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Wednesday, June 25, 2003
U.S. House of Representatives,
Subcommittee on Oversight and Investigation,
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 2:13 p.m., in Room 2128, Rayburn House Office Building, Hon. Sue Kelly [chairman of the subcommittee] presiding.
    Present: Representatives Kelly, Green, Inslee, Crowley and Matheson.
    Chairwoman KELLY. [Presiding.] This hearing on the Subcommittee on Oversight and Investigations will come to order.
    Without objections, all members' opening statements are going to be made part of the record.
    Far too often, we in Washington see much reckless and wasteful spending without regard for American taxpayers. I believe we have to carefully examine every penny the federal government spends to ensure that hardworking American families are getting the most for their tax dollars.
    The budget resolution passed by the House for the next fiscal year includes a pledge to search for and eliminate waste, fraud or misuse in federal spending. This pledge represents a commitment to all Americans that this Congress will not take their hard-earned dollars for granted. The subcommittee is meeting today to discuss how to fulfill this promise immediately.
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    With the committee's encouragement, senior managers at the Department of Housing and Urban Development and the Rural Housing Service, an agency within the Agriculture Department, are scouring decade-old accounts and contracts under their control. I would like to commend both of these agencies for working diligently with this subcommittee to identify funds that are available to reduce spending needs in future years.
    After careful investigation, I am pleased to be able to announce that we have discovered, they have discovered for us, over $1 billion that were appropriated and obligated for a specific grant or subsidy, but for a variety of reasons the money was never spent and the money is no longer needed for its original purpose. To date, we have officially found a total of $1.7 billion in unspent funds at HUD that can be used to reduce future spending. We have also located an additional $737 million in unspent funds at the Rural Housing Service, which the Agriculture Department is still investigating. To assist in these efforts to protect taxpayers, I would like to announce our request for a GAO study to determine how much of these funds can be recaptured.
    Today, we have with us senior officials from both agencies to discuss their findings and what they hope to do with the funds they have found. We have asked for and received a statement from the Inspector General of HUD, Kenneth Donohue, on his office's initiatives to halt waste, fraud and abuse. These include work to recover improper payments for housing assistance and a new initiative to detect and prosecute fraud in the Section 8 program in collaboration with HUD management.
    The subcommittee applauds these steps. By eliminating waste in important housing programs, Secretary Martinez and Inspector General Donohue are ensuring that vital program funds are spent to help the beneficiaries as Congress intended. I ask the subcommittee's unanimous consent to insert this statement into the record.
    I really thank the witnesses for appearing before the subcommittee today. I look forward to your testimony.
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    I will turn now to my fellow New Yorker.
    Mr. CROWLEY. I thank the chairwoman. And I would like to read an opening statement.
    I would like to thank her for holding this hearing today in the Oversight and Investigations Subcommittee regarding the Republican directive inserted into the budget resolution for each committee to identify and weed waste, fraud and abuse out of mandatory spending. Let me begin by stating that I opposed the Republican budget resolution as it was, and as I believe it to be a sham document that cuts vital spending programs, including mandatory veterans benefits and discretionary housing accounts.
    But today we are not here to discuss the overall budget, again a budget that will produce well over $1 trillion in new deficits over the next several years, further eroding our nation's economy, an erosion which began in the winter of 2002 after 8 straight years of growth and prosperity. We are here to discuss a specific section of that document, Section 301 of Title III which pertains to the weeding out of waste, fraud and abuse. This is one thing that should be bipartisan, with Democrats and Republicans working together. We are all taxpayers here and no one likes to see any of our taxpayer dollars wasted.
    But the gist of this hearing is off, in my opinion, as Section 301 pertains to mandatory spending programs only, not discretionary programs as the chairwoman is highlighting in the hearing today. In fact, both Section 8 and the rural housing programs are discretionary programs, not mandatory programs. So when my colleagues talk of eliminating waste, fraud and abuse in mandatory programs, what are they actually referring to? I believe they are referring to federal employee benefits, something I will be interested in getting the take of our two witnesses here today as they are both federal employees. The Republican Caucus I believe is referring to Medicare, veterans's benefits and Social Security. These are mandatory programs.
    In fact, with respect to the housing programs Chairwoman Kelly wants to have a discussion on today, I will quote budget chief Jim Nussle who stated that the Budget Committee, ''wants to put the same discipline that the appropriators put into their disciplinary spending process into the mandatory side,'' meaning we should be looking at only mandatory spending, not the discretionary programs that we will be discussing here today. In fact, Mr. DeLay says that these mandatory cuts will save the government over $10 billion a year, but again, what are the mandatory cuts? Veterans, Medicare, Social Security, they are not the HUD programs in question today as they are discretionary, as opposed to mandatory in nature.
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    While I welcome the opportunity for the other side to finally come clean in their ultimate goal which I believe is to gut key social service programs like veterans's benefits, we must be 100 percent honest in this debate. Let us remember that the head of the Disabled American Veterans himself wrote to Speaker Hastert and called the Republican budget shameless as it cut disabled veterans's services and benefits. Let us also not forget the Administration recently moved to cut benefits for 164,000 veterans citing the same waste, fraud and abuse claims being made here today.
    These are the mandatory spending programs threatened by Mr. DeLay on the other side of the aisle, and this pursuit of destroying veterans's benefits or Medicare will not be a bipartisan issue.
    Moving on to the claims of waste, fraud and abuse at HUD, the other side cites the unobligated balances in the Section 8, 236, and 521 programs. But these are not caused by waste, fraud and abuse on the part of local housing authorities, low-income tenants or assisted housing landlords. Such balances only come about through contracts entered into where all of the obligated funds are not needed once the long-term contract expires or is canceled due to prepayment. The funds are not wasted. Eventually, they are routinely rescinded, recaptured or reallocated, meaning the government takes them back and uses them again, either for housing or for some other purpose. In fact, unobligated funds are routinely used as a piggy bank so to speak to fund non-housing programs in supplemental spending bills.
    According to preliminary data provided by CBO, the Congress rescinded $6.8 billion in Section 8 budget authority in supplemental spending bills from fiscal year 1997 through fiscal year 2002, the overwhelming majority of which were used to fund non-housing expenditures, meaning the money was spent, not wasted as they would have many believe here today.
    More recently, Congress rescinded $300 million in Section 236 balances in the fiscal year 2002 supplemental spending bill, and $100 million in fiscal year 2003 appropriations bills. These funds were previously earmarked by authorizing statute for rehabilitation of low-income housing units. Again, the funds went elsewhere and did not disappear into thin air. In fact, the rescission of unobligated Section 8 balances would leave a gaping hole in the HUD budget, which would require as much as $1 billion in additional cuts to housing program on top of the cuts recommended by the president's budget. This is as the Administration proposed to use 100 percent of the estimated $1 billion in unobligated Section 8 balances in fiscal year 2004 to help cover the cost of Section 8 renewals, again seeing the money go back into other programs and again not wasted.
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    The only real issue of accountability is whether HUD and RHS are properly accounting for and reporting to Congress the accurate level of balances in these accounts. This waste, fraud and abuse issue I believe is a red herring to justify further cuts in important housing programs.
    With that, Madam Chair, I yield back.
    Chairwoman KELLY. Thank you.
    Just to set the record straight, Mr. Crowley, the budget which was passed included $63.8 billion for veterans, which is more than they have ever allocated for the veterans issues.
    Mr. Green?
    Mr. GREEN. Madam Chair, thank you for adding that point of clarification.
    I appreciate your holding this hearing today. This hearing is an opportunity for good news, ways that we can make the taxpayer dollar go further. The opening statement from the gentleman from the other side did not seem to focus on that. Instead, tossed the usual partisan rhetoric about gutted programs and so on and so forth. I look forward to a hearing in which we find ways to make things work and find ways to make those dollars go further and further.
    Thank you, Madam Chair.
    Chairwoman KELLY. Thank you, Mr. Green.
    There are no more opening statements, so I will introduce our witnesses.
    We have with us the Honorable Angela Antonelli, who is the Chief Financial Officer of the Department of Housing and Urban Development; the Honorable Thomas Dorr is the Under Secretary for Rural Development at the Department of Agriculture. He is accompanied by David Grahn, the Associate General Counsel for Rural Development.
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    We thank you very much for testifying before us today. I welcome you on behalf of the entire committee. Without objection, your written statements and any attachments that you have will be made part of the record. You will be recognized for a five-minute summary of your testimony. The lights in the box on the table will indicate, it is green when you have the full five minutes; within one minute of the time your time is ended at the end of four minutes, the yellow light will go on; when your time is up, the red light will go on. I want to warn you that I tend to keep on time because I think other people need to be heard. With that, we start with you, Ms. Antonelli. It is a great pleasure to have you here. I look forward to your testimony.
    Ms. ANTONELLI. Thank you very much.
    Chairwoman Kelly and other distinguished members of the House Subcommittee on Oversight and Investigations, on behalf of HUD Secretary Martinez, thank you for inviting the department to testify on the status of unexpended balances that remain from funds that were previously appropriated by the Congress for HUD programs.
    I believe that HUD's leadership has worked diligently and successfully to reduce unexpended balances and to ensure that funds reach their anticipated beneficiaries as quickly as possible. After all, the benefits of federal programs that are authorized and funded by the Congress are not realized until the funds are actually put to use providing assistance to low-and moderate-income families.
    There are many who criticize HUD for what are perceived as very high unexpended funds balances with large savings potentials. At first glance, this is not an unreasonable criticism or reaction. At the end of May of this year, HUD had $108 billion in unexpended appropriated funds. However, these balances do not represent either an inability of HUD's leadership to award and obligate funds or an opportunity to recapture these funds and use them for other purposes because the program recipients no longer need them.
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    Let me begin by trying to put the total unexpended balance of $108 billion in perspective. First, of the total balance, $34 billion has yet to be awarded and obligated by HUD. The vast majority of the funds are not obligated because Congress only enacted the fiscal year 2003 Appropriations Act in February. And because several of HUD's programs are in fact competitive grant programs, and given the time required to run a competitive funding program, those funds are often not obligated until late in the fiscal year or in some cases until the next year. This leaves a total of $74 billion in obligated balances yet to spend out.
    I would like to break this into two groups; first, the balances for terminated programs. Congress enacted long-term low-income assistance programs in the 1970s and 1980s, many of which no longer receive annual funding for new project activity. However, these long-term programs were either fully funded at their inception or sufficient funds were provided to obviate the need for additional appropriations for many years in the future. All of these funds are obligated against the projects and have steadily been spending out for the past two decades and will continue to do so for many years to come. In total, over $34 billion in obligated funds remain for a variety of programs such as the Section 236 interest rate reduction program, project-based Section 8 contracts, and other smaller programs. Although many of these programs were terminated, the contracts and therefore obligations have not expired and will continue to be expended over time.
    Should the Congress determine that these balances should be reduced and be used for other purposes, it must be aware that future appropriations will be required to complete the contractual obligations into which the government has entered. Hence, the Administration does not necessarily see these funds as excess and available for recapture. However, please understand that once these contracts do expire or for other reasons project owners or grantees opt out or the contract is terminated, HUD moves to recapture any funds that remain.
    One example is the 236 IRP program from which HUD recently recaptured approximately $700 million. We are now completing a reevaluation of the original estimate of need throughout the remaining active life of each contract. The president's budget assumes that $300 million of the $700 million recaptured will be available to offset the overall cost of HUD's program in fiscal year 2004.
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    Of the balance that remains in terms of obligated balances in current programs, there is about $40 billion. In the case of the Section 8 housing choice voucher program, there are about $8 billion in obligated balances. However, of this amount, $6 billion are obligations for fiscal year 2002 and 2003 appropriations, reflecting the fact that public housing agency recipients have different fiscal years than the federal fiscal year, and there is a lag in the receipt of funds.
    These balances do not necessarily reflect a failure by PHAs to expend the funds properly, since they are current-year contracts that have not yet expired. Over the past few years, HUD has moved to recapture all unused tenant-based Section 8 funds from all expired contracts with a long-term project base or annual tenant-based contracts. In fiscal year 2004, the president's budget assumes approximately $1.4 billion in fiscal year 2002 and prior year unused Section 8 funds will be made available to offset the costs of this program.
    HUD is working as hard as possible to ensure that it annually sweeps both the project-based and tenant-based programs and makes funds to offset the costs of the program. Thus, combined with the budget reforms enacted in 2003, we will ensure that future obligated balances will always be the lowest possible. This reform represents one of the most significant management improvements since the start of the Administration.
    In the case of the public housing capital fund, of the $4.4 billion in obligated funds for modernization appropriated from 1997 to 2002, PHAs have four years to spend the funds once they are obligated. HUD is working closely with Congress to enforce the new law that requires PHAs to spend these funds within that time frame or if not, Congress requires that HUD recapture the funds.
    We have already seen a dramatic drop in obligated balances, particularly for funds that are more than two years old. In the case of our special populations program, there are $4.4 billion in unexpended obligations in the case of our elderly and disabled housing program. Seeing such a large amount of funds yet to be expended may make people think that the department is not using its funds in a timely manner. However, the majority of the funds, about $2.5 billion, are associated with the elderly 20-year and 5-year project rental assistance contracts for support of completed and occupied projects.
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    A recent GAO report on the elderly stated that at the end of September 30, 2002, only about $700 million represented funding for projects that remained in the pipeline. The $700 million represents funds for some of the most difficult projects to bring to closure because of unanticipated issues with the site or litigation. However, we have made it a priority to clear the pipeline and have significantly reduced the number of projects in that pipeline.
    In conclusion, I hope that I have been able to give you a different perspective on what many believe are these excessive unexpended balances in HUD programs. I hope that I have been able to demonstrate that where the real excess balances do exist, HUD has been aggressive in recapturing those funds and using them to offset the costs of HUD programs or for other uses.
    In fiscal year 2004 alone, HUD's budget assumes that over $1.7 billion in recaptured balances will be used to reduce the overall budgetary requirements of the department. I want to emphasize that while it is important to recapture funds, our first goal at HUD is to ensure that our grantees or other intermediaries expend the funds as fast as possible, consistent with the rules Congress has enacted, so that low-income families and communities across the country can enjoy the benefits that are intended by Congress. The real success story at HUD is the tremendous effort that is now going into reducing these unexpended obligations through improved program performance, rather than recaptures.
    Thank you very much. I would be happy to answer any questions.
    [The prepared statement of Hon. Angela M. Antonelli can be found on page 18 in the appendix.]
    Chairwoman KELLY. Thank you very much.
    Mr. Dorr?
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    Mr. DORR. Thank you, Chairwoman Kelly, members of the committee. Thank you for this opportunity to testify on the multi-family housing Section 521 rental assistance program. The rental assistance program currently helps 264,000 rural households maintain their rental residence by providing a subsidy to pay the difference between the basic rent for the apartment and up to 30 percent of an eligible tenant's income. Section 515 multi-family housing borrowers operate the rental assistance program under contract with USDA. These contracts consist of a commitment from the borrower to operate an affordable housing property to the life of the mortgage and a commitment from the United States Government to provide funds to help residents make rent payments.
    At the start of the rental assistance program in 1978 until 1982, contracts were executed for 20 years for new construction projects, and five-year contracts were executed for existing properties. Contracts executed after that period are all five-year contracts. All contracts continue until the obligated rental assistance funds are depleted. The General Accounting Office is reviewing the Section 521 rental assistance program and has raised concerns about the unliquidated balances on the 20-year contracts and five-year contracts on which rental assistance payments continue to be paid on units beyond the original terms.
    Rural Development has determined that there is $737 million approximately outstanding on these active contracts that were obligated between 1978 and 1998. This obligated amount remains outstanding for several reasons. First, the 1978 to 1982 contracts were vastly overestimated, mostly due to the newness of the program. Second, lower than projected rental assistance usage occurs as tenant income goes up and the gap narrows between 30 percent of income and the basic rent. As a result, less rental assistance is needed.
    Third, lower usage is also experienced when vacancies at the property are higher than expected. This reduces the number of occupied units and may reduce the amount of rental assistance used by the property. And fourth, rental assistance units exist in our program in perpetuity. If a property no longer needs rental assistance on several units, the rental assistance on those units is transferred to another property to provide rental assistance for rent-overburdened tenants. The usage on these units is subject to adjustment due to changes in tenant income and property occupancy conditions.
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    Of the outstanding $737 million, and this is as of March 11, 2003, $525 million represents unlimited authority through the U.S. Treasury to fund the 20-year contracts made between 1978 through 1982. The outstanding obligations are termed ''unliquidated obligations,'' which means unused authority to fund contractual obligations for that period. These are not dollars that rural development can access to spend to fund RA for new construction. These RA funds are only available for the current contracts or may be transferred to other units on existing contracts.
    Unliquidated obligations are not unique to the rental assistance program. Every program has obligations to be paid in the future by the government. The contract executed by Section 515 borrowers identifies a specific amount of rental assistance obligations. Changes in use would require these contracts to be renegotiated with the borrowers and legislation would be needed to provide more flexibility in the use of these funds. This would allow funds set aside for RA payments in the distant future to be used to fund more rental assistance units today.
    We are willing to work with your committee and the Appropriations Committee, General Accounting Office and Office of Management and Budget to explore more flexibility in using this funding source, provided that this can be done without increasing the government's exposure to future unmet funding needs.
    The committee has inquired about the inactive contracts in our portfolio. Those contracts fall into three categories. First, contracts that have not yet started paying out because the contract they are replacing had not yet exhausted all funds. Secondly, we have contracts that have not yet started paying out because a new construction project has not been completed and started operations. And thirdly, for any property whose debt has been accelerated or is in foreclosure, rental assistance is held in abeyance until those legal actions are completed. On completion of these servicing actions, the rental assistance will begin flowing at that property or another that needs rental assistance. In each case, these inactive contracts will be started or re-started.
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    Rural Development has taken steps to become more accurate in our projections of rental assistance, including automation initiatives, rental assistance review, management control review, and the implementation of our Regulation 3560 proposed changes. Rural Development will continue to work with the committee and other interested parties in reviewing the unliquidated obligations.
    Madam Chairwoman, this concludes my testimony. I would like to thank you for allowing me the opportunity to testify today and I would answer any questions you may have or the committee members may have.
    [The prepared statement of Hon. Thomas C. Dorr can be found on page 24 in the appendix.]
    Chairwoman KELLY. Thank you very much, Mr. Dorr. Actually, I do have a couple of questions.
    Of the total rental assistance contracts, what percentage are inactive? I didn't get that number.
    Mr. DORR. What percentage of them?
    Chairwoman KELLY. Yes, what percentage of the rental assistance projects that you now have are inactive?
    Mr. DORR. Of the contracts themselves, we have about 3.5 percent that are inactive. Of the total dollar value of obligations, it amounts to about 7 percent.
    Chairwoman KELLY. About 7 percent and 3.5 percent. The reason for the inactivity again is?
    Mr. DORR. Well, it is three-fold. Essentially, we have new construction or renewal contracts. The new construction contracts are contracts that have been obligated. The properties are not yet functioning and therefore they are not authorized to draw on the rental assistance. Of that 7 percent, about half of them are contracts that will run out of rental assistance this year, and we are obligating another five-year contract, but that has not been activated at this point. Then we have a third category which involves the servicing and transferring of certain contracts including those that have various legal actions pending or are in some other minor form of transition that is not easy to categorize. That is a small number of the total inactivity.
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    Chairwoman KELLY. Mr. Dorr, you said in your testimony that changes in the use of the unliquidated obligations would require the renegotiation of the contracts. That is really what we are asking GAO to resolve with you. For the record, can you please specifically describe the language in the contracts that is at issue?
    Mr. DORR. I would not have specific language for you today, but we will get that to you.
    Chairwoman KELLY. Does Mr. Grahn have that?
    Mr. DORR. Mr. Grahn, would you care to comment? Go ahead.
    Mr. GRAHN. Madam Chairwoman, the Rural Development Administration, and particularly at that time the Farmers Home Administration, entered into a series of amendments in the early 1990s with these contracts. If you take a look at Section 8(a) of the amendment, it talks about the terms of the contract expiring upon the total disbursement or credit at the borrower's account. At the bottom of the amendment, it indicates how much money that is. So we have interpreted that contract to mean that the contract will run until the dollars are expended.
    Chairwoman KELLY. I wonder if you could provide a good copy of the kind of contract that is at issue here for our records, and a legal opinion about your interpretation. I think we would find that to be very helpful in understanding the questions about the contract. Would you do that for us please?
    Mr. GRAHN. Yes.
    Chairwoman KELLY. Thank you.
    Ms. Antonelli, I really want to compliment Secretary Martinez and Deputy Secretary Jackson and you and the other HUD officials for your leadership in identifying and attempting to recapture these funds. I urge you to continue.
    For instance, you testified that the obligated balances in the public housing authorities have dropped from $3.4 billion in 2001 to $700 million as of this March 31. Would you please very briefly describe the specific procedures that you put into place when you arrived at HUD to try to ferret out and recapture unspent funds?
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    Ms. ANTONELLI. Much of what we have done within the department since the beginning of this Administration has really been very generally focused on the entire department and all programs, to focus on the level of unspent balances. Obviously, that includes the PIH programs as well. Again, you are referring specifically to the comment in the testimony regarding the public housing capital fund. There have been efforts that have been put in place in terms of those programs, as well as other programs, to expedite the expenditure of funds and to streamline the processes by which those funds would be expended by the public housing authorities.
    I am also being told that part of the reason that we have been able to see the drop in the level of funding that has been out there is because of efforts to work with the appropriators to try to speed the ability to get the money out towards the modernization projects. So we have worked very closely, again, with the appropriators as well to address some of these issues, particularly in the area of public housing.
    Chairwoman KELLY. Thank you very much. I am out of time.
    Mr. Crowley?
    Mr. CROWLEY. Thank you, Madam Chair. When HUD rescinds, recaptures or reallocates funds from Section 8 programs, for example, are they lost; do these funds just disappear; or are they reused for other purposes, whether it be for housing or other governmental purposes?
    Ms. ANTONELLI. Most of the time, the money that is recaptured from tenant-based Section 8 is often put back and is used for Section 8. For example in the case of the president's fiscal year 2004 budget, as you know, there is $1 billion in offsets anticipated to contribute to reducing the level of appropriations for the Section 8 tenant-based program going forward.
    Mr. CROWLEY. Would you describe that as fraud or waste or abuse?
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    Ms. ANTONELLI. Absolutely not. Obviously in terms of the discussion of the Section 8 program, the tenant-based program, there have been efforts to try to improve the utilization of funds within the program; the fact that every year the department annually recaptures a significant amount of funds from the tenant-based program. It is something that we have been working very, very hard to resolve. In the context of the 2003 Appropriations Act, for example, we had worked very closely with the appropriators to make modifications that would allow us to begin to drop the level of recaptures over time that we would see in this program.
    It is certainly not waste, fraud and abuse. It reflects issues with regards to the management of the program and we need to work to improve the management of the program and have begun to do that in the context of 2003 with these management improvements to try and reduce the level of recaptures that we have so that the money in fact is flowing out to the public housing authorities and those who need them.
    Mr. CROWLEY. Thank you. I have a limited time for questions, but I appreciate your answer.
    Just let me take it one step further. The Inspector General is not here today. Kenneth Donohue has submitted testimony that will be the basis of some of my questions as well. He talked about contract excesses, as well as what I mentioned before in terms of what is rescinded or recaptured or what is reallocated funds. Is the same true about contract excesses in Section 8 programs? Are they also recaptured or are they spent or are they lost?
    Ms. ANTONELLI. Again, as I mentioned, we don't necessarily see the funds as excess per se because, again, we have contractual obligations that we are legally required to uphold. In the case of project-based Section 8, for example, if you look at the funds that are there and that have not yet been spent, these are dollars that are attached to projects. Again, if those monies were to be rescinded, then ultimately it is entirely possible that we would have to seek additional appropriations in fact to meet those legal obligations. That is just one example of, again, we would not necessarily see these as excess funds.
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    They are in fact funds that when these programs were initially created, the money was provided up front. It spends out over a long period of time. And again, to the extent that those funds would be removed, ultimately somewhere down the road the money would have to be appropriated again to uphold those legal obligations, contractual obligations.
    Mr. CROWLEY. Let me ask you and Mr. Dorr, if you can. If you could answer these questions with just one word yes or no answers to the first two parts of the questions. Does Congress allocate an annual appropriation for Section 8 and Section 238 housing programs, as well as Section 521 of the rural housing programs? Does Congress make an annual allocation through the appropriations process towards those programs?
    Mr. DORR. Yes, we get an annual appropriation.
    Mr. CROWLEY. Thank you.
    And the same would be said for HUD?
    Ms. ANTONELLI. Not for 236.
    Mr. CROWLEY. Okay, 238? Section 8?
    Ms. ANTONELLI. Section 8, we do have annual appropriations, yes.
    Mr. CROWLEY. Okay. Does Congress allocate an annual appropriation for Social Security or Medicare? To your knowledge, I know it is not your field, but to your knowledge, does Congress allocate an annual appropriation for Social Security or Medicare?
    Ms. ANTONELLI. These are mandatory programs.
    Mr. CROWLEY. Right. We don't allocate them, do we? We don't make appropriations for them, do we?
    Ms. ANTONELLI. You have to meet the need.
    Mr. CROWLEY. Right.
    The HUD programs in question are discretionary.
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    Ms. ANTONELLI. That is correct.
    Mr. CROWLEY. As opposed to mandatory spending, which veterans' benefits, Social Security and Medicare are. I am holding up a copy of the Section 301 of the budget resolution where it stipulates that the committee needs to look into mandatory spending. None of the programs we are talking about here today are mandatory spending. They are all discretionary spending. Is that correct?
    Ms. ANTONELLI. I should just point out, we do have about $27 billion in mandatory obligated balances, but those are reserves that are in our FHA fund.
    Mr. CROWLEY. Is Section 8 a mandatory program or is it a discretionary program?
    Ms. ANTONELLI. No, sir, it is not. It is a discretionary program.
    Mr. CROWLEY. My feeling is here that the hearing is taking place. I think it is a red herring. I will say it again, because I think this is an attempt to make cuts in the Section 8 program which would have a very serious effect on my city and my district particularly. I think it is wrong to be doing this. Clearly, the excess monies that are recaptured are spent again, either in HUD in Section 8 programs or in other programs. Actually, it is used by Congress for defense spending and other emergency spending that comes up. I think it is wrong to hold in the cloud of trying to find out waste, fraud and abuse, to have members on this side of the aisle vote against any cutting of Section 8, and declare that we are against waste, fraud and abuse. I think it is wrong to do that, and I yield back the balance of my time.
    Chairwoman KELLY. Mr. Crowley, I really need to remind you that when the budget passed, embedded in the budget was the mandate that every chairman of every committee who controlled the budget of any executive agency attempt to work with that agency to cut at least 1 percent out of the budget. The committee chairmen all accepted that challenge. These are not cuts that we are talking about. What we are talking about is streamlining things here in the effort to recapture money. That does not necessarily revolve around waste, fraud and abuse, but management problems, as Ms. Antonelli said, and if it is appropriate, the idea is if we need to make legislation available to these agencies to free up funds and allow flexibility so that money that is residing in those agencies can be used now and appropriately, rather than being held in accounts for 20 years because they are held up and that money will probably never be used, then it is important that we do what we can to provide flexibility and free-up these funds so that they are available.
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    Too many programs, especially in these two areas, with rural housing and with HUD, don't have as much money available to them because there are funds frozen in various ways. That is exactly what I am applauding HUD about because I think the HUD officials have worked very hard to identify and ferret out and recapture these unspent funds that have been frozen in the agencies. So I applaud them for this and I think it is important that we make clear what is happening here. We are not worried about cuts. We are worried about making available the money that is there.
    Mr. Green?
    Mr. GREEN. Thank you, Madam Chair.
    I have listened carefully to the testimony and I will read the written testimony in great detail later on. I would like to step back and just ask a couple of general questions. First off, if each of you could simply bottom-line your testimony for us, if there is one message that you would like us to take from your testimony, what would it be?
    Ms. ANTONELLI. I am sorry, Congressman. I apologize.
    Mr. GREEN. No, not a problem. We have talked a lot about details and specifics. I would like to step back a second. What is the bottom line of your testimony? Can you summarize as best you can if there is one message that you would like us to hear with respect to the discussion points, what would it be?
    Ms. ANTONELLI. I think the most important message that we would like to convey from the Department of Housing and Urban Development is just how seriously we take our responsibilities in terms of being good stewards of the taxpayer dollar and improving the financial management of the department. As the IG has outlined and has the responsibility annually in terms of doing an audit of our financial statements, they have highlighted areas where we can and should be doing better.
    I think the department has already done a great deal in the past and will continue to do what we have been doing in terms of keeping track of and very carefully reviewing the level of unexpended funds program by program within this department. To the extent that we can, we will recapture those funds where we know that we are able to do that, and not have an impact on our programmatic needs. We have been very successful in doing that.
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    In the context of the 2002 audit, there were some things that the Inspector General had highlighted in a couple of our programs. We are happy to work with them. We continue to work with them. As a result of their work, we have very detailed corrective action plans in place that will allow us to continue to do an even better job in the issue of the review of unliquidated obligations. So that, again, we are making the most effective and efficient use of the taxpayer dollars as Congress has allocated them to the Department of Housing and Urban Development.
    Mr. GREEN. Mr. Dorr?
    Mr. DORR. Yes, Congressman Green, I would first of all generally echo what Ms. Antonelli has expressed. But in addition to being good stewards, I would clearly point out that we are very sensitive to our responsibility to provide housing for those elderly and single and others in rural areas who have diminished resources and need access to this program. If there is one thing that I would like you to come away with from this is that, first of all, we need management flexibility. In the long run, what we need is flexibility to administer these programs in a way that allows us to steward these resources effectively, as is what I think is the intent of this committee.
    In our case, we are fully engaged in an automation review so that our rental assistance budget forecasting mechanism is going to be much improved. I feel comfortable in saying that. We also have initiated a very aggressive internal agency review to find out why these obligated unliquidated balances have accrued; what is the cause of them. I think we are very close to determining that. We are also putting in place some management control review processes that we hope will become much more effective, particularly as we implement our new multi-family housing rules.
    In conjunction with everything that Ms. Antonelli said, management flexibility is clearly the one thing that would help us the most.
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    Mr. GREEN. I guess you anticipated my next question. What are the most significant financial management challenges that you are facing right now? And what steps are you taking to address them? I suspect you have partially answered that question already.
    Mr. DORR. The four things that I have outlined are clearly steps that we are taking to address them. Counselor Grahn indicated that he was going to get to you some contract language that I think you are interested in that may cast some additional light on this. And finally, I think collaboratively and collectively we need to review what it takes to essentially make a three-legged stool out of this, which involves more effective management, looking at our internal processes, as well as developing management flexibility. We generally know where we have to go, but I think it takes a little work to flesh it out in ways that make it clear and sensible to everyone involved.
    Mr. GREEN. Ms. Antonelli, my time is running out, but if you could address that question as well?
    Ms. ANTONELLI. We face a number of financial management challenges at the department and we are very determined to overcome them. Some of the management challenges that we face deal basically with people and systems. We have a very strong financial management team, first of all. That was a priority put in place, get some excellent people in here who could help us address some of our problems. Some of the priorities that I focused on, again, have related to our financial statements and, again, the proper accounting for our funds and making sure that we get clean audits.
    We have updated our funds control policies and procedures for the first time in 20 years in the department, and we have detailed funds control plans for every single program now in the department. These are annual funds control plans, and within those plans all of our programs have to tell us what they will be doing in terms of the review of their obligated balances so we can determine again in looking at unexpended funds and what we should be doing there.
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    With respect to the financial audit, the Department of Housing and Urban Development has three material weaknesses and 10 reportable conditions. So again, we have significant challenges that we have to address. We have worked very closely with our IG and have a very good relationship, and have worked with them to develop corrective action plans for the first time. That puts the department on a path to eliminating these major material weaknesses that relate to our financial systems and many of our reportable conditions, one of them being addressing the issue of the review of obligation balances.
    So we have challenges in many respects that we need to address. We are up to that challenge. We have detailed plans of actions. We are committed over the longer term by 2006 to significantly overhaul our financial systems. That will help us significantly improve the job that we are doing, to do it even more effectively, more efficiently, and provide better information in a more timely manner for Congress.
    Mr. GREEN. Thank you. Thank you very much. Thank you, Madam Chair.
    Chairwoman KELLY. Thank you.
    I would like both of you to know that I am interested in whether there is an unnecessary duplication in housing subsidy programs. I am interested in redundancy. I am interested in overlap, because these are also areas where we can perhaps recapture funds, and if we can eliminate anything that might be a turf battle out there, so much the better, because our desire here is to get federal funds to the people who truly need to get housing from these programs.
    Do either of you want to address that issue today, because I am probably going to pursue this a little bit further at some other venue, but if you would like to talk about that, if you feel prepared to do that, I would like to hear an answer.
    Mr. DORR. Specifically with regard to the multi-family issues, I can honestly say that we have not pursued as aggressive a working relationship with HUD to tap into their resources or vice versa, as we have in our single-family programs. But I will tell you that Dr. John Weicher, the Commissioner for their FHA programs, and I have developed a very good relationship. They have been very cooperative in helping us to utilize some of their resources that enable us to automate some of our systems more cost-effectively and more quickly.
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    There is willingness, at least on our part, I know, and I believe at HUD, to work and collaborate on issues that specifically impact us in ways that reduce or eliminate redundancy. There is clearly a delivery mechanism in rural areas that is different from HUD programs in urban areas. I am fairly new at this, but my sense is that some of those delivery mechanisms are unique to rural areas versus the urban area delivery mechanism. There are some things that I think are unique that we effectively deal with. But we are definitely not opposed to collaborating, cooperating and looking for ways to ferret out redundancy and have in fact done this already in our single-family area.
    Chairwoman KELLY. Good.
    Ms. Antonelli?
    Ms. ANTONELLI. I would just echo much of what Under Secretary Dorr has just said. The Department of Housing and Urban Development has and is more than happy and will continue to look at opportunities and work with the Department of Agriculture with respect to our programs, and again look at areas where we can work together more effectively, to the extent that that has not already been happening.
    Mr. DORR. Madam Chairwoman, I would also like to point out that we just executed a memorandum of understanding between the U.S. Department of Agriculture and HUD with regard to collaborative working relationships on programs in the southwest border Colonias region. That was something that has been very effective. And we at USDA also executed an MOU with the National Association of Credit Unions to enhance our ability to finance housing and bring these opportunities more effectively to folks in those areas that need them.
    Chairwoman KELLY. That is wonderful news. We appreciate that.
    I note that some members, this is a busy day for a lot of people, and some members may have questions for this panel that they may submit in writing. So without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.
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    We thank you very much for your time. We appreciate your testimony. This panel is excused with our great, deep appreciation. I want to briefly thank the members and staff for their assistance in making the hearing possible.
    The hearing is adjourned.
    [Whereupon, at 3:00 p.m., the subcommittee was adjourned.]