HUD's Management Challenges

Wednesday, July 24, 2002

United States Senate, Committee on Banking, Housing, and Urban Affairs, Subcommittee on Housing and Transportation, Washington, D.C.

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

Statement of Senator Jack Reed

Senator Reed. The Committee will come to order.

Good afternoon. Let me welcome everyone to today's Housing and Transportation Subcommittee

hearing on HUD's Management Challenges.

The Subcommittee is very concerned about management problems at the Department of Housing and Urban Development and the impact these problems are having on HUD's ability to meet its mission of providing decent, safe and sanitary housing.

The Department of Housing and Urban Development's programs affects millions of Americans every year. HUD provides rental assistance to 5.2 million people, mortgage insurance to 7 million homeowners. HUD has helped revitalize over 4000 communities and it managed about $545 billion in mortgages last year.

Unfortunately, two of HUD's programs -- the single-family mortgage insurance program and the rental housing assistance programs -- make up 70 percent of HUD's business and are currently on GAO's high-risk list and considered, quote, extremely vulnerable, to fraud, waste and abuse.

GAO's concerns largely focus on issues such as staffing at HUD. HUD currently has 9100 employees who oversee almost the same number of contractors, in addition to doing their own job.

A current study by HUD itself shows that HUD is understaffed by at least 1000 FTEs.

HUD is on the cusp of losing almost half of its career work force by June, 2003, because of potential retirements, and I think that's an important point to note -- that half of your present employees could walk out the door next year. And these are the most experienced individuals, those who have been with the programs the longest, and those who have the most knowledge and experience of housing issues.

This makes HUD's current decisions about staffing extremely critical.

We hope to explore today what HUD's plans are for retaining current staff, hiring new employees and maintaining a core of expertise to lead the agency into the future.

HUD also continues to have problems overseeing its thousands of contractors, especially in the FHA single family insurance and multi-family housing programs.

In addition, since 1984, HUD has had problems with its hardware and software systems. These problems make it more difficult for staff to do their job and properly oversee contractors. These systems also keep track of billions of dollars in loans and rent subsidies. If these systems fail to meet HUD's needs, HUD will continue to have problems maintaining oversight over these contractors who provide services, keeping track of billions of taxpayer dollars, and defining the number of people who are helped by their programs.

Although I understand that new managers have the right to make management changes as long as they comply with federal law, I am concerned that HUD's reorganization may jeopardize past improvements. HUD cannot afford to regress given its tenuous footing and continuing management challenges.

That's why we have asked GAO to come here today to talk about its findings. GAO has been a nonpartisan voice that continues to challenge HUD to make improvements.

Senator Sarbanes, Senator Allard and myself commissioned GAO to draft a series of reports on HUD, the first of which is being released at today's hearing.

We also will be hearing today from an officer of one of the unions representing HUD employees.

This Committee wants HUD to succeed and to meet the challenges, the many challenges that it is facing. We want HUD to be able to effectively and efficiently provide families with important rental assistance and to help make the American dream of owning a home a reality for many first-time and minority homebuyers.

And that is why we're holding this important oversight hearing today.

I must also add that this concern has been consistent over many, many committees. I know my Ranking Member, Senator Alllard, was equally concerned about HUD's management and that goes back several years, back to '84 and before.

So let me just say that we're pleased and very delighted to have the Honorable Alphonso Jackson, the deputy secretary of the Department of Housing and Urban Development, here today.

And then we'll hear from Mr. Stanley Czerwinski, the director of housing issues of the United States General Accounting Office.

And our third witness will be Ms. Carolyn Federoff, who is president, American Federation of Government Employees, Council of HUD Locals 222.

Each of our witnesses has been asked to discuss HUD's management challenges, the status of the Administration's efforts to address these challenges, and ideas for further improvement.

When Senator Allard arrives, I'll take the opportunity to interrupt at an appropriate moment so he may give his opening statement, and similarly, with my other colleagues.

But at this point, Mr. Jackson, let me just further add that prior to your appointment as secretary, Secretary Jackson was the president of American Electric Power -Texas, in Austin, Texas.

Let me also say for the record that in addition to Deputy Secretary Jackson, we also have with us John Weicher, who is the FHA commissioner, Angela Antonelli, who is the CFO of HUD, Assistant Secretary for Administration, Vickers Meadows, Melody Fennel, who is assistant secretary for congressional affairs, and Roy Bernardi, the assistant secretary for community and planning development.

So we thank all of you for joining us today.

Mr. Secretary, please.

STATEMENT OF ALPHONSO JACKSON DEPUTY SECRETARY

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

AND

CHIEF OPERATING OFFICER

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Mr. Jackson. Thank you very much, Chairman Reed, and to the members of the Committee.

I am thankful for the opportunity to appear before you today to discuss HUD staffing, acquisition management and information system challenges.

I am happy to provide you with the update of the substantial progress our administration is making to address those issues.

Under the leadership of Secretary Martinez, the first year of our new administration was largely devoted to getting the management team in place, assessing HUD's management environment, and formulating valuable strategies and plans to address the major management challenges and program risks that face the department.

In formulating our strategies and plans, we strongly considered input from HUD's management challenges and program risks as described by the United States General Accounting office, better known as GAO, and the HUD Office of the Inspector General.

Our believe our management team and the GAO shares a common view -- that improvements to HUD's management of its human capital, acquisitions and information systems are essential to addressing HUD's remaining high-risk programs -- the rental housing assistance and single-family housing mortgage insurance programs -- and to maintaining adequate controls over the program's activities previously considered high-risk.

The inclusion of our management challenges and program risks in the President's Management Agenda is indicative of the importance placed on these issues.

We welcome the GAO's independent assessment and I am confident that they will see that we are moving in the right direction to address our management challenges, reduce our program risk, and improve our program performance.

We also appreciate the advice, the counsel, and constructive dialogue of the HUD union.

Since coming to office, I have made it a priority to meet with the HUD union representatives, with Ms. Federoff and the union there at HUD, monthly to discuss issues that are of interest to them and how we can better manage our HUD organization.

The first area I'd like to discuss is human capital management.

HUD's human capital is most important to all of us as a valuable asset. We have taken substantial steps to enhance and better utilize our existing staff capacity, and to obtain, develop and maintain the staff capacity necessary to adequately support HUD's future programs.

As you know, decisions were made and actions by HUD leadership to undertake separate realignment of headquarters and field activities to better use our existing resources and strengthen our program, and to deliver the services better.

The details of this realignment are in my testimony and I'm asking that it be submitted for the record.

Senator Reed. Without objection.

Mr. Jackson. Thank you.

Senator Reed. And I am more than happy to answer any questions that you have about the details of this realignment.

We have formalized our realignment structure with the publication of Delegation of Authority in the Federal Register and are providing current operations policies and procedures to support staff training and ongoing operations.

In addition, the department has taken on other positive actions to improve HUD's human capital. For example, we have developed a human capital strategic management plan in February of 2002 to provide an overall framework of our human capital activities, developed a departmental succession strategy to assess the impact of potential human capital loss and results of skill imbalance, as you just noted.

Completed in 2001 the implementation of the new Resource Estimate and Allocation Process, known as REAP, to use as a baseline estimate and justify its staffing resources needs to allocate for the proper resources.

Significant improvements in our training, including etraining programs and their availabilities.

Expanded recruitment, retention efforts to take advantage of the excellent programs, such as the Presidential Management Intern Program, the new HUD Intern Program, the Legal Honors Program, and the Senior Executive Service Candidate Program to establish a pipeline from our perspective of well-qualified employees to meet the staff needs and the anticipated shortage that will occur.

The second management challenge I would like to discuss is acquisition management.

HUD is heavily relying on contract service in support of the current operation, as you just stated. HUD's contract services go well beyond facility management and other routine services to many core program functions.

Given the extent and significance of the HUD contract service, the department has taken positive steps to address the acquisition challenges.

For example, the department has re-established a senior level Cabinet Management Review Board, we call CMRB, to review and approve all annual procurement plans for each HUD component and to approve contracts over $500,000.

The CMRB helps to assure that HUD contracting resources are used to address the department's priority.

The department also is increasing the use of integrated program teams to improve the quality and timeliness of procurement actions. The Secretary and I recognize that small businesses are vitally important to job growth and the economic strength of the country. The Secretary has challenged HUD to try to award at least 50 percent of the contracts to small businesses.

As of June 30, 41 percent of the FY 2002 contract dollars have been awarded to small business, and I am particularly pleased that women-owned business did 21 percent, well above the five percent that Congress has established.

The third challenge I would like to discuss with HUD is information technology, as you so noted.

Adequate automated information systems are essential to the effective administration of HUD's large, diverse and complex program. However, to be very candid and honest, we recognize that HUD has antiquated system that are poorly integrated, inefficient and inadequate for meeting many essential program management information needs.

We have taken significant actions to address this challenge.

HUD integrated its IT capacity planning process with HUD's Enterprise Architecture and e-Government directives from the office of Management and Budget. This will better assure efficient resource use and effective business results.

HUD's Enterprise Architecture initiative is designed to provide department-wide documentation of HUD's current business and technology systems to better manage HUD's current information system and meet future information system needs.

HUD's Enterprise Security Program was established to provide protections for HUD's critical infrastructure, both physical and informational systems.

HUD's Office of Inspector General recognized both substantial control improvements in HUD's mainframe computer system.

As you can see, our efforts to meet the human capital, acquisitions, and systems challenges have been extensive. It will continue, and it must be strong.

Our efforts to better manage our staffing, acquisitions and information systems is important. We believe that we are making progress in the two remaining high-risk programs -- our rental housing assistance and single-family housing mortgage insurance programs.

We welcome the pending independent assessment of our progress through the GAO's biennial government-wide review of major management challenges and high-risk programs.

In conclusion, Mr. Chairman, I would like to say simply this, that we have established a leadership meeting every month at HUD, and in this leadership meeting, we track the progress of each one of the President's management agendas and the GAO's agenda as to what we need to be doing.

The Secretary and I hold the senior leadership responsible for making sure that this accountability is talked about every month in our executive management meeting.

Even more importantly, the Secretary and I firmly believe in not only recruiting new staff at HUD, but we have not over the past years trained, retrained or empowered our employees to do their job in an outstanding manner.

Over the last 18 months, the Secretary and I have traveled extensively to field offices to meet our staffs.

As you know, almost two-thirds of HUD's staff is in the field and the operations there are critical. Some of the HUD field offices, as I have been told when I was in one city, had never seen a HUD secretary or a deputy secretary in 21 years.

We believe that the strength of this organization is in the field and if we do not show up in the field as well as we show up at the headquarters, we will have and continue to have serious trouble.

I have talked during this period of time of 18 months, Mr. Chairman, to more than 1200 HUD staff in the past 18 months, and we have seen the morale in the field grow stronger every day.

It is my belief that as the deputy secretary and the chief operating officer of the agency, that not only am I to manage our staff here at HUD headquarters, but our job is to make sure that the staff in the field realize that they’re just as intricate a part of HUD as headquarters. And we're making every effort to do that.

Lastly, the Secretary and I have made a commitment that we will enter no city without visiting with the HUD staff, whether it's field or regional staff. And to date, the Secretary and I have kept that commitment.

So, in conclusion, I am glad to be here and I will be here to answer any questions that you may have.

(The complete statement of Mr. Jackson follows.)

Senator Reed. Thank you very much. Prior to introducing the other panelists, let me recognize the Ranking Member, Senator Allard.

Senator?

STATEMENT OF SENATOR WAYNE ALLARD

Senator Allard. Mr. Chairman, thank you. I apologize for being late here. The votes that we had prior to this kind of moved my schedule back.

I want to congratulate you on holding this hearing. I believe that oversight is one of Congress' most important functions.

I think all too often, this critical responsibility is ignored. It's nothing glamorous, but very important. Frequently, you don't get any credit for holding these kinds of oversight hearings.

This hearing is a helpful way, I think, to perform our charge. And when you and I changed places, I think I had some ten oversight hearings at that particular time.

And Mr. Czerwinski frequently showed up.

But I think there were some favorable results that were happening as a result of that. I look back at 1997, when HUD described itself as a poster child for inept government. We had reports coming out of the GAO and the Inspector General.

And since that time, the department has undertaken a variety of initiatives designed to transform the agency. GAO has reported that HUD has been making creditable progress towards its goal of reform. It has reduced the number of HUD programs deemed to be high-risk.

Although HUD has made considerable progress, Mr. Chairman, much remains to be done. Last year, I requested that GAO conduct a comprehensive evaluation of the department's progress, HUD’s ability to sustain improvements and changes are still needed.

As always, I appreciate the work that the GAO has done for this request. In fact, today, they are releasing a report on 's human capital issues as a part of my request.

It is my hope that their findings will be helpful to Congress as we consider authorization and appropriation matters concerning HUD.

Additionally, I believe that this body of work can be extremely helpful to HUD. I am hopeful that they will work closely together to identify and implement necessary improvements at the department.

In this matter, HUD can become a strong agency that meets its mission with effectiveness and efficiency.

I'd like to thank our witnesses for being here today. I'm pleased that Alphonso Jackson of HUD is here to update us on the department's status. I know that you've had a very busy schedule personally, and I appreciate your taking the time to come forward with this important responsibility.

I also welcome Carolyn Federoff, president of the American Federation of Government Employees, Council 222.

Carolyn, your perspective as a HUD employee will be helpful as we discuss HUD reforms.

Finally, I'd like to extend a special welcome to Stan Czerwinski of the General Accounting Office. Stan has been an invaluable resource for me and my staff during my years as chairman and now as Ranking Member. I've had the pleasure or receiving testimony from Stan on a number of occasions. His insight and expertise has been extremely helpful.

Unfortunately for this Subcommittee, I understand that Stan is probably testifying before us for the last time in your current capacity. Next month, you will be comptroller of GAO. I want to congratulate you on that.

And while I'm sure that you will be incredibly successful in your new position, we're going to miss you here at the witness table.

Stan, thank you for your hard work on behalf of this Subcommittee. And again, thank you, Mr. Chairman, for convening this oversight hearing. I look forward to hearing today's testimony.

Senator Reed. Thank you very much, Senator Allard.

As I pointed out in my opening remarks, oversight activities are not unique to this chairmanship. You were very active as an oversight chair, and we're following through with some of the issues that collectively, we were pushing two and three years ago.

Senator Allard. Yes. Very good. Thank you, Mr. Chairman.

Senator Reed. and I want to join Senator Allard in both recognizing Stan Czerwinski, and also thanking him for his valuable testimony on many different occasions, and wishing you well in your new position as comptroller.

And again, you will probably not be here as you are now. Mr. Czerwinski is testifying in his capacity as the senior GAO expert with respect to housing programs in the United States government. He will broaden that expertise as comptroller.

So we'll get you back here in some guise, Stan.

(Laughter.)

Please, go ahead.

STATEMENT OF STAN CZERWINSKI

DIRECTOR

PHYSICAL INFRASTRUCTURE TEAM

UNITED STATES GENERAL ACCOUNTING OFFICE

Mr. Czerwinski. Mr. Chairman, I happen to notice that you're on the Appropriations Committee, so we'll be talking to you.

Senator Reed. I've become very popular recently.

Mr. Czerwinski. Yes, you are. Mr. Chairman, Mr. Allard, before I begin, I'd like to express my appreciation for this Subcommittee's diligent oversight. And that's a theme that you're going to hear during this hearing.

Your work is instrumental to improving HUD. You are asking the right questions and we are seeing results at HUD because of that.

And I think the evidence is today, where the deputy secretary and you and we agree as to what the top management challenges are.

I just wanted to also mention that it's really crucial that this oversight be bipartisan, as you've done, going back to the leadership of Mr. Allard and now with you, Mr. Chairman.

It's very gratifying to us to see you doing this. I know oversight is not glamorous on the Hill. To the GAO, it's our lifeblood.

So thank you very much for that.

In my testimony today, I'd like to update our high-risk assessment on HUD and the outline what we think needs to be done. And again, it's the three areas that everybody agrees on.

You may recall in the mid-1990s, GAO designated HUD as a whole, the whole agency, as high risk, the only agency in government to be designated that way.

Then in our last high-risk series of January, 2001, we noted the creditable progress that HUD had made and as a result, we no longer said that the whole agency was at high risk, but instead, two major program areas. And as you noted, Mr. Chairman, these two areas comprise about 70 percent of HUD's budget -- single-family mortgage insurance and multi-family rental assistance.

In fairness to HUD, I want to note that HUD faces inherent risks that most agencies in government do not.

For example, it has about $1 trillion exposure on the financial markets through FHA and Ginnie Mae. Also, in carrying out its mission, HUD relies on third parties, including about 10,000 lenders, 25,000 appraisers, and about 12,000 subsidized landlords.

We have made, and to its credit, HUD has implemented, a number of recommendations to address deficiencies in lender and appraiser oversight, property disposition, tenant income, and property inspection. Yet, problems persist.

If we were to issue the high-risk report update today, we would still find single-family mortgage insurance and multifamily rental assistance to be of high-risk. And this is in some sense because the programmatic fixes are really addressing the symptoms rather than the root causes.

And as you noted, at the request of this Committee, for the past two years, we have been focusing on the root causes. And just to reiterate what has already been said today, the top three root causes that we all agree on are human capital, acquisitions and program and financial information systems.

As the chart to your left shows, we see those three root causes sweeping through all of HUD's programs.

As you noted, Mr. Chairman and Mr. Allard, you released our report today on human capital. And what I would like to do is just briefly summarize what that report says.

Simply said, HUD does not have the right people, with the right skills, in the right places, to do the right things.

As you also mentioned, HUD has the additional challenge, or maybe it's an opportunity, of having more people who are ready to retire than any agency in the Federal Government. And as you mentioned, this is about half of HUD's work force that could be retiring next summer.

This means it's critical for HUD to determine its mission, the mission that it wants the agency to have now and in the future, and decide what skills it needs to carry out that mission, assess what skills it has now and then match what it has with what it needs.

And I guarantee through that match, there will be a gap. There's no question about that.

HUD then needs strategies for fulfilling that gap. These strategies including recruiting, retaining and training staff.

As Mr. Jackson noted, HUD has made the first step with REAP. REAP is a snapshot. It provides a picture of what the agency has today in terms of skills, today in terms of needs.

However, because as you mentioned, Mr. Chairman, HUD could be losing about a thousand people each year, HUD must be looking to see how it will fill those losses.

The answer to that question will determine whether HUD as an agency takes the shape that its leadership in the Congress wants it to take.

As you may recall, HUD used to have about 50 percent more people a decade ago than it does today. Over that decade, HUD's responsibilities haven't diminished. Instead, it relies much more on contractors. In factor, contractor reliance has grown 60 percent in the last five years alone.

This reliance has resulted in significant problems and abuse.

At your request, and again, this is a theme that you'll see, requesting all the right things -- at your request, we'll be reporting on acquisitions this September and we will be including concrete example of contracts gone wrong.

What I'd like to do today is give you an interim look at the findings.

The bottom line is that contracting problems are caused by three things at HUD. One is inadequate monitoring. HUD's monitoring does not hold the contractors accountable.

Second goes back to the issue of human capital. And you'll see there's another theme, that these root causes are not independent. One affects the other. Because they have fewer people, they rely on more contracting. Because they rely on more contracting, it exacerbates the human capital weaknesses.

What we have found is that HUD all too often has employees in the wrong locations, with the wrong skills and inadequate training to oversee contractors.

Finally, HUD has no single information system to accurately track contractor obligations, milestones and performance.

This leads me to the third area, Mr. Chairman, and the final top management priority -- financial and programmatic information systems.

As you can probably guess, you've requested that study also and we'll be reporting to you by the end of the year. But I want to give you a simple bottom-line in layman's terms -- HUD's systems do not talk to one another.

Sadly, this is not a new problem. We first reported it 20 years ago. As a result, even if HUD has the right people with the right skills in the right places, their oversight is going to be difficult without the information they need.

For example, if a HUD employee wanted to visit or evaluate a lender, he or she would have to get data on the lender's address from one data system, the loan volume data from another system, default and claim data from yet another system, and finally, complaint information from another system.

The two key thoughts I want to leave you with on information systems are systems integration. HUD must make its systems compatible.

The second one is user needs. In making the systems compatible, emphasis has to be given to doing it in a way that addresses the needs of the users to do their jobs.

I'd like to close by saying that in my five years directing GSO's housing work, it's been an honor to assist this Subcommittee. You've provided quality oversight and it makes a difference.

Our teams are over at HUD every day and I see the response at HUD because of the kinds of things you're asking them. And again, I think this hearing is a real example that we were all agreeing as to what the major issues are.

Also, your staffs have shown professionalism and dedication. Day in and day out, we deal with your staffs, both sides of the aisle. I have not seen staffs of that quality in my 20 years of government, and it's been an honor and a privilege to work with you.

I'd like to leave you with one thought. And that is, we would ask you to keep watching and working closely with HUD and please continue to ask GAO to help you do it.

Senator Reed. Thank you very much, Mr. Czerwinski, for excellent testimony. And again, we thank you for your service to the Committee and to the GAO. And we look forward to working with you in a different capacity.

I've been remiss because I should have initially, up front, asked everyone to stay within the five-minute time limit and that your statements would be made fully a part of the record.

But, through telepathic means, both Secretary Jackson and Mr. Czerwinski did that.

Now we're pleased to introduce Carolyn Federoff, who is the president of the American Federation of Government Employees, Council of HUD, Locals 222.

The council is HUD's largest employee union, representing approximately 6000 employees. And she's been president since May of 2001.

Welcome, Ms. Federoff.

(The complete statement of Mr. Czerwinski follows.)

STATEMENT OF CAROLYN FEDEROFF

PRESIDENT

AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES

COUNCIL 222

Ms. Federoff. Thank you very much. And thank you for inviting us to speak for HUD's career bargaining unit employees.

I first want to thank both of my fellow panelists here. The Deputy Secretary has in fact invited us to meet with him monthly to discuss employee issues, and we're very appreciative for that opportunity.

And the GAO, especially with your leadership, has made recommendations that our employees always eat up. They like when the GAO reports come out. They want to be able to read them. They want to see what our agency is doing and what we can do better.

So thank you very much.

My written testimony, which I would like to have submitted for the record - -

Senator Reed. Without objection.

Ms. Federoff. -- is a detailed look at HUD's human capital management issues and oversight of contractors. But my oral testimony is much more pointed.

Employees have been concerned for a long time with our designation by GAO as a high-risk agency. But even without this designation, we would be concerned for the long-term viability of HUD programs.

We believe that no administration can resolve these issues without the sustained support of Congress.

HUD programs are largely bricks and mortar. They're long-term investments. This is one of the distinguishing characteristics of the challenges that face HUD.

The programs that Congress creates have a lifespan longer than the lifespan, or rather, the career span, of a federal employee. So that a Section 202 development that is built today will continue to have a HUD mortgage in place in 2040, well after the current employees at HUD have retired.

Furthermore, the nature of developments is such that they either have problems at the very beginning of their lifespan or they have problems at the very end of their lifespan.

And so, it is very important to have staff continuity, to have the sharing of institutional memory from one generation of HUD employees to the next generation of HUD employees. And that is crucial to problem-solving, when problems arise.

Now all American employers at this point are facing the impending retirement of the Baby Boom generation. So this is a problem that's not unique to HUD.

But because of the unique programs that HUD is responsible for, that problem in fact can be a crisis.

Currently, HUD only fills vacancies after they occur, frequently months or even years after a seasoned employee has left.

Now in our written testimony, we recommend no reduction in HUD staffing ceiling. But the truth is, if 4500 employees are projected to, or are eligible to retire within the next five years, we need to hire 2000 employees within the next two years.

We have to hire this staff now in order to permit mentoring and a transfer of knowledge. We cannot replace journey-level staff with entry-level staff.

This is a task that no administration can accomplish without congressional support. As stewards of the public trust, as HUD employees, we don't want to hear that it can't be done or that we have deficit budgets.

It can be done. We know this because the money is already being spent. It's being spent on contractors.

With the knowledge, and sometimes the express approval of Congress, HUD spends more money on contractors than it would cost to hire HUD employees.

The Section 8 contract administration contracts alone, which are part of the rental housing assistance contracts, would cover 2500 additional HUD staff. These contracts are costing us $220 million a year now, and when they are in full force, will cost us $280 million.

Now the contracts replace the need for a maximum of 1250 staff. And this is only one example of many examples.

We need Congress to work with HUD and stop playing smoke and mirrors with the budget.

Our written testimony includes recommendations that would assist recruitment and retention. It would assist the use of retention programs, such as loan forgiveness, child care subsidies, extend permanent positions to its interns, reform an overly bureaucratic human resources department. But these are band-aids. They will make HUD a better place to work for the workers that remain.

But we need more than band-aids. We need whole blood. We need staff and we need them now.

Congress can make a difference between the long-term success of the programs that it authorizes or it can assist in their failure.

Thank you.

(The complete statement of Ms. Federoff follows.)

Senator Reed. Well, thank you very much, Ms. Federoff. Thank you all for excellent testimony. And I think you've in very graphic terms the serious challenges.

As Mr. Czerwinski pointed out, HUD is the most vulnerable agency to retirements in the whole entire Federal Government. And thinking that if even a third or a half of the retirements take place, that will have a crippling effect on the agency, an agency that is responsible for over $500 billion in mortgages.

So the consequences of mismanagement are not simply that people don't get the full services that they need and deserve. But it could be huge financial consequences for the Federal Government.

So this is a very serious challenge.

Mr. Secretary, we all agree on the critical issues -- human capital, information technology, and oversight acquisition of contractors.

Let me ask -- do you think that the budget that was set up this year to Congress reflects the seriousness of these challenges, reflects the potential loss of thousands of employees and the fragility of the agency at this point?

Mr. Jackson. Before answering, Mr. Chairman, I'd like to say that I appreciate both persons' testimony because I think that they specifically zoomed in on the points that are very critical to us.

And in answering your question, I will simply say, I think the budget reflects that we are trying to address the needs that the GAO and the unions have consistently told me. That is, human capital, information technology, succession plans, because they are critical.

And as Carolyn will tell, often I have said to her, I would hate to see a third of our employees leave on our watch -- that is, the Secretary and my watch -- because I think it would be absolutely devastating.

I think if we go back to 1995, when we had a situation where there was no thought, not methodically or otherwise, and we were forced to cut HUD's agency.

The young employees that Ms. Federoff is talking about that would have been the middle employees this year, were taken away. In the process, it left seasoned employees. We were in a hiring freeze. It did not occur.

But what we expected out of the employees at HUD, and I think, under the circumstances, with my traveling in the field, these employees have done an excellent job of maintaining HUD as best that they could, with the limited resources.

We expected them to do the same amount of work with an increased budget.

So I do believe that if, as we've said to OMB and to GAO, we have a budget that, if given the priorities to hire people to do some of the job, and to terminate some of the contractual arrangements that we have, the third-party contractual arrangements, I truly believe that we can hire the staff that can be trained.

And I think that one of the things that Ms. Federoff said that was so important, which I did when I was running AEP, which was a $13 billion corporation, when we realized that we had somebody leaving the organization, we brought someone in to be trained by that person.

That is not the way that we have operated at HUD because of the hiring freeze. We believe now in our process of trying to recruit and hire new staff members, staff members who have the expertise, to give them an opportunity to work with those persons who have this expertise who will be leaving us within the next three years.

So I would say, yes, the budget does reflect it. And the Secretary is very concerned that we address the needs of human capital, as has been denoted to you today, we address the needs of information technology.

And I can't come here, as Stan can tell you, and contradict him, I'm not in the position to do that. I'm in the position to listen to him.

And that's why we have periodically worked with him, without the insistence of being told by Congress.

I just believe that government, as when I ran the corporation, has two functions. That is, to have the profit and shareholders' return.

I believe that the profit is saving the taxpayers money. The shareholders' return is making sure that the taxpayers get what they've paid for.

And I believe that with the help of GAO, with the support of Congress, as Ms. Federoff has said, and with the union's help, that can be accomplished, and I think the budget reflects that.

Senator Reed. Well, as I understand it, Mr. Secretary, HUD has not asked for any additional dollars for staff in FY 2003. And going to Ms. Federoff's point, if we're going to make any serious transition in the face of these retirements, you have to get the people on board now so that at least they have a year or two to learn what they can from the hands.

Mr. Jackson. I agree. Let me say this to you on that.

We are in the process, as Ms. Federoff knows, of hiring 400 new employees. I won't say new because some will come from internal promotion. But we're in that process.

We've also asked OMB for another 400 next year, to get us up to the 9100 level.

What we have decided is this, is that we know we have a shortage. But I think that REAP was the beginning. We need to look at this systematically and thoroughly, and say, where is it that we have serious problems of losing people, whether it's in CPD, community development and planning, whether it's in housing, whether it's in public and Indian housing, and begin to replace those people systemically.

Yes, I am very concerned. I can't say to you today we're not. But I do also believe that in the process, it is not necessarily from my perspective more money. I think that if given the opportunity, as I've said on a number of occasions to OMB, to utilize our money more efficiently -- that is, to end some of the contracting that we do -- that I think we can address these needs clearly.

Senator Reed. Thank you. Mr. Czerwinski, you might not have a detailed knowledge of the budget submission, but you certainly, I would suspect, have a feel for the kind of money we're talking about -- getting a well-trained work force in place and staying in place despite retirements, improvements in hardware and software and computer systems, active oversight of contractors.

That's a lot of money, even if you're efficient and you get more flexibility, I would suspect.

Do you have any thoughts?

Mr. Czerwinski. Yes, Mr. Chairman. Ultimately, HUD may need more money. But the key is before they can come and ask for more money, is to have a credible plan and a vision for what they're going to do with it.

And let's use human capital as an example.

As we agree, with the REAP, it's a first step, a snapshot of what's going on today. What HUD needs to do, though, is to project what it wants the agency to look like, and then target the shortages and gaps to that vision.

They then need to a recruiting strategy, targeting certain schools, certain types of professions. And then, once they have that, then they have to implement it. And that's probably ultimately going to take money. But they need to have a compelling plan before, in all fairness, they can come and ask you for that.

Senator Reed. Mr. Secretary, when can we expect to have the details of that plan from HUD that Mr. Czerwinski said?

Mr. Jackson. Very soon. We're in the process of developing a five-year human capital plan because that was one of the things that the Secretary and I initially said. We did not have, and again, Stan knows it. And we have been discussing that, not only with GAO, OMB, and with the union. And I'm convinced that we will have that very soon for you.

Senator Reed. Let me ask, before I turn to the Ranking Member, Ms. Federoff, if she has any comments on this line of discussion we've had?

Ms. Federoff. Well, two comments. One is that I think the agency is hampered by a severe reduction in their human resource staff in the 1990s. So that the agency restructured in 1995 with the goal of going from one human resource manager or personnel specialist per 60 employees down to one to 100.

I think that loss of staff has made it very difficult for this administration to quickly respond to the need for a human capital plan. I think that focusing staff in those areas would help the agency be more responsive.

The other item is that we would certainly support the deputy secretary in giving HUD the ability to transfer dollars that are spent on contractors to S&E.

My familiarity with the budget is that there is not that sort of flexibility, and it would have to be specifically authorized.

And we would certainly support that sort of an authorization.

Senator Reed. Thank you very much. Senator Allard?

Senator Allard. Thank you, Mr. Chairman.

I would just comment on the lack of compatibility between the various computers that we have in the HUD. Of all your testimony, I think that that is one of the things that is the most disappointing to me.

It seems to me like it's one of the easiest things to be able to rectify.

I can understand sometimes the problems with compatibility maybe between the IRS and maybe the CIA or something like that. But there's an effort within the government to try and even make those compatible.

Isn't there a relatively quick solution to this, or is this more complicated than just what appears on the surface?

Mr. Jackson. Well, let me say this to you. I will say this to you, Senator, that when I walked into HUD after running AEP, I was absolutely not only dismayed but shocked that there was no interaction between the information technology systems.

We immediately went to the point again with the help of GAO, OMB, and I said we can't continue this process.

We're in the process right now of planning. We have one area that we're addressing which we call the information technology system contract out on the streets, and we should be getting the results back very soon.

Secondly, I think it is imperative and it is relatively simple. But I don't think we can again do what we did in '95 without being very methodical, cutting people out of the staff at HUD.

So I believe that if we could do this in a very systematic manner, we will be able to make sure that we have an information technology system within a couple of years that interacts and talks to each other.

But I must tell you that, as you've just stated, I was absolutely shocked when I came here, having a system from a corporation that we talked to each other all over the country. AEP was the largest electrical company in this country. And yet, we could talk to each other from Texas all the way to Washington, D.C.

And not to have that in the Federal Government was absolutely shocking.

But I will tell you, we're moving expeditiously to make sure that we have that and we're working with GAO and OMB to make sure that that's done.

Senator Allard. Mr. Czerwinski, I think that my colleague here brought up some issues related to the budget. So I was thinking back on our testimony that we had the year before last maybe.

At one point in time, we had $10 billion in unobligated dollars in HUD. Are those unobligated dollars still there, as far as you know?

Mr. Czerwinski. There are still sizable numbers.

Senator Allard. There's still a sizable number there.

Mr. Czerwinski. Yes.

Senator Allard. You wouldn't still say necessarily as much as $10 billion, but there's still a sizable number there.

Is there any reason why you have to ask for an increase in HUD spending when you've got un-obligated dollars in HUD there?

Can't they be used for current programs? Is there any reason why that can't happen?

Mr. Jackson. I think that, from my understanding, the monies designated for specific programs, once they're allocated - -

Senator Allard. Yes, but this is un-obligated. I got the impression that un-obligated means that they're not necessarily designated for any specific program.

Mr. Jackson. From my understanding last year, all un-obligated monies -- not all, but most of the un-obligated monies had to be returned back to Congress.

And so, therefore, I would say to you, Senator, that I believe that if given that authority, as I said previously in my testimony, I am not convinced that we necessarily need more funds. And I think that Stan spoke to that.

If we're given the right to utilize the fund in a very efficient and effective manner, to hire and train new staff, clearly, I think we can do a lot of it within the present budget.

Senator Allard. So you're telling me at the end of each fiscal year, un-obligated dollars get held in the department? They don't get transferred over to the next year?

Mr. Jackson. I'm not sure. Let me ask that.

(Pause.)

If they're not obligated, they don't stay with the department. I didn't think so because I know we had to return un-obligated monies last year.

Senator Allard. Stan, do you have a comment on that?

Mr. Czerwinski. My understanding, Senator Allard, is that most of the un-obligated monies are what is called no-year budget authority, and they sit until the Congress or HUD takes action to essentially sweep them up.

Now a certain amount is swept up in most years. But there's also amounts that sit.

In the question you're asking, could those monies be used for other purposes, yes, they could, but it would take a reprogramming authority to be given to HUD to do that.

Senator Allard. Does that go through the appropriations bill or is that an authorization?

Mr. Czerwinski. Appropriations.

Senator Allard. The appropriations does that. So is the budget request now, does that reflect recycling or reusing those unauthorized dollars that are sitting there?

Mr. Jackson. Let me say as an answer, some of them reflect years that, clearly, the money must be spent.

We have in Section 8 a program that is obligated for project-based for a 30-year period of time. All the funds are not obligated at one time, but clearly, they're going to be spent.

Those funds that are not in a situation of Section 8, I would perceive, as Stan has said, that if they're reauthorized, yes, we can use them.

Senator Allard. Okay. If we've got a problem of not enough dollars there, Mr. Chairman, to meet some of these needs, it might be that we just need some simple language in there that would allow them to handle the un-obligated dollars that are sitting there, if there's any that are sitting there.

And I don't know. How do we quickly get a hold -- how do we find out what that un-obligated amount is as we move towards the end of this budget year?

Mr. Jackson. I'd be happy to submit a detailed report to you if you'd like to know that.

Senator Allard. Would you do that, Mr. Jackson?

Mr. Jackson. Yes, I would.

Senator Allard. I'd appreciate it.

Senator Reed. As I understand it, the department has to request a reprogramming from the Appropriations Committee, which would have to be cleared by the Office of Management and Budget.

So I'd be very happy to push that along if we got it up here.

Senator Allard. Okay. Now the other area that I want to talk a little bit about, and this shouldn't surprise any of you because any time you've always testified in front of this Committee, I always ask you about the Government Performance and Results Act.

I think it's important that we work on it -- I'm glad that the President seems to be moving in that direction for all agencies. But the result act requires agencies to utilize outcome rather than process-based management.

I was extremely pleased to see that the President's fiscal year budget of 2003 request begins to incorporate the next step, which is outcome-based budgeting.

And this is for all of you -- would you please comment on the importance of the results act for an agency in transition like HUD?

Mr. Jackson. I think it's absolutely important and imperative. I think that, again, I'm not one to cast aspersions. But I've said so often that, and I've said it to you, Stan, that if I had run AEP as we've run HUD over the years, I wouldn't have lasted four months as president of that company.

So I do believe that outcome-based analysis is the most crucial thing to know exactly where you're going. And that's why I'm pleased that we had set some processes in place to judge that.

But the President's management agenda specifically sets the objectives of what we must meet to do that.

And we have, as I said to Senator Allard before you came in, we have put in place a monthly executive staff meeting to know where we are. We are sharing that information on a monthly basis, not only with OMB, but with GAO, and we're asking for their input.

So I do think that it's absolutely imperative.

Senator Allard. Mr. Czerwinski, this is not a new question for you.

Mr. Czerwinski. No.

Senator Allard, I was thinking back to the start of this hearing when we talked about oversight not being glamorous. And I'm wondering what's less glamorous than not glamorous.

(Laughter.)

And that's GPRA. So thank you very much for embracing that.

(Laughter.)

And of course you know, GPRA is one of GAO's mantras. Looking at the President's budget, this current budget embraces GPRA more than any prior budget.

Having said that, I think going to the question you asked, is it important for an agency in transition? Absolutely. You need to have a vision of where you want to go. Link the vision to specific goals that are measurable, and then evaluate against those goals and measurable targets, and act accordingly. And that's really what's going to drive the budgeting.

So, yes, that's crucial.

Senator Allard. Ms. Federoff?

Ms. Federoff. Well, one of the things that we need to keep in mind when we look at results is not only risk that's been taken, but risk that's been avoided.

And there are times -- I'm a field employee and there are times when a development comes in and you work and you work it and then you just decide, no, this one we're not going to do.

It just shouldn't be done.

And I think that that is also a result that should be taken into consideration in any review of results. Not just housing units built, but are they quality housing units? And were the ones that didn't get built in fact shouldn't have been built?

Senator Allard. So you don't think that GPRA is a good idea?

Ms. Federoff. No, I think it's a fine idea. I just think that we have to think about results in terms of risk.

Senator Allard. Okay. Thank you, Mr. Chairman.

Senator Reed. Thank you very much, Senator Allard.

For the record, there is a memorial service for Officer Chestnut and Detective Gibson, who gave their lives in the defense of the Capitol on this day in 1998. It's at 3:40.

So I would like to ask a few more questions, then recess, if I may, attend quickly, and return. And let me just start our second round.

Mr. Secretary, going back to this whole issue of using what you've got rather than getting more. I understand that HUD hasn't been able to hire the 91 full-time equivalents that you're authorized in this year or last year's budgets, that you're 300 short.

Is this a conscious decision or is this suggesting the problems you face even if you had the resources to hire people, which begs other questions.

What do we have to do to make this an attractive place to work?

Mr. Jackson. I think that's a very excellent question, Senator.

And my answer to that is that we have, during the department realignment, that took a substantial portion of our time because, initially, we made some very -- we made some mistakes in the sense that we did not initially consult with the union, which I think was absolutely a mistake.

In the process, we began to consult to make sure that we get the input as to how best to redeploy and realign. And it took a little longer than we had expected.

Secondly, we did not have at that time an assistant secretary for administration in place, nor a director for human resources.

And going back to Ms. Federoff's statement -- nor did we have in place the ratio that I felt that was necessary to address the needs of hiring up as quickly as we wanted to.

We have put that process in place now, which will carry over to 2003. We believe that we will reach the 9100 without any problems.

So I take full responsibility at that point for not being cognizant of the fact that during the early part of the process, we did not confer with the union and in the process, that we did not have an assistant secretary, nor a director of human resources.

In fact, we hired the assistant secretary this spring and we just hired within the last month a director of human services.

So we're in the process to rectify that.

Lastly, we are hiring up in human resources. And I must say that I was not really aware of that until it was brought to my attention where we were with the union.

So the union, in my case, and in the case of HUD, has been very helpful in making sure that we understand the problems that we're confronted with.

So I do believe that in the year we will do that. But we did not do it and it was not an effort on our part not to do it.

Senator Reed. Thank you, Mr. Secretary.

Ms. Federoff, before I recess for a brief interlude, do you have a comment?

Ms. Federoff. Well, our experience with the intern program is that we had many, many more applicants who were interested in working for the agency than we had positions available.

Mr. Jackson. True.

Ms. Federoff. So there is a real interest. Our concern with the intern program is that those employees need to be extended permanent positions as soon after their one-year traditional probationary period as possible, so that during their second year, they don't spend the bulk of their time looking for other employment.

Mr. Jackson. We agree with that.

Senator Reed. Mr. Secretary?

Mr. Jackson. We agree with that.

Senator Reed. At this time, I would ask that the Committee stand in recess subject to the call of the Chair, and I will endeavor to come back as quickly as possible.

Thank you. (Recess.)

Senator Reed. Let me call the hearing to order and thank you all for your indulgence in letting me get over to the floor for that moment of silence.

I have two areas of concern I want to address. I'm sure, though, there might be other questions and the record will remain open for a number of days. So you might receive some written requests for further information, Mr. Secretary.

Mr. Jackson. Thank you, Mr. Chairman.

Senator Reed. And Mr. Czerwinski and Ms. Federoff.

One of the critical issues that we all agree upon is the need for accountability of the consultants and the contractors that HUD has.

I was struck by some information about the single-family program. And let me see -- GAO reports that HUD lost $1.9 billion in Fiscal Year 2000 on the sale of foreclosed homes that it had insured, greater losses than it had when HUD career employees were performing the function. Although it might be appropriate to contract out those functions, they clearly need better oversight.

It's been five years since FHA implemented its new loss mitigation program. And again, I wonder, and what really prompts my concern is this has been the hottest real estate market I can remember in my life. And I know that HUD insures properties not in the most affluent neighborhoods, but in some difficult neighborhoods. But the magnitude of this loss is sobering because if the real estate market ever started trending down, this $1.9 billion could accelerate.

It exemplifies the problem that we've talked about all afternoon. What steps are you taking to ensure that these contractors are doing their job and they're not causing huge losses that we've seen in this particular program?

Mr. Secretary?

Mr. Jackson. If I might, if it's fine with you, Mr. Chairman, I'll defer that specifically to the FHA

commissioner, Mr. Weicher, to answer for you, please.

Senator Reed. Sure. Mr. Secretary?

Mr. Weicher. Thank you, Mr. Chairman.

We have typically had losses on our REO ranging from $1.6 billion to $2.5 billion from year to year. And the reason we have losses, that's why it's REO. It's not worth what we have insured, and so we lose money on it.

Our loss per claim, our loss per dollar, has been dropping. It's now down to under 30 cents per dollar. Four or five years ago, and before that, it was running at least 39 cents a dollar and on up to 45 cents a dollar.

So the loss per claim has been down in the last three years.

We are not going to break even on the REO ever. But we are doing a better job in minimizing the losses to the fund from year to year.

Senator Reed. Thank you, Mr. Secretary.

Mr. Czerwinski, might you comment on this whole issue of contractor accountability in the single-family program and other programs, and the Secretary of the FHA's comments?

Mr. Czerwinski. Sure. Yes, Mr. Chairman. The way we look at it is on a per-property basis. Roughly, you're about a $30,000 loss per property. And FHA turns over, say, 50,000, 60,000 properties a year. You do the math. That's how you come up with your $1.9, or approximately that amount of money.

The key is probably two- or three-fold.

First one obviously is loss mitigation. If you can stop the properties from going into that process, you obviously are not going to be suffering that loss.

Mr. Weicher is exactly right. Whenever you get a property into the disposition area, you are going to lose money. The idea is once they get in, though, you want to minimize the loss.

There are probably two ways to do that. one is incentives to shorten the timeframes. The longer the properties sit in inventory, the uglier they get, the lower they sell for.

So you want to shorten those timeframes.

Also what you want to do is maintain the properties because the better they look, the more you'll get.

The offshoot of that is the properties that sit around, the properties that are ugly, end up with neighborhood blight.

So the incentives to contractors should be to sell them quickly and to maintain them while they're doing that.

Mr. Jackson. And we're addressing both of those issues.

Senator Reed. That's my question. And Mr. Weicher wants to comment, too.

Mr. Jackson. We're addressing both of those.

Senator Reed. Mr. Secretary, Mr. Secretary, at your discretion.

Mr. Jackson. Please.

Senator Reed. Around here, you can't go wrong just calling for Secretary.

Mr. Weicher. Mr. Czerwinski is right, that it's important to get the properties out quickly. And we have been doing that.

Three years ago, we had properties in inventory for eight months on average before we sold them. Now it's down to under six months on average before we sold them.

Three years ago, our inventory was 47,000 properties. Now our inventory is 29,000 properties and the inventory has not gone up during the recession. And that's never happened in the history of the department.

We certainly want to do as good a job as we can on our REO. We know that the property, as we own it and it's in a neighborhood and it's not helping the people in the neighborhood to have this. And we're doing our very best to get that property out as quickly as we can.

And if I might say, on loss mitigation, three years ago, we assisted 10,000 homeowners through loss mitigation. Two years ago, 30,000 homeowners. Last year, 50,000 homeowners.

This year, we're on track to help 70,000 homeowners, and it's an extremely important tool in helping people stay in their homes and help the neighborhoods they live in.

Senator Reed. Thank you. If I could just note, though, because Secretary Weicher made the point about it. In this recession -- this is a very unusual recession because the housing market has shown not only no damage, but it seems to be bounding along.

So that's just a note. Mr. Secretary?

Mr. Jackson. Mr. Chairman, this is one of the areas that, initially, when we started meeting with Stan and GAO, we told him that we were not going to debate or argue with him about.

In fact, I couldn't understand why anybody was arguing.

They were absolutely correct that the approach that we had taken and the assistant secretary has taken on behalf of the Secretary and myself is a very pro-active approach.

And so, I will say that I think it was a very excellent question. But we're really trying to minimize as much as we can. And I think that Stan was correct in conjunction with Assistant Secretary Weicher.

Ms. Federoff. With your permission, Mr. Chairman.

Senator Reed. Ms. Federoff, please.

Ms. Federoff. Thank you. Our single-family staff would like to have another issue raised, which is that they see the properties as a resource that can be used towards affordable housing in this country, and is very concerned that the contractors at this time are in fact not using them as a pool of affordable housing that employees at one time were able to do better.

So that, for example, the number of investor owners are increasing over time with the use of contractors, as opposed to homeownership. And that is one of the issues of many that we have with this set of contracts.

Senator Reed. Thank you very much.

Let me move to another topic because Senator Allard is here for his second round, also.

Mr. Secretary, I understand that the department went through a reorganization last year, including moving the independent real estate assessment center, the REAC, to public housing, and the enforcement center to the office of general counsel.

I have testimony from the GAO on REAL and the enforcement center prior to this reorganization, is as follows:

The creation of REAC and the enforcement center were positive developments that yielded real results.

The GAO went on to say that the new REAC enabled HUD to complete its first physical and financial assessment of its inventory, while the creation of the enforcement center resulted in the restoration of 41,344 housing units to decent, safe and sanitary conditions compared to 968 units in FY '99.

The question is, these centers seemed to be performing very well. What was the need to put them into a different posture underneath the public housing and the general counsel's office?

Mr. Jackson. Well, Mr. Chairman, first of all, REAC. REAC does half of the work for housing, half for PIH.

We felt that since it was doing the work, and the initial process was probably the correct process, but I think it had to be outside of those areas because it had not been working internally.

We felt that, at least from my perspective, that it should, in essence, address the issues of both of those areas. And I felt the best way to do that was to put it in one, house it in one of those areas.

We chose public and Indian housing.

But in the process, the assistant secretary for public and Indian housing, and the assistant secretary for housing worked together and they formulated, I think, a very outstanding plan to make sure that REAC is working better now than it's worked in the past.

The second part, as you asked, is about the enforcement center.

The enforcement center was in the general counsel's office in the first place. It was taken out. It was taken out, from my understanding, and please let me say this gingerly, because the previous administration was not getting the response that they wanted.

I believe you don't remove organizations because you don't get the response. You' make them better or put the right people in place.

Right now, there has not been one step lost in the enforcement center in carrying it out back under the general counsel. It's still doing the same exact response, but yet, it is reporting.

I believed when I came in, and I said this, that we had a number of people reporting directly to the Secretary through the deputy secretary. And I believe that we shouldn't have had -- I forget. I think there was like -- how many people were reporting to me?

(Pause.)

More than 30 people were reporting to me. And if I might have the opportunity to use this example.

When I ran AEP, which was a 3000-employee operation, a $13 billion corporation, I had two people reporting to me. They were executive vice presidents. One was executive vice president for administration. The other was executive vice president for operations. They had the responsibility.

I think that, actually, from my perspective, for a more streamlined approach, that only the assistant secretaries, except those that are authorized by Congress, should report directly to the deputy secretary and the secretary.

And so, we tried to find the best housing mechanism to make sure that we lost none of the importance of these agencies to respond to, and that's the approach that we took, strictly from a business approach.

Senator Reed. Thank you, Mr. Secretary.

Mr. Czerwinski and Ms. Federoff might have a comment. Then I'll ask Senator Allard for his questions.

Mr. Czerwinski. Yes, Mr. Chairman. If I could use REAC as an example.

I believe the key is to look at what you want to accomplish with a function such as REAC. You're talking about inspections -- number of inspections, quality of inspections. You're talking about the condition of the property -- maintaining the property in good shape.

You also want to talk about the analysis to a unit like REAC could do that would help you maintain it in good shape. And finally, the landlords who have defects in their properties need to be overseeing to make sure that the corrective actions are taken.

Those are the measures of whether REAC is working or not.

Now we have studied REAC extensively. We have areas where they could do better. But overall, it was significant improvement over HUD's capability in the past, where it really wasn't able to do much of any of that.

The question becomes, with REAC responding to the deputy secretary's secretary or to PIH, whether you maintain that capability or not.

And frankly, in our view, it's up to the Secretary how he wants to organize his agency. But better maintain the results in terms of the issues that we've raised.

And that's what we would ask of the reporting along those lines.

The final point is that, in any organization structure, you have to look at what tensions and stresses there are for independence and you have to decide if REAC is going to be delivering bad news to somebody who is an owner of the property or the owner of a program, what that does to the program.

If they can deliver bad news and that assistant secretary can correct that bad news and handle it, it's fine. But if the capability is diminished, it's not fine.

Mr. Jackson. And I agree with Stan.

Senator Reed. Thank you, Mr. Secretary.

Mr. Jackson. And I think that we've taken all of that into consideration of the process.

What he has just stated to you, we took into consideration. And we feel deeply that it can still do that.

Let me say this to you, Mr. Chairman, and Senator Allard. I am flexible. I believe that the tenor of a good administrator or a good manager is to be flexible, to give an opportunity for programs to work. If they don't, then understand that, a year from the day, if it's not, or two years from the day, to admit that it hasn't.

And that's one of the reasons I. think it's important to have the oversight of not only your Committee and the Senate and the Congress, but also GAO, because I'm of the hue at this point, I would much rather find a way to work with GAO and work with the union than to find a way to disagree with them.

Because our agency that the President has appointed the Secretary and I to run is in serious trouble. And I believe that almost everything that has been said today by both Stan and Carolyn, it's absolutely imperative that we work together to cure these problems.

And I think we have worked so far to this point very well. I'm not sure who's going to replace Stan, we've had our disagreements, but we've disagreed on issues. We have not disagreed and not spoken to each other.

And I think, to me, that's the most imperative thing that we have today.

I want to say this to both of the persons sitting here, and to you. I want to see HUD work. I just believe we have to run HUD as a business. Some people think I'm absolutely crazy. But the taxpayers deserve to have a well-run government.

And I think that, in appointing me, I think that's my task, is to run it like we run a business, and to be accountable to you, but also be accountable to the taxpayers.

And I think that without the help of GAO, without the help of OMB, without your help, that's not going to occur because I think people have a tendency if they're not looked at, to slide.

And I would prefer not to slide.

Senator Reed. Thank you, Mr. Secretary.

Ms. Federoff, do you have a comment on this line? And then I'll call on Senator Allard?

Ms. Federoff. I am glad to hear that a cooperation plan has been put together for REAC staff working on office of housing programs while working for the assistant secretary of public and Indian housing.

I know that employees have been looking forward to that plan and we're glad that that is in fact coming to pass.

Senator Reed. Thank you very much.

Senator Allard?

Senator Allard. Mr. Chairman, you pre-empted me on that last question, which is all right. I had a couple of other office of chief procurement officer and then office of chief information officer.

I wasn't sure that you directly answered the question that I'm about to ask you, Stan. And that is, what are your views concerning this realignment decision?

It sounded to me like it was favorable, but I'm not sure we got a direct response on that?

Mr. Czerwinski. Senator Allard, our view is that it really is the Secretary's prerogative as to how he wants his agency to be structured.

But there are functions that have to be accomplished. And what we would urge the Secretary to do is to take a look at those in the past which have worked and those which haven't and to take that into account.

You asked about the chief procurement office. That, as we know, used to be independent. It now responds through the admin office.

If contract oversight works, then that structure works. If there are problems with contract oversight, we need to think about the structure.

One thing that we also need to think about, as I mentioned, is the stresses and tensions that go along an organization.

The admin office right now accounts for about a third of HUD's contracts. So that's an issue that the chief procurement office has to think about because they're essentially overseeing contracts within their own office.

If they can do that effectively, it's fine. But it does complicate it.

Senator Allard. Did he answer my question, Mr. Chairman?

(Laughter.)

Senator Reed. That's why he's being promoted. He answered it very well.

(Laughter.)

Senator Allard. You're very adept there, Mr. Czerwinski.

Mr. Czerwinski. You know, Mr. Allard, I remember many discussions I had with Senator Kerry when he was in the minority. And he had somewhat the same reaction.

(Laughter.)

Senator Allard. Well, I've got another question.

I have also requested that GAO review HUD's acquisition management practices and how the agency holds contractors responsible for results. And that work is nearing completion, it's my understanding.

What can you tell us today about the results of that work and what HUD needs to do to do better management on its acquisitions?

Mr. Czerwinski. That's a really important question because of the increased emphasis that HUD has placed on acquisitions.

As I mentioned in my statement, there really are three areas that HUD needs to focus on.

One is the monitoring. And monitoring really means getting out there and seeing what's happening with the contractor. Otherwise, you can be taken advantage of.

That really ties into the second point, which is you have to have people who know how to oversee contracts. And with HUD's emphasis shifting, we found that to be an issue with the skills and backgrounds of some of the people who are overseeing contracts. They weren't trained to do that.

So even if they could get out there, they sometimes didn't know what to look for or ask.

The final one is the information systems. That really meant that they had to get out there because information systems weren't giving them the information they needed in a ready basis to assess the contracts.

And Senator Allard, this really ties into the points that we made in the hearing, and that is, we've talked about human capital. We've talked about acquisitions. We've talked about information systems.

Really, those are not separate issues. They're all interwoven. And they manifest themselves in different ways. But you have to have a whole plan to do it.

And that's pretty much the basic message we have on approving acquisitions.

Did I answer your question that time?

(Laughter.)

Senator Allard. You did a pretty good job, Stan.

(Laughter.)

Mr. Jackson, I wonder, would you please describe how HUD fits into the President's management agenda, and how this will help HUD transform into an effective and efficient agency?

Mr. Jackson. There are five critical elements to the President's management agenda. The first is human capital, information technology.

When we started the process, I will tell you that -- well, let me back up a second.

The process is a process of green, yellow and red. It's just like the stop light.

Senator Allard. Yes.

Mr. Jackson. So you know when it's red, it means you're not to move. And, in essence, we had inertia on our part when we started this process some year ago.

We have moved in a number of the categories to green. Some of the categories we're still at yellow. But we feel that without a management structure as to denote exactly where we need to go to improve the agencies, we're going to be in serious trouble.

The President's management agenda gives us that process that we can address the needs that are affecting HUD at this point in time.

Plus, I think that with the information that we've been able to gain from GAO about the high risk, and they're working with us, we've been able to address these needs.

Now there are five, and I can't tell you right away -- I think she's probably giving me all five here.

Senator Allard. Staff is helpful at times, isn't it?

Mr. Jackson. That's right. Human capital, e-government, competitive sourcing, budget and performance integration, and improved financial performance.

And the only one that we have vehemently disagreed with, and I think we’ve been given some dispensation, is competitive sourcing. And we believe that we've competitively sourced too much out already in this agency.

And therefore, it goes back to what Stan has said, is that we’re not able to manage and monitor our contracts in a very efficient manner.

Second of all - -

Senator Allard. Is it too much competitive resourcing or just not enough management over which you've already competitively laid out there?

Mr. Jackson. I think, Senator, that if we are able, as Carolyn has said, to do the analysis that we're presently doing, that will tell us whether we can do the job better in house than competitively sourcing out, whether it's single-family or multi-family, we must look at that. That is something that, until this year, this agency has not been able to look at.

OMB has given us permission to look at it.

And if we can find that we can do it better by having workers under the federal umbrella, we should do it.

But I can't tell you right now empirically that that's the case. I will say this to you, that I believe, and my testimony, when I was being asked during the process of my hearing, I feel today the same way.

I think that it was a serious mistake to cut HUD of some 8000 workers without doing an empirical and methodical study as to how it should be done. And I think it's hurt the agency.

I don't believe it's the responsibility of the staff that's here now. I think that they have done everything within their power to do the very best job that they can do.

But we go back to an issue that was raised early in this meeting by Stan. Even if they've done the best job, do we have enough resources to manage internally what we have? And secondly, to manage externally what we have, which is competitive sourcing?

And I believe not.

Senator Allard. I think when you look at competitive, when you compare the public sector versus the private sector, there's one really distinct difference. The public sector doesn't pay any property taxes. They don't pay local taxes. They're exempt from that.

But if you bid it out, then they pay property taxes. Property taxes go towards supporting education -- if it's Colorado, a big chunk of that is education. And I don't know how you factor that in because in the way of energy saving, or by way of trying to save that, you can just -- you've got your employees there, federal employees there who are using schools, using the facilities, but they're not paying the property taxes to support it.

That's why we have things like PILT. But in most cases, like the programs that you have, the PILT isn't big enough to compensate and never really gets figured into the formula.

So in certain areas they figure that in. I don't know how you figure that in.

Mr. Jackson. I'm not sure how you do that, either. But I might be able to answer you this way.

When I was running the utility company, I paid a lot of taxes.

Senator Allard. Sure you did.

Mr. Jackson. I mean an awful lot of taxes. And I personally paid an awful lot of taxes.

So I didn't like paying the taxes. And so I feel that if that is the basic reason, because they pay taxes, I think that's important. But I also think that efficiency and how we run our government and how we can give our constituents the best service is very important.

And I believe that you and I will probably agree, if we can do it better, more efficient, at a cheaper price, we should do it. Especially in today's era, we should do it.

But if it's clear that it's a wash, whether we do it publicly or privately, then I would say, yes, and it can be done just as efficiently privately, to do it privately, because I do think that there are benefits.

Senator Allard. Thank you. Thank you, Mr. Chairman.

Senator Reed. I have one other area I'd like to explore and offer Senator Allard a chance - -

Senator Allard. I'm finished.

Senator Reed. And if you're finished, then I would close the hearing.

OMAR was created in 1997 to bring a market approach to the mark-to-market program, the entrepreneurial skills. People who are business-oriented rather than bureaucratically oriented, perhaps.

At the request of HUD, OMAR was put under the office of housing.

GAO has reported that OMAR's private-sector partners are seeing some significant problems due to the transition to the office of housing. Specifically, these partners cite delays in issuing guidance in the new legislative provisions, delays in completing certain restructurings, attrition in OMAR staff, and quoting from the GAO briefing, quote, indecisiveness. Every decision is contingent on approval from the office of housing.

Mr. Secretary, could you comment on that?

Mr. Jackson. Again, if it's okay, I'd like to defer to Dr. Weicher to comment on that.

Mr. Weicher. Senator Reed, we have met with Stan and his staff on a bi-monthly basis, as you all have requested them and us to do.

We are one under the staff ceiling for OMAR at this point. The ceiling is 85. We have 84 on board.

We brought on a director this spring, Charles Williams, known as Hank Williams for reasons that escape me. He doesn't carry a guitar or anything like that.

(Laughter.)

But it's his name. We left him with the ability to make some hiring decisions once he got on board, rather than filling every vacancy immediately.

So for a little while, we were down to 80, 79.

The deals have been going at the rate of 20 to 30 a month through the period since OMAR was brought within the office of housing. We expect an increase because of some of the legislative authority that you gave us at the end of the year, we expect a one-time increase to about 30 to 40 per month for the next few months.

But we are continuing to do deals at a steady basis and Hank, Mr. Williams, is very much getting on top of the job and getting comfortable.

Senator Reed. It's my understanding that OMAR is authorized 91 full-time workers and that they've been waiting for permission to hire up to that level, even though there's 84 on the job now.

Mr. Weicher. The REAP process concluded that OMAR's appropriate staffing level was 85, and as we have done elsewhere in the department, we have operated within those staffing constraints.

Senator Reed. 91, I'm told, Mr. Secretary. Let's sort this confusion out.

Mr. Czerwinski, might you comment on this since it's a GAO briefing finding?

Mr. Czerwinski. Sure. Yes, Mr. Chairman. And my comments are consistent with what I said all along.

The key is having oversight of something that's important. And the success of OMAR is obviously very important.

The first step in that is establishing a baseline as to what everybody agrees should be the performance level, and also on what areas we should agree on the performance.

In this case, you've zeroed in on the two main things. One is the deals and two is the number of people that you need to make the deals happen.

And one we establish what the right number of deals is, then we can say whether the transition is working or not.

Now, historically, OMAR had been running, and Secretary Weicher can correct me because he probably works more closely than I do with this, probably at a plateau of around 30 to 40 deals per month.

At the transition, you'd probably expect to see that going down, and it has. The question becomes, will it come back up. Will it stay back up?

In terms of people on board, there's an allocation that HUD has. There's also an estimate that REAP has. Those are verifiable numbers. And we just need an agreement as to what HUD will staff that office at, and then it's up to them to do it.

Senator Reed. Thank you. Actually, I've heard myself comments about OMAR and a lack of decisiveness through New England housing people.

So this is an issue, I think, not just -- it might be coincidental, but I've been hearing the same thing.

Let me conclude by first thanking everyone for their very candid and thoughtful testimony. I think this has been a very useful hearing.

Let me also say, Senator Allard asked somewhat facetiously if you answered his question. Well, here's what I think you said vis-a-vis all these reorganizations.

Is that taking these quasi-independent agencies and putting them back underneath some part of HUD raises the issue that, in fact, they have to bring bad news to people who are responsible for the bad news and have to take corrective action.

That's also difficult.

And the question is whether that would inhibit REAC and the enforcement center from pulling their punches. Now I think what the Secretary said is you recognize that, explicitly recognize that. You're watching for that and you're going to do everything you can to prevent that from happening.

Mr. Jackson. Yes.

Senator Reed. But if it begins to happen, then I think we have to question again the reorganization.

Mr. Jackson. And I would agree with you.

Senator Reed. Is that the answer?

Mr. Jackson. I would agree with you, Senator.

Senator Reed. Thank you.

Mr. Jackson. I would agree with you. During the realignment, redeployment, reorganization, I had to make some decisions where I had put one specific area under an area. And clearly, I had made a mistake. It was my understanding that, really, we had the authority to do it. But it was brought to my attention that we didn't. And I had no problems removing it or putting it back.

And in one area, we had the authority, but I felt just what you just said, that it might be inhibited from doing the kind of job that it should do, and I decided that it wasn't the best fit.

Mr. Czerwinski. Mr. Chairman, I think you stated my answer very well.

What I would say is that the key to making that work is oversight. And holding hearings just like this, where we can establish what the criteria are, what the performance levels should be, and then seeing whether it's happened.

And as I mentioned in the short statement, that's what we're here to help you with. So I would encourage you to ask our staff to go in and keep looking and reporting back to you, and then we'll have this kind of dialogue.

Senator Reed. Thank you very much.

Again, let me thank all of you. It's apparent, I think, from today’s hearing that we're at a critical crossroads. HUD has made progress in management. But there are some significant challenges ahead. The potential retirement of half the workforce, trying to get computer systems that talk, getting a budget that supports your plans to go forward, and fundamentally, getting a plan that clearly outlines the human capital needs, the computer needs, the oversight needs of the contractors.

Time is running out because the departure of retirees could be taking place in the next few months to the next two years, and the need to get on top of these programs are essential.

So I thank you for your candid and thoughtful discussion, Mr. Secretary, Mr. Czerwinski, and Ms. Federoff.

If members of the Subcommittee have additional questions of the witnesses, I'll ask them to submit them no later than July 29th, next Monday. And the witnesses, I would hope, could respond within ten days to any written questions. Thank you again.

The hearing is adjourned.

(Whereupon, at 4:20 p.m., the hearing was adjourned.)