[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                 DEPARTMENTS OF COMMERCE, JUSTICE, AND
                   STATE, THE JUDICIARY, AND RELATED
                    AGENCIES APPROPRIATIONS FOR 1998

========================================================================

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                              FIRST SESSION
                                ________

  SUBCOMMITTEE ON THE DEPARTMENTS OF COMMERCE, JUSTICE, AND STATE, THE 
                    JUDICIARY, AND RELATED AGENCIES

                    HAROLD ROGERS, Kentucky, Chairman

JIM KOLBE, Arizona                 ALAN B. MOLLOHAN, West Virginia
CHARLES H. TAYLOR, North Carolina  DAVID E. SKAGGS, Colorado
RALPH REGULA, Ohio                 JULIAN C. DIXON, California
MICHAEL P. FORBES, New York        
TOM LATHAM, Iowa                   

 NOTE: Under Committee Rules, Mr. Livingston, as Chairman of the Full 
Committee, and Mr. Obey, as Ranking Minority Member of the Full 
Committee, are authorized to sit as Members of all Subcommittees.

  Jim Kulikowski, Therese McAuliffe, and Jennifer Miller, Subcommittee 
                                 Staff
                                ________

                                 PART 8

                            RELATED AGENCIES
                                                                   Page
Legal Services Corporation.......................................    1
Securities and Exchange Commission...............................  101
Maritime Administration and Federal Maritime Commission..........  139
Equal Employment Opportunity Commission..........................  207
Commission on Security and Cooperation in Europe.................  293
Commission on Immigration Reform.................................  304
Ounce of Prevention Council......................................  308
Commission on Civil Rights.......................................  327
                                ________

         Printed for the use of the Committee on Appropriations
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                       COMMITTEE ON APPROPRIATIONS                      

                   BOB LIVINGSTON, Louisiana, Chairman                  

JOSEPH M. McDADE, Pennsylvania         DAVID R. OBEY, Wisconsin            
C. W. BILL YOUNG, Florida              SIDNEY R. YATES, Illinois           
RALPH REGULA, Ohio                     LOUIS STOKES, Ohio                  
JERRY LEWIS, California                JOHN P. MURTHA, Pennsylvania        
JOHN EDWARD PORTER, Illinois           NORMAN D. DICKS, Washington         
HAROLD ROGERS, Kentucky                MARTIN OLAV SABO, Minnesota         
JOE SKEEN, New Mexico                  JULIAN C. DIXON, California         
FRANK R. WOLF, Virginia                VIC FAZIO, California               
TOM DeLAY, Texas                       W. G. (BILL) HEFNER, North Carolina 
JIM KOLBE, Arizona                     STENY H. HOYER, Maryland            
RON PACKARD, California                ALAN B. MOLLOHAN, West Virginia     
SONNY CALLAHAN, Alabama                MARCY KAPTUR, Ohio                  
JAMES T. WALSH, New York               DAVID E. SKAGGS, Colorado           
CHARLES H. TAYLOR, North Carolina      NANCY PELOSI, California            
DAVID L. HOBSON, Ohio                  PETER J. VISCLOSKY, Indiana         
ERNEST J. ISTOOK, Jr., Oklahoma        THOMAS M. FOGLIETTA, Pennsylvania   
HENRY BONILLA, Texas                   ESTEBAN EDWARD TORRES, California   
JOE KNOLLENBERG, Michigan              NITA M. LOWEY, New York             
DAN MILLER, Florida                    JOSE E. SERRANO, New York           
JAY DICKEY, Arkansas                   ROSA L. DeLAURO, Connecticut        
JACK KINGSTON, Georgia                 JAMES P. MORAN, Virginia            
MIKE PARKER, Mississippi               JOHN W. OLVER, Massachusetts        
RODNEY P. FRELINGHUYSEN, New Jersey    ED PASTOR, Arizona                  
ROGER F. WICKER, Mississippi           CARRIE P. MEEK, Florida             
MICHAEL P. FORBES, New York            DAVID E. PRICE, North Carolina      
GEORGE R. NETHERCUTT, Jr., Washington  CHET EDWARDS, Texas                 
MARK W. NEUMANN, Wisconsin             
RANDY ``DUKE'' CUNNINGHAM, California  
TODD TIAHRT, Kansas                    
ZACH WAMP, Tennessee                   
TOM LATHAM, Iowa                       
ANNE M. NORTHUP, Kentucky              
ROBERT B. ADERHOLT, Alabama            

                 James W. Dyer, Clerk and Staff Director




DEPARTMENTS OF COMMERCE, JUSTICE, AND STATE, THE JUDICIARY, AND RELATED AGENCIES APPROPRIATIONS FOR 1998

                              ----------                              

                                      Wednesday, February 26, 1997.

                       LEGAL SERVICES CORPORATION

                               WITNESSES

DOUGLAS S. EAKELEY, CHAIRMAN, BOARD OF DIRECTORS, LEGAL SERVICES 
    CORPORATION
JOHN N. ERLENBORN, VICE CHAIRMAN, BOARD OF DIRECTORS, LEGAL SERVICES 
    CORPORATION
MARTHA BERGMARK, PRESIDENT, LEGAL SERVICES CORPORATION

                   Chairman Rogers' Opening Statement

    Mr. Rogers. The Committee will come to order.
    This afternoon we would like to welcome the Chairman of the 
Board of the Legal Services Corporation, Douglas Eakeley; the 
new Vice Chairman of the Board of Directors, John Erlenborn, a 
former colleague of ours; and the acting President of the 
Corporation, Martha Bergmark who is appearing before the 
Committee in support of the request for the Legal Services 
Corporation.
    The LSC is requesting a budget of $340 million for fiscal 
1998, a 20 percent increase over the fiscal year 1997 enacted 
level. As you well know, fiscal year 1998 will be another 
austere year in terms of the amount of money this Subcommittee 
will have available to spend on all of the programs and 
agencies that we are charged with.
    In addition, there are numerous policy issues which we will 
face as we continue to debate how we ensure that indigent 
people have access to our civil legal system.
    Clearly this Committee is well aware of recent legal 
challenges raised to the reforms adopted by the Congress for 
this current year, and proposed to be continued in the fiscal 
year 1998 budget request. We will be watching closely the 
developments in these cases as well as the Corporation's 
response to the challenges.
    At this point, we will insert into the record each of your 
written statements, and we would ask that you proceed with an 
oral summary.
    Mr. Eakeley, you may begin.

          Opening Statements of the Legal Services Corporation

    Mr. Eakeley. Thank you, Mr. Chairman.
    Thank you for giving me the opportunity to be with you once 
again to speak in support of the Legal Services Corporation's 
fiscal year 1998 budget request.
    As the Chair knows, I am an attorney in private practice in 
Roseland, New Jersey, and the Chair of the Corporation's Board 
of Directors. It is also my pleasure and privilege to have with 
me here today our new Vice Chairman John Erlenborn who is no 
stranger to the Chair, having served for two decades in the 
Congress, and Martha Bergmark who is in a new position with the 
Corporation as President, but has ably served as Executive Vice 
President for the past 3 years until Alex Forger left just 2 
weeks ago and Martha took over as President while we pursue a 
search for a successor.
    I will not go through our written testimony. You have 
indicated that it is part of the record. I will, if I may in my 
2.5 minutes just make a couple of other points with the Chair's 
permission.
    Since we last testified before this Committee 10 months 
ago, the Corporation has been engaged in a massive effort to 
implement the new vision of legal services reflected in our 
1996 fiscal year appropriation. We have instituted a new system 
of competition for grants. The Board has been very impressed 
with the Corporation's efforts to invent a legal system from 
scratch and to make it work. Competition has already brought 
about some significant changes in the delivery system and we 
recognize that it provides an important new tool for improving 
program quality.
    Our other major efforts relate to bringing the legal 
services delivery system into compliance with the congressional 
intent that federally funded legal services be refocused on 
serving individual clients with particular legal needs, while 
leaving broader efforts to address the problems of the client 
community to entities that do not use Federal funds.
    The Board has drafted regulations implementing the various 
restrictions contained in our appropriation. All but two sets 
of regulations are now in final form, and on those two matters 
we have interim emergency regulations in place. Our grantees 
have also made a huge effort to dispose of cases which they are 
no longer permitted to handle.
    We reported in June that there were some 630 class actions 
and many thousands of cases involving prisoners and aliens who 
could be represented at the time with non-LSC funds. As of the 
end of 1996, all of our grantees have reported that they have 
disposed of those matters and brought themselves into 
compliance with our new regulations.
    In a few instances where judges were reluctant to allow the 
local legal services attorneys to withdraw from the case, the 
Corporation was forced to take a very strong position and took 
that position effectively.
    Our Office of Inspector General is monitoring selected 
programs to check for compliance with these regulations.
    As I am sure you are all aware there has been one recent 
development relating to the implementation of the new 
restrictions that is also the subject of a press release and 
letter to the leadership of the Congress that was on the table 
outside. Two cases have been brought in the United States 
District Court, one in Hawaii--the one in Hawaii by several of 
our grantees, and one in New York by individual attorneys and 
others.
    The Federal judge in the Hawaii case has granted a 
preliminary injunction barring the Corporation from enforcing 
some of its regulations against the plaintiffs insofar as they 
restrict the use of non-LSC funds on the grounds that they have 
a fair chance of showing that they go too far in limiting the 
exercise of First Amendment rights. I want to stress that for a 
moment.
    The judge merely ruled that in the preliminary injunction 
phase he thought that plaintiffs had a fair chance, not would 
likely to or would definitely prevail, but they had a fair 
chance of prevailing on the Corporation's restrictions, not the 
congressional restrictions, on some of the uses to which the 
Corporation had sought to restrict non-LSC funds.
    Mr. Rogers. Question. I am sorry to interrupt you.
    Mr. Eakeley. That is why we are here.
    Mr. Rogers. Does that mean probable cause or preponderance 
of the evidence?
    Mr. Eakeley. I don't think it means either in this 
instance. What the judge had to do in order to grant the 
preliminary injunction was find a likelihood of irreparable 
injury in the balancing of the hardships facing the plaintiffs. 
They had the burden of persuasion to demonstrate that the 
elements of the preliminary injunction were met, but the 
element that requires a likelihood of success on the merits was 
not founded by the judge. He used the term ``fair chance,'' 
which is a curious----
    Mr. Rogers. But can't you tell I have been watching the 
O.J. Simpson case?
    Mr. Eakeley. We are still puzzling. We have 30 days, until 
the Ides of March actually, to decide what to do, how to do it, 
and how most effectively to ensure that the congressional 
intent is fully fulfilled, and we are doing our utmost to 
puzzle that through. But that is the starting point.
    The Chair is right. I don't know what the fair chance means 
in the context of 28 United States Code.
    A couple of things to point out about that case, if I 
might. The decision does not affect, indeed, it upholds the 
right, the constitutional authority of Congress to impose 
restrictions not only on the use of Federal funds, but also on 
the use of non-Federal funds. It does not even as it stands, 
and it is limited in a preliminary injunction context to these 
local grantees for these purposes for non-LSC funds.
    It does not take it back to where we were even with them 
with respect to the use of non-LSC funds. The reason being that 
since then, we have implemented new recordkeeping, new 
monitoring and new timekeeping so that we will be able to 
track, and we will be relying on outside auditors supervised by 
the Inspector General to make sure that there is no overlap or 
walking across the line, even as narrowly drawn in this 
context.
    The decision confirms the basic principle that Congress may 
prohibit grantees from using LSC and non-LSC funds for 
activities that it deems to be inappropriate and places no 
limits on the Corporation's ability to restrict class actions, 
collection of attorneys' fees, and representation of aliens.
    I might point out that contrary to the press release that 
was on the table outside issued by the National Legal and 
Policy Center, Mr. Boehm who is here today is quoted as saying 
that this ruling allows the legal services programs to return 
to using taxpayer dollars for a number of restricted 
activities. That is not the case. That is absolutely false.
    The ruling permits limited--and it is still unclear, but 
the ruling applies only to the Corporation's restrictions on 
the use of non-LSC funds in those areas. It does not impact at 
all the Corporation's ability to control disposition and use of 
Federal funds or non-Federal funds for all of the other 
purposes, including class actions and attorneys' fees.
    Now, the Court in applying the Supreme Court's test in Rust 
against Sullivan, found that the Corporation's policies on 
interrelated organizations and transfer of funds did not allow 
for adequate alternatives for participating in certain 
constitutionally protected activities with non-LSC funds. There 
is where the rub is.
    At our board meeting next week the Corporation and its 
attorneys will consider what legal strategy is best suited to 
defend the funding framework Congress has enacted and whether 
it is possible to address the Court's concerns about these two 
policies and thus avoid additional lawsuits on the same grounds 
while carrying out the intent of Congress to restrict LSC 
grantees from using non-LSC funds for particular activities. 
Again, the principle that will be guiding our response is how 
best to implement the will of Congress.
    In conclusion, I would just like to outline the main points 
of our budget request for fiscal year 1998. As you know, Mr. 
Chairman, we have asked for an overall appropriation for fiscal 
year 1998 of $340 million. As you said at the outset, that is 
an increase of 20 percent from last year, but actually would 
bring the Corporation back to an 18.5 percent reduction from 
our $400-415 million funding level of 2 years ago.
    What we are looking for and seeking to do is ask this 
Committee to bring us to a level where the Corporation will 
share its fair share of the burden of reducing Federal funding, 
but not absorb much more than that fair share.
    The need for legal services on the part of low-income 
Americans remains overwhelming. We do not yet have statistics 
for 1996, but we know that local programs were forced to close 
offices and lay off staff and turn away people in desperate 
need. No matter how hard we try to foster the development of 
other sources of funding and more efficient ways of providing 
services, and our budget includes a request for $12 million for 
technology initiatives to help our grantees do more with less, 
the bottom line is that more Federal dollars will enable the 
Corporation to represent more clients.
    As in the past, we are seeking an allocation for management 
and administration which is equal to about 3 percent of the 
total appropriation. We are asking that it be funded at a level 
that permits 75 employees, exclusive of the Office of the 
Inspector General. This represents an increase of 6 positions 
over our current level but it is still far below the staffing 
level of 1995, and it largely generated by our need to 
effectively implement and continue monitoring the competitive 
system.
    We believe that it is essential that the Corporation have 
sufficient staff so that we can do a credible job implementing 
the new competition initiative and carrying out the 
Corporation's oversight functions.
    Before turning the table to John Erlenborn, I want to thank 
you, Mr. Chairman and Members of the Subcommittee, for your 
long-standing bipartisan support for legal services for the 
poor, and the Board joins me in that word of thanks and 
gratitude. We understand that these are difficult times and you 
are faced with difficult choices and we want you to know that 
we give the highest priority to making sure that we use the 
taxpayers' funds as efficiently and as wisely as possible, 
consistent with the congressional purpose of securing access to 
justice on behalf of poor people.
    Thank you again for the opportunity to testify.
    Now I would like to introduce someone who truly needs no 
introduction, but Mr. Erlenborn.
    Mr. Rogers. We are honored to have John Erlenborn back with 
us. He was a distinguished Member of Congress for many years. I 
have noticed since he left he appears to be getting younger as 
the days pass.
    Mr. Erlenborn. Thank you very much, Mr. Chairman.
    I am glad I suggested that introduction to you. It is nice 
to be flattered. I do need introduction, though, because I left 
this body some 12 years ago and there are a lot of new Members 
here in this Subcommittee, as well as in the House generally.
    I do appreciate this opportunity to testify. I must say I 
spent much more time on the other side of the table and 
probably found that much more enjoyable than being on this 
side, but I am going to enjoy this, I truly do hope.
    Mr. Chairman, my involvement with the Legal Services 
Corporation dates back over more than 20 years. When the 
Corporation was created during the Nixon Administration, I 
managed the legislation for the Republicans on the Education 
and Labor Committee. I thought then, and continue to think, 
that if we truly believe we are a society of equality under the 
law, that access to redress through the legal process must be 
available to all regardless of their ability to pay.
    Over the intervening years I have been critical of some of 
the cases that the LSC grantees have brought. And I have 
supported the imposition of some restrictions on the types of 
cases that grantees may handle, such as some of those included 
in the Corporation's fiscal 1996 appropriation.
    Whatever abuses there have been in the past, however,have 
now been addressed by the Congress. When I joined the Board last year I 
advised my fellow board members that they should be prompt in enforcing 
the restrictions that at that time were pending in conference.
    I was impressed to learn that they had already begun 
drafting the regulations to implement the letter and intent of 
the restrictions that were expected to be enacted. Since then I 
have been appointed to the Committee that recommends 
regulations to the Board and I have been impressed by the 
diligence and rigor and thoroughness of the Board's efforts.
    I can attest to the fact that our deliberations have been 
guided by the principle that the will of Congress must be 
reflected in and implemented by the regulations.
    And I would add that the Corporation is being guided by 
that same principle, implementing the will of Congress fully 
and in good faith in its defense of the lawsuit brought 
challenging the restrictions. There were several lawsuits. 
There are difficult constitutional questions involved in these 
cases. And the Corporation and its attorneys are seeking to 
find a way to satisfy the constitutional requirements as set 
forth by the courts, while accomplishing the results that 
Congress intended.
    I recently had occasion to respond very strongly to some 
unfortunate suggestions that the Corporation is failing or 
refusing to enforce the enactments of Congress. That is simply 
not the case. Unfortunately, those who would abolish the 
Corporation have recently been given ammunition by one of the 
Corporation's grantees, Texas Rural Legal Aid, which brought a 
case under the Voting Rights Act challenging the results of a 
local election, which, in my personal view, should not have 
been brought with Federal funds.
    As soon as the Corporation received a complaint about this 
case it began an investigation to determine whether it violated 
any of the applicable restrictions. It was immediately apparent 
that TRLA had violated at least one restriction because it had 
sought attorneys' fees in the case. The Corporation promptly 
notified TRLA that it was in violation and sought its 
withdrawal in the case, which has since come about.
    Although its investigation into this matter is not yet 
complete, the Corporation has made a decision that it will 
institute a questioned cost proceeding against TRLA which, in 
effect, will impose a financial penalty on TRLA by disallowing 
the costs associated with the violation.
    As to other possible violations, the Corporation has made a 
determination that the case does not violate the restriction on 
political activity as has been suggested. I have reviewed the 
basis for this decision and I concur; the legislative history 
of this provision makes it clear that what Congress intended 
with this provision was to prohibit activities such as working 
on behalf of candidates or driving people to the polls on work 
time and explicitly did not intend to restrict representation 
of eligible clients in voting rights cases.
    In addition, in 1989, the Board of Directors of the 
Corporation appointed by President Reagan considered this issue 
and decided not to place voting rights cases within the 
political activity restriction. So it is completely clear to me 
that voting rights cases are not currently restricted, although 
I prefer not to have legal services grantees get involved in 
anything that might appear to be involved in the political 
process.
    Again, I believe that in its response to this case the 
Corporation is acting in good faith to enforce the enactments 
of Congress and that the criticism that has been directed at 
the Corporation and the legal services system as a whole for 
this case has been misdirected.
    The principle of local control remains a great source of 
strength to the legal services delivery system. Let us keep in 
mind that this was one case out of well over a million being 
handled by the Corporation's grantees this year, or during this 
past year. And that as a result of the Corporation's prompt 
response, TRLA is now out of the case.
    On behalf of the entire Board, I want to thank you, Mr. 
Chairman and Members of the Subcommittee, for your long-
standing bipartisan support for legal services for the poor. We 
know these are difficult times that you are faced with, and 
difficult choices. And we want you to know that we give the 
highest priority to making sure that the Legal Services 
Corporation is committed to using the taxpayers' funds as 
efficiently and wisely as possible and consistently with the 
will of Congress.
    Thank you very much for this opportunity to testify.
    Ms. Bergmark. I am not going to be making any opening 
remarks, thank you.
    [The information follows:]

[Pages 8 - 27--The official Committee record contains additional material here.]


                       challenges to restrictions

    Mr. Rogers. Well, I thank all of you for being here.
    We labored hard last year over LSC and what to do with it 
and how to do it. The restrictions and reforms that we came out 
with were a product of the Authorizing committees in the House 
and Senate and Appropriations committees in the House and 
Senate. And even then, it barely squeaked by.
    Now that many of those restrictions are under attack in the 
courts, your supporters in the Congress are watching you very 
carefully to see if you are not only defending those 
restrictions but defending them with zeal and enthusiasm. 
Because they want to believe, some of them would want to 
believe, that you will defend them with one arm tied behind 
your back, all the while winking at the judge. I am saying that 
not in a literal sense.
    So I guess we want to see how intent you are on defending 
the restrictions, which you probably don't like. Well, it is 
not probably, I know you don't like them, but nevertheless, 
they are the will of the Congress and written into law. So I 
guess we want you to roll up your sleeve and show us your scar.
    Are you really with us on this?
    Mr. Eakeley. The answer is unequivocally yes, Mr. Chairman. 
Clearly we resisted some of the restrictions last year, but 
once they became law and indeed before they became law, we 
started--initiated efforts to implement them and we have 
implemented them as effectively as we could. And I thinkthat 
some of the scars or the sources of the scars can be found in the 
statistics.
    We had 632 class actions pending at the time that the 
restriction on class actions went into effect. There are no 
legal services grantees undertaking any class actions in the 
Nation today of which I am aware. By the way, when the Chair 
said that the Hawaii decision impacts many of the restrictions, 
I suppose it is a question of how you look at it, but, in fact, 
none of our regulations restricting what grantees can do with 
Federal funds are affected nor are most of them affecting what 
they may do with non-LSC funds.
    What is affected are the regulations that say to grantees 
at the time they went into effect, you may not transfer non-
Federal funds to another entity and use them for any of these 
restrictions. And also some of the rigor of our regulation that 
goes beyond what the Congress required in requiring 
independent, unaffiliated entities to provide representation on 
otherwise restricted activities. Those are the source of the 
Hawaii ruling and, yes, that has made a difference at the 
moment.
    But our defense of that action I think can, without 
hesitation, be qualified as enthusiastic and with zeal and 
unqualified. We retained Covington & Burling. I think if you 
saw the papers that we submitted on behalf of the Corporation, 
that they will demonstrate the vigor with which we opposed the 
application for a preliminary injunction.
    We certainly don't agree with the decision, but we don't 
quite know exactly how to deal with it as yet. But I don't 
think it is a question of liking or disliking the regulations. 
They are the law. They are our mandate and we have done 
everything we can to assure ourselves and the Congress that the 
congressional intent is implemented here.
    John Erlenborn is on the Operations and Regulations 
Committee, and I think has probably got an even closer and 
different perspective on that process.
    Mr. Erlenborn. I thank you, Mr. Chairman, and you, Mr. 
Chairman.
    Might I say that the Regs and Operations Committee on which 
I serve spent a good deal of time on each one of these 
regulations. And we are always consistently trying to see that 
the regulations do implement the will of Congress, and that the 
administration of the Legal Services Corporation sees that 
those rules are enforced.

                              hawaii case

    Let me say this, however, as to the reaction from some of 
the critics of the Legal Services Corporation. I think you have 
to look very carefully at what they say and check the facts.
    As I mentioned to you, Mr. Chairman, earlier this year 
there was criticism of the Legal Services Corporation as being 
arrogant and another aspect of its arrogance was shown in the 
Hawaii case. We are the defendants. We didn't bring that case. 
We were not attacking the Corporation's restrictions or the 
Congress' imposition of restrictions. We were the defendant in 
the case, and at the very time that we were being criticized 
for being arrogant because this case was filed, the President 
of the Corporation was stating that the Corporation would 
vigorously defend that lawsuit, and that is exactly what we 
have been doing.
    So, critics can be saying many things, I just say very 
carefully, check to make certain what they are telling you 
conforms with the facts.
    Mr. Rogers. It is my understanding that the Federal court 
has issued a preliminary injunction, not a final, but a 
preliminary injunction prohibiting LSC from implementing most 
of the restrictions on the non-Federal funds portion of your 
budget--core reforms made by the Congress. Is that where we 
are?
    Mr. Eakeley. I think there are restrictions. Part of the 
core reform imposed by the Congress on the use of outside funds 
had to do with class action advocacy. That was not touched nor 
was the core reform on recovery of attorneys' fees.
    Mr. Rogers. But it is a preliminary injunction; it is not 
final.
    Mr. Eakeley. Yes.
    Mr. Rogers. We can only speculate about the final outcome 
of that litigation, right?
    Mr. Eakeley. Yes.
    Mr. Rogers. And you are fighting as hard as you know how to 
defend the Congress' restrictions that we talked about?
    Mr. Eakeley. That is correct.
    Mr. Rogers. Now, your testimony indicates that you are 
considering rewriting your regulations to accommodate the 
Court's concerns, even though there is no final decision in the 
case; is that right?
    Mr. Eakeley. That is correct.
    Mr. Rogers. I think that would be most unwise.
    Mr. Eakeley. We don't--there may be, and I stress the word 
``may''--there may be space within which to maneuver in order 
to accommodate the constitutional concerns articulated by the 
Federal judge that were not directed at the congressional 
restrictions themselves, but at the regulations that the 
Corporation imposed. And it may be possible to deal with the 
constitutional issue in a way that eliminates the problem and 
the need for further judicial review or intervention while 
remaining consistent and faithful to the intent of the 
Congress, I don't know the answer to that, though, yet we are 
still looking at it carefully.
    Mr. Rogers. Does that deal with the so-called mirror 
corporations?
    Mr. Eakeley. Well, to a certain extent. I think to a larger 
extent what we did, that was not necessarily mandated by the 
Congress, was to impose very rigid restrictions on transfers of 
funds and the uses to which those pre-existing funds could be 
utilized.
    And I think those are the two areas where we are looking to 
see whether it is possible to remedy the constitutional defect 
noted in a way that is politically viable and acceptable to the 
Congress.
    Mr. Rogers. Well, if you are thinking of the mirror 
corporations, letting a separate entity take the private 
contributions or non-Federal contributions to your budget and 
spend those monies as they see fit, if that is the approach 
that you are taking, you might please the Court, but you would 
make an enemy of the Congress.
    Mr. Eakeley. We understand that we have two masters here, 
in effect. We and the Congress must act constitutionally, and 
yet we understand that we are answerable to the Congress, and 
therefore what I said in terms of stressing the word ``may'' is 
that there may be a way to deal with the legal issues presented 
by the judge that affect our regulations rather than the 
congressionalrestrictions in a way that is acceptable to the 
Congress. If it is not acceptable, we will litigate it to the hilt. But 
litigating it to the hilt at the risk of losing and having the courts 
intervene in a way that may not--that may risk losing even further 
control, it may not be the best outcome either. And that is what we are 
looking at very carefully today and will be until the Board meets next 
weekend.
    We have until March 15th to decide the best strategy. But 
that strategy will, I can assure you, be designed to maintain 
our credibility with the Congress by fulfilling the 
congressional intent consistent with the--with what counsel 
advises us is constitutionally permissible.
    Mr. Rogers. I have more questions. I will come back later.
    Mr. Mollohan.

                          competitive bidding

    Mr. Mollohan. Thank you, Mr. Chairman, Mr. Eakeley, 
gentlemen. Just a few questions about the competitive bidding 
process. How is that faring? What is your experience so far 
with it?
    Mr. Eakeley. I defer to Martha Bergmark for that. She is 
the one who has had to implement it and live with it since 
then.
    Ms. Bergmark. We had our first round of competitive bidding 
under the 1996 appropriation, but that was an appropriation we 
got very late in the year, as you remember, and the 
restrictions and the new structure came along in almost 
midyear, so that was a very hurried effort to implement 
competition that year. So we really consider this year's round 
for the 1997 money has been our first truly fully implemented 
round of competition.
    We had competition in 352 service areas across the country, 
and in 37 of those service areas we had more than one 
applicant. And in 14 of those service areas, we selected 
grantees who were not the previous grantee for that service 
area. So we have seen----
    Mr. Mollohan. When the previous grantee was in competition 
for the award?
    Ms. Bergmark. In some cases yes, and in some cases no; in 
the 14, some of each.
    Mr. Mollohan. Some of the previous grantees----
    Ms. Bergmark. Withdrew or had merged with another one. So 
we had 14 service areas in which the grantee was not the 
previous grantee.
    We had an experience in which we were very aggressive about 
notifying as many interested parties as possible of the 
possibility of application. We provided technical assistance to 
possible grantees, and we used a review process where when we 
had only one applicant in the service area, we used a review 
process that was with our own staff and one outside reviewer. 
In the case of competition, we used outside review panels to 
review those applications.
    So we believe we have done a very conscientious job of 
designing and implementing a system of competition that has 
indeed brought about some change in the delivery of service and 
I think given the Corporation an opportunity to have some 
influence on quality of service and quantity of service in 
going about that process.
    Mr. Mollohan. There wasn't a rush for competition, was 
there?
    Ms. Bergmark. No.
    Mr. Mollohan. You had 352 service areas that you solicited, 
and in only 37 of them did you have competition?
    Ms. Bergmark. Just under 10 percent. We actually didn't 
anticipate and don't anticipate a dramatic or, you know, rapid 
rush for this money. The grant process is difficult simply 
because being a legal services provider is difficult. It 
requires setting up a board and hiring a staff, and, you know, 
making a commitment to a service delivery system that is 
definitely an effort.
    Mr. Mollohan. Of the 37 that you did receive multiple 
interest in, were any of those 37 already service providers 
from outside that particular area?
    Ms. Bergmark. Yes, they were. Some were, and some weren't.
    Mr. Mollohan. How many?
    Ms. Bergmark. That is in our testimony.
    Mr. Mollohan. A lot of them?
    Ms. Bergmark. I think something over half of those 37 were 
either private firms or other entities that had not previously 
provided service.
    Mr. Mollohan. So only about 18 out of all; the solicitation 
only generated about 18 new?
    Ms. Bergmark. That is right.
    Mr. Mollohan. I was interested in exploring that 
competitive process a bit. In situations where you had more 
than one applicant and they were competing against the 
incumbent, what criteria do you use? I know the statute says 
that you can't give preference in the competitive process to a 
current grantee, but there has to be an experience factor. 
There has to be a capability to serve.
    Ms. Bergmark. The statute itself provides that we can make 
grants not only to nonprofits now, but to State and local 
governments, to regional planning agencies, to private lawyers. 
So then our request for proposals sets out a number of criteria 
that are actually based on the American Bar Association 
standards for providers of legal services to the poor and our 
own performance criteria to try to see to it that several 
categories of ability, capacity, to provide service are shown. 
So the application process itself is rather detailed and asks 
for a lot of information about just how service would be 
provided by the proposed grantee. And actually I note that we 
had 14 applications from entities that have not been a provider 
of ours in any service areas, so there were 14 new ones; seven 
law firms, six other nonprofit associations.
    Mr. Mollohan. There were 14 new applicants who were 
successful?
    Ms. Bergmark. No, sir, just totally. Applicants, period.
    Mr. Mollohan. How many of those new applicants were 
successful? I thought you said there were 14 new grantees?
    Ms. Bergmark. No. There were 37 service areas in which 
there was more than one applicant. In 14 of those, there was a 
competing application from someone or some entity that had not 
previously been a grantee of ours.
    Mr. Mollohan. So it didn't come from another area?
    Ms. Bergmark. Correct.
    Mr. Mollohan. And of those 14 new, how many were 
successful?
    Ms. Bergmark. I am having to add this up here from a whole 
lot of different types of service areas, and we had a number of 
mergers. Rather than take up your time, why don't I give you 
that information. We had a number that were mergers among other 
programs. We had at least two service areas in which our grant 
award was to a private law firm,and we had at least a couple 
where it was to a new nonprofit.
    Mr. Mollohan. In those instances where you had new grantees 
who were in competition with an ongoing grantee, would the 
ongoing grantee have to have tripped up somewhat in order to 
lose? I mean, I would think if you are up there operating and 
doing a job, and even though there is no presumption that you 
are going to get it, it would seem you have a certain 
expertise, and that shows the ability to serve.
    Ms. Bergmark. Our statute provides that we give no 
preference to an existing provider. I realize that is difficult 
when you have got someone who perhaps does have a demonstrated 
capacity to provide the service, and yet they are competing 
with someone who may be brand new to it, although, in the case 
of certain nonprofits and certain law firms, they have a track 
record of delivering legal services.
    Mr. Mollohan. I know you can't give a preference, and I 
have read the statute, and I understand that, but what I am 
saying is that just the experience ought to allow you to come 
in pretty strong on the criteria that you can consider. So what 
I am asking, in these instances where you have competition and 
you have a new grantee, was it the case of the new grantee so 
outshining on the criteria, on the merits, or did the incumbent 
stub their toe?
    Ms. Bergmark. Well, we do have a scoring system. So the 
applications were scored, and certainly an applicant that had a 
wonderful track record on all the criteria would get a high 
score on all of those. So in that sense they would score high 
in our system, and the competitor would need to outshine that.
    Mr. Mollohan. Thank you, Mr. Chairman.
    Mr. Rogers. Mr. Taylor.
    Mr. Taylor. Thank you, Mr. Chairman.

                                lobbying

    I have listened to the ladies and gentlemen with the 
program here. I am not sure whether Legal Services yet has 
measured the depth of feeling in Congress about this to a large 
extent in looking over records not necessarily brought out here 
today, but it looks a lot like the same old same old in many 
cases. For example, I look at late 1996, when the Michigan 
Migrant Legal Assistance Program involved itself in legislation 
dealing with immigrants. It was a lobbying effort inside the 
Michigan legislature, and it was criticized by some of the 
members of the Senate in Michigan.
    And I think that was one of the things--outside lobbying 
that Congress was particularly against. And, of course, 
whatever money was used in that effort was taken away from 
dollars that would be spent on defending the poor. And I would 
like to present this to you because of limited time. I will let 
you take these and work on them and get back to me. How much 
money might have been diverted from the poor in what is really 
a violation of the rules?
    And then in the question of the lawsuits themselves that 
have been brought, I would like to know approximately how much 
money was diverted from the poor by Legal Services in those 
cases that you have brought action on or at least you 
questioned the conduct of particular grantees.
    One of the problems about the whole Legal Services program 
is that a lot of these groups, once you make the grant, they 
seem to go off on their own, and a lot of the things they 
meddle in have absolutely nothing to do with the poor as we are 
talking about here. I'm talking about many, many cases that we 
could spend the rest of the afternoon on. I notice that the 
organization sent out a letter in Ohio stating: We have 
survived the Republican revolution. We are bloodied, but 
intact. And then it goes on with a variety of other language.
    But then in December, Texas Rural Legal Aid was involved in 
a lawsuit challenging the right of absentee military voters to 
vote in local elections. They were trying to overturn two 
Republican victories in local elections in that county by 
throwing out the votes of a number of military personnel who 
voted by absentee ballot.
    I don't care whether it is Republicans or Democrats, the 
money used in that case had to be diverted from the poor, and 
that certainly wasn't the kind of thing that Congress intended. 
I would think that in most counties there are appropriate 
election officials, and multitudes of ways to address problems 
without spending the taxpayers' money through Legal Aid, which 
may have been whatever motives there were involved.
    I don't have a lot more time, but in those three areas I 
would like to know how much money was diverted from the poor 
that we keep referring to. I don't think there has been a lot 
of individual reform when you get down to where the rubber 
meets the road at the individual grantee's expenditure of 
funds.

                former president's outside compensation

    I haven't been able to assess what the main Corporation's 
position is. I would say, though, that the example set by the 
leadership in walking around the rules may lead some of the 
grantees to feel that they can thumb their nose at the rules, 
and I mention specifically the former president, who I 
questioned some time ago about how he could according to the 
act, which states no officer of the Corporation may receive any 
salary or compensation from other services during his period of 
employment by the Corporation except as authorized by the 
Board. He indicated that he did work full time for Legal 
Services, but he worked--did other things on weekends and at 
night. And for his weekend and night work he recently applied 
for $450,000 in legal fees for some of his estate work. And 
that was in one estate, and he was representing other estates.
    Now, perhaps he rendered that type of weekend and night 
service of that value. He was severely criticized by the Wall 
Street Journal and I believe by the Attorney General of New 
York. And I am not getting into how he spent his time and 
whether or not he earned the fees, but it sets a particularly 
bad example, it would seem to me, like for grantees, that if he 
could find a way to slip, and I am putting parentheses around 
``prohibition against any officer receiving salary or other 
compensation,'' it doesn't set a good example for the grantees 
to try to follow the spirit and the letter of the law.
    I still am not supportive of the program, and have never 
hidden that fact. And I don't think there has been nearly 
enough done to merit an increase in this appropriation, Mr. 
Chairman. I appreciate the time. If you could respond on the 
time spent in those three cases I mentioned, I would appreciate 
it. Thank you.
    Mr. Rogers. Mr. Skaggs.
    Mr. Skaggs. Thank you, Mr. Chairman.
    Sounds like the criticism that might be applied to Kenneth 
Starr.
    Mr. Taylor. Or any number of the special prosecutors.

                             PRIVATE FUNDS

    Mr. Skaggs. Mr. Chairman, I want to say how much I respect 
the work that you have done in trying to keep the fabric intact 
that holds a modest amount of funding for the Legal Services 
program, and I know that has been a difficult task, and one 
that should not be interpreted as being critical of you at all.
    I think it is important, even as we drill these witnesses 
to make sure that they are carrying out the restrictions that 
Congress has imposed, that we not leave the impression that 
Congress is of one mind on these matters. There are many of us 
that think that these are absolutely outrageous restrictions.
    I commend your flexibility in being able to carry them out 
in good faith, as I am sure you are, but I think they have the 
inevitable effect of turning the clients of Legal Services 
Corporation grantees, the lawyers that represent them, into 
second class citizens, and it is a shame. It is a shame.
    I am interested as a practical matter what all of this has 
done to your ability or your grantee's ability to raise private 
funds.
    Mr. Eakeley. I think it has adversely impacted it in a 
number of ways. I think that to start with you have a general 
compartmentalization, a loss of cohesion, a demoralization that 
some of our foes have long sought that is coupled with a 
questioning of the effectiveness of the use to which funds can 
be put if there are so many restrictions on the attorneys.
    The other sources of funding are predominantly State and 
local government in nature, and the IOLTA program is the other 
one, but I think that we are still doing our best. The basic 
thrust of the program has always been individual delivery of 
legal services to individuals in the communities for their 
needs, and that has been predominantly the need to keep 
families intact, preserving jobs, and care for the elderly and 
the like.
    The tools and resources have diminished over time. I think 
that the effort remains concerted to supplement by volunteer 
legal services as well as outside fund-raising. But at this 
moment we are being attacked by friend and foe alike. It leaves 
a very confused situation. And in the confusion, as well as the 
competitive grants, it is difficult to elicit new entrants into 
an area where funding is touch and go and it is unclear the 
uses to which that funding will be put, for example.
    So it is not easy, it never has been, and we are not 
complaining. But in responding to your question, that is the 
situation as we find it today.

                         PRO SE REPRESENTATION

    Mr. Skaggs. Your prepared testimony touched on a matter 
that we discussed last year, and that is the unintended 
consequence that contraction of services funded from the 
Corporation will bring greater pro se representation which will 
in turn bog down the courts and produce additional costs, not 
to mention poorer justice. I am wondering if we have enough 
practical experience or track record yet to know how that is 
actually going to play out in practice?
    Mr. Eakeley. I don't think we do, but I should add that our 
request for a modest amount of funding for technical innovation 
is attempting to address the anticipated demand for greater pro 
se representation, to facilitate that both in terms of intake 
advice and permitting individuals with civil legal needs to 
represent themselves with some guidance. And we hope that we 
can deal with that and make--and have these limited resources 
go further with some of the technological innovations that we 
are requesting the funding for.

                        CLASS ACTION LITIGATION

    Mr. Skaggs. What will happen, hypothetically, if in 
jurisdiction X a rash of individual cases are brought, 
litigating precisely the same legal question in a court that of 
its own motion decides it should certify a class?
    Mr. Eakeley. I defer that to Mr. Erlenborn.
    Mr. Erlenborn. I don't know why you would defer that to me, 
but certainly I think that we are fortunate at this time that 
the Hawaii case is limited to those few plaintiffs who are 
named and it was not a class action. If we had a class action 
and there were a preliminary injunction, it would impact the 
funds of the Corporation, of course, all over the country.
    Ms. Bergmark. Just any sort of issue that might come up 
that a number of----
    Mr. Skaggs. Welfare regulations, let's say.
    Ms. Bergmark. I think our regulation would require--if the 
court were to do that on its own motion, would require our 
grantee attorneys to get out of that case. Our restriction on 
class action participation would prohibit that.
    I am not sure how often that happens necessarily, but our 
restrictions at that point do require that our lawyers not be 
involved in a class action and withdraw from it should it 
become one.
    Mr. Skaggs. Thank you, Mr. Chairman.
    Mr. Rogers. Thank you Mr. Skaggs.
    Mr. Taylor.

                      NON-FEDERAL FUNDING SOURCES

    Mr. Taylor. Mr. Chairman, when you state that your fund-
raising has been deeply depressed, the Legal Aid Society that 
made this comment about the Republican revolution also pointed 
out that although they had a 30 percent cut in Federal funding, 
they were able to make up part of it through increased State 
funding, and they have started a private fund which they say it 
currently is small, but growing. They also indicate they are 
having that much success in replacing their 30 percent cut in 
funding. It seems that your grantees are not having that 
fundraising problem.
    My opposition does not come from the fact that there are 
Legal Services available for people in the community. There are 
many organizations other than the federally-funded Legal 
Services Corporation that have pro bono programs. I am 
disappointed to one extent that we have such a small percentage 
of the bar that participates, 15 percent out of merely a 
million attorneys or perhaps 13 percent out of a million 
attorneys.
    And secondly, the local programs, like most local 
government programs, usually work better than Federal programs 
because the local people are not going to support programs that 
get into lobbying, that get into areas of suing different 
governmental agencies. They will try to correct the agency 
first. And the local programs that are funded locally and 
controlled locally generally are programs that really help the 
poor rather than get off into the variety of areas that I have 
talked about today. That is why I think that you might find 
without the Federal funding, you might have moreresponsible 
programs, and you might see the bar stepping forward.
    Mr. Mollohan. Will the gentleman yield?

                      SERVICE AREAS AND CASELOADS

    Just on that point about capability to serve. Looking at 
West Virginia, which is a rural State, and I don't know if 
there is any difference between rural and urban areas and the 
ability to make up these funds, but the information I have been 
provided suggests that prior to our funding cuts, there were 17 
offices in West Virginia open and operating. There are now 
eight offices. There were 44 lawyers; there are now 13. There 
are significant reductions in services and caseload.
    We did have a few cases that I agreed with you and the 
Chairman, and some of them maybe even Mr. Skaggs, were 
objectionable because they involved the supporting or defending 
alleged drug dealers in public housing. But most of these cases 
do not fall in these categories, and the case closings have 
dropped from 25,000 or 30,000 cases a year prior to the funding 
cuts to 8,000 cases. Even though some of the 25,000 to 30,000 
cases were things that Legal Aid attorneys shouldn't be 
addressing, issues they shouldn't be addressing, there is a 
real reduction in the ability of the poor to access legal 
services. My point is that it hasn't been made up.
    Mr. Taylor. I would ask the gentleman if he has asked the 
local bar to increase their pro bono work. It is extremely low 
nationwide. I don't know what it is in West Virginia. United 
Way in our area is a strong supporter. Of course, the funds 
coming in from set-asides by State legislation as well as 
county and other funds have moved into many of the areas.
    Mr. Mollohan. That is a ``could be, would you,'' and the 
reality is that there is a reduction in access to 
representation.
    Mr. Eakeley. If I might make one observation, Mr. Chairman. 
The presence of a Federal commitment and a Federal system of 
providing minimal access to justice for poor people in civil 
legal matters, I believe, has proven to be--provided a 
structure and the sinews to connect that structure in ways that 
facilitate and encourage private resources to be contributed. 
Without the structure and without the sinews, without the 
Federal government commitment to access to justice for poor 
people, we would have a lot less rather than more.
    And, Mr. Taylor, we will look into the individual cases of 
the three you mentioned. I think one did not involve a legal 
services grantee. The Texas case involved one where we took 
steps actively to have that program withdrawn from the 
litigation and are seeking to find out just the answer to your 
question that you posed quite rightly.

                            attorneys' fees

    Mr. Rogers. One of your pending--your draft regulations 
that you say are not yet finalized, which is particularly 
troublesome to me, is that the Board has proposed exceptions to 
the restrictions on attorneys' fees.
    I am very surprised we are even having this discussion, 
because the congressional intent could not be more plain. The 
1996 House report's explanation of this provision states as 
follows, quote: ``The grantee receiving Federal funds must 
refrain from collecting attorneys' fees. The Committee believes 
that cases which provide an opportunity for the collection of 
attorneys' fees can be serviced by the private bar. Further, 
the Committee notes that Corporation grantees are supported by 
public resources in order to provide free legal aid to clients. 
Therefore, the Committee believes it is inappropriate for 
attorneys' fees to be collected for free legal aid.''
    Can we be any clearer than that?
    Mr. Eakeley. I think the statute reads or is worded 
``pursuant to a Federal or State statute.'' I will defer to Mr. 
Erlenborn again, because that was the judgment of the 
Operations and Regulations Committee, that that statutory 
language was clear, and prohibits seeking fees and fee-shifting 
statutes such as the Civil Rights Act.
    Mr. Rogers. How did you come up with such an 
interpretation? There is nothing in our language that even 
leaves a loophole.
    Mr. Erlenborn. I don't have the statute before me, but I 
understand and my recollection is it says ``fees awarded,'' as 
the Chairman just said, fees awarded pursuant to State or 
Federal statutes.
    That has a connotation that is more limited than all fees 
that might be awarded. This is what the committee drafting the 
regulation has been discussing, and we have not resolved it at 
the present time, but it does appear to us it doesn't say do 
not collect fees. It says fees awarded pursuant to State and 
Federal statutes.
    Mr. Rogers. I think it is outrageous your interpretation 
would be that minute, given the hot water you are already in.
    Mr. Erlenborn. One of the situations where we have had 
quite a response from the public is the situation where fees 
are collected in representing Social Security claimants that 
have been denied improperly and then are awarded the benefits 
they are entitled to.
    I have read an awful lot of letters that have been sent to 
the Corporation in response to the proposed regulation, and it 
breaks down that there is, first of all, a private bar that 
devotes a good deal of their time to this type of case. Some 
attorneys specialize in this particular area.
    Some have written to the Corporation saying don't allow 
legal services programs to collect contingent fees based upon 
the recovery of back benefits. Others have applauded the 
Corporation's consideration of the regulation that would allow 
that.
    Mr. Rogers. John, we are not talking here about popularity 
of the regulation or the popularity or unpopularity of LSC. We 
are talking about congressional intent and we are talking about 
the survival of the LSC. We are not talking about how many 
angels can dance on the head of a pin. You are in the fight for 
your life. I would do everything I could to be nice to the 
people that have you by the neck here, and that is the 
Congress.
    I am not talking about the Subcommittee. I am talkingabout 
the Congress. You can't seem to help yourselves. I mean, some of us try 
to help you, and then you go out here and do all these crazy, silly 
things that cause us to look like fools up here, and I am just sick of 
it. I don't know what we can do to change the attitude of those on the 
LSC from throughout to appreciate the political circumstances you are 
in.
    Mr. Erlenborn. I think we do, Mr. Chairman.
    Mr. Rogers. I don't think you do. I think this very 
regulation, to me, is symbolic of your utter inability to grasp 
reality.
    Mr. Erlenborn. I would point out it is not adopted. It is 
wholly a proposed regulation.
    Mr. Rogers. So you can change your mind when you can change 
it.
    Mr. Erlenborn. We haven't made up our mind, Mr. Chairman. 
It is proposed.
    Mr. Rogers. Well, do what you will. Do what you want to do. 
But some of us are losing patience, and we have gone out on a 
limb. You don't know how many hours some of us last year put in 
trying to work something out to satisfy the needs of the very 
poor, who have no other recourse to the courts, and I have got 
a lot of them in my district, and the group there is a 
legitimate, hard-working group that works on individual poor 
people's problems. They are not involved in class actions or 
representing somebody's election or registering voters or 
whatever. They are there and they work on legitimate poor 
people's problems. That is what I am after.
    But for God's sakes, you simply cannot listen to what this 
outfit up here has been trying to tell you, and here we go 
again.
    Mr. Erlenborn. Mr. Chairman, could I make one statement in 
response to that?
    Mr. Rogers. Yes, sir.
    Mr. Erlenborn. Again, I have been very pleased with the 
fact that the Corporation has been spending a good deal of 
time, employees of the administration of the Corporation, 
coming up here to the Hill and consulting on all of these 
regulations, consulting with staff on both the House and the 
Senate side. I think there has been a lot of give and take, 
there has been a lot of information that has been utilized by 
the staff in trying to make certain that these regulations do 
conform generally with congressional intent.
    The one case that you point out, again, let me reiterate, 
it is only a proposed regulation. It has not been adopted, and 
it may not be adopted in the form that you object to.
    Mr. Rogers. I am only bringing that up as only symbolic, 
because the real problem is attitude. It demonstrates or 
signifies an attitude throughout the LSC that we will sort of 
dance around this thing that the Congress said, we will show 
them, and be smart about it, cute about it. That is what is 
wrong with it now. That is what has gotten you in trouble.
    Mr. Erlenborn. I can understand that, if all of the 
regulations were of the type you just mentioned. I am talking 
about many that have been adopted with the full concurrence of 
the staff, after consultation. So I don't think you can condemn 
the process or the people involved in it on the basis of one 
example. It is not typical.
    Mr. Rogers. Well, it is not one example. We could spend the 
rest of the afternoon talking about other examples over the 
years that have demonstrated this attitude, I think. In the 
past, it has been an arrogance. I am hoping that is not the 
case now. Maybe that is the nature of lawyers, and I am one, to 
refine and make distinctions that may have some legal 
legitimacy, but politically just ruin you. And that has been 
somewhat the case over the years with the LSC.

                  texas rural legal aid investigation

    Well, let me quickly move to something else here. Mr. 
Bonilla, Henry Bonilla from Texas, wanted to be here and ask 
these questions himself, but had a conflict and could not be 
here and he requested that I ask you these questions on his 
behalf.
    This is a matter of great concern to him. Evidently, and 
you have referred to it, the Texas Rural Legal Aid illegally 
filed a lawsuit attempting--he believes--to deprive our 
military, members of the military, of the right to vote. He 
appreciates your prompt action requiring them to withdraw from 
the case on January 23rd.
    LSC wrote to him that it was investigating TRLA's 
activities to determine if additional action should be taken 
against the program. The question is, have you completed your 
investigation and, if not, what is its status?
    Mr. Erlenborn. Well, let me defer to the President of the 
Corporation to tell you what is going on relative to the 
investigation and the imposition of any penalty that might be 
considered. But, first of all, if I might, let me read from the 
order of the Federal judge. It is called an order regarding 
abstention pending State court actions.
    I have read a lot of the information in the newspapers, 
copies of letters that have been sent back and forth, saying 
that this lawsuit was filed to prohibit servicemen and women 
from exercising their right to vote.
    Let me read from this order, if I might. The court says, 
``It is first apropos to say what the issue is not, whether 
personnel of the United States military can vote. Clearly, the 
sacred franchise of our Armed Services protection can be 
exercised by the protectors. This the Congress has provided 
subject to the State election laws and in the Federal postcard 
application laws. Instead, the question is, where legally may 
mobile minions of military members mark ballots for local 
offices.''
    Now, the judge is certainly fond of alliteration. But I 
think the important thing is that the Court has stated what the 
question is not, and that is was this lawsuit filed to stop 
members of the military from exercising their right to vote, 
and the Court said that was not the question before the Court.
    Now, we did take prompt action under the interim attorney 
fees regulation that the Chair mentioned a few minutes ago. I 
would ask if Martha Bergmark would address the complete answer 
to that.
    Ms. Bergmark. We did make a finding of violation of the 
claim for attorney fees restriction. We did that immediately 
upon learning that that was the case, and sought the withdrawal 
of TRLA from the case. That has since come about.
    We have decided--although we haven't yet completed our 
investigation in the matter, we have decided to implement a 
proceeding to exact a financial penalty disallowing costs 
associated with the violation. We are in the process of 
determining what that amount should be, and we are continuing 
to investigate whether there are any other violations of the 
statute.
    Mr. Rogers. Mr. Bonilla wanted me to also ask, have you yet 
uncovered other violations?
    Ms. Bergmark. We have not. We have made one referral.We had 
one complaint that a deposition on written questions, a questionnaire 
that went to some of the plaintiffs, amounted to voter intimidation, 
and we did refer that to our Inspector General for his review.
    Mr. Rogers. Will TRLA be disqualified from competing for 
LSC grants as a result of this?
    Ms. Bergmark. No, sir. Unless we were to make a finding of 
substantial violation across the board, it would not prohibit 
them from applying for funds. In their next competition round, 
certainly it will be a consideration.
    Their history of compliance with our regulations and other 
restrictions will be a factor in that consideration. They could 
file an application.
    Mr. Rogers. Has LSC taken any interim actions, such as 
suspension of funding, probation and so forth, due to their 
violation?
    Ms. Bergmark. No, sir, we have not. When we notified them 
of the attorney fee violation, that was pursuant to our 
regulation, Part 1606, that permits going forward with 
suspension or termination of funding, but we have not done so 
at this time.

                           political activity

    Mr. Rogers. He goes on and wants me to ask, restrictions 
make it clear that no LSC grant recipients should involve 
itself in any election-related or political activity. Do you 
agree, and, if not, will you provide us with the changes 
necessary to ensure that this does not happen again?
    Mr. Erlenborn. If I might address that question, I 
mentioned in my oral testimony that I looked at this. Prefacing 
that by saying I would prefer that this type of case not be 
handled by a local grantee, because of the kind of political 
trouble that this has generated. But I have looked at it, and 
under the regulation, Part 1608.7, it has to do with the 
political activity, which I think is the question raised here.
    It says, ``Nothing in this part is intended to prohibit an 
attorney or staff attorney from providing any form of legal 
assistance to an eligible client or to interfere with the 
fulfillment of any attorney's professional responsibilities to 
a client.''
    This is a long-standing regulation relative to political 
activity. I have a transcript of the deliberations of the Board 
of Directors back in 1989 concerning a portion of this 
regulation. The Chairman of the Board at that time was Michael 
Wallace. I should mention that was a Reagan-appointed rather 
conservative board. And the Chairman said in this transcript, 
``there will be language made clear that the Voting Rights Act 
cases can be brought by our programs except where they involved 
redistricting cases.''
    Again, the Chairman said, so if anybody is being denied the 
right to vote because of race, and they are otherwise eligible, 
our programs can represent them. That is no problem.
    What you can't do is to get involved in redistricting cases 
as defined in this regulation.
    Their focus was the redistricting cases. Again, I think it 
was very ill-advised for programs to get involved in that sort 
of a political thicket. But it was very clear that the 
regulation now standing which was standing then in 1989, 
clearly allows a program to represent clients in a voting 
rights case.
    Mr. Taylor. Mr. Chairman, I know he has explained about 
sort of wiggling around the intent of Congress and getting in 
the election cases. I would ask the question why is Legal 
Services involved in this election case anyway, dealing with 
military absentee ballots? There is your State election law 
with your State Attorney General. There is the Election 
Commission in Texas that has the right to bring a case. A 
citizen can file it with them if it is a voting rights case.
    You can go to the Federal Government and get relief. There 
are many other ways. Why is Legal Services involved in a case 
like this, when they maintain they cannot serve the poor in 
many communities?
    Mr. Erlenborn. I might point out, and I am not certain 
about this procedure, but I understand there are two cases 
pending in the State courts, and the actual question of the 
contested elections will be determined in those State courts. 
This was a case under the Voting Rights Act to hold the 
situation in status quo until those cases were determined.
    Mr. Rogers. He asked a basic question that you didn't 
address there. Since we have so many poor people that are 
waiting in line to be represented, why are you taking these 
kinds of cases, election cases?
    Mr. Erlenborn. I reiterate, I wish TRLA had not done that. 
But, they do have, I think under the law and under the 
regulation, the right to take cases under the National Voting 
Rights Act. I think that is all I can say. They do have the 
authority to do that.
    Now, they have a board, as all grantee agencies do, that 
determines the priorities at that level where they are serving 
the clients.
    Mr. Rogers. It may be a legal right, but it sure is stupid.
    Mr. Taylor. Is it that the Justice Department, Civil Rights 
Division, is totally inadequate in Texas? Is that what you are 
saying? So Legal Services has to pitch in?
    Ms. Bergmark. I think the program was representing an 
individual client, a woman of Hispanic origin, whose allegation 
was that her right to vote had been diluted by the way this 
election was conducted. In terms of the fact of the case, I 
think those were the facts.
    Mr. Taylor. It is not an emergency situation. I say again 
that you have a Civil Rights Division of the Attorney General's 
office. You have got numerous places to go. Go to the 
congressional office.
    Mr. Rogers. Are you volunteering to take these things?
    Mr. Taylor. Gosh. They think the congressional office does 
all sorts of things. Half of what comes to Legal Services comes 
to our office first. There are offices that exist now, like 
ombudsmen in the Governor's office, you have insurance 
ombudsmen, you have the Attorneys General, that never existed 
25 years ago that are there to represent people.
    Mr. Rogers. So what you are saying is if you go ahead and 
handle these matters, we wouldn't have to have legal services?
    Mr. Taylor. Absolutely, in my district, we will take on 
civil rights cases.
    Mr. Eakeley. I don't think any of us know why those other 
sources of recourse weren't available or turned to.
    Ms. Bergmark. I think the record shows they did make an 
effort to refer it, a significant effort to refer it to some 
other source of counsel, and were unsuccessful.
    Mr. Eakeley. The other question behind the question, how 
many voting rights cases did legal services grantees undertake? 
This is one of a very small number.
    Mr. Erlenborn. We may recover those costs and they can then 
be utilized to furnish services to the poor.
    Mr. Rogers. Mr. Mollohan.
    Mr. Mollohan. I am not sure we want Mr. Taylor hanging out 
his shingle to practice law. Us lawyers have enough problems.
    Mr. Rogers. He is talking about his congressional office. 
They can handle all these matters.
    Mr. Taylor. Many times we can make references.
    Mr. Mollohan. I am sorry. That wasn't a yield.
    Mr. Taylor. I am sorry.
    Mr. Rogers. Mr. Mollohan has the floor.
    Mr. Mollohan. Thank you, Mr. Chairman. Ms. Bergmark, I 
assume if this process catches on, there probably will be more 
competition in the next round. I would like to explore a little 
bit more of what incumbent grantees can expect, just to get 
specific for the purpose of understanding your attitude toward 
it, and society's attitude toward it.

                        pennsylvania competition

    I understand in the Pennsylvania case where this law firm 
was the chosen grantee, that the incumbent enjoyed the support 
of the organized bar, the Judiciary, the law schools, the 
private lawyers who provided pro bono services, the client 
community, the State and local funders, and, yes, I am advised 
even Members of Congress from the area, for whatever good that 
was.
    This suggests to me the incumbent grantee was doing a 
pretty good job, if those good opinions are accurate. Can you 
discuss where they fell down? Was the competition just so 
great?
    Ms. Bergmark. The system that we had in place and applied 
in actually the two service areas that we selected a private 
firm as the projected grantee, we used a scoring system to rate 
the proposals. We had an internal staff review of those 
proposals. We then in both of those instances made a visit to 
the service areas in question by the staff. They in turn made a 
report on what their findings were. So we had a review both of 
the paper that was submitted and a visit to the area.
    We then had outside review panels in both of those service 
areas take a look at the paperwork that had been submitted by 
the programs and the competitor, and also took a look at the 
report that had been submitted by staff of their visit to the 
program.
    It was on the basis--and they made in turn a recommendation 
as did staff to the President of the Corporation, who made the 
decision, based on that entire record, as to which of the 
competitors would be selected.
    So the decision of the President was based on that process 
that took place over the course of several months.
    Mr. Mollohan. So it is a real competitive process, 
independent review?
    Ms. Bergmark. We are attempting again in this instance, as 
well, to implement the will of the Congress to have competitive 
systems in place, to make choices on that basis.

                               technology

    Mr. Mollohan. That is going to be interesting. Mr. Eakeley, 
you are asking, I think, $12 million for technology 
enhancements. In some ways that is a lot of money, and in some 
ways that is not a lot of money for technology enhancement.
    What do you expect to do with that $12 million?
    Mr. Eakeley. As we say in the testimony, we are proposing 
to make that available to each of the grantees in an amount of 
roughly no more than 3 percent plus of that basic grantee's 
field grant. Our expectation or hope is that grant will 
stimulate the innovation in the area of technology, either by 
way of consultation, by the acquisition of necessary hardware 
or software, the facilitation of communication and access to 
the program by the client community.
    There is a separate smaller sub-component that is designed 
to permit us to fund several specific demonstration projects 
using hotlines, for example, pro se approach in certain areas 
as another example.
    It is an attempt to follow up on the report and 
recommendation of our Inspector General that this is an area 
where, because of chronic need exceeding----
    Mr. Mollohan. To multiply your capability to serve?
    Mr. Eakeley. And because local programs are so relatively 
underfunded, they haven't had the luxury or resources even to 
make an incremental shift in many cases.
    Mr. Mollohan. So this $12 million, you are just looking for 
proposals from as many grantees as possible of how they would 
use technology to better be able to serve their clientele?
    Mr. Eakeley. I think also we have a feedback mechanism 
established within the competitive grant system where we are 
actively encouraging, through the competitive grant system, the 
upgrading of programs and program delivery through the use of 
technology. I think the idea is to create some feedback so it 
is not just a random walk, but there is some guidance and some 
reference to other programs that would successfully implement 
the technological approaches as well.
    Mr. Mollohan. Can you give me an example? If a grantee 
submitted a proposal to buy three state-of-the-art computer 
systems and to link them in some way, would that be what you 
would be funding, or are you looking for some imaginative ways 
to deliver service?
    Mr. Eakeley. I think it can be pretty basic, but let me 
defer to President Bergmark.
    Ms. Bergmark. We have a real range in terms of our 
programs, in terms of how far along they are technologically, 
and we had as a grant condition last year and again this year, 
a requirement that a capacity to communicate with us 
electronically was a minimum that we expected.
    We have many programs who are way beyond that who have done 
quite a lot with technology. We have others that have not. So 
we are seeking a way to stimulate and upgrade across the board, 
but not penalize--not only make that money available to the 
folks who have lagged behind, because that would in essence 
penalize the folks who have shown more initiative to move 
forward more quickly.
    So a portion of the money we are asking for, $10 million of 
the $12 million, would be in the way of one-time allocations 
for each service area in the country, recognizing that no 
matter where you are on that spectrum of technology, you can do 
something more.
    Mr. Mollohan. For hardware upgrades.
    Ms. Bergmark. For hardware and software and innovative 
programs in terms of telephone intake and hotlines and so 
forth.
    Mr. Mollohan. I want to understand. So a portion of this 
money is to buy hardware, off-the-shelf hardware.
    Ms. Bergmark. It can be, if that is the proposal for what 
is necessary.
    Mr. Mollohan. And then you are inviting people to be 
imaginative about different ways of delivering service.
    Ms. Bergmark. That is right. In other words, if a program 
is very far over on one side of the spectrum here in terms of 
not having made much progress on technology, then they may need 
some hardware in order to be able to accomplish that.
    Mr. Mollohan. You want to fund that. So it is hardware 
upgrade for some?
    Ms. Bergmark. To some degree.
    Mr. Mollohan. Since this publication here, ``Increasing 
Legal Services Delivery Capacity Through Information 
Technology,'' what are you sending out to your service areas, 
your grantees?
    Ms. Bergmark. We have prepared a brochure and some 
guidelines and some technical supports in the area of 
centralized intake and delivery with telephone hotlines. I 
don't have that with me.
    Mr. Mollohan. Could you provide me with a copy of that 
material?
    Ms. Bergmark. I would be happy to.
    We have done quite a bit of work and been participating in 
training programs to try to increase the use of telephone 
intake and centralized intake.
    Mr. Mollohan. You will send that to me? Thank you.
    [The information follows:]

[Pages 46 - 61--The official Committee record contains additional material here.]


                            attorney's fees

    Mr. Skaggs. I wanted to pick up on your inquiry about the 
lawyer fee issue. I am not nearly as well versed as you are on 
the draft regulation, but I was just trying to figure out what 
was going on there.
    At least one area that comes to mind is the availability of 
attorneys' fees as part of a sanction if discovery is 
inappropriately delayed or resisted, which is rarely imposed. 
But it is really the only thing in the way of costs and fees 
typically in a case like this that might have any real leverage 
against opposing counsel. What would happen in a Legal Services 
case that might go to litigation if you were dependent on 
discovery and really had the one tool available to you from the 
court, namely getting some redress about a obstinate counsel on 
the other side, put off limits?
    Ms. Bergmark. Our interim rule, as it now stands, would not 
prohibit a court from--if a court were entering a sanction of 
some kind against an opposing party for its wrongful behavior 
that it finds to be the case, I believe it is the case that our 
interim reg, that the program would not have sought that or 
claimed that, but it would not ban the entry of sanctions by a 
court if that court chooses to award.
    Mr. Erlenborn. I believe that is correct. Again, it is 
because of the language in the act itself that says ``imposed 
pursuant to State or Federal law.''
    Mr. Skaggs. This would be under the rulings of procedure, 
State or Federal. I am just getting at the concern expressed by 
the Chairman that we meant all fees. I wonder whether we really 
do want to preclude any award of fees in those kinds of 
circumstances, given the consequences it would have for 
appropriate processing of discovery or other matters involved 
in the preliminary stages of litigation.
    Ms. Bergmark. That is an example of one of the types of 
questions we wrestled with, Mr. Chairman, throughout the 
regulations process.
    Mr. Skaggs. It is certainly an invitation to opposing 
counsel to stonewall.
    Mr. Eakeley. Also it wastes Federal funding to the extent 
that it ties up legal services counsel on matters that are 
abusive parts of the discovery process.
    I don't think we took the time to point out what the 
regulation does cover. I think all fee-shifting, under any 
available statute, is prohibited.
    Mr. Skaggs. I understand.
    Mr. Eakeley. The Hawaii District Court case does not affect 
that regulation or its effectiveness on non-LSC funds as well. 
I think--the one area that I think is open to debate, and I 
take the Chairman's point about lawyers not being a terribly 
politic lot. I don't think we do it out of arrogance, though; I 
think we do it because we are focused, sometimes, awfully 
myopically.

                         social security cases

    But I think the one issue that was hotly debated in the 
process of developing the interim regulation was whether or not 
in certain social security cases where the statute permits the 
social security recipient to pay his or her attorney out of the 
award, whether that is reached by the statute and whether or 
not the Congress truly intended to reach that as well.
    That was a matter of hot debate, and I think it is because 
there was a fair difference of opinion about that, Mr. 
Chairman, that the interim regulation has come out the way it 
has. But I hope the Chair or the Committee does not see that as 
an indication that the Corporation has any intention to do 
anything other than interpret fairly and then implement the 
mandate that the Congress has given us.
    Mr. Skaggs. Nothing further, sir.
    Mr. Eakeley. If I might, Mr. Chairman, I regret Mr. Taylor 
has left, but I would feel very remiss if I left the record 
without making a very brief comment upon the comment made by 
Mr. Taylor with respect to Mr. Forger.
    Mr. Forger served this Corporation and the Nation, I 
believe, honorably and under quite extraordinary conditions. 
When the board first came in I asked him to leave everything 
and move down from New York City where he had been the managing 
partner of a leading law firm shortly after his wife had died 
to take over as interim president.
    He assured us, and I took assurance, that he would be 
permitted to pursue some of this estate administration work. 
The one case we are talking about was something that the court 
asked Mr. Forger to do, and clearly in the public interest. Mr. 
Forger assured me, his counsel assured me, and I am assured the 
time he spent diligently and effectively serving as our 
president was full-time and was not encumbered or impaired in 
any way by his service on some of these other matters.
    The nature of the fee application process itself does not 
involve the adding up of hours spent and then calculating a 
fee. That is not the way it is done on these matters of estate. 
I talked to his lawyer about that, as well, just to be able to 
assure the Corporation and this Committee of something that 
should have required no assurance; but nevertheless, I provide 
it in recognition of the service that Mr. Forger has rendered 
to all of us.

                       closeout budget for fy '98

    Mr. Rogers. Now, in conclusion, let me ask you, suppose 
theoretically that the Congress decided to discontinue the 
Legal Services Corporation at the beginning of the next fiscal 
year. What would happen in that event to the cases that your 
grantees are currently representing out there across the 
country in localcourts? What happens to those cases?
    Mr. Eakeley. I think there would be not only total chaos, 
but great loss and pain and extraordinary disillusionment of 
the Federal Government.
    Mr. Rogers. I don't mean psychologically. I mean, legally 
what happens?
    Mr. Eakeley. Legally, I don't think that one can 
constitutionally conscript lawyers to provide legal services 
for free, full-time. And if one withdraws the resources that 
are necessary to provide legal services to those requiring them 
to access our system of justice, one is left roughly 1,600,000 
cases of needy individuals, most of whom have meritorious 
claims, a majority of whom have--and a majority of whom are 
children--are left and will be left without representation.
    Mr. Rogers. Well, what would happen to their case, each 
case?
    Mr. Eakeley. I think that would be a case-by-case. In some 
cases, in very few, volunteers might be able to come forward, 
but we have been doing a great deal to solicit and recruit 
volunteer efforts for many years. I think in some cases the 
court might be able to appoint. But I think in general you 
would see not just a great deal of confusion and chaos, but the 
machinery of justice grinding to a halt.
    Mr. Rogers. What would it cost if the Congress wanted to 
shut down Legal Services, but provide close-down costs, for 
example, for a year? I guess that would mean that you could not 
take any new cases, but you are talking about ending, 
concluding, the present cases.
    What do you think that cost would be?
    Mr. Eakeley. I don't know how we could estimate that, and 
it pains me to think--it pains me to--it grieves me to have to 
respond to the question, but--it is fairly posed, but I can't 
answer it.
    Mr. Rogers. Well, I think it is something that we have to 
think about.
    Mr. Mollohan. Mr. Chairman, what percentage of your funding 
is Federal funding?
    Mr. Eakeley. 100 percent.
    Ms. Bergmark. Of the Legal Services Corporation.
    Mr. Mollohan. But it is supplemented by the grantees?
    Ms. Bergmark. Right now, it is about half and half. We 
don't have the 1996 data in. We have already had the 
conversation about what we project will be a reduction to our 
grantees in non-LSC funding.
    Of course, there has been a reduction in legal services 
funding, but I think the consequences would be absolutely 
devastating from what you pose. I share Mr. Eakeley's 
consternation at even the prospect of imagining such a thing.
    There obviously would be a significant cost to such a 
shutdown, both financially and to our system of justice. That 
would be the major consequence.
    Mr. Rogers. Well, I raise the question because recent 
actions in the Congress force us to think about the what-ifs. I 
am thinking about the individual person out there who has a 
case in court, who can't afford a lawyer and has a Legal 
Services lawyer representing their claim in the local court, 
who knows nothing about all of this activity here.
    Ms. Bergmark. You need to multiply that by almost two 
million cases.
    Mr. Rogers. I am trying to think what would be our 
responsibility toward that person in the event the Congress 
decided not to continue LSC. Perish the thought, but I still 
think we have to think in those terms, and those who would like 
to do away with LSC, I think should follow through this 
thinking process as well.
    We have an obligation to those who are already in the 
system, individuals out there whose legal rights are now 
enmeshed in court represented by a lawyer. If you are going to 
cut off that lawyer's funding, what is that person to do? I 
think we have to think about that as part of our 
responsibilities.
    I would be interested to know your considered thoughts 
after you have had time to reflect on it. I know it is not a 
pleasant thought, but I think it is one that we need to at 
least have something in the record, about what it would cost 
for a close-down budget for fiscal 1998 in the event that 
should come.
    Mr. Erlenborn. Mr. Chairman, one thought that comes to my 
mind is, if you have someone hired from the private bar to 
conclude these cases, they are not going to be working on the 
same economic grounds as the legal services attorneys. They are 
not going to do it on a salary basis, and a low salary at that; 
they will be doing it on an hourly basis. And I think the 
costs, at least initially, are going to equal or exceed the 
current costs of providing the services through the Legal 
Services Corporation.
    Mr. Rogers. John, what I was thinking was--what I was 
intending to ask was--if we continued to pay the current Legal 
Services grantee to continue and close down that case, all 
these cases out there, not shifting it to a private lawyer, 
just keeping the grantee in place long enough to close down the 
existing cases is what I was trying to get at.
    Ms. Bergmark. Although I don't think you could count on 
those programs to just be around to do that, the disruption 
that would be created by the announcement that the Federal 
funding was about to be over would, I think, create a 
disruption as well. So I hope we will consider not just the 
Federal Government's commitment to the existing cases, but to 
the new cases, that there is now an expectation in every 
community in the United States to provide.
    So it is an awful prospect to contemplate.
    Mr. Rogers. Thank you all for being here today. It is good 
to see you.
    [Clerk's note.--Subsequent to the hearing, the following 
information was provided:]

[Pages 66 - 99--The official Committee record contains additional material here.]


                                            Friday, March 14, 1997.

                   SECURITIES AND EXCHANGE COMMISSION

                                WITNESS

ARTHUR LEVITT, CHAIRMAN

    Mr. Rogers. The Committee will be in order.
    We are pleased to welcome Arthur Levitt, the Chairman of 
the Securities and Exchange Commission. The SEC, with a budget 
of just over $300 million, is responsible for the oversight of 
financial markets that have grown to be worth more than $10 
trillion. That is a respectable amount of market leverage.
    We have tried hard, and hopefully succeeded, in ending 
several years of uncertainty in the availability of fees for 
the funding of the SEC with the passage of the fiscal year 1997 
appropriations bill and the National Securities Markets 
Improvement Act, ending a period when the operation of SEC on 
the first day of the fiscal year was always in doubt.
    Chairman Levitt, we welcome you again with us today. Your 
written statement will be made a part of the record, and if you 
would like to briefly summarize your statement, we would be 
happy to hear from you.

  Statement of Arthur Levitt, Chairman, U.S. Securities and Exchange 
     Commission, Accompanied by James McConnell, Executive Director

    Mr. Levitt. Thank you very much, Chairman Rogers and 
Members of the Subcommittee. I appreciate the opportunity to 
testify in support of the fiscal 1998 budget of the SEC.
    The President's request for the Commission includes $317.4 
million in fiscal 1998, and this request would put the 
Commission on a no-growth budget with respect to staffing 
levels. It would allow, however, for an increase of $12 million 
above the Commission's fiscal year 1997 appropriation.
    Most of that funding would go to mandatory increases in pay 
and related personnel benefits. The proposed appropriation 
would hold SEC staffing at the 1997 level of 2,797 full-time 
equivalents, which would stretch agency resources to the 
maximum in order to fulfill its responsibilities to investors 
in the rapidly expanding U.S. securities markets.
    Our markets are the deepest, fairest and most liquid in the 
world. They have experienced considerable growth during the 
longest and most vigorous bull market in history. Compared even 
with the year before, 1996 set some extraordinary records.
    The mounting participation of small investors in our 
markets fueled some of this growth. Today, one out of three 
American households invests in mutual funds. The number of 
first-time investors grows daily and will accelerate if 
Congress acts to privatize a portion of the Social Security 
program. Whether up or down, such broad-based markets do not 
happen without investor confidence in their integrity. I think 
that after 64 years of successful regulation, we sometimes take 
that for granted.
    For a reality check, consider the extreme opposite end of 
the spectrum. As I speak, the Government of Albania is in 
crisis after an open rebellion in the streets. Why? At bottom, 
it is because investors were not protected from pyramid 
schemes, one of the simplest and most common financial frauds 
around.
    In the United States, however, thanks to the wisdom of 
Congress, investors are confident that if a pyramid scheme 
wipes out someone's savings, the government will wipe out the 
pyramid scheme, period. Confidence is the cornerstone of our 
markets.
    Although we believe staffing can safely remain level for 
one more year, the challenges we face will continue to grow. 
These challenges include, among other things, the increasing 
number of Americans who invest their retirement savings in 
mutual funds, redesigning the EDGAR electronic filing system, 
considering alternatives to the current model of capital 
formation, including the idea of registering companies as 
opposed to the offering of securities, facilitating a greater 
use of communications technology by companies, brokers, dealers 
and investors, and the reporting of retail price and trade 
information in the municipal bond market, which should be in 
place by next January.
    I want to thank you and your staff for your hard work last 
year in forging a consensus to solve the Commission's enduring 
funding problems. As a result of Congress' bipartisan efforts, 
a more stable funding structure will allow us to plan better 
for future needs. The 1998 budget request is the first year 
that our funding is controlled by and fully consistent with 
that agreement.
    Thank you. I ask that my formal testimony be submitted for 
the record, and I would be pleased to answer questions.
    Mr. Rogers. Your statement will be made a part of the 
record.
    [The statement of Mr. Levitt follows:]

[Pages 103 - 124--The official Committee record contains additional material here.]


                           market volatility

    Mr. Rogers. Chairman Levitt, in view of yesterday's 160-
point drop in the Dow, it just reminds us how volatile the 
market seems to be, and we all worry about that big precipitous 
drop.
    How worried are you about the possibility of the bottom 
dropping out of the market and how well prepared are the 
markets and the SEC to respond, should that happen?
    Mr. Levitt. I guess after a life's history dealing with 
markets, I have come to respect them. I have come to recognize 
that the nature of markets is to go in two directions.
    The recent reports that our markets have fundamentally 
changed in some way, that interest rates have been self-
correcting, I am very skeptical of. I think markets are what 
they always have been, and, by virtue of superior means of 
communicating with various market centers--as a result of 
circuit breakers and other structural changes that have been 
made, I believe we are better able to deal with volatile 
markets than we were in 1987.
    On the other hand, we have instruments today whose velocity 
and whose impact, such as derivatives, for instance, are far 
greater than any we faced in the past, and the globalization of 
markets means that we have to be concerned not only with the 
kind of disclosure and the kind of regulation and the kind of 
systems that we have in the UnitedStates, but we have to be 
concerned about the implications of trading internationally, which 
extend the parameters of risk.
    So my rather long-winded answer to your question is that I 
do not believe that we have seen the end of volatility in our 
markets, but I believe that in many ways we are better able to 
respond intelligently to those changes and avoid the kind of 
mischief that is possible if we try to do the wrong things when 
the market does react.

                              sec funding

    Mr. Rogers. Now, for the first time in many years, the 
issue of SEC fees has been settled and will not be an issue of 
contention or trepidation with respect to funding for the 
Commission, as a result of the enactment of our bill for this 
year and the National Securities Markets Improvement Act of 
1996.
    What is the structure of these fees over the next 10 years, 
and how will it affect the need for direct appropriations by us 
to fund the SEC?
    Mr. Levitt. The plan is that over the period of the next 10 
years, we will gradually reduce fees and gradually increase the 
amount of appropriation. That will bring us to a point where at 
some point in time we will be in balance in terms of that.
    Mr. Rogers. In fiscal 1998, the fees available to fund the 
operations of SEC are expected to increase, not decrease?
    Mr. Levitt. That is correct.
    Mr. Rogers. What are the reasons why the collections of 
fees that help finance SEC are increasing, despite the fact 
that the rate of the registration fee is declining?
    Mr. Levitt. It is that the Section 31 fees, which will now 
apply to the over-the-counter market as well as the stock 
exchanges, will bring in additional revenues this year, and 
also the one-time windfall that was created in the act last 
year.
    Mr. Rogers. And doesn't the volume also affect the amount 
of fees?
    Mr. Levitt. And higher than expected, higher than 
anticipated volume.
    Mr. Rogers. What is your current estimate of the amount of 
offsetting fees collected in fiscal years 1996 and 1997 that 
will carry over into 1998?
    Mr. Levitt. Between $30 and $50 million.

                               sec budget

    Mr. Rogers. You propose in your request an overall funding 
level increase of $12 million, mostly to cover the increased 
costs of maintaining the same number of personnel. Is that more 
or less correct?
    Mr. Levitt. That is correct.
    Mr. Rogers. And $2.8 million of the increase is requested 
to fund computer modernization efforts?
    Mr. Levitt. Yes, sir.
    Mr. Rogers. What are you proposing to do with these funds 
until fiscal 1998, but also in future fiscal years?
    Mr. McConnell. There are two primary elements to that 
increase for 1998.
    Mr. Rogers. You need to identify yourself.
    Mr. McConnell. I am Jim McConnell, Executive Director of 
the agency.
    Two primary elements. One is the requirement that we move 
from mainframe systems to client server applications; that is 
an OMB directive. That would have a long-term benefit but a 
short-term cost as we take those applications off of the 
mainframe and onto the client servers.
    Second, there are a number of applications that need to be 
developed for the examination program that we are going to 
undertake. That will be a multiyear effort starting in 1998.
    Mr. Rogers. And what is the total cost?
    Mr. McConnell. Well, it is $2.8 million for 1998. In our 
authorization, we requested another $5 million be considered 
for 1999.
    Mr. Rogers. Now, Chairman Levitt, although the 1998 budget 
is fairly flat, you are asking for a large increase of the 
authorization for 1999, from the request of $317 million to 
342.7 million. What is driving that large increase?
    Mr. Levitt. A large part of that increase is mandatory, 
salary increases and other increases. That is about $9.2 
million. Approximately $5 million of that is in connection with 
technology improvements.
    Mr. McConnell. The rest is in staffing.
    Mr. Levitt. The rest is staffing increases.

                              mutual funds

    Mr. Rogers. With money flooding into those mutual funds, 
and much of it--most of it, I guess--from small investors, the 
question has arisen as to whether mutual fund fees are higher 
than warranted and whether investors are aware of what they are 
being charged.
    Are you looking at the issue of whether some mutual fund 
fees are reasonable?
    Mr. Levitt. We are. I am concerned about what appears to be 
counterintuitive. With more money flowing into mutual funds, 
one would expect that fees would go down in response to 
efficiencies of size. That hasn't occurred.
    Our response to that is to require clearer, better 
disclosure by allowing the funds to use what we call a 
``profile prospectus'' that will highlight essential elements, 
including the fee structure, and by imposing upon the funds--
and other issues, for that matter--the obligation of writing 
their material in plain English. It is our hope that disclosure 
will enable competitive forces to drive those fees down, but it 
is something we are concerned about and intend to stay on top 
of without being unduly intrusive.
    It is not, I am sure you would agree, the government's job 
to tell them what to charge, but I think investors are entitled 
to know what is going on. I don't think they have a clear 
notion as to the fee structure they are enduring.
    Mr. Rogers. Mr. Skaggs.
    Mr. Skaggs. Thank you, Mr. Chairman.

                          decimal stock quotes

    Good morning. I was interested in the reporting yesterday 
of the Oxley/Markey bill to move away from pieces of eight and 
on to decimals, and there was some reference to the impact that 
that would have on your responsibilities to deal with 
regulating the markets. I just wondered if you would want to 
say anything about the proposal.
    Mr. Levitt. Yes. I think that our markets are moving in 
that direction. The American Stock Exchange has recently asked 
permission to allow them to trade in 16ths. I understand the 
NASD is prepared to do the same.
    Momentous changes have occurred in the securities industry 
in recent months. The transferring over to our new order 
handling rules, which thus far has saved investors many 
millions of dollars and reduced spreads by nearly 30 percent, 
is only part way through; and the costs to the firms to make 
that transition without damaging the system is enormous. We are 
talking about many millions of dollars.
    The cost of adapting to the computer changes implied by the 
transition in the year 2000, is hundreds of millions of dollars 
and many man-hours of time.
    Whether government should impose upon the industry at this 
time that additional responsibility is something that I think 
we have to question. I think that our markets are moving in 
that direction, and I think all of us have to consider very 
carefully whether government's responsibility should be to 
force that change right now.
    The Commission is going to study carefully the impact to 
investors. It seems as if it may be a savings to them, but I 
don't think we can say that with absolute certainty, and I just 
think we have to be careful about it.
    I think that getting there is important, but how we get 
there is just as important. I think the timing is extremely 
important, that we do not overburden the industry and that we 
allow market forces to prevail.
    So we are going to study it very carefully. We are going to 
do a very careful cost-benefit analysis, and we are going to 
try to integrate it with the timing of a lot of other things 
going on in the industry today.
    Mr. Skaggs. I appreciate your insights into that. I was 
pretty good at fractions, but I am not sure my definition of 
progress is going from an 8th to a 16th, except that it goes to 
a more discrete market. The conversion tables become twice as 
long.
    Mr. Levitt. They may get there. They may very well get 
there, and I suspect they will. I have no doubt that we will 
get to decimals in the near future. My question is how we get 
there and whether we need to mandate that we get there.

                          banking legislation

    Mr. Skaggs. Please tell me we won't have to go through 
32nds and 64ths to get to 100ths. We may defy gravity and get a 
comprehensive banking bill through this place this year. I 
wonder whether there remain some outstanding issues from your 
point of view in reconciling and rationalizing the commercial 
banking and securities parts of life that need to be dealt with 
if we do take up such legislation.
    Mr. Levitt. I think so much of it has already taken place 
that I am not greatly concerned about failures in the system in 
the absence of having such a bill. But I believe that a bill 
would rationalize a system that has kind of grown by itself.
    Clearly the changes made by the Fed and Comptroller's 
office have moved us further than some of the earlier bills 
suggested that we go. But my concern about a bill, which I 
think would do a great deal theoretically to clarify this area, 
is that the principles of functional regulation be obtained.
    By that I mean there is an absolute clear difference in the 
culture and philosophy of the banking industry, which is a 
culture of safety and soundness, and the kind of 
entrepreneurship that is part of the culture of the securities 
industry. And it is very important that a system of regulation 
that has worked so effectively in the securities context for a 
culture of risk-taking and entrepreneurship continue, and that 
a culture of safety and soundness and regulation that has 
worked well in the banking industry continue, but to have a 
culture of safety and soundness overlap with a culture that 
fosters risk taking could do potential great violence to the 
system.
    If we are able to maintain the principles of functional 
relationship, really maintain them, rather than giving lip 
service to them, I think that some part of each of the major 
bills that I have heard of would probably make a pretty good 
ingredient for the ultimate outcome.
    If you were to ask me which I favored over the others, I 
would probably be closer to the Senate version at this point, 
but I think there are good points in each of the bills right 
now.
    Mr. Skaggs. What, if any, significant jurisdictional 
questions regarding the SEC's jurisdiction remain unresolved in 
all of this fast-moving market development?
    Mr. Levitt. Well, I think a great deal remains unresolved, 
because when you talk about umbrella regulation and who will be 
the umbrella regulator, will it be the Federal Reserve Board or 
the Comptroller or somebody else, and who will inspect the 
brokerage entities, the banks, one proposal I think offers the 
danger that even though a bank may be a small part of a 
brokerage operation, the banking regulator could prevail at 
that point. So I think that there are jurisdictional issues 
that would be responded to by functional regulation.
    In the Senate version, the D'Amato-Baker bill, there 
appears to be no super-regulator that looks down and says this 
is the way it will be, and perhaps for that reason, we tend to 
be more comfortable with that than the other proposals.

                    market supervision jurisdictions

    Mr. Skaggs. And I would also welcome your comments beyond 
just the question of the banking securities set of 
jurisdictional issues, on other market supervision 
jurisdictions that remain unresolved, if any.
    Mr. Levitt. Well, I guess another issue is the affiliation 
of commercial entities and banks. On that major issue, I guess 
I tend to favor that affiliation, but I think, again, it is one 
that I would approach carefully and slowly. It is coming about 
in and of itself, and I think that--yes, are you perchance 
referring to the Lugar bill with respect to the CFTC?
    Mr. Skaggs. I'm sorry I don't keep track of all of these 
bills by their sponsors. I was wondering where we were on the 
commodities futures and those sorts of jurisdictional things. 
Is something happening to get all of that put to rest that I 
missed?
    Mr. Levitt. Well, the Lugar bill, which deals mostly with 
the CFTC's jurisdiction, is one I do think has implications for 
our markets, by creating a professional market which would 
leave the major commodities exchanges unregulated insofar as 
their institutional transactions are concerned. I have 
reservations about that.
    I think that there is spill-over in terms of our equity 
markets that relate to the futures markets importantly, and I 
have great reservations about leaving such a vast bulk of our 
trading in unregulated hands. I think there are better ways of 
doing that.
    So that is an area that the Commission has written the 
Committee on and it has sent testimony on as well. These are 
the areas that I think you are probably referring to.
    Mr. Skaggs. Thank you.

                          fraud investigations

    Mr. Rogers. With the tremendous amount of money flowing 
into the markets, how are we doing on fraud investigations?
    Mr. Levitt. I have said before that no commission is able 
to eliminate all fraud in the marketplace, and what we try to 
do is establish priorities, based upon what our perception of 
major frauds in the country may be, and then bring test cases.
    The Commission has emphasized a number of areas. The 
municipal bond market has been one such area. Wireless 
communications has been another. Prime banks have been a third 
and practices in the brokerage industry is yet another.
    We are greatly concerned about electronic fraud taking 
place on the Internet. We have established a series of internal 
task forces to monitor that, as well as monitoring it in 
various regional offices throughout the country. We are seeing 
an increasing number of indications involving Internet fraud.
    The last thing in the world that the Chairman of the SEC 
can do is to assure you or anybody else that ``don't worry, we 
have got everything under control.'' That is not my nature or 
personality. I have enormous confidence in the ability of our 
Enforcement Division and the qualities of cases that are being 
drawn, and I am hopeful that we will be able to continue to 
protect America's investors constructively, but not guarantee 
them a sure profit in the future.

                          fines and penalties

    Mr. Rogers. It seems like hardly a day goes by without an 
article in the paper about the SEC settling a matter involving 
the levying of a substantial fine. Can you give us the level of 
fines and penalties you have imposed and give us the trend on 
whether that level has been increasing or decreasing?
    Mr. Levitt. It has been increasing. I am trying to get the 
total number.
    The collection of those fees is something that we have paid 
increasing amount of attention to. The fee, I am told, is a 
total of $2.2 billion.
    Mr. Rogers. Over what period?
    Mr. Levitt. Since 1987.
    Mr. Rogers. That is the current year-to-date?
    Mr. McConnell. Cumulative.
    Mr. Levitt. From 1987 to date.
    Mr. Rogers. I see. You are pursuing the enforcement of the 
payment?
    Mr. Levitt. Yes, we are, and we are working with the 
Treasury Department on a new plan to assist us in making those 
collections and doing it in a more cost-efficient fashion.

                           web site capacity

    Mr. Rogers. Now, on your web site recently, reportedly it 
was overwhelmed by volume, and it may have missed some new 
data. Does this indicate a reliability problem or an indication 
that the system is vulnerable to being swamped by volume?
    Mr. Levitt. I would like to ask Mr. McConnell to answer 
that.
    Mr. McConnell. That problem was associated not with 
requests coming in; we can handle those quite easily. It was 
the structure of the EDGAR database on the machine we were 
operating. It had to be reindexed to allow for people to access 
it. That was done over a weekend, and it is fully functioning. 
There will be no problem with people accessing it.
    Those lines are well equipped to handle any volume we have 
seen so far.

                          edgar recompetition

    Mr. Rogers. What is the status of the EDGAR recompetition? 
How do you expect EDGAR to change as a result of the terms of 
recompetition?
    Mr. Levitt. As you know, we have put out for bid the EDGAR 
proposal and have recently received the results of that 
process. I can't go into specific details at this point, but 
within the next several weeks, I will submit to you the results 
of that bid and our efforts to adhere to the congressional 
mandate directing privatization of the EDGAR contract.
    [The information follows:]

    The SEC's EDGAR Request for Proposals (RFP), issued February 28, 
1997, sought to address the Congress' mandate that the SEC explore 
approaches to privatizing EDGAR within the context of maintaining and 
modernizing a system that is currently serving well the interests of 
both the corporate issuer community as well as the needs of the 
investor community. The procurement was divided into two phases to 
afford the SEC and the Congress an opportunity to examine and discuss 
variations in offeror privatization proposals prior to the issuance (in 
Phase 2) of definitized guidance on privatization.
                                findings
    SEC staff have nearly completed their evaluations of Phase 1 
proposals and have discussed with House and Senate staff privatization 
approaches proposed by the offerors. What has become clear is that 
balancing the need to modernize EDGAR with the needs of the issuer and 
data user communities is difficult to achieve in a highly privatized 
environment in which the contractor is dependent upon very specific 
revenue sources.
    It is essential, however, that modernization be pursued for the 
30,000 entities that use EDGAR to file documents and are especially 
anxious to take advantage of an improved, easier to use filing process. 
Subscribers to commercial EDGAR data products as well as the hundreds 
of thousands of daily users of the SEC's Internet site are also in need 
of an improved document structure. High-value improvements to the 
system that serve the filers and information users will further 
increase the utility of EDGAR.
                             current status
    Pursuant to the House and Senate discussions referenced above, the 
SEC is preparing the second phase of the EDGAR solicitation that will 
establish the boundaries of privatization to be made a part of 
offerors' Phase 2 proposals. Congressional action modifying or 
repealing Section 35A of the Securities Exchange Act of 1934 may be 
required to further on-going efforts to privatize EDGAR.

                           headquarters lease

    Mr. Rogers. Now, what annual savings were you able to 
realize in the renegotiation of the lease for your headquarters 
here?
    Mr. Levitt. We renegotiated that lease based upon a 5-year 
renewal of the lease, extension of the lease. We saved on an 
annual basis; the rate went from $31 to $27 a foot for an 
annual savings of about $1.7 million over a 5-year period.
    Mr. Rogers. Good. Well, we thank you for your testimony 
here this morning, both of you. We appreciate your appearing 
here. We are going to be tight for money again this year, it 
looks like. We don't know for sure yet, but we will not be able 
to afford you to sit in the lap of luxury.

                           Closing Statement

    Let me say this, Mr. Chairman. There are a lot of slings 
and arrows in this business, politics and public 
administration, and people like to criticize and find fault. 
But there are a lot of wonderful, admirable people doing public 
service that could make a lot more money out in the private 
world. It takes a special person to take the slings and arrows 
and the other sacrifices that are required in this business.
    Let me just say, you are a star in public service, and I 
just wanted to let you know that a lot of people out here think 
that you are doing a wonderful job.
    Mr. Levitt. Thank you very, very much. I deeply appreciate 
those remarks.
    Mr. Rogers. With that, I wish we could afford your budget--
--
    Mr. Levitt. Well, now----
    Mr. Rogers. Thank you very much. The meeting is adjourned.

[Pages 133 - 138--The official Committee record contains additional material here.]


                                          Wednesday, April 9, 1997.

        MARITIME ADMINISTRATION AND FEDERAL MARITIME COMMISSION

                               WITNESSES

ALBERT J. HERBERGER, ADMINISTRATOR, MARITIME ADMINISTRATION
HAROLD J. CREEL, JR., CHAIRMAN, FEDERAL MARITIME COMMISSION

                   General Statement of the Chairman

    Mr. Rogers.  The Committee will come to order.
    This afternoon we are pleased to have with us the two 
Maritime related agencies within the Subcommittee's 
jurisdiction; the Maritime Administration of the Department of 
Transportation and the Federal Maritime Commission.
    This is the third time that we've asked these two agencies 
to appear together. The fiscal year 1997 appropriation did not 
result in an overhaul of either of these organizations but it 
did require significant belt-tightening. There is little reason 
to believe that 1998 will be any less forgiving.
    For the Federal Maritime Commission, this Congress will 
once again be examining the need to maintain its independent 
status. For the Maritime Administration, significant 
developments have occurred since passage of the Maritime 
Security Act of 1996.
    Also, Admiral Herberger, the press reported your decision 
to retire after an impressive 40 years of service with the U.S. 
Navy and MARAD. So, we want to take this opportunity to salute 
you, your final appearance before this Subcommittee as the 
Administrator of the Maritime Administration. We hope you come 
back in whatever capacity follows. We want to wish you luck in 
your future endeavors.
    Mr. Herberger.  Thank you, sir.
    Mr. Rogers.  It's been a pleasure having you with us all 
this while. Both of your written statements will be made a part 
of the record. We'd like to have you summarize your statement 
in five minutes or less after which we will have questions. 
Administrator Herberger, you may proceed.

            Opening Statement of the Maritime Administrator

    Mr. Herberger.  Thank you, Mr. Chairman. Thank you for 
those kind words.
    I welcome the opportunity to be with you today to discuss 
the Maritime Administration's fiscal year 1998 budget request. 
Our mission is to facilitate efficient and secure waterborne 
transportation of people and cargo in domestic and 
international trade which in turn promotes America's economic 
growth and international competitiveness, and provides maritime 
support for national security purposes.
    In order to achieve our mission, MARAD must assure that the 
United States has an active fleet of modern, efficient, 
privately owned and operated commercial vessels, a sufficient 
supply of trained U.S. mariners to crew the commercial and the 
government sealift ships, a government owned reserve fleet of 
cargo vessels which can be activated during national 
emergencies, a modern economically sound shipbuilding and 
repair capability, and efficient intermodal port facilities.
    The value of the U.S. flag merchant fleet is most visible 
during emergencies or wartime. Privately owned Americanmerchant 
ships and civilian mariners have provided critical sealift support 
during the conflicts that this country has been involved with 
throughout our history and in recent humanitarian efforts.
    Timely and effective sealift support has become even more 
critical in recent years with the shift of our national defense 
strategy toward a U.S.-based global power projection deployment 
posture.
    The recently enacted Maritime Security Program, MSP, 
ensures the continued operation of modern merchant ships under 
the American flag manned by skilled American civilian mariners, 
while also providing the Defense Department with ready access 
to cost effective commercial sealift and intermodal 
transportation systems.
    The fiscal year 1998 budget requests adequate funding for 
the MSP, as well as funds to maintain the existing contracts 
under the Operating Differential Subsidy Program, ODS. These 
ODS payments are being phased down and will end in the year 
2001. The budget also continues to support the National 
Shipbuilding Initiative through our funding request for the 
Maritime Guaranteed Loan, Title XI Program.
    From the inception of this restructured program in 1993 
through March of this year, MARAD has approved approximately $2 
billion worth of Title XI financing for 278 vessels and five 
shipyard modernization projects. Included among these approvals 
were 15 double hull tankers.
    This year, we have requested an appropriation of $39 
million for subsidy costs and administrative expenses 
associated with new Title XI loan guaranteed commitments. These 
resources will permit loan guarantees of about $500 million 
during fiscal year 1998.
    The Operations and Training appropriation has been reduced 
over the past two years, requiring MARAD to undertake cost 
saving measures. During fiscal year 1997, we terminated the 
Market Development Program, down-sized other programs, closed 
field offices, and curtailed funds for support contracts, 
travel, supplies, and training.
    We conducted a reduction-in-force, RIF, at the end of 
October 1996 and cut headquarters and region operation and 
training staffing by 17 percent. An appropriation of $70 
million for Operations and Training is requested for fiscal 
year 1998.
    In summary, the fiscal year 1998 President's budget request 
includes resources for the Maritime Security Program, Operating 
Differential Subsidies, Operations and Training, and the 
Maritime Guaranteed Loan Program Title-XI to enable MARAD to 
operate effectively and fulfill its statutory requirements for 
a strong and effective U.S. Merchant Marine.
    Mr. Chairman, this concludes my prepared statement. I will 
be pleased to answer any questions you may have.
    [The statement of Mr. Herberger follows:]

[Pages 141 - 152--The official Committee record contains additional material here.]


    Mr. Rogers.  Thank you. Commissioner.

  Opening Statement of the Chairman of the Federal Maritime Commission

    Mr. Creel.  Mr. Chairman. Thank you for the opportunity to 
appear before you to present the President's fiscal year 1998 
budget for the Federal Maritime Commission. I'm accompanied by 
a fellow Commissioner, Ming Hsu.
    I'd like to begin by reminding this Subcommittee that over 
the last two fiscal years the Federal Maritime Commission has 
sustained significant cuts in funding. Through a series of 
extraordinary cost-cutting efforts, we've been able to continue 
to carry out our statutory functions at these reduced budgetary 
levels.
    The President's budget for the Commission provides $14.3 
million for fiscal year 1998. While this represents an increase 
of $300,000 over our fiscal year 1997 appropriation, it is 
solely to fund required annual salary and benefit adjustments 
for federal workers. Travel has been straightlined at the 1996 
and 1997 levels, a reduction of almost 50 percent from 1995 
travel costs. Administrative expenses have been held at the low 
levels set for 1997, and in some cases reduced. Increased 
agency retirement contributions and government-wide salary 
increases have been offset somewhat by eliminating funding for 
promotions, awards, et cetera. Our current staffing level is 
our lowest since the Commission's first full year of operation 
over 35 years ago.
    The Commission's budget contains absolutely no 
discretionary spending. It is composed entirely of mandatory or 
essential expenses which represent the basic expenses the 
organization faces in order to conduct day-to-day operations.
    As I indicated, the Commission has taken many cost-cutting 
actions to meet the 25 percent reduction in appropriation it 
faced between fiscal years 1995 and 1997. We absorbed 
significant attrition, closed our field offices, reduced rental 
space, cut travel by about 50 percent, eliminated performance 
and incentive awards, reduced service levels for ATFI, 
instituted a virtual freeze on hiring, and reduced or 
eliminated funding for furniture, equipment, training, et 
cetera. All of these actions were taken while the Commission 
retained its full array of statutory responsibilities.
    Besides these cost-cutting measures, we've introduced a 
number of efficiencies. Our Internet Home Page provides public 
access to agency information, decisions, and forms which would 
otherwise be provided by staff, either telephonically or by 
mail. In fact, the testimony that I'm giving today will be 
available on the Home Page this afternoon. As you recall, we 
worked with your Subcommittee last fiscal year in downsizing 
our field operations. Two years ago, the Commission had 37 
field personnel in seven district offices. Since June of 1996, 
field activities have been handled by four employees, one each 
in Miami, Los Angeles, Seattle, and New Orleans. Our area 
representatives are available to regulated entities and the 
public via E-Mail, faxes, and cellular phones, making them more 
accessible than ever before.
    The proposed fiscal year 1998 budget will require that the 
Commission further reduce its funded FTE level from 147 FTEs in 
fiscal year 1997 to 143 FTEs in 1998. As a further illustration 
of the decline in our work force, ten years ago, our General 
Counsel's office had a staff of 12 staff attorneys; today it 
has five. Five years ago, the Chairman's office had a staff of 
seven; today, I have a staff of two--and one of those has been 
nice enough to be detailed to my office from elsewhere in the 
agency.
    I would now like to highlight some of the Commission's more 
significant activities and give you a better understanding of 
how we attempt to fulfill our mission within current budgetary 
constraints. In this regard, I would note that the industry 
that the Commission oversees transported 13.3 million 
containerloads of imports and exports in 1996, with an 
estimated value of greater than $440 billion.
    One of the Commission's most important statutory 
responsibilities is to protect U.S. oceanborne trade and U.S. 
carriers from discriminatory andunfavorable treatment by 
foreign governments. We've used this authority in recent years to force 
other countries to abandon protectionist policies and to open maritime 
markets to U.S. companies. We understand that the ever-present threat 
of FMC sanctions makes it far easier for the Administration to extract 
market-opening concessions in its negotiations.
    The Commission's efforts to combat restrictive practices 
are ongoing. In February of this year, the Commission issued a 
final rule imposing fees of $100,000 per voyage on Japanese 
liner operators, in response to unfavorable practices in 
Japanese ports. The Commission found restrictive conditions 
involving Japan's harbor services industry, as well as its 
licensing requirements for terminal operators and stevedoring 
companies. These conditions unfairly increase carrier costs 
while precluding foreign companies, including U.S. carriers, 
from implementing operational efficiencies. The fees will 
become effective next Monday, April 14. We would, of course, 
prefer a diplomatic resolution to this problem. If, however, 
diplomacy fails, the Commission is hopeful that this action 
will bring about reforms in Japan's port services market.
    The Commission also is investigating conditions in Latin 
America which may place U.S. carriers at a competitive 
disadvantage through discriminatory fees, and restrictions on 
warehouse operations and service in foreign-to-foreign trades. 
We also have serious concerns about developing maritime 
policies of the People's Republic of China.
    The Commission remains responsible for a wide range of 
other statutory functions as well. We protect cruise passengers 
by ensuring that vessel operators have sufficient resources to 
pay judgments for personal injury, death, or nonperformance of 
a voyage. This function has taken on a great deal more 
importance, given both the expansive growth of the cruise 
industry and the financial difficulties recently experienced by 
some companies.
    We license ocean freight forwarders and bond non-vessel-
operating common carriers to protect customers using their 
middleman services. The Commission provides an expeditious and 
inexpensive forum for both the formal and informal resolution 
of ocean shipping disputes between private parties.
    The Commission also engages in investigative and 
enforcement activities with respect to its statutorily mandated 
responsibilities. In most instances voluntary compliance is 
achieved in these areas without the necessity of formal 
adjudicatory proceedings.
    Mr. Chairman, with the recent introduction of S. 414, 
Congress has once again embarked on an effort to improve our 
method of regulating the ocean shipping industry. The 
Commission fully supports this objective. We will work with 
Congress to achieve the best possible system. However, even if 
passed immediately, such legislation would make no changes to 
the Commission's programs until well into fiscal year 1998. Any 
delays in its enactment will move that timetable back to fiscal 
year 1999. In the meantime, the Commission must be permitted to 
do the job that Congress has entrusted to it under the laws 
currently in force.
    Mr. Chairman, I hope I have adequately expressed the 
importance of the work of the FMC. I respectfully request 
favorable consideration of the President's budget so that the 
FMC may be able to perform its statutory functions in fiscal 
year 1998 without further reductions in effectiveness.
    Once again, I'd like to personally thank you for working 
with us last year to maintain an enforcement presence in the 
field. Thank you.
    [The statement of Mr. Creel follows:]

[Pages 156 - 167--The official Committee record contains additional material here.]


    Mr. Rogers.  Thank you. Thank you Commissioner and 
Administrator.

                           japanese sanctions

    Now, Commissioner Creel you mentioned in your statement the 
decision to impose $100,000 fine on Japanese cargo ships to go 
into effect April 14. Admiral Herberger, you've been 
negotiating with the Japanese to see if a resolution can be 
had. What is the status of both of these matters and of the 
talks?
    Mr. Herberger.  Staff talks are ongoing as I speak. We are 
continuing to press the Japanese for a significant forward 
movement in changing their port practices. There are two areas:
    One is called prior consultation wherein any shipping 
company needs to get permission to make even minor changes--
ship names, scheduled hours to arrive at a terminal; that type 
of thing. Now the system is very cumbersome and the 
efficiencies that are needed are not there.
    The second is the licensing. The Government of Japan 
licenses stevedores and terminal operators. We want U.S. and 
foreign shipping companies to have the ability to have those 
licenses. So, as I say the discussions are still ongoing. The 
deadline is midnight on the 14th to start imposing the 
sanctions. The one thing I've learned in negotiations is you 
won't know until the final hour whether or not we will be 
successful.
    Mr. Rogers.  Now, this applies to three Japanese companies. 
Is that right?
    Mr. Herberger.  The sanctions apply to three Japanese liner 
companies that do business in the United States.
    Mr. Rogers.  How likely is it that those fines will go into 
effect?
    Mr. Creel.  I'll defer to our negotiator.
    Mr. Herberger.  I'm optimistic that we will be successful 
in getting something here this week that will hopefully be 
sufficient enough to stay the execution of the sanctions. Then 
we would wait to see if the Japanese do what they say they're 
going to do, with the sanctions still being held in abeyance. 
I'm optimistic based on the progress that we've made since last 
Wednesday that we'll see some forward movement here.
    Mr. Rogers.  What effect would you anticipate on trade with 
Japan if those fines are imposed?
    Mr. Creel.  Mr. Chairman, we've determined that at the 
$100,000 level, which, I would note, is only one-tenth of what 
we're permitted under statute to levy on offenders, they will 
not divert cargo to other, non-U.S. ports. The Japanese 
carriers have been quoted in the press as saying that, at that 
level, they would not divert cargo. The fee works out to be 
about $45 per container.
    The carriers are making $4 million to $5 million in revenue 
on a one-way voyage. So, we don't anticipate cargo diversion at 
the $100,000 fee per voyage level. If we raised that fee level, 
which we have reserved the right to do in case of retaliation 
by the Japanese, we would have to again assess the effect on 
U.S. trade.
    Mr. Rogers.  Well, the $100,000 per stop is almost token; 
isn't it?
    Mr. Creel.  Well, it has a pretty big effect on these three 
operators--about $40 million to $45 million over the course of 
the year on the three individual operators.

                      china ocean shipping company

    Mr. Rogers.  Now, is it correct to say that the FMC is 
investigating the China Ocean Shipping Company, COSCO, for 
unfair practices by undercutting shipping rates?
    Mr. Creel.  The Chinese have recently entered the North 
Atlantic trades, and have come in and cut prices pretty 
substantially. That, combined with the fact that COSCO is a 
controlled carrier, meaning that it is owned or controlled by 
the Government of China, subjects COSCO to greater scrutiny.
    We constantly monitor controlled carrier activities and 
their rates. We continue to do that with COSCO. I will say that 
COSCO is under greater scrutiny at this moment. We haven't 
decided to investigate formally yet, but we're gathering more 
information and we will hopefully go forward with a decision 
one way or the other in the next few weeks.
    Mr. Rogers.  What's been the hold-up?
    Mr. Creel.  Just because they have a low rate doesn't 
necessarily mean that they're engaging in predatory pricing. In 
fact, in the North Atlantic there are some carriers that are 
not controlled carriers whose rates are lower than COSCO's.
    We look to the effect that being government-owned has on 
them being able to take those cuts. Obviously, being 
government-owned they're not necessarily profit driven as much 
as commercial carriers would be. We're looking at their costs, 
at different commodities in the trade, and looking at the rates 
the other carriers are charging as well.
    Mr. Rogers.  Well, COSCO recently signed a $157 million 
contract with an Alabama shipyard to build four ships, 
commercial ships, guaranteed under the MARAD Title XI Program. 
FMC may be investigating the same company for unfair practices 
by underpricing the market significantly.
    Do either of you see a problem with the situation that on 
the one hand parts of the Federal Government are working with 
COSCO providing certain benefits to them while on the other 
hand another part of the government is investigating it for 
predatory pricing that may harm U.S. shipping? Is there any 
contradiction here?
    Mr. Creel.  I can only speak for the FMC. We are concerned 
with pricing practices of controlled carriers, and certainly 
with COSCO. We will act accordingly under the statute to 
proceed with a formal investigation if the information we 
gather in the next few weeks warrants that. We are concerned 
about controlled carriers generally. This recent action by 
COSCO has subjected them to greater scrutiny.
    Mr. Rogers.  Is it correct that in 1992 COSCO paid a 
$400,000 penalty on charges of paying kickbacks to secure 
customers?
    Mr. Creel.  Yes, sir. That was a misdescription case. It 
wasn't a rate case per se. They did pay a penalty of $400,000.
    We look at the different trades and the different 
commodities. In one particular trade there may not be a problem 
and in another there may be a problem. That's why we have this 
constant monitoring.
    Mr. Rogers.  Now, is COSCO an agency of the Chinese 
Government?
    Mr. Creel.  They are owned and controlled by the Chinese 
Government.
    Mr. Rogers.  Have they had a history of violating shipping 
laws?
    Mr. Creel.  They have not been charged or convicted with 
predatory pricing under Section 9 of the Shipping Act of 1984. 
The $400,000 settlement concerned violations of Section 10 of 
the Shipping Act of 1984.
    Mr. Rogers.  How much was the federal loan guarantee to 
COSCO to build the four container ships at Alabama shipyards?
    Mr. Herberger.  I believe it was $137 million for four 
small container ships, what they call 1,400 TEU vessels. The 
loan guarantee was 87.5 percent of the total cost. We 
approached our assessment of that application as we do all 
other applications.
    We did a thorough review. COSCO operates 600 ships 
worldwide in most of the maritime nations. Look at the scope of 
their business. They've been operating out of the United States 
since the early 1980s. They have a U.S. subsidiary. They do a 
tremendous amount of business. To my knowledge, we found 
nothing out of the ordinary about their application.
    Mr. Rogers.  Anyone of any note weigh in to recommend the 
contract with them, the loan guarantee?
    Mr. Herberger.  Did anybody come to us about it?
    Mr. Rogers.  Yes.
    Mr. Herberger.  An Alabama delegation did. There was one 
lobbyist, Al Haig. Other than that, I'm not aware of anybody. 
There is nothing unusual about the request. It was a more ``how 
is it going'' type of an intercession.
    Mr. Rogers.  Is it ironic or contradictory that one agency 
is helping a company and you're investigating the same company?
    Mr. Creel.  Sir, we're required under our statute to 
monitor COSCO because they are a controlled carrier, and to 
watch their pricing and other practices to ensure that they're 
competing fairly under Section 9 of the 1984 Shipping Act.

                        deregulation of shipping

    Mr. Rogers.  Commissioner Creel, the bill that actually 
will control your fate I guess now appears to be S. 414, which 
would require substantial deregulation of shipping in 1998, and 
then merger of the FMC into a new intermodal transportation 
board.
    If that bill is enacted, how will it change the operations 
of the FMC in 1998 and when would you start preparations to 
merge into the new entity; on January 1, 1999?
    Mr. Creel.  Not later than January 1, 1998, the FMC and the 
STB would issue new regulations which would substantially 
change the law. Certain changes will be effected in March 1998. 
On January 1, 1999 the physical transition and the merger into 
the STB would occur. It would take about two years for this to 
happen, beginning in March 1998 and then concluding the 
following year in January.
    Mr. Rogers.  What do you think about that bill?
    Mr. Creel. On the merger issue, I'm most concerned about 
maintaining our independence. Now, the STB is currently an 
independent agency within DOT. They are arguably decisionally 
independent. That's the most critical thing as far as I'm 
concerned--maintaining that decisional independence.
    I am somewhat concerned that the merger may send a message 
to our trading partners, for example, the Brazilians or the 
Japanese, that the agency is being changed and will be less 
independent than it once was. It may be that over time we could 
prove our independence and continue to assert ourselves. But 
I'm concerned about losing the sort of autonomy that we 
currently have.
    Mr. Rogers.  Admiral, do you have any thoughts about the 
bill?
    Mr. Herberger.  I know that there is a significant debate 
ongoing between various segments of the maritime industry. You 
have ports and long shore activities that are concerned about 
the downstream effect of this bill. You have a split in the 
shipping companies themselves; some wanting the changes, 
particularly in certain features in the bill, and other smaller 
companies not wanting it.
    So, the debate continues. I know the Department of 
Transportation has not taken a position on it yet. I think 
they're not going to until they see the final form of the bill. 
So, we're concerned, again, as the Chairman just said, about 
the downstream effect of making the changes just for the sake 
of change.
    I would hope that when they change, that we see the full 
range of benefits that we're going to gain by making a change 
like this. I do feel that when we have coordinated a number of 
activities with the FMC, their independent nature and their 
ability to do what they do is very helpful to the United 
States. For 14 years we've had a debate over harbor practices 
in Japan. It wasn't until the FMC threatened and now has 
sanctions in the air that we're seeing some progress.
    Mr. Rogers.  Mr. Forbes.
    Mr. Forbes.  Thank you, Mr. Chairman. I appreciate both of 
you being here today. I am here as you probably know because I 
am a very staunch supporter of the maritime schools. I don't 
have to tell any of you about the importance of the Merchant 
Marine Academy and the state maritime schools in the New York, 
the Long Island, and the metropolitan region.
    I want to thank you both for the cooperation and assistance 
that I've gotten from your agencies. Over the last couple of 
years, since the budget has gotten tighter, the maritime 
schools obviously are having to tighten their belts. I was 
wondering, Admiral, maybe if you could just address what it has 
meant to Kings Point.

                      U.S. Merchant Marine Academy

    Mr. Herberger.  The Kings Point budget has been 
constrained, but thankfully in recent years it's been at a set 
level around $30 million to $31 million. The one area that is 
causing us to plus it up about $1 million with this submission 
is the physical plant. It was built in World War II in 1943 
under an accelerated building program in order to begin to 
provide the officers they needed for the war effort. After 50 
years, it's beginning to show wear and tear. We've just 
completed a significant update to the heating system.
    That's complete now. One of the significant infrastructure 
problems is the seawall on the Long Island Sound. We've got 
some money in this budget request for the repair of that 
seawall before it deteriorates further. So, it's some of the 
repairing of that infrastructure that becomes a heartache in 
any given year.
    By and large, as constrained as it is, they're learning to 
live with the funding. I would urge you not to bring it down 
further or it will begin to impact on the size of the faculty 
and some of the features that we have there.
    So, the submission that we have will be adequate. The $1 
million growth from the last year, is particularly for the 
start of taking care of this seawall that needs to be 
addressed.
    Mr. Forbes.  Was there a fire in one of the buildings at 
Kings Point?
    Mr. Herberger.  Yes. There was a workman working on a door 
to this building. There is a garage on the first level, a store 
room on the second level, and office space. The workman was 
using a welding torch and set the fire. The fire went up a pipe 
and set fire to the store room. They lost the stores. There is 
an ongoing litigation. We're optimistic that we will be able to 
recoup the monies that were lost. In the meantime, we had to 
spend money out of the constrained operating budget.
    The store room was for paper and other types of 
consumables. There was no significant damage other than a 
little smoke damage to the third floor.
    Mr. Forbes. Given your expertise in this field, could you 
from the Headquarters's point of view speak to the debate that 
has been ongoing, long before this Congress, on the funding 
differences between the state maritime schools and Kings Point.
    Mr. Herberger.  We have obviously a significant 
responsibility for Kings Point due to its status as a Federal 
academy. We have the responsibility for the full funding of 
Kings Point and its programs. For the state schools, we provide 
the bulk of the funding for their school ships, the five 
training vessels. We provide some student incentive payments. 
There is about $1 million total for the five schools in direct 
payments to help their programs. In the case of the training 
ships, it amounts to about 60 percent of what it costs to 
operate the training ships. About 40 percent comes out of the 
state funds and the school funds.

                         Training Ship Program

    The training ships are vital to their program. Their 
Underway Program is extremely important. It not only provides a 
floating lab and classroom space, but also the ability 
particularly to refresh and teach the new students all of the 
features of living and working aboard a ship.
    The students have their cruises every year and all of that 
counts towards their accumulating one year's worth of 
experience before they can sit for their licenses. The two-
month cruises per year, plus the labs, plus the simulator 
training, counts toward the one year required by the Coast 
Guard in order for the cadets to sit for their basic Third 
Mate, or Third Engineer license.
    The training ships have become an invaluable part of the 
schools' wholeprogram. In the case of some of the schools now 
that have oceanographic and other study areas, they take, again, 
students from those areas out to sea for under-wing work periods. So, 
the training ships have always been and remain an extremely important 
part of the school's programs.
    That's the support that we give them. The rest of their 
support comes out of their own state legislatures, as well as 
the tuition fees that are paid by students. So, we have two 
different programs. We see them as all part of the total 
package to continue to produce high quality individuals for the 
maritime industry.
    Mr. Forbes. Over the past few funding cycles the Committee 
has been reluctant to pay for the repair and maintenance of the 
state maritime school sponsored ships. Is it correct that you 
have used prior year funds to continue these maintenance 
efforts.
    Mr. Herberger. We did. Last year we moved $665,000 from 
what I call the ``all other'' category. We moved it into the 
budget for the maintenance of the ships because of some things 
that came up as we put three relatively new training ships into 
operation.
    Further, we were in a position whereby the conference 
language required that we pay no less than a certain amount for 
Kings Point, no less than a certain amount for state schools, 
and no more than a certain amount for ``all others'' in 
operations in MARAD. That was the one account where we could, 
to stay under these constraints, move about $665,000.
    Mr. Forbes. Have efforts been made to advise the state 
maritime schools that all the prior year funding has been spent 
and they will not be able to tap into those funds for ship 
maintenance if there is a budget shortfall.
    Mr. Herberger. Well, if we receive the amounts that we've 
asked for, we should be able to sustain the kind of support 
that we expect within fiscal year 1998.
    Mr. Forbes. If I may, one final question, Mr. Chairman. 
Have you considered the idea of state schools sharing ships?
    Mr. Herberger. Yes. I know that it was a major issue a 
number of years ago. At that time, I was in the Navy. I had 
different problems I guess. I do know this, that the training 
ship value is more than just the summer cruises that the 
students go on. The fact that the ship is there at the Academy 
and it's used extensively by the Academy for as many different 
programs as you can imagine, such as, providing labs for the 
engineers, examining the ship's systems, becoming familiar with 
the equipment. There is an awful lot that can be done in port. 
The intent is to orient the new students coming in to ensure 
that when the summer cruise comes along, they will have gone 
through all of the safety training and all of the fire fighter 
and damage control drills.
    All of those things are needed in order to be able to go to 
sea safer. One of the problems we had in the Navy, and one 
worry that I had as a commanding officer of a Navy ship, was 
having the new sailors oriented enough to be able to go to sea, 
to rough seas, and be able to handle themselves so you didn't 
lose them overboard. To ensure they didn't have accidents 
opening simple things like hatches while the ship was rolling 
or tossing about. So, the total orientation, the total focus 
that the schools are able to convey by having those training 
ships is invaluable, absolutely invaluable. That's why the 
schools put so much emphasis on them. I can fully appreciate 
that. That's why I have supported them.
    Mr. Forbes. I just want to thank you personally from my 
vantage point for your three and a half decades plus of public 
service to the people of this nation. I think we will be 
suffering a great loss on July 1 when you go back to the 
private sector. We thank you so very much for your leadership.
    Mr. Herberger. I'm going to try leisure time for awhile.
    Mr. Forbes. Mr. Creel, thank you for being backup----
    Mr. Creel. Thank you.
    Mr. Forbes. Mr. Chairman, I have a couple of questions for 
the record and I'd like to submit those.
    Mr. Rogers. Without objection.

                       Maritime Security Program

    Mr. Rogers. Admiral, the Congress provided a total of $100 
million in fiscal years 1996 and 1997 for the Maritime Security 
Program. But the program just started up a few months into 
1997.
    Mr. Herberger. Yes, sir.
    Mr. Rogers. What's the total amount of funds you expect to 
obligate in 1997?
    Mr. Herberger. In 1997, let me get that.
    Mr. Rogers. What I'm really looking for is carry forward.
    Mr. Herberger. Yes. We do have a different number than the 
$54 million that's in the budget. The revised number is $35.5 
million. This is for 1998.
    Mr. Rogers. Yes.
    Mr. Herberger. This is because, as you've stated, by the 
time the program came into operation, we were well into this 
fiscal year. I will give you the carry forward numbers.
    Mr. Rogers. What I really would like to see is the number 
needed in 1998 through carryover.
    Mr. Herberger. $35.5 million.
    Mr. Rogers. All right.
    Mr. Herberger. That takes into account the amount of 
carryover that we're predicting. The other factor that we have 
to consider is that we still have a number of ships, about ten, 
that are on the old Operating Differential Subsidy Program.
    They will expire at varying times. A good number of them 
expire early in 1998 as a matter of fact, after the first 
quarter. So, the MSP number will be a varying amount. We won't 
really come to a steady state on this until about 1999.
    Mr. Rogers. Well, either here or if you don't have it for 
the record, can you indicate what the amount for the Operating 
Differential Subsidy Program is once the books get scrubbed and 
we know where we are?
    Mr. Herberger. Yes. We will provide it for the records. We 
expect the MSP to pay out $45.7 million in fiscal year 1997. 
That means $54.3 million will carryover into 1998. So, for FY 
1998, our best estimate for new budget authority is $35.5 
million.

                    Operating Differential Subsidies

    Mr. Rogers. I know that. I'm shifting now to the Operating 
Differential Subsidy Program. Your budget request for the ODS 
is $135 million to liquidate contracts there. That's a small 
decline from last year even though the program is phasing out. 
My understanding is that you're going back and scrubbing the 
books and that a lower figure for ODS may be sufficient. Can 
you tell me what that amount is?
    Mr. Herberger. Approximately $51 million.
    Mr. Rogers. Can you get us the exact figure for the record?
    Mr. Herberger. Yes, sir.
    [The information follows:]

    Based upon estimated accrued payments for Operating 
Differential Subsidy contracts, the FY 1998 budget request 
ought to be $51,030,000.

                                staffing

    Mr. Rogers.  All right. Now, what level of staffing is 
required to administer the Maritime Security Program?
    Mr. Herberger.  We have nine FTEs engaged in that.
    Mr. Rogers.  In the Maritime Security Program?
    Mr. Herberger.  In the Maritime Security Program as well as 
the other programs that are now involved with the new VISA 
program, Voluntary Intermodal Sealift Agreement program. It 
also includes our NATO planners; all of those things having to 
do with national security. We put them all in one area. It's 
about nine FTEs.
    Mr. Rogers.  On the ODS, how many staff are required to 
administer the ODS in 1998. How does that compare to 1997?
    Mr. Herberger.  In 1998, we will be down to 16. In 1993 we 
had 46, just as a frame of reference. We will be down to 16 by 
1998. Then that will drop off just a few numbers after that.
    Mr. Rogers.  What is it this current year?
    Mr. Herberger. Let me provide that for the record. I have 
the 1998 number.
    [The information follows:]

    A total of 16 full-time equivalents (FTEs) support the ODS 
program in FY 1997.

    Mr. Rogers.  All right.
    Mr. Herberger.  We're absolutely downsizing there.
    Mr. Rogers.  Well, even though the ODS program is 
decreasing, the overall employment levels in the Operations and 
Training budget remain constant from 1997 to 1998, except for 
the residual effect as the fiscal year 1997 RIF. What offices 
are you increasing staffing for and why do you need those 
increases?
    Mr. Herberger.  We increased staffing in the Maritime 
Security area. Those nine FTEs are a good example of where 
staffing changes because of a new function. That, and the VISA 
program and some of the other initiatives that were involved 
with national security. We're at about the same level with the 
administration of the Title XI program.
    We've added just a couple of billets in the ports, 
intermodal, environmental--particularly in the environmental--
area, due to the increased activity there.
    Mr. Rogers.  Well, you're going up, it looks like, in two 
areas. One, emergency planning; you're going from 22 to 27, 
from 1996 to 1998. You going from 22 FTEs to 27. In the ports, 
intermodal, environmental you're going up from 29.5 to 41 FTEs 
between 1996 and 1998.
    Mr. Herberger.  Yes. Those are the areas that we're 
focusing on.
    Mr. Rogers.  Otherwise, you're stable more or less or 
declining; right?
    Mr. Herberger.  Yes, except in the Ready Reserve Force--the 
RRF is stable. That funding comes out of Defense. But what I 
call the ``all others'' area has come down 17 percent.
    Mr. Rogers.  Now, Commissioner Creel, with respect to your 
personnel, at the time we went to conference with the Senate 
last fall you circulated information stating that if FMC was 
reduced to $14 million from the previous year you would either 
have to RIF 124 people or furlough everyone in the agency for 
12 days. In fact you were reduced to $14 million. I don't know 
that there has been a RIF or a furlough. Is that right?
    Mr. Creel.  There has not been.
    Mr. Rogers.  So, was that information you gave us 
inaccurate?
    Mr. Creel.  No, sir. We've had some significant 
unanticipated savings. First of all, we were talking about 
needing $14.855 million at that point. Our funding requirements 
subsequently changed. There was net savings of about $330,000 
because of the personnel that we have lost. We have lost about 
nine people since October 1, some of them were early outs and 
some of them were retirements or transfers. Additionally, 
$277,000 in savings was achieved because of the vacancies in 
the fifth Commissioner's office, which are now not funded for 
fiscal year 1997. We're halfway through the year with no fifth 
Commissioner. The President and the Senate could confirm a 
fifth Commissioner, and at that point we would probably have to 
RIF or furlough.
    On the issue of RIF versus furlough, obviously we get more 
for our dollar with the furlough. We get about $42,000 in 
savings for each day of agency-wide furlough.
    Mr. Rogers.  The point I wanted to ask you about was, you 
said you'd have to RIF 124 people unless you got it.
    Mr. Creel.  Or furlough, we said.
    Mr. Rogers.  Or furlough the whole agency for 12 days.
    Mr. Creel.  Right. My point is----
    Mr. Rogers.  Neither one occurred.
    Mr. Creel.  That's right because of these significant 
savings that we achieved.
    Mr. Rogers.  Yes. But those are modest savings compared to 
this.
    Mr. Creel.  Well, we had----
    Mr. Rogers.  I just want to let you know that we don't 
react well to being fed a line. I think you fed us a line last 
year.
    Mr. Creel. Mr. Chairman, we have experienced $825,000 in 
unanticipated savings subsequent to that analysis. We didn't 
know these individuals wereleaving. We are suffering the risk 
of the President appointing another Commissioner at which point we 
would have to provide funding--we still have six months left in the 
year. We reduced our service level for our Automated Tariff Filing and 
Information System by $45,000. We reduced our administrative expenses 
by $33,000. We didn't have to fund the 1.5 percent retirement increase 
which we anticipated, saving another $140,000. By the way, we're still 
estimating our expenses to be about $30,000 over the $14 million 
appropriation.
    Mr. Rogers.  Now, your 1997 budget of $14 million is based 
on having 147 FTEs.
    Mr. Creel.  That's right.
    Mr. Rogers.  How many do you have on board now?
    Mr. Creel.  We have 142 on board now.
    Mr. Rogers.  Does that mean you'll have some savings even 
below your $14 million appropriation?
    Mr. Creel.  No, sir. I don't anticipate that.
    Mr. Rogers.  Why not?
    Mr. Creel.  For the 1997 or 1998? For 1997?
    Mr. Rogers. 1997.
    Mr. Creel.  1997. No, sir. I don't anticipate that.
    Mr. Rogers.  Why not? Why not?
    Mr. Creel.  We're still projecting a $30,000 deficit.
    Mr. Rogers.  I don't understand that. You are five FTEs 
below what your budget was based on. You should have quite a 
few dollars of savings.
    Mr. Creel.  Actually it's four I think; 147 to 143.
    Mr. Rogers.  You said 142.
    Mr. Creel. That's right. We have 144 FTEs projected for the 
year, but we're down to 142 employees on board now.
    Mr. Rogers.  The $14 million was based on 147. You're five 
short of that. You should have some money left over if your 
budget submission last year was accurate.
    Mr. Creel. Our final FTE level for the year is estimated at 
144, three below the 147 projected in the President's Budget. 
We had an individual who had been with us for 32 years who 
unexpectantly retired. His annual leave payment was over 
$170,000 which equates to funding of three FTEs.
    Mr. Rogers.  That's still not enough to account for the 
difference.
    Mr. Creel.  Why don't we supply you something for the 
record on that.
    Mr. Rogers.  All right.
    [The information follows:]

    The Commission previously estimated that it could fund 147 
FTEs at $14 million. We currently project the total number of 
FTEs we will be able to fund in fiscal year 1997 to be 144. 
Although we presently have 142 employees on board, it must be 
remembred that employees who leave during the fiscal year 
contribute towards the total fiscal year FTE level until they 
leave. Therefore, we actually will be only 3 FTEs short of the 
147 level.
    Normally, funding three FTEs less than projected would 
result in a savings. However, the Commission was required to 
make a payout of over $170,000 for unused annual leave to a 
Senior Executive Service (``SES'') employee who retired this 
year--until fairly recently, there was no cap on the amount of 
annual leave employees of the SES could accrue. Accordingly, 
the potential savings from funding 3 less FTEs than projected 
had to be used for this payment.

                         training ship program

    Mr. Rogers.  Admiral, as I understand it the Merchant 
Marine Academy and the state maritime schools use different 
methods of on board training for students. At the Academy I 
believe students are placed on operating ships for half of 
their second and third years.
    The Academy doesn't really have a school ship comparable to 
the state maritime schools. At those schools students train by 
sailing on the school's ship. Can you describe how students 
receive on board training and whether there are differences in 
cost and experience gained?
    Mr. Herberger.  At Kings Point the students go to sea for a 
total of a year; two six-month periods separated by a period 
back at the Academy. In addition, they have a very small former 
Navy vessel at Kings Point which provides some limited training 
out of the Academy on local cruises.
    The U.S. flag vessels that the students sail on pay a sea 
pay, if you will, while they're at sea duty. It's basically 
enough to cover their meals and a shaving kit or the likes of 
that. The funds for the travel to and from the ship come out of 
the Academy funding.
    So, their program again is focused on sailing on different 
U.S. flag vessels. In many cases over the one year period of 
sailing, they will sail on a number of different type ships. 
That's the Kings Point training. The state schools primary 
training at sea is in the training vessels. But in addition to 
the two-month training cruise some number of the state academy 
individuals sail on commercial ships, too. I don't know if they 
get any extra stipend or anything when they're sailing for 
those companies. I could provide that for the record.
    [The information follows:]

    In 1996, 360 state maritime students sailed on commercial 
vessels. The conditions by which they sailed varied by school. 
All of the schools, except Michigan and New York, charge 
students a commercial cruise fee which averages $235. The 
companies usually pay all student transportation costs.
    Except for California, students receive wages for their 
work on commercial vessels. The wages vary by company, making 
it difficult to estimate costs precisely. However, these wages 
invariably are high enough at least to offset student costs. 
For example, if a student sailed for 30 days at the highest 
rate of $70 per day, and has paid a commercial cruise fee of 
$500, he/she would net $1,600.

    Mr. Rogers. Is there a preferable way to do it?
    Mr. Herberger. I think the key is at-sea training. In the 
old days, using the training ship, which the Coast Guard did 
and still does, was the accepted way.
    When Kings Point came along and started during a war, 
students needed the training and they went to sea. They were 
gone for two years, for almost the duration of the war. I think 
that's how sailing on commercial ships got started. I do think 
that both programs provide the kind of support for the 
individual schools.

                   maine maritime academy school ship

    Mr. Rogers. Now, let me go over with you the situation 
involving the Maine school ship. Apparently, and you correct me 
if I'm mistaken on this, $16.3 million was wasted in converting 
one ship. The contract was terminated. The ship was abandoned. 
And another $13.9 million has been invested in a replacement 
ship. Is that more or less correct?
    Mr. Herberger. I'd like to describe it in a little 
different way. Let me just describe how the activities took 
place. I think that's important. In 1992, it was determined 
that the State of Maine, the Maine Maritime Academy training 
ship that was a decommissioned Navy troop ship built in 1952, 
had to be replaced.
    By that time it was 43 years old. It had served as the 
State of Maine training ship for 22 years. At that time the 
Harkness, another Navy oceanographic vessel, was designated as 
a replacement for the old State of Maine. A contract was 
procured to convert it from an oceanographic vessel to a 
training ship.
    It was put under contract with a yard in Brooklyn, New 
York, in 1994. Yes, there was $16.9 million made available for 
that. The bulk of that funding came out of Ready Reserve Force 
funds. That contract and the conversion were a very difficult 
process.
    The yard did not perform well and did not stay on schedule. 
The long and short of it, was that in 1995, I terminated that 
contract because I did not see that we were going to get the 
type of school ship we needed. By that time, we had expended 
about $13.1 million on it. We stopped payments.
    The case went to litigation after the ship was pulled out 
of the yard. In the meantime, in 1994, the Navy decommissioned 
two very new oceanographic ships; the Maury and the Tanner 
built in 1989 and 1990 respectively. We did a thorough 
assessment with the Harkness after we pulled it out.
    The Harkness was going to cost another $6 million or $7 
million to put it in the kind of safe condition we needed as a 
training ship. A like amount was assessed to do a conversion of 
the Tanner into a training ship. It was decided that we'd go 
with a ship that was 20 years younger, almost relatively new. 
It was going to cost about $6 million or $7 million; the same 
amount that we would have used to continue trying to make the 
best we could out of the Harkness.
    After we started an in depth assessment of the Tanner, it 
was found that the main engine of the vessel needed to be 
replaced. This was a ship that was only four years old. To 
everybody's surprise, it was decided at that time that the 
engine would have to be replaced. Then the funding was 
increased to $13.9 million total.
    If you take it step-by-step, that's how the case evolved. 
At the same time, a like ship to the Harkness, the Chauvenet, 
had gone into another yard at Brooklyn and come out okay and is 
now the school ship for Texas. It's a mystery why the Harkness 
went down the path it did versus the Chauvenet, at the two 
shipyards which, as a matter of fact, were owned by two 
brothers. So, that's how it happened.
    Mr. Rogers. That's your story and you're sticking to it.
    Mr. Herberger. It's the story step-by-step.
    Mr. Rogers. What happened to the original ship?
    Mr. Herberger. The original ship is in the mothball fleet 
down in the James River. It will never be used as a training 
ship, even though it had been converted into a training ship. 
There were so many problems with the conversions.
    Mr. Rogers. That's the one that you----
    Mr. Herberger. That's the one that I pulled out of the yard 
and terminated the conversion contract.
    Mr. Rogers. So, it's back in the Ready Reserve Fleet?
    Mr. Herberger. No. It's out of the Ready Reserve Fleet. 
It's in the National Defense Reserve Fleet. It's in the 
mothball fleet. Some day I'm sure it will be scrapped. But we 
did take out all of the usable materials, all of those things 
that were put into it that we could use in the Tanner.
    Mr. Rogers. Did you say there is a lawsuit?
    Mr. Herberger. It was settled out of court. We lost nearly 
$3.2 million in that case much to my dismay.
    Mr. Rogers. In addition to the----
    Mr. Herberger. It cost us $16.3 million total for the 
Harkness.
    Mr. Rogers. So, you had paid them $13 million whatever and 
then----
    Mr. Herberger. The total is $16.3 million. We've recouped 
about $600,000 that we have put into the Tanner.
    Mr. Rogers. What happened? What was the problem? Was it 
impossible to fix the ship or what?
    Mr. Herberger. It was basically the quality of the work.
    Mr. Rogers. Of the repair work?
    Mr. Herberger. No. It was the conversion. It was a 
hydrographic ship. What you had to do is convert large spaces 
into dormitory accommodations for a larger number of people to 
go on board, a larger galley, classrooms; and have a 
significant amount of work done to the engine to make it such 
that it could be used as a training vessel.
    Mr. Rogers. You say the problem was the poor quality of the 
work at the shipyard.
    Mr. Herberger. Yes, at the yard.
    Mr. Rogers. At the modification yard.
    Mr. Herberger. Yes.
    Mr. Rogers. But they fixed the other ship.
    Mr. Herberger. Another yard did.
    Mr. Rogers. Another yard.
    Mr. Herberger. It just happened to be in Brooklyn right 
next to them.
    Mr. Rogers. Well, why was there a settlement in the lawsuit 
that you filed?
    Mr. Herberger. We went to litigation. It was decided----
    Mr. Rogers. Did you sue or did they sue?
    Mr. Herberger. No. They sued us. They sued us for the 
remaining payments.
    Mr. Rogers. And your defense was?
    Mr. Herberger. Our defense?
    Mr. Rogers. Yes.
    Mr. Herberger. At the time it was the unsatisfactory 
progress and the final condition.
    Mr. Rogers. But then you later said, well, we were wrong 
and want to pay you another----
    Mr. Herberger. No, we didn't. Someone else made that 
decision. We did not make that decision.
    Mr. Rogers. Who do you mean, the Justice Department?
    Mr. Herberger. The Contract Appeals Process.
    Mr. Rogers. What's contract appeals?
    Mr. Herberger. When a company doing business with the 
Federal government has an objection to the government's 
position on a given contract, they can take it to this Contract 
Appeals Process for adjudication.
    Mr. Rogers. When was that done?
    Mr. Herberger. About 1994.
    Mr. Rogers. Did Maine contribute any monies to that 
process?
    Mr. Herberger. The State of Maine?
    Mr. Rogers. Yes.
    Mr. Herberger. No, sir.
    Mr. Rogers. I'm sorry, no?
    Mr. Herberger. No.
    Mr. Rogers. Now, your 1998 budget includes $1 million for 
maintenance and repair of that ship, a higher amount than any 
other of the four school ships. How can maintenance and repair 
of a newly refurbished ship be that high?
    Mr. Herberger. It's the shakedown of putting a new ship in. 
The fact that you have to step up and outfit it with the spare 
parts, the consumables; all of those features to put it in good 
operating order. Basically, it will be a good ship when it 
comes out of the yard. But the outfitting and the maintenance 
in the first year of introducing any new ship is a little 
higher than the norm. We feel that that's a good estimate 
because of the experience we've had in putting each of the 
school ships into commission.
    Mr. Rogers. Well, that's the third payment we've made on 
that ship or will have made.
    Mr. Herberger. As it turned out, yes, sir.
    Mr. Rogers. And as you know I've got a real--have had a 
real problem with the federal government paying such a big 
share of the cost of these training ships.
    Mr. Herberger. Right.
    Mr. Rogers. Since the states get a lot of the benefits. 
Now, Maine and Massachusetts have been sharing a ship since the 
original was retired in 1995. How has that worked?
    Mr. Herberger. They shared it for one cruise. When the 
Harkness fell off its schedule and we decided to move the 
Tanner as a replacement vessel for the 1996 cruise, 
Massachusetts Maritime Academy provided the Patriot State to 
the Maine Maritime Academy. They used that for their summer 
cruise. The schools' cruise schedules were at different times 
and they were able to share the ship.
    Mr. Rogers. That worked out okay.
    Mr. Herberger. It worked out, yes.
    Mr. Rogers. Why couldn't we do more of that?
    Mr. Herberger. For the reasons that I stated earlier. Those 
ships provide almost an all-year-round floating platform used 
by all grades in the school for different types of training. 
It's become very much a part of the whole training program in 
each of the academies.

                            scrap ship sales

    Mr. Rogers. Are we making any progress on moving the sale 
of ships for scrap?
    Mr. Herberger. No, not real progress. We have an IFB out 
now for domestic and/or foreign scrapping. We're waiting for 
that to be finalized. We're very concerned because under the 
rules that we're playing now, the EPA rules, we're going to 
have to clean the vessels up--PCBs, obviously asbestos, and any 
hazardous materials.
    Therefore, in some cases, depending on the type of vessel, 
it may cost us more to clean them before they can be scrapped; 
the cost of the remediation would be more than the scrap value.
    Mr. Rogers. That's not true of all of the ships though, is 
it?
    Mr. Herberger. The more complex vessels--the former Navy 
vessels, possibly some Coast Guard vessels where they have much 
more salvageable valuable materials in them--may result in our 
getting a little more out of the scrap value. The jury is still 
out on what it's going to take totally to clean out those 
vessels.
    It's a very difficult process because it's not just taking 
the materials off the ships but it's the total chain of custody 
and disposal of those hazardous materials. That all costs much 
more than, I think, the scrap value is going to be.
    Mr. Rogers. Well, at least 25 percent of the proceeds could 
be used to support the state schools.
    Mr. Herberger. Under the new maritime allotment, yes.
    Mr. Rogers. So, what you're telling me is in order to move 
the--to get the sale of those ships to take place, it's going 
to really take legislation to change the EPA's rulings on them?
    Mr. Herberger. It's a law. The law is that no U.S. entity 
can export hazardous materials. So, it's a law that's been on 
the books I guess since 1980.
    Mr. Rogers. That's why I say----
    Mr. Herberger. It's EPA's administering of that law that 
has held us in check. I've got 67 ships that could be scrapped; 
41 of them are stripped of anything valuable and ready to be 
scrapped. The dilemma we have is being able to get the 
permission we need to scrap.
    Mr. Rogers. My colleague, Herb Bateman from Norfolk, 
apparently has proposed such a change.
    Mr. Herberger. Yes.
    Mr. Rogers. To allow some remediation of the EPA laws that 
would allow us to sell those ships. It seems to me like that 
would be a very wise thing.
    Mr. Herberger. Yes. The Navy is also in the same 
predicament. We know that they're equally concerned with the 
same problem that we have.
    Mr. Rogers. On salvaging?
    Mr. Herberger. On being able to salvage the ships that they 
want to pull out entirely.
    Mr. Rogers. In your fleet, suppose we were able to sell 
them at a reasonable price and not go through the EPA hurdles, 
what are we talking about here? How much money are we talking?
    Mr. Herberger. Just prior to this EPA decision not to allow 
us to send any more hazardous material off shore, for the old 
Victory and Liberty ships, we were getting somewhere around 
$350,000 to $400,000 per vessel. It depends on the world's 
scrap metal rate. We were pulling them out at a dozen at a time 
while watching the rate to get the most favorable return.
    Overseas, the scrap metal rate is a moving number. But my 
estimation is that we could get probably about $50 a ton. That 
would depend on the light ship weight of the vessel. About $50 
aton was the most recent world number.
    Mr. Rogers. How many tons?
    Mr. Herberger. For some of these smaller older ships that 
we want to put out, about $300,000 to $400,000 per vessel.
    Mr. Rogers. How many vessels are we talking?
    Mr. Herberger. We have 67 of them ready to scrap. A couple 
of them in there are a little bit more complex. We may get up 
to $500,000 or $600,000. That was the experience we were having 
prior to EPA's enforcement of its rules. One thing more about 
the EPA rules that have caused some confusion. If we strip the 
vessels of the PCBs and all of the hazardous materials, we 
probably won't be able to tow them. They will not be seaworthy. 
Therefore it does not make any sense to try to clean them 
before sale. We will be in a real catch-22. Once you strip all 
of this hazardous material, the vessels may not be seaworthy 
enough to be towed.
    So, the people are saying, well, we will clean them up and 
then we will scrap them. No. It's not that easy. On a lot of 
the vessels the wire ways, the armored cable wire ways, are on 
one side of the ship. If you take them off, the vessel's center 
of gravity is adversely affected.
    Mr. Rogers. What are the hazardous materials we're talking 
about?
    Mr. Herberger. They're lubricants. They're paint. They're 
asbestos. They're the protection of wires. They're PCBs. 
They're primarily the PCBs that are in just about everything 
imaginable in a vessel, including the grease, the lubricants, 
the gasket material. It's an extensive problem.
    Mr. Rogers. The same materials I guess that was in the 
Arizona.
    Mr. Herberger. There are probably fewer materials in the 
post-World War II vessels since more recently when we've come 
in with these sophisticated lubricants and gasket material 
which had done a better job as a lubricant and a gasket, but 
they do have some PCBs in them.
    Mr. Rogers. How many such ships do you think are laying at 
the bottom of the ocean?
    Mr. Herberger. Do you mean from World War II?
    Mr. Rogers. Yes, and World War I.
    Mr. Herberger. Lots of them, obviously, thousands.
    Mr. Rogers. And they're made of the same types of 
materials?
    Mr. Herberger. They were made of very good steel, and 
copper and----
    Mr. Rogers. Jute?
    Mr. Herberger. Pardon me?
    Mr. Rogers. Jute, PCBs?
    Mr. Herberger. PCBs. There will be lubricants, yes. They 
might have been a little different lubricant.
    Mr. Rogers. My point is that there are literally thousands 
of these things laying at the bottom of the oceans of all the 
world today polluting the ocean, supposedly, the EPA says, and 
here we are worried about, how many are you talking about, 60, 
70?
    Mr. Herberger. We had 67. We will have more. There is a 
total in the fleet now of about 224 vessels, Navy vessels and 
other agency vessels that we will probably want to scrap in the 
coming years.

                            title xi program

    Mr. Rogers. Now, Admiral, MARAD put out a large number of 
Title XI loans in fiscal year 1996 totaling over $1 billion. 
Can you give us an update on the program?
    Mr. Herberger. Yes, sir. We have a high number of 
applications that we're processing. We would expect that for 
the rest of this year and into 1998 that we will use the 
funding we've requested for these projects. We've dropped the 
amount for FY 1998 to about $35 million for loans in 1998 based 
on our estimates.
    Currently we have about $77 million in unobligated subsidy 
funding. But the difficulty with this is that you can get a 
very large order that will take quite a big amount from this 
balance--there is no steady state to it. If you get one loan 
guarantee for about $200-plus million, you use up quite a bit 
of the funding.
    There is no monthly rate of expenditure. Based on pending 
projects that we have in the review process now plus some that 
are coming in to us in a preliminary manner, there is still a 
considerable amount of interest in this program.
    Mr. Rogers. Have the loans met the economic soundness 
requirements?
    Mr. Herberger. Yes, sir.
    Mr. Rogers. Any defaults?
    Mr. Herberger. No, sir. We have not had any defaults on any 
loan that has been issued since 1985.
    Mr. Rogers. What's the ratio of approvals to applications?
    Mr. Herberger. I'll have to get back to you on that.
    Mr. Rogers. Do you know how many loans you've turned down 
so far?
    Mr. Herberger. We have quite a few that have been turned 
down. They are turned down at different stages. Many times when 
they first come in to start discussing it, we can tell them 
right there and then that unless they meet certain criteria 
they're not going to be suitable.
    Mr. Rogers. If you could provide for the record the number 
of turn downs and the ratio to applications.
    Mr. Herberger. I will.
    [The information referred to follows:]

    Companies that apply for Title XI financing and whose 
projects do not receive approval have not received rejection 
letters. Rather, some companies opt to withdraw their 
application so as to avoid receiving a formal rejection from 
the Government. Other projects are incomplete for processing 
and MARAD will terminate the application process. No formal 
rejection is issued to those companies. Additionally, many 
companies never file an application after meeting with MARAD as 
they realize they cannot meet the program requirements. 
Therefore, three possible alternatives can result once an 
application is filed. MARAD can approve the application; 
terminate the application; or the application can be withdrawn 
by the applicant. Until one of these three outcomes occurs, the 
application remains pending. An analysis of the outcomes of 
pending applications since the start of FY 1993, which is the 
year in which the National Shipbuilding Initiative was 
implemented, is provided below:

Fiscal Years 1993-1997:
    Pending Applications at 1993..................................     8
    New Applications..............................................    81
                        -----------------------------------------------------------------
                        ________________________________________________
      Total.......................................................    89
                        =================================================================
                        ________________________________________________
Fiscal Years 1993-1997:
    Approvals.....................................................    46
    Terminations/Withdrawals......................................    17
    Pending.......................................................    26
                        -----------------------------------------------------------------
                        ________________________________________________
      Total.......................................................    89

    The above categories do not include projects involving the 
refinancing of existing Title XI debt.
    Based upon the above information, the ratio of 
terminations/withdrawals to total applications was 1 to 5.2 for 
the period FY 1993 through FY 1997.

                        quincy shipyard project

    Mr. Rogers.  Now, the Quincy Shipyard Project, where do we 
stand on that project?
    Mr. Herberger.  We have issued a loan guarantee for a 
shipyard revitalization for the amount of $55 million under a 
Letter of Commitment with some very explicit conditions that 
have to be fulfilled before we execute the $55 million loan 
guarantee.
    All of those conditions have not been met todate. We're 
continuing to work with the parties concerned. In addition, 
there is a second submission from Quincy for six private 
tankers for a loan guarantee of about $250 million. We're still 
reviewing that. We would expect it will take another month or 
two to complete our review.
    Mr. Rogers. Will that application be required to meet the 
economic soundness test?
    Mr. Herberger. Yes, for the ships.
    Mr. Rogers.  In your opinion does the shipbuilding 
application satisfy the economic soundness test?
    Mr. Herberger.  If we approve it, it will. We are not that 
far into it to be able to determine that. But it definitely 
will be put through the economic soundness test. The applicant 
is a foreign party. These vessels will be used in international 
trade, not in domestic trade.
    Mr. Rogers.  Well, if the ship application should not be 
approved, then isn't there some question as to whether or not 
the loan for the shipyard refurbishment could be approved?
    Mr. Herberger.  It would have a direct bearing on it. 
Unless the parties were able to substitute another project, it 
absolutely would have a bearing. They are related to that 
degree.
    Mr. Rogers.  There would be no revenue flow----
    Mr. Herberger.  Yes, sir. That's correct.
    Mr. Rogers [continuing]. If there are no ships to be built.
    Mr. Herberger.  That's correct.
    Mr. Rogers.  When will you decide that? When will that be 
decided?
    Mr. Herberger.  We're continuing to receive more 
information regarding the ship contract. We're working on it 
almost daily. It's a little difficult at this point to predict. 
My best estimate is that it will be at least another month or 
two before we complete the assessment.

                             oecd agreement

    Mr. Rogers.  Now, what's the status of the OECD 
shipbuilding trade agreement and legislation to implement that 
agreement in the U.S.?
    Mr. Herberger.  As you know, it wasn't well received over 
here in the Congress last year. There was no ratification. The 
U.S. Trade Representative has continued to work with the other 
signatories to the OECD. There was a meeting in March and there 
is another meeting in May to continue to look for changes 
without struggling to hold agreement; changes that could be 
made that would satisfy those that have supported what are 
called the Bateman amendments.
    It's an ongoing effort; continual discussions between all 
of the parties. At this point in time it's too early to tell 
what is going to happen. In the meantime though, at least in 
the European area, they've made some announcements that they're 
going to continue with their rather substantial subsidies to 
their shipyards.
    They've been holding off and now that the stand still is 
being extended further, there has been some announcements to 
the effect that three countries at least are going to put forth 
rather substantial direct subsidies to their shipyards.
    Mr. Rogers.  Under the terms of the legislation as passed 
by the House last year, what will be the impact or affect upon 
the Title XI Program?
    Mr. Herberger.  Under Title XI, we would have to change 
from an 87.5 percent coverage to 80 percent. We'd have to 
reduce the term 25 year coverage to 12 years. Then there are a 
couple of other minor features having to do with the amount of 
the percent of R&D that could be made available.
    It would only impact on the ocean going propelled vessels. 
It would not impact on what we do for thenon-self-propelled 
barges, power barges, tug boats and the like. It would be for the 
larger ocean going vessels that are self-propelled.

                    title xi administrative expenses

    Mr. Rogers.  Now, the loan volume in Title XI is projected 
to drop almost by half or roughly half. That will bring it to 
about $500 million in 1997. Yet, you are requesting an increase 
in administrative support from $3.45 million to about $4 
million. Why is that?
    Mr. Herberger.  We requested $4 million. You gave us $3.45 
million. We're requesting $4 million again because that's the 
amount required to fund the number of people involved. You can 
have just a couple of projects that take a huge portion of your 
staff effort. You can't estimate administrative expenses based 
on the amount available for guarantees. Some projects can take 
ten times the effort of others. It's not something that you can 
predict based on any steady schedule of activity.
    Mr. Rogers.  I thank you both for your testimony. We look 
forward to working with you. We're not flush with money again 
this year. So, don't get too hopeful. It's going to be another 
tough year, but we don't know our numbers yet obviously, so we 
can't give you much indication. But I do know it will be 
austere, whatever it is. So, we will do the best we can by the 
needs that we know that you have.
    Admiral, again, it's been wonderful dealing with you over 
these years in your position. You've carried the flag for the 
agency very well, but more importantly, over your career you've 
carried the Red, White, and Blue high. We appreciate that 
service.
    Mr. Herberger.  Thank you, Mr. Chairman.
    Mr. Rogers.  Good luck to you.
    Mr. Creel.  Thank you, Mr. Chairman.
    Mr. Rogers.  We're adjourned.

[Pages 187 - 205--The official Committee record contains additional material here.]


                                         Wednesday, April 16, 1997.

         UNITED STATES EQUAL EMPLOYMENT OPPORTUNITY COMMISSION

                                WITNESS

GILBERT F. CASELLAS, CHAIRMAN

    Mr. Rogers. The Committee will come to order.
    This afternoon we would like to welcome the Chairman of the 
Equal Employment Opportunity Commission, Gilbert Casellas, who 
will testify in support of the budget request and activities of 
the EEOC, the federal agency responsible for enforcement of 
laws that prohibit employment discrimination of federal and 
private sector employees based on race, sex, religion, national 
origin, age, or handicapped status.
    For 1998, the EEOC has requested a budget of $246 million, 
an increase of $6 million, or 2.6 percent over the current 
level for 1997. In 1997, we provided an additional $7 million 
to help you make some progress in resolving the pending backlog 
and to help make investments in new programs and automation 
that would improve the effectiveness of your case reduction 
efforts.
    We're glad to hear you've made some progress. We hope that 
progress will continue and that you will continue to look for 
ways to streamline your own review of complaints and avoid any 
duplication of effort between the EEOC and other federal, 
state, and local agencies, and courts in reviews of these 
cases.
    Fiscal year 1998 will bring another tight budget year for 
us. Your request is modest compared with previous requests, but 
it will still be difficult to find any additional resources 
within amounts that are likely to be available to the 
Subcommittee.
    Mr. Casellas, we will insert your full written statement in 
the record at this point. You may proceed if you'd like with a 
brief oral statement.

                           Opening Statement

    Mr. Casellas. Thank you, Mr. Chairman.
    Thank you for the opportunity to appear. It's now been two 
and a half years that I have served as Chairman. This is my 
third appearance before this Committee. You may recall in my 
first appearance, we had just completed a comprehensive review 
of the agency through the task forces that I had set-up. We 
were about ready to launch these major changes.
    The problems as you no doubt recall were enormous: a 
backlog of 100,000 cases and growing; an antiquated technology 
system that was on the verge of collapse; demoralizing internal 
labor-management problems; little input from our constituents 
and our stakeholders; and very little guidance to facilitate 
voluntary compliance with the laws we enforce; and on and on.
    I asked at that time for more time and more money. I asked 
for a chance to see these changes through. Thankfully, with 
this Committee's support, your support, Mr. Chairman, and with 
the recommendation of our oversight Committee, you didn't cut 
our appropriation for fiscal year 1996, and we were funded at 
the same level in 1996 as we had been in 1995.
    In my second appearance last year we had instituted many 
changes, some of them only a couple of months old. I said at 
that time as well that it was still too soon to tell whether 
our priority charge handling procedures and our national and 
local enforcement plans would get the backlog down; whether 
we'd get the legislative go ahead that would permit us to move 
ahead with the use of volunteers for our mediation initiative.
    Again, I asked for more time and more money. Mr. Chairman, 
thanks to your help on the Floor last summer, the effort that 
had been initiated and spearheaded by D.C. Delegate and Former 
EEOC Chair, Eleanor Holmes Norton, as well as Congressman J.C. 
Watts, resulted in a small, but critical increase for fiscal 
year 1997.
    This is my third appearance. I hope that three times indeed 
is a charm because I do have good news to report. The backlog 
is down by more than 30 percent from the time we initiated our 
changes--from 111,000 to 75,000. It is the lowest it has been 
in five years.
    Last year we resolved more charges than in any time in the 
Agency's 31-year history. We're now more current in our 
existing inventory. We've put in place alternative dispute 
resolution. In the past six months, we've resolved over 300 
charges through mediation and collected benefits of about $4 
million for victims of discrimination.
    We've increased education, outreach, and technical 
assistance to facilitate voluntary compliance. Our technical 
assistance programs for employers had an all time high 
attendance. Nearly 6,800 persons attended last year. Hundreds 
of others were turned away. We're going to add 20 new programs 
this year, taking it up to about 70 of these programs.
    Our field staff in addition made 1,364 presentations of a 
technical assistance nature to more than 65,000 persons 
representing employers. We responded to over 400,000 requests 
for our publications from members of the public.
    In terms of employee training, we've spent $1.5 million, 
not a lot of money, but five times the amount annually spent in 
the past four years for employee training. It's still not 
enough, but critical to teaching people how to do their jobs in 
this new environment.
    In terms of technology, I used to always say that on the 
information superhighway, we were road kill. But we finally 
reached a one-to-one ratio of PCs and all of our computers are 
now 486s or above. We hope to have them all in the Windows 
environment shortly.
    We just launched a home page on the Internet this year to 
better disseminate our information. And throughout all of this, 
we've increased benefits to victims of discrimination. Our rate 
of finding reasonable cause is now almost double what it was 
last year.
    In the past two years during my tenure, we have collected 
over $350 million for victims of discrimination. With what 
we've obtained for the first half of fiscal year 1997, we 
expect that figure is now well over $400 million. About 80 
percent of these benefits have come from our administrative 
enforcement activities, not from litigation.
    In terms of litigation, we've filed half the number of 
cases in fiscal year 1996 as we did in fiscal year 1995, but we 
collected twice the monetary benefits by being more strategic 
and more selective in our litigation cases.
    Mr. Chairman, we accomplished all of these things with the 
lowest staffing level in 20 years. I am proud of what we 
accomplished. I have done what this Congress asked me to do. 
The backlog is down significantly; ADR is in place. We're 
working with employers and with the communities.
    We have operated with the lowest staffing in 20 years while 
enforcing more statutes and the rights of victims of 
discrimination have not been sacrificed or compromised. I ask 
that you continue to support this success story. Our request is 
$6 million over last year's appropriation.
    Without this small, but crucial increase we will have to 
consider consolidating or closing field offices; an agency-wide 
furlough; further postponing or limiting implementation of ADR; 
and continued delay of our technology initiatives.
    Mr. Chairman, we can't afford to go back. I thank you for 
your support. I look forward to answering your questions.
    [The statement of Mr. Casellas follows:]

[Pages 210 - 217--The official Committee record contains additional material here.]


                          litigation policies

    Mr. Rogers. Thank you very much.
    As you've indicated, we have supported your work to achieve 
caseload reductions and to improve your response to new 
complaints. We're pleased with the improvements that we've 
seen.
    As a result of your new priority charge handling procedures 
which have now been in effect for almost two years, you've 
reduced your backlog by almost 32,000 cases. When you dismiss 
these cases, are the respondents by law issued a ``right to 
sue'' letter?
    Mr. Casellas. Yes, sir.
    Mr. Rogers. Some critics, as you know, argue that simply 
pushes these 32,000 cases into the courts. Is that an accurate 
criticism?
    Mr. Casellas. No. It's not for a couple of reasons. Number 
one, it's not at all clear that everyone who receives a ``right 
to sue'' letter in fact takes it and files a lawsuit. We are 
just essentially an administrative mechanism. We can't deny 
anyone the right to go into court.
    We investigate their case. We make a determination. If they 
don't like our determination, they can go into court. They 
don't always go into court. So, the cases that end up in court, 
it's hard for us to track. As a matter of fact, we don't track 
them at all unless they are our own cases that we bring.
    So, it's difficult to say that those cases that we have 
dismissed under our Category C, in this case no cause, that 
those cases result in lawsuits. As a matter of fact, some 
people think that most of those people don't end up in court 
because it's difficult to find a lawyer who is going to take a 
case that has already been investigated by the EEOC which has 
subpoena power, which can look at records, which can interview 
witnesses.
    And a private attorney who is going to be paid or not paid, 
depending on the merits of the case, is going to say this 
doesn't look like a good case. I'm not going to waste my time. 
So, it's hard really to determine whether those people end up 
in court.
    Mr. Rogers. Once you've issued a ``right to sue'' letter, 
are you completely out of the picture?
    Mr. Casellas. Yes.
    Mr. Rogers. Would there be instances where you might 
reinstate an investigation after it's already been resolved by 
your standards?
    Mr. Casellas. I guess I'm not sure I understand. We could 
always go back into an employer based on either a subsequent 
complaint or new information.
    Mr. Rogers. Let me clarify that for you. Once you've issued 
a ``right to sue'' letter, and let's say that person then goes 
into court, is there a way that EEOC could get back into the 
case after the courts have taken it over?
    Mr. Casellas. There are a number of ways. We can file an 
amicus brief in either the district or more likely the court of 
appeals level. We can intervene or we can be asked to 
intervene. The best example, the most recent example, was in 
the Texaco case.
    Parties to that case, the lawyers in that case sought to 
certify this group as a class. And the federal judge referred 
them to us and said, we want you to go back to the EEOC and 
have the EEOC do an investigation on the class allegations 
before I will consider it.
    Mr. Rogers. But in other cases, not necessarily Texaco, I 
don't know much about the merits of that case, but just in 
general. Once you have issued a ``right to sue'' letter, it 
means you have determined that there is no cause, doesn't it?
    Mr. Casellas. Well, not necessarily. We can also issue a 
``right to sue'' letter where we have found cause, but we have 
decided not to litigate. We don't litigate every case in which 
we find cause. So, we will find reasonable cause. We will go 
through conciliation, which is an attempt to resolve it.
    If we can't resolve it, then a determination is made as to 
whether we are going to file a lawsuit or not. We don't file 
lawsuits in every case in which there is cause. It used to be 
the situation. I have changed that. So, we make a separate 
determination of whether a case merits our resources--for 
litigation purposes. So, we will issue a ``right to sue'' 
letter in that instance as well.
    Mr. Rogers. I'm trying to get at possible duplication. 
We're trying to spend our dollars as wisely as we can because 
they are so limited. If it's true that EEOC and the courts are 
both looking at the same case, it seems to me like there is a 
waste of some money somewhere.
    Mr. Casellas. We're not looking at the same case. What 
happens is there is a whole new review by the court. That has 
always been the case.
    Mr. Rogers. Why in any given case would you issue a ``right 
to sue'' letter--meaning you've disposed of it in your own 
process and the person goes to court--and then you reenter the 
case in any fashion, amicus curiae or otherwise. Why would you 
do that?
    Mr. Casellas. Again, it could be at the invitation. It 
could be a legal issue that arose in the course of the case as 
a result of discovery or evidence that came up.
    Mr. Rogers. After you had finished with the case?
    Mr. Casellas. After we had concluded our investigation. In 
many cases, because we are prioritizing these cases, it may be 
that cases get categorized a certain way based on the evidence. 
Subsequently, it changes. I'll give you another example. A few 
months ago in Detroit we won a $5.5 million verdict for an 
epileptic who had been denied any kind ofaccommodation in a 
particular job situation. That case had been categorized as a C case 
and would have been dismissed, but for the fact that the attorney who--
attorneys now try to review these things as sort of a double check--
thought that there was something to that case.
    So, that case was brought back into the system before the 
determination had been made. Evidence was obtained. 
Conciliation failed. They went to court and the case resulted 
in this verdict. So, all I'm saying is that a case is changed 
depending on the investigation; depending on the knowledge that 
you have at the particular time.
    Mr. Rogers. Is this few or many cases we are talking about?
    Mr. Casellas. In terms of our intervention?
    Mr. Rogers. Yes.
    Mr. Casellas. Very, very few. As a matter of fact I think 
in the single digits per year. I don't think it is any more 
than five or six in which we intervene in a year.
    Mr. Rogers. Why don't you provide us a list of the ones 
where you have taken such action.
    Mr. Casellas. I will tell you that in 1994 it was eight 
cases where we intervened. In 1995, there were six. In 1996, 
the were four. And so far in 1997 there have been two.
    Mr. Rogers. If you will provide for the record so we can 
look at them.
    Mr. Casellas. I'll be glad to.
    Mr. Rogers. Now, I have a number of detailed questions that 
I may submit for the record. We won't belabor the hearing 
today, but I would appreciate your answers for the record.
    [The information follows:]

[Page 221--The official Committee record contains additional material here.]


                  Priority Charge Handling Procedures

    Mr. Rogers. Now even though you have these new procedures 
in place to review current and new cases and determine which 
requires full investigation, your budget indicates that the 
backlog for 1999 will be almost at the same level as it was in 
1995 when you first initiated your caseload reduction strategy. 
Did you intend that the new charge processing procedures would 
only have a one-time impact?
    Mr. Casellas. Well, the hope was that we would keep it 
down. It's all a function of the number of people that you have 
dedicated to the function. So, that right now we have 
experienced a big drop off because we've gone through the 
cases. We've separated the wheat from the chaff.
    The number of cases is still coming in. The number of 
people who are working on those cases has stayed about the 
same. So, it's going to now take us longer to work on the cases 
that we have because we're focusing more on those cases and 
trying to get rid of the ones that don't have merit. So, we've 
done these projections based on the in-flow and the workload.
    Mr. Rogers. Your new cases, that is, the fresh cases that 
are coming in each year, will be given the full treatment, 
right?
    Mr. Casellas. Well.
    Mr. Rogers. I mean there should be the same percentage of 
those new cases that are chaff, to use your word, as 
theoriginal batch. Is that right or wrong?
    Mr. Casellas. That's right, but the determination that's 
made at the outset is a little more complicated than I might 
have suggested. I mean when a case is filed it's categorized, 
A, B, or C.
    The determination of whether something is a B case may take 
longer than whether it's a C case. A C case is one that clearly 
there is no jurisdiction. It's self-defeating on its facts. We 
can't stop people from filing these charges either, just like 
you can't keep anybody from filing a lawsuit in court.
    They have a right to file it. We've got to make a 
determination. That determination sometimes can take place on 
the spot. Other times it may take a little while to determine.
    Mr. Rogers. Mr. Dixon.
    Mr. Dixon. Thank you, Mr. Chairman.

                   eeoc/state and local relationship

    I just have one question. That relates to the FEPA agencies 
that you are in some kind of collaborative effort with.
    Mr. Casellas. Yes.
    Mr. Dixon. Are you paying these state agencies to take care 
of business?
    Mr. Casellas. We actually subsidize them, in part, is what 
it is. We pay them what amounts to $500 per charge. We don't 
pay them for the full universe of charges. There are far more 
charges that they resolve, these dual-filed charges, than we 
can pay them. So, we do pay them for a part of that. We also 
offer them training. We also try to give them some technology 
so that we keep statistical information in the same sort of 
way.
    That has been going on for, at least in terms of the 
payment, for about 20 years. These agencies have existed--40 
years. Some of their statutes are the same. Some of them are 
different.
    Mr. Dixon. How has it affected your caseload? I heard you 
say in your testimony that there are 46,000 referrals made.
    Mr. Casellas. That's right. It's a net of about 6,000; 
6,500 is the net that ends up with us.
    Mr. Dixon. Thank you, Mr. Chairman.
    Mr. Rogers. Thank you.
    To briefly follow-up on Mr. Dixon's line of questions, your 
1998 request includes an increase of $6 million primarily for 
pay raises and inflation so that you can maintain your current 
staffing level of 2,680 FTEs. How many of those would you need 
to reduce if you were funded at the 1997 level?
    Mr. Casellas. Do you mean how many folks would we--how many 
FTEs would we lose if we didn't get the increase?
    Mr. Rogers. Right.
    Mr. Casellas. Approximately 100.
    Mr. Rogers. Last year we gave you a $7 million increase and 
increased the earmark for state and local agencies by $1 
million as you requested. In last year's budget you said that 
since the EEOC and the state and local agencies share workload, 
the capacity to investigate complaints by either you or the 
state and local agencies affects the workload of the other.
    Your budget request for 1998 now proposes to reduce that 
earmark to $5 million. Tell us if you will, what that means as 
it relates to the relationship between the state agencies and 
EEOC? What casework do they handle? How does the Federal 
funding support the casework? I'm not sure I understood your 
earlier statements.
    Mr. Casellas. It obviously varies by agency. We pay each of 
them with whom we have these work sharing agreements $500 per 
charge that they resolve. Some resolve thousands of them. Some, 
you know, we have contracts with a smaller number. They used 
that money in obviously different ways. Some of them use it to 
support staff. Some of them use it for training. It's just a 
dollar amount assigned to a charge that they investigate.
    Mr. Rogers. Could the amount for that program be reduced 
any further with only a minimal impact on case processing?
    Mr. Casellas. Well, they will tell you no. I think that 
probably not. I think that they are at the bare minimum. I mean 
$500 per charge is not a lot of money. It doesn't pay for what 
it actually costs them. I remember one of them testifying 
before us a year or two ago that it cost about $1,500 to 
investigate a charge and we pay them $500. So, we are only a 
partial subsidy. To take that away when states are cutting back 
on their own civil rights law enforcement, really wouldn't 
advance the overall goal of civil rights enforcement for the 
United States.

                 alternative dispute resolution program

    Mr. Rogers. Last year you told us that you had not yet 
implemented alternative dispute resolution.
    Mr. Casellas. Right.
    Mr. Rogers. Because of lack of resources and because we had 
not yet passed the Alternative Dispute Resolution Act.
    Mr. Casellas. Correct.
    Mr. Rogers. We provided EEOC a $7 million increase last 
year and then we passed the Act on September 20, 1996. Have you 
started that program yet, and what level of funding are you 
allocating to it?
    Mr. Casellas. Yes. We have started it. The level of funding 
is difficult to break down because we have done training of 
mediators in selected offices. Some offices are using volunteer 
mediators pursuant to the statutory authorization. Other 
offices are using the services of the Federal Mediation 
Conciliation Service with which we contracted for about 400 
charges.
    The amount of that was about $200,000 which was with the 
Federal Mediation Conciliation Service. We continue to train 
our people as mediators. We continue to support the efforts in 
the local offices to design mediation programs that fit their 
local constituencies.
    Mr. Rogers. How much are you spending outside of the 
Federal Mediation and Conciliation Service?
    Mr. Casellas. I don't know that. That would require us to 
figure out how much the training has been for people and then 
what the time is worth. That's probably about the only way to 
do it. We don't really keep those figures, but we can try to 
get that.
    Mr. Rogers. Provide that for the record then.
    Mr. Casellas. Yes.
    [The information follows:]

                               ADR Costs

    In total, EEOC has spent $450,000 on ADR. Under our 
agreement with the Federal Mediation and Conciliation Service, 
we obligated a total amount of $250,000. Performance under this 
agreement began in late FY 1996 and will continue throughout FY 
1997. In addition, since 1996 the agency has spent 
approximately $200,000 primarily to train field staff in 
mediation and to develop field office ADR programs. Because of 
our limited budget, the agency has been unable to hire 
additional staff to dedicate to ADR. Our field offices are 
currently implementing their ADR programs this year. The 
majority of EEOC staff associated with ADR are staff who have 
been assigned from other functional areas and who work on ADR 
as well as their regularly assigned duties--Enforcement 
Supervisors, Administrative Judges, etc. Some headquarters 
managers have also been trained in mediation skills and are 
augmenting the field program by doing occasional mediations. 
However, since the agency does not track staffing by task, but 
rather by job classification, we are not able to provide the 
Subcommittee more specific salary costs associated with ADR.

    Mr. Rogers. Do you know how many cases are going through 
the ADR process?
    Mr. Casellas. Well, as I've said in the opening statement, 
it's been in place for six months. We've resolved over 300 
cases through mediation. We've collected benefits of about $4 
million on those 300 charges. There are about 800 plus pending.
    Mr. Rogers. What is pending?
    Mr. Casellas. Meaning they are waiting for mediation.
    Mr. Rogers. They have been referred to mediation and not 
yet decided?
    Mr. Casellas. Yes. That's right.
    Mr. Rogers. Is it an efficient process?
    Mr. Casellas. Well, I'm not sure whether it--I'm not sure I 
understand the question. In terms of mediation generally or 
just what?
    Mr. Rogers. Yes. Is it a good way to do business?
    Mr. Casellas. Well, it's one good tool to have. Mediation, 
number one, will never solve our problems in terms of the 
backlog. Number two, not everybody wants it. You can't force it 
on folks. Just on Monday I met with the President and CEO of 
the American Arbitration Association and a number of his staff 
people. We were comparing notes on the fact that many people 
are suspicious of any kind of different program like mediation, 
ADR, because if it's proposed, they think that they are going 
to be at a disadvantage, and that tactically the only reason 
you're suggesting it is because you've got an advantage over 
them.
    So, it's going to take awhile for people to, I think, 
accept the fact that we're going to try to be honest brokers 
when it comes to our mediation program and that this mediation 
program in effect is nothing different than what we now are 
required to do by statute, which is conciliate it. Except we're 
going to do it at the front end instead of awaiting a lengthy 
investigation and a finding of reasonable cause.
    Mr. Rogers. We were told last year that the use of ADR 
would free-up your personnel, your EEOC personnel, to handle 
cases that require full investigation. Is that true?
    Mr. Casellas. Well, after six months we think it is. But 
it's hard to know. We've only had this in place for only six 
months.
    Mr. Rogers. Well, many Federal and private sector agencies 
are using ADR to mediate conflicts.
    Mr. Casellas. Right.
    Mr. Rogers. Your projected decrease in new case receipts 
doesn't reflect, I don't believe, that you hold that much 
prospect that ADR is going to make a big difference.
    Mr. Casellas. Well, because ADR doesn't affect the cases 
that come in the door. It only affects how they are resolved. I 
mean we are still going to get whatever number of cases we get.
    Mr. Dixon. Mr. Chairman, perhaps I could pursue this.
    Mr. Rogers. Please.

                         eeoc/fepa relationship

    Mr. Dixon. FEPA; can you briefly tell me how that works?
    Mr. Casellas. Yes. An individual files a charge of 
discrimination let's say in Washington, D.C. Because 
Washington, D.C. has its own Human Relations Commission, Human 
Rights Commission, we're required by statute to defer to that 
local agency for an investigation pursuant to the Work Sharing 
Agreement.
    Then when they conclude their investigation, it comes back 
to the EEOC for what's called a substantial weight review. That 
is by statute we're required to give substantial weight to what 
the state and local agencies have concluded. Following the 
review, we essentially issue the credit or reject, or however 
it's done. And the case then proceeds to either right to sue or 
litigation.
    They actually handle cases that they would have to do 
anyway. So, they are handling thousands of cases and we pay 
them for some of them.
    Mr. Dixon. In other words, you use the local FEPA as kind 
of an extended staff to do a work-up on these?
    Mr. Casellas. Well, no. It sometimes works the other way 
around. They have a case that's filed with them. They send it 
to us and that's why I say the net transfers which we are 
transferring cases back and forth is about 6,500.
    Mr. Dixon. Do you pay them a fee if a person walked into 
the District of Columbia's office and filed?
    Mr. Casellas. Yes, if it fits within the category of cases 
that we pay for. We pay for so many Title VII, so many 
disability cases; that's really how it's done. In some cases, 
they are very helpful because, say the State of Texas for 
example, there might be a local Fair Employment Practices 
Agency where we don't have an office.
    So, they basically do intake as well and then send the 
charge over to us. We may or may not pay for it depending on 
the agreement we have with them.
    Mr. Dixon. I think the budget is what, $25 million or $26 
million?
    Mr. Casellas. $26.5 million.
    Mr. Dixon. Right. Is that an increase over last year?
    Mr. Casellas. No. It's the same amount they asked for last 
year. It's not the same amount that we got. Last year we asked 
for $26.5 million for the FEPA agencies. When we got the 
increase, there was a $7 million increase for EEOC and then of 
that $7 million, $1 million went to the State and local 
agencies.
    Mr. Dixon. Thank you, Mr. Chairman.
    Mr. Rogers. Well, on that point, you asked for a $1 million 
increase last year to $27.5 million?
    Mr. Casellas. No. That was what was appropriated.
    Mr. Rogers. That was a result of the vote taken on the 
Floor?
    Mr. Casellas. Right.
    Mr. Rogers. And you apportioned $1 million of that?
    Mr. Casellas. Right. We were essentially told take $1 
million of this.
    Mr. Rogers. I'm looking at your 1997 budget request on page 
42. You asked for $27.5 million.
    Mr. Casellas. I thought we didn't--I thought it was a flat 
request.
    Mr. Rogers. It was $27.5 million according to this.
    Mr. Casellas. Unless that was the budget where we asked for 
more money for ourselves. I'd be glad to follow up.
    Mr. Rogers. Let me quote from page 42. You say ``With a 
requested level of $27.5 million in fiscal year 1997, EEOC will 
be able to increase the number of charges paid under contract'' 
and so forth. Does someone have different information?
    Mr. Casellas. They all seem to have different information.
    Mr. Rogers. I noticed a lot of shaking of heads and drawing 
for guns back there.
    Mr. Casellas. You're right. This shows $27.5 million. I'm 
sorry.
    Mr. Dixon. Then you are actually asking for less money this 
year than you received last year.
    Mr. Rogers. You're asking for a decrease, right?
    Mr. Casellas. We also asked for some $35 million more for 
EEOC on that same request--that's why I asked whether it was 
that request--I'm sorry. Yes, $27,500,000.

                             Revolving Fund

    Mr. Rogers. Now, finally, the revolving fund. In 1992 
Congress established a revolving fund for training activities 
and gave EEOC authority to charge fees for that training as a 
way to reduce the need for appropriated funding. Your budget 
request indicated that this Fund is carrying a balance of about 
$2.2 million. Is that correct?
    Mr. Casellas. Our current balance is about $1.2 million 
today. From this amount we still have to make some additional 
allocations to field offices to cover 1997 seminar costs. So, 
that will be approximately $350,000; about $850,000.
    Mr. Rogers. Well, by the end of the year, with the 
collections you're going to receive from fees, the balance will 
be around $2.2 million, right?
    Mr. Casellas. No, because a part of the problem of this 
revolving fund and everybody has picked it upis that we have 
not yet figured out how to take a private sector type ``profit making 
activity'' and allocate overhead costs, how to allocate staff costs to 
this because we're supposed to reimburse the agency for employee time, 
for travel in connection with this. That's where the business plan----
    Mr. Rogers. I was looking at your 1998 budget submission on 
page 53. You show a 1996 actual year-end balance of $2.339 
million.
    Mr. Casellas. Right. That balance constantly changes.
    Mr. Rogers. How can we write a budget if we can't depend 
upon your submission?
    Mr. Casellas. Because a revolving fund doesn't have 
anything to do with this budget. You gave us $1 million to set-
up technical assistance programs for employers and it is 
supposed to be self-sustaining. It doesn't and it's not 
supposed to supplant the money that we get to run the agency.
    Mr. Rogers. Well, that's not for you to decide.
    Mr. Casellas. No. You decided it. I mean that's what the 
statute--the statute set this up separately. I know it's not 
for me to decide, but you've already decided it. You gave the 
agency at the end of 1992, $1 million.
    Mr. Rogers. Well, we set it up, but you're not charging 
your expenses to it.
    Mr. Casellas. Well, we are. We do get reimbursed. We do get 
reimbursed for some. What I am saying to you is that what I've 
set-up now with this group to put together a business plan is 
to be able to properly allocate that.
    I know that because I've been in the private sector, but 
quite honestly no one knows how to take government employees' 
overhead, their time, and do a calculation and say, okay, this 
is what the agency is owed for its time of its employees in 
training employers how to follow the law. So, I hope that by 
the end of this year that will be in place so that we can--so 
that this won't be a question anymore.
    Mr. Rogers. Now, you've lost me.
    Mr. Casellas. Well, for example, we have to come up with a 
marketing plan. This pot of money was set aside to do--to train 
employers.
    Mr. Rogers. Are you saying that you don't know how many 
people you are using to do training and therefore you don't 
know how much in charges to the fund you're going to have?
    Mr. Casellas. No. But should the agency be charged, should 
my time be reimbursed for going out and giving a talk at a--
program? Probably. What's that worth?
    Mr. Rogers. That's what the fund was set-up for.
    Mr. Casellas. That's exactly right.
    Mr. Rogers. Well, the point is your budget says you're 
going to have $2.2 million carryover in the revolving fund into 
1998. You're saying that's not so.
    Mr. Casellas. That's not so. If I get this business plan in 
place, which I'm going to do, and we're able to really 
calibrate and calculate what these numbers are. Then we're 
going to have to get some outsider to come in to do a marketing 
plan because this is a private sector type operation. We're 
supposed to go out and market videos and CDs at seminars. There 
is nobody set-up to do that.
    Mr. Rogers. We expect a reprogramming request for any 
expenditures above the obligation figure.
    Mr. Casellas. I mean, if----
    Mr. Rogers. Any dollar figure above $1.2 million that 
you've estimated you would obligate in 1997, if it's more than 
that we need to have a reprogramming request sent to us so that 
we can review it, and then we will deal with it.
    Mr. Casellas. Well, let me just understand this because the 
revolving fund sits there and has sat there for four years. It 
started off with $1 million.
    Mr. Rogers. We just discovered it.
    Mr. Casellas. Right. I know. You set it up. And it sits 
there.
    Mr. Rogers. It's been sitting there for four years. Now, 
we've found it. We think it ought to be put to proper--to good 
use.
    Mr. Casellas. Well, I think it's being put to good use.The 
problem is that if you take it away, then there will be no program 
because you can't do a marketing plan----
    Mr. Rogers. We're not going to take it away.
    Mr. Casellas. Well, but you're asking me to reprogram 
something that is always a moving target. Money is coming in 
and out of that constantly. That's why it's a revolving fund.
    Mr. Dixon. Where does the revenue come from for this?
    Mr. Casellas. From employers; people who attend these 
seminars. We charge roughly $150, $175. It's a day-long 
program. They leave with materials. They listen to EEOC experts 
telling them this is how you can avoid liability. Here are some 
examples. Here are some cases. Here are some situations.
    Mr. Dixon. And the Federal Government seeded it with $1 
million?
    Mr. Casellas. That's exactly what it was. It was $1 million 
seeded.
    Mr. Dixon. Four years ago.
    Mr. Casellas. In 1992. And as I understand before my time 
it was really at the 11th hour. I mean no one expected it. So, 
this money came in and they were told you've got to put 
together a plan, i.e., marketing plan to market this stuff. 
This is supposed to be a money making operation, but you're 
supposed to reimburse the agency for its time, of its people, 
and that was not done. I admit that, that was not done. And 
that's what I'm doing.
    Mr. Rogers. You're doing what?
    Mr. Casellas. I've put together a group to come up with a 
plan, a business plan, because it's never had a business plan.
    Mr. Rogers. Well, under our rules any expenditures above 
the $1.2 million that you've estimated for 1997, you would be 
required to submit a reprogramming request to the Committee to 
reprogram those expenditures. That's all I'm saying. No one is 
taking away the fund. I'm just saying that like any other 
agency you would have to reprogram those monies.
    Mr. Dixon. If I could; you don't anticipate drawing more 
than $1 million out in, say, fiscal year 1998; do you?
    Mr. Casellas. No, we don't
    Mr. Dixon. As I understand----
    Mr. Casellas. We've not----
    Mr. Dixon [continuing]. To build a revolving fund for 
services rendered by federal employees.
    Mr. Casellas. Correct.
    Mr. Dixon. So, my question is in the--I guess the Chairman 
was talking about fiscal year 1997. You don't intend to draw 
out more than $1.2 million; do you?
    Mr. Casellas. Net, no because we'd end up with nothing. The 
whole point is not to end up with a zero account but to grow 
it.
    Mr. Rogers. You've got a starting balance of $2.3 million.
    Mr. Casellas. Well, as of that date we did.
    Mr. Rogers. And you expect to spend $1.2 million?
    Mr. Casellas. Well, it's actually going to be different. 
We've reduced it to $1.2 million. We've reduced it in the last 
several months.
    Mr. Rogers. Reduced what?
    Mr. Casellas. That $2.3 million; that number you're looking 
at. I mean that's why it's a revolving fund because you know we 
are reimbursing and then we're taking money out of that fund to 
fund, you know, I'm going to attend two or three of these 
things in the next several months.
    Mr. Rogers. But you've got $1 million coming into the fund.
    Mr. Casellas. Well, we don't have $1 million coming in. I 
mean, to the extent that that's a projection----
    Mr. Rogers. Well, you did last year. You had over $1 
million in receipts.
    Mr. Casellas. And that did not include some of these 
expenses that we've now reimbursed the agency in 1997. We've 
reimbursed in 1997 expenses from 1996.
    Mr. Rogers. It's really pretty simple according to your 
1998 budget estimate. If you look at page 53, do you have that 
with you there?
    Mr. Casellas. Yes.
    Mr. Rogers. You've got me thoroughly confused now. The 1996 
actual shows offsetting collections totaling $1.1 million, 
roughly. And you had carryover from 1995 $1.8 million, and at 
the end of 1996 an unobligated balanced of $2.339 million; 
right?
    Mr. Casellas. Right.
    Mr. Rogers. In 1997, you estimate the same type of thing. 
You show collections of roughly $1.1 million and a start of 
year balance of $2.339 million You're going to spend $1.2 
million and you're going to have $2.224 million left at the end 
of the year; right?
    Mr. Casellas. That's the estimate.
    Mr. Rogers. So, what would change that? What could possibly 
happen that would change that?
    Mr. Casellas. Well, reimbursement to the agency, number 
one. Number two, developing different products, like I said 
videos, CDs.
    Mr. Rogers. Do you expect the reimbursement to be less than 
$920,000?
    Mr. Casellas. What we don't know is the registrations from 
these seminars, from these programs. We never know that until 
after the fact.
    Mr. Rogers. I'm beginning to think that we made a mistake 
when we passed the Technical Assistance and Training Revolving 
Act of 1992.
    Mr. Casellas. I'm sure it won't be the first mistake you 
made, generally. But whatever it is I'm trying my best to 
explain it because I inherited this as well.
    Mr. Rogers. Well, it looks to me like according to your 
1996 actuals, your 1997 estimate, and your 1998 estimate, like 
you are going to be carrying over a little over $2 million at 
all times in that Fund. Is that generally correct?
    Mr. Casellas. That's what that looks like. What I am 
telling you is that I am trying to get this fund to operate as 
it was intended to operate.
    Mr. Rogers. I'm just trying to save some money.
    Mr. Casellas. I understand that.
    Mr. Rogers. I mean we're scratching and digging to fund 
everything in the Subcommittee's whole jurisdiction with fewer 
dollars every year. And any dollar I can save anywhere can go 
to a needy cause. You've got $2 million laying there. We're 
looking every day closer and closer at unused monies in every 
agency.
    Mr. Casellas. I understand that. But let me also tell you 
that there are some costs that are hard to estimate. One of the 
costs that's hard to estimate is does it make a difference that 
employers are told how to avoid liability? That's the long and 
short of it. I can't measure that. I mean really no one can 
measure that. But all I ask you to do is look at the 6,800 
people who attended last year and our evaluations are all very, 
very high.
    Mr. Rogers. Mr. Dixon, do you have anything further?
    Mr. Dixon. If I could just pursue this a little further, 
Mr. Chairman. You draw out of this fund for reimbursement of 
salaries in some proportion, for employees of your agency.
    Mr. Casellas. We've done some of that. What I'm saying is 
that we've not done it with the precision that we should have. 
That's what I'm trying to get at.
    Mr. Dixon. Where I think the Chairman is going is that, 
with the use of this Fund, your actual budget is larger. Your 
appropriated budget is larger than it appears because you are 
drawing money out of this non-appropriated fund. So, I'm 
asking, what kind of funds do you draw out of it. If you have a 
conference, do you pay the Xerox guy out of this Fund?
    Mr. Casellas. No. You pay for the hotel.
    Mr. Dixon. Okay.
    Mr. Casellas. You pay for the facilities.
    Mr. Dixon. Okay.
    Mr. Casellas. You pay travel for speakers.
    Mr. Dixon. Okay. The funds go for reimbursement for 
servicesfrom third parties.
    Mr. Casellas. Yes.
    Mr. Dixon. What money comes back to your agency? I think 
that's where we are going.
    Mr. Casellas. The registration fees of the attendees.
    Mr. Dixon. Do you mean like your employees? In other words, 
what kinds of money comes back to EEOC?
    Mr. Casellas. I'm sorry; back to EEOC.
    Mr. Dixon. Do you follow what I'm saying?
    Mr. Casellas. Yes.
    Mr. Dixon. The Fund is here and you put money out there. 
And then some of it comes back to EEOC.
    Mr. Casellas. Right.
    Mr. Dixon. I'm trying to get an idea of what comes back to 
EEOC.
    Mr. Casellas. Historically, very little because no one 
historically did a calculation. That was my point. No one sat 
down and tried to figure out what was it really costing the 
EEOC in terms of employee time, in terms of administrative 
allocation, you know. The people who are doing this are still 
working for EEOC. We're still doing our job. When I go out to 
speak at a TAPS program----
    Mr. Dixon. Okay. Do you bill the Fund----
    Mr. Casellas. I haven't----
    Mr. Dixon. $500 for your appearance.
    Mr. Casellas. I haven't. I should have and we should be. 
That's the point. That's why these numbers--you know, I 
apologize for these numbers, but I mean that's what this 
estimate is. When I looked at this there was no business plan, 
for example. You asked a government agency to run a business. 
They didn't know how. that's the truth. They didn't know how. 
So, we're putting together a business plan. We have to do a 
marketing plan. We have to do product development because you 
can't just do seminars in a day of CD-ROMs and videos. We 
compete against law schools. We compete against law firms. We 
compete against organizations that offer this kind of training.
    Mr. Rogers. If I can just interrupt.
    Mr. Dixon. Yes.
    Mr. Rogers. Let me see if I understand. You're planning to 
start using the fund for these types of expenses; correct?
    Mr. Casellas. For?
    Mr. Rogers. For example reimbursing yourself.
    Mr. Casellas. Yes. I've put together a group that is 
putting together this business plan.
    Mr. Rogers. So, your plan is to start using all of this 
money or practically all of it in the normal business.
    Mr. Casellas. Well, to use it to reimburse us to the extent 
that we can't. I mean it's not going to deplete the fund.
    Mr. Rogers. Right. But right now those expenses are being 
paid out of your general appropriated account.
    Mr. Casellas. No.
    Mr. Rogers. Your salary is.
    Mr. Casellas. No. My salary is not being paid out from the 
revolving fund.
    Mr. Rogers. No, it is paid out of the appropriated funds we 
gave you.
    Mr. Casellas. Yes. I'm on duty 24 hours a day.
    Mr. Rogers. So, if you instead start paying some of those 
expenses out of the revolving fund the appropriated amount we 
give you would not need to be as large. Am I right about that?
    Mr. Casellas. Yes, theoretically.
    Mr. Rogers. Okay. Then we finally got to the bottom of it.
    Mr. Casellas. But you can't write an agency off on theory. 
I mean the reality is that----
    Mr. Rogers. The world operates on theories. I mean this 
isn't rocket science we're talking about here.
    Mr. Casellas. Let me just make one final point. If you take 
that money out, then you can't fund things in the future. If we 
increase the fees, we can't compete for example, we can't 
compete in Peoria, Illinois at $175 per person when the Bar 
Association is charging $50 per person.
    Mr. Rogers. Right.
    Mr. Casellas. We can't do it. But no one has a marketing 
plan yet. That's a part of what we're trying to do so that we 
really make it a market-driven concept.
    Mr. Rogers. Okay. We've cleared all of this up. We thank 
you very much for your testimony. Mr. Dixon, anything final?
    Mr. Dixon. No, Mr. Chairman.
    Mr. Rogers. Thank you for being here.

[Pages 233 - 292--The official Committee record contains additional material here.]


                                          Thursday, April 24, 1997.

            COMMISSION ON SECURITY AND COOPERATION IN EUROPE

                               WITNESSES

HON. ALFONSE D'AMATO, A UNITED STATES SENATOR FROM THE STATE OF NEW 
    YORK
HON. STENY H. HOYER, A REPRESENTATIVE FROM THE STATE OF MARYLAND

    Mr. Rogers. We will now hear from the Commission on 
Security and Cooperation in Europe. We welcome the Commission's 
Chairman, Senator Alfonse D'Amato; and the former Chairman and 
Commissioner, Steny Hoyer, who happens to be, as we know, a 
Member of this Committee.
    Gentlemen, your statements will be made a part of the 
record, and we would like you to summarize them. Because of the 
time schedule, we are hoping that you can keep the panel 
discussion down to about no more than 10 minutes, hopefully 
less. Let's hear from both of you.
    Senator D'Amato. Mr. Chairman, how about 60 seconds?
    Mr. Rogers. That would be great.
    Senator D'Amato. First of all, Mr. Chairman, it is good to 
see you.
    Mr. Rogers. It is good to see you.
    Senator D'Amato. I have not seen you in awhile, and I would 
anticipate that Congressman Smith will be here. We had a 
hearing today.
    Let me say the Commission is requesting the same amount at 
the same level that we have operated on for the past 3 years. I 
think that given the nature of our work, it is as important 
today as ever before.
    Today we had hearings that focused in on the question of 
those nations formerly known as the captive nations, including 
Poland, in terms of their entry into NATO, what we would expect 
of them, what their hopes and aspirations are, and what the 
impact on the former Soviet Union, now Russia, is. As you know, 
the Russians are opposed--and how we should proceed.
    It is important work. The work of the Commission has been 
carried out at this level due to, I think, outstanding 
management on a bipartisan basis; and we have, I think, one of 
the fine examples of a bipartisan professional staff, a great 
staff that has been professionalized. We have done this over 
the years. And I would hope that you would look supportively, 
as you have in the past, on our request.
    Mr. Rogers. Thank you, Senator.
    Mr. Hoyer. Mr. Chairman, thank you for this opportunity to 
appear before you. I want to emphasize a couple of things.
    First of all, the work of the Commission is even more 
important, I think, today than it was 10 years ago. Ten years 
ago, 5 years ago, the mission of the Commission was largely to 
raise high the banner of human rights and to make sure that 
human rights was raised in every forum that we could find. In 
fact, that was done and done so effectively, within the 
Helsinki process.
    Today, Mr. Chairman, you--I think you probably know this: 
The OSCE structure, which is now 55 nations, is the only 
structure which has existed for over 2 decades in which the 
former Soviet Union and Warsaw Pact nations were full members 
from the outset, so they feel comfortable operating within this 
context. And because they feel comfortable and full partners in 
this context, it is a very important international organization 
as the emerging democracies grow and learn how to operate 
within a democratic framework.
    So in many respects, it had a very, very important role 
prior to the fall of the Wall and the Iron Curtain.
    It now has an equally important role--changed, as you 
recall, by the Bush administration and Secretary Baker--to 
enhance its role and inclusiveness. But that is the first point 
I want to make: We have an equally important role today.
    And, therefore, if we were in a different context I would 
frankly, Mr. Chairman, be pressing for an increase in the 
budget, because we have been flat for 3 years, as Senator 
D'Amato pointed out.
    I will close on this, Mr. Chairman, because I have been 
probably the only one on the Commission that has had the 
closest opportunity to witness it. Senator D'Amato spoke about 
our staff. This staff is a small staff, highly qualified and 
totally bipartisan. One of the reasons it is bipartisan is 
because, when the leadership of the Commission changed--Dante 
Fascell, as you recall, was its Chairman for the first 9 
years--but when we went to a Senate and House passback of the 
chairmanship, Senator D'Amato was the first chair in 1986 and 
1987--excuse me, 1985 and 1986, of that commission.
    He was under intense pressure, very frankly, Mr. Chairman, 
from a lot of Republicans--Republicans who felt that Dante 
Fascell was for a long time, in effect, trying to get rid of 
that staff and put in place a partisan staff. At some political 
discomfort, Senator D'Amato said, we are not going to do that 
and stood up for the professionals--many of whom are still 
there, Mr. Chairman; some of whom were hired by Senator Dole, 
some of them hired by Dante Fascell in a bipartisan way.
    But this commission is a unique institution and does 
operate very bipartisanly. Chris Smith and I cooperate fully, 
and I have had the pleasure of working with Senator D'Amato 
since 1985 in a very bipartisan way.
    So I think this commission is worth funding; it is doing 
important work. And we appreciate the support that this 
Committee has given to it over the years. Thank you.
    Mr. Rogers. We all know how quiet and effacing Chairman 
D'Amato is.
    Mr. Hoyer. Well, he is shy and retiring. I keep trying to 
move him out front, Mr. Chairman. It is hard.
    Senator D'Amato. I have become the new sensitive Senator.
    Mr. Rogers. In your budget, while you request the same 
amount as last year, you do have some carryover, which would, 
if we give you the full amount, total $1,233,000. Does that 
mean that we are at the end of the line on being able to 
operate on $1,090,000?
    Senator D'Amato. Probably, yes.
    Mr. Hoyer. Probably.
    Senator D'Amato. As a matter of fact, we have kept a number 
of staff positions open so as to attempt to deal with them when 
we get into the next year. We still have two professional staff 
positions we neet to fill.
    I might say our staff is multilingual, as is necessary, as 
we find, and it does operate on that basis as a truly 
bipartisan committee. And I think if Chris were here--and by 
the way, Mr. Chairman, he sent a note with his apologies that 
he would not be able to make it.
    Mr. Rogers. Well, I know somewhat firsthand of the work of 
the Commission. I have been at one of the meetings----
    Mr. Hoyer. One of the parliamentary assemblies.
    Mr. Rogers [continuing]. Assemblies, and have observed the 
operation. And I think at that time, Steny, you were the 
Chairman, weren't you?
    Mr. Hoyer. Yes, I was the Chairman. Actually, I think you 
went, as I recall, in 1995, the first year of the 104th 
Congress. I happened to be Chairman because Chris couldn't go.
    Was that the case, or was I the Chairman? In 1994, I was 
the Chairman.
    Mr. Rogers. Anyway, I observed the work of the Commission, 
and it does wonderful work; and the both of you, among others, 
have put a lot of time and effort and devotion into this 
organization.
    Now, having been involved in the oversight of the conflicts 
in the former Yugoslavia and Chechnya, after the breakup of the 
former Soviet Union, is there a real chance, do you think, to 
reach some kind of peace and stability in those regions, or can 
we expect continued turmoil, in spite of all the efforts, like 
NATO troops, that have been made to try to reach a peaceful 
outcome?
    Senator D'Amato. Well, let me, if I might, say that I think 
in Chechnya we have a much better chance, as difficult as that 
may seem on the surface, than we do in the former Yugoslavia, 
where you have the question of religion, ethnic turmoil that 
spans centuries.
    I am very much concerned that in the fullness of time, when 
there is a withdrawal of troops, that hostilities will take 
place. There is almost the inevitability, sadly, of further 
conflict until or unless you have a separation. A separation, 
basically, that some have tried to bring about unfortunately by 
the use of their armies, and the ethnic cleansing. It is a 
very, very difficult situation. And only because of our 
presence do we have an absence of the armed conflict that has 
heretofore existed.
    Maybe the Congressman has a different point of view on 
that.
    Mr. Hoyer. No. I think the Senator is accurate.
    However, I think it is important to remember, for whatever 
reasons, under Tito there was a relatively long, extended 
period of peaceful coexistence of these ethnic and religious 
groups. So it is not that people say, well, they have always 
been fighting, they are always going to kill one another. In 
point of fact, they didn't for 4 decades or 5 decades; and so I 
think it is possible. The important thing, I think, for the 
purposes of this budget hearing is, Mr. Chairman, as you well 
know, the OSCE is the lead organization in Bosnia and has been 
very critical in Chechnya, so that in both of those instances, 
OSCE is now becoming sort of an operational force. It had been 
more of a consultative force historically.
    It has now changed into an operational force, where it is 
actually working on the ground, as you know, to bring factions 
together within an OSCE context. So to that extent, the 
international OSCE is furthering the possibility in both of 
those areas for a continued peaceful engagement as opposed to a 
warlike engagement.
    Whether it will bring peace is another issue, because it is 
complicated and it is tough. But I think the OSCE and this 
organization give it a better chance.
    Mr. Rogers. Well, it certainly does good work.
    Both of you are instrumental in that, and we appreciate 
your testimony here today.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Rogers. Thank you.
    Senator D'Amato. Mr. Chairman, good to see you again.
    Mr. Rogers. Anything further?
    Senator D'Amato. Oh, no, thank you.
    Mr. Rogers. Good to see you. Come back and see us more 
often.
    Senator D'Amato. Look forward to it. Take care now.
    Mr. Rogers. Thank you.
    [The information follows:]

[Pages 297 - 330--The official Committee record contains additional material here.]




                           W I T N E S S E S

                              ----------                              
                                                                   Page
Bergmark, Martha.................................................     1
Casellas, G.F....................................................   207
Creel, H.J., Jr..................................................   139
D'Amato, Hon. Alfonse............................................   293
Eakeley, D.S.....................................................     1
Erlenborn, J.N...................................................     1
Herberger, A.J...................................................   139
Hoyer, Hon. S.H..................................................   293
Levitt, Arthur...................................................   101


                               I N D E X

                              ----------                              

                       Legal Services Corporation

                                                                   Page
Attorneys' Fees..................................................37, 62
Basic Elements of Effective Centralized Telephone Intake and 
  Delivery Systems...............................................    46
Biographies of Witnesses.........................................    27
Chairman Rogers' Opening Statement...............................     1
Challenges to Restrictions.......................................    28
Class Action Litigation..........................................    35
Closeout Budget for FY '98.......................................    63
Competitive Bidding..............................................    30
Former President's Outside Compensation..........................    34
Hawaii Case......................................................    29
Lobbying.........................................................    33
Non-Federal Funding Sources......................................    36
Opening Statements of the Legal Services Corporation.............     2
Pennsylvania Competition.........................................    43
Political Activity...............................................    41
Private Funds....................................................    34
Pro Se Representation............................................    35
Questions for the Record:
    Submitted by Chairman Harold Rogers..........................    66
    Submitted by Congressman Charles Taylor......................    92
    Submitted by Congressman Michael Forbes......................    89
Service Areas and Caseloads......................................    36
Social Security Cases............................................    62
Technology.......................................................    44
Texas Rural Legal Aid Investigation..............................    39
Written Statement of the Legal Services Corporation..............     8

                   Securities and Exchange Commission

Banking Legislation..............................................   128
Biography of Arthur Levitt.......................................   123
Closing Statements...............................................   131
Decimal Stocks Quotes............................................   127
EDGAR Recompetition..............................................   131
    Current Status...............................................   131
    Findings.....................................................   131
Fines and Penalties..............................................   130
Fraud Investigations.............................................   129
Headquarters Lease...............................................   131
Market Supervision Jurisdictions.................................   129
Market Volatility................................................   125
Mutual Funds.....................................................   126
Opening Statement................................................   101
Questions Submitted for the Record..............................133-138
    Appropriation of the Government Performance and Results Acts 
      (GPRA).....................................................   133
SEC Budget.......................................................   126
SEC Funding......................................................   125
Testimony of Arthur Levitt, Chairman.............................   103
    Broker Sales Practices.......................................   116
    Conclusion...................................................   121
    Easing Capital Formation.....................................   109
    Examinations.................................................   112
    Funding Structure............................................   121
    Improvements in Disclosure...................................   117
    Investor Education...........................................   118
    Investor Protection..........................................   113
    Law Enforcement..............................................   113
    Market Growth................................................   106
    Market Regulation............................................   111
    Mutual Fund Disclosure.......................................   117
    Order Handling Rules.........................................   116
    Promoting the International Competitiveness of U.S. Markets..   119
    Recent Commission Achievements and Ongoing Initiatives 
      Selected Highlights.......................................107-122
    Reducing Regulatory Burdens..................................   108
    Role of the SEC..............................................   105
    Technology...................................................   118
Web Site Capacity................................................   130
Witness..........................................................   101

        Maritime Administration and Federal Maritime Commission

China Ocean Shipping Company.....................................   169
Deregulation of Shipping (S. 414)................................   170
General Statement of the Chairman................................   139
Japanese Sanctions...............................................   168
Marine Maritime Academy School Ship..............................   178
Maritime Security Program........................................   174
OECD Agreement...................................................   185
Opening Statement of the Chairman of the Federal Maritime 
  Commission.....................................................   153
Opening Statement of the Maritime Administrator..................   139
Operating Differential Subsidies.................................   174
    Staffing.....................................................   175
Prepared Statement of the Commissioner of the Federal Maritime 
  Commission.....................................................   156
Prepared Statement of the Maritime Administrator.................   141
Questions for the Record from Congressman Forbes:
    Training Ship Program........................................   202
    US Merchant Marine Academy...................................   200
Questions for the Record from Congressman Rogers:
    Government Performance and Results Act--FMC..................   187
    Government Performance and Results Act--MARAD................   192
Questions for the Record from Congressman Taylor: Oil Spill 
  Protection Systems.............................................   204
Quincy Shipyard Project..........................................   185
Scrap Ship Sales.................................................   181
Staffing.........................................................   175
Title XI Program.................................................   183
    Administrative Expenses......................................   186
Training Ship Program..........................................172, 177
US Merchant Marine Academy.......................................   171
Witness Biographies:
    Harold J. Creel, Jr..........................................   167
    VADM Albert J. Herberger.....................................   151
Witnesses........................................................   139
Alternative Dispute Resolution Program...........................   223
Casellas, Gilbert F.:
    Biography....................................................   217
    Opening Statement............................................   207
    Written Statement............................................   210
EEOC/State and Local Relationship..............................222, 225
Litigation Policies..............................................   218
Priority Charge Handling Procedures..............................   222
Questions and Answers Submitted for the Record:
    Forbes, Representative Michael...............................   287
    Rogers, Chairman Harold......................................   233
    Taylor, Representative Charles...............................   277
Revolving Fund...................................................   227
Witness..........................................................   207