    [Senate Hearing 113-313]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 113-113

    TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES
                      APPROPRIATIONS FOR FISCAL YEAR 2014

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

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                        ONE HUNDRED THIRTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

                               H.R. 2610/S. 1243

    AN ACT MAKING APPROPRIATIONS FOR THE DEPARTMENTS OF TRANSPORTATION AND
    HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES FOR THE FISCAL YEAR
               ENDING SEPTEMBER 30, 2014, AND FOR OTHER PURPOSES

                                   __________

                  Department of Housing and Urban Development
                          Department of Transportation
                           Nondepartmental Witnesses

                                   __________

             Printed for the use of the Committee on Appropriations

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       Available via the World Wide Web: http://www.gpo.gov/fdsys/browse/
            committee.action?chamber=senate&committee=appropriations

                                   __________

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                          COMMITTEE ON APPROPRIATIONS

                   BARBARA A. MIKULSKI, Maryland, Chairwoman
    PATRICK J. LEAHY, Vermont            RICHARD C. SHELBY, Alabama, Vice
    TOM HARKIN, Iowa                         Chairman
    PATTY MURRAY, Washington             THAD COCHRAN, Mississippi
    DIANNE FEINSTEIN, California         MITCH McCONNELL, Kentucky
    RICHARD J. DURBIN, Illinois          LAMAR ALEXANDER, Tennessee
    TIM JOHNSON, South Dakota            SUSAN M. COLLINS, Maine
    MARY L. LANDRIEU, Louisiana          LISA MURKOWSKI, Alaska
    JACK REED, Rhode Island              LINDSEY GRAHAM, South Carolina
    FRANK R. LAUTENBERG, New Jersey \1\  MARK KIRK, Illinois
    MARK L. PRYOR, Arkansas              DANIEL COATS, Indiana
    JON TESTER, Montana                  ROY BLUNT, Missouri
    TOM UDALL, New Mexico                JERRY MORAN, Kansas
    JEANNE SHAHEEN, New Hampshire        JOHN HOEVEN, North Dakota
    JEFF MERKLEY, Oregon                 MIKE JOHANNS, Nebraska
    MARK BEGICH, Alaska                  JOHN BOOZMAN, Arkansas

                       Charles E. Kieffer, Staff Director
                 William D. Duhnke III, Minority Staff Director
                                     ------

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

                       PATTY MURRAY, Washington, Chairman
    BARBARA A. MIKULSKI, Maryland        SUSAN COLLINS, Maine
    RICHARD J. DURBIN, Illinois          RICHARD C. SHELBY, Alabama
    PATRICK J. LEAHY, Vermont            LAMAR ALEXANDER, Tennessee
    TOM HARKIN, Iowa                     LINDSEY GRAHAM, South Carolina
    DIANNE FEINSTEIN, California         MARK KIRK, Illinois
    TIM JOHNSON, South Dakota            DANIEL COATS, Indiana
    FRANK R. LAUTENBERG, New Jersey \1\  ROY BLUNT, Missouri
    MARK PRYOR, Arkansas                 JERRY MORAN, Kansas
    JACK REED, Rhode Island              JOHN BOOZMAN, Arkansas

                               Professional Staff

                                  Alex Keenan
                              Meaghan L. McCarthy
                                 Rachel Milberg
                                  Dabney Hegg
                          Heideh Shahmoradi (Minority)
                             Ken Altman (Minority)
                           Jason Woolwine (Minority)
                            Rajat Mathur (Minority)

                             Administrative Support

                                   Dan Broder

    ----------
        \1\ Died on June 3, 2013.

                                C O N T E N T S

                                  ----------

                            Thursday, April 11, 2013

                                                                       Page

    Department of Housing and Urban Development: Office of the
      Secretary......................................................     1

                            Thursday, April 18, 2013

    Department of Transportation:
        Federal Aviation Administration..............................    51
        Office of Inspector General..................................    51

                             Tuesday, June 4, 2013

    Department of Housing and Urban Development:
        Federal Housing Administration...............................   125
        Office of Inspector General..................................   125
    Nondepartmental Witnesses........................................   185

    TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES
                      APPROPRIATIONS FOR FISCAL YEAR 2014

                                  ----------

                            THURSDAY, APRIL 11, 2013

                                           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, Collins, Coats, and Blunt.

                  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                            Office of the Secretary

    STATEMENT OF HON. SHAUN DONOVAN, SECRETARY

                   opening statement of senator patty murray

        Senator Murray. Good morning. The subcommittee will come to
    order.
        This morning, we welcome Secretary Donovan to the
    subcommittee to discuss the President's fiscal year 2014 budget
    request for the Department of Housing and Urban Development
    (HUD).
        As we begin our discussion of next year's budget, we have
    to really acknowledge where we are today. Because of the
    unwillingness of some in Congress to compromise on fair and
    balanced deficit reduction, we are now living with
    sequestration and the arbitrary cuts to Federal spending that
    it requires.
        Some here in Washington, DC, have claimed that the impact
    is minimal. That is not the story that people all across the
    country who have to live with sequestration's consequences are
    telling.
        The truth is these cuts are having an impact. And in so
    many cases, it is an impact that is being felt by the most
    vulnerable in our society.
        The cut to HUD's section 8 voucher program, for example, is
    more than $938 million, forcing housing authorities to make
    difficult choices to stay within their reduced budgets.
        On the ground, that means tens of thousands of fewer
    vouchers to help our low-income families find safe, affordable
    housing.
        In my home State of Washington, the King County Housing
    Authority announced it will not be reissuing vouchers, leaving
    our low-income Washington families without access to affordable
    housing. Stephen Norman, who is the King County Housing
    Authority director, said immediately after he was forced to
    make these cuts that, ``Because rents are so high, many of
    these families may, quite literally, find themselves out on the
    street as a result of these arbitrary cuts.''
        They are not alone. Many housing authorities across the
    country are being forced to make similar decisions.
        In other communities, families that were in the process of
    finding a place to live after spending months or years on a
    waiting list have been told their voucher has been withdrawn.
        They are losing hope and relief of finally having access to
    affordable housing. Instead, they are left with frustration and
    uncertainty.
        Those families are paying the price for the fact that
    Washington, DC, continues to lurch from crisis to crisis
    instead of compromising around a balanced deficit reduction
    plan.
        As we continue to debate the future of the Federal budget,
    they are a clear reminder that our decisions have consequences,
    because this debate is about more than just numbers, it is
    about people's lives and the Nation's values.
        This debate is also occurring at a critical time for our
    economy. After struggling through the great recession, the
    economy is finally growing. But recent jobs reports highlight
    how fragile our recovery is and that we cannot afford to push
    off the hard choices a budget deal requires.
        Our focus needs to be on creating jobs today, while laying
    a strong foundation for the future.
        A responsible plan will reduce the Nation's deficit. But it
    cannot be at the expense of the most vulnerable or investments
    in things like infrastructure and education that are essential
    for a strong economy.
        The budget we recently passed in the Senate provides a path
    forward that balances responsible spending cuts with necessary
    investments. And I look forward to working with my colleagues
    in both the House and the Senate to try to enact a responsible
    budget compromise.
        This will require hard choices on all sides, but the
    American people expect action.
        So as we continue to work on the budget, we also have to
    begin our work on the fiscal year 2014 appropriations bills.
    And today, this subcommittee begins its work by examining HUD's
    budget request.
        The majority of HUD's budget supports a critical part of
    the Nation's safety net--housing assistance. This includes
    funding for section 8 vouchers, project-based section 8, public
    housing, and homeless assistance grants.
        These programs have long provided low-income Americans with
    safe, affordable housing and shelter in time of crisis. These
    programs are even more important today as families struggle to
    find affordable housing.
        According to HUD's recent report on the worst-case housing
    needs, in 2011, there were over 8.5 million low-income renters
    who spent more than 50 percent of their income on housing,
    lived in severely substandard housing, or both.
        Perhaps even more troubling is the fact that this number
    has grown by 43.5 percent since 2007.
        As we struggle to address the growing housing needs with
    limited resources, Federal programs must be smarter and more
    agile. Neither the taxpayers nor the millions of people who
    rely on these programs can afford waste or inefficiency.
        So it is incumbent upon HUD and this subcommittee to ensure
    accountability. We have to look for ways to improve program
    oversight and delivery by ensuring people are following the
    rules, eliminating outdated regulations, streamlining programs,
    and improving coordination across Government programs to make
    the best use of scarce resources.
        Improving Federal programs goes beyond ensuring compliance.
    It also means focusing on outcomes.
        Successful housing programs are those that create new
    opportunities for their residents so they can improve their
    lives and those of their children.
        In Washington State, I have seen exciting partnerships
    among housing authorities, schools, community colleges, and
    employers designed to reduce poverty and its lasting impacts.
        These partnerships are built on an understanding that
    housing can and should do more than meet the basic need for
    shelter.
        Housing in strong, safe neighborhoods with access to good
    schools, jobs, services, and transportation can help transform
    people's lives.
        The President's budget includes an initiative called
    Ladders to Opportunity, which is focused on creating jobs,
    attracting private investment, improving educational outcomes,
    and increasing economic activity in high-poverty communities
    across the Nation.
        Several proposals in HUD's budget support this initiative,
    including Choice Neighborhoods, the Rental Assistance
    Demonstration, and the Neighborhood Stabilization Initiative.
        In addition, the budget includes a new pilot program to
    help address the needs of the growing low-income elderly
    population, funding to combat mold in Indian country, and
    expansion of the successful Jobs-Plus program for public
    housing residents.
        While all of these proposals address important issues
    facing urban and rural communities across the country, we must
    evaluate both their budgetary cost and HUD's capacity to take
    on new initiatives.
        HUD cannot effectively manage new initiatives at the cost
    of the performance and oversight of their existing programs.
        The Department must improve its oversight of public housing
    authorities and other grantees; deliver on the needed
    investments in its information technology (IT) systems; and
    continue to strengthen the Federal Housing Administration's
    (FHA) Mutual Mortgage Insurance (MMI) Fund, which the budget
    anticipates needing to draw on taxpayer funds for the first
    time in its history.
        As our housing market continues its recovery, now is the
    time to be thinking of the future of the Nation's housing
    policy.
        This conversation is appropriately focused on reforming our
    housing finance system to ensure a strong housing market,
    supported primarily by the private market. But this
    conversation must also address the future of affordable rental
    housing.
        Recently, the Bipartisan Policy Center's Housing Commission
    released recommendations for the future of housing policy. My
    friend, former Senator Kit Bond, was a member. Their
    recommendations support homeownership and the need to reform
    our Nation's housing finance system.
        The commission also reaffirmed the importance of affordable
    housing. Its recommendations provide a very good foundation for
    beginning the discussion of our Nation's housing policy, which
    I look forward to continuing today.

                               PREPARED STATEMENT

        And with that, I will turn it over to my partner, Senator
    Collins.
        [The statement follows:]
                   Prepared Statement of Senator Patty Murray
        The subcommittee will come to order. This morning we welcome
    Secretary Donovan to the subcommittee to discuss the President's fiscal
    year 2014 budget request for the Department of Housing and Urban
    Development (HUD). As we begin our discussion of next year's budget, we
    must acknowledge where we are today.
                 sequestration's impact on the most vulnerable
        Because of the unwillingness of some in Congress to compromise on
    fair and balanced deficit reduction, we are now living with
    sequestration and the arbitrary cuts to Federal spending it requires.
        And while some here in Washington, DC, have claimed that the impact
    is minimal, that's not the story that people all across the country who
    have to live with sequestration's consequences are telling. The truth
    is these cuts are having an impact. And in so many cases it's an impact
    that's being felt by the most vulnerable in our society.
        The cut to HUD's section 8 voucher program, for example, is more
    than $938 million, forcing housing authorities to make difficult
    choices to stay within their reduced budgets. On the ground, this means
    tens of thousands of fewer vouchers to help low-income families find
    safe, affordable housing.
        In my home State of Washington, the King County Housing Authority
    announced that it will not be re-issuing vouchers, leaving low-income
    Washington families without access to affordable housing. Stephen
    Norman, the King County Housing Authority director, said immediately
    after he was forced to make these cuts that ``Because rents are so
    high, many of these families may, quite literally, find themselves out
    on the street as a result of these arbitrary cuts.''
        And they are not alone. Many housing authorities across the country
    are being forced to make similar decisions. In other communities,
    families that were in the process of finding a place to live after
    spending months or years on a waiting list have been told that their
    voucher has been withdrawn. They are losing the hope and relief of
    finally having access to affordable housing. Instead they are left with
    frustration and uncertainty. These families are paying the price for
    the fact that Washington, DC, continues to lurch from crisis to crisis
    instead of compromising around a balanced deficit reduction plan. As we
    continue to debate the future of the Federal budget, they are a clear
    reminder that our decisions have consequences.
        Because this debate is about more than just numbers, it is about
    people's lives and the Nation's values. This debate is also occurring
    at a critical time for our economy. After struggling through the Great
    Recession, the economy is finally growing. But recent jobs reports
    highlight how fragile our recovery is and that we cannot afford to push
    off the hard choices a budget deal requires.
        Our focus needs to be on creating jobs today, while laying a strong
    foundation for the future. A responsible plan will reduce the Nation's
    deficit. But it cannot be at the expense of the most vulnerable or
    investments in things like infrastructure and education that are
    essential for a strong economy.
        The budget we recently passed in the Senate provides a path forward
    that balances responsible spending cuts with necessary investments. I
    look forward to working with my colleagues in both the House and Senate
    to try to enact a responsible budget compromise. This will require hard
    choices on all sides, but the American public expects action.
        As we continue work on the budget, we must also begin our work on
    the fiscal year 2014 appropriations bills. And today, this subcommittee
    begins its work by examining HUD's budget request.
        The majority of HUD's budget supports a critical part of the
    Nation's safety net--housing assistance. This includes funding for:
      --section 8 vouchers;
      --project-based section 8;
      --public housing; and
      --homeless assistance grants.
        These programs have long provided low-income Americans with safe,
    affordable housing and shelter in times of crises. These programs are
    even more important today as families struggle to find affordable
    housing.
        According to HUD's recent report on the worst case housing needs,
    in 2011, there were over 8.5 million low-income renters who spent more
    than 50 percent of their income on housing, lived in severely
    substandard housing, or both. Perhaps even more troubling is the fact
    this number has grown by 43.5 percent since 2007.
                    improving performance and accountability
        As we struggle to address the growing housing needs with limited
    resources, Federal programs must be smarter and more agile. Neither the
    taxpayers nor the millions of people who rely on these programs can
    afford waste or inefficiency. So it is incumbent upon HUD and this
    subcommittee to ensure accountability. We must look for ways to improve
    program oversight and delivery by:
      --Ensuring people are following the rules;
      --Eliminating outdated regulations;
      --Streamlining programs; and
      --Improving coordination across Government programs to make the best
            use of scarce resources.
        Improving Federal programs goes beyond ensuring compliance. It also
    means focusing on outcomes. Successful housing programs are those that
    create new opportunities for their residents so that they can improve
    their lives and those of their children.
        In Washington State, I have seen exciting partnerships among:
      --Housing authorities;
      --Schools;
      --Community colleges; and
      --Employers designed to reduce poverty and its lasting impacts.
        These partnerships are built on an understanding that housing can
    and should do more than meet the basic need for shelter. Housing in
    strong, safe neighborhoods with access to good schools, jobs, services,
    and transportation can help transform people's lives. The President's
    budget includes an initiative called ``Ladders to Opportunity'', which
    is focused on:
      --Creating jobs;
      --Attracting private investment;
      --Improving educational outcomes; and
      --Increasing economic activity in high poverty communities across the
            Nation.
        Several proposals in HUD's budget support this initiative,
    including:
      --Choice Neighborhoods;
      --The Rental Assistance Demonstration; and
      --The Neighborhood Stabilization Initiative.
        In addition, the budget includes a new pilot program to help
    address the needs of the growing low-income elderly population, funding
    to combat mold in Indian Country, and expansion of the successful Jobs-
    Plus program for public housing residents.
        While all of these proposals address important issues facing urban
    and rural communities across the country, we must evaluate both their
    budgetary cost and HUD's capacity to take on new initiatives.
        HUD cannot effectively manage new initiatives at the cost of the
    performance and oversight of existing programs. The Department must:
      --Improve its oversight of public housing authorities and other
            grantees;
      --Deliver on the needed investments in its IT systems; and
      --Continue to strengthen FHA's Mutual Mortgage Insurance Fund, which
            the budget anticipates needing to draw on taxpayer funds for
            the first time in its history.
        As our housing market continues its recovery, now is the time to be
    thinking of the future of the Nation's housing policy. This
    conversation is appropriately focused on reforming our housing finance
    system to ensure a strong housing market, supported primarily by the
    private market. But this conversation must also address the future of
    affordable rental housing.
        Recently, the Bipartisan Policy Center's Housing Commission
    released recommendations for the future of housing policy. My friend,
    former Senator Kit Bond, was a member. Their recommendations support
    homeownership and the need to reform our Nation's housing finance
    system.
        The Commission also reaffirmed the importance of affordable
    housing. Its recommendations provide a good foundation for beginning
    the discussion of our Nation's housing policy, which I look forward to
    continuing today.
        With that I turn it over to my partner, Senator Collins.

                     STATEMENT OF SENATOR SUSAN M. COLLINS

        Senator Collins. Thank you, Madam Chairman.
        First of all, let me say that I am delighted to be working
    with you once again this year, as we start the fiscal year 2014
    appropriations process under the new leadership of both
    Chairman Mikulski and Vice Chairman Shelby, as well as the
    members of this subcommittee, including our colleagues, Senator
    Coats and Senator Blunt, who have joined us today. I am always
    glad to see strong representation on the Republican side of the
    dais here.
        Mr. Secretary, it is also a great pleasure to see you
    again. I am very happy that you are apparently going to be
    staying on in the second administration, at least for a while,
    since I have found you to be a real straight-shooter and
    dedicated to improving housing opportunities for the people of
    this country. And I look forward to continuing to work with
    you.
        Obviously, we still have very serious budget issues to deal
    with. And we must find a careful balance to ensure that we deal
    with the ongoing unsustainable $16.7 trillion debt, while
    providing housing for our most vulnerable citizens.
        As we begin to construct this spending bill, we continue to
    face difficult decisions given these fiscal constraints.
    Sequestration is going to make some of these decisions even
    tougher.
        I am concerned for the Maine housing authority directors,
    with whom I recently met, who told me they are being forced to
    reduce spending at the expense of families in need. Some of
    them told me that they were actually turning back vouchers
    because they did not have sufficient administrative funds. And
    that certainly is of great concern.
        Yet, even though sequestration cuts have already taken
    effect, the deficit continues to rise. The budget that HUD has
    submitted is $47.6 billion for fiscal year 2014 and an increase
    of nearly $4.2 billion, or 6.67 percent, over the fiscal year
    2013 sequestration levels.
        What would be helpful to me today, however, is to have you
    describe the total resources that are available to HUD,
    including offsetting receipts, and to give us a comparison to
    the pre-sequestration levels, as well. And I understand that
    you are prepared to do that.
        The vast majority of this funding will support renewals for
    rental and homelessness assistance. The budget also provides
    for investment to revitalize neighborhoods and support economic
    development initiatives in communities throughout the country.
        As we prepare the budget, it is critical that we address
    the ongoing challenges with homelessness, which remains a
    personal top priority of mine.
        Chairman Murray and I continue to share this commitment,
    particularly for our Nation's veterans. One out of every six
    men and women in homeless shelters are veterans. And
    unfortunately, veterans are 50 percent more likely to fall into
    homelessness compared to other Americans.
        I am pleased that the budget continues funding for HUD's
    Veterans Affairs Supportive Housing, the HUD-VASH program, at
    $75 million. This level of funding, I am told, will allow us to
    serve an additional 10,000 veterans.
        And it is important to note that this program is working,
    that veterans' homelessness has fallen, and it fell by nearly
    7.2 percent from 2011 to 2012. That demonstrates that programs
    like this work.
        And that needs to be our focus. We need to focus like a
    laser on what kinds of housing programs work, give us the
    biggest bang for the buck, and what kind really have outlived
    their usefulness, are not expansive, and, most of all, are not
    effective in serving families in need.
        In addition to programs that serve the homeless, HUD
    provides important support for affordable rental housing.
        Another important issue which we discussed at length is the
    oversight and monitoring of HUD's programs. In that regard, Mr.
    Secretary, I want to thank you for your work on an
    investigation in Maine into the Maine State Housing Authority
    section 8 voucher program last year. I requested an
    investigation into the troubling cases of serious code
    violations and other poor conditions that were uncovered in
    Oxford County, Maine, and brought to me by the attention of a
    local fire chief who was so concerned. And I appreciate so much
    the work of your Department in addition to the work of the
    inspector general.
        It is critical that federally subsidized properties comply
    with all health, safety, and quality standards. After all, it
    is inexcusable that we are putting residents in units and
    apartments that had serious violations of welfare and safety
    and health standards. But it is doubly offensive when the
    taxpayers are subsidizing those unfit units.
        So those are just some of the issues. I am pleased with the
    increased funding levels for section 202 housing for the
    elderly. This program has provided over 400,000 affordable
    homes for very low-income elderly individuals through a number
    of different financing structures.
        Many people are surprised to learn that Maine has one of
    the largest elderly populations in the country. In fact, if you
    look at the median age, we are the oldest State in the Nation,
    older than Florida even. That raises certain challenges.
        There is one area that I want to highlight in closing, and
    that is the funding level for the community development block
    grant (CDBG) program. As you know, I believe that the level of
    $2.79 billion is truly disappointing. I am told that, if
    enacted, this would be the lowest level of funding since 1976.
    And yet, this program remains the most adaptable, the most
    welcomed community and economic development Federal program for
    meeting the unique needs of communities throughout this
    country.

                               PREPARED STATEMENT

        These are just some of the many issues we are going to have
    to tangle with this year, and I look forward to working with
    the chairman and the members of this subcommittee as we
    consider HUD's fiscal year 2014 budget request.
        Thank you.
        [The statement follows:]
                 Prepared Statement of Senator Susan M. Collins
        Thank you, Chairman Murray. I am delighted to join you as we start
    the fiscal year 2014 appropriations process under new leadership of
    both Chairman Mikulski and Vice Chair Shelby, as well as the new
    members of this subcommittee.
        Mr. Secretary, it is nice to see you again. I look forward to
    continuing to work with you to meet the housing and economic
    development needs of families and communities throughout the Nation and
    I look forward to your testimony as we consider the Department of
    Housing and Urban Development's (HUD's) fiscal year 2014 budget
    request.
        As we begin to construct this spending bill, we continue to face
    difficult decisions given the fiscal constraints we remain under.
    Sequestration will make these decisions even tougher. I am also
    concerned for the public housing authorities who are being forced to
    reduce spending at the expense of families in need. While sequester
    cuts have already taken effect, the deficit continues to rise. We must,
    however, find a careful balance to ensure that the Nation's most
    vulnerable are provided for.
        The President's fiscal year 2014 HUD budget request is $47.6
    billion, an increase of nearly $4.2 billion or 6.67 percent above
    fiscal year 2013 enacted levels. The vast majority of this funding will
    support the renewals for rental and homelessness assistance. The budget
    also provides for the investment to revitalize neighborhoods and
    support economic development in communities throughout the country.
        As we prepare the budget for fiscal year 2014, it is critical that
    we address the ongoing challenges with homelessness, which remains a
    top priority of mine. Chairman Murray and I continue to share this
    commitment, particularly for our Nation's veterans. One out of every
    six men and women in homeless shelters are veterans, and unfortunately,
    veterans are 50 percent more likely to fall into homelessness compared
    to other Americans. I am pleased the budget continues funding for HUD's
    Veterans Affairs Supportive Housing (HUD-VASH) program at $75 million.
    This level of funding will serve an additional 10,000 veterans
    nationwide. Veterans' homelessness fell by nearly 7.2 percent from 2011
    to 2012, demonstrating that programs like HUD-VASH work.
        I continue to support the Homeless Assistance Grants program to
    prevent and end homelessness. The budget proposes $2.38 billion for
    this program, which is $575 million over current levels.
        In addition to programs that effectively serve the homeless, HUD
    also provides support for affordable rental housing. The budget
    proposes nearly $20 billion for the Tenant-Based Rental Assistance
    program, of which $1.685 billion is available for administrative costs.
        Another important issue is the oversight and monitoring of HUD's
    programs. Mr. Secretary, I want to thank you for your work into the
    investigation of Maine State Housing Authority's section 8 voucher
    program. Last year, I requested an investigation into the troubling
    cases of code violations and other poor conditions that were uncovered
    in Oxford County. I appreciate the work of your Department, in addition
    to that of Inspector General Montoya. It is critical that federally
    subsidized properties comply with all health, safety, and quality
    standards.
        It is bad enough that taxpayers were charged for substandard units,
    but it is appalling that residents were forced to live in such horrible
    conditions. The welfare and safety of tenants must be safeguarded, and
    federally subsidized properties must represent fair value to the tenant
    and the taxpayer alike.
        Nationwide, more than 5.4 million families receive housing
    assistance through the many programs offered at HUD. Altogether, more
    than 65 percent of HUD-assisted households are elderly or disabled. I
    am pleased to see the increased funding levels for the Section 202
    Housing for the Elderly program. This program has provided over 400,000
    affordable homes for very-low-income elderly individuals through a
    number of different financing structures in the past. Maine has one of
    the largest elderly populations in the United States. In fact, Maine
    has the oldest median age population in the United States.
        Finally, the funding level for the Community Development Block
    Grant (CDBG) program, which is proposed at $2.79 billion is truly
    disappointing. If enacted, this would reach the lowest level of funding
    since 1976. With 1,100 grantees served by an estimated 7,000 local
    governments across the country, CDBG remains the largest and most
    adaptable community and economic development Federal program for
    meeting the unique needs within these communities.
        These are just some of the many issues we are confronted with on
    our subcommittee this year. Chairman Murray, I look forward to working
    with you as we consider HUD's fiscal year 2014 budget request.

        Senator Murray. Thank you very much. And, Senator Collins,
    I appreciate the opportunity to work with you again this year
    on a subcommittee we both care passionately about. It is great
    to work with you.
        Senator Coats, do you have an opening statement?

                         STATEMENT OF SENATOR DAN COATS

        Senator Coats. Madam Chairman, I do.
        I thank you. I look forward to serving on this subcommittee
    with you and our ranking member.
        Not to repeat, but I will repeat Senator Collins' point
    that we are operating during a time where the game has changed.
    Instead of coming here every year on the Appropriations
    Committee and saying, ``how much more are we going to spend
    this year?'' we are faced with a fiscal crisis which requires
    us to say, how can we take better care of the taxpayer dollars
    that are being sent here? How can we better manage our
    Departments? How can we be more efficient with perhaps less to
    spend or not as much to spend as we would like? How can we
    separate the essential from the ``well, we would like to do
    this but can't afford it right now,'' from the ``why are we
    doing that in the first place?'' Or maybe that had a sufficient
    function going forward at one time, but we just cannot justify
    that program.
        All of this to address the fiscal issue in one of two ways:
    One, how can we save money and turn it back and reduce our debt
    and deficit? Second, how can we better transfer this money to
    essential programs instead of wasting it on programs that do
    not seem to work very well?
        Let me just mention a couple things.
        Mr. Secretary, I am not sure my time will allow me to be
    here to ask this direct question, but I will just put it out
    there and you can address it in a general way.
        In 2012, the Government Accountability Office (GAO) found
    that the Federal Government is operating 160 separate housing
    assistance programs and tax expenditures within 20 departments,
    agencies, costing about $170 billion. Is there room here to
    eliminate some of this duplication or to consolidate some of
    this, so that we do not have to have each separate entity here
    staffed all the way down through the administrative positions,
    and so forth? Is there room for this type of consolidation and
    coordination?
        Every business in America has had to do this since the 2008
    collapse. And when we mentioned sequester, they say, ``Five
    percent, 7 percent? I mean, we have had to do 15 percent. We
    have had to do 18 percent. But we are a much more leaner, more
    efficient organization now.''
        We see that everywhere in the private sector, but we do not
    see that in the Federal Government.
        HUD provided a community development block grant in the
    amount of $505,000 to a private entity, Sergeant's Pet Care
    Products, Inc., which specializes in pet shampoo and
    toothpaste. Now, maybe there is justification for this small
    business. I do not know. But it is a private company. They are
    expected to bring in revenue of $140 million in 2012. Why are
    we giving CDBG grants to private companies who are earning
    revenues of over $100 million?
        And last, according to HUD's own inspector general, for
    2012 fiscal year, he said HUD could have put over $3.2 billion
    to better use and has paid over $1.3 billion in questionable
    costs. So that is $4.5 billion in public funds that perhaps
    could have shifted to provide better housing or more effective
    housing, or not spent at all.
        So just in a general way, Mr. Secretary, address the
    broader question. You do not have to provide it here exactly
    the details of this particular loan or justify this or that.
    The larger question of what is HUD doing, what are you doing,
    to try to make your Department more efficient, more effective,
    given the scarcity of funds that we have, and the fact that we
    need to be more careful with the taxpayer dollars. So when you
    have a chance to address that, I would appreciate it.
        And, Madam Chairman, thank you.
        Senator Murray. Thank you very much.
        Senator Blunt.

                         STATEMENT OF SENATOR ROY BLUNT

        Senator Blunt. Chairman, thank you for conducting the
    hearing.
        Secretary, thank you for being here. I look forward to
    working with you and Senator Collins on this important
    subcommittee.
        And I have a statement for the record, and I will just
    submit it for the record.
        [The referenced statement was not available at press time.]
        Senator Murray. Thank you very much.
        With that, Secretary Donovan, we will turn it over to your
    opening statement. And we do have a vote around 11 o'clock, but
    I think we have sufficient time for your statement and
    questions from those of us who are here this morning. I will
    turn it over to you.

                    SUMMARY STATEMENT OF HON. SHAUN DONOVAN

        Secretary Donovan. Thank you.
        Chairman Murray, Ranking Member Collins, members of the
    subcommittee, thank you for having me here today.

                            HOUSING AND COMMUNITIES

        HUD's fiscal year 2014 budget proposal will help grow our
    economy from the middle class out by supporting the ongoing
    recovery in our housing market and creating Ladders of
    Opportunity in communities across the country.
        As the President said, our economy is strongest when we
    expand opportunity and reward the hard work of everyone. HUD's
    budget does this by supporting the creation and retention of
    620,000 jobs.
        We followed four main principles in creating our 2014
    budget. The first was to continue support for the resurgent
    housing market, while encouraging the return of private capital
    and rebalancing the Nation's housing finance system.
        Today, the housing market is playing a key role in our
    economic recovery. Rising home values lifted 1.7 million
    families back above water, and home equity grew by more than
    $1.6 trillion in 2012.

                         FEDERAL HOUSING ADMINISTRATION

        FHA continues to play an important role in this effort,
    insuring nearly 1.2 million single-family mortgage loans in
    2012. However, due to reverse mortgages and other loans insured
    during the economic crisis, the fiscal year 2014 budget
    projects that FHA will need $943 million in support from
    Treasury. As you know, any decision to draw from the Treasury
    depends on the actual performance of the fund during the
    current fiscal year.
        We have taken aggressive steps to protect the fund and are
    already seeing strong results from those efforts, even with
    stress from the troubled reverse mortgage program and the now
    banned seller-assisted down payment programs. In fact, while
    the gross budget authority HUD requests in 2014 is $47.6
    billion, a 7-percent increase over the fiscal year 2012 enacted
    level, offsetting receipts from FHA and Ginnie Mae totaling
    $14.5 billion bring the cost to the taxpayer to only $33.1
    billion, almost 12 percent below the fiscal year 2012 enacted
    level.
        Despite this progress, we continue to take responsible
    administrative action, and the fiscal year 2014 budget calls on
    Congress to further assist in stabilizing the fund.

                                ASSISTED HOUSING

        The second principle we used in developing our budget was
    to protect current vulnerable residents. There are 5.4 million
    families who live in HUD-assisted housing, a number we have
    increased by more than 219,000 over the last 3 years through
    better management.
        These households earn just $12,500 a year on average and
    nearly two-thirds have a member who is elderly or disabled.
        Fully funding renewals consumes 84 percent of our proposed
    budget just to keep current residents in their homes, support
    homelessness prevention, and provide basic maintenance to
    public housing.
        And again, to echo your words, chairman, this has never
    been more important with the staggering over 40 percent
    increase in worst-case housing needs we have seen in just 4
    years.

                              EXISTING PARTNERSHIP

        The third principle we followed was to build on existing
    partnerships, helping to create Ladders of Opportunity while
    embracing smart, effective, efficient Government. As the
    President made clear in his State of the Union Address, in too
    many hard-hit communities, the life chances of a child are
    determined not by her talents, but by her ZIP Code. The Promise
    Zones proposed by the President expand investments by HUD, the
    Departments of Education and Justice, and other agencies, while
    coordinating and streamlining this work to maximize impact and
    reduce costs.

                              CHOICE NEIGHBORHOODS

        The $400 million we have requested for our Choice
    Neighborhoods program represents a significant increase that
    will allow us to transform public and assisted housing in our
    hardest hit neighborhoods and ensure our children are prepared
    for the 21st century economy.
        Building on the success of three rounds of neighborhood
    stabilization funding, a $200 million Competitive Neighborhood
    Stabilization Initiative within our community development block
    grant program will address the needs of neighborhoods that
    continue to suffer the negative effects of abandonment and
    foreclosure of privately owned housing.
        Our reorganized Office of Economic Resilience, to be
    located within HUD's Community Development and Planning
    Division, would offer $75 million in integrated planning and
    investment grants that support local investments in
    infrastructure and other development to create jobs and build
    diverse, resilient economies.

                               REGULATORY BURDENS

        The final principle we used in creating this budget was to
    increase efficiency, reduce regulatory burdens, and provide
    flexibility to our partners, allowing them to better manage
    resources.

                               SECTION 8 REFORMS

        I look forward to working with Congress to enact the
    section 8 reforms proposed in our budget, which would save
    approximately $2.8 billion over the next 5 years and streamline
    outdated statutes governing our public and assisted housing.
        Expanding initiatives like the Rental Assistance
    Demonstration and the Moving To Work program will allow more
    public housing authorities the flexibility to pilot innovative
    strategies that will better serve residents, consolidate
    programs, and save taxpayers money.

                           TRANSFORMATION INITIATIVES

        This budget also continues the transformation initiative,
    allowing us to propose increased investments in programs we
    know work and stop funding the ones that do not, and to hold
    our partners accountable for the funding they receive.
        Perhaps the best example of this approach is found in
    Opening Doors, the administration's plan to end homelessness,
    which has dramatically reduced chronic and veterans'
    homelessness over the last 2 years.

                                 VASH VOUCHERS

        Because we know these programs save lives as well as
    taxpayer dollars, our budget proposes 10,000 new VASH vouchers
    and a significant increase in our homeless assistance grants.
        Unfortunately, sequestration seriously threatens our
    ability to serve families, communities, and even veterans
    across the Nation with hundreds of thousands likely to lose
    assistance we have worked so hard to preserve.
        While we are attempting to reduce these impacts, there is
    simply no way to prevent serious damage this year, or the
    resulting consequences for fiscal year 2014, unless
    sequestration is reversed with the balanced deficit reduction
    plan proposed by the President.

                               PREPARED STATEMENT

        I look forward to working with you, both on the fiscal year
    2014 budget and on reversing the harmful cuts imposed by
    sequestration.
        Thank you for the opportunity to testify today. I look
    forward to your questions.
        [The statement follows:]
                    Prepared Statement of Hon. Shaun Donovan
        Thank you, Chairman Murray and Ranking Member Collins, for this
    opportunity to discuss how the Department of Housing and Urban
    Development's (HUD's) fiscal year 2014 budget proposal will grow our
    economy from the middle class out--not from the top down--while
    supporting the recovery in our housing market and economy. The
    investments in the Department's programs that this budget makes are
    essential to delivering on the President's promise to make America a
    magnet for jobs and manufacturing, equip every American with the skills
    they need to do those jobs, and ensure that hard work leads to a decent
    living.
        Overall, this budget furthers the Department's mission of
    supporting home ownership, access to affordable housing free from
    discrimination, and community development. The 2014 President's budget
    provides $47.6 billion for HUD programs to support these efforts, in
    addition to a receipts projection of $14.5 billion--representing a net
    decrease of $3.2 billion from the 2012 enacted level. Increases are
    provided to protect vulnerable families and employ proven tools to
    revitalize neighborhoods with distressed HUD-assisted housing and
    concentrated poverty. To build more evidence of what works, State and
    local public housing authorities are offered program flexibilities in
    exchange for designing and rigorously evaluating innovative programs
    and policies. The constrained fiscal environment also forced tough
    choices, including funding reductions to programs that increase the
    supply of affordable housing.
        The Department's budget for fiscal year 2014 follows the roadmap
    the President has laid out for jumpstarting our economy through
    educating, innovating, and building--by targeting our investments to
    the families and geographies that need them the most, and putting
    American back to work. Specifically, this budget:
        Supports the Mortgage Market and Helps Borrowers Who Are at Risk of
    Foreclosure.--The Administration projects that the Federal Housing
    Administration (FHA) will insure $178 billion in mortgage loans in
    2014, supporting new home purchases and refinanced mortgages that
    significantly reduce borrower payments. FHA financing was used for 27
    percent of home purchase loans in 2011, including an estimated 41
    percent of first-time homeowners. FHA's loss mitigation program
    minimizes the risk of financially struggling borrowers going into
    foreclosure, and since the start of the mortgage crisis, it has helped
    more than a million homeowners. Recent increases in FHA premium levels
    will boost FHA's capital reserves and increase Federal revenues.
        The budget also includes $132 million for housing and homeowner
    counseling through HUD and the Neighborhood Reinvestment Corporation
    (NeighborWorks). Over half of these funds are dedicated to foreclosure
    assistance. NeighborWorks' National Foreclosure Mitigation Counseling
    program has assisted over 1.4 households since its inception in 2008.
        Provides Ladders of Opportunity for Anybody Willing To Work Hard
    and Play by the Rules.--The budget provides $400 million for Choice
    Neighborhoods to continue to transform neighborhoods of concentrated
    poverty into opportunity-rich, mixed-income neighborhoods. This funding
    level, which is $280 million above 2012 enacted, will be used to
    revitalize HUD-assisted housing and surrounding neighborhoods through
    partnerships between local governments, housing authorities,
    nonprofits, and for-profit developers. A portion of these funds will be
    targeted to designated Promise Zones--high-poverty communities where
    the Federal Government will partner with local leadership to create
    jobs, leverage private investment, increase economic activity, reduce
    violence, and improve educational opportunities. To further support
    Promise Zones, the budget includes companion investments of $300
    million in the Department of Education's Promise Neighborhoods program,
    $35 million in the Department of Justice's Byrne Criminal Justice
    Innovation Grants program, and continues to support the Strong Cities,
    Strong Communities initiative as well as tax incentives to promote
    investment and economic growth.
        Supports Strategic Infrastructure Planning and Investments To Help
    Make America a Magnet for Jobs.--In addition to the hundreds of
    thousands of jobs that this budget creates both directly and
    indirectly, it makes an essential contribution to the Administration's
    broader effort to discourage outsourcing and encourage ``insourcing.''
    Specifically, attracting new businesses to our shores depends on urban,
    suburban, and rural areas that feature more housing and transportation
    choices, homes that are near jobs, and transportation networks that
    move goods and people efficiently--which is why this budget includes
    funding for the Office of Economic Resiliency which, as part of the
    Administration's multiagency partnership between HUD, the Department of
    Transportation, and the Environmental Protection Agency, will
    administer $75 million in Integrated Planning and Investment Grants.
    These grants will create incentives for communities to develop and
    implement comprehensive housing and transportation plans, such as
    updates to building codes, land use, and zoning ordinances that result
    in more resilient economic development, improve housing supply response
    to demand, and increase affordable housing near public transit. This
    funding, which builds upon the progress made through Sustainable
    Communities program, would support about 30 additional regional and
    neighborhood planning and implementation grants to enable communities
    to plan for their economic future. This funding embodies the
    President's commitment to being a new kind of Federal partner to
    regions, States, and localities as they tackle planning and economic
    development challenges in the 21st century.
        Of course, smart planning requires sustained follow-through. That
    is why HUD is committed to ensuring that its core community and housing
    development work contributes to more and better transportation choices;
    promotes equitable, affordable housing; helps communities address the
    lingering neighborhood impacts of the foreclosure crisis; and aligns
    Federal policies and funding to remove barriers to local collaboration.
    The budget provides $3 billion for the Community Development Block
    Grant (CDBG) program and neighborhood stabilization activities, and
    proposes reforms to better target CDBG investments to address local
    community development goals. This funding level includes $200 million
    in new competitive funds to continue mitigating the impacts of the
    foreclosure crisis. This funding will provide essential new resources
    to help communities hardest hit by the foreclosure crisis while
    creating jobs through rehabilitating, repurposing, and demolishing
    vacant and blighted properties. The budget also maintains its support
    for the proposed $15 billion Project Rebuild program, which will
    leverage private capital to bring the benefits of neighborhood
    stabilization to national scale.
        Protects the Vulnerable Recipients of HUD Rental Assistance and
    Makes Progress on the Federal Strategic Plan To End Homelessness.--The
    budget includes $20 billion for the Housing Choice Voucher program to
    help more than 2.2 million low-income families afford decent housing in
    neighborhoods of their choice. This funding level supports all existing
    vouchers and provides 10,000 new vouchers targeted to homeless
    veterans. The budget also includes $10.3 billion for the Project-Based
    Rental Assistance program to maintain affordable rental housing for 1.2
    million families, and provides $6.6 billion in operating and capital
    subsidies to preserve affordable public housing for an additional 1.1
    million families.
        The budget provides $2.4 billion for Homeless Assistance Grants,
    $480 million above the 2012 enacted level. This funding maintains the
    approximately 325,000 HUD-funded beds that assist the homeless
    nationwide and expands rapid re-housing and permanent supportive
    housing. Backed with new data and emerging best practices across the
    United States, this evidence-based investment will make further
    progress towards the goals laid out in the Federal Strategic Plan to
    End Homelessness.
        Puts HUD-Subsidized Public and Assisted Housing on a Financially
    Sustainable Path.--This budget also recognizes that we can no longer
    tolerate a federally supported rental housing system that is ``separate
    and unequal''--one which expects public housing authorities (PHAs) to
    house over 1 million families in public housing while subjecting them
    to overly burdensome regulation and denying them access to private
    capital available to virtually every other form of rental housing. To
    bring the public housing program toward mainstream real estate
    financing and management practices and begin to address the $26 billion
    in capital needs, the Department will continue to implement the Rental
    Assistance Demonstration (RAD) enacted in 2012. At the same time, the
    budget provides $10 million for a targeted expansion of RAD to public
    housing properties in high-poverty neighborhoods, including designated
    Promise Zones, where the Administration is also supporting
    comprehensive revitalization efforts.
        Improves the Way Federal Dollars Are Spent and Builds Evidence of
    What Works.--The budget proposes to scale up the Moving To Work (MTW)
    program, which gives high-performing State and local public housing
    authorities (PHAs) various flexibilities in their use of Housing Choice
    Voucher and public housing funds. In exchange for this flexibility,
    PHAs will help design and test innovative policies to support self-
    sufficiency and other positive outcomes for families, streamline and
    consolidate program delivery, and reduce long-term costs. In addition,
    PHAs will report on outcomes associated with their MTW activities, and
    those that choose to implement work requirements, time limits on
    assistance, or major rent reform initiatives will participate in
    rigorous evaluations.
        The budget also modernizes the Housing Opportunities for Persons
    With AIDS (HOPWA) program to better reflect the current case
    concentration and understanding of HIV/AIDS and ensure that funds are
    directed in a more equitable and effective manner. This update includes
    a new formula that will distribute HOPWA funds based on the current
    population of people living with HIV/AIDS, fair market rents, and
    poverty rates in order to target funds to areas with the most need. It
    also makes the program more flexible, giving local communities more
    options to provide targeted, timely, and cost-effective interventions.
    The budget's $332 million investment in HOPWA, in combination with the
    proposed modernization, will assist local communities in keeping
    individuals with HIV/AIDS housed, making it easier for them to stay
    connected to treatment, and therefore improving health outcomes for
    this vulnerable population.
        Makes Tough Choices.--The budget provides $950 million for the HOME
    Investment Partnerships Program, 5 percent below the 2012 enacted
    level. At this funding level, HOME will provide grants to State and
    local governments to supply almost 40,000 additional units of
    affordable housing for low-income families. This funding reduction is
    mitigated by the investment of $1 billion in mandatory funding for the
    Housing Trust Fund to finance the development, rehabilitation, and
    preservation of affordable housing for extremely low income families.
        The budget provides a total of $526 million for the Housing for the
    Elderly and Housing for Persons with Disabilities programs, $13.6
    million below the 2012 enacted level. This funding level will support
    all 150,000 existing units in these programs, but limits new
    construction to $40 million for additional supportive housing units.
    These investments directly support research that will build our
    understanding of the intersection between supportive housing and
    healthcare costs, and help identify what works best in allowing seniors
    to age-in-place.
        Reforms Government So That It's Leaner, Smarter, More Transparent,
    and Ready To Succeed.--The American economy of the future requires a
    Federal Government that is efficient, streamlined, and transparent. As
    such, the budget proposes reforms to HUD rental assistance programs
    that would save nearly $400 million in fiscal year 2014 without
    reducing the number of families served--by streamlining programs and
    reforming policies. Moreover, this budget once again calls for the
    flexible use of resources through the Transformation Initiative, which
    the Department will use to invest in technical assistance to build
    local capacity to safeguard and effectively invest taxpayer dollars;
    conduct innovative research, evaluations of program initiatives and
    demonstration programs so we can fund what works and stop funding what
    doesn't; and upgrade the IT infrastructure that tracks and monitors our
    programs.
        In short, this budget will achieve substantial results not only for
    vulnerable, low-income Americans but also for hard-hit local and State
    economies across the country. Its carefully targeted investments will
    enable HUD programs to serve millions of families in thousands of
    communities nationwide, helping to make America a magnet for jobs, and
    ensuring that our workers have the skills they need for those jobs.
    Consistent with its budget proposals in the first term, HUD's fiscal
    year 2014 budget is structured around the five overarching goals the
    Department adopted in its Strategic Plan 2010-2015. These goals reflect
    the Department's--and my--commitment to ``moving the needle'' on some
    of the most fundamental challenges facing America. Indeed, every month,
    I hold HUDStat meetings on one or more of these goals, to assess
    progress and troubleshoot problems in order to: (1) ensure that HUD is
    as streamlined and effective as possible in the way that we administer
    our own programs and partner with other Federal agencies; and (2) hold
    our grantees accountable for their expenditure of taxpayers' hard-
    earned dollars.
     goal 1: strengthen the nation's housing market to bolster the economy
                             and protect consumers
        This Administration entered office confronting the worst economic
    crisis since the Great Depression--as mortgages were sold to people who
    couldn't afford or understand them, while banks packaged them into
    complex securities that they made huge bets on--and bonuses with--other
    people's money. And while the largest factors contributing to this
    crisis were market driven, the American people have turned to Congress
    and the Administration for leadership and action in righting our
    Nation's housing market. HUD remains firmly committed to working
    together with communities and individuals to cope with these
    unprecedented challenges.
    Responding to the Market Disruption
        The Federal Housing Administration (FHA) and Government National
    Mortgage Association (GNMA) continue to have a significant impact on
    the Nation's economic recovery. The activities of the Federal
    Government are critical to both supporting the housing market in the
    short term and providing access to homeownership opportunities over the
    long term, and doing both in a way that minimizes risks to taxpayers.
        In 2014, HUD is requesting $400 billion in loan guarantee authority
    for the Mutual Mortgage Insurance Fund, which will provide an estimated
    1.2 million single-family mortgages (at a projected $199.3 billion in
    loan volume) and $30 billion in loan guarantee authority for the
    General and Special Risk Insurance Fund, which will provide an
    estimated 273,000 units in multifamily housing properties and an
    estimated 75,700 beds in healthcare facilities. The need for this
    investment is clear as FHA has stepped up in recent years to address
    the unprecedented challenges wrought by the housing crisis, playing an
    important countercyclical role that has offered stability and liquidity
    throughout the recession. While a recovery of the housing market is
    currently underway, FHA continues to act as a crucial stabilizing
    element in the market, and to assure ongoing access to credit for
    qualified first-time, low-wealth or otherwise underserved borrowers.
    However, FHA's expanded role is and should be temporary.
        FHA's share of the mortgage market has gone from a low of 3.1
    percent of loan originations in 2005, up to a peak of 21.1 percent in
    2010, and more recently down to 16.5 percent in the 4th quarter of 2012
    (U.S. Housing Market Conditions Report, 4th Quarter 2012). In fact, the
    number of FHA single family loan endorsements has declined to levels
    comparable to those seen in fiscal years 2002 and 2003, when FHA's
    market share was lower than it is today, indicating that FHA's current
    slightly elevated market share is primarily due to a substantial
    decrease in the size of the total mortgage market rather than
    exceptionally high FHA loan volumes. As the market continues to recover
    and private capital returns at more normal levels, FHA's role will
    naturally recede.
        As has been true throughout its history, FHA is particularly
    important to borrowers that the conventional market does not adequately
    serve, including qualified borrowers who would otherwise be shut out of
    the mortgage market. Fully 60 percent of all African American and
    Hispanic homebuyers using mortgages rely upon FHA financing and over 30
    percent of all FHA-insured homebuyers are minorities. According to the
    latest Home Mortgage Disclosure Act data, half of all African Americans
    who purchased a home in 2011, and 49 percent of Hispanics, did so with
    FHA financing.
    Redoubling Efforts To Keep Homeowners in Their Homes
        While there is work still to be done, HUD is proud of the progress
    this Administration has made in tackling ongoing foreclosure
    challenges. Between April 2009 and February 2013, more than 6.4 million
    foreclosure prevention actions were taken--including nearly 1.7 million
    FHA loss mitigation and early delinquency interventions and 1.5 million
    homeowner assistance actions through the Making Home Affordable
    program, including more than 1.1 million permanent modifications
    through the Home Affordable Modification Program (HAMP)--saving these
    households an estimated $18.5 billion in monthly mortgage payments.
        As part of the Administration's commitment to help responsible
    homeowners stay in their homes, we have actively sought to use our
    current programs and authorities to make homeownership sustainable for
    millions of American families. Examples of our efforts include:
      --Streamline Refinance.--An option that allows borrowers with FHA-
            insured loans who are current on their mortgage to refinance
            into a new FHA-insured loan at today's low interest rates
            without requiring additional underwriting, permitting these
            borrowers to reduce their mortgage payments. This program
            benefits current FHA borrowers--particularly those whose loan
            value may exceed the current value of their home--and by
            lowering a borrower's payment, also reduces risk to FHA. And,
            because we see potential for more widespread use of this
            product, FHA made changes to the way in which streamline
            refinance loans are displayed in the Neighborhood Watch Early
            Warning System (Neighborhood Watch) to encourage lenders to
            offer this product more widely to homeowners with FHA-insured
            mortgages.
      --Changes to FHA's Loss Mitigation Waterfall.--A mortgagee letter
            published on November 16, 2012, outlined changes to FHA's loss
            mitigation home retention options. One of the key elements of
            this update was moving FHA's Home Affordable Modification
            Program (HAMP) product up in FHA's loss mitigation waterfall so
            servicers could more quickly offer deeper payment relief to
            struggling FHA borrowers, resulting in an increase in the
            number of borrowers being able to retain their homes.
      --Housing Counseling.--In 2014, HUD is requesting $55 million in
            housing counseling assistance, to improve access to quality
            affordable housing, expand homeownership opportunities, and
            preserve homeownership, all of which are especially critical in
            today's economic climate. With this funding, HUD estimates that
            2,650 HUD-approved counseling agencies employing an estimated
            8,000 newly certified housing counselors, will assist a total
            of 2.5 million renters and owners. HUD-approved counselors help
            clients learn about purchasing or refinancing a home; rental
            housing options; reverse mortgages for seniors; foreclosure
            prevention; loss mitigation; preventing evictions and
            homelessness; and moving from homelessness to a more stable
            housing situation. In 2012, 2,410 HUD-approved housing
            counseling agencies, with grant funds from HUD and other
            funding sources, assisted over 1.9 million renters and owners.
          HUD's new Office of Housing Counseling has several initiatives to
            ensure borrowers have access to all rights and remedies
            afforded to them to stay in their homes. HUD has worked closely
            with interested States to determine effective ways in which
            funds from the National Mortgage Servicing Settlement can be
            used to expand housing counseling resources, resulting in more
            than $300 million in settlement funds committed to housing
            counseling or legal services for affected borrowers. HUD-
            approved housing counseling agencies continue to provide
            foreclosure prevention services, reaching 774,000 families in
            fiscal year 2012. In addition, FHA is exploring ways to further
            integrate housing counseling into its loss mitigation program,
            offering distressed FHA borrowers additional resources with
            which to assess their options and make decisions appropriate to
            their situation.
      --Short Refinance Option.--In 2010, FHA made available an option that
            offers underwater non-FHA borrowers, who are current on their
            existing mortgage and whose lenders agree to write off at least
            10 percent of the unpaid principal balance of the first
            mortgage, the opportunity to refinance into a new FHA-insured
            mortgage. FHA made enhancements to the program in March of last
            year and announced an extension to the expiration date of the
            program in order to increase the number of borrowers who will
            benefit from this initiative.
      --Strengthening FHA and Paving the Way for Private Capital To
            Return.--The President's budget shows that FHA, while still
            under stress from legacy loans, has made significant progress
            and is on a sound fiscal path moving forward. Like nearly all
            mortgage market institutions, FHA sustained significant losses
            due to the precipitous fall in the housing market and home
            prices, and is putting additional funds aside this year to
            cover those legacy losses. But, again, like most mortgage
            lenders, recent and future books of mortgage business are
            expected to bring healthy gains.
        Throughout the economic crisis, as the FHA's fiscal health faced
    challenges, this Administration took swift and effective action to
    protect the FHA and the American taxpayer alike, as FHA continued to
    fulfill its dual mission of supporting the housing market during tough
    times and providing access to homeownership for underserved
    populations. FHA is currently insuring the strongest loans in its
    history. In contrast to legacy loans, and thanks in large part due to
    changes the Administration has put in place regarding pricing, lender
    enforcement, and risk reduction, the books of business FHA has insured
    since 2010 are vastly superior to any others from recent years, as
    measured by early delinquencies and other metrics. In addition, the
    Administration has raised annual insurance premiums for most FHA
    mortgages by 0.8 percentage points, greatly increasing revenue for the
    FHA fund. And healthier house prices have reduced FHA losses on
    defaulted mortgages.
        Due to the higher quality and large volume of current loans, we
    project FHA will generate $18 billion in receipts during fiscal year
    2013, including $3 billion generated from the new premium increase that
    went into effect April 1, 2013, and reversal of a policy that caused
    FHA to forfeit collection of mortgage insurance premium (MIP) after a
    loan reached 78 percent of its original principal balance. Further, as
    a result of these same changes, the fiscal year 2014 budget projects
    FHA receipts of almost $13 billion, even as FHA market share and loan
    volume continues to be reduced (down to 13.9 percent according to U.S.
    Housing Market Conditions Report, 3rd quarter 2012).
        For FHA's legacy loans, the President's budget forecasts the FHA
    Mutual Mortgage Insurance (MMI) Fund, which provides the fiscal capital
    to support FHA's single family and reverse mortgage guarantees, will
    use $943 million of its mandatory appropriation authority to supplement
    its reserves at the end of fiscal year 2013. The MMI Fund currently has
    approximately $32 billion in cash available to pay claims, so this is
    not a cash problem; it is one of setting the right size of loan loss
    reserves aside. The $943 million figure is based on an annual Office of
    Management and Budget (OMB) re-estimate of the reserves FHA will need
    to hold as of September 30, 2013, for the payment of expected losses
    over the next 30 years on its portfolio of guaranteed loans as of last
    September, based upon Federal Credit Reform Act (FCRA) scoring. This
    potential appropriation is largely due to the existing reverse mortgage
    (HECM) portfolio. This product, particularly as it has been structured
    to date, is sensitive to home prices and economic conditions. This
    results in a negative value of $5.248 billion and a disproportionately
    negative impact to the Fund from the HECM program. The actual need for
    a mandatory appropriation from the Treasury General Fund to the MMI
    fund will not be determined until September 2013, and will be based on
    FHA's realized revenues through the end of the fiscal year. Notably,
    any mandatory appropriation to FHA would not involve approval from
    Congress, as all Federal loan programs have this standing authority. As
    we consider this potential appropriation, let us not forget that FHA
    played a crucial, countercyclical role in bringing the housing market
    from the brink of collapse to a place where it is positive and growing
    again.
           goal 2: meet the need for quality, affordable rental homes
        In an era when more than one-third of all American families rent
    their homes and over 8.5 million unassisted families with very low
    incomes spend more than 50 percent of their income on rent and/or live
    in severely inadequate conditions, it is more important than ever to
    provide a sufficient supply of affordable rental homes for low-income
    families--particularly since, in many communities, affordable rental
    housing does not exist without public support. HUD's fiscal year 2014
    budget maintains HUD's core commitments to providing rental assistance
    to some of our country's most vulnerable households as well as
    distributing housing, infrastructure, and economic development funding
    to States and communities to address their unique needs. Overall, 84
    percent of HUD's total fiscal year 2014 budget authority requested will
    provide rental assistance to over 5.4 million residents of HUD-
    subsidized housing, including public housing and HUD grants to homeless
    assistance programs. And, I am proud to say that, despite an era of
    challenging budgets, we have increased the number of families served
    through our rental assistance programs every year.

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        Detailed data shows how vulnerable these families are to the
    economic downturn. In HUD's core rental assistance programs, including
    tenant-based rental assistance (TBRA), public housing and project-based
    rental assistance (PBRA): 72 percent of families are extremely low-
    income (below 30 percent of area median income) and an additional 20
    percent are very low-income (below 50 percent of area median income).
    The devastating effect of the tough economic environment on the housing
    circumstances of poor Americans was underscored this year, when HUD
    released its latest Worst Case Housing Needs study results. HUD defines
    worst case needs as: renters with very low incomes who do not receive
    Government housing assistance and who either pay more than half their
    income for rent, live in severely inadequate conditions, or both. The
    report showed an increase of 43.5 percent in worst case needs renters
    between 2007 and 2011. This is the largest increase in worst case
    housing needs over a 4-year period in the quarter-century history of
    the survey. The need for HUD investments in this area is clear.
    Preserving Affordable Housing Opportunities in HUD's Largest Programs
        This budget provides $20 billion for HUD's section 8 TBRA program,
    which is the Nation's largest and preeminent rental assistance program
    for low-income families. For over 35 years it has served as a cost-
    effective means for delivering safe and affordable housing in the
    private market. This 2014 funding level is expected to assist
    approximately 2.2 million families by renewing existing vouchers and
    issuing new incremental vouchers to homeless veterans.
        The budget also provides a total of $6.6 billion to operate public
    housing and modernize its aging physical assets through the public
    housing operating ($4.6 billion) and capital ($2 billion) funds, a
    critical investment that will help approximately 1.1 million extremely
    low- to low-income households obtain or retain housing. Similarly,
    through a $10.3 billion request in funding for the PBRA program, the
    Department will provide rental assistance funding to privately owned
    multifamily rental housing projects to serve over 1.2 million families
    nationwide.
    Reducing Administrative Burdens and Increasing Efficiency
        This budget recognizes the need to simplify, align, and reform
    programs to reduce administration burdens and increase efficiency
    across programs by:
      --Enabling PHAs To Combine Operating and Capital Funds.--To both
            simplify the program and reduce the administrative burden on
            State and local public housing authorities, the budget provides
            all PHAs with full flexibility to use their operating and
            capital funds for any eligible capital or operating expense.
      --Providing Flexibility for Public Housing Authorities To Improve
            Supportive Services for Assisted Households.--The budget
            proposes streamlining and flexibility measures to help PHAs
            improve supportive services for assisted families. The Family
            Self-Sufficiency (FSS) program will be consolidated and aligned
            to enable PHAs to more uniformly serve both TBRA and public
            housing residents. This program aims to connect residents to
            resources and services to find and retain jobs that lead to
            economic independence and self-sufficiency. In addition, the
            budget authorizes PHAs to use a portion of their public housing
            and TBRA funding to augment case management and supportive
            services coordination provided through FSS or provide other
            supportive services to increase opportunities for residents.
      --Expanding the Moving To Work (MTW) Program.--The budget proposes to
            scale up the Moving To Work (MTW) program, which gives high-
            performing State and local public housing authorities (PHAs)
            various flexibilities in their use of Housing Choice Voucher
            and public housing funds. In exchange for this flexibility,
            PHAs will help design and test innovative policies to support
            self-sufficiency and other positive outcomes for families,
            streamline and consolidate program delivery, and reduce long-
            term costs. In addition, PHAs will report on outcomes
            associated with their MTW activities, and those that choose to
            implement work requirements, time limits on assistance, or
            major rent reform initiatives will participate in rigorous
            evaluations.
    Rebuilding Our Nation's Affordable Housing Stock
        Over the last 75 years, the Federal Government has invested
    billions of dollars in the development and maintenance of public and
    multifamily housing, which serve as crucial resources for some of our
    country's most vulnerable families. Despite this sizable Federal
    investment and the great demand for deeply affordable rental housing,
    we continue to see a decline in the number of available affordable
    housing units. Unlike other forms of assisted housing that serve very
    similar populations, the public housing stock is nearly fully reliant
    on Federal appropriations from the Capital Fund to make capital
    repairs. Funding and regulatory constraints have impaired the ability
    for these local and State entities to keep up with needed lifecycle
    improvements. The most recent capital needs study of the public housing
    stock, completed in 2010, estimated the backlog of unmet need at
    approximately $26 billion, or $23,365 per unit. Available funding is
    vastly insufficient to meet accruing needs of approximately $3 billion
    per year. Under the strain of this backlog, and without financing tools
    commonly available to other forms of affordable housing, the public
    housing inventory loses an average of 10,000 units annually through
    demolitions or dispositions.
                Rental Assistance Demonstration
        In addition to the public housing stock, the Rental Assistance
    Demonstration (RAD) program targets certain ``at-risk'' HUD legacy
    programs. The 24,000 units assisted under section 8 Moderate
    Rehabilitation (MR) are limited to short-term renewals and constrained
    rent levels that inhibit the recapitalization of the properties. The
    approximately 21,000 units assisted under Rent Supplement (RS) and
    Rental Assistance Program (RAP) have no ability to retain long-term
    project-based assistance beyond the current contract term. As a result,
    as their contracts expire, we can no longer depend on these projects to
    be available as affordable housing assets.
        Conversion to long-term section 8 rental assistance, as permitted
    under RAD, is essential to preserving these scarce affordable housing
    assets and protecting the investment of taxpayer dollars these programs
    represent. Long-term section 8 rental assistance allows for State and
    local entities to leverage sources of private and public capital to
    rehabilitate their properties. While the Department expects and
    continues to process public housing conversions of assistance without
    additional subsidy, HUD requests $10 million in fiscal year 2014 for
    the incremental subsidy costs of converting assistance under RAD for
    very limited purposes. Such funding will be targeted only to public
    housing projects that are: (1) not feasible to convert at current
    funding levels; and (2) located in high-poverty neighborhoods,
    including designated Promise Zones, where the Administration is
    supporting comprehensive revitalization efforts. The Department
    estimates that the $10 million in incremental subsidies will support
    the conversion and redevelopment of approximately 3,300 public housing
    units that would not otherwise be feasible to convert and sufficiently
    stabilize over the long-term, while helping to increase private
    investment in the targeted projects and surrounding neighborhoods.
        In addition to the funding request, each of the legislative
    requests in the 2014 budget for RAD are designed to allow for maximum
    participation by those PHAs and owners whose current funding levels are
    sufficient for conversion. In the first component of RAD, an increase
    in the 60,000 unit cap to 150,000 units, and the exclusion of section 8
    MR properties from the cap will both allow for a greater portion of
    both the public housing and MR stock that can convert at no cost to the
    Federal Government to participate in the demonstration.
                Small Building and Housing Finance Agency Securitization
        Nearly a third of the Nation's renters, more than 20 million
    households, live in small, unsubsidized housing. These 5- to 49-unit
    properties tend to be owned by small businesses--the engines of our
    communities--and are typically more affordable to low- and moderate-
    income families. But these properties are at risk of continued
    disinvestment because they can be expensive to finance. Small building
    owners are less likely than other multifamily property owners to be
    able to secure financing to make repairs and improvements. Small
    properties are less likely to have mortgage financing (86 percent of
    large multifamily properties are mortgaged, compared to 61 percent of
    small multifamily properties). Just 14 percent of all fiscal year 2010
    FHA-insured properties were for projects with fewer than 50 units.
        To address this problem, the fiscal year 2014 budget includes a
    legislative provision to support small building finance, and to
    strengthen the Risk Share program as a rental finance tool, seeks
    Congressional authority for Ginnie Mae to guarantee securities
    containing FHA Multifamily Risk Share loans, thereby increasing
    liquidity and decreasing cost of capital. This proposal would apply to
    both State and local Housing Finance Agency Risk Share lenders under
    section 542(c) and new Risk Share lending under section 542(b). The
    proposal would also amend section 542(b) of the statute to allow for
    flexibility in how affordability is determined in order to make it a
    more effective tool to recapitalize existing naturally affordable 5-49
    unit rental properties.
    Increasing the Production of Affordable Housing Capital Projects
        In addition to developing tools to address the growing capital
    needs of America's public housing stock, HUD is committed to expanding
    the supply of affordable rental homes in safe, mixed-income communities
    that provide access to jobs, good schools, transportation, and most
    importantly, economic self-sufficiency. Accordingly, in fiscal year
    2013 HUD is working together with its partners to identify ways to make
    the Low Income Housing Tax Credit (LIHTC) program a more flexible and
    nimble tool for the creation and preservation of affordable housing. As
    the primary tool of the Federal Government for developing and
    rehabilitating affordable rental housing, the LIHTC program is
    administered by State agencies with assistance and guidance from the
    Treasury Department and the Internal Revenue Service. It attracts
    capital to low-income rental housing by satisfying some of the Federal
    income tax obligations of investors in certain low-income rental
    properties.
        Since its addition to the tax laws in 1986, the LIHTC program has
    been used to create 1.8 million in affordable rental-housing units
    across the country. Annually, the program supports 95,000 jobs and
    generated $2.7 billion in State, local, and Federal revenues. In fiscal
    year 2014, as part of an ongoing effort to better align Federal rental
    programs, HUD, the Departments of Treasury and Agriculture, the
    Domestic Policy Council (DPC), the Office of Management and Budget
    (OMB), and the National Economic Council (NEC) will continue partnering
    to allow greater flexibility to State and local agencies that
    administer LIHTC programs, as well as to developers and investors, to
    continue to enable the creation of affordable housing in markets where
    it is needed the most.
        Specifically, the revenue provisions of the 2014 budget update
    several revenue proposals that were included in the 2013 budget, and
    the budget also introduces two new proposals:
      --A new proposal for Private Activity Bond Conversion authority that
            will create much needed flexibility in how States implement the
            LIHTC program. Specifically, this request will allow States to
            convert a portion of their tax-exempt Private Activity Bond
            authority (volume cap) into allocated (so-called 9 percent)
            LIHTCs to accomplish several goals. First, for many complex
            preservation projects this proposal eliminates the need for
            going through unnecessary bond issuance procedures, which
            reduces transaction costs. Second, not only does the proposal
            allow States to increase their pool of 9 percent credits, but
            it brings more projects into the competitive LIHTC allocation
            process. This effectively gives States more authority to better
            prioritize projects with limited resources. Third, it would let
            States avail themselves of the greater flexibility that they
            have to increase eligible basis (and thus to increase credits)
            for high-priority projects that are subject to the LIHTC
            allocation cap (as compared with projects subject to the tax-
            exempt bond cap).
      --A new proposal for a Selection Criterion for Preservation of
            Affordable Housing. Adding this criterion to Qualified Action
            Plans under IRC Sec. 42(m)(1)(C) will encourage States to
            consider how to address the preservation needs of affordable
            housing.
      --A modification and permanent fix to the Congress' temporary 9
            percent credit floor provisions in HERA and the American
            Taxpayer Relief Act of 2012. This proposal to improve the
            computation of allocated credit rates will revise the present
            value formula for allocated LIHTCs to increase the annual
            credit percentage rate and more accurately reflect market
            practice.
      --An income averaging proposal from the President's fiscal year 2013
            budget that would encourage a greater range of incomes in
            LIHTC-supported affordable housing by allowing developers to
            choose an income-limitation requirement that would be satisfied
            if households in the low-income units have an average income no
            greater than 60 percent of AMI, with no household above 80
            percent AMI. An additional provision would allow certain
            existing tenants to remain in residence without impairing the
            developer's entitlement to LIHTCs.
      --A LIHTCs earned by Real Estate Investment Trusts (REITs) proposal
            from the President's fiscal year 2013 budget that is designed
            to diversify the pool of investors for LIHTCs and to increase
            the overall demand for LIHTCs. The proposal would allow a REIT
            that earns LIHTCs to provide a tax benefit to its investors by
            paying them tax-exempt dividends in an amount almost triple the
            amount of the REIT's LIHTCs.
        Finally, the recent Worst Case Housing Needs report underscores
    what has been the case since well before the recent recession, namely,
    that extremely low-income renters face the most severe housing shortage
    and cost burden of any Americans. The 2014 budget once again proposes
    $1 billion in mandatory appropriations for the Housing Trust Fund (HTF)
    to address this critical shortage of housing where it is most
    desperately needed. Enacted in 2008, the HTF was designed to provide
    capital resources to build and rehabilitate housing to fill this
    precise--and growing--gap in the Nation's rental housing market. The
    time has come for Congress to provide this crucial funding.
      goal 3: utilize housing as a platform for improving quality of life
        Stable housing provides an ideal platform for delivering a wide
    variety of health and social services to improve economic, health, and
    broad-based societal outcomes. For some, housing alone is sufficient to
    ensure healthy outcomes, while others require housing with supportive
    services to assist with activities of daily living or long-term self-
    sufficiency, as well as proximity to crucial services. HUD's fiscal
    year 2014 budget acknowledges this reality by making critical
    investments in housing and supportive services, and partnering with
    other Federal agencies to maximize resources and best practices.
    Moreover, these investments will save money in the long term, by
    avoiding overuse of expensive emergency and institutional
    interventions.
    Preventing and Ending Homelessness, Serving Our Nation's Most
            Vulnerable
        Nowhere is the relationship between housing and supportive services
    clearer than in the successful efforts in communities around the
    country to address homelessness, which have led to nearly 20 percent
    reductions in veterans homelessness and a 10 percent reduction in
    chronic homelessness over the past 2 years.
        Additionally, this work has yielded a substantial body of research,
    which demonstrates that providing permanent supportive housing to
    chronically ill, chronically homeless individuals and families not only
    ends their homelessness, but also yields substantial cost saving in
    public health, criminal justice, and other systems. This year's budget
    once again invests in this critical effort, by providing $2.381 billion
    in Homeless Assistance Grants, including competitive programs that
    annually serve over 1.5 million homeless families and individuals. This
    includes funding for the Emergency Solutions Grants program, which will
    continue the work of the Homelessness Prevention and Rapid Re-Housing
    Program (in the form of a $60 million set aside)--funded by the
    Recovery Act--that in the last 3 years alone has helped prevent or end
    homelessness for over 1.4 million people nationwide.
        Moreover, HUD continues to focus on the unique needs of homeless
    veterans through both its targeted homeless programs and its mainstream
    housing programs using successful methods and interventions. Currently,
    an estimated one out of every six men and women in our Nation's
    homeless shelters are veterans, and veterans are 50 percent more likely
    to fall into homelessness compared to other Americans. HUD is committed
    to providing affordable housing units to this unique homeless
    population, and has partnered with the Departments of Health and Human
    Services (HHS) and Veterans Affairs (VA) to develop targeted approaches
    to serve the homeless veteran populations. Accordingly, this budget
    includes $75 million for HUD's Veterans Affairs Supportive Housing
    (HUD-VASH) program, which combines tenant-based voucher assistance with
    case management and clinical services tailored to veterans and their
    families. This funding will provide 10,000 new vouchers to help
    veterans move from our streets into permanent supportive housing, in
    addition to the nearly 48,000 already allocated HUD-VASH vouchers, as
    well as the 10,000 vouchers that will be awarded through the fiscal
    year appropriation.
    Investing in Leveraging and Serving Our Most Vulnerable
        This budget provides a total of $526 million for the Housing for
    the Elderly and Housing for Persons with Disabilities programs, which
    includes $40 million to support 4,100 additional supportive housing
    units. Doing more with less, the budget proposes reforms to the Housing
    for the Elderly program to target resources to help those most in need,
    reduce the up-front cost of new awards, and better connect residents
    with the supportive services they need to age in place and live
    independently.
        Historically, HUD has provided both capital advances and operating
    subsidies to nonprofit sponsors to construct and manage multifamily
    housing for low-income people with disabilities. In an effort to
    maximize the creation of new affordable units in a time of funding
    restraints, in fiscal year 2012 HUD began providing operating
    assistance to State housing agencies that formed partnerships with
    State healthcare agencies for service provision to low-income persons
    with disabilities. These funds are used to set aside supportive units
    for this target population in affordable housing complexes whose
    capital costs are funded through Low-Income Housing Tax Credits, HOME
    funds, or other sources. Investing section 811 funds under this
    authority allows HUD to rely on the expertise of the State housing
    agencies to administer the award and on the State healthcare agency to
    identify the most critical population to be served and guarantee the
    delivery of appropriate services. In fiscal year 2014, HUD is
    requesting similar authority for the Section 202 program. Drawing on
    lessons learned from implementation in the section 811 program, HUD
    will take advantage of efficiencies inherent in these same agencies'
    oversight responsibilities for tax credits, HOME funds or similar
    housing funding.
           goal 4: build inclusive sustainable communities free from
                                 discrimination
        The American economy suffers when significant numbers of its labor
    force experience individualized or systemic discrimination, or when
    families live in isolated neighborhoods of concentrated poverty. An
    American economy built to last requires an increased supply of
    affordable rental homes in safe, mixed-income communities that provide
    access to jobs, good schools, transportation, high-quality services,
    and most importantly, economic self-sufficiency. As such, HUD's fiscal
    year 2014 budget puts communities in a position to plan for the future
    and draw fully upon their resources, most importantly their people.
        Each year HUD dedicates approximately 15 percent of its funds to
    the capital costs of housing and economic development projects
    throughout the country. Through this investment, HUD and its partners
    are able to provide better opportunities for people living in
    neighborhoods of concentrated poverty and segregation, and offer
    choices that help families live closer to jobs and schools. Programs
    such as the Community Development Block Grant (CDBG) and Choice
    Neighborhoods provide funding for locally driven solutions to
    overarching economic development challenges in areas of need. As with
    HUD's rental assistance programs, HUD's capital grants--including the
    Public Housing Capital Fund, Choice Neighborhoods, CDBG, and HOME--are
    focused on assisting areas of great need, including communities with
    high unemployment.
    Preserving HUD's Major Block Grant Programs for Community Development
            and Housing
        Through both formula and competitive grants, HUD has partnered with
    local organizations and State and local governments to fund innovative
    solutions to community development challenges. Underpinning these
    partnerships is the fundamental philosophy that local decisionmakers
    are best poised to drive a cohesive development strategy, based on a
    keen perception of local needs and priorities. In fiscal year 2014, HUD
    is requesting a total of $3.14 billion in funding for the Community
    Development Fund. These programs aim to support economic development
    initiatives and projects that demonstrate the ability to connect
    private sector growth to some of our country's most distressed citizens
    and communities.
        As part of CPD programming, the Community Development Block Grant
    (CDBG) remains the largest and most adaptable community and economic
    development program in the Federal portfolio for meeting the unique
    needs of States and local governments. Since its inception in 1974,
    CDBG has invested over $135 billion in economic development at the
    local level, investing in infrastructure, providing essential public
    services and housing rehabilitation, and creating jobs primarily for
    low-and moderate-income families. In fiscal year 2014, HUD is
    requesting that $2.8 billion in CPD funds be dedicated to the CDBG
    formula program. Altogether, CDBG funding annually reaches an estimated
    7,000 local governments across the country, in communities of all
    shapes and sizes.
        To begin to respond to concerns that CDBG formula funds need to be
    better targeted to need and be used more effectively, the budget
    proposes several reforms to the program. The budget includes changes to
    establish a minimum CDBG grant threshold and eliminate the community
    ``grandfathering'' provision. This will ensure that communities receive
    grants large enough to be effective in advancing the goals of the
    program. Local governments affected by these changes would not lose
    access to CDBG funding; funding would be available through an urban
    county or State-administered CDBG program. In addition to better
    targeting CDBG formula funds, the budget provides $200 million in
    community development funding for a new competitive grant program
    targeted to areas hardest hit by the foreclosure crisis and specific
    activities that support neighborhood stabilization. Where appropriate,
    these grants will be linked to the above-mentioned Promise Zones
    initiative. HUD will seek input from stakeholders over the coming
    months regarding further programmatic changes that would improve the
    targeting of CDBG formula funds and strengthen their accountability and
    performance.
        Often, CDBG dollars alone are not sufficient to complete crucial
    economic development projects that communities desperately need. In
    those instances, HUD offers another potent public investment tool in
    the form of the Section 108 Loan Guarantee program. Section 108 is the
    loan guarantee provision of the CDBG program and allows States and
    local governments to leverage their CDBG funds into federally
    guaranteed loans in order to pursue large-scale physical and economic
    investment projects that can revitalize entire neighborhoods or provide
    affordable housing to low- and moderate-income persons. In fiscal year
    2014, HUD is requesting Section 108 loan guarantee authority of $500
    million and is proposing to implement a fee-based program that will
    eliminate the need for budget authority to cover the program's credit
    subsidy.
    Assisting Native Americans and Native Hawaiians
        Through innovative programming, HUD has found new ways to partner
    with American Indian and Alaska Native tribal governments to help these
    communities craft and implement sustainable, locally driven solutions
    to economic development challenges. HUD recognizes the right of Indian
    self-determination and tribal self-governance, and has fostered
    partnerships that allow tribal recipients the flexibility to design and
    implement appropriate, place-based housing programs according to local
    needs and customs. In most of these communities, housing and
    infrastructure needs are severe and widespread, disconnected from
    transportation networks and isolated from key community assets
    including jobs, schools and healthcare facilities. In fiscal year 2014,
    HUD is requesting a total of $739 million to fund programs that will
    directly support housing and economic development in American Indian,
    Alaskan Native, and Native Hawaiian communities nationwide, including:
      --$650 million for the Indian Housing Block Grant program, which is
            the single largest source of funding for housing on Indian
            tribal lands today
      --$70 million for Indian Community Development Block Grants, a
            flexible source of grant funds for federally recognized tribes
            or eligible Indian entities, requested within the Community
            Development Fund.
      --$13 million for Native Hawaiian Housing Block Grant program, to
            develop homeownership units as well as support the prevention
            of foreclosures and the promotion of responsible homeownership.
      --$6 million for the Indian Housing Loan Guarantee Fund.
    Transforming Neighborhoods of Poverty
        The President has made it clear that we must build our economy from
    the middle class out. But that necessity is imperiled when a fifth of
    America's children live in poverty, at a cost of $500 billion per
    year--fully 4 percent of GDP--due to reduced skills development and
    economic productivity, increased later life crime, and poor health, and
    a growing population lives with the problems of concentrated
    neighborhood poverty--high unemployment rates, rampant crime, health
    disparities, inadequate early care and education, struggling schools,
    and disinvestment--all of which isolate them from the global economy.
        That's why HUD's fiscal year 2014 budget provides $400 million for
    the proven tools in the Choice Neighborhoods Initiative, to continue
    transformative investments in high-poverty neighborhoods where
    distressed HUD-assisted public- and privately owned housing is located.
    Choice Neighborhoods--along with RAD--is an essential element of the
    President's Promise Zones initiative. This initiative will revitalize
    many of America's highest-poverty communities by creating jobs,
    attracting private investment, increasing economic activity, improving
    affordable housing, improving educational opportunities, and reducing
    violent crime. Promise Zones are key rungs on the Administration's
    Ladders of Opportunity initiative, which also includes raising the
    minimum wage, increasing access to high-quality preschool, redesigning
    America's high schools, and promoting fatherhood and marriage.
        High-need communities will engage in an open, transparent,
    competitive process to apply for a Promise Zone designation. The
    Promise Zone designation process will ensure rural and Native American
    representation. If approved by Congress, Promise Zones will receive tax
    incentives to stimulate hiring and business investment, alongside with
    Federal partnership and technical assistance aimed at breaking down
    regulatory barriers and using Federal funds available to them at the
    local level more effectively. Promise Zones will be able to access
    investments that further the goals of job creation, additional private
    investment, increased economic activity, expanded educational
    opportunity, and reduction in violent crime. These could include Choice
    Neighborhoods at HUD, Promise Neighborhoods at the Department of
    Education, and Byrne Criminal Justice Innovation at DOJ. The Promise
    Zones initiative builds on the lessons learned from these existing
    place-based programs, for which the budget reflects increases in
    investment across agencies. Other Federal agencies that will be
    aligning their work with that of local Promise Zone partners include
    the Departments of Commerce, Health and Human Services, and
    Agriculture.
        The Choice Neighborhoods initiative is a central element of the
    Administration's inter-agency, place-based strategy to support local
    communities in developing the tools they need to revitalize
    neighborhoods of concentrated poverty into neighborhoods of
    opportunity. The Department's administration of the first rounds of
    funding for Choice Neighborhoods grants exemplify how our practices
    generate effective partnerships with local housing and community
    development efforts. In the past, many Federal grant programs followed
    a rigid, top-down, ``one-size-fits-all'' approach that dictated what
    local policymakers could and could not do rather than listening to them
    and providing the tools they needed to meet local needs. Having served
    in local government myself, I am committed to a collaborative approach
    responsive to local needs--and believe the results thus far demonstrate
    that we are making good on that commitment.
    Helping Cities, Towns, and Regions To Plan Their Economic Future
        The President is committed to making America a magnet for jobs. But
    attracting new businesses to our shores depends on urban, suburban, and
    rural areas that feature more housing and transportation choices, homes
    that are near jobs, transportation networks that move goods and people
    efficiently, all while lowering the cost and health burdens on
    families, businesses and the taxpayer. When America's metropolitan
    areas and rural communities are struggling to rebound from the economic
    crisis and compete for jobs on a global scale, 20th century practices
    are just not sufficient to attract businesses that have the flexibility
    to locate wherever they see the potential to hire committed and skilled
    workers. Increasingly, mayors and business and community leaders are
    instituting and demanding new economic development approaches that
    simultaneously recruit businesses based on industry clusters, unique
    resources available in the community, and implement community
    development strategies that ensure that employees have affordable
    housing choices, can get to work quickly and affordably, and are able
    to enjoy a high quality of life.
        The Office of Economic Resilience (OER), located within HUD's
    Office of Community Planning and Development, will foster and incubate
    innovative program, practice and policy throughout the Department and
    with other agencies by partnering with communities to:
      --strengthen and diversify their economies in ways that allow them to
            effectively compete on a global stage;
      --retain and recruit workers that demand high quality places with
            robust local services and amenities;
      --address distressed and isolated neighborhoods that minimize access
            to opportunity for residents; and
      --effectively align and deploy Federal, State, and local funding for
            development and infrastructure.
        OER will work in partnership with other Federal agencies like the
    Departments of Commerce, Transportation, Agriculture and Energy, Health
    and Human Services, the Environmental Protection Agency, Small Business
    Administration, and others to build the capacity of local, regional,
    and State governments, community organizations and business leaders to
    prepare and execute data-driven community economic development and
    infrastructure investment strategies. OER will fund $75 million in
    Integrated Planning and Investment Grants that will seed or enhance
    locally created, comprehensive blueprints that strategically direct
    public and private investments in development and infrastructure to
    projects that result in: attracting jobs and building diverse and
    resilient economies; significant municipal cost-savings; and stronger,
    more unified local leadership. These grants will create incentives for
    communities to develop and implement comprehensive housing and
    transportation plans, such as updates to building codes, land use, and
    zoning ordinances that result in more resilient economic development,
    improve housing supply response to demand, and increase affordable
    housing near public transit. Integrated Planning and Investment Grants
    will incorporate some of the same features of the previously funded
    Regional Plans for Sustainable Communities and the Community Challenge
    Grants offered by the Office of Sustainable Housing and Communities,
    but using lessons learned from those programs and feedback from local
    leaders and Congress, will prioritize supporting actionable economic
    development strategies, reducing redundancy in federally funded
    planning activities, setting and monitoring performance, and
    identifying how Federal formula funds can be used smartly and
    efficiently in support of economic resilience. As with the previous
    efforts, priority will be placed on directing grants to rural areas,
    cities, counties, metropolitan areas and States that demonstrate
    economic need and are committed to building the cross-sector, cross-
    disciplinary partnerships necessary to tackle the tough decisions that
    help make places economically competitive.
        We know how important these planning tools are to regional
    economies--particularly those that rely on integrated supply chains
    that cross national borders and how essential they are to meeting the
    President's charge to double U.S. exports over the next 5 years. These
    investments will leverage other Administration proposals (e.g.,
    Infrastructure Bank, Project Rebuild) to help overhaul America's
    deteriorating infrastructure and increase residential and commercial
    construction around transit.
    Ensuring Inclusive Housing Nationwide
        An inclusive community is one in which all people--regardless of
    race, ethnicity, religion, sex, disability, or familial status--have
    equal access to housing and economic opportunities. Throughout its
    portfolio of programs, HUD is committed to maintaining that inclusivity
    and providing accountability in housing and lending practices
    nationwide. Through inclusive development, education, enforcement of
    fair housing laws, expanded training and language assistance, HUD will
    affirmatively further fair housing and the ideals of an open society.
        The Fair Housing Initiatives Program (FHIP) is critical to building
    and sustaining inclusive communities. FHIP is the only grant program
    within the Federal Government whose primary purpose is to support
    private efforts to educate the public about fair housing rights and
    conduct private enforcement of the Fair Housing Act. In fiscal year
    2014, HUD is requesting approximately $44 million in FHIP funds,
    representing the Department's strong commitment to fair housing,
    including $28 million to support the efforts of private fair housing
    organizations that conduct private enforcement of the Fair Housing Act.
    The Private Enforcement Initiative (PEI) grantees investigate and test
    housing providers alleged to have engaged in discrimination. The
    requested amount will continue funding to support fair housing
    enforcement by all statutorily eligible private fair housing
    organizations. In addition it will fund fair housing education at the
    local, regional, and national levels.
        The Fair Housing Assistance Program (FHAP) is a critical component
    of HUD's effort to ensure the public's right to housing free from
    discrimination. FHAP multiplies HUD's enforcement capabilities,
    allowing the Department to protect fair housing rights in an efficient
    and effective manner. In fact, FHAP agencies investigate the majority
    of housing discrimination complaints filed in the United States. In
    fiscal year 2014, the budget provides $24.6 million in FHAP grants to
    95 Government agencies, including 37 States, 60 localities, and the
    District of Columbia, to enforce laws that prohibit housing
    discrimination that have been reviewed and deemed substantially
    equivalent to Federal law.
    Ensuring That an Economy Built From the Middle Class Out Includes
            Opportunities for Rural Americans
        The Administration has placed a significant emphasis on ensuring
    that America's rural communities are competitive in the global
    economy--particularly given the reality that rural communities
    generally have less access to public transportation, along with higher
    poverty rates and inadequate housing. HUD serves families in small
    towns and rural communities through almost every major program it
    funds. The State-administered Community Development Block Grants
    (CDBGs) provide approximately $692 million to rural areas, supporting
    over 25,000 jobs both directly and indirectly, providing needed
    infrastructure, economic development, and affordable housing. HUD also
    funds over $300 million in rural areas for affordable housing and
    homeownership programs through its HOME Investment Partnership program,
    directly and indirectly supporting over 5,360 jobs.
        As the single largest sources of funding for housing on Indian
    tribal lands today, programs like Indian Housing Block Grants, Indian
    Housing Loan Guarantees, and Indian Community Development Block Grants
    support development in remote areas where safe, affordable housing is
    desperately needed. HUD also directly supports housing and economic
    development initiatives in remote areas of Hawaii, through the Native
    Hawaiian Housing Block Grant Program and Native Hawaiian Loan Guarantee
    Program. HUD recognizes the right of Indian self-determination and
    tribal self-governance by allowing the recipients the flexibility to
    design and implement appropriate, place-based housing programs
    according to local needs and customs. Taken together, in fiscal year
    2014 HUD is requesting $739 million to fund programs that will support
    housing and development in American Indian, Alaska Native, and Native
    Hawaiian communities.
        In addition, HUD and the Department of Agriculture (USDA) meet
    regularly through an interagency rental housing policy group to better
    align and coordinate affordable rental housing programs. Altogether,
    over 800,000 families in rural communities are directly assisted
    through the Housing Choice Voucher program, public housing, and
    Multifamily programs, with another 450,000 assisted through USDA. For
    homeowners, the FHA helps first-time homebuyers and other qualified
    families all over the country purchase their own homes. More than 1.5
    million of the homes currently insured by the FHA are in rural areas,
    and approximately $545 million in current FHA loans are to rural
    healthcare facilities designated as ``critical access hospitals.'' HUD
    recognizes the unique challenges in these rural areas, and continues to
    develop innovative, community-based programming to meet those needs.
        HUD has also entered into a memorandum of understanding with the
    Department of Treasury's Community Development Financial Institutions
    Fund and the Department of Agriculture--Rural Development, to expand
    the capacity of organizations providing loans and investment capital in
    underserved rural regions. The initiative, which is being piloted in
    colonias along the United States-Mexico border, will improve the
    delivery of funding from Federal agencies and private sources
    supporting small business, affordable housing and community facilities.
                  goal 5: transform the way hud does business
        A 21st century American economy that is a magnet for jobs and
    equips its residents with the skills they need for those jobs demands a
    government that's leaner, smarter, and more transparent. The current
    economic and housing crisis; the structural affordability challenges
    facing low-income homeowners and renters; and the new, multidimensional
    challenges facing our urban, suburban, and rural communities all
    require an agency in which the fundamentals matter and the basics
    function. As such, HUD remains committed to transforming the way it
    does business. This transformation is more crucial now than perhaps
    ever before--HUD remains at the forefront of the Federal response to
    the national mortgage crisis, economic recovery, Hurricane Sandy
    recovery, and the structural gap between household incomes and national
    housing prices--roles that require an agency that is nimble and market-
    savvy, with the capacity and expertise necessary to galvanize HUD's
    vast network of partners. HUD's 2014 budget reflects these critical
    roles, by investing in transformation, research, and development that
    will be implemented persistently over time.
    Investing in Our Staff
        HUD's greatest resource is its dedicated staff. When employees
    attain skills and are motivated to use those skills to help their
    organization reach goals, the capacity of the organization grows and
    employees in the organization grow as well. This is why HUD is
    providing its employees training and leadership development
    opportunities. In addition, many internal rules and regulations have
    become hurdles instead of being helpful. In response, HUD is in the
    process of simplifying and combining programs, streamlining
    regulations, and eliminating rules and constraints. The Department is
    also in the middle of a major reform of its information technology,
    human resources, procurement, and other internal support functions to
    give more authority and flexibility to managers and provide better
    service to HUD customers.
        In fiscal year 2014, HUD is requesting $1.467 billion in salaries
    and expenses, including $127.7 million for HUD's Office of Inspector
    General (OIG). This funding request represents just a 0.6 percent
    increase from the fiscal year 2012 enacted level, and reflects HUD's
    commitment to lean and smart management. The HUD request includes
    several initiatives to streamline the HUD organization, including
    restructuring the accounts, increasing training for our staff, and
    providing significantly more detail on how HUD staff supports programs
    and strategic goals. HUD is making specific investments of more staff
    to manage major rental assistance programs, increasing our ability to
    enforce new fair housing rules, and providing more oversight to our
    community grant programs. The Department will continue to improve
    operations and create a dynamic organization capable of addressing some
    of our Nation's most difficult challenges. HUD remains at the forefront
    of the Federal response to the national mortgage crisis, the economic
    recovery, and the structural gap between household incomes and national
    housing prices. These roles require an agency that is nimble and
    market-savvy, with the capacity and expertise necessary to galvanize
    HUD's vast network of partners, including local officials, nonprofits,
    and faith-based organizations, among others.
    Carrying Out Critical Program Demonstrations and Research
        HUD's ongoing transformation is a multiyear effort that can only be
    achieved through the relentless focus of agency leadership, full
    transparency and accountability for real results, and sustained and
    flexible budget resources. The Transformation Initiative (TI) remains
    the primary source of funding for this transformation. Since TI was
    first enacted in 2010, it has bolstered the long-neglected areas of IT
    modernization, research and evaluation, and program demonstrations
    crucial for increasing the efficiency and effectiveness of the
    Department's programs. Further, TI has provided a mechanism for
    innovative, cross-cutting technical assistance that goes beyond program
    compliance to improve grantee capacity, performance and outcomes.
        While the Department's transformation is a crucial long-term
    commitment, HUD continues to prioritize these efforts in a responsible
    manner that ensures HUD's constituent services don't suffer at the
    hands of internal transformation. This year's budget proposes a
    Department-wide HUD Transformation Initiative Fund to be funded by
    transfers from program accounts of up to 0.5 percent at the Secretary's
    discretion. The 2014 budget requests transfers of $80 million into its
    Transformation Initiative Fund for priorities such as:
        Research and Evaluation.--To strategically increase efficiency and
    effectiveness of the Department's programs through examining policy
    questions and assessing program functioning and outcomes. TI-funded
    research complements the data infrastructure created through Research
    and Technology funding of national housing surveys. TI will support
    research priorities developed in a 5-year Research Roadmap by the
    Office of Policy Development and Research. The Roadmap reflects a year-
    long process of consulting with stakeholders about the research
    questions that are most relevant and crucial for housing and urban
    development policy and that HUD is best positioned to advance in a
    timely way. For example, one fiscal year 2014 priority project would
    refine HUD's utility models to enable the Department to more accurately
    account for energy usage in housing assistance programs in which
    utility costs are paid by tenants, and thereby help HUD to more
    effectively disburse funds for utilities that are actually consumed.
        Program Demonstrations.--Demonstrations test new program approaches
    in a carefully structured and rigorously evaluated manner, and are
    essential mechanisms for evidence-based policy improvements. For
    example, the Rental Assistance Demonstration (RAD), approved in fiscal
    year 2012, supports the trial conversion of public housing and certain
    multifamily properties to long-term project-based contracts. TI will
    enable evaluation of outcomes. HUD is also proposing, within the Public
    Housing Capital Fund, a $15 million pilot of the evidence-based Jobs-
    Plus Demonstration to increase the earnings and employment of public
    housing residents. A process evaluation conducted in tandem through TI
    will document successful local adaptations and how this larger scale
    implementation affects outcomes.
        Surveys and Data Infrastructure.--The Office of Policy Development
    and Research (PD&R) also provides fundamental support for informed
    decisions by the Department and national policy makers through data
    collection and research dissemination. PD&R has a key role in the
    improvement of national housing data infrastructure and meeting other
    key national information needs. In fiscal year 2014, HUD is requesting
    $50 million to fund the Nation's basic data infrastructure and share
    research knowledge on housing and community development. Complementing
    TI, this funding to support foundational housing market surveys
    continue the transformation of PD&R into the Nation's leading research
    organization addressing the wide array of America's housing and urban
    development challenges.
        Delivering Strategic and Cross-Cutting Technical Assistance.--To
    ensure HUD's funds make the most impact in the communities where they
    are invested, HUD has shifted from making small investments in narrow,
    compliance-focused assistance to comprehensive, results-oriented
    capacity building that assists both grantees with deeply rooted
    management and financial challenges, as well as those driving
    innovation by being the first to implement new polices or programs. HUD
    delivers intensive, place-based technical assistance, working hand-in-
    hand with jurisdictions, housing authorities, and other stakeholders
    that are experiencing a range of capacity challenges. HUD also provides
    ongoing training and development on principles fundamental to operating
    housing and community development programs effectively, such as
    financial management and using data to drive decisionmaking. HUD's TA
    resources and training are increasingly offered online to make access
    easier for many stakeholders and to reduce the costs of providing TA.
    Upgrading the Department's Information Technology Infrastructure
        In fiscal year 2014, HUD is requesting $285 million to support and
    modernize its information technology infrastructure. This request
    includes $45 million for the development, modernization, and
    enhancement of key outdated systems; $116 million for the operations
    and maintenance of our current systems; and $124 million to complete
    the transition to our new IT Infrastructure system, HUDNET. In fiscal
    year 2014, HUD will focus our development efforts on transitioning the
    Department's IT infrastructure from the current antiquated environment
    to a modern, sustainable infrastructure, continued development of a
    modern financial management system that will improve HUD's ability to
    measure, track, and report on program costs and efficacy, and
    transitioning the current FHA systems to a modern platform. These
    changes will allow HUD to deliver services and manage its multi-billion
    dollar programs faster, more accurately and using better information
    for analysis. These funds are crucial to complement HUD's
    transformation efforts, providing resources for maintaining and
    improving Department-wide information technology systems.
                                   conclusion
        Madam Chairman, this budget reflects the Administration's
    recognition of the critical role the housing sector must play to ensure
    that America becomes a magnet for jobs that strengthen the Nation's
    middle class, including providing ladders of economic opportunity for
    all Americans. Equally important, it expresses the confidence of the
    President in the capacity of HUD to meet a high standard of
    performance.
        Given the economic moment we are in, HUD's 2014 budget proposal
    isn't about spending more in America's communities--it's about
    investing smarter and more effectively.
        It's about making hard choices to reduce the deficit--and putting
    in place much-needed reforms to hold ourselves to a high standard of
    performance. But most of all, it's about the results we deliver for the
    vulnerable people and places who depend on us most.

        Senator Murray. Thank you very much, Mr. Secretary. And I
    will begin the questioning by talking about the status of FHA's
    Mutual Mortgage Insurance (MMI) Fund. Your budget states that
    $943 million may be needed to cover expected FHA losses in the
    single-family insurance fund in the fiscal year 2013. That
    follows on the most recent actuarial report showing that the
    capital reserve account would go negative. Can you talk about
    how the condition of the fund has changed in the past year, and
    how HUD arrived at its 2013 shortfall estimate?
        Secretary Donovan. Absolutely.

                         MUTUAL MORTGAGE INSURANCE FUND

        I am glad you raised the actuarial report and where we are.
    Before that report and since, we have taken aggressive actions
    to protect the fund--five different premium increases,
    including most recently at the beginning of this month, that
    will help protect the funds. That leads to, obviously, the
    significant receipts we expect in the budget this year, the
    $14.5 billion that I referred to.
        What that shows you is that the new loans that we are
    making in the fund are the best quality that we have ever seen
    in FHA. And I do not believe, at this point, that we should be
    taking further steps to increase premiums. What we really
    should be focusing on are the loans that are causing the
    damage.
        And those steps that we have already taken, as you can see,
    move us from a negative $16 billion number that was in
    actuarial report to the under negative $1 billion that we have
    in the President's budget.
        The further steps that we need to be taking focus on the
    loans that are causing the deficit. If you just took out the
    reverse mortgage loans from the FHA fund, we would be in a
    positive $4 billion----
        Senator Murray. Why are these such a problem?
        Secretary Donovan. Frankly, the program needs reforms. And
    unfortunately, we do not have the authority to implement those
    reforms without full notice-and-comment rulemaking. That is a
    process that could take 18 months. And one of the things that
    we are asking Congress to do as quickly as possible is give us
    the ability to make these changes to the program through a
    mortgage letter much more quickly rather than having to go
    through this full notice-and-comment rulemaking.

                             REVERSE MORTGAGE LOANS

        The other thing I would say in particular is that, because
    of the nature of the reverse mortgage loans, they are more
    highly sensitive to changes in house prices. So the recent
    economic crisis and housing crisis has had a more severe
    impact.
        So we need to change the Home Equity Conversion Mortgage
    (HECM) program. We are asking for the authority to do that as
    quickly as possible, in addition to the changes we have already
    made.
        The second thing I would say is we need to continue to
    increase the collections that we can make on older loans
    outside of the HECM program. We made a number of changes this
    year. We are going to continue to do that, streamlining short
    sales, improving loan sales. All of those can bring billions of
    dollars to the fund. But we also need help from Congress in
    increasing our enforcement authorities; for example, allowing
    us to remove servicing from lenders that are not doing a good
    enough job helping homeowners and helping protect the taxpayer.
        Senator Murray. Okay, I appreciate that.
        Let me ask you about sequestration. You testified before
    the full Appropriations Committee a few weeks ago about the
    impact on HUD's programs and the people who rely on those.
    Those cuts have now been implemented with some real
    consequences. I am hearing a lot about this at home. I
    mentioned that in my statement.
        Can you talk about how public housing authorities are
    responding to these cuts, and what is their effect, especially
    since this has come so late in the fiscal year?
        Secretary Donovan. Absolutely.

              SEQUESTRATION'S IMPACT ON PUBLIC HOUSING AUTHORITIES

        First of all, and you really talked about this in your
    statement, Senator, more than 100,000 families that we expect
    to lose vouchers, and we have already seen--you talked about
    the example of King County, where families who are on the
    waiting list who would have gotten a voucher are going to
    remain at risk of homelessness in terrible situations by not
    getting that voucher.
        But there are even more extreme examples around the
    country. We have identified over 700 housing authorities where,
    even if they fully draw down their reserves, stop leasing new
    vouchers, that we do not think will be enough. That means that
    they will literally have to start cutting off families from the
    program----
        Senator Murray. Who are currently in section----
        Secretary Donovan. Who are currently served, or other
    extreme measures, reducing payment standards and other things
    that would have direct impacts on families that are already
    severely stressed. And so we are most concerned about those.
        In the most extreme example, and I know this is
    particularly important to you and the ranking member, we have
    seen housing authorities start to turn back their entire
    programs. In other words, they say we can't administer vouchers
    anymore.
        Senator Murray. Because they do not have the personnel to
    do it?
        Secretary Donovan. Because they do not have the ability to
    do it. Thirteen housing authorities in the first 3 months of
    this year, that is a more than tripling of the rate that we saw
    last year. And last year was already high because of the cuts
    that we have seen in prior--we even have housing authorities
    turning back VASH vouchers. Can you imagine a housing authority
    saying I can't serve a veteran of this country to get them off
    the street?
        Senator Murray. Not because they don't have a population
    that needs it, but because they do not have the personnel?
        Secretary Donovan. Absolutely. Only because they do not
    have the funding.
        Senator Murray. Right.
        Secretary Donovan. Now, beyond that, thanks to the work
    that you did in the recent continuing resolution, we have gone
    from expecting about 100,000 people in our homeless programs to
    be back on the streets--that is down to 60,000. So it is better
    than the 100,000, but it is still 60,000 people that could be
    hurt that way.
        I would also just point to one other example. As Senator
    Blunt knows, Joplin is still recovering from the devastating
    tornado we saw there. You all worked hard to make sure that
    funding was available through the Sandy supplemental. We have
    allocated over $100 million there to Joplin.
        But we are going to see, just in the CDBG program, over
    $800 million of cuts. We believe that is 20,000 jobs in
    reconstructing, not to mention the more than 10,000 families
    and businesses who may never get rebuilt as a result of that.
        Overall, what we are talking about, and you pointed to
    this, just at a time when we are really seeing the economy with
    the ability to take off, just in HUD's budget, we are talking
    about 50,000 jobs lost from sequestration, combining both the
    supplemental funding and the work that we are doing across our
    other programs.
        So these are real impacts on the middle class, on our most
    vulnerable families, and they are happening today, and they
    will continue to grow for the rest of the year if we do not
    reverse sequestration.
        Senator Murray. Yes, and what I am seeing is the impact on
    the broader community, too. As I see that constriction, people
    are once again stopping spending. They are stopping expanding.
    It has had a real impact, so I appreciate your perspective.
        Senator Collins.
        Senator Collins. Thank you, Madam Chairman.
        Mr. Secretary, I was very interested in the exchange that
    you had with Senator Murray about reverse mortgages, because
    over the past couple of years, a retired mortgage banker in
    Maine has repeatedly contacted me to express her well-informed
    view that, in many cases, our seniors are getting into these
    reverse mortgages, and they are turning out to be a disaster
    for them. And she keeps asking why isn't HUD doing more, why
    isn't Congress doing more, to regulate this financial product?
        So it is very interesting to learn today, and to learn
    based on the Home Equity Conversion Mortgage program, I believe
    you called it HECM?
        Secretary Donovan. HECM.
        Senator Collins. HECM. That HECMs are contributing to the
    financial instability of FHA's MMI Fund due to factors that
    included longer mortgage terms than were expected, declining
    home values, and an increase in the number of homes conveyed to
    HUD.
        So I was very glad when Senator Murray asked you about the
    impact of those reverse mortgages on the MMI Fund, especially
    since we are concerned about that fund drawing on the Federal
    Treasury.
        But I am also concerned about the impact on seniors of the
    wider spread use of reverse mortgages.
        For example, the surviving spouse of a borrower with a HECM
    insured loan, if not a party to the mortgage him or herself,
    must pay off the loan upon the mortgager's spouse's death. And
    I am wondering if the spouse even realizes that when the
    reverse mortgage is granted.
        So what is HUD doing to ensure that borrowers and their
    spouses understand that consequence and other potential
    problems with getting a reverse mortgage? We see these ads on
    television. It sounds like it is the best thing since sliced
    bread, and yet, I am hearing that there are a lot of problems.
    And the fact that you are seeing such a negative impact on the
    MMI Fund suggests this is an area that we really need to look
    at.

                     HOME EQUITY CONVERSION MORTGAGE REFORM

        Secretary Donovan. Absolutely. And just to take this
    specific point, Senator, about the spouse, this is an issue
    that does need work and clarification. We are asking for
    legislative language that would clarify this in our budget. But
    we have also made sure that, in the counseling that we require,
    that this is a much more clear focus when seniors are making a
    decision about whether to take a reverse mortgage or not.
        I agree with you that we need to do more outreach and make
    it more clear. We do believe that it is important that a spouse
    should be on the mortgage, be not just a part homeowner but
    actually signed on the mortgage for the financial integrity of
    the program. But we also have taken a number of steps to create
    more options; for example, to create more flexibility to allow
    a sale through the estate to ensure that there are ways to
    recover short of foreclosure in those situations.
        So both the counseling and the flexibility on sale are
    things that we have done. But we need the clarification legally
    to make sure we all understand, because there is pending
    litigation on this, and that has created a lack of clarity as
    well.
        More broadly, I would just say, quickly, for the reverse
    mortgage program, we have taken a number of steps to create
    safer products. We introduced a safer version a few years ago.
    We have enhanced the financial tools in addition to counseling
    that we provide. And we are seeing significant improvement in
    loans that were originated after these changes were put in
    place in 2011. Using an apples-to-apples comparison, default
    rates have come down in half. So we are seeing improvements in
    the safety of the loans.

                        MORATORIUM ON FULL DRAW PROGRAM

        But we are very concerned about what we call the full draw
    program. We have put a moratorium on that program to stop it.
    And we will only reinstitute it if we can get the legislative
    authority we need to make the changes quickly. Otherwise, it
    will take us, as I said, through full notice-and-comment
    rulemaking, probably 18 months or so to be able to institute
    those changes.
        And unfortunately, if we do not have them sooner, we are
    going to have to take more drastic measures that would really
    harm the seniors that should have a reverse mortgage, where it
    can be a productive tool, because by the end of the fiscal
    year, we have to have the program back to making money. We have
    to have it with what we call negative credit subsidy, so have
    it be a profitable program for the Federal Government.
        And the only way that we can do that without this
    legislative change is to impose significant changes on
    principal limit factors and other things that we think do more
    harm than good in some ways.
        Senator Collins. Thank you for that response. That is
    something I am very interested in working with you and the
    chairman on.
        I do recognize that a reverse mortgage can be very helpful
    to some of our seniors, but it seems to me it is fraught with
    risks for others. And the fact that your fund is being hit hard
    suggests that it is also fraught with risk for the Federal
    Government. And of course, those two facts are connected.
        So I do think that we need to take a look at that.
        Let me just touch on one other issue. The budget proposes
    to increase the loan guarantee commitment authority for FHA's
    General and Special Risk Insurance programs from $25 billion to
    $30 billion. And as you are well aware, Chairman Murray and I
    tried very hard to get this anomaly included in the continuing
    resolution. Unfortunately, we were unable to include provisions
    that could prove problematic to final passage, and this was one
    of them, although it should not have been, in my view.
        This important program provides mortgage insurance for the
    construction of multifamily housing, hospitals, and healthcare
    facilities. Based on commitments recorded through January of
    this year, the total demand for mortgage insurance during this
    fiscal year is expected to exceed the commitment limitation
    available.
        If funding is depleted, delays in the approvals of mortgage
    insurance could jeopardize construction projects that add jobs
    to our economy.
        So my question for you, Mr. Secretary, is when do you
    anticipate that the program will reach its current limitation
    of commitment authority during this fiscal year, since we were
    unable to get it increased through the continuing resolution?

            GENERAL AND SPECIAL RISK INSURANCE COMMITMENT AUTHORITY

        Secretary Donovan. Based on our latest projections, we
    expect to run out of commitment authority and have to shut down
    the program in mid-August. So that would be 6 weeks before the
    end of the fiscal year.
        Let me just be clear. There are three reasons why we should
    do this, and we want to push hard to get this. We have done
    this in past years. We want to get this done during the rest of
    the year.
        First, and you made this point, that $5 billion in
    commitment authority is 22,000 jobs. Second, we are also using
    that commitment authority to refinance existing loans that are
    already in the program to record low interest rates. That
    actually saves taxpayers money by making those loans safer
    going forward. Third, the new loans, that $5 billion, will
    actually make the taxpayers about $200 million, because those
    new loans we are making at the higher premiums that are
    charging today make money. And so, in lots of different ways,
    not doing this would be a real mistake.
        Senator Collins. I completely agree with you, and it should
    have been done as part of the continuing resolution. We tried
    mightily to get it in there as an anomaly.
        Secretary Donovan. I know you did, and I appreciate it. I
    think we know where the resistance has been. And I think if we
    work together--I certainly have had conversations already on
    the House side about this. I hope we can get there. We have
    been able to in the past, and really, for the private sector,
    in terms of these jobs and being able to move forward, it would
    be a shame at the time our housing market is recovering to
    reverse that progress.
        Senator Collins. Absolutely. Those three arguments are very
    solid. Thank you.
        Senator Murray. Senator Blunt.
        Senator Blunt. I thank the chairman.
        Secretary Donovan, on the last page of the booklet I have
    here on fiscal year 2014, if I am looking at these figures
    right, it looks like to me that, in the billions, the number
    you had available in fiscal year 2012, was $44.341 billion. The
    number you asked for 2014 is 10 percent higher than that.
        What number did you actually wind up with available to you
    in 2013?
        Is that $44.615 billion what you had available or is that
    pre-sequestration?
        Secretary Donovan. You are looking at 2013?
        Senator Blunt. I am.
        Secretary Donovan. That is pre-sequestration.
        Senator Blunt. So how much did you----

                          SEQUESTRATION BUDGET NUMBERS

        Secretary Donovan. So post-sequestration would be $42.4
    billion. And again, that is on a gross basis. Our receipts from
    FHA and Ginnie Mae total $11.2 billion in 2013. So, on a net
    basis, it would be $31.2 billion.
        And I do not believe the table you have includes those
    receipts, if I am correct.
        Senator Blunt. I think it has $11.204----
        Secretary Donovan. Yes, I am sorry.
        Senator Blunt. A lot higher than 2012 and 2011, more than
    twice as high as 2012 and 2011.
        Secretary Donovan. That is correct. And that is both due to
    the better quality of the loans that we are making, as well as
    the increase in premiums.
        Senator Blunt. And does that affect overall programs, or
    just the programs where those receipts come in?
        Do you actually get to spend that money like it was other
    money available to you?
        Secretary Donovan. Ultimately, that is up to the Congress
    to determine in the allocations for the budget, how much of
    those receipts would stay----
        Senator Blunt. What happened here? What happened here? Did
    you have $11 billion more to spend on other things as supposed
    to the year before, where you had $5.8 billion?
        Secretary Donovan. Again, I do not have the discretion to
    spend that money. But it is a net benefit to the taxpayer. It
    does offset the cost of our programs. So Congress determines
    how to use those receipts.
        Senator Blunt. Okay, back to my earlier point then. Your
    total spending in fiscal year 2013 was higher even with
    sequestration than fiscal year 2012, because of those receipts?
        Secretary Donovan. So with sequestration, it is about a
    $1.9 billion reduction.
        Senator Blunt. Reduction.
        Secretary Donovan. In gross spending. So that is the $44.3
    billion going down to the $42.4 billion.
        Senator Blunt. Why did you decide to submit the numbers as
    if sequestration or the budget caps would not be utilized again
    this year? Was that the direction you got from the Office of
    Management and Budget (OMB)? Or did you decide that on your
    own?
        Secretary Donovan. We wanted to provide both pieces of
    information.
        Here is the reason, fundamentally. The President believes,
    I believe, that, as I said very clearly, that sequestration is
    damaging; it is not the right way to manage these programs; and
    that we should, before the fiscal year is out, we hope to reach
    a comprehensive agreement with Congress that would reverse
    sequestration and put in place a balanced deficit reduction
    plan. And, therefore, we think it is critical to look at not
    just where we are today with sequestration, but also to provide
    the information that shows where we would be without that
    sequestration, as well.
        Senator Blunt. But do you have a list of proposals to show
    where you would be with sequestration? I noticed the President
    yesterday, according to Reuters, had to submit a document that
    reduced his own budget he submitted the day before by $91
    billion, but with no particular prioritization, just taking it,
    I guess, out of the budget like sequestration.
        You do know that is the law, of course?
        Secretary Donovan. Obviously, it is the law, and we are
    living with the consequences.
        In fact, if the----
        Senator Blunt. We also live with the consequences of not
    acting like it is the law. September 28, OMB sent out a
    document to you and everybody else that I put in the
    Congressional Record a couple months ago that said, spend your
    money beginning October 1 as if the law will not be followed. I
    think it actually said, ``as if Congress will change the law,''
    which is, of course, a nicer way to say that.
        But it would seem to me that we would want to set the
    priorities you want with the money you are likely to get, as
    opposed to the priorities you want with lines that will, in all
    likelihood, I believe, now will be cut. But that is just my
    view as opposed to yours.
        Answer a question for me about veterans' housing, homeless
    veterans. You said you had 60,000 people unserved instead of
    100,000? Was that the comment you made?
        Secretary Donovan. That is in our homeless programs more
    broadly, not just----
        Senator Blunt. Not veterans. Homeless programs more
    broadly.
        What did we do in the continuing resolution that allowed
    you to at least close 40,000 of that anticipated gap from
    100,000 to 60,000?

                         SHORTFALLS UNDER SEQUESTRATION

        Secretary Donovan. There was funding added to our homeless
    assistance grants that allowed us to renew more of the existing
    units that are there. We still are going to have to, if
    sequestration continues, and the continuing resolution, we are
    going to have to eliminate existing programs that house the
    homeless if sequestration is not reversed. And that would be
    about the 60,000 number that I cited.
        Senator Blunt. So the continuing resolution update was
    better for this program than if we had just continue to go with
    past priority-setting efforts.
        Secretary Donovan. Senator, I would just add, to go to your
    question earlier, to be clear, we do believe sequestration
    should be reversed. We believe that is the right course. And
    the President is not going to give up on that.
        But I would also say that if sequestration continues, it
    will make the budget picture worse next year and increase needs
    in many of our programs. Just to give you one example, if
    sequestration continues, we will go into next year with a $1.2
    billion shortfall in our project-based section 8 program. Those
    are contracts that we signed with private owners who manage
    housing that says here is the rent that they are entitled to.
    And so, for us to live up to those contracts, we are in a
    position, if sequestration is not reversed, where, in addition
    to the funding that we have here, is an additional $1.2 billion
    that would be needed to live up to those contracts.
        Senator Blunt. And would those contracts be a priority?
        Secretary Donovan. Absolutely. And as I said in my
    testimony----
        Senator Blunt. Absolutely. So why wouldn't you want to be
    dealing with this subcommittee to try to be sure we were
    helping you meet your priorities before you meet anything else?
        Secretary Donovan. That is exactly why this was a priority
    for us in the budget as I laid it out. Eighty-four percent of
    our budget that goes to renewals is the top priority for us,
    and we have made sure in the budget for next year that every
    single family that is currently served could continue to be
    served.
        Senator Blunt. Well, I am sure you are not the only agency
    that has had to approach this, or decided to approach this,
    this way. But my sense would be that, at some point, we are
    either going to decide we are going to change the law, or it is
    actually the law, and we all need to figure out how to deal
    with that as we are helping set priorities as opposed to vote
    for an appropriations bill that is going to be cut in areas
    that we wouldn't want it cut on a line-by-line basis, and other
    things that were new and aspirational might have had a broader
    debate if you knew they were truly areas that were going to be
    impacted by these funding programs.
        Chairman, thank you for the time.
        Senator Murray. Thank you. And I would just remind all of
    us that we are in a position now where we are trying to work
    between the White House, the House, and the Senate on what
    those levels are going to be. Meanwhile, we have to move our
    appropriations bills forward, and we are all trying to manage
    through that.
        Mr. Secretary, in recent years, examples of housing
    authorities that misused Federal funds or failed to comply with
    important safety regulations have really highlighted the
    importance of oversight. As you work now to improve HUD's
    oversight, it is important to make sure we are not just adding
    new requirements or just asking for more information, but we
    are instead asking for the right information and using it
    effectively.
        What steps are you taking to improve oversight and
    streamline reporting requirements and update regulations?

                OVERSIGHT OF TROUBLED PUBLIC HOUSING AUTHORITIES

        Secretary Donovan. Well, first, I would point to the
    critical section 8 reform legislation that we have proposed. As
    I said, we are looking at $0.5 billion in savings just next
    year, $2.7 billion over 5 years. That is enormously important.
    This does go to Senator Blunt's point as well.
        There are important steps that we can take while serving
    the same number of families to lower costs in the programs.
        We have also taken substantial steps to make sure that the
    minority of public housing authorities, the small number that
    are violating program rules, that are in serious difficulties,
    and are not living up to the standards that we have set, those
    troubled housing authorities, that we are focusing on them and
    either enforcing against them or working with them to correct
    those problems.
        And I do think we are making progress there. If you go back
    to the beginning of administration, we had about 175 troubled
    housing authorities around the country. We are now down to 52.
    And I think that we will continue to make progress. We would be
    happy to provide more information on how we are doing that
    through our FARs effort.
        We have over 100 teams around the country that are working
    with these housing authorities, both to enforce and to improve
    them.
        We made enough progress that we have started working on the
    near-troubled agencies. We have seen about a 10-percent
    reduction in the number of those, and we are going to take
    additional steps. We are looking forward to seeing the results
    of those assessments this year to see if we made further
    progress. And we are actually going to go further upstream to
    those that are, for some reason, in the risk-ranking that we
    are doing, appear to be at risk of troubles.
        So those are all important.
        The other thing I would just make sure we understand here,
    HUD needs to live up to its responsibilities to oversee these
    housing authorities. But these are local entities created under
    State law with boards of directors, executives that have
    authorities for oversight themselves. And we are going to be
    aggressive, and we have been aggressive, in going after
    individuals who are not living up to their standards and also
    that may be violating our rules.
        We are debarring and taking other steps against individuals
    who are not living up to their responsibilities. We need to
    make sure that local responsibility is met.
        Just the last thing I would say is, even where these folks
    are doing a great job--you mentioned Steve Norman in King
    County. Senator Collins mentioned the improvements that we have
    made in the Maine State Housing Authority. They are also not
    magicians. And when you are operating at under 70 percent of
    administrative fees, we have to recognize that the risk here,
    no matter what we do to make the programs more efficient and
    effective, is that oversight will fail, that we will get more
    units, because there are not capital funds to fix them up, that
    are not in decent condition.
        And so while we do everything that we can to create more
    flexibility, the fungibility between operating and capital fund
    is a good example in our budget, to increase oversight, there
    is a limit as to what we can do. And even some of these efforts
    we would like to undertake, we will have to put aside or delay,
    given the funding levels that we have.
        Senator Murray. An excellent point. And on the local
    governance issue, that really is important. And I would like to
    work with you and the inspector general on ways to improve the
    ability of housing authorities and other governing boards to
    identify some of these problems.
        I want to quickly talk about some of the new initiatives.
    As I have traveled around my home State, I have been excited to
    see some of the partnerships housing providers have created to
    address the housing and service needs of people seeking
    assistance.
        Tacoma, King County housing authorities are doing really
    great and exciting work around education. Longview and Walla
    Walla in my State are doing some really great work with our
    veterans' groups. Seattle's Yesler Terrace project supported by
    Choice Neighborhoods involves partnerships with schools,
    community colleges, local employers. And that project is going
    to redevelop housing and the whole surrounding neighborhood,
    while also increasing opportunities for families living in
    them.
        Your budget proposes to make a significant investment in
    Choice Neighborhoods, and I wanted to ask you, how does Choice
    encourage the kind of partnerships and leveraging happening in
    Seattle?

                              CHOICE NEIGHBORHOODS

        Secretary Donovan. Yes, I very much appreciate you raising
    this because the President strongly believes that we can reach
    our balanced deficit reduction while still investing more in
    the programs that are going to create jobs and growth, and help
    people be ready for those jobs through these Ladders to
    Opportunity.
        And I would just quibble a little bit with your use of the
    term ``new initiatives.'' I do want to be very clear that
    everything in this budget, whether it is in Choice
    Neighborhoods, the Neighborhood Stabilization Investment, Jobs-
    Plus, some of the other things that you mentioned, those are
    all things that are tested at this point and that we have done.
        We are proposing an effort to coordinate these better
    through Promise Zones, but it is not a new program, in the
    sense that it is simply scaling up existing initiatives or
    things that we have proposed before.
        One of the things that I think is so impressive about
    Choice Neighborhoods--and you have seen it directly, just about
    anybody who goes to see the transformation of these
    neighborhoods--is that they have enormous leveraging of what
    work is being done, whether it is at the Department of
    Education, that is why we want to link up with their Promise
    Neighborhoods effort. But it also brings so much private
    capital.
        So just take the nine grantees that we have done so far in
    implementation grants for Choice Neighborhoods. They have
    raised over $2 billion in capital for investment and job
    creation. That is over eight times a multiple of the money that
    we have put in on the Federal side.
        So some people might say, well, we ought to put this money
    into the regular capital fund account. But I think we can get
    more bang for the buck if we put it into Choice Neighborhoods
    and leverage all of this other private capital that can go to
    work creating jobs.
        The other thing that it recognizes is, what is the cost of
    the child that grows up in that neighborhood and ends up in a
    homeless shelter, that ends up not being able to get a job
    because they are not getting a decent education?
        Senator Murray. Never finishes, yes.
        Secretary Donovan. We estimate that the 20 percent of kids
    growing up in poverty in this country costs us $0.5 trillion a
    year in lost productivity and wages.
        And that is a cost that we have to avoid. And that is why
    the President focused on this Promise Zones coordination
    effort, to make sure that not only we are giving these kids a
    chance, we are living up to the American promise, but that we
    are also avoiding those enormous costs of failure.
        Where are our future workers going to come from if we are
    leaving all these kids behind? And that is a cost we can't
    afford to bear.
        Senator Murray. Right. Well, I really appreciate that. And
    as I have seen in my State, the partnerships that are created
    through these initiatives really do make a difference.
        Secretary Donovan. Seattle Housing Authority Yesler is a
    terrific example.
        Senator Murray. Great example, yes.
        Senator Collins.
        Senator Collins. Thank you, Madam Chairman. Madam Chairman,
    I am going to submit the remainder of my questions for the
    record, because I think if I get into a long exchange, we will
    get into the vote that is coming up very shortly, which
    probably makes the Secretary very happy. But I do want to make
    one----
        Secretary Donovan. This is one of the few hearings I love
    spending time in.
        Senator Collins. He is tactful as well.
        I do want to say that the budget presentation--and this
    isn't just HUD's, it is across the board. Because of the way it
    was done this year, comparing to fiscal year 2012 rather than
    to the enacted sequestered amount, is extremely confusing.
        I had to have my staff write out for me, and HUD's is even
    more confusing because you have offsetting receipts, which a
    lot of agencies and departments don't. So I had to have them
    write out for me fiscal 2012 enacted, then what is the amount
    with receipts; fiscal 2013, the sequester year, what is the
    amount with receipts; fiscal 2014, what is the request and what
    is the amount with receipts.
        And I think to prevent confusion as we begin marking up and
    putting together a bill, we need a clearer chart from you. I
    mean, you can glean it from some of this, but it isn't easy.
        And I suspect that that is because you were instructed by
    OMB to pretend the sequestration is going to go away and do
    your comparisons to fiscal year 2012.
        Is that an accurate assumption on my part, or can we get a
    more straightforward chart?
        Secretary Donovan. I will hand you this in about 30 seconds
    when we finish. So, yes, we do have that.
        And look, obviously, we want to provide whatever
    information you need to make decisions.
        I do think it is a fundamental point here that the
    President believes, we all believe, that sequestration is not
    the right policy, and that we ought to reverse it, that we can
    reverse it. And particularly building into our budget, for
    instance, this $1.2 billion hole for project-based section 8,
    if we believe we can get there and not have that was not just a
    ``we were instructed'' but it was a policy choice that we made
    that we fully believe in.
        Senator Murray. Can I just say that this is all going to
    have to be resolved? The House is looking at a different number
    than the Senate, and, at some point, we are going to have to
    have an agreement.
        But we are moving forward as if we are enacting a budget
    that has--well, we will hear from our chairman of the
    Appropriations Committee what exactly our subcommittee
    allocations are. But they have to move forward now. We can't
    wait for several months for the budget to be decided between
    the House and the Senate.
        So this will all come to a head at some point, but I think
    we are trying to manage between the guesses at this point.
        Senator Collins. And I agree with that, and I also am no
    fan of sequestration. We do need to reduce our spending. But to
    do these mindless automatic meat axe cuts does not reflect
    priority setting, which is what we are supposed to do.
        But that doesn't mean that we shouldn't be looking at
    budget constraints and reduce spending.
        I am just trying to figure out what the real numbers are
    here and you need to make that----
        Senator Murray. So is the Appropriations Committee
    chairman.
        Senator Collins. You need to make that easier for us, not
    harder, just by your views on sequestration, which I may well
    largely share, and despite the hope that this goes away and
    that we come up with a more rational priority-based budget.
        But it truly was extremely difficult to follow the figures.

                        RENTAL ASSISTANCE DEMONSTRATION

        Secretary Donovan. I apologize. And I also just would say,
    to thank you, Senator and the chairman, for the remarkable way
    that we have worked together on some of these.
        Let me just give you one example. You talked about, are
    there smart things that we can do to save money, consolidate
    programs? Last year, you gave us the authority to begin our
    RAD, Rental Assistance Demonstration. We have already gotten
    either commitments or letters of interest to convert to the
    section 8 platform from two-thirds of all the units across the
    country in two of the legacy programs--we call them orphan
    programs, about 14,000 apartments across the country--that we
    should be looking to move to a platform.
        We have 13 different rental assistance programs. With what
    we are proposing in our budget, I think we could easily
    complete that conversion and end up with fewer programs with no
    additional appropriations, no other work.
        So I do think that there are lots of things that we can
    continue to do, as you say, not with the meat axe, not with
    these--as Senator Graham said the other day, he asked all of
    his witnesses, so you are saying this is stupid, sequestration?
    We sort of looked at each other, is this a trick question? But
    yes, it is.
        There are smart ways we can do this, and we have been able
    to do that in the past. We did it last year, and I am sure that
    we can continue going forward in making those smart decisions
    while not hurting the veterans, the families, the seniors, the
    people with disabilities that so often depend on our programs.
        Senator Collins. Thank you.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Murray. Thank you. And I do have additional
    questions I will submit for the record and remind my colleagues
    that we will leave the hearing record open for 1 week for
    additional questions.
        And, Mr. Secretary, thank you so much again for your
    incredible work on this. We look forward to working with you as
    we work through the numbers.
        Secretary Donovan. Thanks for your partnership.
        [The following questions were not asked at the hearing, but
    were submitted to the Department subsequent to the hearing:]
               Questions Submitted by Senator Barbara A. Mikulski
                               super storm sandy
        Question. Super-Storm Sandy's wrath had a measurable impact on
    residents of Maryland, and especially on the residents of Garrett
    County. Maryland suffered a double whammy. Our coastal areas along the
    beloved Chesapeake Bay and the Atlantic Ocean were hit by the
    hurricane. In Garrett County, called the Switzerland of Maryland, we
    were hit by a blizzard.
        Homes were destroyed or damaged, nearly all of the county lost
    power for a week. More than 100 people had to stay in shelters during
    the storm. Fallen trees, debris, and power lines blocked almost all of
    the county roadways.
        Fire companies were not able to respond to several structure fires
    because of the blocked roadways. The county lost their primary and
    backup 911 call center for 5 days. And the local hospital operated on
    Code Yellow Divert (critical patient intake only) for 4 days during the
    storm.
        30,000 people live in Garrett County, almost 10 percent below the
    poverty line, and almost 15 percent are seniors. Residents have
    experienced significant costs after electrical masts were ripped from
    homes during the storm. Electrical companies repairing the lines will
    not hook up homes to power until residents repair electrical masts at
    their own expense.
        My first legislation as Chairman of the Appropriations Committee
    was taking over the disaster spending bill to get it passed into law.
    And the Sandy Task Force has been hard at work. The TV cameras have
    left, but the compelling human need has not.
        Secretary Donovan, I'm grateful for the work that you and the Task
    Force have been doing, and I appreciated it when you assured me at the
    last hearing on Super-Storm Sandy that Community Development Block
    Grant Program Disaster Recovery (CDBG-DR) funds could help ``fill
    gaps'' for areas that didn't get Individual Assistance (IA) from the
    Federal Emergency Management Agency (FEMA).
        I'm concerned that IA qualification may act as a barrier to Garrett
    County getting the help it needs for its poor and elderly residents.
        Will you work with me and my staff to ensure that the county gets
    the help that it needs in the coming rounds of CDBG-DR funding
    releases?
        Answer. Madam Chairwoman, please be assured that the Department is
    evaluating the full range of recovery needs associated with Hurricane
    Sandy and will be making additional allocations of CDBG-DR funding in
    response to these needs. I would appreciate the opportunity to better
    understand the needs in Garrett County as a result of Hurricane Sandy
    and would be happy to have our CDBG disaster recovery staff meet with
    Garrett County officials and work with you and your staff to ensure
    that we fully understand the scope of the county's unaddressed recovery
    needs.
                                     ______

               Questions Submitted by Senator Frank R. Lautenberg
        community development block grant disaster recovery action plan
        Question. On March 28, I signed a letter urging the Department of
    Housing and Urban Development (HUD) to quickly review New Jersey's
    proposed Community Development Block Grant (CDBG) Disaster Recovery
    Action Plan. As you know, the $1.8 billion in Federal disaster recovery
    aid that is the subject of the plan cannot be distributed until HUD
    approves the plan. When will HUD complete its review?
        Answer. The Department completed its review of the State of New
    Jersey CDBG disaster recovery action plan in late April and approval of
    the plan was announced on April 29, 2013. Both State officials and HUD
    have signed the initial grant agreement and funds are currently
    available to the State.
                         cdbg disaster recovery funding
        Question. On March 5, HUD issued a notice regarding the criteria
    for the initial allocation of $5.4 billion in Community Development
    Block Grant (CDBG) disaster recovery funding. This notice prohibited
    the use of these funds to cover costs incurred by privately-owned, but
    publicly-regulated electric utilities in response to Superstorm Sandy.
    In previous disasters, these entities did qualify. This change in
    precedent will likely result in increased electricity bills for New
    Jersey residents and could hurt the ability to strengthen critical
    power infrastructure. Will HUD include privately-owned, but publicly-
    regulated electric utilities as qualified CDBG recipients in the next
    allocation to protect New Jersey ratepayers from rate increases?
        Answer. In its December 7, 2012, request to Congress for assistance
    in response to Hurricane Sandy, the administration indicated its
    intention to limit Community Development Block Grant disaster recovery
    (CDBG-DR) assistance to for-profit entities solely to small businesses.
    This position is reflected in the Federal Register Notice that HUD
    issued on March 5, 2013, governing the use of CDBG-DR funds. The
    Federal Register Notice defines ``small business'' by applying Small
    Business Administration definitions as found in 13 CFR 121. The Notice
    also specifically prohibits the provision of CDBG-DR assistance to
    privately owned utilities for any purpose. The Department will consider
    the full range of recovery needs when establishing requirements
    applicable to future CDBG-DR allocations in response to Hurricane Sandy
    but will remain consistent with overall administration policy in the
    use of these funds.
                       cdbg disaster recovery action plan
        Question. New Jersey's proposed Community Development Block Grant
    Disaster Recovery Action Plan provides $825 million to assist
    homeowners, while providing only $254 million to rebuild rental
    housing. This allocation has raised concerns because 43 percent of New
    Jersey households registering for Federal Emergency Management Agency
    (FEMA) assistance as a result of Sandy are renters, and many are low-
    income families. Will you commit to carefully reviewing New Jersey's
    plan to make sure that all families in New Jersey--both renters and
    homeowners--get the help they need?
        Answer. The New Jersey CDBG-DR action plan approved by HUD on April
    29, 2013, directs approximately 33 percent of housing program funds to
    multifamily/rental properties uses. This represented an increase of 5
    percent from the State's initial proposed allocation to multifamily/
    rental purposes. The Department has conducted its own analysis of the
    owner/renter split in the FEMA data and believes the State's allocation
    of 33 percent for multifamily/rental purposes is consistent with the
    data.
        Question. Superstorm Sandy damaged more than 800 public housing
    units in my State, displacing 100 families. New Jersey's proposed
    Community Development Block Grant Disaster Recovery Action Plan sets
    aside only $5 million to support public housing unit repairs. I am
    concerned that--because of the pre-existing backlog of public housing
    capital repair needs--this amount may be inadequate. What share of the
    Sandy-damaged public housing units in New Jersey will it be possible to
    restore to a state of good repair with this and other anticipated
    Federal funding?
        Answer. As part of the Department`s review of New Jersey's CDBG-DR
    action plan, HUD discussed with State officials the proposed public
    housing allocation of $5 million. The Department is pleased to report
    that as part of the HUD-approved action plan, the State increased the
    public housing allocation from $5 million to $20 million. Further, the
    State is committed to reassessing public housing recovery needs as
    additional information becomes available and additional allocations are
    made by HUD.
                    public housing drug elimination program
        Question. Prior to 2002, public housing authorities were able to
    fund safety, security, and drug- and gang-prevention activities through
    the Public Housing Drug Elimination Program, which I created. That
    program was eliminated by the Bush administration. In the absence of
    dedicated funding, how is your agency working with public housing to
    make their facilities safe and drug-free?
        Answer. Annually a portion of the Emergency/Disaster set aside
    within the Capital Fund is made available for funding safety and
    security grants. This funding provides assistance to public housing
    agencies for emergency capital needs including safety and security
    measures necessary to address crime and drug-related activity.
        Emergency safety and security grant funds may be used to install,
    repair, or replace capital needs items including, but not limited to
    the following:
      --security systems/cameras;
      --fencing;
      --lighting systems;
      --emergency alarm systems;
      --window bars;
      --deadbolt locks; and
      --doors.
        Outside of the Safety and Security set-aside competition, physical
    improvements to the property, such as fencing, security cameras, or
    additional lighting, are eligible Capital Fund modernization activities
    under current laws and regulations. Public housing agencies (PHAs) can
    also use their Operating Fund subsidy for ``anticrime and anti-drug
    activities, including the costs of providing adequate security for
    public housing residents, including above-baseline police service
    agreements.'' (U.S. Housing Act.)
              public housing authorities--emergency capital needs
        Question. In fiscal year 2013, Congress allocated up to $20 million
    for grants to public housing authorities to address emergency capital
    needs, including ``safety and security measures necessary to address
    crime and drug-related activity.'' Of the $20 million emergency capital
    needs allocation, what share has HUD set aside for safety and security
    measures?
        Answer. The Department plans to set aside $3 million initially for
    safety and security measures. At the end of the fiscal year, if funds
    remain that were not awarded for emergencies/disasters, the Department
    will make additional safety and security awards for applications that
    were received and determined to be eligible, which could not be funded
    due to the limited funds.
                                     ______

                  Questions Submitted by Senator Daniel Coats
                      better stewards of taxpayer dollars
        Question. We are operating during a time where the game has
    changed. Instead of coming here every year in the Appropriations
    Committee and asking ``how much more are we going to spend this year?''
    we are faced with a fiscal crisis which requires us to ask ``how can we
    take better care of the taxpayer dollars that are being sent here?'' We
    must all ask how we can better manage and oversee Federal departments.
    How we can separate the essential projects from the projects we'd like
    to do but can't afford it right now from the projects where we ask
    ``why are we doing this in the first place?'' Please describe how you
    are working to save money in the Department of Housing and Urban
    Development (HUD). Furthermore, please explain how you are working to
    prioritize funding requests for essential programs instead of programs
    that don't seem to work very well.
        Answer. The Department strongly shares your belief of the
    importance of credible stewardship of taxpayer funds, particularly in
    the difficult fiscal environment for discretionary programs. The
    Department is proposing several significant cost savings proposals
    identified below as well as policy changes that will further strengthen
    our successful program efforts.
        As you would agree, HUD's mission--to create strong, sustainable,
    inclusive communities and quality, affordable homes for all--is crucial
    to our Nation's well-being, particularly at a time when nearly 8.5
    million households were found to have worst case housing needs in 2011,
    an increase of about 1.4 million in only 2 years, largely reflecting
    the lack of affordable housing. These very low-income renters do not
    receive government housing assistance and either paid more than half
    their monthly incomes in rent, lived in substandard housing, or both.
    Housing needs cut across all regions of the country and included all
    racial and ethnic groups, regardless of whether they lived in cities,
    suburbs, or rural areas, and were found across various household types,
    including families with children, senior citizens, and persons with
    disabilities. Without HUD assistance, a fiscal year 2011 HUD study
    projected that 68 percent of the tenants we assist would be added to
    the worst case housing needs rolls.
        To help address the affordable housing need, HUD dedicated a
    majority of its fiscal year 2014 funding request to serve families with
    the greatest financial needs and support those most vulnerable. More
    than three-quarters of HUD's fiscal year 2014 budget request will
    provide rental assistance to almost 5.4 million residents of HUD-
    subsidized housing, including public housing and HUD grants to homeless
    assistance programs. Also, more than three-quarters of HUD-assistance
    households are extremely low-income--i.e., below 30 percent of area
    median income, and over 65 percent of HUD-assisted households are
    elderly and disabled.
        Key contributing programs that support affordable housing
    development, preservation of existing units and past investments, or
    rental assistance to low-income families and associated cost savings
    efforts:
      --Tenant-Based Rental Assistance (Fiscal Year 2014 Request--$19.9
            Billion).--The section 8 Housing Choice Voucher program is the
            Federal Government's major program for assisting very low-
            income families, the elderly, and persons with disabilities to
            afford decent, safe, and sanitary housing in the private
            market. The program currently serves almost 2.2 million
            families. At the same time, the fiscal year 2014 request
            supports approximately 700,000 landlords and property owners
            who participate in the program by providing a fair market rent
            so that they can meet mortgage payments, local tax obligations,
            utility expenses, and maintain properties in good physical
            condition.
        The overall requested amount reflects $235 million in anticipated
            savings in 2014 from proposed changes to income targeting that
            will increase the eligibility of more working poor families,
            particularly in rural areas ($155 million), the increase in
            tenant income contribution from raising the medical expense
            exclusion threshold from 3 to 10 percent ($30 million), and a
            change in how utility allowances are determined in the cases of
            families who rent units that are larger than the bedroom size
            of the voucher for which they qualify under the public housing
            agency (PHA) subsidy standards ($50 million).
      --Project-Based Rental Assistance (Fiscal Year 2014 Request--$10.3
            Billion)--The Project-Based Rental Assistance program provides
            rental assistance for eligible tenants residing in specific
            multifamily rental developments. This program serves
            approximately 1.2 million low-income and very low-income
            households that are primarily seniors, families with children,
            and persons with disabilities.
        The overall request reflects $240 million in anticipated savings
            from policy changes that apply residual receipts accounts to
            offset assistance payments for new and old regulation contracts
            ($105 million); require the appraiser for certain owner-
            commissioned rent comparability studies to provide additional
            support to justify the conclusions of the study ($35 million);
            limit rent levels for certain contracts renewed for projects
            with current rents that exceed market rents ($8 million);
            reduce the time period over which an owner may claim vacancy
            payments from 60 days to 30 days ($7 million); and increase
            tenant income contribution from raising the medical expense
            exclusion threshold from 3 to 10 percent ($85 million).
      --Public Housing (Fiscal Year 2014 Request--$6.6 Billion).--The
            Public Housing program provides affordable, publicly owned
            housing units to approximately 1.1 million families who cannot
            afford or will not be served by housing in the private market,
            60 percent of whom are fixed-income seniors or families in
            which the head-of-household is a disabled person. The Public
            Housing Capital Fund serves as the primary source of funding
            for public housing rehabilitation and development, and the
            Public Housing Operating Fund provides the operating subsidy
            payments to public housing authorities for the operation,
            management, and maintenance of the rental housing.
        --Moving To Work--The fiscal year 2014 budget proposes to scale up
                the Moving To Work demonstration in which high-performing
                State and local public housing agencies are given various
                flexibilities in operating their public housing programs.
                In exchange for this flexibility, public housing agencies
                help design and test innovative policies that use Federal
                dollars more efficiently, help residents become self-
                sufficient, streamline and consolidate program delivery,
                and reduce long-term costs.
        --Rental Assistance Demonstration.--The Rental Assistance
                Demonstration, enacted in 2012, targets HUD-assisted
                properties that are at risk of being lost from the Nation's
                affordable housing stock inventory. It allows the
                conversion of public housing and other HUD-assisted
                properties to long-term, project-based section 8 rental
                assistance as a tool for public housing agencies to
                leverage private debt and equity to address their
                properties' immediate and long-term capital needs,
                estimated at approximately $26 billion (2010). The fiscal
                year 2014 budget requests $10 million for targeted
                expansion of the demonstration to public housing properties
                in high-poverty neighborhoods, including designated Promise
                Zones where the administration is also supporting
                comprehensive revitalization efforts.
      --Homeless Assistance Grants (Fiscal Year 2014 Request--$2.4
            Billion).--The administration is committed--through Opening
            Doors: Federal Strategic Plan To Prevent and End Homelessness--
            to ending chronic homelessness by 2015; homelessness among
            veterans by 2015; and homelessness for families, youth, and
            children by 2020, and setting a path to ending all types of
            homelessness. This commitment has already resulted in a
            decrease in the number of chronically homeless persons by 19.3
            percent since 2007. Chronic homeless are the most expensive
            portion of the homeless population. Homelessness among veterans
            has declined by 7.2 percent between January 2011 and January
            2012. In addition, as of April 2012, almost 40,000 veterans
            have been housed with a HUD-Veterans Affairs Supportive Housing
            (VASH) voucher, funded through the Tenant-Based Rental
            Assistance program. The fiscal year 2014 budget request
            maintains the approximately 325,000 HUD-funded beds that assist
            the homeless nationwide, expands rapid re-housing and permanent
            supportive housing, and targets--through HUD-VASH vouchers--
            chronic homeless veterans.
      --Housing Opportunities for Persons With AIDS (Fiscal Year 2014
            Request--$332 Million).--This program provides housing
            assistance and supportive services for very low-income persons
            living with Human Immunodeficiency Virus (HIV) infection who
            are at risk of homelessness. The budget--through a forthcoming
            legislative proposal--modernizes the program to improve
            targeting of resources by basing the funding formula on Centers
            for Disease Control and Prevention (CDC) data on persons living
            with HIV/AIDS rather than cumulative AIDS cases, and by
            incorporating local housing costs and poverty rates into the
            formula.
        The remainder of HUD's fiscal year 2014 budget is dedicated to
    capital grants, which are used by communities to develop and repair
    affordable housing or support economic development activities and
    infrastructure, and other diverse initiatives, including service
    coordination, Fair Housing and Equal Opportunity, Healthy Homes and
    Lead Hazard Reduction, to name a few. In fact, the budget reflects some
    of the tough choices that needed to be made in the capital grant
    programs, for example. The budget provides $950 million for the HOME
    Investment Partnerships Program (HOME), 5 percent below the 2012
    enacted level, in addition to proposed amendments that would improve
    the targeting focus and effectiveness of the overall program at the
    constrained resource level. The budget provides $2.798 billion for the
    Community Development Block Grant formula allocation, which is a $150
    million reduction for formula allocation purposes in comparison to
    fiscal year 2012. Doing more with less, however, the budget proposes
    several reforms to improve targeting and the effectiveness of this
    program, including changes to the allocation process.
        Also, HUD's Transformation Initiative (TI) Fund remains the primary
    source of funding for HUD's multi-year effort to fundamentally
    transform the agency through the use of evidence and improved
    partnership with the Department's grantees and other partners. The TI
    Fund enables HUD to initiate projects that re-engineer fundamental
    business processes, streamline programs and operations, enhance
    accountability and respond to cross-cutting and urgent challenges more
    nimbly and effectively. Transformation Initiative priorities are: (1)
    research and evaluations to build a foundation of current data on
    program effectiveness and emerging policy issues; (2) program
    demonstrations to test new program approaches in a carefully structured
    and rigorously evaluated manner; and (3) technical assistance to
    diffuse evidence-based innovation and support State and local partners
    to improve their capacity to use public resources effectively. In
    addition, HUD will focus its information technology development efforts
    on modernizing the Department infrastructure, including the continual
    development of a modern financial management system that will improve
    HUD's ability to measure, track, and report on program costs and
    efficacy. These information technology investments will allow the
    Department to deliver services and manage its multi-billion dollar
    programs faster, more accurately, and using better information for
    analysis.
        Finally, the Department is taking steps to protect the Federal
    Housing Administration (FHA) fund, reduce risk, and modernize the FHA.
    The Administration projects that the FHA will insure $199.3 billion in
    mortgage loans in 2014, supporting new home purchases and refinanced
    mortgages that significantly reduce borrower payments. FHA's loss
    mitigation program minimizes the risk of financially struggling
    homeowners going into foreclosure. Recent increases in FHA premium
    levels will boast FHA's capital reserves and increase Federal revenues.
    In addition, legislative proposals would provide additional authority
    to ensure that FHA borrowers are receiving the level of delinquency
    assistance needed from servicers, and stronger and more flexible
    enforcement authorities so that FHA can better identify non-compliance
    and poor performance and take action to avoid losses.
                          housing assistance programs
        Question. In 2012, the Government Accountability Office (GAO) found
    the Federal Government is operating 160 housing assistance programs and
    tax expenditures within 20 Departments and agencies costing about $170
    billion.\1\ Despite these programs, homeownership rates fell to a 17-
    year low in the third quarter of 2012. The effectiveness of the
    programs is also often inconclusive. What is HUD doing to address this
    puzzle of 160 overlapping and duplicative programs?
    ---------------------------------------------------------------------------
        \1\ http://www.gao.gov/assets/590/588818.pdf.
    ---------------------------------------------------------------------------
        Answer. The Department has numerous examples of the effectiveness
    of its housing assistance programs. In the absence of these programs,
    for example, many of the Nation's most vulnerable families would be at
    imminent risk of homelessness, there would be far fewer affordable
    housing units, and many of the current first-time and minority
    homeowners might not own homes with affordable, sustainable, fair, and
    transparent mortgages. Below are key examples of the broad reach and
    success of HUD's major housing programs. In an accompanying question,
    we have also provided reforms and savings proposals included in the
    President's budget for various HUD programs. The Department recognizes
    that each spending and tax expenditure program is enacted into law by
    Congress and reflects commitments to broader housing by goals and
    involves specific mission and individual program designs. Finally, the
    Department does not target a specific individual homeownership rate but
    is committed to providing a strengthened mortgage and housing
    environment that supports and expands appropriate homeownership
    including targeting to low-income and other populations who with proper
    assistance can responsibly participate in the opportunities afforded
    through homeownership.
        HUD Programs Support and Sustain Homeownership.--Federal Housing
    Administration (FHA) financing was used for 27 percent of home purchase
    loans in 2011, including an estimated 41 percent of first-time
    homeowners. Fully 60 percent of all African American and Hispanic
    homebuyers using mortgages rely upon FHA financing and over 30 percent
    of all FHA-insured homebuyers are minorities. According to the latest
    Home Mortgage Disclosure Act data, half of all African Americans who
    purchased a home in 2011, and 49 percent of Hispanics, did so with FHA
    financing.
        Between April 2009 and February 2013, more than 6.4 million
    foreclosure prevention actions were taken--including nearly 1.7 million
    FHA loss mitigation and early delinquency interventions and 1.5 million
    homeowner assistance actions through the Making Home Affordable
    program, including more than 1.1 million permanent modifications
    through the Home Affordable Modification Program (HAMP)--saving these
    households an estimated $18.5 billion in monthly mortgage payments.
        HUD Programs Produce Desperately Needed Affordable Housing Units.--
    HUD's HOME Investment Partnership Program completed 1,095,946
    affordable units in the past 20 years, of which 460,692 were for new
    homebuyers, 212,100 were for owner-occupied rehabilitation and 423,154
    were new and rehabilitated rental units. Thirty-seven percent of those
    assisted by HOME with affordable rental housing between 2008 and 2012
    were extremely low-income families (families with incomes below 30
    percent of area median income).
        HUD Programs House Vulnerable Families.--The Housing Choice Voucher
    (HCV) program helps 2.2 million low-income families afford decent
    housing in neighborhoods of their choice. This program serves the most
    economically vulnerable families in the country, including families
    with disabilities, elderly families, formerly homeless veterans, and
    families with children. Of the families currently receiving HCV
    assistance, 78 percent are extremely low-income, with incomes at or
    below 30 percent of the area median income, 40 percent have a disabled
    head of household, and 18 percent are elderly families.
        Many families assisted by the program formerly experienced worst-
    case housing needs and without the benefit of this program would be at
    immediate risk of homelessness. The most recent Office of Policy
    Development and Research (PD&R) report estimated there were nearly 8.5
    million families with worst case housing needs in 2011--an increase of
    about 1.4 million in only 2 years. A family is defined as having a
    ``worst-case'' housing need if it pays more than half of its income
    toward rent or lives in severely inadequate physical conditions, or
    both (Worst Case Housing Needs 2011: A Report to Congress--Summary
    (2013). Department of Housing and Urban Development, Office of Policy
    Development and Research).
                               hud grant criteria
        Question. HUD provided a Community Block Development Grant (CDBG)
    in the amount of $505,000 to Sergeant's Pet Care Products, Inc. which
    specializes in pet shampoo and toothpaste.\2\ This company was expected
    to bring in $140 million in revenue in 2012.\3\
    ---------------------------------------------------------------------------
        \2\ http://www.governor.nebraska.gov/news/2012/03/19_sarpy_co.html.
        \3\ http://www.morganlewis.com/pubs/Law360_PerrigoWin_13sept12.pdf.
    ---------------------------------------------------------------------------
        Secretary Donovan, how is HUD working to ensure that its grant
    awards are focused on worthwhile projects? Do you believe that we
    should provide awards of over half a million dollars to private
    companies with revenue over $100 million?
        Answer. Loans to for-profit entities are statutorily eligible
    activities under the Community Development Block Grant (CDBG) program.
    The State of Nebraska uses a portion of its annual State CDBG funding
    and CDBG program income to support its Economic Development Revolving
    Loan Fund to provide assistance to businesses and to create jobs. In
    this particular instance, Nebraska awarded funds to Sarpy County which,
    in turn, provided a loan to Sergeant's Pet Care Products to purchase
    machinery and equipment as part of a $7.5 million project. The project
    will help create 58 new full-time jobs, 40 of which will be targeted to
    low- and moderate-income persons, and will help retain 72 existing
    positions. According to State officials, the project is on track with
    all funds anticipated to be drawn and expended by the end of June 2013
    and projected jobs to be created by the end of January 2014. The
    project meets all CDBG eligible requirements, national objective
    requirements and public benefit requirements.
                            overall use of hud funds
        Question. According to HUD's Office of the Inspector General (OIG),
    in fiscal year 2012, HUD could have put over $3.2 billion to better use
    and paid over $1.3 billion in questionable costs.\4\ This represents
    over $4.5 billion in public funds that could have been better spent
    providing housing aid to people in need or not spent at all. Secretary
    Donovan, how do you explain this egregious use of funds that your own
    Inspector General identified?
    ---------------------------------------------------------------------------
        \4\ http://www.hudoig.gov/pdf/sar/sar-68.pdf (page II).
    ---------------------------------------------------------------------------
        Answer. The majority of funds that you are highlighting as funds
    that could be put to better use are constituted by four major items
    described below. The Department does not believe that the
    classification of funds that can be ``better used'' is useful or
    transparent in informing the public regarding the details of these
    significant financing issues. The Department would like to stress the
    many areas of agreement with the Office of the Inspector General (OIG)
    and the positive actions taken to meet specific circumstances including
    enactment of statutory authority by Congress for large portions of the
    total amounts--proposals that the Department actually initiated. In
    like manner, the Department emphasizes the need to examine the
    specifics of each case of financial action classified under the
    heading, ``questionable costs.'' For instance, the fact that a
    guaranteed loan program that was enacted by Congress for 1 year only
    did not have full subscription to the program does not seem to be well
    defined as funds that could be put to better use.
    Four Items That Constitute the Vast Majority of Funds OIG Labeled as
            Having Potential ``Better Use''
        Item 1 involves the FHA Preforeclosure Sale Program, which
    accounted for approximately $800 million of the $3.2 billion identified
    by the OIG. The OIG conclusions derive from an examination of 61 claims
    involved in the $25 billion national foreclosure settlement that was a
    great accomplishment involving the Department, the OIG and 49 State
    Attorneys General. This landmark settlement is resulting in recovery of
    funds for thousands of families impacted by improper foreclosure
    proceedings as well as having provided additional resources for the
    Federal Housing Administration (FHA) Single Family Mortgage Insurance
    program. In addition, in a larger context the Department is working
    diligently on both an operational, regulatory and statutory basis to
    further reduce risks involved in the FHA mortgage programs and thereby
    further strengthen the financial position of the FHA funds. While the
    FHA has agreed to implement the OIG's recommendations, we do not agree
    with the characterization that the funds in question could have been
    put to better use.
        Items 2 and 3 reflect an OIG review done covering fiscal year 2012
    that recommended that $1 billion in Public Housing Operating Subsidy be
    offset by limiting reserves held by public housing authorities to 6
    months. The audit also recommended an additional $890 million could be
    used as an offset from PHAs' Housing Choice Voucher (HCV) program net
    restricted assets (NRA), `` . . . if it is determined these funds are
    in excess.'' The Department worked closely with the Congress on this
    issue and the enacted fiscal year 2012 Appropriations bill did provide
    for a $750 million Operating Subsidy offset (initiated by the
    Department) and an additional $650 million reduction in HCV NRA as
    proposed in the audit, but at levels that were considered by Congress
    and the Department to be more appropriate.
        Item 4 reflects a recommendation by the OIG to return funds in the
    amount of $471.8 million to the U.S. Treasury from the Emergency
    Homeowners' Loan Program since all of the funds were not obligated.
    This loan program was authorized at $1 billion for 1 year only and the
    Department did follow the direction discussed by the OIG to return
    several hundred million dollars to the U.S. Treasury recognizing that
    the subscription to the program was less than originally projected by
    the Congress when they enacted the legislation.
    Two Items That Constitute the Vast Majority of OIG Identified
            ``Questionable Costs''
        Under the category of questionable costs the OIG report includes
    $322.2 million under the FHA Preforeclosure Sale Program discussed
    above and an additional $807.3 million, of which the majority share is
    associated with FHA-insured loans made by Countrywide Home Loans,
    Incorporated (later sold to Bank of America). As described on page 27
    of the OIG semiannual report covering through September 30, 2012, Bank
    of America has paid FHA nearly $471 million to settle the Countrywide
    portion of the consent judgment and has also agreed to a deferred
    settlement payment to FHA of $850 million.
                       fha's preforeclosure sales program
        Question. HUD's OIG also reviewed the Federal Housing
    Administration's (FHA's) Preforeclosure Sales Program in fiscal year
    2012. Of 80 claims statistically sampled, 61 did not meet the criteria
    for participation in the program. As a result, it is estimated that HUD
    paid $1.6 billion in claims.\5\ How do you intend to strengthen program
    controls and obtain reimbursement from those lenders that were not
    previously pardoned from repayment in the national mortgage settlement?
    ---------------------------------------------------------------------------
        \5\ http://www.hudoig.gov/pdf/sar/sar-68.pdf (page III).
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        Answer. The Department provided an auditee response to the Office
    of Inspector General (OIG) audit of the Federal Housing
    Administration's (FHA's) Preforeclosure Sale Program (PFS); Audit
    Report No. 2012-KC-0004. The auditee response dated September 17, 2012,
    stipulated that the Office of Single Family Housing agrees that its PFS
    policies should align with market execution. To achieve this objective,
    FHA agreed: (1) to introduce a streamline PFS approval based on loan
    characteristics and borrower credit profile; and (2) specify income
    documentation requirements for the deficit income test that must be met
    for borrowers that do not meet the streamline requirements. OIG
    reviewed the corrective action stipulated above and a mortgagee letter
    that will achieve the two objectives referenced is scheduled to be
    issued in the 4th quarter of fiscal year 2013, pending OMB approval.
        [A copy of HUD's complete auditee response follows:]
    HUD Memorandum--Auditee Response to OIG's Audit of FHA's Preforeclosure
                                  Sale Program
                                                    September 17, 2012.
    For: Ronald J. Hosking,
    Regional Inspector General for Audit, 7AGA

    From: Charles S. Coulter,
    Deputy Assistant Secretary, Single Family Housing, HUD

    Subject: Auditee Response, FHA Preforeclosure Sale Program, Audit No.:
            2012-KC-000X
        The Office of Inspector General (OIG) reviewed the Federal Housing
    Administration's (FHA) Preforeclosure Sale Program. OIG performed this
    nationwide audit because of noted significant deficiencies in borrower
    qualifications during their audit of CitiMortgage's compliance with
    FHA's Preforeclosure Sale (PFS) claims (2011-KC-1005, September 30,
    2011). OIG's audit objective was to determine whether the U.S.
    Department of Housing and Urban Development (HUD) paid claims for only
    those preforeclosure transactions that met the criteria for
    participation in the program.
        The Office of Single Family Housing acknowledges that existing PFS
    policy and lender execution against that policy is inconsistent. To
    improve alignment and ensure that the long-term interest of the FHA
    Insurance Fund are met, FHA is working toward: (1) introducing a
    streamline PFS approval policy based on loan characteristics and
    borrower credit profile; and (2) specifying income documentation
    requirements for the deficit income test that must be met for borrowers
    that do not meet the streamline requirements.
        The Office of Single Family Housing would also note that the 80
    loans sampled by the OIG had an average credit score of 596 and an
    average delinquency of 8.7 months. Given this profile, it is likely
    that most of the 80 loans would have been conveyed to FHA as real
    estate owned (REO) if the PFS transactions had not been approved. Since
    the recovery rate of all PFS transactions is 53 percent and the
    recovery rate for single family REO sales in 36 percent, the claims
    paid by FHA on the PFS transactions were lower than they otherwise
    would have been and may have resulted in a net benefit to the FHA
    Insurance Fund of as much as $170 million.
        Regardless of the economic impact to the FHA Insurance Fund, the
    Office of Single Family Housing recognizes the need for strong, clear
    PFS policies and lender oversight. The Office of Single Family Housing
    will work closely with the OIG to ensure that these objectives are met
    and that the issues identified in the report are rectified.

                              SUBCOMMITTEE RECESS

        Senator Murray. This hearing is recessed until next
    Thursday, April 18 at 10 a.m., at which time we will hold a
    hearing on the Federal Aviation Administration's budget
    request.
        [Whereupon, at 11:06 a.m., Thursday, April 11, the
    subcommittee was recessed, to reconvene at 10 a.m., Thursday,
    April 18.]

    TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES
                      APPROPRIATIONS FOR FISCAL YEAR 2014

                                  ----------

                            THURSDAY, APRIL 18, 2013

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:07 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Patty Murray (chairman) presiding.
        Present: Senators Murray, Feinstein, Collins, and Moran.

                          DEPARTMENT OF TRANSPORTATION

    STATEMENTS OF:
    HON. MICHAEL P. HUERTA, ADMINISTRATOR, FEDERAL AVIATION ADMINISTRATION
    HON. CALVIN L. SCOVEL III, INSPECTOR GENERAL, OFFICE OF INSPECTOR
                GENERAL

                   OPENING STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Good morning. The subcommittee will come to
    order.
        Today, we are going to hear testimony from the Federal
    Aviation Administration (FAA) Administrator Huerta and the
    Department of Transportation (DOT) Inspector General Scovel on
    the President's fiscal year 2014 budget request for the Federal
    Aviation Administration. I want to welcome both of our
    witnesses. Thank you both for being here this morning.
        This hearing marks the beginning of our process to build a
    budget for the FAA for fiscal year 2014. But as we take a close
    look at the agency's budget request for the coming year, we
    have to acknowledge where we stand today. For far too long,
    some Members of Congress have been unwilling to reach a fair
    and balanced compromise on deficit reduction, and as a result
    we are now facing drastic and arbitrary cuts to Federal
    spending that is required under sequestration.
        The process of sequestration has slashed the FAA's budget
    by more than $630 million, and it has hit just about every part
    of the agency, its operations and management of air traffic;
    its capital investments, including the Next Generation Air
    Transportation System (NextGen), the modernization of its air
    traffic control system; and its research activities. Some here
    in Washington, DC, claim the effect of such cuts will be
    minimal.
        But Secretary LaHood has spoken out about the real impact
    these cuts will have on the FAA and our aviation system. He
    talked about how sequestration means the FAA will furlough its
    air traffic controllers, close down contract towers, and delay
    NextGen.
        Secretary LaHood made it clear the FAA will not sacrifice
    the safety of our aviation system. Instead, the agency will
    reduce its services while ensuring air travel remains safe.
    However, reductions in air traffic control services will
    translate directly into an increase in travel delays.
        We still need to see the details on how FAA plans to
    implement the cuts required by sequestration. This is important
    information for the subcommittee to consider as it develops a
    funding bill for next year.
        Sequestration and a year-long continuing resolution enacted
    well into the fiscal year have made 2013 a challenging year for
    our agencies. But the fact remains that we have implemented
    large cuts to the funding for the Federal Government, and we
    still don't know exactly what Government services will look
    like after these cuts are implemented.
        For fiscal year 2014, we must take seriously our
    responsibility to pass a budget that not only determines the
    total level of Government spending, but that reflects our
    priorities and puts into place the services we want to see
    fulfilled next year. We also need to make sure any potential
    cuts to the air traffic control system are fair and that FAA's
    process is transparent with adequate consideration given to the
    benefits and costs of specific tower closures.
        Putting together this budget means we must take a hard look
    at the work the FAA has been doing. The FAA manages the most
    complex airspace in the world, and it is a world leader in
    protecting aviation safety.
        Mr. Huerta, I look forward to hearing about your budget
    request and what you want to accomplish in the coming year. But
    we also have to recognize some problems at the FAA. The
    agency's history is filled with capital programs that run over
    budget, pass deadlines, and do not deliver on all of the
    promised capabilities. These problems continue to burden the
    FAA.
        The agency recently awarded its System Engineering 2020
    contract, which has a maximum value of $7.3 billion. For a
    contract of this size, it is disturbing that a recent report
    issued from the Office of Inspector General (OIG) found that
    the FAA cannot track costs accurately.
        NextGen requires the FAA to coordinate the development of
    several complex capital programs. However, another recent
    report from the OIG points out that problems with the En Route
    Automation Modernization (ERAM) program have directly
    contributed to 2 years of delay in the FAA's effort to
    transition from voice to data communication, which is an
    essential part of NextGen.
        Problems continue to plague the FAA's operations as well.
    Just this past February, the OIG issued a report on the
    increase in operational errors by air traffic controllers. The
    FAA is unable to determine whether the increase in errors
    reflects better data collection or an increase in actual errors
    committed by controllers. In addition, the FAA does not have a
    base line that can be used to measure any improvement in
    operational errors.
        The OIG has also reported recently on the FAA's inability
    to develop an effective model for its aviation inspector
    staffing. After spending 7 years developing it, the FAA still
    does not have a model it can use to justify its budget request
    or to place its aviation inspectors efficiently across our
    globe.
        Mr. Scovel, your office has done excellent work on all
    these topics. I look forward to hearing your perspective on
    these issues as we discuss them this morning.
        We do need to hold the FAA accountable for how it spends
    taxpayer dollars. As we move forward in this tight budget
    environment, the FAA cannot afford to continue any kind of
    mismanagement.

                               PREPARED STATEMENT

        At the same time, we need to do our job here in Congress.
    We need the FAA doing its job on aviation, not trying to figure
    out how to move forward without a real budget in place. And
    that's why it's so important for this subcommittee and this
    Congress to return to regular order to pass a full
    appropriations act that reflects the priority of Congress and
    to pass it on time and through the regular process.
        With that, I will turn it over to my ranking member,
    Senator Collins.
        [The statement follows:]
                   Prepared Statement of Senator Patty Murray
        The subcommittee will come to order.
        Today we will hear testimony from Federal Aviation Administration
    (FAA) Administrator Huerta and Department of Transportation (DOT)
    Inspector General Scovel on the President's fiscal year 2014 budget
    request for the Federal Aviation Administration. I want to welcome both
    of our witnesses, and thank you for being here this morning.
        This hearing marks the beginning of our process to build a budget
    for the FAA for fiscal year 2014, but as we take a close look at the
    agency's budget request for the coming year, we must acknowledge where
    we stand today.
        For too long, some members of Congress have been unwilling to reach
    a fair and balanced compromise on deficit reduction. And as a result,
    we are now the facing drastic and arbitrary cuts to Federal spending
    that is required under sequestration.
        The process of sequestration has slashed the FAA's budget by more
    than $630 million, and it has hit just about every part of the agency:
      --its operations and management of air traffic;
      --its capital investments, including the Next Generation Air
            Transportation System (NextGen), the modernization of its air
            traffic control system; and
      --its research activities.
        Some here in Washington, DC, claim that the effect of such cuts
    will be minimal, but Secretary LaHood has spoken out about the real
    impact these cuts will have on the FAA and our aviation system. He
    talked about how sequestration means that the FAA will furlough its air
    traffic controllers, close down contract towers, and delay NextGen.
        Secretary LaHood made it clear that the FAA will not sacrifice the
    safety of our aviation system. Instead, the agency will reduce its
    services while ensuring air travel remains safe. However, reductions in
    air traffic control services will translate directly into an increase
    in travel delays.
        We still need to see the details on how the FAA plans to implement
    the cuts required by sequestration. We need to know:
      --How the FAA will invest its funding for facilities and equipment;
      --How many furlough days will be imposed on FAA employees; and
      --After delays in the FAA's schedule for closing down contract
            towers, the status of each and every tower in the coming
            months.
        This is important information for the subcommittee to consider as
    it develops a funding bill for next year.
        Sequestration and a year-long continuing resolution enacted well
    into the fiscal year have made 2013 a challenging year for agencies.
    But the fact remains that we have implemented large cuts to the funding
    for the Federal Government, and we still don't know exactly what
    Government services will look like after those cuts are implemented.
        For fiscal year 2014, we must take seriously our responsibility to
    pass a budget that not only determines the total level of Government
    spending, but that reflects our priorities, and puts into place the
    services that we want to see fulfilled next year.
        We also need to make sure that any potential cuts to the air
    traffic control system are fair and that FAA's process is transparent,
    with adequate consideration given to the benefits and costs of specific
    tower closures.
        Putting together this budget means that we must take a hard look
    the work that the FAA has been doing.
        The FAA manages the most complex airspace in the world, and it is a
    world leader in protecting aviation safety. Mr. Huerta, I look forward
    to hearing about your budget request and what you want to accomplish in
    the coming year.
        But we must also recognize problems at the FAA. The agency's
    history is filled with capital programs that run over budget, past
    deadlines, and do not deliver on all of the promised capabilities.
    These problems continue to burden the FAA.
        The agency recently awarded its Systems Engineering 2020 contract,
    which has a maximum value of $7.3 billion. For a contract of this size,
    it is disturbing that a recent report issued from the Office of the
    Inspector General (OIG) found that the FAA cannot track costs
    accurately.
        NextGen requires the FAA to coordinate the development of several
    complex capital programs. However, another recent report from the OIG
    points out that problems with the En Route Automation Modernization
    (ERAM) program have directly contributed to 2 years of delay in the
    FAA's effort to transition from voice to data communication, an
    essential part of NextGen.
        Problems continue to plague the FAA's operations as well. Just this
    past February, the OIG issued a report on the increase in operational
    errors by air traffic controllers. The FAA is unable to determine
    whether the increase in errors reflects better data collection, or an
    increase in actual errors committed by controllers. In addition, the
    FAA does not have a baseline that can be used to measure any
    improvement in operational errors.
        The OIG has also reported recently on the FAA's inability to
    develop an effective model for its aviation inspector staffing. After
    spending 7 years developing it, the FAA still does not have a model
    that it can use to justify its budget request or to place its aviation
    inspectors efficiently across the globe.
        Mr. Scovel, your office has done excellent work on all of these
    topics, and I look forward to hearing your perspective on the issues we
    discuss this morning.
        We need to hold the FAA accountable for how it spends taxpayer
    dollars. As we move forward in this tight budget environment, the FAA
    cannot afford to continue this kind of mismanagement.
        At the same time, we need to do our job here in Congress. We need
    the FAA doing its job on aviation, not trying to figure out how to move
    forward without a real budget in place.
        And that is why it is so important for this committee and this
    Congress to return to regular order: To pass a full appropriations act
    that reflects the priorities of the Congress, and to pass it on time
    and through the regular process.

                     STATEMENT OF SENATOR SUSAN M. COLLINS

        Senator Collins. Thank you very much, Madam Chairman.
        Welcome, Administrator and also Inspector General Scovel.
        Mr. Huerta, I understand that this is your first time
    testifying before our subcommittee, so I want to particularly
    welcome you.
        There is another group here today that I would like to
    welcome. You may have noticed, Madam Chairman, as our
    subcommittee convened that there was a group of students in
    bright green tee shirts----
        Senator Murray. Hard to miss.
        Senator Collins [continuing]. Who came into the room. They
    are from the Presque Isle, Maine, Middle School, and they have
    just arrived on a school visit. We were going to meet up
    earlier, but getting into the building is slow, as you know. So
    I invited them to observe a bit of the hearing, and I will
    sneak out into the hall to take a quick picture with them. But
    I am delighted to welcome the Presque Isle Middle School
    students and teachers and chaperones here today to Washington,
    DC.
        It's not the entire school, but I believe we have 58
    students coming. So I knew that that would help increase the
    attendance for our hearing today.
        Senator Murray. Welcome to all of you.
        Senator Collins. Just over 1 year ago, we passed the FAA
    reauthorization bill. I look forward to hearing the testimony
    regarding the status of ongoing initiatives within the agency.
    The challenges that the FAA faces throughout the remainder of
    this fiscal year and into the next fiscal year are truly
    daunting, not only because we are operating under a continuing
    resolution, which was certainly not the choice of the chairman
    or myself, but also coping with the impact of sequestration.
        It's important to remember that the $637 million reduction
    from sequestration must be implemented in a way that ensures
    safety while minimizing the impact to the traveling public. Not
    only do I travel home to Maine every weekend--so this affects
    all Members of Congress personally--but I represent a State
    where tourism is very important, and being able to have an
    efficient air traffic control system is very important to the
    success of the tourism industry, which is a pillar of the
    economy of the State of Maine.
        FAA recently announced its plans to achieve these savings,
    and I very much appreciated the call from the Administrator.
    But I am concerned that the result will be furloughs, the
    closure of contract towers, and the elimination of midnight
    services, among other controversial cuts.
        In my home State of Maine, Bangor International Airport is
    one of the airports that is affected by the elimination of
    midnight tower closures. If the FAA moves forward with this
    plan, it will be very detrimental to airport operations. And
    let me explain why.
        The Bangor Airport is a major port of entry and a diversion
    point for a wide mix of air traffic, including the return of
    our Nation's troops from overseas. Indeed, in the last decade,
    more than 1 million troops have landed at Bangor, Maine, and
    they've been met every single time by local troop greeters,
    even if they arrive in the middle of the night or the middle of
    a snow storm.
        In addition, Bangor is a diversion point for planes with
    troubled passengers. Whenever there is an issue, whether it's a
    medical issue or an unruly passenger, or it is determined that
    an individual is on the no-fly list and should not be admitted
    into the country, the plane inevitably is diverted to Bangor.
        The curtailment of air traffic control services will
    increase operational risk. Presence of a 24/7 FAA tower with
    full terminal radar services was a key determining factor in
    choosing Bangor as a Noble Eagle alert site post 9/11. The
    missions flown in and out of Bangor during these hours by the
    military are not always scheduled to air traffic, and the
    Bangor Air National Guard base, which shares the commercial
    airport space, has the infrastructure and maintenance support
    to handle these short notice transients.
        These diversions, as well as the civil diversions for
    homeland defense, are often circumstances where a pilot needs
    the support of a tower or radar control to help ensure safety.
    So I very much hope that these military and homeland defense
    factors are taken into consideration when the FAA finalizes its
    plans.
        As the chairman mentioned, I know that the FAA is
    undertaking a long-term effort to improve the efficiency,
    safety, and capacity of the aviation system through NextGen.
    This is a critical system, but it has been plagued with some
    delays and cost overruns. It's a multibillion dollar effort
    that is absolutely essential to modernizing our airspace, and
    it will have the benefits of reducing delays and fuel
    consumptions to the nearly 2 million passengers traveling on
    over 50,000 flights controlled each day here in the United
    States alone.
        This obviously has been a complex procurement, and we need
    to ensure that NextGen delivers the promised benefits while
    representing a sound investment of taxpayer dollars. I
    recognize that over the past several years, the aviation
    industry has faced some tough economic decisions. Aviation
    plays a critical role in economic growth, jobs, and investment,
    and the chairman and I share the goals of keeping our national
    aviation system the largest, safest, and most efficient in the
    world.
        There are several other issues that I am going to discuss
    when we get to the questions. For example, I'm concerned about
    the number of runway incursions that have dramatically
    increased in recent years. And that has happened at a time when
    air traffic operations have been declining.
        I am also concerned about the cutbacks in the Airports
    Improvement Program (AIP). I know the airports in my State rely
    heavily upon this program and are concerned with any reduction
    in AIP whether the reductions are made to small, medium, or
    large airports.
        I'll also be asking about the latest developments with
    Boeing's 787 aircraft. I have a feeling that may be of interest
    to the chairman as well.
        It is critical that we work together, and I look forward to
    doing just that. If the chairman will excuse me for just a few
    moments, I am going to go take a quick picture, and I will be
    right back.
        Senator Murray. I noticed your class went out in the hall,
    so they're waiting for you.

                               PREPARED STATEMENT

        Senator Collins. Thank you.
        [The statement follows:]
                 Prepared Statement of Senator Susan M. Collins
        Thank you Chairman Murray. Welcome Administrator Huerta and
    Inspector General Scovel. Mr. Huerta, I understand this is your first
    time appearing before this subcommittee.
        Just over 1 year since the final passage of the Federal Aviation
    Administration (FAA) authorization bill, I look forward to hearing the
    testimony regarding the status of the ongoing initiatives within the
    agency.
        The challenges the FAA faces the remainder of this fiscal year and
    into fiscal year 2014 are daunting not only because of operating under
    a continuing resolution but compounded with sequestration. It is
    important that the $637 million reduction from the sequester be
    implemented in a way that ensures safety while minimizing the impacts
    to the traveling public. FAA recently announced its plans to achieve
    this savings, which resulted in furloughs, the closure of contract
    towers, the elimination of midnight services, among other controversial
    cuts.
        In my home State, Bangor International Airport is one of the
    airports affected by the elimination of midnight tower closures. If the
    FAA moves forward with this plan, it will be detrimental to airport
    operations. Bangor Airport is a major port-of-entry and diversion point
    for a wide mix of air traffic, including the return of our Nation's
    troops from overseas and the diversion point for planes with troubled
    passengers.
        The curtailment of air traffic control services will increase
    operational risk. Presence of a 24/7 FAA tower with full terminal radar
    services was a key determining factor in choosing Bangor as a Noble
    Eagle alert site post 9/11. The missions flown in and out of Bangor
    during these hours by the military are not always scheduled air
    traffic, and Bangor Air National Guard Base has the infrastructure and
    maintenance support to handle these short notice transients. These
    diversions, as well as civil diversions for homeland defense, are often
    circumstances where a pilot needs the support of tower/radar control to
    help ensure safety. These military factors must be taken into
    consideration when the FAA finalizes its plans.
        The FAA is undertaking a long-term effort to improve the
    efficiency, safety, and capacity of the aviation system through the
    Next Generation Air Transportation System (NextGen). FAA's recent
    estimate for NextGen's total cost through 2025 is expected to be
    between $15-22 billion, with the private sector contributing an
    additional $5-7 billion. This multi-billion dollar effort to modernize
    the national air space will provide many benefits, such as reducing
    delays and fuel consumption to the nearly 2 million passengers
    traveling on over 50,000 flights controlled each day here in the United
    States alone.
        FAA has been working hard to address the many challenges identified
    with these highly complex initiatives, but much work remains to ensure
    programs are implemented on time and within budget. With this
    undertaking, processes must be improved and updated while eliminating
    duplication and waste in order to make the agency more efficient and
    effective. It is our obligation to ensure NextGen delivers the promised
    benefits and represents the sound investments of taxpayer dollars.
        Over the past several years, the aviation industry, as with many
    other industries, has faced tough economic hardships. Aviation plays a
    critical role in driving economic growth, jobs, and investment across
    the country. Chairman Murray and I share the goals of keeping our
    national aviation system the largest, safest, and most efficient in the
    world.
        While the FAA is continuing efforts to improve safety on the
    Nation's airport runways, the number of runway incursions has
    dramatically increased in recent years. This is particularly alarming
    given that air traffic operations have declined at the same time.
        The fiscal year 2014 budget proposes $15.5 billion for the FAA,
    which is a $312 million increase over the current sequestered levels.
    This provides $9.7 billion for the Operations account, $2.8 billion for
    Facilities and Equipment, $166 million for Research, Engineering and
    Development, and $2.9 billion for the Airports Improvement Program
    (AIP). It is worth noting that the reduction to AIP is coupled with
    removing large airports from the program which will be offset with an
    increase to passenger facility charge fees. I am concerned with this
    proposal as this funding is essential to airports throughout the
    Nation. The airports in Maine rely heavily upon this program and are
    concerned with any reduction to AIP, whether the reductions are made to
    small, medium, or large airports.
        I am also interested in the latest developments with Boeing's 787
    aircraft. FAA has now approved Boeing's proposed certification plan
    that will, I hope, address factors that likely contributed to the
    battery incidents. I understand testing and design modifications have
    been completed and FAA is analyzing the results. I am eager to know
    when FAA anticipates its final approval allowing the 787s to continue
    its operations.
        The future of aviation is in our hands. It is critical that FAA
    remain vigilant in its oversight responsibilities, and I look forward
    to working with you both on these efforts.

        Senator Murray. Thank you very much. And I will turn to Mr.
    Huerta to begin his testimony.
        Again, welcome to our subcommittee.

                  SUMMARY STATEMENT OF HON. MICHAEL P. HUERTA

        Mr. Huerta. Thank you very much, Chairman Murray, Ranking
    Member Collins, and members of the subcommittee. Thank you for
    the opportunity to be here today to discuss the FAA's 2014
    budget request. As you are aware, this is my first appearance
    before you as Administrator of the FAA.
        I appreciate the support of the Senate in moving my
    confirmation forward. We have a great number of challenges and
    a great number of opportunities ahead, and I sincerely hope to
    enjoy a long and effective relationship with this subcommittee.
        The FAA's fiscal year 2014 budget request is $15.6 billion.
    The budget upholds our critical safety programs while also
    deploying key NextGen benefits to our stakeholders and
    modernizing our aviation infrastructure. It does this at
    funding levels that are $351 million below fiscal year 2012.
    This is a 2.2-percent decrease, which is part of the
    President's overall effort to reduce our Nation's deficit.
        The FAA's proposed budget for 2014 assumes a long-term
    solution to our Nation's budget deficit and no sequester. The
    2014 proposed budget would allow us to maintain staffing for
    air traffic control and for aviation safety. It would allow us
    to maintain capital investment in both airport infrastructure
    and FAA facilities and equipment and fund research and
    development.
        The budget requests $1 billion for NextGen, which is an
    increase of about 7 percent above 2012, in order to continue to
    support near-term progress. This request would help us continue
    to mitigate congestion in busy airspace above metropolitan
    areas, and it would help us with the continued deployment of
    radio transceivers that allow us to use very precise satellite-
    based information to control air traffic.
        The FAA is requesting $9.7 billion in our operations
    account. This represents an increase of just 0.6 percent above
    the fiscal year 2012 enacted level. This request will enable us
    to run the agency on a day-to-day basis and maintain and
    support our air traffic control and air navigation systems.
        It ensures the safe operation of the airlines and the
    certification of new aviation products. It would also enhance
    the safety of the commercial space transportation industry and
    provide overall policy oversight and management of our
    airspace.
        The operations budget includes an additional $30 million to
    maintain and operate the new En Route Automation Modernization
    System, or ERAM, that became operational in the last 2 years.
    ERAM is at the heart of NextGen. It helps us to advance our
    transition from a ground-based system of air traffic control to
    a satellite-based system of air traffic management.
        The 2014 budget allows the FAA to meet the challenge of
    both maintaining the capacity and the safety of the current
    system, while keeping our comprehensive modernization and
    transformation efforts moving forward. The majority of the $2.8
    billion requested for facilities and equipment is to sustain
    legacy areas. This includes aging infrastructure, power
    systems, information technology, navigational aids, and weather
    systems.
        This year's request for research, engineering, and
    development (RE&D) is $166 million, a decrease of 7 percent
    from 2012. Nonetheless, we intend to continue critical research
    in NextGen and other areas such as fire research and safety,
    propulsion and fuel systems, advanced materials research,
    alternative fuels, aging aircraft, and Unmanned Aircraft
    Systems.
        Our budget emphasizes cost efficiency and reflects the hard
    choices we must make to provide the most benefit to the flying
    public. As a result, we're proposing to modify the mix of
    funding available for airport development projects.
        The budget would allow commercial service airports to
    increase the passenger facility charge from the current maximum
    of $4.50 to $8.00. This gives airports greater flexibility to
    generate more of their own revenue, and it allows us to reduce
    our request for the ongoing Airport Grants Program by $450
    million. This change focuses Federal resources on smaller
    airports that don't have the passenger volume to generate their
    own revenue yet are still important to our Nation's air
    transportation network.
        The President's 2014 budget request represents a balanced
    approach to achieving a long-term solution to our Nation's
    budgetary challenges. And this is critical when we consider the
    impact of the sequester on our aviation system in the current
    fiscal year.
        As you noted, the cuts required by the sequester have
    forced us to slash contract expenses and furlough 47,000 of our
    employees. With employees working fewer hours, we will have a
    less efficient air traffic system and less time for safety
    inspectors to certify new aircraft for the market. It's my hope
    that we can work together to rally around our Nation's air
    transportation system and protect the great contribution that
    civil aviation makes to our national economy.

                               PREPARED STATEMENT

        Madam Chairman, this concludes my prepared remarks, and I
    would be pleased to answer any questions you might have.
        Senator Murray. Thank you very much.
        [The statement follows:]
                  Prepared Statement of Hon. Michael P. Huerta
        Chairman Murray, Ranking Member Collins, members of the
    subcommittee: Thank you for the opportunity to speak to you today. This
    is the first time I am testifying before you as the confirmed
    Administrator of the Federal Aviation Administration (FAA). I sincerely
    hope to enjoy a long and effective relationship with you and this
    subcommittee.
        The FAA's fiscal year 2014 budget request of $15.6 billion strikes
    a balance between maintaining current infrastructure while deploying
    key Next Generation Air Transportation System (NextGen) benefits to our
    stakeholders, upholding our critical safety programs, and modernizing
    our aviation infrastructure at funding levels that are $351 million
    lower than fiscal year 2012. This is a 2.2-percent decrease, which is
    part of the President's effort to reduce the deficit.
        The FAA's Operations request of $9.7 billion represents an increase
    of just 0.6 percent above the fiscal year 2012 enacted budget. This
    funding level includes $30 million to provide maintenance for newly
    transitioned En Route Automation Modernization (ERAM) systems, as well
    as modest inflationary adjustments for FAA's workforce, rent and lease
    increases, and costs for a Service Center building project.
        This budget includes program adjustments of $62 million from the
    fiscal year 2012 level in the Air Traffic Organization (ATO). To
    achieve these savings, ATO will be evaluating cost-savings and
    efficiency gains in the following areas: Contract Weather Observations,
    Facility Realignments and Consolidations, and Very High Frequency
    Omnidirectional Range (VOR) Minimum Operational Network (MON).
        The budget allows FAA to meet the challenge of both maintaining the
    capacity and safety of the current National Airspace System (NAS) while
    keeping our comprehensive modernization and transformation efforts
    moving forward. The Facilities and Equipment (F&E) request of $2.8
    billion represents a 1.7-percent increase from the fiscal year 2012
    enacted level.
        The F&E NextGen portfolio is $928 million in fiscal year 2014, a
    7.5-percent increase above the fiscal year 2012 enacted level. This
    funding provides FAA with the resources needed to continue our ongoing
    NextGen modernization activities, including nationwide Automatic
    Dependent Surveillance-Broadcast (ADS-B) deployment. It also provides
    for follow-on ERAM development for future NextGen capabilities and
    publication and accelerated development of Precision Based Navigation
    (PBN) procedures that will provide greater flexibility in the NAS and
    to facilitate more dynamic management of air traffic. The remainder of
    our investment--representing over $1.8 billion--will be in legacy
    areas, including aging infrastructure, power systems, information
    technology, navigational aids, and weather systems.
        The fiscal year 2014 Research, Engineering, and Development (RE&D)
    request of $166 million is a $1.5 million (1 percent) decrease from the
    fiscal year 2012 enacted level. This supports FAA's continued work in
    both NextGen and other research areas such as fire safety, propulsion
    systems, advanced materials, aircraft icing, and continued
    airworthiness. The RE&D NextGen portfolio is $61.4 million, an increase
    of $1.6 million above the fiscal year 2012 enacted level, and supports
    NextGen-specific research into wake turbulence, human factors, and
    clean aircraft technologies. This includes $12 million for the Joint
    Planning and Development Office (JPDO) to continue their leadership in
    coordinating interagency initiatives.
        The FAA must meet our Nation's growing need for UAS. Our RE&D
    request provides $7.5 million to support this critical area through
    research on UAS technologies which directly impact the safety of the
    NAS. The program is focused on sense and avoid and command and control
    requirements that will support the safe integration of UAS in the NAS
    within the 14 Code of Federal Regulations regulatory framework.
        The NextGen Alternative Fuels for General Aviation program is
    requested at $5.6 million in order to support the recommendations of
    the Unleaded Avgas Transition Aviation Rulemaking Committee. Funding
    for the Environment and Energy program is requested at $33.5 million.
    This program supports a range of activities, including research to
    mature certifiable clean and quiet aircraft technologies, and develop
    sustainable fuels. The program also supports enhanced NextGen
    environmental research via the Continuous Low Energy, Emission and
    Noise (CLEEN) program and other vehicles.
        Airports remain a critical part of the aviation system
    infrastructure. Our fiscal year 2014 request provides the funding
    needed to ensure safety, capacity, and efficiency at our Nation's
    airports through a combination of grant funding and an increase in
    Passenger Facility Charges (PFCs). Our $2.9 billion request supports
    our continued focus on safety-related development projects, including
    runway safety area improvements, runway incursion reduction, aviation
    safety management, and improving infrastructure conditions.
        The fiscal year 2014 budget proposes to lower funding for Airport
    Grants to $2.9 billion by eliminating entitlement funding for large hub
    airports while maintaining discretionary eligibility. To assist the
    airports that need the most help, the budget focuses traditional
    Federal grants to support smaller commercial and general aviation
    airports that do not have access to additional revenue or other sources
    of capital. At the same time, our proposal allows airports to increase
    non-Federal Passenger Facility Charges (PFC) from the current maximum
    of $4.50 to $8 which provides them with greater flexibility to generate
    their own revenue. If all commercial service airports increase the PFC
    collection to $8 they could generate $2.39 billion in additional
    funding for airport projects.
        The fiscal year 2014 budget proposes that we work with the
    insurance companies and air carriers to build private capacity to
    insure against war risk occurrences. Our co-insurance proposal would
    build this private capacity through a transition period where risk is
    shared between the FAA and private insurers. In the first year of
    transition, the FAA would bear the majority of the risk, easing private
    insurers back into the market.
        Private parties would play a large role in setting terms,
    conditions, and pricing of coverage under the proposed arrangement. Air
    carriers and insurers would have flexibility to develop terms and
    conditions that meet the carriers' needs while enabling the insurers to
    offer coverage at affordable prices. The FAA is ready to work with
    insurers and carriers to find parameters that make for viable coverage
    under this proposal.
        Under the co-insurance proposal, FAA and commercial insurance
    providers would jointly underwrite a common policy. In the case of a
    claim, FAA would pay an established fraction of the losses (for example
    80 percent), and a commercial insurance company would pay the
    remainder. Air carriers would be free to negotiate the charge for the
    commercial fraction of the coverage with the insurance company. For
    FAA's share of the risk, FAA would charge the lesser of the current cap
    and a rate proportional to what the commercial insurance company is
    charging under the same policy.
        This budget supports continued progress on our NextGen efforts. The
    entire fiscal year 2014 NextGen portfolio totals $1.002 billion
    distributed among F&E programs ($928.1 million), Research, Engineering
    and Development programs ($61.4 million) and Operations activities
    ($12.6 million). This investment portfolio reflects an increase of
    $67.2 million, or approximately 7 percent, above the fiscal year 2012
    enacted level. This level of program funding enables the FAA to
    continue to support near-term NextGen commitments in a budget-
    constrained environment.
        While the thrust of our work focuses on U.S. airports, airspace and
    aircraft, the FAA actively engages with global aviation partners to
    ensure operators receive benefits anywhere in the world.
        One immediate benefit to the public is the NextGen Metroplex
    initiative. The FAA is working to improve the efficiency of airspace
    above congested metropolitan areas by designing precise GPS routes that
    will accelerate benefits while reducing bottlenecks and congestion.
    These routes will enhance safety and efficiency, and foster the flow of
    commerce. Satellite-based navigation is expected to cut a total of 7
    million nautical miles from flight plans around these cities each year.
    These routes, together with gradual descents that cut back on engine
    power, are projected to save at least 22 million gallons of fuel. For
    these cities, this represents total reduction in carbon emissions of
    220,000 metric tons. That is the equivalent of removing more than
    43,000 cars from the streets.
        Fiscal year 2014 will see the continuation of NAS-Wide deployment
    of the Automatic Dependent Surveillance-Broadcast (ADS-B), the
    cornerstone of our transformation to satellite enabled, GPS-based
    navigation. We expect the total complement of about 700 radio stations
    to be in place and operating by early 2014. Fiscal year 2014 funding is
    also included for the development of ADS-B software requirements for
    the Advanced Technologies and Oceanic Procedures (ATOP) automation
    platform.
        In December 2011, the FAA announced contract awards to analyze fuel
    quality control procedures, conduct jet engine durability tests with
    alternative fuels and perform key testing to support qualification and
    certification of jet biofuels from alcohols, organic matter, and other
    renewable materials. We expect these activities to support the next
    round of jet fuel approvals, scheduled to begin in 2014.
        NextGen's contribution to our Nation's economic recovery and future
    leadership is critical. We recognize the fiscal challenges our Nation
    faces. America's future demands that we continue to invest in modern
    technologies that pave the way for tomorrow's capabilities. We continue
    to work in full partnership with industry, other agencies and
    departments, and with our labor groups to achieve a shared vision,
    leveraging powerful technologies and setting new standards for the
    future of global aviation.
        Safety has always been FAA's number one mission, and our National
    Airspace System (NAS) has never been safer. There has not been a fatal
    commercial passenger accident in the United States since 2009. That
    represents approximately 39.7 million flights that were operated
    safely. I am proud of the hard work that has gone into providing a
    basis for achieving this level of safety. As we move forward into 2013
    and beyond, U.S. aviation is experiencing its safest period ever, and
    the dedicated men and women of the FAA will continue working diligently
    to maintain safe operations within the NAS.
        We are achieving this next level of safety by making our programs
    smarter and more data-driven. Our Nation's safety record is a direct
    result of an unwavering commitment by Government and industry to work
    together to monitor data and identify trends to prevent accidents.
    Instead of a reactive, forensic approach to safety management, we are
    identifying and mitigating conditions or trends that have potential to
    give rise to safety problems. The only way to prevent accidents before
    they happen is to accurately identify risk areas and work to mitigate
    them. This is possible due, in part, to voluntary reporting for both
    FAA and industry employees, safety management systems (for both FAA and
    industry) and the creation of the Aviation Safety Whistleblower
    Investigation Office. All of these efforts have been providing the
    agency with data and information to which we have never before had
    access. More information results in FAA being able to see trends that
    could lead to accidents, and mitigate the associated risks to prevent
    accidents from happening. Adjusting the safety culture to ensure
    employees that they can provide information without fear of reprisal is
    a cornerstone of our approach to safety.
        In 2012 we continued to expand the Aviation Safety Information
    Analysis and Sharing (ASIAS) system, which now covers 95 percent of all
    commercial flights in the United States. This system allows airlines to
    share operational data and voluntary safety reports with each other and
    the FAA. ASIAS and other data analysis tools are constantly making our
    aviation system even smarter. With these tools, we are able to conduct
    more comprehensive safety and performance analysis, and share this
    information with industry stakeholders.
        With regard to the Boeing 787, last month Boeing redesigned the
    battery system and the FAA approved the company's plan for showing that
    the redesign will work. Approving the certification plan was the first
    step in the process to evaluate the 787's return to flight. Boeing has
    redesigned the internal battery components and added better insulation
    for the battery cells. They have also added a robust battery
    containment and venting system. The company has done extensive testing,
    including limited test flights, without passengers, using the
    redesigned battery prototype. The FAA is reviewing these test reports
    and analysis to make sure that the new battery system ensures the
    safety of the aircraft and its passengers.
        We all know the importance of aviation to America and the global
    economy. Aviation creates jobs and trade, and it connects us to
    destinations near and far. The forecast we released March 6 shows that
    aviation will continue to expand both domestically and internationally
    over the coming decades. And traffic volume for U.S. carriers is
    expected to rise by more than 75 percent in the next two decades.
        Last year, 737 million people flew on U.S. carriers, and we
    anticipate that number to hold steady this year. Our future outlook
    shows continued positive growth. In fact, we can expect roughly 400
    million more people flying 20 years from now, an increase equal to more
    than today's U.S. population.
        It is essential to the effective management of FAA's programs to
    have stability and predictability that can be relied upon. The many
    authorization extensions over the last few years took a toll on FAA's
    work in certain areas until the Federal Aviation Reauthorization
    Modernization and Reform Act of 2012 offered the stability essential to
    our agency's ability to meet the current demands of both air traffic
    and aviation safety. For many years, FAA labored under the uncertainty
    of temporary reauthorizations. Now sequestration places us in an even
    more extreme uncertainty. FAA has worked hard to plan for sequestration
    cuts. Seventy percent of FAA's Operations budget is dedicated to
    employee salaries and benefits, so they must bear a significant portion
    of the cuts. I can assure you that safety is the FAA's top priority. If
    sequestration means fewer flights can be safely accommodated in the
    NAS, then there will be fewer flights.
        On March 5, FAA began issuing furlough notices to over 47,000
    employees. There will be 1 furlough day per biweekly pay period, for a
    maximum of 11 days through September 30. We issued final furlough
    determination notices to employees in early April. We are also planning
    to eliminate midnight shifts in over 70 towers across the country,
    close over 149 air traffic control towers at airports with fewer than
    150,000 flight operations or 10,000 commercial operations per year, and
    reduce preventative maintenance and equipment provisioning and support
    for all NAS equipment. All of these changes are being made in
    collaboration with our stakeholders and our unions.
        As a result of employee furloughs and prolonged equipment outages
    resulting from lower parts inventories and fewer technicians, travelers
    should expect delays. Flights to major cities like New York, Chicago,
    and San Francisco could experience delays of up to 90 minutes during
    peak hours because we will have fewer controllers on staff. We are
    aware that these service reductions will adversely affect commercial,
    corporate, and general aviation operators. We also expect that, as
    airlines estimate the potential impacts of these furloughs, they will
    change their schedules and cancel flights.
        Beyond the impacts to air traffic, aviation safety employees will
    also experience furloughs. This will impact airlines, aviation
    manufacturers, and individual pilots who need FAA safety approvals and
    certifications. While the agency will continue to address identified
    safety risks, a slowed certification and approval process due to
    furloughs could negatively affect passengers and all segments of the
    aviation industry.
        We all want the same things. We want to get better at what we do,
    think smarter, improve safety, streamline certification, and remain the
    agency that can work collaboratively with the world to develop safer
    and more efficient practices. Sequestration will not stop us from
    trying to attain these goals, but it will make it much, much harder.
        Despite these uncertain times, the demand for aviation and its
    services will continue to grow, and that is why it is critical that we
    invest smartly. Our world will continue to be even more interconnected,
    and aviation will continue to be a pillar of the global economy.
    NextGen will help us meet the challenges that lie ahead, as we
    transform from ground-based radar to satellite-based navigation, a work
    we are performing in collaboration with our industry partners. We are
    seeing its benefits already, and will continue to do so in the coming
    years as it becomes an even more integral component of our aviation
    system.
        In 2012 we made several noteworthy strides delivering NextGen
    benefits to operators and the traveling public. Laying the groundwork
    is our En Route Automation Modernization (ERAM) program, the platform
    upon which NextGen capabilities will be realized. This enabler of
    NextGen has been deployed at over half of our facilities controlling
    high-altitude air traffic, and eight En Route centers are now using
    ERAM as their primary means of controlling aircraft. Five NextGen
    transformational programs are now under contract, most recently Data
    Communications and NAS Voice System. We also deployed the Automatic
    Terminal Proximity Alert tool in several locations, which has helped
    air traffic controllers better manage aircraft spacing to safely
    achieve optimal efficiency on final approach. And our System Wide
    Information Management tools are providing National Airspace System
    users with more precise weather information and airport surface data.
        This past year, our deployment of satellite-based Performance Based
    Navigation (PBN) procedures increased both safety and capacity across
    the country as part of our Metroplex initiative. From northern
    California to southern Florida, we are implementing PBN to more
    efficiently use our Nation's airspace for direct routing. In addition,
    through data analysis, procedure improvements, and effective training
    for controllers as well as pilots, we safely modified the separation
    standards for approaches to parallel runways at a number of busy
    airports. Taken together, these initiatives are helping airlines
    improve on-time performance, reduce fuel consumption, and deliver
    travelers to their destinations more efficiently.
        We continue to engage through our work with Optimization of
    Airspace and Procedures (OAPM) initiatives, which are being done in
    close collaboration with industry and stakeholders. OAPM is actively
    working in 9 of the 13 metroplexes identified in Phase 1 of the
    program. Of these, one (Houston) is currently in the implementation
    phase with two additional sites planned to start implementation of the
    new procedures later this summer (DC and North Texas). The metroplex
    initiative optimizes procedures in a geographic area where there are a
    number of airports, rather than focusing on each airport separately.
    Through this initiative, we are untangling our busiest airspace and
    creating more direct routes, cutting fuel usage, and becoming more
    environmentally friendly. In the congested airspace in the skies above
    our busiest metropolitan areas, these new modifications are being put
    in place in 3 years, much more quickly than the 5 to 10 years it had
    taken previously. We are also actively engaged with our industry and
    Government partners in the development of NextGen through, for example,
    the NextGen Advisory Committee (NAC). This group is helping to guide
    many aspects of our air traffic modernization work. The NAC also works
    on developing and recommending NextGen performance metrics.
        Another key component of NextGen is reducing aviation's impact on
    the environment. Last year we advanced a number of critical initiatives
    toward this goal. We made great headway in developing a replacement for
    leaded aviation gasoline through our collaboration with industry and
    technical research. We partnered with industry through our Continuous
    Lower Energy, Emissions, and Noise (CLEEN) program to test aircraft
    with new wing and engine designs, as well as a blended sustainable
    biofuel. And we are collaborating with our Nation's airports to develop
    renewable energy sources and sustainability to reduce emissions. For
    example, this year we provided Airport Improvement Program (AIP) grants
    to Chattanooga Metropolitan Airport for construction of a 4,000 panel
    solar farm, and to Chicago O'Hare International Airport for low-
    emission electrical power units used by aircraft parked at the gate.
        While NextGen is delivering benefits now, it also builds for the
    future. Similarly, the past year we made progress toward ensuring
    safety in industry segments where we anticipate significant growth in
    the coming years: Unmanned Aircraft Systems (UAS) and Commercial Space
    Transportation. FAA employees are working creatively with our industry
    partners to meet the challenges of these dynamic sectors.
        We are working to safely integrate Unmanned Aircraft Systems into
    our national airspace. In March 2012, the agency created a new UAS
    integration office. The office serves as the FAA's one-stop portal for
    all matters related to civil and public use of UAS in the NAS. The FAA
    is in the process of drafting the initial Notice of Proposed Rulemaking
    for small UAS. In addition, on February 14, 2013, the FAA released the
    Screening Information Request (SIR) to outline the process in which the
    FAA would collect, evaluate and select six test sites across the
    country to test Unmanned Aircraft Systems. We plan to select those UAS
    test sites by the end of this calendar year.
        Just as with unmanned aircraft, the FAA is working to safely
    integrate commercial space operations into the national airspace system
    as well. To date, the FAA has licensed 215 commercial space launches
    and reentries. They have gone off without a fatality, a serious injury,
    or significant property damage. Last year, we licensed the historic
    launches of the SpaceX Falcon 9 rocket--marking the first time a
    commercial company delivered cargo to the International Space Station.
    Missions like these continue to demonstrate the viability of the
    commercial space industry. The FAA has also licensed a total of eight
    commercial spaceports. In fiscal year 2014, our commercial space
    division is requesting to convert four contract resources to Federal
    employees so they can expand their workload to include responsibilities
    that are inherently governmental. These additional duties would include
    safety inspections, compliance assessments, regulatory activity
    support, and inter-agency coordination efforts to create common safety
    standards.
        Efficiencies are not just for the future. Given the economic
    challenges we are facing, FAA has worked very hard to find cost-savings
    and we have been quite successful. Even before sequestration, we have
    set a target of $91 million in cost-savings for fiscal year 2013. We
    recognize that the status quo is not an option and we will continue to
    strive to achieve additional efficiencies moving forward.
        Last year we made great strides in finding efficiencies, leveraging
    our resources, empowering our employees, and making greater use of
    technology to perform our core mission. Through a congressional
    reprogramming request under our Foundation for Success initiative, we
    streamlined finance, information technology, acquisition, and other
    essential functions within a shared services organization. The results
    included enhancing delivery of information technology services at a
    lower unit cost. Additionally, the FAA's Aeronautical Center, which
    supports the NAS as well as international partners, generated nearly
    $16 million in cost-savings or avoidance last year through streamlining
    processes and continuous improvement initiatives. Overall in 2012, we
    generated nearly $94 million in cost-savings or avoidance through
    control measures and innovative business solutions.
        One of our most significant accomplishments of the year came in the
    wake of one of the Nation's biggest challenges. Hurricane Sandy
    devastated homes and infrastructure throughout the Northeast. Though
    the region's airports experienced flooding and other significant
    damage, our technical staff worked around the clock to restore airfield
    and air navigation systems to operational status. Their hard work and
    dedication to the FAA's mission resulted in the restoration of normal
    air traffic operations just days after the storm. Seeing our
    workforce's efforts to prepare for and rebuild after this unprecedented
    storm is one of my proudest moments as head of the FAA. The agency is
    grateful for the $30 million in emergency relief funding entrusted to
    us by this committee. We are already putting these funds to good use to
    repair roofs and walls at FAA facilities, navigation and landing
    systems, power systems, and other structures and equipment. In total,
    the funds will support 59 repair projects at 21 different locations.
        In the current fiscal climate, we must find ways for FAA's
    employees to work smarter and enhance our productivity. FAA must not
    only meet our day to day responsibilities, we must also look to the
    future and figure out how to shape the agency to meet the demands and
    opportunities of the future. We are actively engaging our employees in
    the development of recommendations for facilities consolidation and
    realignment. As noted earlier, the U.S. aviation system is going
    through significant, even revolutionary changes. NextGen is a major
    transformation which will increase our efficiency and safety, reduce
    delays and reduce fuel consumption. UAS have the potential to change
    the face of aviation. In the midst of these changes, budget pressures
    are making us ask hard questions about what the FAA needs to deliver in
    the coming years to ensure the safety and efficiency of the NAS and how
    to do it most cost-effectively.
        Finally, it is essential that we chart innovative and collaborative
    ways to engage with all segments of the aviation sector, from airlines
    to association groups, to general aviation, to unions. We must embrace
    the opportunity to make long-lasting changes together that ensure a
    vital and vibrant aviation industry that serves the needs of this
    Nation.
        I am extremely proud of our achievements. While I recognize there
    is still much work to be done, I know we are up to the task. In the
    years ahead we will strive to build on these achievements. We will work
    toward making the safest aviation system even safer and smarter;
    accelerate the benefits of new technology; and empower employees to
    increase efficiencies and spur greater innovations. The decisions we
    make over the next few years are going to affect the air transportation
    system in the United States for decades to come, and I am eager to work
    with you and your colleagues to reach the next level of aviation safety
    and efficiency.

        Senator Murray. Mr. Scovel.

                 SUMMARY STATEMENT OF HON. CALVIN L. SCOVEL III

        Mr. Scovel. Madam Chairman, Ranking Member Collins, members
    of the subcommittee, thank you for inviting me to testify on
    FAA's fiscal year 2014 budget. Like other agencies across the
    Government, FAA is having to rethink its funding priorities and
    make difficult tradeoffs in a most trying fiscal environment.
        My testimony today will focus on how FAA can achieve
    efficiencies through more effective management of its
    workforce, the agency's largest cost driver, and its
    modernization efforts while not losing sight of its safety
    mission. My office has identified multiple opportunities for
    FAA to reduce costs in managing its controller and inspector
    workforce.
        The agency has been challenged to ensure thousands of newly
    hired controllers have the skills needed to carry out their
    critical role. Cost overruns on FAA's controller training
    contract have reached almost $89 million. And training times
    for newly hired controllers have increased by 41 percent since
    2009. To meet its goals of reducing training costs and times,
    FAA needs to provide stronger contract controls, including how
    it awards incentive fees.
        FAA also needs to rethink its processes for scheduling
    controllers. While air traffic operations have declined by 23
    percent since 2000, FAA today employs slightly more controllers
    than it did then. Improved scheduling, particularly on
    overnight shifts at low activity towers, could enhance
    productivity as well as yield additional cost-savings.
        The agency similarly needs to improve how it allocates its
    4,000 flight standards safety inspectors. FAA has yet to find a
    reliable model for determining how many inspectors it needs and
    where they are needed most to address the greatest safety risks
    and get the best return on investment.
        FAA's second major challenge is effectively managing its
    implementation of modernization projects and protecting its
    airport investments. For example, FAA continues efforts to
    fully implement the En Route Automation Modernization program,
    a system for processing flight data initially priced at $2.1
    billion. While FAA has overcome some technical problems and
    fielded ERAM at 16 facilities, ERAM remains at risk of cost and
    schedule increases as FAA implements the system at the last
    four facilities, including some of the most complex in the
    National Airspace System.
        To set realistic budgets and expectations for its
    modernization and infrastructure efforts, FAA needs to take
    several actions. First, FAA needs to complete an integrated
    master schedule for NextGen's many interdependent programs to
    address operational and technical risks and make informed cost
    and schedule tradeoffs.
        Second, FAA must rein in excessive costs on major
    acquisition contracts. FAA awarded multibillion dollar
    contracts without resolving differences between the agency's
    cost estimates and those provided in contractor proposals. This
    lack of control creates unreal, unreliable budget estimates and
    unnecessary cost increases.
        Third, FAA needs to ensure airport revenues are
    appropriately spent. Over the past 10 years, we have identified
    millions of dollars in airport revenue that, contrary to
    Federal law, were diverted, used for non-airport purposes or
    simply lost. Had these revenues been used for airport
    operations, the airports could have relied less on Federal
    funding.
        As FAA works to control costs, it must not lose sight of
    its number one priority, ensuring the continued safety of the
    National Airspace System. One of FAA's key safety issues
    remains reducing controller errors. FAA statistics show that
    serious operational errors by controllers are on the rise,
    including those associated with runway incursions. Improved
    data collection and analysis would enable FAA to better
    identify the root causes of these safety risks and mitigate
    them.
        Another important safety issue relates to FAA's
    implementation of new pilot qualification requirements, a key
    provision of the Airline Safety Act. FAA is behind schedule in
    finalizing the highly contested rule for pilots, but still
    states it will make the final due date of this coming August.
        Ongoing aviation advancements such as unmanned aircraft
    systems have created new safety challenges for FAA. Safely
    integrating these new systems, which FAA predicts may number
    roughly 10,000 within the next 5 years, will require new
    approaches to managing the Nation's airspace.

                               PREPARED STATEMENT

        Madam Chairman, this concludes my prepared statement. I'd
    be happy to answer any questions you or other members of the
    subcommittee may have.
        Senator Murray. Thank you very much.
        [The statement follows:]
                Prepared Statement of Hon. Calvin L. Scovel III
        Madam Chairman and members of the subcommittee: Thank you for
    inviting me to testify on the Federal Aviation Administration's (FAA)
    fiscal year 2014 budget. As you know, FAA strives to maintain safe
    operation of the National Airspace System (NAS) while ensuring
    efficiency through modernization efforts such as the Next Generation
    Air Transportation System (NextGen). The sequestration's mandated
    budget cuts require agencies across the Federal Government to rethink
    their priorities and make difficult tradeoffs. FAA is no exception. The
    audits conducted by my office aim to improve safety--FAA's number one
    priority--and to control costs, create efficiencies, and assist in
    establishing priorities.
        My testimony today focuses on three significant challenges for FAA:
    (1) more effectively managing its workforce; (2) managing strategies
    for NextGen and modernization; and (3) continuing efforts to ensure the
    safety of the NAS.
                                   in summary
        Our recent and ongoing work has identified opportunities for FAA to
    improve the management of its workforce, the agency's largest cost
    driver. Specifically, FAA can increase the efficiency of its air
    traffic controller and safety workforce by strengthening its controller
    training program, revising its controller staffing and scheduling
    practices, and developing an effective method for determining how many
    safety inspectors it needs and where they are most needed. At the same
    time, FAA must protect its investment in its multibillion dollar
    NextGen efforts and infrastructure improvements that are critical to
    ensuring the future viability of the NAS. This will require FAA to set
    priorities and establish sound management strategies to achieve near-
    and long-term benefits, enhance its contract oversight, and prevent
    misuse of airport revenue and Federal grant funds. Finally, FAA must
    not lose sight of its number one priority: ensuring the continued
    safety of the NAS. One of FAA's key safety issues remains effectively
    collecting and analyzing data on air traffic controller errors that
    create air and ground collision risks. FAA also faces new challenges
    with safely integrating unmanned aircraft systems into the NAS,
    implementing a safety data sharing system to proactively assess risks,
    and ensuring effective oversight of its voluntary safety disclosure
    program for air carriers.
                                   background
        FAA's budget funds four accounts: Operations; Facilities and
    Equipment (F&E); the Airport Improvement Program (AIP); and Research,
    Engineering, and Development (RE&D).
      --Operations is FAA's largest cost driver and funds most of the
            agency's day-to-day activities, including safety oversight and
            air traffic control functions. Salaries and benefits for
            controllers, safety inspectors, and other FAA personnel make up
            71 percent of FAA's operations costs.
      --F&E funds the agency's NextGen initiatives and other modernization
            activities such as improving aging infrastructure, power
            systems, navigational aids, and weather systems.
      --AIP funds grants to airports to pay for runway construction and
            other related projects.
      --RE&D provides funds for NextGen and other research areas such as
            fire research and safety, and aging aircraft.
        FAA's total fiscal year 2014 budget request of $15.6 billion
    represents about a 2-percent decrease from the agency's 2012 budget.
    However, the 2014 request includes $3 billion in Immediate
    Transportation Investments spending for AIP and NextGen programs (see
    table 1). FAA proposes to shift the focus of its AIP account to smaller
    commercial and general aviation airports and eliminate guaranteed AIP
    funding for large hub airports. The proposal would also increase the
    passenger facility charge limit from $4.50 to $8 per enplanement for
    all eligible airports, giving large hub airports greater flexibility to
    generate their own revenue.

                             TABLE 1.--FAA BUDGET, FISCAL YEAR 2012 THROUGH FISCAL YEAR 2014
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                           2013                          Increase/
                                                                        continuing                     decrease from
                         Account                        2012 actual     resolution     2014 request    2012 to 2014
                                                                      annualized \1\                     (Percent)
    ----------------------------------------------------------------------------------------------------------------
    Operations......................................          $9,653          $9,712          $9,707             0.6
    F&E.............................................           2,731           2,777           2,778             1.7
    AIP.............................................           3,350           3,350           2,900           -13.4
    RE&D............................................             168             169             166            -1.2
                                                     ---------------------------------------------------------------
          Subtotal..................................          15,902          16,008          15,551            -2.2
                                                     ===============================================================
    Immediate Transportation Investments............  ..............  ..............           3,000  ..............
                                                     ===============================================================
          Total.....................................          15,902          16,008          18,551            16.7
    ----------------------------------------------------------------------------------------------------------------
    \1\ This amount excludes the $637 million reduction in funding due to the sequestration.

    Source: FAA.

        Due to sequestration, FAA must reduce its remaining fiscal year
    2013 budget by $637 million. The majority of this reduction will be
    absorbed by the Operations account. FAA expects that cuts to the
    Operations account will result in the closure of 149 contract towers,
    and FAA plans to require controllers, technicians, and other employees
    to take up to 11 unpaid furlough days through the end of September.
    Most of the remaining reduction will be absorbed by the F&E account.
    This reduction will require FAA to adjust its cost and schedule
    baselines for individual NextGen and other modernization programs,
    which could delay completion of these projects.
      faa has opportunities to more effectively manage its controller and
                              inspector workforce
        FAA plans to place thousands of new air traffic controllers at its
    more than 300 air traffic facilities nationwide--a significant
    challenge, as new controllers can require several years of training to
    become certified at their assigned locations,\1\ and each facility has
    unique operations and air traffic volume. Although the agency has had a
    major controller training support contract in place since 2008, the
    contract has experienced cost overruns and has not met its goal to
    reduce total training times. FAA must also continue in its efforts to
    address controller workload issues, particularly in terms of improving
    productivity, which could create cost-savings. Finally, to effectively
    oversee a dynamic aviation industry, it is critical that FAA place its
    approximately 4,000 flight standards safety inspectors where they are
    most needed.
    ---------------------------------------------------------------------------
        \1\ New controllers achieve certification on each position as they
    move through facility training. After they have certified on all
    positions within their assigned area, they are commissioned as a
    certified professional controller at that facility.
    ---------------------------------------------------------------------------
    Challenges in FAA's Training Programs and Contract Oversight Jeopardize
            FAA's Efforts To Ensure a Proficient Controller Workforce
        To replace retiring controllers who were hired immediately after
    the 1981 strike,\2\ FAA plans to hire and train more than 11,700 new
    controllers over the next 10 years.\3\ In 2004, we reported that FAA's
    controller training program was extremely decentralized for such a
    large national undertaking and that the efficiency and quality of
    training varied extensively by location. With the large numbers of new
    controllers entering the workforce and veteran controllers retiring or
    eligible to retire, FAA must have reliable information on how many
    certified controllers it needs to effectively manage the NAS. FAA
    executed a contract to train its new controllers; however, it has not
    been effectively managed.
    ---------------------------------------------------------------------------
        \2\ In 1981, following a period of labor unrest, an overwhelming
    majority of the air traffic control workforce went on strike on August
    3. President Reagan ordered those controllers to return to duty within
    48 hours. When those 10,438 striking controllers did not return to
    work, President Reagan fired them on August 5.
        \3\ Over the past 5 years, FAA has hired more than 6,600 new
    controllers.
    ---------------------------------------------------------------------------
        FAA's $859 million Air Traffic Controller Optimum Training
    Solutions (ATCOTS) contract continues to be a significant issue for the
    agency. FAA awarded the contract in 2008 to provide up to 10 years of
    controller training support and to assist in modernizing the agency's
    training program.\4\ Key ATCOTS goals include reducing total training
    costs, reducing training time, and developing training innovations that
    can be adapted to new technologies--particularly those related to
    NextGen. However, 4 years into the contract, the goals have not been
    achieved. For example, between 2009 and 2012, the average training time
    for newly hired controllers increased 41 percent from 1.9 years to 2.7
    years.
    ---------------------------------------------------------------------------
        \4\ The ATCOTS contract consists of a 5-year base period, worth
    $437 million, and two option periods (a 3-year period and a 2-year
    period) worth $422 million.
    ---------------------------------------------------------------------------
        In 2010, we reported that the ATCOTS contract faced significant
    cost overruns, poor procurement practices, and a lack of effective
    contract oversight.\5\ For example, in its first 2 years, the ATCOTS
    contract exceeded negotiated contract values by $46 million. Our
    current review continues to show that FAA has not implemented
    sufficient changes to improve its program and contract oversight. For
    example, in 2012, after 4 consecutive years of cost overruns (totaling
    approximately $89 million), FAA chose to extend the ATCOTS contract by
    3 years without clearly defining the contract's training requirements
    or ensuring that it can produce sufficient training innovations to meet
    its training goals.
    ---------------------------------------------------------------------------
        \5\ FAA's Air Traffic Controller Optimum Training Solution Program:
    Sound Contract Management Practices Are Needed To Achieve Program
    Outcomes (OIG Report No. AV-2010-126), September 30, 2010. OIG reports
    are available on our Web site at http://www.oig.dot.gov/.
    ---------------------------------------------------------------------------
        Additionally, since awarding the 10 year contract in September
    2008, FAA paid the contractor over $31 million in cost incentive fees
    and award fees that were ineffective at motivating contractor
    performance. For example, to reduce contract costs, FAA paid the
    contractor $19 million in cost incentive fees and award fees related to
    cost containment despite the $89 million in cost overruns. FAA also
    awarded the contractor over $12 million for meeting performance
    measures that do not link to important training goals, such as training
    innovations.
        In May 2011, FAA created an Independent Review Panel of industry
    and academic professionals to evaluate all aspects of how the agency
    hires, assigns, and trains new controllers. To date, the panel has
    identified 49 recommendations, many incorporating actions we previously
    recommended, that could significantly improve FAA's controller hiring
    and training processes. However, most are in the early stages of
    development, and timeframes for actual implementation are not yet
    known.
        We plan to issue reports on FAA's ATCOTS contract and air traffic
    controller facility training later this year and will continue to
    monitor the agency's cost-saving efforts in these areas.
    FAA Could Realize Cost-Savings Through Improved Controller Productivity
            and Scheduling
        Since 1998, FAA has introduced a series of initiatives intended to
    increase controller productivity and reduce operating costs. These
    initiatives include eliminating alternate work schedules, matching
    controller staffing to facility workload, reducing operational overtime
    costs, and developing an automated official time reporting system.
    However, it is unclear whether these initiatives are achieving the
    anticipated productivity gains and cost-savings. FAA data suggest that
    its overall staffing may not be optimal. Since 2000, total air traffic
    operations have declined by 23 percent, while the total number of
    controllers slightly increased. We are currently conducting a review of
    FAA's controller productivity initiatives.
        As directed by the FAA Modernization and Reform Act of 2012,\6\ we
    are also conducting a review of the cost impacts of new FAA controller
    schedules--developed in response to concerns about the impact of FAA
    scheduling practices, particularly during overnight shifts, on
    controller performance and air traffic safety. While most of FAA's new
    controller scheduling policies have not significantly affected costs,
    our ongoing work indicates the agency could realize some cost-savings
    through better scheduling. For example, 72 facilities that do not meet
    the agency's minimum traffic guidelines for continuous overnight
    operations continue to have a minimum of two controllers during the
    midnight shift. Reducing air traffic control services at these
    facilities during a portion of or the entire midnight shift could
    reduce operating costs. However, FAA has not yet calculated the
    potential savings. We expect to report on our reviews of FAA's
    controller productivity and scheduling later this year.
    ---------------------------------------------------------------------------
        \6\ Public Law 112-95.
    ---------------------------------------------------------------------------
    FAA Has Not Developed a Reliable Method for Determining Its Safety
            Inspector Workforce Needs
        FAA currently employs approximately 4,000 flight standards safety
    inspectors who oversee all facets of aviation safety, from general
    aviation to air carrier operations. However, the agency has not
    determined where these resources are most needed or the extent to which
    there may be a shortfall in its inspector workforce. A 2006 National
    Research Council (NRC) study,\7\ conducted at the direction of
    Congress, found that FAA's methodology for allocating aviation safety
    inspector resources was ineffective. NRC recommended that FAA develop a
    new approach, and, in response, FAA introduced a new staffing model in
    October 2009.
    ---------------------------------------------------------------------------
        \7\ ``Staffing Standards for Aviation Safety Inspectors,''
    September 20, 2006.
    ---------------------------------------------------------------------------
        We have evaluated the model as part of an ongoing audit of
    inspector staffing, as requested by Congress.\8\ Thus far, FAA
    officials are not confident in the accuracy of the model's staffing
    projections and therefore have not fully relied on the number projected
    by the model when developing plans and annual budget requests. As of
    January 2013, FAA had reported the results of its staffing model six
    times, with each iteration showing very different nationwide employee
    shortages (see figure 1).\9\
    ---------------------------------------------------------------------------
        \8\ Congress directed our office to review inspector and analyst
    staffing issues in section 205 of the Airline Safety and FAA Extension
    Act of 2010, Public Law 111-216, enacted August 1, 2010.
        \9\ Based on our analysis of FAA data, these fluctuations appear to
    be caused by a number of underlying issues such as inaccurate and
    outdated data.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        FAA is working to further refine the model so that it more
    effectively identifies the number of inspectors needed and where they
    should be placed to address the greatest safety risks and get the best
    return on investment. We expect to issue our report on inspector
    staffing later this year.
           sound management strategies are key to the cost-effective
        implementation of faa's modernization and infrastructure efforts
        FAA has numerous efforts underway to modernize the air
    transportation system and upgrade infrastructure--most notably its
    multibillion dollar NextGen transformational programs.\10\ The success
    of these efforts depends on the agency's ability to set priorities,
    control costs, deliver benefits, and maintain stakeholder support.
    However, FAA has been challenged to maximize near-term benefits through
    its metroplex initiative, while addressing cost and schedule risks
    related to implementing critical automation systems such as the En
    Route Automation Modernization (ERAM) program. In addition, FAA has not
    yet developed an integrated master schedule to help advance and
    prioritize key transformational programs. Other challenges include
    improving contract oversight and management, upgrading aging air
    traffic control facilities, and protecting airport investments.
    ---------------------------------------------------------------------------
        \10\ FAA's transformational programs, defined as programs directly
    related to the delivery of NextGen capabilities, will fundamentally
    change the NAS by enhancing communications, improving the tracking of
    aircraft, and revamping overall air traffic management.
    ---------------------------------------------------------------------------
    Integrating New Performance-Based Navigation Routes Is Critical To
            Maximizing Near-Term Benefits and Ensuring User Support
        In 2010, FAA launched its metroplex initiative--a 7-year effort to
    improve the flow of traffic and efficiency at congested airports in 13
    major metropolitan areas. A key part of this effort and a stepping
    stone for NextGen is the introduction of new performance-based
    navigation (PBN) procedures, such as Area Navigation (RNAV) and
    Required Navigation Performance (RNP),\11\ which can provide
    significant near-term benefits such as more direct flight paths,
    improved on-time aircraft arrival rates, greater fuel savings, and
    reduced aircraft noise. FAA has completed initial studies or begun
    design work at 8 of the 13 metroplex locations but continues to face
    challenges with shifting from planning to implementation. FAA has
    extended the expected completion date for all metroplex sites by 15
    months to September 2017 after determining that its initial schedule
    was too aggressive.
    ---------------------------------------------------------------------------
        \11\ RNAV is a method of navigation in which aircraft use avionics,
    such as Global Positioning Systems, to fly any desired flight path
    without the limitations imposed by ground-based navigation systems. RNP
    is a form of RNAV that adds on-board monitoring and alerting
    capabilities for pilots, thereby allowing aircraft to fly more precise
    flight paths.
    ---------------------------------------------------------------------------
        While the metroplex approach is a step in the right direction to
    achieving the near-term benefits of reduced congestion, we reported in
    August 2012 that industry representatives were concerned that FAA had
    not yet integrated efforts from other related initiatives, such as
    better managing surface operations.\12\ In addition, many airspace
    users that are equipped with advanced avionics would like more advanced
    PBN procedures than FAA's current efforts provide--specifically, those
    that regularly allow for more precise and curved approaches. We also
    identified a number of barriers to FAA's metroplex effort, including
    the need to work across diverse agency lines of business, update
    policies, streamline the process for implementing new flight
    procedures, apply environmental regulations, upgrade controller
    automation tools, and train controllers on new advanced procedures. FAA
    is currently working to address our recommendations, including
    developing milestones for a more integrated metroplex approach and
    addressing barriers in a timely manner.
    ---------------------------------------------------------------------------
        \12\ Challenges With Implementing Near-Term NextGen Capabilities at
    Congested Airports Could Delay Benefits (OIG Report No. AV-2012-167),
    August 1, 2012.
    ---------------------------------------------------------------------------
        FAA has several efforts underway to identify and resolve obstacles
    to PBN use. For example, FAA has tasked MITRE to obtain and analyze
    data to measure the use of PBN procedures and quantify their benefits.
    While our analysis of MITRE's preliminary data shows high RNP use at
    some small- to medium-sized airports, such as Oakland, overall RNP
    usage is low, particularly at busy metroplex airports, such as New
    York.\13\ According to MITRE, one of the obstacles to using the
    procedures in busy metroplex locations is the lack of controller tools
    to manage mixed operations--that is merging aircraft using straight-in
    approaches with those on curved paths.\14\ It is important for FAA to
    use MITRE's data to determine why procedures are not being used and
    what it will take to obtain benefits. FAA currently has a team
    developing an action plan to address obstacles, such as the need to
    update policies and procedures to allow PBN use, and expects to issue a
    report later this year. FAA is also working to streamline its process
    for implementing new procedures in response to recommendations from an
    internal FAA review--the NAV Lean project. However, FAA has only
    implemented 3 of the 21 recommendations thus far and does not expect to
    complete all recommendations until September 2015.
    ---------------------------------------------------------------------------
        \13\ PBN usage data is as of January 2013. MITRE has ongoing
    efforts to update the data and improve the formulas. MITRE is only
    capturing data for RNP procedures with curved approaches because it
    cannot distinguish RNP procedures with straight-in approaches from
    conventional procedures.
        \14\ According to MITRE, other causal factors, such as weather or
    operational conditions that do not necessitate the use of PBN
    instrument approaches, can also affect RNP use.
    ---------------------------------------------------------------------------
    Despite Progress, FAA Faces Programmatic and Cost Risks With Automation
            Systems in the Critical Path of NextGen
        FAA's goals for NextGen ultimately depend on the success of its
    ongoing efforts to deploy ERAM--a $2.1 billion system for processing
    flight data. Without ERAM, the key benefits of FAA's transformational
    programs, such as new satellite-based surveillance systems and data
    communications for controllers and pilots, will not be possible. FAA
    originally planned to complete ERAM by the end of 2010, but significant
    software problems impacted the system's ability to safely manage and
    separate aircraft and raised questions as to what capabilities ERAM
    will ultimately deliver. As a result, FAA rebaselined the program in
    June 2011, pushing its expected completion to 2014 and increasing cost
    estimates by $330 million.
        FAA is making considerable progress toward getting ERAM on track.
    The agency is now using ERAM at 16 of 20 sites either on a full- or
    part-time basis--a significant step forward given the extensive
    problems at the two initial sites. FAA plans for all 20 sites to
    achieve full operational capability and to decommission \15\ the legacy
    system by August 2014. However, as FAA deploys ERAM to the Nation's
    busiest facilities, such as New York and Washington, DC, it expects to
    identify new problems that could impact cost and schedule. FAA is
    currently spending about $12 million a month on the ERAM F&E portion of
    the contract, excluding NextGen efforts funded through the ERAM
    contract. If the current contract burn rate does not decline
    significantly, the agency will need additional funds to complete this
    stage of the program.\16\
    ---------------------------------------------------------------------------
        \15\ Decommissioning involves the disconnection, removal, and
    disposal of the HOST computer system once ERAM has been declared
    operationally ready at a site.
        \16\ The Office of Management and Budget (OMB) approved shifting
    $44 million of ERAM O&M funding to F&E funding, increasing total ERAM
    F&E funding to $374 million. As of February 2013, FAA had spent a total
    of $241.86 million (F&E)--about 64.7 percent of the $374 million in F&E
    funding allocated since the June 2011 rebaseline.
    ---------------------------------------------------------------------------
        Moreover, controllers and experts continue to raise concerns about
    ERAM's capabilities. While these issues are not expected to delay
    ERAM's 2014 implementation, they will need to be addressed for the
    system to support NextGen initiatives.
      --Flight Plan Trajectory Modeler.--This is an ERAM capability that
            models aircraft flight paths and is used to predict conflicts
            and ensure accurate handoffs between controllers and other
            facilities. However, the modeler software has often required
            adjustments to change the flight plan trajectory to ensure
            accurate handoffs. According to controllers, improvements are
            needed in order to support current operations and NextGen
            capabilities that use trajectory-based operations.\17\
    ---------------------------------------------------------------------------
        \17\ Trajectory-based operations focus on more precisely managing
    aircraft from departure to arrival with the benefits of reduced fuel
    consumption, lower operating costs, and reduced emissions.
    ---------------------------------------------------------------------------
      --Aircraft Tracking and Sensor Fusion.--This capability allows ERAM
            to integrate--or ``fuse''--multiple radars and satellite-based
            information for controllers. However, thus far, controllers
            have not been able to take advantage of this improved
            capability because of tracking issues. A MITRE analysis found
            that the ERAM tracker will require adjustments to use the
            Automatic Dependent Surveillance-Broadcast system (ADS-B) \18\
            and radar together to manage air traffic. Until these issues
            are addressed, it is unlikely FAA will be able to reduce
            separation between aircraft at high altitudes.
    ---------------------------------------------------------------------------
        \18\ ADS-B, one of NextGen's transformation programs, is a
    satellite-based surveillance technology that combines the use of
    aircraft avionics and ground-based systems.
    ---------------------------------------------------------------------------
        Similar to ERAM, FAA's Terminal Automation Modernization/
    Replacement (TAMR) effort is on the critical path to NextGen. FAA's
    TAMR program aims to modernize or replace all of the automation systems
    that controllers rely on to manage traffic at terminal facilities with
    a single automation platform--the Standard Terminal Automation
    Replacement System (STARS) system. If effectively implemented, TAMR is
    expected to reduce agency costs and facilitate the implementation of
    NextGen capabilities.
        TAMR currently involves modernizing automation systems at 11
    terminal facilities, 7 of which are the largest and busiest in the
    Nation. FAA estimates this effort will cost $438 million and be
    completed between 2015 and 2017. However, the agency faces significant
    cost, schedule, and technical risks in this effort. Specifically, FAA
    has yet to identify and finalize all ``gaps''--that is, the software
    and hardware requirements that are needed to successfully replace the
    existing automation system \19\ with STARS. Finalizing these gaps
    requires extensive software development and testing--a lengthy and
    potentially costly process should issues arise in testing. FAA is
    currently developing software to address 94 gaps but anticipates
    identifying more gaps once it begins transitioning to STARS at the
    busiest facilities. Moreover, because full STARS capability at the 11
    sites is still years away, FAA continues to add new capabilities to
    existing systems at select facilities to support air traffic
    operations. The longer FAA must maintain and update existing systems at
    these sites, the greater the implementation and cost risk because FAA
    will have to add the same new capabilities to STARS to maintain
    operations at the sites. To improve FAA's effectiveness in achieving
    terminal modernization, we made a number of recommendations to better
    and more cost efficiently manage this effort. We anticipate receiving
    FAA's response and issuing our final report soon.
    ---------------------------------------------------------------------------
        \19\ Common Automated Radar Terminal System (CARTS-IIIE) automation
    systems currently exist at the 11 large terminal facilities.
    ---------------------------------------------------------------------------
    FAA Lacks an Integrated Master Schedule To Manage and Prioritize Key
            NextGen Programs
        Setting realistic plans, budgets, and expectations for key NextGen
    programs is critical to controlling NextGen costs. FAA now spends
    almost $1 billion annually on NextGen efforts and plans to spend $2.4
    billion between 2013 and 2017 on the six transformational programs that
    will provide NextGen's foundational technologies and
    infrastructure.\20\ These include ADS-B, with a current approved cost
    of $2.7 billion, and Data Communications, with a current approved cost
    of $741.5 million.
    ---------------------------------------------------------------------------
        \20\ These six programs are ADS-B, System Wide Information
    Management, Data Communications, NextGen Network Enabled Weather, NAS
    Voice System, and Collaborative Air Traffic Management Technologies.
    ---------------------------------------------------------------------------
        However, FAA has yet to complete an integrated master schedule to
    manage implementation of these six programs--many of which are
    interdependent. Without a master schedule, FAA will be challenged to:
    (1) fully address operational, technical, and programmatic risks; (2)
    prioritize and make informed tradeoffs for programs' costs and
    schedules; and (3) determine what capabilities should be delivered
    first. In response to a recommendation we made in April 2012,\21\ FAA
    is working on the integrated master schedule and expects to have it
    completed by December 2013.
    ---------------------------------------------------------------------------
        \21\ Status of Transformational Programs and Risks to Achieving
    NextGen Goals (OIG Report No. AV-2012-094), April 23, 2012.
    ---------------------------------------------------------------------------
    Ineffective Planning and Oversight Have Contributed to Cost Overruns
            and Delays for Efforts Needed To Support NextGen
        Since 2005, FAA has experienced cost overruns, schedule delays, or
    both on half of its major air traffic control programs, including ERAM.
    Weaknesses in FAA's contract planning have hindered the agency's
    ability to efficiently and effectively advance programs and protect its
    investments. For example, when designing ERAM's contract structure, FAA
    did not fully adopt best practices for information technology (IT)
    acquisitions--such as modular contracting, which calls for dividing a
    large contract into manageable contract segments delivered in shorter
    increments. In addition, ERAM's cost incentive fee did not motivate the
    contractor to stay below cost targets because FAA simply increased the
    target costs as requirements grew. At the time of our review, FAA paid
    the contractor over $150 million in cost incentives fees even though
    ERAM costs exceeded the budget by at least $330 million. Further, FAA
    did not detect or mitigate significant risks until almost 2 years after
    software problems surfaced at a key test site. In response to our
    recommendations, FAA has modified the ERAM contract to implement a more
    modular structure, revised incentives for new software releases, and
    improved ERAM's risk management process.\22\
    ---------------------------------------------------------------------------
        \22\ Weaknesses in Program and Contract Management Contribute to
    ERAM Delays and Put Other NextGen Initiatives at Risk (OIG Report No.
    AV-2012-179), September 13, 2012.
    ---------------------------------------------------------------------------
        FAA has also awarded contracts without resolving differences
    between the agency's cost estimates and those provided in contractor
    proposals, resulting in unreliable budget estimates. For example, to
    accomplish NextGen and efforts related to maintaining the NAS, FAA
    awarded seven Systems Engineering 2020 (SE-2020) contracts for
    technical and professional support services, which have a cumulative
    maximum value of $7.3 billion--the largest award in FAA history.
    However, when FAA awarded these SE-2020 contracts in 2010, it included
    18 million more labor hours than needed, overstating potential contract
    costs by $2 billion. As a result, FAA cannot be sure that the
    contract's cost baseline is an accurate benchmark for monitoring costs.
    For FAA's ATCOTS contract, FAA did not resolve the 29 percent
    difference between the contractor's proposed costs and FAA's
    independent Government cost estimate. In addition, the contract
    experienced a 35-percent cost increase during the first contract year
    due to underestimating controller training requirements.
        FAA's problems in these areas are further exacerbated by weaknesses
    in its review and approval process for major acquisitions. OMB requires
    Federal agencies to monitor and evaluate performance of IT investments
    through a capital planning and investment control process. In response,
    FAA's Joint Resources Council (JRC) was established to ensure capital
    investments fulfill mission priorities and maximize resources. However,
    JRC sometimes lacks complete information when making investment
    decisions. Further, FAA does not consistently follow the JRC approval
    and oversight process. As a result, FAA risks making investment
    decisions with incomplete information, which could jeopardize the
    success of critical FAA programs. For example, since 2005, FAA has
    experienced cost overruns, schedule delays, or both on 7 of its 14
    major air traffic control IT programs, including the Wide Area
    Augmentation System program, which exceeded original cost estimates by
    $2 billion. FAA has established a new control group within its Program
    Management Office that, once appropriately staffed, will begin to
    assess program planning documentation.
    FAA Must Address Key Issues To Achieve Potential Cost Savings Through
            Facility Realignments and Consolidations
        A critical--and costly--step in FAA's NextGen effort is the extent
    to which it realigns and consolidates its aging infrastructure. To
    sustain its current facility infrastructure, in fiscal year 2014, FAA
    plans to spend $125 million to replace or improve its terminal radar
    approach control (TRACON) facilities and air traffic control towers,
    $53 million to maintain en route centers, and $85 million to sustain
    electrical power systems. The average age of an en route center is 51
    years, while the average age of a TRACON is 29 years. Moreover, many of
    these facilities are in poor or fair condition, and the infrastructure
    at some facilities cannot support NextGen and other modernization
    initiatives.
        FAA's current plans call for an integrated control facility in the
    New York metropolitan area--a significant step in achieving operational
    efficiencies. However, to successfully realign and consolidate
    facilities, FAA needs to make informed decisions regarding cost,
    schedule, technical capabilities, and the impact on the aviation
    workforce. In July 2012, we recommended that FAA develop and regularly
    update comprehensive cost estimates for construction, equipment,
    increased salaries, relocation expenses, and training for its
    consolidation effort.\23\ As FAA's plans evolve, addressing these
    issues early will better position the agency to achieve potential cost
    savings and NextGen benefits. FAA expects to provide a detailed cost
    estimate for the integrated New York facility by the end of 2014. To
    completely implement our recommendation, FAA will need to produce
    detailed financial information for consolidating facilities in other
    locations.
    ---------------------------------------------------------------------------
        \23\ The Success of FAA's Long-Term Plan for Air Traffic Facility
    Realignments and Consolidations Depends on Addressing Key Technical,
    Financial, and Workforce Challenges (OIG Report No. AV-2012-151), July
    17, 2012.
    ---------------------------------------------------------------------------
    Further Actions Are Needed To Protect Federal Investment in Airport
            Infrastructure
        FAA projects that U.S. passenger traffic will grow by 2.6 percent
    annually in the next 5 years, and that by 2033 there will be 1.15
    billion passengers. Ensuring enough capacity at the Nation's airports
    is essential to meeting this demand, reducing delays, and realizing the
    full benefits of NextGen. However, NextGen alone will not address
    capacity constraints at some airports. While FAA has made progress in
    overseeing airport infrastructure improvements at our Nation's
    airports,\24\ including new runways, the agency must ensure that
    current and planned runway projects and their corresponding capacity-
    enhancing airspace changes remain on schedule. Moreover, FAA needs to
    improve its grant oversight to protect its significant investments in
    these projects.
    ---------------------------------------------------------------------------
        \24\ According to FAA, since the start of fiscal year 2000, 24
    airfield projects have opened at 20 major airports. These include 16
    new runways, 3 taxiways, 3 runway extensions, 1 airfield
    reconfiguration completed (included relocating a runway and
    constructing a new center taxiway), and 1 airfield reconfiguration to
    be completed this year (includes a runway extension and a new runway
    that have been completed, and another runway due to open in October
    2013).
    ---------------------------------------------------------------------------
        FAA is pursuing several airspace redesign projects nationwide--
    including major efforts to revamp airspace in the Atlanta, Chicago, and
    New York-New Jersey-Philadelphia areas. To ensure runways at these
    sites have sufficient capacity to accommodate the additional air
    traffic, FAA must synchronize its airspace redesign and runway efforts,
    as it did at the Chicago O'Hare International Airport. Completing a new
    runway and extending an existing runway in 2008 \25\ allowed FAA's
    airspace redesign efforts in that area to move forward.
    ---------------------------------------------------------------------------
        \25\ Infrastructure projects as part of Phase 1 of the O'Hare
    Modernization Program.
    ---------------------------------------------------------------------------
        However, the remaining infrastructure and related airspace projects
    for O'Hare, as well as the planned infrastructure and related airspace
    projects for the Philadelphia International Airport, are at risk due to
    the uncertain future of these capacity enhancement programs (see table
    2). Although FAA has committed nearly $1.4 billion in AIP funds for the
    next 20 years--with annual outlays of more than $60 million--the agency
    faces multiple implementation challenges. To protect these investments
    and ensure sufficient capacity, FAA needs to work closely with
    airports, airlines, and other stakeholders to resolve differences and
    make decisions about these projects so they can move forward.

                                      TABLE 2.--STATUS OF MAJOR NEW RUNWAY PROJECTS
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                             Total
                     Airport                               Phase               Estimated completion date      cost
                                                                                                            estimate
    ----------------------------------------------------------------------------------------------------------------
    Chicago O'Hare:
        Runway 10C/28C.......................  Construction.................  September 2013.............     $1,290
        Runway 9R/27L \1\....................  Design \2\...................  2020.......................        520
        Runway 9C/27C........................  Design \2\...................  2020.......................      1,130
        Runway 10R/28L.......................  Construction.................  December 2015..............        516
    Philadelphia: Runway 9R/27L, Runway 8/26   Some Site Prep \2\ \3\.......  TBD........................      5,200
     \1\, Runway 9R/27L \1\.
    ----------------------------------------------------------------------------------------------------------------
    \1\ Extension of existing runway.
    \2\ Funding for construction has not been secured and is subject to ongoing negotiations with the airlines.
    \3\ Extension of runway 9R/27L (which will be renamed 9C/27C when the new runway is built) is in the design
      phase with a 2015 estimated completion date. Due to lack of funding, completion dates for the remaining
      projects have yet to be determined.

        Insufficient oversight of airport revenue and AIP grants further
    jeopardizes FAA's investments. Over the past 10 years, we have
    identified nearly $376 million in airport revenue that was illegally
    diverted, used for non-airport purposes, or was simply lost. Had these
    revenues been used for airport operations, the airports would have been
    more self-sufficient and less reliant on Federal funding. While FAA
    conducts airport revenue reviews, the reviews have been limited to a
    few airports a year. In general, FAA relies primarily on three
    oversight methods that have proven inadequate to prevent the diversion
    and loss of valuable airport revenue: (1) review of airport sponsors'
    annual revenue use reports; (2) single audit reports; and (3) third-
    party complaints. At the request of several House members from
    California, we are currently conducting an audit on FAA's oversight of
    Los Angeles International Airport revenue use.
        Finally, reducing and recovering improper AIP grant payments has
    been a longstanding challenge for FAA. In 2010, we reported that FAA
    had made an estimated $31 million in recoverable improper payments \26\
    during fiscal year 2008 and had not detected them. More recently, we
    reported that FAA's oversight was insufficient to prevent or detect
    more than $1.4 million in recoverable improper American Recovery and
    Reinvestment Act of 2009 (ARRA) grant payments. In particular, we found
    that San Francisco International Airport officials improperly billed
    ARRA for over $832,000 for unapproved taxiway and drainage work, as
    well as ineligible survey equipment. To address this challenge, FAA
    began implementing a new risk-based grant oversight process and an
    electronic grant payment system in 2012. However, it is too soon to
    know whether this additional step will significantly improve FAA's
    ability to prevent or detect future improper payments.
    ---------------------------------------------------------------------------
        \26\ In 2002, Congress passed the Improper Payments Information Act
    (IPIA), providing a framework for agencies to use in testing for
    improper payments, identifying their causes, and implementing solutions
    to reduce them. In August 2006, OMB established detailed requirements
    for complying with IPIA. OMB further clarified that improper payments
    include the following payments to ineligible recipients: duplicate
    payments, payments in incorrect amounts, payments for ineligible
    services or services not received, or payments having insufficient
    documentation.
    ---------------------------------------------------------------------------
       opportunities remain to better ensure the safety of the national
                                airspace system
        While FAA works to achieve efficiencies in its operations,
    programs, and overall costs, it must continue to address ongoing safety
    concerns. FAA has several opportunities to enhance safety by improving
    its collection and analyses of safety data, including data on air
    traffic controller errors that create air and ground collision risks.
    FAA will need to enhance its oversight of aircraft repair stations and
    implement key provisions of the Airline Safety Act related to pilot
    safety. FAA also faces challenges with safely integrating unmanned
    aircraft into the NAS, developing a safety information sharing system
    to proactively assess risk, and improving its voluntary safety
    disclosure program for air carriers.
    Data Collection and Analysis Enhancements Are Needed To Identify and
            Mitigate the Root Causes of Separation Losses
        A top priority for FAA is to accurately count operational errors--
    events where controllers do not maintain safe separation between
    aircraft--and identify trends that contribute to them. FAA statistics
    indicate that reported operational errors rose by 53 percent between
    fiscal years 2009 and 2010. While operational errors remained at these
    levels during fiscal years 2010 and 2011, FAA reports that the most
    serious reported errors continued to rise by 49 percent from fiscal
    year 2009 to fiscal year 2011 (from 37 to 55, respectively).
        In January 2012, FAA issued new policies and procedures for
    collecting, investigating, and reporting separation losses.\27\
    However, their effectiveness is limited by incomplete data and
    implementation challenges. FAA lacks an accurate baseline on the number
    of separation losses due in part to its limited review of Traffic
    Analysis and Review Program (TARP) data \28\ and exclusion of some
    potential operational errors reported under the Air Traffic Safety
    Action Program (ATSAP) \29\ from its official count. At the time of our
    ATSAP review last year, approximately 50 percent of all ATSAP event
    reports \30\ were classified as ``unknown,'' and therefore some errors
    may have been excluded.\31\ Further, as we reported last month, FAA
    does not analyze and report all separation losses automatically flagged
    by TARP. Instead, FAA investigates losses of separation identified by
    TARP when aircraft come within less than 70 percent of the required
    separation distance.
    ---------------------------------------------------------------------------
        \27\ Losses of separation occur when aircraft do not maintain the
    minimum required distance apart. Most losses of separation are
    classified as either an operational error (if the controller's actions
    caused the loss) or a pilot deviation (if the pilot's actions caused
    the loss).
        \28\ TARP is an automated system that detects losses of separation
    at air traffic terminal facilities.
        \29\ ATSAP is a voluntary, non-punitive program in which
    controllers can self-report safety incidents and concerns.
        \30\ Event reports identify actual or potential losses of
    separation, including operational errors, or other situations that may
    degrade air traffic safety.
        \31\ FAA changed how it categorizes event reports in January 2012.
    However, the committees that review ATSAP reports still do not contact
    facilities if they believe an event is unknown to management.
    ---------------------------------------------------------------------------
        In July 2012, we reported a number of management issues with ATSAP
    that the agency must address to correct known deficiencies and realize
    the program's full potential. These include a lack of formal processes
    to review ATSAP committee decisions on errors and enforce key program
    guidelines and requirements. Failure to address these issues not only
    undermines efforts to improve NAS safety but also may lead to the
    perception that ATSAP is an amnesty program that automatically accepts
    reports of serious incidents, regardless of whether they properly
    qualify under the FAA directive establishing the program.
    Runway Incursions Continue To Increase
        Runway incursions--potential ground collisions--are a key safety
    concern for FAA that requires heightened attention at all levels of the
    agency. As we noted in July 2010,\32\ the number of the most serious
    runway incursions--incidents in which a collision was barely avoided--
    decreased after runway safety initiatives detailed in FAA's August 2007
    Call to Action plan were implemented.\33\ However, shortly after our
    2010 report, the trend reversed dramatically. Between fiscal years 2010
    and 2012, reported runway incursions increased about 19 percent, and
    serious runway incursions tripled (see figure 2)--despite the fact that
    total air traffic operations declined by 1 percent between fiscal years
    2011 and 2012. In addition, for the period of October through December
    2012, total incursions increased by approximately 20 percent compared
    to the same period in 2011. As a result of these concerns, we plan to
    initiate another review of FAA's Runway Safety Program later this year.
    ---------------------------------------------------------------------------
        \32\ Review of FAA's Call to Action Plan for Runway Safety (OIG
    Report No. AV-2010-071), July 21, 2010.
        \33\ Specifically, these incidents declined from 25 reported in
    fiscal year 2008 to 6 reported in fiscal year 2010.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        To help reverse these trends, FAA deployed the Airport Surface
    Detection Equipment-Model X (ASDE-X) system at 35 major airports in
    fiscal year 2011, at a cost of approximately $550 million. ASDE-X
    enhances runway safety by providing detailed information to air traffic
    controllers regarding aircraft operations on runways and taxiways.
    However, ASDE-X does not directly alert pilots, as recommended by the
    National Transportation Safety Board (NTSB) in 2000. To address this
    shortcoming, FAA plans to integrate the use of ASDE-X with three other
    systems--Runway Status Lights (RWSL), ADS-B, and In-Cockpit Moving Map
    Displays. Integrating various systems to improve surface safety
    requires establishing requirements for technical upgrades, validating
    system performance and integrity, and determining whether ASDE-X
    capabilities can meet FAA's goals for increasing safety and capacity.
    We are currently assessing FAA's progress in integrating ASDE-X with
    other technologies such as RWSL and ADS-B to improve runway safety.
    Oversight of Repair Stations Remains a Concern
        According to FAA, there are nearly 4,800 FAA-certificated repair
    stations worldwide that perform maintenance for U.S.-registered
    aircraft. Forecasts show that the maintenance, repair, and overhaul
    industry will grow annually by 4.4 percent over the next 10 years,
    yielding a market value of between $50 billion to $65 billion for this
    segment of the aviation industry. These upward trends are expected to
    continue as airlines look to cut maintenance costs and increase
    profitability. However, since 2003, we have recommended that FAA
    strengthen its oversight of air carriers' contracted maintenance
    providers by developing a comprehensive, standardized approach to
    repair station oversight and targeting inspector resources based on
    risk.
        In 2007, FAA implemented a new risk-based system to target its
    surveillance of repair stations. However, our ongoing review indicates
    that inspectors continue to complete mandatory inspections instead of
    targeting resources to where they are needed based on risk.
    Additionally, some inspectors do not use the risk assessment process at
    all; those that do are hindered in their ability to assess risk, due in
    part to limitations in data availability and quality. As a result, FAA
    has been ineffective at conducting risk-based oversight.
        FAA's surveillance at foreign and domestic repair stations also
    lacks the rigor needed to identify deficiencies and verify they have
    been addressed. Systemic problems we identified during our 2003
    review--such as inadequate mechanic training, outdated tool calibration
    checks, and inaccurate work order documentation--persist at the repair
    stations we recently visited. FAA guidance requires inspectors to
    review these specific areas during repair station inspections, but
    inspectors overlooked these types of deficiencies.
        Given U.S. air carriers' continued reliance on repair stations to
    perform their aircraft maintenance domestically and abroad, it is
    imperative that FAA improve its risk-based system to provide more
    rigorous oversight of this industry. We plan to issue our report on
    FAA's oversight of repair stations this month.
    FAA Faces Challenges in Implementing Key Pilot-Related Provisions of
            the Airline Safety Act
        The fatal Colgan Air crash in 2009 raised concerns about a number
    of pilot performance issues, which culminated in the Airline Safety and
    FAA Extension Act of 2010.\34\ Since the act's passage, FAA has made
    important progress in implementing many of the act's requirements, such
    as advancing voluntary safety programs and improving pilot rest
    requirements. However, FAA has not met the act's timelines for updating
    pilot training standards, implementing pilot mentoring and leadership
    programs, or establishing safety management systems.
    ---------------------------------------------------------------------------
        \34\ Airline Safety and Federal Aviation Administration Extension
    Act of 2010, Public Law 111-216, (2010).
    ---------------------------------------------------------------------------
        In addition, FAA missed the act's deadline to substantially raise
    airline pilot qualifications by August 2012. The act mandates that all
    part 121 pilots obtain an Airline Transport Pilot certificate,\35\
    which requires 1,500 flight hours--six times the current minimum of 250
    hours needed for a commercial pilot's certificate. Although FAA's
    proposed rule would provide some flexibility in meeting these
    requirements for pilots with relevant degrees or military flight
    experience, air carrier representatives remain opposed to the new
    requirement, contending that the quality and type of flying experience
    should be weighted more heavily than the number of flight hours.
    However, if FAA does not issue its final rule, the act's requirements
    will automatically go into effect for air carriers in August 2013, and
    FAA must ensure that carriers make the necessary adjustments to their
    pilot training and qualification programs.
    ---------------------------------------------------------------------------
        \35\ An Airline Transport Pilot (ATP) Certificate is the highest
    level of pilot certification. Pilots certified as ATP are authorized to
    act as pilot-in-command of an aircraft in commercial airline service.
    Additional eligibility requirements are contained in 14 CFR 61.153.
    ---------------------------------------------------------------------------
        FAA has also been challenged to develop an act-required pilot
    records database to enhance the screening process for newly hired
    pilots. For example, FAA needs to determine how to incorporate data
    from FAA, air carriers, and the National Driver Registry in a way that
    is accessible for air carriers to review during the pilot hiring
    process. The act did not establish a milestone for when the database
    should be completed, and the agency has yet to make key long-term
    implementation decisions.
    FAA's Safety Oversight Role Continues To Expand as New Technologies and
            Programs Are Introduced Into the NAS
        Over the next several years, FAA will be challenged by the
    introduction of unmanned aircraft, new integrated data systems for
    proactively identifying risk, and further use of voluntary disclosure
    programs.
      --Unmanned Aircraft Systems (UAS).--FAA predicts there will be
            roughly 10,000 active UAS in the United States in 5 years, with
            more than $89 billion in worldwide UAS spending over the next
            10 years. However, FAA has approved these operations on a
            limited, case-by-case basis, due in part to the safety risks
            associated with UAS integration into the NAS. While the
            capabilities of unmanned aircraft have significantly improved,
            they have a limited ability to detect, sense, and avoid other
            air traffic. Given the growing interest and potential safety
            issues associated with UAS flights, Congress recently directed
            the Secretary of Transportation, through the FAA Modernization
            and Reform Act of 2012, to develop a comprehensive plan for
            integrating UAS into the NAS no later than September 30, 2015.
            At the request of the Chairmen and Ranking Members of the
            Senate Commerce Committee and the House Committee on
            Transportation and Infrastructure, as well as their Aviation
            subcommittees, we are currently assessing FAA's progress in
            integrating UAS into the NAS. We expect to issue a report later
            this year.
      --Aviation Safety Information Analysis and Sharing (ASIAS).--In 2007,
            FAA implemented ASIAS to collect and analyze data from multiple
            databases and proactively identify and address safety risks.
            ASIAS enables authorized users to obtain data from confidential
            databases--including voluntary safety programs such as the
            Flight Operational Quality Assurance program and the Aviation
            Safety Action Program--as well as from publicly available data
            sources such as NTSB's Accident and Incident Reports database.
            However, access to ASIAS data for FAA and industry
            representatives has been limited due to airline proprietary
            concerns.
          In the Airline Safety and FAA Extension Act of 2010, Congress
            directed our office to assess FAA's ability to establish a
            comprehensive information repository that can accommodate
            multiple data sources and be accessible to FAA aviation safety
            inspectors and analysts who oversee air carriers. Accordingly,
            we are currently assessing FAA's progress in implementing
            ASIAS, its process and plan for allowing system access at both
            field and headquarters levels, and its use of ASIAS data to
            assist in commercial air carrier safety oversight. We expect to
            issue our report later this year.
      --Voluntary Disclosure Reporting Program (VDRP).--As mandated in the
            FAA Modernization and Reform Act of 2012, we are conducting a
            review of VDRP, a program that allows air carriers to
            voluntarily report adverse safety issues to FAA without fear of
            enforcement actions, provided that carriers develop
            comprehensive solutions to identified safety issues. As part of
            this review, we are examining whether FAA ensures reports meet
            VDRP requirements, including the development and implementation
            of corrective actions, and whether the agency uses VDRP data to
            identify safety risks.
                                   conclusion
        FAA faces many difficult decisions in the months ahead. To resolve
    the complex issues we identified, the agency must think strategically
    to prioritize those programs that can achieve the greatest benefits in
    the most cost efficient and effective manner possible. At the same
    time, FAA needs to protect its investments and assets that are
    vulnerable to misuse and abuse, while remaining focused on safety.
    Fully implementing our recommendations would better position FAA to
    control costs and create efficiencies as it works to enhance
    operations, successfully implement key programs, and address safety
    concerns. We will continue to work with FAA to ensure it meets its
    mission while protecting taxpayer dollars.
        Madam Chairman, this concludes my prepared statement. I would be
    happy to address any questions that you or other members of the
    subcommittee may have.

              BUDGET CONTROL ACT/CONTRACT TOWER PROGRAM/FURLOUGHS

        Senator Murray. Let me begin by asking a question about
    FAA's contract tower program. Under the FAA's original plan to
    comply with sequestration, the FAA said they expected to save
    between $40 million and $50 million by shutting down 173
    contract towers at soon as the first week in April. But under
    the FAA's most recent plans, 149 towers are expected to close,
    and my understanding is that that will start June 15.
        Can you explain to us, Mr. Huerta, what the latest estimate
    is of how much will be saved by closing down those towers, and
    whether those savings will significantly reduce the number of
    furloughs at the FAA?
        Mr. Huerta. Thank you, Madam Chairman. As we look at the
    need to achieve the savings of $637 million that you noted in
    your opening statement, we have to look both at our contract
    expenditures as well as our pay and benefit expenditures. Our
    current estimate of savings from contract towers that we're
    going to be able to achieve based on the June 15 closure date
    is approximately $25 million.
        The savings from furlough days--we have notified our
    employees that they should expect to be furloughed for up to 11
    days.
        Senator Murray. Between now and September 30?
        Mr. Huerta. Between now and September 30. That represents 1
    day per 2-week pay period between now and the end of our fiscal
    year. The total savings associated from those furloughs are
    slightly in excess of $200 million. We have had an extensive
    effort, and it continues, to evaluate and review our ongoing
    expenditures, our contract expenditures, and our information
    technology (IT) expenditures, to find additional areas of
    savings.
        We have significantly reduced travel by 30 percent,
    limiting it to operational travel, for example, when we have to
    send someone to fix a piece of equipment that might have become
    inoperative. Likewise, we have projected, and we expect to
    achieve, savings in our information technology infrastructure
    of approximately $35 million.
        We have focused on reducing our costs associated with
    training. We have canceled a new training program for new
    controllers at the FAA Academy for the summer in order to focus
    our resources on critical personnel needed to operate the
    National Airspace System.
        It's with great regret that we have to look at closing
    lower activity facilities while at the same time reducing hours
    available for our employees. But as we all know, the sequester
    represents a very dramatic and very blunt instrument in terms
    of how we find reductions in expenditures. But in order to
    achieve them, we have to take the actions that we've talked
    about.

                                CONTRACT TOWERS

        Senator Murray. Well, as you know, there's a lot of
    interest in protecting the contract towers in 2014. What will
    it take to get those contract towers back up and running in
    fiscal year 2014?
        Mr. Huerta. It depends on the nature of the specific
    contract tower. We've heard from approximately 50 of the 149
    airport operators that they are exploring opportunities for
    local funding of the expense of the contract towers for some
    period of time. If that were the case for those facilities, it
    would simply be a change in who is paying the cost.
        We have been negotiating with them an orderly handoff so
    that they can take over the facility and assume its cost when
    funding from the FAA would cease on June 15. Should the
    financial picture change in 2014, the handoff would simply work
    as smoothly going the other direction.
        Senator Murray. And what would be the cost of that?
        Mr. Huerta. Well, the cost is they will continue to
    operate, and so it essentially is just a question of who pays.
    As it relates to a facility that may elect to--or for whatever
    reason it might be necessary to close, then what we would need
    to engage in is a process to hire controllers, recertify
    controllers, and get them back up to speed in operating that
    airspace. That would represent an expenditure of both time and
    money in order to make that happen.

                                   FURLOUGHS

        Senator Murray. So do you think it makes sense to close
    some down for the summer?
        Mr. Huerta. We have very few choices, and as we've talked
    about repeatedly, we're looking at a series of bad options to
    choose from. The sequester gives us few options but to achieve
    the required savings and to achieve them in this year.
        Senator Murray. So let's talk about the furloughs, because
    we're hearing a lot about that.
        Mr. Huerta. Sure.
        Senator Murray. You said up to 11 days. How many employees?
        Mr. Huerta. It affects 47,000 of our employees, which is
    most of them. The only employees that are exempt under the
    sequester legislation are those in our Airport Improvement
    Program.
        Senator Murray. Right. So that includes air traffic
    controllers, safety inspectors, and we are hearing it's going
    to lead to a lot of delays this summer. What other actions has
    the FAA taken to avoid furloughs, and how did you decide who
    would get furloughed at the agency?
        Mr. Huerta. Let me take first the question, what other
    actions did we take. We started first at our contract
    expenditures and looked across the board at what we could do to
    dramatically reduce contract expenditures. And we focused on
    those activities such as the ones I mentioned that represent
    out-of-pocket cost, travel, information technology, and so
    forth.
        We do have limits on our ability to reduce some contracts,
    though. For example, our single largest contract is the FAA's
    telecommunications infrastructure contract. That is a services
    contract with a private company that provides critical
    communication services between all air traffic facilities. That
    contract is worth about $225 million on an annual basis.
        So we had to focus in those areas that would not at the
    same time seriously cripple the mission. But our contract
    savings alone were not able to get us to our required savings.
        By the way, I'd also like to mention that our third largest
    contract expenditure is for Federal contract towers. These
    facilities are low activity facilities. They have fewer than
    150,000 operations on an annual basis and less than 10,000
    commercial operations.
        I would like to point out that we have thousands of
    airports in the United States that operate every single day in
    a non-towered capacity and operate safely. All but 1 of the 149
    towers that we have slated for closure, in fact, close for a
    significant number of hours during the day. So they have a
    regular process for operating in a non-towered capacity.
        But even looking at all of the contract expenditures, we
    were unable to achieve the full $637 million in savings. So
    that's what led us to the need to furlough our employees. In
    looking across the agency as a whole, we established a
    principle that we needed to find the appropriate balance of
    getting the cost savings that we needed to get, while at the
    same time having the ability to operate the system, maintain
    its safety, and recognizing that we were imposing a significant
    hardship on our employees.
        Eleven furlough days between now and the end of the year
    represents one per pay period. That is a reduction of 10
    percent of the pay of each employee, the 47,000 that are
    affected. From an operational standpoint, it represents a
    reduction of 10 percent of the available hours that employee is
    able to provide.
        Senator Murray. And I'm hearing from some people that some
    air traffic control towers will be hit more in terms of
    operational ability.
        Mr. Huerta. No. We have allocated them equally across the
    whole system. But each facility operates differently, and it
    may have differing impacts, depending on the specific traffic
    conditions at that airport.
        Let me give you a couple of examples, if I might. Chicago's
    O'Hare Airport is a major hub airport. It operates with two air
    traffic control towers, one on the north side of the airport
    and a central tower that operates for the entire airport. In
    order for us to be able to operate the north tower of the
    airport, we have to have a minimum complement of air traffic
    controllers available to staff a minimal number of positions.

                               RUNWAY INCURSIONS

        If we can't staff all of that minimal number of positions,
    then we must consolidate operations to the central tower. The
    airport can continue to operate, but what it means is we lose
    the ability to use one runway, because that north tower is
    essential to control the northernmost runway of the airport. So
    that is an example of how relatively small reductions of hours
    can significantly affect the operations of an airport.
        Senator Murray. And that's Chicago--does LAX----
        Mr. Huerta. The Los Angeles airport is a four-runway
    airport, but it is also a major hub airport for quite a number
    of operators. In the case of the Los Angeles airport, their
    traffic loads are such that they're relatively constant during
    the day. Already at Los Angeles, the north airfield operates
    under significant operational restrictions because of very
    closely spaced parallel runways that exist at that airport. And
    the airport does have a long-term plan to improve that.
        But, again, if I have fewer controller hours available to
    me, then what it affects is the efficiency of the airport. Our
    highest priority is to ensure that it operates safely, but
    where we take a penalty is inefficiency.
        Senator Murray. Okay. And I apologize to the subcommittee
    for running way over time, but this is what we're hearing from
    a lot of our airlines at this point: Some of our airports are
    going to be significantly impacted for reasons they don't
    understand, like vacations and those kinds of things. So I
    think it's really important that everybody understands how you
    got to these decisions and how we're going to move forward on
    that.
        Senator Collins.
        Senator Collins. Thank you, Madam Chairman. As I
    highlighted in my opening statement, the total number of runway
    incursions increased 21 percent between fiscal year 2011 and
    2012 from 954 to an all-time high of 1,150.
        Administrator, what is the FAA doing to reduce this
    alarming increase and ensure the safety of the traveling public
    on our Nation's runways? And to what do you attribute the large
    increase?
        Mr. Huerta. Thank you, Senator Collins. Let me take the
    second part of that first. Reported runway incursions reached
    an all-time high of 1,150 in fiscal year 2012. We believe this
    number is reflective of changes in our reporting culture
    through voluntary safety reporting systems, as well as enhanced
    use of electronic detection systems, expansion of reporting
    requirements and the deployment of new systems that were
    designed to streamline reporting.
        Nonetheless, this is something that we take very, very
    seriously. The fiscal year 2014 budget request supports our
    efforts to reduce runway incursions and to improve airport
    surface safety. Some of the initiatives that we're talking
    about include airport safety reviews. This involves conducting
    airport safety and certification inspections at each of our
    certificated airports to ensure that the signs, the markings,
    and the lighting all meet national standards.
        Also, airport driver training programs and records are
    reviewed as a significant part of this, because, as you know,
    there are a lot of regular vehicles that operate at the
    airport, and they have to understand how to move on the
    airfield.
        We've been conducting runway safety action team (SAT)
    meetings, and our fiscal year 2014 budget request would
    continue to support those. Our SAT meetings improve
    multidisciplinary teams conducting safety reviews at selected
    airports based on analysis of the data.
        The team is there to improve runway safety through
    coordinated actions with all components of the aviation
    community and the FAA lines of business to really understand if
    there's a design issue or if there's a training issue that we
    need to address at a particular airport, which takes me to
    training. There is a significant focus that we've placed on
    conducting training seminars to provide knowledge, guidance,
    outreach, and awareness at all levels, and really focusing on
    if we have the right kind of training in place.
        I'd also like to talk about industry involvement. The
    Runway Safety Council (RSC) consists of officials not only from
    the FAA and other partners in Government, but also industry and
    labor. What we want to do is meet regularly to determine root
    causes of runway incursions. This is part of a collaborative
    decisionmaking process that we're trying to adopt across the
    whole FAA to bring everyone together.
        Senator Collins. Mr. Scovel, do you agree with the analysis
    that the Administrator just gave that this may reflect better
    reporting rather than an increase in the problem?
        Mr. Scovel. Not entirely, Senator Collins. Here's what our
    examination has revealed. There is a better reporting culture
    within the FAA among the controllers, and we certainly
    acknowledge that. The voluntary reporting programs, such as
    ATSAP, the Air Traffic Safety Action Program, has encouraged
    controllers to come forward, knowing that there will be non-
    punitive results from their self-disclosures, and that has
    certainly increased, we trust, the number of operational errors
    or reported runway incursions over time.
        However, we also note that better reporting tools, such as
    TARP and the TRACON environment and a longstanding reporting
    tool in the en route environment, have also been capturing more
    and more previously unreported operational errors. And that,
    too, has been driving the number up.
        You asked specifically about runway incursions. Before I
    address that, very quickly, let me note also that the data
    collection across the board and the analysis of that data--we
    have identified areas for improvement for FAA. With regard to
    runway incursions, as the subcommittee will well remember, that
    is the number one item on the National Transportation Safety
    Board (NTSB) most wanted list every single year, and it has
    been for more than a decade.
        Senator Collins. Which troubles me, because it's going up,
    not down.
        Mr. Scovel. It is going up. The subcommittee will remember
    that in 2007, the FAA issued a call to action for runway safety
    in light of a previous rise in runway incursions. And between
    2007 and 2009, 2010, that call to action achieved commendable
    results largely through the measures that Administrator Huerta
    cited just now as those that are returning to emphasis under
    his leadership.
        We believe that the agency's attention perhaps drifted off
    some of those safety measures after the initial successes of
    that 2007 call to action. I commend the Administrator for
    returning the agency's attention to those, because, certainly,
    in our view and the view of the NTSB, those will yield the
    greatest success in terms of reducing runway incursions.
        There are technological innovations as well, runway status
    lights, Automatic Dependent Surveillance-Broadcast (ADS-B),
    SDX, surface protection technology, all of which the agency is
    working to implement, encountering some difficulties on those.
    But we encourage the agency to persist, and we're certain that
    those will yield better results as well.
        Senator Collins. Thank you. I'm just going to ask one quick
    second question. I see we have a lot of members here.

                   AIRPORT IMPROVEMENT PROGRAM GRANT FUNDING

        Administrator, I want to ask you about a part of the budget
    that just makes absolutely no sense to me. On the one hand, the
    administration is proposing a $450 million reduction in the
    Airport Improvement Program, while at the same time the
    President's budget proposes what he calls an immediate
    Transportation Investment Program that provides an additional
    $2 billion.
        Could you please explain to us in a brief statement, given
    our other members who are here, the rationale behind what
    appears to be taking away money from the same program with one
    hand and then giving it back with another program? Now, let me
    say I fully understand that you're restructuring AIP to drop
    the larger airports and allow an increase in the passenger
    facility limits. But this still seems to be an odd
    juxtaposition of reducing by $450 million on the one hand and
    then increasing by $2 billion.
        Mr. Huerta. Thank you, Senator Collins. As you point out,
    the two pieces that you referenced are designed to do two
    different things. The first is a restructuring of the AIP
    program. The budget requests a total AIP level of $2.9 billion,
    which is $450 million below our fiscal year 2012 enacted level,
    and it is paired up with an increase in the passenger facility
    charges (PFC).

                           PASSENGER FACILITY CHARGE

        Now, consistent with the recommendations from the
    President's Deficit Reduction Commission, all guaranteed
    funding for approximately 29 large hub airports would be
    eliminated under this proposal, because they would have the
    ability to raise significant funding through the passenger
    facility charges. Medium, small, and non-hub airport passenger
    entitlements as well as non-primary entitlements would then be
    calculated at levels that are consistent with the formulas in
    effect under current law when the total funding level is below
    $3.2 million.
        Now, in terms of the $2 billion proposal, what that
    reflects is an interest on the President's part to catch up on
    the backlog of infrastructure improvements in airports which
    are required. It is a one-time program that would enable us to
    accelerate the development of a large number of projects that
    have been in the pipeline and at the same time create needed
    jobs for the economy.
        Senator Collins. Well, thank you very much, Madam Chairman.
    I would just note that it certainly seems duplicative to me in
    terms of the purpose of the AIP program. Thank you.
        Senator Murray. Senator Feinstein.
        Senator Feinstein. Thank you very much, Madam Chairman.

                           UNMANNED AIRCRAFT SYSTEMS

        Mr. Huerta, I'd like to confine my question time to this
    new area of unmanned aerial vehicles known as drones. And as
    chairman of the Intelligence Committee, I've had an opportunity
    to understand how potentially dangerous these items are and how
    they vary in size and scope and ability.
        I understand that the 2012 reauthorization act orders you
    to develop a comprehensive plan to integrate unmanned aircraft
    into the national airspace no later than September 30, 2015.
    And it's my understanding that, to date, the FAA has permitted
    more than 300 unmanned public aircraft so far. For example, the
    Department of Homeland Security is using surveillance drones to
    monitor the border. These are not armed, we are told.
        Is what I have just said essentially correct?
        Mr. Huerta. That is correct, Senator Feinstein.
        Senator Feinstein. Well, I am very worried about two
    things. One is safety, and the other is privacy. There was a
    hearing in the Judiciary Committee not too long ago on drones,
    and we had one example of a drone that was very small and used
    by a Colorado sheriff's department. I am familiar with drones
    that are quite large, that are armed, and are used in various
    places in the world for various tasks.
        The fact that they're unmanned, the fact that you may
    license them for one use, doesn't mean they can't be converted
    to another use. Has the FAA looked at that and recognized the
    potential danger of the development of drones in commercial
    airspace?
        Mr. Huerta. Thank you, Senator Feinstein. Unmanned aircraft
    is a technological frontier area that we're trying to
    accommodate. The direction that we've received from Congress,
    as you point out, is how we can safely integrate them into the
    National Airspace System by 2015. You're also aware that the
    reauthorization act of last year requires us at the same time
    to designate six test sites to test and understand how this
    technology would be incorporated into the National Airspace
    System.
        The purpose of the test sites is to enable us to develop
    data and information along the lines of what you're talking
    about: How these things are used, what can we learn from them,
    and questions related to other factors as well. As we were
    developing the information request to solicit proposals for the
    test sites, we heard what you heard, which was a lot of public
    concern about privacy and how these particular vehicles could
    be used, and did it raise questions about invasion of privacy.
        Now, privacy is not something that Congress asked us to
    look at, nor is it something that the FAA has the authority to
    regulate. But we did determine that it was important for us to
    frame the question as we were looking at the test site request
    for proposals.
        What we did was at the same time we released the request
    for proposals for the test sites, we also published a notice
    that we would require whoever is designated as a test site
    operator to publish a privacy protection policy and make that
    available to the public so it is out there for everyone to see
    how the data that would be developed through the use of this
    unmanned aircraft would be used, and does it raise any privacy
    questions.
        I think this is a complicated issue. It's new for us. We
    relied on the expertise of people that had regulated this area
    in the past. As an evolving technology, it's one that we're
    going to have to watch very carefully. There is significant
    interest on the part of State and local law enforcement for the
    use of unmanned aircraft for the surveillance purposes that you
    talked about. There are differing laws at the State level about
    how these aircraft might be used.
        I think that as we develop the data and as we do additional
    testing, it's certainly something that we are going to be
    looking at very carefully. But it's not something we have the
    authority to regulate.
        Senator Feinstein. Here's my concern. I understand that. So
    you could have thousands of these things in the air. How do you
    control them? How do you keep them from getting into air
    traffic? And I understand they might have a height limit of 400
    or 500 feet. How do you keep them away from airports? You know,
    there's even a report that a pilot saw one. Was that true or
    false? I don't know whether it is true or false.
        Mr. Huerta. We had the report that a pilot saw what they
    determined to be either a model airplane or an unmanned
    aircraft, yes.
        Senator Feinstein. Is there any more information on that,
    or is that pretty much what it is?
        Mr. Huerta. That's pretty much what it is. But on your
    question of how can we regulate them safely, this is exactly
    what we're trying to determine. Through the use of certificates
    of authorization as well as the test sites, what we need to
    develop a better understanding of is how these aircraft operate
    in ways that are both similar and different from manned
    aircraft that operate in the system every day.
        The direction we've received from Congress is to safely
    integrate unmanned aircraft. And so the thing that we care the
    most about before we allow widespread use of unmanned aircraft
    is to ensure that they can operate safely, both on their own,
    but also in conjunction with other aircraft.
        Senator Feinstein. I've just learned that there's even an
    association promoting drones.
        Mr. Huerta. Yes, that's correct.
        Senator Feinstein. And there's so much that needs to be
    looked at very seriously, I think, before we do this. The
    privacy questions are enormous. Now, I understand that's not
    really your jurisdiction. But in these test sites, which I
    assume are not overpopulated areas, will the people that enter
    into the test have specific privacy policies to which they
    subscribe the use of their drone to?
        Mr. Huerta. The designation of the test sites would need to
    be accompanied by a privacy plan. We're not in a position to
    make a determination of the content of the plan, but what we
    would require is that they develop one, that they make it
    available to the public, and it is available for people to read
    and understand.
        Senator Feinstein. I know they wouldn't legally carry
    munitions. But there's nothing to stop someone from arming one
    with munitions, and that's my big concern.
        Mr. Huerta. Well, to a certain extent, that risk exists
    today with manned aircraft through the extensive use of general
    aviation that takes place----
        Senator Feinstein. Yes, but not in commercial aviation.
        Mr. Huerta. Not in commercial aviation. That is correct.
        Senator Feinstein. But there will be many more drones than
    there are private aircraft, most likely.
        Mr. Huerta. Well, this is something that we're going to
    have to try to understand. You are correct. There are industry
    proponents that really see this as the next frontier of
    aviation and are actively promoting the use of these aircraft.
    There are a lot of beneficial uses that the industry is
    promoting as well, for example, weather surveillance or
    environmental initiatives, where they're examining, for
    example, loss of ice in the Arctic areas or surveying of coast
    lines, mapping activities.
        Senator Feinstein. I think we would all agree with that.
    It's what's outside of that that's of deep concern.
        Mr. Huerta. But this is what we need to focus on, and this
    is what we will need to learn as we develop this information.
        Senator Feinstein. Good. I'm glad to hear that. My time is
    up, and I thank you.
        Senator Murray. Thank you very much.
        Senator Moran.
        Senator Moran. Thank you, Madam Chairman.

                            CONTRACT CONTROL TOWERS

        Administrator Huerta, I want to focus on the control
    towers. Has there been a safety analysis completed on each one
    of the 149 towers that you propose to close?
        Mr. Huerta. Senator Moran, yes. We did conduct an analysis
    and determined that it was feasible for each of these towers to
    operate safely. That was the first decision. The second
    decision----
        Senator Moran. It was capable for each of these towers to
    operate safely.
        Mr. Huerta. Correct.
        Senator Moran. The towers are operating safely?
        Mr. Huerta. No, for the airport to operate safely----
        Senator Moran. In the absence of a tower?
        Mr. Huerta [continuing]. In the absence of a tower. The
    second part of the question then becomes how we get there. It
    was for that reason in working through with our local sponsors
    and partners that we decided to introduce the delay to June 15
    to ensure that everyone fully understood how that transition
    would work.
        As I mentioned in my earlier remarks--this was before you
    arrived, sir--every one of these towers except one operates in
    a non-towered capacity for some portion of the day. So there
    are well-established rules of how the airport operates in a
    non-towered capacity. The tradeoff is in order to maintain a
    safe operation, what you might sacrifice is efficiency. So they
    may operate less efficiently in a non-towered capacity, but
    they will certainly operate safely.
        Senator Moran. So the 149 air traffic control towers that
    potentially will be closed were never necessary for safety
    reasons?
        Mr. Huerta. We have thousands of airports that operate in
    the country every day that----
        Senator Moran. That's not my question. Are the airports
    that we've had towers at--were those towers placed there
    because they were important for safety?
        Mr. Huerta. The towers were placed there for a variety of
    reasons. But my point is that we are not doing anything that is
    not safe. The airport can continue to operate in a non-towered
    capacity safely, just as they do for many hours of the day.
        Senator Moran. Do the airports then operate in a less safe
    manner? You're saying they're safe, but how can they be as safe
    without a tower as they are with a tower?
        Mr. Huerta. What we do is we transfer responsibility to the
    pilots, and we limit and separate traffic greater distances to
    ensure added margins of safety if there is not a tower right on
    the airport.
        Senator Moran. Can you provide the subcommittee with the
    separate analysis of each airport of the 149?
        Mr. Huerta. There is different analysis that we have done,
    and we can certainly provide that to the subcommittee.
        [The information follows:]

        Safety analyses were conducted for each airport subsequent to the
    development of a safety case that looked into airport standards,
    equipment, procedures, provision of critical information to
    stakeholders and pilots, and impact on neighboring facilities. This
    process identified 20 mitigations required for the withdrawal of funds.
    These requirements were then applied to each facility and a mitigation
    implementation plan developed for each airport. We have provided the
    subcommittee with the FAA safety risk management document that contains
    all of this information.

        Senator Moran. When did you do the analysis?
        Mr. Huerta. We did the analysis as part of our overall
    review where we looked at the activity levels associated with
    these towers, we consulted with our partners in the Defense
    Department and the Department of Homeland Security, and then
    once we made the decision, we've been consulting with local
    airports.
        Senator Moran. What was the timeframe in which the analysis
    was done, and how long did it take?
        Mr. Huerta. The analysis was done over the earlier part of
    this year. We spent several weeks looking at this question of
    how we would close these facilities.
        Senator Moran. Were there any airports that you determined
    needed a control tower to remain safe within that program?
        Mr. Huerta. Yes.
        Senator Moran. How many were they?
        Mr. Huerta. I will get you an exact number for the record.
        [The information follows:]

        As a result of the safety analyses we determined that 19 facilities
    needed to remain open for an additional period of time in order to
    evaluate the impact on neighboring air traffic control facilities in
    the event those towers did close and did not continue operating as non-
    Federal contract towers.

        Mr. Huerta. But in general, if two characteristics were
    met, they were located in busy congested airspace adjacent to a
    major commercial airport and so the handling of those
    activities in conjunction with the major airport was a factor
    to consider; or, secondarily, based on discussions with the
    Defense Department, where it served a significant national
    security purpose.
        Senator Moran. Is that the analysis that was done by the
    airports that requested they not be closed because of national
    interest? Is that the ones that you were then----
        Mr. Huerta. That was part of it, yes, sir.
        Senator Moran. But there were airports that had air traffic
    control towers before the request for demonstrating a national
    importance, a national need, that were determined--that a
    control tower needed to be there for safety in this instance.
    But in other instances, the control tower was not necessary for
    safety.
        Mr. Huerta. It's a function of configuration and traffic
    and efficiency of the airport. We're not doing anything that is
    not safe, and each airport operates under different conditions.
        Senator Moran. Do you disagree with the testimony of the
    NTSB at the Commerce hearing that you were at earlier this week
    that talked about the importance of the redundancies that the
    air traffic control tower provides and the safety that's
    necessary, that follows that redundancy?
        Mr. Huerta. I think what the chairman said was that they
    had not done a specific analysis of towered versus non-towered
    airports. She did note that safety is a function of many layers
    of safety. As I've said, we are not doing anything that would
    make the airports operate unsafely. In the event there is any
    tension between safety and efficiency, what will suffer is
    efficiency. But the airports will operate safely.
        Senator Moran. I have a series of questions, but my time
    has expired on my first question.
        Mr. Huerta, let me make sure that I understand what you're
    saying is that none of the airports are any less safe when the
    tower is closed than they were when the tower was there. You
    say they're all operating safely. But my question is has safety
    been reduced?
        Mr. Huerta. It is not, because the nature of the operation
    changes in a non-towered capacity. They operate less
    efficiently. We put more separation--pilots are required to
    communicate with each other, and that compensates for the lack
    of a tower.
        Senator Murray. Thank you very much.

                           FURLOUGH IMPACT ON NEXTGEN

        I wanted to ask you about the furlough's effect on the
    FAA's ability to move forward on NextGen. Even if a capital
    program is fully funded, FAA still needs to have engineers
    there and traffic controllers on the job in order to get the
    work done.
        Mr. Huerta, talk with us about the impact the furloughs are
    going to have on NextGen and especially on ERAM, which provides
    a foundation for FAA's modernization.
        Mr. Huerta. The most significant problem with the furloughs
    and how it affects NextGen is how it affects what we call the
    collaborative workgroups. These are workgroups that are made up
    of stakeholders, controllers, management in facilities, and
    these workgroups are essential for us to work through
    deployment problems associated with new technologies and
    ensuring that we're able to address training and development
    issues associated with the deployment of new technologies.
        We have a large number of these workgroups. They tend to be
    very site specific. For example, as we're deploying ERAM in a
    given air traffic center, there will be a collaborative
    workgroup that supports that deployment. Likewise, in our
    Airspace Modernization Program, such as our Greener Skies Over
    Seattle initiative that you're familiar with, we would have a
    collaborative workgroup that would work on the design of those
    procedures.
        As a result of the reduction in controller hours, we have
    found it necessary to pull back people that would otherwise be
    working on collaborative workgroups to their home facilities so
    that they can deal with day-to-day operations to mitigate the
    impacts that we would otherwise have on day-to-day operations.
    And so that, of necessity, is going to introduce some delay in
    the continued rollout.
        The deployment of ERAM--I feel we are in a very good place,
    where we are right now, as a result of the use of these
    collaborative workgroups. But I can envision a situation until
    we can restart them that some of the later sites may be delayed
    for final deployment.
        Senator Murray. Mr. Scovel, you've done a lot of analysis
    on the ERAM program and its progress. And your most recent
    audit recognizes the FAA has improved its management of ERAM
    and turned it around but said there's still some risks. In
    particular, you said the program is spending its money quickly
    and some of the hardest work is still ahead.
        What does the FAA need to do to manage these risks? And, in
    particular, do you think sequestration cuts will add to the
    FAA's challenges?
        Mr. Scovel. To your last point, Madam Chairman,
    sequestration will certainly add to FAA's challenges in dealing
    effectively with ERAM. What we have learned over the last
    several weeks is that FAA will continue to support facilities
    that use ERAM on a full-time basis. Those are currently 10:
    Salt Lake City, Seattle, Minneapolis, Albuquerque, Denver,
    Chicago, Los Angeles, Oakland, Houston, and Kansas City.
        But the program will halt activities for five facilities
    that were working to transition from part-time use of ERAM to
    full time. And those facilities would be Memphis, Cleveland,
    Washington, New York, and Boston. In addition, the agency will
    stop plans for the last four sites that are currently using
    Host, the legacy system, full time to control air traffic, and
    they have not yet begun transitioning to ERAM. Those would be
    Atlanta, Miami, Jacksonville, and Fort Worth.
        The reason for all of this is precisely what Administrator
    Huerta outlined. The collaborative workgroups that involve a
    significant number of controllers have had to be reduced or, in
    some instances, eliminated from the group of four or the group
    of five in order to ensure that those controllers are available
    for their primary duties.

                       EN ROUTE AUTOMATION MODERNIZATION

        This will have an impact on ERAM, certainly, through the
    rest of this fiscal year, the year in which sequestration is
    fully upon us. But because of the ripple effect of suspending
    transition operations at these other nine centers, we can
    expect that into fiscal year 2014, ERAM will similarly be
    hobbled--perhaps that is the right word. It would not be,
    certainly couldn't be, as far along as it would had
    sequestration not impaired the agency's ability to use
    controllers in these workgroups.
        The agency through dint of main effort has set August 2014
    as the firm and fast deadline for implementation of this
    initial phase of ERAM. I caution the subcommittee, however--and
    the industry is certainly well aware--that whatever state ERAM
    is in in August 2014 will not be what was fully envisioned when
    ERAM was first contracted some years ago.
        It will also necessitate further software releases for
    several years thereafter. In fact, one is planned for fiscal
    year 2014 and thereafter to the tune of close to $1 billion.
    That will, again, position ERAM to most effectively support
    NextGen--impact on NextGen most certainly because of the impact
    of sequestration on ERAM.
        Senator Murray. I've gone over, but I want to ask you one
    additional question, Mr. Huerta. I may have to run to another
    hearing, and in a truly bipartisan fashion, Senator Collins has
    agreed to chair if I have to leave. But I did want to ask you
    one additional question.

                             ALTERNATIVE JET FUELS

        I'm really pleased that FAA has been working hard on making
    air traffic more sustainable, and there are a lot of ways to
    tackle that problem. I am particularly interested in the
    potential of alternative jet fuels. My home State of Washington
    is making some really great strides in research and development
    of some really promising technologies that will help us move
    toward some alternative jet fuels.
        We've got industry, nongovernmental organizations,
    universities. They've all joined together in a consortium--
    Sustainable Aviation Fuels Northwest--to evaluate some of these
    opportunities and challenges around alternative jet fuels. As
    you know, the FAA has created a Center of Excellence on this.
        Can you tell us a little bit, real quickly, in a short
    amount of time--and maybe answer me offline as well--about your
    vision for these centers?
        Mr. Huerta. The vision for the new Center of Excellence is
    to help us tackle the energy and environmental challenges
    facing aviation and to ensure sustained aviation growth but in
    a sustainable manner. Aviation has always faced challenges with
    energy, noise, air quality, and climate, and what this really
    says is you need an integrated approach to look at how all of
    these things relate to one another.
        The idea is that the center would help us through research
    and development activities to develop a much better
    comprehensive understanding. The focus of the new center will
    help us achieve our aspirational goal of having 1 billion
    gallons of alternative jet fuel in use in aviation by 2018 and
    ensuring the widespread use of these fuels in the longer term.
        Now, we've received proposals and we're reviewing them in
    response to the competitive solicitation that we put forward,
    and this should be completed in the next few months, at which
    time we will provide a formal notification.
        Senator Murray. I very much appreciate that.
        I'm going to turn to Senator Collins, and, again, I may
    just leave in just a short minute. But, again, thank you,
    Senator Collins for taking over for me on the subcommittee and
    to our subcommittee members.
        Senator Collins [presiding]. I'm honored to do so and
    pleased that you trust me to do so, Madam Chairman.
        First, let me associate myself with Senator Murray's
    comments about alternative jet fuels. We have some really
    interesting research going on at the University of Maine in
    this area. And I, too, think that it holds great potential, and
    I hope this is something that we will see the administration
    continue to encourage and fund some of the basic R&D that is
    necessary.

                      AIRPORT IMPROVEMENT PROGRAM FUNDING

        I want to return to the Airport Improvement Program and ask
    some basic questions of you. First of all, what percentage in
    dollar amounts of the Airport Improvement Program grants
    currently go to small airports? And, second, under the budget
    proposal for AIP, will there be an increase or a decrease in
    funding to go to small airports? I understand what you're doing
    with the big airports, so I don't want you to take the time up
    on that.
        Mr. Huerta. In fiscal year 2013, we estimate that the small
    airports would receive about $2 billion or 63 percent of the
    $3.2 billion in total AIP grant funding. This includes
    entitlement and discretionary spending, but does not include
    entitlements that may have been carried over from previous
    years.
        Under the fiscal year 2014 budget proposal, small airports
    would be expected to receive about $1.9 billion or 69 percent
    of the $2.75 billion in total AIP grants. So that's an
    estimated decrease of about $121 million.
        Now, while small airports would receive less AIP funding
    overall, the programmatic changes that accompany this in the
    budget would increase the amount of discretionary dollars that
    are available to small airports because of the suspension of
    the large airports from the AIP program. So, therefore, that
    means that the small airports would have more access to the
    $801 million in fiscal year 2014 discretionary spending.
        Senator Collins. So for the small airports, overall,
    there's an estimated decrease of $121 million from fiscal year
    2013. You're pointing out that the small airports would have
    more access to the $801 million in discretionary funding. But
    isn't it accurate to say that they are not guaranteed the same
    level of funding that they had received from the entitlement
    part of the program, the formula part?
        Mr. Huerta. It is true that the formula would be reduced.
    But since we are excluding their large competitors for the
    discretionary program, I would feel confident that they would
    be able to get back to those levels through the discretionary
    program.

                                 787 DREAMLINER

        Senator Collins. Thank you. I want to talk about the 787
    Dreamliner. Some experts have contended that the Dreamliner
    incidents have revealed that the FAA lacks the expertise to
    effectively test and evaluate new technologies such as the
    lithium batteries, and thus is relying too heavily on Boeing to
    vouch for the safety of the system. What's your response to
    that concern? Do you agree with that?
        Mr. Huerta. I don't. For 50 years, the FAA has relied on a
    system of shared technical expertise being brought together,
    where we assemble the best technical experts both from inside
    the Government as well as from industry to make determinations
    on how we set the highest levels of safety. But the FAA always
    retains the ultimate responsibility to make the call and to
    issue the certification.
        Aviation by its very nature is about pushing technological
    boundaries, and so when a new technology is presented as part
    of a new aircraft or a new piece of equipment, we bring
    together technical experts that understand that technology and
    its interactions in an operating context. Based on that
    process, we set certification standards, and that was the case
    for the 787. It's a process that has served us very well for 50
    years, and it will continue to serve us well in the future.
        Senator Collins. Mr. Scovel, do you agree with that? Does
    FAA have the expertise in-house that it needs, or is it too
    reliant on trusting the contractor? I'm just using Boeing as an
    example. There, undoubtedly, are others.
        Mr. Scovel. I understand. I need to start by issuing a
    caveat, and that is we don't have current work, any work,
    specifically, examining the 787 question and supposed over-
    reliance by the agency on Boeing's own engineering expertise. I
    can say that we have examined certain facets of the FAA's
    certification program.
        One that we expressed concern about in a report a couple of
    years ago was FAA's reliance on organizational designation
    representatives. These are company airline manufacturers,
    representatives, employees, who are detailed, in effect, to the
    agency. They remain on the manufacturer's payroll, but they are
    performing the certification responsibilities that
    Administrator Huerta outlined.
        Over the development of that program in more recent years--
    and it's been in effect for a long, long time, so it's not a
    new development--but as the program has been refined in more
    recent years, the ability of FAA to review the qualifications,
    performance, or even the conduct of those company employees who
    are performing FAA responsibilities has been diminished by
    mutual agreement between the agency and the manufacturers
    involved to include Boeing.
        We are concerned that that relinquishment of overall
    supervisory authority over such designees by the agency may, in
    effect, at some point raise the question of whether the agency
    is properly exercising its certification responsibilities.
        Senator Collins. Thank you.
        Senator Feinstein.
        Senator Feinstein. Thanks very much, Madam Chairman. I
    appreciate it.

                         HELICOPTER OPERATING PRACTICES

        I want to raise an old saw, and it's unregulated use of
    helicopters. As you know, this is a source of major concern to
    millions of Angelinos, and I understand the same thing is true
    in New York City. And these are helicopters flying low and
    spying on prominent people, particularly in the Los Angeles
    area.
        Our fiscal year 2013 bill directed the FAA to complete a
    report on the subject. It's my understanding that your regional
    administrator, Bill Withycombe, has held public hearings and is
    looking at the problem and has committed to releasing a report
    in May of this year. That report is meant to evaluate a full
    set of voluntary and regulatory options to reduce helicopter
    noise and address the safety issues, as well as, candidly,
    privacy issues.
        Is that report going to be released in May of this year,
    Mr. Huerta?
        Mr. Huerta. Yes. In response to the congressional request,
    we have, indeed, undertaken LA helicopter noise initiative, and
    we are intending to release it to Congress in May of this year.
        Senator Feinstein. Good. Do you have any indications of
    what might be forthcoming?
        Mr. Huerta. Well, these are always very complex issues. As
    a result of this noise initiative, community interests,
    helicopter operators, have been meeting regularly under the
    leadership of our regional administrator there in Los Angeles.
    The purpose of this is to identify very specific noise
    sensitive locations that exist there, helicopter operating
    practices, and other things which contribute to the residents'
    concern about noise pollution that exists in the neighborhoods.
        It's a group that we're finding to be very committed to
    finding solutions that provide noise relief while not degrading
    or eroding the business operations that exist there. I think
    it's fair to say that we would place a greater emphasis on
    working this out locally and reaching agreements. The reason
    for that is it gets you to solutions more quickly than a
    traditional rulemaking might.
        If the operators can develop a much better understanding
    and through the use of such things as notices to airmen or
    NOTAMs and outreach to the helicopter operators, engaging the
    local officials--for example, a lot of the concerns might come
    through the use of police helicopters or news organizations--
    and you bring the parties together and work through how they
    actually operate, often that will get us to solutions. But this
    is all the stuff that we're looking at there in Los Angeles.
        Senator Feinstein. I think if you just kept them out of
    residential areas and maybe with a waiver for police, that
    might solve the problem. But as you know, Los Angeles has a
    large Hollywood community, and these helicopters regularly are
    a problem in these residential areas. The question is do they
    really belong there to kind of be spying on people, and that's
    not a legitimate business interest.
        Mr. Huerta. Well, I think that, clearly, there is
    significant concern about helicopters that are, in the views of
    the residents, just there to make mischief. But I think the
    distinction that I was drawing was regulatory versus non-
    regulatory approaches. If we can solve the problem through non-
    regulatory approaches, it happens much more quickly. If we
    still have a problem as a result of those efforts, then it is
    something that we have to take another look at.
        Senator Feinstein. Well, let me say that I appreciate that,
    and I appreciate the action. I know it's controversial, but I
    can tell you the complaints are large and the distress is
    large. So I'm very grateful for that.
        Mr. Huerta. Well, Senator Feinstein, as a Californian, I
    hear from your constituents.
        Senator Feinstein. Yes. One other thing. Is there any
    reason why a drone pilot should not be certified and licensed?
        Mr. Huerta. This is actually one of the questions that we
    are examining as part of our overall review of how we
    incorporate them into the National Airspace System: What should
    be the requirements of an operator of an unmanned aircraft?
        Senator Feinstein. Because they also ought to be
    identifiable. If I understand what's coming down the pipe, it's
    hundreds of thousands of these things flying everywhere. And I
    think it's a real hazard and that we really need to be able to
    identify abhorrent behavior, that the pilots who pilot them,
    whether they're crop dusting or doing anything else, should
    have a specific legal responsibility.
        Mr. Huerta. Well, that is one of the questions that we are
    examining as part of safe integration.
        Senator Feinstein. Well, I'm going to introduce legislation
    to require it. So I don't know where that will go, but I have
    real concerns, and I would hope that the FAA could understand
    this, because the first big accident we have is going to change
    the whole dynamic, and it will happen.
        Is there a limit on size that the FAA certifies?

                            UNMANNED AIRCRAFT SYSTEM

        Mr. Huerta. There are different operating characteristics
    for very small unmanned aircraft systems (UAS). Essentially,
    what we're trying to do is draw a distinction between what is a
    modeler, who might be flying a model airplane--as long as
    they're flying at very low altitudes and not interfering with
    any kind of commercial aircraft--that's a category where we
    have much less concern.
        But as you pointed out in your previous statements,
    unmanned aircraft that operate for a wide variety of purposes
    at higher altitudes can be of very different sizes, and our big
    concern is how do we safely integrate them with other aircraft.
        Senator Feinstein. Well, you know, one of the things I'm
    familiar with is the real-time video that can be taken off of
    these.
        Mr. Huerta. Sure.
        Senator Feinstein. Consequently, they are real spy
    machines. Now, is that something we want in commercial service
    in the United States of America? And I think that's a very real
    question with which the industry has to grapple.
        Mr. Huerta. That's a fair question, and I think that's one
    of the things that we will learn more about as a result of
    these test sites and data gathering that we're going to be
    doing.
        Senator Feinstein. Well, let me ask you this. Can this get
    ahead of you?
        Mr. Huerta. It's a very rapidly evolving technology.
        Senator Feinstein. Yes.
        Mr. Huerta. And I think it's fair to say that the public is
    only now coming to grips with what the full implications of
    that are. I have stressed to the industry associations the
    importance of them being very transparent about what the
    potential for these activities needs to be. But I think that we
    as a country need to look at this technology very carefully,
    and while we're very focused on how we safely integrate them,
    larger questions are raised that we and our Government partners
    will need to consider in the months and years ahead.
        Senator Feinstein. And exactly--you know, I can envision
    drone fights in the air, drones cracking into each other. So I
    think they have to be identifiable. I think the pilots have to
    be certified. We have to know who's doing this, because it
    doesn't take much to put a munition on it once you've got the
    know-how.
        So I know the company that makes most of these, I visited
    in California, and it's certainly a first-rate company, but
    that also troubles me because their ability to innovate is so
    great. So I would just like to urge you to give your attention
    to this subject, because what we do is going to make a huge
    difference down the stream, even before we know the full
    implications of this.
        Mr. Huerta. That's very good counsel, Senator.
        Senator Feinstein. Thank you. Thank you very much.
        Senator Collins. Senator Moran.
        Senator Moran. Senator Collins, thank you very much.
        Administrator, I want to go back to something I raised with
    you in my earlier round of questioning, and I want to make sure
    we have an understanding of what you're going to do in
    providing copies of the analysis. Those words, analysis, study,
    exam, review, have different meanings. We use those words many
    times, and I'm not sure they always mean the same to each
    person using those words.

                            CONTRACT CONTROL TOWERS

        So I'm really interested in seeing what kind of analysis,
    study, exam, review that the FAA did to demonstrate the safety
    of your decision. And as I understand it, you did an analysis
    of each one of the 149 control towers and reached a conclusion
    in each instance that it would be safe to eliminate the control
    tower. I want to confirm with you that you will provide that
    analysis on each one of those towers to the subcommittee and
    then ask you what kind of timeframe that will take.
        Mr. Huerta. I'll need to provide a response for the record
    in terms of what kind of a timeframe that will take.
        [The information requested by the subcommittee was
    submitted by the Federal Aviation Administration on CD media on
    June 10, 2013.]
        Mr. Huerta. The analysis that we conducted was a function
    of what is the level of activity of these facilities, and then
    its relationship to the surrounding environment and other
    airports that might exist in those facilities, national
    defense, and so forth. I think that it's fair to say that the
    analysis did, for example, consider questions. Does the tower
    close at night?
        Therefore, that tells us there are specific operating
    procedures for that airport to operate in a non-towered
    capacity. And we can provide you all of that information.
        Senator Moran. That's interesting to me, and I hadn't
    thought of that point. But it's interesting to me that there
    was no analysis that would say that perhaps it's safer if we
    had air traffic control towers operating 24 hours a day. You
    reached the conclusion that it was safe because they weren't
    operating certain hours of the day. But there's also an
    analysis that could show that they could be valuable in
    improving safety if they were operating more hours.
        Mr. Huerta. Senator Moran, as I said in response to your
    earlier question, what changes when an airport operates in a
    non-towered capacity is how it operates.
        Senator Moran. And, again, I don't mean to be redundant,
    but you will provide that information to the subcommittee and
    you will let us know how much time it takes to get it to us?
        Mr. Huerta. Yes, sir.
        Senator Moran. Thank you very much. You may be aware of my
    effort on the Senate floor with Senator Blumenthal and nearly
    30 of my colleagues, Republicans and Democrats, to try to
    alleviate this problem by shifting some funding within the
    debate of the continuing resolution from unobligated balances
    in research and facilities accounts. Did you oppose that effort
    to transfer or to change those monies from being spent in the
    unobligated accounts and facilities manner to providing money
    for control towers?
        Mr. Huerta. I think it was quite clear that the
    administration's position was that we were looking for a global
    resolution to the sequester issue. As it relates to our ability
    to deal with the impacts of the sequester, as you know, it's a
    blunt instrument, and we are implementing the law as it has
    been enacted. Should different laws be enacted, we will
    implement them.
        Senator Moran. You know, that standard was not applied
    uniformly during the continuing resolution debate, and I don't
    expect you to have an answer for why that would be the case. I
    visited, as you may know, with Secretary LaHood, who told me
    that he would like to be helpful in the cause, but indicated
    the administration opposed my amendment.
        His explanation was that the administration wanted to have
    a--different than what you just said, but what he indicated was
    the administration does not want to solve this problem on a
    short-term basis. I should tell you that I didn't vote for
    sequestration. I think across-the-board cuts are irresponsible.
    I'm not defending sequestration. I am criticizing the manner in
    which you're implementing sequestration, because I don't think
    it's required under the circumstances.

                                 SEQUESTRATION

        But, again, I share the view, I suppose, of the
    administration that sequestration is not a manner by which we
    should find savings. Having said that, Secretary LaHood said
    the administration opposes my amendment because it is not a
    long-term solution to the problem. Everything, Administrator,
    within the continuing resolution was a short-term solution.
    It's a continuing resolution that gets us through until
    September 30.
        I couldn't find a single Senator, Republican or Democrat,
    who opposed the amendment. All of them spoke to me in favor of
    the amendment, could not understand why we couldn't transfer
    money that was unobligated and unused to a higher priority. And
    so it is still confusing to me, even with your answer.
        I can't solve in the continuing resolution the issue of
    sequestration. I'm interested in solving the issue of
    sequestration, but it looks to me like you would allow us to
    help you at the FAA solve a problem in a way that is less
    damaging to the traveling public. So I remain confused by the
    suggestion that we want to solve a longer-term problem with
    sequestration. So do I.
        But it does seem odd to me and it seems inappropriate to me
    that you're unwilling to solve a problem that you're presented
    with, one problem at a time as they come up. Unfortunately,
    that's the circumstance in which we find ourselves. You're not
    interested in solving this problem until we solve the larger
    problem?
        Mr. Huerta. Well, Senator Moran, these are all not optimal
    decisions. I've said repeatedly that these are all very
    difficult choices. Every dollar that I am unable to save
    through the Federal contract tower program is a dollar that I
    need to find in employee furloughs. And there's a tension and a
    tradeoff between lower activity facilities, higher activity
    facilities. This is an extremely difficult statute to
    implement, but it is the law and we're forced to implement it.
        Senator Moran. And let me make sure that I understand that
    answer, which is you do have the discretion to decide where the
    cuts would occur, because you're choosing to cut the control
    tower program and perhaps not furloughing air traffic
    controllers at more high volume airports. So the suggestion
    that has been made--I don't know if by you or not--that we have
    no choice--it is a choice, but it's a choice that you describe
    as difficult, but you made a choice. Is that true?
        Mr. Huerta. Well, the choice that we made is to minimize
    impact on the maximum number of travelers. I'd like to share
    with you a specific example. Many of these smaller facilities
    have very low activity of all flights. So if I'm looking at the
    tradeoff between closing a tower which can operate safely where
    the maximum number of commercial activity flights might be,
    say, two or three a day versus affecting the arrival rate at a
    large facility, I'm going to err on the side of ensuring that I
    protect the maximum number of travelers.
        Senator Moran. Administrator, that's exactly what I would
    want you to do. And what's disturbing to me is the continual
    suggestion that we don't have the discretion to do that. What
    you're saying to me is exactly what I've been saying on this
    issue, which is why can't we prioritize? You prioritized. You
    decided that this is more important for safety than this. Why
    isn't spending money on control towers more important than
    unobligated balances?
        Mr. Huerta. Because the unobligated balances are in a
    different funding source which I am not permitted to transfer
    money from.
        Senator Moran. But I was giving you the authority to do
    that.
        Mr. Huerta. But it's authority that I don't have.
        Senator Moran. But you opposed me giving you the authority
    to do that. It doesn't make sense to me. I'm still baffled by
    this. Mr. Administrator, it does seem to me that you have
    indicated there was discretion, or, at least, you have the
    opportunity to prioritize. You have the discretion because
    you've now decided to keep some towers open or keep towers open
    for another couple of months, and you added some towers back to
    the list that wouldn't be closed.
        So it does seem that there's some opportunity for you to
    utilize that discretion, and I wish you would support us giving
    you the opportunity to have more discretion. One of the things
    that caught my attention, and I assume that you said this. It
    comes from a newspaper in Frederick, Maryland. And you were
    quoted at the time when the stimulus dollars were made
    available, $5.3 million at Frederick, Maryland, for an air
    traffic control tower.
        This was just a few years ago, and I read the article that
    said that by the time the air traffic control tower was open
    for business, you made the decision to close the tower. But
    back during sequestration, this is what you reported as saying
    in the local newspaper.
        ``More than 300 aircraft are based at the airport. It has
    two runways and handles 130,000 aircraft operations annually,
    Huerta said. It is estimated that the number will increase to
    165,000 by 2025. Huerta had to almost shout above the noise to
    say he came to make the case that the airport is so busy that
    it needs a tower.'' Quoting you, ``I think the case has been
    made, Huerta said. This has become a very busy airport,'' and
    yet it's one that is being closed.
        Mr. Huerta. And its current rate of activity is less than
    150,000 operations. As I've said, these are difficult choices.
        Senator Moran. Madam Chairman, I was asked by Senator Blunt
    to ask a question in a different vein, although it's along the
    same topic. Our colleague, Senator Blunt, has introduced a bill
    earlier this week that would ensure that essential employees
    upon whom public safety depends can continue to work without
    furlough.
        During a Senate Commerce Committee hearing earlier this
    week, you asked for the opportunity to review the bill. And
    Senator Blunt asked me to ask you if you had reviewed the bill
    and now had an opinion.
        Mr. Huerta. We have reviewed the bill. The administration
    has not taken a position on it at this point.
        Senator Moran. I think, Madam Chairman, that's all I have.

                                  COST-SAVINGS

        Senator Collins. Thank you very much, Senator Moran. I want
    to recognize your very strong leadership on the contract tower
    issue. This is an issue that is of great concern to many of our
    colleagues on both sides of the aisle. And I personally believe
    that had you been able to get a vote on the Senate floor that
    you would have won overwhelmingly.
        Mr. Attorney General--Inspector General--maybe you'd like
    to be Attorney General--maybe not.
        In your statement, you talked about that the FAA could
    realize cost savings through improved controller productivity
    and scheduling. And you talk about that since 2000, total air
    traffic operations have declined by 23 percent while the number
    of air traffic controllers has actually increased. I mention
    this because I think the furloughs are a very blunt and harmful
    instrument that does not set priorities.
        But it seems to me that in your excellent testimony and the
    audits and reports that you've done that you've suggested other
    ways that savings could be achieved and that the targets under
    sequestration could be met. So could you talk to us a little
    bit more about your comment that FAA could realize cost savings
    with better scheduling and higher productivity?
        Mr. Scovel. Yes. Thank you, Senator Collins. It is true
    that air traffic operations since 2000 have decreased about 23
    percent with slightly more controllers on duty today than there
    were then. We've been asked by the House to undertake a review
    of air traffic controller productivity, and that review is
    underway, and we don't have conclusions yet that I can share
    with you.
        However, what we have identified through a number of audits
    of FAA's air traffic controller scheduling practices as well as
    training is that there are a number of towers--and that's been
    the subject of discussion off and on between Senator Moran and
    the Administrator--but a number of towers that maintain at
    least two air traffic controllers on duty through the nighttime
    hours when, by virtue of FAA's own threshold requirements in
    terms of operations, those towers should be closed.

                         CONTROLLER TRAINING AND SAFETY

        There are opportunities for savings if FAA were to apply
    its own thresholds to those particular towers and leave those
    towers unmanned during the nighttime hours. We defer to the
    agency in terms of the safety question, and we are very
    cognizant of Senator Moran's concern with safety as well as the
    testimony of the NTSB chairman on Tuesday, in which she offered
    the view that redundant safety systems, safety layers, can only
    enhance safety rather than decrease it.
        Senator Collins. Well, I think part of that also was in
    response to the very unfortunate incidents where the air
    traffic controller had fallen asleep during the nighttime
    shift----
        Mr. Scovel. Exactly.
        Senator Collins [continuing]. Which is obviously
    unacceptable. I'm not sure the answer is to have a second
    person there to wake the person up. But I do think that that's
    probably why two are on duty.
        Mr. Scovel. It is in some instances as a result of the
    concern over fatigued controllers from several years ago. A
    decision was made by the agency and, in fact, the Department to
    put a second controller on duty at those locations,
    notwithstanding the fact that nighttime operations were below
    the threshold that had been specified by FAA for manning the
    tower in the first place.

                                 SEQUESTRATION

        Senator Collins. The reason I mention this issue,
    Administrator, is that I would encourage you to go back and
    really scrutinize your budget--I'm not saying that you
    haven't--but to look at the contract towers issue, the post
    midnight issue, particularly when you're dealing, as we are in
    Bangor, with a dual use airport that has military operations as
    well as civilian, and to also take a look at the furlough
    issue. I'm worried about the impact on morale. I'm worried
    about the impact on operations.
        I've met just in the last couple of weeks with high-level
    Navy officials and National Guard officials, and they have both
    been able to work through this in a way that has either greatly
    lessened the number of furlough days that will be required by
    DOD's civilian employees within their departments or eliminated
    altogether. And the disturbing thing is I'm also hearing that
    the White House is putting pressure on the Navy, the Coast
    Guard, and the National Guard to do furloughs anyway. I don't
    think we ought to be trying to enhance the pain of
    sequestration.
        I agree that sequestration was a terrible policy. It
    doesn't set priorities. It treats programs as if they're of
    equal worth, and it is a very poor way to legislate. But here
    we are, and it seems to me that we've got to work together to
    try to figure out ways to minimize the impact on operations and
    on the workforce.
        I personally believe we're going to end up paying more
    later in a lot of these cases as we delay contracts and cause
    problems in the supply chain and take other actions as a result
    of sequestration. So I would encourage you to go back and take
    another really close look at your budget.

                                   FURLOUGHS

        Mr. Huerta. Senator Collins, I can't speak to what's going
    on in other agencies, but I will give you my assurance that we
    are in a continuous evaluation of where we can achieve cost
    savings. I will say that when we first began our initial
    planning, we actually thought that we were going to have a much
    larger number of furlough days. And through our very aggressive
    efforts to reduce spending in other areas, we're able to get
    that down to the 11 that we're currently working with, and we
    will continue to work on that.
        I have with my staff weekly reports on how we're doing with
    contract expenditures, what we're seeing with respect to our
    actual performance. This is something that we will continue to
    manage throughout the fiscal year as long as the sequester is
    in place.
        As you know, and as I've said repeatedly, these are
    difficult choices, and we're forced to choose between very
    unattractive options. But nothing would be better news for me
    than a situation where we would be able to relax these
    draconian measures. But it all depends on how the financial
    performance plays out in the weeks ahead.

                          ELECTRONIC DEVICES ON PLANES

        Senator Collins. Let me just ask two final questions. One,
    Administrator, what progress has the FAA made in reviewing
    airline procedures governing the use of portable electronic
    devices such as smart phones and tablet computers in flight?
    It's not that I'm seeking being on a flight where everybody's
    on a phone having a conversation. But, obviously, there's a
    great deal of interest in being able to use devices on these
    flights and a great deal of skepticism, I would say, among the
    traveling public about whether this really is a safety issue.
        Mr. Huerta. Sure. Let me draw the distinction between the
    use of phones and the use of other electronic devices.
        Senator Collins. Yes, a valid distinction.
        Mr. Huerta. The use of phones is regulated by the Federal
    Communications Commission (FCC), and right now their current
    rules prohibit the use of phones on aircraft in flight. The
    FAA, for other electronic devices, recently committed at the
    start of this year an Aviation Rulemaking Committee (ARC) to
    advise us on whether we should revise the regulations that we
    currently have in place that restrict the use of these devices
    during critical phases of flight.
        This rulemaking committee is made up of representatives not
    only of the device manufacturers, but also representatives of
    crews, and of aircraft operators. These members will have the
    full scope of perspectives that would come into play as we
    consider how to look at these things, as well as the research
    and technology community so that we can really understand what
    the challenges are with respect to electronic performance.
        Current law provides that any airline could do an analysis
    of devices on their aircraft, and if they determine there is no
    interference, then they could be allowed. We recognize, though,
    that there has been an explosive growth in the type and variety
    of electronic devices. So it was for this reason that I made it
    a personal initiative to really try to convene this group to
    consider what a way forward would look like.
        We're expecting the work of the ARC to be concluded this
    summer, and at that time they will make recommendations to us
    on what a way forward might look like. The balance they have to
    achieve is what's technologically feasible, but also what can
    be enforced in an operational context by crews and operators of
    airlines.
        Senator Collins. Thank you.

                   AUDIT OF LOS ANGELES INTERNATIONAL AIRPORT

        And, finally, Mr. Scovel, I know that the inspector
    general's office is conducting an audit of the Los Angeles
    International Airport's (LAX) revenue use as a result of a
    particular incident where revenue was diverted for purposes not
    allowed under the law. Two questions: What is the status of
    that audit? And, second, has your office uncovered revenue
    diversion incidents--that's a bureaucratic term for it--at
    other airports throughout the country, in other words, misuse
    of revenues?
        Mr. Scovel. Senator Collins, our review of supposed revenue
    diversion at Los Angeles International Airport is underway. We
    haven't completed it yet. So I'm not in a position to speak
    specifically to that, except to note that we are conducting
    that review in response to a request from three Members of the
    House.
        We have also received information independently through
    third party sources affiliated with LAX. Some of those
    allegations we referred to FAA for their review, and they have
    conducted that. And my staff together with FAA is in the
    process of reviewing those conclusions. But the larger piece
    has fallen to one of our audit groups, and that effort is still
    underway.

                          AUDITS OF REVENUE DIVERSIONS

        To your other question, the nature of revenue diversion at
    airports nationwide, unfortunately, it is--I can only call it
    pernicious and persistent. It is required by Federal law that
    revenues generated by airports be used for airport purposes. To
    use it for anything else, such as police or fire services off
    the airport, as we have found happened--the parking fees
    generated in lots and garages on the airport to be used for
    off-airport services--we have found numerous instances of that.
        Both my office and Administrator Huerta's agency have
    groups that have long experience in investigating and
    attempting to resolve instances of revenue diversion. His group
    as well as mine are tremendously under-resourced. We could
    probably dedicate double figure FDEs nationwide to try to track
    all of this down.
        I can give you a very short list--and I won't take too much
    of your time--but just some of the more recent projects that
    we've had underway. Dating back to 2003, we looked at incidents
    at Pittsburgh, Cleveland, San Antonio, Miami, Detroit; 2004,
    San Francisco; 2005, Bellingham, Charlotte, Cincinnati,
    Detroit, Las Vegas, Reno, Tucson; 2006, Orlando; 2011, Denver;
    2011, Venice, and most recently, Los Angeles.
        Over the course of the last 10 years, our office alone has
    identified well in excess of $400 million of revenue diversion
    or lost revenues. For instance, airport real estate sold for
    less than fair market value. That's money that, had the sale
    been conducted properly, should have been devoted to airport
    purposes under Federal law. But all of that happened.
        That's not to say that those revenues, in some instances,
    could ever be recovered either by the agency or by the airport.
    But, in some instances, they can, and we and FAA try to track
    those instances down.
        Senator Collins. Well, that's a very disturbing list of
    airports, because that suggests a widespread problem and with
    real money, hundreds of millions of dollars. That's the sort of
    thing we have to make sure we're providing enough resources for
    on the investigative front so that we can catch and deter that
    kind of activity.
        Senator Moran, do you have anything further?
        Senator Moran. No. Thank you for the indulgence.
        Senator Collins. Thank you.
        I want to thank both of our witnesses for testifying today.
        And, Administrator, I particularly want to recognize your
    first appearance before our subcommittee.

                         ADDITIONAL COMMITTEE QUESTIONS

        I would announce that we will leave the hearing record open
    for 1 week for any additional questions for the record and
    would ask our witnesses to respond to those as quickly as
    possible.
        [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
                            nextgen master schedule
        Question. I continue to be concerned by the Federal Aviation
    Administration's (FAA's) track record with capital programs. Too many
    FAA programs go over budget, exceed their schedule, and do not deliver
    on all of their promises. This past year, the FAA proposed changes with
    the goal of improving program management. I was happy to approve FAA's
    reorganization that created the Program Management Office (PMO), which
    is designed to focus the agency on good management practices. Mr.
    Scovel, in your testimony, you discuss the need for FAA to integrate
    all of its Next Generation Air Transportation System (NextGen)
    programs. One year ago, the FAA concurred with your recommendation that
    it produce an integrated master schedule. By what date will the FAA
    produce this master schedule?
        Answer. Consistent with Mr. Scovel's recommendation, the FAA is
    developing an Integrated Master Schedule (IMS). The NextGen IMS will
    track progress activities and milestones monthly for the pre-
    implementation and implementation programs.
        By December 2013, the FAA IMS will include the linkages and
    dependencies among NextGen programs. This capability will strengthen
    program synchronization and alignments along with capturing the
    timeline for maturity of the NextGen programs. Further, we will
    continue to enhance the IMS as we revalidate the NextGen schedules and
    definitions of capabilities. In parallel, we will continue our effort
    to align the IMS with the NAS Enterprise Architecture (EA). This
    alignment will include all implementation activities through 2020.
                             acquisitions workforce
        Question. The Inspector General has issued many recommendations on
    the importance of having an FAA workforce with expertise in
    acquisitions. This kind of expertise means hiring the right people and
    giving them the training they need. How will sequestration affect your
    ability to support the PMO and develop a strong acquisitions workforce?
        Answer. The Federal Aviation Administration (FAA) continues to
    prioritize training and certification for the FAA's acquisition
    workforce. The agency views it as a necessary investment to ensure the
    FAA has a strong cadre of skilled acquisition professionals in order to
    effectively manage cost, schedule, and performance of agency
    acquisitions and contracts. The FAA has reduced training and travel
    budgets but is still supporting core training that is required for
    certification of contracting officers and specialists, contracting
    officer representatives, and program/project managers. The FAA is also
    continuing to offer core training to other acquisition specialists,
    such as system engineers, test and evaluation specialists, cost
    estimators, and integrated logistics specialists. However, reduced
    travel budgets are impacting the ability of some field personnel to
    attend training; local training is not available or there is an
    insufficient population to bring training onsite. Additionally,
    diminishing staffing levels and support contractor resources are
    impacting the availability of personnel to attend training due to
    increasing job demands.
        While the FAA remains committed to strengthening the skillsets of
    onboard acquisition staff, sequestration is impacting the FAA's ability
    to hire. The FAA has had to impose restrictions that broadly curtail
    hiring, including backfill hiring and career ladder promotions. While
    there are provisions for exceptions for critical needs, the expectation
    is that these will be very limited. Similarly, there is a general
    freeze on reassignment increases, performance awards, and retention
    incentives. A consequence of these restrictions is difficulty retaining
    staff. Experienced acquisition professionals are in high demand and FAA
    is beginning to see an increase in attrition. Losing highly skilled and
    experienced professionals, and staff managing increasingly complex
    acquisitions, erodes morale and puts the agency at risk for increased
    costs, disruptions, and delays. In addition to a shortage of senior,
    experienced professionals, a thinning pipeline of talent can have long
    term impacts.
        To manage under these circumstances, the FAA is focused on
    developing current, available staff to best meet highest priority needs
    and strategies to retain personnel and organizational knowledge/
    expertise.
        The FAA's Acquisition Workforce Council oversees planning and
    development of the acquisition workforce. The Council is in the process
    of updating FAA's Acquisition Workforce Plan. Through this process the
    FAA will reassess current and projected workload and staffing
    (including retirement and attrition data) and strategies to address
    requirements based on assumptions and constraints. The Acquisition
    Workforce Plan update is expected to be published in September 2013.
                              runway status lights
        Question. Recently, the FAA has recognized cost increases with the
    Runway Status Lights program. And I understand that the FAA may
    consider installing these lights at fewer locations in order to keep
    within the programs budget. What is the FAA doing to ensure that it
    delivers on all of the promises of the Runway Status Lights program?
    Under what circumstances would the agency decide to cut back on this
    program instead of making other adjustments to its budget?
        Answer. Runway Status Lights (RWSL) is a costly system because it
    involves cutting into runways and taxiways in order to install the
    field lighting system. In addition, the FAA must rely on the airport to
    make the runways and taxiways available for suitable lengths of time so
    that construction costs don't become unwieldy.
        At the time of the RWSL Final Investment Decision (FID) in January
    2010, based on the economic analysis, only 13 airports provided a
    positive net present value; however, 23 airports were selected based on
    the cumulative program net present value. Moving forward, FAA is
    focusing on getting positive net present value for each airport
    installation both for this program and other capital investments.
        In the time since the FID, the program experienced cost growth due
    to:
      --changes in construction methods to costlier techniques;
      --requests for additional light arrays;
      --limited runway and taxiway availability; and
      --additional development for supportability enhancements.
        Cost containment measures were taken to address the cost growth and
    an affordability analysis was initiated. The affordability analysis
    included implementation progress to date, funds spent to date, life
    cycle costs, and the benefit cost ratio.
        Taking into account all the relevant factors, the agency is
    considering a two-step approach to complete the deployment of RWSL.
    First, execute a plan to achieve operational status at the appropriate
    number of airports based on the affordability constraints and approved
    by the FAA Joint Resources Council. Second, develop a business case to
    address the remaining airports.
        Employing good business practices, the approach forward for the
    remaining airports will take advantage of all methods of reducing
    runway incursions targeted at the specific airport environment. The
    agency is institutionalizing a new process that will be inclusive of
    airport partners to develop a comprehensive plan that will include a
    combination of innovative non-technology and technology solutions
    tailored for each airport environment. In order to achieve this
    tailored approach, the FAA has chartered a Surface Safety Team to,
    along with stakeholders:
      --Evaluate the current set of surface technologies and risk
            assessment capabilities;
      --Conduct additional risk analysis based on additional information
            available through voluntary reporting systems and Aviation
            Safety Information Analysis and Sharing (ASIAS);
      --Develop portfolios of solutions to address identified causal
            factors; and,
      --Identify funding solutions, including conditions for PFC and Grant
            eligibility, and cost sharing opportunities.
        This Surface Safety Team began its work in February and is expected
    to complete its work by December 2013.
                           787/aircraft certification
        Question. Given the size of the aviation industry in the United
    States, it is not possible for FAA employees to personally oversee
    everything that happens in the industry every day. To make the best use
    of its resources, the FAA has been moving to a risk-based approach. The
    agency has also taken advantage of employees who work in the aviation
    industry, but perform oversight work on behalf of the FAA. As part of
    its investigation into recent events with lithium batteries on the 787,
    the FAA has reviewed its own oversight of aircraft certification. What
    lessons has FAA learned from this review?
        Answer. As part of our certification processes, the FAA determines
    its level of involvement in a given aspect of the design based on a
    number of risk-based factors, including the safety criticality of the
    design feature, the clarity of the requirements and guidance, and the
    experience/competency level of the applicant and their delegation
    system. Our level of involvement is not an ``all-or-nothing''
    proposition. Rather, we fine tune our participation to match the
    specific situation. In the case of the 787 lithium batteries, our
    experienced electrical engineers maintained a high level of
    involvement, even in those cases where the formal test witnessing and
    documentation sign-off was delegated to the Boeing organization.
    Overall, we believe our certification processes are sound and effective
    in supporting our safety objectives.
        There are two on-going 787 related activities we are involved with:
    National Transportation Safety Board (NTSB) investigation of the in-
    service battery events; and 787 Special Review Team which is conducting
    a comprehensive review of the Boeing 787 critical systems, including
    design, manufacture, assembly and coordination activities between
    Boeing and 787 suppliers.
        We will carefully evaluate any recommendations from these
    activities with regard to further improvements to our overall
    certification processes and oversight methods.
                             aircraft certification
        Question. The aviation industry continues to grow and innovate. The
    FAA's highest priority must always be safety, but its oversight still
    has to keep up with industry--making sure that new products meet the
    same standards for safety, but not at the expense of unreasonable
    delay.
        What is the average time today to review and approve new proposals?
    Has this time increased or decreased in recent years?
        Answer. Certification projects involve multiple milestones spanning
    the time period from initial proposal through FAA approval. The
    duration of each project is unique, with some being as short as one
    week and others spanning 6-8 years.
        One area that has been a challenge for FAA has been the ability to
    take on numerous new projects. Since 2005, the FAA Aircraft
    Certification Service has used a process to prioritize the initiation
    of projects based on a number of considerations including the safety
    significance of the project, scope of the project and degree of FAA
    involvement.
        Section 312 of the FAA Modernization and Reform Act of 2012
    identified six areas for assessment and improvement. The FAA developed
    an implementation plan consisting of 14 initiatives to address the six
    areas. One of the initiatives seeks to improve the process and
    timeliness to initiate certification projects. The FAA developed the
    new process based on industry comments that better balances industry
    needs with FAA priorities and resources. The new process has been
    posted on the FAA Web site and the public comment period is open
    through July 2, 2013. Several industry representatives and associations
    have expressed favorable comments regarding the new process based on
    their initial review.
        Question. Given what you have learned with the 787, how do you see
    the FAA continuing to improve aircraft certification?
        Answer. While we believe our certification processes are effective
    in supporting our safety mission, we are always looking for ways to
    improve them. For that purpose, we plan to use the recommendations and
    lessons learned that will come from NTSB's investigation of the 787
    battery and the 787 Special Review Team.
        We believe any recommendations that come from these activities will
    strengthen the work that has been underway for several years within the
    Aircraft Certification Service to build a stronger, system-based
    approach to our certification, continued operational safety, and
    oversight processes. These efforts fully support the FAA commitment to
    develop and implement an overall Safety Management System.
        Question. The FAA Modernization and Reform Act of 2012 required the
    FAA to assess its certification process and report on the FAA's
    recommendations. That report was due 180 days after enactment. What is
    the status of this effort?
        Answer. The Aircraft Certification Process Review and Reform
    (ACPRR) Aviation Rulemaking Committee (ARC) submitted the following
    recommendations to the Director of Aircraft Certification on May 22,
    2012:
      1. Development of Comprehensive Means To Implement and Measure the
            Effectiveness of Implementation and Benefits of Certification
            Process Improvements;
      2. Enhanced Use of Delegation;
      3. Integrated Roadmap and Vision for Certification Process Reforms;
      4. Update Part 21 To Reflect a Systems Approach for Safety;
      5. Culture and Change Management; and
      6. Process Reforms and Efficiencies Needed for Other Aircraft
            Certification Service (AIR) Functions.
        Recommendations from the ARC were included in a report provided to
    Congress on August 13, 2012. The FAA fully supports these
    recommendations and developed a comprehensive implementation plan
    consisting of 14 initiatives addressing each item. Implementation
    actions began in 2012, in advance of the act requirement to begin
    implementation no later than February 14, 2013.
        Question. Will you be able to make these improvements in time to
    develop the fiscal year 2015 budget request? Or even the fiscal year
    2016 budget request?
        Answer. The fiscal year 2015 budget request will use existing model
    formulas to forecast resource requirements. As we improve and revise
    the model for these labor challenges, these will be incorporated in the
    fiscal year 2016 request.
        For fiscal year 2016, the Flight Standards portion of the model
    will incorporate improvements that will provide more accurate staffing
    forecasts. The Aircraft Certification Service portion of the model does
    not require algorithm revisions for staffing forecast. Aviation Safety
    (AVS) will use December 2012 and 2013 Flight Standards Service (AFS)
    Staffing Tool and Reporting System (ASTARS) model data results to
    formulate our fiscal year 2015 and 2016 budget requests respectively.
                          performance-based navigation
        For the past couple of years, the FAA has been working on its
    metroplex initiative. This initiative brings teams of FAA employees to
    major airports across the country to work with local stakeholders and
    develop better procedures. These procedures rely on performance-based
    navigation, which means that each and every aircraft must be equipped
    with the right technology. Some of these avionics are more advanced and
    can take advantage of more precise procedures. The FAA has been
    developing these procedures for a long time, but with the metroplex
    initiative, the FAA has finally shown that it is placing a priority on
    procedures that will be used after these teams leave the airport. A key
    element of NextGen has been the idea that the best equipped aircraft
    will be able to take advantage of the best procedures. But to ensure
    that procedures are being used, they need to accessible to the largest
    number of aircraft.
        Question. Can the FAA develop procedures that will be used on a
    regular basis and also follow a policy of ``best equipped-best
    served''?
        Answer. The Federal Aviation Administration (FAA) has developed,
    published, and maintained over 20,812 conventional and Area Navigation
    (RNAV) Standard Instrument Approach Procedures (i.e., ILS/VOR/RNAV/RNP
    AR/WAAS/GLS), Standard Instrument Departures and Standard Terminal
    Arrivals, and 1,193 low and high altitude routes (i.e., Victor Airways,
    Jet Routes, Q, T, and TK) for use by users (i.e., airlines, business,
    general aviation, Department of Defense (DOD)) of the National Airspace
    System (NAS).
        These public procedures are available for use by all entities
    identified above, provided that aircraft are properly equipped and
    maintained, the aircrew is properly trained and certified, and the
    flight operations to be performed are authorized and conducted in
    accordance with various FAA directives and other documents, as
    appropriate.
        While these procedures are not segregated or developed in a manner
    that follows a policy of ``best equipped-best served'' per se, aircraft
    and aircrews that meet the aforementioned criteria can certainly take
    advantage of operational and economic benefits provided by more
    advanced Performance Based Navigation routes and procedures. This
    promotes the drive for greater investment in upgrades to flight
    planning capability, equipage and training on the user side, as the FAA
    continues to modernize the NAS through its efforts under NextGen.
        Question. Two years ago, FAA data showed a dramatic increase in
    operational errors made by its air traffic controllers. That year, the
    FAA had also been making changes in how such errors were reported, so
    FAA has never been able to determine how many of those errors were due
    to better data collection and how many were due to an actual increase
    in controller errors. But even today, the FAA has not been able to
    establish a new baseline that it can use to measure any improvement in
    its performance. When will the FAA be able to establish a baseline for
    operational errors?
        Answer. As a result of FAA improvements in reporting and monitoring
    systems during the last 2-plus years, the agency has indeed experienced
    a significant increase in the number of reported operational incidents.
    While the FAA cannot prove with 100 percent certainty that the entire
    increase in reporting is related to improvements in policy, procedures,
    and tools, those increases occurred concurrent to the deployment of
    those improvements and the likelihood of the associated increases is
    statistically high.
        Those new capabilities were implemented methodically throughout the
    National Airspace System beginning on January 30, 2012, and we are
    nearly finished with the implementation of all planned improvements.
    For example, the implementation of electronic radar monitoring in the
    terminal environment via the Traffic Analysis and Reporting Program
    (TARP) was rolled out from January to September 2012. The last program
    to be implemented is TARP for en route facilities which we began
    deploying in May 2013, and expect to be fully implemented by September
    2013.
        Best practices for performance measurement typically use 2 full
    years of good data to establish a new baseline; meaning that the FAA
    will have a new official baseline for Operational Incidents in October
    2015. However, by October 2014, the FAA expects to have 1 full year of
    full reporting and will establish new goals for the current System Risk
    Event Rate (SRER) metric.
        As part of its strategy to move beyond traditional reporting of one
    dimensional safety metrics, in 2011, the FAA introduced a new metric:
    the System Risk Event Rate (SRER). The SRER represents a move away from
    legacy safety indicators consisting of merely counting losses of
    separation and a move toward a metric that illuminates, with far
    greater precision, the frequency and rate of high-risk events across
    the NAS. The SRER is a 12-month rolling rate that compares the number
    of high-risk Risk Analysis Events (RAEs) with the total number of
    validated losses of standard separation that have occurred. As
    expected, the vast increase in reported safety data in 2012 has
    resulted in an increase in the overall number of events and RAEs
    reported. However, it is notable that even with a significantly greater
    number of recorded events and a higher number of reported RAEs, the
    total number of high-risk events has remained low.
                               retention bonuses
        Question. Please provide a table for fiscal year 2012, and another
    for fiscal year 2013, listing the title, office, and salary of each FAA
    employee that received a retention bonus during that year, as well as
    the amount of the retention bonus itself.
        Answer.

                                       FISCAL YEAR 2012 RETENTION INCENTIVES--FAA
    ----------------------------------------------------------------------------------------------------------------
                                                                                             Retention    Retention
                   Organization                         Position title            Salary      percent       amount
    ----------------------------------------------------------------------------------------------------------------
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....      $85,356           10   \1\ $8,536
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       84,006           10    \1\ 8,401
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       86,037           10    \1\ 8,604
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....      106,684           10   \1\ 10,668
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       67,780           10    \1\ 6,778
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       85,356           10    \1\ 8,536
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       85,788           10    \1\ 8,579
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       42,319           10    \1\ 4,232
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC \2\.       43,589           10    \1\ 4,359
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  AVIATION ASSISTANT...........       43,102           10    \1\ 4,310
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       84,006           10    \1\ 8,401
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  SUPV AIR TRAFFIC CONTROL SPEC      119,972           10   \1\ 11,997
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       89,879           10    \1\ 8,988
    ATCT PORTLAND, ME.........................  AIR TRAFFIC CONTROL SPEC \2\.       89,879           20       17,976
    HQ-AIR TRAFFIC ORG WASHINGTON, DC.........  DEPUTY CHIEF OPERATING             179,700        24.38       42,500
                                                 OFFICER \3\.
    HQ-HUMAN RESOURCE MGT WASHINGTON, DC......  SUPV HUMAN RESOURCES SPEC....      161,736           25       40,434
    SSC NANTUCKET, MA.........................  AIRWAY TRANSP SYS SPEC.......      103,830           20   \1\ 20,766
    SSC NANTUCKET, MA.........................  AIRWAY TRANSP SYS SPEC.......       79,026           20   \1\ 15,805
    HQ-HUMAN RESOURCE MGT WASHINGTON, DC......  MGT & PROG ANALYST...........      141,735  ...........          \4\
    ----------------------------------------------------------------------------------------------------------------
    \1\ Denotes continuation of a group incentive authorized to supplement the pay of employees at an
      extraordinarily high cost location (Nantucket Island) that is included in the ``Rest of U.S.'' locality pay
      area.
    \2\ Denotes the same employee as row directly above this one--location changed or modified agreement.
    \3\ Retired 9/30/12.
    \4\ Denotes an incentive that was stopped upon expiration or review showing incentive no longer needed.

                                       FISCAL YEAR 2013 RETENTION INCENTIVES--FAA
    ----------------------------------------------------------------------------------------------------------------
                                                                                             Retention    Retention
                   Organization                         Position title            Salary      percent       amount
    ----------------------------------------------------------------------------------------------------------------
    ATCT NANTUCKET, MA........................  SUPV AIR TRAFFIC CONTROL SPEC      $90,478           10   \1\ $9,048
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       84,006           10    \1\ 8,401
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC \2\.       76,267  ...........      \1\ \3\
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       86,037           10    \1\ 8,604
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....      106,684           10   \1\ 10,668
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       20,324           10    \1\ 2,032
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       85,356           10    \1\ 8,536
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       85,788           10    \1\ 8,579
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       67,780           10    \1\ 6,778
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  MGT & PROGRAM ASSISTANT......       46,550           10    \1\ 4,655
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       84,006           10    \1\ 8,401
    ATCT NANTUCKET, MA........................  AIR TRAFFIC CONTROL SPEC.....       76,267           10    \1\ 7,627
    ATCT NANTUCKET, MA........................  SUPV AIR TRAFFIC CONTROL SPEC      119,972           10   \1\ 11,997
    SSC NANTUCKET, MA.........................  AIRWAY TRANSP SYS SPEC.......      103,830           20   \1\ 20,766
    SSC NANTUCKET, MA.........................  AIRWAY TRANSP SYS SPEC.......       79,026           20   \1\ 15,805
    ATCT PROVIDENCE, RI.......................  AIR TRAFFIC CONTROL SPEC.....       83,375  ...........          \3\
    TRACON CAPE, OTIS AFB, MA.................  AIR TRAFFIC CONTROL SPEC.....       87,753  ...........          \3\
    HQ-HUMAN RESOURCE MGT WASHINGTON, DC......  SUPV HUMAN RESOURCES SPEC....      166,265           25   \4\ 41,566
    ----------------------------------------------------------------------------------------------------------------
    \1\ Denotes continuation of a group incentive authorized to supplement the pay of employees at an
      extraordinarily high cost location (Nantucket Island) that is included in the ``Rest of U.S.'' locality pay
      area.
    \2\ Denotes the same employee as row directly above this one--location changed or modified agreement.
    \3\ Denotes an incentive that was stopped upon expiration or review showing incentive no longer needed.
    \4\ Retention payments terminated 6/3/13.

        Question. Please describe the FAA's process for approving retention
    bonuses.
        Answer. An employee's manager may request a Retention Incentive
    when the employee has unique qualifications or there is a special need
    for the employee's services which makes it essential to retain the
    employee. The employee must be likely to leave the Federal service in
    the absence of a retention incentive and have a performance rating of
    acceptable. The employee must have completed a minimum of 1 year of
    continuous service with FAA, immediately prior to receiving the
    incentive, or have been employed by FAA for a period established under
    a service agreement resulting from the payment of a recruitment or
    relocation incentive, whichever is longer.
        The requesting office must complete an Authorization Request form.
    The form has the employee's position information, salary, requested
    amount, and other information required to process the incentive
    request. It also includes sections for narrative justification that are
    designed to present the business reasons for the incentive and to
    address the various factors prescribed by the Department of
    Transportation policy, Departmental Personnel Manual (DPM), chapter
    575, Recruitment, Relocation, and Retention Incentives. Finally, the
    form has a concurrence/approval section with signature blocks to
    facilitate the review and approval process.
        Along with the form, any supporting documentation that may be
    necessary to support the request is added to the package. This may
    include the employee's latest performance assessment, documentation of
    an outside job offer, or documentation of any other expression of the
    employee's intention to leave Federal service absent an incentive. The
    package will also usually include an FAA Retention Incentive Service
    Agreement that outlines the conditions that the employee must agree to
    while receiving the incentive, such as the payment method, agreement
    termination and repayment liability rules, and specific performance
    objectives that the Line of Business or Staff Office (LOB/SO) has
    identified to be achieved or maintained in exchange for the retention
    incentive.
        Requests are initiated by the employee's manager and forwarded
    through channels to the head of the employee's LOB/SO within the FAA.
    If the Head of the LOB/SO concurs, the request is forwarded for review
    by the servicing Human Resource Management Office to validate any
    staffing information outlined in the request and to ensure compliance
    with FAA policy. The request is then presented to the Assistant
    Administrator for Human Resource Management for concurrence.
        The FAA administrator considers the request as the Reviewing
    Official. Only requests approved by the FAA administrator are forwarded
    to the Department of Transportation, Office of the Secretary for
    consideration. At the Department, the request first goes to the
    Departmental Office of Human Resource Management (DOHRM) for technical
    review to ensure it meets the requirements outlined in DPM-575 and FAA
    policy. The DOHRM office forwards each request to the Assistant
    Secretary for Administration for consideration. When the requested
    incentive amount is 25 percent or less of the employee's basic salary
    rate times the number of years required by the service agreement, the
    Assistant Secretary for Administration makes the final decision and
    serves as the Approving Official. If the amount requested exceeds that
    25 percent amount, the request must be forwarded to the Deputy
    Secretary of Transportation for decision as the Final Approving
    Official.
        The DOHRM notifies the FAA's Assistant Administrator for Human
    Resource Management of the final decision.
                                     ______

                Questions Submitted by Senator Dianne Feinstein
                           unmanned aircraft systems
        Question. Under the 2012 Federal Aviation Administration (FAA)
    Modernization and Reform Act, the FAA is directed to develop a
    ``comprehensive plan'' to integrate unmanned aircraft into the national
    airspace. The law sets a deadline for the integration of ``civil''
    drones--those in private hands--by ``no later than September 30,
    2015.'' It also instructs the FAA to integrate ``public'' drones--those
    in Government hands--on an expedited basis.
        I believe the integration of drone technology poses serious privacy
    risks--especially the danger of unwanted surveillance of the
    individual.
        Will you assure this subcommittee that the FAA will work with other
    appropriate agencies and Congress to establish rules protecting
    Americans' privacy before drones are integrated into the national
    airspace?
        Answer. The FAA engaged our interagency partners (including the
    National Aeronautics and Space Administration (NASA), the Department of
    Defense (DOD), and the Department of Homeland Security (DHS)) and
    sought input in the development of the FAA proposed privacy approach
    for the Unmanned Aircraft Systems (UAS) test sites.
        The FAA is analyzing the public input received regarding its
    proposed approach to include terms and conditions in the ``other
    transaction agreement'' (OTA) that would, among other things, require
    operators to develop privacy policies and make them publicly available.
    By the end of July 2013, the FAA plans to finalize the terms to include
    in the OTAs with the test site operators. The FAA will continue to work
    with appropriate agencies on the issue of privacy protection.
                     unmanned aircraft systems test ranges
        Question. Under the 2012 FAA Modernization and Reform Act, the FAA
    is directed to select six ``test ranges'' for the integration of drones
    into the national airspace. These test ranges are supposed to help
    develop certification standards, air traffic requirements, and to
    provide for verification of the safety of unmanned aircraft before
    their integration into the national airspace.
        What specifically does the FAA plan to test at these test ranges?
        Answer. We will consider how well an applicant's research goals
    align with the overarching goal of safely integrating UAS into the
    National Airspace System. In order to be selected as a site operator,
    the applicant must have a sound research plan consistent with the
    minimum areas identified in the FAA Modernization and Reform Act of
    2012.
        Question. Where will these drones fly when they are being tested?
    Will they be flown over populated areas?
        Answer. The exact location of the test ranges will not be known
    until the six test sites are selected. However, the selection process
    takes into consideration the test site operator's ability to assure the
    safety of people and property on the ground. The Screening Information
    Request contains nine specific safeguards to protect persons and
    property that must be addressed by the applicants. The FAA plans to
    complete the test site selection process by the end of 2013.
        Question. How can we be sure that these drones will not interfere
    with manned aircraft traffic?
        Answer. The evaluation will assess the applicant's ability to
    protect the safety of manned aircraft operations in or near the test
    range. Only sites with sound methods for protecting the safety of
    manned aircraft and people and property on the ground will be selected.
    The sites will not be authorized to operate until the FAA evaluates and
    approves the safety system.
        Question. I assume these test ranges will not be placed in highly
    populated areas--where the issues of safety and privacy would be most
    acute. Is that correct?
        Answer. The exact location of the test ranges will not be known
    until the six test sites are selected. However the selection process
    takes into consideration the test site operator's ability to assure the
    safety of people and property on the ground. The Screening Information
    Request contains nine specific safeguards to protect persons and
    property that must be addressed by the applicants.
        Question. Sites all across the country, including two in
    California, are competing to be these ``test ranges.'' Press reports
    say there are as many as 50 applicants in 37 States. The solicitation
    document (``Screening Information Request'') includes a number of
    factors for the FAA to consider in deciding where to put these test
    sites. I am deeply concerned that it accords no weight to whether an
    applicant has a better approach to privacy. Instead, the FAA put out
    its own privacy document for notice and comment. This simply says that
    applicants will be required to have a ``privacy policy,'' without
    specifying what (if anything) that policy must contain.
        Why has privacy been omitted as a factor in choosing these test
    ranges?
        Answer. The selection criteria incorporate factors that Congress
    directed the FAA to consider in the FAA Modernization and Reform Act:
    geographic and climatic diversity, location of ground infrastructure,
    and research needs. In March 2012, the FAA published a request for
    comments in the Federal Register, and in April 2012, FAA hosted two
    public webinars to obtain public input on the FAA proposed selection
    criteria. Although there was substantial public participation, the FAA
    did not receive comments advocating that privacy should be used as a
    factor in choosing the test sites.
        Subsequently, the FAA determined that it should address privacy
    considerations at the six test sites. The FAA elected to do so by
    proposing that the test sites comply with all applicable privacy laws
    and policy that they establish privacy policies that are informed by
    Fair Information Practice Principles--an approach that has been
    successfully applied by Government agencies in other contexts.
        Question. The FAA has already amended its solicitation document--
    most recently on March 20. Will FAA amend the solicitation again to
    make sure privacy is included as a factor in choosing the test sites?
    If not, why not?
        Answer. The FAA engaged our interagency partners (including NASA,
    DOD, and DHS) and sought public input in the development of the FAA
    proposed privacy approach for the UAS test sites.
        Rather than address privacy issues in the solicitation, each
    selected operator will be required to enter into an Other Transaction
    Agreement (OTA) with the FAA, which will set out the terms and
    conditions under which the entity will operate the UAS Test Site. The
    agreement will include a requirement for each operator to publish and
    comply with its privacy policy as it relates to the test sites.
        Question. You testified at the hearing: ``we're not in a position
    to make a determination of the content of the [privacy] plan, but what
    we would require is that [a test range] develop one, that they make it
    available to the public, and it is available for people to read and
    understand.'' Thus, according to your testimony, a privacy policy could
    essentially be devoid of content and still qualify. Why not--perhaps in
    consultation with the Federal Trade Commission or privacy advocates--
    make sure that the privacy policies adopted by the test ranges are
    strong, not weak?
        Answer. FAA will require the site operator to develop a privacy
    policy that is informed by Fair Information Practice Principles.
        The FAA has required each test site operator to be a public
    (governmental) entity and to publicly post its privacy policy. This
    promotes transparency and allows local stakeholders to ensure that the
    public entity operating the site develops privacy policies that address
    local concerns. The FAA believes that a public entity will be
    responsive to local stakeholder concerns.
        Question. You testified at the hearing: ``privacy is not something
    Congress asked us to look at, nor is it something that the FAA has the
    authority to regulate.'' But the portion of the 2012 FAA Modernization
    and Reform Act directed at unmanned aircraft clearly recognizes that
    unmanned aircraft have unique attributes that demand separate
    attention. One of those attributes is the unique privacy risks they
    pose. The law directs FAA to develop a ``comprehensive plan to safely
    accelerate the integration of civil unmanned aircraft systems into the
    national airspace system,'' which will then form the basis for final
    regulations. A plan that is ``comprehensive'' would include the
    paramount issue of privacy. In addition, the law lists a variety of
    broadly-phrased issues (mostly related to safety) that must be
    accounted for in the plan--but it also clearly says that these are the
    absolute ``minimum'' of what the plan must contain. It does not prevent
    FAA from considering the issue of privacy. Finally, the FAA's approach
    to date seems inconsistent with your statement. So far, FAA has put out
    a privacy document for notice and comment with respect to the six test
    ranges. This is supposed to result in a privacy strategy incorporated
    into FAA's agreement with the test ranges that are selected. Is it
    truly FAA's view that it has no authority over the issue of privacy and
    unmanned aircraft?
        Answer. The FAA has authority in 49 U.S.C. 106(l)(6) to issue the
    site operators an ``other transaction agreement'' (OTA) that will
    contain the legally binding terms and conditions under which the entity
    will operate the UAS site. That statute provides, in pertinent part:

        ``The Administrator is authorized to enter into and perform such .
    . . other transactions as may be necessary to carry out the functions
    of the Administrator and the Administration. The Administrator may
    enter into such . . . other transactions with . . . any State,
    territory, or possession, or political subdivision thereof . . . on
    such terms and conditions as the Administrator may consider
    appropriate.''

        Due to the concerns relating to privacy at the test sites, the FAA
    has proposed including terms in each OTA that will require site
    operators to establish a privacy policy.
        Although the authority in 49 U.S.C. 106(l)(6) allows the FAA to set
    the terms under which the test sites will operate, it does not
    authorize the FAA to establish privacy policy for manned or unmanned
    aircraft operations generally.
              unmanned aircraft systems airworthiness certificates
        Question. There are many FAA regulations that apply to private
    aircraft, which are called ``civil aircraft'' under FAA regulations.
    These regulations include the requirement that a civil aircraft be
    certified as airworthy, as well as the requirement that a civil
    aircraft be operated by a licensed airman. However, a great many of
    these regulations do not apply to ``public aircraft''--meaning those
    operated by government agencies like a local police or fire department.
    Thus, FAA regulation of police and other public aircraft generally is
    quite limited. For example, as I understand it, public aircraft are not
    required to have FAA airworthiness certificates, and those who fly them
    are not required to have FAA airman certificates. This regulatory
    approach is especially problematic with respect to drones, which raise
    a whole host of safety and privacy issues that are not raised by
    ordinary manned aircraft. Section 334 of the 2012 FAA Modernization and
    Reform Act can be read to address this issue. It specifically provides
    the FAA with authority over ``public unmanned aircraft systems,''
    meaning those operated by governmental agencies. It specifically
    directs the FAA to ``develop and implement operational and
    certification requirements for the operation of public unmanned
    aircraft systems.''
        Can you confirm that FAA intends to require (1) airworthiness
    certificates and (2) airman certificates with respect to the operation
    of civil unmanned aircraft?
        Answer. Acceptable standards for civil unmanned aircraft systems
    are under development in concert with the Radio Technical Commission
    for Aeronautics (RTCA) under the new special committee (SC) 228.
    Requirements for certificate of authorization/experimental category
    have already been published.
        Question. Will these requirements--in particular the airman
    certificate--be different for the operation of an unmanned aircraft,
    which in many respects is unlike an ordinary manned aircraft?
        Answer. The FAA will work with industry to develop standards for
    licensing civil pilots of unmanned aircraft. FAA is in the process of
    determining whether or not any regulatory changes are possibly needed.
        Question. Does FAA believe it possesses the authority to require an
    airworthiness certificate or an airman certificate with respect to
    public unmanned aircraft operations under section 334 of the 2012 act?
    If so, does FAA intend to use that authority?
        Answer. The FAA intends to comply with the provisions of the FAA
    Modernization and Reform Act's section 334 on Public Unmanned Aircraft
    Systems. The current regulatory structure requires public operators to
    make their own finding of compliance using their processes. FAA will
    issue guidance regarding a public entity's responsibility when
    operating an unmanned aircraft without a civil airworthiness
    certificate issued by the FAA. FAA is in the process of determining
    whether or not any regulatory changes are possibly needed.
      government accountability office report on unmanned aircraft systems
        Question. There remain serious concerns about whether drones can be
    safely integrated into the national airspace. I direct your attention
    to a September 2012 Government Accountability Office (GAO) report,
    which noted the following:

        ``GAO Reported in 2008 that UAS could not meet the aviation safety
    requirements developed for manned aircraft and that this posed several
    obstacles to safe and routine operation in the national airspace
    system. These obstacles still exist. . . .''

        The report, beginning at page 14, goes into detail about the
    serious issues that remain to be considered and addressed. As it notes:
    ``To date, no suitable technology has been deployed that would provide
    UAS with the capability to sense and avoid other aircraft and airborne
    objects.''
        The report also cites other issues, including vulnerabilities in
    command and control, unreliable UAS performance, the issues created by
    the separation of pilot and aircraft, and the transition to Next
    Generation Air Transportation System (NextGen).
        Is there currently technology that would allow a drone to detect,
    sense, and avoid other aircraft?
        Answer. Air Force Research Labs and NASA have demonstrated new
    technologies that are capable of detecting proximate aircraft and
    avoiding them. A standard to allow the certification of these
    technologies is under development by RTCA. The schedule for completion
    of the standard is mid-2016.
        Question. How are the other issues discussed in the GAO report
    being addressed?
        Answer. The FAA has tasked RTCA to develop standards for radios
    used in command and control functions in the portion of the spectrum
    allocated to safety of life uses. These standards will address many of
    the issues identified in the GAO report and allow for civil aircraft
    certification. The radio standards are scheduled for mid-2016.
        Question. If sense-and-avoid technology is not in place and other
    safety issues highlighted by GAO are not addressed, would FAA
    nevertheless proceed with full integration of UAS into the national
    airspace system?
        Answer. The primary mission of the FAA is safety. The FAA will only
    proceed with integration of UAS once safety issues have been
    appropriately addressed.
                                  armed drones
        Question. The question of armed drones has, as you may know, gotten
    a great deal of attention in Congress lately. One issue that appears
    unsettled is whether current FAA regulations prohibit the arming of a
    civilian aircraft, including a drone. Under FAA regulations, 14 CFR
    section 91.15: ``No pilot in command of a civil aircraft may allow any
    object to be dropped from that aircraft in flight that creates a hazard
    to persons or property. However, this section does not prohibit the
    dropping of any object if reasonable precautions are taken to avoid
    injury or damage to persons or property.''
        This regulation has been cited as authority for the point that FAA
    would not allow a civil unmanned aircraft to have a weapon affixed to
    it. Is this correct?
        Answer. FAA Regulation 14 CFR section 91.15 is used to determine
    the safety of installed equipment. This regulation currently prohibits
    the use of weapons on an aircraft.
        Question. Will FAA be more explicit in regulations that civil
    unmanned aircraft may not have weapons affixed to them?
        Answer. FAA Regulation 14 CFR section 91.15 is used to determine
    the safety of installed equipment. This regulation prohibits the use of
    weapons on an aircraft. However, FAA continues to evaluate whether or
    not regulatory changes are needed.
                           grants-in-aid for airports
        Question. The FAA's Grants-in-Aid for Airports, or the Airport
    Improvement Program (AIP), is the primary FAA program investing in
    runways, taxiways, and airport infrastructure. In fiscal year 2012,
    Congress appropriated $3.35 billion. The President's budget proposes to
    cut this to $2.9 billion.
        The needs of our commercial airports substantially outpace these
    resources. But a disproportionate amount of this program's funding (25-
    35 percent) is spent at airports without any commercial service on
    which almost all Americans travelers depend.
        25 to 35 percent is spent at noncommercial airports even though
    noncommercial aviation fuel taxes account for about 1 percent of the
    total Airport and Airway trust fund revenues each year.
        Unfortunately, the FAA's fiscal year 2014 budget proposes to
    prioritize airports without commercial service for Airport Improvement
    Program funds. The budget proposes that large hub airports cover their
    infrastructure costs by raising passenger facilities charges.
        Is it fair that only 65-75 percent of AIP funding is spent at
    airports with commercial service when commercial aircraft account for
    99 percent of revenue to the Airport and Airway Trust Fund?
        Answer. This is fundamental to the safety, efficiency and
    sustainability of the air transportation system. The perceived
    disparity between the source of Trust Fund revenues and the types of
    facilities it supports reflects the fundamental structure of the
    overall U.S. system of airports. Since the early 1900s, Federal policy
    has determined it is in the public interest to support a nationally
    integrated aviation system citing the benefits derived from maintaining
    a diverse geographic network of airports. Such a system facilitates
    rural and remote access, supports military and law enforcement needs,
    expedites emergency and disaster response, and ensures the timely
    transport and delivery of commercial goods. Moreover, many of the
    smaller, non-commercial facilities provide alternatives to airports
    handling commercial passengers, thereby reducing congestion and delay
    at commercial service airports. The functions supported by these
    smaller airports are critical. In 2012, the FAA published a study
    outlining a broad range of critical roles and functions the smaller
    airports serve, from basic access to flight training, emergency
    response, agricultural support, aerial firefighting, and many others.
        The larger commercial airports, especially large hub airports, have
    access to other means of capital, including, airport bonds and
    passenger facility charges (PFCs), not available to the smaller
    airports.
        For more than 30 years, the Airport Improvement Program (AIP) has
    helped State and local governments plan, develop, improve, and maintain
    a broad-based system of integrated airport facilities. The AIP provides
    capital funding to support 3,330 public use airports, heliports,
    seaplane bases, and landing areas included in the federally-mandated
    National Plan of Integrated Airport Systems (NPIAS).
        Question. Would the FAA support a provision requiring that at least
    75 percent of Airport Improvement Program Funding be spent at
    commercial airports?
        Answer. The FAA does not support either limiting the number of
    airports funded or the reducing the minimum level of funding provided
    to airports that are classified as non-commercial service airports.
        Question. Which investment is likely to benefit the greatest number
    of Americans: improving airports with commercial service or improving
    airports without any commercial service?
        Answer. The national integrated system needs to be maintained as a
    whole, with both categories of airports (commercial and non-commercial)
    able to meet the needs of the users that rely upon them, both directly
    and indirectly. While people are most familiar with the commercial air
    travel benefits offered at the 511 commercial service airports in the
    United States, nearly 3,000 smaller general aviation airports form an
    extensive airport network and make important social and economic
    contributions to society. In 2009, non-airline operators at general
    aviation airports flew an estimated 27 million flights for emergency
    medical services, aerial fire-fighting, law enforcement and border
    control, agricultural functions, flight training, time-sensitive air
    cargo services, search and rescue, and business travel. Many of these
    functions cannot be safely, efficiently, or economically supported at
    larger commercial service airports.
        In addition to providing unique general aviation benefits, non-
    commercial service airports provide a critical safety and efficiency
    complement to commercial service airports. Because of their sheer
    number and geographic distribution, general aviation airports provide a
    safety net to support commercial operators in the event of emergency
    aircraft diversions, medical emergencies, deteriorating weather
    conditions, or mechanical failures. In high-density metropolitan areas,
    general aviation airports act as ``relievers'' for congested commercial
    service airports by supporting high-volume activity by smaller and
    slower aircraft.
        In summary, it is crucial to our national life and economy that we
    continue to support both commercial-service and general aviation
    airports. The Airport Improvement Program has evolved over more than 30
    years to achieve precisely that goal.
                                helicopter noise
        Question. The fiscal year 2013 Senate Transportation, Housing and
    Urban Development, and Related Agencies (THUD) report stated: ``The
    Committee recognizes that the use of helicopters in Los Angeles County
    produces quality of life and safety impacts, prompting requests for FAA
    action. The Committee directs the FAA to solicit the views of
    interested parties, including representatives of local communities,
    regarding helicopter noise and safety issues in Los Angeles County no
    later than 90 days after the enactment of this act. The committee
    further directs the FAA to lead a collaborative effort with community
    representatives, elected officials, helicopter operators, and other
    affected interests to: (1) identify specific concerns with helicopter
    operations, including noise; (2) evaluate options that would respond to
    identified concerns including, but not limited to routes, operating
    altitudes, and hovering practices; and (3) develop solutions to the
    identified issues consistent with the FAA's statutory responsibilities.
    Potential solutions should not restrict helicopter operations needed
    for emergency, law enforcement, or military purposes. The committee
    directs the FAA to submit a report to the House and Senate
    Appropriations Committee within 12 months of enactment of this act
    regarding the helicopter concerns in Los Angeles County that have been
    identified, the progress in addressing these concerns including reasons
    why some measures were not retained for further study, and the
    mechanisms for implementing measures and monitoring their continuing
    effectiveness.'' In response, FAA Regional Administrator Bill
    Withycombe has held public hearings and is studying the problem. He has
    committed to releasing a report in May 2013 evaluating a full set of
    voluntary and regulatory options to reduce helicopter noise and address
    safety issues. The report is a necessary first step. But it must be
    followed by effective regulations.
        During the hearing, we were able to discuss this. You indicated
    that ``non-regulatory'' approaches to this problem were preferable
    because they could be implemented more quickly. However, I am very
    concerned that voluntary efforts are less effective than regulatory
    approaches. For instance, on Long Island, New York, FAA established
    voluntary routes for helicopters in 2008 without success. The FAA
    finally completed regulations imposing mandatory routes in 2012.
        If past voluntary efforts to curb helicopter noise above both Los
    Angeles and Long Island failed, why does the FAA believe that ``non-
    regulatory'' options will succeed above Los Angeles as a result of this
    latest effort?
        Answer. The FAA has had decades of success with fixed-wing
    aircraft, voluntary noise abatement measures that can be applied to
    noise abatement measures for helicopters. The FAA does not regard the
    voluntary efforts in New York or Los Angeles as a failure. In fact, the
    voluntary route along the north shore of Long Island, which was
    developed with input from local helicopter operators and airports,
    reportedly had a high rate of compliance and formed the basis for the
    regulation adopted last year.
        In contrast with the north shore of Long Island, the density of
    land use and the diversity of helicopter activity in Los Angeles make
    it difficult to identify noise abatement routes that would avoid
    residential areas. Some efforts to revise Visual Flight Rules (VFR)
    helicopter approach and departure tracks for Los Angeles-area airports
    to minimize noise have not yet produced feasible noise abatement
    routes. This reflects the challenges of safely routing aircraft in an
    urbanized environment rather than a failure of the collaborative
    process used to develop routes. These challenges make it more important
    to fully engage both the residents and helicopter operators in
    addressing noise issues in Los Angeles.
        A significant positive development of the current Los Angeles
    Helicopter Noise Initiative is that it has brought together community
    representatives and helicopter operators to consider, in conjunction
    with the FAA, specific noise-sensitive locations and helicopter
    operating practices that contribute to noise concerns on a regional
    scale. The group is committed to identifying measures that will provide
    noise relief without degrading safety or eroding business
    opportunities. This initiative has already identified targeted measures
    that can provide noise relief to residents. The FAA recommends the
    continued engagement of a robust local process and is prepared to
    support such a process to pursue remedies that will reduce helicopter
    noise, are responsive to community quality-of-life and economic
    interests, and are consistent with National Airspace System safety and
    efficiency.
        Question. Which approach to helicopter noise is most likely to
    reduce noise disturbance on the ground: regulatory or non-regulatory
    options?
        Answer. Success in reducing noise on the ground is directly related
    to the availability of effective noise abatement procedures, rather
    than the implementation mechanism. If a procedure can be designed to
    minimize noise impacts on residential or other noise-sensitive areas, a
    non-regulatory approach can provide just as much noise relief as a
    regulatory approach.
        The most effective and widely-accepted noise abatement measures are
    those that are developed in collaboration with stakeholders and are
    supported by local consensus. The FAA's experience is that voluntary
    noise abatement procedures have a high degree of compliance when
    operators can use them safely and efficiently. The current Los Angeles
    Helicopter Noise Initiative identifies actions and flexible approaches
    that offer the best opportunity to address helicopter noise issues
    within the Los Angeles County.
                                     ______

               Questions Submitted by Senator Frank R. Lautenberg
                        furloughs' impacts on facilities
        Question. The airspace over New Jersey is among the most congested
    in the country, with Newark Liberty Airport serving more than 33
    million passengers each year. The Federal Aviation Administration (FAA)
    has said it intends to apply sequestration in a way that prioritizes
    safety and impacts the fewest air travelers. I have long been concerned
    with the understaffing of air traffic controllers at Newark Liberty and
    I am concerned the sequestration-imposed air traffic controller
    furloughs will disproportionately impact this airport.
        In applying furloughs for air traffic controllers, did you account
    for the additional impact on facilities that are already understaffed
    prior to sequestration, such as the Newark Liberty tower?
        Answer. Yes. Individual facilities were able to determine how best
    to implement the furloughs to minimize disruption based on their shift
    scheduling and staffing requirements.
        Question. Newark Liberty has the highest washout rate of any air
    traffic tower in the country, so it recently had a simulator installed
    to help trainee performance. Will furloughs impact training time on the
    simulator?
        Answer. The funding relief provided by the Reducing Flight Delays
    Act of 2013 will enable the restoration of key support activities,
    including training simulation at Newark Liberty.
                          operations in newark airport
        Question. The fiscal year 2014 budget request proposes to transfer
    the responsibility for staffing the exit lanes adjacent to passenger
    screening checkpoints from the Transportation Security Administration
    (TSA) to commercial airport authorities. This issue is of particular
    concern to me because Newark Airport has seen numerous security
    breaches over the past few years. In 2010, a man breached an exit lane
    at Newark Airport without being screened and shut down the airport for
    more than 6 hours, affecting 16,000 passengers around the world.
        What impact could this transfer have on airport budgets and other
    operations funded by airports?
        Answer. The Transportation Security Administration determines the
    staffing levels, qualifications, and operational requirements necessary
    to meet Federal standards for airport exit lane staffing. TSA would be
    in the best position to quantify the operational and other related
    costs airports would assume in order to comply with TSA requirements.
    The FAA would not be in a position to determine the impacts of such
    decisions on a specific airport's operating budget.
        Question. What challenges would this transfer in responsibility
    present to Newark Airport and Atlantic City Airport?
        Answer. The TSA and operators of Newark Airport and Atlantic City
    are in the best position to provide specific details on the costs,
    personnel, and related operating expenses that would result from the
    transfer of specific TSA operations to the airport operator.
                         remote highjacking of aircraft
        Question. A German security consultant recently claimed to have
    developed technology that could be used to remotely hijack an airplane,
    alleging that current security systems do not have adequate
    authentication methods to ensure commands are from a legitimate source.
    The FAA released a statement saying it is aware of this claim and has
    said it does not pose a threat on actual commercial flights.
        What steps has the FAA taken to determine and ensure this is not a
    problem on commercial flights?
        Answer. The FAA along with Honeywell, the U.S. manufacturer of the
    system that was allegedly threatened, worked together to investigate
    the technical threat immediately after learning about the allegation.
    Honeywell quickly discerned and verified the methods and tools the
    hacker used to create the experiment. The theoretical threat was based
    entirely within a training system that runs on a desktop personal
    computer (PC) whose hardware and software differed significantly from
    actual aircraft equipment. A later version of the consultant's
    experiment, which appeared in media coverage, used a mobile phone
    application to communicate with his desktop PC. None of the experiments
    involved communication with an actual airplane.
        The FAA determined that the hacking technique described during the
    recent computer security conference does not pose a flight safety
    concern because it does not work on any actual, certified aircraft
    hardware or software.
        Question. When did the FAA become aware of this application?
        Answer. The FAA first learned of the alleged threat on March 22,
    2013, when the security consultant was preparing a briefing for a
    computing conference in Amsterdam, the Netherlands. Our investigation
    was completed before the conference began. Honeywell, the European
    Aviation Safety Authority, and the German Police made the consultant
    aware of the deficiencies in his allegations before the conference. The
    consultant chose nevertheless to deliver his presentation on April 8,
    2013.
        Question. Will you commit to reviewing the potential threat and
    updating me on steps being taken to address any deficiencies in our
    security systems that could leave an aircraft open to an attack of this
    nature?
        Answer. We have reviewed the threat, determined it to be false,
    and, as a result, plan no further action at this time. The FAA provided
    this information to foreign civil aviation authorities and to the
    public in press releases. Our investigation, using all information
    available to us from the consultant and from Honeywell, has been
    completed to our satisfaction, with no credible threat found. The
    German consultant promised to provide more information to the FAA and
    Honeywell in support of his claim, but none has been received.
        Question. Are current laws, specifically on cyber security,
    sufficient to address the nature of this threat?
        Answer. The FAA believes current laws are sufficient to address the
    nature of this threat. Aircraft certification regulations under title
    14 Code of Federal Regulations, including special conditions we levy on
    new aircraft programs which use networked or accessible computing
    systems, require aircraft manufacturers to design security features
    into their on-board systems. Numerous other Federal laws, outside the
    scope of our certification mandate, would forbid and impose punishments
    for the act by a hacker of attempting an attack against an aircraft.
                           contract weather observers
        Question. Major airports, such as Newark Liberty, are required to
    employ certified contract weather observers to ensure the accuracy of
    weather reports provided to the airlines and the public. Due to
    sequestration, we have heard concerns that the FAA may consider closing
    down the contract weather observation program and transferring the
    observation responsibilities to air traffic controllers.
        Is the FAA proposing to eliminate the contract weather observation
    program?
        Answer. The fiscal year 2014 President's budget request includes
    sufficient funding to continue the contract weather observation
    program.
        Question. If so, what would be the impact of transferring weather
    observing responsibilities to air traffic controllers? Specifically,
    what would the implications be at Newark Airport, given that the Newark
    air traffic control tower is already understaffed?
        Answer. The fiscal year 2014 President's budget request includes
    sufficient funding to continue the contract weather observation
    program.
                   next generation air transportation system
        Question. To upgrade the air traffic control system, the FAA is
    implementing the Next Generation Air Transportation System (NextGen) to
    reduce gridlock, delays, and safety concerns through a satellite-based
    system. The William J. Hughes Technical Center in New Jersey--the
    Nation's premier facility for aviation research, development, and
    testing--currently conducts NextGen research.
        How will NextGen research and implementation be impacted by the
    fiscal year 2014 budget?
        Answer. The fiscal year 2014 NextGen investment portfolio totals
    $1.002 billion, of which $928.1 million is allocated to Facilities and
    Equipment (F&E), $61.4 million to Research, Engineering and Development
    (RE&D), and $12.6 million to Operations activities.
        The fiscal year 2014 NextGen F&E budget request is $928.1 million,
    an increase of $65.3 million above the fiscal year 2012 enacted level.
    This level of F&E program funding enables the agency to continue
    support of near-term NextGen commitments. The funding allows the
    migration of pre-implementation activities from NextGen-Reduced Weather
    Impact solution set into an implementation program beginning in fiscal
    year 2014.
        The fiscal year 2014 NextGen RE&D budget request is $61.4 million,
    an increase of $1.7 million above the fiscal year 2012 enacted level.
    This allows us to continue the progress we've made in NextGen-specific
    research into wake turbulence, human factors, and clean aircraft
    technologies.
        The fiscal year 2014 NextGen Operations budget request is $12.6
    million; an increase of $0.2 million above the fiscal year 2012 enacted
    level. This level of Operations activities continue to support the
    dedicated full-time equivalents (FTEs) required to implement NextGen.
        The NextGen investment portfolio enables the implementation of
    Performance Based Navigation (PBN) procedures. The PBN is an aircraft
    navigation capability which allow for greater operational flexibility.
    An example is reducing the environmental footprint of greenhouse gas
    emissions and noise created by the aviation industry.
        Finally, the FAA NextGen capabilities continue to provide
    significant improvement to the aviation industry; such as:
      --System Wide Information Management (SWIM).--Allows operators to
            make better-informed decisions that improve their efficiency.
            This capability has been demonstrated by receiving surface
            movement data through this single portal at 19 external
            consumers.
      --Automatic Dependent Surveillance-Broadcast (ADS-B).--Transform the
            Nation's air traffic system by utilizing global satellites to
            provide more precise location data. This capability has been
            demonstrated by supporting surface advisory services at 24
            airports.
                                     ______

                    Questions Submitted by Senator Mark Kirk
                                contract towers
        Question. The Federal Aviation Administration (FAA or
    Administration) issued an appeals process for contract towers slated
    for closure and established four criteria for national security
    concerns that the FAA would evaluate.
        Did the Administration rank all the appeals in order of national
    security importance? If not, how were decisions made regarding what met
    the FAA's criteria? If they were ranked, please provide the list of
    airports and towers in order of national security interest priority for
    all airports that appealed the closure decision.
        Answer. The FAA did not rank the airports by order of national
    security. The FAA considered all of the input provided by the
    Department of Defense (DOD) and other agencies during the review
    process. FAA coordinated with the DOD, and the DOD provided FAA with
    feedback on their top priorities. In addition, the FAA coordinated with
    the Transportation Security Administration (TSA), the United States
    Coast Guard (USCG), the United States Secret Service (USSS), the
    Federal Bureau of Investigation (FBI) and the U.S. Marshal Service.
        Question. Did FAA conduct a separate and distinct safety management
    assessment for each impacted contract tower prior to the closure
    announcements?
        Answer. The FAA conducted a safety assessment for each tower prior
    to implementation of any proposed change as required by FAA
    regulations. In accordance with Air Traffic Organization (ATO) Order JO
    1000.37, the Air Traffic Organization Safety Management System, and the
    Air Traffic Organization Safety Management System Manual (SMS Manual):
    all proposed changes to the National Airspace System (NAS) require
    Safety Risk Management (SRM) evaluation. SRM is broadly applied to
    changes that may affect the NAS to ``ensure that hazards are identified
    and unacceptable risk is mitigated and accepted prior to the change.''
        This includes ``any change to or modification of airspace;
    airports; aircraft; pilots; air navigation facilities; air traffic
    control (ATC) facilities; communication, surveillance, navigation and
    supporting technologies and systems; operating rules, regulations,
    policies, and procedures; and the people who implement, sustain, or
    operate the system components.''
        The level at which an SRM is conducted varies by organization,
    change proponent and/or type of change. In some cases, SRM Panels will
    perform SRM at the national level, and in other cases, SRM Panels will
    perform SRM at the service area or local level. There are five phases
    of a SRM safety analysis, which culminates in a Safety Risk Management
    Document (SRMD). A SRMD describes the safety analysis for a proposed
    change and documents the evidence to support whether the proposed
    change is acceptable from a safety risk perspective. The SRMD is
    intended to enable the relevant management officials to understand the
    proposed change, its associated risks, and corrective steps taken (or
    proposed) to reduce the initial and subsequent residual risks to an
    acceptable level.
        Prior to the decision or announcement to withdraw funds from
    Federal contract towers, subject matter experts (SME) from the Air
    Traffic Organization (ATO) and other FAA offices, namely Flight
    Standards and Airports, conducted a thorough review of the safety
    implications and determined that the FAA had adequate and long-standing
    controls to address the risk associated with the potential closure of
    towers and the transfer of airspace among facilities. In fact, all but
    one of the identified towers close for several hours each day; so, the
    FAA was assured that any potential closure or airspace transfer
    procedures and processes are exercised daily; although a permanent
    closure might require additional planning requirements. Additionally,
    there are approximately 5,000 non-towered public use airports in the
    United States with daily operations; which validates the safety of
    those environments.
        Following the determination that sufficient and long-standing
    safety standards and processes exist to operate at both towered and
    non-towered environments, ATO convened an SRM Panel from April 2-4, to
    ensure that stakeholders had an opportunity to address hazards and/or
    potential mitigations assuming a worst case scenario where all 149
    towers would close and transition to non-towered operations; and, to
    develop additional risk controls and, if needed, implement them before
    any tower closures.
        Question. Why did the FAA choose to cut specific towers completely
    from the program instead of reducing contract support for the entire
    program?
        Answer. The FAA guiding principle, as we planned for sequester, was
    to minimize the impact to the greatest numbers of passengers.
    Therefore, initial plans impact smaller, lower activity locations more
    significantly than locations serving larger blocks of passengers. The
    criteria used identified towers that had less than 150,000 total
    operations and 10,000 commercial operations annually.
                             sequester coordination
        Question. You have obviously been working on a sequestration plan
    for some time and have known the potential impacts have a cascading
    effect. Air travel is a joint effort between several agencies including
    FAA, TSA and Customs.
        Given your travel prognosis, what type of coordination have you
    done with TSA and Customs?
        Answer. As part of sequestration planning efforts, numerous
    operational components of the FAA, TSA, and Customs and Border
    Protection (CBP) participated in several interagency telecons to
    discuss possible trans-agency impacts and mitigation strategies.
    Additionally, there was frequent contact between the FAA, TSA, and CBP
    at the managerial and executive levels to exchange information and
    discuss ways to synchronize mitigation efforts.
        Question. If no coordination occurred, why didn't the
    Administration work out a strategy in advance? There have been several
    weeks of lead-up to this situation; why would you wait until the last
    minute to release your plan to the industry and Congress?
        Answer. As we have planned for and implemented measures to achieve
    the mandatory sequester reductions, we have consistently shared the
    potential impact that sequester could have on the National Airspace
    System with Congress, the aviation sector, our employees, and the
    traveling public. As early as February, we advised that we expected the
    automatic cuts to have a significant adverse impact on the aviation
    system and air travelers. We urged our stakeholders to work with us to
    minimize these impacts to the extent possible. Our outreach included
    written communications, congressional briefings, meetings, and
    testimony on Capitol Hill.
                                     ______

                  Questions Submitted by Senator John Boozman
                       general aviation alternative fuels
        Question. The administration included funding in the fiscal year
    2014 budget for an Alternative Fuels for General Aviation program that
    seeks to move the work of the Federal Aviation Administration (FAA) and
    industry from research to a phase focused on coordinating and
    facilitating the fleet-wide evaluation, certification and deployment of
    an unleaded fuel in piston engine aircraft. Why is this program
    important?
        Answer. The intent of this initiative is to implement an unleaded
    fuel for piston-powered aircraft engines to replace the current leaded
    aviation gasoline (avgas) 100 low lead (100LL). The continuation of FAA
    research is necessary to test, identify, and approve a replacement fuel
    that can be safely used by as much of the existing fleet of aircraft as
    possible. This program is important for human health impacts, fuel
    security, and the continued viability of the general aviation
    community.
        Aviation gasoline (avgas) is a vital element of the piston engine
    aircraft safety system. Approximately 167,000 aircraft in the United
    States and 230,000 worldwide rely on 100LL avgas for safe operation.
    100LL is the only remaining transportation fuel that contains the
    additive tetraethyl lead (TEL). TEL has been used as an avgas additive
    for decades to create the high octane levels required to prevent
    detonation (engine knock) in high power aircraft engines. Operation
    with inadequate fuel octane can result in engine failure in flight and
    aircraft accidents.
        The U.S. Environmental Protection Agency (EPA) is currently
    evaluating the health and environmental impacts of lead emissions from
    aircraft, and has identified that general aviation contributes to
    possible violations of ambient air quality lead standards. Petitions
    and litigation from environmental organizations have called for the EPA
    to consider regulatory actions to eliminate or reduce lead emissions
    from aircraft. These activities raise concerns about the continued
    availability and use of leaded avgas.
        Equipment manufacturers, owners and aircraft operators fear that
    the uncertainty about the future availability of a safe fuel for their
    airplanes is affecting the value of existing aircraft, impacting new
    aircraft development, and affecting the growth of the general aviation
    market. In response to the rapidly increasing concerns expressed by the
    general aviation community regarding the continued availability of
    100LL, the Unleaded AVGAS Transition Aviation Rulemaking Committee (UAT
    ARC) was chartered on January 31, 2011, by the Federal Aviation
    Administration (FAA) Administrator. The final report of the UAT ARC can
    be found on the FAA Avgas Web site at the following URL: http://
    www.faa.gov/about/initiatives/avgas/ in the Archived Articles section.
        The UAT ARC recommended that the FAA collaborate with industry to
    establish an unleaded avgas testing and evaluation program that would
    facilitate the development, approval and deployment of a replacement
    fuel for 100LL that would have the least possible impact on the
    existing fleet of aircraft. It was recommended that this program rely
    on the vast experience of the FAA William J. Hughes Technical Center to
    perform this testing. The research to be conducted at this facility
    will shift from developing a drop-in unleaded fuel to testing and
    identifying the best possible replacement unleaded fuel.
        In addition, section 910 of the 2012 FAA Modernization and Reform
    Act specifies Research, Engineering and Development (RE&D) requirements
    to facilitate the transition to unleaded avgas. The FAA has developed a
    plan to implement the recommendations of the UAT ARC and will integrate
    the fuel evaluation and testing program with the requirements of
    section 910.
        Finding a safe, high octane unleaded replacement for leaded avgas
    is an ongoing technical challenge that can benefit greatly from
    continued FAA research. Piston engine aircraft are used for many
    purposes including business and personal travel, aerial surveys,
    agriculture, firefighting, law enforcement, medical emergencies,
    express freight, and instructional flying. The collective, continued
    service of piston engine aircraft in an operationally safe manner is
    essential. This program, to develop and promote an unleaded replacement
    avgas, will address environmental concerns associated with leaded fuels
    and provide a safe option for the general aviation industry.
                             certification process
        Question. In the last FAA reauthorization, Congress included
    language to identify some needed reforms in the certification process.
    These reforms would focus FAA resources more effectively on safety
    critical activities and also begin to address the certification backlog
    that threatens the competitiveness of the U.S. aviation industry.
        Are you moving forward with implementation of these reforms?
        Answer. Yes. The Aircraft Certification Service (AIR) developed an
    implementation plan, issued on August 13, 2012, to address the reforms
    identified in section 312 of the FAA Modernization and Reform Act of
    2012. The implementation plan addresses each of the six recommendations
    developed from an industry and FAA assessment of the existing
    certification and approval processes. As individual projects or
    improvements from the implementation plan are completed, we will
    measure how effective the change was in addressing specific goals. This
    will allow us to iterate the process to continue the improvement until
    the goal has been fully met.
        Question. What is the most challenging aspect of these
    improvements?
        Answer. The Aircraft Certification Process Review and Reform
    (ACPRR) Aviation Rulemaking Committee (ARC) submitted the following
    recommendations to the Director of Aircraft Certification on May 22,
    2012:
      1. Development of Comprehensive Means To Implement and Measure the
            Effectiveness of Implementation and Benefits of Certification
            Process Improvements;
      2. Enhanced Use of Delegation;
      3. Integrated Roadmap and Vision for Certification Process Reforms;
      4. Update Part 21 To Reflect a Systems Approach for Safety;
      5. Culture and Change Management; and
      6. Process Reforms and Efficiencies Needed for Other Aircraft
            Certification Service (AIR) Functions.
        Recommendations from the ARC were included in a report provided to
    Congress on August 13, 2012. The FAA fully supports these
    recommendations and developed a comprehensive implementation plan
    consisting of 14 initiatives addressing each item. Implementation
    actions began in 2012, in advance of the act requirement to begin
    implementation no later than February 14, 2013.
        There are two large and comprehensive rulemaking projects to update
    part 21 and reorganize part 23. These are multi-year projects that
    require extensive coordination within the Government and with industry.
    Another challenge is to streamline the adoption of airworthiness
    directives issued by other civil airworthiness authorities. This
    initiative includes an evaluation of statutory impediments.
        Question. Do you have the resources to manage these changes?
        Answer. In fiscal year 2013 we have allocated sufficient resources
    to initiate certification process reforms. The 2014 budget request also
    fully supports this work. However, this is a difficult budgetary
    environment. In fiscal year 2013 under sequestration, we instituted a
    hiring freeze for FAA beginning March 1. Staffing levels can impact
    progress on our implementation plan, and as a result we are closely
    monitoring attrition and overall staffing levels.
                                contract towers
        Question. Congress recently enacted legislation giving the FAA
    flexibility to: (1) end furloughs that threaten to disrupt our economy
    and destroy jobs that depend on air travel; and (2) prevent the planned
    closure of 149 contract towers.
        When will you announce your plan to carry out the clear,
    unambiguous intent of Congress and forestall the planned closure of 149
    towers that had been schedule to start on June 15, 2013?
        Answer. Secretary LaHood announced on Friday, May 10, 2013, that
    the Department of Transportation (DOT) has determined that the recently
    enacted Reducing Flight Delays Act of 2013 will allow the FAA to
    transfer sufficient funds to end employee furloughs and keep the 149
    low-activity contract towers, originally slated for closure in June,
    open for the remainder of fiscal year 2013.
          business aviation and general aviation--economic impact and
                                 opportunities
        Question. Aviation manufacturing and businesses that utilize
    general aviation (GA) are critical to economic opportunity in Arkansas
    and across our country. General aviation pumps more than $1 billion
    into the Arkansas economy every year, and our State is a proud home to
    large and small manufacturers that serve the general aviation sector,
    as well as other businesses that service and/or rely on GA aircraft.
    Our country is a leader in aviation manufacturing and technology, and
    this sector provides tremendous opportunities for growth and export. GA
    is a diverse sector that includes medical transport, business aviation,
    agricultural aviation, search and rescue, recreational flying, aerial
    firefighting, air charter, bush flying, and a variety of other
    activities.
        I remain concerned about political rhetoric that castigates
    business aviation and general aviation to score cheap political points.
    Do you believe that business aviation is essential to economic strength
    and job opportunities in our country, and do you believe that it should
    not be unfairly targeted as an activity deserving disparate treatment
    under Federal law?
        Answer. The FAA recognizes the critical role general aviation (GA)
    plays in supporting jobs and generating significant economic activity
    for the country. FAA's latest aviation forecast sees growth in business
    aviation demand over the long term driven by a growing U.S. and world
    economy especially in the turbo jet, turboprop and turbine rotorcraft
    markets. As the fleet grows, the number of general aviation hours flown
    is projected to increase an average of 1.5 percent a year through 2033.
        Support for GA is part of the administration's goal to invest in
    the Nation's transportation infrastructure. The U.S. Department of
    Transportation and the Federal Aviation Administration (FAA) continue
    to invest in and improve GA and airports that serve GA through ongoing
    initiatives including direct support to airports, Next Generation Air
    Transportation System (NextGen) safety enhancements, and improving
    access to data.
        Question. Will you address the importance of general aviation to
    our economy?
        Answer. According to a study done by the FAA in 2011, general
    aviation operations added nearly $39 billion and approximately 496,000
    jobs to the United States economy. To support the Nation's GA airports,
    FAA awards an average of $1 billion in Airport Improvement Program
    (AIP) grants annually. These grants help GA airports fund safety,
    capacity, standards and environmental improvements. Moreover, under the
    State Block Grant Program, participating States are allowed to
    administer AIP funds at non-primary airports. In addition, FAA has been
    working with the GA community on an ongoing study to develop a
    strategic plan for GA airports in the United States.
        Through NextGen, the FAA has demonstrated its commitment to
    ensuring improved access and level of service for GA operators. For
    example, with the implementation of new technologies and procedures for
    the Wide Area Augmentation System (WAAS), and Localizer Performance
    with Vertical Guidance (LPV), GA operators have unprecedented access to
    airports where no ground-based instrument landing systems exist. Using
    these technologies and procedures, GA aircraft can land at airports
    even when visibility is limited. As of February 2012, there were nearly
    2,800 WAAS LPV approach procedures to more than 1,400 airports
    throughout the United States.
        Enhancing safety in GA operations is an FAA priority and is
    critical to supporting the growth of GA. Reducing the fatal accident
    rate for GA is one of the agency's strategic goals. We are also
    improving tracking of aircraft position and providing GA operators with
    tools that provide increased awareness of weather, terrain, aircraft
    and other conditions in the national airspace. Through another NextGen
    technology, Automatic Dependent Surveillance-Broadcast (ADS-B), GA
    pilots will have greater situational awareness.
        To further enhance access and capabilities of GA aircraft and
    pilots, the FAA is currently developing technologies and policies that
    make FAA data more accessible to GA pilots through Internet-based
    portals. These portals support open government initiatives and will
    enable individual pilots to access new sources of information. The FAA
    is also making data and services more accessible through the use of new
    tools like the Apple iPad, which, when used as an Electronic Flight
    Bag, can be used for viewing navigational charts and approaches to
    airports.
        Through these initiatives, FAA continues its active support of the
    GA industry.
                                   user fees
        Question. The administration's use-fee proposal could potentially
    levy a fee on aircraft used to conduct aerial application activities by
    thousands of dollars per day, since they take off and land frequently
    to treat farmers' crops. This would cause great harm to farmers, aerial
    applicators, and food consumers.
        Are you concerned about the impact this proposal would have on
    agricultural aviation and other users that require frequent take offs
    and landings?
        Answer. This proposal would create a per flight fee by aviation
    operators who fly in controlled airspace. Military aircraft, public
    aircraft, recreational piston aircraft, air ambulances, aircraft
    operating outside of controlled airspace, and Canada-to-Canada flights
    would be exempted. Aircraft conducting aerial application activities
    and that fly outside of controlled airspace, like those used in
    agricultural aviation, would not pay the flight surcharge fee.
           agricultural aviation and low-level airspace safety issues
        Question. Agricultural aviation is extremely important to many
    Arkansas farmers. Do you recognize the importance of this niche sector
    in the aviation community, and will you commit to work with
    stakeholders and with my office to address the unique needs and
    concerns of this sector?
        Answer. The Federal Aviation Administration recognizes the vital
    link between the agricultural aviation industry and American farmers,
    including those in the State of Arkansas. In order to communicate with
    this specific industry segment, we have participated in meetings hosted
    by the Arkansas Agricultural Aviation Association. In addition, we have
    a long-standing partnership with the director for the Arkansas
    Department of Aeronautics, including meetings on at least a quarterly
    basis to exchange updates on aviation topics of interest at the State
    and/or Federal levels.
        At the regional level, our staff performs regularly scheduled
    outreach efforts with congressional staff to address any identified
    State-level issues of interest and share updates on agency efforts
    related to local areas of interest including NextGen, Unmanned Aircraft
    Systems, and obstacle evaluation, marking and lighting efforts.
        Question. The FAA is rightly working to integrate Remotely Piloted
    Aircraft (RPAs) into the airspace. As this work continues, what is the
    Administration doing to ensure other, long-standing users of low-level
    airspace, such as aerial applicators, are protected from mid-air
    collisions and other operations that may prevent them from safely and
    effectively treating crops, protecting the public health, and combating
    forest fires at low levels?
        Answer. The integration of Unmanned Aircraft Systems (UAS) into the
    National Airspace System (NAS) will require the FAA to carefully
    evaluate safety impacts on current NAS users, regardless of their
    altitude, size, or mission. Once the FAA has evaluated the safety
    impacts for a specific type of UAS operation, we will develop the
    appropriate regulatory requirements and risk mitigation strategies. We
    will ensure that UAS operations do not diminish safety or increase risk
    to persons or property in the air or on the ground.
        Question. What is the status of the feasibility study FAA is
    conducting on the development of a database that would show the
    location of free-standing and guy-wired towers below 200 feet?
        Answer. The FAA has completed the analysis as directed in section
    219 of the FAA Modernization and Reform Act (Public Law 112-95). Our
    report is in final executive review and will be delivered to Congress
    in the near future.
        Question. Does FAA believe it possesses the authority to require an
    airworthiness certificate or an airman certificate with respect to
    public unmanned aircraft operations under section 334 of the 2012 act?
    If so, does FAA intend to use that authority?
        Answer. The FAA intends to comply with the provisions of the FAA
    Modernization and Reform Act's section 334 on Public Unmanned Aircraft
    Systems. The current regulatory structure requires public operators to
    make their own finding of compliance using their processes. FAA will
    issue guidance regarding a public entity's responsibility when
    operating an unmanned aircraft without a civil airworthiness
    certificate issued by the FAA. FAA is in the process of determining
    whether or not any regulatory changes are possibly needed.
        Question. I am told that agricultural aviation interests have
    requested that the FAA expand Advisory Circular (AC) No. 70/7460-1 to
    include marking guidance not just for meteorological evaluation towers
    under 200 feet but for all towers--freestanding and guy-wired. Is the
    FAA considering this expansion of the AC?
        Answer. Requirements to file notice under 14 CFR part 77 generally
    do not apply to structures at heights lower than 200 feet unless they
    are close to an airport environment. Meteorological evaluation towers
    (METs) under 200 feet do not meet the provisions of part 77 and the FAA
    does not conduct aeronautical studies to determine whether these
    structures are obstructions or whether they adversely impact air
    navigation. However, the FAA acknowledges that METs in remote, rural
    agricultural areas may be difficult to see by low-level agricultural
    flights operating under visual flight rules. It was the combined
    factors of these structures being in rural, remote areas, the speed of
    their construction, and skeletal composition that led to additional,
    limited marking guidance. Guidance was not applicable to METs that are
    erected in urban areas and far removed from rural agricultural spraying
    operations.
        The request to expand marking guidance for structures other than
    METs is not based on safety of flight issues. The guidance used for
    METs is not feasible or warranted for other structures under 200 feet.
    Other structures do not carry the same visibility concerns of skeletal
    METs, and additional marking guidance may cause an undue burden on the
    public.

                              SUBCOMMITTEE RECESS

        Senator Collins. This hearing is recessed.
        On next Thursday, April 25, at 10 a.m., we will hold a
    hearing on the Federal Housing Administration. Thank you all.
        [Whereupon, at 11:56 a.m., Thursday, April 18, the
    subcommittee was recessed, to reconvene at 10 a.m., Thursday,
    April 25.]

    TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES
                      APPROPRIATIONS FOR FISCAL YEAR 2014

                                  ----------

                             TUESDAY, JUNE 4, 2013

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:30 p.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Patty Murray (chairman) presiding.
        Present: Senators Murray, Collins, and Boozman.

                  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    STATEMENTS OF:
    HON. CAROL GALANTE, COMMISSIONER AND ASSISTANT SECRETARY FOR HOUSING,
                FEDERAL HOUSING ADMINISTRATION
    HON. DAVID A. MONTOYA, INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL

                   OPENING STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. The subcommittee will come to order.
    Senator Collins will be here in just a few minutes, but we'll
    go ahead and get started.
        But before we do begin, I do want to just take a moment to
    remember Senator Frank Lautenberg. He was a passionate public
    servant who wasn't afraid to fight for what he believed in. It
    goes without saying he was a wonderful member of this
    subcommittee, and he was actually former chairman of this
    subcommittee and added a really important voice to many of our
    housing and transportation issues. He was a tireless advocate
    for his State and for policies that protected Americans.
        He fought hard to make sure we funded Amtrak and banned
    smoking on airlines and raised the drunk driving standard. We
    owe him a tremendous debt. So I just wanted to start today by
    remembering him and letting his family know how much all of us
    have them in our thoughts and prayers.
        During this hearing this afternoon, we will hear from
    Federal Housing Administration (FHA) Commissioner Carol Galante
    and Housing and Urban Development (HUD) Inspector General David
    Montoya.
        I want to thank both of you for your patience with
    scheduling this hearing. Both Senator Collins and I had
    conflicts and had to move this around, and I really appreciate
    your coming and being here today. FHA is an important issue and
    your input is really valuable to this subcommittee. So thank
    you for accommodating our changes and welcome to both of you.
        It has been almost 6 years since the housing market
    collapsed. In the lead-up to that crisis, home prices were on a
    seemingly unstoppable upward climb while home ownership became
    a new reality for millions of Americans. But the promises made
    to homeowners and investors alike were too good to be true, and
    when the risks associated with these mortgages began to
    materialize, it was too late to stop the damage.
        When defaults and foreclosures skyrocketed, the impact was
    felt not only by the defaulting homeowners but by entire
    communities that watched their home values plummet, by
    investors who bet on these products and lost, and, of course,
    by older Americans who saw the value of their retirement
    savings tumble. During this crisis, FHA quickly stepped in to
    ensure a functioning mortgage market, and there's no question
    that intervening in the faltering housing market exposed FHA to
    greater risk.

                               FHA INSURANCE FUND

        But FHA took on this risk in order to support the broader
    housing market, and without its support, the cost to the market
    and to taxpayers today would likely have been far higher.
    Today, we are finally starting to see signs of recovery. New
    homes are being built. Home sales are up. Foreclosures are
    down, and home prices are now beginning to rise.
        But we are still dealing with the fallout from the housing
    market's boom and bust. While some homeowners are feeling
    relief from increased home prices, this is not true for
    everyone. I still hear from families that are underwater in
    their homes and unable to refinance. They feel trapped, unable
    to move to a new job or to a neighborhood with a better school.
    Unable to refinance at today's historically low rates, they
    remain saddled with excessive mortgage payments, money that
    could be better spent on family and at local businesses or
    saved for their kids' college education.
        We are acutely aware of the consequences for FHA and
    possibly the taxpayer, as the Mutual Mortgage Insurance (MMI)
    Fund has sustained significant losses in recent years. The
    President's fiscal year 2014 budget indicates that FHA may
    require taxpayer funding to cover the losses to its mutual
    mortgage insurance fund this year. This would represent the
    first time the fund would need taxpayer funding in its history.
        In the past 3 years, HUD has taken numerous steps to
    strengthen the fund. It has raised insurance premiums five
    times, it tightened its standards, and it placed new
    requirements on program participants. Yet the biggest drain on
    the fund continues to be those older loans originated at the
    height of the housing market when lending standards and program
    rules were too lax.
        So we must ensure that HUD has the authority it needs and
    is taking all the steps necessary to mitigate losses from those
    loans. This includes recovering money from servicers and
    lenders that did not follow HUD rules and regulations. The $25
    billion settlement that 49 States, the District of Columbia,
    and the Federal Government reached last year with the five
    largest servicers resulted in $684 million being returned to
    Federal housing programs.
        But the work determining responsibility for losses didn't
    stop with that settlement. FHA's Office of Inspector General
    (OIG) and the Department of Justice continue to investigate
    lenders to ensure that FHA is not paying for losses on loans
    that should never have been made.
        As a result, there have already been five further
    settlements, bringing the total amount returned to the MMI Fund
    to over $1.1 billion. I want to thank both the Commissioner and
    the Inspector General for the important work they're doing on
    that issue. The taxpayer should not have to pay for losses of
    lenders who did not follow the rules.
        We also need to ensure that the terms of settlement
    agreements are being honored. And I am concerned by recent
    reports that some of the banks may not be providing the relief
    to borrowers that they committed to under the terms of the
    settlement. So the work to hold the lenders accountable
    continues.

                        HOME EQUITY CONVERSION MORTGAGE

        While we must hold lenders accountable for not following
    the rules, we must also make sure that we have the right rules
    in place. As we discussed with the Secretary when he testified
    before us several weeks ago, the Home Equity Conversion
    Mortgage, or HECM, requires careful examination. This product
    can be a good option for seniors who want to stay in their
    homes as they get older. But the recent crisis has exposed
    serious flaws in this program, and it is clear that as
    currently designed, the program is not working for taxpayers
    or, in many cases, for borrowers.
        Some seniors and their families did not fully understand
    the product and are now facing foreclosure. These loans have
    resulted in significant losses to the MMI Fund. In fact,
    without the HECM mortgages, FHA's insurance fund would have a
    positive balance. HUD has suggested steps Congress can take to
    strengthen the program. I know the Inspector General's Office
    has studied this subject and suggested improvements as well.
        So I look forward today to a discussion on how we can work
    together to preserve a responsible product for people who need
    it while ending the practices and policies that add unnecessary
    risks to borrowers and to the FHA's insurance fund.
        In addition to HECM changes, HUD, its Inspector General,
    and the Government Accountability Office (GAO) have identified
    other steps that can be taken to strengthen FHA. For example,
    HUD has sought additional enforcement authority to ensure that
    unscrupulous lenders can't continue to originate FHA-insured
    loans. And the Inspector General has recommended changes to how
    HUD manages loans that experience early default.
        But it's also important to recognize many of these changes
    can't be made quickly or at all without the help of Congress.
    So we need to hear from both of you about what happens if
    Congress doesn't provide the necessary legislative authority to
    make additional program changes.
        We must also continue to ensure effective management of
    FHA's programs and operations. For many years, staffing
    challenges and outdated information systems have compromised
    effective management of FHA programs. HUD must have staff with
    the necessary skills to monitor its programs and understand the
    risks in both the market and its portfolio.
        In recent years, this subcommittee has provided HUD with
    resources to address its staffing needs, including funding for
    the recently established risk office. Since 2010, Congress has
    also invested millions of dollars in upgrading FHA's
    information technology (IT) systems to increase its efficiency
    and to better detect risk.
        The success of the FHA Transformation IT Project is
    critical to FHA's short- and long-term health. This
    subcommittee is closely following the management of this
    project, so I want to discuss its current status as well as its
    future.
        While HUD has made progress in improving its information
    systems and filling important positions, sequestration creates
    new challenges for FHA. HUD will be forced to make difficult
    decisions about which of its IT projects will continue to go
    forward and which ones will be slowed down or even canceled.
    Staff will be furloughed, and some positions lost through
    attrition may not be filled.

                                 SEQUESTRATION

        The broad consequence of sequestration cuts across the
    Government could also impact FHA. Sequestration threatens our
    fragile economy and housing market. The financial position of
    the MMI Fund benefits as the housing market and economy
    improve, but it will also suffer if our economy slows. So we
    have to continue to work for a fair and balanced solution that
    provides certainty to our Federal agencies and to the American
    people.
        The budget we recently passed in the Senate provides a path
    forward that balances responsible spending cuts with necessary
    investments. I look forward to working with my colleagues in
    both the House and Senate soon, I hope, to enact a responsible
    budget compromise.

                               PREPARED STATEMENT

        Ms. Galante and Mr. Montoya, both of you serve in important
    roles as we continue to deal with the consequences of the
    housing crash and think through the future of FHA and America's
    housing finance system, and I look forward to our discussion
    today.
        [The statement follows:]
                   Prepared Statement of Senator Patty Murray
                             lautenberg remembrance
        Before we begin, I'd like to take a moment to join my colleagues in
    remembering Senator Frank Lautenberg. Frank was a passionate public
    servant who was not afraid to fight and vote for what he believed in.
        As a member of this subcommittee and former Chairman, Frank added
    an important voice on the many housing and transportation issues we
    consider.
        He was a tireless advocate for his State and for policies that
    protected the safety of Americans, whether it was ensuring funding for
    Amtrak, banning smoking on airlines or strengthening the drunk driving
    standard. Frank gave everything he had to public service and those who
    served with him know that it gave him all the satisfaction in the
    world.
        He will be missed by all those who served with him on this
    committee and here in the Senate.
                              hearing introduction
        This afternoon we will hear testimony from Federal Housing
    Administration (FHA) Commissioner Carol Galante and Department of
    Housing and Urban Development (HUD) Inspector General David Montoya.
        I want to thank Commissioner Galante and Inspector General Montoya
    for their patience with the scheduling of this hearing. Both Senator
    Collins and I had scheduling conflicts that made it necessary to
    reschedule. But the FHA is an important issue and your input is
    valuable to this subcommittee, so thank you for accommodating the
    changes and welcome.
        It has been almost 6 years since the housing market collapsed. In
    the lead up to the crisis, home prices were on a seemingly unstoppable
    upward climb while homeownership became a new reality for millions of
    Americans.
        But the promises made--to homeowners and investors alike--were too
    good to be true. And when the risks associated with these mortgages
    began to materialize, it was too late to stop the damage. When defaults
    and foreclosures skyrocketed, the impact was felt not only by
    defaulting homeowners, but also by entire communities that watched
    their home values plummet, investors who bet on these products and
    lost, and older Americans who saw the value of retirement savings
    tumble.
        During this crisis, FHA quickly stepped in to ensure a functioning
    mortgage market. And there is no question that intervening in the
    faltering housing market exposed FHA to greater risk. But FHA took on
    this risk in order to support the broader housing market, and without
    its support, the cost to the market and to taxpayers today would likely
    be far higher.
        Today, we are finally starting to see signs of recovery:
      --new homes are being built;
      --home sales are up;
      --foreclosures are down; and
      --home prices are rising.
        But we are also still dealing with the fallout from the housing
    market's boom and bust. While some homeowners are feeling relief from
    increased home prices, this isn't true for everyone. I still hear from
    families that are underwater in their homes and unable to refinance.
    They feel trapped, unable to move for a job or to a neighborhood with a
    better school. Unable to refinance at today's historically low rates,
    they remain saddled with excessive mortgage payments--money that could
    be better spent on family and at local businesses, or saved for the
    kids' college education.
        We are acutely aware of the consequences for FHA--and possibly the
    taxpayer as the Mutual Mortgage Insurance (MMI) Fund has sustained
    significant losses in recent years.
                  losses to the mutual mortgage insurance fund
        The President's fiscal year 2014 budget indicates that FHA may
    require taxpayer funding to cover the losses to its Mutual Mortgage
    Insurance Fund this year. This would represent the first time that the
    fund would need taxpayer funding in its history. In the past 3 years,
    HUD has taken numerous steps to strengthen the fund. It has:
      --raised insurance premiums five times;
      --tightened its standards; and
      --placed new requirements on program participants.
        Yet the biggest drain on the fund continues to be those older loans
    originated at the height of the housing market when lending standards
    and program rules were too lax. So we must ensure that HUD has the
    authority it needs and is taking all of the steps necessary to mitigate
    losses from these loans. This includes recovering money from servicers
    and lenders that did not follow HUD rules and regulations. The $25
    billion settlement that 49 States, the District of Columbia, and the
    Federal Government reached last year with the five largest servicers
    resulted in $684 million being returned to Federal housing programs.
    But the work determining responsibility for losses did not stop with
    that settlement.
        FHA, HUD's Office of Inspector General, and the Department of
    Justice continue to investigate lenders to ensure that FHA isn't paying
    for losses on loans that should never have been made. As a result,
    there have already been five further settlements bringing the total
    amount returned to the MMI Fund to over $1.1 billion.
        I want to thank both the Commissioner and the Inspector General for
    the important work they are doing on this issue. The taxpayer should
    not have to pay for losses of lenders who didn't follow the rules. We
    also need to ensure that the terms of settlement agreements are being
    honored. I am concerned by recent reports that some of the banks may
    not be providing the relief to borrowers they committed to under the
    terms of the settlement. So the work to hold lenders accountable
    continues.
                     home equity conversion mortgage loans
        While we must hold lenders accountable for not following the rules,
    we must also make sure that we have the right rules in place. As we
    discussed with the Secretary when he testified before us several weeks
    ago, the Home Equity Conversion Mortgage, or HECM, requires careful
    examination. This product can be a good option for seniors who want to
    stay in their homes as they get older. But the recent crisis has
    exposed serious flaws in the program.
        And it is clear that, as currently designed, the program is not
    working for taxpayers, or in many cases, for borrowers. Some seniors
    and their families didn't fully understand the product and are now
    facing foreclosure. These loans have resulted in significant losses to
    the MMI Fund. In fact, without HECM mortgages, FHA's insurance fund
    would have a positive balance.
        HUD has suggested steps Congress can take to strengthen the
    program. I know the Inspector General's Office has studied this subject
    and suggested improvements as well. So I look forward to a discussion
    on how we can work together to preserve a responsible product for
    people who need it, while ending the practices and policies that add
    unnecessary risk to borrowers and FHA's insurance fund.
                              other areas of risk
        In addition to HECM changes, HUD, its Inspector General, and the
    Government Accountability Office (GAO) have identified other steps that
    can be taken to strengthen FHA. For example, HUD has sought additional
    enforcement authorities to ensure that unscrupulous lenders can't
    continue to originate FHA insured loans. And the Inspector General has
    recommended changes to how HUD manages loans that experience early
    default.
        But it is also important to recognize that many of these changes
    can't be made quickly, or at all, without the help of Congress. So we
    need to hear from both of you about what happens if Congress does not
    provide the necessary legislative authority to make additional program
    changes.
                                 fha operations
        We must also continue to ensure effective management of FHA's
    programs and operations. For many years, staffing challenges and
    outdated information systems have compromised effective management of
    FHA programs. HUD must have staff with the necessary skills to monitor
    its programs and understand the risks in both the market and its
    portfolio. In recent years, this subcommittee has provided HUD with
    resources to address its staffing needs, including funding for the
    recently established Risk Office.
        Since 2010, Congress has also invested millions of dollars in
    upgrading FHA's information technology (IT) systems to increase its
    efficiency and better detect risk. The success of the FHA
    Transformation IT project is critical to FHA's short and long-term
    health. This subcommittee is closely following the management of this
    project, so I want to discuss its current status, as well as its
    future.
                                 sequestration
        While HUD has made progress in improving its information systems
    and filling important positions, sequestration creates new challenges
    for FHA. HUD will be forced to make difficult decisions about which of
    its IT projects will continue to go forward and which ones will be
    slowed down, or even canceled. Staff will be furloughed and some
    positions lost through attrition may not be filled.
        The broad consequences of sequestration cuts across the Government
    could also impact FHA. Sequestration threatens our fragile economy and
    housing market. The financial position of the MMI Fund benefits as the
    housing market and economy improve, but it will also suffer if our
    economy slows.
        So we must continue to work for a fair and balanced solution that
    provides certainty to our Federal agencies and to the American people.
    The budget we recently passed in the Senate provides a path forward
    that balances responsible spending cuts with necessary investments. I
    look forward to working with my colleagues in both the House and Senate
    to enact a responsible budget compromise.
                                    closing
        Ms. Galante, Mr. Montoya, both of you serve in important roles as
    we continue to deal with the consequences of the housing crash and
    think through the future of FHA and America's housing finance system. I
    look forward to our discussion today.

        With that, I am delighted to be joined by my colleague,
    Senator Collins, and will turn to her for an opening statement.

                     STATEMENT OF SENATOR SUSAN M. COLLINS

        Senator Collins. Thank you very much, Madam Chairman. Thank
    you for holding this important hearing on the Federal Housing
    Administration and the future of the housing finance market. I
    join you in welcoming Commissioner Galante and Inspector
    General Montoya before the subcommittee this afternoon.
        The administration has made several announcements regarding
    our housing policies and programs. Yet there is much more that
    must be done to stabilize the housing market and to
    reinvigorate private sector participation. HUD faces many
    challenges in balancing the goal of strengthening responsible
    home ownership while minimizing the financial risk to the FHA
    and to the taxpayer.
        Eventually, FHA should play a more limited role, in my
    judgment, in the mortgage market and help encourage the private
    sector to reassert its primacy. Nevertheless, I believe there
    will always be some role for the FHA to play. Since its
    inception, FHA has provided mortgage insurance for more than 41
    million single family home mortgages and 53,000 multifamily
    mortgages.
        FHA continues to partner with current and prospective
    homeowners during these difficult economic times. In addition
    to helping FHA program participants refinance at lower interest
    rates, FHA also assists non-FHA homeowners in refinancing
    untenable mortgages. A financially sound FHA is an essential
    component in the recovery of the housing market. The weakening
    of our housing sector over the past several years has had a
    tremendous impact on families and communities throughout the
    Nation. The housing market is slowly coming back, but a
    sustained recovery is still uncertain.
        The agency's role has dramatically expanded since the
    beginning of this crisis. Prior to the housing collapse, FHA
    accounted for approximately 3 percent of the single family
    housing market, reaching upwards of 21 percent in the year
    2010. I am pleased to hear that HUD's FHA market share
    continues to decline as the housing market recovers and that
    we're now at about 14 percent of market share.
        It is, however, troubling to me that year after year, FHA
    is unable to meet its statutory requirement of maintaining a 2-
    percent capital reserve ratio. The President's fiscal year 2014
    request shows that FHA anticipates drawing on its permanent
    indefinite budget authority with Treasury for $943 million
    starting this fiscal year to hold in reserve against expected
    future losses. If FHA does draw funds from Treasury, it will
    mark the first time that it has ever needed to take this
    action.
        While HUD has taken a number of steps since January of this
    year to improve the program, I am concerned about the need to
    draw this level of funding at the end of the fiscal year. This
    is attributed to the poor performance of the HECM loans due to
    borrowers' longevity, house prices declining over recent years,
    as well as a failure to pay taxes and insurance. We need to
    ensure that borrowers, especially seniors, are not taken
    advantage of and are able to make informed decisions regarding
    their mortgages, both because of the impact on them, but also
    the impact on the fund.

                               PREPARED STATEMENT

        These are not easy issues to resolve, but they are
    critically important to our Nation's long-term economic health.
    I remain concerned that we must reform our present housing
    finance programs, and in doing so, we must remain mindful of
    the need to limit the exposure of taxpayers to additional
    financial losses.
        I look forward to working with the chairman, the other
    subcommittee members, and both of you on these important
    issues.
        Thank you.
        [The statement follows:]
                 Prepared Statement of Senator Susan M. Collins
        Chairman Murray, thank you for holding this important hearing on
    the Federal Housing Administration (FHA) and the future of the housing
    finance market. I join you in welcoming Commissioner Galante and
    Inspector General Montoya before our subcommittee this morning.
        The Administration has made several announcements regarding
    existing housing programs, yet there is much more that must be done to
    stabilize the housing market and reinvigorate private sector
    participation.
        The Department of Housing and Urban Development (HUD) faces many
    challenges in balancing the goal of strengthening responsible
    homeownership while minimizing the financial risk to FHA and the
    taxpayer. Eventually, FHA should play a more limited role in the
    mortgage market and help encourage the private sector to reassert its
    primacy.
        Since its inception, FHA has provided mortgage insurance for more
    than 41 million single-family home mortgages and 53,000 multifamily
    mortgages.
        FHA continues to partner with current and prospective homeowners
    during these difficult economic times. In addition to helping FHA
    program participants refinance at lower interest rates, FHA also
    assists non-FHA homeowners in refinancing untenable mortgages. A
    financially sound FHA is an essential component in the recovery of the
    housing market.
        The weakening of our housing sector over the past several years has
    had a tremendous impact on families and communities throughout the
    Nation. The housing market is slowly coming back, but a sustained
    recovery is still uncertain.
        The agency's role dramatically expanded since the beginning of the
    housing crisis. Prior to the crisis, FHA accounted for approximately 3
    percent of the single family housing market; reaching upward of 21
    percent in 2010. I am glad to hear that HUD's FHA market share
    continues to decline as the housing market recovers, with just below 14
    percent of the market share.
        It is troubling that year after year, the FHA is unable to meet its
    statutory requirement of maintaining a 2 percent capital reserve ratio.
    The President's fiscal year 2014 request shows that FHA anticipates
    drawing on its permanent indefinite budget authority with the
    Department of the Treasury for $943 million during fiscal year 2013 to
    hold in reserve against expected future losses. If FHA does draw funds
    from Treasury, it will be the first time that it has ever needed to
    take this action. While HUD has taken a number of steps since January
    of this year to improve the program, I am concerned about the need to
    draw this level of funding at the end of the fiscal year. This is
    attributed to the poor performance of the home equity conversion
    mortgage (HECM) loans due to borrowers' longevity, home prices
    declining over recent years, as well as failure to pay taxes and
    insurance.
        We need to ensure that borrowers, especially seniors, are not taken
    advantage of and are able to make informed decisions regarding their
    mortgages.
        These are not easy issues to resolve, but they are critically
    important to our Nation's long-term economic health. I remain concerned
    that we must reform our present housing finance programs. In doing so,
    we must remain mindful to limit taxpayers' exposure to additional
    financial losses.
        I look forward to working with you on these important issues.

        Senator Murray. Thank you very much.
        With that, Ms. Galante, we'll begin with you.

                        STATEMENT OF HON. CAROL GALANTE

        Ms. Galante. Thank you, Chairman Murray and Ranking Member
    Collins. I appreciate the opportunity to testify today on the
    fiscal year 2014 budget proposal.
        Before I begin, I did want to take a moment to echo your
    comments and Secretary Donovan's statement in offering my
    condolences on the passing of Senator Lautenberg. As a Member
    of this body, he was a champion of preserving access to
    affordable housing for all Americans. I join you in mourning
    his passing.
        I also want to thank HUD's Inspector General, David
    Montoya, and his entire staff for their dedication and
    partnership as we work to protect FHA and taxpayers.
        FHA has played a significant role in lessening the severity
    of the financial crisis and contributing to our Nation's
    economic recovery, temporarily increasing its market share to
    ensure stability and preserve access to credit. However,
    playing this role during the crisis was not without an impact
    to our portfolio, requiring decisive action to strengthen FHA.
        The Mutual Mortgage Insurance Fund is already seeing strong
    results from our efforts to improve lender oversight,
    strengthen credit policies, increase premiums, improve loss
    mitigation and asset management, and establish a risk
    management office and portfolio surveillance capability. FHA's
    new books of business are the strongest in agency history.

                                 FHA SHORTFALL

        However, due to loans insured during the crisis as well as
    stress caused by the HECM reverse mortgage program, the 2014
    budget projects that FHA capital reserve will need support from
    the Treasury. The shortfall is estimated at $943 million. But,
    as you know, the level of support from Treasury will not be
    known until the end of the fiscal year. Second, this amount
    would be added to over $30 billion FHA already has in reserves.
        The fund's performance has continued to improve, and if
    losses from the HECM program are excluded, our actions and the
    ongoing recovery would leave the capital reserve at positive $4
    billion. We look forward to working with Congress on several
    legislative requests that will further strengthen the fund,
    increasing our ability to hold lenders accountable, improving
    recoveries on defaulted loans, and allowing FHA greater ability
    to respond quickly to risks as they emerge.
        One of these requests, granting FHA the explicit authority
    to make changes to the HECM program via mortgagee letters, is
    crucial. Given the challenges HECM currently faces, we must
    make further changes immediately, both to preserve the program
    and to minimize risk to the fund.
        FHA has also proven to be a critical source of financing
    quality affordable rental homes and healthcare facilities. In
    fiscal year 2012, FHA supported the construction, improvement,
    substantial rehabilitation, or refinance of nearly 234,000
    apartments and more than 91,000 beds in healthcare facilities.
    And while our multifamily and healthcare programs were not
    stressed as severely as the single family portfolio, we have
    nonetheless made substantial changes in our risk management and
    loan review processes, including increasing premiums for the
    first time in 10 years, protecting these programs for the
    future.
        For fiscal year 2014, we have requested $30 billion in
    commitment authority for multifamily and healthcare programs.
    Furthermore, we now estimate that the $25 billion approved for
    fiscal year 2013 will be insufficient to support the current
    level of program activity, including refinancing and
    strengthening our existing portfolio and providing financing
    for important initiatives such as the Rental Assistance
    Demonstration Program.
        Therefore, we are requesting an additional $5 billion in
    commitment authority for the remainder of the fiscal year.
    Without legislative action, we project that we will exhaust our
    current authority by mid August. In fact, this morning, I
    notified this subcommittee and others that as of today, we have
    exhausted 75 percent of our authority for the year.
        Finally, our 2014 budget request continues to support
    transforming the way HUD does business. This means addressing
    both the infrastructure and processes that support our
    operations, ensuring that they are compatible with the 21st
    century financial system. Given the dynamic nature of the
    mortgage market, it is vital that FHA has the ability to assess
    and analyze current market trends, borrowers, and lender data
    for risks.
        Through the FHA Transformation Initiative, we have made
    significant progress in developing and implementing a modern
    information technology environment. However, without dedicated
    and sustained funding, we will not be able to implement or
    maintain these improvements.
        Last, another part of our continued efforts is the
    reorganization and consolidation of the Office of Multifamily
    Housing at headquarters and in our field offices. These
    organizational improvements are being undertaken to ensure that
    even in a constrained budget environment we have an effective
    delivery model for the future.

                               PREPARED STATEMENT

        While the fiscal year 2014 budget is the result of many
    tough choices, it is also an opportunity for FHA to continue to
    support HUD's mission and our Nation's continuing economic
    recovery while effectively managing risk.
        Madam Chairman, thank you for the opportunity to testify
    today. I look forward to your questions.
        Senator Murray. Thank you very much.
        [The statement follows:]
                    Prepared Statement of Hon. Carol Galante
        Thank you, Chairman Murray and Ranking Member Collins, for this
    opportunity to discuss how the Department of Housing and Urban
    Development's (HUD's) fiscal year 2014 budget proposal will grow our
    economy from the middle class out--not from the top down--while
    supporting the recovery in our housing market and economy.
        As the President has said, housing is an important part of our
    economic recovery. In 2012, rising home values lifted 1.7 million
    families back above water and created $1.6 trillion in equity. New home
    construction levels are at their highest since before the financial
    crisis and new home purchases are up 12 percent over last year. The
    number of new foreclosure actions has been cut in half since the height
    of the crisis. And the Federal Housing Administration (FHA) has played
    a critical role in ensuring that we remain on the path to a complete
    recovery.
        This budget provides FHA with the ability to assist HUD in meeting
    three goals that are critical to the Agency's mission. Using a variety
    of strategies, it allows us to focus on strengthening the Nation's
    housing market to support the economy while also protecting consumers.
    And, despite the challenging fiscal climate, this budget allows us to
    meet the need for quality, affordable rental homes across the Nation.
    Finally, this budget continues our efforts to transform the way HUD
    does business--creating a more modern, efficient, and responsive
    agency.
     goal 1: strengthen the nation's housing market to bolster the economy
                             and protect consumers
        This Administration entered office confronting the worst economic
    crisis since the Great Depression--with mortgages sold to people who
    couldn't afford or understand them, while banks packaged them into
    complex securities on which they placed huge bets. And while this
    crisis was largely market driven, the American people have turned to
    Congress and the Administration for leadership and action in righting
    our Nation's housing market. HUD remains firmly committed to working
    together with communities and individuals to cope with the
    unprecedented challenges facing the housing market.
    Responding to the Market Disruptions and Serving Underserved
            Populations
        The Federal Housing Administration (FHA), along with the Government
    National Mortgage Association (GNMA), continues to have a significant
    impact on the Nation's economic recovery. The activities of the Federal
    Government are critical to both supporting the housing market in the
    short term and providing access to homeownership opportunities over the
    long term, and doing both in a way that minimizes risks to taxpayers.
        For fiscal year 2014, HUD is requesting $400 billion in loan
    commitment authority for the Mutual Mortgage Insurance Fund, which will
    provide an estimated 1.2 million single-family mortgages--at a
    projected $199.3 billion in loan volume for forward and reverse
    mortgage loans as well as loans insured under the FHA Short Refinance
    program for borrowers in negative equity positions. HUD is also
    requesting $30 billion in loan guarantee authority for the General and
    Special Risk Insurance Fund, which will provide an estimated 273,000
    units in multifamily housing properties and an estimated 75,700 beds in
    healthcare facilities. The need for this investment is clear as FHA
    continues to play an important countercyclical role that has offered
    stability and liquidity throughout the recession. While a recovery of
    the housing market is currently underway, FHA continues to act as a
    crucial stabilizing element in the market, by assuring ongoing access
    to credit for qualified first-time, low-wealth or otherwise underserved
    borrowers. However, FHA's expanded role is and should be temporary.
        FHA's share of the single family mortgage market (purchase and
    refinance transactions) has gone from a low of 3.1 percent of loan
    originations in 2005, up to a peak of 21.1 percent in 2010, and more
    recently down to 13.9 percent in the 3rd quarter of 2012 (U.S. Housing
    Market Conditions Report, 3rd Quarter 2012). In fact, the number of FHA
    single family loan endorsements by loan count, has declined to levels
    comparable to those seen in fiscal years 2002 and 2003, when FHA's
    market share was lower than it is today, indicating that FHA's current
    market share is primarily due to a substantial decrease in the size of
    the total mortgage market rather than exceptionally high FHA loan
    volumes. As the market continues to recover and private capital returns
    at more normal levels, FHA's role will naturally recede and FHA has
    demonstrated that it is committed to policies that facilitate this
    return. However, during this crisis, access to FHA insured financing
    has been critical to bolstering the housing market and providing access
    to credit to creditworthy, low-wealth borrowers.

        Figure 1. FHA Market Share as a Percent of Total Market

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        As has been true throughout its history, FHA is particularly
    important to borrowers that the conventional market does not adequately
    serve, including qualified borrowers who would otherwise be shut out of
    the mortgage market. According to the latest Home Mortgage Disclosure
    Act (HMDA) data, half of all African Americans who purchased a home in
    2011, and 49 percent of Hispanics, did so with FHA insured financing.
    Seventy-eight percent of the loans insured by FHA go to first time
    homebuyers.
    FHA Single Family Programs
                Redoubling Efforts To Keep Homeowners in Their Homes
        While there is work still to be done, HUD is proud of the progress
    this administration has made in tackling ongoing foreclosure
    challenges. Between April 2009 and February 2013, more than 6.4 million
    foreclosure prevention actions were taken--including nearly 1.7 million
    FHA loss mitigation and early delinquency interventions.
        As part of the Administration's commitment to help responsible
    homeowners stay in their homes, we have actively sought to use our
    current programs and authorities to make homeownership sustainable for
    millions of American families. Examples of our efforts include:
      --FHA Streamline Refinance.--An option that allows borrowers with
            FHA-insured loans who are current on their mortgage to
            refinance into a new FHA-insured loan at today's low interest
            rates without requiring additional underwriting, permitting
            these borrowers to reduce their mortgage payments. This program
            benefits current FHA borrowers--particularly those whose loan
            value may exceed the current value of their home--and, by
            lowering a borrower's payment, also reduces risk to FHA. And,
            because we see potential for more widespread use of this
            product, FHA made changes to the way in which streamline
            refinance loans are displayed in the Neighborhood Watch Early
            Warning System (Neighborhood Watch) to encourage lenders to
            offer this product more widely to homeowners with FHA-insured
            mortgages, and offered reduced premiums for borrowers who could
            benefit most from a Streamline Refinance.
      --Changes to FHA's Loss Mitigation Waterfall.--A mortgagee letter
            published on November 16, 2012, outlined changes to FHA's loss
            mitigation home retention options. One of the key elements of
            this update was moving FHA's Home Affordable Modification
            Program (HAMP) product up in FHA's loss mitigation waterfall so
            servicers could more quickly offer deeper payment relief to
            struggling FHA borrowers, resulting in an increase in the
            number of borrowers being able to retain their homes.
      --Housing Counseling.--In fiscal year 2014, HUD is requesting $55
            million in Housing Counseling Assistance to improve access to
            quality affordable housing, expand homeownership opportunities,
            and preserve homeownership, all of which are especially
            critical in today's economic climate. With this funding, HUD
            estimates that 2,650 HUD-approved counseling agencies,
            employing an estimated 8,000 housing counselors, will assist a
            total of 2.5 million renters and owners. In 2012, 2,410 HUD-
            approved housing counseling agencies, with grant funds from HUD
            and other funding sources, assisted over 1.9 million renters
            and owners. HUD-approved counselors help clients learn about
            purchasing or refinancing a home; rental housing options;
            reverse mortgages for seniors; foreclosure prevention; loss
            mitigation; preventing evictions and homelessness; and moving
            from homelessness to a more stable housing situation.
        HUD's new Office of Housing Counseling has several initiatives to
    ensure borrowers know their rights and have access to the remedies that
    will allow them to stay in their homes. While HUD approved housing
    counselors serve all homeowners, regardless of the type of loan,
    effective loss mitigation for FHA borrowers also protects the Mutual
    Mortgage Insurance (MMI) Fund. Therefore, HUD has worked closely with
    interested States to determine effective ways in which funds from the
    National Mortgage Servicing Settlement can be used to expand housing
    counseling resources, resulting in more than $300 million in settlement
    funds committed to housing counseling or legal services for affected
    borrowers. HUD-approved housing counseling agencies provided
    foreclosure prevention services to 774,000 families in fiscal year
    2012.
        In addition, FHA and the Office of Housing Counseling are exploring
    ways to further integrate housing counseling into the home purchase
    process, as well as continuing efforts around loss mitigation, offering
    distressed FHA borrowers additional resources with which to assess
    their options and make decisions appropriate to their situation.
      --Short Refinance Option.--In 2010, FHA made available an option that
            offers underwater non-FHA borrowers, who are current on their
            existing mortgage and whose lenders agree to write off at least
            10 percent of the unpaid principal balance of the first
            mortgage, the opportunity to refinance into a new FHA-insured
            mortgage. FHA made enhancements to the program in March of last
            year and announced an extension to the expiration date of the
            program in order to increase the number of borrowers who will
            benefit from this initiative.
                Strengthening FHA and Paving the Way for Private Capital To
                        Return
        The President's budget shows that FHA, while still under stress
    from legacy loans, has made significant progress and is on a sound
    fiscal path moving forward. Like nearly all mortgage market
    institutions, FHA sustained significant losses due to the precipitous
    fall in the housing market and home prices and is putting additional
    funds aside this year to cover those legacy losses. Moreover, like most
    other market participants, recent and future books of mortgage business
    are expected to bring healthy gains and perform well.
        Throughout the economic crisis, as FHA faced fiscal challenges,
    this administration took swift and effective action to protect the FHA
    and the American taxpayer alike, as FHA continued to fulfill its dual
    mission of supporting the housing market during tough times and
    providing access to homeownership for underserved populations. Of the
    changes made since 2009, FHA's lender oversight and credit policies
    have yielded substantial improvements in the quality of new loans
    endorsed by FHA, and premium increases have priced appropriately for
    risk. But significant opportunity remains to reduce the impact on the
    fund of poorly performing legacy loans severely impacted by the
    recession, and to provide greater assistance for distressed borrowers
    as they seek to recover and find meaningful assistance in dealing with
    their delinquent loans. With a majority of FHA's projected losses
    attributable to loans insured from 2007-2009, FHA will take several
    additional steps to maximize recovery in the areas of loss mitigation
    and asset management.
                  Counterparty Risk Management and Lender Enforcement
        One of the first things this administration did upon taking office
    was to take strong actions to improve FHA's monitoring and oversight of
    lenders. This has included substantial improvements to risk analysis
    systems and procedures, and policy changes to focus resources on the
    areas of FHA's business which pose the greatest potential risk to the
    MMI Fund. These efforts have resulted in lenders being withdrawn from
    FHA programs, improvements in lender compliance with FHA requirements,
    and a number of settlements with lenders and servicers for violations
    of FHA origination or servicing requirements.
        Yet, it remains important that we continue to clarify and refine
    the rules of the road for FHA lenders. That is why last month FHA
    issued a mortgagee letter implementing a Lender Insurance (LI) Lender
    Indemnification Final Rule which was published in January 2012. This
    guidance establishes better and more consistent monitoring of LI
    lenders and establishes clearer parameters upon which HUD will require
    indemnification for loans originated by these institutions.
        Additionally, we have been concerned of late with a number of Web-
    based and print advertisements that proclaim the supposed ease of
    obtaining an FHA-insured loan following a foreclosure. While FHA has
    taken a number of proactive steps in the past few years to clarify its
    requirements regarding lender advertising and to enforce those
    requirements aggressively, we determined in last year that it was
    necessary to address the issue of post-foreclosure advertising
    specifically. Therefore, on January 25, 2013 FHA issued a reminder to
    its industry partners that advertisements that imply that little or no
    qualification criteria are necessary to obtain an FHA loan are
    unacceptable and that FHA will not hesitate to take action within its
    authority to enforce its requirements related to lender advertising,
    including sanctions by HUD's Mortgagee Review Board and/or referral to
    the HUD Inspector General or the Consumer Financial Protection Bureau
    (CFPB).
                  Credit Policy
        We have also worked to strengthen our credit policies for FHA
    borrowers. First and foremost, FHA implemented Congress's elimination
    of seller-funded down payment assistance programs which cost the MMI
    Fund more than $15 billion in economic value. Further, we enacted
    increased down payment requirements for borrowers with credit scores
    below 580. The long-term positive impact of these two credit policy
    changes cannot be overstated. The 2005-2008 vintages, accounting for
    less than 15 percent of total originations over the last 30 years, are
    projected by the Actuary to contribute more than one-third of total
    credit losses of the fund. Loans with credit scores below 580 and/or
    seller-funded down payment assistance will have accounted for 44
    percent of those losses. Additionally, we will continue work on
    finalizing regulations to reduce the amount of allowable seller
    concessions that increase risks to FHA arising from inflated
    appraisals.
        In late 2012, FHA announced several additional policy changes which
    continue its work to strengthen credit policy, support the ongoing
    recovery and maintain access to mortgage financing for credit worthy
    borrowers while also taking steps to recede FHA's total market share.
    These steps include requiring manual underwriting for borrowers with
    credit scores below 620 and debt-to-income (DTI) ratios over 43
    percent, enhancements to FHA's TOTAL Scorecard, and a proposed increase
    in the required down payment for borrowers seeking loans in excess of
    $625,500. Taken together with all the other measures outlined above as
    well as those detailed in Appendix A of FHA's Annual Report to
    Congress, these steps will ensure that home buyers using FHA-insured
    financing are capable of meeting their mortgage obligations and will
    not put undue stress on the fund.
                  Increased Revenue
        In addition to the improvements made to the quality of new
    endorsements, we have also made the difficult choice to increase
    mortgage insurance premiums for FHA-insured loans multiple times in the
    past 4 years. Since 2009, FHA has increased premiums five times--the
    most recent increase effective April 1, 2013. Combined, the premium
    increases made since 2009 have yielded more than $10 billion in
    additional economic value for the fund to date. These increases have
    not been undertaken lightly, and FHA has been careful to balance
    changes to pricing to improve the outlook of the fund with its
    countercyclical role of providing liquidity and access to credit in the
    midst of the recent crisis and ongoing recovery.
        Additionally, effective beginning with case numbers assigned on
    June 3, 2013, FHA will cease a policy of canceling required mortgage
    insurance premiums (MIPs) on loans for which the outstanding principal
    balance reaches less than 78 percent of the original principal balance.
    Under that policy, FHA remained responsible for insuring 100 percent of
    the unpaid principal balance of a loan for the entire life of the loan,
    a period often extending far beyond the cessation of MIP payments. As
    written, the timing of MIP cancellation was directly tied to the
    contract mortgage rate, not to the actual loan loan-to-value ratio
    (LTV). That policy, which was reversed in a mortgagee letter published
    on January 31, 2013, was put in place at a time when it was assumed
    that home price values would not decline, but today we know that LTV
    measured by appraised value in a declining market can mean that actual
    LTVs are far higher than amortized mortgage LTV, resulting in higher
    losses for FHA on defaulted loans. Analyses conducted by FHA's Office
    of Risk Management projects lost revenue of approximately $10 billion
    in the 2010-2012 vintages as a result of the current cancellation
    policy. The same analyses also suggest that 10-12 percent of all claims
    losses will occur after MIP cancellation. Therefore, beginning in June,
    FHA plans to once again collect premiums based upon the unpaid
    principal balance of FHA loans for the entire period during which they
    are insured, permitting FHA to retain significant revenue that is
    currently being forfeited prematurely.
                  Loss Mitigation and Asset Management
        The Actuary projects nearly $60 billion in claims costs for FHA
    from seriously delinquent loans that will go to claim by the end of
    fiscal year 2014, largely arising from loans insured between 2007 and
    2009. As a result, reducing the severity of losses derived from these
    loans will exert a demonstrable positive impact to Fund performance
    over the next few years. Throughout the past fiscal year, FHA has been
    executing on an overall asset management strategy aimed at ramping up
    real estate owned (REO) alternatives. REO alternatives (primarily short
    sales) comprised about 15-20 percent of total dispositions since 2010,
    yielding average loss severities about 20 percent lower than REO. In
    recent months, as noted, FHA also unveiled its Distressed Asset
    Stabilization Program (DASP), another REO alternative that improves
    Fund performance. These and other actions have had a measurable effect,
    as loss severities have already fallen by 9 percent in the last year. A
    reduction in loss severities will further improve fund performance.
    And, compared to March 2012, serious delinquencies are down in March
    2013, with non-seasonally adjusted serious delinquencies dropping below
    9 percent for the first time in over a year, showing that FHA and the
    market have made some progress in clearing the backlog of seriously
    delinquent loans previously withheld from a final disposition.
        FHA expects further gains on this front through a number of
    initiatives:
      --Streamlining of the FHA Short-Sale Policy.--Although FHA is deeply
            committed to providing loss mitigation alternatives to
            borrowers which permit them to retain their homes, home
            retention is simply not an option for some borrowers. For these
            borrowers, pre-foreclosure sales (short-sales) offer an
            opportunity to transition out of their homes. This enables both
            FHA and the borrowers to avoid the costs and damages of the
            foreclosure process. This month, FHA will introduce a
            streamlined pre-foreclosure sale policy which removes certain
            barriers for borrowers in obtaining a short sale on an FHA-
            insured mortgage. This change is expected to increase the
            number of defaulted loans that end in short sales rather than
            in foreclosures. Because losses from short-sales are
            substantially lower than from the traditional FHA REO process,
            the shift of greater numbers of distressed homeowners to short-
            sale dispositions rather than foreclosures is anticipated to
            yield better results for the MMI Fund while allowing distressed
            borrowers to start anew without having to go through the
            difficult and costly foreclosure process.
      --Claim Without Conveyance Pilot Program.--FHA is expanding a pilot
            in which properties secured by non-performing FHA-insured loans
            are offered for sale by the lender who has completed the
            foreclosure process. At a reserve price slightly below the
            outstanding unpaid principal balance of the loan, the
            properties are sold to third party purchasers without ever
            being conveyed to FHA. This method of disposing of these
            properties is expected to yield lower losses for the MMI Fund
            than selling them through FHA's normal REO disposition process,
            as carrying costs associated with preserving, managing, and
            marketing an REO property are eliminated.
      --Proactive Strategies To Further Improve Recoveries.-- In addition
            to the policy and programmatic changes outlined above, FHA will
            also take several innovative and proactive steps to increase
            utilization of loss mitigation options and reduce unnecessary
            asset disposition losses. First, beginning in 2013, FHA will
            launch a large-scale proactive marketing campaign to promote
            modification and short-sale strategies for delinquent
            borrowers. This effort is expected to increase utilization of
            these programs, which will permit more borrowers to become
            aware of and take advantage of these opportunities, while
            reducing foreclosures and decreasing associated losses for FHA.
            In addition, FHA will also pursue more creative strategies to
            dispose of REO properties in geographies where traditional
            asset disposition methods yield net negative recoveries for
            FHA. This approach is anticipated to both save money for FHA on
            unnecessary losses as well as contribute to community
            stabilization initiatives in cities hit hard by the recession.
        Due to these changes, resulting in higher quality of loans and
    reduced loss severities, and combined with the large volume of current
    loans, we project FHA will generate approximately $18 billion in
    receipts during fiscal year 2013. This includes $3 billion generated
    from the new premium increase that went into effect April 1, 2013, and
    reversal of a policy that caused FHA to forfeit collection of MIP after
    a loan reached 78 percent of its original principal balance. Further,
    as a result of these same changes, the fiscal year 2014 budget projects
    FHA receipts of almost $13 billion, even as FHA market share and loan
    volume continue to be reduced.
                Fiscal Year 2013 MMI Fund Budget Re-Estimate
        The President's budget forecasts that the FHA MMI Fund, which
    provides the fiscal capital to support FHA's single family and reverse
    mortgage guarantees, will use $943 million of its mandatory
    appropriation authority to supplement its reserves at the end of fiscal
    year 2013. The MMI Fund currently has approximately $32 billion in cash
    available to pay claims, so this is not a cash on hand problem; it is
    one of setting aside the right size of loan loss reserves. The $943
    million figure is based on an annual re-estimate of the reserves FHA
    will need to hold as of September 30, 2013, for the payment of expected
    losses over the next 30 years on its portfolio of guaranteed loans as
    of last September, based upon Federal Credit Reform Act (FCRA) scoring.
    This re-estimate is done as part of the development of the President's
    budget.
        The potential for a mandatory appropriation to the MMI Fund is
    largely due to the existing reverse mortgage (Home Equity Conversion
    Mortgage or HECM) portfolio. This product, particularly as it has been
    structured to date, is sensitive to borrower longevity, home prices,
    and economic conditions. Lower than anticipated home price appreciation
    substantially affected the expected performance of the portfolio.
    Further, changes to the ways in which borrowers utilize the HECM
    product have shifted the risk profile of the program.
        Originally designed to be used like an annuity, in recent years
    market circumstances and lender preferences have shifted greater
    numbers of borrowers to take full draws via the Fixed Rate Standard
    product. Thus, borrowers are taking all of the funds available to them
    up front and often do not have the resources necessary in later years
    to pay property taxes and insurance, thereby triggering a default on
    the loan. Due to these changes in usage and performance, the budget
    estimates that the use of the HECM program results in a negative value
    of $5.248 billion and a disproportionately negative impact to the fund.
        FHA will take immediate action under its limited authorities to
    better align the HECM program with its objective of enabling seniors to
    age-in-place. These changes, which will significantly impact consumer
    use of the program, will protect FHA from losses and reduce the
    likelihood of borrower defaults.
        In administrative guidance dated January 30, 2013, FHA consolidated
    the Fixed Rate Standard program with the Fixed Rate HECM Saver product,
    which will result in a reduction of the maximum amount of funds
    available to a HECM borrower.
        Additionally, in an effort to reduce losses associated with the
    conveyance and disposition of properties mortgaged with an HECM, FHA
    will issue new incentives for estate executors of HECM borrowers to
    dispose of properties themselves rather than conveying them to HUD.
    Executors are permitted to either sell such properties or convey them
    to HUD. Reversing the historical trend, over the past few years, larger
    numbers of executors have been choosing to convey these properties to
    FHA rather than sell them, adding costs and reducing recoveries for
    FHA. By incentivizing the sale of properties by executors, FHA is able
    to avoid property management, maintenance, and marketing costs
    associated with the REO disposition process, thereby reducing losses to
    the fund on these properties.
        Whether there will be an actual need for a mandatory appropriation
    from the Treasury General Fund to the MMI fund will not be determined
    until September 2013, and will be based on FHA's realized revenues and
    any other developments through the end of the fiscal year. Notably, any
    mandatory appropriation to FHA would not involve approval from
    Congress, as all Federal loan programs have this standing authority. As
    we consider this potential mandatory appropriation, we must also
    acknowledge that FHA played a crucial, countercyclical role in bringing
    the housing market from the brink of collapse to a place where it is
    positive and growing again. This task did not come without its stresses
    which we are experiencing today. Nevertheless, FHA will remain vigilant
    in implementing the policies and practices discussed here to protect
    the fund.
    Legislative Requests To Support FHA Single Family Programs
        Since 2010, Congress has moved in important ways to strengthen and
    protect FHA. Indeed, were it not for the flexibility granted by
    Congress to FHA in setting mortgage insurance premiums, the current
    economic value of the MMI Fund would be more than $10 billion lower
    than it is today. And the work Congress has done to establish FHA's
    first ever Office of Risk Management has been instrumental to our
    improved ability to identify risks in FHA programs and take action to
    mitigate them. We appreciate the commitment to making FHA stronger and
    more secure over the long term.
        We have several legislative requests that, when coupled with
    actions taken previously and the support provided by this budget, will
    allow us to further strengthen the FHA fund and the larger housing
    market. The proposals outlined below will enhance FHA's ability to hold
    lenders accountable for non-compliance with FHA policy, allow FHA to
    increase recoveries on defaulted loans, and provide greater flexibility
    for FHA to make changes to policies and procedures as emerging needs
    and trends are identified. As a result, FHA will better be able to
    avoid unnecessary losses before they occur.
      --Indemnification Authority for Direct Endorsement Lenders.--This
            provision, which FHA has been seeking since 2010, would allow
            FHA to seek indemnification from Direct Endorsement lenders,
            which represent 70 percent of all FHA approved lenders.
            Currently FHA only has authority to require indemnification for
            lenders with Lender Insurance (LI) approval. In granting this
            authority, FHA will be able to obtain indemnification from all
            of its approved lenders for loans that do not comply with its
            guidelines.
      --Authority To Terminate Origination and Underwriting Approval.--This
            legislation would give FHA enhanced ability to review lender
            performance and, if a lender is found to have an excessive rate
            of early defaults or claims, would provide greater flexibility
            in terminating the approval of the lender to originate or
            underwrite single family mortgages for FHA insurance. FHA has
            been seeking this authority since 2010.
      --Revised Compare Ratio Requirement.--This provision would revise the
            statute governing the Credit Watch Termination Initiative to
            provide greater flexibility in establishing the metric by which
            FHA compares lender performance so that it more effectively
            captures the true performance of a lender during all market
            conditions, minimizing further poor performance by FHA lenders
            while reducing uncertainty for them. Specifically, this
            legislation would allow the Secretary to compare the rate of
            early defaults and claims for insured single family mortgage
            loans originated or underwritten by a lender with those same
            rates for other lenders on any basis the Secretary determines
            appropriate, such as geographic area, varying underwriting
            standards, or populations served. Further, the provision would
            permit the Secretary to implement such comparisons via
            regulations, notice, or mortgagee letter. This will allow FHA
            to tailor the compare ratio so it provides meaningful
            comparisons of lenders in varying market conditions, providing
            greater clarity for lenders and a more refined understanding of
            their performance for FHA.
      --Authority To Transfer Servicing.--In order to facilitate more
            effective loss mitigation, this change would give FHA the
            authority to require any of the following actions when a
            servicer is at or below a servicer tier ranking score (TRS) of
            III, or when the Secretary deems the action necessary to
            protect the interests of the MMI Fund: (1) transfer servicing
            from the current servicer to a specialty servicer designated by
            FHA; (2) require a servicer to enter into a sub-servicing
            arrangement with an entity identified by FHA; and/or (3)
            require a servicer to engage a third-party contractor to assist
            in some aspect of loss mitigation (e.g. borrower outreach).
            Such authority would permit FHA to better avoid losses arising
            from poor servicing of FHA-insured loans, yielding better
            results for both borrowers and FHA.
      --Authority To Structurally Change the HECM Program Through Mortgagee
            Letter.--While the HECM product is an important tool to permit
            seniors to age in place, the challenges outlined previously
            necessitate immediate changes to the program. To make such
            changes in a timely fashion and preserve the program for
            seniors, FHA is seeking statutory authority to temporarily make
            changes to the HECM program via mortgagee letter while formal
            rule making is simultaneously in progress. Specifically, FHA
            would make the following changes via mortgagee letter:
        --Limit the amount of the allowable draw;
        --Mandate the use of escrow accounts to ensure continued and timely
                payment of property charges including taxes and insurance,
                and;
        --Require the use of a financial assessment as part of the loan
                origination process to ensure the appropriateness of HECM
                products for potential borrowers.
        These changes will enable FHA to ensure that new HECM originations
    meet the needs of the target population and reduce risks to the MMI
    Fund. Absent ability to make these structural changes, later this
    fiscal year, FHA will have to take more dramatic action to ensure that
    new HECM originations are actuarially sound.
        HECM Non-Borrowing Spouse.--The intent of the HECM program is to
    provide an age-in-place option for senior citizen homeowners. However,
    from an operational standpoint, those homeowners must be party to the
    reverse mortgage for HUD to manage an actuarially sound program.
    Currently, if a mortgagor dies and no other HECM mortgagor continues to
    reside in the home, the loan becomes due and payable. The Department
    believes that in order to benefit from the HECM loan, a party must be
    eligible under the terms of the HECM, including the requirement that
    one be aged 62 or older and also have legal claim to the property. In
    order to clarify the responsibilities of non-borrowing spouses under
    the HECM program, HUD is proposing a general provision in the fiscal
    year 2014 budget that amends the National Housing Act to clarify that
    the HECM becomes due and payable upon the death of the mortgagor spouse
    in order to avoid future misunderstanding. The proposed amendment would
    make clear that HUD's longstanding regulations--in effect since the
    beginning of the program--comport with Congress' original intent.
        goal 2: meet the need for quality, affordable rental homes and
                             healthcare facilities
        At a time when more than one-third of all American families rent
    their homes and over 8.5 million unassisted families with very low
    incomes spend more than 50 percent of their income on rent and/or live
    in severely inadequate conditions, it is more important than ever to
    provide a sufficient supply of affordable rental homes for families of
    modest means--particularly since, in many communities, affordable
    rental housing does not exist without public support. Compounded by an
    aging population and increasing healthcare costs, strong support for
    quality, accessible healthcare is also an essential component in
    achieving the Department's mission of strong, sustainable, inclusive
    communities and quality, affordable housing and services for all
    Americans.
    Office of Multifamily Housing Programs
                Reducing Administrative Burdens and Increasing Efficiency
        This budget recognizes the need to simplify, align, and reform
    programs to reduce administration burdens and increase efficiency
    across programs. The Office of Multifamily Housing is beginning to
    realize savings in salaries and expenses as a result of several major
    initiatives.
      --Breaking Ground.--Completed in mid-fiscal year 2012, Breaking
            Ground was an initiative in Multifamily Housing Development to
            reduce backlogs, improve timeframes, and create an early
            warning system that allows for more effective risk management
            by creating extensive tools to monitor and access credit for
            multifamily insured loans. These tools include a stronger
            credit review of borrowers; an early warning system that
            targets loans early in the process that do not meet FHA
            underwriting criteria; and a dashboard monitoring tool to track
            accountability of field offices; and establishment of a queue
            in order to more efficiently manage workload and provide
            greater transparency to lenders.
        Adopting this approach has produced positive results. Offices that
    had large application backlogs prior to Breaking Ground have reported
    processing efficiency improvements, methodically clearing out older
    applications--the number of applications in process for over 90 days
    dropped from 191 to 50 in just 7 months. In addition, offices that
    began Breaking Ground without a large backlog have begun to meet
    aggressive application processing time cycles. The Department will
    continue to track these metrics and looks forward to reporting on these
    results.
      --Sustaining Our Investments.--The Sustaining Our Investments
            initiative, which was fully implemented last month, has
            resulted in an overhaul of the processes used to manage the
            portfolio of the Office of Multifamily Asset Management. The
            initiative focuses on Risk Based Management--allowing project
            managers at both the headquarters and field level to focus day-
            to-day operations on managing at-risk loans in the portfolio.
            Risk-based reports keyed on financial and physical risk
            triggers direct project managers to act early on potential
            problems with particular assets. The first step in this
            initiative was to complete a full ranking of FHA's entire
            multifamily market rate portfolio to better assess and address
            potential risk factors. The ranking of the non-insured
            portfolio is now underway.
      --Loan Committee.--FHA Multifamily has also implemented a new loan
            committee approval process, aligning Hub and Program Center
            commitment authority and practice to ensure consistency in
            underwriting throughout the regional offices, as well as to
            provide a platform to share best practices. Loan committees at
            the hub and national levels provide oversight for high-risk
            transactions in the multifamily insurance program, based on
            loan size and a project's number of units. Loan committee
            approval processes are standard practice in the lending
            community and are an important tool to prudently manage credit
            risks and ensure the integrity and stability of the General and
            Special Risk Insurance (GI/SRI) insurance fund. The Loan
            Committee has also proven to be an effective tool for
            increasing communication and a more consistent FHA platform.
                Adjusting Premiums To Properly Price for Risk
        Given the unprecedented increase in the number and dollar volume of
    loans insured under the GI/SRI, particularly with respect to ``market
    rate\1\'' loans, in the President's fiscal year 2013 budget proposal,
    the Department announced proposed premium increases for programs in the
    GI/SRI. Implemented on October 1, 2012, this was the first premium
    increase in 10 years for these programs.
    ---------------------------------------------------------------------------
        \1\ Generally, market rate housing covers a range of rental housing
    opportunities. In the FHA portfolio, market rate housing is generally
    affordable to those at approximately 80 percent of area median income.
    ---------------------------------------------------------------------------
        GI/SRI funds provide financing for the FHA multifamily and
    healthcare loan guarantee programs and several very small specialized
    loan products. This account also continues to hold a sizable portfolio
    of single family loan guarantees (HECM, condominium, and rehabilitation
    loans) insured prior to fiscal year 2009 when responsibility for new
    lending under these programs was transferred to the Mutual Mortgage
    Insurance Fund.
        In contrast, premiums for single family programs situated in FHA
    Mutual Mortgage Insurance (MMI Fund) have been increased four times
    since 2010. As with the premium increases for MMI programs, higher
    premiums for market rate loans originated under the GI/SRI funds ensure
    that FHA products are priced appropriately to compensate for FHA's
    risk, consistent with current market conditions. This premium change
    should also have the indirect benefit of encouraging the return of
    private capital to the Nation's mortgage markets.
        Going forward, FHA will continue to examine its business models and
    practices, with an eye toward continuing to improve its risk management
    capabilities and operational efficiencies while expediting processing
    and approval timelines.
                Rebuilding Our Nation's Affordable Housing Stock
        Over the last 75 years, the Federal Government has invested
    billions of dollars in the development and maintenance of public and
    multifamily housing, which serve as crucial resources for some of our
    country's most vulnerable families. Through its mortgage insurance
    programs, over just the past 18 months, FHA facilitated lending of $4
    billion for new construction and substantial rehabilitation of over
    40,000 apartment units. FHA insured over $11 billion of mortgages that
    supported improvements and moderate rehabilitation of more than 150,000
    units of multifamily housing over the same period.
        Despite this sizable Federal investment and the great demand for
    deeply affordable rental housing, we continue to see a decline in the
    number of available affordable housing units. Unlike other forms of
    assisted housing that serve very similar populations, the public
    housing stock is nearly fully reliant on Federal appropriations from
    the Capital Fund to make capital repairs. Funding and regulatory
    constraints have impaired the ability for these local and State
    entities to keep up with needed life-cycle improvements. The most
    recent capital needs study of the public housing stock, completed in
    2010, estimated the backlog of unmet need at approximately $26 billion,
    or $23,365 per unit. Available funding is vastly insufficient to meet
    accruing needs of approximately $3 billion per year. Under the strain
    of this backlog, and without financing tools commonly available to
    other forms of affordable housing, the public housing inventory loses
    an average of 10,000 units annually through demolitions or
    dispositions. Through FHA and other programs, HUD is taking steps to
    address this shrinking inventory.
                  Rental Assistance Demonstration
        In addition to the public housing stock, the Rental Assistance
    Demonstration (RAD) program targets certain ``at-risk'' HUD legacy
    programs. The 24,000 units assisted under section 8 Moderate
    Rehabilitation (MR) are limited to short-term renewals and constrained
    rent levels that inhibit the recapitalization of the properties. The
    approximately 21,000 units assisted under Rent Supplement (RS) and
    Rental Assistance Program (RAP) have no ability to retain long-term
    project-based assistance beyond the current contract term. As a result,
    as their contracts expire, we can no longer depend on these projects to
    be available as affordable housing assets.
        Conversion to long-term section 8 rental assistance, as permitted
    under RAD, is essential to preserving these scarce affordable housing
    assets and protecting the investment of taxpayer dollars these programs
    represent. Long-term section 8 rental assistance allows for State and
    local entities to leverage sources of private and public capital to
    rehabilitate their properties. While the Department expects and
    continues to process public housing conversions of assistance without
    additional subsidy, HUD requests $10 million in fiscal year 2014 for
    the incremental subsidy costs of converting assistance under RAD for
    very limited purposes. Such funding will be targeted only to public
    housing projects that are: (1) not feasible to convert at current
    funding levels; and (2) located in high-poverty neighborhoods,
    including designated Promise Zones, where the Administration is
    supporting comprehensive revitalization efforts. The Department
    estimates that the $10 million in incremental subsidies will support
    the conversion and redevelopment of approximately 3,300 public housing
    units that would not otherwise be feasible to convert and sufficiently
    stabilize over the long-term, while helping to increase private
    investment in the targeted projects and surrounding neighborhoods.
        In addition to the funding request, each of the legislative
    requests in the 2014 budget for RAD are designed to allow for maximum
    participation by those public housing agencies (PHAs) and owners whose
    current funding levels are sufficient for conversion. In the first
    component of RAD, an increase in the 60,000 unit cap to 150,000 units,
    and the exclusion of section 8 MR properties from the cap will both
    allow for a greater portion of both the public housing and MR stock
    that can convert at no cost to the Federal Government to participate in
    the demonstration. It is expected that approximately 40 percent of the
    transactions conducted through the RAD program will leverage FHA
    insured financing, actually contributing to the generation of
    offsetting negative subsidy receipts for the Government.
                Legislative Requests To Support Multifamily Housing
        Nearly a third of the Nation's renters, more than 20 million
    households, live in small, unsubsidized apartment buildings. These 5-
    to 49-unit properties tend to be owned by small businesses and are
    typically more affordable to low and moderate income families. These
    properties are at risk of continued disinvestment as small building
    owners are less likely than other multifamily property owners to be
    able to secure financing for repairs and improvements. Small properties
    are less likely to have mortgage financing and just 14 percent of all
    fiscal year 2010 FHA-insured properties were for projects with fewer
    than 50 units.
        The fiscal year 2014 budget includes a legislative provision to
    support small building finance, and to strengthen the Risk Share
    program as a rental finance tool, seeks congressional authority for
    Ginnie Mae to guarantee securities containing FHA multifamily Risk
    Share loans, thereby increasing liquidity and decreasing cost of
    capital. This proposal would apply to both State and local Housing
    Finance Agency Risk Share lenders under section 542(c) and new Risk
    Share lenders under section 542(b). The proposal would also amend
    section 542(b) of the statute to allow for flexibility in how
    affordability is determined in order to make it a more effective tool
    to recapitalize existing naturally affordable 5-49 unit rental
    properties.
        Section 542(c) HFA Risk Share.--The extension of Ginnie Mae
    securitization to the 542(c) Risk Share program would improve HFAs'
    ability to finance affordable rental housing that serves some of the
    poorest and most vulnerable Americans, without requiring any Federal
    budgetary appropriation.
        Section 542(b) Risk Share and Small Building Finance.--The 542(b)
    Risk Share authorizing statute provides HUD with significant
    flexibility to take on risk-share partners. HUD plans to partner with
    mission-driven lenders to make loans on small multifamily rental
    buildings on a 50/50 risk share basis with HUD. In order for this
    program to work for small multifamily lending, two legislative changes
    are required. Access to Ginnie Mae guarantees for small building risk-
    share lenders combined with flexibility on the statutorily imposed risk
    share affordability standard which otherwise requires ongoing rent and
    income restrictions will allow us to use this tool to meet the needs of
    these smaller properties and prevent disinvestment in a valuable
    portion of our Nation's housing stock.
    Office of Healthcare Programs
        FHA's healthcare programs for hospitals and residential care
    facilities (nursing homes, assisted living facilities, and board and
    care homes) have helped private lenders fill the gap left by shrinking
    conventional finance resources. Since 1934, over 4,000 residential care
    facility mortgage insurance commitments were issued in all 50 States
    under the section 232 program. In 1968, enabling legislation amending
    the National Housing Act was signed into law, creating the section 242
    program for hospital facilities. Since the section 242 program's
    inception, over 400 mortgage insurance commitments have been issued for
    hospitals in 42 States and Puerto Rico. And while the economy seems to
    be rebounding and with it, sources of private capital, we continue to
    expect high levels of mortgage insurance activity for fiscal year 2014
    due in large part to refinancing activity as healthcare facilities take
    advantage of current low interest rates. Furthermore, following
    implementation of a final rule in 2013, hospitals can now obtain FHA-
    insured refinancing loans. As of December 31, 2012, the FHA's portfolio
    of healthcare loan guarantees had an unpaid principal balance of $28.3
    billion on 2,900 loans.
                Evolution of FHA Healthcare Programs--Balancing Risk and
                        Improving Processes
        This Administration, in continuing to improve the program has
    brought in positive risk management changes to both balance risk and
    improve processes. Given the unprecedented increase in the number and
    dollar volume of loans insured under GI-SRI, in fiscal year 2013,
    premium increases for FHA's General Insurance and Special Risk
    Insurance healthcare programs were instituted to increase the stability
    of the insurance fund. With the premium increases, FHA healthcare loans
    are priced more appropriately to encourage the return of private
    capital while, at the same time, continuing to ensure sufficient levels
    of available capital in these sectors.
        Proactive Asset Management.--In FHA's Office of Healthcare
    Programs, weekly loan committees are held to review and approve loan
    submissions and to monitor healthcare industry trends and risks. By
    implementing proactive asset management using early intervention
    monitoring tools, the Office of Healthcare Programs succeeded in
    maintaining claim rates of less than 1 percent in both healthcare
    facility mortgage insurance programs in fiscal year 2012.
        LEAN Business Process Reengineering.--LEAN Business Process
    Reengineering has also played an integral part in streamlining business
    operations within FHA's healthcare programs. Despite volume increases,
    LEAN processing improvements reduced loan processing times while
    increasing risk management efforts. Revised program requirements and
    documents were established to enhance accountability for borrowers,
    operators, and lenders. To further manage risk in the healthcare
    portfolio, in areas of large risk concentrations, such as insuring
    portfolios of multiple healthcare facilities, reviews are conducted at
    both the corporate and individual loan levels. In the residential care
    facility mortgage insurance program, implementation of a Master Lease
    Structure to cross-collateralize properties not only works to improve
    the overall risk profile of FHA's healthcare portfolio, but ultimately
    reduces claims.
        The Office of Healthcare Programs is in ongoing collaboration with
    the Department of Health and Human Services (HHS), Centers for Medicare
    and Medicaid Services (CMS), and State public health departments to
    support efforts to ensure quality of care for the most vulnerable
    populations. Also, by incorporating State survey inspection results,
    cost reports, and data from other Federal and State agencies into FHA's
    underwriting and asset management procedures, the shared utilization of
    data and cross-collaboration has been instrumental in keeping
    healthcare claim rates low within FHA.
                Legislative Request To Support Healthcare Programs
        As part of the efforts of FHA's healthcare programs to strengthen
    communities by addressing specialized financing needs, HUD is seeking
    passage of the language in the Transportation, Housing and Urban
    Development, and Related Agencies (THUD) appropriations bill to permit
    rural Critical Access Hospitals to be eligible for FHA insurance.
    Before their eligibility expired in 2011, 29 Critical Access Hospitals
    received FHA-insured loans, with results that were positive, both in
    terms of loan performance and the jobs created by hospital construction
    projects. Also, quality of life improved in their communities; these
    hospitals by definition are geographically remote from other hospitals,
    and they provide not only emergency, outpatient, and acute inpatient
    services but also nursing and rehabilitation services that avoid the
    need for the elderly and recuperating patients to leave the community
    for care.
        We appreciate the Congress' longstanding support for Critical
    Access Hospitals by amending section 242 to permit these important
    facilities to be eligible for FHA insurance, and hope that this
    language will be approved to allow Critical Access Hospitals to
    continue to be eligible for FHA insurance.
                  goal 3: transform the way hud does business
        A 21st century American economy that is a magnet for jobs and
    equips its residents with the skills they need for those jobs demands a
    Government that's leaner, smarter, and more transparent. The current
    economic and housing crisis; the structural affordability challenges
    facing low-income homeowners and renters; and the new, multidimensional
    challenges facing our urban, suburban, and rural communities all
    require a HUD and an FHA that can meet those challenges. As such, we
    remain committed to improving the way HUD does business. HUD remains at
    the forefront of the Federal response to the national mortgage crisis,
    economic recovery, Hurricane Sandy recovery, and the structural gap
    between household incomes and national housing prices--roles that
    require an agency that is nimble and market-savvy, with the capacity
    and expertise necessary to galvanize HUD's vast network of partners.
    HUD's 2014 budget reflects these critical roles, by investing in
    transformation, research, and development that will be implemented
    persistently over time.
    Strategically Investing in Our Staff While Improving Efficiencies and
            Processes
        HUD's greatest resource is its dedicated staff. When employees
    attain skills and are motivated to use those skills to help their
    organization reach goals, the capacity of the organization grows and
    employees in the organization grow as well. This is why HUD is
    providing its employees training and leadership development
    opportunities. HUD is also in the process of simplifying and
    streamlining programs and reforming its information technology, human
    resources, procurement, and other internal support functions to provide
    flexibility to managers and better service to HUD customers.
                Multifamily Office Reorganization and Consolidation
        Beginning in fiscal year 2013, the Office of Multifamily Housing
    will begin reorganizing its headquarters structure and consolidating
    field office operations. Phased in over 2\1/2\ years, this plan will
    increase efficiency and consistency, modernize our services, and once
    fully implemented has the potential to save an estimated $40 million to
    $45 million in annual costs.
        By taking proactive steps, the Office of Multifamily Housing
    Programs will better serve customers and stakeholders, by operating
    more efficiently and consistently and improving risk management, all in
    an era where HUD and agencies across the Government are working
    diligently to determine how best to do more with less. This
    transformation builds upon the success of Breaking Ground and
    Sustaining Our Investments through four initiatives:
      --Launching More Routine and Effective Workload Sharing Across the
            Country.--By more equitably distributing workloads in the areas
            of Production and Asset Management, Multifamily Housing will be
            able to reduce unevenly distributed pressure on staff and
            reduce customer wait times and the application backlog. A
            workload sharing pilot is already in process throughout the
            country, receiving positive feedback from customers and staff.
      --Introducing Risk-Based Processing and Underwriters in the Office of
            Multifamily Production.--In order to increase processing
            efficiencies, improving customer service and more effectively
            manage risk, FHA Multifamily will segment and process
            applications according to their risk profile and complexity,
            assigning an underwriter to oversee the review of the
            application from start to finish, drawing in technical experts
            as needed.
      --Creating Specialist Support in the Office of Multifamily Asset
            Management.--The newly created positions of Troubled Asset
            Specialist and Account Executives will allow Multifamily to
            assign the most experienced staff to focus on risky, complex or
            troubled assets, ensuring that the most skilled staff is
            engaged to manage risk to the portfolio. Other Account
            Executives with less expertise will focus on non-troubled
            portfolio while building the expertise and skill sets to manage
            more complex transactions.
      --Streamlining Organizational Structures.--In headquarters, FHA
            Multifamily will reduce the number of offices by merging the
            Office of Housing Assistance and Grants Administration and the
            Office of Housing Assistance Contract Administration Oversight
            into other existing headquarters offices. A dedicated Associate
            Deputy Assistant Secretary role will be created to support the
            field while leadership also examines other offices for ways to
            streamline and reduce duplication of efforts. In the field, 17
            hubs will be consolidated into 5--and the total number of field
            offices with Multifamily presence will decline from 50 to 10.
            Affected employees will have the ability to relocate, accept a
            buy-out, or take early retirement.
    Upgrading the Department's Information Technology Infrastructure
        In fiscal year 2014, HUD is requesting $285 million to support and
    modernize its information technology (IT) infrastructure. This request
    includes $45 million for the development, modernization, and
    enhancement of key outdated systems; $116 million for the operations
    and maintenance of our current systems; and $124 million to complete
    the transition to our new IT infrastructure system, HUDNET. Department-
    wide efforts will focus on transitioning the department to a modern,
    sustainable IT infrastructure, and to continue the development of a
    modern financial management system that will improve HUD's ability to
    measure, track, and report on program costs and efficacy, and
    transitioning the current FHA systems to a modern platform. These steps
    are integral to the build the FHA systems and tools needed to manage
    risk.
        FHA in particular expects to expand its portfolio evaluation tool
    capacity to get an ``early look'' at where the value of the MMI fund is
    trending, and to incorporate new business policies or products when/
    where needed. HUD has begun to decommission legacy FHA applications and
    will continue this through the fiscal year 2014 request, freeing up
    those IT dollars for reinvestment. These changes will allow HUD to
    deliver services and manage its multi-billion dollar programs faster,
    more accurately and using better information for analysis. These funds
    are crucial to complement HUD's transformation efforts, providing
    resources for maintaining and improving Department-wide information
    technology systems.
                                   conclusion
        Madam Chairman, the HUD budget reflects the Administration's
    recognition of the critical role the housing sector must play to ensure
    that America becomes a magnet for jobs that strengthen the Nation's
    middle class, including providing ladders of economic opportunity for
    all Americans. Equally important, it expresses the confidence of the
    President in the capacity of HUD to meet a high standard of
    performance.
        By targeting resources where they are most needed, making tough
    choices in order to do more with less, and ensuring the protection of
    taxpayer interests, FHA's Single Family, Multifamily, and Healthcare
    Programs, are ensuring more Americans have the opportunity to realize
    or maintain the economic security of the middle class. Our focus on
    transforming the way we do business will ensure that we can continue to
    remain a relevant and effective support to the housing market--one that
    helps build the economy from the middle class out and ensures that we
    create opportunity for everyone, everywhere. Thank you.

        Senator Murray. Mr. Montoya.

                   SUMMARY STATEMENT OF HON. DAVID A. MONTOYA

        Mr. Montoya. Thank you, Senator. Chairman Murray, Ranking
    Member Collins, I am David Montoya, the Inspector General for
    the Department of Housing and Urban Development. We join you in
    remembering Senator Lautenberg's contributions to the United
    States.
        I want to take the opportunity to thank you for inviting us
    to discuss issues on FHA and also to thank the Commissioner for
    her collaborative efforts with my office over the last 1\1/2\
    years that I've been there and some of the changes that we've
    been looking to make with them.
        FHA is an important spoke in the Nation's housing industry,
    as FHA-insured mortgages finance approximately one-fourth of
    all home purchases in the United States. For this reason, my
    office has been aggressive in its oversight of the FHA program.
    In fact, over the years, my office has consistently expressed
    concerns about the level of oversight and risk taken on by FHA
    and the effect this has had on its financial health.

                        PROPOSED RULEMAKING REQUIREMENTS

        Unfortunately, and for a number of reasons, FHA has been
    slow to respond to many of our recommendations. One reason is
    FHA's requirement for proposed rulemaking. This process can
    take years to finish and delays FHA's ability to make
    regulatory changes or respond quickly to market conditions and
    financial forces. Another reason for the slowness is a
    reluctance, at times, to adopt our recommendations because of
    FHA's concern over the impact changes would have on its market
    share and how such changes would affect the industry.
        One notable example dates back to 1999 regarding
    recommendations my office made back then to discontinue the use
    of seller-funded downpayment assistance. It took almost 9 years
    for FHA to change this practice, and that inaction reverberates
    today as these loans are expected to cost the Mutual Mortgage
    Insurance Fund over $15 billion.
        In another example, the Office of Inspector General
    testified in 2009 about FHA taking on new risks, such as the
    expansion of FHA's HECM program that you just mentioned. This
    product has disproportionately and negatively impacted the MMI
    Fund, and the President's budget has assigned a negative value
    of approximately $5.2 billion to the HECM portfolio for 2013.
    Overall, FHA estimates that it will need to use just under $1
    billion of its appropriation authority to supplement its
    reserves, largely due to the poor performance of the HECM
    portfolio.
        It remains that the fund has failed to maintain a capital
    ratio of 2 percent for the past 4 years and each year has seen
    a further decline in the fund's economic value, which has now
    fallen to a negative $16.3 billion. Based on current actuarial
    projections, the capital ratio will now not reach the 2 percent
    level until 2017, which would represent 8 years continually
    below the 2 percent threshold mandated by Congress.

                          REAL ESTATE-OWNED PROPERTIES

        In addition to unprecedented levels of claims,
    approximately $67 billion in just the last 4 years, FHA can
    expect to see a continuing influx of claims for the foreseeable
    future. FHA's reported default rate on seriously delinquent
    loans as of January 2013 stood at approximately 9.5 percent.
    Based on our analysis of FHA data, the total unpaid balance on
    FHA's single family loans in default now exceeds $100 billion.
        HUD also continues to face challenges in managing its
    inventory of real estate-owned (REO) properties. HUD's
    oversight will be critical to ensure that returns on property
    sales are maximized, thereby reducing further losses to the
    fund. FHA's losses on REO property sales exceeded $9 billion in
    2012.
        Another significant concern we continue to express is FHA's
    ability to perform required financial management functions on
    legacy systems that are at least 15 to 30 years old. FHA needs
    to enhance its integrated insurance and financial systems.
    Unfortunately, FHA's ability to replace the antiquated
    infrastructure on which many FHA single family applications
    reside has been delayed.
        While FHA has taken various measures to restore the
    financial health of the fund, we think more can be done with
    adjustments to their actuarial modeling and in the area of risk
    management and lender oversight. With regard to lender
    oversight, my office continues to conduct reviews that have
    shown high percentages of loans containing not only significant
    deficiencies, but material incurable violations of HUD
    underwriting requirements and standards that expose the fund to
    an unacceptable level of risk and claims that FHA never agreed
    to take on under the insurance program.
        In conclusion, we remain concerned over the lack of
    flexibility that would allow FHA to respond to market changes
    and to our recommendations in a more timely way. FHA's
    competing mandate to continue its role in restoring the housing
    market, ensuring the availability of mortgage credit, and
    continued lender participation in the FHA program should
    heighten these concerns for policy makers.
        My office is strongly committed to working with the
    Department and the Congress to ensure that FHA remains the
    viable and strong program it was intended to be.

                               PREPARED STATEMENT

        This concludes my testimony. Again, thank you for allowing
    me to speak to you today. I look forward to answering
    questions.
        [The statement follows:]
                  Prepared Statement of Hon. David A. Montoya
        Chairman Murray, Ranking Member Collins, and members of the
    subcommittee, I am David A. Montoya, Inspector General of the U.S.
    Department of Housing and Urban Development (HUD). Thank you for the
    opportunity to discuss the oversight of the Department that my office
    conducts and current issues relating to the Federal Housing
    Administration (FHA).
        As part of the Department's primary mission to create strong,
    sustainable, inclusive communities and quality, affordable homes for
    all, HUD also assists families in obtaining housing by providing FHA
    mortgage insurance. HUD is an important spoke in the Nation's housing
    industry in that FHA-insured mortgages finance approximately one-fourth
    of all home purchases in the United States.
        Since becoming the Inspector General, I have had an ongoing
    dialogue with FHA Commissioner Carol Galante on the challenges that the
    Department and FHA face and the work my office has done in its
    oversight capacity.
        In a very coordinated effort, the Department and Office of
    Inspector General (OIG) worked collaboratively to achieve a historic
    result with last year's national mortgage settlement of more than $25
    billion--the largest consumer financial protection settlement in U.S.
    history. We are building on that success and have undertaken an
    initiative to review fraudulent loan originations made by some of the
    Nation's largest mortgage companies in the FHA program. These endeavors
    showcase the accomplishments that we are engaged in, not only with the
    Department, but also working closely with the U.S. Department of
    Justice (DOJ).
        While I continue to support our activities relating to these
    reviews, I also endeavor to manage my limited resources to provide
    proper oversight of the many other programs and operations within the
    Department and its role in responding to Hurricane Sandy and other
    disasters. The following testimony highlights some of the more pressing
    issues facing the Department's administration of the FHA program,
    particularly in light of its increased role in the marketplace.
               a history of oig concerns and fha's slow response
        HUD OIG has consistently expressed its concerns over the years
    about the level of oversight and risk taken on by FHA and the effect on
    its financial health. Unfortunately and for a number of reasons, FHA
    has been slow to respond to many of our recommendations and has only
    recently finally implemented some of them. For example, it has been
    noted that while seller-funded downpayment-assisted loans have been
    prohibited since the end of 2008, OIG has expressed its concern to FHA
    over the negative impact of seller-funded downpayments on FHA as far
    back as 1999. Loans using seller-funded downpayment assistance have
    proven to place a substantial stress on FHA's Mutual Mortgage Insurance
    (MMI) Fund.
        OIG completed its first comprehensive analysis of seller-funded
    downpayments in March 2000, looking in depth at this and the associated
    program risks, as these loans increasingly began to consume a larger
    share of FHA loan originations. We concluded that HUD allowed nonprofit
    organizations to operate downpayment assistance programs that
    circumvented FHA requirements. The downpayment loan transactions did
    not meet the intent of FHA requirements in that the downpayment
    assistance was not a true gift from the nonprofit; sellers raised the
    sales price of properties to cover the cost of the seller-funded
    downpayment assistance, causing buyers to finance higher loan amounts;
    and default rates for buyers receiving downpayment assistance from
    nonprofit organizations were significantly higher than for other FHA
    loans. We recommended back then that HUD implement a proposed rule to
    eliminate seller-funded nonprofit downpayment programs.
        Our long-term concerns and findings were later validated by several
    FHA-commissioned studies and by a U.S. Government Accounting Office
    (GAO) study in 2005, 6 years after we first raised concerns. However,
    FHA still resisted implementing our recommendation, in part because the
    change would have required the Department to go through the rulemaking
    process and there were concerns about whether FHA would prevail. More
    significantly, however, was FHA's concern at the time about the impact
    such a change would have on its market share. By 2006, the
    concentration of nonprofit downpayment assistance had approached 25
    percent of FHA's new business portfolio, including purchase and
    refinance loans. FHA did not act to end the practice until 2007, and
    then legal challenges caused further delay. Ultimately, legislation to
    disallow the practice was enacted in 2008, too late to prevent the
    looming losses we are now seeing.
        The legacy of this delayed inaction reverberates today as seller-
    funded downpayment-assisted loans continue to place significant stress
    on the MMI Fund. According to HUD's fiscal year 2012 report on the
    financial status of the fund, these loans account for only 4 percent of
    the outstanding portfolio but are 13 percent of all seriously
    delinquent loans. Over the life of the loans, seller-funded downpayment
    loans are expected to cost the MMI Fund more than $15 billion.
        Similarly, in 2007, FHA was pressing for ``reform'' legislation
    that, among other things, would have raised loan limits and allowed FHA
    to insure loans with no borrower downpayment requirement. At the time,
    FHA's share of the mortgage market had fallen to less than 4 percent of
    the total market and less than 2 percent of the total dollars for
    mortgages originated in the United States. Indeed, with the ready
    availability of conventional subprime financing, FHA was perceived as
    becoming increasingly irrelevant, and the primary concern at FHA was to
    find ways to increase its market share. It focused more on marketing
    FHA loans than on instituting sound risk management and lender
    oversight.
        HUD OIG testified in March 2007 and expressed its concern as to
    whether FHA was headed in the same direction as the subprime market
    with its seemingly continued deregulation and introduction of
    ``riskier'' products as part of its proposed reform. FHA seemed to have
    lost sight of the fact that since its inception, it has played a
    cyclical role in the housing market, sometimes gaining market share in
    times when it was needed to bolster the market and sometimes losing
    share when the conventional marketplace was addressing the constituency
    that FHA has always focused on: low- to moderate-income and first-time
    potential home buyers. However, this always remained true; whether in
    the conventional or Government mortgage programs, no loans should have
    been given if the purchaser was unable to pay back the loan.
        Finally, in April 2009, when the effects of the economic crisis and
    collapse of the housing market were becoming more and more ominous, OIG
    testified before this subcommittee and expressed its concern about the
    impact of FHA's precedence-setting increased market share and HUD's
    ability to manage the increased workload with its limited and stagnant
    resources. FHA was also taking on new risk that needed to be managed.
    As an example, the Housing and Economic Recovery Act of 2008 authorized
    changes to FHA's Home Equity Conversion Mortgage (HECM) program that
    enabled more seniors to tap into their home's equity and obtain higher
    payouts. This office, at the time, raised concerns about HUD's ability
    to provide proper oversight as there was a critical need for more
    resources for FHA. Those resources were needed to:
      --enhance its information technology (IT) systems;
      --increase its personnel to meet escalating processing requirements;
      --increase its training of personnel to maintain a workforce with the
            necessary skills to deal with the responsibility of this new
            portfolio;
      --oversee the many contractors it maintained; and
      --increase its oversight of all critical front-end issues, including
            such important areas as the appraisal, lender approval, and
            underwriting processes.
        The HECM program was originally projected to be profitable for FHA
    but has turned out to be a substantial drain on the insurance fund. I
    will discuss the HECM program in more detail later in my testimony.
    While Secretary Donovan and FHA Commissioner Galante are proactive and
    supportive of OIG and its recommendations, I have to note, as described
    above, that FHA's reluctance over the years to more quickly deal with
    its looming issues has taken a toll, a toll we are only now beginning
    to understand. FHA has been trying to improve its financial position in
    recent years with legislative and regulatory proposals. But as we said
    years ago at the beginning of the subprime crisis, movement in the
    Department is more like turning an ocean liner than driving a fast boat
    through the tempests and currents of an ever-changing mortgage market.
        A recent example of FHA's apparent inability to quickly react to
    changing conditions can be seen in its efforts to require lenders to
    indemnify HUD for serious and material violations of FHA origination
    requirements and for fraud and misrepresentation in connection with the
    origination of FHA loans. Historically, HUD has sought such
    indemnifications through agreement with the lenders. HUD already
    possesses the statutory authority to require such indemnifications for
    lenders participating it its Lender Insurance program and issued a
    proposed rule in October 2010 to, among other things, provide
    additional guidance on HUD's regulations implementing this authority.
    The rule was not finalized until January 2012, and the mortgagee letter
    to implement the change in policy was not issued until a month ago on
    April 10. According to the mortgagee letter, the revised
    indemnification policy is effective for all loans insured by Lender
    Insurance program lenders on or after that date. Thus, 2\1/2\ years
    have passed since the rule was proposed, and it remains to be seen
    whether this will be an effective tool in recovering losses since FHA's
    homeownership centers have yet to implement the change. To further
    exacerbate this situation, since 2010, HUD has been seeking statutory
    authority to require indemnifications from the remaining 70 percent of
    its direct endorsement lenders that do not participate in the Lender
    Insurance program.
        Based on OIG's experience in dealing with FHA over the years, we
    remain concerned about HUD's resolve in taking the necessary actions
    going forward to protect the fund. HUD is often hesitant to take strong
    but needed actions against lenders because of its competing mandate to
    continue FHA's role in restoring the housing market and ensure the
    availability of mortgage credit and continued lender participation in
    the FHA program. Nevertheless, OIG has generally been supportive of
    FHA's initiatives to raise premiums and better manage its risk,
    including the establishment of its Office of Risk Management.
    Similarly, we strongly agree with HUD's position that FHA needs
    legislative changes to afford it greater flexibility to make changes to
    its policies and procedures as history has shown that it needs to be
    able to react more quickly to market changes and avoid losses that can
    accrue during a lengthy rulemaking process. In this light, my office is
    developing its own set of recommended legislative initiatives that we
    believe can further strengthen FHA's ability to mitigate risk and
    recover losses to the insurance fund and enhance OIG's ability to
    address fraud, waste, and abuse in the program. We will be vetting
    these proposals with FHA and the appropriate committees.
           financial health of the fha mutual mortgage insurance fund
        FHA's MMI Fund is the largest of its four mortgage insurance funds.
    The fund consists of a system of accounts used to manage FHA's single-
    family mortgage insurance programs. The Cranston-Gonzalez National
    Affordable Housing Act of 1990 mandated that the MMI Fund maintain a
    capital ratio of 2 percent from October 1, 2000, forward. The capital
    ratio is defined as the ratio of the fund's economic value to its
    insurance in force. The economic value essentially represents capital
    that exceeds the amount needed to cover anticipated losses. Clearly,
    when establishing this mandate, Congress voiced its concerns that some
    sort of cushion was important to maintain. The capital ratio has been
    below this required 2 percent level for the past 4 years, and each year
    has seen a further decline in the ratio to the point at which, based on
    the latest actuarial study in November of last year, the ratio has
    fallen below zero to negative 1.44 percent, which represents a negative
    economic value of $16.3 billion. The economic value of the forward
    portfolio was estimated at negative $13.5 billion and the HECM
    portfolio at negative $2.8 billion. These economic values represent
    capital reserve ratios of negative 1.28 percent and negative 3.58
    percent, respectively.
        Over the last several years, FHA has increased premiums and taken
    other steps to restore the financial health of the MMI Fund.
    Nevertheless, based upon FHA's deteriorating financial condition, in
    February 2013, GAO included FHA concerns in its ``high risk'' section
    relating to ``Modernizing the U.S. Financial Regulatory System and
    Federal Role in Housing Finance.'' It was not FHA itself that was
    deemed a high risk but, rather, FHA as part of the larger high-risk
    concern over the Federal role in housing finance.
        While we acknowledge the Department's actions to address the MMI
    Fund's finances, my office remains concerned about whether the actions
    are enough to make up for the losses FHA has sustained and to reach the
    required 2 percent level anytime in the near future. For example, FHA
    is now using credit scores as part of the eligibility requirements for
    FHA loans. As of October 2010, borrowers with credit scores below 500
    are no longer eligible for FHA insurance, and the maximum loan-to-value
    ratio for borrowers with credit scores between 500 and 579 is 90
    percent. At the time these changes were being proposed, we expressed
    our overall support but also took the position that the changes did not
    go far enough and would likely have minimal impact on the MMI Fund in
    terms of bringing in additional premiums. While FHA enacted increased
    downpayment requirements for borrowers with credit scores below 580, we
    noted that loans for borrowers with credit scores below 580 were less
    than 1 percent of new activity. Moreover, the 580 credit score
    threshold is well into what is traditionally considered subprime
    territory in the conventional marketplace. A higher downpayment
    requirement at the appropriate credit score level would force borrowers
    to have more personal stake and financial exposure, which we believe
    would have a more meaningful impact in protecting the fund due to the
    larger volume of loans at higher credit score levels. The more a
    borrower is personally financially invested in a loan, the more
    unlikely he or she will be willing to give up on the investment.
        As shown in the chart below from data we obtained from HUD's
    systems as of April 12, 2013, FHA has experienced high levels of claims
    in recent years compared with levels seen before the financial crisis.
    For purposes of illustration, the following chart reflects total FHA
    insurance claims from calendar years 2005 through 2008, the year that
    the current financial crisis began.

                                                                      FHA INSURANCE CLAIMS
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                         Forward mortgage claims       Home equity conversion        Loss mitigation claims                 Total
                                     ------------------------------        mortgage claims       -----------------------------------------------------------
                  Year                                             ------------------------------
                                        Claims      Amount paid       Claims      Amount paid       Claims      Amount paid       Claims      Amount paid
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    2005............................     68,455     $6,562,000,000      1,187        $87,000,000     75,407       $119,000,000    145,049     $6,768,000,000
    2006............................     57,243      5,595,000,000      1,514        143,000,000     82,365        170,000,000    141,122      5,908,000,000
    2007............................     54,556      5,629,000,000      2,257        256,000,000     84,758        150,000,000    141,571      6,035,000,000
    2008............................     62,440      6,981,000,000      3,149        381,000,000    104,092        204,000,000    169,681      7,566,000,000
                                     -----------------------------------------------------------------------------------------------------------------------
          Total 2005 to 2008........    242,694     24,767,000,000      8,107        867,000,000    346,622        643,000,000    597,423     26,277,000,000
                                     -----------------------------------------------------------------------------------------------------------------------
    2009............................     83,881     10,163,000,000      4,652        567,000,000    131,115        268,000,000    219,648     10,998,000,000
    2010............................    119,830     15,654,000,000      5,681        559,000,000    208,876        411,000,000    334,387     16,624,000,000
    2011............................    118,475     15,144,000,000      8,684        928,000,000    173,163        563,000,000    300,322     16,635,000,000
    2012............................    155,266     20,245,000,000     14,207      1,432,000,000    142,551        660,000,000    312,024     22,337,000,000
                                     -----------------------------------------------------------------------------------------------------------------------
          Total 2009 to 2012........    477,452     61,206,000,000     33,224      3,486,000,000    655,705      1,902,000,000  1,166,381     66,594,000,000
                                     =======================================================================================================================
          Grand total 2005 to 2012..    720,146     85,973,000,000     41,331      4,353,000,000  1,002,327      2,545,000,000  1,763,804     92,871,000,000
    --------------------------------------------------------------------------------------------------------------------------------------------------------

        As reflected in the charts above, the amount FHA paid in claims
    during the last 4 years was about 2\1/2\ times the amount paid during
    the preceding 4 years ($66.6 billion vs. $26.3 billion). The total
    amount of claim payments rose substantially in 2009 and has continued
    to increase.
        Apart from the obvious financial implications, this situation
    creates a challenge for FHA, since the Prompt Payment Act requires HUD
    to pay the claim on a defaulted FHA-insured mortgage within 30 days and
    only then can it go back to the lender that underwrote the loan to
    recover losses incurred if it finds that the loan was ineligible for
    insurance. Thirty days is an insufficient amount of time for HUD to
    determine whether a loan was ineligible for insurance due to fraud or
    misrepresentation in the loan origination process. The result of this
    requirement places HUD in a ``pay and chase'' situation as our past
    audits have expressed concern over HUD's exposure when paying claims on
    loans that were not qualified for insurance. In addition, FHA has been
    resistant and slow in implementing a rigorous claim review process and
    to recover losses from lenders instead relying primarily on a strategy
    to focus efforts on loans that had not reached claim status. FHA only
    recently agreed with recommendations we made as far back as 2006 and
    again in 2011 to review all loans for which a claim was paid within the
    first 24 months, claims we define as high-risk claims. This matter
    takes on even greater importance in light of the significant amount of
    claims projected to be filed by lenders in the coming months and HUD's
    current limited capacity for reviewing submitted claims.
        In addition to the unprecedented levels of claims noted above, FHA
    can expect to see a continuing influx of claims in the foreseeable
    future. The latest FHA-reported default rate (seriously delinquent
    loans) as of January 2013 stood at 9.49 percent. By comparison, the
    default rate in September 2008 was 6.91 percent. Based on our analysis
    of FHA data, the total unpaid balance of FHA single-family loans in
    default now exceeds $100 billion.

     FHA LOANS IN DEFAULT (3 MONTHS OR MORE DELINQUENT) AS OF MARCH 31, 2013
    ------------------------------------------------------------------------
                         Loans                            Unpaid balance
    ------------------------------------------------------------------------
    724,173........................................         $103,324,000,000
    ------------------------------------------------------------------------

        While FHA has taken a position that its current losses are
    primarily from loans made from 2007 to 2009, it continues to project
    that the current and future years' books of business will be profitable
    and make up for these past years' losses. However, what we have seen in
    the past 4 years is a troubling trend, whereby the point at which the
    MMI Fund is expected to reach its mandated capital level is pushed
    farther into the future. In the fiscal year 2009 independent actuarial
    study, it was predicted that by the end of fiscal year 2011, the MMI
    Fund's capital ratio would be 1.74 percent and that the MMI Fund would
    meet the 2 percent mandate sometime during fiscal year 2012. In the
    following 3 years, that forecast has changed dramatically as the
    capital ratio has continued to move in the wrong direction and is now
    negative. In addition, we now have concerns about the fiscal year 2010
    and 2011 books of business as their profitability appears to be lower
    than projected and budgeted, as indicated and supported in the fiscal
    year 2014 Federal Credit Supplement to the Budget, although not as
    substantially different as the reestimates from the earlier years of
    2007 to 2009.
        Based on current projections, the capital ratio will not reach the
    2 percent level until 2017, marking 8 years below the 2 percent
    threshold. Moreover, these estimates are heavily influenced by the pace
    at which housing prices will recover. Any additional slowdown in the
    housing market will increase FHA losses and further delay FHA's ability
    to meet its statutorily mandated 2 percent requirement. We continue to
    work with FHA to ensure that it is instituting sound risk management
    and lender oversight practices to avoid further exposure of the MMI
    Fund to losses.
        My office also continues to stress that the FHA actuarial model is
    complicated and difficult to audit, use, and employ for risk management
    and strategic planning purposes. The model inhibits frequent updates as
    well as the ability to understand changes in specific programs or risk
    categories. Ultimately, its current design and objective are to be in
    statutory compliance and do not promote FHA's timely use of policy
    corrections based on products, cohorts, or risk classifications for
    current or interim benchmarking decisions. While we have recommended
    modeling at the midterm or quarterly, which we believe would provide
    FHA a better basis for timely policy corrections and assessing the
    actuarial value of the MMI Fund, the model cannot be easily changed
    because it is proprietary and owned by the actuarial firm. I continue
    to have discussions with the FHA Commissioner regarding these issues.
        With regard to one recent change in the modeling, the 2012
    actuarial study applied a stochastic method to estimate the net present
    value of future cash flows. This was done to a large extent because of
    recommendations by OIG and GAO, recommendations that had been made for
    some years before 2012.
                    home equity conversion mortgage program
        The FHA HECM program is the only Government-insured reverse
    mortgage program. The HECM program guarantees that the lender will meet
    its payment obligations to the homeowner, limits the borrower's loan
    origination costs, and insures full repayment of the loan balance to
    the lender up to the maximum claim amount; that is, the lesser of the
    appraised value at origination or the national HECM loan limit of
    $625,500. HECM insurance endorsements in fiscal year 2012 were down by
    25 percent from fiscal year 2011 levels to 54,591. Fiscal year 2012
    marks the third consecutive year in which HECM volume has declined.
    Yet, with a declining HECM demand, FHA asserts that the fiscal year
    2014 budget request for $943 million is largely due to the existing
    HECM portfolio. This product, particularly as it has been structured to
    date, is sensitive to home prices and economic conditions. This
    condition has resulted in a negative value of $5.248 billion and a
    disproportionately negative impact to the MMI Fund from the HECM
    program.
        FHA is proposing, either through the granting of the legislative
    authority described below or via the much longer rule-making process,
    the following measures:
      --Limiting the draw at origination to mandatory obligations;
      --Addressing the issue of non-borrowing spouse language in the fiscal
            year 2015 budget;
      --Performing a financial assessment of borrowers as a basis for loan
            approval and determining the suitability of various HECM
            products to protect consumers from acquiring loans not fit for
            their situation; and
      --Establishing a tax and insurance set-aside to ensure that
            sufficient equity or an annuity is available to pay taxes and
            insurance on the mortgaged property so that defaults resulting
            from nonpayment of taxes and insurance can be avoided.
        While OIG supports these proposed changes, it continues to raise
    concerns about FHA's belated actions. Since 2008, OIG has been
    proposing similar changes to the HECM program based on results of its
    audit and investigative work. The four OIG reports discussed below
    identified problems with reporting borrowers' deaths, payment of
    required property taxes and insurance, reliability of financial data,
    and compliance with the HECM residency requirement.
        A 2008 audit found that HUD did not ensure that FHA lenders
    reported HECM borrowers' deaths in accordance with Federal
    requirements. HUD could not be assured that FHA lenders appropriately
    met HUD's time requirement for initiating the foreclosure process or
    recording the deeds-in-lieu to take possession of the property, which
    impacted the amount of the lender's insurance claims.
        In an internal audit issued in August 2010, we determined that HUD
    had not tracked almost 13,000 defaulted HECM loans with maximum claim
    amounts of potentially more than $2.5 billion. The audit found that an
    increasing number of borrowers had not paid required taxes or
    homeowner's insurance premiums, thus placing the loan in default. We
    noted that HUD granted foreclosure deferrals routinely on these
    defaulted loans but it had no formal procedures to do so. HUD's
    informal foreclosure deferral policy had a negative effect on the
    universe of HECM loans and loan servicers. After canceling its informal
    policy, HUD did not issue guidance to servicers advising them of what
    action to take regarding defaulted loans. Thus, servicers continued to
    service the loan and paid the taxes and insurance for the borrowers
    without notifying HUD. As a result, four servicers contacted were
    holding almost 13,000 defaulted loans with a maximum claim amount of
    more than $2.5 billion, and two of the four servicers said they were
    awaiting HUD guidance on how to handle them.
        The servicers had also paid approximately $35 million in taxes and
    insurance on these loans. HUD was unable to identify the deferred or
    defaulted loans in its system and did not track the number of borrowers
    who were unable to pay their taxes or insurance premiums. Since
    unreported defaulted loans were only obtained from 4 of a total of 16
    HECM servicers nationwide, more defaulted loans may have existed. Since
    HUD could not track these loans, it did not know the potential claim
    amount in the event of foreclosure of about 7,700 loans of which HUD
    was aware and about 13,000 loans of which it was not aware and could
    lose an additional estimated $1.4 billion upon the sale of the
    properties.
        In June 2011, we issued a report on HECM loan payments made after
    the death of the borrower. Our results indicated a few instances in
    which unscheduled advance payments were made after the death of the
    borrower, which resulted in claims paid by HUD, although we did not
    believe this was a systemic problem. In most cases, we found that
    scheduled payments were not actually made after the death of the
    borrower but were incorrectly recorded in HUD's Insurance Accounting
    Collection System by the lenders. More noteworthy was the fact that
    loan proceeds from the sale of property and claims paid by HUD were not
    credited to the HECM loan balances in a timely manner, resulting in
    inaccurate information being reported to HUD, causing unreliable
    financial data to be used by HUD. This evaluation also noted instances
    in which HECM loan servicing files contained indications of suspicious
    or potentially fraudulent transactions; however, there was no evidence
    that such matters were referred to HUD for further action. Lender
    officials stated that HUD's guidance in this area was too broad and
    that specific fraud indicators should be included in any future
    guidance.
        Finally, in an internal audit issued in December 2012, we found
    that HUD policies did not always ensure that borrowers complied with
    program residency requirements under the HECM program. A review of 174
    borrowers indicated that 37, or 21 percent, were not living in the
    property associated with the loan as required by the residency
    requirement to participate in the HECM program. These 37 loans were
    ineligible and should have been declared in default and due and payable
    to reduce the potential risk of loss of about $525,000 to HUD's
    insurance fund. These 37 loans had already been advanced $5.8 million,
    with the $525,000 remaining to be disbursed, although the borrowers
    were not living in the home.
        In addition to the above-mentioned audits and reviews, the OIG
    Office of Investigation completed a number of criminal cases in which
    the criminals used elderly straw buyers to obtain HECM loans.
        Due to the negative value of the MMI Fund, OIG plans to work
    closely with FHA in obtaining its proposed changes to the HECM program
    and in furthering other OIG-recommended changes to the program.
      oig efforts to recover losses and address fraud against the mmi fund
        As noted earlier, FHA has taken various measures to restore the
    financial health of the MMI Fund. OIG has also played an active role in
    this regard by aggressively pursuing and recovering losses from lenders
    that were engaged in questionable and often fraudulent underwriting of
    FHA loans. In the early part of 2011, OIG, in partnership with HUD and
    DOJ, initiated a number of mortgage lender reviews, whereby statistical
    samples of claims, defaults, and all other loans were drawn to
    determine the accuracy and due diligence of the underwriters of FHA
    loans by a number of the Nation's largest lenders. The reviews
    completed to date have resulted in a total of $1.24 billion in civil
    settlements for alleged violations of the False Claims Act and for
    failure to fully comply with FHA requirements. Some of these
    settlements involved some of America's largest lending institutions.
        The loan-level reviews OIG has been conducting and which have
    resulted in large civil fraud settlements with major lenders are on the
    order of what we would expect HUD to be doing for itself as an inherent
    program responsibility. Examples of these activities include (1)
    reviews of seriously delinquent loans before claim submission and
    terminated loans upon claim submission for origination and
    misrepresentations and (2) claim mitigation in which claims are
    reviewed for documentation issues, violations of servicing
    requirements, and potential collateral-related defects. These examples
    are normal and expected practices in the private mortgage insurance
    sector. This issue relates to earlier comments about FHA's resistance
    to and slowness in implementing a rigorous claims review process and
    going back to the lenders to recover losses instead relying primarily
    on a strategy to focus efforts on loans that had not reached claim
    status.
        OIG continues to aggressively review lender origination and
    underwriting practices as part of its ongoing oversight efforts in a
    housing market that for years was reckless about lending money.
    Imprudent business practices became a pervasive problem, and now those
    loans underwritten during that time are having a significant negative
    impact on the MMI Fund. The result has been a dramatic increase in
    mortgage delinquencies, defaults, and foreclosures. Too often lenders
    ignored FHA requirements to get a loan approved. Borrowers were sold
    unsustainable mortgages, sometimes unsuspectingly and sometimes with
    their full knowledge, which encouraged widespread indifference to the
    ability of many consumers to repay their loans. Some lenders thought
    they could make money on a loan even if the consumer could not pay back
    that loan, by either banking on rising housing prices or passing along
    the mortgage into the secondary market.
        Adding to this problem was a 100 percent insurance guarantee by
    FHA, which created no real financial exposure to these losses on the
    part of the lender and in some cases, no real incentive to comply with
    the requirements of participation. The practices of many lenders were
    not just the result of poor procedures but involved real infractions of
    good business stewardship and proper behavior when participating in the
    FHA program. A failure by FHA to create a strong and meaningful
    oversight atmosphere creates an environment that virtually invites the
    abuses we have seen in our lender reviews. Quite simply, lenders are
    responsible for complying with all applicable HUD regulations and in
    turn are protected against default by FHA's insurance program for doing
    so. To provide some context, mortgage fraud is second only to
    healthcare fraud on DOJ's list of investigative and prosecution
    priorities.
        Indeed, our reviews have shown high percentages of loans containing
    significant deficiencies, loans that clearly should not have been
    underwritten. Our reviews look for major noncompliance and a failure to
    follow the rules that have long been established. We are not looking at
    close-call interpretations of underwriting but wholesale abandonment of
    the core requirements that leads to huge default and claim rates for
    FHA-insured mortgages.
        By way of example, my office is currently reviewing one lender's
    claims to FHA using a statistically representative sample of all claims
    it made in a given period. The statistical sample pool was 85 loans.
    While these results are preliminary, 91 percent of those loans had
    significant deficiencies, 77 of 85 loans. Of those loans with
    significant deficiencies, 87 percent, or 67 loans, had material,
    incurable violations of HUD underwriting requirements and standards.
    These violations were essentially incurable by the lender and exposed
    the FHA insurance fund to an unacceptable level of risk and claims that
    it did not agree to take on under the insurance program.
        In another ongoing example, we conducted a review of a
    statistically representative sample of claims at another lender. Again,
    the statistical sample pool was 85 loans. Again citing preliminary
    results, the percentage of those loans that had significant
    deficiencies was 100 percent. Of those 85 loans, 78 loans (92 percent)
    had material, incurable violations of HUD underwriting requirements and
    standards. We expanded our review to defaults for this lender using a
    statistically representative sample, which resulted in a sample pool of
    110 loans. Our preliminary review found that every one of those loans--
    110 of 110 (100 percent)--had significant deficiencies. Of those 110
    loans, 95 (86 percent) had material, incurable violations of HUD
    underwriting requirements and standards that also exposed the FHA
    insurance fund to an unacceptable level of risk and claims that it did
    not agree to take on under the insurance program.
        To be clear, we are not talking about minor deficiencies. These
    reviews are exposing violations of HUD's underwriting requirements and
    standards, which constitute substantive material violations. Therefore,
    the underwriter's certifications to HUD are false, and those loans can
    form the basis of a False Claims Act case. The types of substantive
    material violations that we are uncovering amount to violating
    fundamental requirements of insuring a loan, which include failing to
    document a borrower's income and employment, failing to evaluate all
    recurring debt obligations that FHA requires an underwriter to
    consider, and failing to verify that the borrowers possess the
    necessary funds to close the loan.
        It is OIG's contention that if lenders follow a well-established
    quality control plan, exercise due diligence and good industry
    practices, follow required procedures, and submit documented conforming
    loans based on a reasonable good faith determination of a consumer's
    ability to repay the loan, their lending behavior does not have to be
    unduly constrained nor should they overly restrict making responsible
    loans.
             inventory of foreclosed-upon single-family properties
        In prior years, we have reported on various concerns relating to
    HUD's procurement and contract management, including HUD's IT
    infrastructure contracts and HUD's transition to the third generation
    of its management and marketing contracts that are used to manage and
    dispose of its extensive inventory of foreclosed-upon single-family
    properties, known as real estate-owned (REO) properties. HUD continues
    to be challenged by its overreliance on contractors in general and its
    ability to allocate sufficient resources to adequately oversee its
    contractor workforce. Since taking this position, I have made it a
    priority to take a closer look at the Department's procurement and
    contract management processes to ensure that waste, fraud, or
    mismanagement can be identified at its earliest occasion.
        HUD's inventory of REO properties had increased dramatically from
    about 45,700 properties in March 2010 to nearly 69,000 at the end of
    March 2011. The inventory declined after HUD restructured its
    management and marketing contracts and as of January 2013, stood at
    about 39,000. While the decline from the historically high levels of 2
    years ago is a positive trend, the percentage loss on the sale of these
    properties remains high but has begun to decline. Still, during fiscal
    year 2012, losses averaged about 62 percent of HUD's acquisition cost.
    In contrast, HUD's average loss during 2007 was about 40 percent. HUD's
    oversight of these management and marketing contractors will be
    critical to ensure that returns on property sales are maximized,
    thereby reducing further losses to the FHA insurance fund. During
    fiscal year 2012 alone, FHA's losses on REO property sales exceeded
    $9.2 billion.
        We recently completed an audit of HUD's oversight of its REO
    Management and Marketing program to determine whether HUD's policies
    and procedures provided for efficient and effective oversight of asset
    managers and field service managers under the program. We determined
    that HUD did not have adequate procedures in place to ensure consistent
    and adequate enforcement of asset and field service manager contracts.
    Specifically, (1) list prices were not always reduced according to the
    marketing plans, (2) bids were approved that did not meet HUD's
    flexible threshold, (3) bids were rejected that met the marketing plan
    thresholds, (4) bids that met applicable thresholds were not always
    counteroffered or forwarded to the government technical representative
    for approval, and (5) properties were not assigned to field service
    managers based on performance even when HUD identified performance
    issues.
                          financial management systems
        Since fiscal year 1991, OIG has annually reported on the
    Department's lack of an integrated financial management system,
    including the need to enhance FHA's management controls over its
    portfolio of integrated insurance and financial systems. We continue to
    report that HUD's financial management systems have not substantially
    complied with the requirements of the Federal Financial Management
    Improvement Act of 1996, which encourages agencies to have systems that
    generate timely, accurate, and useful information with which to make
    informed decisions and to ensure accountability on an ongoing basis.
    This situation could negatively impact HUD's ability to perform
    required financial management functions and efficiently manage
    financial operations of the agency, notably FHA, which could translate
    to lost opportunities for achieving mission goals and improving mission
    performance.
        In August 2009, FHA completed the Information Technology Strategy
    and Improvement Plan, which identified FHA's priorities for IT
    transformation. The plan identified 25 initiatives to address specific
    FHA lines of business needs. Initiatives were prioritized, with the top
    five being single-family related.
        To date, FHA has completed a few of the goals but not all due to a
    lack of funding. FHA is working on acquiring risk management tools but
    has only made substantive progress with its initial objective. During
    our upcoming audit of FHA's fiscal year 2013 financial statements, we
    will be reviewing FHA's progress in implementing this plan.
        The plan also called for FHA to create a program management office
    to facilitate coordination and communication, track and report
    progress, provide support to managers, and support organizational
    change management activities. This office was put into place almost
    immediately after the funding became available and is being led by a
    long-term IT staffer.
        Since fiscal year 2009, the FHA Transformation Initiative's focus
    has been on improving its counterparty management by automating the
    certification processes and acquiring risk management tools to monitor
    lender activity. In conjunction with these development activities, FHA
    has procured the IT infrastructure needed for its planned improvements
    to multifamily underwriting and single-family insurance program
    support.
        Our biggest remaining IT concern is FHA's ability to replace the
    antiquated infrastructure on which many FHA single-family applications
    reside in a timely manner. For example, FHA's general ledger is an
    Oracle system, which has to interface with multiple older COBOL
    systems. None of the older legacy COBOL systems have received
    sufficient funding to be replaced, yet they are expensive to maintain.
    Due to a lack of funding, interfaces and the related systems are still
    in place. While there may have been some programming changes, we
    understand that these were basically patches or temporary fixes to
    implement specific policy changes.
        Overall, it appears that funding constraints have reduced the FHA
    Information System Transformation project to a continuation of high-
    level planning without a defined timetable to complete the new
    application systems and to phase out and deactivate the current
    outdated systems. These delays bring about another concern: the ability
    to maintain the antiquated infrastructure on which some of the HUD and
    FHA applications reside while the Transformation Initiative is
    underway. Workloads have dramatically increased and are processing on
    systems that are 15 to 30 years old. These legacy systems must be
    maintained to effectively support the current market conditions and
    volume of activity. However, the use of aging hardware and software can
    result in poor performance and high maintenance costs. If the IT
    infrastructure is not modernized in a timely manner, it will become
    increasingly difficult and expensive to maintain operations, make
    legislatively required system modifications, and maintain interfaces to
    other IT systems.
                   recent oig investigative and audit results
        As mentioned earlier, HUD OIG conducts criminal investigations
    involving allegations of fraud against HUD's programs, including theft,
    embezzlement, and false statements by program participants and
    recipients. The investigations may be generated from leads provided by
    HUD program staff, the mortgage industry, and other sources and may be
    conducted jointly with Federal, State, and local law enforcement
    agencies. Our long-term investigative experience in the area of
    mortgage fraud schemes has given us proficiency and extensive knowledge
    to address these issues. Many ``traditional'' fraud schemes continue to
    affect FHA, such as appraisal fraud, identity theft, loan origination
    fraud, rescue and foreclosure fraud, and fraud in the HECM program.
        The following represent some examples of recent investigations:
      --A former mortgage company loan officer was sentenced to 54 months
            incarceration and 3 years supervised release and was ordered to
            pay more than $9.2 million in restitution to FHA. He conspired
            with others to create and submit false and fraudulent FHA
            mortgage loan applications and accompanying documents to a
            lender on behalf of unqualified borrowers. He created false pay
            stubs, Federal tax forms, verification of employment forms,
            explanation letters, and other documents to ensure that
            otherwise unqualified borrowers could obtain FHA-insured loans.
            He enticed borrowers to obtain an FHA mortgage by paying them
            an incentive of up to $20,000 per loan. More than 75 FHA loans
            were approved using this false information with more than 31
            claims identified. The loss to FHA was estimated at $6.5
            million. The mortgage company was terminated as an FHA-approved
            lender, and the loan officer and others were suspended pending
            debarment action. Our investigation is continuing.
      --A former senior vice president and loan officer, a former senior
            vice president of residential lending, a former underwriter,
            and a former loan processor pled guilty to conspiracy to submit
            false statements in loan applications and submitting false
            statements in loan applications to FHA. The defendants were
            involved in originating and approving FHA-insured loans and
            conventional loans that contained fraudulent information. The
            case involved approximately 1,900 FHA loans. To date, FHA has
            incurred losses in excess of $36 million after paying claims on
            and disposing of 234 foreclosed-upon properties. An additional
            393 loans, with an unpaid balance in excess of $92 million,
            have been identified as delinquent or in various stages of the
            foreclosure process. The bank was closed by the Federal Deposit
            Insurance Corporation and is no longer in business. The above-
            noted defendants have been recommended for suspension and
            debarment action, and our investigation continues.
      --Two former principals of a HUD-approved mortgage company pled
            guilty to one count of racketeering following their indictment
            in June 2011. The defendants were involved in a complex scheme
            to defraud FHA through a series of false statements on at least
            65 FHA loans totaling in excess of $10 million. The fraudulent
            acts included the use of straw purchasers, phony employers,
            bogus bank statements and pay stubs, forged college
            transcripts, counterfeit court documents, and phony downpayment
            gifts. Additionally, the defendants profited from the scheme by
            recording junior mortgages that were payable to business
            entities or associates from the loan proceeds. The mortgage
            company's FHA approval was terminated, and the company's
            principals were suspended pending their debarment.
        OIG's Joint Civil Fraud Division conducts reviews of FHA-approved
    lenders. The reviews continue to disclose serious deficiencies in the
    originating and underwriting of FHA mortgages. As noted earlier, many
    of these reviews were conducted in support of our efforts to recover
    losses. These reviews and our audit work focus on areas in which HUD
    can improve its oversight and management of its single-family mortgage
    insurance programs. For example, as noted earlier, OIG reviewed the
    foreclosure practices for five of the largest FHA mortgage servicers
    (Ally Financial, Incorporated; Bank of America; CitiMortgage; JPMorgan
    Chase; and Wells Fargo Bank) due to reported allegations made in the
    fall of 2010 that national mortgage servicing lenders were engaged in
    widespread questionable foreclosure practices involving the use of
    foreclosure ``mills'' and a practice known as ``robosigning.''
        In September 2012, we summarized the results of the five reviews,
    which were used by DOJ and 49 State attorneys general to negotiate a
    settlement with the five lenders totaling $25 billion. The Federal
    settlement payment amount of more than $684 million would be used for
    (1) losses incurred to FHA's capital reserve account and the Veterans
    Housing Benefit Program Fund or as otherwise directed by the U.S.
    Department of Veterans Affairs and the U.S. Department of Agriculture's
    Rural Housing Service and (2) the resolution of qui tam actions.
        As result of this work, OIG recommended that HUD:
      --determine the changes needed to FHA's servicing and foreclosure
            policies based on the consent judgments and ensure that the
            servicers incorporate the necessary changes into their
            procedures for servicing FHA-insured loans;
      --ensure that the servicers establish or implement adequate
            procedures and controls to address the control deficiencies
            cited in the five issued memorandums, including but not limited
            to the withholding of claims for insurance benefits and the
            retention of appropriate legal documentation supporting the
            appropriateness of the foreclosure for all FHA-insured
            properties for the life of the loans; and
      --pursue appropriate administrative sanctions against attorneys who
            may have violated professional obligations related to the
            foreclosure of FHA-insured properties.
        Finally, the Department continues to face challenges in ensuring
    that its single-family programs benefit eligible participants and do
    not pay improper claims. In a recent audit of FHA's Preforeclosure Sale
    Program, OIG identified that, based on a statistical projection FHA
    paid an estimated $1.06 billion in claims for 11,693 preforeclosure
    (short) sales that did not meet the criteria for participation in the
    program. This condition occurred because HUD did not have adequate
    controls to enforce the program requirements and requirements were not
    well written. Specifically, FHA relied entirely on the lenders in
    approving borrowers for the program and did not provide lenders with
    detailed instructions for reviewing borrower assets. As a result, the
    FHA insurance fund may have taken unnecessary losses while borrowers,
    who may otherwise have been able to sustain their obligations, were
    inappropriately relieved of their debt using FHA insurance fund
    reserves. FHA has agreed that existing program policy and lender
    execution against that policy are inconsistent. In response to our
    recommendations to improve alignment and ensure that the long-term
    interest of the FHA insurance fund are met, FHA is working toward (1)
    introducing a streamlined program approval policy based on loan
    characteristics and a borrower credit profile and (2) specifying income
    documentation requirements for the income deficit test that must be met
    for borrowers who do not meet the streamlined requirements.
                                   conclusion
        The Department's role has greatly increased, while staffing has
    decreased, over the last decade as it has had to deal with
    unanticipated disasters and economic crises in addition to its other
    missions, which have increased its visibility and reaffirmed its vital
    role in providing services that impact the lives of our citizens. The
    Department can do more to address the internal control and program
    weaknesses in FHA. My office is strongly committed to working with the
    Department and Congress to ensure that these important programs operate
    efficiently and effectively and as intended for the benefit of the
    American taxpayers now and into the future. I look forward to working
    with the Department and this subcommittee to accomplish some of these
    goals.

        Senator Murray. Thank you very much, both of you.

                         MUTUAL MORTGAGE INSURANCE FUND

        Commissioner Galante, let me start with you. The budget
    states that $943 million may be needed to cover losses in FHA's
    MMI Fund in fiscal year 2013. This follows on the most recent
    actuarial report showing that the capital reserve account is
    expected to go negative.
        Can you explain the process HUD goes through to come up
    with these estimates, including any changes to this year's
    model?
        Ms. Galante. Certainly. Thank you, Chairman, for the
    question. To be clear, FHA goes through two different
    processes. The independent actuarial that is done and was
    released in November 2012 looks at the 30-year projections of
    what is necessary for projected losses under the fund under
    economic conditions that they are projecting through
    independent indices.
        The President's budget takes a look at the same kinds of
    conditions, but uses their own analysis of interest rates,
    house prices, and what-not in terms of how the projection of
    the budget re-estimate is made. So they're similar processes,
    but they're two different processes.
        With respect to the actuarial, I would just say we made a
    number of changes, or the actuarial made a number of changes
    this year, including going to what's called stochastic
    modeling, which models a variety of economic paths more
    clearly, more distinctly than it had done in the past, as well
    as how it looked at the defaulted loans and how they would
    transition from performing to non-performing and how that
    works--so a number of important changes in the model.
        Senator Murray. Mr. Montoya, you raised concerns about the
    2010 and 2011 books of business. Can you tell us what your
    specific concerns are?
        Mr. Montoya. Our concerns are that they aren't appearing to
    be as profitable as we think FHA has sort of rested their
    future estimates on. While they're not far off from some of the
    estimates FHA has, it's our feeling they may be weighing too
    much on how successful they will be.
        Senator Murray. Weighing too much?
        Mr. Montoya. Yes, ma'am, that they would be less successful
    than they anticipate to be.
        Senator Murray. Commissioner Galante, do you want to
    respond to that?
        Ms. Galante. Certainly. The budget re-estimate process, as
    part of the President's budget, every year re-estimates every
    cohort of business that FHA does and determines whether the
    estimates that had been done the year before, based on current
    economic conditions, would still hold. So the Inspector General
    is correct that for 2010 and 2011, the re-estimate this year
    was that those books of business were not as profitable as they
    had been anticipated to be. But they certainly still were very
    profitable and successful books of business.
        On the flip side, the 2012 cohort was demonstrated as
    actually adding value to the fund that had been unanticipated.
    So this is really the result of the budget estimation process
    requiring long-term projections in terms of looking at the
    economic success of each of the cohort years of business.
        Senator Murray. We already talked about HECM loans, that
    they continue to represent a disproportionate share of losses
    to the fund. HECM loans can be a great resource for seniors who
    want to stay in their homes, but there are a lot of problems
    with the current product.

                             HECM HIGH DEFAULT RATE

        Commissioner Galante, I wanted you to explain to us why the
    HECM loans are experiencing such high default rates and what
    reforms you are proposing to reduce the risk on that.
        Ms. Galante. Yes, thank you. There are a couple of reasons
    for the challenge with the HECM program. First, I would say
    that like the forward book of business, the HECM loans are
    suffering from projections of a decrease in home prices. And
    that affects--particularly for the HECM loans, long-term house
    price projections definitely affect the reverse mortgage
    program projections more severely than they would in a forward
    mortgage because they are for a longer period of time. So that
    is one reason.
        The other reason is that, frankly, the way they have been
    underwritten is based on the longevity of the life of the
    individual borrower, and there is improvement in longevity. So
    some folks are outliving, so to speak, the original actuarial
    projections there.
        Those things are magnified by other challenges that I would
    say are in the program design today that we really want to get
    to the heart of fixing. One is that the way the program is
    designed today encourages people to take a large amount of the
    mortgage proceeds up front, and then sometimes what happens is
    they don't have enough over the life of the mortgage to
    continue to pay, say, their property taxes and insurance
    liability and other challenges of that nature.
        So what we are really asking for, I would put in three
    buckets. One is to be able to immediately, through mortgagee
    letters, as opposed to going through 1\1/2\ years plus
    rulemaking process, make some immediate changes on the
    principal amount that borrowers are allowed to take out up
    front.
        Senator Murray. And you can do that without legislation?
        Ms. Galante. We can do that without legislation, but we
    would have to go through rulemaking. Without you giving us
    authority to do it by mortgagee letter, we would have to go
    through a longer process to get there. But, statutorily, we
    could do it.
        Second--and I know I'm taking a bit of time here. But,
    second, I would say that demanding that we do a financial
    assessment of the borrowers and their ability to pay the taxes
    and insurance on an ongoing basis--right now, we are
    encouraging lenders to look at that, but it is not a
    requirement of the program. So that's an important measure that
    we would want to do, and, also, requiring set-asides for taxes
    and insurance, for example, for those owners who really need
    that, to be sure that they can pay their ongoing charges.
        Lastly, I would say there is a challenge in the current
    environment where non-borrower spouses are not being--if
    they're not on the mortgage loan, they're not getting the
    protection of being on the mortgage loan and being able to----
        Senator Murray. In my understanding, sometimes that's done
    because of the age of the spouse.

                   HOME EQUITY CONVERSION MORTGAGE COUNSELING

        Ms. Galante. Yes, sometimes--you know, what we believe is
    happening is by the age of the spouse, they are not eligible to
    be part of the HECM mortgage. But what we want to make sure of
    is that we have rules going forward where they're part of the
    mortgage and, therefore, get the protection. But their age is
    also taken into consideration in the underwriting so that we
    are actuarially pricing this according to the life of the
    borrowers.
        And so there's some confusion perhaps in the market or
    disagreement about whether that provision--whether we can do
    that correctly today based on statute. We have taken the
    position for the past 25 years that we can. But there's been
    some challenge to that, and we would like legislation to
    clarify the intent that we can continue to do that.
        Senator Murray. Mr. Montoya, what do you think about those
    proposed reforms?
        Mr. Montoya. We certainly support FHA's proposals. One of
    the concerns that we have seen through a lot of the failings
    with these loans and, quite frankly, from a lot of the fraud
    aspects that we see is that we don't believe that counselors
    are doing as good a job as they should be in really identifying
    for these seniors the loan they're getting into and really what
    they're getting into.
        They're not really instructed on how much and how expensive
    it would be, sometimes not instructed on the taxes and
    insurance and homeowner's fees that will need to be paid,
    sometimes two or three times more than what they make in a
    monthly income. Many times, they don't even see these homes
    before they get into them, if they're buying a new home under
    the HECM program, to make sure they fit their needs as they
    begin to age.
        So there's a lot of other things that we think we can work
    with FHA to do to tighten up just sort of the knowledge that
    these seniors need before they take this product.
        Senator Murray. My time--I've gone way over.
        So, Senator Collins, I'll turn to you.
        Senator Collins. Thank you, Madam Chairman. Let me follow
    up on the question on reverse mortgages.
        Commissioner, you referred very briefly to an issue that I
    want to ask you a little more about. And that is some seniors
    with reverse mortgages insured through the HECM program have
    failed to pay their property taxes and/or their homeowner's
    insurance premiums, which technically, at least, puts them in
    default on their mortgages.
        In order to avoid this problem, could HUD require lenders
    to set up an escrow account where, as with forward mortgages,
    property taxes, and insurance are paid out of that account and
    then added to the mortgage balance? Many of us have escrow
    accounts built into our mortgages to make sure we do have the
    funds available for property taxes and insurance when they come
    due.
        And second and related to that--because you did refer to
    doing something in that area, but I'm unclear exactly what--are
    you in need of legislative authority in order to avoid this
    very lengthy rulemaking that the Inspector General has referred
    to in order to implement such a change? So, first of all, are
    you considering an escrow account type requirement, and,
    second, if so, can you do it administratively quickly?
        Ms. Galante. Yes. In order to do it administratively
    quickly through a mortgagee letter, we need authority from you
    to do it by a mortgagee letter, as opposed to going through the
    full rulemaking process, because the current regulations for
    the HECM program do not permit us to do this.
        Having said that, I do want to be clear. We would really
    like that authority, but I do want to be clear, though, that we
    have been working on this with whatever tools we can in the
    interim. We actually issued a mortgagee letter asking lenders
    to go out and notify borrowers, for example, who were in
    default on their taxes and insurance, and work with them for
    repayment plans. We did that about 1 year ago, and it is being
    successful.

                HOME EQUITY CONVERSION MORTGAGE ESCROW ACCOUNTS

        That isn't going to turn the tide for the future of really
    ensuring that up front. We are setting aside the funds so that
    we know that there is an escrow there for those homeowners to
    pay those property taxes and insurance charges--and also to
    evaluate the borrower on their ability once they take out this
    mortgage to continue to be able to pay those taxes and
    insurance. In order to do that, we need to change the
    regulation, and that means either going through a 1\1/2\ years
    long process, or, if you give us the authority to do it, by
    mortgagee letter, we could do it more quickly.
        Senator Collins. Do you think it's a good idea in concept?
        Ms. Galante. Absolutely. If I didn't make that clear, we
    think it's a very necessary component to the program.
        Senator Collins. Why is your rulemaking so slow? I assume
    you follow the APA the way any other agency would.
        Ms. Galante. Yes. Let me just be clear: We are working on
    guidance today so that if we need to go through the rulemaking
    process, we will try to do it as quickly as we possibly can.
    The proposing of the notice, getting comments back, evaluating
    those comments, putting back out--you know, hopefully, you
    don't get any major controversy; if you get major controversy,
    then you may have to re-propose--it just takes a significant
    amount of time to do that analysis and back and forth.
        Senator Collins. I guess what I don't understand--if I were
    in your shoes--and you've identified this problem, and you've
    identified something you could do about it--I'd be in the midst
    of rulemaking right now. I wouldn't wait. I would still ask us
    for authority for you to do it in a more expeditious manner.
    But I wouldn't be waiting to do rulemaking. And it seems to me
    that a point that the Inspector General has made in his reports
    is this slowness of response by FHA.
        Ms. Galante. Yes. To be clear, we did spend the time to
    immediately--so 1 year ago, we put out the guidance----
        Senator Collins. But guidance isn't rulemaking, and I'm not
    a fan of agencies putting out guidance, because it means that
    it doesn't go through a public comment process.
        Ms. Galante. Right. We did that in January of last year,
    though, just to ensure that we could deal with the current
    situation that we have with people who are already in current
    defaults.
        Senator Collins. Excuse me for interrupting. But if in
    January of last year you had started the rulemaking on this,
    you would be probably done now or close to it.
        Ms. Galante. Yes. So, as I said, we are in that process of
    getting ready to put out a rulemaking. We're in the rulemaking
    process. We just haven't actually put out the proposed rule
    yet.
        Senator Collins. Well, I've got two other issues I want to
    turn to. But I guess what I would say to you is it seems to me
    you should have begun that rulemaking last January. It's now
    June. That's 1\1/2\ years. You'd be done. And I just think,
    even though it's faster if you get the mortgagee letter
    approach approved by us, you know what the legislative
    processes can be like. It's not pretty these days.
        I just would encourage you that if you think you have the
    answer to something, don't wait. Start the rulemaking. You
    don't have to necessarily go--you may be able to short circuit
    it through legislation, but don't wait. That was 1\1/2\ years
    ago.
        Ms. Galante. We are working on that.
        Senator Collins. Let me turn to another question. You
    informed us today that FHA has now used 75 percent of the
    commitment authority for the general insurance and special risk
    insurance fund, and current projections indicate that without
    additional commitment authority this year, FHA will be required
    to suspend insurance activity in mid August. This is very
    troubling to me.
        As you know, the chairman and I have been supportive of
    increasing the commitment authority for this important program.
    We would have liked to have gotten it in along with our bill,
    into the continuing resolution that was passed. It's important
    because it provides mortgage insurance for the construction of
    multifamily housing, hospitals, healthcare facilities.
        How will FHA manage the remaining commitment authority, and
    what will the effect be if the fund is forced to suspend
    activity because you've run out of commitment authority?

                              COMMITMENT AUTHORITY

        Ms. Galante. Yes, thank you, and thank you for your support
    for the additional authority. I would say a couple of things.
    First and foremost, now that we have hit the 75 percent, any
    commitments that are issued need to come into headquarters
    before they're issued so that we can literally--the first and
    foremost concern we have is to be sure that we're monitoring
    daily each commitment that's issued and now allowing a
    commitment to be issued if we don't have the authority. So,
    particularly, as we get closer and closer to the end of the
    fiscal year or to exhausting 100 percent of the authority, we
    need to pay attention to that.
        We have also had a number of conversations with industry
    about how to prioritize if we don't get additional commitment
    authority, you know, the best ways to prioritize the
    remaining----
        Senator Murray. If I could just--how many projects do you
    have in the pipeline right now?
        Ms. Galante. I don't know the exact number of projects, but
    we have in the pipeline more than the amount of authority we
    have left for the balance of the year. So if we need to stop
    issuing commitments in mid August, really, what we're talking
    about is new construction projects that were ready to close or
    soon to be ready to close and get under construction. We'd lose
    those jobs. We'd lose that economic activity.
        For properties that are being refinanced, you know, and are
    rehabilitating properties, they won't get their rehab done.
    They might be refinancing to take advantage of lower interest
    rates and, therefore, really be in a position to be as
    financially sound as possible going forward and protect the
    property. So those activities would need to be delayed. This
    really is a problem of delay if we run out of authority between
    now and the end of the year.
        Senator Collins. Thank you, Madam Chairman. That is of
    great concern.
        Senator Murray. Senator Boozman.
        Senator Boozman. Thank you, Madam Chair.
        Ms. Galante, I have the same problems as the Senator from
    Maine with the guidance issues, as far as not going forward and
    going through the process, where you have guidance which
    essentially has the same force of a rule, but the process isn't
    done. You said that you hadn't done it yet. I guess my question
    is when is yet? When do you expect a rule to be forthcoming?
        Ms. Galante. We're in a position that we are driving as
    hard as we can to get a proposed rule out by July or August of
    this year, because, again, we really need to get it in place as
    soon as possible so that we can continue to operate the
    program.
        Senator Boozman. So July or August is a reasonable
    expectation of the----
        Ms. Galante. That's the proposed rule, and then there's the
    back and forth process, yes.
        Senator Boozman. Let me ask you this. Last summer, the FHFA
    released a public request for comment on proposals to use a
    municipality's power of eminent domain to seize mortgage loans.
    At that time, the FHFA expressed concerns with such proposals
    and said that action may be necessary on its part to avoid a
    risk to safe and sound operations at its regulated entities and
    to avoid taxpayers' expense.
        What is your view on the proposed use of eminent domain in
    that regard?

                                 EMINENT DOMAIN

        Ms. Galante. Yes, thank you for the question. We certainly
    think it's premature for FHA to issue any guidance on this.
    There are a few places that have adopted the policy, but not
    actually implemented it. We believe the eminent domain process
    at its core is a local issue, and how localities use their
    eminent domain is something that is subject to a lot of local
    review.
        We also believe that the idea of it being used on mortgages
    is trying to get at an important issue of people's inability to
    refinance their mortgages that are in private label securities,
    and I think that's the primary driver behind that concept. And
    we do think that there are other ways of working to get more
    people refinanced who are under water, and we certainly look
    forward to continuing to work with Congress on some of those
    solutions.
        Senator Boozman. So if they are refinanced under that
    system, they are done into FHA-backed loans, potentially?
        Ms. Galante. Again, you know, if a community gets to a
    point where they are through all of the significant issues that
    are still to go to work out whether this is a viable concept,
    if all of that happens, then FHA will obviously need to be in a
    position to look at its approach to those loans. We just think
    it's premature in terms of how those proposals are being
    implemented.
        Senator Boozman. It seems like, though, that you would
    weigh in, in the sense that if it is such, that you're going to
    be in a position that they are FHA-backed, and that could
    potentially affect the solvency of the insurance fund, it seems
    like you would take a position.
        Ms. Galante. Again, Senator, we think it's premature in
    terms of even beginning to understand how they would operate in
    an individual localized context at this point.
        Senator Boozman. Do you have any comments about this?
        Mr. Montoya. No, sir. We have not actually looked into the
    matter. Certainly, it's an area that we're going to monitor and
    have some concerns over, but I would echo what the Commissioner
    said. I think these are very localized issues, and how those
    would be addressed in the local areas is probably the biggest
    question we would have.
        Senator Boozman. Personally, I think it's a huge problem if
    you're taking mortgages that are current in their payments from
    individuals. I mean, that, to me, is a huge departure from
    what's been done in the past. So are you starting to weigh in?
    Are you looking into this?
        Ms. Galante. Again, I would just say we think it's
    premature at this point. Some of the concerns that you have
    about how one values these mortgages is a big----
        Senator Boozman. But you wouldn't do that through guidance.
    You'd go forward somehow where somebody could weigh in in
    regard to----
        Ms. Galante. I'm sorry?
        Senator Boozman. I said if that were to happen, we wouldn't
    just have guidance in how to deal with that. You'd do some sort
    of rulemaking process or something.
        Ms. Galante. I think it's hard to say what kind of guidance
    would be necessary until we understand the details of how these
    programs might work in an individualized way.
        Senator Boozman. Thank you.
        Mr. Montoya, you acknowledge that FHA has been slow to
    respond to many of the recommendations and has only recently
    implemented some of them. Can you comment on what you see as
    the primary cause for the delay?
        Mr. Montoya. Well, going back to the earlier discussion on
    the HECM program with regard to the taxes and insurance, a lot
    of those changes or recommendations came out of an audit that
    happened 3 years ago, and we're only now getting to the point
    where something is being done. It's our feeling that FHA may be
    resting too much on the reliance, if you will, on the granting
    of legislative authority as opposed to beginning the proposed
    rulemaking process early.
        That kind of goes in line with what we've been saying. It's
    just very slow to address a lot of these forces that in the
    financial world, if you will, you've got to be able to address
    pretty quickly. You know, 2 or 3 years down the road, you've
    not only surpassed it, but you're into another problem. So,
    again, to echo back to the taxes and insurance issue, that's
    sort of a more recent example.
        Senator Boozman. Can you comment on where you feel the
    glitches are in not responding quicker to the Inspector
    General's suggestions?

                            CHALLENGES TO FHA REFORM

        Ms. Galante. Let me just say on a more global level, as
    opposed to just the HECM program, there are several challenges
    here. The first and foremost, I would say, is to think about
    the crisis that we've been in for the past number of years. We
    have had massive amounts of policy changes and rulemaking to
    do, and we have needed to prioritize at some level our own
    resources, our analytical resources, our process resources.
        All of this goes through our risk management office of
    evaluation, the Office of Management and Budget (OMB), and so
    this, you know--we've had a lot on our plates. And when you
    look at the forward mortgage, which is most of the trillion
    dollars of portfolio, we certainly have been spending a lot of
    effort there.
        The second point I would make here goes to the resource
    question of both staffing and also to the FHA transformation
    project, the information technology. So one of the Inspector
    General's recommendations to us about how we look at defaulted
    loans or non-performing loans--they made some recommendations
    that also took us a while to implement.
        But through use of the FHA transformation project, we were
    able to put in a very robust claims review process that is
    meeting all of the Inspector General's recommendations and
    more. But it took the time and the resources to get the
    information technology in place in order to perform the
    reviewing of all loans that went to claim in 2 years, all early
    payment defaults, plus an algorithm to pick out other high risk
    loans to review.
        So, you know, I think it's very successful that we're doing
    it. But it took that time to get the systems in place to be
    able to do it.
        Senator Boozman. Thank you.
        Thank you, Madam Chair.
        Senator Murray. Thank you. As everyone is so aware, many
    families experience a sudden crisis--it could be a health
    issue, a job loss, or some kind of unforeseeable situation--
    that leaves them unable to make their mortgage payments, and
    many of them are today desperately seeking a way to stay in
    their homes. I've had a lot of constituents come to my office
    to get help with some kind of loan modification.
        We all know appropriate modifications can benefit everyone.
    It can benefit the homeowner, who can stay in their home; the
    lender, if they want to avoid some kind of lengthy, costly
    foreclosure process; and for FHA, loan modifications can help
    avoid or reduce claims, which is why FHA requires its lenders
    to provide loss mitigation services to borrowers that fall
    behind on their payments.
        But it seems that lenders may not be adequately fulfilling
    this requirement. One of the new reforms that FHA is proposing
    to us would allow HUD to transfer the servicing of loans to a
    different servicer who could better assist the borrower with
    some kind of modification.
        Ms. Galante, what problems have you seen or can you
    describe for us in FHA's loss mitigation programs that led you
    to request that new authority?

                                LOSS MITIGATION

        Ms. Galante. Yes, thank you for the question. One of the
    things we see is that while you may be able to see any
    individual servicer looking at their overall record, they are--
    I don't want to say checking the box--but they are meeting the
    individual steps. But when you look at certain servicers and
    you see that their particular portfolio has a much smaller rate
    of successful loan modifications, you say to yourself,
    ``There's something deeper going on in that servicer's shop
    that somehow our reviews just aren't able to pick up.''
        So we really want to be able, particularly for those
    servicers that we see that are not having good outcomes or not
    having outcomes as good as some of the other servicers--we want
    to be able, if we can't get them there through other means, to
    ultimately say, ``Look, we've got to take this part of your
    portfolio and require it to be transferred or require you to
    subservice and really, you know, just require that you show
    that you can perform at a different level or have someone else
    perform for you.''
        Senator Murray. Mr. Montoya, do you think this would
    improve loss mitigation efforts, this proposal?
        Mr. Montoya. Well, I think, on its face, we would certainly
    be supportive of that. Anything that would keep any more losses
    from the fund occurring would be certainly beneficial.
        It's not something we've audited, although we are
    contemplating doing that later this year because, like
    anything, there will be risks, I'm sure, and we'll want to find
    out what that might be to work with the Commissioner early on
    in addressing them. But I would certainly support anything that
    would keep any more losses from occurring as beneficial, not
    only for the fund, but for the communities that they serve and
    the individuals that are being impacted by these issues.
        Senator Murray. Mr. Montoya, the work you're doing in
    partnership with HUD, Department of Justice, and some State
    attorneys is helping HUD recover money from claims that are
    paid on mortgages that weren't properly underwritten. In your
    testimony, you highlighted some of the egregious errors that
    you uncovered in your review of loans from 2007 to 2009.
        I understand that, to date, your office has helped recover
    hundreds of millions of dollars from these settlements in
    addition to the funding FHA received from the servicing
    settlement. Can you explain the investigations you and your
    partners are undertaking and what exactly you're finding?

                   OFFICE OF INSPECTOR GENERAL INVESTIGATIONS

        Mr. Montoya. Sure. Yes, ma'am, absolutely. Thank you for
    the question. I think all total, to date, my office has
    recovered over $1 billion. It would probably pay for ourselves
    a number of times over. But the types of reviews that we're
    doing are not minor technical reviews. We are looking at
    wholesale disregard for the FHA insurance program.
        We're looking at material type violations that we call
    incurable, things you can't fix, things like borrowers who
    never had the income in the first place to afford the home
    they're buying; no debt to income ratio analysis that would
    tell us what other bills they have to pay that would impact
    being able to make the mortgage; and, quite frankly, something
    as basic as whether they have the funds to come to closing to
    close on the loan. So these are the types of things that we're
    seeing and that seem to be rampant in some lenders.
        So, again, what I'd want to stress--because we've heard
    from a lot of stakeholders, mortgage bankers and others, that
    we're sort of nit-picking, that we're looking at technical
    violations, and that couldn't be further from the truth. We've
    got a number of other lenders we're currently looking at, and
    we've got more in the pipeline. Quite frankly, I'd have to say
    we have more than we can deal with, and we've actually had to
    turn some United States attorneys' offices away that would like
    to pursue some of these, because much like the Commissioner, we
    have limited resources, and there's only so much I can do. So
    we're trying to pick the worst of the worst, if you will.
        But, again, just to reiterate, we're talking about
    wholesale disregard of the program, something as fundamental as
    whether they can afford the home in the first place, and
    whether they have the resources to afford it.
        Senator Murray. You've also recommended that HUD take some
    steps to avoid paying unnecessary claims, including delaying
    payments to lenders and reviewing early default loans. What are
    the specific actions that you would like HUD to take to address
    some of those recommendations?
        Mr. Montoya. Well, to reiterate something the Commissioner
    said, we certainly recognize that staffing is always an issue,
    and limited resources. But some of the things that we've been
    recommending are reviews of what we call high risk defaults.
    These are defaults that have defaulted in the first 24 months
    of the loan. Those are always red flags for us of how we got
    there in the first place that early.
        You know, reviewing these while they're in the foreclosure
    process before they become claims, so that--because the
    foreclosure process can take months and months, that's a very
    good time to sort of look at these things to see if there was
    fraud or some sort of mismanagement, if you will, of how they
    underwrite these loans in the first place, so that HUD could
    avoid paying these loans if at all possible.
        These are the kinds of things that take staff resources,
    but they're also the kinds of things that the private mortgage
    insurance companies do. So in a perfect world, we'd like to see
    more of that happen. Recognizing, too, that HUD has an
    obligation to pay on these loans within a very short amount of
    time--you know, the Prompt Payment Act requires them to pay
    these claims within 30 days. That is insufficient time for them
    to do really any kind of review of the loan to see if there was
    any fraud or mismanagement in the underwriting of the loan.
        One of the recommendations that we have shared with the
    Commissioner and would like to talk to Congress and work with
    this subcommittee on is certifications, an idea concerning
    certifications by these lenders, where they're certifying that
    the loan that they're providing to FHA for a claim has been
    reviewed by them and it meets all the qualifications of a
    properly underwritten loan. It puts the onus back on the
    lender, if you will, and kind of keeps the exposure to FHA
    down.
        While there's a lot of discussion yet to be had on the
    issue, these are the kinds of things that we are recommending.
        Senator Murray. Commissioner Galante, do you want to
    comment on whether that's doable and what you think of it?
        Ms. Galante. Sure. I would say two things. First of all, we
    really appreciate the partnerships we have with the Inspector
    General on improving our quality assurance, our loan review
    process. I think their recommendations on looking at early
    payments defaults, for example, and looking at loans on an
    ongoing basis, we are now doing in a robust way with the help
    of our technology, which is from your help. Thank you.
        We think we're on the right path now going forward for some
    of those processes. We recently have talked about additional
    legislative items we might need or administrative actions that
    we could take, including looking at how good the certifications
    we have are. We're certainly willing to work with the IG on
    looking at that.
        Senator Murray. My time has expired, so I'll turn to
    Senator Collins.
        Senator Collins. Thank you.
        Commissioner, you have mentioned that the FHA's market
    share is decreasing and beginning to return to more traditional
    levels. Is a reduction in market share a goal of this
    administration?

                               FHA'S MARKET SHARE

        Ms. Galante. It is a goal of this administration that FHA
    return to a more normalized, traditional role in the
    marketplace. How one measures market share is an interesting
    challenge, in that one of the things that we've seen through
    this whole crisis is that the whole market has shrunk. So even
    though FHA's absolute dollar amount could stay the same, you
    need to have private capital come back in so that you're
    growing the whole market in order for our market share to begin
    to drop.
        We are beginning to see that, and I think there's a couple
    of reasons for that. One is that the premium increases that
    we've made and some of our other policy changes are encouraging
    private capital to come back. But I also think private capital
    is starting to come back because they're seeing the--you know,
    we've played a countercyclical role, the market is getting
    better, and we're seeing that private capital is now willing to
    put more financing available in the marketplace.
        Senator Collins. Let me talk about the premium increases
    that you mentioned and what strikes me as a possible unintended
    consequence of some of the policy changes. FHA, as you
    mentioned, has announced several premium increases in an effort
    to improve the financial health of the fund.
        I was surprised to read that one of the changes that was
    also included was to not allow borrowers to cancel their annual
    mortgage insurance premium when they reach the level where they
    have sufficient equity in their homes. This strikes me as not
    fair, but it also strikes me as leading to a perverse outcome
    where that borrower who has clearly been paying on time and has
    reached a certain level of equity is going to refinance out of
    FHA and leave you with a pool of more risky borrowers.
        So why would you want to implement that change?
        Ms. Galante. Thank you, Senator Collins. This may be a bit
    counterintuitive, but I think this is a hugely important policy
    that FHA is doing, and let me explain why. First of all, the
    policy of allowing cancellation of the premium did not come
    into effect at FHA until about 2000, 2001. So for most of FHA's
    history, the policy we're talking about reversing now was not
    in place.
        There's a bit of history that I don't really know, but I've
    heard, about why FHA back in 2001 did this. It was because the
    private mortgage insurers were going in this direction. But the
    challenge here is--and this is why it's important to have a
    good risk management office--the risk for the private mortgage
    insurers is entirely different than the risk for FHA. They're
    only insuring the top part of the loan. FHA is insuring the
    entire part of the loan.
        Even if you buy on an amortizing basis, have more equity,
    theoretically, in your home, we still have risk that if home
    prices go down, as they did during this crisis, we're still on
    the hook for the risk for that loan. In fact, one of the things
    we saw is that we were continuing to see claims, have defaulted
    loans on loans after they had stopped paying on their MIP,
    because it was an automatic cancellation.
        So we lost during the crisis by having that old policy in
    place. We lost, our risk manager believes, probably $10 billion
    of revenue that we would have otherwise had, and as prices
    declined, we would have had more revenue to deal with the
    losses. So we think this is an important reversal of policy for
    the future. As long as home prices are going up, up, up, maybe
    you'll have some people refinance out of these loans. But in
    the long term, ensuring that your premium matches the risk that
    you're taking on was the most important thing here.
        Senator Collins. Have you seen homeowners refinancing out
    of FHA-insured loans in order to avoid that mortgage premium
    insurance payment?

                          MORTGAGE INSURANCE PREMIUMS

        Ms. Galante. This policy just went into effect, so we
    haven't----
        Senator Collins. It's too soon.
        Ms. Galante. It's too soon to tell. But I would also just
    say that, primarily, what's going to drive people to refinance
    is our interest rates.
        Senator Collins. Right.
        Ms. Galante. So that's really going to be what drives
    people to decide to refinance or not.
        Senator Collins. Let me talk to you about the financial
    health of the FHA single family mortgage mutual fund. We've all
    mentioned the fact that the budget request shows that you
    anticipate drawing on your authority with the Treasury during
    this year to hold in reserve against expected future losses.
    Obviously, $943 million is a lot of money and is of great
    concern to us, or to me, because it would be the first time
    that you have taken this step. We thought it was going to
    happen last year, and then it didn't because of the settlement.
        Have conditions changed since that budget request, or do
    you still anticipate drawing that amount of money from the
    Treasury? What's your current prediction?
        Ms. Galante. Two things I do want to say. While we
    projected that we might draw last year and we didn't, and we
    certainly did get a number of settlements, we also made a
    number of policy changes that impacted, and we had volume that
    went up. So we would have ended up not drawing--even without
    the settlement dollars, we ended up with $3 billion positive as
    opposed to the draw of--I think it was $688 million that we
    thought we might take.
        And I say that because this year, the main thing that will
    drive whether we draw or not draw is whether our--this year, we
    have done all the premium increases and the policy changes
    before this budget came out, so those are kind of baked in.
    Those expectations of revenue are already baked into the
    budget. So the one thing that will change is whether we have a
    significant increase in volume. Then we would be less likely to
    draw or to draw that amount of money.
        And the other thing that I just would want to get out on
    the table here is if we, through the policy changes that we've
    been making, see significant improvements as a result of those
    policy changes in our recoveries, you know, on defaulted loans,
    on our real estate owned, that could, in consultation with OMB,
    change the trajectory.
        Senator Collins. What's your current estimate? You said
    that your premium increases are already baked into the budget.
    So, presumably, that's baked into the $943 million.
        Ms. Galante. Yes. The premium increases are already baked
    in. So, again, it will depend primarily on volume and whether
    there is a significant credit given to the recovery efforts
    that we've been taking on in terms of getting better on our
    recovery of our loans.
        Senator Collins. So do you have an estimate for us, a new
    estimate?
        Ms. Galante. We do not.
        Senator Collins. Thank you, Madam Chair.
        Senator Murray. Senator Boozman?
        Senator Boozman. Thank you, Madam Chair.
        Mr. Montoya, you mentioned that we have situations where
    you have just wholesale disregard for the rules, the high risk
    defaults, where you just know there's something going on based
    on that. Is there adequate legislation in place to deal with
    that right now? Do we have the safeguards to deal with the
    individuals who everybody in the room would agree are blatantly
    playing the system to their advantage?

                          FRAUDULENT LENDER SAFEGUARDS

        Mr. Montoya. Well, I appreciate the question, sir. Thank
    you. I think in one regard, the answer would be no. I think we
    could strengthen some of that. Right now, the way the laws are
    set up, a lender, i.e., being the company, that's found to be
    in violation of FHA's underwriting standards and that we're, in
    essence, going after, can simply shut their doors today. The
    very individuals who were running that lending company could go
    start up a new lending company tomorrow and be back in the
    business.
        So, unfortunately, we're not set up so that we can go after
    an individual. Shy of proving that they, specifically, they,
    themselves, have committed a fraud, which is very difficult to
    do, there's no way to sort of tack onto them the effects of the
    fact that they were running a poor company that poorly
    underwrote loans. So, in other words, there's no way for us to
    suspend them, specifically, individually, from being involved
    in the FHA program.
        So that's an area that we will be recommending some
    legislative language on. That would probably be the biggest
    thing. And I think until you can tag individual responsibility
    onto individuals for this kind of stuff, I'm not sure that
    we'll do much to change the culture of somebody who wants to
    defraud us.
        There's risk in any insurance program, as you well know,
    and we're never going to be 100 percent risk free. To the
    extent we can mitigate that, that would, to me, be one big
    mitigating factor to consider.
        Senator Boozman. Very good.
        Ms. Galante, do you agree, or can you add to that?
        Ms. Galante. Yes. I would just say I think this is an
    important issue and a very tricky one, and we share the concern
    with the Inspector General. What you're struggling with here is
    basic corporate law, in terms of if you're a corporate officer
    and you're doing things in the name of the corporate officer. I
    think there are some ways that we could explore to address this
    particular issue, but it is tricky.
        The other thing I would say is there are other items, in
    terms of help with enforcement, that we certainly legislatively
    would like and some of which we have asked for and were passed
    twice by the House. And we would very much like to work with
    the Senate to get those particular authorities to be able to
    terminate lenders based on their national work. Right now, if
    they operate in different geographies, we have to go after them
    in each of the geographies in which they're operating, which is
    obviously a challenge.
        And we don't have what's called indemnification authority
    for every class of lenders that we have. We have it for most of
    them, but not all of them. Those are two additional legislative
    asks that we would have in terms of enforcement authority.
        Senator Boozman. Very good.
        Mr. Montoya, I guess the only other thing I'd ask is what
    are the top couple--I read your testimony. What are the top
    couple of things that you feel that we as a Congress--you know,
    we're talking about this, and you said that you were prepared
    to perhaps come forward with some suggested legislation that we
    could look at and be more helpful. What other things are out
    there? What are your top couple of things that you'd like to
    see us maybe step forward on?
        This is a huge issue, and it affects those in the housing
    market, in the sense of trying to get in a home. All this stuff
    does is increase costs, and then also the cost to the
    taxpayers. Do you have any other things that you could dwell on
    for a second?
        Mr. Montoya. Yes, sir. Thank you for the question.
    Certainly, FHA faces a difficult challenge in striking that
    balance between protecting the fund, making the program
    attractive to prospective homeowners, lenders, that sort of
    thing.
        I think one of the things we're concerned with is that FHA
    is sort of too concerned, really, with regards to market share.
    While I understand they're coming down from that market share,
    I think, historically, we've seen too much of a concern on
    market share. By that, you end up taking risks, you know, for
    the simple reason of do you want to keep these lenders in the
    program. So that's one concern.

                     INFORMATION TECHNOLOGY INFRASTRUCTURE

        I think sort of the biggest concern for really what is a
    financial institution is their aging IT infrastructure and
    their ability to manage this high finance world, if you will,
    on systems that are 15 and 30 years old. I think in the budget
    request, if I remember correctly, that FHA submitted, they're
    asking for over $100 million in one budget cycle just for
    maintenance of these aging systems, and they're just going to
    get older every year.
        My major concern from an IT perspective when we come and do
    the financial information security type reviews is could we end
    up having a major, major issue with the IT portion of it, i.e.,
    losing data, is it vulnerable to manipulation, these sorts of
    things. So that would probably be my biggest concern, and as
    appropriations go, that takes money. I recognize that.
        But when you're spending $100-plus million a year on just
    maintenance of old systems, at some point you've got to pull
    the bandage and say, ``Okay, we've got to upgrade these
    things.''
        So those are probably my two biggest issues, you know, too
    much emphasis on the lenders in the program and trying to keep
    that market share, as opposed to just letting FHA do the
    cyclical rule that it's always done; and the IT infrastructure.

                               STAFFING CONCERNS

        I think the other thing I would add is the staffing
    concerns that FHA and, quite frankly, their sister counterpart
    in the Department, Government National Mortgage Association
    (GNMA), has, and that's staffing. I think some of the critical
    roles that both of these organizations have--I don't believe
    the pay structure allows them to recruit and retain the best
    that we could probably get because we're competing with the
    private sector market.
        And much like FHFA, as you mentioned earlier, the
    Securities and Exchange Commission, these organizations have
    additional budgetary salary authority to allow for that
    increased salary for key positions. I would certainly support
    something like that on behalf of FHA and GNMA to get the right
    qualifications you need to deal with some of these issues. So
    probably those three things.
        Senator Boozman. Thank you.
        Madam Chair, with your permission, could I ask if she
    agrees?
        Senator Murray. Absolutely.
        Senator Boozman. I think he's trying to help you. Do you
    agree with the aging infrastructure and the things like that
    that Congress perhaps needs to help out with to help you do a
    better job?
        Ms. Galante. Absolutely, I do, and it's very difficult. You
    can't retire the old systems until you build the new systems.
    You still have to continue to function in an ongoing
    environment--so the aging infrastructure. I agree with the
    staffing issue, and I would disagree a little bit on market
    share, but I think I would say it a little differently. We are
    concerned about the balance between access to credit for folks
    and the variety of controls we need to put on enforcement. So I
    think we're in the same basic place.
        Senator Boozman. Thank you, Madam Chair.
        Senator Murray. For the record, would you give us what your
    priorities are on the IT? We have invested quite a bit, and I'm
    worried about that as well.
        [The information follows:]
        For the last 80 years, the Federal Housing Administration (FHA) has
    played a critical role in support of the housing market. FHA has
    provided sustainable affordable housing for millions of Americans while
    also playing a critical countercyclical role during times of economic
    stress.
        FHA's capacity to deliver on this mission is increasingly at risk
    due to operational constraints and technology challenges. FHA's
    budgetary constraints, its uncompetitive compensation structure, and
    outdated technology put its core mission at significant risk and expose
    taxpayers to potential financial losses that can be avoided.
        The outdated technology challenges start with the two, core FHA
    information technology (IT) systems known as CHUMS and FHAC. These
    systems, which manage hundreds of billions of dollars of transactions,
    are between 30-40 years old. These core systems are surrounded by more
    than 20 other fragmented systems, which handle ancillary, but critical
    functions.
        While the technology already at FHA's disposal is challenged, there
    are also technology tools that FHA does not have, but desperately
    needs. These include effectively risk-monitoring tools, portfolio
    evaluation systems, and risk modeling technologies. These are all
    standard systems in the mortgage markets, which FHA lacks.
        These technology issues lead to a number of significant management
    challenges, including:
      --Lack of access to timely and useful data to inform risk management
            and mitigation decisions;
      --Reliance on volumes of paper and manual processes that lead to
            significant errors and suboptimal allocation of resources;
      --Persistent data integrity issue--different systems say different
            things; and
      --Challenging operational constraints which make it difficult for FHA
            to implement new quality assurance and risk mitigation actions.
        FHA generates more than $10 billion in receipts and pays out
    billions in claims each year.
        And while FHA Transformation--an initiative launched to address
    these challenges--has clear and significant payback (e.g., estimated at
    more than a billion dollars over the next several years), lack of
    funding has put the program at risk.
                               fha transformation
        FHA Transformation was launched several years ago to remedy the
    exhaustive list of IT challenges. Specifically, the initiative aims to
    address three main management challenges through better technology
    infrastructure:
      --Detect and prevent fraud, waste, and abuse:
        --Automate the aggregation of lender, borrower, and asset
                information of inbound data;
        --Automate the aggregation of lender and appraiser past behavior
                and violation history; and
        --Synthesize high-risk profile information and past, actual fraud
                data.
      --Prudently manage credit risk at both the portfolio and loan level:
        --Develop comprehensive portfolio, borrower, and collateral risk
                analytics;
        --Implement a portfolio evaluation tool to enable default,
                prepayment, home price, and cash flow modeling and loan-to-
                value (LTV) analysis;
        --Support the Office of Risk Management by enhancing forecasting
                capabilities and analytical;
        --Run situation-specific ad hoc reports and scenarios on the Single
                Family Housing (SFH) portfolio; and
        --Provide monthly refreshed credit data at the loan level for
                borrowers.
      --Respond rapidly to changing market conditions:
        --Provide a common, modern platform that supports rapid deployment
                and continued modification of current and new FHA business
                systems and processes;
        --Deliver a single source of authoritative data from which to
                perform risk analytics and other operational reporting;
        --Following migration of functionality, decommission legacy systems
                within SFH, Multi-Family Housing (MFH), and Healthcare; and
        --Simplify process of making changes to underlying system business
                rules.
        At the time this initiative was launched, the estimated cost was
    set at approximately $115 million. Given FHA generates more than $10
    billion in receipts and billions in losses, this investment has clear
    and immediate payback.
                         progress on fha transformation
        Significant progress has been made on FHA Transformation to date.
    This includes:
      --Investment in basic infrastructure that will replace the core
            systems;
      --Launch of front-end system that accepts lender certification;
      --Portfolio analytics that has identified billions of dollars of
            improvement potential in how FHA disposes of assets; and
      --Piloting and testing electronic application processing tools.
        About half the investment FHA needs has been made to date to
    achieve this progress.
                                    appendix
        IT challenges in the Single Family portfolio:
      --Unclear picture of full credit risk on a loan and inconsistent
            referral of higher-risk loans for manual underwriting;
      --TOTAL system allows lenders an unlimited number of pre-
            qualification submissions with only a limited audit trail;
      --Reliance on multiple automated underwriting systems not owned by
            FHA;
      --Heavy reliance on manual processing and paper case binders sent in
            by lenders;
      --Manual application verification processes;
      --Inability to automatically validate appraised value prior to loan
            closing and endorsement and unable to receive appraisal
            information through direct interface with lenders;
      --Lack the capability to accept eSignatures;
      --Post endorsement and appraisal reviews based on outdated algorithms
            and thus unable to effectively target most risky loans;
      --Lack ability to track lender activity and interactions with lenders
            over time, increasing risk of fraud; and
      --Data integrity and data reporting issues leading to manual data
            entry, processing delays and limited accuracy.
        IT challenges in the Multifamily and Healthcare portfolios:
      --Inability to proactively identify and mitigate risk due to lack of
            capability to share and analyze data (no central data, paper
            based application processing);
      --Processes are entirely manual, relying mostly on MS Word and Excel,
            for credit analysis and write-ups;
      --Difficult, and in many cases, impossible to implement new programs
            in existing systems; and
      --Limited management reporting.

        Senator Murray. But I just had one final question, and that
    is that you recently announced a significant reorganization of
    the Office of Multifamily Housing. It's going to affect about
    900 HUD employees over the next several years. The
    administration has rightfully said this move will reduce costs,
    create efficiencies, and improve program delivery.
        But those changes are going to mean fewer staff available
    to oversee and manage HUD's programs, and it means that HUD
    staff will not be located in many areas of our country, a
    concern that some multifamily housing providers in my State
    have raised with me personally. Can you just tell us how you
    can ensure that oversight will not be compromised under this
    new structure and that customers will continue to see the same
    level of service, particularly in places where HUD is no longer
    going to have an office?

                         OFFICE OF MULTIFAMILY HOUSING

        Ms. Galante. Yes, thank you. Clearly, it is challenging to
    operate on a national platform with the demand on the
    multifamily office. I just want to say that in terms of long
    term, this is critical to get our workload balanced across the
    country.
        So just to give you a quick example of why I believe that
    we will be able, long term, to operate in a more consolidated
    fashion across the country is that we have severe imbalances in
    all these 50 offices in the number of assets. We have some
    offices where project managers are responsible for over 200
    assets, and in other parts of the country, they're responsible
    for 30 assets per project manager. So what you see is just a
    vast imbalance of workload.
        We're trying in a whole variety of ways to balance that
    out. But one long-term way of doing it is consolidating the
    personnel into larger geographic areas so that they can share
    that work more evenly and stay within our very severe budget
    constraints. At the same time, given how we are in an
    electronic world, we believe that through technology and
    through other means, including travel, we will ensure that
    customers are served in all locations.
        Senator Murray. And they know the areas that----
        Ms. Galante. In local areas. And we'll have specialized
    teams within these larger consolidated teams with local
    knowledge and connections to the local community.
        Senator Murray. I appreciate that very much.

                         ADDITIONAL COMMITTEE QUESTIONS

        I do want to remind my colleagues that we're going to leave
    the hearing record open for 1 week for additional questions.
        I thank both of you for appearing before this subcommittee
    today.
        [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. Carol Galante
               Questions Submitted by Senator Barbara A. Mikulski
               consolidation of the office of multifamily housing
        Question. Federal agencies must always be frugal. And they must use
    taxpayer dollars responsibly. But in the current budget environment,
    it's even more important for agencies to think of reforms to make sure
    that every dollar of the taxpayers' money is being used as wisely as
    possible. This consolidation will have an impact on the employees at
    field offices across the country, and the Americans who rely on the
    work that they do. How did you determine that consolidating down to
    five hubs and five satellite offices was the best way to achieve your
    efficiency goals?
        Answer. Please see the end of this response for several exhibits
    that illustrate this explanation of the decision to consolidate to five
    hubs and five satellite offices. The current field structure has 17
    hubs and employees in over 50 field offices. This structure leads to
    five key areas of concern:
      --Unmanageable spans of control at the top of the organization.
            Currently, the Multifamily deputy assistant secretary (DAS) has
            nearly 25 direct reports, with 17 hubs and 6 headquarter (HQ)
            functions (see Exhibit 1);
      --Inconsistent operations across 50+ locations, leading to
            inconsistent customer service across geographies (particularly
            for our largest customers), and inhibiting effective risk
            management (see Exhibit 2);
      --Misalignment between Multifamily's structure and the established
            Federal regions, leading to inconsistent coordination between
            Multifamily and the rest of the Department of Housing and Urban
            Development (HUD);
      --Over 4x workload imbalance across hubs in Production, and 3x in
            Asset Management (worse within individual offices), leading to
            long queues in some markets and underused staff in others (see
            Exhibit 3); and
      --Low spans of control in many field offices (e.g., one manager over
            two staff), creating unnecessary layers and stifling employee
            engagement.
        The proposed structure will directly address each of these failures
    in the following ways:
      --The new five-hub model significantly reduces the number of direct
            reports to headquarters, making management of the field
            organization simpler and more streamlined (see Exhibit 4):
      --Consolidating to 10 locations enables greater consistency in
            Multifamily's operations, enabling us to deliver more
            consistent service to our customers while more consistently
            managing the risk of the entire Multifamily portfolio;
      --The new five-hub model is more in line with the established Federal
            regions, which will allow for better coordination between
            Multifamily and the rest of HUD (see Exhibit 5);
      --Workload across each of the five regions will be more evenly
            distributed; each region will handle a similar volume in both
            Production and Asset Management (see Exhibit 6); and
      --The reorganization will produce greater spans of control--in line
            with HUD policies and Federal standards--ensuring all locations
            operate at scale, allowing us to make the most of scarce
            financial resources.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Question. How was the decision made to close the HUD Maryland
    Office of Multifamily Housing and all the offices in Region 3?
        Answer. Within this response are two exhibits that illustrate this
    explanation, including a detailed breakdown of the comparison of
    Boston, New York, Philadelphia, and Baltimore. First, it is worth
    noting the Multifamily is not closing any HUD field offices; other HUD
    staff will remain in the Baltimore field office. However, we do
    understand the concern about consolidating Multifamily's field
    structure, which means that Multifamily staff will relocate from the
    Baltimore office. To determine which 10 offices would serve as the
    future Multifamily hub and satellite offices, we first began by only
    considering locations that were already hubs (see Exhibit 7).

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        In order to then streamline the Multifamily leadership structure,
    balance workload, and align with Field Policy and Management (FPM)
    regions, we then organized the hub offices into five geographic
    regions: the first covers Federal regions I, II, and III (the Boston,
    New York, Philadelphia and Baltimore offices); the second covers
    Federal region IV (the Atlanta, Jacksonville, and Greensboro offices);
    the third covers Federal region V (the Chicago, Detroit, Columbus, and
    Minneapolis offices); the fourth covers Federal regions VI and VII (the
    Fort Worth and Kansas City offices); and the fifth covers Federal
    regions VII, IX, and X (the San Francisco, Denver, Los Angeles, and
    Seattle offices) (see again Exhibit 7).
        Finally, we compared offices from within the proposed five regions
    based on several factors: the full-time equivalent (FTE) count in each;
    the Production workload (average annual firm commitments); the Asset
    Management workload (total assets); and whether an FPM Regional
    Administrator sat in that office (see again Exhibit 7).
        In determining which two offices to select from Federal regions I,
    II, and III, we ranked Boston, New York, Philadelphia, and Baltimore
    against each other based on these criteria. Based on these criteria,
    Baltimore and Philadelphia were ranked lower than other offices in the
    new Multifamily region (see Exhibit 8).

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Question. What will be the effect on HUD's processing of
    multifamily loans and the review of projects during consolidation and
    after it?
        Answer. We believe that this transformation will improve the way we
    do business by enhancing our efficiency, risk management, and
    consistency--which will in turn improve our ability to deliver on our
    mission of providing affordable housing.
        Prior to the consolidation of field offices, we will roll out
    workload sharing nationally across Multifamily offices. Once
    consolidation begins, workload sharing will allow us to take work
    ``offline'' from impacted offices and move it to other areas of the
    country in order to ensure continuity of operations and excellent
    customer service.
        As we complete the implementation of each wave, all Multifamily
    loans will be reviewed through a formalized ``risk-based processing''
    approach that segments incoming applications based on risk and
    complexity. Staff will be assigned to applications based on the
    particular expertise and experience that assessing those loans will
    require. More experienced underwriters will process riskier, more
    complex applications. These underwriters will oversee an end-to-end
    review of each application, continuing to draw in technical experts
    such as construction analysts and appraisers as needed. While our staff
    already considers risk and complexity in their work, we believe that
    formalizing this process will improve the consistency of our risk
    management and service delivery. This process complements tools
    introduced in the Breaking Ground initiative like the ``Early Warning
    System,'' which allowed Production staff to rapidly identify
    applications that required further review by the submitter before being
    processed.
        In addition to clarifying roles, we will also be identifying
    opportunities to streamline the underwriting process to ensure that
    simple applications are not being over-processed. We believe that this
    approach to Production will improve risk management by focusing expert
    attention on the most challenging applications, improve customer
    service by providing a clearer point of contact and more streamlined
    processing, and improve the overall efficiency of Multifamily's
    Production operations. This model has already proven successful in the
    Rental Assistance Demonstration and Low-Income Housing Tax Credit
    pilot. Many field offices are already experimenting with variants of
    this model, and through the Transformation we will formalize it and
    make it more consistent.
        A similar approach will also be adopted in Asset Management,
    whereby complex and troubled assets will be assigned to Multifamily's
    most expert staff. This approach is again consistent with the risk-
    based approach introduced to Asset Management by Sustaining Our
    Investments. We will continue conducting on-site inspections and
    reviews as required by our policies and procedures. Today, we already
    manage assets and review applications from around the country, even
    when we have no nearby field office. We plan to continue this approach
    in the future.
        Question. How will this consolidation affect smaller banks and
    lenders?
        Answer. Like all Multifamily stakeholders, smaller banks and
    lenders will continue to have the same level of access to dedicated
    Multifamily staff that they have today. Due to shorter processing times
    and improved consistency across sites, banks and lenders should expect
    improved customer service from Multifamily.
        Question. I understand that you have promised the employees
    transparency and that you will keep them informed of changes; what
    steps have you taken, and what will you do as the process continues, to
    make sure that employees are kept up-to-date on the consolidation?
        Answer. In order to maintain an open dialogue between leadership
    and staff, the leadership at HUD and within Multifamily has conducted
    an extensive series of in-person, on the phone, and Web casts with
    staff. So far, this has included over two dozen different interactions,
    including 10 visits to field offices across the country. Multifamily
    leadership plans to continue these conversations into the foreseeable
    future. After the initial announcement, FHA Commissioner Carol Galante
    and Deputy Assistant Secretary Marie Head conducted a series of
    conference calls with each hub, during which they answered questions
    and collected feedback. Secretary Donovan, Deputy Secretary Jones,
    Commissioner Galante, and Deputy Assistant Secretary Head are all
    conducting site visits to field offices to meet with and take questions
    from Multifamily staff in person. During several biweekly conversations
    with the Deputy Secretary, which are broadcast every other Friday, the
    Deputy Secretary has provided answers to frequently asked questions and
    has hosted subject matter experts to describe employee options for
    relocating, buyouts and early retirement.
        Multifamily is committed to providing ``on demand'' resources to
    staff. We have created dedicated Web sites on HUD.gov and on the
    internal HUD@work site. We also continue to track incoming questions
    from individual employees, and regularly update the Questions and
    Answers found online\1\. Finally, we have set up a call center in the
    Office of Housing that directs employees to the appropriate subject
    matter experts.
    ---------------------------------------------------------------------------
        \1\ http://portal.hud.gov/hudportal/documents/
    huddoc?id=052813TrnsfrmMF_FAQs.pdf.
    ---------------------------------------------------------------------------
        We are preparing local supervisors to hold conversations with
    individual staff members regarding their relocation destination, so
    that employees know, to the maximum extent possible, where we are
    proposing to relocate them. Once union negotiations are complete, we
    will launch a new series of communications with employees in order to
    inform them of the outcomes of negotiations and to provide individuals
    with the location of their directed reassignments and the timing of
    buyout offers.
        We expect that this regular cadence of communications will continue
    throughout the multi-year implementation of the transformation, as we
    remain committed to informing staff of the latest developments.

                             CONCLUSION OF HEARINGS

        Senator Murray. This hearing is recessed until Thursday,
    June 13, at 10 a.m. We'll have a hearing on our need to invest
    in our Nation's transportation infrastructure.
        So thank you again to both of you.
        [Whereupon, at 3:55 p.m., Tuesday, June 4, the hearings
    were concluded, and the subcommittee was recessed, to reconvene
    at 10 a.m., Thursday, June 13.]

    TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES
                      APPROPRIATIONS FOR FISCAL YEAR 2014

                                  ----------

                                           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 2014 budget
    request for programs within the subcommittee's jurisdiction.]

                             Congressional Witness

     Prepared Statement of Representative Rick Larsen, U.S. Representative
                         From Washington, 2nd District
        Thank you for the opportunity to submit testimony to the Senate
    transportation appropriations subcommittee on the need for investment
    in our country's infrastructure. Chairman Murray has been a leader on
    this issue for many years, and I appreciate her continuing focus on
    this issue.
        The recent collapse of the I-5 bridge across the Skagit River
    offers an example of the worst case scenario when we fail to adequately
    invest in infrastructure. I am hopeful that Congress will learn from
    this near-tragic incident.
        A couple weeks ago, Dan and Sally Sligh packed up their camper and
    headed out on Interstate 5 on the way to their favorite campsite in
    northwest Washington State. While crossing a bridge over the Skagit
    River they had safely crossed many times before, a large truck ahead of
    them clipped the frame of the bridge above.
        Without warning, and without time to react, the pavement under
    Dan's pickup fell from under them. Next, Dan said, ``It was just a
    white flash and cold water.'' Like thousands of constituents, I myself
    have driven across that bridge hundreds of times. But today no cars are
    crossing it.
        Recovery workers have been working hard pulling pieces of that
    bridge, along with Dan's pickup, from the flowing waters of the Skagit
    River, and quickly building a replacement span. The fact that no one
    died in this collapse is a blessing. But not all have been so lucky.
    I'm sure the subcommittee will recall the 2007 bridge collapse in
    Minneapolis that killed 13 people and injured another 145.
        I would ask the subcommittee to consider a simple question: Should
    Americans be able to drive across a highway bridge with the reasonable
    expectation that it will not crumble away from underneath them?
        While the National Transportation Safety Board is continuing its
    investigation into all the facts of the bridge collapse, what we
    already know about our aging infrastructure should be enough to make
    this Congress act.
        Sixty-seven thousand bridges in our country are rated structurally
    deficient. When those bridges fall, it isn't just the unlucky few on
    those bridges who suffer. Whole economies that rely on safe and
    efficient transportation suffer.
        The I-5 bridge over the Skagit River doesn't just connect
    Burlington and Mount Vernon. It connects the entire West Coast and
    carries millions of dollars' worth of trade between Canada and the
    United States. Today that trade is in stop-and-go traffic on local
    roads.
        The good news is that we know how to build safe bridges. Thousands
    of civil engineers devote their lives to building good structures that
    don't fall down. But we need to pay for them. We need to maintain our
    bridges until they are old, and then we need to replace them. We can't
    keep waiting until they crumble into the water below.
        But if we're really going to do something about our long-term
    transportation needs, Congress needs to get to work on a long-term
    transportation bill that doesn't just patch our aging roads, but
    invests in an infrastructure that meets the needs of America's 21st
    century economy.
        It's time to put our money where our safety is. I look forward to
    working with you to make sure that we do so.

                           Nondepartmental Witnesses

         Letter From the Advocates for Highway and Auto Safety, et al.
                                                         June 17, 2013.
    Hon. Patty Murray,
    Chair, Subcommittee on Transportation, Housing and Urban Development,
            and Related Agencies,
    Washington, DC.
    Hon. Susan Collins,
    Ranking Member, Subcommittee on Transportation, Housing and Urban
            Development, and Related Agencies,
    Washington, DC.
        Dear Madam Chairman: As families who have lost loved ones in large
    truck crashes, victims who have survived large truck crashes, leading
    national safety organizations and truck drivers, we want to express our
    gratitude for your leadership in holding the Appropriations
    Subcommittee on Transportation, Housing and Urban Development and
    Related Agencies hearing, ``Crumbling Infrastructure: Examining the
    Challenges of Our Outdated and Overburdened Highways and Bridges.'' We
    respectfully request that this letter be submitted to the hearing
    record.
        The recent collapse of the Interstate 5 bridge in your home State
    of Washington brought the need to address the declining condition of
    our Nation's infrastructure to the forefront of the debate over
    adequate care and investment in our roads and bridges. Initial reports
    from the National Transportation Safety Board (NTSB) indicate the
    collapse resulted from an oversized tractor-trailer striking an
    overhead truss structure. This catastrophe highlights a growing safety
    risk to the public and demonstrates the critical need for Congress to
    strongly resist constant efforts to allow bigger, heavier and longer
    trucks on our highways.
        Truck crash fatalities are on the rise. In 2011, over 3,700 people
    were killed and 88,000 were injured on U.S. highways in large truck
    crashes. Additionally, in 2010, large truck crash fatalities increased
    by 9 percent to 3,675 deaths, despite an overall decline in motor
    vehicle deaths during the same year. Allowing larger, heavier trucks
    will further burden our bridges and roads, endanger the motoring public
    including truck drivers, as well as strain our wallets. The annual cost
    to society from crashes involving large trucks is estimated to be
    nearly $42 billion. This is an unnecessary and preventable loss of
    lives and dollars.
        By overwhelming margins in public opinion polls, the American
    public has consistently opposed any increases in the size and weight of
    large trucks. A May 2013 Lake Research Partners public opinion poll
    reiterated this, showing that 68 percent oppose heavier trucks and 88
    percent of Americans do not want to pay higher taxes for the damage
    caused by heavier trucks. The consistent and broad opposition to
    bigger, heavier trucks is based on the public's clear understanding
    about the safety consequences that tragically are demonstrated in
    preventable truck crash fatalities and injuries occurring every day on
    our Nation's roadways. Sharing the road with overweight and oversized
    trucks is dangerous to motorists involved in a crash as well as when
    bridges fail. In 2007 the devastating collapse of the Interstate 35
    bridge in Minneapolis tragically killed 13 people and injured 145 more
    innocent motorists.
        The well-financed lobbying efforts by special industry interests to
    push for bigger and heavier trucks, regardless of the human and
    economic consequences, are relentless as well as disingenuous. Claims
    that allowing increases in truck size and weight limits will lead to
    fewer trucks is wrong and has never occurred when Congress or States
    have given in to industry pressure. The catastrophic annual toll of
    deaths and injuries in large truck crashes and the threat to bridge and
    roadway safety highlighted by the recent bridge collapse in Washington
    State as well as the 2007 I-35 bridge collapse serve to validate
    concerns that the public and truck crash victims have regarding truck
    safety. History has demonstrated that every time truck weights
    increase, more trucks occupy our roads. For example, after the 1982
    Surface Transportation Assistance Act (STAA) pre-empted State size and
    weight limits on federally funded interstate highways, and in 2010 when
    the Federal weight limit on Maine and Vermont interstates was
    increased, truck traffic grew significantly. Despite this reality,
    Congress will again be asked to look the other way and legislate
    increases in truck size and weight limits as the discussions begin on
    the next surface transportation reauthorization bill.
        The American Society of Civil Engineers (ASCE) currently rates the
    Nation's bridges at a C+. Other studies have documented billions of
    dollars needed to address the backlog of road and bridge repairs facing
    our Nation. We cannot continue to wait for events like the bridge
    collapses in Washington and Minnesota to bring attention and action to
    the dire state of the Nation's infrastructure. Overweight trucks create
    a disproportionate level of this damage, and as axle weight rises even
    in small increments, the resulting damage increases disproportionately
    at a rapid rate. In the case of the I-35 bridge in Minnesota, a leading
    factor in that bridge's collapse was found to be loading. The loading
    which contributed to that bridge collapse resulted from a combination
    of construction materials and traffic, and can also result from
    increases in truck weights.
        If truck weights are increased from 80,000 to 97,000 pounds, the
    overall weight on a bridge would be magnified substantially when
    multiple trucks are on the bridge each carrying 17,000 more pounds.
    Five trucks simultaneously traveling over a bridge would result in
    85,000 additional pounds on the bridge. On one of our Nation's more
    than 70,000 structurally deficient bridges, this may potentially exceed
    the bridge's loading capacity. Our Nation's leaders must heed the
    Washington and Minnesota bridge collapses as a wakeup call and act
    swiftly to take the necessary legislative action to prevent further
    tragedies of this nature from occurring.
        In the interests of public safety, the protection of our
    infrastructure, and the preservation of our dwindling tax revenues and
    our environment, it is crucial for Congress to resist attempts to
    ratchet up truck sizes and weights. According to the Federal Highway
    Administration, there are 66,749 structurally deficient bridges and
    84,748 functionally obsolete bridges throughout the United States. With
    so many bridges requiring critical maintenance and repair, there are
    simply not enough resources to address even a fraction of the problem,
    let alone to shoulder the additional costs that bigger, heavier trucks
    will impose.
        Thank you for your continuing leadership in addressing highway
    deaths and injuries. We look forward to continuing to work with you in
    advancing safety.
                Sincerely,
                                       Jacqueline Gillan,
                                               President, Advocates for
                                                   Highway and Auto Safety.
                                       Fred McLuckie,
                                               Legislative Director,
                                                   International
                                                   Brotherhood of
                                                   Teamsters.
                                       Daphne Izer,
                                               Founder, Parents Against
                                                   Tired Truckers, mother
                                                   of Jeff Izer who was
                                                   killed in a truck crash
                                                   10/10/93.
                                       Joan Claybrook,
                                               Co-Chair, Citizens for
                                                   Reliable and Safe
                                                   Highways.
                                       John Lannen,
                                               Executive Director, Truck
                                                   Safety Coalition.
                                       Lawrence Liberatore,
                                               Board Member, Parents
                                                   Against Tired Truckers,
                                                   father of Nick
                                                   Liberatore who was
                                                   killed in a truck crash
                                                   6/9/97.
                                       Jennifer Tierney,
                                               Board Member, Citizens for
                                                   Reliable and Safe
                                                   Highways, Member,
                                                   Federal Motor Carrier
                                                   Safety Administration's
                                                   (FMCSA's) Motor Carrier
                                                   Safety Advisory
                                                   Committee, daughter of
                                                   James Mooney who was
                                                   killed in a truck crash
                                                   9/20/83.
                                       Jane Mathis,
                                               Board Member, Parents
                                                   Against Tired Truckers,
                                                   Member, FMCSA's Motor
                                                   Carrier Safety Advisory
                                                   Committee, mother to
                                                   David Mathis and mother-
                                                   in-law to Mary Kathryn
                                                   who were killed in a
                                                   truck crash 3/25/04.
                                       Wanda Lindsay,
                                               Founder, The John Lindsay
                                                   Foundation, seriously
                                                   injured in a truck crash
                                                   5/7/10, wife of John
                                                   Lindsay who died on 5/9/
                                                   10 following a truck
                                                   crash.
                                       Linda Wilburn,
                                               Board Member, Parents
                                                   Against Tired Truckers,
                                                   mother of Orbie Wilburn
                                                   who was killed in a
                                                   truck crash 9/2/02.
                                       Roy Crawford,
                                               Underride Network, father of
                                                   Guy ``Champ'' Crawford
                                                   who was killed in a
                                                   truck crash 1/12/94.
                                       Tami Friedrich Trakh,
                                               Board Member, Citizens for
                                                   Reliable and Safe
                                                   Highways, Member,
                                                   FMCSA's Motor Carrier
                                                   Safety Advisory
                                                   Committee, sister to
                                                   Kris Mercurio, sister-
                                                   in-law to Alan Mercurio,
                                                   aunt to Brandie Rooker
                                                   and Anthony Mercurio who
                                                   were killed in a truck
                                                   crash 12/27/89.
                                       Dawn King,
                                               Board Member, Citizens for
                                                   Reliable and Safe
                                                   Highways, daughter of
                                                   Bill Badger who was
                                                   killed in a truck crash
                                                   12/23/04.
                                     ______

     Prepared Statement of the American Indian Higher Education Consortium
        This statement focuses on the Department of Housing and Urban
    Development (HUD).
        On behalf of the Nation's 37 Tribal Colleges and Universities
    (TCUs), which collectively are the American Indian Higher Education
    Consortium (AIHEC), thank you for the opportunity to express our views
    and recommendations regarding the Department of Housing and Urban
    Development Tribal Colleges and Universities' Program (TCUP) for fiscal
    year 2014.
                              summary of requests
        Department of Housing and Urban Development (HUD).--Beginning in
    fiscal year 2001, a TCU initiative had been administered by the HUD--
    Office of University Partnerships as part of the University Community
    Fund. This competitive grants program enabled TCUs to build, expand,
    renovate, and equip their facilities that are available to, and used
    by, their respective reservation communities. We strongly urge the
    subcommittee to reject the recommendation included in the President's
    fiscal year 2014 budget request and to support the goal of Executive
    Order 13592 to strengthen TCUs by funding the competitive HUD-TCU
    Program at the fiscal year 2010 level of $5.435 million. Additionally,
    we request that language be included to permit that a small portion of
    the funds appropriated may be used to provide technical assistance to
    institutions eligible to participate in this competitive grants
    program.
            tcu shoestring budgets: ``doing so much with so little''
        Tribal Colleges and Universities are accredited by independent,
    regional accreditation agencies and like all U.S. institutions of
    higher education, must periodically undergo stringent performance
    reviews to retain their accreditation status. TCUs fulfill additional
    roles within their respective reservation communities functioning as
    community centers, libraries, tribal archives, career and business
    centers, economic development centers, public meeting places, and child
    and elder care centers. Each TCU is committed to improving the lives of
    its students through higher education and to moving American Indians
    toward self-sufficiency.
        TCUs have advanced American Indian and Alaska Native (AI/AN) higher
    education significantly since we first began four decades ago, but many
    challenges remain. Tribal Colleges and Universities are perennially
    underfunded, and remain some of the most poorly funded institutions of
    higher education in the country.
        The tribal governments that have chartered TCUs are not among the
    handful of wealthy gaming tribes located near major urban areas and
    regularly highlighted in the mainstream media. Rather, they are some of
    the poorest governments in the country and Tribal Colleges and
    Universities are home to some of the most disadvantaged counties in
    America. In fact, 7 of the Nation's 10 poorest counties are home to a
    TCU. The U.S. Census Bureau, American Community Survey specifies the
    annual per capita income of the U.S. population as $27,100. However,
    the annual per capita income of AI/ANs is just $13,300, about half that
    of the general population.
        The Federal Government, despite its direct trust responsibility and
    treaty obligations, has never fully funded the TCUs institutional
    operating budgets, authorized under the Tribally Controlled Colleges
    and Universities Assistance Act of 1978. Currently, the administration
    requests and Congress appropriates over $200 million annually toward
    the institutional operations of Howard University (exclusive of its
    medical school), the only other Minority Serving Institution (MSI) that
    receives institutional operations funding from the Federal Government.
    Howard University's current Federal operating support exceeds $19,000
    per student. In contrast, most TCUs are receiving $5,665 per Indian
    Student (ISC) under the Tribal College Act, about 70 percent of the
    authorized level. TCUs have proven that they need and deserve an
    investment equal to--at the very least--the congressionally authorized
    level of $8,000 per Indian student, which is only 42 percent of the
    Federal amount now appropriated for operating Howard University. It is
    important to note that although about 17 percent of the TCUs'
    collective enrollments are non-Indian students living in the local
    community, TCUs only receive Federal funding for operations based on
    Indian students, which are defined as members of a federally recognized
    tribe or a biological child of a tribal member. Please understand that
    we are by no means suggesting that Howard University does not need or
    deserve the funding it receives, only that the TCUs also need and
    deserve adequate institutional operations funding; however, their
    operating budgets remain grossly underfunded.
        While TCUs do seek funding from their respective State legislatures
    for their students that are non-Indian State residents (sometimes
    referred to as ``non-beneficiary'' students) successes have been at
    best inconsistent. TCUs are accredited by the same regional agencies
    that accredit mainstream institutions, yet they have to continually
    advocate for basic operating support for their non-Indian State
    students within their respective State legislatures. If these non-
    beneficiary students attended any other public institution in the
    State, the State would provide that institution with ongoing funding
    toward its day-to-day operations. Given their locations, often hundreds
    of miles from another postsecondary institution, TCUs remain open to
    all students, Indian and non-Indian, believing that education in
    general, and postsecondary education in particular is the silver bullet
    to a better economic future for their regions.
        TCUs effectively blend traditional teachings with conventional
    postsecondary curricula. They have developed innovative ways to address
    the needs of tribal populations and are overcoming long-standing
    barriers to success in higher education for American Indians. Since the
    first TCU was established on the Navajo Nation in 1968, these vital
    institutions have come to represent the most significant development in
    the history of American Indian higher education, providing access to,
    and promoting achievement among, students who might otherwise never
    have known postsecondary education success.
        Inadequate funding has left many TCUs with no choice but to
    continue to operate under severely distressed conditions. The need for
    HUD-TCUP funding remains urgent for construction, renovation,
    improvement, and maintenance of key TCU facilities, such as basic and
    advanced science laboratories, computer labs, and increasingly
    important student housing, day care centers, and community services
    facilities. Although the situation has greatly improved at many TCUs in
    the past several years, some TCUs still operate--at least partially--in
    donated and temporary buildings. Few have dormitories and even fewer
    have student health centers. At Sitting Bull College in Fort Yates,
    North Dakota, competitively awarded HUD grant funds have been leveraged
    to expand the college's usable space from 12,000 square feet (sf) to
    100,000 sf over 10 years. Additionally, HUD grant dollars have been
    used to address three leaking roofs that created a mold problem in the
    area referred to at the college as the ``Hall of Buckets.'' HUD grant
    funds were also used to complete a renovation on its learning center,
    correcting major deficiencies, including recurring sewer and water
    problems, handicap accessibility issues, lack of effective safety/
    security measures (surveillance and alarm systems), and outdated
    washroom facilities.
                                 justifications
        Department of Housing and Urban Development.--Executive Order 13592
    addressing American Indian education and strengthening of Tribal
    Colleges and Universities holds Federal agencies accountable to develop
    plans for integrating TCUs into their various programs. TCUs work with
    tribes and tribal communities to address all aspects of reservation
    life, including the continuum of education, housing, economic
    development, health promotion, law enforcement training, and crime
    prevention. Likewise, Federal agencies need to work with TCUs. To
    achieve results, Congress needs to hold the administration accountable
    for the strengthening of the TCUs, including their physical plants and
    ensuring that they are routinely included as full partners in all
    existing and potential Federal higher education programs. The HUD-TCU
    competitive grants program, administered by the Office of University
    Partnerships, is an excellent place to start. This competitive grants
    program has enabled TCUs to expand their roles and efficacy in
    addressing development and revitalization needs within their respective
    communities. No academic or student support projects have been funded
    through this program; rather, funding was available only for community-
    based outreach and service programs and community facilities at TCUs.
    Through this program, some TCUs have been able to build or enhance
    child care centers, including Head Start facilities, and social
    services offices; help revitalize tribal housing; establish and expand
    small business development; and enhance vitally needed community
    library services. Unfortunately, not all of the TCUs were able to
    benefit from this small but very important program. The program staff
    at the Department has no budget to provide technical assistance with
    regard to this program. If a small portion of the appropriated funds
    were to be available for program staff to conduct workshops and site
    visits, more of the TCUs and their respective communities could benefit
    from this vital opportunity. We strongly urge the subcommittee to
    support the HUD-TCU competitive grants program at $5,435,000, and to
    include language that will allow a small portion of these funds to be
    used to provide technical assistance to TCUs, to help ensure that much-
    needed community services and programs are expanded and continued in
    the communities served by the Nation's TCUs.
                      president's fiscal year 2014 budget
        The President's fiscal year 2014 budget request does not provide
    funding for the University Community Fund, which housed the TCU program
    and other Minority-Serving Institutions programs. We respectfully
    request that the subcommittee reject the administration's
    recommendation and continue to recognize the abundant need for
    facilities construction and improvement funds for TCUs and appropriate
    funding for the Tribal Colleges and Universities Program, and the other
    MSI-HUD programs, namely: Historically Black Colleges and Universities;
    Hispanic Serving Institutions Assisting Communities; and Alaska Native
    and Native Hawaiian Serving Institutions Assisting Communities, to be
    allocated competitively within their individual programs.
                                   conclusion
        We respectfully request that beginning in fiscal year 2014,
    Congress illustrate its support for the goals of the new executive
    order aimed at strengthening TCUs by restoring the HUD-TCU competitive
    grants program and provide for technical assistance to help these
    dynamic institutions improve and expand their facilities to better
    serve their students and communities. Thank you for your continued
    support of the Nation's TCUs and for your consideration of our fiscal
    year 2014 HUD appropriations requests.
                                     ______

      Prepared Statement of the American Public Transportation Association
        Madam Chairman and members of the subcommittee, on behalf of the
    American Public Transportation Association (APTA), I thank you for this
    opportunity to submit written testimony on the fiscal year 2014
    Transportation, Housing and Urban Development, and Related Agencies
    appropriations bill, as it relates to Federal investment in public
    transportation and high-speed and intercity passenger rail.
        With the passage of a new, 2-year surface transportation
    authorization bill--Moving Ahead for Progress in the 21st Century Act
    (MAP-21)--APTA's focus shifted from reauthorization legislation to
    ensuring the authorized programs are adequately funded. Federal
    investment in infrastructure is necessary for a variety of reasons, all
    of which lead back to supporting the economy and domestic job creation.
    Funding from the Federal Government leverages State and local resources
    and allows local governments and transit agencies to access capital
    markets, providing the resources necessary to build, replace, and
    repair infrastructure.
        Americans took 10.5 billion trips in 2012, the second highest
    ridership since 1957, and 154 million more trips than the prior year.
    This was the seventh year in a row that more than 10 billion trips were
    taken on public transportation systems nationwide. And these ridership
    levels were achieved despite the impact that Superstorm Sandy had on
    transit service in the Northeast. With demand for transit only growing,
    investments will continue to be required to get people to school, work
    and play, and in turn, provide jobs in construction, maintenance, and
    all the related industries required to support public transportation.
                                   about apta
        APTA is a nonprofit international association of 1,500 public and
    private member organizations, including transit systems and high-speed,
    intercity and commuter rail operators; planning, design, construction,
    and finance firms; product and service providers; academic
    institutions; transit associations and State departments of
    transportation.
                 overview of fiscal year 2014 funding requests
        The Moving Ahead for Progress in the 21st Century Act (MAP-21)
    authorizes $10.695 billion for the Federal Transit Administration's
    (FTA's) programs and expenses, with $8.595 billion of that provided
    from the Mass Transit Account of the Highway Trust Fund--which is
    financed with public transportation's share of Federal motor fuel tax
    revenues. The remaining $2.1 billion, used to fund New Starts,
    Research, the Transit Cooperative Research Program (TCRP), Technical
    Assistance, FTA Administration, and a handful of additional programs,
    must be appropriated from General Fund revenues. Given the current
    state of infrastructure and the upward trend in demand for public
    transportation services, APTA urges Congress to appropriate full
    funding to each program as authorized under MAP-21.
        Beyond FTA appropriations, we again urge Congress to appropriate
    funding for the Rail Safety Technology Grants program (section 105) of
    the Rail Safety Improvement Act (RSIA), to assist with the
    implementation of congressionally mandated positive train control
    systems. The Federal deadline for implementation of positive train
    control systems is rapidly approaching, and to date, Congress has not
    provided the necessary funding to support implementation of this
    important safety program for commuter railroads.
         map-21 and the continuing need for federal transit investment
        The new surface transportation law, MAP-21, provided a needed
    respite from years of authorization extensions, combined with
    appropriations continuing resolutions that resulted in significant
    funding uncertainty among transit agencies. Public transportation
    systems and projects require long-term funding certainty in order to
    plan major capital projects and procure assets such as rail cars, buses
    and facilities. While the 27 months of authority have helped to
    stabilize the situation, MAP-21 provided for only modest growth after
    years of essentially flat funding. The investment levels included in
    the bill were far from what is required to bring our systems into a
    state of good repair, much less to expand service to meet growing
    demands. In previous testimony to this subcommittee, APTA has cited
    U.S. Department of Transportation estimates that a one-time investment
    of $78 billion is needed to bring currently operating transit
    infrastructure up to a state of good repair, and this does not include
    annual costs to maintain, expand or operate the existing system.
    Research on transit needs shows that capital investment from all
    sources--Federal, State, and local--should be doubled if we are to
    prepare for future ridership demands. The administration's $50 billion
    proposal would go a long way toward accomplishing our state of good
    repair objectives.
        In their 2013 Report Card for America's Infrastructure released
    recently, the American Society of Civil Engineers (ASCE) gave the U.S.
    public transportation infrastructure a ``D'' grade for the Nation's
    lack of investment. This grade drives home a sense of urgency for our
    Nation to focus on increased investment in public transportation. The
    rating is virtually unchanged from 4 years ago, which was the last time
    ASCE examined the state of America's infrastructure. The ``Failure to
    Act'' report also emphasizes that the American economy lost $90 billion
    in 2010 due to the lack of investment in public transportation. The
    report also shows that, despite ridership gains and a clear and
    increasing demand for public transportation service, 45 percent of
    Americans still lack access to public transit in their communities.
        It is important to stress that the demand for public transportation
    and the need for Federal leadership will not diminish in the months and
    years ahead. Public transportation is a vital component of the Nation's
    total transportation infrastructure picture, and with ridership
    projected to grow, dependable public transportation systems will be
    vital to the transportation needs of millions of Americans. We must
    make significant, long-term investments in public transportation or we
    will leave Americans with limited transportation options, and in many
    cases, stranded without travel options. While Congress continues to
    consider how to proceed on a well-funded, multi-modal surface
    transportation bill, it remains critically important that annual
    appropriations bills address both current and growing needs.
                    federal transit administration programs
        Capital Investment Grants (New Starts).--The New Starts program is
    the primary source of Federal investment in the construction or
    expansion of heavy rail, light rail, commuter rail, bus rapid transit
    and ferryboat projects. Across the country, demand for Federal
    assistance continues to outweigh currently authorized funding and
    resources, and New Starts funding is more important than ever with the
    expanded eligibility for Core Capacity projects. Unlike the core FTA
    formula programs, the New Starts program is funded from the General
    Fund, not the Mass Transit Account of the Federal Highway Trust Fund.
    The program as reformed by MAP-21 includes a streamlined approval
    process, but even with the reforms, projects will continue to face the
    most robust Federal review process of any Federal infrastructure
    investment program and authorized funding remains short of demand. APTA
    asks Congress to appropriate funding for the New Starts program at or
    above the MAP-21 authorized levels.
        Transit Research/Transit Cooperative Research Program (TCRP)/
    Technical Assistance and Standards Development.--APTA strongly urges
    the committee to fully fund the Research, Development, Demonstration,
    and Deployment Program, the Transit Cooperative Research Program
    (TCRP), Technical Assistance and Standards Development, and Workforce
    Development at the authorized levels, or at a minimum at the requested
    levels in the administration's fiscal year 2014 budget.
        In particular, APTA urges Congress to recognize the great value and
    benefits represented in the TCRP. The TCRP is an applied research
    program that provides solutions to practical problems faced by transit
    operators. Over the TCRP's 20 years of existence, it has produced more
    than 500 publications/products on a wide variety of issues of
    importance to the transit community. TCRP research has produced a
    variety of transit vehicle and infrastructure standards and
    specifications, as well as a variety of handbooks addressing many
    relevant subject areas of interest to the transit community. TCRP
    generates significant benefits and large economic returns on
    investment, and it does this with a budget that is 1/10,000 of the $57
    billion governments spend annually on public transit services, and even
    an even smaller ratio when compared with the total benefits that
    transit service improvements provide to users, communities and the
    economy. TCRP costs will be repaid many times over if the program
    produces even small cost savings, service quality improvements,
    ridership gains, increases in transport system efficiency, or
    additional economic development.
                    federal railroad administration programs
        As Congress begins to consider reauthorizations of the Rail Safety
    Improvement Act (RSIA) and the Passenger Rail Investment and
    Improvement Act (PRIIA), there are two important programs APTA wishes
    to emphasize as priorities for the industry.
        Positive Train Control.--A high priority for APTA within the
    programs of the Federal Railroad Administration (FRA) is the adequate
    funding for implementation of Positive Train Control (PTC) through the
    Railroad Safety Technology Grants Program, section 105 of RSIA. The
    RSIA requires that all passenger rail operators, as well as certain
    freight railroads, implement positive train control PTC systems by
    December 31, 2015. The cost of implementing PTC on public commuter
    railroads alone is estimated to exceed well over $2 billion, not
    including costs associated with acquiring the necessary radio spectrum
    or the subsequent software and operating expenses. APTA urges Congress
    to appropriate a minimum of $50 million, the annual authorization
    included under RSIA. APTA urges the subcommittee to direct these funds
    to commuter rail implementation of PTC, and to fund those systems that
    plan to implement before the deadline.
        As the installation of PTC on nearly 4,000 locomotives and
    passenger cars with control cabs, and 8,000 track miles progresses,
    costs are beginning to mount. The total cost of implementation on
    commuter railroads is expected to far exceed initial estimates, with
    estimates doubled in some cases. Meanwhile, Congress has appropriated
    only $50 million of the $250 million that was authorized. A federally
    mandated deadline, coupled with virtually no Federal funding is forcing
    agencies to commit extremely limited capital budgets to implement PTC.
    Commuter railroads that have begun to install PTC are facing difficult
    choices as some will have to defer critical safety sensitive
    infrastructure maintenance projects to pay for PTC. As a group, these
    railroads have worked in good faith to comply with the act's
    requirements. Additional funding provided by Congress for the Railroad
    Safety Technology grants is fundamental to the industry's ability to
    implement PTC.
        High-Speed and Intercity Passenger Rail Investment.--APTA strongly
    supports continued investment in high-speed and intercity rail projects
    and services. The U.S. Census Bureau estimates that the U.S. population
    of our Nation will grow by more than 100 million over the next 40
    years. Such increases will overwhelm America's aviation, road and
    existing rail transportation infrastructure. To accommodate the needs
    of an ever-growing and highly mobile population, the United States must
    develop and continually expand a fully integrated multimodal high-speed
    and intercity passenger rail (HSIPR) system. Investing in
    infrastructure ensures the efficient movement of people and goods that
    is essential to continued economic growth and other national policy
    goals. High-speed intercity passenger rail would ultimately serve both
    densely populated mega-regions as well as rural and small urban
    communities which will benefit from the increased transfer points and
    feeder services connecting with new high-speed rail corridors.
        Passenger rail projects are advancing in 32 States and the District
    of Columbia, with each project supporting economic growth by creating
    construction and manufacturing jobs for American workers and attracting
    small businesses and new development that will generate domestic
    business growth. High-speed rail will create a revitalized domestic
    transportation industry supplying more products and services, with more
    dollars retained in our economy.
                                   conclusion
        We thank the subcommittee for allowing us to share APTA's views on
    fiscal year 2014 public transportation and high-speed and intercity
    rail appropriations issues. APTA looks forward to working with the
    subcommittee as it makes investment decisions about the public
    transportation programs.
                                     ______

          Prepared Statement of the American Public Works Association
        Madam Chairman and members of the Senate transportation
    appropriations subcommittee, thank you for the opportunity to submit
    testimony for the hearing, Crumbling Infrastructure: Examining the
    Challenges of Our Outdated and Overburdened Highways and Bridges.
        My name is Elizabeth Treadway, president of the American Public
    Works Association (APWA). I submit this statement today on behalf of
    our members.
        The American Public Works Association is an organization whose
    members are dedicated to providing public works infrastructure and
    services to millions of people in rural and urban communities, both
    small and large. Working in the public interest, our 28,500 members and
    nearly 2,000 public agencies plan, design, build, operate and maintain
    our transportation, water supply, stormwater, wastewater treatment,
    waste and refuse disposal systems, public buildings and grounds and
    other structures and facilities essential to our economy and quality of
    life.
        Local governments own about 75 percent of the nearly 4-million-mile
    roadway network and more than half of the Nation's bridges and manage
    about 90 percent of the transit systems. With nearly every trip
    beginning and ending on a local road, street or sidewalk, a strong
    local-State-Federal partnership is key to ensuring a safe, seamless and
    efficient multimodal transportation network.
        We join others in expressing our deepest sympathy to everyone
    affected by the collapse of the Skagit River Bridge on May 23. We were
    saddened by this and offer our support to everyone working to recover
    and rebuild.
        Like other bridges throughout the Nation, the Skagit River Bridge
    is a vital link in the transportation system. In the northwest, it is
    part of the main travel route between Seattle, Washington and
    Vancouver, British Columbia and averages 71,000 vehicles daily. The
    tragic collapse of this functionally obsolete span is a stark reminder
    of the aging and deteriorating condition of our Nation's public
    infrastructure, increasingly over-burdened by growing system demands
    and outdated infrastructure. It is suffering the effects of chronic
    underinvestment and is in critical need of funding for maintenance,
    repair and modernization.
        The needs are clear and documented. The U.S. Department of
    Transportation (USDOT) reports that the Nation (all levels of
    government) invests roughly half of what is needed to improve the
    current state of our roads and bridges. Nearly one in four bridges
    nationwide is rated deficient and in need of repair, improvement or
    replacement. Of the more than 607,300 publicly owned bridges on which
    we depend for personal mobility and movement of freight, nearly 151,500
    are rated deficient, with more than 66,740 classified as structurally
    deficient and more than 84,740 as functionally obsolete.\1\ Neither
    designation indicates a bridge is unsafe, but they do indicate a need
    for repair, improvement or replacement. The age of the average bridge
    is more than 40 years.
    ---------------------------------------------------------------------------
        \1\ The Federal Highway Administration defines structurally
    deficient bridges as those characterized by deteriorated conditions of
    significant bridge elements and reduced load-carrying capacity and
    typically require significant maintenance and repair to remain in
    service. A bridge is functionally obsolete when it does not meet
    current design standards either because the volume of traffic carried
    by the bridge exceeds the level anticipated when the bridge was
    constructed and/or the relevant design standards have changed.
    Addressing functional deficiencies may require the widening or
    replacement of the structure.
    ---------------------------------------------------------------------------
        The importance of bridges cannot be ignored. Within the State of
    Washington there are over 65 million bridge crossings a day with
    approximately 10 million of these crossings occurring on locally owned
    bridges. While bridges are a small part of the total road miles, they
    provide vital links in the transportation system, not only spanning
    rivers but also separating traffic at rail crossings and highway to
    highway crossings. However, replacement and rehabilitation of these
    links are of significantly higher cost on a per mile basis than other
    aspects of the transportation system.
        We can no longer afford to ignore the underinvestment in bridge
    maintenance, rehabilitation and replacement. Additional traffic volumes
    and heavier loads are placing ever greater stress on bridges often
    designed for lighter loads. Underinvestment is a major contributing
    factor undermining efforts to adequately address the deficiencies.
        At the local level in particular, local governments' ability to
    fund necessary bridge improvements has eroded significantly over the
    years. Local governments have limited financial means to adequately
    address bridge deficiencies and typically do not have the capacity to
    do major repairs or capital work on the scale of bridge replacement
    without funding support. Immediate action to increase investment at the
    national level is crucial if we are to accelerate local bridge repair
    and replacement programs.
        The needs at the local level are especially significant. Twenty-
    seven percent of local bridges are structurally deficient or
    functionally obsolete. Of that, 15 percent are structurally deficient
    as compared to 7 percent of State-owned bridges. Of the almost 67,000
    structurally deficient bridges in our Nation, more than half of them
    are the responsibility of local government.
        Bridges on local roads typically were built to accommodate lower
    traffic volumes and smaller, lighter vehicles or are so old and
    deteriorated they are in urgent need of repair or replacement. In many
    cases, they were not designed to take the pounding current traffic
    volumes and loads demand. As congestion increases on the interstate
    system and State highways, local roads become diversion routes,
    supporting ever increasing levels of usage. Freight volumes, too, are
    increasing, adding demands on all parts of the system.
        Deficient local bridges are rated, prioritized and repaired or
    replaced as funding is available. When funding is insufficient,
    deferred maintenance, increased inspections, weight limits and closures
    are often the only options. It is not uncommon for bridges to go years,
    even decades, without the appropriate action to repair or replace them,
    due to lack of funds. This is particularly true in more rural areas.
        APWA has been and will continue to be an advocate for the
    development of public policies which ensure the safe and efficient
    management and operation of our public infrastructure. We support a
    determined, comprehensive national effort to increase investment to
    eliminate the bridge funding backlog needed to repair, rehabilitate and
    replace all publicly owned bridges as part of a zero bridge
    deficiencies goal.
        Such an effort, however, should not stop there. It needs sustained
    and sustainable funding to ensure ongoing system preservation and
    maintenance at a level necessary to prevent future deficiencies of all
    publicly owned bridges.
        MAP-21, Moving Ahead for Progress in the 21st Century, provides a
    short-term, 2-year investment in our transportation system. With the
    Highway Trust Fund on the brink of insolvency, we urge the Congress to
    begin work immediately on a long-term authorization that provides a
    sustainable revenue source to avert a looming funding shortfall that
    threatens not only the ability to adequately address bridge
    deficiencies but also the many other pressing transportation needs. The
    Congressional Budget Office reports that the Trust Fund will be unable
    to meet all of its obligations beginning in fiscal year 2015. Inaction
    to address this shortfall could result in Federal transportation
    programs being cut by about 90 percent to bring the Trust Fund into
    balance.
        We support a well-funded, multi-year surface transportation
    authorization that provides an increased and sustainable funding source
    for road and bridge needs, strengthens local decisionmaking authority,
    directs more resources to local priorities and does more to streamline
    and accelerate the project delivery process.
        In addition, we support a mix of revenue options to ensure
    necessary funding sustainability, including: raising and indexing the
    Federal motor fuel tax; exploring the transition to vehicle-mileage
    fees; and expanding access to innovative financing tools.
        MAP-21 eliminated the Highway Bridge Program. MAP-21's National
    Highway Performance Program provides funding for bridges on the
    National Highway System (NHS). Although the Surface Transportation
    Program retains the 15 percent set-aside for off-system bridges
    (bridges not on the Federal system), we need to ensure adequate funding
    for local bridges on the Federal system but not on the NHS.
        In conclusion, our transportation system is aging, deteriorating
    and suffering the effects of decades of underinvestment. The result is
    the unacceptably high levels of deficiencies we see today. We believe
    that, working together in partnership with local, State, Federal, and
    private sector partners, we must take immediate action to address our
    crumbling infrastructure. But it will take funding and leadership.
    Increased investment to repair or replace deficient bridges is vital to
    achieve a safer and more efficient transportation network.
        Madam Chairman, we thank you for holding this hearing and are
    especially grateful to you and subcommittee members for the opportunity
    to submit this statement. We stand ready to assist you and the
    subcommittee as we move forward to address our Nation's infrastructure
    needs.
                                     ______

         Prepared Statement of the American Society of Civil Engineers
        The American Society of Civil Engineers (ASCE) \1\ is pleased to
    present to the subcommittee our views on the state of the Nation's
    infrastructure, as well as the challenges ahead and investments needed.
    ---------------------------------------------------------------------------
        \1\ ASCE was founded in 1852 and is the country's oldest national
    civil engineering organization. It represents more than 146,000 civil
    engineers individually in private practice, government, industry, and
    academia who are dedicated to the advancement of the science and
    profession of civil engineering. ASCE is a nonprofit educational and
    professional society organized under part 1.50(c)(3) of the Internal
    Revenue Code.
    ---------------------------------------------------------------------------
        ASCE was relieved that there were no fatalities or serious injuries
    due to the I-5 bridge collapse. While we await to hear from the
    National Surface Transportation Safety Board as to the cause of the
    collapse, there are reports that an oversized vehicle may have played a
    significant role in the incident. What we do know is that the bridge is
    one of 84,748 functionally obsolete bridges in this country and served
    as a critical link to our economy and trade. Therefore, the ripple
    effect of the bridge collapse will have significant economic
    repercussions. In fact, the Director of the Washington State Department
    of Commerce said that the I-5 bridge collapse could cost the State of
    Washington at least $47 million in lost economic output, as well as
    lost jobs and tax revenues.
                 2013 report card for america's infrastructure
        ASCE's 2013 Report Card for America's Infrastructure graded the
    Nation's infrastructure a ``D+'' based on 16 categories and found that
    the Nation needs to invest approximately $3.6 trillion by 2020 to
    maintain the national infrastructure in good condition. The following
    are the grades and the investment needs by 2020 for the surface
    transportation area:
      --Bridges received a grade of C+;
      --Transit received a D;
      --Roads received a grade of D, and combined with bridges, and
            transit, have an estimated investment need of $1.7 trillion;
            and
      --Rail received a grade of C+ and has an estimated investment need of
            $100 billion.
        While taken for granted by most Americans, our infrastructure is
    the foundation on which the national economy depends. As the economy
    grows, these infrastructure assets must be maintained and improved
    accordingly. While the interstate highway system is a shining example
    of a focused national vision for the Nation's infrastructure, an ever
    expanding population and a growing economy requires these aging
    infrastructure systems to keep pace. Deteriorating and aging
    infrastructure is not only an inconvenience, it financially impacts our
    families, local communities, and our entire country.
        In an effort to see how significant investments are to the Nation's
    infrastructure, ASCE released a series of economic studies that answer
    a critical question--what does a ``D+'' mean for America's economy and
    what is the return on investment we can expect to see. The Failure to
    Act studies compare current and projected needs for infrastructure
    investment against the current funding trends in surface transportation
    (highways, bridges, rail, transit); water and wastewater; electricity;
    and airport and waterborne transportation. The series concluded with a
    final report, Failure to Act: The Impact of Current Infrastructure
    Investment on America's Economic Future, which found improving the
    condition of our Nation's aging roads, bridges, power lines, sewer
    systems, ports and waterways is critical to protecting 3.5 million
    jobs.
        The final summary report found that between now and 2020,
    investment needs across key infrastructure sectors total $2.75
    trillion, while projected expenditures are about $1.66 trillion,
    leaving a total investment gap of $1.1 trillion. This gap leads to
    consequences like congestion, water main breaks, and blackouts and
    brownouts that cost households and businesses money, creating a drag on
    our economy. However, with an additional investment of $157 billion a
    year between now and 2020, the U.S. can eliminate this drag on economic
    growth and protect:
      --$3.1 trillion in GDP;
      --$1.1 trillion in U.S. trade value;
      --3.5 million jobs;
      --$2.4 trillion in consumer spending; and
      --$3,100 in annual household income.
        In order to avoid the severe economic impacts that would be caused
    by failing to invest in our infrastructure at home, the Federal
    Government is allowing other countries to make up where the United
    States is failing. It is long established that money invested in
    essential public works can create jobs, provide for economic growth,
    and ensure public safety through a modern, well-engineered national
    infrastructure. By improving the Nation's deteriorating infrastructure
    system both economic and job creation opportunities will be provided,
    while creating a multi-modal transportation system for the 21st
    century.
                         highway and bridge conditions
        The health of our Nation's highways and bridges serves as a
    critical link moving people and goods throughout the country, therefore
    they are directly tied to the Nation's ability to compete in a global
    marketplace. For this reason, it is of growing concern that the bridges
    in our Nation's metropolitan areas, which are an indispensable link for
    both millions of commuters and freight on a daily basis, are decaying.
    Meanwhile, 42 percent of America's major urban highways remain
    congested, costing the economy an estimated $101 billion in wasted time
    and fuel annually.
        Over 200 million trips are taken daily across deficient bridges in
    the Nation's 102 largest metropolitan regions. In total, one in nine of
    the Nation's bridges are rated as structurally deficient, while the
    average age of the Nation's 607,380 bridges is currently 42 years.
    Overall, we are seeing a decline in the number of deficient bridges;
    however, current funding levels are still not enough to fulfill all of
    the repair and replacement needs.
        The I-5 bridge over the Skagit River in Washington was not
    structurally deficient; however, the bridge was 58 years old and
    classified as functionally obsolete. A functionally obsolete bridge no
    longer meets the current engineering and design standards that are used
    today, with examples being narrow lanes or low load-carrying capacity.
    While functionally obsolete bridges might not pose the same risks as
    structurally deficient bridges, which require significant
    rehabilitation or replacement due to deterioration, they still demand
    consideration, maintenance, and proper postings. Therefore, even though
    we are seeing a slow, but steady decline in the overall number of
    deficient bridges, nationally we still have significant work to do.
    Nationally, we must focus not just the number of structurally deficient
    bridges, but functionally obsolete bridges as well.
        Turning to our Nation's roads, 32 percent of America's major roads
    are in poor or mediocre condition. While the Nation has seen some
    improvements in pavement conditions due to a short surge of investment
    from the American Recovery and Reinvestment Act, these were not
    sustained, long-term investments. Of added concern are the vehicular
    restrictions for some roadways due to poor pavement, which can create
    longer routings for trucks in cases where detours are required.
    Deficient pavements are more common in urban versus rural areas, with
    47 percent of urban interstate vehicle miles traveled (VMT) over
    deficient pavements compared to 15 percent of rural interstates. The
    ultimate cost of poor road conditions is significantly more over time
    than the cost to maintain those same roads in good condition. For
    example, after 25 years the cost per lane mile for reconstruction can
    be more than three times the cost of preservation treatments over the
    same time period, which can lead to a longer overall life span for the
    infrastructure.
                      highway and bridge investment needs
        Federal, State, and local highway and bridge investments are not
    keeping pace with the growing costs of the aging infrastructure.
        Estimates state that to maintain all of the Nation's highways at
    their current condition would cost $101 billion in annual capital
    investment between 2008 and 2028. In order to improve the Nation's
    highways, investment would need to rise to $170 billion annually, or an
    additional $79 billion annually from current investments, during that
    same time period. This investment would bring the number of Federal-aid
    highway vehicle miles traveled on pavements with a good ride quality up
    from 46 percent in 2008 to 74 percent by 2028. Unfortunately, Federal,
    State, and local governments are only spending $91 billion annually on
    capital investments, meaning that each year our roads deteriorate
    further. If present trends continue, the unfunded gap in highway
    funding, which is 48 percent of the total need in 2010, is expected to
    increase to 54 percent by 2040.
        When zeroing in on just the Nation's bridges, the Federal Highway
    Administration (FHWA) estimates that the current cost to repair or
    replace only the deficient bridges eligible under the Federal Highway
    Bridge Program is almost $76 billion. This total is up from 2009, when
    FHWA estimated that the total cost was $71 billion. If bridge
    maintenance continues to be deferred over the next 25 years, these
    backlog costs will rise. To put these numbers in perspective, over the
    last 30 years Congress has provided approximately $77 billion to the
    States through the Federal-aid bridge program. The Federal Highway
    Administration estimates that to eliminate the bridge backlog by 2028,
    the Nation would need to invest $20.5 billion annually; however, at
    this time only $12.8 billion is being spent annually on the Nation's
    bridges.
                               highway trust fund
        With the current surface transportation authorization (MAP-21)
    expiring next September, Congress will soon need to begin discussions
    on how to fund a new multi-year surface transportation authorization
    and more importantly how to make the Highway Trust Fund sustainable as
    a long-term revenue source. Therefore, due to the Nation's growing
    surface transportation needs, Congress must first appropriate the
    funding levels that were authorized under MAP-21, while also tackling a
    way to provide a long-term, reliable, and sustainable approach toward
    fixing the Highway Trust Fund.
        A key reason for the current decline in transportation spending is
    the fact that Federal revenues supporting the Highway Trust Fund have
    not been adjusted since 1993; however demands on the system have grown.
    As a result, current levels of highway and public transportation
    investment cannot be maintained solely with trust fund resources and
    Congress has had to rely on the General Fund to shore up resources.
        Currently, the Highway Trust Fund is allocating more than the
    revenues it receives, with the trust fund allocating $15 billion more
    in 2012 alone. The Congressional Budget Office (CBO) recently projected
    that to prevent a massive shortfall for highway and transit spending in
    2015, Congress will need to severely cut highway spending, transfer $14
    billion to the Highway Trust Fund from the General Fund, raise the
    Federal gas tax by about 10 cents per gallon, or implement some
    combination of the three. The current solution provided by the Obama
    administration is to once again transfer funds from the General Fund,
    which is not a long-term solution for funding highway and transit
    programs.
                              asce recommendations
        While additional funding is critical to improving the Nation's
    highways and bridges, it is not the only solution. ASCE recommends the
    following solutions in order to begin bring the Nation's roads and
    bridges into a state of good repair:
      --Ensure the sustained sufficiency and reliability of the Highway
            Trust Fund by identifying and incorporating necessary
            additional revenue streams.
      --Encourage the use of asset management programs to provide for the
            most efficient use of maintenance and repair investment.
      --Make the repair of structurally deficient urban bridges a top
            national priority through the implementation of a risk-based
            prioritization model.
      --Increase annual investment levels for bridge repair,
            reconstruction, and renovation by approximately $8 billion
            annually from all levels of government, to a total annual
            funding level of $20.5 billion.
      --Develop a national strategic plan for addressing the Nation's
            structurally deficient and functionally obsolete bridges in the
            upcoming decades, including long-term transportation research
            in order to develop more resilient bridges.
      --Set a national goal to decrease the number of just structurally
            deficient bridges to 8 percent by 2020 and decrease the
            percentage of the population driving over all deficient bridges
            by 75 percent by 2020.
                                   conclusion
        Continuing to maintain baseline levels of investment for the
    Nation's roads and bridges only allows us to maintain the inadequate
    conditions that our current surface transportation systems are under.
    Without developing a long-term, reliable user fee approach for the
    Highway Trust Fund, surface transportation programs will continue to
    live under a cloud of uncertainty for the years to come and necessary
    improvements cannot be full addressed. A transportation system cannot
    run properly when it must rely on transfers from the General Fund in
    order to remain solvent. Congress must take the lead in addressing this
    problem to ensure continuity in the Nation's surface transportation
    program. In the short term, ASCE is pleased to see that Congress is
    fully appropriating the funding levels that have been authorized by
    MAP-21 and that Senators continue to push the need to upgrade the
    Nation's aging infrastructure. However, making a strong commitment to
    the Nation's surface transportation system without the proper funding
    does not solve our long term infrastructure needs.
        The longer Congress waits to properly fund surface transportation
    programs, the greater the problem will become. Inaction will lead to a
    further deterioration of the Nation's surface transportation assets, a
    continuation of high levels of traffic fatalities and more wasted time
    and fuel due to increased congestion creating a further drag on the
    economy. Therefore, ASCE stands ready to work with Congress as it works
    to fund our Nation's vital transportation assets.
                                     ______

    Prepared Statement of the California Association of Housing Authorities
        Thank you for the opportunity to present written testimony
    regarding the fiscal year 2014 Department of Housing and Urban
    Development (HUD) budget. The California Association of Housing
    Authorities (CAHA) represents the 113 housing authorities in the State
    of California. Together, we administer approximately 320,000 section 8
    housing choice vouchers for the elderly, disabled, and families with
    children; partner with the Veterans Administration to provide housing
    vouchers for 8,100 homeless veterans; and own approximately 39,100
    public housing units. In addition, we provide housing and supportive
    services to thousands of very low income households under an array of
    other HUD and non-HUD programs, including the Low Income Housing Tax
    Credit. Our testimony pertains to the Housing Choice Voucher (HCV)
    Program and the Public Housing Program.
        Housing Choice Voucher Program.--The fiscal year 2013 budget funded
    us at a 92.5 percent proration for the HCV Program. This is the lowest
    level in the 38-year life of the HCV Program. As a result, housing
    authorities are drafting procedures to terminate existing tenants from
    the HCV Program and HUD has estimated that 125,000 families nationwide
    could lose their housing assistance, some 15,700 in California. These
    are families who have already signed leases with their landlords--
    landlords who, likewise, are dependent on the HCV Program subsidy
    payments to make their mortgage payments. The mission of housing
    authorities is to house people, not terminate their assistance
    resulting in homelessness. We understand that increasing funding for
    the HCV Program to serve all potentially eligible families is not
    possible in these economic times. However, we ask that you provide
    sufficient funding in the fiscal year 2014 budget to renew assistance
    to all current participants so that no family loses its housing.
        HCV Program Administrative Fees.--Housing authorities are paid
    according to a formula to administer the HCV Program. The fiscal year
    2013 budget funded us at a 69 percent proration which, like the HCV
    rental subsidy, is the lowest in the 38-year history of the Program's
    operation. While some may say that 100 percent of the formula is too
    rich CAHA believes that no one can argue that 69 percent is sufficient.
        The HCV Program Administrative Fee proration has been steadily
    decreasing over the last 5 years as follows: 2009--88 percent; 2010--93
    percent; 2011--85 percent; 2012--80 percent and 2013--69 percent. To
    manage, housing authorities are doing lay-offs, mandating furloughs,
    cutting salaries and benefits and reducing office hours. According to
    the National Association of Housing and Redevelopment Officials
    (NAHRO), since fiscal year 2003, the last time housing authorities
    received 100 percent of their Administrative Fee, 213 housing
    authorities have ``handed back'' their HCV Program to HUD or
    transferred it to another housing authority.
        CAHA believes that it takes people to help people. Housing
    authority staff determine family eligibility and rent annually,
    maintain the waiting list, inspect every unit every year per HUD's
    Housing Quality Standards, outreach to landlords, conduct criminal
    background checks, maintain program integrity and prevent fraud, and
    counsel families to find appropriate housing. These activities are
    labor intensive, particularly as the regulatory requirements are overly
    burdensome and far in excess of what would be required to administer a
    sound, integrity-based HCV Program. In addition to restoration of the
    Administrative Fee funding to a 90 percent proration, CAHA respectfully
    asks that you include five regulatory relief measures in your
    deliberations:
        1. Biennial Inspections.--The HCV Program requires annual
    inspections of all subsidized units. Moving to a biennial schedule
    would reduce inspection work by 50 percent. Most Moving to Work (MTW)
    agencies have already successfully adopted initiatives that reduce unit
    inspections to a biennial schedule with special monitoring/sanctions
    for units that fail to meet standards.
        2. Biennial or Triennial Income Recertifications for Fixed Income
    Households.--The HCV Program requires annual recertification of all
    participating households. However, approximately 50 percent of section
    8 households are elderly and/or disabled and typically have fixed
    incomes. Most MTW agencies have already successfully adopted
    initiatives that permit biennial or triennial recertifications for
    fixed income households.
        3. Adoption of a National Waiver for Reduction of Payment
    Standards.--The HCV Program requires subsidy levels, called ``payment
    standards,'' pegged to 90-110 percent of local fair market rents
    (FMRs). When funding is insufficient, regulations permit housing
    authorities to apply to HUD for a waiver to reduce the payment standard
    below 90 percent. Each request is handled individually by HUD and takes
    a remarkable amount of time and resources to process. During this
    section 8 funding crisis, CAHA requests that HUD process a nationwide
    waiver for payment standards as low as 80 percent for housing
    authorities with insufficient section 8 funding from HUD to meet the
    subsidy requirements of their outstanding vouchers.
        4. Reduced Payment Standard Waiver Implementable Immediately.--Per
    HUD regulations, the waiver permitting a reduction in payment standards
    cited in No. 3 above may only be implemented over the course of 1-2
    years. CAHA requests that the proposed nationwide waiver be
    implementable on an immediate basis.
        5. Treasury Offset Program.--The Treasury Offset Program is a
    centralized offset program, administered by the Financial Management
    Service's Debt Management Services, to collect delinquent debts owed to
    Federal agencies and States, typically through Internal Revenue Service
    (IRS) refunds offset of another U.S. Government-issued payment.
    Authorization for housing authorities to participate in the program
    would assist in the collection of debts owed by current or former HCV
    Program and Public Housing Program participants. Amounts recovered
    would become available for current program expenses. The State of
    California Employment Development Department (EDD) already permits this
    activity at the State level.
        Public Housing.--The Public Housing Operating Fund is supposed to
    cover the difference between the rent paid by public housing residents
    and the housing authorities' cost to manage the housing. The Operating
    Fund was structured based on a cost study of well-managed multifamily
    housing done by Harvard University. Despite the study, however, over
    the last 10 years (except for American Recovery and Reinvestment Act of
    2009 (ARRA) funds provided in 2010) the Operating Fund has not been
    funded at 100 percent of the formula and in fiscal year 2013 was at
    only 82 percent.
        The President's fiscal year 2014 budget requests $4.6 billion for
    the Operating Fund. According to HUD, this figure represents 90 percent
    of estimated eligibility under the Operating Fund formula. CAHA
    respectfully asks that the subcommittee appropriate operating funds at
    the 90 percent proration level at a minimum; full funding would be at
    $5.17 billion.
        The President's fiscal year 2014 budget also requests $2 billion
    for the Public Housing Capital Fund, which housing authorities use to
    make major capital improvements to their public housing. For fiscal
    year 2013, the Capital Fund received only $1.789 billion after
    accounting for the impact of sequestration, the lowest level in the
    history of the Public Housing Program. The President's budget
    anticipates that, after set-asides, approximately $1.95 billion would
    be applied toward formula Capital Fund grants for fiscal year 2014.
    This request continues to fall far short of the $3.4 billion in
    annually accruing capital needs estimated by the 2010 Abt Associates'
    Capital Needs Assessment study commissioned by HUD. No funding to build
    additional, new public housing has been provided in years, so it is
    critical to preserve and sustain the public housing that exists. CAHA
    respectfully asks that the subcommittee appropriate $3 billion for the
    Capital Fund.
        CAHA understands well our Nation's budget issues and is poised to
    do its part. Other than full funding to protect all tenants currently
    receiving HCV Program assistance, all of our funding requests are for
    less than the formula amounts. The 5 percent cut imposed by
    sequestration does not necessarily sound unreasonable--but it is not
    just a 5 percent cut. It is 5 percent cut from the lowest amount
    historically appropriated for our housing programs and will have
    significant impacts on some of our country's poorest citizens.
        Thank you for considering our requests.
                                     ______

         Prepared Statement of the Coalition of Northeastern Governors
        The Coalition of Northeastern Governors (CONEG) is pleased to share
    with the subcommittee on Transportation, Housing and Urban Development,
    and Related Agencies this testimony for the record on fiscal year 2014
    appropriations for surface transportation, rail, and community
    development programs. The CONEG Governors deeply appreciate the
    subcommittee's longstanding support of funding for these programs.
    Federal support is vital to maintaining the national transportation
    system, enhancing its capacity to meet enormous and diverse needs, and
    contributing to a balanced, integrated national transportation system
    that supports the Nation's current and future economic growth. As the
    Nation's population grows and the economy recovers, these needs
    confront all of us--Federal, State and local governments and the
    private sector.
        The Governors recognize that the subcommittee, in crafting the
    fiscal year 2014 appropriations measure, faces a very difficult set of
    choices in an environment of severe fiscal constraints. Funding the
    Nation's surface transportation programs in fiscal year 2013 at the
    funding levels authorized in the Moving Ahead for Progress in the 21st
    Century Act (MAP-21) (Public Law 112-141) was a significant
    accomplishment. They thank the subcommittee for its support and urge
    you to continue this strong Federal/State partnership so vital for a
    national, integrated, multi-modal transportation system. This system
    underpins the competitiveness of the Nation's economy; broadens
    employment opportunities; and contributes to the efficient, safe,
    environmentally sound, and energy efficient movement of people and
    goods.
                             surface transportation
        The CONEG Governors urge the subcommittee to fund the highway
    obligation ceiling at the authorized levels, adequately fund safety and
    innovative financing programs, and maintain at least the fiscal year
    2013 levels for public transit programs. These levels of Federal
    investment are the minimum needed to slow the decline in infrastructure
    conditions and maintain the safety of the Nation's highways, bridges,
    and transit systems.
        Continued and substantial Federal investment in these
    infrastructure improvements--in urban, suburban, exurban, and rural
    areas--is necessary to safely and efficiently move people and products
    and to support the substantial growth in freight movement projected in
    the coming decades. The Federal Government has invested significant
    resources in the Nation's transportation systems, and it has a
    continuing responsibility to maintain and enhance the capacity of the
    Nation's transportation infrastructure to keep America competitive in a
    global economy.
        Specifically, the CONEG Governors urge the subcommittee to:
      --Fund the highway obligation ceiling at the authorized levels;
      --Fund public transit programs at no less than the authorized levels,
            with full funding for the current transit formula grants and
            capital investment grants, preserving the historic funding
            balance between these programs;
      --Ensure that Federal transit funds are released to States and
            designated recipients in a timely manner; and
      --Expand the use of innovative financing and public-private
            partnerships to supplement direct Federal funding, including
            Federal loan guarantees and credit assistance, such as the
            Transportation Infrastructure Finance and Innovation Act
            program (TIFIA).
                                      rail
        The Governors deeply appreciate the subcommittee's continued
    support for Amtrak and the funding in prior years for intercity
    passenger rail capital assistance. Recognizing that Congress will
    undertake a new authorization of the rail program to follow the
    Passenger Rail Investment and Improvement Act of 2008 (PRIIA) (Public
    Law 110-432), they urge the subcommittee to provide fiscal year 2014
    funding for intercity passenger rail capital assistance. Significant
    funding for intercity passenger rail, in addition to the Amtrak
    funding, will allow efficient intercity passenger rail corridors to be
    developed as part of a national, multi-modal transportation system. In
    the Northeast, continued, adequate Federal investment is critical to
    bring the current system to a state of good repair; help expand its
    capacity to meet the growing ridership; provide improved service to
    communities; attract State, local and private sector investments in the
    intercity passenger rail system; and develop a coordinated,
    comprehensive vision and plan for future services. These investments
    are essential for the accessible, reliable, frequent and on-time
    service that attracts and retains ridership and grows revenues.
        The Northeast has one of the oldest and most extensive multi-modal
    transportation systems in the world. This system faces major congestion
    and capacity constraints which, if not addressed, have the potential to
    curtail future commerce and mobility in a region that is densely
    populated and serves as an economic engine for the Nation. To begin to
    address these capacity constraints, the Northeast States have already
    invested significantly in the passenger rail corridors of the region--
    the Northeast Corridor (NEC), the Empire Corridor, the Northern New
    England Corridor, and the Keystone Corridor. They have leveraged
    Federal funds appropriated for intercity passenger rail projects
    eligible under the framework created by PRIIA. The intense efforts of
    the States, Amtrak and freight railroads in recent years are now
    showing positive results in the Nation's busiest rail corridor.
    However, continued significant investments in this corridor network are
    needed to meet the growing intercity passenger travel market. The joint
    planning and funding initiatives over the past years are part of an on-
    going coordinated effort to improve service by reducing travel times,
    increasing speed, increasing service reliability and on-time
    performance, and eliminating choke points; while improving
    infrastructure through station upgrades, replacing aging bridges and
    electrical systems, installing track and ties, replacing catenary
    wires, and purchasing new locomotives. Among the active collaborative
    projects that are employing thousands of workers using American-made
    supplies are the following:
      --Maine's Northern New England Passenger Rail Authority (NNEPRA) is
            managing a project to add double track and replace rail in
            Massachusetts on the portion of the Downeaster line owned by
            the Massachusetts Bay Transportation Authority (MBTA). These
            improvements will enhance Downeaster reliability/on-time
            performance and set the stage for more Downeaster frequencies.
            NNEPRA received a Federal Railroad Administration (FRA) grant
            and the MBTA provided a match.
      --The Delaware Department of Transportation, the University of
            Delaware, and the City of Newark are designing and building a
            regional transportation center, on former industrial property
            acquired by the University of Delaware, to serve Amtrak,
            Southeastern Pennsylvania Transportation Authority, and
            Delaware public transit. Preliminary engineering is anticipated
            for the summer of 2013.
      --In Massachusetts, work currently is underway to re-route Amtrak's
            Vermonter will expand service to new communities, connecting
            Vermont, western Massachusetts and central Connecticut to the
            Northeast Corridor and Washington, DC. Upgrades to this
            ``Massachusetts Knowledge Corridor'' include installing 50
            miles of new rail (made in Steelton, Pennsylvania) and
            replacing approximately 75,000 ties. This project builds upon
            work completed in Vermont that has reduced travel time by
            almost 1 half-hour.
        Amtrak.--The Amtrak fiscal year 2014 budget request contains
    specific funding levels provided for operations, capital and debt
    service. These funding levels will enable Amtrak to continue a balanced
    program of adequate, sustained capital investment in infrastructure and
    fleet modernization programs that are vital for an efficient intercity
    passenger rail system that can meet the rising demand for reliable,
    safe, quality services.
        The Amtrak capital request encompasses investments urgently needed
    to maintain the Northeast Corridor and other Amtrak-owned or maintained
    infrastructure and equipment; advance the Gateway Program to expand
    track, tunnel and station capacity between Newark, New Jersey, and New
    York Penn Station; acquire new equipment; and improve accessibility for
    passengers with disabilities.
        The Governors also strongly urge the subcommittee to provide Amtrak
    the requested levels of funding that will allow improved intercity
    service on the NEC--the backbone of a passenger rail network that
    connects the entire Northeast and extends rail service to communities
    in the South, West, and Canada. These projects are initial steps
    required to address the backlog of deferred investments, and to make
    investments in near-term improvements in track, bridges, tunnels, and
    equipment that will increase the capacity of the NEC to offer more
    reliable and frequent intercity service that can deliver more riders to
    their destination in less travel time. Improvements on the NEC can also
    help address the congested highway corridors and crowded Northeast
    airports that are a major source of travel delays nationwide.
        Intercity Passenger Rail Corridors.--To advance the initial
    investments made by the Federal Government and the States, the
    Governors urge the subcommittee in fiscal year 2014 to fund a
    competitive Intercity Passenger Rail Corridor Capital Assistance
    Program, and to provide provisions that fund the planning activities
    for the development of passenger rail corridors, including multi-state
    corridors. The multi-state planning funds are the source of the monies
    that support the continuation of the work being led by the FRA, working
    cooperatively with the Northeast States, to develop an updated service
    development plan and environmental analysis that reflect the current
    and projected demand for passenger rail service on the NEC. A funding
    level of $25 million is needed in fiscal year 2014 for the completion
    of these analyses which are required for any future major improvements
    for higher-speed intercity passenger rail service on the NEC.
        Since these corridors serve diverse travel markets, the Governors
    urge that these grant funds be available to States to advance plans for
    reliable, travel-time competitive service, regardless of maximum speed
    requirements. In light of the stringent FRA requirements for intercity
    passenger rail grants, they request the subcommittee waive the current
    statutory requirement that projects be part of an approved State rail
    plan, since this requirement might curtail thoughtful and well-advanced
    efforts already underway by the States.
        Northeast Corridor Infrastructure and Operations Advisory
    Commission.--The Governors thank the subcommittee for providing funding
    for the Northeast Corridor Infrastructure and Operations Advisory
    Commission (Commission). Consistent with its responsibilities defined
    under PRIIA, the Commission is working actively to facilitate mutual
    cooperation and planning among the States, Amtrak, freight railroads,
    and the FRA for intercity, commuter and freight use of the Corridor--
    and to also maximize the economic growth and the energy and
    environmental benefits of the larger regional NEC network.
        The Commission has extensive responsibilities to set corridor-wide
    policy goals and recommendations that encompass passenger rail
    mobility, intermodal connections to highways and airports, reduced
    energy consumption, air quality improvements, and local and regional
    economic development of the entire Northeast region. It is also tasked
    with developing a standardized formula to determine and allocate the
    costs, revenues and contributions among NEC commuter railroads and
    Amtrak which use each other's facilities and services. The Commission's
    work will also guide the vision and service development plans that are
    a pre-requisite to fund projects that can improve the capacity of the
    NEC. To conduct the assessments required by Congress in a timely
    manner, the Commission needs resources, data and expert analysis that
    exceed that which is currently available through the staff of the
    States, Amtrak and FRA. Continued funding in fiscal year 2014 will
    ensure the Commission's ability to secure all essential resources for
    conducting these assessments.
        Other Programs.--A number of other national rail and intermodal
    programs are important components of the evolving Federal-State-private
    sector partnerships to enhance passenger and freight rail across the
    country.
        The Railroad Rehabilitation and Improvement Financing Program
    (RRIF) can be an important tool for railroads (particularly regional
    and short-line railroads) and public agencies to access the financing
    needed for critical infrastructure and intermodal projects. The
    Governors also encourage the subcommittee to provide funding for the
    Rail Line Relocation program, the Next Generation Corridor Train
    Equipment Pool, and critical rail safety programs.
        The Governors support the continuation of the Transportation
    Investment Generating Economic Recovery, or TIGER Discretionary Grant
    program, at $500 million to encourage investment in multi-modal, multi-
    jurisdictional or other road, rail, transit and port projects that help
    achieve critical national objectives.
        Adequate funding is needed for the Surface Transportation Board to
    carry out its expanded responsibilities for intercity passenger rail
    corridor service, including its specific responsibilities under PRIIA
    regarding equitable cost-sharing formulas among States, Amtrak and
    commuter railroads.
                       community development block grant
        The CONEG Governors urge the subcommittee to provide $3.3 billion
    in formula funding for the Community Development Block Grant (CDBG)
    program. This program, which enables States to invest in improved local
    infrastructure, rehabilitated affordable housing, and local economic
    development and jobs, has a proven track record of contributing to
    neighborhood and community redevelopment and improvement nationwide.
    Every $1 invested in CDBG leverages an additional $3.55 in non-CDBG
    funding.
                                   conclusion
        In conclusion, the CONEG Governors urge the subcommittee to:
      --Fund the highway obligation ceiling at the authorized levels;
      --Expand the TIFIA program;
      --Fund Federal public transit programs at the authorized levels, with
            full funding for the transit formula grants and capital
            investment grant programs, and preserving the historic funding
            balance between these programs;
      --Fund Amtrak at levels that will support sound operations and a
            balanced capital investment program, including the NEC capacity
            improvements;
      --Maintain provisions to fund the Northeast Corridor Infrastructure
            and Operations Advisory Commission;
      --Provide funding for the Intercity Passenger Rail Service Corridor
            Assistance Program for corridor planning and capital
            investment, including provisions for multi-state corridor
            planning;
      --Provide funding for such national rail programs as the Next
            Generation Corridor Train Equipment Pool, the Rail Line
            Relocation program and the RRIF program;
      --Provide $500 million for the TIGER program;
      --Provide adequate funding for the Surface Transportation Board; and
      --Provide formula funding for the Community Development Block Grant
            at the $3.3 billion level.
        The CONEG Governors thank the entire subcommittee for the
    opportunity to share these priorities and appreciate your consideration
    of these requests.
                                     ______

                       Prepared Statement of Easter Seals
        Thank you for this opportunity to submit testimony on behalf of
    Easter Seals about two collaborative partnerships we administer with
    the Federal Transit Administration. We appreciate the strong support of
    the subcommittee over the years and look forward to continuing to work
    to increase the mobility of people with disabilities and older adults.
        Easter Seals respectfully requests that the subcommittee include
    report language in the fiscal year 2014 transportation appropriations
    bill providing no less than $3 million for Project ACTION and no less
    than $1 million for the National Center on Senior Transportation within
    the Standards Setting and Technical Assistance account at the Federal
    Transit Administration.
                              about project action
        People with disabilities rely on public transportation to travel to
    work and to access services, supports and entertainment in their
    communities. Recognizing the need to improve access to public
    transportation for people with disabilities, Congress in 1988
    established a national technical assistance center called Project
    ACTION to partner with transportation providers, the disability
    community and others to promote universal access to transportation for
    people with disabilities. Congress recently reauthorized Project ACTION
    through the Moving Ahead for Progress in the 21st Century Act (MAP-21).
    Project ACTION is funded by the U.S. Department of Transportation's
    Federal Transit Administration (FTA) out of the standards development
    and technical assistance account. Easter Seals, Inc. won the
    competitive bid to manage Project ACTION for FTA.
     collaborating with public transit operators to increase accessibility
                              and improve services
        Project ACTION is the preeminent resource in the country for
    helping increase the mobility of people with disabilities. The project
    does an exemplary job of gathering and sharing best practices;
    providing technical assistance and training; facilitating strategic
    partnerships and community engagement to support the development and
    coordination of transportation options; developing and disseminating
    information, including the use of web-based and social media vehicles;
    and administering demonstration grants.
        Project ACTION's accomplishments include:
      --Creating a strong collaborative environment between the disability
            and transit community;
      --Creating hundreds of useful guides, resources, tools and other
            resources on critical issues affecting mobility for people with
            disabilities and older adults that are available to transit
            providers, disabilities and the general public for free;
      --Providing direct technical assistance to transit providers, people
            with disabilities and others through in-person, phone, online
            and other consultation;
      --Creating and delivering direct training on critical mobility issues
            affecting people with disabilities, transit providers and
            community planners; and
      --Working with communities to help them plan and implement strategies
            to increase mobility.
             easter seals project action appropriations priorities
        Easter Seals urges Congress to support the mobility needs of people
    with disabilities and older adults (through the National Center on
    Senior Transportation) to address significant unmet needs, such as
    addressing the coming increase in the need for accessible
    transportation options as baby boomers age and integrating
    transportation technology advances to increase transportation mobility
    and access.
               about the national center on senior transportation
        Older adults rely on public transportation to travel to work and to
    access services, supports and entertainment in their communities.
    Recognizing the need to improve access to public transportation for
    older adults, Congress authorized the National Center on Senior
    Transportation (NCST) in 2005 as part of the Safe, Accountable,
    Flexible, Efficient Transportation Equity Act: A Legacy for Users
    (SAFETEA-LU). Congress reauthorized the program in 2012 as part of the
    Moving Ahead for Progress in the 21st Century Act (MAP-21) in the
    standards development and technical assistance account.
        With funding from the U.S. Department of Transportation, Federal
    Transit Administration, NCST was launched in 2006 and has been
    administered by Easter Seals, Inc. in partnership with the National
    Association of Area Agencies on Aging (n4a) ever since. In April 2012,
    the Federal Transit Administration once again selected Easter Seals,
    Inc. and n4a to administer. From the Center's inception, a national
    steering committee of experts in senior transportation issues has
    advised NCST on issues in aging and transportation and ways to achieve
    NCST's goals.
      collaborating with communities to increase independence and improve
                                    services
        The National Center on Senior Transportation's mission is to
    increase transportation options for older adults and enhance their
    ability to live more independently within their communities throughout
    the United States. NCST achieves this mission by gathering and sharing
    best practices; providing technical assistance and training;
    facilitating strategic partnerships and community engagement to support
    the development and coordination of senior transportation options;
    developing and disseminating information; and administering
    demonstration grants.
        The Center has a strong commitment to promoting innovations at the
    community level and has provided funding and technical assistance to
    support a number of specific projects across the United States. Working
    with individual communities, the NCST identifies effective and creative
    approaches for addressing the challenges that impact transportation
    services for older Americans. The NCST strives to bring together the
    aging, human service, and transportation providers to create solutions.
    Our work supports the full ``family'' of older adult transportation
    services, including programs using volunteers both to driver and to
    accompany older adults to their destinations, travel training and
    orientation promoting increased use of public transit, older driver
    safety, education for caregivers, coordinated planning efforts and much
    more.
       national center on senior transportation appropriations priorities
        Easter Seals urges Congress to support the mobility needs of older
    adults and people with disabilities (through Easter Seals Project
    ACTION) to address significant unmet needs, such as addressing the
    coming increase in need for accessible transportation options as baby
    boomers age and integrating transportation technology advances to
    increase transportation mobility and access.
                                     ______

            Prepared Statement of Habitat for Humanity International
        Thank you for the opportunity to provide testimony in support of
    the Self-Help and Assisted Homeownership Opportunity Program (SHAHOP)
    account, which funds the Self-Help Homeownership Opportunity Program
    (SHOP), the Section 4 Capacity Building for Community Development and
    Affordable Housing Program (Section 4), and the Department of Housing
    and Urban Development's (HUD's) rural capacity building program.
    Habitat for Humanity International (Habitat) urges the subcommittee to
    appropriate $60 million for the SHAHOP account for fiscal year 2014,
    funding SHOP at $20 million, Section 4 at $35 million, and rural
    capacity building at $5 million.
                  self-help homeownership opportunity program
        HUD's SHOP program has been a uniquely effective tool for enabling
    successful low-income homeownership by providing resources to Habitat
    affiliates and other nonprofits implementing self-help housing models
    to acquire property, including foreclosed or abandoned homes, and to
    develop infrastructure for future Habitat homes, activities that are
    among the most difficult to underwrite through private fundraising.
    With many communities around the country still struggling to overcome
    the effects of the Great Recession and the foreclosure crisis, enabling
    families to become successful homeowners has never been more important
    to local economies. With the support of SHOP funds, Habitat affiliates
    have completed more than 15,000 homes and housed nearly 54,000 people
    and counting, while leveraging over $1 billion in private investment in
    neighborhoods and communities throughout the Nation.
        Since fiscal year 2011, SHOP funding has been cut by 50 percent to
    the current funding level of $13.5 million, drastically reducing the
    impact of one of the most effective Federal tools for enabling low-
    income families to become homeowners. In spite of the program's proven
    effectiveness, the administration's fiscal year 2014 budget request
    proposes eliminating SHOP as a stand-alone program, guaranteeing $0 in
    future funding through a so-called HOME Investment Partnerships Program
    (HOME) ``set-aside'' of ``up to'' $10 million.
        Even if funding were ultimately provided through a HOME set-aside,
    it is unlikely that Habitat affiliates could access or administer such
    a program, as Habitat for Humanity International (HFHI) currently
    applies for and administers SHOP funding and supports critical
    monitoring and evaluation requirements on behalf of its affiliates.
    HFHI would be unable to continue serving in this role if it were
    required to apply separately to every participating jurisdiction for
    funding, and the vast majority of Habitat affiliates would be unable to
    add the necessary staff capacity to do so on their own behalf.
        Additionally, current administrative processes would become even
    more burdensome under the administration's legislative proposal, which
    would expand HUD's regulation of SHOP. This is in stark opposition to
    the clearly expressed statutory intent of Congress to constrain SHOP
    regulatory burdens, maximizing the local impact of the program. In
    light of the Office of Management and Budget's (OMB's) having rated
    SHOP as of the most effective programs at HUD, it makes little sense to
    reform or reauthorize it as a HOME set-aside. Under the program's
    current structure, SHOP grantees have completed more homes at a lower
    cost than HUD requires and have generated levels of private investment
    in local communities rarely achieved through HUD programs.
        In addition to maximizing the impact of scarce appropriations,
    SHOP's traditional structure also ensures quality by enabling grantees
    to select the best local nonprofit developers to implement funding.
    Ultimately the President's proposal would eviscerate SHOP, shifting
    limited funding from serving families to meeting regulations and
    undermining Habitat and other proven grantees' ability to ensure
    program quality. In light of current budgetary constraints, ongoing
    weakness in the housing market, and SHOP's long history of
    effectiveness and efficiency, Habitat urges the subcommittee to
    maintain SHOP's current structure and to restore funding to $20 million
    for fiscal year 2014.
                      section 4 capacity building program
        Complementing SHOP is the Section 4 Capacity Building Program
    (Section 4), the sole HUD program designed specifically to enhance the
    capacity of local nonprofit community developers. Like SHOP, Section 4
    has endured significant cuts since fiscal year 2011, and the
    President's fiscal year 2014 budget request proposes reducing the
    funding level to $20 million, an additional 43 percent cut from the
    current level of $35 million. Such a reduction would inevitably result
    in the diminished ability of community development organizations to
    meet the critical needs of local communities still struggling to
    achieve economic recovery.
        Habitat uses Section 4 funding to provide training, technical
    assistance, and organizational development grants to local Habitat
    affiliates to assist them with building staff capacity and expertise,
    organizational skills, and technical systems required to maximize
    impact on local communities. Affiliates receiving Section 4 funds have
    increased their housing production levels by 48 percent during their 3
    year grant periods and have sustained or increased these gains in
    subsequent years. Habitat urges the subcommittee to maintain Section 4
    at $35 million for fiscal year 2014.
        Together, SHOP and Section 4 serve as impact multipliers for
    Habitat affiliates nationwide in both rural and urban communities. With
    local economies still suffering effects from the Great Recession,
    Congress should maintain proven programs like SHOP and Section 4 that
    leverage tens of millions of dollars of private investment into
    communities, enabling hundreds of additional qualified families to
    become Habitat homeowners each year.
        Please support Habitat's mission and work by funding SHAHOP at $60
    million in the fiscal year 2014 Transportation, Housing and Urban
    Development, and Related Agencies appropriations bill. Thank you for
    your consideration and for your support of Habitat for Humanity.
                                     ______

         Prepared Statement of HUD Council 222, American Federation of
                         Government Employees, AFL-CIO
        Madam Chairman Murray, Ranking Member Collins, and members of the
    subcommittee, my name is Carolyn Federoff. I am the executive vice
    president of HUD Council 222, American Federation of Government
    Employees, AFL-CIO. On behalf of the 1,547 Federal employees who work
    in the Office of Multifamily Housing (MFH) of the U.S. Department of
    Housing and Urban Development, I want to thank you for the opportunity
    to submit our written statement for the hearing record on the important
    issue of the HUD proposal to reorganize the HUD Office of Multifamily
    Housing.
                                    summary
        HUD's proposed reorganization of the Office of Multifamily Housing
    is irresponsible. It would be very costly to implement, would generate
    little or no savings, would not resolve the problems identified by HUD
    in its Federal Register notice (78 FR 25293), and would generate
    additional problems--many of which could increase risk to the Federal
    Housing Administration (FHA) Insurance Fund.
        The Office of Multifamily Housing employees have been remarkably
    successful. Between 2009 and 2012, Multifamily Housing increased its
    customer base from 48 lenders to 89 lenders, more than doubled the
    value of initial endorsements--from $5.1 billion to $13.1 billion, and
    nearly doubled the numbers of loans processed, from 661 to 1,286. The
    Office of Multifamily Housing can be made more effective and efficient.
    But we believe alternative, more responsible, proposals are faster,
    cheaper, and smarter.
                                   discussion
    Proposed Multifamily Housing Reorganization Would Be Very Costly To
            Implement
        HUD is proposing to physically consolidate into 10 locations;
    employees and work currently located in 61 offices nationwide. The
    Agency projects a minimum cost of $57.3 million based on various one-
    time costs, including:
      --Buyout cost--approximately $13.9 million-$20.8 million;
      --Personnel relocation cost--approximately $16.8 million-$33.6
            million;
      --Net office closure costs--$6.1 million;
      --Space alteration costs in the 10 remaining offices--$20 million;
            and
      --Training costs--$500,000.
        However, the Agency has failed to present other costs, including:
      --Minimum loss of 25 percent of skilled and experienced employees;
      --Unknown costs for recruiting and rehiring employees with necessary
            skills to replace employees choosing not to relocate;
      --Unknown costs for training new employees;
      --Unassessed cost of severance pay for employees choosing not to
            relocate or take a buyout;
      --Unknown cost to national and local economies due to lost
            productively during relocation chaos;
      --Unknown cost to FHA insurance funds due to increased risk resulting
            from relocation chaos; and
      --Unknown long-term cost to FHA insurance funds due to reduced
            staffing and oversight.
        In addition, the Agency has presented no reoccurring costs. This is
    not supportable, however. Unless the Agency intends to eliminate all
    site visits or use contractors, the cost of travel will increase as
    Multifamily Housing field staff will be required to travel further
    distances. Further, there will be increased annual office costs in the
    10 remaining offices. Moreover, the per square foot cost for office
    space in the 10 remaining offices will be generally more expensive than
    the cost of current office space.
    Proposed Multifamily Housing Reorganization Would Generate Little to No
            Savings
        HUD projects long term savings of approximately $47 million
    annually: ``The savings is directly related to a reduction in salary
    and benefit costs due to reducing overall MFH staffing from 1,547 in
    fiscal year 2012 to 1,173 by the end of fiscal year 2016.'' These
    savings were calculated based upon an average cost per full-time
    employee (FTE), or approximately $125,000 per FTE.
        However, not all FTEs are the same. The cost of an FTE in New York
    City is more than the cost of an FTE in Des Moines, Iowa. Through
    collective bargaining, the Agency has provided us with a ``from-to''
    list identifying the current duty stations of bargaining unit employees
    and the offices to which they will be reassigned. There are 617
    employees on this list. (The remaining approximately 173 employees to
    be reassigned are not in the AFGE Council 222 bargaining unit.) The
    employees are predominantly GS-12 and GS-13. For ease of calculation,
    we conservatively assumed that all affected employees are GS-12 Step 5.
    We then calculated the cost of their salaries in their current location
    versus in the location to which they will be reassigned. The result is
    an increase in salary costs of more than $2.1 million annually.
        Recognizing that the Agency intends to reduce costs by reducing
    FTEs, we recalculated. The Agency intends to relocate or buyout 790
    employees, with a net loss of 374 FTEs. Our calculations are based on
    617 FTEs, therefore accommodating 191 of the projected loss. The
    remaining 185 of the projected loss represents an additional 30 percent
    reduction in staff. Reducing our salary estimates by 30 percent results
    in a final estimate of almost $1.5 million in additional salary costs
    annually.
        We will be spending more to get less.
    Proposed Multifamily Housing Reorganization Would Not Resolve the
            Problems Identified by HUD but Alternative, More Responsible,
            Methods Would and They Would Be Faster, Cheaper and Smarter
                ``Fragmented and Unwieldy Organizational Structure''/Need
                        for ``Better Spans of Control''
        Many of the problems identified by HUD as the reasons for the
    reorganization are real. But the proposed consolidation into 10 offices
    does not resolve the problems identified. For example, the Federal
    Register Notice presents as a problem a ``fragmented and unwieldy
    organizational structure'' and states that Multifamily Housing needs
    ``better spans of control and [to] establish clear reporting lines in
    the field.'' An organizational structure, however, is not the same as
    an office structure. Organization charts are not written in bricks and
    mortar. Similarly, spans of control and lines of authority are not
    resolved by the configuration of office space. Physically consolidating
    staff will not instantly eliminate fragmentation or an unwieldy
    organizational structure. Physically consolidating Multifamily Housing
    employees will not eliminate multiple layers of review or bottlenecks
    through which all decisions must flow.
        A cheaper, faster and smarter solution is to change the
    organizational reporting relationships and lines of authority. This can
    help resolve fragmentation and create a more ``wieldy'' or controllable
    organizational structure. It can be used to create better spans of
    control. If articulated well, it can establish clear reporting lines in
    the field and headquarters.
        We recommend that the Agency use HUD's established regional
    structure to consolidate hubs and tame unwieldy spans of control,
    assuring access to HUD's core programs (Multifamily Housing, public
    housing, community planning and development (CPD), and fair housing and
    equal opportunity (FHEO)) in offices across the country. To maintain
    customer service at reasonable cost, we recommend that remaining field
    offices be established as satellites. If workload does not support the
    designation of a field office as a satellite, existing Multifamily
    Housing employees can be ``out stationed'' from and report remotely to
    the hub.
                ``Antiquated Systems and Processes''/Need To ``Increase the
                        Consistency of MFH Processing Across the Country''
        The Agency has identified as problems ``antiquated systems and
    processes'' and the need to ``increase the consistency of MFH
    processing across the country.'' Again, however, these are not problems
    that are necessarily resolved through relocation. Antiquated systems
    and processes are location neutral. ``Reducing the field footprint''
    does not automatically result in more consistent customer service. It
    takes better systems and processes, and trained employees and managers
    to achieve consistent customer service.
        Cheaper, faster and smarter solutions are available. The Breaking
    Ground and Sustaining Our Investments initiatives directly address the
    processes our Development and Asset Management divisions use daily. The
    cost of their initial implementation has already been expended. In 2009
    and 2010, the Administration introduced Loan Committees that review
    applications for FHA mortgage insurance before the issuance of a firm
    commitment. This has increased the consistency of Multifamily Housing
    development processing.
                Need for ``More Active Workload Balancing''
        The Agency has identified a need for ``more active workload
    balancing.'' FHA Commissioner Carol Galante testified before this
    subcommittee about wide disparities in the workload of employees from
    office to office. As union representatives, we are acutely aware of
    these inequities. We are also aware, however, that the Agency lacks a
    willingness to actively manage the workload. Physically consolidating
    Multifamily Housing employees in and of itself does not actively
    balance workloads. This takes active management.
        A cheaper, faster and smarter solution is available. The
    administration has recently started a workload sharing pilot program
    that is location neutral. If, as contemplated by this reorganization,
    work from Seattle, Washington, can be done in San Francisco, then the
    work from an overburdened asset manager in Portland, Oregon, can be
    done by an employee with a lighter portfolio in another office. The
    workload sharing pilot should be fully implemented.
    Proposed Multifamily Housing Reorganization Would Generate Additional
            Problems, Many of Which Could Increase Risk to the FHA
            Insurance Fund
        Aside from failing to solve the problems identified, the proposed
    reorganization would create additional problems. Some of the problems
    created will be irreversible. Many will increase risk to the FHA
    Insurance Fund.
        For example, the Agency anticipates losing 395-592 Multifamily
    Housing employees in the field, currently estimated at 1,247. This
    would be a loss of 32 percent to 47 percent of Multifamily Housing
    employees engaged in direct customer service. The overwhelming majority
    of these losses will likely be employees with 20 or more years of
    experience and training. The Agency is unlikely to be able to replace
    lost skills in a timely fashion, except at great cost: in almost every
    instance, the location of the proposed hub or satellite is an area with
    below-average unemployment rates and financial centers competing for
    the same talent pool.
        We are particularly concerned that the proposed reorganization
    would permanently reduce by 30 percent Multifamily Housing employees in
    the field, despite the fact that reductions in staff are made before
    any process improvements are implemented or assessed for efficiency or
    effectiveness, and Government Accountability Office (GAO) reported in
    March that HUD lacks a credible method of determining its staffing
    needs. (``HUD--Strategic Human Capital and Workforce Planning Should be
    an Ongoing Priority,'' GAO March 2013)
    Request for Government Accountability Office (GAO) Report
        We request that the Transportation, Housing and Urban Development,
    and Related Agencies appropriations subcommittee seek a GAO review of
    the process utilized by the Office of Multifamily Housing for
    determining its staffing needs after reorganization, and report on
    whether and how Multifamily Housing overcame the problems identified in
    the March 2013 GAO report.
        We further suggest that the subcommittee prohibit any expenditure
    of funds to implement the proposed reorganization until after Congress
    has an opportunity to review the new GAO report.
        This concludes my written statement. I thank you for including it
    in the hearing record.
                                     ______

          Prepared Statement of the Institute of Makers of Explosives
      fiscal year 2014 federal motor carrier safety administration budget
                                    request
               interest of the institute of makers of explosives
        The Institute of Makers of Explosives (IME) is the safety and
    security association of the commercial explosives industry. Commercial
    explosives underpin the economy. They are essential to energy
    production, construction, demolition, and the manufacture of any metal/
    mineral product. Explosives are transported and used in every State.
    The ability to transport and distribute these products safely and
    securely is critical to this industry. At some point, virtually all
    explosives are transported by truck. Among these explosives are
    products classed as Division 1.1, 1.2, 1.3, and 1.5 materials, which
    with other select hazardous materials, may only be transported by motor
    carriers holding a ``hazardous materials safety permit'' (HMSP) issued
    by the Federal Motor Carrier Safety Administration (FMCSA). According
    to program data, carriers of explosives make up the largest segment,
    roughly half, of the universe of HMSP holders.
        Our industry has maintained an exceptional safety record for
    decades. According to the Hazardous Materials Information System
    (HMIS), no deaths have been attributed to commercial explosives since
    the Department of Transportation began collecting data in the 1970s.
    Despite the safety record of our industry, we have members who struggle
    when it comes to maintaining their HMSP qualification.
                             implementation issues
        HMSP holders failed to appreciate the full impact of the
    disqualifying out-of-service (OOS) thresholds when FMCSA finalized the
    HMSP rule in 2004. First, the preamble and the regulatory text set
    forth in the 2003 proposal, as well as the preamble to the HMSP final
    rule, describes the agency's intent to issue HMSPs to motor carriers
    with a ``satisfactory'' safety rating.\1\ Those without a satisfactory
    safety rating would be eligible for a temporary HMSP if they have ``a
    crash rate in the top 30 percent of the national average, or a driver,
    vehicle, hazardous materials, or total [OOS] rate in the top 30 percent
    of the national average.'' (Emphasis added.) Second, the ``or total''
    OOS rate suggested that the 30 percent national average
    disqualification would, in the aggregate, disqualify only 30 percent of
    carriers. As FMCSA has implemented this program, however, these were
    not the standards that a carrier could rely on to obtain a permit.
    Instead, all carriers must perform to the OOS standard, irrespective of
    their safety rating.
    ---------------------------------------------------------------------------
        \1\ 68 Federal Register (FR) 49737, 49752 and 49753 (August 19,
    2003); 69 FR 39367, 39352 (June 30, 2004).
    ---------------------------------------------------------------------------
        Since the HMSP program's inception in 2005, we have urged FMCSA, in
    meetings, letters, and petitions, to relook at this program and make
    needed reforms. Over these 8 years, the HMSP program has been plagued
    by administrative missteps including double counting OOS inspections
    and thousands of erroneous denials of applications. Last year, FMCSA
    provided ``interim'' relief by ``fixing'' the OOS disqualification
    rates. Prior to the ``fix,'' disqualification rates were recalculated
    every 2 years, thereby exposing carriers to the risk of losing their
    permits simply because they were being judged against a different
    universe of carriers at a particular point in time. Still, questions
    remain unanswered about the statistical basis used by FMCSA to
    calculate the program's most critical criterion, the hazardous material
    (hazmat) OOS rate. We have documented the inherent unfairness of a
    system that relies on OOS rates. Selection criteria for roadside
    inspections is not random (nor should it be given limited resources),
    which is to say that carriers do not have equal opportunity to amass
    ``clean'' inspections. Not all OOS violations are crash-causal, and
    some are inherently biased by personal judgment. Further, the
    methodology used to determine ``significance'' of the inspection data
    lacks statistical confidence. We do not object to a public policy
    requiring that motor carriers transporting hazmats be held to higher
    safety standards. However, we do object to the bias and uncertainty
    that the current HMSP program breeds, especially when the program has
    shown no nexus to safety enhancement.
                      safety benefits of the hmsp unproven
        FMCSA estimated that implementing the HMSP program would prevent
    seven hazmat truck-related crashes per year. The agency stated that the
    safety benefits derived from the projected crash reductions would be
    ``large because of the number of conventional crashes that may be
    prevented.'' This has not proved to be the case. The data generated
    after the 8 years of the HMSP and during the 8 years immediately
    preceding the implementation of the HMSP shows that HMSP holders are
    historically among the safest carriers on the road and that the program
    has had little impact on safety:

    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              1997-2004                 2005-2012                    All hazmat highway incidents
                                                     -------------------------------------------------------------------------------------------------------
                      HMSP material                                                                               1998-2004                 2005-2011
                                                        Crashes     Fatalities    Crashes     Fatalities ---------------------------------------------------
                                                                                                            Crashes     Fatalities    Crashes     Fatalities
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Explosives (25 kg. 1.1, 1.2, 1.3, and placarded            36  ...........           29  ...........  ...........  ...........  ...........  ...........
     1.5)...........................................
    RAM (HRCQ\1\)...................................           16  ...........           19  ...........  ...........  ...........  ...........  ...........
    TIH.............................................           55  ...........           61        \2\ 1  ...........  ...........  ...........  ...........
    Methane.........................................            4  ...........            3  ...........  ...........  ...........  ...........  ...........
          Total.....................................          111  ...........          112            1        2,461           85        2,448           81
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Data from the Hazardous Materials Information System (HMIS), 3/11/2013.
    \1\ It may be that none of these crashes are highway route controlled quantities (HRCQ). From the data in HMIS, it was possible to eliminate some
      incidents that were clearly not HRCQ. Where there was doubt the incident was counted.
    \2\Anhydrous ammonia (AA) intended for agricultural use.

        For HMSP holders, this safety record highlights the need for an
    immediate reconsideration of the disqualifying standards that are
    threatening their livelihoods. Keep in mind that the vast majority of
    carriers subject to the HMSP are not long-haul, freight-all-kinds
    carriers. They serve niche markets that rely on local, often rural
    delivery, and require specialized equipment. As such, these carriers do
    not frequent routes with inspection stations. Once these carriers get
    into trouble based on the non-random, often subjective OOS calls by
    inspectors, it is virtually impossible for these carriers to accrue
    sufficient ``good'' inspections to overcome the ``bad.'' For example,
    it is not uncommon for an HMSP holder to average 15 or fewer
    inspections in a year, but only inspection data from the 12 months
    prior to the expiration of the holder's permit is counted, and only
    holders with at least three inspections are considered ``statistically
    significant'' for purposes of the OOS disqualifications. If two of the
    inspections in this timeframe result in an OOS \2\, the carrier would
    need 28 ``clean'' inspections to requalify. The later into the 12-month
    qualification period that the second OOS occurs, the more unlikely it
    is that a carrier could recover. Consider that two similarly situated
    carriers each receive two OOS inspections, then one of the two obtains
    a third ``clean'' inspection. The carrier that received the clean
    inspection would lose its permit, the other would continue operating.
    Or consider that on any given day two similarly situated carriers could
    be ``underwater'' \3\ because of their current mix of OOS and clean
    inspections. However, because one carrier's HMSP expires that day, that
    carrier loses its permit, while the other continues to operate.
    ---------------------------------------------------------------------------
        \2\ This assumes that the OOS citation was correctly issued. CSA
    experience shows that FMCSA's ``Data Q'' process is overwhelmed and
    State ability and/or willingness to expend resources on these
    challenges is a growing concern.
        \3\ Below the OOS disqualification threshold.
    ---------------------------------------------------------------------------
        These specialized carriers do not have the option to carry non-HMSP
    freight while working to requalify for a permit. The irony is that,
    when these carriers get into jeopardy, FMCSA does not routinely suspend
    or revoke the HMSP; rather carriers are allowed to operate until it is
    time to apply for renewal. The regulations allow for appeals when
    permits are suspended or revoked, but not if the carrier is applying
    for renewal. Under no circumstance may holders apply for a waiver of
    the OOS disqualification irrespective of their overall operational
    safety records.
                          request for expedited relief
        FMCSA accepted a petition for rulemaking from IME and other
    affected industry associations to reform the HMSP disqualification
    standards. While we are pleased that FMCSA has accepted our petition,
    we are disappointed that ``the agency has determined that this
    rulemaking should not be initiated until the CSA Safety Fitness
    Determination (SFD) final rule is published, as it will be used as the
    basis for initiating this rule.'' \4\ We would like to strongly suggest
    that the HMSP reform should take precedence over finalization of the
    SFD rulemaking, a rulemaking that has yet to be proposed. First, the
    HMSP program is being used now as the SFD standard for covered
    materials. Covered carriers that do not meet the contested HMSP
    standards may be shutdown. Non-HMSP carriers do not yet face this
    outcome. Second, the problematic HMSP disqualification standards are
    based on inspections and OOS determinations. These same metrics are
    expected to be the basis of the standards to be proposed in the SFD
    rulemaking. Third, the HMSP regulated community is very small relative
    to the universe of carriers that will be subject to the SFD. For these
    reasons, we believe FMCSA should immediately act to fix the HMSP
    disqualification standards and export that refined SDF model to the
    larger commercial trucking universe under CSA.
    ---------------------------------------------------------------------------
        \4\ Letter to IME from FMCSA, November 14, 2011, page 1. (Emphasis
    added.)
    ---------------------------------------------------------------------------
        The agency's reluctance to immediately address the shortcomings of
    the HMSP is particularly troubling because implicit in FMCSA's plan to
    address by rulemaking many of the issues raised by industry is an
    acknowledgment of deficiencies with the current program. These
    deficiencies will persist over the intervening years between now and
    the time that they are resolved through the promised HMSP rulemaking.
    Meanwhile, the controversy over the evolving SFD standards adds to the
    uncertainty and almost certainly means that it will be years until this
    ``precursor'' rule is finalized. The continuing adverse impacts to the
    HMSP community are undeserved.
        While Congress tried to spur agency action by requiring that the
    agency consult with stakeholders and initiate rulemaking,\5\ we are
    concerned that the agency will not move fast enough to prevent
    relatively good carriers from losing their HMSP and, as explained,
    being put out of business based on limited data anomalies. Safety is
    not enhanced when new and inexperienced carriers with no OOS history
    fill the void. We have asked FMCSA to immediately address these
    pressing concerns by issuing an interim final rule (IFR) to at least
    provide for an additional level of fitness review (ALFR) prior to the
    denial, revocation, or suspension of a safety permit until such time
    that the agency proceeds with the full rulemaking based on our
    petition. The ALFR would consider the safety management controls of the
    applicant or holder not just OOS violations rates, and it would provide
    the applicant or holder an opportunity to file a corrective action plan
    to address identified concerns.\6\ An ALFR would not overly burden the
    agency, as it would involve an examination of less than 100 HMSP
    holders annually. Further, this approach is consistent with the
    direction the agency is pursuing under the CSA initiative to focus
    compliance oversight on carriers needing the most improvement compared
    to their peers.
    ---------------------------------------------------------------------------
        \5\ ``MAP-21'' (Public Law 112-141), section 33014.
        \6\ This opportunity should not be available to applicants or
    holders that present an imminent hazard or evidence of a pattern
    willful and knowing non-compliance with safety regulations.
    ---------------------------------------------------------------------------
        FMCSA told us in January that the agency was not willing to pursue
    a regulatory option as we have described because of resource
    limitations. Justice will not be served by inattention to these
    pressing concerns. The uncertainty of when FMCSA will be able to carry
    out the HMSP rulemaking coupled with the urgency for some action based
    on acknowledged program deficiencies compel us to ask the subcommittee
    to deny funds to administer this program until FMCSA provides interim
    measures to ensure that HMSP holders are not denied permits based
    solely on the flawed disqualification standards in place now.
                                   conclusion
        Congress envisioned a risk-based safety program for hazmat
    carriers. It gave FMCSA wide latitude to name the types and quantities
    of hazardous materials that should be covered by a HMSP. But, the
    agency has chosen to apply this authority only to the narrow list of
    statutorily mandated materials. History shows that carriers of these
    materials are not presenting the crash risk that the agency claims the
    HMSP will address. Neither IME nor its members object to public policy
    that holds hazmat carriers to a higher safety standard, which is the
    premise for the HMSP. We do object, however, to the current standards
    for disqualification. They are not risk-based and deny holders
    meaningful due process protection. Inspection frequency and outcome do
    not seem to correlate to crashes or fatalities. Thank you for your
    attention to these concerns.
                                     ______

          Prepared Statement of the Institute of Makers of Explosives
    fiscal year 2014 pipeline and hazardous materials safety administration
          budget request for the office of hazardous materials safety
               interest of the institute of makers of explosives
        The IME is the safety and security association of the commercial
    explosives industry. Commercial explosives underpin the economy. They
    are essential to energy production, construction, demolition, and the
    manufacture of any metal/mineral product. Explosives are transported
    and used in every State. Additionally, our products are distributed
    worldwide, while some explosives must be imported because they are not
    manufactured in the United States. The ability to transport and
    distribute these products and to receive precursor chemicals 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
    materials contribute to America's quality of life, but if handled
    improperly, adverse 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 under the Hazardous Materials Transportation Act (HMTA) to
    ``provide adequate protection'' against these risks through regulation
    and enforcement.\1\ The Secretary has delegated the HMTA authorities to
    various modal administrations, with primary regulatory authority
    resting in the Pipeline and Hazardous Materials Safety Administration
    (PHMSA).
    ---------------------------------------------------------------------------
        \1\ 49 U.S.C. Chapter 51.
    ---------------------------------------------------------------------------
        PHMSA regulates hazmat transportation so closely that such
    materials may not be moved any distance, via any mode of transportation
    unless a DOT regulation, permit or approval authorizes the movement.
    Such close regulation makes efficient consideration of such
    authorizations critical to the industries and workers involved, as well
    as to the national defense, the security of our homeland, and the
    economy at large.
                               budget uncertainty
        In the absence of the Administration's fiscal year 2014 budget
    request, we are in uncharted territory in terms of our analysis of the
    President's budgetary priorities.\2\ As of the date of this comment,
    Congress has provided a fiscal year 2013 appropriation to PHMSA equal
    to its fiscal year 2012 rate for operations, less the 0.612 percent
    increase provided by Public Law 112-175. Under this scenario, PHMSA is
    looking at $42.3 million for its hazmat program in fiscal year 2013.
    This funding rate is consistent with the amount authorized for fiscal
    year 2013 by MAP-21.\3\ As we look forward to fiscal year 2014, MAP-21
    provides a $42.8 million authorization for PHMSA's hazmat programs.
    However, the Government's budget situation does not improve. The
    agency's fiscal year 2013 appropriations is still subject to a 5-
    percent decrease under a sequestration order if the President fails to
    reach agreement with Congress on an alternative, and we understand that
    the cap on non-emergency appropriations for fiscal year 2014 will drop
    to $966 billion, down from the cap of $984 billion in fiscal year 2013.
    ---------------------------------------------------------------------------
        \2\ The Budget Act requires that submission of the President's
    budget request by the first Monday in February. The current expectation
    is that the President's fiscal year 2014 request will be released in
    April.
        \3\ Public Law 112-141.
    ---------------------------------------------------------------------------
        While there is uncertainty about the specifics of the
    administration's hazmat priorities for fiscal year 2014, it should be a
    given that additional program growth is unlikely in the near future,
    and certainly for the coming fiscal year.\4\ Rather, we should be
    focusing the realignment of program priorities to ensure that the
    agency's core mission is sustained. With this perspective, we offer the
    following comments.
    ---------------------------------------------------------------------------
        \4\ PHMSA's hazmat budget has increased by about $10 million, a 30-
    percent rate of growth, in the last 3 fiscal years.
    ---------------------------------------------------------------------------
              phmsa's fiscal year 2013 ``user fee'' budget request
        In these tight budgetary times, PHMSA may be tempted to repropose a
    ``user fee'' on certain agency activities as it did last fiscal year.
    We commend both the authorizing and appropriating committees of
    Congress for rejecting this request last year, and urge similar
    restraint, if user fees are again proposed.
      phmsa's hazmat program is a success: rulemaking and data collection
                                   priorities
        As noted above, the HMTA requires that PHMSA's regulations be risk-
    based. The agency, in turn, measures the success of its hazmat safety
    program by the number of transportation-related deaths and ``serious
    injuries'' (i.e., hospitalizations) attributed to the hazardous
    materials. The agency acknowledges that these numbers ``have declined
    an average of 4 percent every 3 years over the long term.'' \5\ This
    decline continued last year. Only 10 deaths, all due to human error,
    not a failure of a regulatory standard, were attributed to hazardous
    materials. None, since the early 1970s, have been attributed to
    commercial explosives. This contrasts with thousands of deaths annually
    that result from crashes involving large trucks, for example.
    ---------------------------------------------------------------------------
        \5\ Fiscal year 2013 PHMSA Budget Justification, page 3.
    ---------------------------------------------------------------------------
        This safety outcome suggests that PHMSA needs to focus on two core
    missions: rulemaking, including the timely issuance of approvals and
    permits, to keep commerce moving, and data collection and public access
    to the data. For example, we were very concerned that no new resources
    above baseline were requested last year to support rulemaking activity.
    MAP-21 makes clear that rulemaking, including accelerating the
    incorporation of special permits into the HMR, is a priority. PHMSA
    needs to maintain resources to remain active in international standard-
    setting forums to ensure that U.S. rules are consistent to keep
    American goods moving in the global marketplace. PHMSA's ability to
    collect incident data is critical to stakeholder's ability to
    understand and learn from incidents. Additionally, the agency's efforts
    to enhance the online availability of incident data, rulemakings, and
    the timeliness of processing applications for special permits and
    approvals should be commended and encouraged. Finally, we welcome the
    agency's efforts to improve communication and outreach with the
    regulated community.
                          budgetary issues to consider
        Staffing and Workload.--The biggest expense in PHMSA's budget is
    manpower. The agency's output is the work product of its employees.
    Yet, PHMSA's budget requests have not provided baseline empirical
    workload metrics to judge agency performance or the merit of staffing
    requests. When information about program output is provided, it is
    prospective, not retrospective. Of additional concern, retirements and
    departures of seasoned staff have led to a loss of institutional
    knowledge. While there is a need for qualified chemists, engineers, and
    economists to fill this void, it appears that the agency is using scare
    resources to build a ``senior advisor'' cadre for agency
    administrators.\6\ According to the Office of Personnel Management's
    2012 Federal Employee Viewpoint Survey Results Hazmat, PHMSA ranked
    near the bottom of all government agencies, and the lowest of all DOT's
    safety administrations. Such results to not bode well for attracting
    and retaining the kind of expert staff that are needed to keep up with
    the agency's rulemaking and analytical needs.
    ---------------------------------------------------------------------------
        \6\ https://www.usajobs.gov/GetJob/ViewDetails/339410400 and
    https://www.usajobs.gov/GetJob/ViewDetails/339410600 (March 15, 2013).
    These positions are in addition to other front office staffing added
    during the agency's 2010 reorganization. Approximately 25 percent of
    staff are now senior level grades (GS-14, GS-15, and SES); yet, few are
    for professional series positions. Despite the new positions, hazmat
    safety has not seen statistically significant improvement.
    ---------------------------------------------------------------------------
        Research and Development.--Congress provides 3-year monies to
    support a hazmat research and development (R&D) function within PHMSA,
    with a mission to study and evaluate emerging hazardous materials
    safety issues and technologies. So far, no fiscal year 2011, 2012, or
    2013 funds have been obligated. It does appear that PHMSA may be using
    some of these funds to create a Risk Management Framework (RMF).\7\ The
    RMF is supposed to establish incident probabilities through a set of
    fault and event trees of various hazmat shipping scenarios. The need to
    use scarce funds for such a framework is questionable given that four
    times as many deaths in the United States are caused by lightning
    strikes than hazmat incidents. There is concern that the RMF may lead
    to unnecessary over-regulation of hazmat that would threaten U.S. jobs
    while attaining no measurable safety benefit. At the same time, there
    is a pressing need to develop uniform performance standards for
    training hazardous materials inspectors. Congress agrees and directed
    PHMSA to produce these standards by April 2014. This initiative is
    deserving of support.
    ---------------------------------------------------------------------------
        \7\ In fiscal year 2010, $447, 000 was awarded to BayFirst, LLC for
    this purpose, about 30 percent of the year's R&D budget, and there is a
    placeholder for BayFirst to receive additional fiscal year 2011 funds.
    ---------------------------------------------------------------------------
        Grants Programs (GP).--PHMSA operates three GPs--HMEP, HMIT, and
    SPST--funded by fees assessed on the hazardous materials community. We
    have long looked for evidence of program accomplishment and question
    the agency's claims about achievements ascribed to these programs. In
    2005, Congress directed the agency to annually provide a detailed
    accounting of all grant expenditures.\8\ In the intervening 7 years,
    the agency has released only one such report, and that report did not
    provide the retrospective accounting necessary to determine if grant
    recipients were using funds appropriately.\9\ This year, PHMSA proposed
    that Congress eliminate this report saying that staff time used to
    prepare this report outweighs its benefit.\10\ The lack of GP
    transparency and accountability prompted an audit by the Office of
    Inspector General last year. The audit found systemic mismanagement and
    misuse of grant funds.\11\ PHMSA has still not made its fiscal year
    2012 grant awards to applicants under the HMIT and SPST programs. We
    believe the funds for the SPST program are forfeit because this program
    is not protected by the HMTA provision that funds remain available
    ``without further appropriation.'' \12\ Whether or not PHMSA can
    release these fiscal year 2012 funds, grantees now have 6 months or
    less, rather than a year, to spend the funds, which does not bode well
    for effective use of these monies. These programs warrant increased
    oversight by the subcommittee.
    ---------------------------------------------------------------------------
        \8\ 49 U.S.C. 5116(k).
        \9\ http://phmsa.dot.gov/staticfiles/PHMSA/DownloadableFiles/Files/
    Report_to_Congress_
    HMEP_Grants_Program_2005_2006.pdf
        \10\ The Government Performance and Results Act (GPRA)
    Modernization Act of 2010 invites Federal agencies to identify for
    elimination or consolidation. http://www.performance.gov/sites/default/
    files/tmp/_List_of_Reports_Required_by_P_L%20_111-352.xls.
        \11\ OIG, DOT, AV-2012-040, January 12, 2012.
        \12\ 49 U.S.C. 5116(i).
    ---------------------------------------------------------------------------
                                   conclusion
        The subcommittee needs to make difficult decisions about where to
    save scarce Federal resources. We recommend that the subcommittee
    review new front office staff allocations, and ensure that the agency
    has a plan to replace lost expertise in its rank and file. Additional
    oversight of PHMSA's hazmat R&D and grants programs also is warranted.
    PHMSA should redirect resources to enhance its information technology
    and rulemaking capacities. These services are needed by the hazmat
    community, given PHMSA's close regulatory scheme, to enable the safe,
    secure, and efficient movement of hazardous materials critical to the
    economy.
                                     ______

     Letter From Interested Parties for Hazardous Materials Transportation
                                                        April 26, 2013.
    Hon. Patty Murray,
    Chairman, Subcommittee on Transportation, Housing and Urban
            Development, and Related Agencies,
    Washington, DC.
    Hon. Susan Collins,
    Ranking Member, Subcommittee on Transportation, Housing and Urban
            Development, and Related Agencies,
    Washington, DC.

    RE: Fiscal Year 2014 PHMSA Budget Request
        Dear Chairman Murray and Ranking Member Collins: The undersigned
    industry associations represent all sectors of the economy engaged in
    the transportation of hazardous materials which are essential to
    Americans' quality of life. We are writing to alert you to our concerns
    with the administration's proposed $12 million user fees to be paid by
    applicants for special permits and approvals (SP/A) issued by the
    Pipeline and Hazardous Materials Safety Administration (PHMSA). This
    fee proposal, with charges ranging from $700 to $3,000 per application,
    is identical to the user fee the administration proposed in fiscal year
    2013. Congress wisely rejected this proposal last year, and we urge you
    to once again reject this initiative in order to protect American jobs
    and promote innovation.
        PHMSA states that it needs the user fees to support its oversight
    of the new conditions it has imposed on SP/A applicants. However, the
    user fee proposal is without merit:
      --Currently, about 35 full-time equivalents (FTEs) are dedicated to
            the SP/A program. $12 million would support a staff of 66 FTEs.
            PHMSA has inflated the costs of this program by about 50
            percent.
      --The SP/A workload is decreasing. For example, applicants for
            classification approvals are no longer scrutinized for
            ``fitness'' and special permits in effect over 10 years are
            being incorporated into the Hazardous Materials Regulations
            (HMR).
      --The excess user fee revenue would be used to underwrite the
            agency's general fund, although only a fraction of the
            regulated community are holders of special permits and
            approvals.
      --No death has been attributed to special permits or approvals since
            1971 when agency records began to be kept.\1\
    ---------------------------------------------------------------------------
        \1\ PHMSA claims that a maritime incident in 2008 which resulted in
    three deaths was caused by the violation of a special permit. However,
    the deaths were not the proximate result of a special permit violation.
    Testimony in the resultant litigation showed the deaths were due to
    negligence of a number of parties involved in the shipment.
    ---------------------------------------------------------------------------
      --The Government, not private companies, is the largest holder of
            approvals and special permits. The Government will pay no fees.
      --Historically, fees have not been imposed on foreign entities for
            fear of retaliatory fees on U.S. exports giving foreign
            shippers a competitive advantage in the United States.
      --Part of the revenue will have to be used to hire additional Federal
            workers to administer and collect the fees.
      --It is the business activity, not the size, of a company that
            determines how many applications may be filed. Many payers will
            be small businesses.
      --Despite statements that PHMSA is accelerating incorporation of
            special permits into the HMR, no new resources are requested to
            support this rulemaking activity.
      --The fees would be payable per application, meaning that any
            application returned for corrections and re-filing would result
            in unfair redundant fee payments.
      --Other Department of Transportation (DOT) modal administrations
            issue approvals or what amount to special permits; none assess
            fees.
        This program, which provides safety benefits to the public and
    facilitates technical innovations important to our economy, has been
    successfully run for decades without user fees. PHMSA's proposal could
    be the start of a trend for user fees for other regulatory actions
    including letters of interpretation or petitions for rulemaking
    necessary for compliance and good government.
        PHMSA'S user fees are not fair or equitable but are a hidden tax on
    companies that innovate and produce goods needed to strengthen and
    rebuild the U.S. economy. Congress should again reject this initiative.
                Respectfully,

    Agricultural Retailers Association
    American Chemistry Council
    American Coatings Association
    American Petroleum Institute
    American Pyrotechnics Association
    American Trucking Associations
    Association of Hazmat Shippers, Inc.
    The Chlorine Institute, Inc.
    Compressed Gas Association
    Council on Safe Transportation of Hazardous Articles
    Dangerous Goods Advisory Council
    The Fertilizer Institute
    Gases and Welding Distributors Association
    Industrial Packaging Alliance of North America
    Institute of Makers of Explosives
    International Vessel Operators Dangerous Goods Association, Inc.
    National Association of Chemical Distributors
    National Association of Shell Marketers
    The National Industrial Transportation League
    National Private Truck Council
    National Propane Gas Association
    National Tank Truck Carriers, Inc.
    New England Fuel Institute
    Petroleum Marketers Association of America
    Radiopharmaceutical Shippers & Carriers Conference
    Railway Supply Institute, Inc.
    PRBA--The Rechargeable Battery Association
    Reusable Industrial Packaging Association
    Sporting Arms & Ammunition Manufacturers' Institute
    Steel Shipping Container Institute
    Transportation Intermediaries Association
    Truckload Carriers Association
    Utility Solid Waste Activities Group
                                     ______

       Prepared Statement of the National Affordable Housing Management
                                  Association
        Thank you, Chairman Murray and Ranking Member Collins for the
    opportunity to submit this testimony on behalf of the National
    Affordable Housing Management Association (NAHMA). My testimony will
    focus on the importance of providing full funding for the 12-month
    contract terms under project-based section 8 and other key Department
    of Housing and Urban Development (HUD) rental assistance programs.
                                  about nahma
        NAHMA members manage and provide quality affordable housing to more
    than 2 million Americans with very low to moderate incomes. Presidents
    and executives of property management companies, owners of affordable
    rental housing, public agencies and national organizations involved in
    affordable housing, and providers of supplies and services to the
    affordable housing industry make up the membership of NAHMA. In
    addition, NAHMA serves as the national voice in Washington for 19
    regional, State, and local affordable housing management associations
    (AHMAs) nationwide.
                            project-based section 8
        In the project-based section 8 program (PBS8), HUD contracts with
    private apartment owners to pay the difference between the rent for the
    unit and 30 percent of a qualified tenant's income. The rental subsidy
    in the PBS8 program is tied to the property.
        This program provides housing to 1.2 million low-income households,
    over half of which are elderly or disabled. According to HUD, the
    program supports 100,000 jobs, and PBS8 properties generate $460
    million in tax receipts to local and State governments.
        It is essential for Congress to provide HUD with the necessary
    appropriations to make full and timely contract payments to property
    owners. When HUD does not have sufficient appropriations to obligate
    funding for the entire 12-month contract terms at the time of the
    renewals, it ``short-funds'' the contracts. Prior to 2009, HUD ``short-
    funded'' its PBS8 contracts with owners so that payments would only be
    promised from the date of renewal through September 30 (the end of the
    Federal fiscal year). In other words, on a 12-month contract with a
    January 1 renewal date, HUD would only obligate funding through
    September 30. Funding for the remaining 3 months on the contract would
    have to be re-processed in the new fiscal year. This practice was
    disruptive to properties' operations, wasted HUD's staff time, and
    undermined public confidence in the project-based section 8 program.
    Unfortunately, HUD will resume this practice, at least temporarily, to
    manage the cuts required under sequestration.
        The President's budget proposal for fiscal year 2014 requests
    approximately $10.3 billion for the project-based section 8 program.
    Unfortunately, the fiscal year 2014 request is impacted by the $1.2
    billion shortfall in the program due to sequester funding levels in the
    fiscal year 2013 continuing resolution. As a result, HUD will not be
    able to fund contracts for the full 12-month terms during the remainder
    of fiscal year 2013 and into fiscal year 2014. If sequestration were
    repealed, the budget request would be sufficient to fully fund contract
    renewals; however, a repeal of sequestration seems increasingly
    unlikely. Therefore, an estimated $11.5 billion will be necessary to
    fully fund the fiscal year 2014 contract renewals and to close the
    shortfall caused in the fiscal year 2013 appropriations.
        In fiscal year 2014, NAHMA strongly urges the subcommittee to
    provide $11.5 billion for full funding of the 12-month contract terms
    of project-based section 8 contracts. This level of funding is
    necessary because:
      --The Federal Government must honor its contracts with property
            owners.
      --Short-funding jeopardizes the efficient management, financial
            solvency, and physical health of PBS8 properties.
      --Federal Housing Administration (FHA)-insured properties could
            default without the contract funds to pay their mortgages.
      --Properties accumulate numerous late fees to lenders and service
            providers as a result of having insufficient funds to make
            mortgage and utility bill payments.
      --Property staff suffer lay-offs as a result of insufficient contract
            funding.
      --Rehabilitation and renovation plans are put on hold when funding is
            erratic.
      --Short-funding is a budget gimmick that does not save the Government
            money.
      --Appropriations for 11,000 contracts that will be underfunded in
            fiscal year 2013 due to sequestration will have to be provided
            in fiscal year 2014--in addition to the funds necessary for
            fiscal year 2014 contract renewals.
      --Short-funding wastes administrative time at HUD because staff must
            process funding multiple times for the same property over the
            course of the year.
      --Short-funding jeopardizes investor and owner confidence in the PBS8
            program.
                other critical hud multifamily housing programs
        NAHMA strongly urges the subcommittee to prevent draconian cuts to
    affordable multifamily housing programs administered by the Department
    of Housing and Urban Development (HUD). In fiscal year 2014, NAHMA
    strongly urges that the subcommittee provide the necessary
    appropriations to ensure that all of HUD's rental assistance programs
    receive full funding for their 12-month contract terms in fiscal year
    2014, and that no shortfalls result from the sequester funding levels
    in the fiscal year 2013 continuing resolution.
        In addition to project-based section 8, NAHMA is concerned about
    funding levels for the following programs:
      --NAHMA urges the subcommittee to provide the $20 billion requested
            by HUD for the Housing Choice Voucher (HCV, or tenant-based
            section 8) program plus any additional funding necessary to
            ensure there are no program or contract shortfalls due to the
            fiscal year 2013 sequestration.
      --For Section 202 Housing for the Elderly, NAHMA requests at least
            $400 million plus any additional funding necessary to ensure
            there are no contract shortfalls due to the fiscal year 2013
            sequestration. HUD's request for this program also includes
            $310 million for the renewal and amendments of Project Rental
            Assistance Contracts (PRACs) and $70 million for the service
            coordinator program. NAHMA also requests at least $20 million
            for new construction of apartments to serve the elderly.
      --For Section 811 Housing for the Disabled, NAHMA requests at least
            $126 million plus any additional funding necessary to ensure
            there are no contract shortfalls due to the fiscal year 2013
            sequestration. HUD's request includes $106 million for section
            811 PRACs. NAHMA also requests at least $20 million for new
            construction of apartments to serve disabled persons.
      --The General and Special Risk Insurance Fund programs provide
            mortgage insurance for financing the development or
            rehabilitation of multifamily housing, nursing homes and
            hospitals. NAHMA supports HUD's request of $30 billion in
            commitment authority.
      --The HOME Investment Partnerships (HOME) program is the largest
            Federal block grant to State and local governments designed
            exclusively to produce affordable housing for low-income
            families. NAHMA requests funding at a level as close to $1.6
            billion as possible.
      --The Community Development Block Grant (CDBG) offers block grants to
            local communities for community development purposes, including
            the development of affordable housing. NAHMA urges the
            subcommittee to provide $3.3 billion for the CDBG.
        --Both HOME and CDBG provide essential gap financing for
                development of Low Income Housing Tax Credit (LIHTC)
                properties.
     passing comprehensive, pragmatic rental assistance reform legislation
        NAHMA joins a broad coalition of private housing providers, public
    housing agencies, low-income housing advocates and other stakeholders
    in urging Congress to pass comprehensive rental assistance and section
    8 Housing Choice Voucher (HCV) reform legislation in 2013. The most
    recent proposal was the Affordable Housing and Self-Sufficiency
    Improvement Act (AHSSIA) developed by the House Financial Services
    Committee in 2012. Savings and efficiencies achieved through these
    reforms would help stretch limited funds and minimize the risk of harsh
    cuts in assistance to needy families. If these reforms are enacted, it
    is essential to ensure the savings achieved are used to continue
    funding affordable multifamily housing programs. NAHMA strongly
    supports measures which would:
      --Streamline inspections of HCV housing units by permitting owners to
            make minor repairs within 30 days and permitting public housing
            authorities to allow occupancy prior to the inspection in
            buildings which passed an alternative inspection (HOME, LIHTC
            or other inspections with equally stringent standards) within
            the last 12 months. These changes will help voucher-holders in
            tight rental markets with low vacancy.
      --Expand income targeting for the public housing, HCV and project-
            based section 8 programs. These changes will help house more
            working poor families, particularly in rural areas.
      --Simplify the rules for determining a family's rent and income, for
            example, by allowing families on fixed incomes to recertify
            their incomes once every 3 years instead of annually. This will
            reduce the administrative burdens on tenants, property owners,
            and management agents.
      --Stabilize HCV funding by basing it on the previous year's leasing
            and cost data.
      --Encourage self-sufficiency for residents.
      --Streamline the use of HCVs with other Federal housing programs,
            like the LIHTC, by extending the permitted contract period for
            project-based vouchers from 15 to 20 years.
      --Authorize HUD's Rental Assistance Demonstration (RAD) program. RAD
            is intended to test strategies to leverage private funds for
            public housing capital needs, preserve units assisted through
            the section 8 Moderate Rehabilitation program and allow
            properties assisted under the Rental Assistance Payment (RAP)
            and Rent Supplement (Rent Supp) programs to convert to project-
            based section 8 contracts.
      --Authorize HUD to provide Limited English Proficiency (LEP)
            technical assistance to recipients of Federal funds. This
            program would create a stakeholder working group to identify
            vital documents for translations, require HUD to translate
            identified documents within 6 months and create a HUD-
            administered 1-800 hotline to assist with oral interpretation
            needs. This program is necessary because it will offer a
            higher-level of quality control over the services provided to
            LEP persons and ensure meaningful access to HUD's housing
            programs for persons with LEP. It will also relieve housing
            operators of an unfunded obligation to provide language
            services that could divert funds from repairs and maintenance
            of the properties.
                                   conclusion
        Thank you again for the opportunity to submit this testimony. I
    look forward to working with the subcommittee to ensure essential HUD
    rental assistance programs are fully funded and properly administered.
                                     ______

           Prepared Statement of the National AIDS Housing Coalition
        The National AIDS Housing Coalition (NAHC) is a national housing
    policy and advocacy organization working to end the HIV/AIDS epidemic
    by ensuring that persons living with HIV/AIDS have quality, affordable
    and appropriate housing. NAHC's network of members includes hundreds of
    low-income people living with HIV/AIDS, relying on Federal housing
    assistance to improve their ability to access and remain in care. On
    their behalf, we ask that you fund the highly successful and cost
    effective Housing Opportunities for Persons With AIDS Program (HOPWA)
    at a level of $365.2 million for fiscal year 2014. While this amount
    would provide assistance to far fewer than the actual number of people
    with HIV/AIDS that are eligible for and in need of housing assistance,
    it would permit housing help for an additional 4,250 households beyond
    the 61,614 unduplicated households currently served. HUD's own data
    indicates 146,986 households are currently eligible for HOPWA but
    unserved. In fact, HIV/AIDS housing providers project that half of the
    1.2 million people with HIV/AIDS require some form of housing
    assistance during the course of their illness. This request represents
    the HIV/AIDS housing community's recognition of the considerable
    challenges of the current economic climate yet still provides for some
    of the most vulnerable whose access to care and health outcomes are
    inextricably linked to housing status.
        NAHC is the only national housing organization that focuses
    specifically on the housing and housing-related service needs of low-
    income people with HIV/AIDS. A core tenet of our mission is to see
    housing acknowledged and funded as a component of HIV prevention and
    healthcare. As more people are living longer with the virus and require
    housing assistance, unmet need is significant across the country. We
    understand that as many as three new jurisdictions may become eligible
    for funding during 2014, requiring that providers stretch already
    scarce existing resources to serve more people.
        Anecdotal reports from the NAHC membership and supporters reveal
    more than 45,000 people waiting for housing assistance in just 14
    reporting jurisdictions. In the southern part of United States, where
    the epidemic is growing the fastest, resources continue to be
    unavailable. In Dallas, Texas, for example, more than 4,375 people are
    awaiting housing assistance, not counting those who have given up,
    resigned to life doubled and tripled up in unsuitable dwellings, moving
    from shelter to shelter, or simply are navigating the streets. In
    places where the epidemic is most mature, the numbers waiting are even
    larger. In Los Angeles, for example, more than 11,000 are waiting for
    housing.
        Research shows that homelessness increases HIV risk. In a New York
    City (NYC) study, for example, new diagnoses among NYC shelter users
    were 16 times higher than among general population. Conversely, HIV
    increases risk of homelessness. Research demonstrates that up to 70
    percent of people with HIV/AIDS report a lifetime experience of
    homelessness or housing instability. In some communities as many as 70
    percent of people with HIV/AIDS are literally homeless, living in
    shelters on the streets or in places not intended for human habitation.
        For vulnerable populations the risk is even greater. For example,
    among a study involving HIV-positive women, research demonstrated if
    homeless or unstably housed at time of diagnosis, that women were at an
    increased risk for delayed entry into care and receipt of housing
    assistance was associated with access to care and reentry into care
    after dropping out. Unmet subsistence needs, including housing, had the
    strongest overall effect on physical and mental health of homeless
    women, with a greater effect on overall health as antiretroviral
    therapy.
        Research, much of which has been presented through NAHC's Housing
    and HIV/AIDS Research Summit Series, confirms housing as a strategic
    healthcare intervention to reduce health disparities by addressing both
    HIV/AIDS and those contexts that most expose people to HIV risk,
    including gender, extreme poverty, mental illness, chronic drug use,
    incarceration, and histories of exposure to trauma and violence, as
    well as homelessness. In addition, housing coupled with related
    services reduces overall public expense and more wisely deploys limited
    public resources. Research presented through NAHC's Housing and HIV/
    AIDS Research Summit Series, including a searchable data base of more
    than 300 articles on housing and HIV/AIDS, can be found at the Summit
    Series permanent Web site, www.hivhousingsummit.org.
        HOPWA's track record for helping people with HIV/AIDS achieve
    housing stability is sterling. During program year 2011-2012, more than
    95 percent of people receiving tenant-based rental assistance through
    HOPWA achieved housing stability. Among those receiving any form of
    HOPWA housing assistance, over 93 percent developed a housing plan for
    continued on-going housing and nearly 89 percent had on-going contact
    with a primary care provider as specified in their service plans.
        Moreover, housing is a proven cost-saving and cost-effective
    healthcare and housing intervention. Housing sharply reduces avoidable
    emergency and inpatient health services, criminal justice involvement
    and other crises that are costly for both individuals and communities.
    One of the two seminal studies in this area, the Chicago Housing for
    Health Partnership (CHHP) found that homeless people with AIDS who
    received housing consumed $6,620 less in publicly funded housing,
    medical and crisis care than a comparison group that continued in
    ``usual care,'' not receiving a housing voucher.
        The public cost ``savings'' generated by providing housing supports
    can fully offset the cost of the housing for people with AIDS, even
    before taking into account that each new HIV infection prevented
    through housing stability saves $400,000 in lifetime medical costs.
        There has been some national progress on evidence-based action on
    housing and HIV/AIDS. The July 2010 National HIV/AIDS Housing Strategy
    recognizes that housing is healthcare for people with HIV/AIDS and
    calls for increased resources and calls on Federal agencies to consider
    additional efforts to support housing assistance and other services to
    enhance adherence. In addition, in July 2012, the Department of Health
    and Human Services (HHS) included housing as one of seven common core
    indicators to monitor HHS-funded prevention, treatment and care
    services. Despite these advances, no additional resources have been
    made available for housing.
        NAHC's geographically diverse board fully supports and anxiously
    awaits the revision of the HOPWA formula as directed in the National
    HIV/AIDS Strategy to yield a fairer allocation of resources more
    directly tied to the current geographic distribution of the epidemic.
    Rural settings, the southeast and other regions . . .  Until the
    formula is modernized, we ask that the subcommittee continue to support
    levels of funding for the program in its current formulation that will
    permit some of those waiting to be served.
        In addition, HIV/AIDS providers urge adequate funding for Homeless
    Assistance Grants, Section 8 Housing Choice Vouchers, public housing,
    the 811 program for people with disabilities, and the range of housing
    programs relied upon by people coping with HIV/AIDS.
        We respectfully request the subcommittee to consider protecting and
    expanding resources in the Housing Opportunities for Persons with AIDS
    Program, a proven, effective HIV prevention and healthcare
    intervention.
                                     ______

            Letter From the National Association of Counties, et al.
                                                        April 19, 2013.
    Hon. Patty Murray,
    Chairman, Subcommittee on Transportation, Housing and Urban
            Development, and Related Agencies,
    Washington, DC.
    Hon. Susan Collins,
    Ranking Member, Subcommittee on Transportation, Housing and Urban
            Development, and Related Agencies,
    Washington, DC.
        Dear Chairman Murray and Ranking Member Collins: As you near
    consideration of the fiscal year 2014 Transportation, Housing and Urban
    Development, and Related Agencies Appropriations bill, the undersigned
    organizations representing local elected officials, State and local
    community development practitioners, planners, development
    organizations, and nonprofit organizations, urge you to support $3.3
    billion in formula funding for the Community Development Block Grant
    (CDBG) Program.
        CDBG provides vital funding and flexibility to address local needs
    in the areas of community and economic development, housing,
    infrastructure and vital public services. Over 1,200 communities rely
    on CDBG as a direct source of annual funding. Moreover, each year, an
    estimated 7,250 local governments nationally have access to CDBG funds;
    reaching rural, urban, and suburban areas. CDBG helps create jobs
    through the expansion and retention of businesses.
        Since fiscal year 2010, funding for CDBG has been cut by over $1
    billion, yet the need for these important resources at the local level
    has continued to grow. While we understand the need to address the
    Federal budget, we also understand the value of the local investments
    made by CDBG. We are deeply concerned that these investments are in
    jeopardy due to the Obama administration's fiscal year 2014 proposed
    budget cuts to CDBG, funding the formula program at $2.8 billion.
        The CDBG program generates additional resources, and adds to the
    local economy. For example, for every $1 of CDBG funding invested in a
    project another $3.55 is leveraged from other sources. Since its
    inception in 1974, CDBG has leveraged nearly $400 billion in other
    resources for community development and affordable housing.
        What has CDBG accomplished?
                             economic opportunities
        Between fiscal year 2005 and fiscal year 2012 CDBG created or
    retained 302,622 local jobs.
                                 decent housing
        Between fiscal year 2005 and fiscal year 2012 CDBG has assisted
    over 1 million low- and moderate-income homeowners to rehabilitate
    their homes, provided down payment and closing cost assistance to
    qualified home buyers, and assisted homeowners through lead-based paint
    abatement.
                          suitable living environment
        Between fiscal year 2005 and fiscal year 2012 CDBG-funded
    infrastructure projects have benefited over 30 million Americans
    nationwide, by providing a suitable living environment that includes
    sanitary water and sewer systems, safe streets and transit-ways,
    improved drainage systems, and other improvements that support our
    communities and help grow local economies.
        Between fiscal year 2005 and fiscal year 2012, CDBG has provided
    public services to over 95 million low- and moderate-income households
    nationwide. These services included employment training, meals and
    other services to the elderly, services to help abused and neglected
    children, assistance to local food banks, among others.
        We urge you to support our recommendation of $3.3 billion for CDBG
    formula grants in fiscal year 2014 to help communities nationwide
    continue to provide vital programs and services to low-income persons.
                Respectfully,

    American Planning Association
    Council of State Community Development Agencies
    Habitat for Humanity International
    Housing Assistance Council
    International Economic Development Council
    Local Initiatives Support Corporation
    National Alliance of Community and Economic Development Associations
    National Association of Counties
    National Association for County Community and Economic Development
    National Association of Development Organizations
    National Association of Local Housing Finance Agencies
    National Association of Housing and Redevelopment Officials
    National Community Development Association
    National Housing Conference
    National League of Cities
    National Rural Housing Coalition
    Rebuilding Together
    U.S. Conference of Mayors
    U.S. Soccer Foundation
                                     ______

         Prepared Statement of the National Association of Housing and
                            Redevelopment Officials
        Chairman Murray, Ranking Member Collins, members of the
    Transportation, Housing and Urban Development, and Related Agencies
    Subcommittee, thank you for providing an opportunity for outside
    witnesses to testify with respect to the fiscal year 2014 Department of
    Housing and Urban Development (HUD) budget. The National Association of
    Housing and Redevelopment Officials (NAHRO) is one of the Nation's
    oldest housing advocacy organizations. It represents over 3,100 housing
    and redevelopment authorities nationwide who provide decent, safe and
    affordable housing in neighborhoods of quality for well over 2 million
    families--including senior citizens, the disabled and our Nation's
    veterans. Our members are on the front lines every day to assist
    vulnerable families and the homeless in both urban and rural America.
    They know what works, what does not and why; they are mission-driven
    and they remain, following decades of service to the community, an
    essential component of the Nation's housing delivery system.
        Our national network of housing and community development (HCD)
    professionals stands ready to use taxpayers' dollars wisely and with
    integrity to move us closer to a Nation in which all people have
    decent, safe, affordable housing and economic opportunity in viable,
    sustainable communities. NAHRO calls upon the administration and the
    Congress to provide responsible funding levels for the core Federal HCD
    programs that serve low- and moderate-income families at the local
    level. Recognizing the fiscal realities you face, NAHRO also
    aggressively seeks a more rational, less administratively burdensome
    regulatory environment. NAHRO supports reforms, including essential
    statutory reforms under the purview of the Banking, Housing and Urban
    Affairs Committee, which will allow local agencies to stretch Federal
    investments further, house more families, and pursue targeted community
    and economic development activities with the potential to transform
    neighborhoods and communities.
                                 tipping point
        Our efforts as a Nation to reduce the current Federal deficit are
    important and well-intended. Unfortunately, their serious (though
    unintended) consequences are now affecting vulnerable families who
    would be homeless without the assistance they now receive through
    programs managed by NAHRO members. Limited 302B allocations to this
    subcommittee over many years, coupled with spending caps implemented as
    a result of the Budget Control Act of 2011, disproportionate reductions
    in domestic discretionary dollars and the March 1 sequester, have
    resulted in historically low funding prorations for such things as
    voucher program administration and the public housing operating fund.
    Underfunding, coupled with a lack of regulatory relief, has finally
    brought us to a tipping point. Increasing numbers of housing
    authorities have advised or must soon advise vulnerable families
    currently receiving housing assistance payments that they can no longer
    assist them. More and more housing authorities are returning vouchers--
    including Veterans Affairs Supportive Housing (VASH) vouchers--to HUD
    because they can no longer afford to administer the program (see the
    following chart).

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        In addition, structural decisions impacting housing programs, such
    as the ill-timed reduction in public housing authority reserves in
    fiscal year 2012, have put many housing authorities in a vulnerable
    position. Under current funding scenarios, some housing and
    redevelopment agencies--notably smaller entities in rural areas--will
    in time be forced to close their doors. They will no longer be able to
    assist those who currently rely on them, much less families who have
    been on public housing and section 8 waiting lists for many years.
        Building on the valiant efforts of this subcommittee to provide
    necessary dollars within the context of reduced allocations coupled
    with larger budget pressures, housing and redevelopment authorities
    have done more with less for years. The 2014 Transportation, Housing
    and Urban Development, and Related Agencies (THUD) appropriation
    provides us with an opportunity and a real challenge to deal with the
    current set of facts on the ground in far too many communities across
    the Nation. A return to ``regular order'' in the Congress must be
    coupled with a return to fiscal policies that recognize our Nation's
    core values--notably our decades-long commitment to a decent home and
    suitable living environment for all Americans. In this spirit we
    respectfully urge your consideration and ultimate adoption of following
    principles:
      --Preserve and revitalize the public housing inventory;
      --Reform, strengthen and adequately fund the section 8 program;
      --Fully fund community and economic development programs;
      --Enact small housing authority reforms;
      --Expand the supply of affordable housing;
      --Fully fund homeless assistance grant programs; and
      --Improve the regulatory environment for HCD agencies.
                        program-specific recommendations
        We hope this subcommittee, in conjunction with your colleagues on
    the Banking Committee, will let these recommendations guide your work
    in the formulation of funding decisions and necessary reforms for core
    HUD programs managed by our members. Our own fiscal year 2014 funding
    recommendations can be found in our testimony. For more detail, NAHRO's
    2013 Legislative and Regulatory Agenda is available online at:
    www.nahro.org/sites/default/files/searchable/2013Agenda.pdf.
                                 public housing
        Provide full funding for the operating costs and annual capital
    accrual needs of public housing through direct appropriations.
        Enable greater flexibility to direct available resources toward
    their highest priority needs, regardless of funding source.
        Seek dedicated resources for the revitalization of severely
    distressed public housing properties.
        Unlock the value of public housing assets by providing public
    housing authorities (PHAs) with a variety of tools to leverage and
    invest in the preservation of their properties.
        Provide in statute for the establishment of protected capital
    reserve accounts to allow PHAs to plan responsibly for future needs.
        Improve tools designed to allow PHAs to steward their portfolios as
    true asset managers, including HUD's demolition and disposition
    regulations.
        Provide enhanced incentives for energy efficiency upgrades.
                                   section 8
        Provide appropriations sufficient to renew vouchers at actual
    rental assistance costs for all participating households and full
    funding for ongoing and special administrative fees as provided in
    section 8(q) of the U.S. Housing Act as amended by the Quality Housing
    and Work Responsibility Act of 1998.
        Provide for a voucher funding formula that is based on the number
    of families served and voucher costs for the most recent calendar year
    for which data are available.
        Restore a responsible level of administrative fee funding under
    voucher programs.
        Provide for new authority to allow PHAs to utilize a portion of
    their Housing Assistance Payment Reserves to cover unmet administrative
    expenses related to leasing and retaining leased households.
        Enact meaningful voucher program reform legislation.
        Enable the immediate implementation of long-overdue regulatory and
    administrative reforms that will allow for the more efficient use of
    resources in voucher programs.
        Provide for a responsible level of funding for the renewal of
    section 8 multi-family project-based rental assistance (PBRA)
    contracts.
        Maintain a level playing field in the competition for contracts
    under the Section 8 Performance-Based Contract Administrators
    initiative.
                       community and economic development
        Restore funding for CDBG to ensure the success of State and local
    efforts to spur job creation and retention, provide vital public
    services, and expand affordable housing opportunities for low- and
    moderate-income families and individuals.
        Provide funding for the Sustainable Housing and Communities
    Initiative separate from and not as a set-aside under the CDBG program.
        Cover the credit subsidy for HUD's section 108 loan guarantee
    program, and increase the loan guarantee limit to $500 million as
    previously proposed by the administration.
        Restore dedicated funding for HUD's Brownfields Economic
    Development Initiative.
        Restore a responsible level of funding for the HOME Investment
    Partnerships Program (HOME).
        Enact a budget neutral mandatory funding source for the Housing
    Trust Fund.
        Thank you again for the opportunity to testify. We look forward to
    discussing our funding recommendations with this subcommittee in
    greater detail.

                      NAHRO--RECOMMENDED FISCAL YEAR 2014 FUNDING LEVELS FOR SELECTED HUD PROGRAMS
                    [Brackets in text indicate set-asides, and indented text indicates sub-accounts.]
    ----------------------------------------------------------------------------------------------------------------
                                                     Fiscal year 2013 ($ millions)     Fiscal year 2014 ($ millions)
                       Program                    ------------------------------------------------------------------
                                                     Enacted \1\   Sequestration \2\   Proposed \3\      NAHRO \4\
    ----------------------------------------------------------------------------------------------------------------
    Public Housing Operating Fund................          $4,253            $4,054       \5\ $4,600      \6\ $5,168
    Public Housing Capital Fund..................           1,871             1,777            2,000           3,750
        ROSS Program.............................            [50]              [47]   ..............              50
        Emergency Capital Needs..................            [20]              [19]         \7\ [20]              20
    Choice Neighborhoods Initiative..............             120               114              400          \8\400
    Rental Assistance Demonstration..............  ..............  .................              10  ..............
    Tenant-Based Rental Assistance...............          18,901            17,964           19,989  ..............
        Section 8 HAP Renewals...................    \9\ [17,207]          [16,349]    \11\ [17,968]     \11\ 18,540
        Ongoing Administrative Fees..............         [1,322]           [1,258]          [1,635]           1,994
        Additional Administrative Fees...........            [50]              [48]             [50]              50
        Tenant Protection Vouchers...............            [75]              [71]            [150]             150
        Incremental HUD-VASH Vouchers............            [75]              [75]             [75]              75
        Family Self-Sufficiency (FSS)                        [60]              [57]          \11\ 75              87
         Coordinators............................
    Sec. 8 Project-Based Rental Assistance.......      \12\ 9,321             8,852           10,272      Fully Fund
                                                                                                                \13\
    Community Development Fund...................           3,301             3,135            3,143  ..............
        Community Development Block Grant Program         [3,242]           [3,078]          [2,798]           3,300
        Neighborhood Stabilization Initiative....  ..............  .................           [200]  ..............
        Integrated Planning and Investment Grants  ..............  .................            [75]  ..............
    Section 108 Loan Guarantees..................            5.94              5.64             \14\              12
    HOME Investment Partnerships Program.........             998               948              950           1,600
    Housing Opportunities for Persons with AIDS..             331               315              332             365
    Homeless Assistance Grants...................           2,029             1,933            2,381           2,381
    ----------------------------------------------------------------------------------------------------------------
    \1\ Enacted levels from Consolidated and Further Continuing Appropriations Act, 2013, as signed by the President
      on March 22, 2013. Figures reflect application of 0.2 percent across-the-board cut as required by the
      legislation.
    \2\ Figures reflect 5 percent across-the-board sequestration reductions as calculated by the Office of
      Management and Budget on March 1, 2013.
    \3\ Obama administration's proposed budget for FY 2014. Figures do not reflect proposed Transformation
      Initiative set-asides.
    \4\ NAHRO recommendations are for standalone/line-item funding. Blank indicates no position.
    \5\ The budget proposes to reduce eligibility by a total of $63 million through changes to flat rent and the
      medical expense deduction threshold.
    \6\ NAHRO's recommendation assumes that eligibility is determined according to current statutes and regulations
      governing such calculations.
    \7\ Proposes the elimination of safety and security measures as an eligible use of funding.
    \8\ NAHRO's support for this funding level is contingent upon responsible funding levels for the Operating and
      Capital Funds and the enactment of authorizing legislation requiring that two-thirds of each year's funding be
      awarded to projects where PHAs are the lead or co-applicants.
    \9\ The act authorizes the use of the housing assistance payments (HAP) adjustment fund ``for PHAs, that despite
      taking reasonable cost savings measures, as determined by the Secretary, would otherwise be required to
      terminate participating families from the program due to insufficient funds.''
    \10\ Assumes $235 million in savings from proposed changes to income targeting, minimum rents, the medical
      expense deduction threshold, and the determination of utility allowances. Also assumes an unspecified amount
      of indirect funding through offsets of ``excess'' HAP Reserves from non-Moving to Work (MtW) PHAs and MtW
      PHAs.
    \11\ The Administration proposes eliminating the section 8 family self-sufficiency (FSS) set-aside in favor of a
      standalone consolidated program to serve Public Housing and section 8 housing choice voucher (HCV) residents.
    \12\ The act authorizes the use of ``unobligated balances, including recaptures and carryover, remaining from
      funds appropriated'' for fiscal year 2013 and prior years under the headings of ``Housing Certificate Fund,''
      ``Annual Contributions for Assisted Housing,'' and ``Project-Based Rental Assistance'' for ``renewal of or
      amendments to section 8 project-based contracts and for performance-based contract administrators.''
    \13\ NAHRO supports a stable, reliable subsidy stream in the form of full 12-month contract renewal funding.
    \14\ In lieu of appropriations, the Administration proposes collecting a fee from borrowers to cover the
      program's credit subsidy costs.

                                     ______

    Letter From the National Association of Local Housing Finance Agencies,
     the U.S. Conference of Mayors, and the National Community Development
                                  Association
                                                        April 19, 2013.
    Hon. Patty Murray,
    Chairman, Subcommittee on Transportation, Housing and Urban
            Development, and Related Agencies,
    Washington, DC.
    Hon. Susan Collins,
    Ranking Member, Subcommittee on Transportation, Housing and Urban
            Development, and Related Agencies,
    Washington, DC.
        Dear Chairman Murray and Ranking Member Collins: The undersigned
    organizations of local elected officials and local and State housing
    and community development practitioners write to you concerning fiscal
    year 2014 appropriations for the Community Development Block and HOME
    Investment Partnerships (HOME) programs. Specifically, we wish to urge
    the Transportation and Housing and Urban Development Appropriations
    subcommittee to reject recommendations contained within the
    administration's fiscal year 2014 budget recommending set-asides and
    other ``reforms'' of these programs.
        Like other national organizations we urge you to support $3.3
    billion in formula funding for the Community Development Block Grant
    (CDBG) Program.
        However, we do not support the administration's proposal to reduce
    overall CDBG formula funds by $275 million, for a $200 million
    Neighborhood Stabilization Program Initiative and $75 million for
    Integrated Planning Grants (formerly known as the Sustainable
    Communities Initiative). This has the effect of transferring formula
    funds which benefit the many into two categorical grant programs that
    would benefit the few. Similarly, the HOME budget request contains an
    up to $10 million set-aside for the Self-Help Homeownership Opportunity
    Program (SHOP). These set-asides are for activities that could be
    funded under the CDBG or HOME programs respectively.
        We also want to advise that we do not support the establishment of
    a minimum funding threshold for CDBG entitlement grants. This would
    adversely affect an estimated 340 smaller communities who are currently
    implementing programs that are responsive to their needs. This would
    force them to compete for limited State funds without any positive
    benefit to either them or the State. We also oppose the
    administration's proposal to repeal the grandfathering provisions in
    CDBG for metropolitan cities and urban counties. Again, this would
    seriously disrupt on-going programs.
        Based on fiscal year 2012 allocations (the Department of Housing
    and Urban Development (HUD) has not released the fiscal year 2013
    allocations) in Washington State the following communities would lose
    direct funding because they fall below the $350,000 threshold:
    Anacortes, East Wenatchee City, Longview, Marysville, Mount Vernon,
    Olympia, Redmond, Richland, Shoreline, and Wenatchee.
        CDBG provides vital funding and flexibility to address local needs
    in the areas of community and economic development, housing,
    infrastructure and vital public services. Over 1,200 communities rely
    on CDBG as a direct source of annual funding. Moreover, each year, an
    estimated 7,250 local governments nationally have access to CDBG funds
    reaching rural, urban, and suburban areas. CDBG helps create jobs
    through the expansion and retention of businesses.
        Since fiscal year 2010, funding for CDBG has been cut by over $1
    billion, yet the need for these important resources has continued to
    grow. While we understand the need to address the Federal budget
    deficit, we also understand the value of the local investments made by
    CDBG. We are deeply concerned that these investments are in jeopardy
    due to the Obama administration's fiscal year 2014 proposed budget cuts
    to CDBG, funding the program at $2.8 billion.
        The CDBG program generates additional resources, and adds to the
    local economy. For example, for every $1 of CDBG funding invested in a
    project another $3.55 is leveraged from other sources. Since its
    inception in 1974, CDBG has leveraged nearly $400 billion in other
    resources for community development and affordable housing.
        As a companion to CDBG, the HOME Investment Partnerships program
    has suffered severe cuts since fiscal year 2010, from $1.8 billion then
    to $950 million in fiscal year 2013, following sequestration. We urge
    that its funding level be restored to $1.6 billion in fiscal year 2014.
        HOME serves as a critical source of funding for the expansion of
    affordable ownership and rental housing for low- and moderate-income
    households. The types of activities HOME assists are the construction
    and preservation of affordable rental housing usually as gap
    assistance, the construction and rehabilitation or affordable ownership
    housing as well as for homeownership assistance and tenant-based rental
    assistance. Since HOME was enacted in 1990 it has produced over 1
    million affordable homes, including 612,792 homeownership new
    construction and rehabilitation units and 423,154 new construction or
    preservation of rental units. Every $1 of HOME funds leverages an
    additional $4 in non-HOME funds.
        The administration's fiscal year 2014 budget proposes funding for
    HOME at the $950 million finally approved for fiscal year 2013. It is
    estimated that this will decrease production of HOME units by 34,000
    units and result in the loss of an estimated 8,935 jobs.
        Thus, we urge you to support our recommendation of $3.3 billion for
    CDBG formula grants and $1.6 billion for HOME in fiscal year 2014 to
    help communities nationwide continue to provide vital affordable
    housing and neighborhood revitalization programs and services to low-
    income persons.
                Respectfully,
                        U.S. Conference of Mayors, National Association of
                                Local Housing Finance Agencies, and the
                                National Community Development Association.
                                     ______

           Letter From the National Council of State Housing Agencies
                                                        April 19, 2013.
    Hon. Patty Murray,
    Chairman, Subcommittee on Transportation, Housing and Urban
            Development, and Related Agencies,
    Washington, DC.
    Hon. Susan Collins,
    Ranking Member, Subcommittee on Transportation, Housing and Urban
            Development, and Related Agencies,
    Washington, DC.

        Dear Chairman Murray and Ranking Member Collins: We appreciate this
    opportunity to provide testimony in support of the HOME Investment
    Partnerships (HOME) program. HOME program funding is vital to the
    production and provision of housing affordable to low-income families.
    Yet HOME has received devastating cuts--cut almost in half in just the
    past few years. Just since fiscal year 2011, HOME has been cut by 41
    percent from $1.6 billion to an estimated post-sequester level of $948
    million in fiscal year 2013. Cuts to the HOME program are being felt
    deeply across the country. For example, the HOME funding allocation to
    the State of Washington has decreased by 43 percent, from $34.5 million
    in fiscal year 2010 to $19.8 million in fiscal year 2012, and the
    allocation to the State of Maine has fallen 44 percent, from $8.5
    million in fiscal year 2010 to $4.7 million in fiscal year 2012.
        To begin restoring funds for HOME, we implore you to fund HOME in
    fiscal year 2014 at $1.6 billion, equal to its fiscal year 2011 funding
    level. We ask that you resist additional, disproportionate cuts to HOME
    and recognize both the successful track record of the program and the
    need for its continued funding at a time when our housing market, and
    broader economy, continues to struggle and the need for affordable
    housing continues to grow.
        Authorized in 1990, the HOME program provides grants to State and
    local governments to produce affordable housing for low-income
    families. HOME funds are a vital and unique source of financing for
    numerous affordable housing developments--many of which would not be
    possible without HOME assistance. States and localities use HOME for
    affordable housing production and rehabilitation, preservation, and
    rental and homeownership assistance.
        By flexibly working with and supporting many critical Federal
    housing programs, including the Low Income Housing Tax Credit and rural
    housing programs, HOME uniquely empowers States and localities to
    respond to the housing needs they judge most pressing. States and
    localities use HOME to serve the whole spectrum of housing need, from
    homeless to ownership to disaster recovery, from urban to rural areas,
    and all low-income populations, including families with children, the
    elderly, veterans, and persons with special needs. HOME also enables
    for-profit and nonprofit developers to provide affordable housing in
    their communities.
        In its 20 years of existence, the HOME program has successfully
    produced more than 1 million affordable homes, in addition to making
    homes affordable for hundreds of thousands of families with rental
    assistance. From 1992 to 2012, States and localities have used HOME
    funds to produce 460,692 home buyer homes, 423,154 rental homes, and
    212,100 rehabilitated home buyer homes. Another 264,715 families have
    received rental assistance through the HOME program. States and
    localities leverage HOME funding by generating more than $4 in other
    private and public resources for every $1 of HOME. Over the program's
    lifetime, HOME funds have been used to leverage $100.2 billion in funds
    for affordable housing.
        HOME funding is used exclusively to create affordable housing for
    low-income households, those earning incomes of 80 percent or less of
    area median income (AMI). While the statute requires that at least 90
    percent of families receiving rental assistance through HOME have
    incomes at 60 percent of AMI or less, almost 100 percent of those
    receiving tenant-based rental assistance and 97 percent of families
    living in HOME-assisted rental units have incomes of 60 percent of AMI
    or less. One out of four families helped with HOME are extremely low-
    income, with incomes of 30 percent of AMI or less.
        In addition to providing needed affordable housing, HOME funds
    contribute to job creation, especially in the hard-hit construction
    sector. Every $1 billion in HOME creates or protects approximately
    18,000 jobs. Restoring funding to $1.6 billion in fiscal year 2014
    would create 11,736 more jobs than created by HOME's fiscal year 2013
    funding level.
        Based on projected production levels included in HUD's fiscal year
    2014 budget request, if HOME is funded in fiscal year 2014 at the
    administration's proposed level of $950 million, we expect almost
    34,000 fewer affordable homes will be produced in fiscal year 2014 than
    were produced in fiscal year 2011. This means fewer home buyer and
    rental units, fewer homeowner rehabilitation projects, and fewer
    tenants assisted.
        As we face decreased investment in the production of affordable
    housing, we face a continued growing need for it. According to HUD's
    latest Worst Case Housing Needs report, in 2011 nearly 8.5 million very
    low-income families--who received no government housing assistance--
    paid more than half their monthly income for rent, lived in severely
    substandard housing, or both. This number is up 2.6 million, or 43.5
    percent, since 2007.
        Today, there are only 57 affordable rental homes available for
    every 100 very low-income renter households, those earning 50 percent
    of AMI or less. For the 10.1 million households with extremely low
    incomes, there are only 30 affordable homes available for every 100
    households. Only one in four households eligible for Federal rental
    housing assistance receives it.
        As a capital program, HOME is a vital resource for addressing this
    growing housing need. HOME funds produce new units of affordable
    housing and thus are necessary to increasing the overall supply of
    affordable housing. The Bipartisan Policy Center's Housing Commission
    in its recent report entitled Housing America's Future: New Directions
    for National Policy, called for an increase in HOME appropriations to
    serve as the gap financing needed to support new developments that
    would expand the supply of affordable rental housing.
        A HOME program appropriation of $1.6 billion in fiscal year 2014
    would only go partway towards restoring HOME program funding, but it
    would provide States and local communities with the critical resources
    needed to help address the spectrum of affordable housing needs they
    face. Therefore, we urge you to support the proven outcomes of the HOME
    program by providing a fiscal year 2014 appropriation of $1.6 billion.
    Thank you for this opportunity to testify on the need for HOME funding.
    Please do not hesitate to contact us with any questions.
                Sincerely,

    Council for Affordable and Rural Housing
    Council of State Community Development Agencies
    CSH
    Enterprise Community Partners
    Habitat for Humanity International
    Housing Assistance Council
    Housing Partnership Network
    Mercy Housing
    National Alliance of Community Economic Development Associations
    National Association for County Community and Economic Development
    National Association of Home Builders
    National Association of Housing and Redevelopment Officials
    National Association of Local Housing Finance Agencies
    National Community Development Association
    National Council of State Housing Agencies
    National Housing Conference
    National Leased Housing Association
    National Low Income Housing Coalition
    National Rural Housing Coalition
    Stewards of Affordable Housing for the Future
    The Community Builders, Inc.
                                     ______

      Prepared Statement of the National Council of State Housing Agencies
        Thank you for the opportunity to provide testimony on behalf of our
    Housing Finance Agency (HFA) members regarding fiscal year 2014
    appropriations for housing programs. As you consider your fiscal year
    2014 Department of Housing and Urban Development (HUD) appropriations
    bill, we urge you to restore HOME Investment Partnerships Program
    (HOME) formula grant funding to $1.6 billion, equal to its fiscal year
    2011 funding level, and provide section 8 funding adequate to renew all
    expiring project-based contracts for a full year, fully fund all
    authorized Housing Choice Vouchers (vouchers), provide new incremental
    vouchers in fiscal year 2014, allocate new flexible rental assistance
    to State HFAs, and ensure that successful HFA voucher and project-based
    contract administrators continue in and are adequately compensated for
    these roles. We also ask you to provide authority for Ginnie Mae to
    securitize Federal Housing Administration (FHA)-HFA Multifamily Risk-
    Sharing program loans.
        The National Council of State Housing Agencies' (NCSHA's) members
    are the HFAs of the 50 States, the District of Columbia, New York City,
    Puerto Rico, and the U.S. Virgin Islands. HFAs administer a wide range
    of affordable housing and community development programs, including
    HOME, section 8, homelessness assistance, down payment assistance,
    State housing trust funds, tax-exempt Housing Bonds, and the Low Income
    Housing Tax Credit (Housing Credit). HFAs effectively employ these
    resources to advance their common public-purpose mission of providing
    affordable housing to the people of their jurisdictions who need it.
                      home investment partnerships program
        HOME program funding is vital to the production and provision of
    housing affordable to low-income families and has a long record of
    tremendous success in doing so. Yet HOME has received devastating cuts
    in recent years. HOME has been cut almost in half since fiscal year
    2010. Just since fiscal year 2011, HOME funding has been cut by 41
    percent--from $1.6 billion to an estimated post-sequester level of $948
    million in fiscal year 2013. This is the lowest funding level in the
    program's 20-year history. We appeal to you to spare the HOME program
    from further cuts and to fund HOME at an amount as close to its fiscal
    year 2011 funding level of $1.6 billion as possible. The need for HOME
    funding vastly exceeds the amount available.
        We also request that the subcommittee resist further reducing the
    amount of this flexible funding source going directly to States and
    localities by not including any set-asides within the HOME program
    account.
        In these tight budgetary times, the HOME formula grant is one of
    the best housing investments Congress can make. HOME's flexibility
    allows States and localities to determine how to put limited HOME funds
    to their best use. HFAs use HOME to serve the whole spectrum of housing
    need, from homeless to ownership to disaster recovery, from urban to
    rural areas, and all low-income populations, including families with
    children, the elderly, veterans, and persons with special needs. HOME
    funding is necessary to help States and localities respond to urgent
    housing needs.
        HOME funds must be used to assist families with low incomes, those
    earning 80 percent of area median income (AMI) or less. State HFAs
    report using more than half of their HOME funds in 2011 to assist very
    low-income families, those earning 50 percent of AMI or less, and more
    than a quarter of the funds to assist extremely low-income families,
    those earning 30 percent of AMI or less.
        HOME has an outstanding track record of success. States and
    localities have used HOME funding to produce more than 1 million
    affordable homes, in addition to making homes affordable for hundreds
    of thousands of families with direct rental assistance.
        Further, every Federal HOME $1 generates more than $4 in additional
    public and private investment. HOME funds have leveraged more than $100
    billion in additional funds for affordable housing. HOME funding is a
    vital piece in financing numerous affordable housing developments--many
    of which would not be able to move forward without its assistance. HOME
    complements and supports many critical Federal housing programs, such
    as the Low Income Housing Tax Credit, making developments financially
    feasible and achieving deeper income targeting than would otherwise be
    possible.
        NCSHA also supports the State-administered Housing Trust Fund and
    seeks a dedicated and sustainable funding source for it. However, the
    Housing Trust Fund is needed as a new resource for developing housing
    affordable to those with very low and extremely low incomes. It is not
    a replacement for appropriations to HOME and other HUD programs and
    should not be funded at their expense.
                               rental assistance
        We recommend Congress provide adequate funding for vouchers and
    project-based section 8 contracts. These two programs serve some of our
    lowest income, most vulnerable people. We urge the subcommittee to
    ensure the section 8 accounts are funded such that all vouchers already
    in use are renewed and all contract renewals are funded for a full 12
    months in order to maintain owner confidence in the program.
        We also ask that you provide the funding necessary for public
    housing agencies (PHAs) to effectively administer the voucher program.
    PHAs have experienced year-over-year proration of administrative fees,
    which has negatively impacted PHAs' ability to administer the voucher
    program. HFA voucher and project-based contract administrators play
    critical roles in providing rental assistance and we ask that you
    ensure that they are adequately compensated for them.
        Thank you for funding new incremental Veterans Affairs Supportive
    Housing (VASH) vouchers in fiscal year 2013. However, additional new
    unrestricted incremental vouchers are needed so we can help some of the
    millions of families who qualify for rental assistance but do not
    receive it. According to HUD's most recent report on Worst Case Housing
    Needs, there was a 43.5 percent increase from 2007 to 2011 in
    households with worst case housing needs--defined as very low-income
    renters not receiving government housing assistance who either pay more
    than half of their monthly income for rent, live in severely inadequate
    conditions, or both.
        We urge you also to provide flexible rental assistance to State
    HFAs that they can use for either project-based or tenant-based rental
    assistance. Such funding would allow States to address their production
    and affordability needs most effectively and to serve more extremely
    low-income families by combining it with State-administered Housing
    Credit, Housing Bond, HOME, and other production resources.
        States consistently target their Housing Credit, Housing Bond, and
    HOME resources to households with incomes below the programs' statutory
    income limits. Yet it is difficult--and sometimes impossible--to reach
    these households at a rent level they can afford without rental
    assistance.
          ginnie mae securitization of multifamily risk-sharing loans
        We request that you provide authority for Ginnie Mae to securitize
    FHA-HFA Multifamily Risk-Sharing loans. Providing this authority will
    allow HFAs to reduce the cost of financing rental housing developments,
    making it possible to achieve lower rents and reach even lower income
    tenants.
        Under the FHA-HFA Risk-Sharing program, HFAs meeting rigorous
    financial standards are able to underwrite FHA multifamily loans in
    return for sharing the risk of any losses on those loans. This program
    has been very successful, with 26 HFAs financing nearly 1,000 loans,
    totaling more than $5 billion in principal and supporting more than
    101,000 affordable rental homes.
        If Ginnie Mae were to securitize FHA-HFA Risk-Sharing loans, HFAs
    predict the interest rate on the underlying mortgages could be reduced
    by as much as 200 basis points, or 2 percent. This rate reduction would
    lower rents and potentially reduce the need for and cost of other
    Federal housing subsidies. This authority would not increase Government
    spending. In fact, it would generate revenue for the Federal Government
    according to the Congressional Budget Office (CBO), which estimates
    that allowing Ginnie Mae to securitize FHA-HFA Risk-Sharing loans would
    result in $20 million in mandatory savings over 10 years, or $2 million
    annually.
        We recognize the continued constrained fiscal environment in which
    you must craft your fiscal year 2014 appropriations legislation. We
    urge you to consider the proven effectiveness of HOME and section 8
    rental assistance and the great unmet need for them, which has been
    further exacerbated in these difficult economic times, as you make your
    funding decisions. NCSHA appreciates this opportunity to offer a
    statement on behalf of these programs and we are ready to assist you in
    any way we can as you move forward with the fiscal year 2014
    appropriations process.

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page

    Advocates for Highway and Auto Safety, et al., Letter From the...   187
    American:
        Indian Higher Education Consortium, Prepared Statement of the   189
        Public Transportation Association, Prepared Statement of the.   191
        Public Works Association, Prepared Statement of the..........   194
        Society of Civil Engineers, Prepared Statement of the........   196

    Blunt, Senator Roy, U.S. Senator From Missouri, Statement of.....    10
    Boozman, Senator John, U.S. Senator From Arkansas, Questions
      Submitted by...................................................   119

    California Association of Housing Authorities, Prepared Statement
      of the.........................................................   199
    Coalition of Northeastern Governors, Prepared Statement of the...   201
    Coats, Senator Daniel, U.S. Senator From Indiana:
        Questions Submitted by.......................................    44
        Statement of.................................................     9
    Collins, Senator Susan M., U.S. Senator From Maine:
        Prepared Statements of...................................8, 56, 132
        Statements of............................................6, 54, 131

    Donovan, Hon. Shaun, Secretary, Office of the Secretary,
      Department of Housing and Urban Development....................     1
        Prepared Statement of........................................    13
        Questions Submitted to...................................41, 42, 44
        Summary Statement of.........................................    10

    Easter Seals, Prepared Statement of..............................   204

    Feinstein, Senator Dianne, U.S. Senator From California,
      Questions Submitted by.........................................   109

    Galante, Hon. Carol, Commissioner and Assistant Secretary for
      Housing, Federal Housing Administration, Department of Housing
      and Urban Development..........................................   125
        Prepared Statement of........................................   134
        Questions Submitted to.......................................   178
        Statement of.................................................   133

    Habitat for Humanity International, Prepared Statement of........   206
    HUD Council 222, American Federation of Government Employees,
      AFL-CIO, Prepared Statement of.................................   207
    Huerta, Hon. Michael P., Administrator, Federal Aviation
      Administration, Department of Transportation...................    51
        Prepared Statement of........................................    59
        Questions Submitted to......................103, 109, 115, 117, 119
        Summary Statement of.........................................    58

    Institute of Makers of Explosives, Prepared Statements of the..210, 214
    Interested Parties for Hazardous Materials Transportation, Letter
      From...........................................................   217

    Kirk, Senator Mark, U.S. Senator From Illinois, Questions
      Submitted by...................................................   117

    Larsen, Representative Rick, U.S. Representative From Washington,
      2nd District, Prepared Statement of............................   185
    Lautenberg, Senator Frank R., U.S. Senator From New Jersey,
      Questions Submitted by........................................42, 115

    Mikulski, Senator Barbara A., U.S. Senator From Maryland,
      Questions Submitted by........................................41, 178
    Montoya, Hon. David A., Inspector General, Office of Inspector
      General, Department of Housing and Urban Development...........   125
        Prepared Statement of........................................   149
        Summary Statement of.........................................   147
    Murray, Senator Patty, U.S. Senator From Washington:
        Opening Statements of....................................1, 51, 125
        Prepared Statements of...................................4, 53, 128
        Questions Submitted by.......................................   103

    National:
        Affordable Housing Management Association, Prepared Statement
          of
          the........................................................   218
        AIDS Housing Coalition, Prepared Statement of the............   221
        Association of:
            Counties, et al., Letter From the........................   222
            Housing and Redevelopment Officials, Prepared Statement
              of the.................................................   223
            Local Housing Finance Agencies, the U.S. Conference of
              Mayors, and the National Community Development
              Association, Letter From the...........................   227
        Council of State Housing Agencies:
            Letter From the..........................................   228
            Prepared Statement of the................................   230

    Scovel, Hon. Calvin L., III, Inspector General, Office of
      Inspector General, Department of Transportation................    51
        Prepared Statement of........................................    66
        Summary Statement of.........................................    65

                                 SUBJECT INDEX

                                  ----------

                  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                         Federal Housing Administration

                                                                       Page

    Additional Committee Questions...................................   178
    Appendix.........................................................   177
    Commitment Authority.............................................   165
    Eminent Domain...................................................   166
    Federal Housing Administration (FHA):
        Insurance Fund...............................................   126
        Market Share.................................................   171
        Operations...................................................   130
        Reform, Challenges to........................................   168
        Shortfall....................................................   133
        Transformation...............................................   176
            Progress on..............................................   177
    Fraudulent Lender Safeguards.....................................   173
    Goal:
        1: Strengthen the Nation's Housing Market To Bolster the
          Economy and Protect Consumers..............................   135
        2: Meet the Need for Quality, Affordable Rental Homes and
          Healthcare Facilities......................................   142
        3: Transform the Way HUD Does Business.......................   145
    Home Equity Conversion Mortgage (HECM)...........................   127
        Counseling...................................................   162
        Escrow Accounts..............................................   164
        High Default Rate............................................   161
        Loans........................................................   130
    Information Technology (IT) Infrastructure.......................   175
    Lautenberg Remembrance...........................................   128
    Loss Mitigation..................................................   169
    Mortgage Insurance Premiums......................................   172
    Mutual Mortgage Insurance (MMI) Fund.............................   160
        Losses to the................................................   129
        OIG Efforts To Recover Losses and Address Fraud Against the..   156
    Office of Multifamily Housing....................................   178
        Consolidation of the.........................................   178
    Other Areas of Risk..............................................   130
    Sequestration..................................................128, 130
    Staffing Concerns................................................   175

                          Office of Inspector General

    Financial:
        Health of the FHA Mutual Mortgage Insurance Fund.............   151
        Management Systems...........................................   158
    Home Equity Conversion Mortgage (HECM) Program...................   155
    Inventory of Foreclosed-Upon Single-Family Properties............   157
    Office of Inspector General (OIG):
        Concerns and FHA's Slow Response, a History of...............   149
        Efforts To Recover Losses and Address Fraud Against the MMI
          Fund.......................................................   156
        Investigations...............................................   169
        Investigative and Audit Results, Recent......................   159
    Proposed Rulemaking Requirements.................................   147
    Real Estate-Owned (REO) Properties...............................   148

                            Office of the Secretary

    Additional Committee Questions...................................    41
    Assisted Housing.................................................    11
    Better Stewards of Taxpayer Dollars..............................    44
    Choice Neighborhoods.............................................12, 38
    Community Development Block Grant (CDBG) Disaster Recovery Action
      Plan...........................................................    42
        Funding......................................................    42
    Department of Housing and Urban Development (HUD):
        Grant Criteria...............................................    47
        Memorandum--Auditee Response to OIG's Audit of FHA's
          Preforeclosure Sale Program................................    49
    Existing Partnership.............................................    11
    Federal Housing Administration (FHA).............................    11
        Preforeclosure Sales Program.................................    48
    General and Special Risk Insurance Commitment Authority..........    33
    Goal:
        1: Strengthen the Nation's Housing Market To Bolster the
          Economy and Protect Consumers..............................    16
        2: Meet the Need for Quality, Affordable Rental Homes........    18
        3: Utilize Housing as a Platform for Improving Quality of
          Life.......................................................    22
        4: Build Inclusive Sustainable Communities Free from
          Discrimination.............................................    23
        5: Transform the Way HUD Does Business.......................    27
    Home Equity Conversion Mortgage (HECM) Reform....................    32
    Housing:
        And Communities..............................................    10
        Assistance Programs..........................................    46
    Improving Performance and Accountability.........................     5
    Moratorium on Full Draw Program..................................    33
    Mutual Mortgage Insurance (MMI) Fund.............................    29
    Overall Use of HUD Funds.........................................    47
    Oversight of Troubled Public Housing Authorities.................    37
    Public Housing:
        Authorities (PHAs)--Emergency Capital Needs..................    43
        Drug Elimination Program.....................................    43
    Regulatory Burdens...............................................    12
    Rental Assistance Demonstration (RAD)............................    41
    Reverse Mortgage Loans...........................................    30
    Section 8 Reforms................................................    12
    Sequestration:
        Budget Numbers...............................................    34
        Impact on:
            Most Vulnerable, the.....................................     4
            Public Housing Authorities...............................    30
    Shortfalls Under Sequestration...................................    36
    Super Storm Sandy................................................    41
    Transformation Initiatives.......................................    12
    Veterans Affairs Supportive Housing (VASH) Vouchers..............    12

                          DEPARTMENT OF TRANSPORTATION

                        Federal Aviation Administration

    787 Dreamliner...................................................    92
        Aircraft Certification.......................................   105
    Acquisitions Workforce...........................................   103
    Additional Committee Questions...................................   103
    Agricultural Aviation and Low-Level Airspace Safety Issues.......   122
    Aircraft Certification...........................................   105
        Process......................................................   120
    Airport Improvement Program (AIP) Grant Funding..................83, 91
    Alternative Jet Fuels............................................    90
    Armed Drones.....................................................   112
    Audit(s) of:
        Los Angeles International Airport............................   102
        Revenue Diversions...........................................   102
    Budget Control Act (BCA)/Contract Tower Program/Furloughs........    78
    Business Aviation and General Aviation--Economic Impact and
      Opportunities..................................................   121
    Contract:
        Control Towers...............................................86, 96
        Towers.................................................79, 117, 120
            Program..................................................    78
        Weather Observers............................................   116
    Controller Training and Safety...................................    99
    Cost-Savings.....................................................    99
    Electronic Devices on Planes.....................................   101
    En Route Automation Modernization (ERAM).........................    90
    Furlough(s).................................................78, 80, 100
        Impact(s) on:
            Facilities...............................................   115
            NextGen..................................................    89
    General Aviation Alternative Fuels...............................   119
    Government Accountability Office (GAO) Report on Unmanned
      Aircraft Systems...............................................   112
    Grants-in-Aid for Airports.......................................   113
    Helicopter:
        Noise........................................................   114
        Operating Practices..........................................    93
    Next Generation Air Transportation System (NextGen)..............   117
        Master Schedule..............................................   103
    Operations in Newark Airport.....................................   115
    Passenger Facility Charge (PFC)..................................    84
    Performance-Based Navigation (PBN)...............................   106
    Remote Highjacking of Aircraft...................................   116
    Retention Bonuses................................................   107
    Runway:
        Incursions...................................................    81
        Status Lights................................................   104
    Sequester Coordination...........................................   118
    Sequestration...................................................97, 100
    Unmanned Aircraft System (UAS)..............................84, 94, 109
        Airworthiness Certificates...................................   111
        Test Ranges..................................................   110
    User Fees........................................................   121

                          Office of Inspector General

    Federal Aviation Administration (FAA) Has Opportunities To More
      Effectively Manage Its Controller and Inspector Workforce......    68
    Opportunities Remain To Better Ensure the Safety of the National
      Airspace System................................................    75
    Sound Management Strategies Are Key to the Cost-Effective
      Implementation of FAA's Modernization and Infrastructure
      Efforts........................................................    70

                                   [all]