<DOC> [107th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:88610.wais] DISAPPEARING TAX DOLLARS; WHAT CHANGES ARE NEEDED? ======================================================================= HEARING before the SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND INTERGOVERNMENTAL RELATIONS of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS SECOND SESSION __________ OCTOBER 3, 2002 __________ Serial No. 107-234 __________ 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 U. S. GOVERNMENT PRINTING OFFICE 88-610 WASHINGTON : 2003 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania STEPHEN HORN, California CAROLYN B. MALONEY, New York JOHN L. MICA, Florida ELEANOR HOLMES NORTON, Washington, THOMAS M. DAVIS, Virginia DC MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois DAN MILLER, Florida DANNY K. DAVIS, Illinois DOUG OSE, California JOHN F. TIERNEY, Massachusetts RON LEWIS, Kentucky JIM TURNER, Texas JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois DAVE WELDON, Florida WM. LACY CLAY, Missouri CHRIS CANNON, Utah DIANE E. WATSON, California ADAM H. PUTNAM, Florida STEPHEN F. LYNCH, Massachusetts C.L. ``BUTCH'' OTTER, Idaho ------ ------ EDWARD L. SCHROCK, Virginia ------ JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont JOHN SULLIVAN, Oklahoma (Independent) Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director James C. Wilson, Chief Counsel Robert A. Briggs, Chief Clerk Phil Schiliro, Minority Staff Director Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations STEPHEN HORN, California, Chairman RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois DOUG OSE, California MAJOR R. OWENS, New York ADAM H. PUTNAM, Florida PAUL E. KANJORSKI, Pennsylvania JOHN SULLIVAN, Oklahoma CAROLYN B. MALONEY, New York Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California Bonnie Heald, Staff Director and Chief Counsel Dan Costello, Professional Staff Member Chris Barkley, Clerk David McMillen, Minority Professional Staff Member C O N T E N T S ---------- Page Hearing held on October 3, 2002.................................. 1 Statement of: Antonelli, Angela M., Chief Financial Officer, U.S. Department of Housing and Urban Development................ 45 Calbom, Linda, Director, Financial Management and Assurance, U.S. General Accounting Office............................. 10 Martin, Jack, Chief Financial Officer, U.S. Department of Education.................................................. 56 Letters, statements, etc., submitted for the record by: Antonelli, Angela M., Chief Financial Officer, U.S. Department of Housing and Urban Development, prepared statement of............................................... 48 Calbom, Linda, Director, Financial Management and Assurance, U.S. General Accounting Office, prepared statement of...... 13 Everson, Mark W., the Deputy Director for Management, in the Office of Management and Budget, prepared statement of..... 73 Horn, Hon. Stephen, a Representative in Congress from the State of California, prepared statement of................. 3 Martin, Jack, Chief Financial Officer, U.S. Department of Education: Followup questions and responses........................ 83, 89 Prepared statement of.................................... 59 Schakowsky, Hon. Janice D., a Representative in Congress from the State of Illinois, prepared statement of............... 7 DISAPPEARING TAX DOLLARS; WHAT CHANGES ARE NEEDED? ---------- THURSDAY, OCTOBER 3, 2002 House of Representatives, Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 2:10 p.m., in room 2247, Rayburn House Office Building, Hon Stephen Horn (chairman of the subcommittee) presiding. Present: Representatives Horn and Schakowsky. Staff present: Bonnie Heald, staff director; Henry Wray, senior counsel; Dan Daly, counsel; Dan Costello, professional staff member; Chris Barkley, clerk; Ursula Wojciechowski, intern; David McMillen, minority professional staff member; and Jean Gosa, minority assistant clerk. Mr. Horn. I ask unanimous consent that the subcommittee hearing begin before completion of today's full committee hearing. I'm sorry that we can't immediately go forward. We'll do the best we can. But the fact is, we've got a situation on the Floor where votes are called about every 5 to 10 minutes. So I'm going to start in on my opening statement until we have to go and cast our votes again. We've already gone through this bit for the last five votes. A quorum being present, this hearing of the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations will come to order. Today's hearing is on the important subject of improper payments made by Federal agencies. Each year, the Federal Government wastes countless billions of dollars of the taxpayers on improper payments. Some of these payments result from fraud and waste. Others represent simply mistakes. No matter what the cause, improper payments are a chronic problem that must be stopped. These improper payments occur for a number of reasons. In some cases, agencies lack appropriate approval structures. Sometimes, the payments are simply not being monitored. And in some cases, there is a widespread circumvention of agency rules and guidelines. When an agency lacks proper controls to monitor payments, it promotes a rubber stamp environment in which payments are made with little or no supporting evidence. The General Accounting Office has found that the purchase card problems at the Department of Education and the Department of Housing and Urban Development suffer from a lack of adequate internal controls. HUD, the Housing and Urban Development department, was unable to provide the GAO, the General Accounting Office, headed by the Comptroller General, with an adequate support for more than $2 billion in purchase card transactions during fiscal year 2001. The Department of Education was unable to find over $200,000 worth of computer equipment that employees bought using their Government guaranteed purchase cards. In addition to the purchase card problem, the General Accounting Office found that HUD's multi-family program is extremely susceptible to improper payments. The GAO discovered that HUD had made payments to multi-family property managers for services that were never performed and for goods that were never received. The GAO also determined that the Department of Education's loan and grant programs are at high risk for improper payments. The Departments could not provide adequate documentation for $8.5 million in grants that were disbursed over a 26 month period. As alarming as these numbers are, they are only the tip of the iceberg. The extent of improper payments in the Federal Government is unknown because Federal agencies are currently not required by law to estimate them. According to the GAO, the handful of agencies that do report voluntarily estimate that they make improper payments of about $20 billion a year. And just today, the Office of Management and Budget has given us an updated estimate of over $33 billion in improper payments for many of the same programs. I've introduced legislation, H.R. 4878, The Proper Payments Information Act of 2002, that will require nearly all Federal agencies to begin measuring the extent of this problem. Enactment of this bill would provide a major step toward addressing this wasteful and abusive loss of taxpayers' dollars. Now I welcome our witnesses today, and I look forward to discussing some strategies to resolve this egregious problem. I now yield for an opening statement to the ranking member, Ms. Schakowsky, the lady from Illinois. I am going to go and vote. [The prepared statement of Hon. Stephen Horn follows:] [GRAPHIC] [TIFF OMITTED] T8610.001 [GRAPHIC] [TIFF OMITTED] T8610.002 Ms. Schakowsky. Thank you, Mr. Chairman, for holding this hearing. And I thank the witnesses for taking time out of their busy schedules to testify today. I have worked closely with the chairman throughout this Congress to highlight the lack of fiscal management in the administration. Most of our work has focused on the Department of Defense, and it is clear that DOD is wasting public funds at an alarming rate. I'm pleased that today we're looking beyond DOD. I believe it is important that we confront waste throughout the Government. GAO has told us that the Department of Education, since its original testimony in April, has made significant progress in correcting the management failures in the purchase card program. HUD, however, continues to be more like the management at DOD. I believe these issues are important because dollars wasted by the Government are dollars that are not available for the important programs within these agencies. However, even if we eliminate all of the purchase card problems at the Department of Education, there will not be enough money to fund Title I and Pell Grants and all the other important education programs. We are confronted with a more fundamental problem. There is simply not enough money to fund the Government next year. This problem exists not because of the events of September 11, but because of President Bush's tax cut. Given the title of this hearing, Disappearing Tax Dollars, it seems fitting that we look at this important information as well. On the easel is a chart that summarizes a study by the Congressional Budget Office. CBO looked at the deterioration of the surplus since last year, and concluded that the main cause for the disappearing surplus is not September 11, and it is not the Bush recession. The main cause of the disappearing surplus is the Bush tax cut. The Bush tax cut has ended the brief period of surpluses and returned us to massive deficits. The second chart shows just how dramatic the change is. If Congress does not restore the fiscal restraint that characterized the budget process during the Clinton administration, we face massive deficits over the next 10 years. As most economists will tell you, those deficits will have a chilling effect on the economy. When President Clinton signaled to the world that he was serious about balancing the budget, it had an important effect. International investment began to flow into the U.S. economy and was one of the engines of the expansion of the 1990's. These deficits will have the opposite effect, holding back the economy and taking a toll on everyone. We have already seen that happening. Last week, the Department of Commerce announced that the poverty rate was up, and household income was down. The last time we saw poverty go up and income go down was during the recession in 1991. The tax dollars that disappeared because of the Bush tax cut are already having an effect on programs designed to help the neediest of our citizens, some of which are at the agencies before us today. The failure of this administration to follow through on its commitment to education is shameful. The President's program, Leave No Child Behind, was supposed to provide our children with the resources needed to obtain the best education possible. Instead, the President's education budget for 2003 would stop 6 years of steady progress and Federal support to local schools. The President's education budget would reduce Pell Grants, eliminate funding for rural education and technological training for teachers, resulting in 16,000 fewer teachers getting trained and 50,000 fewer children in after- school programs. It is clear that in the President's budget, children are being left behind. This afternoon, Ms. Calbom from GAO will testify about the waste, fraud and abuse at the Department of Housing and Urban Development. Quite frankly, I'm not surprised. I am dismayed at the insensitivity of the leadership at HUD toward the people they are supposed to serve. Last year, I introduced the Domestic Violence and Sexual Assault Victims Housing Act, which had bipartisan support, it does have, and over 100 co-sponsors. One of the main provisions of that bill, funding for transitional housing for domestic violence victims, was included in the bill sponsored by Chairwoman Marge Roukema of the Housing and Community Opportunities Subcommittee. The Secretary of HUD opposes these provisions and argues that there are sufficient programs for these victims. Why then does the HUD Commission's evaluation of transitional housing programs find that among all people served battered women are the least likely to experience improved employment and stable housing? If the Bush administration can turn its back on these victims, it is not surprising that it turns its back on the financial management responsibilities at the Department. If financial management is any indication of clear priorities, then I guess I shouldn't be surprised. As the chairman knows, I feel strongly about waste in our Government, because it steals money from those programs that are already under-funded. As the President leads our Nation on a path toward war, financial management in his administration is actually a national security liability. I commend him on his leadership on these issues, and it has been a pleasure to work with him on the subcommittee. While this isn't the last hearing, I want to say, even in his absence, I want to salute the chairman of this subcommittee for his many accomplishments under his leadership. Thank you. And I'm going to go vote, too. We'll be back soon. The subcommittee is at recess. Thank you. [The prepared statement of Hon. Janice D. Schakowsky follows:] [GRAPHIC] [TIFF OMITTED] T8610.003 [GRAPHIC] [TIFF OMITTED] T8610.004 [GRAPHIC] [TIFF OMITTED] T8610.005 [Recess.] Mr. Horn. We will need to have you take the oath, so if you would stand up and raise your right hands. [Witnesses sworn.] Mr. Horn. Thank you. The clerk will note that all three witnesses affirmed. And we will now start from the witnesses in the order. You've been here many times, Linda, and we thank you, Linda Calbom, Director, Financial Management and Assurance, General Accounting Office. STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE Ms. Calbom. Thank you, Mr. Chairman. I'm pleased to be here today to discuss the results of our improper payments reviews of selected areas of the Departments of Housing and Urban Development and Education, and also to talk about some strategies these and other Federal agencies can use to better management their improper payments. Improper payments occur for many reasons, but the root causes can typically be traced to a breakdown in internal control. This certainly was the case at both HUD and Education for the areas we reviewed, which included purchase card transactions at both HUD and Education, grant and loan disbursements at Education and multi-family contractor payments at HUD. First, purchase cards. We found, as you were mentioning, Mr. Chairman, that both HUD and Education lacked fundamental internal controls over their purchase card program. For example, neither agency had an effective review and approval process. While both had policies requiring supervisory review of monthly purchase card statements and supporting documentation, this process was not carried out effectively for 77 percent of our sampled transactions at HUD and 37 percent of our sampled transactions at Education. Combined with the lack of monitoring over these programs an environment was created at HUD and Education where improper purchases could be made with little risk of detection. Inadequate controls over these expenditures, along with the inherent risk of fraud and abuse associated with purchase cards, likely contributed to the $3 million of fraudulent, improper and questionable purchases we identified at HUD and Education. The bulk of these transactions, about $2.3 million, relates to questionable purchases at HUD from vendors such as Lord and Taylor, Clean Cuts Music and the Cheesecake Factory, for which the agency could provide little or no supporting documentation. We also identified over $1 million of likely split purchases at HUD and Education. These are purchases that are split into two or more transactions in order to circumvent the $2,500 micro purchase limit. Education has taken a number of actions to address our recommendations we made to them regarding the problems with purchase cards that we identified in our review. I'm sure that you'll hear about that in a few minutes. We will be making similar recommendations to HUD in a forthcoming report. Controls were also an issue in Education's grant and loan disbursements, which did not include a key edit check or followup process to help identify schools that were disbursing Pell Grants to ineligible students. Our test and followup investigation identified four schools that fraudulently or improperly disbursed about $3.4 million of Pell Grants to ineligible students. We referred the results of our investigation of these four schools to Education's Inspector General. We also identified 31 other schools that had similar disbursement patterns, and we have referred those to Education for followup. Now I want to talk a little bit about some of the problems we found with contractor oversight at HUD. HUD contracts with two property management firms to oversee the operation of its multi-family properties, including arranging for repairs, maintenance and renovation. We found that one of these property management firms regularly circumvented HUD controls by alleging that construction renovations were emergencies, thus not requiring multiple bids or HUD pre-approval, and splitting renovations into multiple projects to stay below the $50,000 threshold of HUD-required approval. HUD failed to comply with its own policies that require quarterly onsite inspections and management reviews, and thus did not question these practices, which based on our review resulted in several cases where HUD paid for work that was not performed. In one such case, HUD's contractor submitted falsified documents indicating emergency replacement of 15,000 square feet of sidewalk at a cost of $227,500. The work was billed on five identical invoices for $45,500 each, for replacement of concrete sidewalk in front of five buildings. With the assistance of an independent construction firm, we determined that only about one-third of the work billed and paid for was actually performed. As an example, we brought a photograph today, which I think is in your packet there, Mr. Chairman, that shows the front of one of the buildings; the outlined portion is the portion of the sidewalk that was actually replaced. The other portion that's not outlined was billed for but had not been replaced. As a result of this, for the work done at the five buildings, more than $164,000 of the $227,500 billed and paid for emergency installation of concrete sidewalk appears to be fraudulent. The HUD OIG and GAO Offices of Special Investigations are now investigating this case, as well as other improprieties we found during our review of this contractor. Mr. Horn. That insert will be in the record at this point, and it's HUD Improper Payments, $164,000 overpayment for sidewalk repairs. Ms. Calbom. Yes, thank you, Mr. Chairman. By the way, that picture is also on page 17 of my written statement. I'd like to shift gears just a little bit now and talk about some of the things that HUD, Education and other Federal agencies can do to comprehensively address their improper payments. Our executive guide, which is entitled Strategies to Manage Improper Payments, Learning from Public and Private Organizations, which was issued last October, identifies strategies that other organizations, both here and abroad, found effective in reducing improper payments. And it provides some case illustrations and other information for Federal agencies to consider when addressing improper payments. Again, we have another insert, Mr. Chairman, that I think is in your packet, and we also have a chart here that really shows the five key areas of internal controls which can be used to combat improper payments. As is shown in this chart, it's a circular process, and that indicates that it really is a continuous process that's interrelated. The first area, which is the perimeter, is the control environment. This really deals with instilling a culture of accountability. Setting the tone at the top is critical in this area and must include clearly communicating from the top the need for improved program operations and changes in organizational culture. As the chart shows, this area surrounds and reinforces all of the other control areas. The next area is risk assessment. This is determining the nature and extent of the problem. It's very easy to rationalize avoiding addressing a problem if you don't know how big it is. And it's just critical that the problem be identified and measured through a systematic risk assessment process and openly communicated to all relevant parties. Mr. Chairman, this is exactly what your bill calls for. It's absolutely key to this whole process. Control activities are the next area. And that's taking action to address identified risks. Organizations need to tailor their activities to fit their particular needs. There's a wide range of activities, both high tech and low tech, that can be efficiently and effectively used to address improper payments. Information and communication is the next area. That's using and sharing knowledge to manage improper payments. An important part of this strategy involves the education of agency employees, contractors and beneficiaries about what is expected of them and the consequences of not meeting those expectations. Finally, monitoring is tracking the success of improvement initiatives. Just putting control activities in place is not the end of the process. Monitoring progress and results is essential and must include the involvement of top officials. In closing, Mr. Chairman, I want to emphasize that high levels of improper payments need not and should not be an accepted part of running Federal programs. And I know that you agree with that. The organizations in our study found that they could effectively and efficiently manage improper payments, using the strategies I just outlined that are discussed in detail in our executive guide. While HUD, Education and other agencies have taken some steps in these areas, effectively addressing improper payments requires a comprehensive strategy that permeates the entire organization. Implementation of this process in the Federal Government will not be easy or quick, and it will take money. However, as shown in our study, such investments ultimately pay for themselves in program savings, and also produce large dividends in the form of renewed public trust and confidence. That concludes my statement, Mr. Chairman. [The prepared statement of Ms. Calbom follows:] [GRAPHIC] [TIFF OMITTED] T8610.006 [GRAPHIC] [TIFF OMITTED] T8610.007 [GRAPHIC] [TIFF OMITTED] T8610.008 [GRAPHIC] [TIFF OMITTED] T8610.009 [GRAPHIC] [TIFF OMITTED] T8610.010 [GRAPHIC] [TIFF OMITTED] T8610.011 [GRAPHIC] [TIFF OMITTED] T8610.012 [GRAPHIC] [TIFF OMITTED] T8610.013 [GRAPHIC] [TIFF OMITTED] T8610.014 [GRAPHIC] [TIFF OMITTED] T8610.015 [GRAPHIC] [TIFF OMITTED] T8610.016 [GRAPHIC] [TIFF OMITTED] T8610.017 [GRAPHIC] [TIFF OMITTED] T8610.018 [GRAPHIC] [TIFF OMITTED] T8610.019 [GRAPHIC] [TIFF OMITTED] T8610.020 [GRAPHIC] [TIFF OMITTED] T8610.021 [GRAPHIC] [TIFF OMITTED] T8610.022 [GRAPHIC] [TIFF OMITTED] T8610.023 [GRAPHIC] [TIFF OMITTED] T8610.024 [GRAPHIC] [TIFF OMITTED] T8610.025 [GRAPHIC] [TIFF OMITTED] T8610.026 [GRAPHIC] [TIFF OMITTED] T8610.027 [GRAPHIC] [TIFF OMITTED] T8610.028 [GRAPHIC] [TIFF OMITTED] T8610.029 [GRAPHIC] [TIFF OMITTED] T8610.030 [GRAPHIC] [TIFF OMITTED] T8610.031 [GRAPHIC] [TIFF OMITTED] T8610.032 [GRAPHIC] [TIFF OMITTED] T8610.033 [GRAPHIC] [TIFF OMITTED] T8610.034 [GRAPHIC] [TIFF OMITTED] T8610.035 [GRAPHIC] [TIFF OMITTED] T8610.036 [GRAPHIC] [TIFF OMITTED] T8610.037 Mr. Horn. Thank you. The reporter will put in the Managing Improper Payments through Internal Controls with the various segments, control, environment, monitoring, risk assessment, information and communications, control activities, with the objective of manage improper payments. We will now go with the second witness, the Honorable Angela M. Antonelli, Chief Financial Officer, Department of Housing and Urban Development. Thank you for being with us. STATEMENT OF ANGELA M. ANTONELLI, CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Ms. Antonelli. Thank you, Mr. Chairman. Mr. Chairman, thank you for the opportunity to appear before you today to discuss HUD's initiatives to identify and reduce erroneous payments. Every dollar that HUD pays in error is a dollar that is not available to serve the intended low- income beneficiaries of our housing and community development programs. Improved financial performance, including erroneous payment reduction, is a key components of the President's management agenda. HUD Secretary Mel Martinez and his leadership team are focused on meeting the President's goals. I am pleased to report that HUD is making real progress in strengthening internal controls and reducing the risk of erroneous payments. And I applaud your efforts, Mr. Chairman, to aggressively tackle this issue. I am pleased to appear before you today with Jack Martin, the CFO at Education, as well as Linda Calbom from GAO. As I'm sure my colleague from Education will agree, GAO and its fine staff, like Linda Calbom, have issued very useful guidance for more effective management of erroneous payments by Federal agencies. The GAO's extensive audit work at HUD also has been instrumental in identifying vulnerable areas in need of stronger internal controls to reduce the risk of erroneous payments. My testimony today will focus on two such areas reviewed by GAO. Before I continue, I would like to request that my more detailed written statement be submitted for the record. Mr. Horn. I should have said in advance, it automatically goes in the record once you are noted. All of that goes in. Ms. Antonelli. Thank you. I would also like to introduce two people who are with me. Behind me are seated Vickers Meadows, HUD's Assistant Secretary for Administration, and John Weicher, HUD's Assistant Secretary for Housing and the FHA Commissioner. First, I want to discuss HUD's efforts to reduce the risk of erroneous payments in its Government credit card program. I'll first start with our travel card to illustrate what I believe HUD can accomplish with strong leadership and an effective plan. This was a good place for Secretary Martinez and his new leadership team to start to create a culture of accountability at HUD. When I became HUD's CFO in mid-July 2001, HUD had a recognized payment delinquency problem in its travel credit card program. We took aggressive action that included staff training, travel payment system improvements, and the use of salary offsets for more egregious cases. We also began to produce monthly delinquency reports that the Deputy Secretary distributed for followup and action at monthly executive management meetings with all of HUD's assistant secretaries. I'm proud to say that action reduced the monthly balance of delinquencies over 60 days and reduced it by 96 percent. In July 8, 2002, in the Federal Times, HUD and the Department of Justice were reported as tied for first place with the lowest travel card delinquencies, with only 1 percent delinquent, versus a 6 percent Government-wide average. It's clear HUD's travel card users now understand the rules and follow them with appropriate management oversight to assure they do. The story on HUD's purchase credit card program is not yet as good. But it will be. HUD's Office of Administration administers the purchase credit card program. HUD's new Assistant Secretary for Administration was not confirmed to serve in her position until March 2002. She will provide leadership in this area. Earlier this year, the Director of OMB requested all agencies to review the adequacy of their internal controls over purchase card use and establish remedial action plans to address deficiencies. Working with OMB, HUD's Office of Administration developed plans for stronger program controls and increased oversight. However, HUD's GAO briefing on the results of their audit of HUD's $10 million fiscal year 2001 purchase card activity disclosed the need to strengthen controls and oversight immediately, and we've begun to do so. Of particular concern was the GAO's finding on purchase card holders failing to maintain adequate documentation in support of their purchases. The Office of Administration has initiated interim action to advise all purchase card holders of the need to use a designated HUD form to clearly document a description of the purchase, the business need for the purchase and the required approvals. Also, a staff person has now been assigned to work exclusively on the internal audit functions of the program. Failure to maintain required documentation and obtain required approvals will result in the card holder's loss of the purchase card and possible other appropriate disciplinary action. HUD staff will be fully accountable for the purchase card program activity and our goal is to establish a model purchase card program in fiscal year 2003. I am confident we will achieve this. The GAO also recently performed a vulnerability assessment and audit of payments for contracted services for the management and maintenance of HUD-owned multi-family housing property inventory. The GAO detected possible fraud. Pending conclusion of an investigation by GAO and HUD's IG, HUD does not have complete information at this time on the specifics of the GAO review, and has been restricted in its ability to pursue any necessary followup actions on the activities now under investigation. Nevertheless, the Office of Housing is proactively analyzing its existing contract activity to determine if there are other, similar circumstances requiring immediate attention. In addition, even before GAO's reporting of the preliminary results of its review, the Office of Housing had already initiated several actions that would bring greater control and accountability to the property management control activity. These actions are designed to collectively establish a strong quality control program for HUD's existing property management contracts and new contracts to begin in January 2003. The actions strengthen HUD's oversight of all property management contractor activity, as well as the property management contractors' oversight of their own subcontractor activity. Further details on these actions are provided in my written statement. Mr. Chairman, HUD embraces the content of GAO's October 2001 executive guide on strategies to manage improper payments. As the GAO has referenced in recent testimony and reports to Congress, HUD's current administration is already well underway, taking action and doing well to address erroneous payments in its largest program area, rental housing assistance. Our rental housing assistance program constitutes over two-thirds of HUD's budget authority, with over $21 billion of expenditures in fiscal year 2001. And in fiscal year 2001 financial statements we reported an estimated net annual housing assistance overpayment of $2 billion. We will continue to improve these estimates. In addition, the President's management agenda has set a goal for a 50 percent reduction in that amount by 2005. HUD also will need congressional support to reduce the overpaid housing assistance. As noted in the OMB testimony submitted for the record, 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 administrator in correctly calculating housing assistance. Mr. Chairman, HUD will continue to focus on reducing the risks of erroneous payments in its rental housing assistance program area, and to address other internal control deficiencies identified by the GAO and our IG. In addition, we will increase the efforts of HUD managers to assess erroneous payment risks in other areas and to strengthen controls. That concludes my remarks, and I would be happy to answer any questions. Thank you. [The prepared statement of Ms. Antonelli follows:] [GRAPHIC] [TIFF OMITTED] T8610.038 [GRAPHIC] [TIFF OMITTED] T8610.039 [GRAPHIC] [TIFF OMITTED] T8610.040 [GRAPHIC] [TIFF OMITTED] T8610.041 [GRAPHIC] [TIFF OMITTED] T8610.042 [GRAPHIC] [TIFF OMITTED] T8610.043 [GRAPHIC] [TIFF OMITTED] T8610.044 [GRAPHIC] [TIFF OMITTED] T8610.045 Mr. Horn. Thank you. We will now go to the Honorable Jack Martin, Chief Financial Officer for the Department of Education. STATEMENT OF JACK MARTIN, CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF EDUCATION Mr. Martin. Mr. Chairman, and members of the subcommittee, good afternoon. I want to thank you for the opportunity to discuss the Department of Education's progress toward improving financial management, including the reduction of improper payments and instituting an improved culture of accountability. I would also like to thank you for your continued efforts in helping Federal agencies identify and address management problems and supporting our efforts to improve the overall efficiency and management of Government operations, particularly in the area of financial management. The Department supports the need to effectively address the issue of improper payments in the context of improving the overall financial management of Federal programs. Recognizing the work of the General Accounting Office, the Inspector General community and others, the President's Management Agenda initiative for improved financial performance specifically identifies erroneous payments as a critical problem that needs to be addressed by Federal agencies. To insure a coordinated approach to erroneous payments Government-wide, OMB, through the Chief Financial Officer's counsel, established an erroneous payments committee approximately 1 year ago. This committee's membership is comprised of staff from more than a dozen CFO Act agencies. The Department's Deputy CFO chairs this committee. The President's Management Agenda directs agencies to establish baselines on the extent of erroneous payments within the Federal Government. In their fiscal year 2003 budget submissions, Federal agencies were required to include information on erroneous payment rates in the form of actual rates, as well as targeted rates of reduction for benefit and assistance programs over $2 billion. For the first year of reporting, the Department of Education was required to provide information on four program areas: Title I, special education grants to States, vocational rehabilitation grants to States, and student financial assistance. We have established at the Department specific annual targets for the reduction and/or elimination of both the numbers and amounts of erroneous payments by 10 percent per year through fiscal year 2007. Secretary Paige has assigned me the responsibility for establishing policies and procedures for assessing agency and program risks of improper payment, assuring actions are taken to reduce those payments and reporting the results of the actions taken. We have made much progress to date. In response to specific concerns raised in GAO's recent audit reports, we have taken additional measures to strengthen our internal controls, including a 2-hour internal control training course for all Department employees and an 8-hour internal control course for all Department managers. With respect to purchase cards, we have implemented new policies and procedures to reduce the Department's vulnerability to future improper purchases. We issued a revised Procedures Directive in January 2002 that provided instructions to card holders and to approving officials who are responsible for reviewing and approving purchase card transactions. We have trained all approving officials and all alternate approving officials in the new procedures and have increased the number of approving officials and program officers where disbursement reviews were considered inadequate. We have accepted GAO's suggestion and are conducting compliance reviews of a random sample of purchase card transactions. As of September 30, reviews have been conducted of all Department Program Offices at headquarters and in all regional offices. A quarterly review is ongoing. These reviews will ensure that purchases are not above thresholds and that there are no split purchases, that goods and services were properly received and accepted, and that appropriate separation of duties existed between the card holder and the approving official. The Department has blocked more than 300 Merchant Category Codes for purchase cards that are clearly not business related or appropriately chargeable to a purchase card. In addition, computer equipment cannot be purchased on a purchase card without the consent of the Office of the Chief Information Officer and new policies have been designed to maintain control over the procurement of computers and related equipment. We also initiated data mining technology to proactively identify potential improprieties in purchase card use and payments. By January 2003, we anticipate expanding data mining to analyses to identify potential improprieties in travel cards. We believe that all of these efforts will be effective in eliminating the types of abuse that GAO and the IG noted in our purchase card process. But we can't stop there. So we continue to communicate to our employees and managers as well as our delivery partners the importance of these and future internal control initiatives. Turning now to Federal Student Aid [FSA], GAO's financial management audit report of the Program's loan and grant disbursements found that four schools disbursed $3.4 million in Pell Grants to ineligible students. While this represents a very small percentage of the FSA disbursements that GAO reviewed, the Department recognizes the importance of identifying and correcting the underlying causes of internal control weaknesses that allowed these erroneous payments. Thus, FSA has begun to perform various types of data analysis to identify areas where problems may exist. Working with GAO, FSA has adopted techniques to locate unusual concentrations of students with particular characteristics, has determined what the norm is for concentrations of such students and has begun to determine what constitutes abnormal concentrations which warrant further review. Cases where fraud and abuse are suspected are referred to the OIG. FSA routinely conducts matches with the Social Security Administration to ensure that applicants have valid Social Security numbers. In fiscal year 2000, we enhanced our student eligibility edits by matching information supplied on the application for Federal student aid with the Social Security Administration's dead file to intercept attempts to secure Federal funding using a false Social Security number. In addition, the Department's Central Processing System [CPS] performs pre-screening matches to ensure that applicants who are in default on Federal loans or who owe over-payments of Federal grant funds do not receive additional funds. Hundreds of millions of dollars of potential improper payments a year are averted because of these matches. The Secretary has set as one of his highest priorities the goal of getting the student financial assistance programs off the GAO list of high risk programs. But to do that, we need Congress' help. In 1998, as part of the reauthorization of the Higher Education Act of 1965, Congress authorized a data match with the Internal Revenue Service on student aid applicant data. However, because return information may not be disclosed to third parties unless authorized by the Internal Revenue Code of 1986 itself, the match described in Section 484(q) of the Higher Education Act could not be implemented. Section 6103 of the Internal Revenue Code must be amended to allow for this critical verification. In early June 2002, Treasury informally provided draft legislation to the Joint Committee on Taxation for technical review that would address this issue. The Director of OMB and the Secretaries of the Treasury and Education formally transmitted the proposed amendment to Congress on August 9, 2002. Staff from Treasury and Education are currently identifying and agreeing on processes and procedures to support the match once authorized, including necessary followup with applicants and schools in a manner that will protect the privacy of the taxpayer in accordance with the proposed legislation. Implementation of the proposed data match between the Department and IRS has the potential to ultimately eliminate over $300 million in erroneous payments in the Federal Pell Grant program each award year. I urge Congress to consider this proposal in the near future. I believe our efforts thus far demonstrate our firm commitment to address the overall problems of improper payments and to complete necessary improvements in the administration of the Department's programs. They have strengthened internal controls throughout the Department. We are actively monitoring the use of purchase cards and analysis of travel expenditures. In our student financial assistance programs, we have a very clear focus on integrating systems, maintaining critical accountability while improving customer service, demonstrating a balanced yet accountable school monitoring approach and addressing quickly suspected anomalies in the payment of funds to recipients. We will periodically report on our progress in reducing erroneous payments to OMB and the Congress, as well as announcing any future plans for controlling improper payments. I would like to close by saying that our management improvements have clearly put us on a very positive course toward our goal of becoming a model agency of management and program excellence. I have come before you today with confidence to assure you that corrective actions are being well targeted throughout our Department. This concludes my testimony. I will be happy to answer any questions you may have. [The prepared statement of Mr. Martin follows:] [GRAPHIC] [TIFF OMITTED] T8610.046 [GRAPHIC] [TIFF OMITTED] T8610.047 [GRAPHIC] [TIFF OMITTED] T8610.048 [GRAPHIC] [TIFF OMITTED] T8610.049 [GRAPHIC] [TIFF OMITTED] T8610.050 [GRAPHIC] [TIFF OMITTED] T8610.051 [GRAPHIC] [TIFF OMITTED] T8610.052 [GRAPHIC] [TIFF OMITTED] T8610.053 [GRAPHIC] [TIFF OMITTED] T8610.054 [GRAPHIC] [TIFF OMITTED] T8610.055 [GRAPHIC] [TIFF OMITTED] T8610.056 [GRAPHIC] [TIFF OMITTED] T8610.057 [GRAPHIC] [TIFF OMITTED] T8610.058 Mr. Horn. Thank you very much. We have a statement to put in the record by the Honorable Mark W. Everson, the Deputy Director for Management, in the Office of Management and Budget. Without objection, that's put into the record. [The prepared statement of Mr. Everson follows:] [GRAPHIC] [TIFF OMITTED] T8610.059 [GRAPHIC] [TIFF OMITTED] T8610.060 [GRAPHIC] [TIFF OMITTED] T8610.061 [GRAPHIC] [TIFF OMITTED] T8610.062 [GRAPHIC] [TIFF OMITTED] T8610.063 [GRAPHIC] [TIFF OMITTED] T8610.064 [GRAPHIC] [TIFF OMITTED] T8610.065 [GRAPHIC] [TIFF OMITTED] T8610.066 Mr. Horn. So we will move now to go to a few questions. It seems like things are improving, thank heavens. Questions for Ms. Calbom, how would you characterize the responsiveness of these Departments to your requests for documentation concerning questionable purchase card transactions? Ms. Calbom. Education was very responsive in the work we did there. That's been, I guess about a year or so ago when we started our work, or maybe 18 months ago. We actually got all but about I think maybe 1 or 2 percent of the information that we asked for. At HUD, we had a little more difficulty in getting the information that we needed, and that would be the support for transactions. I believe it was about 68 percent of the dollar amount of transactions that we asked for support for HUD was not able to provide. So we did have a little more difficulty. And just in general, there was, I think, a more cooperative spirit at Education. I think that is part of why you're seeing the differences in levels of documentation provided. Mr. Horn. When you look at these various types of line of years going back probably 50 to 100 years in some cases, and HUD and Education, it's a newer agency, what was the role of the Inspector General in all the cases that you looked to them, and is a good part of the documentation put up by the Inspector General or what? Ms. Calbom. Actually, the Inspector General didn't have any role at all, typically, in providing the documentation, unless there happened to be transactions that their employees entered into. We pretty much dealt with either the CFO office or the program offices, in the case of HUD, to come up with our documentation. The Inspector General played a role in both agencies when we referred certain items to them for further followup and investigation. Mr. Horn. And did that happen? Ms. Calbom. That has happened and is happening now, yes. Mr. Horn. Are there any agencies you can name that they might serve as examples of best practices for reducing improper payments? Ms. Calbom. I think there are agencies where pieces of the agencies would serve as good examples for reducing improper payments. And of course, that's what your bill is trying to get more and more people to do. And actually, HUD has been one of the agencies, for their rental assistance programs, where they have been measuring the payments. And that, is key because you've got to know how much the problem is before you can figure out how many controls you need to put in place, and how much money you need to spend addressing the problem. Also, Social Security Administration has been one that's been doing a fairly good job in measuring the improper payments and taking a lot of good actions in trying to address the improper payments in their big programs. Also, we do note in our executive guide, there are several States, actually, that have done an excellent job, Kentucky, Illinois and Texas are three States that we talk about in our guide that do a lot of data matching and that kind of thing, and some real good monitoring on their improper payments. So there are a number of agencies that are doing some things. What isn't being done is really an across the board program that has all of these components that I talked about, so that there is really a program that permeates entire organizations. Mr. Horn. It was noted, Mr. Martin, that Education is missing a high number of computers acquired with purchase cards. Would you please elaborate on this, and also on your comment that there are indications of similar problems at HUD? Mr. Martin. I didn't comment, Mr. Chairman, that there were similar problems at HUD. Ms. Calbom. I could comment on that, after you answer the original question. Mr. Martin. We have implemented a new fixed asset inventory management system. I think that system should be fully implemented by the end of December. We have inventoried all of our computer equipment. I think practically all of that equipment has been accounted for. Mr. Horn. Well, give me an idea of that. Is this a GS-9, a GS-12, 13, whatever, to supervise it? Mr. Martin. That's conducting the inventory? Mr. Horn. Yes. Mr. Martin. We are using an outside contractor to conduct the inventory, and we do have probably GS-12s and 13s working with that contractor to help facilitate the completion of the inventory. Mr. Horn. How long will that contractor be doing that? Mr. Martin. The contractor should be wrapped up, Mr. Chairman, I would guess. I can get you an absolute date if you require that. But I think the contractor should be---- Mr. Horn. Tell us who it was, tell us how much it cost, how long will they be around, etc. And that will go at this point in the record. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T8610.067 [GRAPHIC] [TIFF OMITTED] T8610.068 [GRAPHIC] [TIFF OMITTED] T8610.069 [GRAPHIC] [TIFF OMITTED] T8610.070 Mr. Martin. OK. They should be complete, I think, by the end of November, no later than that. And I will get you the name of the contractor and---- Mr. Horn. How much they're getting paid and how long and for what. Mr. Martin. OK. I will provide that information. Mr. Horn. Because you know, these contractors come in, they go out and you do it for one audit, and if you don't do that, the whole thing goes back. Mr. Martin. I think at Education we're very sensitive to that problem. Mr. Horn. The question is, if they're really a fixed asset, as you say, we've got to have some sort of structure in there so it doesn't come every month, every quarter, every half year, every budget year, and have to have all this be spread out again. Mr. Martin. The system that we're implementing will track our purchases and disposals, so that we will have good balances that we will be able to use in our financial statements. Mr. Horn. You indicated something earlier--would you please elaborate on not just the computers, but what else a person can use with not thinking about it, and did any of them come from their own personal life that they want to do it with that Government card, and did you find much of that? Mr. Martin. Mr. Chairman, I'm not quite sure I understand the question. Mr. Horn. Well, let me give you an example. We started in on this in the U.S. Navy in San Diego. It was unbelievable. I mean, hundreds of people were out spending the taxpayers' money. And we want the U.S. Attorney to move in on them. So fraud is what we're talking about. And we ought to be serious about it. So in one case down there, one of the worst, the Navy somehow palmed that person off here in the Pentagon, in the Army. I couldn't believe it. I said, what kind of idiocy is this. Senator Grassley and I sent a letter several months ago to Secretary Rumsfeld, we gave him about 800 names. You can start going to them. And he was just livid. He's got a task force over in the Pentagon now, the Secretary is beginning to move very quickly and quietly and try to get the message to everybody, ``Hey, this is important, do something about it.'' So I'm just curious, what's your strategy, and whether it's one person or ten people or something, is it worth doing? Mr. Martin. We just implemented a table of penalties that applied to any employee that is discovered to be using either travel cards or purchase cards improperly. I think right now we've identified, since 1999, there are 58 employees that have been subject to formal disciplinary action as a result of mis- use of travel cards. And we have another 38 recently that we are reviewing with no actions concluded for mis-use of purchase cards. So in any case, the penalties have been communicated to the employees. They have been essentially reviewed with our union representatives, and the union has agreed to our table of penalties. We are vigorously enforcing penalties where there is any indication of mis-use of travel or purchase cards. Mr. Horn. What are the types of sanctions? Mr. Martin. They can range from a temporary suspension of the use of the cards to termination from the Department. And that's the range that's shown in the table of penalties. Mr. Horn. Has anyone been put out of the Department? Mr. Martin. I believe one person has been terminated, Mr. Chairman, and I will get that information to you. Mr. Horn. It will go at this point in the hearing. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T8610.071 [GRAPHIC] [TIFF OMITTED] T8610.072 [GRAPHIC] [TIFF OMITTED] T8610.073 Mr. Horn. Now, Ms. Antonelli, you've got a handful, no question about it. Of all of these agencies, that's why you're there, and that's why Congress has put in Inspectors General and the Chief Financial Officer, the Chief Information Officer, all of them are very important. They can't just sit in their office, they've got to go and find out how this system works in HUD or Education or Agriculture, whatever it is. So what can you do to educate us as to what's happening, so we don't have to go through this every year? Ms. Antonelli. Well, in the time that I've been at HUD, and the example that I presented on the travel card, I think there's a tremendous amount that we can do, in my opinion, in a relatively short period of time to address many of the issues that have been raised by GAO. I believe we've already taken significant steps to tackle the two specific issues that GAO has raised today with respect to its work at HUD. In the case of the purchase card program, we will be doing many of the similar things that we had done in the case of travel cards. I do believe that by the time 1 year from now, if you are asking us about what we've done at HUD in terms of our purchase card program, I'm confident that we will be able to come back to you with a very positive story. Because this kind of issue, along with any of these other types of financial management issues, are a very high priority for Secretary Mel Martinez to address. It is given monthly attention within the Department. All the assistant secretaries are fully engaged. They will be receiving reports on people in their program offices who hold these purchase cards, what levels they're approved for use of a purchase card. There will be training of staff who have purchase cards. In instances where we discover abuse of the use of purchase cards, we will take appropriate disciplinary action. As in the case of travel cards, we are reviewing the policies and procedures that are in place. We will review the course of disciplinary actions that can be taken to make sure they are in place, and that they are communicated clearly to staff. And again, to the extent that we identify problems, we will take appropriate action. I believe that we can address many of the concerns. Documentation we've already taken steps to address. The splitting of purchases is another area where, to the extent that we more adequately train card holders as well as approving officials, review who the card holders are, review who the approving officials are, we should be able to more effectively, through training, identify who these officials should be, and through the use of automated systems, through working with Bank One that manages the purchase cards, be able to make significant steps to identify in real time as opposed to the paper and manual reporting that could take as much as a month or more, more quickly identify these kinds of problems when they occur. We were all very disturbed to see what GAO had uncovered. Again, I believe that I speak not only for myself but for the Secretary and my colleagues, the assistant secretaries, that we take this very seriously and will move very rapidly to address it. In addition, GAO has said that it has reviewed our remediation plan, it still thinks that it can be improved. We agree, and we will continue to work with GAO and with OMB and the IG in the days and weeks ahead and look for their additional feedback and assistance to further strengthen our remediation plan that we will aggressively implement in 2003. We would be more than happy to report or submit that plan to the committee once we have the feedback and agreement from all parties that they feel comfortable with that plan. Mr. Horn. You mentioned the assistant secretaries. It rang a bell with me. How is the management situation in HUD? Does it work with a weekly or monthly deputy secretary and in the room are the assistant secretaries? Ms. Antonelli. That's correct. Mr. Horn. And any under secretaries floating around? Ms. Antonelli. Deputy assistant secretaries do attend those meetings as well. But it has been a priority from as long as I've been there, day one, with the Secretary and the Deputy Secretary that communication and making sure a culture of accountability is established, that it permeates the organization, is a very high priority. And those monthly meetings are a very good vehicle for the Deputy Secretary to communicate these types of concerns fairly rapidly to the senior team. And the senior team works very well together and in turn works with their staffs to address these kinds of issues. So we're very happy and we're committed to seeing the type of improvements we saw in travel cards with purchase cards as well. Again, I'm very confident that we can achieve that same level of improvement in a very short period of time. Mr. Horn. Well, I hope it works. What happens to the employees in your Department that if they are caught using their cards in properly, in other words, what are the types of penalties? We've, I think, gone with that. Ms. Antonelli. I think the penalties that Education, that Mr. Martin had mentioned, are not dissimilar from the ones that we would employ at the Department of Housing and Urban Development. Anything from reprimand to dismissal from the position, depending on the severity of the offense. In the case of travel cards, for example, early on we discussed, we sat down internally with our general counsel, asked for them to review the procedures, the disciplinary actions that were currently on the books to make sure that they were satisfactory, whether or not they needed to be strengthened. Our general counsel had reviewed it, said those were satisfactory. To the extent we identified problems, we could then take those actions. We have not, to my knowledge, dismissed anyone at this time. But certainly to the extent that we have some problem in the future that we identify, I can assure you that we would be aggressive in addressing it. Mr. Horn. Well, do you find that the assistant secretaries really care about this and under them are the real working bit of HUD or Education or Agriculture, whatever, and the question is, you can talk about it at the top and it doesn't mean a thing because you've got 12 different layers and several thousand people. So how are you going to get to that? It really takes the Secretary, the Deputy Secretary, to go after it. Ms. Antonelli. Well, another way that the emphasis on improved financial performance is communicated throughout the Department, we have these monthly meetings led by the Deputy Secretary. Our Deputy Secretary and Secretary, unlike previous Secretaries and Deputy Secretaries, have made working with our field offices a very high priority, making it one Department, not headquarters versus field, but an integrated Department. Many of these monthly management meetings that we have don't simply focus on headquarters. Every month they then go out to the field and meet with the field and communicate these messages to our field offices. Our Secretary and Deputy Secretary have, to the best of my knowledge, pretty much been to every region, probably more than once, to probably almost every field office. So it's very important that these messages are communicated, not just by the assistant secretaries, the Secretary and the Deputy Secretary, in headquarters, but two-thirds of our Department is in the field. They are using these purchase cards. This kind of message gets carried out to the field on a regular basis. These management meetings are done not just in headquarters, but in the field. Mr. Horn. Well, besides e-mail or whatever, do you ever swap between field and Washington for a day or two, so they understand what a region does? Because often people don't, believe it or not, they just don't know. Because that's been their career, a lot of the career people just remain in Washington. Ms. Antonelli. Right. Mr. Horn. And that's where part of the problems are. Are we getting people back and forth so they know what everybody's doing and why? Ms. Antonelli. I believe that has very much been a message that's been communicated by the Secretary and Deputy Secretary. Again, that the field cannot be forgotten, it is an extremely important part of the ability of the Department to execute its programs and our ability to manage those programs well. So everything that we're talking about here in terms of improving financial performance, the issues of erroneous payments, is a message that's not carried just in Washington, but it is carried to the field. And an effort to have the folks in Washington get out to the field and see what is being done in the field, where they are really where the rubber hits the road, and the execution of our programs, and similarly our field folks certainly come into Washington. Mr. Horn. In order to, and this is directed at both HUD and Education, the order to manage the problem of improper payments, you must first understand the size of the problem . In the future, how do you plan to measure the amount of improper payments that your Departments are making? Ms. Antonelli. In the case of HUD, our rental housing assistance area, one of the areas that's identified as high risk by GAO, it is by far the largest area of expenditure in terms of HUD's budget. We have the $2 billion estimate of erroneous payments. That has been a very, very, very high priority for this Department, this administration, to continue to improve those estimates. We will do another estimate, re- estimate, in 2003 of the extent of the subsidy overpayments, under-payments, net overpayment in the rental housing assistance area. We have a very detailed plan of action that we've developed to reduce those overpayments. We have a 50 percent reduction target by 2005. We have interim targets, we hope 15 percent in the next year, 15 percent in 2004, and then ultimately 50 percent by the time we reach 2005. The estimation is extremely important. GAO is certainly right in that regard. In our other areas, we will certainly do what we can to identify where there are erroneous payments, estimate it to the extent that we can. But again, by far our largest area is the rental housing assistance, and we are focusing a tremendous amount of resource, time and energy in trying to do that right and to actually accomplish our goal, finally, within the next couple of years. Mr. Horn. Let's take that as an example. Tell me what happens when the client gets so much, and then they have extra left over that they shouldn't have had? How do you see this? Ms. Antonelli. In the case of rental housing assistance, it's the process by which the public housing authorities, project owners and agents estimate the amounts of subsidies that need to be paid. Because we have to work through so many intermediaries, several thousand, there's quite a challenge. We have very complex rules for determining the amounts of the subsidies and there's often errors that are done by those who actually have to do the subsidy determinations. In addition, we have issues related to the tenant. Mr. Horn. Give me an example of subsidies and how you deal with them, and where does the improper aspect come in? Ms. Antonelli. The amount of subsidy that a family, an eligible family or individual would be entitled to, there has to be a determination of what that subsidy amount is. It has to be based on the amount of income that family holds. There are types of exclusions and deductions to determine the amount of rent, and the amount that has to be subsidized of that rent. It's a very complex process and we need to do a better job of educating public housing authorities about how to go about doing those calculations, so that they do them more accurately. At the same time, the individual or the family in terms of presenting income information sometimes makes errors. They may under-report their income. There's a variety of different reasons why the calculations may be erroneous. So from our perspective, we need to do a lot in the way of additional program guidance and training. We're developing a rent calculator, something that is just more computerized, that makes it much easier for someone to enter the data and do the calculations, rather than for it to be a manual exercise that's much more prone to basic mathematical mistakes. Anything that we can do in terms of education guidance, the use of technology, to make the subsidy calculations more accurate, so that we can reduce the levels of error. So there are many different things that we're going to be needing to do and to develop over time. And also, our communication efforts with the public housing authorities and other stakeholders, to help them understand what we're trying to do. Obviously to the extent that we could reduce the level of erroneous payments, we're able to serve a greater, larger population of people who are eligible for benefits. So ultimately, that's a great motivator for us to reduce the level of erroneous payments. And I think our stakeholders see those benefits. Mr. Horn. Do you find the housing people in the county or the city need education and how do you educate them? Have you had various types of panels for them or what? Ms. Antonelli. The effort within the Department is led by our Assistant Secretary for Public and Indian Housing. Mr. Horn. I'm not talking about within HUD now, I'm talking about their clients. Ms. Antonelli. I understand. It's the Public and Indian Housing, along with Office of Housing, working together, certainly have plans in place to do greater outreach and greater communication efforts to work with stakeholder organizations to talk more about this effort and the directions in which we want to go. Because I think ultimately, information and communication is one of the steps in managing improper payments and that's extremely important. The degree to which we do that well is going to have a significant impact on our ability, ultimately, to succeed. Mr. Horn. Is there an inventory up in HUD as to what kind of housing we have put up and invested the taxpayers' money? Ms. Antonelli. Is there an inventory---- Mr. Horn. Inventory, yes. Ms. Antonelli. Of housing? Mr. Horn. Yes. Ms. Antonelli. Yes, to the best of my knowledge. Absolutely. Mr. Horn. Well, I'll give you an example. Four years ago, one of the cardinals was looking at the housing situation. When he got to the city, they couldn't find the housing. And yet the special authority or the city or whatever had simply given them the money and they ran and never even put a brick on the ground. So is that the Inspector General's role, the Chief Financial Officer, or we can always use GAO? Ms. Antonelli. Well, certainly GAO obviously helps us identify those kinds of problems. But certainly we do have these inventories of our properties. If there's a specific example, we'd be more than happy to look into that and get back to you about it to see what the issue was, perhaps where the problem is. I certainly would assume that the type of example-- -- Mr. Horn. It wasn't under this administration. It was about 4 to 10 years. Ms. Antonelli. Well, we certainly don't want it to be an example in this administration. Again, we'd be happy to respond to any specific situations that you might be aware of, and look into it in more detail. Mr. Horn. Well, how do you work out these situations, you're the Chief Financial Officer, with the Inspector General? How does that work out? Ms. Antonelli. Certainly from my perspective as the CFO at the Department, and the Secretary and the Deputy Secretary and HUD's leadership team are all in agreement that we want to and believe that we do have a very good working relationship with our Inspector General. And again, as is the case with the General Accounting Office, much of the work that they do, the audits that they conduct, the investigations, obviously supplement the work that we do, highlight areas of vulnerability that allow us to turn around and to develop plans of action to address problems. So we have a very good working relationship with the IG. I believe we've just finished a third semi-annual reporting period where we've reached management decisions on all outstanding audit findings. Previously, that was never done, in previous administrations. So I think that reflects how much of a priority we've made it in this administration to work with the IG to address audit findings, come to management decisions on how we're going to address those findings. So it's been a very, very high priority for the Department to work very closely with the GAO as well as the Inspector General. Mr. Horn. Now, let's get back to the General Accounting Office, and Ms. Calbom. You've noted that there are various practices that we ought to be using on what you and the Controller General have called the best for reducing improper payments. Upon what you've heard what else ought to be tagged on that hasn't come up yet? Ms. Calbom. I think again, at both HUD and Education, they're doing some good things in some areas. But what I think needs to happen there as well as at all Federal agencies is, it needs to be something that encompasses the entire organization. I think people are starting to do that in the Federal Government. But as I said in my testimony, it takes money to do this. But what people have found in the study we did, and we went to Australia and the United Kingdom and several other places, they found that the money they saved in implementing this kind of a strategy paid for the program itself. And as I said, when you're a steward of taxpayer money, I think it's absolutely critical that the public have trust in these agencies and that their money is being spent appropriately. So it is going to take an up-front investment. It is going to take the support from the Congress, things like your bill and the President's management agenda. We're beginning to see more and more agencies addressing this issue. OMB is pushing this issue very hard with the agencies. And so it's beginning to happen. We just need to keep the momentum going now. Mr. Horn. Very good. Are there any comments you want to add to the record that we haven't brought up, or you haven't, let us know, and we'll wind it up. Anything you want to add to it? Ms. Calbom. Mr. Chairman, I'd like to just add one thing. On a personal note, I want to thank you for all the efforts that you've made in improving financial management in the Federal Government. Certainly there have been tremendous improvements, and a lot of that is a result of these kinds of hearings that you've been holding, and your efforts in this area. Mr. Horn. Thank you. I appreciate that. I want to thank the people here on the Hill that have helped us with getting this proper-improper bit, because that is new to everybody. Bonnie Heald is the staff director, Henry Wray, senior counsel, Dan Daly, counsel, has been the person leading on this in particular, Dan Costelo, professional staff member, then Chris Barkley, the majority clerk, right over there, his hands are always full, and Ursula Wojciechowski, our new intern. Minority staff, David McMillen, professional staff, Jean Gosa, minority clerk. And our court reporter was Mary Ross. Thank you very much. With that, we are adjourned. [Whereupon, at 3:25 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.] -