"REDUCING THE RISK OF IMPROPER PAYMENTS"

In early July 2002, the GAO briefed HUD on the results of their erroneous payments vulnerability assessment on HUD's $10.2 million of purchase card program activity in fiscal year 2001. GAO advised HUD of four internal control deficiencies observed during their review. In essence, HUD's system of internal control in fiscal year 2001 did not provide reasonable assurance that: 1) adequate supporting documentation was maintained for individual purchases, 2) individual purchases were properly reviewed and approved, 3) split purchases were prohibited, and 4) records on purchase cardholders and approving officials were current and accurate. While HUD made some program improvements in fiscal year 2002, such as blocking Merchant Category Codes that are clearly not business related, we acknowledge the need to strengthen our purchase card controls to address the issues raised by the GAO.

HUD views the GAO finding on the lack of adequate supporting documentation for purchase card purchases as a serious matter of non-compliance with existing purchase card program requirements. As a result, the Office of Administration has initiated interim action to advise all purchase cardholders of the need to use the HUD Form 10.4, "Requisition for Supplies, Equipment, Forms, Publications and Procurement Services" to clearly document a description of the purchase, the business need for the purchase, and the required approval of the purchase. Failure to maintain such required documentation would result in the cardholder's loss of the purchase card and possible other appropriate disciplinary action.

HUD will work with the GAO and the OMB to further improve its purchase card program remediation plan to include other actions that will fully address the issues raised by the GAO. The Office of Administration has begun implementation of its remediation plan and our schedule for completing implementation has been expedited in light of the GAO's findings on the risks apparent in fiscal year 2001. I believe that the implementation of these new strategies and procedures will strengthen our processes and controls to adequately reduce the risk of erroneous payments in HUD's Purchase Credit Card Program.

Multifamily Housing Property Management Services

The GAO also recently performed a vulnerability assessment of payments for contracted services for the management and maintenance of the HUD-owned multifamily housing property inventory. At GAO's first presentation of its findings to the Department, GAO informed the HUD staff that GAO's Office of Special Investigation and HUD's Office of the Inspector General (OIG) had begun an investigation of the GAO findings. The GAO advised HUD not to pursue any of the project specific findings or question any of the contractors regarding the GAO findings because of the ongoing investigations. Based on the continuing investigation, it was not possible for HUD staff to review many of the project specific findings, and we are therefore not able to comment on them. However, I can discuss the procedural changes that are underway at HUD and have been underway for several months.

The GAO review indicated deficiencies in the Department's oversight of the contracts for property management services. Prior to the GAO's reporting of the results of its review of the multifamily property management activities, the Department had already initiated several actions that would bring greater control and accountability to these functions. The GAO assessment reinforced the need for better internal controls and more detailed oversight of the property management contracting activities.

In the next several weeks, HUD staff will be revising the guidance and policies and procedures in reference to the Department's oversight of these property management contracts. The Department will be adding additional controls (e.g., a semi-annual audit of each contractor), conducting additional Government Technical Monitoring and Government Technical Representative training for HUD staff, and providing clearer and more concise guidance.

Since the GAO conducted its initial reviews with HUD's Atlanta and Forth Worth Property Disposition Centers and discussed its areas of concern, the Department has modified the current contract with the property management Oversight Contractor to include new inspection and procurement assessment requirements that will assist the Centers in their oversight of the Property Management Contractor's procurement activities.

The new requirements require the Oversight Contractor to perform the following activities:

• Review the Property Manager's procurement activities, including subcontracting activities.
  
  
• Perform on-site reviews of subcontract work, services, and deliverables to assure compliance with the terms and conditions of the Property Managers' subcontracting requirements, on a random sampling basis.
  
  
• Perform on-site comparisons of subcontractor billings to work performed, on a random sampling basis.
  
  
• Review the Property Manager's subcontracting file documentation and on-site invoices to assure that work orders were not deliberately split to avoid competition and/or HUD approval.
  
  
• Perform physical inspections of completed subcontracted work to compare work orders to actual work performed, and produce both written and photographic records of significant work items actually completed, on a random sampling basis.

Notwithstanding GAO's request to not conduct specific inquires into the issues raised in the GAO review, the magnitude of these property management contracting activities required HUD to take some very proactive steps to assure that on-going procurement activities were and are being properly performed. The Atlanta Property Disposition Center's staff have begun analyzing a voluminous printout that lists all the purchase orders issued by the Center's Property Management Contractor to determine if the contractor is conducting its procurement activities under the terms of the Property Management Contract. Where irregularities are found, they will be brought to the contractor's attention for appropriate action. Additionally, upon completion of the HUD OIG and GAO investigations, the Atlanta Property Disposition Center will contact the contractor and address the irregularities identified in the GAO's report.

HUD is in the process of procuring new property management contractors nation-wide to manage the mortgagee-in-possession and HUD-owned properties. These new contractors should begin work on January 1, 2003. The Department has significantly strengthened the requirements for oversight and management in the new property management contracts that are out for solicitation. The new contracts have increased the contractor's oversight responsibilities, particularly in the areas of quality controls and subcontracting activities. Some of these new requirements include:

• Provide an upfront Quality Control (QC) Plan for the overall operation of the Property Management Contract. The Plan will establish written procedures to monitor work assignments of employees and subcontractors, inspect work completed, and ensure compliance with the Property Management Contract as well as Federal, state, and local laws and regulation.
  
  
• Provide photographic documentation to accompany all inspections of significant work or subcontracted work.
  
  
• Perform yearly audits of on-site subcontracting activities, on a project-by-project basis.
  
  

• A definition of what constitutes an emergency repair, which was lacking in the old Property Management Contracts. (Emergency repair is defined as a situation where life, health or property is in danger and immediate action is needed to eliminate or mitigate the dangerous conditions.)
  
  
• Additional language to emphasize the importance of procurement planning to avoid costly emergency acquisitions.
  
  
• The use of long-term, indefinite delivery subcontracts to consolidate the purchase of routine supplies and recurring services.
  
  
• An expanded list of the types of documents to be included in subcontract files.
  
  
• Expanded requirements for monthly subcontracting reports and inspection requirements.
  
  
• The Property Manager must conduct internal audits of the subcontracting activities performed at each project site and submit annual reports to HUD's Contracting Officer.
  

The combination of these actions to improve the quality control activities of HUD staff, HUD's Oversight Contractor and the Property Management Contractors themselves, will greatly reduce the risk of erroneous payments in the Department's future multifamily property management activity.

Management of Erroneous Payments

While the focus of today's hearing was on the GAO's erroneous payment vulnerability assessment work at HUD and the Department of Education, it is important to note that HUD is addressing erroneous payments in areas other than its government credit card and multifamily housing property management contracting. HUD embraces the content of the GAO's October 2001 Executive Guide on "Strategies to Manage Improper Payments - Learning From Public and Private Sector Organizations." As referenced in the GAO's August 2002 report on "Financial Management - Coordinated Approach Needed to Address the Government's Improper Payments Problems," HUD is addressing erroneous payments in its largest programs area-rental housing assistance.

The rental housing assistance programs area constitutes over two-thirds of HUD's budget authority, with over $21 billion of expenditures in fiscal year 2001. Our actions to identify and address erroneous payments in this programs area closely follow the model espoused in the GAO guide on managing erroneous payments. In this regard, we have established a baseline error measurement. The combined effect of the estimated assistance overpayments and underpayments attributed to program administrator processing errors and tenant underreporting of income yielded a net annual assistance overpayment estimate of over $2 billion. Secretary Martinez established a Department-wide task group to develop a comprehensive strategy to address the underlying causes of these erroneous payments. This strategy calls for the provision of improved program guidance and training, development of automated processing tools, increased income data sharing, enhanced incentives and sanctions, the pursuit of program simplification, and increased monitoring. The Department will continue to track, measure and report on its progress in reducing these erroneous payments. The President's Management Agenda establishes an overall goal of a 50 percent reduction of the estimated $2 billion in net annual overpaid rental housing assistance by 2005. HUD will need the support of OMB and the Congress to provide us the tools and resources needed to meet this goal. Of particular importance is the need for statutory authority to perform computer matching with available Federal sources of income data for use by HUD and HUD's program administrators in correctly calculating housing assistance.

HUD's leadership places a strong emphasis on high ethical standards and accountability in our program administration. We will continue to focus on reducing the risk of erroneous payments in our rental housing assistance programs area and to address other internal control deficiencies identified by the GAO and OIG. In addition, we will increase the efforts of HUD managers to assess erroneous payment risk in other areas, and to strengthen controls where it is cost-beneficial and feasible within HUD's budgetary resources.

That concludes my testimony. I look forward to working with the OMB, the GAO and the Congress in the continued pursuit of cost-effective solutions for identifying and reducing erroneous payments at HUD.