March 22, 2000
Deputy Secretary Saul N. Ramirez, Jr.
House Government Reform Committee
Subcommittee on Government Management,
Information and Technology
Good morning, Chairman Horn,
Ranking Member Turner, and Members of the Committee. Thank you
for allowing us this opportunity to testify regarding the Departments
financial management systems.
First let me say that the Departments
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 Administrations
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 FHAs $450 billion portfolio of outstanding
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 nations
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 agencys 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, HUDs
Office of Inspector General informed us that it was unable to
complete the task of auditing HUDs 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 Americas families.
The retention of a clean audit
opinion on HUDs 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 Departments long-standing
material internal control and systems weaknesses -- weaknesses
which led to the General Accounting Offices (GAO) designation
of HUD as a "high risk" agency in 1994. HUDs
efforts to correct these weaknesses were recognized just last
month by the GAOs David Walker, the Comptroller General,
who testified before the House Budget Committee that HUD had
made credible progress toward improving its management and that
HUDs management team had given top priority to addressing
the Departments management deficiencies.
In his Congressional testimony,
Mr. Walker specifically pointed to HUDs 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 HUDs reform efforts
referenced by the Comptroller General are worth noting here,
particularly those related to modernizing information and financial
As the Committee is well aware,
several long-standing agency weaknesses related to HUDs
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 Authoritys 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 HUDs housing
portfolio. This new process replaced the public housing self-certified
management assessment system as well as the Federal Housing Administrations
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 HUDs minimum level
for "decent, safety, and sanitary" housing. As a result,
we now have the nations 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 managers compliance with major
HUD housing program requirements as well as each projects
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 HUDs
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 HUDs 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 years 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 FHAs 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 agencys 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
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
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