own review identified incidents when
    contractor staff did not meet the expected qualifications for positions
    billed. For example, we found that an employee on a contract was
    originally billed as an administrative assistant at an hourly rate of
    $35. Four months later, the same employee was billed as an analyst at
    an hourly rate of $71 without any proof of additional qualifications.
    Verifying contract labor qualification for the rates billed could
    potentially save FAA millions of dollars for support services.
        Based on our RESULTS audit, and as part of an agency-wide
    initiative announced by the FAA Administrator to strengthen internal
    controls over procurements, FAA reviewed one of its other multiple-
    award programs, BITS II, and found similar problems. For example, FAA
    found evidence that multiple contractors had extensively billed FAA for
    employees at labor rates that were higher than their actual education
    and experience warranted, as specified by terms of the contract.
        FAA referred this matter to us for investigation. In one case, we
    found that a contractor invoiced FAA for the services of an employee in
    the labor category of ``Senior Management Analyst'' at a rate of $100
    per hour, instead of the proper rate of $40 per hour based on the
    employee's qualifications. Specifically, the ``Senior Management
    Analyst'' category required an individual with 12 years of direct
    experience, yet the employee in question had only 2 years of
    experience. As a result of our investigation to date, 12 of 13
    contractors have agreed to repay a total of $7.9 million in inflated
    billings under administrative settlements with FAA.
        Review of Contractor-Proposed Prices.--Our audit found that FAA
    awarded contracts without sufficient competition and price analyses.
    FAA now requires that the Deputy Administrator approve all new
    contracts valued over $1 million that are awarded on a sole-source
    basis. While this is a step in the right direction, FAA still needs to
    strengthen its review of contractor-proposed prices. When facing
    inadequate competition from bidding contractors, FAA's contracting
    officers are required to perform a price analysis to assess the
    fairness of contractor-proposed prices. We found that this control was
    not working in many incidents. For example, we found a case where the
    Independent Government Cost Estimate was prepared by the contractor to
    whom the contract was awarded. We plan to follow up on FAA's use of
    price and cost analysis techniques to ensure the reasonableness of
    prices in contract proposals.
    Controls Over the Conversion of Flight Service Stations to Contract
            Operations
        On February 1, 2005, FAA awarded a 5-year, fixed-price incentive
    contract (with 5 additional option years) to Lockheed Martin to operate
    the Agency's 58 flight service stations in the continental United
    States, Puerto Rico, and Hawaii. The contract, worth about $1.8
    billion, represents one of the largest non-defense outsourcing of
    services in the Federal Government.
        FAA anticipates that by contracting out flight service facilities,
    it will save $2.2 billion over the 10-year life of the agreement. On
    October 4, 2005, Lockheed Martin took over operations at the 58 flight
    service stations. We are currently conducting a review of FAA's
    controls over the conversion of flight service stations to contract
    operations. We plan on issuing our interim report later this month.
        Overall, we found that FAA has implemented effective controls over
    the initial transition of flight service stations to contract
    operations. These controls include contractual performance measures
    that require the contractor to achieve acceptable levels of operational
    performance and service and internal mechanisms that oversee the
    operational and financial aspects of the program.
        We also found that the agency uses these controls to monitor
    contract flight service stations and, in some cases, penalizes the
    contractor for poor performance. To date, FAA has imposed approximately
    $9 million in financial penalties against the contractor for failing
    several contractual performance measures. FAA is requiring the
    contractor to submit corrective action plans to resolve the deficient
    performance measures. In addition, FAA and the contractor are now
    entering the next and most critical phase of the transition.
        In February, the contractor began efforts to complete, test, and
    implement a new software operating system for flight service stations
    and consolidate the existing 58 sites into 3 hub and 16 refurbished
    locations--all by the end of July.\19\ Any slips in that schedule could
    have significant implications to the costs and anticipated savings of
    the transition.
    ---------------------------------------------------------------------------
        \19\ One facility, which was originally planned to be refurbished,
    will now remain open until the end of the year; it will then be
    consolidated into the Leesburg hub.
    ---------------------------------------------------------------------------
        In addition, FAA could be facing further reductions to savings as
    Lockheed Martin is requesting nearly $177 million in equitable
    adjustments to the contract. Most of that adjustment ($147 million) is
    based on the contractor's claim that it was not provided the correct
    labor rates when it submitted its bid.
        In April, FAA provided us with the first of its planned annual
    variance reports comparing estimated and actual first-year costs. This
    is an important tool in that it will allow FAA to identify cost
    overruns, determine the reasons for the overruns, and allow for
    adjustments to ensure that savings are realized. We are currently
    reviewing the completed variance report and assessing the contractor's
    progress in executing the next phase of the transition.
        That concludes my statement, Madam Chairman. I would be happy to
    address any questions you or other members of the subcommittee may
    have.

                         RE-BASELINING CAPITAL PROJECTS

        Senator Bond. Thank you very much, Mr. Scovel. First, to
    both of you, it appears the FAA has implemented a system of re-
    baselining, as we've discussed, and it's very difficult to
    examine adequately programs as to projected cost savings and
    implementation dates.
        But now, it shows everything's on schedule, on time, on
    performance. Please let me know how these programs have
    changed, and how do we determine the true savings of a program,
    the true cost, and whether a program is on time per the initial
    implementation, if the goal post changed when the team loses 10
    yards instead of gains 10 yards. Madam Administrator?
        Ms. Blakey. I'd be happy to, because there seems to be some
    real energy around something we believe is a good practice. In
    fact, I've worked closely with Congress, and have been
    instructed to do so by both the Department of Transportation
    and OMB.
        We are trying to be more accountable and transparent, for
    when circumstances do change on these major capital programs,
    which they do. As you can appreciate, that happens in business,
    that happens anywhere where you're making major technology
    investments over a long period of time.
        Now, I think it's important to understand, when we say that
    we have our major capital programs on schedule and on budget,
    we track them very carefully. There are 37 programs that we're
    tracking in the Flight Plan, and 27 of those are what we
    consider to be major, and that has to do with size and scope.
        At this point, this year, 100 percent are on schedule when
    we have re-baselined, and there were seven that I can count
    that are major programs since 2004, so there's not very many
    we're talking about here that we have in fact re-baselined.
        We do have reasons in each case for that. One that I would
    particularly point out is the WAAS program. The WAAS program is
    turning out to be a tremendous success. I'm not talking about
    just in this country. I'm talking about worldwide, that it is
    being adopted all around the globe as a GPS basis for
    navigation, that it is getting close to Cat 1, in terms of ILS
    capability, in terms of its performance.
        What has happened with the WAAS program is that we re-
    baselined because several years ago--and I believe this
    probably was 2004--we had a shortage of funds in our operations
    account, because of the lease of the satellites and the lease
    of some of the connectivity were all coming out of operations.
        In consultation with both Congress and OMB, we moved those
    costs into our capital investment line. Absolutely, that caused
    a bump in the F&E account.
        But I think that was sound business. It was the right thing
    to do, because we were having severe constraints in the cost of
    our operations at that point. So that is one example.
        Senator Bond. Let me just ask you about that. In other
    words, you included operational cost, not in the cost of the
    program, not in the capital cost of the program, but in
    operations, and when you had a shortfall in operations, then it
    was an accounting move, just to charge those operating costs to
    the program, whereas you had not done so before. Is that what I
    understand?
        Ms. Blakey. Essentially. Essentially, that is correct. In
    other words, where should you count the lease of the
    satellites? We felt that this was an appropriate way to deal
    with budget shortfalls.
        There has been some cost growth in the WAAS program over
    time, but it was determined to be a capital lease by OMB, not
    by FAA.
        Again, I think everyone was comfortable with that at the
    time, in terms of that shift. So yes, the taxpayer would've
    paid for it one way or the other.
        Senator Bond. Mr. Scovel? Do you have a comment on that?
        Mr. Scovel. Yes. Thank you, Senator Bond. Many members of
    the subcommittee this morning have mentioned their reservations
    about FAA's use of budget and schedule metrics.
        We share the committee's reservations, but we commend FAA
    and other agencies in government for following OMB's directions
    and using cost and schedule metrics as worthwhile tools for
    management.
        We think that there's always the rest of the story to be
    told. We believe that, first of all, a statement such as 100
    percent of projects are on time or on budget simply represents
    a snapshot in time, rather than a videotape.
        That is important, because, as Administrator Blakey just
    described, the evolution of the WAAS program, program events,
    in terms of capabilities and performance requirements, will
    change over time.
        A simple statement that it is on time and on budget doesn't
    capture that evolution, and certainly, the taxpayer and the
    Congress will be interested in that entire story, rather than
    just the sound bite.
        The budget metrics should be--I wish to emphasize represent
    a snapshot largely of the current fiscal year picture. In other
    words, it represents a variation from the most recent baseline
    figure, which has been reset essentially to zero. So it doesn't
    capture cost events that occurred before the re-baselining
    event. Again, that is part of the rest of the story.
        This is done in response to OMB's directions. We fully
    acknowledge that, what happened with the WAAS program. We
    commended Administrator Blakey this morning for explaining very
    cogently what happened with that program, but if we look simply
    at a statement, on time, on budget, it doesn't convey what the
    true parameters of that particular program's events were.
        Finally, when it comes to schedule metrics, sir, we would
    ask that there be greater specificity on the part of FAA in
    choosing which metrics it wishes to highlight in its reports to
    the public and to Congress.
        Here, we would draw a distinction between a simple task
    completion, such as delivery of units to a site for
    installation, and a metric that would capture movement toward
    full operational capability.
        Some of the metrics that FAA has chosen highlight the
    latter, much to their credit. Others, for example, simply, as I
    mentioned, delivery to a site for installation, it doesn't give
    you or the public a good idea of how far along a program may
    truly be to becoming full mission capable.

                        AIR TRAFFIC CONTROLLER STAFFING

        Senator Bond. Thank you, Mr. Scovel. Senator Lautenberg?
        Senator Lautenberg [presiding]. Thanks, Senator Bond.
    Administrator Blakey, it's become abundantly clear to me that
    FAA doesn't really know how many air traffic controllers are
    needed at the Newark Tower. Last year, you said that 35 were
    needed. This year, if I understand your statement correctly,
    you say between 30 and 36.
        Well, as we discussed before, there are only 29 certified
    controllers there, and that, despite an increase in movements
    at the airport, it is my understanding that in the last 3
    years, staffing levels at Newark have dropped 20 percent, and
    operational errors have increased 700 percent.
        Now, for one of the most complex jobs in the country, when
    will we have fully-trained, certified controllers at Newark to
    assure public safety? It's understood that more are needed, and
    more will be placed there.
        Ms. Blakey. All right. The numbers currently--and as you
    know, these are always fluid, depending upon some other time on
    a given day, or some change occurring; someone gets promoted
    into supervisory ranks. But currently, at Newark Tower, we have
    27 fully certified controllers on board.
        We also have three who have been fully certified
    controllers, veteran controllers from other facilities who are
    learning the specific sectors there, and are partially
    certified. Again, we consider them, since they are veterans and
    have been working in other towers in complex airspace, that
    they are fairly new for Newark. We also have what we call
    developmentals, and those are true trainees, and there are two.
        Right now, that therefore brings us to 32. The authorized
    staffing for the Newark Tower is between 30 and 36. As you
    know, we work with a range. And at this point, we have brought
    in those two new developmentals.
        We are scheduled before the end of the fiscal year to have
    an additional seven coming in. So that will be planned to
    increase, and when you add seven more, you're up there close to
    39, unless we have additional retirements.
        Senator Lautenberg. What you're saying is that we really
    haven't met the schedule thus far. Mr. Scovel, in your opinion,
    is FAA fully aware of how many controllers are needed in each
    of these facilities to run this system in a safe and efficient
    manner?
        Mr. Scovel. Thank you, Senator Lautenberg. I'm not prepared
    at this point to comment specifically on the New York TRACON. I
    know that is a specific concern of yours. If you'd like, I can
    get back to you with perhaps a more detailed analysis.
        Our effort, my staff's effort, has concentrated rather
    truly systemwide. FAA's 2004 Controller Workforce Plan
    indicated to us that it didn't have a good grasp of how many
    controllers would be needed at that time in order to replace
    what we expected to be a sizable number of retirements of
    controllers hired immediately after the 1981 strike.
        We recommended a workforce study in order to validate at a
    facility level what would be needed, and, to its credit, FAA
    has undertaken that, and the Mitre Corporation currently has
    that underway this year, with respect to en route centers, and
    they expect to complete their study of en route center staffing
    in 2007.
        It's our understanding that it won't be until later in 2008
    that other facilities, to include TRACONs and the New York
    TRACON, might be completed.
        FAA's most recent update to its workforce plan, which was
    just issued in March of this year, has facility-level targets
    or numbers, and those are updates of their own internal
    numbers, with management input and some analysis over
    productivity achievements and so forth. My understanding is
    that is the most recent number that the agency is working from.
        Senator Lautenberg. So let's be sure, Madam Administrator.
    Even using your controller staffing range estimates, how many
    facilities would you say are below the minimum range needed?
        Ms. Blakey. Very, very few. I can get you a number. That's
    actually not really an issue in the system. We have a handful
    of facilities where at this point, we are below the authorized
    staffing range, and we're working very quickly to bring
    controllers into them.

                        AIR TRAFFIC CONTROLLER STAFFING

        For the most part, there was a period where we had several
    centers that we were particularly concerned about. We've done a
    great deal of center hiring, and right now, we have a few
    smaller facilities. But let me be clear, Senator Lautenberg.
    The Newark Tower is within the staffing range. We are not below
    the staffing range.
        Senator Lautenberg. Well, if you want to add these new
    people, the transfers who aren't really qualified under the
    usual definition, and you talked about two trainees. That is
    not what we discussed in last year, Madam Administrator.
        I think that we ought not to try to bypass what was the
    standard established by your own statement, and now talk about
    how we're going to be doing by the end of the year.
        We're late on these things, no matter how you slice it. As
    a consequence, we see the increase in operational errors there.
    According to the information I have, there are 164 facilities
    that are below the minimum range, and even if you count the
    trainees, we're 61 down.
        Do you dispute those figures?
        Ms. Blakey. They don't sound correct, but I'm looking back
    there. I'm hoping staff can give me the specifics. I think we
    have them for you. I'll certainly submit them for the record.
        [The information follows:]
                              Controller Staffing
        The following table shows the number of facilities below their
    corresponding authorized staffing range minimums as of April 28 and
    August 18 (i.e., based on end of pay period data).

                    NUMBER OF FACILITIES BELOW STAFFING RANGE
    ------------------------------------------------------------------------
                                                                    All
                                             All controllers    Controllers
                                                   \1\           excluding
                                                              developmentals
    ------------------------------------------------------------------------
    April 28, 2007.........................               17              81
    August 28, 2007........................               17             107
    ------------------------------------------------------------------------
    \1\ All controllers include CPC, CPC-IT, and developmentals.

        CPC-IT is a certified professional controller at one facility but
    in training for certification at a new facility.

        Senator Bond. Thank you very much, Senator Lautenberg.
        Senator Lautenberg. Mr. Chairman, what----
        Senator Bond. Well, we have been--I cut off my questions
    after five minutes to give you an opportunity. I just wanted to
    mention--are you finishing up now, because I have some
    questions.
        Senator Lautenberg. Well, I would like to, but I think
    we're in kind of a funny situation, where traditionally, I
    thought the majority party exceeds to the chairmanship of a
    subcommittee or committee. But in fairness, if you have
    questions you want to interrupt for, please do.
        Senator Bond. I just thought we ought to trade back and
    forth for 5 minutes, but please, finish up your questions.
        Senator Lautenberg. Well, I just wanted the Inspector
    General's verification. Are you satisfied with the answer that
    we have about the number of facilities that are understaffed,
    using the parameters that we do?
        Mr. Scovel. Senator, I would ask permission to do some
    quick research on that and get back to you with an answer for
    the record, better information.
        [The information follows:]

        Whether a facility is understaffed compared to the staffing ranges
    established by FAA depends on which types of controllers are included
    in the comparison. Non-supervisory bargaining unit controllers assigned
    to a particular facility fall into three categories:
        Certified Professional Controllers (CPCs).--Those controllers fully
    certified to control air traffic at their assigned facility;
        Certified Professional Controllers-In Training (CPC-IT).--Those
    controllers that were fully certified at a previous facility, have
    transferred to a new facility, and are currently training on the new
    airspace at their assigned facility; and
        Developmental Controllers.--Newly hired controllers that have not
    been fully certified to control air traffic at their assigned facility.
        According to FAA, the staffing ranges developed for air traffic
    control facilities and published in the 2007 Controller Workforce Plan
    update were based on the number of CPCs and CPC-ITs required to control
    air traffic at a specific location. The staffing ranges developed by
    FAA do not include developmental controllers. Therefore, when we
    analyzed facility staffing reported by FAA, we compared the facility
    staffing ranges to the number of CPCs and CPC-ITs actually on-board at
    each location--we did not include the number of developmental
    controllers on-board at each facility.
        The results of our analysis shows that as of April 2007, there were
    84 facilities that had actual controller staffing levels (CPCs and CPC-
    ITs) below the minimum staffing range for that location. As of August
    2007, the number of facilities that had actual controller staffing
    levels (CPCs and CPC-ITs) below the minimum staffing range for the
    location had increased to 107.
        As of August 2007, the Newark tower had 26 CPCs and 3 CPC-ITs (29
    controllers) on board. The staffing range established for Newark tower
    is between 30 and 36 controllers.
        We are currently conducting an audit of FAA's facility training
    program. As part of that review, we are recommending that FAA report on
    the actual number of CPCs, CPC-ITs, and developmental controllers at
    each location in its next update of the Controller Workforce Plan. We
    plan on issuing our report during the second quarter of fiscal year
    2008.

        Senator Lautenberg. Senator Bond?

                          AIRPORT IMPROVEMENT PROGRAM

        Senator Bond. Thank you, Senator Lautenberg. The Airport
    Improvement Program is far below previously appropriated
    levels. Considering your own estimates about a growing need,
    how can your request for 2008 not be justified, when it doesn't
    come close to meeting the expanding need for our airport
    capacity?
        Ms. Blakey. We believe that you have to look at the
    entirety of our request to have a good picture of the support
    we're providing for airports. As you know, under a separate
    bill, of course, our reauthorization bill, we are requesting an
    increase in the amount of passenger facility charges from $4.50
    to $6.
        This enables very, very substantial revenue to be raised by
    airports around the country for the specific needs they have,
    and is something that they are able to do targeted to the exact
    projects that they need to fund at the time they need to fund
    them.
        What that also enables is it takes some pressure off the
    AIP funding, which, of course, comes in through our Trust Fund,
    so that we're able to provide significant funding for medium
    and smaller size airports.
        We would transition the very large airports that are
    eligible for PFCs from the discretionary AIP funded, and allow
    more funding for medium and smaller airports.
        Now, we believe that this is a good system. Certainly,
    Congress has looked at the AIP program differently over time,
    and allocated more funding coming from AIP. But we believe that
    the kind of streamlining we're proposing in the program will be
    a great asset.
        Senator Bond. Again, that depends upon the new structure,
    which is a triumph perhaps of hope over reality, in our
    experience. The fiscal year 2008 budget request proposed
    reorganizing the account structure even if Congress does not
    authorize a new financing system before the 2008 appropriations
    bill is enacted.
        What advantages would there be in changing the
    appropriations structure, absent a user fee system and the
    other proposed financial changes?

                           FAA ACCOUNT RESTRUCTURING

        Ms. Blakey. I think the new account structure reflects a
    more holistic understanding of the FAA's work. When you're
    looking at this, not many people in the public or in the large
    aviation community think in terms of F&E or R&D. They think in
    terms of what we're doing for safety, what we're doing for air
    traffic control, and capacity enhancements.
        So I think that it really does help, in terms of people
    understanding the large investments they were making on big
    areas that track to what people know are the key elements in
    the system. I would offer that as good rationale, but
    certainly, this does support a different kind of financing
    mechanism.

                               DELAYS IN THE NAS

        Senator Bond. A major question I raised with you earlier,
    there have been lots of horror stories this winter about severe
    delays due to weather and other unfortunate circumstances. You
    can't change the weather, but there are certain things that I
    think can be changed.
        As I believe I mentioned to you, I was the one who had the
    good fortune of sitting on a runway at National on an incoming
    plane. There were at least four full planes sitting there for
    2\1/2\ hours, and we were told that the FAA would not let the
    airplanes be brought in to the gate to unload the incoming
    passengers, because of some rule or regulation.
        The question I guess I would have for both you and Mr.
    Scovel is what can the FAA do? You can't manage the weather,
    you can't control what the carriers do necessarily, but what
    can you and the system do to alleviate the problems for
    passengers in these terrible weather delays?
        Ms. Blakey. Well, it's an excellent question, Senator Bond,
    and I wish I had the entirety of the solution here, because
    you're right. A tremendous amount of it is the God-given
    weather we have, and we have tremendous delays in the system.
    About 70 percent of the delays in the system are weather-
    related.
        That said, they're also related to capacity, and we make no
    bones about the fact that we cannot get, particularly in the
    congested corridors on the east coast, where you are flying,
    all the airplanes up there on a given day into that very
    congested airspace, and back down often, again, into airports
    like Newark and Washington, and New York out of Washington.
        I don't know the specifics, obviously, on that flight,
    although I might be able to trace it back with a little
    information and just see. But what I do find is that it's not
    infrequent to hear on the PA system in the cabin that FAA says,
    when it really does not go to FAA regulations.
        It is always the pilot's prerogative and responsibility to
    determine when an aircraft is going to get out of line and go
    back to the gate when they have been too long in queue, and
    that is something we rely on the airlines for. I know the
    Inspector General has been looking at those practices rather
    closely, so I would defer to him. But short of every gate at
    National being full, or some other problem having to do with
    the weather conditions, it is the responsibility of the pilot
    to make that determination.
        Mr. Scovel. Thank you, Senator Bond. Some members of my
    staff have spent the past 5 or 6 years, in fact, on so-called
    airline customer service issues. The Administrator mentioned
    the rule--and you did, as well, in recounting your history with
    landing recently at National--an FAA rule that an arriving
    flight would be prohibited from going to a gate, even if a gate
    were available.
        I'm not familiar with that rule. A rule that I am familiar
    with, however, is FAA's practice and rule for departing flights
    when they're in queue waiting for weather to clear, that if
    they leave the queue to return to a gate to offload passengers
    for their convenience, if they can get back in line, it's at
    the end of the line.
        We have suggested to FAA and to both Houses of Congress in
    testimony on customer service questions that that rule be
    examined as part of a way to increase airline customer service.
    We've also recommended to the airlines that they look at their
    contingency plans to provide for specific deadlines when
    customers may be offloaded for convenience or other reasons.
        We have also asked for airports and the FAA to assist in
    that, especially when it comes to getting the airlines together
    in order to share facilities, which would necessarily limit it
    at most airports, so that gates can be made available, even if
    they're not customarily assigned to a particular airline.
        Senator Bond. Thank you, Madam Administrator and Mr.
    Inspector General. I'll ask unanimous consent that the rest of
    my questions, and questions from Senator Specter, be submitted
    for the record. Thank you.

                                  LABOR ISSUES

        Senator Lautenberg. Madam Administrator, regarding working
    conditions, and with the air traffic controller workforce,
    there isn't--there hasn't been a negotiated agreement with
    their representatives and as a consequence, is it fair to say
    that there might have been higher than predicted retirements?
        Ms. Blakey. I think the effect of the work rules and pay
    that we put into place in September did cause an uptick in
    retirements last fall. We saw about a 25 percent increase. I
    think it was a negative reaction on the part of some of the
    controllers. We have, of course, stepped up our hiring plan as
    a result.
        The conditions in the facilities, we continue to keep a
    very sharp eye on, and address issues as they arise at the
    local level. I think we are being very effective in doing that.
        Senator Lautenberg. I just want to correct--there was a
    transposition in the number that I had, and the internal memo
    that we had an opportunity to review said there were 146, not
    164, facilities that are below the minimum range with their
    controller staffing.
        I wanted to ask, as mentioned when there was a failure to
    negotiate a new contract with the NATCA over employee
    compensation, working conditions, and even the dress code;
    however, you decided what you thought was appropriate and
    imposed your views.
        Now, given the difficulty among controllers, how can you
    work with NATCA to address the important safety issues, like
    controller fatigue? As you know, the National Transportation
    Safety Board recommended that this be done after the commuter
    jet crash in Lexington, Kentucky last year. So I would
    appreciate your view, Administrator Blakey.
        Ms. Blakey. Thank you, Senator Lautenberg, and let me be
    clear. The work rules that were put in place in this contract
    were not my view at all. They were over 2 years in the making
    on the part of a large team of managers who all came together
    to discuss better ways to have heightened safety and
    productivity in our facilities.
        All of those managers, of course, as you know, came up
    through the ranks of being controllers themselves. So we're
    relying on expert views and advice in terms of work rules. Let
    me mention that the dress code is simply asking that people
    wear pants, a collared shirt, and shoes.
        It is nothing more than that. There is no tie. There is
    nothing that anyone would consider in the workplace to be
    anything other than simply neat and casual. That is what we're
    looking for, rather than flip-flops, tank tops, et cetera.
        Now, on the issue of controller fatigue----
        Senator Lautenberg. After negotiating with them, I can't
    intercede here, because I don't know what--I understand why a
    dress code might be necessary to preserve an atmosphere of
    dignity, but negotiate that, please, with your group, and don't
    just impose it, because I think that then starts to stiffen the
    backs of people on both sides.
        Ms. Blakey. Senator Lautenberg, some of these things are
    surprising there would be that much energy and concern, about
    something that I think is considered to be just simple
    professionalism.
        That said, I would talk to you for a moment about fatigue,
    since you've raised that, because we are very concerned that we
    use the best practices possible, in terms of our staffing.
        The scheduling practices that the FAA has, in terms of
    shifts, and how those work, particularly on what we call the
    midnight shifts and the later shifts, are ones that were
    developed over the years, again, with NATCA, with the
    controller workforce, and much of the schedule as we have it
    right now is very much preferred.
        That said, I think we do have to look at the question of
    whether or not we should permit that kind of rolling and back-
    to-back scheduling. Perhaps we should insist that we run
    schedules that are consistent over a period of time for the
    same shift.
        Therefore, we would pay more attention to circadian rhythms
    and the latest research on fatigue. We're opening that question
    right now, at the urging of the NTSB.
        Senator Lautenberg. Again, negotiating with NATCA, I think,
    can facilitate a better working relationship, which I think has
    been slightly somewhat damaged by a relatively heavy hand on
    some things. I would urge you to negotiate these things with
    them, schedules, as you do other things.
        I want to ask you this. Controllers at the Newark Tower
    have tried to get FAA's attention for years about a potentially
    dangerous practice that FAA has endorsed there, that involves
    allowing two planes to land at the same time on intersecting
    runways. Is that a problem?

                       NEWARK LIBERTY AIRPORT PROCEDURES

        Ms. Blakey. The procedures that we have in place for
    allowing approaches using intersecting runways are well
    developed all around the country. As you know, many of the
    Nation's airports are old military airports, and they use
    intersecting runways a great deal, allowing simultaneous or
    offset approaches into those is something we have worked with
    and worked effectively.
        I'm not aware there's a real issue at Newark, but I'll be
    happy to take a look at that and see if there is something we
    need to address there.
        I will tell you this. We have just changed practices, for
    example, in Memphis, and we're always looking at better safety
    measures that we should take. So if there is an issue at
    Newark, I'd be happy to take it under advisement.
        Senator Lautenberg. Because last year, the agency renewed
    this program and found it to be a problem, and I quote
    ``requiring immediate attention.'' So I would urge you to take
    a look there.
        Before I surrender the chair here, I'm going to ask you a
    question about a proposed redesign of the airspace above New
    Jersey that is going to cause hundreds of thousands of
    residents in my State to face the increased noise from
    aircraft.
        Now, I've heard from many of them, in no uncertain terms,
    that they're concerned about this and feel it would be an
    inappropriate change. Now, I've heard from many constituents,
    and I've written to you twice now, asking for more public
    hearings in New Jersey on this issue.
        At a recent public hearing in Philadelphia, people were
    actually turned away at the door and did not get to see the
    maps and projections of how their lives would be affected under
    the FAA's plan.
        Now, I'll ask you now, will you hold another hearing in New
    Jersey on this issue, to accommodate, and at least let the
    people in the area know that their voices and their views
    count?

                               AIRSPACE REDESIGN

        Ms. Blakey. Senator, as you know, we have held multiple
    hearings over a period of time. This has been in the works for
    9 years. I can't tell you the numbers we have held, but we have
    held a lot in New Jersey itself.
        At this point, we have our very best information up on the
    Web site, and I would urge that any of the constituents that
    you have that need further information about the maps, the
    approach patterns, or the way the preferred alternative works,
    to go there. And if they want to send in questions via e-mail,
    we're very happy to respond.
        I think that's the most efficient way, given the years this
    has all evolved and the numbers of public hearings we've had.
    We do have a number of Members of Congress who would like to
    have public hearings. If we were to do that, I don't think
    there would ever be an end to it. After 9 years, I think we're
    there.
        Senator Lautenberg. I hope that you will find that in your
    schedule, you can do it. This is a major change. We have
    reviewed and rejected many changes of this type, trying to
    crowd up the airspace, and I would urge that you turn an ear to
    these people, and at least let them know that we're concerned
    about it.
        I think that is not an uncommon practice, and that is to
    have public disclosure or public review of these things.
        Ms. Blakey. It is important, Senator, to know that the
    airspace redesign that we're proposing actually results in a
    dramatic reduction in the number of people who are exposed to
    noise in the area.
        It also is essential to being able to continue to avoid the
    kind of delays that you have been so concerned about at Newark
    and at the New York and Philadelphia airports. We really do
    have to undertake changes in the very, very old way we sector
    the airspace.
        Senator Lautenberg. Please explain it to the people in New
    Jersey directly, that their fears are imagined and not real.
    Thank you. Thanks, Madam Chairman.

                                     ASDE-X

        Senator Murray [presiding]. Thank you, Senator Lautenberg,
    for filling in. I really appreciate it. Thank you. I apologize
    for having to be gone, and appreciate your patience.
        Administrator Blakey, you heard my concerns with my opening
    remarks about the ASDE-X program during--that I spoke about.
        Costs have grown by almost $100 million since you re-
    baselined the program, and are likely to grow even more, and
    you've fallen further behind schedule while serving fewer
    airports.
        And the systems are not performing as promised, especially
    as I talked about, when the weather's bad and the risk of
    runway incursions is really heightened.
        Your technological solution isn't performing very well, in
    fact, at SeaTac Tower. I wanted to ask you why you still
    promote this program as one that is on schedule and on budget.
        Ms. Blakey. I think it's important to understand what we're
    saying when we talk about programs being on schedule and on
    budget. If you want to look at programs from their very
    inception--some of the ones you mentioned are more than a
    decade old. AAS is really sort of the Dark Ages in terms of the
    FAA's history.
        It is like saying you never can consider that a team is
    winning this year, because way, way back, they had their losing
    season.
        We do believe that the re-baselining periodically is the
    right way to tackle changes in complex technological programs.
    Sometimes, slips are because of shortfalls in appropriations;
    sometimes, they're because of shortfalls from the standpoint of
    the technology itself. We're acknowledging that. But what we do
    say when we are on schedule and on budget is we take it within
    a fiscal year, and we look at it then. That's the way we can
    measure performance and hold people accountable.
        If we say that they're accountable for things that happened
    5 years ago, it's a defeating approach.
        Senator Murray. But this was re-baselined 18 months ago.
        Ms. Blakey. ASDE-X was re-baselined for several different
    reasons. It's important to know that we did incorporate some of
    the technical refresh that we would have done further down the
    road. As you know, you always do technical refresh on major
    software programs.
        It also combined the sites that we were going to place
    ASDE-X in. ASDE-X is an interesting program, because it was not
    originally designed for the way we are approaching it now.
    It's, in a sense, outperformed what we expected.
        It started as a program for small airports. It started as
    one that we would address runway problems in a less complex
    atmosphere.
        Because it has proven to be excellent technology, we are
    now deploying it at some of the airports with the most complex
    runway patterns, and frankly, the biggest problems with runway
    incursions. It has moved to the larger airports. When you do
    that, there are costs involved, and I think that has to be
    taken into account, as well. But on the whole, we believe that
    ASDE-X is one of the best safety programs we have got.
        At Seattle, we just installed some changes, and we think
    they're going to help address the problem. Seattle seems to
    have pretty complex challenges because of the weather
    conditions. The precip, and some fairly unique factors, that,
    make it more challenging than some other airports.
        Senator Murray. Well, rain and fog occur in a number of our
    airports around the country: San Francisco, Seattle, Alaska.
        Ms. Blakey. I would tell you, as I say, Seattle has proven
    to be a challenge, and we're spending a lot of time and money
    trying to address it.
        Senator Murray. Let me ask you, are you satisfied with the
    pace at which this equipment is being installed?
        Ms. Blakey. I would like for it to be faster. It takes us
    about 3 years to put an ASDE-X system in place. Because it is a
    critical safety program that has a significant effect on
    aircraft and vehicles on the airport surface, you have a lot of
    requirements that go into it--from site selection to the
    installation to operational testing.
        We also spent, at the beginning of ASDE-X a lot of time on
    the software and a lot of time on the initial requirements. So
    I think that the pace is going to pick up considerably, in
    terms of the deployment and actual commissioning.
        That is the reason we're less concerned than the IG is
    about the overall schedule.
        Senator Murray. Is it ever going to be able to perform in
    rainy weather?
        Ms. Blakey. Yes, absolutely. I can't tell you that we have
    all of the technical challenges completely solved, but we are
    addressing them, and I think we will.
        The issue of using radar, which depends on reflectivity off
    of surfaces, and at times, we found that sleet and certain
    forms of precip reflect. So we're trying to make sure that we
    go at this whenever we find that there's an issue. The same
    thing has been true, as you know, on the STARS system.
        Senator Murray. General Scovel, would you like to comment
    on any of this?
        Mr. Scovel. Thank you, Senator Murray. I would concur with
    Administrator Blakey that ASDE-X is a technology that has
    outperformed, and indeed, it has tremendous safety potential.
    It's unique in that it can use radar transponders and ADS-B
    data to generate target information and avoid potential
    collisions.
        You covered the history of the program in your opening
    statement. If I can add one data point to that, and that was,
    as originally conceived, ASDE-X, together with the AMAS and
    ASDE-3 systems, were designed to be in place at a total of 59
    airports. And if that had happened, then it was calculated that
    95 percent of the risk of fatal collisions could have been
    addressed.
        As the program currently stands, we won't hit 59 airports.
    My understanding is that 44 airports total will now have some
    sort of surface detection technology. I think that if the other
    15 airports are left uncovered, certainly, that should be
    worrisome.
        We mentioned cost and safety issues. My statement, for the
    record, indicated that 64 percent of the planned funding had
    been obligated to date, but only 8 of 35 systems had been
    placed in operational use. In other words, we're almost two-
    thirds of the way through the funding stream, and less than
    one-fourth of the systems have been installed.
        We have a gap. It doesn't appear that we will be able to
    get there from here without additional re-baselining and, of
    course, additional funding.
        When it comes to scheduling issues, we've mentioned as well
    that in fiscal 2006, four of seven planned systems were
    commissioned for use. It should also be noted that the agency
    has determined that the ASDE-X system for Chicago should be
    advanced on the schedule.
        We certainly don't quarrel with that decision, but it
    should be--Chicago had some unique ground safety challenges.
    But it should be noted that when a system is advanced on the
    schedule like that, it may well have a domino affect on other
    ASDE-X systems further down on the line.
        To address safety, just in passing, there's been talk of
    the dangers of intersecting runways and converging taxiways. We
    note that the agency has a modification to ASDE-X which is
    currently being tested in Louisville. I'm sure the committee
    and we have great hopes for that system, but it still remains
    unproven.
        When it comes to the unique weather challenges that you've
    talked about with regard to Seattle, specifically, it's our
    understanding that the agency has another modification to ASDE-
    X that is being tested at Orlando. Again, we have great hopes
    for that, but it still remains untested.
        NTSB's recommendation, longstanding now, that there be an
    alert system in the cockpit to alert flight crews of impending
    collisions on the ground, may be able to be addressed by
    incorporating ADS-B features into ASDE-X, but again,
    unaddressed, and we would hope that would be focused on in the
    future, and hopefully incorporated into the system.
        One final point regarding safety, Madam Chairman, and that
    is there's been recent press attention to the problem of ground
    vehicles at airports. That brings up the question of radio
    frequencies and funding to equip those vehicles with
    transponders.
        FAA has responded to that attention by promising to work
    with FCC to obtain radio frequencies. The question of funding
    for vehicles we think is up in the air. The agency certainly
    has a valid question when it asks why should it be responsible
    for funding of vehicles instead of airports, but that's a
    question that needs to be addressed, again, because it's
    certainly a very real danger of collision between aircraft and
    vehicles.
        Senator Murray. I appreciate that. And, General, while
    you're talking, you have in the past criticized the contracting
    mechanism the FAA used for the ASDE-X program. Why, in your
    view, did the FAA continue to use a cost-plus contract with
    undefined requirements for that technology?
        Mr. Scovel. You know, I'd better continue----
        Senator Murray. Maybe you could explain why the costs have
    grown by about $100 million in the last 18 months.
        Mr. Scovel. We've recently sent a management advisory to
    FAA about the ASDE-X contract. What we identified were what we
    believed to be prohibited contract administration practices,
    including the lack of contract terms and conditions.
        Specifically, we advised FAA of our reservations concerning
    increased contractor fees, based on a cost incurred instead of
    a negotiated fixed fee dollar amount.
        Second, we believe that the agency had made payments to the
    contractor before work had been completed in some instances.
    And third, we believe that the agency hadn't documented
    contract changes.
        The agency responded to us in August 2006 by addressing our
    first point, that they disagreed with our legal analysis and
    believed the statute did permit them to increase cost--
    contractor fees, based on a cost-incurred basis.
        They agreed with us on the latter two points, and they are
    addressing those.
        Senator Murray. Administrator Blakey, do you want to
    comment on that?
        Ms. Blakey. We're working with the IG, and whenever they
    point out that there are issues--and this goes back even more
    than a year now. We have looked at cost-plus contracts, and
    they make a great deal of sense in many cases. But as you also
    know, we use fixed-price. We try to use those appropriately.
        A program like ASDE-X has tremendously benefited by the
    fact that it has evolved. I think you all, from the committee's
    standpoint, would want it to. The idea that you keep something
    absolutely frozen, with only a specific set of requirements,
    even though you know that it has greater applicability, and
    frankly, will have more benefit at different airports is the
    question.
        Chicago is a great example. I think it was the right thing
    to do, because we were seeing operational errors at Chicago
    that we knew ASDE-X could help fix. That is an evolving airport
    with tremendous pressure on it.
        Senator Murray. So it's impossible to kind of tell us what
    the final cost of this is going to be?
        Ms. Blakey. Five hundred and fifty million dollars is what
    we're projecting right now for ASDE-X. If there turns out to be
    additional requirements and evolutions that we think are
    sensible, we will certainly consult with a committee.
        Senator Murray. Inspector General, will we be able to keep
    to 550?
        Mr. Scovel. We don't think so. As I alluded to before--as I
    specifically addressed before, with the number of systems
    currently being installed, and the funds obligated being
    expended at the rate they are, we don't think that we can even
    get to the 35 systems, much less modify them to incorporate,
    for instance, technology to address the rainy weather situation
    or the intersecting and converging runway situation.
        Ms. Blakey. Madam Chairman, I would simply point out the
    obligation rate is not necessarily an indicator of what the
    final cost will be. Because you obligate a great deal of money
    up front before you get to the stage of operational
    commissioning.
        So we do think that this is going to be something that is
    doable, but as I say, if it should be that we looked at
    improvements or we looked at shortfalls, we will consult with
    you all about it. Our best belief at this point, because we
    work on ASDE-X a great deal, is that we will be able to work
    within that parameter.

                               SAFETY INSPECTORS

        Senator Murray. I appreciate the comments from both of you.
    We'll keep moving forward and trying to get to a good number on
    this. Let me move to the topic of safety inspectors.
        Administrator Blakey, for the past 3 out of 6 years, this
    committee has given you more funding for safety inspectors than
    you requested.
        For the current fiscal year, we added $16 million that you
    did not request to hire additional inspection certification
    personnel. But despite our efforts, we have seen staffing
    levels drop in this critical function. Your on-board strength,
    as of 3 weeks ago, showed that the number of inspectors in
    flight standards was almost 150 below the level of last year,
    and you're also below last year's level in aircraft
    certification.
        When we are giving you additional funding to increase the
    number of critical safety inspectors, why are we still seeing
    the number of these inspectors decline?
        Ms. Blakey. We expect to be able to hit the end of the year
    numbers that your $16 million additional allowed us to
    undertake. At this point, we do not see that there's going to
    be difficulty doing that.
        What we think there will be difficulty doing is to be able
    to sustain those next year, because the President's budget
    request was predicated on an ongoing CR--a full-year CR.
        When it turned out that the committee was able to help us
    with the additional funding, that was not the base that we
    looked at.
        When you annualize those salaries for the additional
    inspectors we are hiring this year, plus the ones that we had
    intended to hire under the 2008 budget, there is a gap there. I
    think that is the thing I would simply call to your attention.
    I do not have the exact numbers that you are referring to. I
    would be happy to check them and submit them for the record.
        [The information follows:]

                               INSPECTOR STAFFING
    ------------------------------------------------------------------------
                                                           On Board Staffing
                                                            as of 5/30/2007
    ------------------------------------------------------------------------
    Flight Standards....................................               4,728
    Aircraft Certification..............................               1,146
    ------------------------------------------------------------------------

                        FUNDING THE INSPECTOR WORKFORCE

        Senator Murray. I appreciate that. Can you assure us the
    full $16 million will be used to exclusively raise the number
    of inspectors?
        Ms. Blakey. Yes
        Senator Murray. Inspector Scovel, do you think--are you
    satisfied with the FAA's overall efforts?
        Ms. Blakey. Madam Chairman, can I put one little caveat? We
    do need to support the work of those inspectors, obviously.
    There are attendant costs to bringing them on board. Let me be
    dead sure I'm speaking correctly, it would all go to their
    ability to be hired and deployed.
        Senator Murray. Inspector General, are you satisfied with
    the FAA's efforts to hire and deploy safety inspectors?
        Mr. Scovel. Senator, we believe the agency is making a good
    faith effort to hire, train, and deploy inspectors.
        We would note for the committee's attention, however, that
    until the staffing study is complete--and it's our
    understanding that FAA recently contracted with
    PriceWaterhouseCoopers in order to complete a staffing study
    workforce-wide to determine number and location of aviation
    safety inspectors. Until that's done, we're really dealing with
    a moving target.
        We would also note further--one further point on that, it's
    our understanding, as well, that staffing study won't be
    completed until 2009, so there is some gap yet.
        While we commend the Congress for giving the FAA funding in
    order to hire inspectors, we just won't know whether it's
    enough or whether they're in the right places until that
    staffing study is done.
        We would note one other item briefly for the record, and
    that is that our statistics show that 50 percent of aviation
    safety inspectors will be eligible for retirement--in fact,
    they are currently eligible for retirement. And given that kind
    of uncertainty, that may well lead to further attrition.
        Senator Murray. Administrator Blakey, can you tell me how
    much more funding you do need for fiscal year 2008 to afford
    the inspector staff that you're going to be hiring this year?
    Do you have a number?
        Ms. Blakey. Madam Chairman, I was afraid you were going to
    ask me that and I don't have that exact figure. I will get it
    for you. Let me also tell you this, that I think the Inspector
    General has very good concerns on this issue of a staffing
    model for our safety staff.
        [The information follows:]
                       Fiscal Year 2008 Inspector Funding
        The fiscal year 2008 budget requires an additional $16 million
    above requested funding in order to maintain the inspector staff hired
    in fiscal year 2007.

                               INSPECTOR STAFFING

        Ms. Blakey. We do have one, but it goes back some time. I
    think advances in terms of industrial engineering, plus the
    kind of very specific work that we can do, right down to each
    facility, with an eye to the very changing face of the airline
    industry--because, as you know, things have changes a great
    deal there--I think will allow us to have a much better sense
    of that. We have two contracts in response to the Inspector
    General's recommendations to develop that, and we're going to
    be hard at work at it, so I do want you to know we will have it
    underway.
        Because it's complex, it's hard to do, it will probably
    take us the better part of 2 years to complete it, but we will
    learn from it as we go. We intend to, on an ongoing basis, have
    that refine the way we are assigning our workforce.
        And retirements, I'm really happy to say this. As you know,
    we get our safety inspectors very significantly from people
    who've already spent a lot of their career as aerospace
    engineers with the airlines, military, et cetera. They seem to
    be very much willing to stay with the FAA, and we have a very,
    very low rate of retirement in that workforce.

                    OUTSOURCING TO NON-CERTIFIED FACILITIES

        Senator Murray. Well, one of the areas I'm very concerned
    about is the change in the airline industry, where we're seeing
    an outsource of the repair work being conducted by firms that
    aren't certified by the FAA.
        Ms. Blakely, you don't allow airlines to use airplane parts
    that aren't FAA certified, correct?
        Ms. Blakey. They have to meet FAA standards; that's
    correct.
        Senator Murray. Well, how can we allow airlines to use
    repair stations that are not certified by you?
        Ms. Blakey. The issue of certified repair stations, as you
    know, we have a very large network of those in this country. In
    addition to that, there also are repairs, modifications, et
    cetera that are done by non-certificated entities out there.
        A lot of this goes to things that are generic in their
    nature; for example, welding. The best places to do welding may
    not be solely confined to aerospace, and they may not be
    facilities that, in fact, we should try to directly oversee or
    to directly certificate.
        What we do believe is ultimately, that the FAA's
    regulations are extremely clear, and that the airlines
    themselves have to apply the quality control and the oversight
    to be responsible, that they do meet the aspects, that they do
    meet the certification requirements, and that they are living
    up to the finest level of detail.
        The requirements that the FAA places is what we really do
    rely on, in addition to the fact that we have, of course, a now
    better and more robust inspector team out there. We are
    requiring that everyone adhere to the safety management systems
    that apply issues of risk appropriately to where you then
    target what you are specifically watching day in and day out.
        But there's a great deal to this that I think under girds
    the system of having some companies out there that are
    providing service to the airlines that are not directly
    certified by the FAA.
        Senator Murray. Inspector General, are you satisfied with
    this program?
        Mr. Scovel. Senator, my office has undertaken a number of
    studies of air carrier outsourced maintenance. What we've
    concluded is that we're not concerned so much with where
    maintenance may be performed, whether it's by certificated
    facilities, or facilities in this country or overseas.
        What we are concerned about is the level of oversight by
    FAA and its aviation safety inspector workforce. We think that
    there's generally a continuum of concern. Many air carriers
    maintain their own in-house maintenance facilities, and they do
    very well, and there's very close and detailed oversight by FAA
    aviation safety inspectors.
        There are certificated repair facilities in this country
    and overseas that, likewise, receive much more aviation safety
    inspector oversight. When you talk about non-certificated
    facilities, both in this country and especially overseas, then
    the level of oversight, the degree of attention necessarily
    declines.
        A concern that we have is that we don't believe the agency
    has a firm grasp on the type of maintenance that some of these
    non-certificated facilities are indeed performing. It may be
    generic, in the nature of welding.
        On the other hand, we know that it also includes such items
    as engine replacements and landing gear maintenance. Those are
    critical items of maintenance in any analysis of aircraft
    maintenance.
        We have asked that the agency get a firm handle on what
    type of maintenance is being performed and where, so that it
    can address it, both with its inspector workforce and using its
    risk-based safety oversight systems.
        Ms. Blakey. And we have said that we will require that the
    airlines inventory all of this. So we are specifically aware
    when they are using non-certificated companies out there for
    various kinds of work.
        Senator Murray. So is that an ongoing basis, or do you have
    a deadline for them to come back to you?
        Ms. Blakey. I'll have to check about deadline. This is
    something we've been responding to the IG on very recently, so
    I'll find out exactly what period of time we expect to have
    that fully in place.
        [The information follows]
                   Use of Non-certificated Repair Facilities
        By regulation title 14 Code of Federal Regulations part 121.369, an
    air carrier is required to maintain a list of contract maintenance
    providers, both certificated and non-certificated, and a description of
    the services they provide.
        In response to the Department of Transportation's Office of
    Inspector General (OIG) report number AV-2006-031, Air Carriers' Use of
    Non-certificated Repair Facilities, dated December 15, 2005, the FAA
    issued Notice N 8000.362 on April 23, 2007. This notice addresses all
    the OIG concerns and tasks the FAA with reviewing air carrier
    procedures for qualifying and authorizing all contract maintenance
    providers used by air carriers, whether certificated or not. Any
    discrepancies noted by the FAA in the subject areas would need to be
    corrected by the air carrier.
        Adding to N 8000.362, Flight Standards will publish two notices of
    national policy and guidance to its inspector workforce. The notices
    are: (a) Notice 8000.D91 Revised Operations Specification D091,
    Substantial Maintenance Providers (SMP) and All Other Outsource
    Maintenance Providers (OMP) for part 121 Operations and (b) New
    Operations Specification D491, The Quarterly Utilization Report (QUR),
    for part 121 Operators. Regarding the deadline for the first notice,
    the compliance date of the notice is 30 days after its publication,
    meaning prior to December 2007; for the second notice, air carriers
    must submit the data quarterly for the months of months of March, June,
    September, and December.
        These notices further respond to the OIG report number mentioned
    above. During this audit, the OIG made recommendations to the FAA
    concerning oversight of a part 121 certificate holder's contract
    maintenance practices. The notices address the OIG report and provide
    inspectors with guidance for continued oversight of air carriers using
    contract maintenance providers, specifically, requiring regular
    surveillance to ensure compliance and that air carriers produce a QUR
    that details their use of contract maintenance providers.
        Additionally, the FAA plans to publish a Notice of Proposed
    Rulemaking (NPRM) in June 2008 that propose to amend the current
    regulation (see above, part 121.369) to require air carriers to include
    requirements specific to outsourced maintenance in their maintenance
    manuals to ensure that all maintenance is performed in accordance with
    the provisions of the air carriers' maintenance programs and to require
    air carriers to provide the FAA with a QUR.

                            FLIGHT SERVICE STATIONS

        Senator Murray. Thank you. Let me move on and ask about
    another issue. Back in 2006, your agency asked us to fund a
    large and expensive initiative to transition the operations of
    your flight service stations to a private vendor.
        Fiscal year 2007 was the first year where you had the
    flexibility to spend your capital budget without the
    limitations of a project by project amount stipulated in the
    appropriations act.
        To our surprise, you used that flexibility to augment the
    funding for your flight service stations by another $9 million
    in order to address the needs associated with the downsizing of
    a number of those facilities.
        Can you tell us why those costs were never included when
    you presented the costs of the transition back in 2006?
        Ms. Blakey. My understanding of this is that--as you know
    $9 million, while it's big to us as taxpayers, it's a
    relatively small amount of money in the overall scope of that
    endeavor.
        The transition period was one in which there was some shift
    in terms of timetable and responsibilities, and ultimately, we
    felt this was within the appropriate use of those funds. We
    were not aware that the committee would see it differently. If
    that's the case, that's instructive for the future.
        Senator Murray. Well, in order to ease the impact of that
    transition on your employees, you required the competing
    vendors for the effort to hire, at least temporarily, all the
    FAA personnel that were operating those flight service
    stations.
        The winning vendor, Lockheed-Martin Corporation, is now
    claiming the FAA misstated the wage rates of the employees they
    were required to hire, and they're now asking that you pay them
    an additional $147 million to make up for that mistake.
        Can you tell us, did your agency understate the wage rate
    for those workers?
        Ms. Blakey. Madam Chairman, I'll tell you, this is a matter
    of much dispute between us and Lockheed at the moment. It's
    very different from the amount we just were talking about, and
    we take this very seriously.
        The situation is one in which, as we were making the
    necessary changes and working with the then union, NAT, that
    was representing the employees. We agreed that we would have
    the Department of Labor review the wage rates, because we felt
    that that was a request of the union that we could accommodate.
        So that was in play when Lockheed put their contract into
    bid, and we ultimately selected--put their bid forward. We did
    stipulate in a number of places in our request for proposals
    that that was the case, and that was among risk factors that
    companies needed to take into account.
        I will tell you, this is in dispute with Lockheed at this
    point. We also are challenging the Department of Labor's wage
    rate that they have put forward, because we do not believe the
    comparable professions that they chose to benchmark against are
    the correct ones, and we would see that the amount of money
    that would be involved in this, under any circumstances, would
    be dramatically lower than that $140-plus million figure you
    mentioned, but that is what currently is in discussion and
    dispute.
        Senator Murray. Is the likely result we'll need that
    additional $147 million, or is it too soon to tell?
        Ms. Blakey. I don't believe so, but it is too soon to tell.
    This, as I say, is something we are actively addressing right
    now.

                                      FTI

        Senator Murray. Let me switch to another area. The NextCom
    program is expected to provide the FAA with a system for
    providing air to ground communications. That's going to be
    essential to any Next Generation Traffic Control System.
        However, NextCom is now experiencing the same problems with
    many of the other capital programs as the FAA. At the end of
    2005, the FAA delayed the program's full implementation by 2
    years.
        Your own program managers told our staff that this delay
    was due largely to the fact that too much of the NextCom
    workforce had to work on fixing problems at the
    Telecommunications Infrastructure Program, or FTI, so they
    could not focus on their original assignment.
        Can you tell us why the agency has been unable to address
    the problems at FTI, while still effectively managing this
    NextCom program?
        Ms. Blakey. FTI has been a challenging program because, as
    you know, it is one that is, on the surface, not a technology
    challenge like a lot of the NextGen systems, but one in which
    we're trying to convert the service to a unified single service
    from one that developed over many, many years, in sort of a
    growing like topseed with a lot of patchwork to it.
        So what seemed to be a more straightforward enterprise
    turned out to have a lot of, if you will, just operational
    glitches to getting it done. We also had the situation of a
    disappointed bidder for the contract who was required to help
    make this transition to the new successful bidder.
        All of that is by way of background on FTI, but I have
    compared it in the past to stacking bricks. It is not one where
    you don't know how to get there; it's just how well and how
    fast can you get these cutovers done?
        The good news on FTI is that despite the fact that we were
    required to re-baseline that program by the requirements that
    are stipulated by OMB, we actually are now running ahead of
    schedule against the new re-baselined schedule.
        As you know, it's a fixed-price contract, so it's not
    changing, in terms of money, but it is certainly one in which
    the speed at which we can make those cutovers affects how much
    savings the taxpayer will experience. At this point, we are
    ahead of schedule, and are fairly optimistic we will do better
    than December 2008.
        The issue of NextCom staff against the FTI contract,
    certainly, some of those are the same people, and we did put
    tremendous focus on that, because it is the here and now. It is
    immediate. But that in no way lessens our commitment to the
    NextGen communication capabilities that we expect to put
    forward.
        Senator Murray. Well, that program was touted as a great
    opportunity for the FAA to enjoy huge savings in its operating
    costs, but now, it looks like the program won't save as much as
    anticipated.
        The initiative was originally scheduled to save $444
    million over the life of the program. Now, it's expected to be
    about $320 million.
        Part of that savings--or lost savings is attributable to
    the fact that the FAA had to extend at least one full year the
    cost of keeping the old phone lines operational, costing us $65
    million. That's all because of the delays in getting the system
    up and running.
        I just have to ask how many additional safety inspectors
    could we have bought with that money?
        Ms. Blakey. I will have to simply tell you we are working
    as fast and hard as we can to achieve those savings, and we are
    catching up, Madam Chairman. I mean, that is what's important
    here, when you hit a problem, if you focus on it and address
    it, you very often can recover.
        Not entirely, and we do use different figures. I think it
    depends over what period of time you're talking about, about
    savings. How do we see our savings dropping from somewhere
    close to $800 million to somewhere close to $600 million? Still
    big numbers. And the faster we can go at making the cutovers to
    the new service, the more we will be able to save.
        So I think that's important to see. Beyond that, all I can
    suggest to you is that we also have a tremendous amount of
    interest in using our resources as best as possible, and that's
    one of the reasons why we aggressively moved to the FTI
    contract, as opposed to leaving in place the old system.
        Senator Murray. General Scovel, do you want to comment on
    the FTI program at all?
        Mr. Scovel. Yes, just in general. Thank you, Madam
    Chairman. You've talked about the erosion of expected cost
    savings, and our study--and, in fact, I will note that we've
    had an ongoing study on FTI that we reported on in depth last
    year, and we have a follow-up study that's underway currently,
    so we have good information on this.
        The savings that were expected initially in the program, in
    2002, were $820 million. By 2005, those had eroded to $672
    million. Our estimate is that in late 2006, including some
    costs, the estimated cost savings now were at about $442
    million. So it has declined dramatically.
        There have been performance questions, as well. The
    Administrator is entirely correct when she says that they've
    made great progress on those in reducing the backlog in so-
    called cutovers that is moving telecommunication services from
    the old system to the new one, but they still have an ongoing
    backlog rate, if you will, of about 1,800 services per month.
        They're about halfway through the anticipated 21,000 or so
    services that need to be transitioned from the old system to
    the new. That's a watch item, however, for us, is how fast they
    can move in the overall number, and also, how fast they can
    move to reduce the backlog.
        I've talked about the expected cost savings erosion. We
    would also note that there have been, if you will, customer
    service problems, and that is with the FTI contractors
    performing upgrades on FTI equipment at various airports, and
    inadvertently, certainly, bringing the equipment down to the
    point that it's resulted in operational delays, at some
    airports, of several hours, and many dozens of flights that
    were affected and had to be delayed.
        It's not our belief this amounts to a safety risk, and I
    want to be entirely clear on that, but it is an operational
    risk, in terms of flight delay.
        Ms. Blakey. Madam Chairman, if I could, I really would tell
    you though that we are actively contesting the IG's figures on
    the area of FTI.
        The savings we projected were $790 million. This has
    dropped to $596. As I've said, it was about a $200 million
    drop. But we will substantiate that with the IG's office,
    because there seems to be some confusion of the figures.
        [The information follows:]
                                      FTI
        In then-year dollars, the FTI program savings were projected to be
    $790.5 million prior to baselining. The new baseline savings figure
    established in September 2006 is $596.4 million--a difference of $194.1
    million. The program, however, is overachieving against the 2006
    baseline by a significant measure. We therefore expect the eventual
    erosion of cost savings to be less than $194.1 million.

                                 SWIM AND ADS-B

        Senator Murray. And we'd like to see the results of that.
    Better information. Let me just ask a few more questions.
    You've both been very patient with the committee this morning.
    I appreciate it.
        Last year, Administrator Blakey, I commended you for
    including funds for the SWIM and ADS-B programs in your budget
    request for 2007, and I'm really glad to see that you're
    continuing to request them in 2008.
        This committee started funding those initiatives without
    the benefit of a request prior to last year, and these programs
    are going to build, I think, a strong foundation for the next
    generation of air transportation systems.
        Can you tell us what your target dates are for implementing
    those two programs?
        Ms. Blakey. I certainly can tell you what we are doing with
    regard to ADS-B, and I think also probably with regard to SWIM.
    I'm very encouraged by how well SWIM is performing.
        The NEO demonstration that we had just done, I think
    substantiates why this kind of data interconnectivity--our
    Internet for aviation is critical.
        ADS-B is a program that we are moving on very aggressively.
    We expect to have the contract this summer for the ground
    stations. We would expect to have the initial phase of those in
    place by 2009 and move out to about 2011. I want to double-
    check that in terms of our national network. But we're moving
    very fast on that.
        As you know, part of the initial deployment is on a
    regional basis. The Gulf of Mexico, the Ohio River Valley,
    Philadelphia, in addition to the aspects that, as Senator
    Stevens referred to earlier, where we have pioneered in the
    Alaskan area.
        So the program is well underway. I think the questions, of
    course, on ADS-B are also how fast the airlines and the general
    aviation community will be able to equip, and I will turn your
    attention to the fact we're going to put a rule out this fall,
    which will propose a timetable.
        It is under discussion now, but we will propose that
    timetable, and then we will see if the comments that we receive
    support that.
        Senator Murray. The timetable on requiring all the airlines
    to install this?
        Ms. Blakey. Exactly.
        Senator Murray. So you are looking to require everybody to
    do it?
        Ms. Blakey. As a mandate, that is correct. Ultimately, it
    will be essential for the system to require relatively
    universal equipment. There will always be exceptions for GA
    below certain altitudes, but as a matter of operating the NAS,
    yes.
        Senator Murray. Inspector General, do you agree that
    requirement will be necessary to make it work?
        Mr. Scovel. We do, and thank you. In order for ADS-B to
    achieve its full potential, it needs to be aboard the large
    majority of major carriers' aircraft.
        In order to permit reduced separation and achieve the
    capacity and safety advantages represented by ADS-B, to get a
    handle on all those benefits, it needs to be installed really
    across the entire system.
        If there is a point regarding that that I would like to
    make further, it has to do with the human factors issue. For
    ADS-B, again, to achieve its full potential, it has significant
    workforce challenges when it comes to the performance of both
    controllers, whose role will change under ADS-B, and with
    regard to pilots and flight crew.
        Their role will change, as well, and significant attention
    should be paid to those human factor issues, with regard to
    both workforces.
        Ms. Blakey. Let me also correct what I said, because the
    initial phase is 2009-2011 timeframe, but we will have the full
    national build-out on ADS-B by 2013.

                              BORROWING AUTHORITY

        Senator Murray. Very good. Let me just ask you two other
    questions. Earlier this year, Secretary Peters came before us
    and testified that the FAA's proposal for reauthorizing the
    aviation programs would not include any mandatory spending
    outside of this committee's control, but the administration's
    proposal is now in front of us, and it includes $5 billion in
    what is called direct borrowing authority from the Treasury.
        I wanted to ask you, Administrator Blakey, what do you see
    this committee's role in overseeing and determining the
    programs that will be funded using those dollars with this new
    borrowing authority?
        Ms. Blakey. I don't see the committee's role changing at
    all. We see that all the funds that are extended will be
    subject to appropriations.
        What we do think, though, is that the potential to have
    borrowing as an additional tool to spread out the period of
    time in which those investments are covered, in terms of the
    cost to the users, could be a very valuable asset, but it
    really does not change the role of the committee.
        We'll still see those projects as being ones that the
    committee has to sign off on.
        Senator Murray. Inspector General, I wanted to ask you, the
    FAA proposed replacing the current system of aviation taxes
    with a new user fee system. That really represents a dramatic
    change in the way aviation programs are funded.
        Do you think it is necessary to completely restructure how
    the aviation programs are financed, in order to fund the FAA
    over the next 5 years?
        Mr. Scovel. Senator, I think that's a significant policy
    question. If I can help inform the debate along those lines,
    our conclusion after running the numbers is that the current
    financing system will be sufficient to sustain FAA to include
    its NextGen costs--estimated costs of $4.6 billion between 2008
    and 2012.
        Senator Murray. Okay. Thank you very much to both of you. I
    wanted to just mention as we are closing, we recently learned
    that this subcommittee is going to be losing a very valuable
    asset.
        Cheh Kim has been a steady and valuable staff member of
    this subcommittee now for over 8 years, and his wise counsel
    and intellect have provided some significant results that have
    increased the quality of life for all Americans.
        We're going to miss him, and wish him the best in his new
    position. I understand you're going over to Treasury, and we
    wish you the absolute best.

                         ADDITIONAL COMMITTEE QUESTIONS

        Thank you very much. Any additional questions will be
    submitted to you for your response.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                 Questions Submitted by Senator Byron L. Dorgan
                   airport improvement program (aip) funding
        Question. I was disappointed that the President has proposed to cut
    the Airport Improvement Program (AIP) from $3.5 billion in fical year
    2007 to $2.75 billion in fiscal year 2008. The airports hurt hardest by
    your fiscal year 2008 proposal would be the smaller general aviation
    airports in our smallest communities. The North Dakota Aeronautics
    Commission estimated that the State's 45 general aviation airports
    would see their AIP dollars cut on average 58 percent in fiscal year
    2008.
        Can you explain why you are targeting our smallest airports and
    communities that are already at a transportation disadvantage?
        Answer. The administration believes that $2.75 billion in Airport
    Improvement Program (AIP) funding is sufficient to support the critical
    safety, security, and capacity projects scheduled for fiscal year 2008.
    The proposal also targets funding to the smallest airports, while
    allowing larger airports to fund capital projects through other means.
        The administration's FAA reauthorization proposal includes
    significant programmatic changes to both the AIP and the Passenger
    Facility Charge (PFC) program to refocus AIP on the projects and
    airports with the greatest need. Additionally, the proposal gives the
    largest airports flexibility to use the PFC program to meet their
    ongoing capital needs, retains the ability of large airports to apply
    for AIP grants, and eliminates the burden on the AIP program of
    providing an entitlement to the largest airports. With these changes,
    AIP would be targeted to the smaller airports.
        Additionally, the Administration's proposal:
      --Retains entitlements for small airports at current levels and
            eliminates the risk that they will be cut in half or terminated
            if AIP falls below $3.2 billion.
      --Enhances the general aviation airport entitlement by moving from a
            flat $150,000 maximum entitlement for all GA airports to a
            tiered system giving the largest and most complex GA airports
            $400,000 per year.
      --Increases the minimum discretionary fund and establishes a minimum
            State apportionment to make sure that FAA and the States have
            the funds they need to help airports build major capacity and
            safety projects, such as runway safety area improvements.
      --Increases the maximum PFC from $4.50 to $6.00, permitting airports
            to generate an additional $1.5 billion annually in PFC revenue.
        Question. Have you assessed the impact a 58 percent cut in AIP
    dollars will have on small airports that already struggle to make
    needed improvements? If so, will you share it with our committee?
        Answer. The administration's proposal contained formula changes
    directly for Airport Improvement Program (AIP) funding to the smaller
    airports. Small airports are most dependent on AIP to provide the funds
    they need to finance their most critical safety and capacity projects.
    The administration proposal does that by:
      --First, the proposal ensures that smaller airports can rely on a
            stable AIP funding stream by preserving passenger entitlements
            at all levels of AIP.
        --Under current law, if AIP falls below $3.2 billion, the smallest
                primary airports currently getting $1 million will lose
                $450,000. Larger airports would have their entitlements cut
                in half. Our proposal eliminates these reductions.
      --We preserve the non-primary entitlement at all levels of AIP. Under
            current law, this entitlement funding would disappear if AIP
            falls below $3.2 billion.
      --We move from a flat non-primary entitlement to a more strategic
            investment program, which recognizes that GA airports play
            different roles in the system and have different capital
            requirements. Our proposal does this by moving from a flat
            $150,000 non-primary entitlement to a four-tier system.
      --Over 900 small airports will see their non-primary entitlement
            increase under our proposal.
      --The proposal provides a higher guaranteed level of State
            apportionments, which States can direct to high priority
            projects at their rural airports.
      --Making common-sense eligibility changes to AIP eligibility rules to
            fund Federal mandates.
      --Expanding the eligibility of airports to build revenue-producing
            facilities.
                small community air service development program
        Question. The Small Air Service Community Development Program was
    established by Congress in 2000 to provide grants to help address their
    local air service problems, such as high fares and insufficient levels
    of service. Several communities in my State, including Grand Forks,
    Jamestown, Devils Lake and Fargo, have received small community air
    service development program grants to improve air service. Minot, North
    Dakota has submitted a grant application in fiscal year 2007.
    Unfortunately, the President has proposed to eliminate this program in
    his fiscal year 2008 budget.
        In testimony before a House panel last month, Michael Reynolds,
    Deputy Secretary for Aviation and International Affairs at the U.S.
    Department of Transportation, said DOT is monitoring the progress of
    the communities who have received past awards but that ``it is
    difficult to draw any firm conclusions as to the effectiveness of the
    Small Community Program in helping small communities address their
    service issues'' because ``. . . the majority of the projects involve
    activities over a 2- to 4-year period'' and ``many grant projects are
    still in process.'' Does the FAA routinely eliminate programs before
    they've ever been properly evaluated?
        Answer. There are a number of recent and ongoing efforts to
    evaluate the Small Community Air Service Development Program (SCASDP).
    In 2005, the Government Accounting Office (GAO) assessed the program
    and found that certain types of grant awards worked better than others.
    As the GAO indicated in conducting its review, it is impossible to get
    a comprehensive understanding of the effectiveness of the program with
    a very limited sample of completed grants. Of the over 200 grants
    currently being administered, the GAO reviewed a little over 20 grant
    projects. GAO recommended the Department follow up with a later
    analysis of the program and the Department's Office of the Inspector
    General (OIG) is currently undertaking such a review. The emphasis of
    the OIG review is to evaluate the effectiveness of past grants on the
    ability of small communities to acquire and/or maintain air service.
    The OIG was able to include about 40 grants in its assessment.
        Question. What is the FAA's justification for eliminating this
    program?
        Answer. The administration has determined that the cost of
    continuing to fund the program cannot be justified in light of the many
    other budget priorities that are competing for limited funding
    resources. DOT and FAA are fully committed to ensuring that grants
    already awarded are effectively administered.
        Question. Did the FAA or DOT conduct any comprehensive review of
    the Small Air Service Development Program before it put the program on
    the cutting block for fiscal year 2008?
        Answer. GAO recommended the Department follow up with a later
    analysis of the program and the Department's Office of the Inspector
    General (OIG) is currently undertaking such a review. The emphasis of
    the OIG review is to evaluate the effectiveness of past grants on the
    ability of small communities to acquire and/or maintain air service.
    The OIG was able to include about 40 grants in its assessment.
          air traffic controller off-the-street hiring--impacts on und
        Question. Administrator Blakey, you face a daunting challenge in
    hiring and training 15,000 air traffic controllers in 10 years to
    replace the retiring controllers. We all agree that air traffic
    controllers are an integral part of the National Airspace System and we
    support efforts to meet the 15,000 controllers in 10 years goal. Your
    10-year plan identifies three pools of potential candidates: (1)
    previous controllers; (2) Collegiate Training Initiative program
    students; and (3) general public.
        How many new controllers has the FAA hired in the past 3 fiscal
    years?
        Answer.
      --Fiscal year 2005--519
      --Fiscal year 2006--1,116
      --Fiscal year 2007--1,815
        Note: Includes 81 transfers from the Flight Service Station
    operation.
        Question. Of that total, how many controllers were from Category 1
    (previous controller)? From Category 2 (Collegiate Training Initiative
    program students)? From Category 3 (general public):
        Answer.

    ----------------------------------------------------------------------------------------------------------------
                                                                        Fiscal Year     Fiscal Year     Fiscal Year
                                Category                                2005 Total      2006 Total      2007 Total
    ----------------------------------------------------------------------------------------------------------------
    CATEGORY 1 (Previous Controllers) \1\...........................             210             516             666
    CATEGORY 2 (Collegiate Training Initiative).....................             296             544           1,019
    CATEGORY 3 (General Public).....................................              13              56             130
        TOTAL.......................................................             519           1,116           1,815
    ----------------------------------------------------------------------------------------------------------------
    \1\ Includes Veterans Readjustment Act hires, and 81 transfers from the Flight Service Station operation.

        Question. The media has reported that the FAA plans to launch an
    aggressive new general public, off-the-street recruiting campaign
    called ``Destination FAA.''
        Can you describe your Destination FAA initiative, including what it
    is, its timeframe, cost, goals and objectives?
        Answer. ``DESTINATIONFAA'' is a slogan utilized under our corporate
    recruitment branding campaign. ``Land the Perfect Job,'' ``Reach Your
    Destination,'' and ``Watch Your Career Take Off,'' are a few of several
    tag-lines used in marketing career opportunities at FAA. The slogan and
    tag-lines are used when participating in career fair activities, on
    recruitment materials, and in advertisements.
        FAA's DESTINATIONFAA campaign was designed to market the agency as
    an employer of choice in an effort to attract highly qualified talent
    to the agency by educating the public on careers in aviation with
    emphasis on our mission critical occupations (i.e., air traffic
    controller, aviation safety inspector, engineers, airway transportation
    systems specialists, computer specialist and computer scientist). Our
    recruitment and marketing campaign are collaborative efforts developed
    by the Office of Human Resource Management and the lines of businesses.
    Our campaign encompasses a broad based outreach approach to attracting
    active as well as passive job seekers in all communities throughout the
    United States.
        For fiscal year 2008, our recruitment and marketing strategy is
    estimated to cost approximately $720,000. The recruitment plan utilizes
    the following activities:
      --Military Job Fairs
      --Internet advertising, recruitment tools and direct mass e-mailings
      --Newspaper (majority and minority publications) advertisements
      --Periodicals (majority and minority publications) advertisements
      --Transportation Outlets Advertisements
      --Radio and Television
      --Career Fairs
      --College, University and Technical School Outreach
        If the plan is fully funded and implemented, we anticipate reaching
    over 4,000,000 employment contacts.
        Question. Does this initiative represent a policy change or have
    you always allowed people with no experience to be considered for
    controller jobs?
        Answer. We believe this question refers to applicants from the
    general public. Those applicants are not required to have prior
    experience or training in air traffic control to be considered for
    jobs. Utilizing this source of applicants is not a change in policy. On
    page 28 of the fiscal year 2007 update to the Controller Workforce
    Plan, FAA stated that it planned to open vacancy announcements for the
    general public in the second quarter of fiscal year 2007. Vacancy
    announcements were opened from March through August 2007.
        Previously, applications from the general public were accepted in
    limited fashion through job fairs. This was done on an as-needed basis.
    In fiscal year 2007, FAA began recruiting from the general public more
    extensively than in the past few years. The objective is to maintain a
    large pool of readily available applicants. It should be noted that the
    FAA has also expanded the number of Air Traffic Collegiate Training
    Initiative schools, in part to assist in meeting the same objective.
        Question. I'm told that the FAA plans to advertise air traffic
    controller job announcements on popular Internet sites, such as
    diversity hire.com, Craig's List, and Career Builder. An April 19, 2007
    Craig's List posting states the ``FAA does all the training, so you
    don't have to know anything about air traffic control to be
    considered.'' The University of North Dakota (UND) in Grand Forks is
    one of the FAA approved Air Traffic Collegiate Training Initiative (AT-
    TCI) programs. The UND program has graduated more than 500 students
    since 1993. However, UND has seen a reduction in the number of transfer
    students entering into its Air Traffic Control program. The school
    directly attributes this transfer student reduction to the FAA's off-
    the-street initiative.
        Aren't you undercutting the need for a four year degree from an
    FAA-approved program when you are aggressively advertising that
    applicants need no experience to become an air traffic controller?
        Answer. Only those occupational series that have a ``positive
    educational requirement'' in the qualifications standards set by the
    Office of Personnel Management require a 4 year degree. Those
    occupations with positive educational requirements are rare and they
    also include specific courses taken or credits earned in a particular
    course of study. For most occupational series positions, including the
    Air Traffic Controller series, ATCS 2152 occupation, the qualifications
    are less restrictive in that they allow for either a full 4-year course
    of study leading to a bachelor's degree or 3 years of progressively
    responsible work experience or an equivalent combination of work
    experience and college credits. Applicants would also meet the
    qualification requirement upon the successful completion of an FAA
    approved Air Traffic-Collegiate Training Initiative (AT-CTI) program.
        The University of North Dakota has been a valued AT-CTI participant
    since the early development of the AT-CTI program. The approved AT-CTI
    programs vary between 4-year, 2-year, and certificate programs. All
    approved programs that meet the agency's requirements are acceptable to
    FAA. It is possible that the 4-year bachelor level programs may benefit
    applicants who may later transition into management and throughout
    their careers.
        This summer FAA re-evaluated all existing AT-CTI schools, and
    opened the program for new schools to apply. The FAA also evaluated and
    completed site visits at newly applied schools. As a result, the
    program accepted 9 new schools for a total of 23 current AT-CTI
    schools.
        The FAA is tapping into multiple hiring sources to keep up with the
    agency's staffing needs and projected attrition. The AT-CTI schools are
    a significant source of applicants for FAA. We speculate that this will
    become a more significant source for FAA in the coming years as our
    hiring needs continue to grow. For this reason, the agency has opened
    the AT-CTI program to new schools.
        Question. Is the FAA turning its back on the FAA-approved
    controller college programs?
        Answer. No. The FAA is in full support of the Air Traffic
    Collegiate Training Initiative (AT-CTI) program. The AT-CTI is a
    growing and significant hiring source for FAA. This hiring source will
    be critical to our meeting controller staffing needs in the next
    several years and we speculate the need for this source to grow.
        In fact, this summer FAA re-evaluated all existing AT-CTI schools,
    and opened the program for new schools to apply. The FAA also evaluated
    and completed site visits at newly applied schools. As a result, the
    program accepted nine new schools for a total of 23 current AT-CTI
    schools. We will continue to support and develop our partnership with
    all of the approved AT-CTI schools.
        Question. Do AT-CTI program graduates receive preference over a so-
    called off-the-street applicant with no experience?
        Answer. The FAA strives to consider all qualified applicants
    equally regardless of which hiring pool they apply from. In addition,
    FAA considers all qualified applicants regardless of political
    affiliation, race, color, religion, national origin, sex, sexual
    orientation, marital status, age, disability, or other non-merit
    factors.
        Air Traffic Collegiate Training Initiative (AT-CTI) graduates are a
    valued hiring source for FAA and will continue to be.
        Question. Does the time and cost of training increase for off-the-
    street applicants versus applicants who have graduated from an FAA-
    approved AT-CTI program?
        Answer. Yes. General public announcement applicants must attend a 5
    week basics training course at the FAA Academy in Oklahoma City,
    Oklahoma. Since the Air Traffic Collegiate Training Initiative (AT-CTI)
    graduates bypass this requirement, the Agency incurs this additional
    time and cost for general public applicants.
        Question. Does a student from an AT-CTI program come to the FAA
    better prepared to succeed as an air traffic controller?
        Answer. The FAA believes that applicants who meet the agency's
    qualification requirements are prepared for success as an air traffic
    controller regardless of the hiring source and does not take a position
    on whether some hiring sources are better qualified than others.
                      uas access to the national airspace
        Question. The University of North Dakota Odegard School has a
    proposal pending at the FAA for the development of an unmanned aircraft
    system (UAS) test range in North Dakota that is controlled by a
    ``Ganged Phased Array Radar System.'' This is a mitigation strategy for
    emerging onboard ``Sense and Avoid'' technology that would allow the
    test flights and certification of UASs without creating Restricted
    Airspace.
        Please provide me with your assessment of the UND proposal.
        Answer. The Department of Defense (DOD) is funding the project plan
    submitted by the University of North Dakota (UND). Although UND
    approached FAA with its proposal, FAA has made it clear that DOD must
    approve the project and that FAA could benefit by seeing the test plan.
    To date, no request for a test range has been filed with FAA, either
    from UND or DOD, for this test.
        FAA currently does not have enough data to determine whether the
    phased array radar system proposed for this test will serve as a
    potential mitigation strategy for detect, sense and avoid technology
    requirements in the NAS. DOD testing may provide additional data to
    conduct a better assessment of the technology. FAA looks forward to
    working closely with UND in the development of this project.
                                     ______

                  Questions Submitted by Senator Arlen Specter
                           airspace redesign project
        Question. How did you arrive at 5.09 minute average departure delay
    reduction benefit at Philadelphia under the three departure heading
    proposal as compared to one departure heading for west flow departures
    on Runway 27L? Local elected officials in Delaware County have
    concluded that the benefit is much lower by dividing the FAA's
    estimated 290,000 annual minutes in delay reduction at Philadelphia
    under the Preferred Alternative by the airport's 255,000 annual
    departures.
        Answer. An airspace design that works perfectly well on an average
    day may have serious flaws that are only evident under heavy traffic
    loads. Operational efficiency of a set of airspace designs is assessed
    by comparing systems on a day of heavy traffic. Environmental analysis
    is concerned with long-term influences, so it is done based on annual
    averages. The 290,000-minute figure is a product of the outcomes of the
    two analyses producing an annual total of an efficiency metric that was
    generated in response to a special request from Federal Aviation
    Administration leadership. It is not part of the usual analysis
    methodology.
        Delay is nonlinear. It grows faster as demand approaches the
    capacity of the system, so a day with 710 departures will have far more
    delay than a day with 700. Airlines anticipate a certain amount of
    delay; the delay on the average day does not disrupt passengers' travel
    plans. As a result, dividing the annual delays by the annual number of
    operations will tell you nothing about the delays on heavy traffic
    days, which are the days when delay affects operations. The 5.09-minute
    figure is obtained from a 90 percentile day spent entirely in the
    highest capacity configuration and is not weighted to account for the
    times when the airport is not in that configuration or demand is
    different. The 290,000-minutes per year figure includes weekends, low
    demand days, and less important airport configurations.
        Question. Section 17.5 of the operational analysis notes that
    because benefits analyses for airspace redesign projects must be
    referred to a large common denominator, airspace redesign benefits are
    often on the order of a few minutes. Further, section 17.5 notes that
    while these numbers appear small, a change of a few minutes per flight,
    over a large set of aircraft, ``can have enormous economic consequences
    for the aviation industry and the flying public.'' Is section 17.5
    implying that because the analyses included every flight in the study
    area, some of which are unaffected by the project, that the estimated
    benefit statistics are diluted? Would the benefits appear greater if
    unaffected flights were removed from the common denominator? Further,
    please expound on the ``enormous economic consequences'' which could be
    realized by a minute or two delay reduction.
        Answer. Certainly, the benefits would appear greater if the
    unaffected flights were removed from the common denominator. That would
    make it impossible to decide whether a change to Philadelphia was
    better for overall system performance than a change to Newark.
        ``Enormous economic consequences'' are described in section 17.2 of
    the Operational Analysis of Mitigation document. The most relevant part
    is excerpted here:
        A nationwide study conducted by Logistics Management Institute in
    1999 found that air traffic congestion nationwide could cost $46
    billion to the Nation's economy in 2010 because of increased travel
    time. The nationwide change in travel time that was anticipated for
    2010, converted to its equivalent in terms of the metrics used for this
    study, is approximately three minutes per flight. This includes costs
    to airlines, loss of service to people who wish to travel, and over
    200,000 lost jobs in aviation and other industries. The New York/New
    Jersey/Philadelphia airspace will handle 15-20 percent of all the air
    traffic in the Nation in 2011, so this airspace redesign is concerned
    with removing inefficiencies that could yield benefits to airlines,
    passengers, and businesses of $7 to $9 billion in 2011. This is a crude
    estimate; congestion on the east coast is worse than average in the
    United States and airlines' high-revenue flights are concentrated here,
    so benefits in this area may be worth more than this simple average.
        Question. What was the air traffic volume in the study area when
    the airspace system was originally designed in the 1960s and what is
    the current air traffic volume in the study area?
        Answer. Based on data that have been collected over more than 40
    years, it indicates approximately a doubling of the number of aircraft
    that transition the airspace on a daily basis. Because of larger
    aircraft being used, the number of passengers has increased almost six
    fold.
        Question. What is the estimated average noise exposure range for
    Delaware County in 2011 if no action were taken compared to the
    estimated average noise exposure range for Delaware County in 2011
    under the Preferred Alternative with mitigation?
        Answer. Under the Preferred Alternative, the distribution of noise
    is changing, but there are no significant increases. The census block
    with the highest noise exposure sees a higher day/night noise level
    (DNL). The noise exposure of the median census block decreases, but
    again not by a significant amount. The following table is a total of
    all Delaware County census tracts taken from our noise exposure tables
    provided on our project Web site.

                                       DNL
    ------------------------------------------------------------------------
                                                               Integrated
                                               Future No      Airspace with
                                                Action         Mitigation
    ------------------------------------------------------------------------
    Highest noise exposure................            66.1              67.3
        99 percent of residents experience            57.8              57.4
         noise below......................
        90 percent of residents experience            49.3              51
         noise below......................
        50 percent of residents experience            43.8              43.2
         noise below......................
    ------------------------------------------------------------------------

        Question. It was noted at the public meeting that air traffic
    controllers at Philadelphia have not been briefed on this project. It
    would seem that consulting with the air traffic controllers who would
    be directly affected by this project would be in the public interest.
    Does the agency have plans to brief the air traffic controllers at
    Philadelphia or other facilities in the study area?
        Answer. Representatives of the air traffic controllers' union
    formed the core of the design team that created all the alternatives in
    the Draft Environmental Impact Statement. As the parts of the redesign
    affecting Philadelphia were developed, Philadelphia controllers became
    involved. The air traffic controllers' union later withdrew from
    participating in the plan. Philadelphia managers and supervisors were
    present at the public meetings to explain the proposal. Before
    implementation, all facility personnel will be trained on the changes.
                       phl air traffic controller issues
        Question. Is the FAA considering a separation of the air traffic
    control tower and TRACON room at Philadelphia International? If so,
    what impacts will this have on Philadelphia's facility rating and air
    traffic controller salaries?
        Answer. The FAA is considering separating the tower and TRACON
    functions at several facilities across the country, including
    Philadelphia International. No decisions have been made at this time
        Question. In recent years, Philadelphia has consistently ranked at
    or near the bottom of major commercial airports in terms of on-time
    performance for both arrivals and departures. The latest statistics
    (Year-to-date through March 2007) place Philadelphia 28 out of 31 major
    airports in terms of on-time arrivals and 28 out of 31 in terms of on-
    time departures. Only 64.9 percent of flights arrive to Philadelphia
    on-time, and only 67.24 percent depart on-time. Has the FAA considered
    hiring more air traffic controllers at Philadelphia as a way to address
    the air traffic volume that leads to these chronic delays?
        Answer. Yes, FAA is hiring more controllers for Philadelphia, but
    that will not solve the facility's delay issue. Most delays are a
    result of limited airport capacity, airline over-scheduling, and/or
    weather issues. Hiring more controllers will not fix any of those
    problems. Philadelphia's on-time performance rate is an indication of
    the need to modernize the air traffic control system.
                                     ______

                Questions Submitted by Senator Pete V. Domenici
                            taos, new mexico airport
        Question. Administrator Blakey, I have a local concern that needs
    your attention. I often hear from constituents in Taos, NM both opposed
    and in support of proposals to improve the airport. I recently met with
    the Town of Taos officials about the need for a new runway to improve
    safe access at the Taos Airport, and my staff recently met with leaders
    from the Taos Pueblo on the same issue. This is not a new issue, and I
    know it is also not a simple one. I understand that the FAA has
    released and received comments on a draft Environmental Impact
    Statement regarding the Taos Airport runway and the related expansion.
    The review process languished for several years, but now seems to be
    moving forward.
        Would you please provide me with an update on the status of the
    Environmental Impact Statement and the public process associated with
    the study, so I can update my constituents in New Mexico?
        Answer. A Draft Environmental Impact Statement (EIS) for the
    proposed new runway was issued in October 2006. A public hearing was
    held on November 14, 2006, in Taos. The public and agency comment
    period on the Draft EIS was scheduled to end November 26, 2006, but at
    the request of the Taos Pueblo, the comment period was extended to
    January 10, 2007.
        Extensive comments on the Draft EIS have been received from the
    Taos Pueblo, the National Park Service, the Advisory Council on
    Historic Preservation, the County of Taos, and the Taos Coalition.
        In order to address Pueblo concerns regarding potential audio and
    visual impacts of aircraft operations to and from the new runway, FAA
    proposed a flyover demonstration. After two attempts to schedule the
    flyover, it was held on June 26, 2007. A general aviation aircraft
    representative of the largest and noisiest type of aircraft currently
    using the airport performed the flyover. Current and future flight
    tracks associated with the new runway were flown, as were the flight
    tracks for one of the Pueblo's recommended alternative alignments for
    the new runway. An over flight of the Pueblo was also conducted at
    their request.
        A meeting was held in Taos, NM, on October 19, 2007, with
    representatives of the Taos Pueblo, the Town of Taos, the National Park
    Service, the Advisory Council on Historic Preservation, the State
    Historic Preservation Officer, and other interested parties. The
    purpose of the meeting was to entertain recommendations from all
    parties on means to mitigate the adverse impacts the project will have
    on the Taos Pueblo and other identified cultural and historic
    resources.
        The FAA is finalizing detailed responses to comments received on
    the Draft EIS. In addition, the FAA is nearing completion of its
    evaluation of the feasibility of a list of over 20 recommended measures
    to mitigate the projects forecasted impacts to cultural and historic
    resources. Once both of these efforts have been completed the FAA will
    coordinate a draft Final EIS with the Taos Pueblo and other consulting
    parties. At that time the FAA will also issue a draft Memorandum of
    Agreement for execution by the Pueblo and consulting parties in
    accordance with section 106 of the Historic Preservation Act. The
    agreement will address the adverse impacts to cultural and historic
    resources and proposed measures to lessen or mitigate those impacts.
    The estimated date for issuance of a Final EIS is by September 2008.
        Question. I understand that the Pueblo of Taos has submitted
    recommendations to you regarding their concerns, and the FAA is
    currently evaluating those recommendations and the costs associated
    with them. Would you also update me on your work regarding the concerns
    of the Taos Pueblo?
        Answer. The Taos Pueblo has provided very comprehensive comments on
    the Federal Aviation Administration (FAA's) Draft Environmental Impact
    Statement (EIS). Several comments, especially with regard to the
    feasibility of certain Pueblo recommended runway alignment
    alternatives, have required FAA to reexamine our earlier analysis and
    findings in the Draft EIS. Responses to those comments will be fully
    addressed as part of the Final EIS. A draft version of the Final EIS
    will be coordinated with the Pueblo for their review and comment before
    the FAA issues the Final EIS. The FAA proposes to provide the draft
    Final EIS to the Pueblo and other consulting and cooperating parties by
    February 2008.
        As a result of our meeting with representatives of the Taos Pueblo
    and other parties in Taos, NM on October 19, 2007, we are examining the
    feasibility of a number of measures recommended by the Taos Pueblo and
    others for reducing or mitigating the adverse impacts of the proposed
    new runway on the Taos Pueblo and other identified cultural and
    historic resources. At the October 19, meeting, FAA encouraged the
    attending parties to engage in an open discussion on ways to address
    the adverse effects of this proposed project. As stated in the meeting,
    FAA is open to any and all recommendations; nothing is off the table at
    this point.
        The FAA and the Taos Pueblo, along with the other interested
    parties, agreed to institute regular telephone meetings to discuss the
    status of FAA's work to address their mitigation recommendations as
    well as comments made on the Draft EIS. Telephone meetings were held on
    November 27, 2007, January 16, 2008, and February 22, 2008. A December
    2007 meetings was not possible due to individual schedules and the
    holidays. The next meeting date has not been set since the Taos Pueblo
    is in a quiet period which we understand will end around the end of
    March or early April 2008. The next meeting is expected be an on site
    meeting in Taos either in late April or May 2008 depending on
    participant's availability. Minutes of each meeting are prepared and
    sent to all participants.
                          roswell, new mexico airport
        Question. Administrator Blakey, a group of public and private
    entities in southeast New Mexico has worked together for over 2 years
    to arrange for nonstop regional jet service between Dallas, TX and
    Roswell, NM. One of the requirements to make regional jet service a
    reality is an upgrade of the Roswell Airport from a Class 2 to a Class
    1 facility.
        I believe that the FAA has received the application from Roswell
    officials for Class 1 certification. Would you please provide me with
    an update on Roswell Airport's review process and notify me if there is
    anything I can do to help you with regard to the Class 1 certification?
        Answer. FAA issued Roswell a Class 1 certificate on May 4, 2007.
        Question. When communities like Roswell determine that a class
    certification upgrade is needed to accommodate 44 or 50-passenger
    regional service, what tools or technical assistance is available
    through the FAA to help these communities comply with FAA requirements?
        Answer. The FAA's Office of Airport Safety and Standards publishes
    a full series of Advisory Circulars that provide guidance on methods
    and procedures acceptable to the Administrator in meeting the
    requirements of 14 CFR part 139, Certification of Airports. In
    addition, personnel in FAA's Airports Regional and District Offices are
    available to help guide airport sponsors.
        Finally, airport development necessary to meet the higher standards
    (e.g. airport rescue and fire fighting vehicles, runway safety areas)
    is generally eligible for funding under the Airport Improvement Program
    or Passenger Facility Charge Program.

                             CONCLUSION OF HEARINGS

        Senator Murray. With that, the subcommittee stands in
    recess, subject to the call of the Chair.
        [Whereupon, at 11:32 a.m., Thursday, May 10, the hearings
    were concluded, and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]

      DEPARTMENT OF TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND
              RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2008

                                  ----------

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.

                           NONDEPARTMENTAL WITNESSES

        [Clerk's note.--The following testimonies were received by
    the Subcommittee on Transportation and Housing and Urban
    Development, and Related Agencies for inclusion in the record.
    The submitted materials relate to the fiscal year 2008 budget
    request.
        The subcommittee requested that public witnesses provide
    written testimony because, given the Senate schedule and the
    number of subcommittee hearings with Department witnesses,
    there was not enough time to schedule hearings for
    nondepartmental witnesses.]
       Prepared Statement of the National Association of Mortgage Brokers
        Chairwoman Murray, Senator Bond and members of the subcommittee,
    thank you for permitting the National Association of Mortgage Brokers
    (``NAMB'') to submit this written testimony on Solvency and Reform
    Proposals for the Federal Housing Administration (``FHA''). In
    particular, we appreciate the opportunity to address: (1) the need to
    reform the FHA program to eliminate arbitrary and unnecessary barriers
    that restrict mortgage broker participation; (2) the positive effects
    on FHA's market share and profitability that will result from increased
    mortgage broker participation; (3) the need to develop risk-based
    pricing for mortgage insurance on FHA loans; and (4) the importance of
    adjusting the current FHA loan amounts for high-cost areas.
        NAMB is the only national trade association exclusively devoted to
    representing the mortgage brokerage industry, and as the voice of the
    mortgage brokers, NAMB speaks on behalf of more than 25,000 members in
    all 50 States and the District of Columbia.
                fha market share & mortgage broker participation
        NAMB supports many of the proposed reforms to the FHA program, but
    believes we should first make certain that the FHA program is a real
    choice for prospective borrowers. Regardless of how beneficial a loan
    product may be, it requires an effective distribution channel to
    deliver it to the marketplace. The need to make the FHA loan product a
    viable option is even more acute today given recent developments in the
    subprime market, which is likely to lead to less liquidity and
    increased costs. Unfortunately, today many prospective borrowers are
    being denied access to the benefits of the FHA program because mortgage
    brokers--the most widely used distribution channel in the mortgage
    industry--are limited in their ability to offer FHA loan products to
    their customers.
        As a prerequisite to originating FHA loans, mortgage brokers
    currently are required to satisfy cost prohibitive and time consuming
    annual audit and net worth requirements. These requirements place
    serious impediments in the origination process, and functionally bar
    mortgage brokers from delivering FHA loans into the marketplace.
        As small businesses men and women, most mortgage brokers find the
    costs involved with producing audited financial statements an
    unbearable burden. FHA audits must meet government accounting standards
    and only a small percentage of certified public accountants (``CPAs'')
    are qualified to conduct these audits. Moreover, because many auditors
    do not find it feasible to audit such small entities to government
    standards, many qualified CPA firms are reluctant to audit mortgage
    brokers. Cost however, is not the only factor. A mortgage broker can
    also lose valuable time--up to several weeks--preparing for and
    assisting in the audit process.
        The net worth requirement for mortgage brokers is also limited to
    liquid assets because equipment and fixtures depreciate rapidly and
    loans to corporate officers and goodwill are not permitted to be
    included as assets. To compound this, a broker who greatly exceeds the
    net worth requirement is forced to keep cash or equivalents of 20
    percent of their net worth up to $100,000. Because the net worth for
    brokers usually needs to be in cash, it tends to destabilize a small
    business by robbing it of needed operating funds. This makes the net
    worth requirement of little value for indemnification because a company
    in trouble can easily dissipate its net worth. Additionally, there is
    no evidence to demonstrate that loans originated by high net worth
    originators perform better than those with a lower net worth.
        Because of the burdens imposed by the current financial audit and
    net worth requirements, many mortgage brokers do not engage in the FHA
    program. In this regard, the impediments stated herein have actually
    served to limit the utility and effectiveness of the FHA program and
    seriously restrict the range of choice available for prospective
    borrowers who can afford only a small down payment. At a minimum, NAMB
    believes annual bonding requirements offer a better way to ensure the
    safety and soundness of the FHA program than requiring originators to
    submit audited financial statements.
        Moreover, annual audit and net worth requirements are unnecessary.
    Today, mortgage brokers participate in the FHA program typically
    through a large lender. Replacing net worth and audit requirements with
    a surety bond will not change the framework set to ensure
    responsibility and accountability, it will simply encourage brokers to
    participate thereby increasing the amount of FHA loans offered. The
    larger FHA-approved lenders will continue to submit to the standards
    deemed necessary by FHA (i.e. audits, net worth etc.) before being
    approved to offer FHA loans through retail or wholesale channels. This
    affords the U.S. Department of Housing & Urban Development's (``HUD'')
    adequate protection against loss to the FHA program. Brokers who choose
    to offer FHA loan products will also continue to be governed by
    contract agreements with these respective FHA-approved lenders.
    Additionally, brokers who participate in the FHA-program will remain
    state-licensed entities subject to any state bond requirements,
    criminal background checks and education requirements in addition to
    any FHA-required surety bond. This, in effect, creates a dual-layer of
    protection for both the FHA program and the consumer. Last, the process
    of obtaining a surety bond itself involves stringent standards and
    review. Surety companies pre-qualify their customers to determine
    whether they are financially sound and have the baseline to conduct
    their business, i.e. ability to pay out upon a loss, before issuing a
    surety bond.
        A stated objective of the FHA is to increase origination of FHA
    loan products and expand homeownership opportunities for first-time,
    minority and low to moderate-income families. NAMB supports increased
    access to FHA loans so that prospective borrowers who have blemished
    credit histories, or who can afford only minimal down payments, have
    increased choice of affordable loan products. These prospective
    borrowers should not be forced by default into the subprime market. A
    recent Inside Mortgage Finance publication estimated the current FHA
    market share at 2.7 percent.\1\ NAMB believes the solution to
    increasing FHA loan origination and market share is increasing the
    number of origination sources responsible for delivering FHA loan
    products directly to consumers. Today, the most effective and efficient
    origination source is through mortgage brokers.
    ---------------------------------------------------------------------------
        \1\ See Inside Mortgage Finance, Mortgage Originations by Product,
    p.7 (March 2, 2007).
    ---------------------------------------------------------------------------
        Mortgage brokers originate over 50 percent of all home loans, yet
    brokers are responsible for just 10 percent of FHA's origination
    volume, or .27 percent of all home loans. This is due, in large part,
    to the fact that mortgage brokers are discouraged from participating in
    the FHA program by the unnecessarily burdensome financial audit and net
    worth requirements. These requirements erect a formidable barrier and
    prevent a significant majority of mortgage brokers from participating
    in the program.
        NAMB estimates that less than 18 percent of all mortgage brokers
    are approved to originate FHA loans under the current requirements;
    however, recent NAMB surveys indicate that roughly 80 percent of ``non-
    participating'' mortgage brokers would offer FHA loans to their
    customers if there were no financial audit or net worth requirement.
    NAMB predicts that such a change would increase mortgage broker
    participation in the FHA program from 18 percent to roughly 85 percent.
    This, in turn, would increase FHA's loan origination volume and market
    share by nearly 40 percent.
        For example, in 2006, FHA's origination volume was roughly $80
    billion.\1\ All things being equal, the 67 percent increase in broker
    participation would increase FHA's origination volume to nearly $112
    billion, and FHA's total market share from 2.7 percent to 3.78 percent.
    This increase of $32 billion and 1.08 percent total market share will
    be directly tied to an increase in mortgage broker participation in the
    FHA program.
                            fha risk-based premiums
        The ability to match borrower characteristics with an appropriate
    mortgage insurance premium has been recognized as essential by every
    private mortgage insurer (``PMI''). PMI companies have established
    levels of credit quality, loan-to-value, and protection coverage to aid
    in this matching process. These companies also offer various programs
    that allow for upfront mortgage insurance premiums, monthly premiums,
    or combinations of both. This flexibility has enabled lenders to make
    conventional loans that are either not allowable under FHA or present a
    risk level that is currently unacceptable to FHA.
        FHA is essentially a government mortgage insurance provider. Where
    FHA mortgage insurance is not available, PMI companies are free to
    increase premiums without fear of losing market share to a more
    competitively priced FHA loan product. FHA should be permitted to
    balance risk with premiums charged in order to increase competition and
    ultimately drive down costs for consumers. Since FHA is not required to
    make a suitable profit or demonstrate market growth to shareholders, it
    is likely that FHA can afford to assume greater risk levels than PMI
    companies can currently absorb. This increased capacity to assume and
    manage risk will allow FHA to not only serve borrowers who presently do
    not have PMI available as a choice, but also those borrowers whose
    premiums will be reduced because of the increased competition in the
    market.
                    fha mortgage amounts in high-cost areas
        In an environment of rising interest rates, many first-time,
    minority, and low to moderate-income homebuyers need the safer and
    less-expensive financing options that the FHA program can provide. For
    this reason, NAMB uniformly and unequivocally supports increasing FHA
    loan limits in high-cost areas. The benefits of the FHA program should
    be available equally to all taxpayers; especially those residing in
    high-cost areas, where borrowers are most often in need of affordable
    mortgage financing options.
        Congress must act to ensure that FHA loan programs continue to
    serve as a permanent backstop for all first-time homebuyer programs. We
    believe that Congress should allow for FHA loan limits to be adjusted
    up to 100 percent of the median home price, thereby establishing a
    logical loan limit that will benefit both the housing industry and
    consumers. Tying the FHA loan limit to the median home price for an
    individual county, and letting it float with the housing market, allows
    the FHA loan limits to respond to changes in home prices instead of an
    esoteric number derived from a complicated formula. In this fashion,
    the FHA loan limit will reflect a true home market economy.
                                 future of fha
        Changes must be made to the FHA program to sustain its viability
    and to fulfill its stated objective of increasing origination of FHA
    loan products and expanding homeownership opportunities for first-time,
    minority, and low and moderate-income families. Without substantial
    reform of the FHA program, PMI will continue to dominate the low down
    payment market with little competition, while the sub-prime mortgage
    market will meet the needs of those who are unable to obtain PMI
    insurance. Minority families and first-time homebuyers will find
    themselves underserved or even shut out of the housing market entirely.
    For this reason, NAMB also supports the ability of the FHA to control
    minimum borrower contribution to correspond to the levels deemed
    acceptable by the government-sponsored enterprises. Furthermore, it is
    possible that FHA's pool of loans will grow too small to effectively
    manage risk, and FHA could ultimately be unable to fulfill its function
    of being a helping hand for those who need it the most. The ripple
    effects could easily extend to the homebuilding industry and even to
    the economy at large.
        Congress has the opportunity to revitalize the FHA program by
    increasing its profitability and ensuring that borrowers across the
    country have an equal opportunity to obtain a better loan at a lower
    interest rate.
        NAMB appreciates this opportunity to offer our perspective on
    ``Solvency and Reform Proposals for the Federal Housing
    Administration.''
                                     ______

    Prepared Statement of the American Association of Service Coordinators
                                     (AASC)
        The American Association of Service Coordinators (AASC) urges the
    subcommittee to support the staffing of service coordinators in
    federally assisted and public housing, as part of the Transportation,
    HUD, and Related Agencies fiscal year 2008 Appropriations bill. AASC, a
    national nonprofit organization based in Columbus, Ohio, represents
    over 1,900 service coordinators and other housing professionals who
    serve low-income frail elderly, persons with disabilities, and families
    seeking self-sufficiency residing in public and federally assisted
    housing.
        We understand that the committee and Congress face difficult
    choices with tight funding constraints. We are grateful for the
    leadership of this committee in the establishment and funding of
    service coordinators; and would urge your support for the full funding
    of service coordinators as a cost-effective investment. Service
    Coordinators not only give consumer choices, but also saves public
    funds by promoting economic self-sufficiency for low-income families
    and options for the delay or avoidance of elderly individuals moving
    into more costly settings, such as nursing homes.
        Service coordinators have helped thousands of low-income elderly
    and persons with disabilities with their health and supportive service
    needs, allowing them to remain in their home while avoiding premature
    institutionalization. The concern for many persons is that the
    fragmentation, lack of awareness, and complexities of essential
    services available in the community, have hindered timely access.
    Without the benefit of well-trained service coordinators, many
    vulnerable persons have been forced to move to more costly settings.
    Service coordinators are increasingly recognized as a vital lynchpin in
    linking older persons with essential community services. They provide
    assistance allowing many families in public housing or using Housing
    Choice Vouchers to become more economically independent through
    employment and homeownership.
        Service coordinators in federally assisted housing are funded
    primarily through national competitive grants through the section 202
    program; through use of residual receipts; or incorporated into the
    project's operating budget. For public housing, service coordinators
    have been funded through competitive grants of the Resident
    Opportunities and Self-Sufficiency program (ROSS), the Housing Choice
    Vouchers Family Self-Sufficiency (HCV-FSS) program; or through PHA
    Operating Funds.
        Yet, despite the critical need and cost-effectiveness of service
    coordinators in assisting frail elderly and others who seek to remain
    in their home or low-income families seeking to become more self-
    sufficient, funding for service coordinators remains very limited.
    While the administration's fiscal year 2008 budget provides a slight
    increase for service coordinators in section 202 and other federally
    assisted senior housing, but it significantly cuts funds for service
    coordinators assisting elderly and families residing in public housing.
    AASC would urge the committee's support for the following:
      --$100 million in fiscal year 2008 for service coordinators in
            federally assisted housing, particularly to ensure adequate
            funds for expiring contracts of existing service coordinators;
      --Full funding for Section 8, Project Rental Assistance Contracts
            (PRAC), other rent subsidies and project operating funds to
            permit the staffing of a service coordinator as a routine part
            of the project's operating budget;
      --A separate add-on of $75 million in Public Housing Operating Funds
            for service coordinators; and
      --$55 million for the Resident Opportunities for Self-Sufficiency
            (ROSS) program; and $85 million for the Housing Choice Voucher
            Family Self-Sufficiency program.
                    federally assisted housing--$100 million
        The administration's fiscal year 2008 budget requests $71 million
    for service coordinators, a moderate increase over the $59.4 million
    requested in fiscal year 2007 and the $51.6 million provided in the
    fiscal year 2007 Continuing Resolution (H.J. Res. 20). Of this amount,
    only $10 million was provided in the HUD fiscal year 2007 SuperNOFA to
    expand the number of service coordinators to projects that currently do
    not have them. Most of the funds are necessary to extend the expiring
    contracts of existing service coordinators. While the initial
    competitive grants for service coordinators is for 3 years, extensions
    cover only 1 year. There is a potential of losing existing service
    coordinator positions if the administration's proposed budget is not
    increased. For the first time since Congress established the service
    coordinator program in 1990, there would be no additional funds
    available to hire new service coordinators. Currently, many federally
    assisted and public housing facilities do not have sufficient resources
    in their operating budgets to hire service coordinators; or due to
    limited funding, need to share service coordinators between several
    facilities, thus stretching their effectiveness. Additionally, some
    projects that need service coordinators, such as section 515 rural
    housing or Low-Income Housing Tax Credits, are currently ineligible to
    compete for service coordinator funds.
        AASC would recommend funding the service coordinator program for
    federally assisted housing at $100 million in order to ensure renewal
    of existing contracts, as well as to fund service coordinators in
    federally assisted housing for elderly or persons with disabilities
    that currently do not have them. There is a need for a dual strategy
    for funding service coordinators that includes maintaining the service
    coordinator grant program, as well as routinely staffing service
    coordinators within the facility's operating budget. While statutory
    authority exists to allow HUD to fund coordinators, many senior housing
    facilities have not been able to secure the necessary rent adjustments
    to accommodate them. AASC would recommend that sufficient Section 8,
    PRAC, or other operating funds be increased to allow routine staffing
    of service coordinators, as well as to direct HUD and their field
    offices to provide necessary budget adjustments and regulatory relief
    to remove any barriers restricting the staffing of service coordinators
    though the project's operating budget.
               public housing: operating funds, ross and hcv/fss
        Residents of public housing and those using Housing Choice Vouchers
    have been denied full access to the valuable assistance that service
    coordinators can provide. Over one-third of residents in public housing
    are elderly residing in various settings such as senior housing, family
    housing, mixed-population housing with younger persons with physical
    and mental disabilities. Funding for service coordinators in public
    housing is very limited, complex, and has experienced a steady
    reduction in funds over the past few years.
        A number of local housing authorities have funded service
    coordinators though competitive short-term grant programs, such as
    those under the Resident Opportunities and Self-Sufficiency (ROSS)
    program. Unfortunately, over the past few years, there have been
    funding cuts and a lack of program consistency. For example, the
    Elderly and Persons with Disabilities Service Coordinator program
    (EDSC) funded at over $15 million, was initially a part of the ROSS
    program. In fiscal year 2004, it was shifted to the Public Housing
    Operating Fund with no additional funding provided. HUD specified that
    only those public housing authorities that had received EDSC funds in
    1995 were eligible for extension and that no new service coordinators
    would be funded. The existing EDSC coordinators need to compete with
    other critical operating budget priorities; and are subjected to the
    same proportional cuts with Public Housing Operating Funds. Because of
    funding cuts in their operating budgets and other competing needs, a
    number of public housing authorities have been forced to lay off or
    reduce their service coordinator program. This action, while necessary
    by local housing authorities given their funding limitations, is
    counter-productive for broader Federal long-term care policies that
    seek to allow frail elderly and persons with disabilities more
    independence while avoiding premature admission to more costly care.
        AASC commends this committee for acknowledging in the fiscal year
    2007 appropriations for public housing that operating funds covered
    only 76 percent of operating budget needs; and with the committee's
    action this year to provide additional funds in the final fiscal year
    2007 Continuing Resolution for Public Housing Operating Funds. However,
    the projected shortfall for public housing operating funds this year is
    $1 billion. For fiscal year 2008, public housing service coordinators
    must be included in the PHA plan. Therefore, it is necessary to ensure
    that there are adequate funds available in the fiscal year 2008 Public
    Housing Operating funds to accommodate service coordinators. AASC would
    urge that $85 million be provided as a separate add-on to Public
    Housing Operating Funds to ensure they can include service coordinators
    within their operating budget as part of routine staffing.
        resident opportunities and self sufficiency (ross)--$55 million
        The Resident Opportunities and Self Sufficiency (ROSS) program
    provides grants to public housing agencies, tribal housing entities,
    resident associations, and nonprofit organizations for the delivery and
    coordination of supportive services and other activities designed to
    help public and Indian housing residents attain economic and housing
    self-sufficiency. There are several separate programs within the ROSS
    program that were appropriated at $38 million in fiscal year 2007,
    assuming some fiscal year 2006 carry-over funds. These include: (1)
    Family and Homeownership ($30 million in fiscal year 2007 NOFA) that
    links residents with services such as job training, and educational
    opportunities to facilitate economic and housing self-sufficiency; (2)
    Elderly and Persons with Disabilities ($20 million in fiscal year 2007
    NOFA) that funds service coordinators and supportive services to assist
    elderly and persons with disabilities residing in public housing; and
    (3) Public Housing Family Self-Sufficiency ($12 million in fiscal year
    2007 NOFA) promotes participating public housing families to increase
    their earned income, reduce or eliminate the need for welfare
    assistance, and to make progress toward achieving economic independence
    and housing self-sufficiency.
        Prior to fiscal year 2004, PH/FSS was funded out of the public
    housing operating fund. However, with the switch to ROSS and technical
    problems encountered by a number of housing authorities with the NOFA,
    a number of service coordinators and PH/FSS programs were cut. Despite
    the demonstrated need and effective results, the administration's
    fiscal year 2008 budget seeks no funding for these three ROSS programs,
    and no additional funds for Neighborhood Networks (listed within ROSS
    that had received approximately $15 million over the past few years).
    AASC would urge that ROSS be funded at $55 million, as it had been
    prior to fiscal year 2005.
     housing choice voucher/family self-sufficiency (hcv/fss)--$85 million
        The HCV/FSS program enables participants in the Section 8 Housing
    Choice Voucher program to increase their earned income, reduce or
    eliminate their need for welfare assistance, and promote their economic
    independence. Funds are used to provide for FSS program coordinators to
    link participants with supportive services they need to achieve self-
    sufficiency; and to develop 5-year self-sufficiency plans. In fiscal
    year 2004, HUD made major changes in the procedure to distribute HCV/
    FSS funds that led to a reduction of nearly one-third (256 of the 771
    HAs) and shifted funds to HAs that had not previously been funded in
    the HCV/FSS program. The fiscal year 2007 appropriation for HVC/FSS was
    for $47 million compared to $72 million in the administration's fiscal
    year 2004 budget request. AASC urges for fiscal year 2008 an increase
    in HCV/FSS funding to $85 million in order to restore those HAs cut in
    fiscal year 2004 and to expand the number of FSS participants. In
    addition, we support administrative changes for up-front funding of
    escrow accounts, and to streamline the staffing of service coordinators
    to enable 1 coordinator per 25 FSS participants.
               collaboration between hud, hhs and other agencies
        Given the strong relationship between suitable and affordable
    housing with timely access to supportive services and health care
    needed by older residents, low income families and others, it is vital
    that there be effective collaboration between HUD, HHS, and other
    Federal agencies serving these populations. Policies, programs and
    funding requirements in one agency can contribute (or be counter
    productive) to consumer preferences and public savings in another
    Federal agency, including linking services with housing and mixed-
    financing developments (tax credits administered by IRS and States with
    various HUD programs). Last year, the Senate passed S. 705 to establish
    an Interagency Council on Housing and Service for the Elderly that was
    modified by the House and enacted (Public Law 109-365, section 203 of
    the Older Americans Act) as an Interagency Coordinating Committee on
    Aging within HHS. AASC would urge that the committee give directives to
    HHS for the prompt establishment of this interagency committee; and
    direct HUD, HHS and other Federal agencies to develop means to promote
    collaboration with their respective programs and policies involving
    affordable housing and services to assist the elderly, low income
    families and persons with disabilities residing in public and federally
    assisted housing. Thank you for your consideration.

                                                                                  FEDERALLY ASSISTED AND PUBLIC HOUSING
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                           Fiscal Year 2004             Fiscal Year 2005                           Fiscal Year 2006                         Fiscal Year 2007 Cont
                                        ------------------------------------------------------------------------------------------------------------------------------------------------ Fiscal Year
                                           Budget     Appro      Budget     Appro       Awards      Budget   Appro \10\       NOFA          Awards      Budget     Res \11\   NOFA \13\  2008 Budget
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Federally Assisted SC/CHSP.........    $40 mil    $30 mil    $53 mil    $50 mil    $15.5 mil    $53 mil   $51.6 mil       $51.6 mil    \1\ $12.1  $59.4 mil    $51.6 mil  $51.6 mil      $71 mil
                                                                                                                                                 mil
    PHA CAPITAL FUND...................    2.6 bil    2.7 bil   2.76 bil    2.6 bil          n/a    2.3 bil    2.43 bil             n/a          n/a   2.17 bil     2.43 bil  .........   $2.024 bil
                                        ============================================================================================================================================================
    ROSS total \2\.....................     40 mil     55 mil     55 mil     53 mil     \3\ 49.5     24 mil      38 mil          38 mil  ...........   23.8 mil       38 mil  .........  ...........
                                                                                             mil                             (+$34 mil)
        Family and Homeownership.......  .........  .........  .........  .........     27.8 mil  .........  ..........          18 mil    29.46 mil  .........  ...........     30 mil  ...........
                                                                                                                             (+$25 mil)
        Homeownership Sup. Services....  .........  .........  .........  .........      3.1 mil  .........  ..........  ..............      ( \4\ )  .........  ...........  .........  ...........
        Elderly/Persons with             .........  .........  .........  .........      9.5 mil  .........  ..........          10 mil     \5\ 8.79  .........  ...........     20 mil  ...........
         Disabilities..................                                                                                       (+$6 mil)          mil
        PH/FSS Coordinators............  .........  .........  .........  .........      9.1 mil  .........  ..........          10 mil     \6\ 9.67  .........  ...........     12 mil  ...........
                                                                                                                              (+$3 mil)          mil
                                        ============================================================================================================================================================
    PH Neighborhood Networks...........     15 mil     15 mil  .........     15 mil     13.8 mil  .........     7.5 mil  7.5 mil (+$9.5   \7\ $13.73  .........  ...........  .........  ...........
                                                                                                                                   mil)          mil
    PHA OPERATING FUND: Elderly/           3.6 bil   3.59 bil    3.6 bil    2.4 bil          n/a    3.4 bil    3.56 bil             n/a          n/a   3.56 bil    \12\ 3.86  .........      4.0 bil
     Disabled SC \8\...................                                                                                                                                  bil
    HCV/FSS Coordinators...............     72 mil     48 mil     48 mil     46 mil     45.5 mil     55 mil      48 mil          47 mil    \9\ 47.49     48 mil     47.5 mil     47 mil       48 mil
                                                                                                                                                 mil
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Funded through the section 202 program; most fiscal year 2006 NOFA funds used to extend existing contracts.
    \2\ ROSS (Resident Opportunity and Self Sufficiency) moved from CDBG to PHA Capital fund in 2004, includes 4-5 separate programs.
    \3\ Additional funds awarded in fiscal year 2005 based on appeals.
    \4\ Fiscal year 2006 ROSS NOFA merges Family and Homeownership Support Services programs and $25 mil carryover funds; HUD awards announced Feb. 23,2007.
    \5\ Formerly Resident Services Delivery Model changed in fiscal year 2006 NOFA to Elderly/Persons with Disabilities and includes $6 mil carryover funds; HUD awards announced Jan. 18, 2007 to
      32 PHAs.
    \6\1A Public Housing Family Self Sufficiency (PH/FSS) moved from PH Operating Fund to ROSS in fiscal year 2004; fiscal year 2006 NOFA includes $3 mil carryover funds; HUD announced Dec. 20,
      2006 to 173 PHAs.
    \7\1AFunded as separate line item fiscal year 2004-fiscal year 2006 in PHA Capital Fund; moved to ROSS as a separate program not included in total funding; fiscal year 2006 NOFA includes $9.5
      mil carryover funds; HUD announced 12/22/06 to 53 PHAs.
    \8\ Elderly/Disabled SC shifted in fiscal year 2004 from ROSS to PH Operating Fund; previously funded level $15.6 mil.
    \9\ Housing Certificate Voucher FSS Coordinators (self-sufficiency/homeownership); HUD announced Oct. 2006 to 623 public housing authorities.
    \10\ Defense fiscal year 2006 Appropriations bill cut most domestic programs 1 percent across the board, Dec 21, 2005.
    \11\ 3rd Continuing Resolution to Feb 15, 2007; H.J. Res 20 passed House Jan. 31, 2007.
    \12\ H.J. Res 20 increases fiscal year 2007 funding to $3.86 billion from House passed $3.56 billion; House Appropriations Committee acknowledges that fiscal year 2007 funding is $672 million
      short of the need and that HUD is funding PHAs at 76 percent of their operating level.
    \13\ HUD published in March 13, 2007 Federal Register the fiscal year 2007 SuperNOFA.

       Prepared Statement of the National Affordable Housing Management
                              Association (NAHMA)
        Thank you, Chairman Murray and Ranking Member Bond for providing me
    this opportunity to share NAHMA's perspectives on the fiscal year 2008
    budget request for the U.S. Department of Housing and Urban
    Development.
        NAHMA represents individuals involved with the management of
    privately-owned affordable multifamily housing regulated by the U.S.
    Department of Housing and Urban Development (HUD), the U.S. Rural
    Housing Service (RHS), the U.S. Internal Revenue Service (IRS), and
    State housing finance agencies. Our members provide quality affordable
    housing to more than 2 million Americans with very low and moderate
    incomes. Executives of property management companies, owners of
    affordable rental housing, public agencies and vendors that serve the
    affordable housing industry constitute NAHMA's membership.
        Key HUD multifamily programs of interest to our members include:
    Project-based section 8; section 8 Housing Choice Vouchers; section 202
    housing for the elderly; section 811 housing for the disabled; the
    Community Development Block Grant (CDBG) and the HOME program. The
    majority of my statement will focus on funding and administration of
    the project-based section 8 program.
        It is imperative to fully fund all rental subsidy contract renewals
    in the project-based section 8 program. NAHMA is extremely concerned
    that the fiscal year 2008 budget request for project-based section 8 is
    seriously under-funded. The administration requested only $5.5 billion
    for project-based section 8 contract renewals in fiscal year 2008--a
    figure well below the $5.8 billion Congress appropriated for this
    purpose in fiscal year 2007. Such a serious shortfall in this account
    would further exacerbate the well-documented problem of late Housing
    Assistance Payments (HAPs) to owners of these properties.
        As the subcommittee is well aware, the Government Accountability
    Office (GAO) released a report in November 2005, entitled ``Project-
    Based Rental Assistance: HUD Should Streamline Its Processes to Ensure
    Timely Housing Assistance Payments.'' GAO recommended three key actions
    HUD should take to improve the timeliness of HAP payments to owners:
      --Streamline and automate the contract renewal process to prevent
            errors and delays;
      --Improve HUD's monitoring of contract funding levels; and
      --Notify owners about late payments.
        Although HUD agreed with GAO's recommendations, the Department
    pinned much of its plans for implementation on its planned Business
    Process Reengineering--which has since been cancelled due to its costs.
        Much of this report confirmed what we believed about the problem of
    late HAP payments, including the close association between late HAPs
    and contract renewals. In the experience of our members, HUD will not
    execute a renewed contract until the funding is in place. Nevertheless,
    there are some aspects of the report which we hope the subcommittee
    will explore further. Near the end of the Federal fiscal years, and in
    periods funded by continuing resolutions, NAHMA receives many pleas for
    assistance from members who have not received their HAP payments, or
    were told by the HUD field office or PBCA that there was no funding
    available for their contract. Often, when a member does not receive
    their HAP payment on time, they will notice the code given in HUD's
    TRACS system for the contract is ``R-26'' (i.e. insufficient funding).
    While these requests for help are not limited to the end of the fiscal
    year or periods of continuing resolutions, they are generally expected
    around these times. Based on interviews with HUD budget officials, GAO
    dismissed continuing resolutions as a cause of late HAP payments. HUD
    told GAO a process was in place to deal with such situations. NAHMA
    strongly believes this claim requires further examination. When GAO
    released this report in late 2005, HUD would execute short-term,
    partial-year contracts in such situations. Recently, NAHMA was informed
    that HUD now frowns on partial-year contracts. The effect of HUD's
    policy reversal is that owners will remain unpaid for indefinite
    periods of time rather than receive a partial payment. Although GAO did
    not address whether lag-time between HUD's request for its funding
    allotment and release of funds from the Office of Management and Budget
    (OMB) caused late HAPs, we believe this matter should be explored.
        Last year, in H. Rept. 109-495 to accompany the fiscal year 2007
    Transportation, Treasury, HUD bill (H.R. 5576) the House Appropriations
    Committee directed HUD to report on its progress in implementing GAO's
    recommendations for improving timeliness of HAP rental subsidy payments
    to affordable housing owners. Language found under the Project-Based
    section 8 section noted the Committee's concern ``. . . that the
    Department take adequate measures to avoid late or delayed payments to
    providers of Project Based section 8 rental housing.'' The committee
    repeated GAO's three specific recommendations and directed the
    Department, ``. . . to provide the committee with a report on progress
    achieved in reducing the incidence of late payments to project-based
    providers and other measures to implement GAO's recommendations to
    accompany the Department's fiscal year 2007 Operating Plan submission.
    The report is to include a preliminary allocation plan for fiscal year
    2007 funding requirements for both project-based contract renewal and
    amendment funding needs in fiscal year 2007. In addition, the report
    accompanying the Operating Plan is to address how the proposed fiscal
    year 2007 program for project based-based renewals and amendments, as
    reflected in the preliminary allocation plan, is to be funded using a
    combination of new budget authority and recaptures in fiscal year
    2007.''
        Nearly 18 months after GAO released its report in 2005, late HAP
    payments to owners remain a serious problem. The House Financial
    Services Committee included the late HAP issue on its Oversight Plan
    for the 110th Congress. NAHMA believes continued oversight by the
    authorizers and appropriators will be necessary to resolve this
    problem.
        In a new report released by GAO in April, 2007, ``Project-Based
    Rental Assistance: HUD Should Update Its Policies and Procedures to
    Keep Pace with the Changing Housing Market,'' (GAO-07-290), GAO
    documented serious consequences of late HAP payments:

    ``Owners told us that when they did not receive payments on time, they
    often had to use reserve funds to cover critical operating expenses,
    leading to cash flow problems. During these periods, some owners
    delayed needed maintenance to make up for the budget shortfall. For
    example, we found in our work for this current report that in
    Baltimore, a nonprofit owner of a project-based section 8 property for
    elderly residents delayed critical repairs to the boiler system when
    the payments were delayed. The owner used reserve funds that should
    have been used for repairs to cover operating costs. This situation
    contributed to a lower physical REAC score for the owner because the
    boiler was in need of repair.''

        NAHMA has also come to the unfortunate conclusion that legislation
    will probably be necessary to solve the problem once and for all. Not
    surprisingly, we are unequivocal in our position that HAPs must be paid
    to owners on time and in full. Ideally, we believe HUD should pay a
    penalty to owners when HAPs are late, just as owners must pay late fees
    on missed mortgage and /or utility payments which result from the late
    HAP. We will seek legislation which requires HUD to implement GAO's
    late HAP recommendation to notify owners when payments will be late,
    requires HUD to automatically approve releases from reserves when the
    HAP is 10 days late, and penalizes HUD for late HAP payments to owners.
    Where HAP payments are not made in a timely manner, our members feel
    strongly that HUD should pay interest on the late HAP payments--just as
    the owners must pay a penalty for late mortgage payments. Moreover,
    when owners must use reserve for replacement funds to sustain the
    property until the HAP payment is received, interest earned on the
    reserves is lost.
        We believe a precedent for penalizing late HAP payments exists in
    Treasury's Prompt Payment Rule, which ensures that Federal agencies pay
    vendors in a timely manner. Prompt Payment assesses late interest
    penalties against agencies that pay vendors after a payment due date.
    This rate was established under the Contract Disputes Act and is
    referred to as the ``Renegotiation Board Interest Rate,'' the
    ``Contract Disputes Act Interest Rate,'' and the ``Prompt Payment Act
    Interest Rate.'' For more information, please see http://
    www.fms.treas...gov/prompt/index.html. While we understand that HAP
    payments are subject to annual appropriations, we do not believe the
    legislative intent of such policy was to delay payments from days to
    sometimes months at a time. I would welcome the opportunity to discuss
    our proposed solution with the subcommittee at length.
        Finally, it is in the context of HUD's questionable funding request
    for project-based section 8 and chronic late payments of HAP contracts
    that I respectfully ask the subcommittee to consider NAHMA's request
    for assistance in implementing HUD's Limited English Proficiency (LEP)
    guidance. HUD published its final LEP guidance, ``Notice of Guidance to
    Federal Assistance Recipients Regarding Title VI Prohibition Against
    National Origin Discrimination Affecting Limited English Proficient
    Persons,'' in the Federal Register on January 22, 2007. It became
    effective on March 7, 2007. The term ``limited English proficiency''
    refers to inability to read, write, or speak English well. Among other
    things, the LEP guidance obligates affordable housing owners to provide
    translated ``vital documents'' and interpretation services to persons
    with limited English proficiency. It also places responsibility on the
    owners to ensure competency of translators/interpreters and accuracy of
    the translations. The guidance was issued pursuant to Executive Order
    13166, which directed Federal agencies to issue guidance clarifying how
    recipients of Federal funds are supposed to satisfy their obligation
    under Title VI of the Civil Rights Act of 1964 to ensure meaningful
    access to their programs by persons with limited English proficiency
    (LEP).
        NAHMA supports HUD's goal of ensuring that persons with LEP have
    access to Federal programs. In fact, many individuals with limited
    English proficiency already live in properties owned or managed by
    NAHMA members. It is the methods HUD has proposed to advance the goal
    we find highly problematic. For example, no additional funding has been
    proposed to offset the cost of complying with this guidance. Feedback
    from NAHMA members suggest translating documents could cost $10,000 per
    language per property. Many properties are already stretching funds
    just to meet the ever-increasing regulatory requirements and to
    maintain the physical condition of properties. Furthermore, HUD has
    resisted suggestions to issue a specific, definitive list of ``vital
    documents.'' The owner is left to guess which property-specific
    documents could be considered vital in legal proceedings and then
    translate them at the project's expense. Likewise, the guidance says
    the owner is responsible for ensuring the accuracy of translations and
    competency of the translators or interpreters. Generally speaking, the
    management of affordable housing bears no relationship to linguistic
    abilities, translation services or the ability to differentiate between
    high quality interpretation and inadequate interpretation. To impose
    this requirement on housing providers is no less burdensome than asking
    them to become practitioners of some other profession requiring years
    of extensive training and specialized personal abilities. We strongly
    believe HUD should provide any necessary translations and/or oral
    interpretation services directly to LEP persons.
        We urge the subcommittee to include language in the fiscal year
    2008 HUD appropriations legislation which will provide funding (either
    through new appropriations or reprogramming from existing accounts) for
    standardized translations and a toll-free interpretation hotline
    service to assist persons with limited English proficiency. We believe
    the standardized translations should include both official HUD
    documents, as well as any unofficial documents used by a recipient of
    the agency's funding to support the HUD program. NAHMA strongly
    believes responsibility for producing the translations and providing
    interpreters should be shifted from housing providers to HUD. The
    suggested duplication of effort by small, medium and large housing
    providers will result in multiple translations of the same document
    with inconsistent quality. A reasonable compromise would make HUD
    responsible for identifying vital documents and producing standard
    translated versions of those documents. A single translation produced
    by HUD will better serve individuals with limited English proficiency.
    There would be more consistency and better control over the accuracy,
    which will provide LEP persons with quality translations. Standard
    translations produced by HUD represent a more cost-effective approach
    to satisfying the goal of ensuring persons with Limited English
    Proficiency have meaningful access to Federal housing programs.
    Furthermore, professional interpreters available through a HUD-provided
    hotline service and trained in HUD's programs would offer a win-win
    alternative to the current proposal.
        In conclusion, NAHMA appreciates that the subcommittee has a very
    difficult task ahead in balancing many competing priorities in a
    climate of tightened budgets. As you make these difficult
    determinations, please continue to reject outright cuts to Federal
    multifamily housing programs. NAHMA respectfully requests that the
    subcommittee provide full funding for all authorized section 8
    vouchers. Please also fully fund contract renewals for project-based
    section 8, and continue legislative oversight to end the problem of
    late HAP payments. Likewise, we urge the subcommittee to at the very
    least increase appropriations for the section 202, section 811, HOME
    and CDBG programs at the rate of inflation. Please resist any proposed
    cuts to these important programs.
        Thank you for your consideration.
                                     ______

      Prepared Statement of the National Council of State Housing Agencies
        Chairman Murray, Ranking Member Bond, and members of the
    subcommittee, the National Council of State Housing (NCSHA) is pleased
    to provide you testimony on our fiscal year 2008 HUD funding
    priorities. NCSHA represents the Housing Finance Agencies (HFAs) of the
    50 States, the District of Columbia, Puerto Rico, and the U.S. Virgin
    Islands. We appreciate your continued commitment to affordable housing
    and consideration of our views.
        State HFAs are full partners with HUD in the delivery of affordable
    housing programs. HFAs administer the HOME Investment Partnerships
    program (HOME) in 41 States. They administer the section 8 Housing
    Choice Voucher Program in 21 States and project-based section 8
    contracts in 43 States. Many HFAs administer homeless assistance.
    Forty-three participate in FHA mortgage insurance programs.
        In addition to administering HUD programs, HFAs allocate the Low
    Income Housing Tax Credit (Housing Credit) and issue tax-exempt private
    activity single-family Mortgage Revenue Bonds (MRBs) and multifamily
    housing bonds. HFAs often use HOME and other HUD programs in
    combination with the Housing Credit and Bonds to extend their reach to
    even lower income families.
        NCSHA urges Congress to increase total HUD funding this year. In
    recent years, HUD has borne more than its share of budget cuts. Since
    2001, HUD funding as a percentage of total discretionary spending has
    declined 20 percent.
        Today's HUD budget is a fraction of what it would have been had it
    just kept pace with inflation since 1976. In the last 31 years, HUD's
    budget authority has barely grown from $29.2 billion in 1976 to $36.6
    billion in 2007, despite the steady rise in the number of families
    needing affordable housing in this country. If HUD's budget authority
    had grown at the rate of inflation since 1976, today it would be $88.2
    billion.
        Increased funding is sorely needed. According to Harvard's Joint
    Center for Housing Studies, 15.8 million--nearly one in seven--American
    families spend more than half of their incomes on housing. Eighty
    percent of these families have incomes in the bottom fifth of the
    income distribution scale.
        The country is losing more affordable rental housing than it is
    producing each year to deterioration, rent increases, and conversion to
    market-rate housing or commercial use. The threat of further losses
    looms as Federal subsidy contracts on hundreds of thousands of
    apartments expire each year, and mortgages on thousands more become
    eligible for prepayment.
        Recognizing that budget constraints will prevent Congress from
    providing funding adequate to address all our housing needs, NCSHA
    urges Congress to prioritize increasing HOME formula grant and voucher
    funding.
                      increase home formula grant funding
        NCSHA appreciates the subcommittee's continued support of the HOME
    program. HOME enjoys strong bipartisan support throughout Congress.
        Since Congress created the HOME program more than 15 years ago, it
    has financed more than 1 million affordable homes, helping nearly a
    half million homeowners and just as many renters. Every year, HOME
    funds are used to provide housing assistance to more than 100,000
    additional families.
        HOME continues to be a wise investment and one of the most
    successful HUD programs available to States and localities. According
    to HUD, HOME production last year exceeded 140,000 units nationwide.
    Still, HOME participating jurisdictions (PJ) need much more HOME
    funding than they receive to meet the demand for it.
        The administration proposes to increase HOME funding to $1.97
    billion in fiscal year 2008, a 12 percent increase over the fiscal year
    2007 HOME appropriation. It recommends a 10 percent increase in the
    State and local HOME formula grant to $1.85 billion.
        The administration's proposal does not make up for funding cuts
    HOME has suffered since 2004. In fiscal year 2006, Congress cut HOME
    funding overall by 7.5 percent and the HOME formula grant by 6 percent,
    even though the House and Senate provided higher funding levels. The
    fiscal year 2006 funding cut came on top of a 5.3 percent reduction in
    fiscal year 2005. fiscal year 2007 HOME funding remains frozen at the
    fiscal year 2006 levels, the lowest since fiscal year 2000.
        NCSHA urges Congress to restore HOME funding to at least its fiscal
    year 2004 level of $2 billion, adjusted for inflation. Adjusted for
    inflation since fiscal year 2004, the fiscal year 2008 funding level
    for HOME would be $2.24 billion.
        During tight budgetary times as these, HOME is a particularly sound
    investment. State HFAs are able to direct scarce HOME funds where they
    will have the greatest impact meeting the States' most pressing low-
    income housing needs. PJs may use HOME funds for rental production,
    tenant-based rental assistance, homeowner rehabilitation, and down
    payment assistance. HOME funds can also be targeted to the elderly,
    persons with disabilities, extremely low-income, and working families.
        We also strongly urge Congress to put every available HOME dollar
    into the formula grant and not set-asides like the American Dream
    Downpayment Initiative (ADDI) or Housing Counseling. Such set-asides
    take away State flexibility and impose Washington dictates that may not
    address States' highest priority needs. Also, PJs already can and do
    use HOME formula grant funds for down payment assistance.
                    increase housing choice voucher funding
        NCSHA also calls on Congress to increase voucher funding to fully
    fund all authorized vouchers and provide for new incremental vouchers.
    The administration proposes to provide $16 billion for vouchers in
    fiscal year 2008, less than 1 percent more than the fiscal year 2007
    appropriation of $15.9 billion.
        This amount would not be enough to renew all vouchers already in
    use. At a minimum, Congress must fully fund all vouchers in use. We
    urge Congress also to fully fund all authorized vouchers.
        Vouchers assist some of our neediest families. With the help of
    vouchers, other important housing programs such as HOME, the Housing
    Credit, and Bonds are able to reach more low-income families than they
    can independently. In fact, the financial viability of some HOME,
    Credit, and Bond developments depends on vouchers. Adequately funding
    all authorized vouchers will help ensure the stability and longevity of
    these developments.
        In addition, we urge Congress to provide for new incremental
    vouchers so we can help some of the millions of families who qualify
    for voucher assistance, but do not receive it. According to the Joint
    Center for Housing Studies, more than 7 million low-income renters pay
    more than 50 percent of their income for housing. Three-quarters of all
    families eligible for housing assistance do not receive any. Yet,
    Congress has not funded any new incremental vouchers since 2002.
        To make matters worse, HUD has distributed the voucher funding
    Congress has provided to PHAs under a formula based on limited and
    outdated utilization data from May, June, and July 2004. Under this so
    called ``three-month snapshot'' formula, some public housing
    authorities (PHAs) have received too little funding to renew all
    vouchers in use, and others have received more than they are authorized
    to use.
        According to the Center on Budget and Policy Priorities, the
    funding shortages and misallocations have caused the number of families
    served since February 2004 to drop significantly. Over this period, HUD
    has provided vouchers to 150,000 fewer families than it would have if
    all authorized vouchers had been fully funded.
        NCSHA thanks the subcommittee for recognizing the problems created
    by the outdated funding formula. The formula changes Congress made in
    the fiscal year 2007 joint funding resolution, with your support, were
    a step in the right direction. Under the resolution, HUD will calculate
    voucher funding allocations on the most recent 12-month utilization and
    cost data available, adjusted for cost increases, rather than the old
    3-month snapshot.
        It is essential that Congress ensure HUD allocate whatever voucher
    funds are available according to a fair formula. We recommend the
    subcommittee make permanent the 1-year funding formula changes that
    Congress called for in the fiscal year 2007 appropriations bill and
    make other important allocation improvements, including directing HUD
    to reallocate unused funds from low utilization PHAs to high
    utilization PHAs and giving PHAs access to up to 2 percent of their
    next year's allocation to absorb temporary overleasing costs.
                support increased affordable housing production
        To meet the country's ever-growing housing needs, we must devote
    more Federal resources to producing new affordable housing and
    preserving the current housing stock. Existing resources are simply not
    sufficient.
        States administer a number of successful programs that produce
    affordable rental housing, including the Housing Credit, HOME, and
    multifamily tax-exempt bonds. While these programs are extremely
    effective, they were not designed to meet the needs of households at
    the bottom of the income spectrum without additional rental subsidies.
    At their current funding levels, they cannot adequately address our
    country's huge unmet affordable housing needs.
        We urge you to work with your authorizing committee colleagues to
    authorize and fund a new resource for increasing affordable rental
    housing production. Such a resource could be combined cost-effectively
    with other existing production resources to extend their reach to even
    lower income families.
                                     ______

        Prepared Statement of the National Low Income Housing Coalition
        The National Low Income Housing Coalition (NLIHC) is pleased to
    submit testimony on the fiscal year 2008 Department of Housing and
    Urban Development. We would also like to thank the subcommittee for its
    series of hearings on the fiscal year 2008 HUD budget.
        NLIHC is dedicated solely to ending the affordable housing crisis
    in the United States. Our members include non-profit housing providers,
    homeless service providers, fair housing organizations, state and local
    housing coalitions, public housing agencies, private developers and
    property owners, housing researchers, local and State government
    agencies, faith-based organizations, residents of public and assisted
    housing and their organizations, and concerned citizens. NLIHC does not
    represent any sector of the housing industry. Rather, NLIHC works only
    on behalf of and with low income people who need safe, decent, and
    affordable housing, especially those with the most serious housing
    problems. NLIHC is entirely funded with private donations.
        The need for more affordable housing is indisputable. The
    nationwide shortage of rental homes for extremely low income
    households, which are composed of elderly and disabled people on fixed
    incomes or people in the low wage workforce, is acute and getting
    worse. In the United States, there are 9,022,000 extremely low income
    renter households and only 6,746,000 homes renting at prices these
    households can afford, paying the standard of 30 percent of their
    income for housing. In Washington, there are only 31 affordable and
    available units to every 100 extremely low income renter households who
    could afford them. In Missouri, there are only 46 affordable and
    available units for every 100 extremely low income renter
    households.\1\
    ---------------------------------------------------------------------------
        \1\ Pelletiere, D. (2007). American Community Survey estimate shows
    larger national, State affordable rental housing shortages. Research
    Note No. 07-01. Washington, DC: NLIHC.
    ---------------------------------------------------------------------------
        This lack of affordable housing forces 74 percent of extremely low
    income renters to pay more than half of their incomes toward their
    homes, compared to 26 percent of renters in any income group.\2\
    ---------------------------------------------------------------------------
        \2\ NLIHC tabulations of 2005 American Community Survey PUMS.
    ---------------------------------------------------------------------------
        NLIHC firmly believes in the potential for federal housing programs
    to address these types of housing affordability problems through a
    variety of housing programs targeted to the lowest income households.
        NLIHC urges the subcommittee to provide full funding for the
    voucher program, including language that tenant protection vouchers
    must replace all units leaving the affordable housing inventory, not
    just for those units under lease. The Center on Budget and Policy
    Priorities estimates that the President has requested between $300 and
    $600 million less than what will actually be needed to renew existing
    vouchers in fiscal year 2008.\3\
    ---------------------------------------------------------------------------
        \3\ Sard, B. and Rice, D. (2007) Memorandum to Interested Parties
    on administration's proposed housing budget for fiscal year 2008.
    Washington, DC: CBPP.
    ---------------------------------------------------------------------------
        We appreciate the many improvements made to the section 8 housing
    choice voucher program in the fiscal year 2007 funding resolution.
    NLIHC is encouraged by legislation in the House, H.R. 1851, which would
    also fix the voucher funding formula while providing other welcome
    reforms to the program. It is our hope that this legislation will be
    enacted before fiscal year 2008 begins. If not, we hope that funding
    formula fixes will be included in the HUD fiscal year 2008 bill.
        NLIHC rejects the President's policy proposal to lift voucher
    agencies' authorized voucher caps. NLIHC firmly believes such action
    would be tantamount to creating a block grant and that no one,
    including Congress, HUD and advocates, would know the number of
    vouchers in use locally or nationally. It is also apparent that many
    housing authorities have not expended funds up to their authorized cap
    so we are very doubtful that lifting the cap would result in any
    significant increase, if we could even hope to measure it, of vouchers
    in use.
        In addition to assuring the current voucher program is on solid
    ground to restore all vouchers lost since 2004, NLIHC urges the
    subcommittee to include funding for 100,000 new, incremental vouchers
    in fiscal year 2008. Such action would be a meaningful, much-needed
    step toward meeting the Nation's housing needs and would signal the
    subcommittee's belief that the reliability and credibility of the
    voucher program have been re-established.
        NLIHC is concerned about the President's request for section 8
    project-based contract renewals and urges the subcommittee to seek
    additional data from HUD to ensure that all section 8 project-based
    contracts are renewed in fiscal year 2008. Preliminary analysis shows
    1,004,529 units with section 8 project-based contracts expiring in
    fiscal year 2008 at a cost of at least $5.92 billion. But, the
    President has only requested $5.52 billion for renewals, a shortfall of
    at least $400 million. This is potentially exasperated by a recent HUD
    general counsel decision that, counter to HUD's previous practices, HUD
    cannot renew project-based contracts for terms fewer than 12 months.
        The Nation's 1.2 million units of public housing are in need of
    immediate attention and increased funding in fiscal year 2008. NLIHC
    urges the Subcommittee to increase both public housing operating and
    capital funding to levels that will restore financial and physical
    stability to these homes. Adequate funding is the only way these homes
    can be preserved for their target population. NLIHC supports at least
    $4.7 billion for operating funds and at least $3.5 billion for capital
    funds in fiscal year 2008.
        NLIHC supports Resident Opportunity and Self Sufficiency funding of
    at least $55 million in fiscal year 2008 to help ensure that residents
    are prepared to participate in the public participation opportunities
    available to them.
        NLIHC continues to have serious concerns about the HOPE VI program.
    NLIHC is hopeful that forthcoming legislation in the House will require
    that each public housing unit revitalized with HOPE VI funds will be
    replaced with a public housing unit and that residents will have a
    universal right of return to the revitalized housing. Without these and
    other improvements to the HOPE VI program, NLIHC believes that, if the
    HOPE VI program continues to be authorized in fiscal year 2008, any
    public housing revitalization funds would be better appropriated
    through the public housing capital fund.
        NLIHC also urges the subcommittee to adequately fund HUD's research
    functions, with particular attention to fully funding its core housing
    market and program data collection, research, and policy evaluation
    functions that are necessary to inform the public debate on the most
    effective solutions to housing affordability and quality problems.
        NLIHC urges adequate funding for HUD's other core programs,
    including homeless assistance grants, Community Development Block
    Grants, HOME, section 202 supportive housing for the elderly, section
    811 housing for persons with disabilities, Housing Opportunities for
    Persons with AIDS, fair housing and lead-based paint hazard reduction.
        NLIHC urges the subcommittee to fund all provisions of H.R. 1227,
    the Gulf Coast Hurricane Housing Recovery Act. H.R. 1227, which passed
    the House on March 21 with a large bipartisan majority, would do much
    towards assuring the replacement of housing for low income people in
    the gulf coast and providing a long-term housing solution to the over
    150,000 families that remain displaced. It is a concrete, long-term
    plan to address the critical housing needs of those displaced
    households that remain in trailer camps and other temporary housing
    arrangements, and must be funded through the fiscal year 2008
    appropriations bill. It is our hope that similar legislation will be
    considered in the Senate and that enactment will occur very soon.
        Thank you for considering our views.
                                     ______

        Prepared Statement of the National Alliance to End Homelessness
        The National Alliance to End Homelessness (the Alliance) is a
    nonpartisan, nonprofit organization with several thousand partner
    agencies and organizations across the country. The Alliance supports
    the over 160 State and local entities who have completed 10 year plans
    to end homelessness. The Alliance represents a united effort to address
    the root causes of homelessness and challenge society's acceptance of
    homelessness as an inevitable by-product of American life.
                                    overview
        The story of homelessness over the past decade has been one of
    communities innovating and improving their homeless assistance systems
    under the increasing strain of a worsening housing crisis. Reducing
    homelessness will require Congress to do two things:
      --Increase funding for Homeless Assistance Grants to $1.8 billion and
            support performance driven, cost-effective solutions to
            homelessness like permanent supportive housing and rapid re-
            housing programs.
      --Increase the supply of affordable housing for extremely low income
            households.
                                  homelessness
        Widespread homelessness did not always exist. Between WWII and the
    1980s, the sight of people living in shelters, cars, churches, on the
    streets, or in the woods was exceptionally rare. However, throughout
    the 60s, 70s, and 80s, deinstitutionalization, powerful new illegal
    drugs, a shifting economy, and, most importantly, a declining supply of
    affordable housing, caused the homelessness we see today.
        Over the course of a year, as many as 3.5 million people will
    experience homelessness. The most recent nationwide estimate of the
    size of the homeless population found that at one point in January
    2005, 744,000 people were homeless. Of those, 171,000 were chronically
    homeless. An additional 304,000 were in families with children. Despite
    the fact that the count was conducted during the coldest month of the
    year, 331,000 homeless people, 44 percent of the total, were
    unsheltered. Homelessness was prevalent in every region of the country,
    in urban, suburban, and rural areas.\1\
    ---------------------------------------------------------------------------
        \1\ Homelessness Counts. National Alliance to End Homelessness.
    January 2007. Washington, DC.
    ---------------------------------------------------------------------------
        Though the problem is very large, and seems intractable, we know
    that homelessness can be ended. Indeed, a nationwide movement to end
    homelessness has begun. Nearly 300 communities have completed or are
    working on 10 year plans to end homelessness. Many places are already
    showing success. Here are just a few examples:
      --Portland, Oregon--the number of people sleeping on the streets
            declined by over 40 percent from January 2005 to January 2007.
      --San Francisco, California--Between 2002 and 2005, the city reduced
            the number of people sleeping on the streets by 40 percent, and
            the total number of homeless people by 28 percent.
      --Columbus, Ohio--Between 1997 and 2005, the number of homeless
            families declined by 44 percent.
        These remarkable results were accomplished because of two major
    shifts in the way communities serve homeless families and individuals--
    permanent supportive housing for chronically homeless individuals and
    rapid re-housing for homeless families.
                          permanent supportive housing
        About 23 percent of homeless people experience chronic
    homelessness. They are homeless for years or even decades, or they
    cycle between homelessness, psychiatric hospitals, jails, prisons,
    detox programs and emergency rooms. For that group, most of whom have
    one or more severe disabilities, homelessness is extremely harmful and
    very costly to the public. Numerous studies have shown that providing
    permanent supportive housing to chronically homeless people ends their
    homelessness, improves their mental and physical health, and saves
    thousands of dollars per person by reducing the need for shelter,
    detoxification, hospitalization, emergency rooms, and incarceration.\2\
    In Denver, Colorado, permanent supportive housing saved $2,300 per
    person per year, and in Portland, Oregon, permanent supportive housing
    saved $15,000 per person per year.
    ---------------------------------------------------------------------------
        \2\ The two studies compared the cost of health care,
    incarceration, emergency shelter, and other publicly funded care for
    chronically homeless individuals before and after entering permanent
    supportive housing. Denver source: Denver Housing First Collaborative:
    Cost Benefit Analysis and Program Outcomes Report, Jennifer Perlman,
    PsyD, and John Parvensky, Colorado Coalition for the Homeless. December
    2006. Portland source: Estimated Cost Savings Following Enrollment In
    The Community Engagement Program: Findings From A Pilot Study Of
    Homeless Dually Diagnosed Adults. Thomas L. Moore, Ph.D. Central City
    Concern. June 2006. Portland, OR.
    ---------------------------------------------------------------------------
        Congress, the administration, the bipartisan Millennial Housing
    Commission and numerous researchers and advocacy organizations have
    identified a need for 150,000 units of permanent supportive housing
    over 10 years targeted to chronically homeless individuals. Combined
    with better prevention policies, these units would end chronic
    homelessness in the United States.
                                rapid re-housing
        While chronic homelessness has received more attention in recent
    years, communities have also been making great strides in serving
    homeless families. Most homeless families have very similar
    characteristics to other poor families with similar levels of education
    and similar rates of mental illness or depression. Most of these
    families struggled to pay for housing in an increasingly unaffordable
    rental market and then experienced some crisis, like domestic violence,
    a job loss, or a medical problem, that eventually led to their
    homelessness.
        Recently, the Alliance studied some communities that had reduced
    family homelessness to identify the key ingredients to their
    success.\3\ The success stories included the following:
    ---------------------------------------------------------------------------
        \3\ Promising Strategies to End Family Homelessness. National
    Alliance to End Homelessness and Freddie Mac. June 2006. Washington,
    DC.
    ---------------------------------------------------------------------------
      --Hennepin County, Minnesota--From 2000 to 2004, the number of
            families experiencing homelessness declined by 43 percent.
      --Westchester County, New York--The number of families needing
            shelter declined by 57 percent over a 2 year period.
      --Massachusetts--From 2002 through 2006, the number of families
            experiencing homelessness declined from 1,600 each night to
            1,338.
        The common ingredient in these and other successful communities is
    that they help families move back into permanent housing as rapidly as
    possible, and then provide services to help them stabilize and focus on
    their longer term needs. These rapid re-housing strategies reduce
    spells of homelessness from several months to several weeks, and when
    families at high risk of homelessness are identified early enough, they
    can prevent homelessness altogether.
                     funding needs for homeless assistance
        To help communities make sufficient progress in their efforts to
    end homelessness, the Alliance recommends a funding level of $1.8
    billion for Homeless Assistance Grants.
        While some cities have already made remarkable progress reducing
    homelessness, all of them are at a critical juncture. They have
    developed 10 year plans to end homelessness, brought in new partners,
    identified cost-effective strategies, and located some potential
    sources of funding. Many have made significant commitments of State,
    local and private dollars. They are, however, counting on the Federal
    Government to be an active partner in their efforts.
        The administration's fiscal year 2008 budget request calls for
    $1.586 billion for HUD homeless assistance funding, an increase of $144
    million from 2007. The Alliance estimates that the request would be
    sufficient to continue existing homeless activities, yet it would fund
    fewer than 8,000 new units of permanent supportive housing. While this
    is slightly more than has been funded in the last 2 fiscal years, it is
    still well below the pace of new units funded between 2001 and 2004,
    and only a little over half the number needed to fund the 15,000 units
    needed each year to be on track to end chronic homelessness in 10
    years. The administration's request would do nothing to help
    communities implement rapid re-housing programs for families, even as a
    growing body of research is showing that those programs are the best
    way to end homelessness for most families.
        An appropriation of $1.8 billion would help communities make
    progress on their 10 year plans to end homelessness by accomplishing
    the following:
      --Fund all expiring permanent housing renewals, which by themselves
            will increase by $65 million between 2007 and 2008.
      --Provide $25 million to communities to set up cost-effective
            programs to help homeless families move into permanent housing.
      --Fund 15,000 new units of permanent supportive housing, helping put
            communities on track to create the 150,000 units needed to end
            chronic homelessness.
                 policy needs for homeless assistance programs
        For the past several years, Congress has implemented two policies
    that have helped make Homeless Assistance Grants a much more effective
    tool for ending homelessness:
      --A 30 percent set-aside for permanent supportive housing for
            individuals and families with disabilities.
      --Added funding for Shelter Plus Care renewals. Without the funding
            guarantee, people in permanent housing were in jeopardy of
            losing their housing.
        The policies allowed communities to develop 50,000 units of
    permanent supportive housing over the past 6 years, and they should
    continue.
        A similar initiative is needed to help end homelessness for the
    roughly 600,000 families who are homeless each year. The Alliance
    recommends that Congress provide an incentive within HUD's homeless
    assistance grants for rapid re-housing programs that focus on helping
    homeless families move into permanent housing as quickly as possible;
    provide flexible short-term housing assistance as needed; and provide
    follow up support to ensure stability and prevent future homelessness.
        By increasing HUD's homeless assistance grants to $1.8 billion,
    continuing policies that create permanent supportive housing, and
    initiating policies to encourage rapid re-housing for homeless
    families, Congress will help communities take critical steps in their
    efforts to end homelessness.
                         increasing affordable housing
        This Nation will continue to have homelessness until we address our
    affordable housing shortage. The link between affordable housing and
    homelessness can be summed up very simply. In 1970, there were 300,000
    more affordable housing units available nationally than there were low-
    income households that needed to rent them.\4\ As result, there was not
    widespread homelessness. Many people had mental illness, addictions,
    poor educations and low incomes, but they could still afford a place to
    live. Today, the situation is reversed. In 2003, there were 5.4 million
    more low-income households than there were affordable housing units
    available to them.\5\ Although the problem exists for all low-income
    households, it is especially acute for those with extremely low
    incomes.
    ---------------------------------------------------------------------------
        \4\ In Search of Shelter: The Growing Shortage of Affordable Rental
    Housing. Daskal, Jennifer. June 1998. Paper. Center on Budget and
    Policy Priorities, Washington, DC.
        \5\ The State of the Nation's Housing: 2006. Joint Center for
    Housing Studies for Harvard University. June 2005. Cambridge, MA.
    ---------------------------------------------------------------------------
        The new Congress faces an extremely difficult budget climate. Even
    so, investing in more affordable housing is economically sensible. Many
    of the challenges our Nation faces--homelessness, concentrated poverty,
    inefficiencies in health care and mental health, high rates of
    recidivism in the criminal justice system, failing schools, and
    others--are exacerbated by the lack of affordable housing. The Alliance
    joins many of our partners in the affordable housing community in
    recommending further strengthening and expanding the Housing Choice
    Voucher program, ensuring that public housing is fully funded and
    continues to be a valuable housing resource, and creating more
    affordable housing through a National Housing Trust Fund and other
    mechanisms, particularly for extremely low income households.
                                     ______

     Prepared Statement of the American Association of Homes and Services
                             for the Aging (AAHSA)
        AAHSA members serve 2 million people every day through mission-
    driven, not-for-profit organizations dedicated to providing the
    services people need, when they need them, in the place they call home.
    Our members offer the continuum of aging services: assisted living
    residences, continuing care retirement communities, nursing homes,
    senior housing facilities, and home and community based services.
    AAHSA's mission is to create the future of aging services through
    quality the public can trust. Over half of our members develop, own or
    operate federally subsidized senior apartment buildings and AAHSA
    represents the majority of HUD section 202 senior housing providers.
             growing need for affordable supportive senior housing
        The senior population in the United States is expected to double by
    2030 to approximately 70 million seniors. The Commission on Housing and
    Health Facility Needs for Seniors in the 21st Century, in its report to
    Congress, estimated that an additional 730,000 assisted units would be
    needed by 2020 to meet the needs of low income seniors. Today more than
    5.8 million of non-institutionalized people age 65 and older require
    assistance with everyday activities and about 1.2 million are severely
    impaired and require assistance with three or more activities of daily
    living (ADLs).
        The HUD section 202 Supportive Housing for the Elderly program
    funds capital development grants, rental assistance contracts and other
    programs, directed to non-profit housing sponsors to develop and
    maintain safe, decent, affordable, supportive housing for seniors
    living on very-low incomes. Today more than 300,000 seniors rely on
    section 202 housing for an affordable, supportive living environment.
    The average section 202 resident is 79 years old and has less than
    $10,000 per year in income and needs some form of supportive
    assistance.
        In a recent survey of section 202 property managers, AARP reported
    there are at least 10 seniors waiting for every unit of section 202
    affordable elderly housing that becomes available. Furthermore, elderly
    residents comprise a growing segment of many of HUD's programs. Seniors
    make up one third of the public housing population and one half of
    section 8 voucher holders. With the average cost of assisted living
    more than $3,000 per month, low income seniors have few options beyond
    nursing home care for supportive housing outside of the HUD programs.
        Level funding, across the board cuts and increased construction and
    rental assistance costs means that fewer section 202 units are being
    built each year. The section 202 program appropriations funded 5,819
    units in fiscal year 2002, 5,689 in fiscal year 2003, 5,353 units in
    fiscal year 2004; 4,681 in 2005; 4,313 in 2006 and 3,667 in fiscal year
    2007. Under the administration's proposed budget just 3,000 units will
    be built in fiscal year 2008.
        To make matters worse, we are losing ground. Existing affordable
    housing units are being lost to market rate conversion and contract
    opt-outs. The Joint Center for Housing found that for every unit of
    affordable housing we build, two are lost. The National Housing Trust
    estimates that almost 15,000 federally-assisted elderly units have been
    lost to conversion and another 82,900 remain ``at risk.''
              supportive housing as part of the continuum of care
        Affordable senior housing, such as section 202, can serve as an
    integral part of the continuum of care and avoid premature,
    inappropriate, unnecessary and costly institutionalization for seniors
    that do not want to leave their communities. In addition, section 202
    housing sites provide a proven and cost-effective infrastructure system
    for service delivery for residents, as well as the community at large.
    Sites often serve as a base for the delivery of home and community
    based services from meals to health screenings to Older Americans Act
    programs.
        Failure to invest in the section 202 program will add to the
    ongoing crisis in our long-term care system, forcing low-income seniors
    into institutions if they want to have a roof over their heads and
    access to meals and services. The section 202 program is a model of a
    public-private partnership that maximizes efficiency and quality in
    Federal housing programs. The administration has called on faith and
    community based groups, such as AAHSA's members, to be more involved in
    providing essential services for low-income citizens. They cannot
    respond to this call with continuous funding cuts.
      --On behalf of our members, their residents and families, AAHSA
            strongly urges Congress to fund 10,000 new section 202 units by
            providing $1.33 billion for fiscal year 2008. This amount would
            include funding for existing project rental assistance contract
            renewals and:
        --$1.18 billion for the development of 10,000 new section 202
                units. This will not come close to meeting the existing,
                much less future housing needs, but it represents a first
                step to the unmet housing needs of thousands of seniors.
        --$20 million for section 202 Predevelopment Grants. If implemented
                properly, this program increases efficiency and streamlines
                the development process for not-for-profit organizations.
                These grants are needed to cover the costs of architectural
                and engineering work, site control and other planning
                relating to the development of section 202 housing.
        --$75 million for service coordinators grants so that there is
                staff to assist frail elderly residents with identifying
                and obtaining the services they need to aging in place and
                avoiding premature institutionalization.
        --$50 million for the Assisted Living Conversion Program (ALCP) to
                fund modernization and conversion of existing facilities to
                an ``assisted living'' level of care, facilitating
                residents' ability to age-in-place. AAHSA urges you to
                allocate $20 million of the amount to increase the number
                of affordable housing units with supportive services and
                $30 million for substantial and emergency capital repairs.
                Many of the properties are ``aging in place'' and
                recapitalization may not be feasible. This funding is
                essential to affordable housing preservation efforts.
        In addition to funding the section 202 program, we urge Congress to
    fully fund all HUD programs and USDA housing programs that serve rural
    seniors. These housing facilities provide safe, decent, affordable
    options to our seniors and enable them to avoid homelessness or
    premature and more expensive placement in a nursing home.
      --Provide funding for additional section 8 Vouchers.--Increased
            project basing of section 8 assistance will allow providers to
            house the lowest income seniors and preserve at risk properties
            with partial or no rental assistance. This cannot be done
            within the existing section 8 funding levels.
      --Fully fund the Community Development Block Grant Program (CDBG).--
            This program provides crucial gap and infrastructure financing
            for section 202 developments, as well as paying for supportive
            services in section 202 properties.
      --Continue to fund the USDA section 515 Multifamily program and the
            HUD Rural Housing and Economic Development Program.--These
            programs ensure that low income seniors and the disabled in
            rural communities have access to safe, decent housing and an
            infrastructure where supportive services can be delivered and
            thereby reduce premature nursing home admission.
      --Support increased project-basing of section 8 vouchers.--Public
            housing authorities can provide up to 25 percent of their
            section 8 housing vouchers as project-based assistance to
            privately owned, new or rehabilitated housing that are
            otherwise without rental assistance. Public Housing Authorities
            should be encouraged to do so.
                                   conclusion
        In light of the importance of affordable housing to low income
    seniors, we urge Congress to address the funding needs of section 202
    and the entire HUD budget to guarantee all seniors have access to safe,
    decent, affordable housing. Last year the Senate Appropriations
    Committee took a monumental step to increase the funding for both the
    section 202 and 811 programs for the first time in years. Your
    leadership is crucial. The elderly and disabled populations need
    additional funding for supportive housing options outside of
    institutional settings. AAHSA and its members appreciate your continued
    support and look forward to working with you in the future throughout
    this process.
                                     ______

          Prepared Statement of the Institute of Makers of Explosives
        Dear Madam Chairwoman: On behalf of the Institute of Makers of
    Explosives (IME), I am submitting a statement for inclusion in the
    subcommittee's hearing record regarding the proposed fiscal year 2008
    budget for the U.S. Department of Transportation (DOT).
                              interest of the ime
        The IME is the safety and security association of the commercial
    explosives industry. Our mission is to promote safety, security and the
    protection of employees, users, the public and the environment; and to
    encourage the adoption of uniform rules and regulations in the
    manufacture, transportation, storage, handling, use and disposal of
    explosive materials used in blasting and other essential operations.
    Commercial explosives are transported and used in every State.
    Additionally, our products are distributed worldwide, while some
    explosives, like TNT, must be imported because they are not
    manufactured in the United States. The ability to transport and
    distribute these products safely and securely is critical to this
    industry.
                                   background
        The production and distribution of hazardous materials is a
    trillion-dollar industry that employs millions of Americans. These
    products are indispensable to the American economy. In the explosives
    industry alone, the value of our shipments far exceeds the $1 billion
    in gross revenues credited to the industry. The transportation of
    hazardous materials involves producers and distributors of chemical and
    petroleum products and waste, transporters in all modes, and
    manufacturers of containers. DOT estimates that upward of 800,000
    shipments and as many as 1.2 million regulated movements of hazardous
    materials occur each day in the United States. This represents over 10
    percent of all freight tonnage transported. As a major export, the
    transportation of hazardous materials contributes positively to our
    trade balance. These products are pervasive in the transportation
    stream and in our society as a whole.
        While these materials contribute to America's quality of life,
    unless handled properly, personal injury or death, property damage, and
    environmental consequences can result. The threat of intentional misuse
    of these materials also factors into public concern. To protect against
    these outcomes, the Secretary of Transportation (Secretary) is charged
    to ``provide adequate protection against the risks to life and property
    inherent in the transportation of hazardous materials in commerce by
    improving'' regulation and enforcement.\1\ These regulations are to
    provide for the ``safe transportation, including security,'' of
    hazardous materials in commerce.\2\ The Secretary's authority to
    accomplish this mission is embodied in the Hazardous Materials
    Transportation Act (HMTA).\3\ Beginning in the 1990s and most recently
    in 2005, the HMTA has been significantly amended. As a consequence of
    these amendments, Congress directed DOT to accomplish a number of
    tasks. How DOT has handled these responsibilities and how it proposes
    to handle them in the future is the focus of this statement.
    ---------------------------------------------------------------------------
        \1\ 49 U.S.C. 5101.
        \2\ 49 U.S.C. 5103(b)(1).
        \3\ 49 U.S.C. Chapter 51.
    ---------------------------------------------------------------------------
        The HMTA directs the Secretary to implement the law. In reality,
    the Secretary has dispersed authorities in the act to the various modal
    administrations, with primary regulatory authority resting in the
    Pipeline & Hazardous Materials Safety Administration's (PHMSA) Office
    of Hazardous Materials Safety (OHMS). OHMS issues the hazardous
    materials regulations (HMR). As noted above, the commerce of hazardous
    materials demands that OHMS have intermodal, as well as international,
    expertise. It regulates a diverse community of interests and must
    constantly manage the tension between safety, security and efficiency
    in the transport of these materials in order to fulfill its mission to
    protect the public and the environment. The fiscal year 2008 budget
    presents challenges and opportunities to OHMS in accomplishing its
    mission.
    Staff and Program Resources
        We want to begin our comments with praise for the leadership team
    assigned PHMSA. We have seen palpable evidence of improved outreach,
    responsiveness, not present in prior years. We attribute the focus to
    the recent reorganization under the Norman Y. Mineta Research and
    Special Programs Improvement Act of 2004 and the management style of
    the current administration.\4\ Administrator Thomas Barrett, VADM Ret.,
    is committed to a ensuring a risk-based program that is developed in a
    manner that is inclusive and transparent to stakeholders.
    ---------------------------------------------------------------------------
        \4\ Public Law 108-426.
    ---------------------------------------------------------------------------
        As a result of the fiscal year 2007 continuing resolution, OHMS was
    denied a four FTE staff increase. The administration is again
    requesting these positions expand the number of field inspectors from
    30 to 34.\5\ We fully support Congress' approval of these new staff
    positions. This staff request is still below the number PHMSA estimates
    it would need to raise its inspection rate to the minimum it believes
    is necessary to maintain a credible enforcement presence. PHMSA's job
    is particularly challenging, compared to other modes, given the
    diversity of entities within the regulated community over which PHMSA
    has primary inspection responsibility.
    ---------------------------------------------------------------------------
        \5\ Fiscal year 2008 PHMSA Budget Submission, page 42.
    ---------------------------------------------------------------------------
        We are concerned about a continuing high number of vacancies, over
    15 percent of current FTP. Some of the vacancies can be attributed to
    end-of-year retirements and to inside promotions. The issue of staff
    vacancies is even more problematic given that ``over one-third of
    hazmat employees will be eligible to retire within five years.'' \6\
    Every effort should be made to fill these necessary positions.
    ---------------------------------------------------------------------------
        \6\ Fiscal year 2008 PHMSA Budget Submission, page 44.
    ---------------------------------------------------------------------------
    Performance Measures
        We are delighted to see that the OHMS budget, including the
    Emergency Preparedness Grants Program, is credited with supporting the
    Secretary's ``global connectivity'' and ``security'', as well as the
    traditional ``safety'' strategic goal.\7\ OHMS' international
    harmonization activities do contribute to ``global connectivity,'' and
    we strongly advocated for recognition of OHMS' security mission since
    the enactment of the 2002 amendments to the HMTA. However, we are
    puzzled that the portion of the OHMS budget that is attributed to
    enhancing security is attributed to the emergency preparedness grants
    program (EPGP), rather than OHMS' rulemaking or enforcement
    accounts.\8\ The EPGP program has nothing to do with security of hazmat
    shipments. The EPGP planning grants support a U.S. Environmental
    Protection Agency program concerning emergency releases of hazmat into
    the environment and the training grants are aimed at emergency
    responders.
    ---------------------------------------------------------------------------
        \7\ Fiscal year 2008 PHMSA Budget Submission, pages 127-128.
        \8\ OHMS currently supports security rules concerning plans and
    training (see 49 CFR 172 subparts H and I) and has pending two security
    rulemakings concerning security-sensitive hazmats (HM-232F) and rail
    security (HM-232E).
    ---------------------------------------------------------------------------
        To measure OHMS' progress to enhance safety, the agency sets as its
    primary measure to ``reduce deaths, injuries, property damage and
    economic disruptions from hazardous materials transportation
    incidents.'' \9\ In the past, we have been critical of PHMSA's budget
    submission because the only performance measure has been the reduction
    of serious incidents which we believe is influenced by the state of the
    economy as much as it is the quality, or lack thereof, of OHMS
    activities. We are pleased that OHMS has set some secondary measures of
    performance.\10\ These include increasing response time to stakeholder
    requests for assistance, the number of exemptions to be issued in a
    timely manner, and the compliance rate for security plans.
    ---------------------------------------------------------------------------
        \9\ Fiscal year 2008 PHMSA Budget Submission, page 133.
        \10\ Fiscal year 2008 PHMSA Budget Submission, pages 40 & 42. ``We
    will enhance the response time by 10 percent. . . . We will reduce the
    time for processing special permits and approvals by 10 percent. . . .
    It is our goal to have a non-compliance rate of less than 15 percent
    when [reinspecting] companies [for] security plan compliance. This will
    permit an estimated 7 percent increase in the regional [enforcement]
    level-of-effort.''
    ---------------------------------------------------------------------------
        In the past, there has been a dearth of information about the OHMS
    program output. We are pleased to see OHMS share statistics about
    compliance with security plans and reports of undeclared hazmat
    shipments, in addition to data about the number of serious hazardous
    materials incidents.\11\ We hope that Congress will encourage OHMS to
    baseline these data so that progress to meeting regulatory needs can be
    objectively measured over time.
    ---------------------------------------------------------------------------
        \11\ Fiscal year 2008 PHMSA Budget Submission, pages 42-3.
    ---------------------------------------------------------------------------
        PHMSA presents several output efforts under the aegis of the
    Emergency Preparedness Grants Program (EPGP).\12\ Our concerns about
    the EPGP and these measures are discussed below.
    ---------------------------------------------------------------------------
        \12\ Fiscal year 2008 PHMSA Budget Submission, pages 121-2.
    ---------------------------------------------------------------------------
    Regulatory Backlog Reduction
        OHMS should be commended for its efforts to reduce regulatory
    backlogs. Last year, OHMS had eight open dockets designated as
    ``significant.'' This year only four from that list remain.\13\ At the
    same time, OHMS has engaged in new rulemaking of significance to
    industry to better focus security plan requirements on security-
    sensitive hazardous materials that would be of interest to terrorists.
    ---------------------------------------------------------------------------
        \13\ 71 FR 73663-9 (December 11, 2006).
    ---------------------------------------------------------------------------
        These rulemakings do not take into account rulemaking petitions,
    which OHMS has accepted but has not yet assigned to a specific
    rulemaking action. OHMS has pending 159 such rulemaking petitions, 53
    more than last year at this time.\14\ In addition, OHMS is in the ninth
    of a 10-year cycle to review the impact of the HMR on small entities
    and to determine, as a result of those impacts, which rules should be
    continued without change, amended, or rescinded, consistent with the
    objectives of applicable statutes. OHMS also takes this opportunity to
    receive comments to make the regulations easier to read and understand.
    These regulatory reviews were mandated by Congress pursuant to the
    Regulatory Flexibility Act (RFA).\15\ OHMS has finalized two of its
    regulatory reform proposals based on RFA reviews, while one rulemaking
    is pending. We are still waiting to see how OHMS will use the
    information collected during other prior year reviews to improve the
    HMR.
    ---------------------------------------------------------------------------
        \14\ http://dms.dot.gov/reports/PHMSA_report.cfin, March 19, 2007.
        \15\ Public Law 96-354, section 610 as amended.
    ---------------------------------------------------------------------------
        While OHMS has historically processed over 200 hundred special
    permit requests annually--a commendable effort--the administration's
    budget request does not disclose information to assess the special
    permit workload. OHMS is under a statutory mandate to process special
    permits within 180 days. OHMS does periodically report in the Federal
    Register special permit requests it has received and those that it has
    failed to process within the statutory 180-day deadline. As an
    indicator of the effort OHMS has put forward in the last year to reduce
    backlogs, OHMS reported a monthly average of 56 special permit requests
    in process longer than 180 days during the first 3 months of 2006 and
    attributed over 87 percent of that delay to lack of staff resources
    given other priorities or volume of applications. In the first 3 months
    of this year, the monthly average of requests in process longer than
    180 days fell to 13 and the percent attributed to lack of staff
    resources fell to 84 percent. While part of the backlog decline should
    be attributed to increased productivity, Congress extended the timeline
    for most special permit renewals from 2 to 4 years. CY 2006 was the
    first full year where the effect of this statutory change could be
    observed. A helpful workload indicator to the subcommittee may be the
    actual number of special permit requests received, the actual number
    processed, and of that number, the actual number processed within the
    statutory 180-day deadline set by Congress. As noted above, OHMS has
    set for itself a performance measure to ``reduce the time for
    processing special permits and approvals by 10 percent.'' \16\
    ---------------------------------------------------------------------------
        \16\ Fiscal year 2008 PHMSA Budget Submission, page 40.
    ---------------------------------------------------------------------------
        One aspect of the hazmat regulatory workload that continues to
    present concern is the processing of petitions for preemption. This
    activity is managed by the PHMSA Office of Chief Counsel. Two petitions
    for preemption determinations are currently pending. Neither these, nor
    any prior petition for preemption, have been processed within the
    congressionally mandated 180-day turnaround.\17\ PHMSA' ability to
    swiftly deal with petitions for preemption is essential to the purpose
    Congress hoped to achieve in granting administrative preemption to DOT,
    namely that the preemption determination process would be an
    alternative to litigation.\18\ A priority of the HMTA is to achieve
    greater regulatory uniformity. Essential to that objective is the
    ability to respond through the preemption determination process to
    inconsistent non-Federal requirements that ``creat[e] the potential for
    unreasonable hazards in other jurisdictions and confound[] shippers and
    carriers which attempt to comply with multiple and conflicting
    registration, permitting, routing, notification, and other regulatory
    requirements.'' \19\
    ---------------------------------------------------------------------------
        \17\ 49 U.S.C. 5125(d).
        \18\ In authorizing the preemption determination process, Congress
    found that ``the current inconsistency ruling process has failed to
    provide a satisfactory resolution of preemption issues, thus
    encouraging delay, litigation, and confusion.'' H. Rept. 101-444, Part
    1, page 21.
        \19\ Public Law 101-615, sec. 2.
    ---------------------------------------------------------------------------
    Hazmat Registration and Fees
        We have appreciated the years of support and oversight the House
    and Senate Appropriations Committees have provided to ensure that fee
    collections have not been spent on activities above authorized amounts.
    The 2005 amendments to the HMTA have propelled us to a new era in the
    use and allocation of these fees. Over the objections of the regulated
    industry, the 2005 amendments to the HMTA nearly doubled the fees to be
    collected in support of the Emergency Preparedness Grant Program (EPGP)
    for States and Indian tribes, ``train-the-trainer'' grants for first
    responders, publication of the Emergency Response Guide (ERG), and, for
    the first time, grants to train hazmat employees. These fee increases
    will be effected in fiscal year 2008 for the 2008-09 registration year.
        Current law requires that the fees be deposited into the Hazardous
    Materials Emergency Preparedness Fund (HMEPF) and allows OHMS to
    transfer these funds ``without further appropriation.'' \20\ The hazmat
    fee program was never intended nor could it be expected to generate the
    amount of funds necessary to meet the needs of communities or first
    responders for planning or training for transportation-related
    chemical, biological or radiological incidents. DOT's hazmat
    registration fees are not the only source of financial assistance
    available to States to support emergency preparedness and response and
    the safe and secure transportation of hazardous materials shipments.
    Congress has already provided more comprehensive, direct sources of
    funding for emergency response planning and training. Since 2001, the
    administration has provided nearly $37.5 billion to State, local, and
    tribal governments to enhance first responder preparedness of which $22
    billion was allocated through DHS grant programs. This includes a total
    of $25.5 billion in support related to terrorism and catastrophic
    preparedness events, with $16.3 billion allocated through DHS. The
    fiscal year 2008 budget request proposes to add to these funds $2
    billion in grants for first responder preparedness. These funds are in
    addition to the over $5 billion in funds that State, local, and tribal
    governments are raising and spending on their own. While these funds
    are not dedicated to hazardous materials planning and training, these
    activities are an allowable use of the assistance, and in fact, the
    majority of these funds are used to assist communities to address
    chemical, biological, and radioactive incidents. Planning and training
    to respond and recover from these hazardous materials releases, whether
    accidental or intentional, is the same. We do not believe that the
    hazmat registration program would ever generate the levels of revenue
    provided by other sources even if all subject to the OHMS fees were
    assessed the maximum amount authorized by law because smaller carriers
    would simply chose not to transport hazardous materials. For these
    reasons, it is important that the subcommittee continue to scrutinize
    the amount of hazmat fees that can be transferred from the HMEPF and to
    cap transfers at levels the subcommittee believes will be appropriately
    spent.
    ---------------------------------------------------------------------------
        \20\ 49 U.S.C. 5116(i).
    ---------------------------------------------------------------------------
        Thirty percent--$4 million--of the $13.5 million fee increase
    provided by the 2005 amendments is earmarked to train trainers of
    private sector hazmat employees or hazmat employees themselves. Prior
    to the 2005 amendments, this private sector training program was
    authorized only to train ``trainers'' and was funded from general
    revenues at $3 million per year. Hazmat employers have never advocated
    for a Federal appropriation for this training option. The HMTA is clear
    that hazmat employers are responsible for the training of hazmat
    employees. Yet, this program is of no benefit because the training
    provided is limited to that offered by non-profit hazmat employee
    organizations, organizations that are unlikely to be relied upon to
    provide the specific and specialized training each company is liable to
    provide to address its own unique hazmat environment. Any potential
    hazmat employee who availed themselves of such training from a third-
    party non-profit training organization would still have to be trained
    in his employer's hazmat operations. Furthermore, these funds are not
    needed to spur companies or organizations to get into the training
    business. There are a number of companies that offer hazmat training
    already. The real issue with private sector training is assessing the
    quality of the training that is available. Industry is already facing
    millions of dollars of additional fees for other aspects of the EPGP.
    This program amounts to a double taxation for hazmat employee training.
    Using industry fees for this purpose cannot be justified. If these
    funds will be made available for these purposes, we are pleased that
    OHMS has determined to make ``the new grant program will be
    competitive.'' \21\
    ---------------------------------------------------------------------------
        \21\ Fiscal year 2008 PHMSA Budget Submission, page 123.
    ---------------------------------------------------------------------------
    Emergency Planning and Training Grants
        The purpose of the Emergency Preparedness Grants Program (EPGP) is
    to cover the ``unfunded'' Federal mandate that States develop emergency
    response plans and to contribute toward the training of emergency
    responders. Industry has contributed, through hazmat registration fees,
    nearly $183 million during the life of the grants program.\22\ Since
    the events of September 11, 2001, we question whether or not the EPGP
    is the most efficient way to deliver hazmat training to the response
    community, especially in light of other viable alternatives to address
    these needs. Even OHMS admits that this program, at most, provides
    ``funds that might not otherwise be available'' to localities for
    training and planning for hazardous materials incidents.\23\ Still,
    OHMS' characterization of the EPGP would have one believe that the
    funds are limited to planning and training to respond to
    transportation-related hazmat incidents only. There is no such
    limitation.\24\
    ---------------------------------------------------------------------------
        \22\ Fiscal year 1992-2006, HMRP, DOT, October 6, 2006.
        \23\ Fiscal year 2008 PHMSA Budget Submission, page 121.
        \24\ 49 U.S.C. 5116(a) & (b).
    ---------------------------------------------------------------------------
        We have, for a number of years, called for more accountability in
    the EPGP and more evidence of coordination among other similar Federal
    initiatives to ensure that all resources are used as efficiently and
    effectively as possible. We are not alone in our concern. In 2005, the
    Volpe Center issued a report making recommendations to better align
    grantee activities with program goals.\25\ The 2005 amendments also
    directed OHMS to submit annual reports to Congress on the allocation
    and uses of the grants, identify the ultimate recipients and providing
    a detailed accounting of all grant expenditures as well as an
    evaluation of the efficacy of the programs carried out. OHMS was also
    directed to make this information available to the public.\26\ However,
    no reports or information have been forthcoming.
    ---------------------------------------------------------------------------
        \25\ Hazardous Materials Emergency Preparedness Grants Program;
    Assessment of the alignment between local activities and program goals,
    John A. Volpe National Transportation Systems Center, for PHMSA,
    October 2005.
        \26\ 49 U.S.C. 5116(k).
    ---------------------------------------------------------------------------
        The EPGP also restates the claim of the last several years that it
    will provide support to update and develop at least 3,000 emergency
    plans during fiscal year 2008.\27\ The incredulity of this claim still
    warrants oversight. Using a productivity analysis alone, OHMS has not
    adjusted its workload output one iota since its request for funding
    this activity increased 63 percent.\28\ Congress intended that the
    planning grants portion of the EPGP be used to ``develop, improve, and
    carry out emergency plans under the Emergency Planning and Community
    Right-To-Know Act'' (EPCRA).\29\ EPCRA requires State coordinating
    commissions (SERC) to designate Local Emergency Planning Committees
    (LEPC) which were charged to develop localized plans for chemical
    emergencies, of which one type may be transportation-related hazmat
    incidents. So, it should come as no surprise that PHMSA sets as a
    measure of the impact of the EPGP a number of these emergency plans to
    be developed and updated. What is surprising is the target number of
    plans to be completed or updated. First, EPA estimates that the current
    number of LEPCs is about 3,500.\30\ Each LEPC prepares one plan, so at
    most 3,500 plans would need support. Second, LEPCs were in existence
    before the inception of the EPGP. EPCRA was enacted in 1986 and has
    required LEPCs to have ``complete'' plans in place since the late
    1980s. Once an LEPC's plan is ``complete,'' based on acceptance by the
    LEPC's SERC, LEPCs are not required to ``re-complete'' these plans each
    year, although they are required to annually ``review'' their plans.
    Third, EPA last surveyed LEPC compliance in between October 1999 and
    February 2000.\31\ At that time, the agency found that approximately 45
    percent of responding LEPCs had completed plans and another 10 percent
    mostly complete. Furthermore, 24 percent of LEPCs had incorporated
    counterterrorism measures into their emergency response plans. Using
    these percentages, it would appear that 1,600 would be a more accurate
    projection of the number of emergency plans to be completed, not
    3,000.\32\ Furthermore, it is unlikely, given EPA's assessment of
    ``completed'' and approved plans, that any significant portion of these
    plans are being reopened and revised.
    ---------------------------------------------------------------------------
        \27\ Fiscal year 2008 PHMSA Budget Submission, page 122.
        \28\ Prior to fiscal year 2007 when funding for the EPGP grants
    program was due to increase and, except for the fiscal year 2007
    continuing resolution, would have, the project number of plans to be
    assisted was 3,000. With the funding increase, the number is still
    3,000. [Inconsistencies in the budget submission, further underscore
    the need for oversight and accountability of this program. Compare page
    122 (3,000 plans), with page 159 (5,000 plans) and page 160 (3,700
    plans). Similar inconsistencies can be noted with regard to training
    first responders by comparing pages 159 and 160.]
        \29\ 49 U.S.C. 5116(a)(1)(A).
        \30\ http://yosemite.epa.gov/oswer/ceppoweb.nsf/content/
    epcraOverview.htm
        \31\ 1999 Nationwide LEPC Survey, George Washington University for
    EPA, May 17, 2000. http://yosemite.epa.gov/oswer/ceppoweb.nsf/
    vwResourcesByFilename/lepcsurv.pdf/$File/ lepcsurv.pdf. EPA is
    preparing to update this survey with results available in the fall of
    2007. 70 FR 54044 (September 13, 2005).
        \32\ Not all LEPCs responded to the latest EPA survey. Even
    assuming that every one of the non-respondents had no plan, together
    with those known to have no plan or an incomplete plan, the number of
    plans needing completion would be 2,500, still under the 3,000 estimate
    provided for fiscal year 2008.
    ---------------------------------------------------------------------------
        Finally, OHMS claims that is will ``plan and hold 15 annual,
    national monitoring and technical assistance sessions where grantees,
    responders and [LEPCs] members present program accomplishments and
    receive technical assistance from a team of Federal and non-Federal
    experts.'' \33\ This ambitious schedule would require more than one
    ``national'' session per month, planned and supported for $13,333 per
    session. Irrespective of frequency or number of technical assistance
    meetings held, however, little is known about where the meetings are
    held, how many Federal and non-Federal personnel attend, for how long,
    exactly what is allowed to be reimbursed or spent with the $200,000
    allotted for this purpose. As a fiduciary matter, the subcommittee may
    wish to explore this matter further.
    ---------------------------------------------------------------------------
        \33\ Fiscal year 2008 PHMSA Budget Submission, page 121.
    ---------------------------------------------------------------------------
        OHMS' assertion that the training grants are ``to ensure [that the
    LEPC] plans can be effectively implemented'' is misleading.\34\ There
    is no statutory limitation that these training funds can only be used
    to train on the implementation of the LEPC plans. No proof has ever
    been offered to this effect. Since the planning and training grantees
    are different entities, it would be highly unlikely that LEPC plan
    implementation would be the focus of the training first responders
    receive. In fact, local emergency preparedness training is based on an
    ``all-hazards'' approach. This approach requires communities to assure
    that emergency personnel have the training necessary to respond to a
    wide range of emergencies: intentional or naturally occurring
    infectious disease outbreaks; chemical, explosive or radiological
    accident or attack; weather-related disaster; or other emergency.
    ---------------------------------------------------------------------------
        \34\ Fiscal year 2008 PHMSA Budget Submission, page 121.
    ---------------------------------------------------------------------------
        In contrast to the evidence that suggests the level of financial
    support needed for LEPC plans is waning, the needs of first responders
    for training significantly eclipse the amount available from the EPGP,
    which if funded at the level of the administration's request offers a
    grant package of only $13.7 million and, of that, only 75 percent is
    passed through to localities.\35\ Given the plethora to other viable
    alternatives to address the needs of the response community, the EPGP
    is at best inconsequential, but more realistically, a program that has
    outlived its relevance and usefulness.
    ---------------------------------------------------------------------------
        \35\ Fiscal year 2008 PHMSA Budget Submission, page 23.
    ---------------------------------------------------------------------------
        While the law provides that OHMS can expend industry's hazmat
    registration fees for the EPGP ``without further appropriation,'' \36\
    we would encourage the subcommittee to exercise its oversight to
    address these programmatic issues and concerns before handing over a
    blank check. The subcommittee has established congressional precedent
    in this area, setting caps on the amount of the fees that may be
    expended for the EPGP. As an indication of congressional concern that
    the LEPC set-aside may not be the best use of the new $9 million fee
    increase in the EPGP, the 2005 HMTA amendments provide discretion to
    DOT to limit or deny new funding. While allowing a 35/65 percent split
    of the new funds between the planning and training accounts, the law
    also provides that up to all of the increase may be allocated to the
    training portion of the EPGP.\37\ Yet, the allocation proposed in the
    OHMS fiscal year 2008 budget submission does not reference the
    statutory latitude that the Secretary has to move funds from the
    planning to the training account nor does it describe any sort of
    analysis that would justify making no adjustment to the 35/65 split.
    OHMS should be asked to prioritize the needs and value of the planning
    and training portions of the EPGP to the safety and security of
    hazardous materials transportation.\38\ The subcommittee should use
    this information to redirect the new $9 million allocation up to the
    maximum extent allowed.
    ---------------------------------------------------------------------------
        \36\ 49 U.S.C. 5116(i).
        \37\ 49 U.S.C. 5128(b)(2).
        \38\ For example, how many first responders accessed their
    community's LEPC plan prior to responding to a recent hazmat
    transportation emergency?
    ---------------------------------------------------------------------------
        Our efforts to address EPGP shortcomings with PHMSA have not been
    satisfactory. We believe that the subcommittee is best suited to demand
    a level of oversight that will continue annually and that will include
    a complete accounting of funds distributed and their use as know
    required by law, not the type of anecdotal ``successes'' that comprised
    so much of PHMSA's 1998 report to Congress on this program.
    Hazmat Intermodal Portal
        PHMSA is proposing to increase funding to implement the Intermodal
    HAZMAT Portal. The Intermodal Portal is a DOT-wide data system that
    allows all modes to integrate ``stovepiped date, to collaborate, and to
    monitor business processes.'' \39\ This initiative was identified by
    DOT in 2000 and the OMB PART review.\40\ We support this initiative.
    The transportation of hazardous materials is an intermodal enterprise.
    The Department cannot fully understand the issues facing this commerce
    without taking a systemwide view. Too often, modal responses to issues
    only shifts risk to other modes than may be less prepared to deal with
    them.
    ---------------------------------------------------------------------------
        \39\ Fiscal year 2008 PHMSA Budget Submission, page 46.
        \40\ ``Departmentwide Program Evaluation of the Hazardous Materials
    Transportation Programs,'' Executive Summary, March 2000, pages xvi &
    xvii; and OMB PART recommendations No. 1 & 2, March 2005, fiscal year
    2008 PHMSA Budget Submission, page 50.
    ---------------------------------------------------------------------------
    Program Funding Decreases
        While we support the Hazmat Intermodal portal initiative, we are
    concerned about decreases in other OHMS operations. The budget request
    proposes to decrease funds for the research and analysis capacity
    necessary to support the development of new or the revision of existing
    regulations, to defer maintenance of and to defer the introduction of
    new features and enhancements to the Hazardous Materials Information
    System; and to scale back the package testing program.\41\ We urge the
    subcommittee to restore these funding decreases.
    ---------------------------------------------------------------------------
        \41\ Fiscal year 2008 PHMSA Budget Submission, page 47.
    ---------------------------------------------------------------------------
        Regulation is vital to the transport of hazardous materials. The
    HMR is structured so that hazardous materials do not move unless a
    department rule says it can move. Additionally, the industry is so
    large and diverse that the only way to ensure a level playing field is
    to hold industry to the same regulatory performance standards. These
    realities require that OHMS not only be heavily engaged in rulemaking,
    but the rulemaking process must be efficient. OHMS' research and
    analysis capability identifies safety and security gaps in the hazmat
    transportation system. In the risk analysis area, OHMS is heavily
    dependant on this capability to determine equivalent levels of safety
    in order to process what has been annually over 200 new special permit
    petitions.\42\ If anything, OHMS rulemaking resources should be
    increased to ensure against regulatory backlogs.
    ---------------------------------------------------------------------------
        \42\ OMB Part Recommendation No. 4, March 2005, directs that PHMSA
    ``develop a new efficiency measure that characterizes the time to issue
    special permits from the date of application,'' fiscal year 2008 PHMSA
    Budget Submission, page 50.
    ---------------------------------------------------------------------------
        We want to underscore the importance and necessity of the HMIS.
    This system supports PHMSA's key measurement of its goal to reduce
    deaths, injuries, property damage and economic disruptions from
    hazardous materials transportation incidents. The data collected and
    maintained in the database is not available from other sources. Not
    only does the HMIS allow OHMS to identify and analyze safety risks for
    regulatory purposes, it also (1) assists non-Federal governments to
    identify problematic routes; (2) can be used to focus enforcement
    efforts; (3) is used by industry in its risk management initiatives,
    and (4) can be used to defuse public concern about hazardous materials
    transportation by validating the extraordinary safety record of this
    industry, considering the potential of these materials to cause serious
    harm. If OHMS/PHMSA is to be a ``data-driven'' operation, this is not
    the account to cut.\43\
    ---------------------------------------------------------------------------
        \43\ Fiscal year 2008 PHMSA Budget Submission, page 6.
    ---------------------------------------------------------------------------
        As noted, the transportation of hazardous materials is extensively
    regulated. A key component to the effectiveness of these regulatory
    schemes is credible enforcement. In order to determine what those needs
    may be, it is critical that the agency know who it is regulating. About
    200,000 hazmat shippers, packaging manufacturers and testers are the
    focus of PHMSA's compliance efforts. This is a daunting universe to
    inspect with a cadre of 30, and hopefully soon 34, inspectors. However,
    key to credible enforcement is OHMS ability to test packagings. The
    packaging standards are the basis for the HMR. Packaging differs by the
    type and amount of material to be shipped. The packaging standards are
    DOT's assurance to the public that hazmat can move safely in
    transportation. In 1990, the PHMSA adopted internationally-recognized
    performance-based standards for the transportation of hazardous
    materials, in lieu of specification standards. The only way to ensure
    regulatory compliance is to test packagings. It is disingenuous for
    PHMSA to declare that one of the anticipated accomplishments for the
    2008 fiscal year will be to ``dedicate resources to testing new
    packagings against PHMSA's performance standard to ensure that hazmat
    containers are adequate to meet safety requirements during transport,''
    when the budget request cuts the agency's package testing program.\44\
    ---------------------------------------------------------------------------
        \44\ Fiscal year 2008 PHMSA Budget Submission, pages 39, 40 and
    138.
    ---------------------------------------------------------------------------
                                   conclusion
        The transport of hazardous materials is a multi-billion dollar
    industry that employs millions of Americans. This commerce has been
    accomplished with a remarkable degree of safety, in large part, because
    of the uniform regulatory framework authorized and demanded by the
    HMTA. Within the Federal Government, OHMS is the competent authority
    for matters concerning the transportation of these materials. Despite
    productivity that averages 40 administrative actions a day, this small
    agency still has a backlog of correspondence, rulemaking petitions, and
    technical applications for exemptions and approvals. We, therefore,
    strongly recommend full funding for OHMS.
        Thank you for your attention to these issues.
                                     ______

    Prepared Statement of the Capital Metropolitan Transportation Authority
        Mr. Chairman and members of the subcommittee: On behalf of the
    Capital Metropolitan Transportation Authority in Austin, Texas, I am
    pleased to submit this statement for the record in support of our
    fiscal year 2008 funding requests from the Federal Transit Authority
    for Capital Metro--the transportation provider for Central Texas. I
    hope you will agree that the appropriating of funds for these Central
    Texas projects warrants serious consideration as Austin and the
    surrounding Texas communities plan for our region's growing
    transportation needs.
        First, let me thank you for your past financial support for
    transportation projects in Central Texas. Your support has proven
    valuable to Capital Metro and to our Central Texas community as we face
    new challenges.
        As you know, Interstate 35 runs from Canada to Mexico, and along
    the way it also runs through the city of Austin and Capital Metro's 600
    square mile service area. While traffic in this important corridor has
    always been a challenge, the North American Free Trade Agreement has
    resulted in increased traffic and congestion for our region. In fact, a
    2002 study by the Texas Transportation Institute determined Austin,
    Texas to be the 16th most-congested city nationwide.
        Also, Central Texas' air quality has reached near non-attainment
    levels. Together, our community has developed a Clean AirForce, of
    which Capital Metro is a partner, to implement cooperative strategies
    and programs for improving our air quality. Capital Metro has also
    unilaterally implemented several initiatives such as converting its
    fleet to clean-burning Ultra Low Sulfur Diesel (ULSD), becoming the
    first transportation authority in Texas to introduce environmentally-
    friendly hybrid-electric buses, and creating a GREENRide program to
    carpool Central Texas workers in low emission hybrid gas/electric
    automobiles.
        To address these transportation and air quality challenges as well
    as our region's growing population, in 2004 Capital Metro conducted an
    extensive community outreach program to develop the All Systems Go
    Long-Range Transit Plan. This 25-year transportation plan for Central
    Texas was created by Capital Metro, transportation planners, and local
    citizens. More than 8,000 citizens participated in the design of the
    program that will bring commuter rail and rapid bus technologies to
    Central Texas. The plan will also double Capital Metro's bus services
    over the next 25 years.
        By a vote of over 62 percent, this long-range transportation plan
    was adopted by the Central Texas community in a public referendum on
    November 2, 2004. The plan received bipartisan support, along with
    endorsements from the business community, environmental organizations,
    neighborhood associations, and our community leaders.
        An important component of the All Systems Go Long Range Transit
    Plan is the creation of an urban commuter rail line along a 32-mile
    long freight rail line currently owned and operated by Capital Metro.
    The proposed starter route would provide urban commuter rail service
    extending from downtown Austin (near the Convention Center) through
    East and Northwest Austin and on to Leander.
        To implement the community's All Systems Go Transit Plan, Capital
    Metro is seeking $10 million for fiscal year 2008 for four projects of
    importance to our Central Texas community:
      enhancement and improvement of buses and bus facilities--$5 million
        Capital Metro has embarked on a long term plan to improve and
    expand bus service. In addition to improving bus routes, the agency is
    investing in critical park and ride facilities, transit centers and
    enhanced bus stop locations and amenities. As Capital Metro's service
    area and the population we serve continue to grow, we will continue to
    enhance our system and facilities while addressing traffic congestion
    and air quality concerns. In the next 3 years, Capital Metro has
    planned to invest $82.5 million in capital projects to better serve our
    growing population. Capital Metro seeks $5 million from the
    appropriations process for these improvements and expansions of our bus
    service and facilities.
                  oak hill park and ride facility--$2 million
        The Oak Hill Park and Ride facility will anchor Capital Metro's
    future rapid bus services to rapidly growing areas of Southwest Austin
    and Travis County. This facility and its routes will connect local
    service to several nearby neighborhoods to serve the growing number of
    suburban commuters in this portion of Capital Metro's service area.
    Capital Metro is seeking $2 million for this project.
              urban commuter rail circulator vehicles--$2 million
        Capital Metro's 32-mile Urban Commuter Rail line will begin
    operations in 2008, serving 9 stations throughout Central Texas. Urban
    Commuter Rail circulator vehicles will serve each of the stations to
    transport passengers to and from their final destinations, connecting
    with the MetroRail. Capital Metro is seeking $2 million for this
    project.
                    paratransit service vehicles--$1 million
        Pursuant to, and in accordance with, the Americans with
    Disabilities Act, Capital Metro provides door-to-door van and sedan
    paratransit service throughout Central Texas for persons with
    disabilities and senior citizens. This $11.7 million (fiscal year 2007)
    program provides more than 500,000 rides each year. Capital Metro will
    be replacing many of the vans and sedans that serve this program, as
    they are retired during fiscal year 2008. This crucial funding will
    assist Capital Metro in ensuring the accessibility of transportation
    services for all Central Texans.
        I look forward to working with the committee in order to
    demonstrate the necessity of these projects. Your consideration and
    attention are greatly appreciated.
                                     ______

              Prepared Statement of the City of San Marcos, Texas
        Mr. Chairman and members of the subcommittee: On behalf of the city
    of San Marcos, Texas, I am pleased to submit this statement in support
    of our requests for project funding for fiscal year 2008.
        The city of San Marcos requests Federal funding for the San Marcos
    Municipal Airport to accomplish improvements that are in the public
    interest. The improvements are described in the three specific projects
    listed below:

    ------------------------------------------------------------------------
                                                                    Amount
    ------------------------------------------------------------------------
    Northside Infrastructure Development.......................   $3,500,000
    New Terminal Building......................................    4,500,000
    Fixed Base Operator (FBO) Facility.........................    1,500,000
                                                                ------------
        Total Request..........................................    9,500,000
    ------------------------------------------------------------------------

        The San Marcos Municipal Airport is a public general aviation
    airport classified as a reliever airport within the National Plan of
    Integrated Airport Systems. The airport is owned and operated by the
    city of San Marcos, Texas. It is located just east of Interstate
    Highway 35 on Texas Highway 21 approximately 30 miles south of Austin
    and 45 miles north of San Antonio in one the fastest growing corridors
    in Texas.
        The airport is part of a closed military base; the remainder of the
    former Air Force Base is occupied by the U.S. Department of Labor's
    Gary Job Corps Center. When the base was closed and divided in 1966,
    the Job Corps retained the portion of the property with the buildings
    and other amenities while the city of San Marcos was given the
    aeronautical facilities consisting of runways, taxiways, and the
    parking apron.
        This arrangement has resulted in a ``bare bones'' airfield that
    lacks the support structure to sustain an economically viable modern
    airport. We have adequate aeronautical facilities and real estate but
    little other facilities. In addition, current legislation provides for
    airport capital improvement funding assistance through the Federal
    Aviation Administration for aviation infrastructure, but not for the
    type of improvements that this airport needs.
        The city of San Marcos requests assistance to transform the airport
    into a modern, self-sustaining enterprise benefiting not only the local
    community but the region. After analysis and master planning, we have
    determined that the three projects herein described will get us the
    ``biggest bang for the buck''. These projects will meet our highest
    priorities and most immediate needs, and they will be a highly visible
    indicator that the San Marcos Municipal Airport is on the move. We are
    firmly convinced that these improvements will kick-start further
    development and attract private investment that will far surpass the
    amount that we are seeking in Federal support.
        The following program descriptions outline our three requests:
    Northside Infrastructure Development--$3,500,000
        The layout of the former Gary Air Force Base is such that all the
    buildings and developed area of the base were to the south of the
    airfield. When the base was divided between the Gary Job Corps Center
    and the San Marcos Municipal Airport, the airport was given only a thin
    sliver of land on the south side to provide access and support the
    airfield. There is not enough room for all the support facilities such
    as hangars, maintenance shops, and terminal buildings that an active
    airport requires.
        However, on the north side of the airfield is real estate that has
    never been developed. One prime piece of the north side area consists
    of approximately 40 acres of very desirable airport land that fronts on
    Texas Highway 21 and borders an existing taxiway that will become the
    main taxiway for the entire north side development. Except for the
    absence of infrastructure, it is the ``McDonald's'' location on the
    airport. The area requires access roads including a main airport
    entrance, drainage improvements, aircraft ramps and aprons, existing
    taxiway pavement reconstruction, and utilities. It also needs a seed
    project to stimulate private investors to move into the area.
        Our plan proposes to construct the infrastructure and to then build
    approximately 50 nested T-hangars in 2 or 3 city-owned buildings. Our
    planning estimate for the cost to implement this project is $3,500,000.
    We are also convinced that once this north side development ball starts
    to roll, the future of the new San Marcos Municipal Airport will shift
    from the current limited and constrained south side to the several
    hundred acres of prime undeveloped land available on the north side.
    New Terminal Building--$4,500,000
        The commercial, economic, and public service hub of a modern
    airport is the public terminal building. The terminal building provides
    public amenities such as a waiting room or lounge, airport
    administration offices and public meeting rooms, restrooms, flight
    planning facilities and communications links to obtain flight planning
    information, commercial lease space for such businesses as restaurants,
    retail shops, rental car facilities, and other aviation-related
    commercial activities.
        An airport's facilities will be the first thing a business traveler
    will see, and it's those facilities which represent the city of San
    Marcos. These facilities are sorely lacking in our present airport
    configuration and the existing terminal building is undersized to meet
    existing demand, much less provide room for growth. It is opportune
    that the Federal Aviation Administration is programming a new air
    traffic control tower for our airport in fiscal year 2007. A new
    terminal building located adjacent to the control tower could be
    architecturally coordinated with the control tower for aesthetic
    advantage. The two facilities could achieve a significant efficiency in
    the coordinated construction of road access, utility services, parking
    facilities, drainage improvements, and landscaping. This same concept
    is being touted at several other airports similar to ours. (Dallas
    Executive Airport is a prime example.) The planned terminal building
    planning concept is for a modern, state-of-the-art building of
    approximately 10,000 square feet first floor and total cost estimated
    at $4,500,000.
    Fixed Base Operator (FBO) Facility--$1,500,000
        For general aviation operations, airport activity centers on the
    FBO. This is where the transient and based pilots and aircraft
    operators go to buy fuel and obtain direct support for their flights.
    It is also a place where transient and based pilots can arrange to have
    their aircraft serviced, repaired, and hangared overnight or longer
    when required.
        It is again opportune that the San Marcos Municipal Airport has an
    established FBO that is capable of accomplishing these vital services
    if a facility were available for them to lease. We propose that a
    modern, state-of-the-art FBO be constructed to meet the airport's
    present and future commercial requirements. The approximately 30,000
    square foot structure would be mainly hangar space with an attached
    business, shop, and office area. Cost is estimated at $1,500,000. Lease
    payments and other airport fees would offset this investment; and the
    investment is calculated to be a profitable enterprise for the airport
    in the long term.
        The 1,356 acre San Marcos Municipal Airport is a potential economic
    dynamo for this region of Central Texas. The three airport improvement
    projects that we are proposing will result in an increase in activity
    and private investment. This is a good investment of public revenue
    that will result in more high-paying aviation jobs, an increased tax
    base, and more direct revenues in the form of airport fees and rents.
    Our airport will also better serve the aviation needs of the region and
    spur further growth, development, and prosperity for our citizens.
    These projects are grounded in sound public policy principles. They
    will result in excellent value for the American taxpayer and for the
    traveling public that will utilize the facilities.
        The city of San Marcos sincerely appreciates your consideration of
    these requests for funding in the fiscal year 2008 cycle, and
    respectfully requests your support.
                                     ______

       Prepared Statement of the University Corporation for Atmospheric
                                Research (UCAR)
        On behalf of the University Corporation for Atmospheric Research
    (UCAR) and the university community involved in weather and climate
    research and related education, training and support activities, I
    submit this written testimony for the record of the Senate Committee on
    Appropriations, Subcommittee on Transportation, Housing and Urban
    Development, and Related Agencies.
        UCAR is a consortium of 70 universities that manages and operates
    the National Center for Atmospheric Research (NCAR) and additional
    research, education, training, and research applications programs in
    the atmospheric and related sciences. The UCAR mission is to serve and
    provide leadership to the atmospheric sciences and related communities
    through research, computing and observational facilities, and education
    programs that contribute to betterment of life on Earth. In addition to
    its member universities, UCAR has formal relationships with
    approximately 100 additional undergraduate and graduate schools
    including several historically black and minority-serving institutions,
    and 40 international universities and laboratories. UCAR is supported
    by the National Science Foundation (NSF) and other Federal agencies
    including the Federal Highway Administration (FHWA), and the Federal
    Aviation Administration (FAA). I would like to comment on the fiscal
    year 2008 budgets for these agencies.
                       the federal highway administration
        The fiscal year 2008 budget request for the FHWA should support the
    administration's and the country's commitment to a safe, efficient, and
    modern surface transportation system. Weather research and intelligent
    transportation system (ITS) technology significantly contributes to
    this commitment. According to the National Academy of Sciences, adverse
    weather conditions obviously reduce roadway safety, capacity and
    efficiency, and are often the catalyst for triggering congestion. In
    the United States each year, approximately 7,000 highway deaths and
    450,000 injuries are associated with poor weather-related driving
    conditions. This means that weather plays a role in approximately 28
    percent of all crashes and accounts for 19 percent of all highway
    fatalities. The economic toll of these deaths and injuries is estimated
    at $42 billion per year. The societal and economic impacts of adverse
    weather on the highway system are obviously enormous.
    Road Weather Research and Development Program
        The Road Weather Research and Development Program funds the
    collaborative work of surface transportation weather researchers and
    stakeholders. This work is potentially life saving for the users of the
    national surface transportation system. Much has been accomplished
    already in understanding and developing decision support systems to
    address the impact of poor weather on the surface transportation system
    including congestion. However, it should be noted that according to the
    2004 National Research Council's report titled, Where the Weather Meets
    the Road: A Research Agenda for Improving Road Weather Services, the
    investment required to satisfy the unmet needs for road weather
    information is $25 million per year for 15 years. An investment at this
    level would be focused on developing decision support systems for
    traveler information systems, winter road maintenance, traffic
    management, incident and emergency management, in-vehicle information
    systems through the vehicle infrastructure integration program, and
    ITS. Enhanced research on pavement condition prediction, snow and ice
    control, fog, road friction, flooding, thunderstorm forecasting, icing,
    sensor development, and other areas will result in significant savings
    in lives and dollars.
        Only recently has the FHWA begun investing in road weather research
    and this investment level has been extremely low ($2.8 million per
    year), considering its impact on the transportation system. An
    adequately funded road weather research program will improve the
    safety, capacity, efficiency and mobility (by reducing congestion), of
    the national roadway system. It will benefit the general public,
    commercial trucking industry, State DOT traffic, incident and emergency
    managers, operators and maintenance personnel.
        The 2006 Transportation Reauthorization bill, SAFETEA-LU (section
    5308) contains language that establishes the Road Weather Research and
    Development Program within the FHWA ITS Research and Development
    Program, with annual funding at $4 million (significantly less than the
    NRC recommendation of $25 million). The fiscal year 2008 request is
    only $3 million and may be found within the FHWA Intelligent
    Transportation Systems account. This program is well supported by
    numerous organizations including the American Association of State
    Highway and Transportation Officials (AASHTO), the Intelligent
    Transportation Society of America (ITSA), the Transportation Research
    Board (TRB), the National Research Council (NRC), State Departments of
    Transportation (DOTs), and the American Meteorological Society (AMS). I
    urge the committee to fund the Road Weather Research and Development
    Program at $4 million, at a minimum, in fiscal year 2008.
                     federal aviation administration (faa)
        Our Nation's air transportation system has become a victim of its
    own success. We created the most effective, efficient and safest system
    in the world. But we now face a serious and impending problem . . .
    demand for air services is rising, and could as much as triple over the
    next 2 decades.
                                                    FAA Administrator,
                                                    Marion Blakey, July
                                                    2006
    Research and Engineering Development Account (RE&D)
        The following three programs can be found within the RE&D section
    of the fiscal year 2008 FAA budget request.
                Weather Program
        The FAA anticipates a three-fold increase in demand on the National
    Airspace System (NAS) by 2025; any air travel interruption, including
    weather problems, will result in overwhelming flight delays. The FAA
    and airlines have done a remarkable job of minimizing delays given the
    limited airport and system capacity. But major weather related delay
    events, such as the 2006 Denver blizzard over the holidays, have left
    thousands of travelers stranded and cost the industry many millions of
    dollars. This recent incident indicates existing vulnerabilities that
    must be addressed.
        Research and development conducted today forms the basis for
    tomorrow's operational products. Enhanced weather forecasts as well as
    improved use of forecasts will contribute to a reduction in weather
    impacts. The FAA's Weather Program focuses on projects that address the
    current challenges of operating the safest, most efficient air
    transportation system in the world while building a foundation for the
    Next Generation Air Transportation System (NextGen). For fiscal year
    2008 and beyond, FAA is focusing on capabilities to help stakeholders
    at all levels make better decisions and better react to avoidable
    weather situations, thus minimizing their impact.
        To mitigate the effects of weather, the FAA's Weather Program
    conducts applied research in partnership with a broad spectrum of the
    weather research and user communities with a goal of transitioning
    advanced weather detection and forecasting technologies into
    operational use. Leveraging the work of the research community, the FAA
    has made tremendous strides in understanding and mitigating the impacts
    of severe weather on aviation. Enhanced research on turbulence,
    thunderstorm forecasting, oceanic weather, icing, and other areas can
    result in even more savings, in both lives and dollars. The fiscal year
    2008 request for the Weather Program is $16.8 million, down from the
    fiscal year 2007 request of $19.5 million. This program continues to be
    severely under funded. To truly be responsive to the new weather
    research capabilities and national needs, the Weather Program needs to
    be doubled and funded at about $35 million. I urge the committee to
    fund the Weather Program at the fiscal year 2007 requested level of
    $19.5 million, at a minimum.
                Joint Planning and Development Office (JPDO)
        In preparation for a burgeoning National Airspace System, 4 years
    ago the President and Congress created the multi-agency Joint Planning
    and Development Office (JPDO) to oversee planning related to NextGen.
    The JPDO, in its brief existence, has already accomplished much, and
    has defined eight critical strategies to meet the goals and objectives
    for NextGen--one of which is focused on mitigating the impacts of
    weather on the air transportation system.
        The President's fiscal year 2008 request of $14.3 million for JPDO
    is not an adequate level of funding, given the challenges of bringing
    the aviation system up to 21st Century needs. The request is down 21
    percent from the fiscal year 2007 request of $18.1 million. To
    accomplish an initiative of this magnitude and complexity, JPDO should
    be doubled to $28 million. I urge the committee to fund the Joint
    Planning and Development Office at the fiscal year 2007 requested level
    of $18.1 million, at a minimum.
                Wake Turbulence
        Better detection and forecasting of wake turbulence, dangerous
    swirling air masses trailing from aircraft wingtips, is a key element
    in the FAA's safety program. Research results and technologies derived
    from the Wake Turbulence program will allow airports and airlines to
    operate more efficiently, increasing capacity and safety, by providing
    a better understanding of this phenomenon. I urge the committee to
    support the fiscal year 2008 request of $10.7 million for the wake
    turbulence program.
    Facilities and Equipment Account
        The following program can be found within the Facilities and
    Equipment Account on the FAA's fiscal year 2008 budget request.
                Wind Profiling and Weather Research--Juneau
        High wind and terrain-induced turbulence information can help
    airlines adjust their routes and schedules to optimize usage of the
    airport. Within the FAA's Facilities and Equipment Budget the program,
    Wind Profiling and Weather Research--Juneau, supports the Juneau
    Airport Wind System (JAWS), a developing operational system designed to
    detect and warn of wind and airport turbulence hazards. I urge the
    committee to support the administration's fiscal year 2008 request of
    $4.0 million for Wind Profiling and Weather Research--Juneau.
        On behalf of UCAR, as well as all U.S. citizens who use the surface
    and air transportation systems, I want to thank the committee for the
    important work you do that supports the country's scientific research,
    training, and technology transfer. We understand and appreciate that
    the Nation is undergoing significant budget pressures at this time, but
    a strong Nation in the future depends on the investments we make in
    research and development today. We appreciate your attention to the
    recommendations of our community concerning the fiscal year 2008 FHWA
    and FAA budgets and we appreciate your concern for safety within the
    Nation's transportation systems.
                                     ______

                     Prepared Statement of Foothill Transit
        Mr. Chairman and members of the subcommittee, my name is Doran
    Barnes, and I serve as the Executive Director of Foothill Transit in
    West Covina, California. Thank you very much for the opportunity to
    submit testimony to this subcommittee.
        Mr. Chairman, I recognize the difficult tasks before this
    subcommittee and commend your leadership in determining the allocation
    of available transportation resources during this congressional budget
    period. We are very appreciative of the strong support provided to
    Foothill Transit by this committee over the past 12 years. The support
    of your committee has enabled Foothill Transit to construct two
    operating and maintenance facilities and initiate replacement of our
    aging bus fleet with new compressed natural gas coaches, as well as
    embark upon providing commuter parking to encourage transit ridership.
    These initiatives will greatly enhance the service we provide to our
    customers.
                         why this bus capital request?
        Thanks to the unwavering support of our congressional delegation,
    Foothill Transit has been extremely successful in achieving its capital
    goals. Our fiscal year 2008 funding request is for $10 million in
    Discretionary Bus Capital funding to assist Foothill Transit in
    partnering with member cities by providing funding for commuter parking
    in transit-oriented neighborhood projects. This funding will be used
    for our innovative ``Transit Oriented Neighborhood Program'', which
    offers a win-win solution for commuters and communities in the San
    Gabriel and Pomona Valleys. Through this program, we will assist our
    member cities and the County of Los Angeles with the construction of
    facilities with 500 to 1,000 commuter parking spaces in neighborhood
    projects each year.
        The program, begun in fiscal year 2004, provides an incentive for
    Foothill Transit's 21 member cities and unincorporated areas of Los
    Angeles County to include commuter parking in their plans for mixed-
    use, transit-oriented projects. Foothill Transit is working with our
    local cities by partnering to develop projects that meet our common
    goals. Projects are intended to serve the dual purpose of facilitating
    transit use during daytime commuter hours, and providing general public
    parking for dining, shopping, and other uses during evening hours and
    weekends
        Over the past several years, commuter parking in Foothill Transit's
    service area has dwindled, culminating in the closure of a major park-
    and-ride lot in early 2003. At one time, the Eastland Park and Ride
    provided over 1,000 parking spaces for transit customers. With the
    revitalization of the Eastland Shopping Center, this park and ride
    facility has been eliminated. A second park and ride facility in the
    southern portion of our service area ceased operating in February 2004.
    This facility was provided by a regional shopping mall. As the shopping
    mall intensified its retail activities, it was no longer willing to
    provide its parking lot for park and ride activities. Under both of
    these scenarios, customers have found it more difficult to access
    Foothill Transit's commuter express services. Accordingly we have seen
    decreases in ridership on these express lines and we believe that a
    portion of these transit riders have returned to driving into downtown
    Los Angeles. This increases both traffic congestion and vehicle
    emissions.
        The Transit Oriented Neighborhood Program enables Foothill Transit
    to continue its longstanding tradition of responding to customer needs
    by providing more convenient access to its high caliber bus service. By
    encouraging more transit use with the availability of park-and-ride
    facilities, Foothill Transit also helps mitigate the traffic congestion
    and poor air quality that plague the Los Angeles area.
        We are pleased to report that our first project under this program
    has been completed. A ribbon cutting and dedication ceremony for the
    Claremont Transportation Center was held on August 31, 2006. The
    transit component of the project includes 477 parking spaces, with 200
    spaces available for transit. In addition to supporting transit, this
    project is a key part of the expansion of the Claremont Transit
    Village.
        The next phase of this program includes plans for parking
    structures in West Covina and Puente Hills. As noted above, for many
    years in these two areas, commuter parking was provided in regional
    shopping malls. However, as business improved at these malls, the
    parking spaces were reclaimed for shoppers. The return of commuter park
    and ride lots to West Covina and Puente Hills will greatly assist in
    maintaining and increasing transit ridership
                             about foothill transit
        Foothill Transit was created in 1987 as an experiment to determine
    the effectiveness of competitively bidding for transit service
    operations. A public/private partnership, Foothill Transit is governed
    by an elected board comprised of mayors and council members
    representing the 21 cities and 3 appointees from the County of Los
    Angeles who are members of a Joint Exercise of Powers Authority. It
    provides public transit services over a 327 square-mile service area.
    Foothill Transit is one of the best investments of taxpayer dollars in
    these times of limited funds.
        Foothill Transit has established a reputation of providing
    outstanding customer service. In five separate customer surveys,
    Foothill Transit drivers have consistently received ratings above
    average or greater by more than 80 percent of our customers. Customers
    also rate Foothill Transit buses very highly on their cleanliness,
    comfort and graffiti-free appearance.
        Foothill Transit was initially established as a 3-year experiment
    to operate 14 bus lines at least 25 percent more efficiently and
    effectively than the former Southern California Rapid Transit District
    (now Metro), with those savings to be passed on to the community
    through increased service and/or lower fares. A 3-year evaluation
    completed by Ernst & Young in 1995 showed that Foothill Transit's
    public/private arrangement resulted in cost savings of 43 percent per
    revenue hour over the previous provider.
        Recognized by Congress in 1996 as a ``national model,'' the
    combination of public accountability and private sector efficiencies
    has allowed Foothill Transit to hold costs constant since its inception
    in 1987, while increasing ridership by 77 percent and more than
    doubling the amount of service on the street.
        Foothill Transit has no employees. All management and operation of
    Foothill Transit service is provided through competitive procurement
    practices. The Foothill Executive Board has retained my employer,
    Veolia Transportation, to provide the day-to-day management and
    administration of the agency. The management contractor oversees the
    maintenance and operation contractors to ensure adherence to Foothill
    Transit's strict quality standards. We have two operating contracts for
    coach operators and vehicle maintenance. First Transit is currently the
    contractor under both of these operating contracts.
        Mr. Chairman, thank you for this opportunity to provide testimony
    and your consideration of our request. Please feel free to contact me
    with any questions you may have or if I can be of any assistance.
                                     ______

         Prepared Statement of the Coalition of Northeastern Governors
        The Coalition of Northeastern Governors (CONEG) is pleased to share
    with the subcommittee testimony on transportation and community
    development programs in the fiscal year 2008 Transportation, Housing
    and Urban Development, and Related Agencies Appropriations bill. The
    CONEG Governors appreciate the subcommittee's longstanding support of
    funding for the Nation's highway, transit, and rail systems, and we
    understand the difficult fiscal challenges and complex, interlocking
    issues that the subcommittee faces in crafting this appropriations
    measure. We urge the subcommittee to continue the strong Federal
    partnership so vital for the national, integrated transportation system
    that underpins the productivity of the Nation's economy and the
    security and well-being of its communities.
                                 transportation
    Surface Transportation
        The Governors urge the subcommittee to fund the combined highway,
    public transit and safety programs at levels consistent with the fiscal
    year 2008 authorized levels, including the Revenue Aligned Budget
    Authority (RABA). This level of Federal investment in these
    infrastructure improvements is necessary if the Nation's surface
    transportation system--in both urban and rural areas--is to safely and
    efficiently move people and support the substantial growth in freight
    movement projected in the coming decade. Specifically, we urge the
    subcommittee to:
      --support a Federal aid highway obligation limit at the authorized
            level of $39.585 billion, plus the Revenue Aligned Budget
            Authority (RABA);
      --fund public transit at the authorized funding level of $9.423
            billion, including full funding for the Small Starts Program;
            and
      --provide sufficient funding for the Coordinated Border
            Infrastructure Program to enable investment in projects
            addressing both security and transportation needs at our
            Nation's borders.
    Rail
        The CONEG Governors also request that the fiscal year 2008
    appropriations include $1.78 billion in Federal funding for intercity
    passenger rail as provided in the Senate fiscal year 2008 Budget
    Resolution, with specific funding levels provided for operations,
    capital and debt service. We particularly encourage the subcommittee to
    ensure that Amtrak can continue the critically needed bridge repair
    projects and life-safety work in the New York and Baltimore tunnels,
    and also initiate efforts to promptly upgrade the Northeast Corridor
    electric traction system capacity between Washington and New York to
    avoid major service disruptions. We also support the proposal for $100
    million to fund a State capital investment program for intercity
    passenger rail.
        This funding level for intercity passenger rail can ensure the
    stability of the national system, continue vital and on-going work to
    bring the Northeast Corridor to a state of good repair, and provide
    essential investment funds critical to the continued development of
    rail corridors across the country--even as reforms are undertaken
    through concerted and hopefully coordinated activities of the U.S.
    Congress, Amtrak, the U.S. Department of Transportation (USDOT), and
    the States. Since intercity passenger rail is a complex and
    interconnected system with significant capital requirements, it is
    essential that any operations reform be incremental and that the
    Federal Government continues to be a consistent partner in funding the
    capital needs of the Nation's intercity passenger rail system. We also
    believe that any reform of intercity passenger rail must be a data-
    driven, orderly and transparent process that includes meaningful
    collaboration with Amtrak's State funding partners.
        A number of other national rail programs are important components
    of the evolving Federal-State-private sector partnerships to enhance
    passenger and freight rail across the country. We encourage the
    subcommittee to provide funding for both the Rail Relocation Program
    and the Swift High Speed Rail Development Program, both of which
    benefit passenger rail and freight rail systems.
        The CONEG Governors also support a modest increase in funding for
    the Surface Transportation Board (STB) to $26.495 million. This funding
    level will allow the STB to provide the critical oversight services as
    the Nation's rail system assumes increasing importance for the timely,
    efficient, and environmentally sound movement of people and goods
    across the Nation.
                             community development
        The CONEG Governors urge the subcommittee to provide $4.1 billion
    for the Community Development Block Grant (CDBG) program. The CDBG
    enables States to provide funding for infrastructure improvement,
    housing programs, and projects that attract businesses to urban and
    rural areas, creating new jobs and spurring economic development,
    growth and recovery in the Nation's low income and rural communities.
        The CONEG Governors thank the entire subcommittee for the
    opportunity to share these priorities and appreciate your consideration
    of these requests.
                                     ______

     Prepared Statement of the New York State Department of Transportation
        The New York State Department of Transportation (NYSDOT)
    appreciates the opportunity to present testimony on the fiscal year
    2008 transportation appropriations. New York has a truly multimodal
    transportation system and strives to allocate its financial resources
    accordingly. NYSDOT has responsibility for a $1.9 billion highway
    construction program in 2007-2008 and a $2.8 billion annual transit
    operating and capital assistance program. New York voters approved a
    $2.9 billion Transportation Bond Issue in 2005, which will help support
    New York's multi-year highway and mass transportation capital programs
    valued at nearly $36 billion, with each mode receiving nearly $18
    billion in Federal and State funds. New York will invest $235 million
    in State funds for freight and passenger rail projects and will, over
    the next 5 years, provide over $116 million in State funds to advance
    general aviation security, business-use airport development, and
    capital improvement projects for public-use airports. In addition to
    highways and transit, New York State has invested $320 million in the
    State's passenger rail system in recent years. Clearly, New York State
    is committed to multimodal transportation systems.
        In developing the fiscal year 2008 Transportation Appropriations
    legislation, we ask that you consider and endorse the following:
    Support Funding for All Transportation Programs at the Levels Set in
            Authorizing Legislation
        New York urges funding for transportation programs, at their
    maximum authorized funding levels. We are concerned with the
    President's fiscal year 2008 budget because it would reduce Federal
    funding for several programs to levels below authorized amounts, and we
    would particularly urge you to follow the path of SAFETEA-LU rather
    than that of the President's proposed budget in the following areas.
      --The President's budget submission proposed the elimination of the
            distribution of an additional $631 million from Revenue Aligned
            Budget Authority (RABA) required by the Safe, Accountable,
            Flexible, Efficient Transportation Equity Act: A Legacy for
            Users (SAFETEA-LU). New York strongly urges Congress to restore
            this mandated funding as promised by Congress just 2 years ago.
      --A $300 million reduction is proposed in Transit New Starts funding
            below the level authorized by SAFETEA-LU. The demand for
            Transit New Starts funding far exceeds the level of funding
            available, even though SAFETEA-LU increased the authorized
            funding level for this program. In New York, the Long Island
            Rail Road East Side Access and the Second Avenue Subway
            projects are priority New Starts projects to relieve congestion
            on the busiest transit system in the Nation. At a time when
            gasoline prices are at a premium, Federal investment in mass
            transit is key to reducing the Nation's reliance on foreign
            oil.
      --Zero funding is proposed for both Next Generation High Speed Rail
            program and the Railroad Rehabilitation and Improvement
            Financing (RRIF) program. There are few Federal financing tools
            available to States and railroads for investment in rail
            passenger or freight. Freight traffic nationwide is projected
            by USDOT to double in the next 20 years. Some experts say
            freight traffic will quadruple in the immediate vicinity of key
            international freight hubs such as the Port of New York and JFK
            Airport in New York City. SAFETEA-LU authorizes $100 million
            per year for the Next Generation High Speed Rail program and
            $35 billion per year for the RRIF program, a credit enhancement
            program for rail freight and passenger investments. Congress
            should provide the full funding at the levels authorized in
            SAFETEA-LU for both of these important Federal rail investment
            programs.
      --New York State continues to believe that there is an urgent need
            for short-term funding stability while a long term solution for
            intercity rail passenger service is developed and implemented.
            Short-term funding should be sufficient to operate existing
            intercity passenger rail service, as well as enable critical
            maintenance and ``state of good repair'' capital investments to
            continue. To achieve this, intercity passenger rail should be
            funded at $1.78 billion, the level called for in Senate bill S.
            294. The administration's budget request of $800 million is
            significantly below what Amtrak needs to meet its commitments
            for operations, service, and debt payments. We particularly
            encourage the subcommittee to ensure that Amtrak can continue
            the critically needed bridge repair projects and life-safety
            work in the New York and Baltimore tunnels.
      --The administration also proposes a new $100 million State capital
            investment program, where States would apply to the Federal
            Railroad Administration (FRA) for grants for up to 50 percent
            of the cost of capital investments necessary to support
            improved intercity passenger rail service that either requires
            no operating subsidy or for which the State or States agree to
            provide any needed operating subsidy. This proposed Federal-
            State partnership should be modeled on the highway and transit
            programs, with 80/20 Federal-State funding, dedicated, stable
            Federal funding, and a strong role for States in decision-
            making. Further, while this proposal is a good start, it needs
            to be part of a larger national intercity passenger rail
            strategy which establishes a strong, ongoing Federal-State
            partnership, brings Amtrak assets up to a state of good repair,
            provides corporate transparency and accountability at Amtrak,
            and expands competition in the delivery of intercity passenger
            rail service.
      --As the debate over the reauthorization of the aviation program
            proceeds through Congress, New York supports funding the
            aviation programs at the fiscal year 2007 level or higher. The
            President's budget proposal includes a significant
            restructuring of the aviation program in the absence of
            authorizing legislation. Aviation funding for fiscal year 2008
            should be based on the existing program structure until
            reauthorizing legislation is complete.
    Impending Insolvency of the Highway Trust Fund
        Both the Government Accountability Office and the Congressional
    Budget Office project that the Highway Account of the Highway Trust
    Fund will not have adequate revenue to support fiscal year 2009
    authorizations for highways and bridges. The Mass Transit Account is
    projected to remain solvent until 2011 or 2012.
        At a recent hearing of the Highways and Transit Subcommittee of the
    Transportation and Infrastructure Committee, a proposal to use the Mass
    Transit Account to address the fiscal year 2009 shortfall in the
    Highway Account was discussed with hearing witnesses. New York is
    concerned that Congress may be tempted to use this quick-fix approach
    in fiscal year 2009 Transportation Appropriations and may consequently
    postpone the fundamental surface transportation funding issue until
    SAFETEA-LU is reauthorized (SAFETEA-LU expires on September 30, 2009).
        New York emphatically urges Congress to leave the Mass Transit
    Account intact when searching for a solution to the fiscal year 2009
    highway funding shortfall. With transit funding already reduced in the
    President's fiscal year 2008 budget, any further reductions of funding
    for this vital component of a multimodal transportation system would be
    disastrous.
        Fixing the Highway Trust Fund shortfall will require significant
    effort by authorizing committees to examine, analyze, and select
    alternative funding mechanisms to meet the financial needs of the
    Nation's transportation systems into the foreseeable future. New York
    believes that a comprehensive, sustainable, diversified portfolio of
    Federal revenue is needed to address the diverse investment needs of
    the Nation's surface transportation system, i.e. its highways, transit
    systems, railroads, and ports. We urge the Transportation
    Appropriations Subcommittee to appeal to the Transportation and
    Infrastructure Committee to begin this work immediately.
        NYSDOT thanks you for this opportunity to present testimony. We
    appreciate your dedication to and support of the Nation's
    transportation systems.
                                     ______

                       Prepared Statement of Easter Seals
        Chairman Murray, Ranking Member Bond and members of the
    subcommittee, Easter Seals appreciates this opportunity to share the
    successes and needs of Easter Seals Project ACTION and the National
    Center on Senior Transportation.
                            project action overview
        Project ACTION was initiated during the appropriations process in
    1988 by funding provided to the Federal Transit Administration to
    undertake this effort with Easter Seals. We are indeed grateful for
    that initiative and the ongoing strong support of this subcommittee in
    subsequent years.
        Following its initial round of appropriations, Congress authorized
    assistance to Project ACTION in 1990 with the passage of ISTEA and
    reauthorized the project in 1997 as part of TEA-21 and in 2005 as part
    of SAFETEA-LU. The strong interest and support of all members of
    Congress has been greatly appreciated by Easter Seals as it has pursued
    Project ACTION's goals and objectives.
        Since the project's inception, Easter Seals has administered the
    project through a cooperative agreement with the Federal Transit
    Administration. Through steadfast appropriations support, Easter Seals
    Project ACTION has become the Nation's leading resource on accessible
    public transportation for people with disabilities. The current project
    authorization level is $3 million, and Easter Seals is pleased to
    request the appropriation of that sum for fiscal 2008.
        The strength of Easter Seals Project ACTION is its continued
    effectiveness in meeting the congressional mandate to work with both
    the transit and disability communities to create solutions that improve
    access to transportation for people with disabilities of all ages and
    to assist transit providers in complying with transportation provisions
    in the Americans with Disabilities Act (ADA).
               national center on senior transportation overview
        The National Center on Senior Transportation (NCST) was created in
    SAFETEA-LU to increase the capacity and use of person-centered
    transportation options that support community living for seniors in the
    communities they choose throughout the United States. The center is
    designed to meet the unique mobility needs of older adults and provide
    technical assistance and support to older adults and transit providers.
    The NCST is administered by Easter Seals in partnership with the
    National Association of Area Agencies on Aging (N4A) and involves
    several other partners including the National Association of State
    Units on Aging, The Community Transportation Association of America,
    The American Society on Aging, and The Beverly Foundation. The
    Cooperative agreement forming the NCST was developed in August of 2007
    and the Center was officially launched in January of this year.
        The expected outcomes of the project are:
      --Greater cooperation between the aging community and transportation
            industry to increase the availability of more comprehensive,
            accessible, safe and coordinated transportation services;
      --Increased integration of provisions for transportation in community
            living arrangements and long-term care for older adults;
      --Enhanced capacity of public and private transportation providers to
            meet the mobility needs of seniors through available,
            accessible, safe and affordable transportation;
      --Enhanced capacity of human service providers to help seniors and/or
            caregivers individually plan, create and use appropriate
            transportation alternatives;
      --Increased knowledge about and independent use of community
            transportation alternatives by seniors through outreach,
            education and advocacy;
      --Increased opportunities for older adults to obtain education and
            support services to enable the individuals to participate in
            local and State public and private transportation planning
            processes.
        The tools and resources being developed to achieve these goals
    include:
      --Technical assistance extended through cross-agency and public/
            private collaboration to improve and increase mobility
            management for older adults through new or existing local and
            State coalitions;
      --Technical assistance and other supportive services extended to
            communities, seniors, transportation and professional agencies
            and organizations, government, and individuals so they can
            effectively address barriers and/or respond to opportunities
            related to senior transportation; and
      --Creation and dissemination of products and training programs (e.g.,
            brochures, workbooks, best-practice guides and self-
            assessments) to help transportation providers, human service
            agencies and older adults and their caregivers understand their
            roles and/or opportunities for increasing senior mobility
            options;
      --Use of an 800-telephone line, Web site, visual exhibit, newsletters
            and other communication tools;
      --Implementation of communication strategies to increase the profile
            of senior transportation on topics such as emerging best
            practices, advances in public policy, success stories and more;
      --Facilitation and testing of new ideas to increase and improve
            community mobility for seniors through the administration and
            management of demonstration projects.
        In SAFETEA-LU, the NCST is authorized at $2 million for the first
    year of the project and $1 million for years after that. Easter Seals
    respectfully requests and appropriations of $2 million for the NCST in
    fiscal 2008. The additional $1 million included above the authorized
    level in this request would allow the center to fund local community's
    efforts to demonstrate creative, unduplicated and effective solutions
    to increasing mobility for older adults. This funding will allow us to
    support local communities' efforts to put the tools and resources
    developed by the NCST into practice.
           scope of project action and the national center on senior
                                 transportation
        Both Project ACTION and the NCST are working at the State, local
    and national level to achieve the goal of greater mobility for all
    Americans. This includes everything from working with local communities
    to provide curriculum, resources, training and ongoing technical
    supports as they work to coordinate their local transportation
    resources, to working with States implementing the United We Ride
    Initiative activities, to hosting national level listening sessions and
    summits on issues of importance to the Nation's mobility.
                              fiscal 2008 request
        In order to continue the outstanding work of Easter Seals Project
    ACTION and the NCST, Easter Seals respectfully requests that $3 million
    be allocated for Project ACTION and $2 million be allocated for the
    National Center on Senior Transportation in fiscal 2008 to the
    Department of Transportation for project activities.
        Mr. Chairman, thank you for the opportunity to present this
    testimony to the subcommittee. Your efforts have improved the
    accessibility of transportation for persons with disabilities and older
    adults and the ability of the transportation community to provide good
    service to all Americans. Easter Seals looks forward to continuing to
    work with you toward the pursuit of these objectives.
                                     ______

                  Prepared Statement of All Aboard Washington
        Thank you and many other members of this subcommittee for having
    supported basic investments in Amtrak intercity rail in past years.
    While understanding there are many competing needs for tax dollars, I
    believe the justification for an increased Federal role in rail
    investments is now higher than anytime during my 20+ years as
    representing rail advocates from our State of Washington. (We were long
    known as the Washington Association of Rail Passengers.)
        Given the finite, increasingly high cost of petroleum motor fuels,
    general acknowledgement of the negative impacts of upon local and
    global environments of ever-increasing motor vehicle use, the multiple
    costs of vehicular congestion and airport congestion, coupled with the
    inherent safety and efficiency of the rail mode, it would seem
    appropriate for the United States to join virtually all other advanced
    industrial nations and such rapidly advancing nations as China, Taiwan
    and South Korea to add intercity rail to road and air as significant
    means of moving people.
        Our State of Washington has done its part since the early 1990s,
    having made the majority of investments in our popular and successful
    Amtrak Cascades trains, which serve Amtrak's Northwest Corridor,
    between Vancouver BC south through the densely populated and rapidly-
    growing western Washington on to Eugene Oregon. Customer satisfaction
    by Cascades' passengers is, year after year, judged to be at or near
    the top within the Amtrak system.
        Only two significant concerns have surfaced concerning the Amtrak
    Cascades: that on-time performance is below optimum, brought about by
    the generally good news that shipments by the freight railroads are
    considerably higher than was predicted and planned for, resulting in
    track congestion; and, the need for more Cascades' trips per day,
    particularly between the major Seattle-Portland markets. In both cases,
    additional investments, by the freight railroads, the States of
    Washington and Oregon, the province of British Columbia, local
    communities, other private sector entities, and the U.S. Government,
    would strongly address these concerns.
        A Rail Capacity and System Needs Study funded through the
    Washington State Transportation Commission and completed in December of
    2006 concludes that it is in our State's interest to continue State
    investment in both passenger and freight rail, in cooperation with
    other private and public interests. The Study also concludes with the
    caveat that Washington State's success at increasing the role of rail
    transportation, with its manifold benefits to the State, would be
    greatly increased with a greater Federal investment role in the rail
    mode, one which starts to approach the many decades of U.S. Government
    generosity to highway, air, and inland waterway modes. While Amtrak
    participated in the funding of our Amtrak Cascades trains, and our
    congressional delegation has in general been supportive of Amtrak
    funding (Chair Murray has been a leader in this regard!), the State
    Transportation Budget passed overwhelmingly by the Washington
    Legislature on 21 April 2007 includes proposed rail projects which
    await a significant Federal investment component before they could be
    fully realized.
        Legislators, transportation commissioners, and WSDOT leadership
    have said in blunt terms, ``We are doing our share; now it's the Feds'
    turn!''
        S. 294, with excellent bipartisan co-sponsorship, is a potential
    funding vehicle that can move toward a source of rail investment that
    would serve our State and other States well. As an authorization bill
    it remains a ``good set of ideas''. The means by which these good ideas
    can be financed fall under your committee's jurisdiction.
        Details of S. 294, its characteristics, benefits, and costs would
    be well-known to your committee's excellent staff; I need not repeat
    them here. But as I am this week visiting this Washington, the Nation's
    Capital, and may have the privilege of meeting with some of you or you
    staffs, I would hope next week to be able to report back to my
    Washington that ``the Feds'' are indeed progressing toward a greater
    inclusion of passenger rail as a safe, fuel-efficient and
    environmentally-sound means of travel for the American people and our
    many foreign visitors.
        It is said the President of South Korea was asked by an American
    diplomat how his country could afford the multi-billion dollar
    investment in high-speed passenger rail between his country's booming
    industrial cities. The President politely answered, ``How can we afford
    not to?''
        The funding means found in S. 294 are a start for a greater Federal
    rail investment in our country. Given the realities of fuel supply and
    cost, environmental concerns, public safety, and economic and community
    well-being, ``How can we afford not to ?''
                                     ______

      Prepared Statement of the American Public Transportation Association
                                  introduction
        Madam Chairman and members of the subcommittee, on behalf of the
    American Public Transportation Association (APTA), we thank you for
    this opportunity to submit written testimony on the need for and
    benefits of investment in Federal Transit Administration (FTA) programs
    for fiscal year 2008.
        The fiscal year 2008 Transportation, Housing and Urban Development,
    and Related Agencies Appropriations bill is an opportunity to advance
    national goals and objectives through increased investment in our
    surface transportation infrastructure, particularly public
    transportation. For that reason, we strongly urge Congress to fund the
    Federal transit program at no less than the $9.731 billion level
    authorized in the Safe, Accountable, Flexible, Efficient Transportation
    Equity Act--A Legacy for Users (SAFETEA-LU, Public Law 109-59).
        In 2006, Americans took 10.1 billion trips on public
    transportation. Let me put the 10.1 billion number in perspective. This
    is more than the number of Americans who attended NFL games, MLB games,
    NBA games, NHL games, NASCAR races, went to the movies, and ate a
    hamburger from McDonald's, Burger King, and Wendy's combined. Transit
    ridership growth of 30 percent since 1995 is outpacing both the growth
    of our population--12 percent--and the growth in the use of the
    Nation's highways--24 percent--since then. Each weekday, 34 million
    trips are made on public transportation in our Nation. All across
    America, public transportation provides choice, freedom and
    opportunity.
        Expanding access to public transportation is more important than
    ever. Transit plays a number of important roles. It reduces congestion
    and it provides mobility options. Its use decreases our dependence on
    foreign oil and improves air quality. Increasing access to public
    transportation is clearly needed to create a stable, healthy and strong
    America. Forty years from now when America's population will exceed 400
    million, we will be glad we had the foresight to discuss, plan and
    invest in the future of public transportation today. As we look to the
    future, we know there is no possible way that our roads can accommodate
    all the anticipated growth on their own. Transit is, and has to be,
    part of the solution.
                             fiscal year 2008 goals
        APTA recognizes the need to invest limited Federal resources
    wisely, and we believe that investment in public transportation is an
    astute use of limited resources. To realize all of the benefits of
    public transportation, we urge Congress to follow the investment
    schedule in SAFETEA-LU. The law authorizes $9.731 billion for the
    Federal transit program in fiscal year 2008, including $7.766 billion
    in contract authority from the Mass Transit Account (MTA) of the
    Highway Trust Fund and $1.965 billion in new budget authority general
    fund spending.
        We urge Congress to fund the Federal transit program at the
    authorized level so that communities across the Nation, utilizing State
    and local resources in tandem with Federal funds, can begin to address
    the overwhelming need both to preserve the existing transit
    infrastructure and to expand and improve that infrastructure in growing
    communities and those without good transit service.
        A new survey prepared by Cambridge Systematics as part of the
    Transit Cooperative Research Program finds that annual transit capital
    needs are greater than $45 billion a year. State and local governments
    cannot meet the expanding capital need requirements of public
    transportation while also providing for transit operating expenses. To
    help meet these needs, APTA believes that the Federal Government should
    invest no less in public transportation than the $9.731 billion level
    that was authorized and guaranteed by SAFETEA-LU.
                          president's budget proposal
        The administration's fiscal year 2008 budget proposal would cut
    $309 million from the level authorized and guaranteed by the Congress
    for fiscal year 2008 in SAFETEA-LU. The administration's budget cuts
    some $300 million in investments in rail and other fixed guideway
    transit projects in the New Starts and Small Starts program that were
    authorized by Congress under SAFETEA-LU. This is a failure to fund
    nearly 18 percent of the investment authorized to build projects which
    are crucial to attracting new riders.
        As this committee knows, there is overwhelming demand for New
    Starts and Small Starts projects, and SAFETEA-LU authorized 387 such
    projects. New fixed guideway projects are an important part of meeting
    transit needs, but these major capital projects take years to develop
    and require a predictable funding commitment. The effect of
    underfunding the New Starts/Small Starts program will be felt
    disproportionately in future years. Transit providers would fall
    further behind in the development of new projects due to the cuts in
    the administration proposal, depriving communities of the congestion
    relief and environmental benefits associated with the projects.
        If New Starts project schedules are delayed, project costs also
    rise due to inflation. A recent study by the Associated General
    Contractors of America (AGC) finds that the cost of building surface
    transportation infrastructure has increased at a much faster rate than
    the Consumer Price Index. Transportation-related construction costs
    increased by more than 30 percent between 2003 and 2006, yet the
    consumer price index for urban areas grew by only 11 percent during
    that period. Looking ahead, the AGC's research predicts that
    transportation construction prices will increase at an annual rate of
    at least 6 percent, but increases could be much higher based on the
    experience of recent years. Prices spiked 10 percent and 14.1 percent
    in 2004 and 2005, respectively. If the New Starts/Small Starts program
    is cut by $300 million in fiscal year 2008, it will require $330
    million in fiscal year 2009 to build equivalent projects if costs rise
    by only 10 percent. The administration's budget proposal is truly
    pennywise and pound foolish. In recent years the time required to
    develop and complete New Starts projects has also continued to grow.
    This adds further to project costs, and APTA urges the committee to
    work with FTA to expedite this process.
        We want to make another point, Madam Chairman. SAFETEA-LU
    restructured the general fund and Mass Transit Account (MTA) funding
    sources so that MTA outlays are now scored when they are actually spent
    rather than when they are appropriated. The good news is that MTA
    balances now are significantly higher than they would have been under
    the old scoring system. But this also means that the New Starts program
    is now funded exclusively from the general fund. Madam Chairman, it is
    important to emphasize that this was done to improve the overall
    financing of the Federal transit program. The change was not meant to
    create funding uncertainty or program cuts, as the administration has
    proposed for the second year in a row.
        While we understand the need to protect against spending the
    public's money on imprudent projects, we also believe FTA has
    effectively prevented the advance of viable projects by overemphasizing
    a limited number of benefits in the evaluation of potential New Starts
    projects, particularly travel time savings. Fixed guideway investment,
    particularly rail transit, is an alternative that requires long-term
    vision since the construction and expansion of systems takes time, but
    it is one of the most effective ways to reduce and prevent congestion
    in metropolitan areas and advance other national goals.
        Finally, APTA urges this committee to consider providing New Starts
    projects with the same Federal share of project costs provided for
    other transit and highway investments. Both FTA and Congress have taken
    a number of actions that have prevented the advancement of New Starts
    projects that seek a Federal share of costs greater than 60 percent,
    and for most current projects, the local cost share exceeds 50 percent
    even though current law provides up to an 80 percent Federal share.
    APTA believes that at a time of growing concern about congestion,
    greenhouse gas emissions and weaning the country off foreign energy
    sources, the Federal Government should be encouraging communities to
    invest in new transit systems and the expansion of current systems. New
    Starts projects should be treated like other transportation projects
    and receive an 80/20 Federal match ratio.
                           transit fights congestion
        The U.S. Department of Transportation (USDOT) has recognized that
    system congestion is one of the single largest threats to our Nation's
    economic prosperity and way of life. In 2003, Americans lost 3.7
    billion hours and 2.3 billion gallons of fuel sitting in traffic jams
    as a result of congestion. APTA strongly applauds the Department's
    efforts to focus national attention on our congested roads, rails and
    airways, but USDOT's efforts to fight congestion under its National
    Strategy to Reduce Congestion on America's Transportation Network
    (commonly referred to as the ``Congestion Initiative'') are simply
    incomplete. While our Nation's anti-congestion ``blueprint'' should
    incorporate new strategies such as innovative pricing, private sector
    investment, and urban partnership elements of the Department's
    Congestion Initiative, it must also call for a dramatic increase in the
    use of proven congestion fighting strategies like transit.
        Thirty-four million trips are taken each weekday in the United
    States on public transportation, and each trip fights congestion.
    According to the 2005 Texas Transportation Institute Annual Urban
    Mobility Report, transit is successfully reducing traffic delays and
    costs in the 85 urban areas studied. Without transit delays in the 85
    urban areas would have increased 27 percent, and residents in the urban
    areas studied would have lost an additional $18.2 billion in time and
    fuel as a result of increased congestion.
        The impacts of congestion run deep. Good public transportation
    service allows all types of trips to be completed quickly and
    efficiently. Removing autos from congested urban freeways through
    transit use speeds truck-borne freight as surely as building highway
    capacity. In short, we must view the entire transportation network as a
    single system, one that can be planned managed and financed with a
    broad view to the overall good. Holes in the network through
    underinvestment result in degradation of performance for the entire
    system.
                 public transportation and energy independence
        As our Nation revaluates our patterns of energy use, we must
    recognize the important energy savings that are derived from transit
    use. Earlier this year, a report by ICF International calculated that
    public transportation today reduces petroleum consumption by a total of
    1.4 billion gallons of gasoline each year. This means:
      --108 million fewer cars filling up--almost 300,000 every day;
      --34 fewer supertankers leaving the Middle East--one every 11 days;
      --over 140,000 fewer tanker truck deliveries to service stations per
            year;
      --total savings as great as the entire amount of gasoline consumed in
            States the size of Nevada, Utah or New Mexico; and
      --5 times greater savings than converting the entire 478,000 Federal
            light duty vehicle fleet to alternative fuels.
        These savings result from the efficiency of carrying multiple
    passengers in each transit vehicle; the reduction in traffic congestion
    from fewer automobiles on the roads; and the varied sources of energy
    for public transportation.
        All savings would be magnified with increased use of transit
    relative to the automobile. Savings would be magnified still further
    when we account for the energy efficiencies that are characteristic of
    cities highly reliant on transit which use much less energy per capita
    than auto dependent cities. According to research by sustainability
    experts Peter Newman and Jeff Kenworthy, U.S. cities use two and a half
    times more oil than comparable cities in Europe, and five times more
    oil than comparable cities in Asia.
                                   conclusion
        Public transportation plays a key role in meeting the national
    goals of the administration and Congress in providing energy
    independence, congestion relief and transportation mobility options for
    Americans. APTA strongly believes that the Federal Government should
    invest no less than the $9.731 billion level authorized and guaranteed
    by Congress for fiscal year 2008 in SAFETEA-LU if we are to advance
    these goals.
        Madam Chairman, on behalf of APTA's more than 1500 member
    organizations, I thank you for this opportunity to express our views.
                                     ______

     Prepared Statement of the California Industry and Government Central
                        California Ozone Study Coalition
        Madam Chairman and members of the subcommittee: On behalf of the
    California Industry and Government Central California Ozone Study
    (CCOS) Coalition, we are pleased to submit this statement for the
    record in support of our fiscal year 2008 funding request of $500,000
    from the Department of Transportation for CCOS. These funds are
    necessary for the State of California to address the very significant
    challenges it faces to comply with new national ambient air quality
    standards for ozone and fine particulate matter. The study design
    incorporates technical recommendations from the National Academy of
    Sciences (NAS) on how to most effectively comply with Federal Clean Air
    Act requirements.
        First, we want to thank you for your past assistance in obtaining
    Federal funding for the Central California Ozone Study (CCOS) and
    California Regional PM10/PM2.5 Air Quality Study
    (CRPAQS). Your support of these studies has been instrumental in
    improving the scientific understanding of the nature and cause of ozone
    and particulate matter air pollution in Central California and the
    Nation. Information gained from these 2 studies is forming the basis
    for the 8-hour ozone, PM2.5, and regional haze State
    Implementation Plans (SIPs) that are due in 2007 (ozone) and 2008
    (particulate matter/haze). As with California's previous and current
    SIPs, all future SIPs will continue to be updated and refined due to
    the scientific complexity of our air pollution problem. Our request
    this year would fund the completion of CCOS to address important
    questions that won't be answered with results from previously funded
    research projects.
        To date, our understanding of air pollution and the technical basis
    for SIPs has largely been founded on pollutant-specific studies, like
    CCOS. These studies are conducted over a single season or single year
    and have relied on modeling and analysis of selected days with high
    concentrations. SIPs are now more complex than they were in the past.
    The National Academy of Sciences (NAS) now recommends a weight-of-
    evidence approach that will involve utilizing more broad-based,
    integrated methods, such as data analysis in combination with seasonal
    and annual photochemical modeling, to assess compliance with Federal
    Clean Air Act requirements. This will involve the analysis of a larger
    number of days and possibly an entire season. In addition, because
    ozone and particulate matter are formed from some of the same emissions
    precursors, there is a need to address both pollutants in combination,
    which CCOS will do.
        Consistent with the NAS recommendations, the CCOS study includes
    corroborative analyses with the extensive data provided by past
    studies, advances the state-of-science in air quality modeling, and
    addresses the integration of ozone and particulate pollution studies.
    In addition, the study will incorporate further refinements to emission
    inventories, address the development of observation-based analyses with
    sound theoretical bases, and includes the following four general
    components:

    ------------------------------------------------------------------------
                                                                    Years
    ------------------------------------------------------------------------
    Performing SIP modeling analyses...........................    2005-2011
    Conducting weight-of-evidence data analyses................    2006-2008
    Making emission inventory improvements.....................    2006-2010
    Performing seasonal and annual modeling....................    2008-2011
    ------------------------------------------------------------------------

        CCOS is directed by policy and technical committees consisting of
    representatives from Federal, State, and local governments, as well as
    private industry. These committees, which managed the San Joaquin
    Valley Ozone Study and are currently managing the California Regional
    PM10/PM2.5 Air Quality Study, are landmark
    examples of collaborative environmental management. The proven methods
    and established teamwork provide a solid foundation for CCOS.
        For fiscal year 2008, our Coalition is seeking funding of $500,000
    from the DOT through Highway Research funds. DOT is a key stakeholder
    in air quality issues because Federal law requires that transportation
    plans be in conformity with SIPs. Billions of dollars in Federal
    transportation funds are at risk if conformity is not demonstrated for
    new transportation plans. As a result, transportation and air agencies
    must be collaborative partners on SIPs and transportation plans, which
    are linked because motor vehicle emissions are a dominant element of
    SIPs in California and nationwide. Determining the emission and air
    quality impacts of motor vehicles is a major part of the CCOS effort.
        Heavy-duty trucks are known to have very different driving patterns
    than light duty cars and, despite smaller numbers, are responsible for
    a disproportionate amount of emissions (e.g. approximately 50 percent
    of California's mobile source NOX emissions). The continued
    growth of heavy-duty truck travel, including increases in inter-state
    and international goods movement, makes this element of the SIP
    transportation emission estimate critical. Thus, to support the
    region's new SIPs and to address the new NAS recommendations,
    improvement of the temporal and spatial distribution of heavy-duty
    truck emissions is needed. We propose funding of this activity at a
    level of $500,000. The funding will go to collect data that can be used
    to more accurately characterize heavy-duty truck emissions, including
    those resulting from NAFTA
        If we receive the funds requested this year to complete this
    research project, this will be our final request.
        Thank you very much for your consideration of our request.
                                     ______

        Prepared Statement of the Illinois Department of Transportation
        Mr. Chairman and members of the subcommittee, we appreciate the
    opportunity to submit testimony concerning the fiscal year 2008 U.S.
    Department of Transportation (U.S. DOT) appropriations on behalf of the
    Illinois Department of Transportation (IDOT) to the Senate
    Appropriations Subcommittee on Transportation, Housing and Urban
    Development, and Related Agencies. We thank Chairman Byrd and the
    members of the subcommittee for their past support of a strong Federal
    transportation program and for taking into consideration Illinois'
    unique needs.
        IDOT is responsible for the planning, construction, maintenance and
    coordination of highways, public transit, aviation, intercity passenger
    rail and freight rail systems in the State of Illinois. IDOT also
    administers traffic safety programs. Our recommendation for overall
    funding priorities and our requests for transportation funding for
    projects of special interest to Illinois are discussed below.
                                    highway
        Highway Obligation Limitation/RABA.--IDOT urges the subcommittee to
    set the obligation limitation for highway and highway safety programs
    at the guaranteed SAFETEA-LU level in fiscal year 2008 at $40.2
    billion--a $1.1 billion increase over the fiscal year 2007 level of
    $39.1 billion. This recommendation consists of the obligation level of
    $39.585 billion authorized in SAFETEA-LU plus the $631 million expected
    from the upward Revenue Aligned Budget Authority (RABA) adjustment.
    IDOT is aware of the implications of supporting a RABA increase when
    the long-term viability of the trust fund is in question. However, IDOT
    is more concerned with the Federal funding needed to address immediate
    highway and bridge deficiencies as noted in the recent U.S. DOT
    publication, 2006 Status of the Nation's Highways, Bridges, and
    Transit: Conditions & Performance Report. Overall, IDOT continues to
    support the SAFETEA-LU guarantees and funding firewalls as do other
    transportation advocates such as the American Association of State
    Highway and Transportation Officials (AASHTO) and the American Road and
    Transportation Builders Association (ARTBA). The full utilization of
    the additional RABA funds will allow further improvements to highway
    and highway safety programs.
        Rescission of Unobligated Highway Apportionments.--IDOT urges the
    subcommittee to suspend its practice of rescinding unobligated highway
    apportionments. Rescissions undermine the SAFETEA-LU principles of
    guaranteed funding and budgetary firewalls by withdrawing ``promised''
    Federal funding to offset increased non-transportation funding
    elsewhere. Moreover, the accumulated impact of numerous rescissions
    since fiscal year 2002 has exacted unanticipated programmatic
    consequences. With large scale rescissions, such as the one implemented
    in fiscal year 2007 for $3.471 billion, a State has less flexibility to
    shift funding toward unique State needs and to meet individual highway
    program priorities. For example, to more equitably soften the impact of
    the most recent rescission on categories such as CMAQ and Enhancements,
    IDOT found it necessary to withdraw from categories with current-year
    apportionment. Additionally, State transportation departments are being
    unduly pressured by various transportation interests to make
    rescissions based on that group's particular preference. In total,
    Illinois has rescinded $326 million in unobligated apportionments since
    the first rescission in fiscal year 2002.
        If the subcommittee finds the flexibility to earmark meritorious
    projects in existing discretionary SAFETEA-LU categories or outside the
    authorized categories, IDOT requests the following earmarks for
    highway, transit and rail funding:
      --I-55 Add Lanes Project.--IDOT requests a fiscal year 2008 earmark
            of $16.4 million to provide additional lanes for 14.5 miles in
            each direction on I-55 from I-80 to Weber Road in an effort to
            reduce congestion and improve safety.
      --Illinois Statewide Intelligent Transportation Systems (ITS)
            projects.--IDOT requests a fiscal year 2008 earmark of $14.5
            million in ITS equipment/technology funds to implement 3
            priority projects that will address congestion, improve safety,
            enhance security and improve the operating efficiencies of
            highway and transit systems.
      --Illinois Route 120 Corridor Initiative.--IDOT requests a fiscal
            year 2008 earmark of $12.56 million for the planning and
            construction of a traffic facility to provide access and
            congestion relief for an east-west route in central Lake
            County. The facility would address future land use and economic
            development.
      --ITS Vehicle Infrastructure Integration Test Bed for NE IL
            (MOTODRIVETM).-- IDOT requests a fiscal year 2008
            earmark of $2 million to utilize technology developed by
            Motorola to pursue the goals of the Vehicle Infrastructure
            Integration (VII) program and to assemble components and
            technologies that quickly, securely and reliably send large
            amounts of wireless data from transmitter devices, mounted on
            light poles along roadsides, to cars equipped with on-board
            devices.
      --Illinois Scenic Byways.--IDOT requests a fiscal year 2008 earmark
            of $1 million for informational materials needed to promote and
            add signage to the two new byways in Illinois. These materials
            will promote travel and tourism and foster economic
            development.
        Other IDOT Priorities--(to be earmarked under the: Subcommittee on
    Commerce, Justice and Science, and Related Agencies) Height
    Modernization.--IDOT requests a fiscal year 2008 earmark of $3.5
    million to establish a Height Modernization (HM) program in Illinois. A
    HM program will establish a network of survey benchmarks and a
    statewide high-resolution digital elevation model of the earth's
    surface based upon the updated network. Illinois currently ranks
    alongside the bottom 10 states with regard to the quality of its
    elevation information.
                                    transit
        Transit Obligation Limitation.--IDOT urges the subcommittee to set
    the obligation limitation for transit programs at the guaranteed
    SAFETEA-LU level in fiscal year 2008 at $9.731 billion--a $756 million
    increase over the fiscal year 2007 level of $8.975 billion.
        Bus and Bus Facilities.--IDOT, the Illinois Public Transportation
    Association and the Regional Transportation Authority (RTA) jointly
    request a Federal earmark of $31 million in fiscal year 2008 section
    5309 bus capital funds for Illinois. This joint request is a
    demonstration of our mutual interest in securing funding for essential
    bus capital needs throughout the State.
        The request will provide $5.3 million for downstate Illinois
    transit systems to purchase up to 36 buses and paratransit vehicles to
    replace overage vehicles and to comply with Federal mandates under the
    Americans with Disabilities Act. All of the vehicles scheduled for
    replacement are at or well beyond their design life. The request will
    also provide $12.6 million to undertake engineering, land acquisition
    or construction for five maintenance facilities and two transfer
    facilities that will enhance efficient operation of transit services.
        In northeastern Illinois, $12.9 million will be used to purchase up
    to 40 heavy-duty buses, 10 for Pace, RTA's suburban bus operator, and
    30 for the Chicago Transit Authority (CTA).
        Illinois transit systems need discretionary bus capital funds since
    regular formula funding is inadequate to meet all bus capital needs.
    IDOT believes that Illinois' needs to justify a much larger amount of
    funds than the State has received in recent years. Under SAFETEA-LU
    Illinois is expected to receive nearly 6 percent of the needs-based
    formula funds but Illinois has only received between 1 and 3 percent of
    appropriated bus capital funds in the past. RTA ranks third in the
    Nation in bus passenger trips, yet Illinois' share of bus capital has
    been far below shares received by other States with much less bus use.
        New Systems and Extensions--Chicago Transit Authority (CTA).--IDOT
    supports the CTA's request for an earmark totaling $40 million in New
    Starts funding to assist in upgrading the Ravenswood Brown Line. The
    match for these funds will be provided by IDOT.
        The funding requested for upgrading the Ravenswood Brown Line would
    continue construction to extend station platforms to handle longer
    trains that are needed to serve the increasing demand along this line.
    Lengthening all platforms to handle longer, 8-car trains, straightening
    tight S-curves that slow operations and selected yard improvements will
    increase capacity by 25 to 30 percent. The CTA is seeking $40 million
    in New Starts funds for fiscal year 2008. A FFGA for $245.5 million was
    executed in January 2004 for the project.
        New Systems and Extensions--MetroLink.--IDOT supports the Bi-State
    Development Agency's request for a Federal earmark of $50 million in
    fiscal year 2008 New Starts funding for extending the MetroLink light
    rail system in St. Clair County from Scott Air Force Base to MidAmerica
    Airport. The MetroLink system serves the St. Louis region in both
    Illinois and Missouri. MetroLink service has been a tremendous success
    and ridership has far exceeded projections. In addition, this new
    extension will provide employees the needed transportation to commute
    to a new industrial development that is to be located between Scott Air
    Force Base and MidAmerica Airport.
        Formula Grants.--IDOT urges the subcommittee to set appropriations
    for transit formula grant programs at levels that will allow full use
    of the anticipated Highway Trust Fund Mass Transit Account revenues.
    IDOT also supports utilizing general funds to supplement transit needs.
        In Illinois, Urbanized Area formula funds (section 5307) are
    distributed to the Regional Transportation Authority and its 3 service
    boards which provide approximately 600 million passenger trips per
    year. Downstate urbanized formula funds are distributed to 14 urbanized
    areas which provide approximately 30 million passenger trips per year.
        The Rural and Small Urban formula funds (section 5311) play a vital
    role in meeting mobility needs in Illinois' small cities and rural
    areas. IDOT urges the subcommittee to fully fund section 5311 at the
    SAFETEA-LU authorized level. Many small urbanized areas have raised
    expectations under SAFETEA-LU and therefore the full appropriation is
    sought. In Illinois, such systems operate in 60 counties and 11 small
    cities, carrying approximately 2.9 million passengers annually.
                                      rail
        Amtrak Appropriation.--IDOT supports Amtrak's request of $1.53
    billion in funding from general funds for fiscal year 2008 to cover
    capital, operating and debt service costs. Amtrak needs the full amount
    of their request to maintain existing nationwide operations. IDOT urges
    Congress to provide funds to continue current service until it develops
    a new national rail passenger policy and a clear plan for any changes
    to existing services as part of the congressional reauthorization of
    Amtrak. Chicago is a hub for Amtrak intercity service, and Amtrak
    operates 58 trains throughout Illinois as part of the Nation's
    passenger rail system, serving approximately 3.3 million passengers
    annually. Of the total, Illinois subsidizes 28 state-sponsored trains
    which provide service in 4 corridors from Chicago to Milwaukee, Quincy,
    St. Louis and Carbondale. Amtrak service in key travel corridors is an
    important component of Illinois' multimodal transportation network and
    continued Federal capital and operating support is needed.
        CREATE--Chicagoland Region Environmental and Transportation
    Efficiency Program.--IDOT requests a fiscal year 2008 earmark of $10
    million to support continued funding of the CREATE program that will
    improve the movement of freight through the Chicago region and will
    improve the overall efficiency of freight movements throughout the
    Nation.
      --Passenger Rail-Freight Congestion Relief.--IDOT requests a fiscal
            year 2008 earmark of $1 million for engineering for selected
            capital infrastructure improvements necessary to relieve
            passenger and freight train congestion on the three state-
            supported downstate corridors.
                                    aviation
        Airport Improvement Program Obligation Limitation.--IDOT supports a
    fiscal year 2008 Airport Improvement Program (AIP) obligation
    limitation that, despite any programmatic restructuring as offered
    under the President's proposed plan, will net at least the same level
    of funding for airports as under VISION-100. In addition, IDOT supports
    a reauthorization bill that provides consistent increases to the AIP
    obligation funding levels in the out-years similar to the $100 million
    per year increases authorized during the 4 years of VISION-100.
        Adequate AIP funding remains especially important for Small, Non-
    Hub, Non-primary, General Aviation and Reliever airports. While most
    Large/Medium Hub airports have been able to raise substantial amounts
    of funding with Passenger Facility Charges, the smaller airports are
    very dependent on the Federal AIP program. Airports must continue to
    make infrastructure improvements to safely and efficiently serve
    existing air traffic and the rapidly growing passenger demand. The most
    recent National Plan of Integrated Airport Systems (NPIAS) report
    identified $41.2 billion in airport development needs over a 5-year
    period (2007-2011), an annual average of $8.2 billion. More
    significantly, the Airports Council International-North America
    recently estimated that U.S. airport development costs (capital
    projects, terminal work, parking lots, etc.) will exceed $71.5 billion
    through 2009 (an annual average of $14.3 billion from 2005 through
    2009). Lower AIP obligation levels will mean less Federal funds for
    airport projects, thereby exacerbating the existing capital project
    funding shortfall.
        Essential Air Service Program (EAS).--IDOT supports an EAS program
    funded at a level that will enable the continuation of service at all
    current Illinois EAS points. Several Illinois airports, Decatur,
    Marion/Herrin and Quincy, currently receive annual EAS subsidies.
        Small Community Air Service Program.--IDOT supports funding for the
    Small Community Air Service Development Program at the full authorized
    fiscal year 2008 level of $35 million. In fiscal year 2006, Abraham
    Lincoln Capital Airport in Springfield, Illinois received $390,000
    under this program. Other airports in Illinois have received funding
    from this program in the past.
        This concludes my testimony. I understand the difficulty you face
    trying to provide needed increases in transportation funding. However,
    an adequate and well-maintained transportation system is critical to
    the Nation's economic prosperity and future growth. Your ongoing
    recognition of that fact and your support for the nation's
    transportation needs are much appreciated. Again, thank you for the
    opportunity to discuss Illinois' federal transportation funding
    concerns.
                                     ______

     Prepared Statement of the National Association of Railroad Passengers
        The National Association of Railroad Passengers strongly supports
    the Senate Budget Resolution level of $1.78 billion for Amtrak. This
    includes $100 million--likely to be administered by the Federal
    Railroad Administration--for a Federal matching program to support
    State corridor development work, and $50 million for station-related
    Americans with Disabilities Act work.
      --This is the third straight year that an Amtrak board composed
            exclusively of President Bush's appointees has supported
            significantly greater Federal investment in the Nation's
            passenger train system than the administration has requested.
      --The Bush Administration, like Amtrak and our Association, supports
            a Federal/State matching program for intercity passenger train
            service. But we oppose the administration's proposal to fund
            this by taking it from Amtrak's appropriation.
      --The administration's proposed budget of $800 million for Amtrak is
            unrealistic. Not only would it make it impossible to implement
            the program the administration proposed and funded for Federal/
            State corridor development, but it likewise would make it
            impossible to continue existing services.
     there is a strong case for growing the nation's passenger train system
        The public wants more rail service, and is increasingly impatient
    with the extent to which Federal transportation spending remains
    focused on highways and aviation, the least energy-efficient, most
    environmentally damaging forms of transportation (see section II), and
    the most costly. Here are three omens worth noting:
      --California A.B. 32 enacted last year imposes an economy-wide cap on
            greenhouse gas emissions, including from transportation,
            beginning in 2009.
      --The Institute for Public Policy Research, which Reuters
            characterized as ``a leading British think tank,'' urged
            requiring advertisements for flights or vacations that include
            flying to carry a tobacco-style health warning to remind people
            of the global warming crisis. ``The evidence that aviation
            damages the atmosphere is just as clear as the evidence that
            smoking kills,'' said IPPR Climate Change Chief Simon
            Retallack.
      --The long-term trend in the price of oil is up. ``This year, the
            world is going to use about 86 million barrels of oil per day.
            And if every oil well in the world were running, assuming 1.2
            percent production growth, we are producing around 88 million
            barrels a day. Reserves that we are putting on, in general,
            don't produce as fast as the reserves we are replacing . . .
            [The economies of India or China] may slow, but from a double-
            digit level to something that is still very high . . . The
            chance of demand going down for energy is remote to none.''--
            John Segner, Portfolio Manager, AIM Energy Fund (interview in
            Barron's, March 19, 2007).
        Current U.S. reliance on air transport for mass travel may well not
    be sustainable. We cannot assume the indefinite existence of
    ``bargain'' airlines or airfares, which depend heavily on cheap oil,
    given what we already know about oil supply and demand worldwide.
                               energy efficiency
        The Transportation Energy Data Book, published annually by Oak
    Ridge National Laboratory under contract to the U.S. Department of
    Energy, shows that Amtrak is 18 percent more energy efficient per
    passenger-mile than scheduled airlines and 17 percent more efficient
    than automobiles (2003 data, the most recent reported; a passenger-mile
    is one passenger transported one mile). These are actual figures based
    on total energy consumption by the systems, and load factors.
        General aviation (including corporate aircraft) is even less energy
    efficient. Oak Ridge reports that general aviation was 2.6 times (162
    percent) more energy intensive than certificated air carriers in 2001,
    the last year for which data are available; other modes are 2003 data:

                    BRITISH THERMAL UNITS PER PASSENGER-MILE
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
    Commuter Railroads.........................................       2,751
    Amtrak.....................................................       2,935
    Automobile.................................................       3,549
    Certificated air carriers..................................       3,587
    Light trucks (2-axle, 4-tire)..............................       7,004
    General aviation (2001)....................................      10,384
    ------------------------------------------------------------------------
    Lowest = most energy efficient.

        Amtrak's showing would be even more favorable with the benefit of
    adequate investment in rail infrastructure and rolling stock. The
    results above compare highways and aviation which have benefited from
    decades of investment by all levels of government while Amtrak depends
    on a largely inadequate and outdated rail network that government has
    consistently ignored. (We appreciate that the neglect would have been
    even worse but for the efforts of Congress.)
                  route cutting is not in the public interest
        Pressure to downsize Amtrak's already shrunken, minimal system even
    more is contrary to the public's need for high quality mobility
    choices. It is appropriate to increase the cost-effectiveness and on-
    time performance of the system, but further downsizing will not do
    this. Efforts to increase service and expand the route network would
    drive economies of scale that would improve economic efficiency and
    better serve the public need for safe, reliable and energy efficient
    mobility.
        None of the current routes is expendable. When considered in terms
    of the service Amtrak provides, the public makes heavy use of all
    existing routes; there are no ``empty trains.'' The current trend is
    positive. Travel on overnight trains as a group rose 3 percent in the
    first half of fiscal 2007 and yield (revenue per passenger-mile)
    climbed 4 percent compared with year-earlier figures. Comparing the
    entire fiscal 2006 with fiscal 2005, yield jumped 10 percent while
    passenger-miles fell only 3 percent despite major service disruptions
    caused by Hurricane Katrina. Amtrak is not ``giving away the store.''
    Congress's oversight should focus on year-long averages and not get
    distracted by individual fares offered selectively on the internet.
        Attempts to improve economic efficiency by forcing removal of the
    ``weakest routes'' have not been effective in the past and likely will
    continue to fail in the future because of ``network interdependencies''
    that affect both cost and revenue:
      --A significant proportion of passengers on overnight national
            network routes connect with other Amtrak routes. The
            elimination of one route takes revenue away from surviving
            routes;
      --The elimination of one route doesn't eliminate all of the costs
            allocated to it; many of those costs are just transferred to
            remaining routes.
      --Further tinkering with Amtrak's current route structure risks great
            damage to the system's usefulness to travelers both now and in
            the future, while doing little to reduce Amtrak's operating
            grant requirement (and possibly increasing it).
        The purpose of identifying ``weak'' routes should be only to focus
    management's attention on improving the attractiveness of the service
    and raising fare box recovery.
        It is important to measure performance with metrics that are both
    accurate and appropriate. For example, Amtrak reports separate
    financial results for the Sunset Limited and Texas Eagle. This creates
    the illusion that the Sunset has a loss per passenger mile nearly
    double that of the Eagle. In reality, the Sunset and Eagle run as a
    single combined train San Antonio-Los Angeles; it is impossible to
    segregate the revenue and cost into two separate trains. When treated
    as a single train, the ``net cost'' of operating Eagle/Sunset is in
    line with other overnight long distance routes. Elimination of the
    Sunset would significantly increase the ``net cost'' of the Eagle,
    producing either much higher Eagle costs or much lower revenue,
    depending on whether or not Amtrak continued the San Antonio-Los
    Angeles segment.
        ``Subsidy per passenger'' is not a standard measure for intercity
    travel because it ignores wide variations in trip lengths of different
    passengers. Consequently, it is not an economic measure but a statement
    of prejudice against passengers taking long trips, and against rural
    America. More reasonable measures include revenue-to-cost ratio,
    operating ratio (opposite of revenue-to-cost; frequently used in the
    railroad industry, loss per seat-mile and loss per passenger-mile.
        No matter how many routes get cut, there always will be another set
    of ``worst performing routes'' that become the next targets for
    elimination. The most effective strategy to improve Amtrak's utility
    and economic efficiency is for Amtrak to focus on increasing volume and
    revenues, not reducing or eliminating service.
                     overnight trains: a national treasure
        Here are some of the major reasons Congress should maintain and
    expand nationwide passenger train service. An expanded national network
    will provide:
      --Mobility for the one of every three Americans who does not drive.
      --Mobility for millions of Americans who cannot or do not want to
            fly, in major markets with affordable air fares and markets
            with little or no alternative public transportation.
      --An essential link between underserved rural communities and
            metropolitan areas.
      --A foundation for future rail development that facilitates start-up
            of shorter-distance intercity services and commuter rail
            operations into congested urban areas--both of which use some
            of the same tracks and/or facilities.
      --The only intercity passenger train service for people in most
            States. If all long-distance trains disappeared, the surviving
            system would serve just 21 States, and the network would
            consist of only four, isolated mini-networks.
      --Needed transportation capacity with minimum impact on the
            environment. Except in a few key corridors already at capacity,
            rail can increase its capacity at comparatively low cost by
            increasing train length or running more trains on existing
            infrastructure.
      --Greater public safety; rail is far safer than highways.
      --Enhanced national security both by increasing the energy efficiency
            of the Nation's transportation system and by giving travelers
            needed choices in emergencies.
      --On many routes, the best way to see the Nation's natural beauty and
            the only practical way for those who can't take long automobile
            trips.
                               shorter corridors
        The need for these services is increasingly well understood, helped
    most recently by strong ridership response to the frequencies Illinois
    added last fall on the lines linking Chicago with St. Louis, Quincy and
    Carbondale. For March, ridership on these lines was up 57 percent, 44
    percent and 75 percent, respectively, over March, 2006.
        States are eager to develop new passenger train services and will
    respond quickly when provided a Federal matching fund program. In some
    cases, like California, the need is for new equipment as ridership
    growth begins to exceed the capacity of available rolling stock. In
    other States, the issue is adding new lines. Thank you for considering
    our views.

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page

    All Aboard Washington, Prepared Statement of.....................   327
    Allard, Senator Wayne, U.S. Senator From Colorado:
        Prepared Statement of........................................   201
        Question Submitted by........................................   218
        Statements of...............................................55, 230
    American Association of Homes and Services for the Aging (AAHSA),
      Prepared Statement of the......................................   307
    American Association of Service Coordinators (AASC), Prepared
      Statement of the...............................................   294
    American Public Transportation Association, Prepared Statement of
      the............................................................   328

    Blakey, Hon. Marion C., Administrator, Federal Aviation
      Administration, Department of Transportation...................   221
        Prepared Statement of........................................   233
        Statement of.................................................   231
    Boardman, Hon. Joseph H., Administrator, Federal Railroad
      Administration, Department of Transportation...................    59
        Prepared Statement of........................................    60
        Questions Submitted to.......................................   101
    Bond, Senator Christopher S., U.S. Senator From Missouri:
        Opening Statements of..........................4, 52, 109, 178, 225
        Prepared Statements of.......................................6, 112
        Questions Submitted by................................165, 168, 169
    Brownback, Senator Sam, U.S. Senator From Kansas, Prepared
      Statement of...................................................     9

    Cabrera, Orlando J., Assistant Secretary, Office of Public and
      Indian Housing, Department of Housing and Urban Development....   175
    California Industry and Government Central California Ozone Study
      Coalition, Prepared Statement of the...........................   331
    Capital Metropolitan Transportation Authority, Prepared Statement
      of the.........................................................   316
    City of San Marcos, Texas, Prepared Statement of the.............   317
    Coalition of Northeastern Governors, Prepared Statement of the...   323

    Domenici, Senator Pete V., U.S. Senator From New Mexico,
      Questions Submitted by..................................101, 216, 288
    Donohue, Hon. Kenneth M., Inspector General, Office of Inspector
      General, Department of Housing and Urban Development.........107, 175
        Prepared Statement of........................................   121
        Questions Submitted to.......................................   168
        Statement of.................................................   119
    Dorgan, Senator Byron L., U.S. Senator From North Dakota,
      Questions Submitted by........................................40, 283

    Easter Seals, Prepared Statement of..............................   326

    Foothill Transit, Prepared Statement of..........................   321

    Illinois Department of Transportation, Prepared Statement of the.   332
    Institute of Makers of Explosives, Prepared Statement of the.....   309

    Jackson, Hon. Alphonso, Secretary, Office of the Secretary,
      Department of Housing and Urban Development....................   175
        Prepared Statement of........................................   182

    Kohl, Senator Herb, U.S. Senator From Wisconsin, Questions
      Submitted by...................................................   215
    Kummant, Alexander, President and Chief Executive Officer, Amtrak    49
        Prepared Statement of........................................    58
        Questions Submitted to.......................................    99
        Statement of.................................................    56

    Lautenberg, Senator Frank R., U.S. Senator From New Jersey:
        Prepared Statement of........................................     8
        Questions Submitted by......................................43, 215
        Statements of..........................................54, 181, 228

    Montgomery, Hon. Brian D., Assistant Secretary for Housing and
      Federal Housing Commissioner, Federal Housing Administration,
      Department of Housing and Urban Development....................   107
        Prepared Statement of........................................   116
        Questions Submitted to.......................................   165
        Statement of.................................................   114
    Murray, Senator Patty, U.S. Senator From Washington:
        Opening Statements of..........................1, 49, 107, 175, 221
        Questions Submitted by.............................38, 99, 101, 102

    National Affordable Housing Management Association (NAHMA),
      Prepared Statement of the......................................   298
    National Alliance To End Homelessness, Prepared Statement of the.   304
    National Association of Mortgage Brokers, Prepared Statement of
      the............................................................   291
    National Association of Railroad Passengers, Prepared Statement
      of the.........................................................   335
    National Council of State Housing Agencies, Prepared Statement of
      the............................................................   300
    National Low Income Housing Coalition, Prepared Statement of the.   302
    New York State Department of Transportation, Prepared Statement
      of the.........................................................   324

    Peters, Hon. Mary E., Secretary, Office of the Secretary,
      Department of Transportation...................................     1
        Prepared Statement of........................................    12
        Statement of.................................................    10
    Poole, Joanne, Committee Liaison, National Association of
      Realtors.......................................................   137
        Prepared Statement of........................................   138

    Robbins, John M., Chairman, Mortgage Bankers Association.........   145
        Prepared Statement of........................................   146

    Scheinberg, Phyllis F., Assistant Secretary for Budget and
      Programs, Office of the Secretary, Department of Transportation     1
    Scovel, Hon. Calvin L., III, Inspector General, Department of
      Transporta-
      tion...........................................................   221
        Prepared Statement of........................................   242
        Statement of.................................................   240
    Serlin, Robert, President, Rail Infrastructure Management, LLC...    77
        Prepared Statement of........................................    79
        Questions Submitted to.......................................   104
    Shear, William B., Director, Financial Markets and Community
      Investment, Government Accountability Office...................   107
        Prepared Statement of........................................   129
        Questions Submitted to.......................................   169
        Statement of.................................................   128
    Specter, Senator Arlen, U.S. Senator From Pennsylvania:
        Questions Submitted by.......100, 102, 103, 104, 168, 172, 216, 287
        Statement of.................................................    72
    Stevens, Senator Ted, U.S. Senator From Alaska:
        Question Submitted by........................................    46
        Statement of.................................................   229

    Tornquist, David, Assistant Inspector General for Competition and
      Economic Analysis, Office of the Inspector General, Department
      of Transportation..............................................    63
        Prepared Statement of........................................    65
        Questions Submitted to.......................................   102

    University Corporation for Atmospheric Research (UCAR), Prepared
      Statement of the...............................................   319

    Wytkind, Edward, President, Transportation Trades Department,
      AFL-CIO........................................................    73
        Prepared Statement of........................................    75
        Question Submitted to........................................   103

                                 SUBJECT INDEX

                                  ----------

                                     AMTRAK

                                                                       Page

    Additional Committee Questions...................................    98
    Amtrak:
        Operating Costs..............................................    87
        Service Terminations.........................................    98
        Status Update................................................    56
    Fiscal Year 2008 Funding Request.................................    57
    Multi-Year Capital Investment Plan and the Northeast Corridor....    89
    State Matching Grants............................................    95

                  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                         Federal Housing Administration

    Additional Committee Questions...................................   165
    Asset Control Area Program.......................................   166
    Borrower Benefits of FHA.........................................   141
    Continued Support................................................   127
    Continuing OIG Areas of Concern..................................   124
    Costs of Implementing Risk-Based Pricing System..................   167
    Downpayment Assistance Loans.....................................   165
    Fair Housing Concerns with Risk-Based Pricing....................   167
    FHA:
        Current Reestimated Subsidy Costs Are Generally Less
          Favorable Than its Original Estimates......................   136
        Fraud......................................................167, 168
        Has Not Implemented Sufficient Standards and Controls to
          Manage Financial Risks of Loans With Down-Payment
          Assistance.................................................   132
        Loan Limits..................................................   168
        Multifamily Programs.........................................   154
        Reform Proposals.............................................   139
        Risk.........................................................   122
        Record.......................................................   148
        Structure..................................................166, 168
    High-Risk Status of FHA..........................................   169
    How Else Can FHA Assist in Achieving Homeownership?..............   144
    Impact of Subprime Market........................................   166
    In Addition to FHA, the U.S. Department of Housing and Urban
      Development (HUD) Offers These Resources.......................   144
    Legislative Activity in the 109th Congress.......................   151
    Managing Risk....................................................   166
    Need for FHA.....................................................   139
    Other FHA Issue--Treatment of FHA Non-Conveyable Properties......   154
    Practices That Other Mortgage Institutions Use Could Help FHA
      Manage Risks from Low- or No-Down-Payment Products.............   134
    Realtors and FHA--Working Together To Help People Fulfill the
      American Dream.................................................   143
    RESPA Reform.....................................................   167
    Risk-Based Pricing...............................................   168
    Shopping for a Mortgage? FHA Improvements Benefit You............   143
    Solvency and Strength of FHA.....................................   142
    The Challenge....................................................   121
    The FHA Budget Forecast for 2008.................................   149
    The Need for FHA Today and Tomorrow..............................   148
    The Record.......................................................   125
    The Way FHA Developed TOTAL Limits the Scorecard's Effectiveness
      in Assessing the Default Risk of Borrowers.....................   135
    There Are Several Other Features Worth Knowing About an FHA-
      Insured Mortgage...............................................   144
    Unleashing FHA's Potential.......................................   149
    What About Eligibility?..........................................   144
    What Are the Benefits of an FHA Mortgage?........................   143
    What is FHA Mortgage Insurance?..................................   143

                            Office of the Secretary

    Additional Committee Questions...................................   214
    Asset Management.................................................   216
    Assisting the Most Families--Section 8...........................   185
    At-Risk Republicans..............................................   216
    Combating Homelessness...........................................   184
    Continuing the Fight Against Housing Discrimination..............   187
    Counseling Our Way to Greater Homeownership......................   184
    Cuts in Section 811 Funding......................................   216
    Cuts in the Operating Fund.......................................   215
    Elderly and Persons With Disabilities............................   185
    FHA Modernization................................................   183
    Funding for Public Housing.......................................   215
    Healthy Homes and Lead Hazard Control............................   187
    HOPE VI..........................................................   216
    Housing Opportunities for Persons With Aids (HOPWA)..............   186
    Human Capital....................................................   218
    Increasing Access to Affordable Housing..........................   184
    Increasing Operational Efficiency................................   187
    Indian Housing Loan Guarantee Fund...............................   185
    Making Improvements to Public Housing............................   185
    Management Accountability of Public Housing......................   185
    Multifamily Mortgage Insurance Premium Increase..................   211
    Promoting Economic and Community Development Through Homeowner-
      ship...........................................................   183
    Public Housing Funding...........................................   185
    Public Law 109-234--Requirement for Affordable Rental Housing....   205
    Reforming the Community Development Block Grant Program..........   186
    Sec. 202/811 Funding.............................................   215
    Self-Help Homeownership Opportunity Program......................   184
    Unobligated and Unexpended Balances..............................   211
    Using HOME to Help More Low-income Families Own Their Own Homes..   183

                          DEPARTMENT OF TRANSPORTATION

                        Federal Aviation Administration

    Acquisition and Contracting Issues...............................   258
    Additional Committee Questions...................................   282
    Addressing Attrition in FAA's Critical Workforces................   252
    Air Traffic:
        Controller:
            Off-the-Street Hiring--Impacts on UND....................   284
            Staffing...............................................261, 263
        Organization.................................................   234
    Airport Improvement Program (AIP)................................   264
        Funding......................................................   283
    Airspace Redesign................................................   268
        Project......................................................   287
    ASDE-X...........................................................   269
    Borrowing Authority..............................................   282
    Controller Staffing..............................................   263
    Controlling Labor Costs/Pay-for-Performance--Human Capital Reform   238
    Delays in the NAS................................................   265
    Determining the Appropriate Amount of Airport Funding............   255
    Environmental Stewardship........................................   238
    FAA:
        Account Restructuring........................................   265
        Fiscal Year 2008 Budget......................................   244
    Fiscal Year 2008:
        Budget.......................................................   233
        Inspector Funding............................................   275
        Request......................................................   232
    Flight Plan 2007-2011............................................   236
    Flight Service Stations..........................................   277
    FTI............................................................278, 280
    Funding the Inspector Workforce..................................   274
    Grants in Aid for Airports (AIP).................................   235
    Improved Financial Management Performance........................   239
    Increased Safety.................................................   236
    Increasing Capacity..............................................   237
    Inspector Staffing...............................................   275
    International Leadership.........................................   237
    Keeping Existing Modernization Efforts on Track and Reducing
      Risks With NextGen.............................................   246
    Labor Issues.....................................................   266
    Newark Liberty Airport Procedures................................   268
    NextGen and Capital Needs........................................   234
    Organizational Excellence........................................   238
    Outsourcing to Non-certified Facilities..........................   275
    PHL Air Traffic Controller Issues................................   288
    Re-baselining Capital Projects...................................   259
    Research, Engineering, and Development (R, E, & D)...............   235
    Roswell, New Mexico Airport......................................   290
    Safety:
        And Operations...............................................   234
        Inspectors...................................................   273
    SAVES............................................................   239
    Security.........................................................   238
    Small Community Air Service Development Program..................   284
    Smarter Capital Investment Choices and Improved Performance......   239
    SWIM and ADS-B...................................................   280
    Taos, New Mexico Airport.........................................   288
    The NextGen Financing Reform Act of 2007.........................   231
    UAS Access to the National Airspace..............................   286
    Use of Non-certificated Repair Facilities........................   276

                        Federal Railroad Administration

    Additional Committee Questions...................................    98
    Administration Fiscal Year 2008 Budget Proposal..................    59
    Amtrak:
        On-Time Performance..........................................    94
        Operating Efficiency Grants..................................    61
    Capital Grants...................................................    61
    Intercity Passenger Rail Grant Program...........................    62
    Separation Proposal..............................................    93
    State Matching Proposal..........................................    59
    Volume: Amtrak vs. Freight Railroads.............................    97

                        Office of the Inspector General

    Amtrak Reform Efforts............................................    64
    Additional Committee Questions...................................    98
    Critical Decisions are Needed Before Implementing a State Capital
      Grant Program..................................................    70
    DOT IG Fiscal Year 2008 Amtrak Budget Proposal...................    63
    Despite Improvements, Amtrak's Financial Condition Remains
      Precarious.....................................................    67
    Increased Investment in Intercity Passenger Rail Must Go Hand-in-
      Hand With Improved Operating Efficiencies......................    70
    OIG Concerns With State Matching Proposal........................    64
    Reauthorization is a Better Course for Reforming Intercity
      Passenger Rail Service.........................................    71
    The Appropriations Process Can Provide Needed Fiscal Discipline
      Over Amtrak's Operating Losses While Amtrak Continues To
      Address Critical Capital Needs.................................    69

                            Office of the Secretary

    Additional Committee Questions...................................    37
    Air Traffic Control..............................................    18
    Amtrak...............................................19, 22, 38, 40, 43
    Aviation.........................................................    40
    Captive Shippers.................................................    42
    Congestion Relief............................................11, 20, 38
    Corporate Average Fuel Economy (CAFE)............................    31
    Denver Southeast Corridor Light Rail Project (T-REX).............    23
    Essential Air Service Program....................................    25
    FAA:
        Financial Management.........................................    29
        Reauthorization..........................................11, 17, 26
    Fewer Air Traffic Controllers....................................    44
    Funding:
        For Congestion Mitigation....................................    32
        For Transit Projects.........................................    43
        Transportation:
            Investments..............................................    11
            Safety Programs..........................................    14
    Future Funding of the Highway Trust Fund.........................    37
    Highway:
        Fatality Rate................................................    15
        Trust Fund...................................................    16
            Revenues.................................................    31
    Indian Reservation Roads.........................................    46
    Intercity Passenger Rail and Transit.............................    32
    Mass Transit and Congestion Relief...............................    34
    Motorcycle Safety................................................    39
    Nationwide Differential Global Positioning System................    41
    Oversight and Control Over FAA Funding...........................    28
    Primary Safety Belt Laws.........................................    30
    Proposed Aviation Fee Structure..................................    27
    Rail Safety......................................................    35
    Reports to Congress..............................................    45
    System Performance...............................................    23
    Transit New Starts and Small Starts..............................24, 25
    Transportation Safety............................................    10
    Use of Cell Phones During Flights................................    20

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