Good morning, Chairman Horn, Ranking Member Turner, and Members of the Committee. Thank you for allowing us this opportunity to testify regarding the Department’s financial management systems.

First let me say that the Department’s financial house is in order. HUD has received a $26 billion dollar budget for the delivery of decent safe and sanitary housing to over 5 million American families, and we have invested those funds in sound policies and programs that have assisted homeless people, low-income families and first-time homebuyers in communities across the country.

FHA and its Mutual Mortgage Insurance (MMI) Fund are the healthiest they have been in decades. The total value of the fund stands at an all-time record high of $16.637 billion, an increase of $5.277 billion from the economic value as reported for FY98. The Clinton Administration’s FY 2001 budget proposal has already projected over $20 billion dollars to be returned to the Treasury by FHA from 2002 to 2006. When combined with the current economic value of $17 billion, this amount is more than sufficient to assure the safety and soundness of FHA’s $450 billion portfolio of outstanding mortgage insurance.

The Administration is looking at whether any funds generated in excess of the amount booked in the FY 2001 budget proposal be returned to affordable housing, creating a new and permanent source of funding to serve the nation’s neediest families and communities.

Building on these successes, HUD has been working very hard to improve our management controls, including our financial management systems, in order to rebuild public confidence in our ability to administer housing funds. Last year, for the first time, HUD received an unqualified opinion on our Fiscal Year 1998 financial statements. We regarded that as a significant achievement, but we did not rest on our laurels. We proceeded with the implementation of an ambitious new financial management system called HUDCAPS which, when completed, will result in a significant consolidation of the agency’s financial reporting protocols from over 80 different systems to under 5.

We have a multi-year conversion process underway. The technical and logistical challenges that were posed by the task of transferring nearly one trillion transactions from our old general ledger system – known as PAS – to the new HUDCAPS system significantly complicated the task of preparing and auditing our financial statements. Each of those one billion transactions had to be converted from PAS to HUDCAPS, and the funds reported had to be reconciled with the fund balances as reported to Treasury. The audit occurred in the middle of this conversion and reconciliation process. Ultimately, HUD’s Office of Inspector General informed us that it was unable to complete the task of auditing HUD’s Fiscal Year 1999 financial statements by the March 1 deadline. We are continuing to work with OIG to enable a complete review of our financial statements.

Notwithstanding these difficulties, we have always been able to account for the public money. Congressional appropriations have been accounted for in the monthly and quarterly reports that we supply to the Department of the Treasury. These reports detail the dollar amounts spent on each of the Congressional appropriations administered by HUD in addressing the housing needs of America’s families.

The retention of a clean audit opinion on HUD’s consolidated financial statements is an annual goal we are working hard to sustain. Closely related, and of even greater importance, are the substantive efforts that are being made to correct the Department’s long-standing material internal control and systems weaknesses -- weaknesses which led to the General Accounting Office’s (GAO) designation of HUD as a "high risk" agency in 1994. HUD’s efforts to correct these weaknesses were recognized just last month by the GAO’s David Walker, the Comptroller General, who testified before the House Budget Committee that HUD had made credible progress toward improving its management and that HUD’s management team had given top priority to addressing the Department’s management deficiencies.

In his Congressional testimony, Mr. Walker specifically pointed to HUD’s 2020 Management Reform Plan -- with its emphasis on streamlining programs, retraining staff, reorganizing field offices, consolidating functions into specialized centers and modernizing information and financial management systems -- as a "major contributor" to the progress that HUD has made. Although Mr. Walker acknowledged that it is "too soon to tell" whether HUD 2020 will succeed in getting HUD off the "high risk" list, we are confident that when the reviews that GAO presently has underway are concluded, the substantive progress that HUD has made will justify its removal from the high-risk list in February of 2001.

Some of HUD’s reform efforts referenced by the Comptroller General are worth noting here, particularly those related to modernizing information and financial management systems.

As the Committee is well aware, several long-standing agency weaknesses related to HUD’s inability to monitor and manage our housing portfolio. We did not know exactly what properties we were funding, or how to maximize public dollars for investments and improvements to public and assisted housing. To address this, HUD developed and tested a four-part Public Housing Assessment System (PHAS), with evaluations of every Public Housing Authority’s physical condition, financial soundness, management capacity, and resident satisfaction.

Through the creation of our Real Estate Assessment Center (REAC), we set out to conduct a first-ever objective, standardized physical inspection of HUD’s housing portfolio. This new process replaced the public housing self-certified management assessment system as well as the Federal Housing Administration’s previously sporadic monitoring attempts of assisted housing. Inspections conducted by commercial inspectors using protocols developed by HUD in concert with industry and housing experts have assessed over 40,000 public and assisted housing properties. Over 75% of properties scored above HUD’s minimum level for "decent, safety, and sanitary" housing. As a result, we now have the nation’s first precise, computerized record detailing the condition of our housing stock.

We also have an unprecedented national database of complete financial statement and compliance audit information for monitoring projects and managing risks within our housing portfolio. Assessment and referral processes replace staff-intensive manual review processes that were inconsistently performed and acted upon in the past. Our new system now allows us to review each project manager’s compliance with major HUD housing program requirements as well as each project’s overall financial condition and risk to HUD.

As part of these assessment protocols, HUD developed a state-of-the-art Tenant Income Verification System -- a fraud prevention system that uses computer-matching technology to identify potential underreporting of tenant income and ensure that only income-qualified households receive housing subsidies. This benefits tenants and property administrators by dramatically streamlining the verification process.

Finally, as part of HUD’s Homebuyer Protection Plan, we developed an assessment system that dramatically reformed the FHA appraisal process and includes computerized scoring of every new single family appraisal submitted for endorsement -- more than one million per year.

We are now in the position to perform front-end risk analyses for new housing programs; provide regulatory relief to the public and assisted housing properties that score exceptionally well on their assessments; and, target resources to those who need to elevate their delivery of decent safe and sanitary housing to our residents.

Taken together, these assessment tools have enabled the Department to better manage and invest our resources so that over 5 million American families receive better housing assistance.

The results are reflected not only in our communities, but in HUD’s financial and audit reports as well. Turning our attention to the audit reports, I am pleased to report that although we started Fiscal Year 1999 with eight material weaknesses, these assessment reforms helped us end the year with only five. For example, one material weakness -- Management and Control of Staff Resources -- was downgraded to a reportable condition. This was accomplished because HUD completed organizational changes, provided greater management accountability for achieving program and operating goals, enhanced the Management Control Program structure and activities, and increased risk-based management control techniques.

In addition, the Federal Housing Administration (FHA) accomplished significant progress in addressing its three reported material weaknesses, eliminating one and downgrading another to a management concern.

In this year’s FHA audit, the material weakness relating to the FHA Resource and Asset Management Strategy has been eliminated. In addition, the real estate assessment tools I just described have enabled FHA to monitor its insured multifamily portfolio such that the material weakness related to Early Warning and Loss Prevention for FHA-Insured Mortgages was downgraded to a management concern. Only one material weakness remains open – the FHA Federal Basis and Budgetary Reporting; even here, significant actions have been taken to account for FHA’s financial commitments, such as routine procedures to analyze contracts and purchase orders as well as reviews of loan guarantee commitments and endorsements to ensure that all credit subsidy amounts have been properly recorded.

These efforts at modernizing information and financial management systems will continue. As we go forward with our consolidation of the agency’s financial reporting protocols, we will also be taking concrete steps to address the disclaimer and material weaknesses cited in the Fiscal Year 1999 Audit Report.

HUD has established an Audit Resolution Committee, headed by myself, to focus on the resolution of all audit issues. This committee will provide a central point of contact for HUD senior management and the OIG to ensure audit related matters are properly communicated and monitored by both parties.

We have dedicated resources to address each and every material weakness and reportable condition cited in the Audit. Already, we are in the process of completing the HUDCAPS conversion and reconciliation process by compiling documentation to support the reconciliations. We have asked the OIG to immediately return to the task of reviewing our financial statements, complete the Fiscal Year 1999 audit, and render an opinion by June 2000.

We are hopeful that we will yet receive a clean audit on our Fiscal Year 1999 financial statements. Our goal is to ensure that our statements merit unqualified opinions year after year, and that the final implementation of the HUD 2020 Management Reform Plan will address each of the remaining material concerns.

Content Archived: January 20, 2009