U.S. GOVERNMENT PRINTING OFFICE

66–338 CC WASHINGTON : 2000

PROVIDING ADEQUATE HOUSING: IS HUD

FULFILLING ITS MISSION?

HEARING

BEFORE THE

SUBCOMMITTEE ON CRIMINAL JUSTICE,

DRUG POLICY, AND HUMAN RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

NOVEMBER 3, 1999

Serial No. 106–140

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH-HAGE, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON CRIMINAL JUSTICE, DRUG POLICY, AND HUMAN RESOURCES

JOHN L. MICA, Florida, Chairman

BOB BARR, Georgia

BENJAMIN A. GILMAN, New York

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

ASA HUTCHINSON, Arkansas

DOUG OSE, California

DAVID VITTER, Louisiana

PATSY T. MINK, Hawaii

EDOLPHUS TOWNS, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

JANICE D. SCHAKOWSKY, Illinois

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

SHARON PINKERTON, Staff Director and Chief Counsel

MASON ALINGER, Professional Staff Member

FRANK EDRINGTON, Professional Staff Member

LISA WANDLER, Clerk

CHERRI BRANSON, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on November 3, 1999 ........................................................................ 1

Statement of:

Beard, D. Michael, District Inspector General for Audit, Texas, Department of Housing and Urban Development; Carolyn Federoff, vice president, Massachusetts State Office AFGE Local 3258; and Saul Ramirez,

Jr., Deputy Secretary, Department of Housing and Urban Development ............................................................................................................... 85

Kuhl-Inclan, Kathy, Assistant Inspector General for Audit, Department

of Housing and Urban Development; Joyce Gibson, spokeswoman, Coalition for Accountability; Cheryl Peterson, homeowner, Boise, ID; and

William Apgar, Assistant Secretary for Housing, Department of Housing and Urban Development ........................................................................ 13

Letters, statements, et cetera, submitted for the record by:

Apgar, William, Assistant Secretary for Housing, Department of Housing

and Urban Development:

Information concerning previous participation experience .................... 52

Prepared statement of ............................................................................... 35

Beard, D. Michael, District Inspector General for Audit, Texas, Department of Housing and Urban Development, prepared statement of .......... 87

Federoff, Carolyn, vice president, Massachusetts State Office AFGE Local

3258, prepared statement of ........................................................................ 111

Gibson, Joyce, spokeswoman, Coalition for Accountability, prepared statement of ........................................................................................................... 30

Kuhl-Inclan, Kathy, Assistant Inspector General for Audit, Department

of Housing and Urban Development, prepared statement of .................... 16

Mica, Hon. John L., a Representative in Congress from the State of

Florida:

Memo dated September 10, 1999 ............................................................. 165

Prepared statement of ............................................................................... 6

Ramirez, Saul, Jr., Deputy Secretary, Department of Housing and Urban

Development, prepared statement of .......................................................... 121

(1)

PROVIDING ADEQUATE HOUSING: IS HUD

FULFILLING ITS MISSION?

WEDNESDAY, NOVEMBER 3, 1999

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CRIMINAL JUSTICE, DRUG POLICY, AND HUMAN RESOURCES, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 10:10 a.m., in room

2154, Rayburn House Office Building, Hon. John L. Mica (chairman of the subcommittee) presiding.

Present: Representatives Mica, Mink, Kucinich, and Tierney.

Staff present: Sharon Pinkerton, staff director and chief counsel;

Steve Dillingham, special counsel; Mason Alinger and Frank

Edrington, professional staff members; Lisa Wandler, clerk; Cherri

Branson, minority counsel; and Jean Gosa, minority staff assistant.

Mr. MICA. I would like to call the Subcommittee on Criminal Justice, Drug Policy, and Human Resources to order.

This morning I would like to open with a statement and yield to

other Members as they arrive, but we would like to proceed. We

have a full agenda, two full panels. We will try to expedite the

hearing as quickly as possible today.

Today’s hearing before the Subcommittee on Criminal Justice,

Drug Policy, and Human Resources will examine recent developments at the Department of Housing and Urban Development. Specifically, we will focus on changes in two HUD program areas. The

first topic will be the Federal Housing Authority [FHA], Marketing

and Management Program. The second topic will be HUD’s Community Builders Program. As I pointed out to our subcommittee

members, we do have oversight jurisdiction and investigation jurisdiction over HUD, and I believe this is our first subcommittee hearing and probably our only one this year, so we will cover these two

areas.

As we examine changes that have occurred and problems that

have arisen in these two programs, it is important to remember

that program problems are not new at HUD. In fact, HUD has had

the continuing distinction of being classified by the General Accounting Office [GAO], as being a department at which is termed

‘‘high risk.’’ The reasons that underlie this ‘‘high risk’’ designation by GAO

are numerous and, of course, documented. They include a series of

problems which are internal control weaknesses, unreliable information and management systems, organizational deficiency, and

ineffective program monitoring and oversight, which is due, in part,

2

to staff with inadequate skills. Again, these are some comments

and observations and determinations by the General Accounting

Office.

The seriousness of these deficiencies is magnified when you consider the scope of the Department’s responsibilities, which continue

to multiply. FHA now insures about 6.5 million loans totaling over

$400 billion. In fiscal year 1998, FHA paid out more than 76,000

claims valued at almost $6 billion, and had more than 42,000 properties in its inventory. HUD staff now includes approximately

9,300 Federal employees, and its annual budget exceeds $26 billion. This subcommittee needs to explore and know a little bit more

about whether taxpayers are, in fact, getting the most for their tax

dollars and whether housing needs for those who need these public

housing assistance programs are being met.

Today, we will examine changes regarding two HUD programs

and attempt to learn whether recent changes have made things, in

fact, better or worse.

First, we will hear from witnesses on the topic of HUD’s Marketing and Management Program, which replaced the Real Estate

Asset Management Program. The new program contracts out critical marketing and management responsibilities. We will try to find

out why HUD decided not to follow OMB Circular A–76 in studying

the costs and benefits of the program prior to implementing it. If

a comprehensive study had been conducted, could current problems

have been avoided? Is the program now working properly, or do

risks continue? What needs to be done in light of the fact that the

largest contractor, Intown, has filed for bankruptcy, apparently

leaving others holding the bag?

On March 29, 1999, HUD awarded 16 Management and Market- ing contracts to seven contractors for a 5-year value of about $927

million, nearly $1 billion. The contractors manage nearly every aspect of the property disposition, including acquiring and maintaining property, and marketing and selling it. The Office of Inspector

General will testify today that HUD, in fact, and this is from their

testimony, ‘‘did not adequately document or evaluate basic business

decisions before executing these contracts.’’

We will also hear testimony that some properties are not being

maintained as they should be, and some are not being disposed of

efficiently. There are continuing reports of damage, vandalism, neglect and delay, probably also decay. Overall inventory has increased, and defaults are up. Why does this occur? Is there adequate incentive for contractors and subcontractors to protect and

enhance property values? Should properties continue to be sold in

a condition as is?

A serious problem identified by the Office of Inspector General

is that the contracts are not clear about how contractor costs will

be reimbursed or whether penalties can be assessed for poor performance. This omission and lack of clarity reportedly results in

needed repairs and maintenance being ignored.

A major marketing and management failure is the recent experience of the largest contractor, Intown. That contractor, Intown, successfully bid on and received 7 of 16 management contracts, covering some 39 percent of HUD’s properties. The company’s recent

bankruptcy filing has caused contractor liens to be placed on many

3

properties, creating serious financial and legal problems for both

subcontractors and also for people in need of affordable housing.

Why did one company get the lion’s share of the contracts and then

go bankrupt within months? Is the problem being remedied? These

are questions which I think this subcommittee must ask and which

we must seek answers for today.

Let me run this tape here.

[Videotape played.]

Mr. MICA. This is just one television account of some of the problems that have occurred across the country. I saw a similar piece

here in the District of Columbia because of some of the problems,

the default situation and the condition of properties. We could play

many of these tapes, as I said. This one was from Idaho.

Our second topic today that we are going to address, briefly, is

the controversial Community Builders Program. We want to look

at specifically why the program was developed and implemented in

the manner that it was, and what the successes and failures of that

program are to date. Why wasn’t a comprehensive study conducted

on the need for such a program when it was started, and how has

that project developed to date? Those will be some of the questions

we will ask.

The Department claims to have relied upon recommendations

from a 1994 consultant report performed by the National Academy

of Public Administration in proposing the program. A clear reading

of the NAPA report recommends that a small number of staff be

assigned to State coordinators, and that experienced staff, ‘‘who can

work well with community leaders’’ and ‘‘effectively across the complexity of HUD’s programs’’ be selected through a ‘‘merit system

process.’’ That was their recommendation.

How can this recommendation be misconstrued as justifying the

hiring of hundreds of persons, persons lacking HUD knowledge and

experience, outside of normal competitive merit system selection

rules and procedures? Having chaired the Civil Service Subcommittee, I can tell you that I am aware of no one who envisioned the

hiring of hundreds of individuals for this type of program relying

on a minor revision in regulations governing the provision that we

have in Civil Service for excepted service. I am very troubled that

the Department chose to drive a Mack truck through a small regulatory opening intended to provide some flexibility under unique

hiring circumstances. I think we are up to 800 Community Builders in a program the size of some small agencies.

In the recent fiscal year 2000 appropriations language, Congress

is requiring that HUD conduct an open competition for these positions and evaluate job applicants pursuant to normal hiring practices in the future.

Perhaps veterans’ preferences will now be properly evaluated

and applied to new hires, as was not done originally, and happens

to be one area that we have focused on. We were able in Civil Service to get some changes in the law, and now the law has been circumvented.

I am also very concerned about certain conflicts of interest and

ethical lapses of some Community Builders, resulting in reprimands and employment terminations. Why would HUD allow federally employed Community Builders to hold partisan elective ofVerDate 11-MAY-2000 08:52 Dec 13, 2000 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\66338.TXT HGOVREF1 PsN: HGOVREF1
4

fices? Were these employees adequately briefed and assessed at the

beginning of the hiring process? Hopefully, these deficiencies have

been corrected.

I am very pleased that the appropriators have attempted to correct this situation, but I am uncertain that they have done enough.

I will seek more assurances from HUD that further corrections

have been made and that past irregularities in this program and

hiring practices will not be repeated. I am awaiting the findings of

the review of HUD’s personnel practices by the Office of Personnel

Management, as requested by the Office of Inspector General.

The concerns that I have outlined with these two programs raise

a much broader issue that is very important to our subcommittee

and to many others, including some of our witnesses today.

Is HUD focusing on obtaining affordable homes for deserving

people, or is it investing too much time, energy and money in promoting its image, and on an off-track agenda? HUD’s stated mission is to, and let me quote from their mission statement, ‘‘promote

adequate and affordable housing, economic opportunities, and a

suitable living environment free from discrimination.’’ I think we

will hear testimony today that brings into question HUD’s progress

in promoting this mission.

I am very concerned that millions of dollars have been unwisely

expended on training and travel for temporary employees who will

be leaving their positions soon. I am also concerned about the millions of dollars devoted to HUD’s TV studio. I am also concerned

that the Secretary is traveling 30 percent of his time, making public appearances across the Nation, while his Department continues

to experience significant problems and to be, not as I have termed

it, but as GAO has termed it, at risk for even more.

I do not accept the Department’s response that public relations

has not been a major factor in HUD’s operations and programs. An

OIG audit found that a significant number of Community Builders

state that they spend 50 percent or more of their time on public

relations activities.

Today, HUD has released the findings of the Ernst & Young

analysis of the Community Builder Program, a study that was designed, funded and reviewed by HUD. The conclusions of the study

indicate that Community Builders improved customer services and

perceptions.

The report also mentions expanded outreach, increased

partnering, valuable experiences, and furtherance of strategic objectives. While I realize that HUD prefers the terminology ‘‘customer relations’’ rather than ‘‘public relations’’ in describing Community Builder roles, I think there is an obvious overlap of the two

terms in this program.

Furthermore, I am not persuaded that HUD should distinguish

its employees with public trust responsibilities from Community

Builders. I also fail to understand how HUD’s strategic goal of restoring public trust is served by filling hundreds of positions with

employees dedicated to improving HUD’s image and/or customer

relations. It is my opinion that capable Federal employees with

knowledge, training and experience in performing HUD business

effectively and efficiently can, in fact, earn public trust. From what

I see, a new public relations core may be, in fact, unnecessary. It

5

is also wasteful and harmful to employee morale, and, most importantly, it drains significant personnel resources from HUD programs that remain at risk.

In conclusion, the Community Builders Program has been a topic

of considerable controversy in the Department, in the press, and in

Congress. On September 16, 1999, the Senate Appropriations Committee reported, and again this is their report, ‘‘There is no valid

evidence that these Community Builders are communicating HUD

programs effectively or providing a link for the delivery of program

services, and much of the activity seems to be primarily for public

relations. In many cases, the Community Builders do not appear

to act like HUD staff, but instead act in the capacity of lobbyists

for a particular community or group.’’ Again, not my comment, but

the Senate appropriations report.

Because of these concerns, appropriations conferees mandated

that the existing Community Builders Program with temporary fellows is to terminate effective September 1, 2000. Any functions

now being performed by the Community Builders fellows will be

carried out by regular Civil Service employees. I hope that meaningful lessons have been learned from this unfortunate and sad

chapter in HUD’s history and will not be repeated again.

I would like to thank our witnesses for appearing today, some of

whom have traveled at a great distance with personal sacrifice, and

I look forward to hearing from each of you as we explore how best

we can meet our Nation’s critical housing needs and ensure a maximum return on our Nation’s precious tax dollars.

With that background and those opening remarks, I am pleased

to yield to our ranking member, the gentlewoman from Hawaii.

[The prepared statement of Hon. John L. Mica follows:]

6

7

8

9

10

11

Mrs. MINK. Thank you very much, Mr. Chairman. I would like

to also join with you in welcoming the panelists that have been

called to examine these two areas that the chairman has so carefully outlined as problem areas that he feels oversight responsibility in examining. And while I agree certainly that we do have that

responsibility to make sure that the programs that are implemented by all of the executive departments are working well and

have consistent missions that relate to their statutory functions, in

both of these cases today I raise some of my own personal qualms

about the necessity of pursuing these issues.

In the first place, the full Committee on Government Reform not

too many months ago conducted a hearing about the whole matter

of the foreclosures and the management of the properties under

foreclosure, the long-term possession by the HUD department, and

the failure to put these properties out to market in a reasonable

length of time. And it seemed to me that as an outcome of that

hearing, that much was said, and the Department, I thought, responded to the questions of the chairman of the full committee

quite adequately.

We are placing on the department a huge responsibility to be

able to balance the demands of efficiency and also productivity and

to assure against loss of public funds in this whole program of

mortgages and foreclosures and management. As a matter of deeply held personal commitment, I generally do not support the notion

of privatizing what I consider to be functions that government

could very well perform adequately, and it seems to me that this

whole idea of property management is one area in which HUD

could have retained responsibility. But given the huge hue and cry

about the management program, I can see why HUD felt compelled

under the demands for reform and change and responding to criticism, opening up a whole new area of privatization. And now that

they have done that, responded to the private cry—the public cry

for privatization, it seems a bit hasty to now fall upon the Department for having retained someone who totally failed, as a private

contractor, from performing its responsibilities.

I think that the Department should answer the questions as to

the propriety of this particular contract, and why the contractor

was selected, and how it performed, and why the contract was terminated. I think those are reasonable questions. But the whole concept of challenging the government’s decision to privatize because

of one failure I think is a bit premature and certainly something

that I don’t fall readily to, basically because I really don’t like the

whole idea of privatization in the first place. But having done that,

it seems to me that the government has done, in this case, a fairly

reasonable job in making sure that there was reasonable value performed by the contractor.

On the matter of the community development—developer or

Community Builders Program, again, in the years that I have been

in Congress, there has always been a hue and cry by the Congress

and others in the public that the Department needed to find ways

in which to respond to the public criticism of connecting its major

responsibilities to the public so that the public would have a better

understanding of what its functions were, and we have demanded,

in fact insisted, that the Department look for ways to revise its

12

functioning, to reform its general mission and the way in which its

responsibilities were being conducted. So, here is an initiative

which the Department has embarked upon, and now it is being

mercilessly criticized for failures to conform to the expectations of

the public.

Now, I personally have some views and conclusions that I have

made about this initiative, but I certainly don’t fault the Department for having moved in this direction.

I am pleased that, and hopefully, with the decisions made by our

appropriators in terms of revision of this program, I hope that the

criticism has now been put to rest, and we can analyze it from the

viewpoint of whether any substantial advantages have been developed as a result of the implementation of this program. I have been

advised that, yes, there have been some substantial improvements

to the overall conduct of the Department because of the Community Builders participation in implementation of the Department’s

mission.

So yes, I look forward to the panelists, Mr. Chairman, today to

elucidate on both of these issues. I must say in advance, next door

my Committee on Education and the Workforce is having a markup

on four bills, and I may have to drift in and out, and I apologize

if I am called to vote next door. Thank you very much.

Mr. MICA. Thank you.

I recognize the gentleman from Massachusetts Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman.

I really have nothing to add to the remarks that have previously

been made, except to also say that I am on the same committee as

Mrs. Mink, and that you may find me coming in and out to vote

on the markup over there, but I would prefer, if we could, to get

on with the witnesses and thank them all for sharing their time

and thoughts with us this morning. Thank you.

Mr. MICA. Thank you.

Mr. Kucinich, would you like to make an opening statement?

Mr. KUCINICH. I just want to join my colleagues in welcoming the

witnesses and particularly those who are serving the Department

of Housing and Urban Development, thanking them for the work

that they do, and I look forward to working with you.

Mr. MICA. Thank you, Mr. Kucinich.

Let me just say as I introduce our first panel that we did, in fact,

on March 23rd hold a full committee meeting on the question of

Marketing and Management Programs. It is my understanding,

just for the record, that, in fact, Intown Properties won a contract

in March to manage and market a $367 million program. Since

that time, Intown, as I stated, has filed for bankruptcy, so that has

occurred since then; in fact, on September 22nd. Since then, the

press has exposed and others have found that the contractor that

HUD contracted with was a convicted felon with a string of and

histories of bankruptcies.

So I think our subcommittee is moving in a proper fashion of

oversight and investigations to see how that contract got in that

situation, what is going on with this program. Community Builders

has been battered around. We have put off a hearing, and the Senate has gone before us and appropriators. But we still have an obliVerDate 11-MAY-2000 08:52 Dec 13, 2000 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 C:\DOCS\66338.TXT HGOVREF1 PsN: HGOVREF1
13

gation to look at what has happened there and how that program

will be phased down or replaced.

With those comments, let me introduce our first panel of witnesses. You will have to help me with the name here. Ms. Kathy

Kuhl-Inclan. Ms. Kathy Kuhl-Inclan is Assistant Inspector General

for Audit of the Department of Housing and Urban Development;

Ms. Joyce Gibson is a spokeswoman from Chicago, IL, for the Coalition for Accountability; and Ms. Cheryl Peterson is a homeowner

from Boise, ID. We also have the Honorable William Apgar, who

is the Assistant Secretary for Housing with the Department of

Housing and Urban Development.

I would like to welcome all of our witnesses. We are an investigations and oversight subcommittee of Congress. We do swear in our

witnesses, so if you would stand to be sworn.

[Witnesses sworn.]

Mr. MICA. Let the record reflect that the witnesses answered in

the affirmative.

I would like to again welcome our panelists. I think what we are

going to do is, we have had you sworn, take about a 15-minute recess, run to the floor, vote and come back. So if you will excuse us

for about 15 minutes, we will vote and then return. This subcommittee will stand in recess.

[Recess.]

Mr. MICA. I would like to call the Subcommittee on Criminal Justice, Drug Policy, and Human Resources back to order.

Our first agenda item again is panel one, and deals with the

Marketing and Management Program. I have introduced our witnesses, so we will go directly to Ms. Kathy Kuhl-Inclan, who is Assistant Inspector General for Audit with the Department of Housing and Urban Development. I did swear you in, and I also will advise each of our witnesses that if you have lengthy statements or

documentation or reports that you would like made a part of the

record, if you will just request that, and by unanimous consent, we

will include as much as possible of that information in the record.

So with that, we will recognize the Assistant Inspector General

for Audit with HUD. Welcome, and you are recognized.

STATEMENTS OF KATHY KUHL-INCLAN, ASSISTANT INSPECTOR GENERAL FOR AUDIT, DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT; JOYCE GIBSON, SPOKESWOMAN, COALITION FOR ACCOUNTABILITY; CHERYL PETERSON, HOMEOWNER, BOISE, ID; AND WILLIAM APGAR, ASSISTANT SECRETARY FOR HOUSING, DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

Ms. KUHL-INCLAN. Thank you. Chairman Mica and other members of the subcommittee, I appreciate the opportunity to appear

before you today to discuss the Management and Marketing contracts for HUD’s property disposition activities.

On September 17, 1999, our Southeast/Caribbean District issued

a comprehensive audit of HUD property disposition activities entitled, ‘‘Nationwide Internal Audit of Federal Housing Administration’s Single-Family Property Disposition Program.’’ When we

began this review, plans for contracting out property disposition activities were still under discussion. By the end of our audit, the

14

M&M contracts, as they have been called, had been awarded, but

had not yet been started.

I want to make it clear that we have not audited the current

Management and Marketing contracts. We made a conscious decision to hold off on any detailed audit work until the M&M contracts had sufficient time to get up to speed. We believe that sufficient time has elapsed, and we plan to begin that audit this month.

We did have an opportunity to review the M&M contracts and

the contracting monitoring policies toward the end of our property

disposition audit. We also looked at the M&M contracts in an audit

of the departmental procurement activities earlier in the year. Our

property disposition audit noted that while the M&M contracts and

contract monitoring policies were comprehensive, there were some

areas in need of improvement. Contracts did not contain sufficient

information regarding FHA’s reimbursement to contractors for

property repair costs or monetary penalties for contractor noncompliance.

In addition, the new Contracting Monitoring Manual did not provide comprehensive guidance to review and approve reimbursements of repair costs, conduct contract risk assessments, and document monitoring results. We thought clarity and consistency in applying this policy was needed, and I would like to add that the

HUD staff agreed with us almost immediately and indicated that

they would make these changes to their policies.

Our recent internal audit followup review of HUD contracting

was dated September 30th and examined the contracting actions

leading up to the M&M contracts. The Department carried out this

procurement action without conducting an OMB Circular A–76 cost

comparison to determine if contracting out was warranted. While

these M&M contracts were at an anticipated cost of $927 million

over the next 5 years, the Department believed that a cost comparison was not legally required. We disagreed. The supplement to Circular A–76 states that the circular is not designed to simply contract out; rather it is designed to balance the interests of the parties in a make or buy cost comparison, provide a level playing field

between public and private offerors to competition, and encourage

competition and choice in the management and performance of

commercial activities.

The Department stated that there is no requirement to conduct

an A–76 review if the contract is not affecting more than 10 HUD

employees. Additionally, it said that it is the program office’s responsibility to evaluate all the procurement activities and the contracting office’s responsibility to ensure that once the decision is

made, that the award is carried out efficiently. We believe the Office of Procurement and Contracts needs to be more involved.

We reviewed the implementation and pre-award files for the

M&M contracts. Prior to award, these kinds of functions were handled by a combination of HUD staff and the Real Estate Asset

Managers [REAM], contractors. Even though these procurements

have a 5-year spending authority of almost $1 billion, and the contractors will have substantial control over HUD’s multibillion-dollar single-family property inventory, the Office of Housing did not

adequately document or evaluate basic business decisions before

executing these contracts. Instead of preparing an A–76 cost study,

15

the Office of Housing requested a determination from the Chief Financial Officer that a study was not technically required. The

memorandum did not explain Housing’s intent to contract out the

entire process at the cost of almost $200 million a year.

The CFO did agree with Housing that since the Department was

not reducing staff, the study was not required, but that didn’t

make sense to us, because of all of the downsizing and the restructuring of the Department that had been done and was being considered.

In addition to the absence of a cost analysis for the M&M procurement, we questioned the Department’s examination of the financial and operational capacity of the bidders. Intown Management Group was awarded contracts comprising almost 40 percent

of HUD’s work, making Intown one of the largest property managers in the country. We asked contracting staff if they considered

Intown’s financial capacity to manage such a large contract. We reviewed the summary of negotiations and technical evaluation reports and did not see a discussion of their capacity. The staff indicated that these matters were discussed, and it was determined

that the Intown had sufficient financing. During negotiations, Intown reduced its original bids from $565 million to $367 million. That is a 30 percent drop. Revised best

pricing schedules provided by Intown during the negotiation process may have been overly ambitious. In fact, Intown’s estimated

costs would actually decrease due to improved efficiencies. By contrast, staff stated that Intown had the highest technically rated

proposal and believed the negotiation process evidenced HUD’s interest in procuring the best value.

When we completed our field work in August 1999, Intown had

sold only 2.8 percent of its assigned inventory. M&M contracts receive 30 percent of the fees when properties are listed and the remaining 70 percent when properties are sold. Consequently, there

was a concern that Intown would not be able to adequately maintain the 20,000 HUD properties assigned to them without the revenues it generated from property sales.

On September 23rd, HUD announced it had terminated the

M&M contract with Intown Management Group. We hope that

those contractors remaining can manage this large workload that

is left. We anticipate a report from our upcoming audit in about 6

months, and we will be happy to keep you apprised. Thank you.

Mr. MICA. Thank you.

[The prepared statement of Ms. Kuhl-Inclan follows:]

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Mr. MICA. We will next hear from Ms. Joyce Gibson, who is the

spokesperson for the Coalition for Accountability from Chicago, IL.

Welcome, and you are recognized.

Ms. GIBSON. Good morning, Mr. Chairman. My name is Joyce A.

Gibson. I am the president and owner of J.A. Gibson Realty & Associates in Chicago. I would like to thank the committee for allowing me this opportunity. I am here today as a spokesperson for the

Unity Coalition for Accountability, a loosely formed coalition of 70

small businesses, 240 churches, and a handful of community organizations in Illinois and Indiana who are concerned about the lack

of responsibility and accountability HUD has exhibited with respect to its M&M contracting program.

Our coalition was formed after Intown Management, a HUD

Marketing and Management prime contractor, lost its contract and

declared bankruptcy. That was September 22, 1999. For many

small businesses in Illinois and Indiana, and 20 other States

around this country, that day will live in infamy. It was the day

we learned that after providing millions of dollars in labor and material over a period of 5 months to maintain HUD-owned properties, we would not be paid.

From the information we have gathered, the amount owed in Illinois alone is $3.5 million, and that just represents the contractors

who have heard about our efforts and contacted us. As we began

to talk to more people over the Internet, we realized that this problem was much larger than just a few vendors not being paid in Illinois. We have heard from an appraiser in Maryland who is owed

$411,000, a contractor in Virginia owed $41,000, a property manager in New York owed $54,000, and the list goes on, totaling more

than $7.5 million. Mind you, this figure only represents moneys

owed to approximately 87 subcontractors.

When we started this effort, we were only focused on the shortterm view: Our money. As we talked to more people in our respective communities, we began to see an even bigger problem, one of

abandoned homes that create unsafe, unhealthy environments; lost

tax revenues to local municipalities; and a destabilization and devaluation of the communities where these properties are located. It

is why our efforts have been joined by local ministers and community groups concerned about housing issues.

I am here to represent the small voice of hard-working citizens

that often get overlooked. We don’t have the millions to hire lobbyists to speak for us. We pass the hat, hope we have enough money

for airfare and room accommodations, and pray that we can spare

the time from our businesses to make the trip. That is why we are

extremely grateful that someone in our government is willing to

spare the time to listen to what we have to say.

It is our understanding that HUD has taken the position that

they are not responsible for the actions of their contractor. We disagree. We believe that HUD contracted an agent, Intown Management, and the agent provided management and marketing services

for the owner of this property: HUD. As a realtist, this says that

an agency relationship existed, and under an agency relationship,

they cannot just walk away and not be accountable for the actions

of their agent. HUD still has accountability and responsibility.

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Most of the vendors were willing to provide services because Intown was HUD’s prime contractor. To many of us, that meant payment would be slow in coming, but it was guaranteed payment.

That is why people felt confident in refinancing their homes to buy

equipment and purchase materials. That is why people continued

to provide services even after there was no payment for 90 days.

It wasn’t because of Intown; we didn’t know them, nor do we know

them now. We trusted that our government had made a wise selection and that our government was behind these people.

I am sure that it was not HUD’s intention to stick it to small

business, but that is exactly what has happened in the M&M program. Intown is the second contractor that HUD has had in the

Chicago area. There are vendors who contacted us who have not

only not been paid by Intown, but who are still owed money from

a contractor called Citywide. And to add insult to injury, we have

been informed as of yesterday that many of the vendors who were

promised payment in 14 days by the new contractor,

Goldenfeather, are now 30 days due, and counting.

I don’t know how much money was paid to Intown, but it would

seem to me that HUD has a responsibility to pay for the services

that were contracted on their behalf up to and including the day

that they pulled the plug.

Additionally, HUD has got to take responsibility for the condition

of the properties that are in our communities. These properties belong to the taxpayers. HUD cannot delegate its responsibility to noname companies and then walk away.

We believe that HUD needs to rethink its current use of national

contractors and return to the model that allows for local-based

management and marketing of HUD properties. We also believe

that HUD must establish more effective monitoring guidelines. We

cannot continue with a program that erodes the credibility of our

government and causes economic devastation to its citizenry.

Thank you.

Mr. MICA. Thank you for your testimony.

[The prepared statement of Ms. Gibson follows:]

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Mr. MICA. We will also hear from Ms. Cheryl Peterson, a homeowner from Boise, ID. Welcome, and you are recognized.

Ms. PETERSON. Thank you.

In August of this year, my husband and I bid on a HUD home,

and we won that bid. On September 24th, we signed the closing

documents and were preparing to move. Earlier in this same week,

HUD fired Intown, their management company. The next day, Intown filed bankruptcy, and it became uncertain who would represent HUD in completing our paperwork process.

On September 30th, our paperwork was received back from

HUD, and we were in the final stage of acquiring our home. On

Monday, October 4th, our title company went to record the deed at

city hall, and it was discovered that there was a $1,320 lien placed

on the property and numerous other properties in the State of

Idaho.

At this time the situation became very stressful for my family.

Within 2 weeks, we really did not have a place to live. We called

everyone. We called our realtor, our title company, our lender, our

lawyer and our Congresswoman. Within a few days, there was yet

no resolve.

So, on October 7th, we paid the $1,320 lien, believing that we

would have our home that day. Yet, when the title company went

to city hall to record the deed, they called to say that another lien

had been placed on our home. We had a difficult decision to make

at that time. It was either to back out, cut our losses, or pay the

$120. And this, of course, was somebody else’s debt, not ours.

So on October 8th, we paid the $120, and we were recorded that day, and the home became ours. As a taxpayer, we paid $1,440 for

property management.

We did have to ask ourselves what we were paying for. The

weeds on the right side of the house were chest high, the grass was

dead, there was a beehive in the sprinkler box that was a foot in

diameter. This home had sat vacant for 6 months. Yet, in the end,

we were very thankful that we were never without a place to live

and that we now have a place that we call home. Thank you.

Mr. MICA. Thank you for sharing your experience with us.

We will now hear from Mr. William Apgar, who is the Assistant

Secretary for Housing of HUD. Welcome, and you are recognized,

sir.

Mr. APGAR. I am pleased to testify today about how HUD

has——

Mr. MICA. You might pull that mic over.

Mr. APGAR. I am pleased to testify today about how HUD is fulfilling its mission to address the homeownership and affordable

housing needs of the Nation and to report on our progress in the

management market initiative.

The past 12 months have been historic for the Department. Secretary Cuomo’s 2020 reforms have produced substantial evidence

that HUD works. At the start of the year, our progress in reforming the Department was recognized by the House and Senate as

they approved the best HUD budget in a decade. The year culminated last month when Congress enacted an even smarter and

stronger budget, giving us $1.5 billion more resources to do our

programs, including 60,000 new rental vouchers, a homeownership

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security program for older Americans, a major job creation program, and new tools to assess the growing crisis of opt-outs.

FHA has also had an outstanding year this year. We have assisted 1.3 million families in purchasing homes, with an all-time

record of $125 billion in mortgage insurance. FHA multifamily

mortgage insurance remained at a near record level of $4.1 billion.

Regarding the implementation of the M&M initiative, I am also

pleased to report that after 7 months of operation, six of the seven

contractors retained by HUD are generating very positive results

and have demonstrated that profit-motivated, private sector real

estate professionals can more efficiently and effectively manage,

market and sell REO properties. The bottom line is the M&M system is selling more homes faster and doing so in a way that is generating greater returns to the FHA.

Since implementing the M&M initiative nationwide, in March,

six of our seven contractors, who had the responsibility of more

than 60 percent of the inventory at takeover, had performed well.

Over the first 6 months they have increased HUD’s average gross

property sales by 25 percent; they have increased FHA’s recovery on the mortgage insurance claims by some $3,243 per property.

Taken together, these six contractors have sold 16,273 properties

through September, and with an improvement in our recovery

rates, we have generated savings of more than $50 million to the

Department.

Still, despite the overall success of the M&M initiative, one contractor, Intown Management Group, failed to meet HUD’s performance standards. Intown did not properly maintain HUD’s properties, as was discussed, and they were extremely slow to list properties for sale and to enter into sales contracts. While this has lead

to substantial problems for FHA, for homeowners, for communities,

for subcontractors, I want to stress that it is the FHA monitoring

and control system that identified the problems with Intown and

developed a record that facilitated termination of the contract and

the proposed debarment of the principals and will be a basis for future actions as we seek to hold Intown accountable for their failure

to meet the obligations of this contract.

This monitoring system noted problems in the very early days of

the contracts. Within 45 days, we terminated one Intown contract.

But, despite our repeated efforts, Intown’s overall performance

didn’t improve. Having started with 16,803 homes, the inventory in

the Intown area swelled to 26,000 homes by the end of September,

an increase of 9,400 homes. In contrast, over the same period, the

other six contractors sold more than 16,000 homes, and collectively

the inventory in these areas held more or less steady.

There are a lot of statistics here, and I will explain them more

in detail in my written statement, which I would like to have included in the record. But the bottom line is simple. Intown didn’t

sell homes. They didn’t even do a good job of listing homes for sale.

As a result, the overall inventory mushroomed.

My testimony also includes detailed descriptions of how we are

doing in the 6 weeks since we terminated the Intown contract. I

am pleased to report that the new replacement contractors are

working well. For example, in just 6 weeks, they have completed

the sale of over 1,900 properties, nearly as many as Intown did in

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the 6 months that they had the contract. The new contractors in

6 weeks have sold almost as many homes.

I would like to end my testimony with an assessment of how we

got to this situation today. My answer is simple. Intown failed because its three principal partners did not deliver the resources that

they promised in their proposal. Each of these individuals had performed well in the past under HUD and other Federal contracts.

Consider Larry Latham, a recognized leader in online real estate

marketing. The proposal indicated that Mr. Latham would be in

charge of marketing, but Intown’s marketing effort was slow to

start and, even after 6 months, was hopelessly inadequate. I am

not a lawyer, but I believe that Intown and its three partners misrepresented to HUD the resources that they would bring to the

contract, and in doing so, may have committed fraud against the

U.S. Government.

That is why I recently moved to immediately suspend each of

Intown’s principals from all government contracting and also proposed that they be debarred for a period of 10 years. Moreover, I

have asked HUD’s Office of General Counsel to refer the three

principals to HUD’s Office of Inspector General within the Department of Justice for criminal investigation.

In conclusion, I feel that HUD and the FHA are headed in the

right direction. I thank you for this opportunity to testify, and I

look forward to answering your questions today.

Mr. MICA. Thank you, Mr. Apgar.

[The prepared statement of Mr. Apgar follows:]

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Mr. MICA. Right off the bat, let’s get into the Intown situation.

A contract was awarded in March for $367 million. It defaulted and

filed bankruptcy on September 22nd. I have a story from the Atlanta Constitution, and through some simple checking they found

that the principal here, Melton L. Harrell, who won the contract,

had a record of felony convictions and had a history of filing bankruptcy, I mean a pretty basic check that even the media did.

Was HUD aware of this individual’s background and his record

of bankruptcy and felony convictions?

Mr. APGAR. We were not aware at the time that the contract was

issued. Let me explain our process.

Mr. MICA. Wouldn’t you check? This is over a third of $1 billion.

Mr. APGAR. I hear you. Under our process we have a previous

participation review. It is the responsibility of the Inspector General’s Office to conduct that review. We asked them in October,

when we first had Intown’s bid, again in December, to review Intown for their suitability for this contract. I have here letters

signed by appropriate officials at the Inspector General’s Office

that said they conducted such a review and found nothing.

Notice that there is no requirement for the Federal Government

in its contracting procedure to check background checks on criminal records going back that far. We did check the Dunn & Bradstreet records. They showed nothing of any nature of financial liability. We checked other performance records relative to HUD contracts. Each of the contractors had substantial contract experience

with the Federal Government, and there was no indication of any

of that work by Mr. Latham, Mr. Gonzalez or Mr. Harrell had any

problem, including substantial contracts with the Department of

the Army, the FDIC, and other Federal agencies.

Mr. MICA. Well, Ms. Kuhl-Inclan, the Assistant Secretary, is saying that it was your responsibility to check, and he has a report

here that says that you found a clean bill of health; is that correct?

Ms. KUHL-INCLAN. That check was done by another part of the

Office of the Inspector General. I am not aware of the letters he

has, but I will be glad to check on that when I return to my office.

Mr. APGAR. You are right, it is part of the standard of previous

participation experience report. The letterhead is the Office of the

Inspector General. I appreciate that this is not done by Kathy’s division, so she might not be aware of this, but this is standard contracting procedure. The Inspector General is the responsible party

for identifying potential criminal violations on the part of contractors.

Mr. MICA. Well, somewhere it seems like somebody missed the

boat. I mean, just a perfunctory check by the Atlanta Constitution

seems to reveal that we are dealing with a convicted felon with repeated bankruptcy failures.

Mr. APGAR. Again, in terms of the bankruptcy——

Mr. MICA. It is astounding to me. I have been in the development

business, and I couldn’t imagine an award anywhere near this size

and not having the scrutiny.

Now, we will have to find out where the problem is. Is the Department going after these folks? Are you reporting them to the

Department of Justice?

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Mr. APGAR. Yes. As I mentioned in the testimony, we have made

appropriate referrals to our Office of General Counsel. They are

considering a referral to the Inspector General, as well as to the

Justice Department, and it is under review. The whole item is now,

of course, in bankruptcy court.

Mr. MICA. Did you say considering, or is this under way?

Mr. APGAR. From my point of view, it is under way.

Mr. MICA. So we should expect some action by the Department

of Justice.

Is there someone at the Department of Justice now who has already started an investigation?

Mr. APGAR. Working through our Enforcement Center, they have

met with people from the Department of Justice. I could get you

the names of the Department of Justice people that they have been

working with.

Mr. MICA. Could you provide us with that?

Mr. APGAR. Right.

Mr. MICA. The next question is we have people like Ms. Peterson. She has laid out $1,400. It may not seem like a lot to people in

Washington, put probably a good part of her savings to close on

this house. A lien was slapped. The lien was really the responsibility of a mistake made by HUD in awarding a contract—the contract to these fleecing artists.

Is there a system now being considered to reimburse people?

And Ms. Gibson told us about subcontractors that haven’t been

paid to the tune of multimillion dollars. What is the plan for resolution for these folks?

Mr. APGAR. Well, I by no means minimize Ms. Peterson’s $1,400

lien. She is, in fact, an FHA home-buyer and insured her house

with the Federal Housing Administration, so we know our customer profiles very well and appreciate that for that family, $1,400

was a major problem.

In Intown’s failure, they failed to pay many contractors across

the country. Those contractors rightfully put liens on our property.

We now have a system in place where we are bonding the liens.

That is the way of preserving our capacity to recover against Intown in bankruptcy, while at the same time allowing the sales to

go forward.

Mr. MICA. That has been in only 20 States so far, or some

States? It is not in place everywhere?

Mr. APGAR. No. We are going State by State. The proof is in the

pudding. We have sold almost 2,000 homes, and so we have substantially attacked the lien problem.

Mr. MICA. What about this lady sitting next to you?

Mr. APGAR. In cases where individuals paid their own liens, we

will establish a process in which we will repay them for that lien

and assume the responsibility as we have with the other liens in

order to let the sales go forward.

Mr. MICA. How much is the taxpayer going to end up paying as

a result? Is there any estimate? Has the IG or has your Department estimated what this is going to cost us in the end?

Mr. APGAR. Well, it is our understanding there will be no cost to

the government; that, in fact, I would say that our overall program

has been generating benefits in excess of the cost of the program.

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In terms of the liens, of course, we paid every dollar that Intown

billed us, so they had the money to pay many of these contractors.

That matter will be resolved in bankruptcy court.

Mr. MICA. But we don’t have a clear estimate as to what this will

cost?

Mr. APGAR. The bankruptcy court is assembling a nationwide estimate of what was owed and what was paid. I mean, let’s be clear.

Intown, when we seized their records, were in substantial disarray.

We literally had to do almost like a midnight raid in order to get

into their offices. And again, the records were in substantial disarray.

Mr. MICA. But what concerns me finally is we have Ms. Gibson

testifying today under oath that now we have another contract—

well, we have a previous contractor, Citywide, replaced, what is it,

Goldenfeather.

Ms. GIBSON. Goldenfeather replaced Intown. Intown replaced, I

guess, the previous contractor, Citywide.

Mr. APGAR. If I could say a word about Goldenfeather.

Let me tell you a little bit about Goldenfeather. Goldenfeather

was and is one of the best contractors we have had and proven by

experience. They took over initially the very difficult southern California market. They have been now selling homes faster than they

have been taking them in, lowering the inventory, returning good

return, better than we did through our old system.

Mr. MICA. But they are overtaking Citywide, which has not met

its obligations.

Mr. APGAR. Now they are in Chicago trying to dig out from the

mess that Intown had created, and we fully anticipate that they

will be able to work with the contractors, pay the liens where they

are appropriate, and move forward.

Mr. MICA. Ms. Gibson, you testified, however, that Citywide, was

that the one that——

Ms. GIBSON. The first—there were people who told us that they

had worked for, and I don’t know if they were M&M or REAM contractors, but they were called Citywide, and that when they came

to us, because they had not been paid by Intown, a number of them

had said they were still waiting to be paid from Citywide.

Mr. MICA. Which was the previous one?

Ms. GIBSON. Which was the first one.

Mr. MICA. Before Intown.

Ms. GIBSON. Before Intown.

Now, a lot of those people went and signed up to work for

Goldenfeather, even though our position was that they should not

work for Goldenfeather until Goldenfeather was able to put in writing to us that we would be paid for services. Goldenfeather refused

to do that. My position was that I was not going to do anything

else on any contract until HUD was prepared to say, these are the

people we sent to town to do work for us and we backed them. If

that is not happening, then most of the contractors that I represent

are not providing services for Goldenfeather, and as of last week,

they were begging for contractors because their credibility has been

shot. So therefore, the properties are sitting. They do not have

enough contractors in the Chicago area to meet the needs, and peoVerDate 11-MAY-2000 08:52 Dec 13, 2000 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 C:\DOCS\66338.TXT HGOVREF1 PsN: HGOVREF1
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ple are not going to provide those services because we don’t have

any accountability or feel that we are going to be paid.

Mr. MICA. Let me clarify for the record, if I may. Is it C-I-T-Y— Citiwest, not Citywide. I have been saying Citywide. Citiwest, what

is more disturbing to me, Mrs. Ranking Member, is Citiwest, who

she is talking about, who didn’t perform before Intown, who went

bankrupt, that didn’t perform, has contracts that were given June

19th for business in New England and now hasn’t performed in

New England; only has 84 of 218 properties available. So the dudes

that messed up in her area have now moved into the Northeast to

perform their nonperformance tasks.

Mr. APGAR. If I could give you a full report on Citiwest’s performance in New England, I am not sure what information you are

looking at, but they have performed well under this contract. They

also have increased the FHA’s—— Mr. MICA. Did you talk to them about meeting their obligation

back in—— Mr. APGAR. There is no evidence that they haven’t. We would be

happy to hear that complaint.

Mr. MICA. We just had testimony to that effect.

I have taken more than my time.

Mr. APGAR. With all due respect to Ms. Gibson, she also testified

that Goldenfeather was begging for contractors. Our reports from

Goldenfeather, that they are up and operating in Chicago, and they

have ample resources to perform these contracts. Obviously, Ms.

Gibson is not one of those contractors, but others have stepped forward, and the process is working.

Mr. MICA. Mrs. Mink.

Mrs. MINK. I think that one of our fundamental principles in

America is that if people work for whoever, even under bankruptcy

laws, that they have a priority commitment on the part of the court

and the government that they be paid, and it seems to me that

that principle needs to be recognized by HUD. Now, going back to the Intown contract of $300-some million,

what was that money supposed to represent, if it was a contract

of commitment to Intown?

Mr. APGAR. This was a performance-based contract. Intown got

paid when they listed properties and when they sold properties.

Mrs. MINK. So the $360-some-odd million is an estimated value

of the properties that was assigned to Intown to sell?

Mr. APGAR. Right. Estimated—the number of properties that

they were assigned over a 5-year period over an estimated basis.

Mrs. MINK. So the assumption is if they did their job and sold

the properties, then they could pay all of the people that helped

them perform in the maintenance and upkeep of these properties

before they were sold.

Mr. APGAR. That’s right. It was a performance contract. They got

an initial just for listing the property, and they got additional payment when they sold the property.

Mrs. MINK. So in some instances then, the properties were actually listed, and the government then paid them the 30 percent advance fee, even though the properties were not sold; is that correct?

Mr. APGAR. Right. We paid them in two stages.

Mrs. MINK. How much was paid to Intown then?

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Mr. APGAR. How much was paid to Intown in total? Many millions of dollars. I have to get the exact figure.

Mrs. MINK. Out of that money that Intown was paid, is there any

way to make sure that the actual obligations to the subcontractors

are actually met for maintenance, or is that not part of the contract

that you entered into with Intown, that they pay these obligations

first out of that 30 percent?

Mr. APGAR. Yes. They are bound by all kinds of contractual law

which says that as contractors and in their relationship to subcontractors, they are obligated to pay.

Mrs. MINK. So what is the overall total then of the subcontractors’ claims against Intown? Now that it is all public and it is in

the bankruptcy courts, I imagine that that total figure is available.

Mr. APGAR. No. They are still totaling up the figure.

Mrs. MINK. What is your estimate of what the figure would be?

Mr. APGAR. Oh, several millions of dollars, maybe as many as $10 million.

Mrs. MINK. Up to $10 million.

Mr. APGAR. Yes. That is just a rough estimate.

Mrs. MINK. Now, is that—— Mr. APGAR. Can I explain why it is difficult to sort this out? We

don’t have clear information as to whether or not Intown has taken

the money we have given them already and paid these contractors.

Mrs. MINK. That was my earlier question; you made the estimate that it is about $10 million. Is any part of that money somewhere

in escrow so that these people can be paid?

Mr. APGAR. We withheld every payment that wasn’t made at the

time of termination back, and that is part of our resources that are

moving forward.

Mrs. MINK. So does HUD consider this to be a firm obligation to

meet with respect to all of these subcontractors and workers that

have not been paid for work that they have done?

Mr. APGAR. We have, as we noted, taken the step of paying all

the liens by posting surety bonds. By doing it that way, of course,

it retains our claims in bankruptcy court so that we will be able

to recover against those claims. We want to be careful not to pay

twice for work that has already been done, and we have no obligation or resources to do that. It was our intention to work to make

sure that the subcontractors are made whole, consistent with the

operations of the bankruptcy court.

Mrs. MINK. How long do you think that process will take before

these people can be paid?

Mr. APGAR. Well, we are paying already, as folks who have liens

are being paid. We cleared almost 2,000 houses for sale, and the

liens on all of those are being paid.

Mrs. MINK. You are making good on the liens. How about Ms.

Peterson’s?

Mr. APGAR. Right. It has come to our attention that a few people

paid their own liens in order to do this, and then our procedure will

be to identify those folks and pay their lien——

Mrs. MINK. So Ms. Peterson can expect to get her money soon?

Mr. APGAR. As soon as we can handle that transaction, that is

correct.

Mrs. MINK. Thank you.

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I have a whole bunch of other questions, but I am being beckoned to my other committee. But I did want to get to the point of

the how come they didn’t know about this individual’s defaulting

on bankruptcies and criminal record, and you stated that it was

the Inspector General’s responsibility. As I understand it, this is an

entirely separate operation, so it is unfair to place that burden of

failure of knowing who these people were on the Department when

you have an Inspector General that is supposed to be doing the job.

Mr. MICA. Well, let me say just in a quick dialog with the ranking member, if I may, and Mr. Tierney, that there is something

wrong on the procedure. I don’t know if it is in the law or in the

regulations or their administrative procedure, but when you can

award a $367 million contract to a guy with a conviction of felonies

and a series of bankruptcies with that much public trust responsibility, there is something wrong.

Mrs. MINK. Can I make an amusing comment, side-bar?

Mr. MICA. Go right ahead.

Mrs. MINK. I understand that the Majority party, however, is

adamantly opposed to the administration’s recommendation that

we do establish a policy in which we examine the records of the

would be contractors, and while I think that is a very good stand

that the administration’s taking, I wonder why it is being so vehemently opposed on your side.

Mr. MICA. Well, I don’t oppose it. I happen to be—— Mrs. MINK. Good. Score one.

Mr. MICA [continuing]. In favor of looking at what the problem

is here, but obviously, we have a report that was just read by the

Assistant Secretary from the IG office within the agency that is

supposed to perform this function. Something went wrong, badly

wrong, in this process, and whether it is changing the law, the regulation or whatever, we need to look at it. I am open to that, certainly.

Let me yield now to Mr. Tierney, the gentleman from Massachusetts.

Mr. TIERNEY. Thank you, Mr. Chairman. I am not going to take

up any time. I think that you have pretty much hit it on the head,

that where we ought to be going with this is looking at the process

and determining where it broke down and what we should do to

make sure it doesn’t happen again; because clearly, you are exactly

on point, that we should not be giving contracts out of this magnitude without some investigation into the past.

We have now identified that nobody at this table was supposed

to do the investigation, but one of the agencies should have. Maybe

the next set of hearings should be bringing those people in to find

out why they didn’t do the appropriate job. Thank you.

Mr. MICA. I thank the gentleman.

We are going to leave the record open for at least 3 weeks, because we will have additional questions that we are going to ask

the agency.

Ms. Gibson, let me just clarify again, the contractor you spoke

about was Citiwest that was in Chicago before Intown, and

Citiwest was taken over by Intown. But you are telling me that

there were—I don’t know if there still are, but there were obligations of Citiwest, the first one, not met.

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Can you again enlighten the subcommittee?

Ms. GIBSON. Some of the subcontractors, again, when they came

to us, they said that they were still waiting to receive all of their

full compensation out of Citiwest. They had not received that

money, and then my question, of course, to them was, if you

haven’t been paid from the first contract, why are you now with Intown, in this boat with those of us who came on board just with

Intown? Their response was, well, we had to work. Those people

are probably still with Goldenfeather.

But I just have a question, because I am really not understanding what Mr. Apgar just said to us. I am trying to understand, are

you saying that if we put liens on the property, we will get paid,

because you are saying you are going to pay off the vendors that

put liens on the property. We were advised against putting liens

on the property by some attorneys who had done work for HUD,

because we have called, I think, every agency in this government

trying to find out how we get remedy. We were advised against

putting liens. But what I seem to be hearing you say is that if we,

as small vendors, put liens on the HUD property, then you will pay

us our money. I am just asking for clarification.

Mr. MICA. Secretary Apgar, she raised the question, and I think

you addressed how the lien folks—and you did say that in some

States you are in a bonding situation, so there are some that

aren’t. But what about also this question of nonlien obligations?

Mr. APGAR. It is my understanding that State law enables contractors of this type to place liens against the property as a way

of securing an interest. I am particularly mindful of the fact that

many of these contractors are literally the folks who cut the glass

and do small chores all the way up to substantial rehab contractors, and that is essentially a way of getting around issues of bankruptcy court and other complexities. So, in fact, I don’t know who

advised Ms. Gibson as to how to pursue her rights, but contractors

that have placed liens against the properties have secured their interest that way, and we are, in fact, moving ahead with paying

those contractors in order to facilitate the sale of the property.

Mr. MICA. But again, those who haven’t slapped a lien on, what

is their recourse?

Mr. APGAR. They don’t lose their claim, and as we work with the

bankruptcy court, we are pursuing options so that we can pay contractors directly.

Mr. MICA. Do you know how much money was disbursed to Intown before they filed bankruptcy?

Mr. APGAR. That is a number that I would have to check on.

Mr. MICA. I would like that information.

Mr. APGAR. The annual contract, if they sold the properties, it

would have been many millions of dollars. They sold so few that

the actual disbursements were small, or less than they would have

been if they had been performing.

Mr. MICA. My question would be if the portion—I guess they got

a certain amount for management and other—— Mr. APGAR. They got—for initial listing?

Mr. MICA. Well, for their initial activities, right.

Mr. APGAR. They got initial listing fees, that is correct.

Mr. MICA. What percentage was it?

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Mr. APGAR. I think it was 30 percent of the overall payment that

they eventually received that came up front, and then—— Mr. MICA. I would like to know how much of that they did get,

excluding money for the sales, how much money they did get.

Mr. APGAR. Right. I will get you that figure, sir.

Mr. MICA [continuing]. I think that is important.

Mr. APGAR. There are no buzzes coming from the air back here,

so I think my supporting folks don’t have that. We will give you

the exact number. We do have these numbers, of course, in our central computers.

Mr. MICA. All right. Finally, you said you had a report from the

IG. Who signed that report? Can you tell us what office it came

from?

Mr. APGAR. Yes. It is the previous participation experience. It is

the IG’s office, and it is signed by a Mary Dickens.

Mr. MICA. Dickens?

Mr. APGAR. I am trying to read this. It is handwritten here. Dickens. I am sure that our contracting office could give you the name

of this person because—— Mr. MICA. Are you familiar, Ms. Kuhl-Inclan?

Ms. KUHL-INCLAN. It is Mary Dickens, yes.

Mr. MICA. Mary Dickens. What office of the IG?

Ms. KUHL-INCLAN. She works in our Office of Management and

Policy.

Mr. MICA. All right. Would you provide us with a copy of that

report for the record?

Mr. APGAR. Yes. Be happy to.

Mr. MICA. Without objection, those reports will be included as

part of the record.

[The information referred to follows:]

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Mr. MICA. Ms. Kuhl-Inclan, what went wrong?

Ms. KUHL-INCLAN. I can only—I really don’t know, sir. Intown

Management Group was a brand-new organization, and that is the

only thing I can speculate is that it was looked at—when the request came in, it came under Intown Management Group. Our experience had been with Intown Properties, Inc., but that is only

speculation. I will have to get you a complete answer.

Mr. MICA. Is your office also recommending working with the Department of Justice now to make certain that we pursue both

criminal and civil action against these folks?

Ms. KUHL-INCLAN. I have not seen the request to our office, but

yes, if it is sent to us, we will make sure that we work with the

office, for both civil and criminal.

Mr. MICA. Do you have anything else, Mr. Tierney?

Mr. TIERNEY. No. We are obviously talking to the wrong people,

but I would assume the IG’s office would check the principals at

least for their background.

Ms. KUHL-INCLAN. I have no—I will give you a complete explanation.

Mr. MICA. Well, we may follow through with your request. I

think this is a large enough item for us to continue pursuing not

only in this hearing, but a subsequent hearing, to make certain the

program works well. I mean, we want people like Mrs. Peterson to

have housing. We want to dispose of these properties. We don’t

want folks like Ms. Gibson out there also left holding the bag and

other subcontractors across the country. This is a pretty big problem, and when they went down, it has created some incredible

problems. But we need to work our way through this and make

sure that it doesn’t happen again, for God’s sake.

Well, I thank this panel. We have fulfilled some of our responsibility in conducting oversight and investigation on this program.

We will excuse you at this time, and we will call our second panel.

In the second panel we are going to discuss the Community

Builders Program, which we have heard has been the source of a

great deal of controversy, to discuss that program and some of the

problems surrounding it. We have several panelists. They include

Mr. D. Michael Beard, who is the District Inspector General for

Audit, Texas, Department of Housing and Urban Development; Ms.

Carolyn Federoff, and she is vice president of the Massachusetts

State Office AFGE, and I am glad to see Mr. Tierney here from

Massachusetts; and we have the Honorable Saul Ramirez, Jr., Deputy Secretary, Department of Housing and Urban Development.

Ms. Kathy Kuhl-Inclan, I am told you are also going to sit in on

this panel. You have been sworn. If the other three could please

stand.

[Witnesses sworn.]

Mr. MICA. The witnesses answered in the affirmative. We welcome the three new panelists. Again, if you have lengthy statements or additional information you would like added to the record,

we would be glad to do that upon request.

With that, I will recognize first Mr. D. Michael Beard, District

Inspector General for Audit, Texas, Department of Housing and

Urban Development.

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STATEMENTS OF D. MICHAEL BEARD, DISTRICT INSPECTOR

GENERAL FOR AUDIT, TEXAS, DEPARTMENT OF HOUSING

AND URBAN DEVELOPMENT; CAROLYN FEDEROFF, VICE

PRESIDENT, MASSACHUSETTS STATE OFFICE AFGE LOCAL

3258; AND SAUL RAMIREZ, JR., DEPUTY SECRETARY, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Mr. BEARD. Chairman Mica, Ranking Member Mink, and other

subcommittee members, I appreciate the opportunity to appear before you today to discuss the results of our audit on Community

Builders at the Department of Housing and Urban Development. I

am accompanied today by Kathryn Kuhl-Inclan, the Assistant Inspector General for Audit.

Our audit generally found problems with the Community Builder

concept, its implementation and its impact on HUD. While we did

see some positive results from the 85 Community Builder specialists, overall we concluded that HUD could not afford the Community Builder concept. Over the last two decades, HUD has

downsized from 20,000 employees to just over 9,000. During this

same period, HUD’s programs have increased dramatically. The

General Accounting Office placed the Department on its ‘‘high risk’’ list.

Our audits have also identified some weaknesses. A common

theme in these audits is the lack of sufficient resources to effectively manage and monitor programs. We do not see how Community Builders contribute to resolving any of those deficiencies. On

the contrary, we believe a large number of staff devoted to this

function diverted other staff resources from performing oversight

functions.

The Community Builders was an attempt to separate the outreach and monitoring functions. However, HUD chose an expensive

and controversial solution. HUD did not properly establish the necessity for the Community Builders or the level of resources it required. Rather than targeting staff from within, HUD chose to look

to the general public for Community Builder fellow positions. In

our view, HUD used Schedule A authority because it offered the

most latitude in hiring outside Civil Service rules.

In selecting personnel for Community Builder fellow positions,

HUD ignored veterans’ preference and OPM’s rule of 3 selection

process. Senior management dismissed the failure to follow veterans’ preference and selection rules as administrative errors. Further, in response to our report, HUD stated they complied with veterans’ preference. However, audit evidence shows they did not. In

light of the foregoing, we have asked Director Lachance of the Office of Personnel Management to conduct a full review of HUD actions.

The Community Builders’ positive impact on HUD’s mission is

indeterminable. The Community Builders’ purpose is everything

from providing one-stop customer service to solving the toughest

economic and social problems facing communities. This visionary

mission is not easily measured or realistically accomplished.

Through the establishment of the Community Builder Program,

HUD has redirected a significant amount of its staff resources to

outreach and customer relation activities. Since the function was

created without any increase in HUD funding, all associated costs

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reduced the funds available for other program staff. These other

program staff, known as public trust officers, have the responsibility for monitoring and overseeing several HUD programs. At a time

when HUD is designated by GAO as a high-risk agency, HUD can

ill afford to devote substantial resources to the Community Builder

concept. Community Builder activities do little to address HUD’s

mission and require scarce resources being directed away from

areas that could help in addressing the many identified material

weaknesses in HUD’s program.

Our overall conclusion is HUD should discontinue the Community Builder position. As designed and implemented, the Community Builder function is too costly. Excluding the Community Builder specialists assigned to specific program areas, HUD never established the need for Community Builders, identified skills Community Builders would need, or gave focus to their activities.

In responding to our report, HUD cites favorable comments by

other organizations on Community Builders; however, these organizations performed limited reviews. For example, the interim Ernst

& Young report stated their work was limited to reporting on 25

case studies identified by HUD.

HUD had also asked to control the selection of the people that

we wanted to interview and the sites that we wanted to visit, but

we declined.

HUD also cited several instances where Community Builders

have had a positive impact. We have no doubt individual Community Builders have had a positive impact; however, we believe career HUD employees have always had a positive impact and could

have had an even greater impact if given the same resources provided to the Community Builders.

Let me emphasize that we are the only entity to give the Community Builder Program an independent review. The other organizations that have reviewed it are consultants. I would like to quote

from the engagement parameters of the Ernst & Young report

which says, ‘‘Our sample of case studies was drawn solely from the

population of case studies provided by HUD. The terms and scope

of our engagement did not provide for us to independently verify

or otherwise test the completeness of the overall case study population provided. Further, this report is based solely on information

submitted by the Community Builders, HUD, and individuals

interviewed. In addition, all case study interview sources were

identified from the Community Builders, identified as references in

their individual selective case studies. Our findings and observations relate solely to the selected case studies. The scope of our engagement did not provide for us to interview HUD employees regarding the Community Builders Program. These and other engagement parameters are described in more detail in section 5 of

the report.’’

The project was considered a consulting engagement under the

standards of the American Institute of Certified Public Accountants. So therefore, it was not an audit engagement.

Thank you very much.

Mr. MICA. I thank the gentleman.

[The prepared statement of Mr. Beard follows:]

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Mr. MICA. I would like to yield now to the gentleman from Massachusetts, Mr. Tierney, for the purpose of an introduction.

Mr. TIERNEY. Thank you, Mr. Chairman.

It is my pleasure to introduce Carolyn Federoff, who is known to

me for her fine work up in our area. Carolyn Federoff works in the

Boston office of the Department of Housing and Urban Development. As the development attorney with the Department, she has

helped in the development of many projects, particularly in my district, including the Whittier School Apartments, which is an eightunit development for persons with mental disabilities in Amesbury,

as well as the HEPA 39 apartments, which in reality is a 54-unit

development for the elderly. She has an outstanding reputation

amongst HUD’s clients.

Carolyn has been elected union representative for more than 10

years, and during that time she and her coworkers have kept the

Massachusetts congressional delegation informed of proposed

changes to HUD and the impact on our constituents. I will just add

that she has done an excellent and incredible job. We appreciate

her services, and I am pleased to introduce you today, Carolyn.

Mr. MICA. Thank you, Mr. Tierney.

Welcome, you are recognized.

Ms. FEDEROFF. Thank you, Congressman Tierney, for that kind

introduction, and thank you, Mr. Chairman and Members, for inviting me to testify on behalf of our members. We represent members throughout New England, and our members are very happy

that you are taking an interest in the programs and issues at

HUD. I hope that you will place my written testimony into the

record, but I am going to provide only some details.

Mr. MICA. Without objection, your entire statement will be included in the record.

Ms. FEDEROFF. A little bit of background. In 1991, the Boston office had 322 staff. In 1999, we have 183 staff, which represents a

43 percent reduction in staff over 8 years. Currently, more than 10

percent of our staff are Community Builders.

HUD is very resource-poor, but what particularly disturbs employees is that we believe it uses its resources poorly, and the

M&M contract is a case in point, which the previous panel did discuss, and that is covered in my written testimony.

There is another contract that was considered in that same audit

by the IG that looked at the M&M contract, and that is the Section

8 contract administration contract. That is also a $1 billion contract over 5 years for which the agency has not conducted any credible cost-benefit analysis and certainly no cost-benefit analysis

under A–76. Based upon our review of agency documents, we believe that contract is $159 million more than hiring HUD staff annually. That works out to more than 27,000 housing vouchers that

could be provided for homeless families if this work were to be kept

in-house as opposed to contracted out. The IG also mentions that

there are significant threats to the integrity of the program if this

were to be contracted out.

I realize that this panel is concerned primarily with Community

Builders. Now, first allow me to say that our testimony is not directed toward individual Community Builders, because, in fact, all

of the Community Builders that I know personally are, in fact,

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committed to the mission of the agency and came here with that

express purpose. Our concern is that given the expenditure of

funds and the expenditure of resources that is necessary to maintain the Community Builder Program, that, in fact, it is not significant enough to warrant that distribution of resources.

In New England, we presently have 43 Community Builders.

Only the Office of Housing has more staff resources than the Community Builder Program has in New England. So, for example, our

Community Planning and Development Office has 28 staff in new

England. This staff oversees congressionally mandated programs,

such as 55 community development block grant recipients, 28 home

recipients, 22 emergency shelter grant recipients and 550 McKinney homeless grant recipients.

In Massachusetts alone, the staff is responsible for overseeing more than $170 million in funds, and they are also responsible for

Maine, New Hampshire, Vermont and Rhode Island. So statutorily

mandated, taxpayer-funded program responsibilities receive only

two-thirds of the staff that is currently dedicated to front office responsibilities, responsibilities which have no statutory mandate or

rule or regulation.

Now, the grade parity issue has been an issue that has been

identified, the Community Builders GS 13, 14 and 15. And frequently as a union rep, I am asked what is the impact on rank and

file, and clearly there is an impact on rank and file, but this really

has to be taken as a full management issue.

Let’s compare one Community Builder position, which is the Officer Next Door Program. The Officer Next Door Program staff person is a job that had previously been one part of a GS–11 singlefamily property disposition specialist job, and I understand that

this Community Builder fellow has far more territory to cover than

any GS–11 PD specialist had previously. However, this person

has—oversees no staff, has no fiscal responsibilities, and cannot obligate agency funds, and is a GS–15. Compare this to our Director

of our—of the New England multifamily Hub. That GS–15 Director

is responsible for overseeing 88 staff in five offices, more than $150

million in development dollars in 1999 alone, the largest portfolio

in the country of 2,266 active properties, and more than 200 properties in the development pipeline.

Now, why would you become a manager in the Federal Government if you have that much responsibility and are paid the same

amount as the GS–15 down the hallway?

This is an issue that attacks the morale of the agency throughout

the entire agency. I realize that the agency is saying that this is

no longer an issue, that we are no longer going to have a temporary Community Builder Program. Well, in fact, it appears that

we are going to have a permanent Community Builder Program,

and this is going to be a severe blow to the morale of employees

throughout the agency.

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We hope that this committee and our representatives in Congress will look seriously at the distribution of resources in our

agency, particularly with regard to the Community Builders and

the Section 8 administrative contract, which is a serious issue for

our members and for our constituents. Thank you for giving us this

opportunity.

Mr. MICA. Thank you for your testimony.

[The prepared statement of Ms. Federoff follows:]

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Mr. MICA. We will now hear from Mr. Ramirez, who is the Deputy Secretary for the Department of Housing and Urban Development.

You are recognized, sir. Welcome.

Mr. RAMIREZ. Thank you very much, Mr. Chairman and members of the subcommittee. It is certainly a pleasure to be here, and

as I mentioned, I am the Deputy Secretary, my name is Saul Ramirez, and it is a pleasure to be here to discuss our Community

Builder Program. I would like to request that both my written and

oral testimony be included for the record, Mr. Chairman.

Mr. MICA. Without objection, so ordered.

Mr. RAMIREZ. Let me say that this is an innovation that we are

extremely proud of, and it is a critical part of our successful management reform efforts and is making the Department work better

for the people we serve. Please allow me a brief moment to explain

how the Community Builder Program came about.

For years, HUD was considered the poster child of inept government. It was criticized as a bureaucracy riddled with waste, fraud

and abuse, and was known more for red tape than results. The

media reported HUD scandals and landlord rip-offs. HUD customers shared horror stories of making 10 phone calls to 10 different people, just to find a simple answer, if they could get one

at all.

In 1994, with the recommendation of Congress, HUD worked

with the National Academy of Public Administration to look at its

management. NAPA told HUD that it needed to make working

with communities just as important as enforcing regulations. They

said HUD should be providing comprehensive services to the communities it serves.

By January 1997, when Secretary Cuomo arrived, many in Congress were fed up with the situation at HUD, citing sloppy or nonexistent accounting, shoddy program monitoring and blatant disregard for the needs of the customers. They called, in fact, for

HUD’s elimination. HUD needed to get its own house in order first

and fast, and a goal for a comprehensive management reform plan

was designed to transform HUD into a streamlined, effective community partner.

First we began to restore the public trust and improve our competency. We focused agency staff on ridding waste, fraud and

abuse. We cracked down on bad landlords, debarring those who

were cheating taxpayers or who refused to provide safe, decent

housing. We hired an FBI agent to head up our new Enforcement

Center, and we went after lenders who discriminated and cheated.

We built a system for the first time that enabled us, in fact, to assess the condition of our entire housing portfolio, and, for the first

time in our Department’s history, we balanced our books and had

a clean opinion, as concurred by the Inspector General.

But we also needed to better serve our current clients and customers as well as those underserved communities still in desperate

need of assistance and who found us unapproachable. I am certain

that no one in this room would disagree with me when I say that

cutting red tape and streamlining operations is the right goal, and

that is exactly what Community Builders helped do, and here is

how.

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At the heart of better customer service and better overall management, it is the recognition that the employee role confusion undermines performance. Now, let me repeat that. The recognition

that employee role confusion undermines performance. NAPA understood this, as well as David Osborne, who warned HUD of pitfalls when one employee must assume two contradictory roles. We

know HUD staff can no longer wear two hats, serving as both

facilitators to help communities access resources, and monitor

those same communities and make sure that they use their funds

properly. These contradictory roles weaken both customer service

and monitoring and compliance.

Using private sector reorganization as a model, HUD took a customer service function that was performed by all HUD employees

and concentrated them in a small number of employees, our Community Builders. Now, Community Builders, some 9 percent of the

agency work force, focus on customer service, leaving more than 90

percent of the agency to put 100 percent of its time into restoring

the public trust in meeting our mission to meet compliance and

monitoring efforts within the Department. This change makes

sense to all of us intuitively. What insurance company would have

the same group of employees act as both a sales force and an underwriting force?

We are pleased to say that many people agree with these

changes that we have made and, in particular, in our Community

Builder Program. You have alluded to the Ernst & Young report

that concludes, in fact, that the Community Builder Program may

serve as an innovative government model for improved customer

service for government institutions at all levels.

I would also like to state that Andersen Consulting conducted a

survey in which they found, ‘‘In striking contrast to the image of

the Federal bureaucracy, HUD staff is perceived by customers as

providing exemplary service and accurate information. Many of

these customers are public entities and officials, Members of Congress, and others that have worked directly with Community Builders,’’ and I have submitted a list of some of the hundreds of people

and organizations that we have heard from as it relates to this effort.

I would like to just conclude by saying that the OIG is the only

organization that has criticized HUD Community Builders, and

that the Department firmly disagrees with the OIG criticism. In

fact, it would take me hours to just walk through the many mistakes and misassumptions that the OIG report has stated.

So I urge you to thoroughly review the detailed response that we

have provided you in response to their audit.

Let me just briefly state three items that we disagree on. First,

the OIG argues that there were problems with the process for hiring Community Builders. HUD followed all proper procedures and

consulted with the Office of Personnel Management to institute a

very stringent hiring process, a process, I might add, that was carried out entirely by civil servants. Congress decided at this point,

though, in its most recent budget that we make all Community

Builders now Civil Service positions, and we are moving in that direction.

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The second point that the IG highlights is that the Community

Builders take up too many of the Department’s resources. Well,

that is just simply wrong. I would refer you to that chart of our

salaries and expenses, as well as our travel dollars that we allocate

in the Department, and would be happy to allude to in greater detail as it relates to that.

Third, I would like to say that the Community Builders do add

value in contrast to what the Inspector General has cited in their

report, and Members of Congress, mayors, HUD customers and clients and respected organizations that are credible, like Ernst &

Young, Andersen Consulting, Booz-Allen, public strategy groups,

have stated specifically that Community Builders are a tremendous

asset to the Department. Even GAO and NAPA acknowledge that

the Department is moving in the right direction to deal with its

weaknesses.

We at the Department are still not satisfied with that and are

working to improve our systems, and will outline any additional detail in improving those systems, but I am prepared to answer any

questions that you may have at this time as it relates to this subject or any other, Mr. Chairman.

Mr. MICA. Thank you.

[The prepared statement of Mr. Ramirez follows:]

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Mr. MICA. Your testimony stated that the only organization that

has criticized the Community Builders is the OIG. I would imagine

that Ms. Federoff represents—who is representative our civil servants, maybe AFGE has a different opinion. I think she stated some

of that here.

There was concern about the selection process. There is concern

when you have someone with no supervisory responsibility, limited

duties as far as oversight of financial obligations and things of that

sort, major consequences being at a substantially different pay

grade. That sounds inequitable. So, I think other than the OIG,

and I did cite the U.S. Senate, I guess that could be referred to as

an organization, although sometimes it is a bit disorganized, has

been very critical.

Ms. Federoff, we are now sort of institutionalizing the Community Builders. If we were to properly do that in your estimation,

how would we proceed?

Ms. FEDEROFF. Well, I believe that, in fact, there is a role to play

by Community Builders. However, I think it would be a smaller

cadre of staff that would be more appropriately graded to reflect

the duties that they are doing and put them on par with other employees within the Department.

I believe that one of the largest problems with this program is

the large numbers of temporary employees at very high-grade levels that causes a significant morale problem.

Mr. MICA. Well, that is one of the inequities I pointed out that

you had mentioned. We have this in place—Congress wants it

changed, and I am sure that there has been some good to come out

of the program. The problem we have now is we have a lot of these

folks in high-paying positions selected on a different basis.

Mr. RAMIREZ. May I address that?

Mr. MICA. In fact, I was going to ask you a question about it.

Mr. RAMIREZ. Yes.

Mr. MICA. As we make this transition, how are the employees or

employees’ groups going to have a say in how this is organized? It

was my understanding that OPM uses civil servants to help in the

selection process. Is that correct?

Mr. RAMIREZ. No. All of the hiring was done by HUD civil servants for the external Community Builders. If I may, the total number is almost even between career Community Builders and fellows

at this time. There are a few more fellows than there are career.

Mr. MICA. So you are going to fire all the fellows?

Mr. RAMIREZ. No. What we are going to do, sir, is we are—as

term employees are subject to, and we have had other types of

term employees employed by the Department that are subject to

limited tenure—let me just state a couple of points.

First off, we went into this reform with the national representatives as well as locals into 2020 reform, which included Community

Builders, at the onset of this. We have kept that dialog current

with our national representative and also met with the local presidents. I was sorry to miss Ms. Federoff.

Mr. MICA. How would you propose to bring the pay schedule in

to some——

Mr. RAMIREZ. I was going to get to that point. I would like to

state this for the record, that if you take the Grades 13s, 14s and

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15s on the career side of Community Builders and the fellow side,

that, in fact, the career Community Builders average more than

$5,000 in their salary than the fellows, if you take out—if you take

the average of salaries between those grades. What we are proposing to do is, again, based on the formula for need and other activities within a jurisdiction, allocate those fellows accordingly.

I would like to also add that we did follow the veterans’ preference in contrast to what has been stated by the OIG, and would

say that, in fact, the Neighborhood Next Door, a fellow that was

alluded to by Ms. Federoff as well as the other two are veterans

that were hired by the Department. So there have been a lot of

items that have been stated that have not been thoroughly reviewed or investigated or have not had the kind of objectivity that

we would like to place forth as we move forward in meeting

Congress’s wishes to make sure that we address the deficiencies

that we have as a department, Mr. Chairman.

Mr. MICA. Ms. Federoff, again, back to the question of how do we

achieve some new equity as far as pay, what would be your recommendation? We talked a little bit about positions, about getting

the pay schedule in order. How do we solve something like that

now that we have gotten ourselves into this?

Ms. FEDEROFF. This is a very uncomfortable position for a union

representative to be in.

Mr. MICA. Well, you know, the Federal employees have a lot at

stake. There are 90 percent of your folks that are living by a different set of rules and regulations. Congress——

Mr. RAMIREZ. That is not so, sir. They were all hired under the

same standards that are applied to higher public trust officers and

by civil servants. They were the same rules and same regulations,

and the compensation that they received was based on the analysis

that the Federal Government provides to hire new outside hires

into the Federal Government as well as position descriptions and

responsibilities that they assume.

Mr. MICA. Well, Ms. Federoff doesn’t seem to agree entirely with

that. Maybe you would like to comment.

Ms. FEDEROFF. Well, it is interesting that in the Inspector General’s report the Inspector General does quote, I believe, yourself as

saying that much of the work being done by Community Builders

now is work that had been done for at least 6 years previously by

our CPD staff. The journey level for our CPD staff is a Grade 125.

Now, what is particularly infuriating for our staff is that the very

best work, quite frankly the ‘‘funnest’’ work that we do, which is

customer relations, was taken away from us, and we were told, no,

now all you are going to do is be enforcers. I didn’t come to work

for the United States in order to be an enforcer. I came to work

with customers, to find a way to get them the product that they

deserve. And now to be told that the very best work I do will be

given to another employee at a Grade 13, 14, 15, and I will be relegated to doing nothing but enforcement actions is—quite frankly,

insulting.

Mr. MICA. She is not a happy camper.

I do want to give the gentleman a chance.

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Mr. RAMIREZ. Real quickly. She sells herself short to say she

would be just a regulator. She brings a technical expertise and the

program experience that is necessary to deliver that product.

And I would like to say two more things real quickly. First off,

all HUD employees had an opportunity to apply for Community

Builder positions. No one was excluded. So if they chose to want

to do that, they could have applied for those positions.

Second, I will note that even after the first year of implementation, that as a result of having our public trust officers concentrate

100 percent of their efforts to, yes, compliance and monitoring,

which is a statutory requirement, as well as facilitating program

expertise, that in particular those activities that community development workers or staffers were doing, we have actually increased

our numbers. We have been able to show that in our Home Household Program, for example, we went from, in 1998 where we serviced 75,323 homes to, in 1999, 90,958. We also went out there and

increased, in this particular line of work, new community partnerships. We went from a goal of 300 to 609 that were created as a

result of that. We believe that in addition to that, community consultations were almost doubled as a result of now having a true bifurcation of responsibilities that allows for the technical expertise,

the compliance and monitoring effort be focused 100 percent, and

the Community Builders be the contact for the general informationgathering and dissemination of what the Department does.

I would like to finish by saying that as a mayor for over 8 years,

one of the most difficult things I had to contend with, as mayor in

dealing with HUD, was that I had a community development representative come in 1 week, an FHA representative coming the following week, and intermittently nobody knew that each other was

down there, and I needed both of those to make projects work in

a comprehensive way. That is what we are trying to get to with

this particular program of Community Builders.

Mr. MICA. Thank you.

I will yield to Mr. Tierney, the gentleman from Massachusetts.

Mr. TIERNEY. Thank you, Mr. Chairman.

Mr. Beard, you have been getting off scot-free here, so I want to

talk to you for a second.

I understand what the Under Secretary is saying, and I understand what Ms. Federoff is saying, but I guess the question I would

have is coming from Boston, where we have gone from an office of

about 322 employes down to about 237, that is about a 26 percent

whack there, at a time when Congress is mandating certain programs to be operated and adding some, such as the McKinney program, what does your office say about the appropriateness of instituting a new public relations type of effort, one, I think, that we

are going to have trouble servicing the mandates that Congress has

put on for programs?

Mr. BEARD. This is the point that we are making. HUD’s resources are shrinking. The Inspector General has consistently

taken the position that HUD does not have sufficient people to do

the work outlined for it to do now, and as this number is shrinking,

what has happened is HUD has taken a large chunk of people

away from what its primary functions are to do this customer service, public relations function.

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This is one of the points that we are making. It can’t afford to

do this, because it is being asked to do so much more. It has so

many more programs. Its monitoring and enforcement functions

are extremely important, and they don’t have the resources to do

that.

Mr. TIERNEY. Now, if we give the Under Secretary credit at least

for the fact that there is some obvious legitimacy to having some

outreach to communities and coordinating HUD’s efforts so that

mayors and other local officials don’t go around, what is the recommended way of dealing with all of the enforcement and monitoring provisions and using resources to also take care of those issues;

and is the Under Secretary’s argument that you can’t do both from

the same position because it is a conflict which is going to compromise your position relevant in your view?

Mr. BEARD. It is not relevant, in my view. As a matter of fact,

the one individual that that has really settled on is the Secretary’s

representative. They still play both an enforcement and outreach

function.

HUD has always had an outreach function. It has always been

there with the Secretary’s representatives. It has always been

there with the office managers and State coordinators. They have

different titles, but there have always been contacts from mayors,

towns, executive directors to come to one person to ask their questions and get the answers that they need.

So I don’t think it is a function that we dismiss, it is an important function. But our point is the scale that this particular Community Builder position has been built to has taken away too much

from the other things that HUD is supposed to be doing.

Mr. TIERNEY. Ms. Federoff, the employees, the ones that are left

with the idea of monitoring in that position, they must now feel

overwhelmed with what is left to them in terms of the fact that

they have fewer flows, particularly in the Boston office, have all of

those responsibilities, and they have another group of about 16, I

think it is, in the Boston office come in, and their job doesn’t expend any funds, they are just out there, as you say, having the fun

end of the job. I am sure they serve a purpose, but what effect does

this have on employees?

Ms. FEDEROFF. I know that when I was provided an opportunity

to testify before this subcommittee, I sent a message out to our

local executive board, our stewards and our alternate stewards and

asked them should I, in fact, testify, and I got back a resounding

yes, and I was told emphatically that I was to stress the morale

issue on Community Builders, that that was our membership’s top

priority, although, quite frankly, I am more exercised over contracting out. But yes, our employees are very concerned about this program.

Mr. TIERNEY. Well, the contracting out issue, I guess, is one that

we are not going to get into today, although I would love to both

on the other issue and this issue. It seems to me that is one direction where some in the majority have been going, and I think this

is just one more example of how that is a failed policy and a bad

idea. Maybe we could talk about the IG report or the agency’s plan

to contract out Section 8 and talk about how there is about $38

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million missing in that operation that we could have probably

saved by keeping it in-house and work on that basis.

So I guess I just want to go on record as saying that I think that

we should probably do a lot better in terms of morale, we should

probably do a lot better in terms of getting this function served

within our existing staff, but not at the sacrifice to those programs

that Congress has mandated.

Mr. RAMIREZ. May I address that? In our reorganization efforts,

there have been a little less of an equal amount of public trust positions that were created and have been available to other employees, or all employees of HUD to actually apply for and still dedicate

themselves to doing public trust work. It is not like we went out

and only hired Community Builders. In this process we staffed up

an enforcement center and a real estate assessment center that, by

the way, for the first time has inspected our entire portfolio for

physical and financial conditions.

And let me just state for the record that the downsizing of the

Boston office was primarily due to the fact that we consolidated our

underwriting activities into four centers around the country in our

single-family operation, and as a result of that, we have now been

able to show with unequivocal results that we went from 1,000,080

endorsements last year to over 1,291,000 endorsements.

All we have tried to do here in this reorganization and in the reform that was as a result of Congress coming out there and pointing out real weaknesses that we have had for over 10 years, since

Ms. Federoff has been there, is that we are trying to address them

in a real, bold, innovative and responsible way. We think we have

been able to balance it. We think we have strengthened our public

trust role. The numbers reflect it through the results of our business and operating plan, and the Community Builders are out

there facilitating programs to underserved areas and touching communities that have not been touched in the past. We look forward,

though, to working to further refine, strengthen, and move into the

direction that Congress has so instructed us.

Mr. TIERNEY. I appreciate your comments, but I just as strongly

want to urge you back that I think you can do better.

Mr. RAMIREZ. Absolutely.

Mr. TIERNEY. I am not nearly as sold on the success of this program as you are, and I think that in Boston alone, although you

consolidated everything down to Hartford or whatever, you took

those 90 positions away from Boston and filled them with 16 PR

people, in my view that are not implementing programs, and I

don’t think that is such a hot break for the Boston and greater Boston area. So if you could take that message back to Mr. Cuomo,

maybe we can do better.

Mr. RAMIREZ. I would be glad to, sir.

Mr. BEARD. Mr. Chairman, could I be allowed to just mention the

irregularities in hiring?

Mr. MICA. Go right ahead, on Mr. Tierney’s time.

Mr. BEARD. Page 143 of the report, I would like to draw your attention to a letter written by the Deputy Director of the Office of

Human Resources in which she informs a 10-point disabled veteran

that the selecting official at HUD was free to select any 3 of the

41 candidates listed for the Fort Worth job, and that is precisely

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how HUD approached hiring people. They selected anybody they

wanted to off of any list they were dealing with.

In our letter to Janice Lachance, the Director of OPM, this is

what we listed that she should be looking into in terms of Schedule

A and both hiring irregularities: HUD did not establish that it was

facing a limited pool of applicants; it did not set up a plan for crossfertilization to occur; intended the individuals hired with occupied

policy-determined positions; conducted full examinations of the applicants when Schedule A anticipates examinations would be impractical; failed to establish the need for 460 temporary employees;

advertised using a GS–13, 14, 15 career ladder; failed to determine

needed skills; failed to determine needed grade levels; failed to

mention veterans’ preference in the advertisement; prepared one

best qualified list for all applicants rather than three separate lists

for each level advertised; failed to document or show how they determined a successful applicant’s grade level; hired at grade levels

higher than the Department’s norm; hired Schedule A employees to

perform functions previously performed by career staff without the

required approval from OPM; ignored veterans’ preference in the

selection process; and ignored the prescribed selection process set

forth in 5(c)FR302, which is essentially rule of 3.

Mr. RAMIREZ. Let me just comment on that. Before we moved on

with our Schedule A authority as allowed by law, we had our

human resource department craft it out. We had OPM’s input in

implementing the Schedule A, and I would like to note for the

record that a current Assistant Counsel for the Office of the Inspector General, Mr. Anthony De Marco, was the one who crafted and

signed off on the legal analysis on the Schedule A hiring authority

and its appropriateness as it relates specifically to the external

Community Builders.

Mr. MICA. Well, we seem to have some serious internal problems

in the agency, making certain that the intent of Congress and also

the law on regulations as we would like to see them fulfilled are,

in fact, executed. I am very concerned about the veterans’ preference matter. I worked for 4 years to try to make certain that our

veterans have preference and are considered as having served in

Federal employment, and we want them to have that recognition

and consideration in the Federal jobs opportunities. So I am not a

happy camper about that at all.

Mr. Tierney has expressed some of his concern. We want this to

work. Certainly the agency has to resolve these things.

Mr. RAMIREZ. Let me just say that, again, we are of the opinion

and do have the legal analysis and the record shows if someone

would look at the process of how it was employed, and it is being

looked at, veterans were hired, Mr. Chairman.

Mr. MICA. Again, there is something wrong, whether it was the

previous panel or the IG’s office, one arm of the IG’s office doesn’t

know what the other end of the Department is doing; whether it

is somebody checks off in your agency, it is still not as we intended

it.

We also have contracted out, and it has been part of the new majority’s intent, even the administration, the Vice President, what is

it, reinventing government, wants to contract some of these things

out. It wasn’t our intent to contract out work to convicted felons

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with bankruptcy histories. Something has gone askew in the process. So whether it is with the previous panel or this panel, we want

this thing to work right.

I have some serious questions about home builders—I am sorry,

Community Builders and HUD. Mr. Apgar works for you?

Mr. RAMIREZ. Yes.

Mr. MICA. He sent out a memo, and it is my understanding Community Builders are supposed to work with tenants and with individuals, whoever needs information. He sent out a memo on September 10th. We have a copy that says it has come to our attention

that in their effort to provide responsive customer service, Community Builders in certain areas have misrepresented or overstepped

their role in dealing with HUD’s identified troubled family projects.

He goes on to say, at no time is it proper for the Community Builder to schedule meetings, respond to or initiate contacts directly

with an owner, owner’s representative, owner’s agent, the media,

tenants, Members of Congress, or their staffs regarding a troubled

multifamily project without the explicit prior agreement of the Director of the Multifamily Hub/Program Center and, where DEC is

involved—I can read the rest of this memo, and we will make it

a part of the record.

[The information referred to follows:]

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Mr. MICA. But, you know, they have certain responsibilities to

work with everyone. Here we have memos being sent out—— Mr. RAMIREZ. And I know you don’t—and I am glad you are including the entire memo for the record, sir. But it also states that

this is in regards to multifamily projects that are currently—— Mr. MICA. Right, current troubled multifamily projects.

Mr. RAMIREZ. That are currently being investigated by the Enforcement Center. Once it is in the Enforcement Center’s hands, we

are coordinating the troubled projects directly with the program

manager for the site, as well as—and that is—that was the spirit

of that memo as it was sent out, and I regret that Assistant Secretary Apgar is not here, but it was in direct response to projects

that were being referred to the Enforcement Center, of which we

have 500 nationwide right now.

Mr. MICA. Well, I have additional questions regarding this

memo, other specific problems that have been brought to the attention of the subcommittee. Without objection, we will leave the

record open for at least 3 weeks.

We will not have any further questions at this time. Unfortunately, we do have a vote pending, and it will be some time before

we get back. So we will dismiss this panel and thank you for your

cooperation.

There being no further business to come before the subcommittee

at this time, this meeting is adjourned.

[Whereupon, at 12:30 p.m., the subcommittee was adjourned.]

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