[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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                      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.
---------------------------------------------------------------------------
    \2\ Source: Inside Mortgage Finance, March 2, 2007.
---------------------------------------------------------------------------
    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.
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    \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.
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    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.
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    \6\ Fiscal year 2008 PHMSA Budget Submission, page 44.
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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.
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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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