Contracting Out - Makes Both Management Reform and Reinvention An Oxymoron
Chairman Allard, Ranking Member Kerry, the distinguished Senator from Pennsylvania and other Members of the Subcommittee, in 1998, in the report that accompanied the conference committee's report on HUD's FY1999 appropriations, bipartisan agreement was reached in requesting the Department not concentrate, to the exclusion of cost and efficiency, in replacing federal workers with contractors. Attachment #1. Despite this bipartisan request, no tools to evaluate the efficiency and cost of hiring additional staff versus contracting out has occurred at HUD. Indeed HUD has gone ahead and pursued a policy of entering into over a billion dollars in contracts without a single A -76 cost comparison. In addition, we have hired contractors to monitor the performance of other contractors and to perform inherently governmental tasks - illegal contract actions. As the budget conference report states "the Committee's concern was not so much whether HUD contracting out decisions violate law, but rather whether these decisions make sense." Speaking for the union, we too would like to see it make sense.
I appreciate the opportunity to appear before you on behalf of my members as both Regional Vice President, HUD Council of Locals 222 and President, American Federation of Government Employees, AFL-CIO, Local 2032 to discuss the impact of this Administration's slavish use of contracting out as a means of downsizing under the rubrics of both reinvention and management reform.
COST MORE - LESS FILLING
I doubt the average taxpayer equates either reinvention or management reform with having to pay several times more for the same products and services - yet that is exactly what is happening. Rather than act prudently with the public's money, my agency has entered into well over a billion dollars of contracts(1) - more than the entire salary and expense expenditures for the Department - without one single cost benefit analysis and in many instances without any measurable product or result.
The taxpayers should be outraged. I know the employees are.
What is worse is that this doesn't include waste, fraud and mismanagement a la Intown Management or First Preston, the damage to HUD among the industry or with the public, who has flooded your offices with complaints. I know the public has contacted your offices since Congressional correspondence has gone up 10 fold in my office alone. The cost of these contracts does not include the cost to existing employees who must clean up the mess left behind only to see it handed to another contractor and the process of training, then cleaning up repeat itself.
The bottom line is that downsizing the federal government, literally at the expense of the taxpayer and program beneficiaries, is not in anyone's best interest and certainly not something to brag about. While saying they are drawing parallels with the private sector, this Administration has done something no private business could do and survive - ignore both the cost and the law.
Example - HUD's Single Family Real Estate Owned (REO) Management and Marketing (M&M) Contracts
How would you like to save the taxpayer a minimum of $110 million over 5 years in only one of the Department's four Home Ownership Centers (HOC) while increasing accountability? I asked that question in a March 1999 analysis I did of the then pending Intown contract. This savings can be done by hiring approximately 70 additional employees in the Department's field offices to deal with its single family inventory of properties.
While there has been a lot of criticism concerning dilapidated HUD houses in some communities before HUD decided to contract the function out, the sole reason for this was that there were insufficient staff on hand to monitor contractor performance, enter tracking and management data, advertise the properties, and respond to the public's requests for information and bidding instructions. HUD has always contracted out the property management, property cleanup and boarding, and emergency repairs where necessary. However, given almost 10 years of no new hiring in the field, there was insufficient staff to keep on top of contractor performance and to do site visit sampling. For example, the Inspector General criticized the Boston operation for permitting waste, when there were only 2 employees assigned to oversee the inventory and handle the whole state of Massachusetts. Baltimore, which was the subject of the first demonstration program of the M&M contract, had 6 people to handle 1,200 to 1,500 properties. New Orleans had approximately 1,500 properties and 9 employees. It should not be surprising therefore that mistakes were made.
When the public complains that a property is not properly maintained, it was a contractor who was not properly monitored that allowed this to happen. Does anyone really expect this to improve when there is no one in the entire state to hold accountable and the contractor fails to respond? When we place our collective future as a Department in the hands of a few contractors - what real control does the Department have? Can HUD even find a replacement for non-performing contractors and at what cost? We experienced this problem when a company called Benefact on the west coast went bankrupt while servicing a portfolio of HUD single family mortgages with disastrous consequences for the Department. Do we need to repeat this lesson? It seems the answer is a regrettable yes. What is easily forgotten is that when a contract goes bad, again like Intown, the Department invokes emergency conditions to award the second round of contracts without competition and frequently for more money.
In a Partnership meeting in 1998, the Secretary stated that he was reforming the process of contracting by limiting the number of contracts and giving them more jurisdiction. This is a good thing? All it means if that if you have a default, your trouble just became national rather than an isolated event. In addition, how many organizations out there can handle multi-regional responsibilities of the type HUD undertakes? [Even large banks subcontract out their mortgagee work.] Not many, so you may be stuck with an under-performing or non-performing contractor simply because you have placed yourself in the position of no options.
Cost Savings Analysis - Intown Contract
The proper ratio for employees to REO properties is 1:100. I had management estimates of 1:70, but employees responded that they could handle between 110 and 120 properties over the course of a year. Now that there is no longer a manual bid process for those wishing to purchase HUD housing (which the employees believe favors sales to investors rather than homeowners), there are a few economies from this change in the process.
The Department awarded contracts in 1999 totaling $233 million for the next 5 years for management and marketing of its inventory of single family properties in the Philadelphia Home Ownership Center's (HOC's) jurisdiction. Approximately 16,000 properties are supposed to be processed a year. Without taking into account the cost of the 3 to 6 months HUD staff have to train the contractor in HUD systems and requirements, the taxpayer could save $110 million dollars over the life of the contract calculated as follows:
$233 million ¸ 5 years = $46.6 million per year.
60% of $46.6 million = $27.9 million.
In order to develop the most conservative estimate of savings possible, I left 40% of the contract amount to cover costs of travel, property management (security, grass cutting items always contracted for), property repair and other associated costs which could total a staggering $18.7 million a year without impacting the analysis. (There probably are savings that could be achieved on that portion as well. However, that is not the subject of this analysis.)
I took the salary for a GS-12, step 10 employee in Philadelphia - $63,000 (in 1999), and added 24% for the maximum retirement contribution, including a 5% TSP match, for a FERS employee. I then added an additional 4.6% which represents the maximum contribution under the health plan made by the Department. My total cost to the Department per employee was $83,433.
$27.9 million ¸ $83,433 = 334 people that the Department could hire at the top grade and pay with the maximum amount of deductions USING ONLY 60% OF THE CONTRACT AMOUNT. Since the Department, at 1 employee to every 100 properties would only need an additional 70 employees, that means 264 ´ $83,433 = $22,026,312 a year in savings.
$22,026,312 ´ 5 years = $110,131,560 in the Philadelphia HOC alone!
Where is the analysis suggested by the bipartisan committee in the FY1999 appropriations? After all, the contract was originally funded with FY1999 money? What about A-76? The Department always responds that it doesn't have to do an A-76 review since it mismanaged (didn't fill vacancies or hire where prudent to do so), intimidated and reassigned enough staff that it was "always" below the 10 person threshold. All of this just demonstrates that this Administration will sacrifice efficiency for a hollow sound bite about reinvention, reform, and a smaller federal government. Funny, I don't recall them ever saying it would cost the taxpayer 4 or 5 times what it does now to achieve.
What happened with the very expensive Intown contract a mere six months later?
Poor Performer Rewarded With Over $2.5 Million
On Wednesday September 22, 1999, HUD notified InTown Management, HUD's contractor for management and marketing services for its single family inventory of properties in 11 of the 16 states in its jurisdiction, that it was terminating its contract. To date, InTown has been paid $2,556,275.35. For what, if anything, remains unclear. They have filed for bankruptcy protection amidst reports of unpaid subcontractors filing liens on HUD properties - contractors HUD is paying despite its earlier web messages that they are not responsible since these were subcontractors of Intown. I wonder how much this alone has cost the Department when all is said and done. Obviously, Intown was not using the over $2.5 million HUD paid it for these expenses.
InTown had been debarred from participation in the Department's activities in the past for failure to pay subcontractors, and failure to render services. The union knew of this, as did most employees in this office, despite Assistant Secretary William C. Apgar employing the "dog ate my homework" excuse before a House subcommittee when he blamed it on a clerk in the Inspector General's office. What about the 2530 clearance process undertaken by the Office of Housing which should have contained information on the contractors failure to perform in the past and criminal activity, if any? Or didn't the Assistant Secretary care? I surmise that getting rid of the work of even more HUD employees through contracting - in order to meet the Secretary's scheduled downsizing - was more important at the time than checking the clearance process, or even assessing Intown's capability to perform.
Since the debarment was over 5 years ago, Intown was free to make the same mistakes again. Yet nothing has even been suggested to plug this loophole - and then the public if left with the perception that it was the employees' fault.
Intown Defaults and Employees are Called Upon to go Where No Contractor Would
We documented how the Department could save at least $110 million dollars on this contract by doing the work in house with the appropriate number of additional employees to handle the workload. We have documented how employees were instructed "to make this work[the Intown Contract] whatever the costs." We documented employees being ordered to perform work supposed to be performed by the contractor. We documented employees being paid overtime to do data entry work at the InTown offices in Hatboro, Pennsylvania. Finally, we predicted, shortly before the files were even sent to InTown, that this would be a fiasco rivaling that of a prior similar contractor bankruptcy that took the Department nearly 7 years to sort out. In other words - we told the Department so. This amply demonstrates that in the pursuit of downsizing for its own sake, nothing matters. Of course, the politicians claiming the credit for downsizing aren't pointing out the costs, inefficiency and illegalities going on - it would ruin the sound bite.
And the Scandals Keep Coming
The Office of HUD's Inspector General has documented one scandal out of the Santa Anna HOC. In her testimony before the House Budget Committee on February 17, 2000, Ms. Gaffney states:
In January 2000, as a result of another OIG and FBI investigation, a HUD Housing Specialist in the Los Angeles Office pled guilty to receiving $80,000 in kickbacks in exchange for selling about $2.1 million in HUD REO properties to a real estate company owner for only about $700,000. OIG auditors again followed up to find out why HUD staff had not detected this fraud, which continued over a 7-month period. They found that the Housing Specialist's work had been subject to no supervisory review. The responsible supervisor said the office's REO workload was too large, and the pressures to dispose of it too great, to allow for any supervisory review.
On March 14, 2000, the Buffalo News printed the following story on its web site:
An Amherst man hired by the federal government to coordinate the maintenance of hundreds of houses all over Western New York has been accused of demanding payoffs and threatening the life of one of the contractors working for him. (See Attachment 2)
It wasn't until page 2 of the article that you learned that the person was an employee of First Preston, the replacement contractor for most of Intown's former territory, not HUD.
Nancy Richards, president of First Preston, said Fernsted was fired last week, immediately after her company learned of the charges. She said she is unaware of any other company official involved in the alleged shakedown scheme.
Well I guess First Preston does the same kind of background check on its employees HUD does in assessing the contractor capacity - none. We who work in the field believe this is the tip of the iceberg. As one manager put it who was tired of being constantly told to do more with less, he replied, "We are beyond that - we are doing more with nothing." I have a number of workers in the HOC who are coming down with carpal tunnel, back and stress related problems. Several have injured themselves because the literal number of boxes piled up behind their desks and in the isles that they simply don't have the time to file. Some have been out on workmen's compensation. This insanity has got to stop! The problems noted by the Inspector General's office with respect to the offices already discussed pale in comparison to her recent reports on the state of the inventory, profitability and fraud. If we know nothing else, WE KNOW WE ARE GOING IN THE WRONG DIRECTION.
Who are they counting on to clean up the mess left by the Intown contractor? The few rank and file employees left in the office. Beginning Wednesday at 8:30am, teams of HUD employees were at the offices of InTown thorough the night - 24 hours - packing boxes of files. Before employees were ordered in, they were told they may be threatened with violence! Then InTown informed them they were not going to permit the files to be removed. This issue was resolved Thursday afternoon. Question why the agency didn't hire contractors to go in and pack the files and provide security - no they called on the dedicated employees to go where no contractor would.
The union is concerned not only for the taxpayer and the reputation of the Department, but for the homeowners living next to a HUD foreclosed property that has not been secured, cleaned out, grass cut or those waiting to go to closing. We ask that both the taxpayers and their Congressional representatives be aware that the HUD employees pointed out the problems in plenty of time for the management in Washington to do something about it. Our issues and concerns were ignored by management in their continuing effort to downsize government.
First Preston - Take a (Sound)Bite Out of This
I understand that two contractors have "divided up" the 11 states with the exception of Maryland formerly handled by InTown. One of the two assuming contractors - First Preston is not all that different. I have received reports from across the country that when HUD employees went out to review First Preston's performance, including areas where they were not cleaning up after Intown, the employees repeatedly found buildings not secured, grass not cut, and no notifications to purchaser to hire someone to assess lead based paint hazards. While the employees continually brought these failures to perform to management's attention - NOTHING WAS DONE! Indeed, I think nothing was done for the same reasons quoted to the Inspector General with regard to fraud she uncovered in the Santa Ana HOC [which by the way had nothing to do with First Preston] "The responsible supervisor said the office's REO workload was too large, and the pressures to dispose of it too great, to allow for any supervisory review." Again, so that this Administration can preserve its sound bite concerning government reduction , it has positioned itself with no alternatives but to continue contracting out - whatever the cost to HUD employees and the public. Indeed, we have had several changes is management officials with oversight responsibility for First Preston. Several of them believe that if they are too critical of First Preston, First Preston complains to Headquarters and the managers find themselves replaced for doing their job too well. More importantly, First Preston is being paid pursuant to the contract, $37,270,960 for the approximately 16 month period between 9/23/99 and 1/31/01. For the first 4 months of operation (9/23/99 through 1/31/00), HUD paid First Preston $16,424,846.25, which included some $486,255.75 in "pass through" expenses on the Intown inventory. If this is typical activity for the entire period of the contract, HUD will pay another $47,815,771.50(2) or over ten million more than provided by the original contract for this payment alone! For a total contract cost of not $37.3 million as originally provided but $64.2 million. This rather dramatic increase in costs, means that my original analysis of how much could be saved is understated by several million to say the least.
Let me reiterate. When HUD management contracts out due to a default on the part of the original contractor - there are absolutely no cost containment mechanisms. No competition. No pressure to limit costs to the amount originally listed on the contract. Indeed, there is no evidence that HUD even knows how much it is paying or will pay. The list I got from the contracting office, shows the First Preston contract amount as $1.75 million. See Attachment 3.
Where will the funds come from? I am told that the contract will be amended and the funds taken from the FHA program account. No competition. No cost benefit analysis. Just a black hole where there are no restraints on how much this is going to cost. I know one thing. If this keeps up, we won't be hunting down mortgagors to pay them their Mortgage Insurance Premium rebates, there won't be any. This Administration has taken a well run and profitable program and all but gutted it through contracting.
However, the costs don't stop there. What neither the public nor Congress know is that HUD has already made over $200,000 in improper payments to First Preston. HUD agreed to pick up virtually all the expenses to First Preston of dealing with the Intown inventory - including clean up and other expenses that had been calculated into the contractors profit. First Preston continued to bill for these expenses EVEN ON THE NEW INVENTORY! Of course, the emphasis on paying the contractor was primary - again because in pursuit of the sound bite they were now essential - can't make them mad. Staff expect the amount of the overpayment to be much greater - once they have the time to truly reconcile the bills versus the contracts. However, given the constant flood of directional changes and priorities occurring in the office, as well as a total of only 8 staff (+3 managers) to handle oversight of the contractors for the 15 of the 16 states covered by the HOC, who knows when and even if this will ever be completed. Please keep in mind that while First Preston covers four of the five states with the highest inventories, it only currently covers 5 of the total of 16 for the HOC! Close to $50 million for just 5 states. When you realize my analysis was based on a little over $46.6 million for the entire 16 states compromising the HOC, you have some appreciation for just how much we all are paying for this much touted downsizing/reinvention/whatever.
Who did management select to replace the departing HOC director? They selected a consultant assigned to the office just a few weeks prior to his "pre-selection" as Director. We recently received another consultant that no one knows what she is doing. Once she is pre-selected for a position, I intend to file a complaint with the Office of Special Counsel concerning yet more prohibited personnel actions at HUD. Why should the union be interested in who manages the office? Because the Director is asking the impossible from staff (from my perspective because he constantly calls his buddies in HQs about what he should do and none of them know the programs or can manage.) An example is the Maryland properties not subject to First Preston.
Speaking of the Maryland Inventory
You can't cover contracts on approximately 4,000 properties with 8 REO staff and 3 other temporarily reassigned staff. According to the above analysis, you would need 40 employees, not 11 and preferably they would be located in the community were the market is, not Philadelphia. Management then decided to change the "teams" working on this twice in the last 6 months. Employees not only had to clean up after the Intown debacle, which left them with incomplete files and sometimes no file at all on HUD properties, a meeting was called by the new (officially here about a month) Director to inform them what failures they were in performing their jobs! Well, when you only have a quarter of the people you need, you change teams twice in 6 months, you give them additional priorities such as answering Congressional inquiries, issuing reports, paying contractor invoices, locate them too far away from the activity to have day to day oversight, and have each employee respond to or make a minimum of 11.24 calls a day for the month of March(3), something has to give. Its not the employees fault. As an example, our closing contractor in Maryland subcontracted the closings on condominium units to another entity, then told that entity to get the money directly from HUD. This is but one problem rank and file employees must contend with every day - they are expected to know everything and above all, make it work.
I only wonder how much more money we will be spending in contracting out another third of the existing inventory under contract? If First Preston, who covers 5 states gets $50 million, how much will the contractor be getting who takes over Maryland? Its truly chilling to the employees to see the hemorrhaging of money this is costing the taxpayer, especially as its also viewed as a slap in the face to those doing their best with no support from the management in Headquarters. How many new program positions have we created to be filled? How many temporary workers have we hired? Virtually none if we are talking about worker bees.
We can't make bricks without straw. The problems cited by our own Inspector General the GAO cannot be remedied by hiring an increasing number of public affairs prima donnas to shake hands. Pretty soon, people realize that is all they are going to get - oh yeah, that and a run around since the hand shakers still don't know the programs. Production, with the exception of sound bites, will simply cease to exist. There aren't enough bodies now to stop or even discover fraud and waste - after all if the Department were really concerned about it, they would have analyzed the costs and dangers before plunging into contracting. The really bad news is that having been repeatedly shown it doesn't work in many cases, this Administration remains undaunted in its efforts to downsize the government regardless of the expense to the public and the beneficiaries of our programs. Where is the make sense analysis asked for by the FY1999 conference report?
What's a Beneficiary?
Given the number of complaints I have been provided copies of from real estate brokers and others that do business with HUD, as well as those from the receptionists that greet people who walk in from the street looking for a HUD home, we are not fulfilling the mission stated for the HOC of increasing affordable housing and reaching out to underserved populations. See Attachment 4.
Even in this computer age, there are real estate agents who aren't computer savvy enough to submit a bid on a HUD property via the Internet. Result: sales concentrated in the hands of a reported few who sell almost exclusively to investors, not owners.
What about first time home buying inner city minorities? Well, there was a time you saw a HUD sign and could check the local paper to see if there was a property you could afford. Now, especially if your not computer literate, you have to call a broker and potentially embarrass yourself by asking a broker for the house's asking price. Of course, that presumes the broker can pull the listing and is confident in submitting a bid. This is not outreach to first time underserved populations and its not facilitating home buying. Indeed, staff believe that the sales program has become almost exclusively investor driven.
While the Internet is undeniably the future, we have done nothing to assure that underserved populations are not left behind. Yet there are no proposals to address this problem, no real outreach. Despite the Secretary dedicating 10% of the overall staffing in the Department to community builder positions which are supposed to facilitate participation and the Department's mission, staff are still the principle presenters at home ownership fairs and absolutely nothing has been done to assure underserved populations, which typically live in neighborhoods whose schools can't even afford computers or access to the internet for every student, participation in a program this Administration has determined a primary mission and function of the HOC.
As I stated before, those who used to be tracked down to receive their mortgage insurance premium rebate, can rest assured there will be none in time. A profitable program, will need to be supplemented by Congress.
While not as dramatic as perhaps the §8 program, each dollar needless and inefficiently spent on contracting either reduces program benefits or increases taxpayer subsidies. Sometimes if you happen to contract with a really bad player, it can do both. Again, this can't be what the public wants - more for less. It certainly is not what the dedicated employees working for HUD want.
When You Add It All Up
When you add it all up, contracting out in this and many other instances is costing us more than a 10 minute commercial during the Superbowl. Its long term costs are not only staggering, but literally endless.
I have dealt extensively with the contracting at the HOC and didn't even scratch the surface of the illegal contracting taking place. I will let the brief I am submitting to AFGE National speak to that. I spent so much time on this contract because it is typical unfortunately of just how bad it is and the profound impact it is having on program responsiveness and efficiency. The same can be said for our current efforts to contract out multifamily project management and the debacle contracting out physical inspections of our multifamily inventory has become. I was forwarded documentation indicating that a property got a rating of 96 to be re-inspected some 16 months later to receive a score of 17. Another property got a score of 18, then 11 months later a score of 86. See Attachment 5. These results are from the Secretary's much touted Real Estate Assessment Center (REAC) where all the work is contracted out. Too bad with results like this, we can't use the Secretary's other much touted creation - the Enforcement Center. Gee, don't hear much about HUD's enforcing decent, safe and sanitary housing requirements - not to mention prohibiting equity skimming. Good thing the economy has allowed the Secretary to concentrate on gun control rather than housing. For those of us who will be here to clean up the mess when he's long gone, its scary - the state of housing - not his body guard leaving his gun in the cafeteria and wandering away. Maybe the Secretary should concentrate more on housing and gun control of his immediate employee. Then again, where's the sound bite in that?
I hope this committee gives serious consideration to imposing additional constraints on HUD's contracting out activities, whether it be the full blown safeguards of AFGE National's legislation introduced in the House as H.R.3766 or a temporary, idiot proof, thumb test I developed to determine if more expensive contract evaluation needs to be undertaken at HUD, something needs to be done to make the agency do what the conference committee on the budget told them to do 2 years ago - develop a mechanism to see if the decision to contract out makes sense.Having ignored the advice of the conference committee on the FY1999 budget, having ignored the complaints of their own employees, the union, the Inspector General's Office, the GAO, and even the industry(4) in many instances that are essential to our programs, we are left with requesting the legislative enactment of a common sense approach to contracting having seen no evidence whatsoever that his Administration will go there short of being forced by legislation.
American Federation of Government Employees, AFL-CIO
U.S. Department of Housing and Urban Development
100 Penn Square East
Philadelphia, Pennsylvania 19107
Testimony given by Irene H. Facha, Regional Vice President, HUD Council of Locals 222, representing the states of Pennsylvania, Delaware, Maryland, Virginia and West Virginia. I am also President, AFGE Local 2032 located in the Philadelphia HUD office, but also covering the State of Delaware. Testimony given before the Senate Subcommittee on Housing and Transportation, Senator Wayne Allard of Colorado, Chairman, on May 16, 2000. Mailing address appears above.
1 This is not only the amount routinely identified by the agency as going to contracts, but includes a large amount of housing program funds used to support these programs. For example, in the FY2000 budget the Department requested $209 million in contract authority to administer the §8 program. The appropriations report allows up to that amount to be used from program funds.
2 The pass through expenses, which are supposed to be one time events, were deducted from the $16 million first payment total before the balance was then multiplied by 3 to determine yearly costs.
3 This is not the highest usuage month, but is a conservative estimate of usage. Numbers are for the month of March and actually cover the group supervising the contractors covering the other States. For Maryland, the Department hired a contractor who also received calls in addition to the staff. In addition, the teams changed so it was not possible to get an accurate number for the Maryland team. Since they are the same size as the overall team, the overall teams numbers are used. Our receptionists complained repeatedly to the union concerning the number of calls coming in on the Maryland inventory and about contractors not picking up their calls.
4 I was told that sometime in January or February of this year Mr. Eisenman, General Deputy Assistant
Secretary for Housing, went to a Mortgage Bankers Meeting in Florida and was approached by several
industry people and told that they prefer to deal with the staff rather than the contract personnel who didn't
seem to know what they were doing. Mr. Eisenman returned to call a meeting of management to impress
upon them that they were not to talk to industry people - "they are not our friends." Well, they sound like
friends I would like to have.
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