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



 
                 TREASURY, POSTAL SERVICE, AND GENERAL
                     GOVERNMENT APPROPRIATIONS FOR
                            FISCAL YEAR 1999

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

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION
                                ________

  SUBCOMMITTEE ON THE TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT 
                             APPROPRIATIONS

                      JIM KOLBE, Arizona, Chairman

FRANK R. WOLF, Virginia          STENY H. HOYER, Maryland
ERNEST J. ISTOOK, Jr., Oklahoma  CARRIE P. MEEK, Florida
MICHAEL P. FORBES, New York      DAVID E. PRICE, North Carolina
ANNE M. NORTHUP, Kentucky        
ROBERT B. ADERHOLT, Alabama      

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.

      Michelle Mrdeza, Bob Schmidt, Jeff Ashford, and Tammy Hughes,
                            Staff Assistants
                                ________

                                 PART 1

                       DEPARTMENT OF THE TREASURY

                              

                                ________

         Printed for the use of the Committee on Appropriations
                                ________

                     U.S. GOVERNMENT PRINTING OFFICE
48-677                      WASHINGTON : 1998
------------------------------------------------------------------------

             For sale by the U.S. Government Printing Office            
        Superintendent of Documents, Congressional Sales Office,        
                          Washington, DC 20402                          













                       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        ESTEBAN EDWARD TORRES, California   
HENRY BONILLA, Texas                   NITA M. LOWEY, New York             
JOE KNOLLENBERG, Michigan              JOSE E. SERRANO, New York           
DAN MILLER, Florida                    ROSA L. DeLAURO, Connecticut        
JAY DICKEY, Arkansas                   JAMES P. MORAN, Virginia            
JACK KINGSTON, Georgia                 JOHN W. OLVER, Massachusetts        
MIKE PARKER, Mississippi               ED PASTOR, Arizona                  
RODNEY P. FRELINGHUYSEN, New Jersey    CARRIE P. MEEK, Florida             
ROGER F. WICKER, Mississippi           DAVID E. PRICE, North Carolina      
MICHAEL P. FORBES, New York            CHET EDWARDS, Texas                 
GEORGE R. NETHERCUTT, Jr., Washington  ROBERT E. (BUD) CRAMER, Jr., Alabama
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














TREASURY, POSTAL SERVICE AND GENERAL GOVERNMENT APPROPRIATIONS FOR 1999

                              ----------                              

                                      Wednesday, February 25, 1998.

                       DEPARTMENT OF THE TREASURY

                               WITNESSES

HON. ROBERT RUBIN, SECRETARY OF THE TREASURY
RAYMOND KELLY, UNDER SECRETARY FOR ENFORCEMENT

                              Introduction

    Mr. Kolbe. The meeting of the subcommittee will come to 
order. This is our first hearing of the 1998-1999 budget 
appropriations cycle, and we are very pleased this morning to 
begin by welcoming such a distinguished panel of our top 
Treasury and law enforcement officials here, Secretary Rubin 
and Under Secretary Ray Kelly, and also the top law enforcement 
agencies that I mentioned: John Magaw from BATF, Sam Banks, the 
Acting Commissioner of Customs, Lew Merletti from U.S. Secret 
Service, Ralph Basham, Director of the Federal Law Enforcement 
Training Center, and Stan Morris, Director of the Financial 
Crimes Enforcement Network.
    This will be the first of our hearings, as I mentioned, in 
this appropriations cycle, and we are going to focus it on 
Treasury's law enforcement missions and functions.
    Mr. Secretary, I have to tell you, I am very pleased and 
gratified to see you, as Secretary, sitting here, shoulder to 
shoulder, with the head of all of our Treasury law enforcement 
team. I think it is more than symbolic. I think it says a great 
deal about your commitment and our commitment to making the 
Treasury law enforcement work.
    This Subcommittee has noted, repeatedly, over the past 
several years, that Treasury's law enforcement role should be 
regarded as essential to Treasury's mission and the 
Department's efforts to carry out and oversee the Nation's 
economic and monetary policies.
    Without exception, your law enforcement agencies have an 
irreplaceable role, not only in the Federal effort, but also in 
assuring stability for our economy in the face of major threats 
from narcotics, from counterfeiting, from electronic and 
financial crimes, as well as from major national security and 
destabilizing forces that could affect our society and our 
economy as a whole.
    Given this, Mr. Secretary, I have to tell you I continue to 
find it very discouraging to see the emphasis that is placed on 
funding of Treasury's law enforcement efforts. Once again, they 
seem to have taken a back seat to other concerns, particularly 
in relation to other agencies. Funding for other agences, such 
as the INS, continues to grow more dramatically.
    Mr. Secretary, I have got some charts here that I would 
like to show you. I will put my glasses on to see these here. I 
am sure these figures probably do not surprise you, but, to me, 
when you display them, graphically, they show it in a very 
dramatic way.
    What you have there, at the bottom, the bottom line there, 
is the funding increases for Treasury. Let's see. This one is 
Treasury law enforcement, all Treasury law enforcement 
agencies, and up above, of course, you see Justice in the red. 
You see the rather sharp jump in 1994 with Operation Hard Line, 
and some of the other things that occurred there, but you do 
not see a corresponding major increase in Treasury law 
enforcement.
    What you have is funding for Treasury going up from $2.5 
billion to $2.8 billion. That is an increase of 14 percent, 
while Justice goes from $4.2 billion to $7 billion in 1997, an 
increase of 67 percent in law enforcement.
    The second chart here shows the numbers of personnel, and 
again, here, we're talking all Treasury law enforcement. At the 
bottom there, in the maroon or red there, you can see virtually 
no increase when you put all of the different agencies, parts, 
components of Treasury together. There have been modest 
increases in Customs, but declines in some of the other areas, 
so you have virtually no change, while you have a substantial 
increase in the area of Justice Department, both FBI, DEA, INS, 
Border Patrol.
    So you have a very, very significant increase in numbers of 
personnel, a 34 percent increase at Justice, none at Treasury.
    This story is the same for all the Treasury law enforcement 
agencies, but a very sharp picture emerges when you look at the 
Customs Service, and I think that is shown in the next chart 
here.
    In 1994, the Administration began to reinforce our southern 
borders against the unabated flow of illegal drugs, aliens, and 
other contraband to the United States, including, as I 
mentioned earlier, the hardening of border areas between our 
ports of entry, with additional immigration and border patrol 
resources.
    At the same time NAFTA, the North American Free Trade 
Agreement, the Uruguay Round of GATT, the General Agreement on 
Trades and Tariffs, imposed new trade obligations, so there was 
additional Customs' responsibility. All of these increased, not 
only from the standpoint of law enforcement but from the 
standpoint of compliance with tariffs, increased the demand on 
Customs' resources, and yet as this chart indicates, while INS 
spending is going to rise 178 percent--this is real terms--
between 1994 and 1999, Customs' real spending will increase by 
just 15 percent.
    Finally, the last chart shows the personnel disparity. 
Again, here, this is just Customs, now, versus Border Patrol 
and INS. You can see, again, the tremendous difference there.
    I said earlier, there were some modest increases in 
Customs. You cannot see it from that chart, at all. It is so 
small, it is insignificant. My statement says 3 percent. It 
does not even look like it is a 3 percent increase there.
    INS, in any event, has grown by 51 percent during that same 
time, and that does not take into account the new positions, 
this year and next.
    Mr. Secretary, I think it is time we take a critical look 
at the implications that this funding disparity has forTreasury 
law enforcement, not only for our drug strategy, but also our ability 
to investigate and stop money laundering, gun smuggling, child 
pornography, church arson, financial crime and fraud, counterfeiting, 
tax evasion, electronic crime, violent acts such as bombings. This is 
not to disparage Justice Department programs. They are certainly 
critical and important and deserving of the funding they have gotten.
    It is rather to suggest that I think we have some tunnel 
vision that results in a nonintegrated approach to our national 
law enforcement policy, and I do not understand, I do not know 
where this comes from or how this develops, that we have this 
kind of huge chasm between Treasury and Justice over the roles 
on law enforcement.
    But I hope that the hearing today is going to underscore 
the magnitude of the tasks that Treasury law enforcement has to 
perform and help make clear the level of resources that you 
need to do your job.
    We have a very full morning ahead of us, and I will reserve 
specific comments and concerns about individual bureaus during 
the question and answer period. Let me just say, before I yield 
to Mr. Hoyer, I know that Secretary Rubin has to leave as soon 
as he finishes his testimony.
    So as soon as we have the opening statement, we will take 
questions from Secretary Rubin and then we will go on to the 
others, to see if they have any statements.
    Mr. Hoyer, and then we will go to Secretary Rubin.
    Mr. Hoyer. I will be the one delaying Secretary Rubin, Mr. 
Chairman.
    Mr. Kolbe. Not at all.

             funding disparity between treasury and justice

    Mr. Hoyer. I want to welcome the distinguished leaders of 
various law enforcement components of the Treasury Department. 
The Chairman's observations I think are very cogent ones, 
indeed. I am one who has served on this Committee since 1983, 
and therefore have experienced a lot of the differences between 
the Justice Department and the Treasury Department on funding 
levels.
    The virtue the Chairman has is he serves on both of the 
Appropriations Committees dealing with Treasury and Justice, 
and I am hopeful that he will redress these differences in 
his----
    Mr. Kolbe. In both capacities.
    Mr. Hoyer. The fact of the matter is I am pleased to see 
each of you. Particularly, Mr. Merletti, I want to congratulate 
you on your new job. Mr. Kelly, on your new job. Mr. Basham, on 
your new job. And for the rest of you ``old guard'' types, I 
want to say I am pleased to see you.
    I have had the opportunity of working with all of your 
agencies, and I have had the opportunity of reading Mr. Kelly's 
comments. Mr. Secretary, I will look forward to your comments 
because I have not read them yet.
    But I did have the opportunity of reading Mr. Kelly's, who 
is going to be the new Customs Commissioner, shortly, but is in 
his capacity now as the secretary, and I am pleased to see that 
the important work of these law enforcement bureaus is 
coordinated around the essential goals that I believe Under 
Secretary Kelly is going to address.
    First, to reduce the trafficking, smuggling, and use of 
illicit drugs. There is no doubt that the American public, the 
Congress, and the Administration share the view that this is 
one of the most critical problems confronting our society, and, 
in particular, our young people. We are all concerned. I know 
the President is concerned because I have talked to him about 
it, and I know each of you are concerned about the growth in 
use of some drugs by some young people.
    We are pleased of course that crime statistics are going 
down, but this particular facet is of great concern to all 
Americans.
    Second, to combat financial crimes and money laundering. I 
want to congratulate FinCEN. I want to congratulate all of you. 
Obviously, the objective of drug smuggling and drug selling, 
and undermining the health of our young people, and our 
society, is profit, money, and to the extent that we can go 
after the money and undercut the profit, we will undermine the 
incentive for this very dirty business.
    Thirdly, to fight violent crime, where ATF plays the 
leading role for the entire Federal Government in the fight 
against armed, violent crime. As Mr. Magaw knows, a good 
friend, a former Director of the Secret Service, who responded 
positively to Secretary Bentsen's request that he shift jobs, 
and has done an excellent and outstanding job as the leader of 
ATF, but I have said many times on the floor, and in this 
committee, the ATF confronts some of the most dangerous, 
deranged threats to the American people, and to American 
democracy, and to the American society.
    Fourth, to protect our Nation's leaders and visiting world 
dignitaries. Lew Merletti follows in a distinguished group of 
leaders of the Secret Service, the best agency of its type in 
the world, bar none, and we need to provide the continuing high 
quality for law enforcement personnel in FLETC, that all of 
these officers who protect us in so many different ways need in 
order to do their job in an outstanding fashion.
    Mr. Basham, I want to congratulate you on your leadership, 
as I said earlier.
    So that all those components--I know, Mr. Secretary, you 
will speak at great length with particular focus--are 
critically important. All of those expenditures, all of those 
increases at Justice, would not possibly be able to do the job 
if it were not for the Treasury law enforcement component which 
makes up 40 percent, as all of us know, of law enforcement at 
the Federal level.
    Therefore, Mr. Chairman, I congratulate you for presenting 
these charts and focusing on the disparity, not because we want 
to undercut Justice, because Justice is a critical component in 
this fight against crime, and to insure the safety of our 
communities and neighborhoods and schools, and people, but 
because we need to focus, as well, on making sure that Treasury 
law enforcement, Mr. Secretary, has the resources to do its job 
and the job that the American taxpayers and the Congress expect 
of it.
    We are looking at a combined law enforcement budget request 
for fiscal year 1999 of $3.2 billion, which represents an 
overall increase of 5.7 percent above fiscal year 1998 
appropriated levels.
    This amount funds all of these law enforcement operations, 
strategic investments and equipment, and technology, as we will 
see today, and 26,580 Treasury law enforcement FTEs. That, in 
and of itself, sounds very good, but, again, we need to make 
sure that America, not just OMB, but America focuses on the 
critically important component that Treasury makes up of this 
law enforcement effort at our national level.
    I look forward to hearing your testimony, gentlemen, and 
seeing demonstrations of how you work, and do youroutstanding 
job.
    Thank you very much, Mr. Chairman. Mr. Secretary, I look 
forward to hearing from you.
    Mr. Kolbe. Let me see if we have any other statements from 
other Members of the subcommittee.
    Mrs. Meek.

                      customs--south florida area

    Mrs. Meek. Thank you, Mr. Chairman, and welcome, Secretary 
Rubin, and all of the dignitaries sitting in front of us today.
    Knowing that you are head of the shop, Secretary Rubin and 
you must leave, I must commend you for what you have done in 
the past, and by your own admittance, you are very good on the 
financial matters, and you will perhaps get better, but there 
are some areas----
    [Laughter.]
    Mrs. Meek. There are some areas of concern over which you 
have governance, that I have quite a bit of concern, and I will 
talk more about it later today. But I did want you to know I 
have some very strong concerns about Customs in terms of 
meeting the needs of people, particularly in the South Florida 
area, and these areas where we have an infusion of drug 
traffickers, and an infusion of drugs being sold to inner city 
youth. That has been my concern, as the Chairman knows, since I 
have been on this committee, and I will continually speak out 
against this, and hopefully we can get some more infusion of 
neighborhood type programs, so that we can put a tap on as many 
killings by teenagers and young people in our areas.
    I know, as well as the rest of you, that these people 
within the inner city areas do not import these drugs. They do 
not bring these drugs in the community. They are just dropped 
off there, and then we do some kind of sophisticated sting and 
bring them in. But I am concerned about this being stopped 
before it gets into these areas.
    I am pleased to see that you have chosen some very capable 
people, Mr. Kelly and Mr. Magaw, to lead these areas, but we 
certainly need more help in the area of Customs, and we need 
more help in the area of the ATF, the Alcohol, Tobacco and 
Drugs. The firearms. They are killing us, Mr. Secretary, and we 
need you--you at the top of this--to be sure that there is a 
top-down model, so we get to really impact on the neighborhood 
level in these inner city areas.
    Thank you, Mr. Secretary.
    Mr. Kolbe. Thank you very much, Mrs. Meek, and I think 
there are no other opening statements. We will go to Mr. 
Secretary.
    Mr. Secretary.

                        law enforcement summary

    Secretary Rubin. Thank you, Mr. Chairman.
    Let me start by saying that I very much identify with the 
focus that the three of you who have spoken have with respect 
to Treasury law enforcement. When I began at Treasury--
obviously it goes to my private sector experience--I knew a lot 
about the financial area, but as Mrs. Meek suggested, law 
enforcement had not been a part of my life.
    In the three years I have been here, I have learned an 
enormous amount about law enforcement and about the Treasury 
law enforcement bureaus. I think they are truly outstanding 
groups of people, and they are organizations with critical 
missions, as Mrs. Meek has suggested, and with esprit and with 
extremely capable people.
    I think, Mr. Chairman, when you look at this year's budget, 
you will see a real effort by all of us in the Administration 
working together to find a reasonable and an optimal allocation 
of budget authority resources.
    But having said that, I also think that there has been a 
tendency, over time, to under-recognize the extreme importance 
of the Treasury bureaus and their mission, and so we very much 
welcome the focus that you have brought to this, and we 
obviously will be very supportive as we work our way through 
the question of the budget this year.
    Let me also say that I think a critical part of law 
enforcement for the Nation, as a whole, is the relationship 
between the Treasury bureaus and the Justice Department. The 
Attorney General told me the other day--we were talking about 
something--that it is her sense that the coordinating 
relationship between our law enforcement bureaus and the 
Justice Department is probably better than it has ever been 
before, both at the most senior level and also the operational 
level, and that contributes, very importantly, I think, to the 
performance of the Federal law enforcement function in this 
country.
    Let me just, if I may also say, more generally, Mr. 
Chairman, that we very much appreciate, Treasury very much 
appreciates the support that this committee has shown, 
traditionally, historically, for our law enforcement bureaus as 
well as more generally for the Treasury. And I think our 
working relationship clearly plays a very important part in 
enabling us, all of us, to do our jobs as best we can.
    I am joined today by Under Secretary Kelly, and also, as 
you have already indicated, Mr. Hoyer, by the heads of the 
Treasury law enforcement bureaus. We have had some very good 
bureau heads leave us since we last appeared before you, but it 
is true of any very strong organization--when you lose very 
good people, you get very good people to take their place. And 
I think in the case of Treasury law enforcement bureaus, that 
clearly has happened.
    Lew Merletti has taken over as head of the Secret Service. 
Ralph Basham is the new Director of FLETC. George Weise did a 
terrific job at Customs, and of course we greatly miss George. 
On the other hand, Sam Banks has done an excellent job as 
Acting Commissioner, and we very much look forward to working 
with Ray Kelly, once he has been nominated, which in the 
fullness of time will happen, and then confirmed.
    As you well know, as both of you have addressed in your 
opening remarks, Treasury has a wide-ranging array of law 
enforcement responsibilities to protect the President. We work, 
Mrs. Meek, to prevent the flow of drugs into the country, 
though as you correctly say, it is a critical mission and one 
that needs every bit of intensity that we can bring to it.
    We enforce the Federal firearms laws, investigate violent 
crimes, such as the bombing in Atlanta at the Olympics. We 
enforce the tax laws. We investigate financial crimes, 
counterfeiting and money laundering.

                         FY 1999 budget request

    I think it is fair to say that Treasury is unique in law 
enforcement, in that in most of these areas, in fact in almost 
all of these areas, there is a mutually reinforcing 
interrelationship between regulation, revenue collection, and 
law enforcement. To strengthen these critical efforts, the 
President's 1999 budget for Treasury law enforcement bureaus 
totals $3.204 billion, which is an increase of $172 million, or 
5.7 percent above last year.
    The increase is needed to meet certain mandatory cost 
increases, to enhance initiatives in combatting narcotics 
trafficking, reducing illegal firearms trafficking to young 
people, improving presidential protection, White House 
security, investigating financial crimes, and training law 
enforcement officers.
    The heads of each of our bureaus will provide more details 
on the specific functions, but I would like to take a few 
moments to highlight several of these items.
    First, in response to the comments that Congresswoman Meek 
made, we need additional resources to help the Customs Service 
with the critical mission of drug interdiction.
    In cooperation with the Office of National Drug Control 
Policy, the Customs Service has developed a 5-year technology 
plan which is designed to deploy an array of technologies, 
which would enable Customs to effectively fulfill both of its 
missions at the same time, preventing the entry of illegal 
products and of course the principal focus there is drugs, and 
at the same time processing the large flows of trade that is so 
central to our economic well-being. Funding for the first phase 
of this plan has been requested for 1999.
    Second, a major priority at Treasury is combatting money 
laundering. It is a very, very important area, Mr. Chairman, 
and one that I think has received very little focus, until 
recently.
    Money laundering efforts can provide a unique vantage point 
for getting at the leadership of organized crime and drug 
lords, by going after their Achilles heel, the profits from 
their illegal activities. The leaders of organized crime and 
drug gangs could separate themselves from their street level 
activities, but they cannot separate themselves from their 
profits, and so by going after their profits we can get to the 
leadership of these organizations.
    In addition, money laundering presents a real risk for 
financial systems, particularly in developing countries, and so 
by promoting stronger measures, internationally, with respect 
to money laundering, we not only get at organized crime and 
drug lords, but we also strengthen the financial systems of 
developing countries which is particularly important in the 
global economy that we now are part of.
    Money laundering is a very sophisticated business that is 
international. It utilizes state-of-the-art technology. To be 
effective in combatting money laundering, our efforts also must 
be international, and we must use equally state-of-the-art 
technology.
    FinCEN is applying state-of-the-art technology to tracing 
flows of money that are exceedingly complex. Its budget 
includes an expansion of the Gateway program which is designed 
to coordinate Federal, State, and local efforts.
    We need the resources to stay on the cutting edge, and the 
effort to develop more innovative technologies and techniques, 
and to make sure that we have the international cooperation 
that is necessary, if we are going to be successful.
    Third, we are asking for additional resources to support 
initiatives that the Department and ATF have led over the past 
two years to prevent violent firearms crime by the Nation's 
youth. The Youth Crime Gun Interdiction Initiative is a 
collaborate law enforcement effort between ATF, local police 
departments and prosecutors.
    Its goal is to develop and share better information about 
how juveniles and gang offenders are illegally obtaining 
firearms, and by doing this, reduce the supply of firearms to 
kids by investigating, arresting, prosecuting, and then 
incarcerating illegal gun traffickers.
    There has been a preliminary analysis done and it shows us 
a very promising program. With these resources, we will be able 
to expand from the current 18 cities to 27 cities, and we will 
be able to add additional agents in those cities. [Clerk's 
note.--Department later clarified that the number of cities 
currently covered is 27.]
    Fourth, in fiscal year 1999, the Secret Service will begin 
to build its capacity to protect candidates and nominees for 
the elections in the year 2000. Increased funds have been 
requested to meet this mandatory workload increase, as well as 
additional funds for ongoing White House security and other 
protective initiatives.
    Finally, we are asking for additional resources for FLETC 
so that it can better perform its critical mission.
    Over the past couple of years, FLETC has seen an 
unprecedented increase in its workload and current projections 
indicate that this increase is likely to continue for the 
foreseeable future.
    We will need to continue to work on construction sites, 
both in Glynco, Georgia, and in Artesia, New Mexico, if we are 
going to satisfactorily meet this need.
    Let me conclude, Mr. Chairman, if I may, by saying, once 
again, something that I said at the beginning of my remarks. In 
the time that I have been at Treasury, I have developed a deep 
respect both for the institutions and the people in Treasury 
law enforcement. I think the Members of this committee can feel 
very good about the leadership of these bureaus and also about 
the capabilities and esprit and commitment of the men and women 
in these bureaus.
    I very much look forward to working with you as we work 
through this budget process, and in making sure that these men 
and women have the financial support they need to perform their 
critically important missions.
    Thank you very much, Mr. Chairman.
    [The information follows:]


[Pages 10 - 12--The official Committee record contains additional material here.]



             Funding disparity between Treasury and Justice

    Mr. Kolbe. Thank you, Mr. Secretary. As we suggested 
earlier, rather than going to other opening statements now, we 
will go directly to questions because we understand that you 
have other commitments and that you must leave. I do not know 
whether we will get questions to you, Mr. Secretary, in one 
round. We will certainly try to do that. Mine are relatively 
simple.
    Mr. Secretary, from the charts that I showed you, I think 
the disparity is clear. I think it is undeniable, and I am just 
wondering if you have any explanation for this--if you can tell 
me what is going on, to the extent that you can, within the 
confidences of your conversations at OMB and the White House?
    Why do we have this disparity? Why are we failing to make 
those who have the responsibility for preparing budget requests 
understand that there has to be an integrated approach to 
Federal law enforcement--that you cannot simply put all the 
resources in Justice and none in Treasury, which is 40 percent 
of our law enforcement?
    If we are talking about Customs being the first line of 
defense against drug interdiction, we are not doing anything to 
give them the kinds of--we are not doing enough, let me put it 
that way, to give them the kind of resources that I think we 
need. I think that is undeniable.
    Certainly, when you look at the--if drug interdiction 
isthat important, and we are looking at the resources that INS and 
Border Patrol are getting, then something is fundamentally wrong here. 
I do not understand what is going on and I wish you would address this 
issue.
    Secretary Rubin. Let me say, in the first place, Mr. 
Chairman, that I identify with your overall comments.
    It seems to me what the Federal Government needs to do is 
allocate the resources for Federal law enforcement in an 
optimal fashion, or to get the best possible effect for the 
resources it has.
    I think, in fairness to OMB, that they recognize that there 
has been an historical disparity, and your charts well show it, 
and they have committed to what I would call a balanced 
approach or attempting to optimize, as we go forward. If you 
look at budget authority, actually, for this year, I think you 
will find that law enforcement in Treasury went up slightly 
more than Justice, though that may be neither here nor there.
    On an outlay basis, it goes up less, and I assume that 
that--I do not know the explanation of that, offhand, though I 
suspect it may have to do with----
    Mr. Kolbe. It definitely does not in outlays.
    Secretary Rubin. No.
    Mr. Kolbe. I did not think it did in budget authority 
either.
    Secretary Rubin. Yes, it does, slightly.
    Mr. Kolbe. I do not think the 1999 budget clearly reflects 
that.
    Secretary Rubin. Mr. Chairman, I think--maybe I am 
incorrect--but I think you will find that total Justice law 
enforcement is up about 5 percent and Treasury law enforcement 
about 5.7 percent.
    On budget authority, based on outlays, I would guess--and I 
do not know this, I did not relook at the Justice numbers--but 
I think what it may be is capital improvements in some measure.
    They also have some special situations in the--my 
recollection of having sat through the budget process--special 
situations with respect to Bureau of Prisons and INS.
    But having said that, Mr. Chairman, I think that--and as 
Mr. Hoyer said, you are on both Subcommittees, so you can be 
very helpful in trying to accomplish this--we have tried, 
within the Administration, to make sensible judgments of 
allocation of resources. I identified very, very strongly with 
the Treasury law enforcement bureaus. I think they do an 
excellent job. I think it is a remarkable group of people, I 
really do. And I think that they have a mission that is unique 
unto themselves, and I think it is imperative that they be 
given proper support, so that as you review our budget you, 
sitting on both these subcommittees, will have to make a 
judgment as to whether we in the Administration have made a 
proper allocation of resources or not.

                       law enforcement resources

    Mr. Kolbe. Well, in your view, then, given the coordinated, 
the new strategy that is being put forward by ONDCP on drug 
interdiction, does this budget reflect the resources that are 
necessary to carry that out?
    Secretary Rubin. I think that this budget will provide 
Customs with what it needs in 1999, subject to the caveat that 
all of our law enforcement activities, and in fact the entire 
Federal budget is constrained by the enormous commitment we 
have had to bring the deficit down, and getting into a position 
that now we will be in surplus in this budget.
    If there were additional resources, I can assure you, Mr. 
Chairman, they could be utilized very, very effectively, but in 
all of the activities of the--the Administration, as you may 
know, has a small group of people that work through the entire 
budget process as part of that--and in all of our activities, 
our overarching framework was to make sure that we stayed on 
the path to fiscal discipline.
    As I said, we will now actually expect a small surplus. I 
think within the context of the framework that we are operating 
in, I think that the Customs allocation was a correct 
allocation, or we would not have agreed to it.
    Having said that, if, as it turns out in your wisdom, you, 
the Congress, make a different set of judgments with respect to 
the allocation, Customs certainly can make exceedingly good use 
of additional resources.
    For example, by adding technology that enables them at the 
same time, as I said in my remarks, to both process trade and 
deal with drug interdiction.
    I think, historically, there clearly has been a 
disproportion. And it is one that OMB acknowledges, and has 
said that they are committed to an appropriate and optimal 
allocation of resources both this year, and as we go forward.
    I am not disagreeing with you on the importance of 
optimizing it.

             funding disparity between treasury and justice

    Mr. Kolbe. No. I understand.
    Secretary Rubin. You know, we have made our judgments, and 
I think you all have to make your judgments.
    Mr. Kolbe. I just find it distressing, that for very solid 
and sound reasons, I think we have kept our Federal law 
enforcement organized the way it is, with certain components 
under Justice and certain under Treasury, but there has to be 
something over that, that becomes the overarching element that 
integrates this, and I do not see that happening here.
    Secretary Rubin. Let me make a suggestion, if I may, Mr. 
Chairman. You know, we have attempted to do that in the 
administration in ways that seem to us to be sensible, but 
since you are both on both subcommittees, you are in 
aparticularly good position to do that. If you analyze both of these 
budgets, if you think they are inappropriate, then I think--and I am 
sure you will do this--you will come back and discuss this with us and 
then we will work our way through----
    Mr. Kolbe. Well, I will, and I certainly intend to make 
this point very strongly within the leadership of the 
Appropriations Committee, and the leadership on our side of the 
aisle, to try to bring this disparity to their attention. I am 
not sure, though, that given the figures that we are getting 
from the Administration, that I am going to have a lot more 
success with changing it, when we do not see the beginnings of 
that happening from above in the budget that has been presented 
to us.
    I have used up my time.
    Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman.
    I want to congratulate the Chairman on his focus. I think 
it is very appropriate and we need to discuss this, not as I 
said--and I want to emphasize, because we want to reduce the 
resources available to Justice.
    Justice's role is absolutely critical. So this is not a 
question of where we want to take from Justice. It is a 
question of where we want to make sure that the complementary 
role that Treasury and law enforcement plays in Federal law 
enforcement is not overlooked because, generally speaking, when 
the American public and yourself, when you came in, think of 
Treasury, you think of IRS, you think of the financial aspects, 
international finance. You do not necessarily think of law 
enforcement as being a major component of the Treasury 
Department, although it clearly is, and I think the Chairman's 
point is well-taken.
    I might observe, I was asking the staff of the committee 
whether this red line of Customs and Justice, or Customs and 
INS, I guess, reflected appropriated, or requested funds.
    In point of fact under the Reagan administration, under the 
Bush administration, and I believe under the Clinton 
administration--I want to check that--the administrations have 
historically asked for less funds than the Congress have 
appropriated for Customs.
    That was I know true in the Reagan Administration where we 
continually added agents to Customs and other--and the expert 
in the room on what we did in the past, Patty Lynch, tells me 
that that is exactly--I am correct, and the fact is we will 
probably continue to do that.
    But part of it is because of this concept, that when you 
are dealing with border interdiction, or you are dealing with 
violent criminals, you are dealing with the FBI, when in fact 
ATF has a leading role there, and go down the line.
    But in any event, Mr. Secretary, I know you have to go.
    I want to make an observation, Mr. Chairman. First of all, 
I said that your focus is, I think, critically important, and I 
think you have led this committee very well.
    Secondly, as I said, I have served on this committee since 
January of 1983. No Secretary--and we have had some very good 
Secretaries. I do not diminish any Secretary's involvement by 
these comments. But no Secretary, in my experience, has had the 
hands-on involvement, and the significant role in the bigger 
picture with the administration this Mr. Secretary.
    Now, he has been very involved in IRS, which is critically 
important, but in terms of law enforcement, I have also engaged 
with him on specifics, on the finite as opposed to the 
infinite, and Mr. Secretary, I think you are making a 
tremendous contribution to this country, to the administration 
and you are a pleasure to work with because of the fact that 
you are involved and focused, and very objective, in my 
opinion, when you pursue these issues, and it is to the 
benefit, as I said, of this administration, that you are such a 
critical component of the administration's highest level of 
policy makers.
    I do not have a question for you, I will have questions for 
your colleagues, but I thank you for your leadership.
    Secretary Rubin. Thank you, Mr. Hoyer.
    Mr. Kolbe. Thank you much, Mr. Hoyer, and Mr. Secretary.
    To the other Members of the subcommittee, I have just been 
advised by the Secretary's staff that the Secretary really does 
have to depart. He will be back with us next Wednesday and we 
can continue this line of questioning. Hopefully, we will have 
more time.
    Secretary Rubin. Can I just add one thing, Mr. Chairman?
    Mr. Kolbe. Yes, of course.
    Secretary Rubin. Let me just say, if I may, I think you 
have opened up a very interesting question, and I think one 
that really is worth very serious analysis.
    I have come to identify, enormously, with the bureaus of 
Treasury, and have, as I said in my comments a moment ago, 
enormous respect for their missions, for the people, for the 
work that they do, and I think all of us have brought that to 
this budget process.
    But as you look at this historical disparity--and I agree 
with you, it certainly would behoove us to take a look at it 
and if this has been a disproportionate allocation of 
resources. As Mr. Hoyer said it is not a denigration of anybody 
else, it is just a question of whether there has been optimal 
use of Federal resources in the law enforcement area.
    Now, I think if you frame the issue that way, it seems to 
me that you open up a very interesting line of analysis, and we 
would be very happy to participate with you in that project. 
We, in the Administration, went at that, and arrived at the 
judgments that we had, and I think they were sound and sensible 
judgments.
    But I think that if you take a look at the historical 
record, it certainly suggests that this could well benefit from 
a continued analysis between this Committee and the other 
Committee that deals with Justice, and we, the Administration, 
so we would look forward to that discussion and analysis.
    Mr. Kolbe. Thank you.
    Just for the record, using ONDCP's numbers, the increase in 
budget authority on drug-related law enforcement for Justice is 
5.6 percent, and for Treasury 4.5 percent. So there is more 
than a percent different there in BA on drug enforcement for 
Justice, and of course it starts from such a huger base, that 
it just increases the disparity even more this year.
    We will be getting into this more as we go through the 
questions with the others, and Mr. Secretary, we thank----
    Secretary Rubin. I do not think you are going to find them 
arguing with you----
    Mr. Kolbe. No, I suspect they will not be arguing with us 
[Laughter.]
    What we need for you to do, Mr. Secretary, is to go down to 
the White House and argue the case, and I knowthat you will.
    Secretary Rubin. I am delighted to.
    Mr. Kolbe. Thank you very much, Mr. Secretary.
    Secretary Rubin. Thank you, Mr. Chairman.
    Mr. Kolbe. We will let the Secretary depart, and then we 
will continue here.
    Before I call on Under Secretary Kelly for his opening 
remarks, let me just correct, for the record earlier, when I 
welcomed our panel, I mistakenly welcomed Stan Morris, Director 
of Financial Crimes Enforcement Center, and he is being 
represented today by his deputy, William Baity, today, or will 
be this afternoon, when we get to that testimony. So he will be 
on that panel.
    Mr. Hoyer. Mr. Chairman, he is, however, in the room, and 
you are right, he has done an outstanding job.

                  under secretary for law enforcement

    Mr. Kolbe. Right. He certainly has.
    I think we are ready to go to Mr. Kelly's opening 
statement.
    Mr. Kelly. Thank you, Mr. Chairman, Congressman Hoyer, and 
other members of the Committee for this opportunity to testify 
on Treasury law enforcement.
    You have my full written testimony and I ask that it be 
inserted in the record. I will briefly summarize my statement.
    Before I get started, I wanted to take this opportunity to 
point out that Bill Baity, who has just departed, the Deputy 
Director of the Financial Crimes Enforcement Network (FinCEN), 
will be testifying today.
    However, as you stated, I want to acknowledge the presence 
of Stan Morris. Stan is the current director of FinCEN. In a 
few days, Stan will be leaving FinCEN and begin his retirement 
from Government service.
    Stan has had a long and distinguished law enforcement 
career. It included Director of the Marshal Service; Chief of 
Staff in the Treasury, Office of Enforcement; the Attorney 
General's Office; the Office of National Drug Control Policy; 
the Office of Management and Budget, and of course FinCEN. So I 
would ask the Committee to join me in wishing Stan all the best 
in his retirement and thanking him for a job well done. Thank 
you.
    I want the committee to know that I certainly appreciated 
Stan Morris' leadership, particularly in advancing our 
understanding of money laundering and its corrosive effects, 
not only in rewarding narcotics traffickers and other 
criminals, but in its potential for undermining entire 
economies.
    One of the areas in which the Office of Enforcement has 
been most effective over the past year in fact was in 
combatting money laundering. By implementing our rarely used 
geographic targeting orders, we effectively disrupted the flow 
of drug profits between the New York metropolitan area and 
Colombia.
    The money the cartel could not wire back to Bogota piled up 
in stash houses, and was seized by Customs as the drug dealers 
tried to smuggle the cash out of the United States in bulk.
    We are seeing similar results in targeting money laundering 
involving the Dominican Republic. Eventually, a seamless 
authority will be put in place, tightening the reporting 
restrictions on cash transfers anywhere in the world.
    The criminal organizations Treasury contends with operate 
internationally. So we must, too. That is why I was 
particularly pleased that the Office of Enforcement was able to 
play a lead role in establishing ILEA-South. That's the 
International Law Enforcement Academy, opened recently in 
Panama under an agreement with the State Department.
    This is Treasury enforcement's counterpart to the Justice-
run center in Budapest. Our focus at ILEA-South will be 
counternarcotics and involve police agencies from throughout 
Latin America.
    Internally, at the Office of Enforcement, we have moved 
forward, not as quickly as we certainly would have liked, with 
the filling of the OPR [Clerk's note. Office of Professional 
Responsibility] slots authorized by this committee. About half 
of the positions are now filled, including the slot focusing on 
internal affairs issues across the bureaus.
    It is critically important to constantly monitor the 
integrity functions of law enforcement, especially in an era 
when the criminal environment is awash in narcotics money.
    It raises the stakes and the corruption potential 
everywhere, posing a threat to every nation's interdiction 
efforts. That is why we felt it was critically important to 
have an expert in internal affairs inside Treasury enforcement, 
looking at the standards and support for integrity functions 
across the Treasury enforcement bureaus.
    That is also why we are seeking an additional $6 million in 
the 1999 budget for the internal affairs functions at the 
Customs Service. Customs is on the front line of narcotics 
interdiction. As a result, we want to make certain that Customs 
gets all the training, equipment, and case management support 
it needs to make its internal affairs capabilities second to 
none.
    With that, Mr. Chairman, I want to express my thanks for 
the support and understanding that you and the committee have 
shown for the Treasury Department's enforcement bureaus over 
the years.
    What you will see today from our bureaus demonstrates the 
complexity of the jobs they face, and you will also witness the 
ingenuity they bring to the job in combatting a widearray of 
crimes.
    Thank you, Mr. Chairman.
    [The information follows:]


[Pages 20 - 134--The official Committee record contains additional material here.]




                                    Wednesday, February 25, 1998.  

                BUREAU OF ALCOHOL, TOBACCO AND FIREARMS

                                WITNESS

JOHN W. MAGAW, DIRECTOR

    Mr. Kolbe. The Subcommittee will come to order.
    We will be joined very quickly by other members and will 
resume our hearing.
    First of all, looking out in this room, I would like to ask 
everybody with a gun to please stand up. That is just a joke. 
[Laughter.]
    But looking out at this audience, I must say, it seems to 
be a disproportionate share of men in law enforcement rather 
than women. Maybe we need a little more affirmative action here 
in law enforcement.
    We welcome back this afternoon not only Under Secretary 
Kelly, who has already given an opening statement, but we have 
with us this afternoon, Mr. Magaw from the Bureau of Alcohol, 
Tobacco and Firearms. We have Mr. Basham. We have Mr. Merletti 
from Secret Service. We have Mr. Baity from FinCEN.
    Since you have already had an opening statement, we will 
begin with Mr. Magaw, who we did not get to this morning, for 
opening statements. I will remind all of you that we will put 
your full statement in the record, and if you would summarize 
it, it would be helpful to us.
    I will also advise members of the audience that we expect 
another vote in approximately 30 minutes or so.

                         ATF Opening Statement

    Mr. Magaw. Mr. Chairman and the members of the 
subcommittee, I am pleased to represent all the men and women 
of ATF who are outstanding in both their abilities and their 
dedication.
    Once again, I have asked ATF's executive staff to accompany 
me here today because we find it is very helpful if they hear 
your questions and they hear your comments firsthand--they sit 
on both sides of the aisle here and in the second row--so that 
we can all better respond to your concerns.
    ATF's 1999 budget request is $586,324,000 and 4,038 full-
time-equivalent positions. This budget includes $32,000,000 for 
the relocation of Bureau Headquarters, which is essential for 
the protection of our employees and our customers.
    The other major increases are found in the $16,000,000 and 
81 FTEs to expand the President's Youth Crime Gun Intradiction 
Initiative, and $2,000,000 to expand our Violent Crime 
Coordinator Program.

                           atf strategic plan

    Our request in the 1999 performance plan of this Bureau are 
directly linked to the elements of our strategic plan, which 
includes protecting the public, reducing violent crime, and 
collecting the revenue.
    As we implement our key programs, we will utilize the full 
array of enforcement tools to carry out our interwoven mission. 
That blends tax, regulatory and criminalinvestigations 
together.
    Not only does this unique mix serve ATF's own operational 
responsibilities, but it allows us to provide otherwise 
unavailable expertise to State, local, and Federal agencies.

                youth crime gun interdiction initiative

    The Youth Crime Gun Interdiction Initiative typifies the 
driving collaborative spirit behind our strategic plan, 
partnerships and technology that merged to provide value to the 
citizens that we serve. There are 27 major cities that are 
employing ATF's expertise in resources to trace firearms used 
by juveniles in crime, to identify sources and patterns of 
illegal firearms trafficking, and to develop strategies to 
reduce the flow of weapons to the youngest and most volatile 
members of our society.

                   violent crime coordinator program

    ATF's Violent Crime Coordinator Program, for which we are 
also requesting additional funding, is yet another 
collaborative effort, but one that concentrates on the most 
hardened members of our society. Because many of the Federal 
firearms laws contain a provision for mandatory extended 
sentences, ATF strives to increase State and local awareness of 
available Federal prosecution under these statutes.
    ATF's Violent Crime Coordinators will work closely with 
local prosecutors and the U.S. Attorney's Office to provide the 
investigative component to the Department of Justice's Trigger 
Lock Program. We will focus on ensuring that the violent career 
criminals are appropriately matched to the criminal charges 
that will remove them from our communities for the longest 
period of time.
    Our videotape presentation this afternoon and displays in 
the back of the hearing room highlight some of the critical 
partnerships and state-of-the-art technology that we have 
developed to impact firearms, arson, and explosive crimes, and 
to ensure the integrity of alcohol beverage products, as well 
as the collection of nearly $13 billion in revenue.

              ATF chief financial officer's audit opinion

    You can be confident that ATF is able to fully account for 
the funding that you provide us. I am pleased to report that 
for the third consecutive year, we have received the highest 
possible rating on the annual Inspector General's audit of our 
finances and internal controls. This audit was conducted this 
year by Price Waterhouse.

                             ATF personnel

    While the demands on ATF have increased dramatically over 
the past 25 years, I believe that it is of special note that 
our personnel level has increased by fewer than 100 people in 
25 years. Moreover, we have had a 14-percent reduction in the 
number of special agents between fiscal years 1992 and 1997. 
This places an enormous strain on our personnel.

                               Conclusion

    Mr. Chairman, that concludes my statement, and with your 
permission, I will show our short video, or do you want that 
done after the statements?
    [The information follows:]


[Pages 138 - 170--The official Committee record contains additional material here.]



    Mr. Kolbe. Let us go ahead with your presentation now.
    [Videotape shown.]
    Mr. Kolbe. We have a vote under way. I believe it is just 
one vote. Why don't we break and go do that, and the moment I 
get back, we will begin again with Mr. Merletti, and I 
understand we have a very interesting presentation.
    [Recess.]


[Pages 172 - 278--The official Committee record contains additional material here.]



                                    Wednesday, February 25, 1998.  

                  FINANCIAL CRIMES ENFORCEMENT NETWORK

                               WITNESSES

WILLIAM F. BAITY, DEPUTY DIRECTOR
MATTHEW COTTINI, SENIOR ANALYST
    Mr. Kolbe. We are going to go now to Mr. William Baity, the 
head of FinCEN. It may not be quite as dramatic and exciting, 
but just as important.
    Mr. Baity, we welcome you, also, and you are for the first 
time before this Subcommittee in your role as the Deputy 
Director of the agency. Thank you very much for being with us.

                              case support

    Mr. Baity. Thank you, Mr. Chairman.
    If you could, just bear with us for a few seconds while we 
set up the monitors. Mr. Chairman, we have a monitor that will 
be set up for the Committee, as well as a monitor to the right 
for the audience.
    Again, Mr. Chairman, Mr. Hoyer, and members of the 
Committee, thank you very much for giving us the opportunity to 
discuss the mission of FinCEN and our FY 1999 budget request.
    The Financial Crimes Enforcement Network, or FinCEN as we 
are commonly known, feel the best way to illustrate our effort 
is to show you, after a brief description, how we work as a 
network. In fact, we take great pride in the fact that network 
is in our name because we do believe that we are a link between 
law enforcement, regulatory, and the financial communities.
    Our goal, of course, is to maximize information-sharing 
among our partners in order to develop more effective ways 
tocombat money-laundering.
    Our second objective is to show how important technology is 
in fighting financial crimes. As financial crimes become more 
complex, technology becomes for us one of the most important 
weapons in our arsenal.
    Looking at FinCEN's network approach and how it uses 
technology, we will show the significance of our 1999 budget 
request and how it will strengthen the quality of support being 
provided to law enforcement and to all of FinCEN's other 
stakeholders.
    As we have described to this Committee before, FinCEN 
provides case support to well over 150 Federal and State law 
enforcement agencies [Clerk's note.--agency added that this 
number includes local agencies]. Through our relationship with 
the banking industry and other financial communities, we also 
use our network to administer the Bank Secrecy Act, the BSA.
    Under the BSA, banks and other financial institutions 
report and keep records on large cash transactions. The purpose 
of this requirement is to curb money laundering and create a 
financial trail for investigators to follow, in order to track 
criminals and their assets.
    BSA records also include information on transactions that 
banks believe are suspicious or unusual. Not only does FinCEN 
put the rules in place, but FinCEN also works to use that 
information to help detect and prevent money-laundering. 
[Clerk's note.--The agency adds that FinCEN is one of the 
primary users of such information.]
    To illustrate the use of the BSA data and our network 
capabilities, today I will describe three recent law 
enforcement investigations.
    Our first case is an example of how FinCEN works with State 
and local governments through a program called Gateway, which 
the Secretary alluded to earlier this morning. Through this 
system, State and local law enforcement agencies have direct, 
online access to records filed by banks and others under the 
Bank Secrecy Act. Using software designed by FinCEN, Gateway 
saves investigative time and money. User agencies can conduct 
their own direct research without intermediaries.
    Last year, Gateway alone processed almost 58,000 inquiries 
from 50 States, as well as the District of Columbia.
    The case which I am about to discuss shows that hidden 
behind today's sensational headlines are the chilling realities 
of criminal activity. We will show that financial records are 
extremely useful in money-laundering cases, but they can also 
help investigators in other areas and unravel other crimes.
    This case shows how a highly trained investigator used 
FinCEN and the technologies we have to locate a very violent 
and dangerous criminal. This is a story about a man named 
Arthur Thrash, a man previously convicted of armed robbery who 
went on to commit murder [Clerk's note.--agency added that 
Thrash was also convicted of larceny]. Having been arrested and 
convicted, Thrash received a life sentence without parole. He 
had been in prison for 6 years when he escaped from the 
Cummings Correctional Institution in Varner, Arkansas.
    Authorities learned that Thrash may have had an accomplice 
who they believed was one Nellie Jean Smith, who had been a 
counselor at the prison. About the time of the escape, Smith 
began selling off her assets and told her family that she was 
leaving the country for a year.
    The Arkansas State Police had jurisdiction of this matter, 
and the lead investigator, Roy Stayton, traced Smith and her 
accomplice to Memphis, Tennessee. Investigator Stayton learned 
that Smith had obtained a Tennessee driver's license about the 
same time of Thrash's escape. Although Smith used her real date 
of birth and Social Security number, she had used a fictitious 
name and address. So, with no additional information, the 
investigation appeared to have hit a dead-end.
    At that point, Investigator Stayton turned to his police 
crime analyst, who is the Arkansas State coordinator for 
FinCEN's Gateway system. Using this system, that analyst 
queried our BSA database and quickly found five currency 
transaction reports (CTRs), which had been filed on Smith. Four 
of the currency transaction reports showed that Smith withdrew 
almost $112,000 in cash from the Mercantile Bank of Arkansas 
within a 3-day span of the escape of Thrash. This information 
confirmed to the investigator that she had been accumulating a 
large amount of cash. But what was most important in this case 
was the fifth CTR, or currency transaction report, because it 
was the one that ultimately led to the capture. [Clerk's 
note.--agency added that the CTR, which led to the capture of 
Thrash, was filed two months after the escape.]
    Why? Because that CTR indicated to the investigator that 
Smith had used her fictitious Tennessee driver's license in 
Greenville, Mississippi, and at that time did a cash 
transaction in which the bank processed and sent in a CTR to 
Planters Bank and Trust of Greenville. [Clerk's note.--agency 
added that Smith gave a Greenville, Mississippi address when 
the CTR information was collected, and the report from the bank 
placed Smith in Mississippi. This provided the first solid lead 
in months.]
    At this time, the investigator had a new lead and then 
proceeded to go to Mississippi. In Mississippi, he learned that 
a woman meeting Smith's description had lived in a trailer 
park, but had left, but at the time while being at the trailer 
park was living with a male accomplice that fit Thrash's 
description.
    At the same time, the Arkansas investigator used his 
analyst who had developed an additional lead from the CTR. 
[Clerk's note.--agency classified that the lead was developed 
from the 5th CTR by the Arkansas analyst, who continued to work 
on the case.] That additional lead showed a transaction that 
Smith had used about $14,000 to purchase a cashier's check. The 
check had been made out to an individual who, through 
subsequent BSA queries, was found to live in Pennsylvania.
    Finding the location of that individual using the Bank 
Secrecy Act data, they [Clerk's note.--agency refers to the 
Arkansas analyst] in turn found that Smith had purchased a 
mobile home in Pennsylvania. At that time, they [Clerk's 
note.--agency refers to Investigator Stayton] contacted the 
Pennsylvania State Police who were able to locate the mobile 
home and determine that both Thrash and Smith were living there 
and effectuated the arrest.
    FinCEN's ability to operate as a network in this case, to 
link together pieces of extraneous information and make this 
information available to law enforcement was critical to 
Thrash's recapture. The BSA database provided the clues that 
Investigator Stayton needed to pick up what had become, indeed, 
a cold trail.
    First, the CTRs provided enough circumstantial evidence and 
confirmed suspicions that Thrash had an accomplice. Second, the 
currency transaction reports pinpointed the location in 
Greenville, Mississippi, from which the investigative team 
gained other leads.
    Also, the Arkansas crime analyst who was the Gateway 
coordinator, used the BSA database to locate the individual who 
sold the property to Smith, and this information led to the 
location of the two criminals.
    The final result was that the fugitive who had been on the 
run for approximately 8 months was captured 10 days after first 
sourcing the Bank Secrecy Act database by the Arkansas State 
coordinator. Today, Thrash is back in jail, and Smith is 
awaiting trial.
    In a letter to FinCEN, [Clerk's note.--agency added 
``supervisor in charge of the''] Arkansas Crime Analysis Unit 
said the information provided by FinCEN ultimately resulted in 
the arrest of Thrash and Smith. This cooperation was key to 
bringing this case to a close.
    Now, obviously, what we have portrayed today is not a 
complicated financial case, but it does show the usefulness of 
the Bank Secrecy Act data, and it is important how FinCEN tries 
to network between different agencies who use that information 
linking together those agencies on all kinds of cases which 
quickly gets the information to investigators who need it.

                  financial intelligence units (FIUs)

    I would like to turn now to our next case, which shows how 
expanding our network assists U.S. law enforcement in financial 
crimes here at home. As we all know, and to echo again this 
morning's comments by the Secretary, money laundering trails 
lead all over the world, and international cooperation is 
essential.
    At FinCEN, we foster this cooperation, encouraging the 
creation of organizations, similar to us, that are now known 
internationally as financial intelligence units, (FIUs) to work 
together.
    As you can see on the monitor, these financial networks, 
which are designed to continually strengthen our developing 
relationships [Clerk's note.--agency inserted ``with the 
growing number of FIUs.''], started in 1991 with only four. 
Today, there are 28, with at least 25 FIUs under some planning 
stage throughout the world.
    In the last 3 years, a core group of financialintelligence 
units have met to determine how better to exchange information and 
develop strategies. Their goal, quite simply, is to promote 
international cooperation through information-sharing, technology, 
training, and technical assistance.
    These FIUs now are able to communicate through a secure 
Internet web site which we have built at FinCEN for them. 
[Clerk's note.--agency amended this to say the web site was 
``designed by FinCEN's technical experts''.] Using the 
Internet, FIU members are able to communicate with each other, 
in a secure environment, not only to exchange information, but 
to track trends and patterns as well.
    To demonstrate how we have used [Clerk's note.--agency 
amended this to ``our relationship with.''] the FIUs, I would 
like to briefly walk you through actions we recently took in 
response to a query sent to FinCEN from one of the FIUs in 
Europe. These actions will show how FIUs network together to 
identify and link government entities at home and abroad with 
common interests.
    As this committee well knows, among one of the most elusive 
and difficult money laundering techniques to detect are illegal 
wire transfers, funds transferred between other countries. This 
detection is difficult because illicit activity is just a tiny 
fraction of the total volume of international funds transfers.
    Electronic wire transfer systems move funds between 
financial institutions and handle a daily volume in excess of a 
half-a-million transactions resulting in more than $2 trillion 
[Clerk's note.--agency inserted ``moving around the world.''] a 
day, and only a small portion of that obviously involved 
illicit funds. Thanks to the cooperation of an FIU in Europe, 
FinCEN was informed of millions of dollars, U.S. dollars, being 
wired into its country by a United States citizen. These 
transactions were deemed suspicious in their particular 
country, and FinCEN was asked [Clerk's note.--agency inserted 
``by our FIU colleague.''] to determine if there were any 
interests by U.S. law enforcement or other entities in terms of 
this movement of money.
    At FinCEN, our analyst ran the name of the individual 
wiring the funds through our law enforcement databases. We 
discovered that a Federal law enforcement agency was, in fact, 
investigating the individual for fraud. The analyst then ran 
the name through our public record databases and discovered 
that the subject was an officer of a financial company.
    Further inquiry by FinCEN revealed that a Federal 
regulatory agency, having jurisdiction over this particular 
type of financial company, was also simultaneously pursuing 
civil proceedings against the individual and the company. And 
so, in this case, FinCEN discovered two agencies conducting 
investigations on the same subject. These two agencies, until 
we were able to bring them together, were not aware of each 
other's investigations.
    Now, it is not unusual for U.S. agencies to investigate the 
same individual or business. The fact is that financial crimes 
are complex and have multiple facets. They cover a number of 
jurisdictions often, and they require expertise from many 
different agencies.
    Within this stream of agencies, FinCEN was able to 
determine the identity of two different agencies which were 
conducting investigations on the subject brought to the 
attention of FinCEN by our FIU counterpart. Because these 
agencies were focused on different aspects of the crime, each 
was unaware of the other's interest. Obtaining the consent of 
the FIU and the two agencies, we actually were able to bring 
these two together to actually network their information. We, 
again, suggest that this is networking at its best.
    The FinCEN analyst also used our databases in this case to 
provide additional information and used our Gateway contacts 
which I previously discussed add value to this case. The FinCEN 
network proved valuable in several ways in this matter.
    First, because of our relationship with the FIUs around the 
world, a foreign government sought cooperation on and advised 
us of sensitive information which was subsequently related to a 
case under investigation by two separate Federal agencies.
    Second, using our domestic network, FinCEN was able to link 
these agencies together, adding value to each of their 
investigations.
    Finally, FinCEN was able to quickly provide additional 
information to support the U.S. investigative agencies. This is 
the key characteristic of an FIU, being a central governmental 
repository of informational databases that have analysts who 
are expertly trained to use the information.
    I would like to say to the chairman and the members of this 
committee, we are very grateful for the support we have 
received for our international endeavors that you have actually 
funded over the last year. We believe this shows that the 
funding that you have provided to continue the promotion of 
FIUs are starting to pay dividends not only internationally, 
but domestically as well.

                     ARTIFICIAL INTELLIGENCE SYSTEM

    Turning to our last case, I would like to focus on FinCEN's 
Artificial Intelligence system, or what we commonly refer to as 
our AI system, which is yet another tool which we make 
available to law enforcement to combat money laundering.
    Using advanced AI technology, the system provides a cost-
effective and efficient way to locate unusual activity in the 
tens of millions of currency transaction reports that are 
required to be filed under the Bank Secrecy Act. AI provides 
analysts and Federal investigators with the ability to link 
ostensibly disparate bank transactions. This linking reveals 
patterns of financial transactions that we know are used to 
launder money and to perpetuate other crimes, producing 
hundreds of new investigative leads.
    This technology, blended with the expertise of FinCEN's 
analysts, finds the needle in the haystack. To illustrate the 
effectiveness of the AI system, I have asked Mr. Matthew 
Cottini, who is sitting to my left, a senior intelligence 
analyst at FinCEN to describe an actual case that was developed 
using the AI system.
    Mr. Cottini. Thank you, and good afternoon.
    Before I begin my short presentation, what I would like to 
do is tell you about the data we will be reviewing within our 
artificial intelligence system. This data consists of Bank 
Secrecy Act's three forms, which I have in front of me, the CTR 
or the currency transaction report, the CMIR or currency or 
monetary instrument report, and the casino report. These three 
forms track movement of large sums of currency either in or out 
of a financial institution, in or out of the United States.
    Since the inception of the Bank Secrecy Act in 1970, over 
94 million of these filings have occurred. Defined, relevant, 
intelligent information from that database, which is a large 
voluminous database, would be impossible without a system such 
as ours.
    Mr. Hoyer. Excuse me. The last one is the casinoreport?
    Mr. Cottini. The casino report. It is a CTR based just on 
filings for casinos. It is deposits and withdrawals within a 
casino.
    I would like to point out that the CTR form itself, 
currency transaction report, is a double-sided form, and the 
complexities of this form alone makes identifying targets, 
potential money laundering targets, extremely difficult because 
it provides for multiple people filing from multiple businesses 
in multiple accounts.
    I would also like to point out that last year, roughly 14 
million filings occurred under the Bank Secrecy Act, roughly 12 
million of which were the CTR.
    What I would like to do next is show you an example of how 
we use our system. If you could divert your attention to our 
two monitors, we will see the basic target set that we will 
come up with under our system.
    What we are looking at here is connections our system made 
looking at all the filings of a particular area in the Midwest 
of the United States. In this particular example, we looked at 
grocery stores and restaurants.
    I would further like to divert your attention to the second 
item on the screen, and we can see it is the first time a 
restaurant is displayed.
    If we work down into the middle of the screen, we can see 
another restaurant is displayed there. I would also like to 
point out that the second column over here to the left 
indicates that our first occurrence of a restaurant shows a 
figure of 104. That represents the number of cash filings, 104 
cash filings for this restaurant.
    This screen was sorted by the number of cash filings and 
the next highest filer with a similar type of activity has less 
than half, which was 43.
    What I would like to next is focus my attention on that 
individual that is highlighted. We can see his name is Joe 
Jones. For our example here, we are using a sanitized data set 
for privacy issues. What we are going to do is ask for a 
monthly aggregate.
    What just appeared on the screen is a summary total showing 
us Joe Jones' financial activity, and we are looking at 1995 
data. That is when this particular case started. We can see the 
total of 104 filings down here on the bottom that contributed 
to over a million dollars cash and deposits.
    What I would also like to point out, the fourth column from 
the right indicates 65 transactions marked suspicious by the 
financial institution. This also confirms why this particular 
individual should be looked at a little further.
    I would also like to direct your attention to the next 
column over to the left. It represents 81 filings that were 
under the $10,000 BSA threshold. That is important because the 
bank was notifying law enforcement and the Government that this 
could be a potential structuring violation taking place.
    What I would like to do next is, since we have identified 
an individual, look further into our system and pull out 
subjects, the subjects filing with this individual.
    Starting out with our initial subject, Joe Jones, we can 
see three different businesses were linked to him. This is the 
way our system identifies and makes those connections, all 
behind the scenes intelligently in an automated environment. 
Once again, this could never have been done in a manual sense.
    What I would like to do next is highlight all the subjects 
and ask for accounts. We get back the account screen which 
indicates a total of seven accounts for those three businesses. 
That is unusual in itself since the three businesses, have more 
than one account apiece.
    What I would like to do next is identify, at this point in 
time, the business with unusual financial activity. It was 
supported by the indications from the bank or the financial 
institution, alerting the Government that something was 
suspicious in nature with those filings. We also found there 
were multiple businesses and numerous accounts involved.
    What I would like to do next is to show this in an 
automated sense. What I am going to pull up is a link analysis 
tool we have and which will show in a data-visualization sense.
    What I am going to do in the circle is focus in on the 
lower corner. As we zoom in a little closer, we will see data 
inside that circle. These numbers we are currently looking at 
represent record control numbers, or RCNs, that correspond to 
the financial transaction.
    If I zoom in, in the blue area, we are going to see our 
individual, Joe Jones. His name, date of birth, and Social 
Security would appear. All this information is taken right from 
those financial transactions.
    Other elements on the screen we see in the different colors 
represent businesses, locations, bank accounts, and other 
identifiers. What we see going across on all the lines is where 
the computer has actually drawn a line connecting people to 
places, to accounts, and identifiers.
    What we have displayed on the screen so far is extremely 
abstract, and it would be difficult for law enforcement to make 
any connections in the field looking at that circle. So what I 
have asked the system to do is condense the information, take 
out the actual filings, and show this information with shapes.
    In this example, we are using circles to represent people. 
We are using rectangles to represent the businesses. We used 
the jagged boxes for accounts and the houses or locations.
    What I have to do next is untangle the screen and make it 
visually pleasing to the human eye, and basically, I can do 
that just by moving data around on the screen. What I would end 
up with for this example would be a target that looks like 
this. If I window in, we can see over to the right or to the 
left, we have Joe Jones. If we look into the center of the 
screen, we would have all of the accounts. In this case, we 
ended up with five accounts, his three businesses, and 
something very important, all three businesses share one common 
address. They are not spread out over the city. They are in one 
particular location.
    At this point, this package was completed. It was submitted 
to law enforcement in the field. It went to IRS CID, and IRS 
was unaware of this particular activity taking place at the 
time. They started reviewing the package for a preliminary 
investigation.
    At that point in time, based on intelligence reports in the 
field, law enforcement returned back to FinCEN and saidwith the 
information you have provided, we also found through our own 
intelligence, there is another individual linked to the subject you 
provided us. This was a close relative, as indicated at the bottom of 
the screen. The relative has two different businesses, a spouse, and an 
address. This particular subject was important because they were 
suspected of smuggling large amounts of narcotics into the United 
States.
    At that point in time, with the new additional information 
FinCEN received, we provided a value, once again. We looked at 
the new information, and looking at public records, there was 
additional information that we provided back to law enforcement 
for their review. What I've just shown you is an extremely 
trivial example. Although it still would be impossible to 
detect this activity in such a large database. What I would 
like to do is hold up an example of a much more complex case. 
We were only looking at 104 transactions. The information we 
see on this screen represents well over a thousand cash 
transactions. A thousand cash transactions gave us over 275 
individuals, and over 108 different accounts. This type of 
investigation would be absolutely impossible to extract and 
make all the relative connections within that database without 
this type of system.
    What we ended up with for this particular example, was a 
final schematic that looks like this one.
    At that point, I would like to return back to Mr. Baity.
    Mr. Baity. Thank you, Matt. This AI case illustrates the 
successful marriage between the application of advanced 
software and the analytical techniques, and the crucial, very 
crucial, local intelligence that only law enforcement customers 
in the field can provide.
    To summarize, each of the cases demonstrated today reflect 
FinCEN's network approach and its use of technology. They 
illustrate our innovative way of leveraging our resources, 
adding value to our customers' investigative work in as many 
ways as our resources will permit. They also explain the 
significance of FinCEN's FY '99 budget request of $24 million 
which enables us to continue our support to law enforcement 
investigations, regulatory efforts, and international 
coordination.

                          program initiatives

    In addition, our three new program initiatives, which we 
are respectfully proposing be funded from the Violent Crime 
Reduction Trust Fund, are modest in terms of dollars: $300,000 
to more effectively analyze suspicious activity reports and 
other information related to financial transactions which, as 
we saw earlier in the case, can be essential in detecting 
unknown criminal activity; $200,000 for continued training for 
the Gateway Program, also described earlier; and $500,000 to 
produce a statistically based model to explain and measure the 
magnitude of money laundering problems.
    This last initiative we believe will help leverage limited 
law enforcement resources, including helping Congress in terms 
of providing information on where anti-money laundering efforts 
would best be directed. I would also stress that this 
initiative is the foundation for our strategic planning, and at 
the heart of measuring our performance.
    If we are able to construct a viable model for measuring 
the magnitude of money laundering, FinCEN will be able to 
review all its objectives in a more meaningful way. We will 
know whether we are making a difference.
    We appreciate the Committee's consideration of our request 
and the time you have given us today to illustrate key aspects 
of FinCEN's mission. It has been a personal honor for me. I 
will be glad to answer any questions you may have. Thank you 
very much.
    [The information follows:]


[Pages 288 - 299--The official Committee record contains additional material here.]



    Mr. Kolbe. Thank you very much, Mr. Baity.
    Secretary Kelly, I understand you have to leave. Are you 
sure? Because you can probably leave these gentlemen to our 
tender mercies. [Laughter.]


[Pages 301 - 337--The official Committee record contains additional material here.]



                                      Wednesday, February 25, 1998.

                FEDERAL LAW ENFORCEMENT TRAINING CENTER

                                WITNESS

W. RALPH BASHAM, DIRECTOR
    Mr. Kolbe. Very well. We welcome Mr. Basham, who has been 
on board as the Director of FLETC for all of about ten days, I 
believe.
    Mr. Basham. You are correct. Less than that, I believe.
    Mr. Kolbe. Less than that? Well, we are delighted to have 
you here, and we welcome your statement. Again, the full 
statement can be put in the record.

                            Opening Remarks

    Mr. Basham. Yes, sir. Mr. Chairman and members of the 
committee, I am pleased to be here today to report on the 
current operations and performance of the Federal Law 
Enforcement Training Center, and to support our appropriation 
request for the Fiscal Year 1999.
    Even though I am new to this position, I am well aware of 
the outstanding reputation this organization has acquired over 
nearly three decades of delivering high-quality training to law 
enforcement officers across the country and around the world. 
And I assure you that I will continue to preserve and build on 
that reputation.
    I would also like to acknowledge my predecessor, Charlie 
Rinkevich. Under Mr. Rinkevich's leadership, the Center 
experienced tremendous growth and came to be recognized as the 
nation's premier law enforcement training organization. While 
he was at the Center, FLETC grew into a partnership of over 70 
participating agencies providing the best law enforcement 
training available anywhere in the world.
    Mr. Rinkevich leaves behind an organization with a highly 
motivated and talented staff dedicated to the mission of 
providing quality, cost-effective training for law enforcement 
professionals. I would like to express my deep respect and 
sincere appreciation for the outstanding and selfless 
leadership provided by Mr. Rinkevich over the last 15 years.
    Under the leadership of Secretary Rubin and Under Secretary 
Kelly, the Center has received strong support and active 
assistance for carrying out its responsibilities. And 
throughout the Center's 28-year history, this Committee has 
also been most supportive in its funding of consolidated 
training, and discerning in its oversight role. The success 
enjoyed by the Center and the success of the consolidated 
training concept are directly attributable to this Committee's 
strong and consistent support.

                          fy 1999 initiatives

    Today I am prepared to discuss the initiatives in our 
request, which include mandatory workload increases, master 
plan staffing, the International Law Enforcement Academy, and 
master plan implementation.

                           workload increases

    The Center continues to face an unprecedented increase in 
its training workload. Last year the Center delivered more 
student weeks of training than at any other time in its 
history. The majority of the increase in training workload 
results from initiatives by the Administration and Congress to 
improve the effectiveness of the Immigration and Naturalization 
Service in protecting our nation's borders. Other factors 
contributing to the Center's increased workload are security 
enhancement at federal facilities, new federal prisons coming 
online, and significant increases in the workload of the Bureau 
of Indian Affairs.

                          strategic plan goals

    The initiatives outlined in our request are targeted at 
increasing the Center's training capacity in response to this 
growing workload, and they tie directly to the goals outlined 
in the Center's current strategic plan. As you are aware, and 
as has been stated, I have only been Director for a few days; 
and therefore, I have not had sufficient time to review and 
assess all the goals and measures in the plan. But I will be 
looking at the plan over the next few weeks, and I will be 
asking the Department, OMB, and this Committee for input and 
support in determining the future of the FLETC as we move into 
the new millennium.
    I would like to take a few minutes and discuss in more 
detail two of the initiatives that I mentioned earlier: the 
master plan and the International Law Enforcement Training 
Academy for Latin America and the Caribbean Region, otherwise 
known as ILEA-South.

                        master plan construction

    To meet the dramatic rise in its training workload, the 
Center is moving forward on its master plan construction 
program to increase capacity at both Glynco and Artesia. 
Through 1998, Congress has appropriated nearly $83 million for 
master plan construction projects. By necessity, the master 
plan has been updated several times over the last few years, 
and copies of these updates have been furnished to this 
Committee.
    It should be recognized that the cost of fully implementing 
the master plan has increased over time, due to inflation and 
changes necessary to meet training requirements of our 
customers. I want to assure you that FLETC will continue to 
work through Treasury, OMB, and the Congress, in dealing with 
any additional changes that may come about in the master plan.
    In the past two fiscal years, the Center has completed 
construction on two additions to the main classroom building at 
Glynco, and has expanded the driver training complex. 
Additionally, construction is underway on a new dormitory and 
an administration building at Glynco, and a contract has 
recently been awarded for the construction of a new dormitory 
in Artesia.
    Our '99 request includes over $16 million to continue the 
implementation of this plan. These funds would be used to 
construct another dormitory and classroom building at Glynco, 
and for expansion of the cafeteria, construction of a laundry 
facility, and infrastructure improvements at Artesia.
    The additional facilities are vital if the closure of the 
temporary facility in Charleston is ultimately to be realized. 
However, I must tell you that the workload projections have 
increased since the submission of our budget, and we are now in 
the process of further analyzing facility requirements to meet 
this additional workload increase.

                 international law enforcement training

    Our request for ILEA-South is aimed at building strong and 
lasting relationships with and among law enforcement officials 
from Latin America and the Caribbean. Current demand for 
training assistance from the international community, resulting 
from Congressional and Administration initiatives, already 
exceeds the FLETC's available resources. That demand, coupled 
with the added responsibility for management oversight and 
administrative support of ILEA-South, make it essential that 
additional resources be provided.

                       video on center operations

    Now, Mr. Chairman, if I may, I would like to draw your 
attention to the television monitors located in the room. We 
have prepared a short video to keep this Committee fully 
informed on Center operations. The video focuses on three areas 
of interest to this Committee, ones we believe will assist this 
Committee in its decision-making process. They are workload, 
facility expansion, and the use of technology and training.
    I do not know whether the technology is up to startingthis 
right away, but there you go.
    [Video shown.]
    Mr. Basham. Mr. Chairman, I am committed, as are all of the 
employees of FLETC, to the mission of the Center to provide the 
highest quality training at the lowest possible cost. I look 
forward to your continued support, and I appreciate your time. 
Thank you.
    [The information follows:]


[Pages 342 - 363--The official Committee record contains additional material here.]



    Mr. Kolbe. Thank you very much, Mr. Basham. And I know this 
has been, for the members of the Subcommittee and those in the 
audience, a very long day, with the interruptions that we have 
had of presentations. But I think they have been very important 
for all of us to hear these presentations on Treasury law 
enforcement, and we certainly appreciate the time and the 
effort that was put into this.
    Commissioner Banks, I would like to invite you to come back 
up here, because we did not get a chance to ask a lot of 
questions of Customs this morning and so we will take everybody 
that is here at this time and take any questions.
    I will take the first go here at this, with the members 
that are remaining, and then we will try to get, as quickly as 
possible, through all of this. I will submit most of my 
questions for the record.

          atf--gang resistance education and training program

    Mr. Magaw, I wanted to ask you a couple of questions about 
the Gang Resistance Education And Training Program, the GREAT 
program. I mean, I think I know it's a program that has a lot 
of popular appeal. There's a lot of community support for it, 
and I think it's probably done a lot to help the image of BATF, 
maybe to soften the image of BATF. But I want you to be as 
candid as possible in telling me whether or not you think this 
program is really having a measurable impact in communities in 
reducing gang-related crime and violence. And how are you 
measuring that?
    Mr. Magaw. That was a concern from the very beginning for 
me, Mr. Chairman. And so about two years ago, we contracted 
with the University of Nebraska to do a study of this program, 
to look at the students who had gone through the program who 
lived in very difficult areas, to find out if in fact this was 
keeping them out of gangs.
    The first report has come back on that, and it is very 
clear that it is substantially assisting children to stay out 
of gangs. There are a number of recommendations that have come 
up in the last year or so; and that is to have a summer program 
for them. Local police departments are having the summer 
programs and, as you know, these programs, both in the school 
and outside the school, are being taught by uniformed officers. 
And it is having a tremendous effect on the children. In fact, 
in two or three cities in the country, they are taking their 
GREAT program officers and having them teach a program for a 
month, and then they go out on the streets of that community 
for a month, and then back into the classroom. So when they see 
these children in the classroom, they also see them a month 
later on the street.
    We have reached 1.2 million children, and have the program 
in every state now, at 800 localities. It has been in so much 
demand that we were not able to meet the demand just with 
Phoenix and with us, so now it is in regional. We are just 
moving into Philadelphia as a regional training center, also in 
the state of Washington, and also in the state of Florida. That 
will give us a capability to reach more students and get more 
officers trained.
    Mr. Kolbe. Just to follow up on that study, though, I 
believe the study you referred to, if that is the same one, 
really did not do a study over time. It was not a longitudinal 
study. It is my understanding you are going to go back and do 
that. Because it seems to me you have a great opportunity for 
people to slip back into the behavior that they had before, and 
that a longitudinal study is the only thing that is going to 
tell you whether this is really having a long-term impact.
    Mr. Magaw. That is correct. We are going to do a 
longitudinal study. Up until now, you really have not been able 
to do one, because the program is not quite old enough. But as 
the program grows now, Nebraska is going to do that.
    Mr. Kolbe. Okay. How many sites are we in now?
    Mr. Magaw. We are in 800 sites throughout the country.
    Mr. Kolbe. Eight hundred sites? How many communities are on 
a waiting list to get a program started there?
    Mr. Magaw. I am not sure of that.
    Mr. Kolbe. I guess it would be school districts, I would 
guess.
    Mr. Magaw. I am not sure of that number, but we can get 
that back to you.
    Mr. Kolbe. Okay.
    Mr. Magaw. I am not sure of the number on the waiting list.
    [Clerk's note.--The bureau reported in responses to the 
Committee's questions for the record that 200 communities had 
applied for fiscal year 1998 funding, but that the process for 
determining which communities would receive funding is not yet 
complete.]

                         customs--drug seizures

    Mr. Kolbe. All right. My time is very limited, so I am 
going to try to just get one more question in here, or topic 
in, with Mr. Banks here. I think you and I have actually talked 
a little bit about this, the concern that we have that, despite 
the fact that we have increased the technology, despite the 
fact that we have increased the number of Customs agents, 
despite the fact that we are doing all of that, the drop in the 
number of drugs seized last year was definitely statistically 
significant. I think you would agree with that. What 
conclusions are you drawing from that drop in the number of 
drugs? Particularly, cocaine I believe, is that not correct?
    Mr. Banks. Well, Mr. Chairman, some of that has been 
misinterpreted. Actually, what we witness is, there was a 12 
percent drop in cocaine seized last year nationwide. Probably 
the biggest concern that we had was cocaine seized on the 
southern border. But actually, we seized the same amount of 
cocaine virtually in '97 that we seized in '96. What happened 
was in the areas in which drugs are concealed changed 
significantly.
    What we saw is less cocaine seized in commercial cargo. And 
yet a lot of the intelligence was coming out, at least 
generically saying, that was where the problem was. So did it 
raise concerns? Absolutely. What we saw is cocaine going back 
into automobiles. We saw cocaine coming in in much smaller 
amounts, much deeper concealments along the border.
    So I have to tell you we have been concerned, in terms of 
how the dynamics have worked. What we have seen is much more 
cocaine coming in through the Caribbean areas. We are seeing 
more and more into the fast-boat operations into Haiti and the 
Dominican Republic. What we have done, one of the things, we 
have run a couple of intelligence operations along that 
southwest border, in order to try to gauge the reaction of the 
traffickers. And the one thing that has come through crystal 
clear is they watch every move we make. They know everything 
that we do. They know when we change shift, they know who we 
have got on the line.
    And so what we have done is we have launched into this most 
recent thing, called ``Operation Brass Ring,'' in which we are 
mounting a completely unpredictable process. We are doing 
everything we can to shake them up, to change the way that we 
do business. And we are assessing that right now to try to 
determine what the impact is on the smuggling organizations.
    So are we concerned about this? Absolutely, we are 
concerned. But we are mounting a pretty strong effort on this.
    Mr. Kolbe. But Commissioner, yes, cocaine, there was a 
slightly greater drop in the southern area than there was 
nationally, but it doesn't seem nationally there was a 
significant drop. And in heroin it was greater nationally than 
it was on the southern tier; and in marijuana, similarly.
    So, I mean, we are seeing it all across the board here, the 
drop in all of the seizures. Are you telling me you think it is 
related primarily to the fact that they are coming across in 
smaller amounts now?
    Mr. Banks. Well, I think that is a big piece of it. The 
other thing that we are seeing, in sitting down and comparing 
notes with border patrol, is that they have seen a 70 percent 
drop in the amount of cocaine seized between the ports and at 
checkpoints, as well.
    Mr. Kolbe. And yet, if we are to take the measure, as I 
think the only good measure you can of our success, the street 
price, I think the street price is actually slightly down for--
let us take cocaine over a few months, six months or a year 
ago. So you are not suggesting that we have stopped the flow of 
it?
    Mr. Banks. No, sir. The last thing in the world I would 
suggest.
    Mr. Kolbe. All right. So what is happening?
    Mr. Banks. Part of the reason, I think, that they have gone 
to deeper concealment----
    Mr. Kolbe. Deeper concealment.
    Mr. Banks [continuing]. Smaller loads, actually during this 
same time, we have seen some issues at least where the amount 
of cocaine seized has dropped or has stabilized, is the number 
of seizures that we are making are escalating significantly.

                     customs--rail car inspections

    Mr. Kolbe. The last question is, because I have already 
exceeded my time, I note here that we have got a 31-percent 
estimated increase in these next two years in rail cars, a 21-
percent increase in commercial aircraft. I mean, those are 
tremendous increases we are talking about, rail cars. I mean, I 
see it every day, trains coming across the line from Nogales 
into the United States, and vice-versa. What kind of real 
inspection are we doing of railroad cars?
    Mr. Banks. Well, to be quite candid, we really did not do 
much with railroad cars up until about six months ago. And they 
are very difficult to inspect. We really did not have the 
facilities to inspect them. And what we did six months ago was 
we launched a major effort to go after the rail cars.
    We have actually reached agreements with the railroads, 
especially Union Pacific. We are in the process of, one, 
building those facilities; two, tying into their automated 
systems so we can track who is actually shipping within their 
cars. Three, we have launched a joint effort with border patrol 
to go after these cars. We have sent dogs out. We have brought 
technology in. We use the gamma ray imagers in order to try to 
look through the rail cars.
    Within the last four months, we have seized 15 rail cars in 
El Paso. Most of those have been with false compartments. A 
couple of them have been active with narcotics. But the 
concerns that we still have are, they are getting to those rail 
cars, the bad guys are getting to those rail cars, before we 
do. They go into those staging areas and they are vulnerable to 
theft and people going in like we showed on that videotape.
    Mr. Kolbe. Last question. Do you confiscate the rail car 
the same way you would a truck?
    Mr. Banks. Yes, sir, we sure do. Fifteen rail cars.
    Mr. Kolbe. Well, if you are doing that, those are expensive 
pieces of equipment. It seems to me that the railroads would 
have an interest in providing better security in their yards so 
that they are not being used inadvertently or unknowingly, 
unwittingly, as the carriers for this.
    Mr. Banks. Since we have seized those 15 rail cars, we have 
gotten significant enhanced cooperation from the railroad 
companies. [Laughter.]
    Mr. Kolbe. I have more questions.
    Mr. Kolbe. Mr. Hoyer.
    Mr. Hoyer. Do we still have the cars?
    Mr. Banks. Yes, sir, we still do. We are looking for a 
locomotive. [Laughter.]

                           atf great program

    Mr. Hoyer. Good for you. Because our time is brief, I am 
just going to ask a few questions, not necessarily the most 
important questions in terms of the fiscal issues, but 
questions that interest me. The GREAT program I want to 
mention. Senator DeConcini, as you know, from your state, Mr. 
Chairman, was very instrumental in the GREAT program. Phoenix, 
of course, was the first site. And it has been a terrific 
program.
    We utilize it in Maryland. We were one of the first. 
Director Magaw has been out there. And our police department 
and educational officials are very enthusiastic about it, and 
they believe it is effective. I do not know whether the 
longitudinal study will show the justification for that 
enthusiasm, but they think it works.
    And one thing it does, like the DARE program, it gives a 
lot of young kids a very positive involvement with uniformed 
officers in a very constructive program, and builds therefore a 
partnership between young kids and uniformed police officers; 
not a confrontational relationship, but a cooperative 
relationship. And I think that is critically important. As well 
as educating them about the dangers of gangs and negative 
associations that can result. That is not a question, 
obviously.
    Staffing levels. Director Magaw, what has the staffing 
growth been at ATF over the past four to five years, and how 
does this compare with the FBI and DEA? This ties in with the 
charts and the observations made by the Chairman.

                              atf staffing

    Mr. Magaw. The ATF has lost about 400 personnel over the 
last three or four years. And at the same time, agencies like 
the FBI and--well, the FBI actually has increased about 3,000 
agents during that time. But we have gone from a little over 
2,000 agents to a little over 1,700. By the projections with 
all the jurisdictions and the church fires and the abortion 
clinic bombings and these other things, my projection is--and 
it is a realistic one--we should have grown to about 2,600 
agents. And so dropping to 1,700 is a tremendous net loss for 
us.
    And it was shown very well this morning on the graphs. And 
ATF would fit in there as a big loss.
    Mr. Hoyer. Let me extrapolate quickly. Would that mean is 
that you're approximately 50 percent understaffed in agents, 
from your perspective?
    Mr. Magaw. Yes, sir.
    Mr. Hoyer. Seventeen hundred to 2,600?
    Mr. Magaw. And our inspectors are likewise. We were asked 
to do 100 percent of the explosive storage facilities around 
the country, and we just cannot do it with the number of people 
we have.
    Mr. Hoyer. How many inspectors do we have, Director?
    Mr. Magaw. About 745.
    Mr. Hoyer. How many do we need?
    Mr. Magaw. We would need near 1,000. And those are 
conservative. Those are not stacked figures at all, sir.

             national integrated ballistic imaging network

    Mr. Hoyer. The--I don't know how you pronounce it--NIBIN or 
``NEEBIN''--the National Integrated Ballistic Imaging Network; 
can you tell me how much progress has been made in achieving 
inter-operability between ATF and FBI?
    As you know, Mr. Secretary, this is one of the turf wars 
that I and other members on this Committee and members on the 
Committee that Mr. Kolbe is also a member of, as well as the 
Authorizing Committees, were involved in. And I would like to 
hear how--I understand we have got essentially an agreement on 
how to operate jointly. How is that going?
    Mr. Magaw. Well, it is going very well so far. It has the 
chief of police from Boston on it. It has one of our assistant 
directors and one from the FBI. And they sit as a group and 
make judgments on how those funds will be spent to best serve 
local law enforcement.
    There are some problems, as you would expect, when you put 
two separate programs together, in terms of the units that are 
already out there. How do we get those two units to talk to 
each other? And with our portable system that you saw here, it 
does both bullets and shell casings. The FBI system does 
primarily shell casings. And so when you have a situation or a 
crime scene that has bullets, it will be very important that we 
get those systems tied together.
    NIST is working with us to try to work out a system so that 
we can get them to talk together. And if that cannot be worked 
out satisfactory to this Committee and also to the FBI and to 
us, then we need to go to one system or the other.
    But I believe we are making real progress in getting them 
tied together. The attitude from Director Freeh and his entire 
staff, and our staff, has been very positive.
    Mr. Hoyer. I am glad to hear that. It has been my premise 
that, although we talk about constricted resources, we are 
spending a lot of money. When you put our DOD assets together 
with our law enforcement assets and a lot of other assets we 
have, state, local, and federal, we have a lot of assets.
    One of the reasons, Mr. Secretary, I like HIDTA so much is 
because my local law enforcement people believe the greatest 
contribution that HIDTA makes is not in money--which is why, 
Mr. Chairman, I think it is so popular around the country. It 
is the coordination that it creates between federal, state, and 
local law enforcement, successful.

           national center for missing and exploited children

    Mr. Merletti, again, let me congratulate you for assuming 
your new duties. You are going to do a terrific job. I have 
worked with you a long period of time, and know your quality, 
and am enthusiastic about your leadership.
    Two-point-six million dollars we had in this Committee for 
the National Center for Missing and Exploited Children. It is 
not in the budget. I assume, Mr. Merletti, it was in the budget 
when you made your request to OMB. Am I correct on that, sir?
    Mr. Merletti. Yes. That initiative is one which we provide 
to local, state, and other federal law enforcement agencies the 
forensic services that we have, which are very unique, as 
applied to our core missions. And we have applied them to 
assist in the investigation of child victimization.
    We do understand that during this time of tough budget 
situations, that that was not able to be put in at this time.
    Mr. Hoyer. I appreciate that answer, and understand your 
judgment on that. Let me ask you for your judgment, however. 
Was this a useful service that Secret Service was able to 
perform and had a unique ability to perform, which was leading 
to better protection for America's children?
    Mr. Merletti. Absolutely. It was one of the best programs.

                        secret service staffing

    Mr. Hoyer. Thank you. Can you answer the question thatI 
asked of Mr. Magaw? I know I am transgressing on my time. Well, then 
let me end with this question. The same question I asked Director Magaw 
in terms of personnel.
    Mr. Merletti. Yes, we are roughly at about 2,000 agents, 
and as far as uniformed division, we are just about fully--we 
are whole, just about. There has been a situation with a number 
of retirements that we have had, in order to get full, 
completely up to staffing as far as special agents, will take 
us about another year, but we are well in the process.
    At the end of this year, we anticipate that we will be 
within 150 of our full FTE, and by the end of 1999 fiscal year, 
we should be completely staffed.
    Mr. Hoyer. And completely staffed is staffed at levels you 
believe are sufficient to carry out the mission which has been 
assigned to you?
    Mr. Merletti. At this time; yes. We have had a situation in 
which we had to--we are constantly reexamining ourselves, and 
we felt it was necessary to move some agents into our 
protective divisions.
    Our agents in protection were roughly working in a year 
period, the equivalent of one and one-half FTE. We were not 
getting our proper training and, at times, there were agents 
that were traveling upwards of 30 days away from home without a 
day off. As I said, it was very bad on our training, bad on 
morale. I think it was even becoming a safety issue.
    Mr. Hoyer. I want to pursue this further with you. 
Obviously my time is up. The last brief question. Mr. 
Secretary, do you have any information that Secret Service 
personnel are also going to be assigned to FinCEN, so that we 
can have a--I know you are going to Customs, so I am just 
wondering----
    Mr. Kelly. We keep moving. [Laughter.]
    Mr. Hoyer. Keep moving! You do not have to answer that 
question, but the Secret Service seems to be doing pretty well 
at that table.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Mr. Price.

                       atf explosives inspections

    Mr. Price. Thank you, Mr. Chairman.
    I want to thank all of our witnesses for being here today 
and for the fine quality of the testimony. The video aides are 
most helpful.
    Mr. Magaw, I would like to take my limited time to focus on 
your agency. I spent some time last week in Raleigh with ATF 
that are based in my district. I want you to know how impressed 
I am with the work they are doing there.
    In fact in some ways I was perhaps more impressed than I 
wanted to be simply because they revealed a whole range of 
criminal activities that were occurring in North Carolina that 
I have been only partially aware of.
    Needless to say, I am very glad that they are aware of 
these activities and maintaining a strong presence.
    I think their presence will be increasingly important, if 
the trends they have observed continue--an apparent movement of 
crime away from some of the urban areas and into the smaller 
towns of rural America.
    North Carolina is still, in large part, a rural State, and 
oftentimes the law enforcement capabilities of local and county 
Governments are simply not going to be adequate to deal with 
the kind of firearms thefts, drug trafficking and explosive 
crimes that your agents specialize in.
    So I applaud the dedication with which they are doing their 
job, and the good working relationship they have developed with 
the municipal police departments, and county sheriffs 
departments that make up so much of our law enforcement 
capability.
    Now one of the issues that we discussed last week was 
explosives inspections, and I noticed in your budget 
justification that you proposed making the explosive 
inspections initiative, which has been funded by the Treasury 
Asset Forfeiture Fund part, of your base funding.
    This is a $2.7 million initiative involving 26 FTEs. Your 
budget justification also indicates that you are attempting to 
achieve an annual 100 percent inspection rate.
    The agents I met with indicated that they do not have the 
resources to perform all the inspections they want to--that 
they need to--so I have to assume this means we are not at that 
100 percent inspection rate now.
    I would like to know what rate you calculate we are at now, 
and whether this funding level you are proposing represents the 
kind of increase that you will need to get to a 100 percent 
rate, and if not, what would be required?

                       atf explosives inspections

    Mr. Magaw. Well, Congressman Price, we appreciate your 
visits. You do not know how that influences our personnel. 
Their morale goes up when they realize how much your interest 
is, and we appreciate that.
    On the explosive inspections, it would have taken about 55, 
or 56 more inspectors, new inspectors to get to a hundred 
percent, over what we have. The budget allows for 24, we have 
them on board and they are now in training, so we are going to 
reach about 80 percent of the explosive inspections.
    In order for me to reach a 100 percent, I would have to do 
something less somewhere else, and with the church fires, the 
abortion clinic bombings, and things like that that are going 
on, there is just no way I can reach 80 percent. I have lost 
not only 100 inspectors, but about 400 agents over the last 
four years.
    Part of that was knowing that we had a $52,000,000 
shortfall in our base, in our budget, so I had to get us 
fiscally sound first, and this committee has helped do that.
    We helped ourselves by making sure we were spending our 
money properly and those audits have shown that. This Committee 
has given us, for the last three years, in the neighborhood of 
an average of $14,000,000 to help us get back, and we are whole 
now, this year.
    So we have restructured our headquarters after our tragedy 
four years ago, almost five years ago now. We have got a 
strategic plan. Our field is being restructured to try to meet 
the needs with the amount of personnel that we have and if we 
can start to increase and get towards those additional figures, 
I would like to reach a 100 percent.
    But I am so thinly spread out now, that I just do not think 
I can. We have had a tremendous case here in the last 10 days, 
in the State of Pennsylvania, where over 2,000 pounds of 
explosives were stolen, almost in fact the same mix, virtually 
the same mix that destroyed the Oklahoma City building. I am 
happy to tell you that the stolen amount of explosives has been 
recovered, in its entirety, along with blasting caps, and the 
fuses that will set that off, and the suspects have been 
arrested.
    That was a very good working case, along with the FBI and 
our troops, and the local law enforcement. But a veryserious 
case because it was enough to do as much or more damage than was done 
at Oklahoma City.
    Mr. Price. Well, just to summarize, you are saying now that 
your current explosives inspection rate is what?
    Mr. Magaw. In 1999, we will reach 80 percent, sir.
    Mr. Price. And what will the additional FTEs you are 
requesting bring it to?
    Mr. Magaw. That is with these. We asked for 56, we ended up 
getting 24, so about the max that I can get to next year is 80 
percent. This year, I am running about 73 percent.
    Mr. Price. All right. And I gather this kind of crime, this 
kind of investigation is greatly increasing in number. Is that 
true?
    Mr. Magaw. Well, it is very important that we try to work 
towards that 100 percent, so that we do not have the 
availability of some of this material that has been stolen, so 
that these pipe bombs are made then.
    Mr. Price. Excuse me. What I am asking is: Are you seeing a 
greater need for these inspections? Are we seeing more of this 
kind of activity, more of this kind of crime being committed?
    Mr. Magaw. We are seeing more of this crime being committed 
throughout the country in stolen explosives.
    Mr. Price. That is certainly what I was told in North 
Carolina. Any particular factor that would account for that?
    Mr. Magaw. Well, I think with the increase in the militias 
throughout the country and their intent to train themselves, 
with the white supremist groups throughout the country, I think 
when this case in Alabama is solved--and it will be solved, the 
bombing in Alabama at the abortion clinic--I think you will see 
that there are various groups who go to secluded areas, do not 
want any control by any authority, whether it is the city, 
county or a State, do not want to pay their taxes, and want to 
train in these kinds of activities.
    If our explosives supplies in this country are not 
protected--and that is what these inspections will do, to make 
sure they are in protected bunkers--we are going to have 
additional problems.

                       Federal Firearms Licenses

    Mr. Price. Finally, I will just ask about one additional 
area of inspection activity. I know the time is limited. This 
question has to do with the on-premises inspections that you do 
of firearms dealers.
    You refer in your testimony to this only briefly. I wonder 
about the levels of activity there. What is your rate of 
inspection and how far short are you falling of what, ideally, 
you would like to accomplish?
    And what kind of information can you give us, either orally 
here, today, or for the record, of any trends in this area--the 
overall numbers of dealers that we are looking at now, the 
findings that you are seeing in terms of firearms trafficking 
and other illegal activities. Any summary you can give us of 
that inspection activity?

                       Federal Firearms Licensees

    Mr. Magaw. Well, just three years ago, we had 285,000 
firearms dealers in this country. Now it is just a little over 
100,000. With the Youth Crime Gun Initiative, where we are 
tracing all firearms--we are able to identify the dealers who 
are criminally dealing in firearms. The large portion of the 
100,000 firearms dealers, well over 90 some percent, 99 percent 
are legitimate dealers, obeying all the laws, and so we want to 
make sure we help them and not make their job more difficult.
    But at the same time, we do not have enough inspectors to 
get around and take a peek at these questionable ones as often 
as we should, and we are about at a 7 year mark now, 
investigating, or inspecting each one of the firearms dealers.
    Mr. Price. Well, could you give us, for the record, some 
indication of the number of inspectors that are assigned to 
this activity and what kind of estimate you would give of the 
percentage of inspections that you are conducting as compared 
to what you would ideally want to conduct?
    Mr. Magaw. I think if I tried to do that off the top of my 
head, it would be slightly----
    Mr. Price. I was going to say, for the record.
    Mr. Magaw. We will get this to you, in writing.
    Mr. Price. Thank you.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Mr. Aderholt.

                         Semiautomatic Firearms

    Mr. Aderholt. Because of time, I will only limit to one 
question and then I may have some others I will submit for the 
record, and I will direct this either to Mr. Magaw or Mr. 
Kelly, whichever wants to respond.
    The President announced back in November of last year the 
suspension of certain semiautomatic firearms and the President 
at that time ordered a study in order to determine whether the 
importation of these firearms were particularly suitable or 
readily acceptable to sporting purposes, and it is my 
understanding that the Treasury Department is conducting this 
120 day review, and theoretically, the suspensions would end or 
a permanent ban would be imposed in mid-March of this year by 
the President, or of course he could extend the study period 
further.
    The question is since we are only a few weeks away from 
this review being completed, I think it is vitally important 
that you update us on where the Treasury Department is and 
where the White House stands on the completion of this study, 
and what the current status of it is.
    Mr. Kelly. Yes, sir. That study is being conducted with 
both Treasury and ATF personnel. It is still ongoing. We intend 
to make the deadline or certainly do everything that we can to 
make that deadline. But it is ongoing now. It is a joint effort 
between Treasury and ATF, who are certainly theexperts in this 
area.
    Mr. Aderholt. Okay. So you are saying that by end of the 
120 day time period, we should have some information on that?
    Mr. Kelly. Yes, sir.
    Mr. Aderholt. Thank you. Because of time I will submit the 
other questions for the record.

                          White House Security

    Mr. Kolbe. All right. A couple of quick questions.
    Mr. Merletti, there is $7.9 million in the President's 
request for White House security. This is all part of that 1995 
security review which ultimately translated into a $62 million 
budget amendment.
    Does this satisfy all the recommendations? Does this 
complete all the recommendations included in that 1995 review?
    Mr. Merletti. Concerning the recommendations, yes. With the 
exception of the funding for FTEs, we are where we should be.
    Mr. Kolbe. Is it going to be done within the $62 million? 
Are we going to complete all these recommendations within that 
$62 million?
    Mr. Merletti. Yes, it will be. Now, there the Service did 
request--there is a $15,664,000 request in our 1998 budget, 
that we need to complete some of the projects. We may have to 
ask that that be no year money, though, because we do not know 
that we can get all the construction done.

                            FLETC Management

    Mr. Kolbe. Okay. I will have some other questions in that 
area, then, to follow up with that, but Mr. Basham, you have 
taken over in a very tough situation I think. FLETC's had some 
serious management problems. You alluded a little bit to that 
in your written statement. There have been some law suits, 
harassment law suits. I am not sure whether they have all been 
settled, or not.
    You have a Booz-Allen study that has just been completed 
which reports some very serious findings of problems between 
management and staff, communications problems, suggesting that 
there is an atmosphere of mistrust, disrespect, poor 
communications.
    Have you had an opportunity to digest this report and the 
recommendations, and could you comment on them, and your vision 
of the future of FLETC and what actions you intend to take with 
regard to this report.
    Mr. Basham. Well, Mr. Chairman, yes, I have had an 
opportunity to review the report. I have had an opportunity to 
review the recommendations that are contained within the 
report. I am currently serving on a committee that is chaired 
by the Deputy Assistant Secretary at Treasury for Enforcement 
to look at these recommendations, and to develop an 
implementation plan for those recommendations.
    I cannot say to this Committee exactly how long it is going 
to take to actually implement the recommendations, but we will 
aggressively pursue them.
    I can tell you that in my tenure there, in terms of any 
kind of discrimination or sexual harassment, there will be a 
zero tolerance policy.
    We will aggressively pursue and determine if those sorts of 
things are occurring there, and we will handle them in the most 
severe method. But at this time, I cannot give you an answer as 
to when the recommendations will be implemented but we are 
reviewing those.

                          Charleston Facility

    Mr. Kolbe. Mr. Basham, we are supposed to close the 
Charleston facility, the temporary training facility in, I 
think, fiscal year 2000.
    Given the build-up we are continuing to see along the 
border and the prospect that we are going to have continuing 
training needs, particularly for INS border patrol, do you 
think that is realistic or not?
    Mr. Basham. Mr. Chairman, I would be somewhat less than 
candid with you if I were to say that the closure of the 
temporary facility at Charleston can in fact be accomplished by 
2000, mid year 2000. We are aggressively trying to meet that 
deadline.
    The funds that are represented here, the $13.3 million that 
has been requested for Glynco for dormitories and classrooms, 
if we stay on the schedule, which is a rather aggressive 
schedule to get the buildings erected and on line, there is a 
possibility that we could close that facility in mid year 2000.
    But everything is going to have to be perfectly set in 
motion to do that. Even with this $13.3 million and the closure 
of Charleston, I am not sure that with the added workload and 
with the additional advanced training that is being requested 
by our clients, that this is going to be able to be 
accomplished.
    So again, I have been there a short period of time, I have 
tried to look at this situation, and we are aggressively trying 
to meet that deadline.
    Mr. Kolbe. Thank you. I have a series of other questions 
but I will submit them for the record.

                           intelligence units

    Mr. Kolbe. Mr. Hoyer.
    Mr. Hoyer. Mr. Baity, I will ask you one question on 
FinCEN, and you referenced it, your chart was there in terms 
of--what did you call them? your intelligence units or----
    Mr. Baity. Intelligence units.
    Mr. Hoyer. Throughout the world. Would you elaborate on the 
success that we are having working with the international 
community, including Russia and China. In particular, I would 
be interested in what success we are having in collaborative 
efforts with them.
    Obviously, money laundering is an international activity. 
Quite obviously, to the extent that there are countries that 
give aid and protection, or at least anonymity to those who 
want to money launder, our success will be less than we would 
like it to be.
    I would appreciate your talking to me about the success we 
are having.
    Mr. Baity. First of all, I could not agree with you more, 
that the problem must be looked at from an international 
perspective.
    We have worked very diligently, both in terms of 
multilateral and bilateral fora, to achieve this. The theory 
being that the weakest link in the international chain of 
countries is where the money launderers and other financial 
criminals will hide. Let me just briefly, if I could, summarize 
the activity, which I think will address specifically your 
questions of Russia and China.
    Primarily, we work in conjunction with the Financial Action 
Task Force, or FATF, which was created by the G-7, and now 
includes 26 countries. FATF has created a set of 40 standards 
which are recognized as the international standards to prevent 
money laundering. All countries that want to implement money 
laundering procedures have looked at those standards for 
guidance.
    Since FATF's beginning in 1989 [Clerk's note.--agency 
inserted ``The standards have not been updated.'']. The United 
States assumed the presidency in 1996, and actually led the 
rewriting of the FATF 40 recommendations to bring them into a 
contemporary mode, to reflect new money laundering trends.
    The other part that FATF has done, which we think is very 
important, is that it create, on an annual basis, a typologies 
report; it's where we bring experts from throughout the FATF to 
look at money laundering trends.
    We have been successful in making that a public document. 
That is very important because it is one thing for law 
enforcement and Governments to have a sense of what is 
occurring in money laundering and financial crime but it really 
does not help if you cannot get the information out to 
financial institutions and others who need to know how to 
protect their institutions from infiltration.
    So making that a public document we think is very 
important.
    About two weeks ago, FATF had its most recent plenary 
meeting, and it is going to recommend to the G-7 summit that 
FATF be extended for five more years. There are two purposes: 
one, to expand the membership of FATF, because FATF, candidly, 
has been pretty much European-centered, with the United States 
and Canada, and a couple others.
    But there is no membership, for instance, from Latin 
America, no membership from Africa. All of these countries 
basically have vulnerabilities to money laundering, so it is 
very important to bring them into the fold, so to speak.
    With that in mind, countries such as Russia, Mexico, and 
China--I'm being somewhat careful here--not to say that they 
will automatically come in, but obviously because of their 
economic importance will be looked at as FATF tries to expand 
its membership.
    FATF is also going to a concept of regionalization. We have 
done that in the Caribbean by creating a Caribbean Financial 
Action Task Force.
    The Asian Pacific Working Group, which is another regional 
group, also has a very strong involvement from the Chinese 
Government. We have started to bring them in to develop anti-
money laundering programs in that way.
    So we are trying to widen the net in terms of bringing in 
everybody in that regard.
    Of course the development of financial intelligence units, 
as I described in our presentation, is critical. Now, the 
Egmont Group is the core group of financial intelligence units, 
which, at its next meeting in Argentina, expects to bring in 50 
countries [Clerk's note.--agency adds that this will include 12 
new members] that basically have created units that can take 
the reports of suspicious, unusual activity from their 
financial community and try to analyze that and exchange 
intelligence about that.
    So in that regard, we are seeing that. We are also, in 
terms of exchanging information with units as they are built, 
including the Russian tax police, starting to build those 
networks as well.
    In that regard, we think that the international efforts are 
starting to move forward to capture all of the people at the 
same time. [Clerk's note.--agency clarified that it means by 
this that efforts are being made to include more countries]
    The Secretary, as you may recall, about two years ago led 
the Summit of Americas meeting in Argentina, and that was the 
first time where, in this hemisphere, we brought 29 of the 34 
countries together.
    We have seen, in the last two years, positivemovement in at 
least 24 of those countries, either implementing anti-money laundering 
legislation, criminalizing money laundering, creating units to work on 
it. So we have started to see some movement in that regard as well.
    Mr. Hoyer. I see you are about to tap the board, so I will 
stop. Thank you very much.

                               conclusion

    Mr. Kolbe. Thank you, Mr. Hoyer, and I want to thank all of 
our panel, and guests here today, and everybody else for their 
patience.
    I think this has been an extraordinarily instructive 
hearing, and Secretary Kelly, especially, you, I know, 
overstayed your time. I hope we have not caused you to miss 
something too important there, but we appreciate all of you 
giving so much of your day to us here. I think this has been 
very useful.
    This Subcommittee is adjourned.


[Pages 378 - 440--The official Committee record contains additional material here.]



                                      Wednesday, February 25, 1998.

                            CUSTOMS SERVICE

                                WITNESS

SAMUEL H. BANKS, ACTING COMMISSIONER OF CUSTOMS SERVICE

                     customs fy 1999 budget request

    Mr. Kolbe. We will go to Acting Commissioner Banks for his 
opening statement. Commissioner Banks, welcome.
    Mr. Banks. Thank you, Mr. Chairman, members of the 
subcommittee, I am very pleased to be here today with you, and 
with Under Secretary Kelly. I have a formal statement that I 
would like to submit for the record, with your permission.
    Mr. Kolbe. Absolutely, and I neglected to say at the 
outset, that all the complete statements of the Secretary and 
Under Secretary will be, as well as all the others, will be 
placed in the record.
    Mr. Banks. Our fiscal year 1999 budget request totals $1.8 
billion and 16,766 FTE. That is basically an increase of $125 
million and 111 FTE over the current year.
    Half of that is really just to maintain our existing 
operations and to keep up with inflation. The other half, which 
is $68 million and 31 FTE, is dedicated to a series of 
initiatives in the areas of narcotics and money laundering, 
integrity improvement, child labor enforcement, and narcotics 
detection technologies.
    We believe this is a modest, responsible budget and we are 
determined to give the Congress and the American people a solid 
return on their investment by insuring our borders are safe. 
Last year, we again confronted a huge increase in the volume of 
workload. We processed 442 million people--which is one and a 
half times the population of the United States--crossing our 
borders into this country. We also scrutinized over $850 
billion worth of trade that came into this country.
    Customs seized over a ton of narcotics last year. Every 
day, every work day, we basically seized a million dollars in 
currency and last year we made 20,000 arrests. We face an 
incredibly complex array of enforcement issues--drug 
trafficking, money laundering, international trade agreements, 
child pornography, intellectual property rights enforcement, 
trade sanctions, and control of weapons of mass destruction.
    I could go on significantly longer, but our foremost 
priority continues to be narcotics interdictions. To meet these 
challenges, we rely principally on the dedication, integrity, 
energy and professionalism of our officers in the field.
    Secondly, we are very dependent on technology, both 
automation technology and high-tech equipment. Tough, 
aggressive new approaches and strategies like our Operation 
Brass Ring allow us to keep the smugglers off balance.
    But rather than just sit here and talk, if I could ask the 
indulgence of the Chairman, I would like to perhaps do a small 
demonstration?
    Mr. Kolbe. Certainly.

                demonstration of inspection technologies

    Mr. Banks. Yes, sir; sure do. In fact, I would like to get 
your coat, and if I could----
    Mr. Kolbe. I told you not to carry those drugs with you. 
[Laughter.]
    Mr. Banks. Can you hear me all right on the microphone?
    First of all, I would like to express our appreciation--I 
hope that fits. The coat is a small size.
    I would like to thank you for being our guinea pig. What 
you represent is one of 1.2 million passengers we see every 
day, vastly more than the population of the District of 
Columbia, that we have to sort through and figure out who are 
the ``bad guys,'' who are the problems. Well, actually, we 
knew--
    Mr. Kolbe. I would like the record to reflect this is a 
demonstration. [Laughter.]
    Mr. Banks. We knew the Chairman was coming in because when 
he boarded his flight to come into the U.S., in Bogota, the 
airlines swiped his passport through a passport reader.
    That reader electronically transmits to us your bio data, 
so we know who is coming into the country. It automatically 
runs against our databases which are our lookout systems. In 
addition to that, we even reached into the airline reservation 
systems and saw that youpaid for your ticket with cash, and you 
actually bought two tickets to try to conceal your itinerary.
    So before you ever arrived in the U.S., we knew we wanted 
to talk to you.
    The second thing that we do is we try to run you through 
additional technologies. What you hear is a radiation pager. 
Customs is putting out 1,700 radiation pagers around this 
country at our ports, so that we can try to prevent the 
possibility of nuclear products coming into this country.
    With the current threats, this is a serious issue. Thank 
you, Inspector Whalen, and by the way, this is just a 
simulation--I assure you--it is totally harmless. [Laughter.]
    Mr. Kolbe. Well, what is that supposed to detect?
    Mr. Banks. That actually detects a radiation source. What 
we are trying to do today is related to what we found when 
testing with the Department of Energy. We have actually set up 
a radiation detector at Dulles Airport, and it was set off 
three times in a period of six months. It scared the Department 
of Energy. It scared us.
    We launched a program with them to find out how we could do 
a better job of insuring that we do not have nuclear products 
or any terrorist type products that could come across our 
borders, by air, land and sea.
    Mr. Kolbe. People carrying them.
    Mr. Banks. People actually carrying them; absolutely, sir. 
And in addition to that, we even put the radiation detectors 
inside our mobile x-rays at the airports, checking the bags and 
the containers and the merchandise that go on aircraft every 
day.
    Another component of our layered inspection process is our 
dog handler, Tim Spittler, and his dog, Flint, as they are 
coming in the room.
    Mr. Kolbe. He is friendly, yes?
    Mr. Banks. Actually, we have over 600 dog teams around the 
country. Most of the dogs are aggressive dogs, so if they found 
narcotics, they would rip them to shreds. That is not entirely 
true.
    This is a passive dog. We have almost 70 passive dogs 
around the country, and if they think that you might have 
something on you, the way they react is they sit down.
    This is a way we can screen a whole room full of passengers 
at an airport by just walking that dog around, and that is what 
this dog basically did, is it says that you have a problem. So 
if we could perhaps get the coat from you at this point? I will 
take it from you.
    And by the way, last week, in San Luis, Arizona, one of our 
dogs, Speedway, alerted on a truck and picked up 265 pounds of 
cocaine. What this dog alerted to was this pound of cocaine 
that is molded into plastic. It looks like a mechanical gear, 
but that is real cocaine.
    And if we could, I would be willing to share it with the 
other members of the subcommittee, although we do need that 
back. [Laughter.]
    Mr. Kolbe. Are you finished with----
    Mr. Banks. The jacket? No, sir. I am not totally finished 
with you; just a little bit longer.
    Mr. Kolbe. I am still under suspicion.
    Mr. Banks. You are still under suspicion.
    Actually, this jacket was part of a real seizure, too. If 
you go into the back of this, it has got false compartments and 
tape. We picked up $80,000 that was going out of the country, 
related to drug proceeds. One of things that we check is 
outbound flights.
    Another piece of technology that we bring into play is a 
narcotics particle detector, and all we have to do is actually 
swipe bags. We take a little wipe and we run it on the handle 
on merchandise. We then put it in this equipment, and this will 
tell us whether or not it's narcotics. It can even tell us what 
type of narcotics.
    This also covers explosives, which is a major issue, again, 
at our airports. We have got a whole variety of technology in 
the back that we would like to be able to show you.
    If you care to go back, you may go back. If it is all 
right, can we keep your luggage for a little bit? Yes, sir. All 
right. Good. Because things are actually going to get worse for 
you as we go through the luggage. [Laughter.]
    Mr. Banks. If you would put the luggage up there, Inspector 
Whalen.
    As he goes through this, the first thing that the inspector 
is going to find is a bank draft for $2,245,000, which the 
Chairman failed to declare when he came into the country.
    I picked that amount only because that is the amount we 
seized last week that actually came into Federal Express at one 
of their courier hubs. Again, we are tying it back to whether 
or not it involves drug proceeds.
    The next thing that Inspector Whalen is going to find, is a 
simple thing like a magazine and a video. It could be real 
simple. But, it could be one of those 323 incidences like last 
year when we actually found child pornography coming into the 
country on people, in the mail.
    But the real enforcement issue on child pornography is the 
Internet. We currently have 325 investigations underway on 
child pornography. Last year, we arrested 145 people for being 
engaged in child pornography, and this included family 
physicians, police officers, and a host of others that are 
involved in youth programs.
    It would be astounding, if it were not so depressing.
    Another thing that you might find in a bag like this is a 
package of compact discs. These discs were actually seized in 
the mail in San Francisco. If these were legitimate, they would 
be worth over $200,000. American industry loses billions of 
dollars every year because of the theft of intellectual 
property rights. I promise you, we are engaged heavily to try 
to protect those industries and protect their property rights.
     In addition, the Chairman had in the bag a little toy 
truck for a child. In actuality, this truck really held almost 
$50,000 in undeclared currency. The money was concealed inside 
of it.
    The truck also reminds me that when we work at the borders, 
we are protecting America's kids against unsafe toys, with 
small parts that break off and can be swallowed. We especially 
work during the Christmas season in order to find unsafe toys 
coming into our country. In addition, we try to protect 
American consumers against unsafe food products, unsafe 
medicines, environmental issues, and a whole host of other 
issues.
    So, thank you very much, Inspector Whalen.
    Mr. Chairman, I would like to give you a cigar for agreeing 
to participate in our----
    Mr. Kolbe. Are you sure this one is okay? [Laughter.]
    Mr. Banks. That one----
    Mr. Kolbe. Not Cuban, is it?
    Mr. Banks. That one is not Cuban. But last year, we seized 
and destroyed 240,000 Cuban cigars.
    Now, that bag was pretty small. But what you have to 
understand is that we get 18 million commercial shipments that 
come into our ports. We get 4.5 million ocean containers. 
[Clerk's note.--bureau notes that these are annual figures.] A 
truck crosses the border from Mexico into the U.S. every five 
seconds. The amount of work that we face, every day, and try to 
sort through is just absolutely astounding.
    Most of the cargo is released within the same day, most of 
it within a couple of hours. We actually process air 
passengers. The vast majority walk out of our airports within 
five minutes of getting their bags. The reason we can do it is 
because we use technology, both automation technology, and 
applied technology. In addition, we use a layered inspection 
process in order to do our job.
    In fact, we'll match our enforcement record against anyone 
else. We seized 982,000 pounds of narcotics last year, $240 
million in currency, and made over 20,000 arrests.
    And by the way, as part of doing our process, we also 
collected for the Treasury over $22 billion in revenue, a 15 to 
1 return for the United States Government based on our S&E 
budget.
    So we are trying to be what we think is a solid return on 
investment. Also, I have just got a short video, if I could 
show it to you, of some things, actual cases that happened, 
things that I cannot bring into this room to demonstrate.
    [A videotape is shown.]

                               videotape

    Mr. Banks. The first happens to be a Cessna Citation jet 
flying and following this fellow. He is flying at about 100 
feet coming into South Florida. As it turns out, he was a pilot 
on a major commercial airline. He is dropping bales of cocaine 
into South Florida and, actually, he is pretty good, because he 
almost delivered it door to door. When he knew we were chasing 
him (that was his house, back there), he virtually dropped the 
bale right on top of his house.
    We, by the way, have aircraft all over South and Central 
America, even into Mexico.
    The next clip is going to happen real fast. This is when we 
actually arrested him and his team when they landed. On this 
one, again, it is a Cessna Citation. There is the ``bad guy,'' 
right there. That is him ramming one of our boats, and then we 
pick him off. This, again, is in the middle of the night. This, 
is by FLIRs [Clerk's note.--Forward Looking Infrared Radar], is 
the only way you can see this at night.
    And what you cannot realize is how dangerous this work is. 
We have got our people out there every day. Off San Diego last 
month, we had an undercover operation. We infiltrated some of 
the group. we knew about two boats coming in and we got 
together with the Coast Guard in order to bring them in. But, 
you would need fast boats in order to catch these individuals.
    We pulled in on that one three thousand bales of marijuana.
    The next clip that we have got is another undercover 
operation. What you are going to see is a freighter just north 
of Cuba. You see a freighter here. This is the ``bad guy.'' 
That is 5,100 pounds of cocaine, dope on a rope, that is just 
trailing behind him. That is actually an undercover Customs 
vessel, in which we pick the stuff up in order to bring this 
case down. Twelve days ago, we picked up another two tons of 
marijuana off Jamaica. Last night, our people got over 2,000 
pounds of cocaine off the coast of Puerto Rico with our fast 
boat operations.
    This is the Seaport at Newark. This was actually an 
undercover operation. We infiltrated a group that was using 
dock workers. What you can see is people that are going in the 
container. Again, this is the middle of the night. These are 
all lights. This is an infrared camera. These folks are going 
in and breaking into that container which came off the ship. 
This is before it ever gets to us for inspection.
    These guys are going in and ripping it off, and then toting 
out 250 pounds of cocaine from this container. They will then 
go back and reseal that container with an authentic seal that 
they got from the shipping line in South America.
    So when it actually gets to us, you will never know it was 
touched. These are some of the challenges that we face with 
internal conspiracies.
    The next clip, which is going to happen fast is a seaport 
operation in Miami. It was an undercover operation. We 
infiltrated a longshoremen group. We knew a container of 
cocaine was coming into the port. We set a hidden camera in 
this next container as you will see in a second. This camera 
will trigger when the container door is tossed open. Two 
longshoremen are going in and two bales, two duffel bags of 
cocaine, are ripped out of the container.
    The point I want to make is that this happened in seven 
seconds. That is our window of opportunity to nab these people. 
Seven seconds. It is a real tough job, especially when you have 
got people that are complicit within these organizations.
    I want to back that next one up for just a second, if I 
can.
    What we have here are two inspectors on our southwest 
border. In just a second, you are going to see two inspectors 
go up and talk to this driver, and start to make an inspection 
of the driver. The driver does not want to get caught, so he 
almost runs over our inspectors. Port runners will run over 
anybody, smash through anybody in order to get away. Now, this 
really is stolen vehicle going southbound into Mexico. We do a 
lot of stolen vehicle work.
    Mr. Kolbe. Did you get him?
    Mr. Banks. No, we did not get that one. But last month, we 
had 30 of those port runners come in. I do not know if all of 
them were carrying dope. Thirty of them came up into the United 
States, and we have had officers injured. We have had shootings 
as a result of this. Again, the work that those guys are out 
there doing on the border is incredibly dangerous, difficult 
work with an amazing array of complexity.
    What we have tried to show you is really just a microcosm 
of the magnitude, the complexity of the job, and also the 
danger.
    If you actually go out and talk to our officers in the 
field, I think you will find they are incredibly dedicated and 
committed to doing this mission correctly. We need to support 
them with the right tools. That is reflected in the budget 
request. We also need to be able to rapidly move products 
through for the U.S. economy.
    It is a big job, but it is not an impossible job. Our 
commitment to you is that we are going to try to spend every 
cent that you give us the best we can. We will give the 
American taxpayer the best return on their investment. That is 
our objective.
    Thank you very much. I would be happy to answer any 
questions.
    [The information follows:]


[Pages 447 - 459--The official Committee record contains additional material here.]



                       law enforcement resources

    Mr. Kolbe. Thank you very much, Commissioner Banks. A very 
interesting demonstration. I think it really does highlight the 
critical work that you are doing, and as you say, the 
tremendous danger that your people work with every day.
    I am going to come back in my second round of questions 
with some thoughts, some questions for you, but in this first 
round, let me, if I might, limit my questions to Under 
Secretary Kelly, and I am going to follow up on the things I 
was talking about with Secretary Rubin.
    My staff, the staff of this Subcommittee and I, and Mr. 
Hoyer, have had an opportunity to visit parts of the border 
during the last year, and my staff has been in other 
significant areas where Treasury law enforcement operations 
have been working, looking at such things as Operations 
Gateway, Hard Line, and HIDTAs.
    Each of these agencies and these programs have told us that 
since, in the last three years, that they are losing personnel 
and resources that are needed to keep up with the criminal 
activity that is associated with drug trafficking.
    The result is, Mr. Secretary, that we have interdiction 
boats that do not have crews on them, we have Black Hawk 
helicopters that do not have the apprehension teams on board, 
we have night operations that lack night vision and infrared 
equipment, and we have air and marine assets that are not being 
coordinated. We have precious little outbound screening, that 
we talked a little bit about it here . WE have very limited 
capability for train, container, and tanker examinations.
    Yet billions of dollars are getting laundered, going out of 
this country, and we lack coordination in our operational 
intelligence. I give a lot of credit to you and to the 
agencies, the Treasury law enforcement agencies that are, I 
think, doing herculean efforts, and doing a tremendous job 
under such difficult circumstances.
    But my basic question, Mr. Secretary, is are we weakening 
our Treasury law enforcement? Is it deteriorating to such a 
level that we really cannot expect to meet the kinds of 
standards that we are talking about with ONDCP's drug strategy 
for the next decade?
    Are we satisfied with the current status of our law 
enforcement in Treasury, and the amount of funding that we are 
getting, the amount of technology that we are getting, and what 
efforts are we making to try to change this, Mr. Secretary?
    Mr. Kelly. Well, first, let me say, Mr. Chairman, that I, 
too, have been out on the border, and I have been very 
impressed with the work that is being done by the agents and 
inspectors who are on the front lines.
    I think you raised a lot of issues here. You talked about 
coordination. I think you mentioned intelligence. Yes, 
resources are an issue. Would we like to have more? Of course 
we would. But we went through a budget process, as Secretary 
Rubin said, judgments were made in an attempt to optimize 
available resources.
    We requested, obviously, more than what we got. I think 
that we are doing a good job. Could we do a better job with 
more resources? Absolutely. We are hopeful that the $54 million 
technology that is budgeted in the 1999 budget will make a 
significant difference. Would we like more? Sure. We would like 
more to do that.
    I think General McCaffrey has done a good job in pulling 
together some of these issues and focusing on them.
    We are meeting now with the Justice Department and ONDCP on 
a regular basis, to better coordinate our operations on the 
border.
    In fact I think Justice and Treasury, specifically Sam 
Banks, and Doris Meissner in INS, have been doing a lot of work 
to better our coordination. There is a model that exists on the 
southwest border in the San Ysidro area that we would like to 
replicate because we think it does certainly improve the 
coordination that is being done between law enforcement 
entities, not only INS and Customs, but other law enforcement 
agencies as well, State and local.
    We need improved intelligence. Traffic at the border is 
projected to increase about 6 to 10 percent a year well into 
the next century. We need better intelligence to help Customs 
target who is coming across the borders. Without that 
intelligence, it just becomes much more of a random effort, 
pig-in-a-poke type operation.
    So I guess to answer your question, yes, we could use more 
resources. I think we are doing a good job with what we have. I 
have been very impressed with the people who are on the front 
lines. The Secretary has pledged to you that he is willing to 
work and see if more resources can be made available.

                 disparity between treasury and justice

    Mr. Kolbe. Well, Mr. Secretary, there is no doubt all of us 
could do more with more resources, if we had them available. 
Any agency in Government would give us that answer. That really 
is not what I am trying to get at with the thrust of my 
question. It is to try to understand what is going on 
internally, within the administration, to understand why 
Justice is so favored in this effort, just knowing that we have 
limited resources all the way around, why we favor Justice law 
enforcement so enormously over the Treasury law enforcement?
    Does it suggest, that having gone through a review, that it 
is the view of the administration that Treasury law enforcement 
is not that critical, that it really is not thefrontline, that 
it is not what the public really wants? I am trying to get a handle as 
to why, year after year, we continue to give almost level funding, or 
such small increases to Treasury, when we continue to give very 
substantial increases to Justice in law enforcement.
    There does not seem to be a lack of will to do something 
about law enforcement when it comes to resources. It is the 
allocation of these that I do not understand and I am trying to 
get a handle on.
    Mr. Kelly. Well, obviously, we make that argument within 
the administration. But I think to be fair to Justice, and to 
OMB, I think they have been responding in recent years to 
chronic understaffing in both the Border Patrol and the Bureau 
of Prisons. [Clerk's note.--Department added the Immigration 
and Naturalization Service to these.]
    We know that the prison population has gone up, 
dramatically, and the Bureau of Prisons' of course has to go up 
to keep pace with that increase in population. Also, the Border 
Patrol, in a lot of people's judgment, has been understaffed 
for a long, long time, and now they are approaching levels that 
most people think will enable them to do a much more effective 
job.
    But having said that, yes, I think there has been 
recognized here by the Secretary, an historical pattern of a 
lack of parity between Justice and Treasury enforcement 
agencies. I cannot give you the historical basis, why it 
happened years ago. All I can say is we have made our 
arguments, we made what we think are cogent arguments, we have 
gone forward, and in the budget process we were not funded, 
obviously, at the level we requested.
    Mr. Kolbe. Thank you.
    Mr. Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman.
    I do want to make an observation here, that the 
administration seems somewhat caught in a vise, either way it 
moves, in terms of criticism.
    Obviously, the integrity of our borders is a very 
substantial concern. What these charts show is the 
administration has beefed up, very substantially, our INS 
border patrol people.
    Frankly, notwithstanding the speaker's comments, that the 
administration does not seem to be engaged in this effort, in 
fact we have had a substantial increase in the War on Drugs. I 
know General McCaffrey does not like to refer to it as the War 
on Drugs, but we have had a substantial increase in a lot of 
different areas, and of course this is one of them.
    Now, I agree with the Chairman that we have historically, 
since I have been on this committee, 1983, not had the level of 
funding at Customs coming from any administration, that I think 
was necessary, and in fact we have beefed it up almost every 
year, I think.
    I am not sure, exactly, whether we have done it every year, 
but we have certainly done it most years.
    Let me ask you something, Mr. Secretary. In terms of 
requests, either at Customs, specifically, or Treasury law 
enforcement as a percentage, how far under are we in terms of 
our request in the OMB submission, or the President's 
submission?
    Mr. Kelly. Well, I can tell you that the aggregate total 
for the bureaus was about $3.9 billion, that we submitted. That 
went to OMB with some minor modifications in the total amount. 
[Clerk's note.--Department adds that ``OMB reduced that request 
in their initial passback'']
    We appealed at a $3.7 billion level, and our budget is now 
roughly $3.2 billion. So that takes you through the process. 
That is what we came out with, $3.2 billion, based on a request 
of $3.9 billion. [Clerk's note.--Department classified that the 
aggregate request was $3.6 billion and the appeal was for $3.3 
billion.]
    Mr. Hoyer. What was last year's figure?
    Mr. Kelly. Last year was less than that. The total increase 
is a little over 5 percent. [Clerk's note.--Department amended 
this to 5.7 percent.] $3.0 billion was enacted for the last 
fiscal year.
    Mr. Hoyer. Okay. So it was 3 even and went to 3.2. That is 
a little more than 5 percent. 5 percent would be 1.5. And it 
was $200 million.
    Mr. Kelly. That figure, exactly.
    Mr. Hoyer. $150 million, I guess would be 5 percent. $200 
million is 7.5, I suppose.
    Mr. Kelly. 5.7 percent.

                       coordination with justice

    Mr. Hoyer. Okay. Let me focus, just briefly, on the--I have 
talked to General McCaffrey. I would like your observation on 
this. Having headed up an operational agency in one of the 
toughest cities in American, New York, and done so, 
successfully--and I have indicated this to the administration--
what we need to convince the American public of is that the 
ONDCP, and the component parts of our drug effort, whether in 
Justice or Treasury, or any place else in Government, is 
operational.
    My question to you is, Is there a sense that General 
McCaffrey and the Administration are able to overcome the turf 
wars that have so often undermined our full effectiveness? And 
you know what I mean. FBI versus ATF. DEA versus Customs, or 
INS--which they are all on the same team, and the theory that 
Congress had, and the objective that Congress hoped to achieve 
was to fully coordinate these efforts, which is what I think 
Secretary Rubin indicated, and the Chairman indicated earlier.
    Is somebody making sure that all component parts of a lot 
of resources being spent--I do not know what our drug--$15 
billion? Anybody know where we are now? In that neighborhood. 
Twenty? Anybody know? Well, anyway, whatever the figure is, it 
is a lot of money.
    Mr. Kelly. $17 billion.
    Mr. Hoyer. $17 billion. Okay. The question therefore is do 
you feel, based upon your experience, that we have an 
operational, integrated, coordinated effort, maximizing the 
effectiveness of the resources we are applying to the integrity 
of our borders and the safety of our neighborhoods from those 
who would undermine it through the sale and distribution of 
drugs?
    Mr. Kelly. You mentioned turf wars, and I believe, and I 
have been told that there are less now than ever before. 
Certainly there are still jurisdictional issues, no question 
about it.
    I know that we coordinate very well with the Justice 
Department at the higher levels. Are there areas of friction in 
the field? In some places, yes. But I am also told, as the 
Secretary said, that there is better cooperation now than ever 
before.
    We work closely with General McCaffrey. Indeed, that is 
what General McCaffrey is attempting to do, to put together a 
coordination model, and we are working towards that end. Is it 
perfect now? No. Do we have a ways to go to improve our 
relationship? Yes.
    But it is better now than it probably has been in a long 
time, and I think both the Attorney General, Secretary Rubin, 
and General McCaffrey are committed to closer coordination.
    We have lots of working groups who are talking on aregular 
basis, trying to put a model together. In San Ysidro, as I mentioned, 
we are working very closely with the Justice Department. We are looking 
to replicate that--the coordination of Customs and INS--along the 
border.
    It is not going to be done with one fell swoop. You just 
cannot wave a magic wand and say, ``Everybody get along.'' But 
we are doing it incrementally, and I see a lot of promise in 
what General McCaffrey and the Attorney General are doing.
    Mr. Hoyer. Mr. Secretary, I understand that you cannot wave 
a magic wand, but if we go to actual war, magic wands are 
waived. It is made clear to everybody by the President and by 
others, you are going to cooperate, you are going to coordinate 
effectively, and we are going to defeat the enemy. I think that 
is the level of cooperation that we need in this effort, and I 
would hope that you would work toward that effort, and that 
General McCaffrey would effect that kind of coordinated effort.
    Thank you, sir.
    Mr. Kelly. Yes, sir.
    Mr. Kolbe. As has been our custom, we will go on the basis, 
alternating between sides, that people appeared at the 
subcommittee. We will begin with Mrs. Meek.
    Mrs. Meek. Mr. Chairman, most of my questions are directed 
regarding Customs, and of course if Secretary Kelly or Mr. 
Banks--are you available to address them now? Or should I wait, 
Mr. Chairman?
    Mr. Kolbe. No, you can--either one of them that are here. 
Mr. Magaw will be back with us, shortly.

            community development of financial institutions

    Mrs. Meek. Good.
    I have two concerns. One is with the financial part of your 
group--and this would go to Mr. Kelly in that you are the 
Deputy Secretary, correct?
    Mr. Kelly. Under Secretary.
    Mrs. Meek. Under Secretary. So you do have the ability to 
think about Treasury and what it does in the financial arena.
    I have a great interest in your community development of 
financial institutions. Are you familiar with that, Mr. Kelly?
    Mr. Kelly. Somewhat.
    Mrs. Meek. I think that is the one segment of what Treasury 
is engaged in, that will help to revitalize some of our 
crumbling economies in some of the small cities in urban areas, 
and I would like you to talk just a wee bit about what can be 
done in this area.
    I notice from your budget you are asking for $125 million 
to be placed in that particular category.
    I would like to know, what do you expect to get done with 
that small amount of money?
    Mr. Kelly. Well, if you are talking about community 
development, I am not certain what budget amount you are 
referring to, but I think that question would probably best be 
addressed next week when--
    Mrs. Meek. The financial area?
    Mr. Kelly. The financial area.
    Mrs. Meek. All right.
    Mr. Kelly. They have people who do that, specifically, who 
will be here with Secretary Rubin.
    Mrs. Meek. All right.
    Mr. Kelly. I can give you my general opinion, but it is 
probably not worth much.

                           customs--workload

    Mrs. Meek. Good. I will move on to the next one.
    The other one has to do with Customs. Last year, when 
Customs came before us, I asked several questions regarding how 
you are going to be able to beef up your employees, and this 
year, there is only an increase of less than 2 percent over 
this year's level and I believe that that is too small.
    I think that is what I am hearing. That is the undertone of 
what I am hearing throughout this panel today. That you are 
requesting a small amount of money for an agency which is 
already underfinanced, and I would like you to look into 
Customs' workload, to see if there is some way that you can 
enhance this, and I would like to comment on what areas within 
that Customs allocation can you use the pittance which you have 
to enhance that area?
    Mr. Kelly. Well, we requested more FTE, clearly, than what 
is in this budget, and I agree, but, again, this is all part of 
a budget process. A figure was ultimately determined that we 
would go forward with and do the best job we can. We requested 
several hundred more FTE in the Customs budget; the Secretary 
supported that request; it went to OMB; and it did not survive.
    And again, we are all part of a team, part of the 
Administration team. Could we use more people in a whole host 
of functions in the Customs Service? Yes. Particularly 
inspectors, and particularly investigators. The investigative 
population of Customs has remained stagnant, in fact has gone 
down over the last several years period.
    So I am in agreement with you, that we could use more 
people to do the job.
    Mrs. Meek. I would just like to reemphasize for the record 
as well as for your future attention, when you look at the four 
year period of fiscal year 1996 through fiscal year 1999, the 
Customs' workload, according to your own figures, is projected 
to grow much faster than its labor force, and the number of 
cargo entries cleared by Customs is projected by Customs to 
reach 19.6 million next year, and that is an increase of about 
23 percent since fiscal year 1996.
    And the number of air passengers, by your own figures 
process, is projected by Customs to reach almost 82 million 
next year. That is an increase of 26 percent since 1996.
    The number of sea passengers processing is projected by 
Customs to reach 10 million next year, an increase by 43 
percent since fiscal year 1996.
    I wanted that read into the record because it demonstrates 
the crisis that you are in in the Customs area, and I will 
continue to reemphasize that in that it plays such a critical 
role in interdicting the drugs, that all of us have such an 
interest in, and I am hoping that through your efforts, Mr. 
Kelly, that OMB will be better impressed with this particular 
problem.
    So just based on the workload, it would appear to me that 
that is a strong rationale for an additional funding amount.
    I would like to turn, Mr. Kelly, as to how you are going to 
allocate the total resources in different parts of the country.
    If you will remember, that is one of the questions I asked 
you last year, not you but the person who was here. In terms of 
the number of Customs employees, the three largest airports are 
JFK in New York, Miami International, and Los Angeles. I would 
like to submit for the record some detailed written questions, 
so that the Committee can better understand the workload per 
employee at each oneof these airports, and of course I have 
charts and information showing the cocaine seizures in commercial 
airports throughout the Nation last year.
    So I ask, Mr. Chairman, unanimous consent to place it in 
the record.
    [The information follows:]


[Page 467--The official Committee record contains additional material here.]



    Mrs. Meek. It shows, Mr. Kelly, that most of these seizures 
are in South Florida. I am told that Miami Airport had more 
narcotics arrests than JFK and Los Angeles combined. It points 
out the strong problems we have in Miami in the cargo area.
    I am also told that South Florida lost more than 150 
narcotics positions over the past five years. I have been told 
that in order to save on overtime pay Customs will no longer 
inspect every cargo ship coming from a foreign port, that 
arrives after normal business hours of 9:00 a.m. to 4:00 p.m.
    Doesn't this all mean that Miami Customs needs more 
resources to deal with the flood of narcotics? I am putting 
this in the record so you can see the importance of this in 
terms of that particular area, and that more attention should 
be placed where the greatest problem is.
    Thank you very much. Would you like to comment on that, Mr. 
Kelly?
    Mr. Kelly. Well, ma'am, if you are going to submit that for 
the record in detailed questions, we will respond in writing.
    Mrs. Meek. Thank you. Thank you.
    Mr. Kolbe. Thank you very much, Mrs. Meek.
    Any questions that Members have to submit for the record 
will of course be submitted.
    Mrs. Meek. Now, Mr. Chairman, I know my time is up----
    Mr. Kolbe. Yes. We will have a second round of questions.
    Mrs. Meek. Wait for the next round.
    Mr. Kolbe. Right.
    Mrs. Meek. All right.
    Mr. Kolbe. Thank you.
    Mr. Forbes.
    Mr. Forbes. Thank you, Mr. Chairman, and I thank both of 
you for being here today, and Mr. Kelly, I appreciate that the 
administration is looking for additional service from you, and 
speaking parochially, we are very proud of that.
    Mr. Kelly. Thank you.

                      youth crime gun interdiction

    Mr. Forbes. I just had one or two questions, and I will 
submit the balance for the record.
    Mr. Secretary, the President's Initiative on Youth Crime 
Gun Interdiction Initiative, which would be aimed at, I guess, 
initially 27 cities and cost about $60 million, could you--I 
understand that Mr. Magaw will be back, and probably would want 
to address it in greater depth--but if you could, what is not 
happening in the seizure of weapons with gangs and youth, that 
this initiative seeks to address?
    What is not happening?
    Mr. Kelly. This initiative seeks to develop information for 
both local and Federal law enforcement as to how guns are being 
obtained by young people. People in gangs; people not in gangs. 
[Clerk's note.--Department clarified that this refers to 
illegally obtained guns, and that ``people'' means juveniles 
and youths.]
    In fact this project was done as a pilot, initially, in 
1996, with 17 cities, and a report was issued last year, and 
the report, in my judgment, having been in local law 
enforcement for a long time, was very helpful to police chiefs.
    Let me back up and say what happened in the Youth Crime Gun 
Interdiction Initiative is that police chiefs, police 
executives and prosecutors signed up in this program to put all 
of their crime guns into a tracing system that will enable 
information to be obtained as to where the guns were coming 
from. [Clerk's note.--Department clarifies that this refers to 
illegal sources of guns.]
    A report was issued to the public, but particularly focused 
on these 17 cities, and we have gotten a lot of positive 
comments from police chiefs, police executives who are involved 
in this program, saying that it gave them a lot of information, 
showed them where the flow of guns was coming from, 
particularly for young people, but other people as well. 
[Clerk's note.--Department clarified that this reference is to 
the illegal flow of guns.]
    So it gives police executives a clearer picture, and 
therefore they can develop strategies. Now what this report 
showed, that in all but I think two cities, crime guns were 
coming from the States in which those cities were located. So 
we can develop more specific localized strategies to address 
the guns coming into a city.
    Mr. Forbes. And heretofore there has not been any kind of 
tracking system on weapons and how they fall into the hands of 
young people or gangs?
    Mr. Kelly. No, there was not. There was simply not a system 
to do that, and a part of this is because of developing 
technology that enables it to now be done. [Clerk's note.--The 
Department adds that this refers to the previous absence of 
trace analysis and reporting to police departments.] This adds 
to ATF's Project Lead, which John Magaw can certainly talk more 
about.
    Mr. Forbes. Thank you.
    Mr. Kelly. And also, there was no commitment by local 
Government to actually have their guns traced. [Clerk's note.--
Department clarified that this refers to recovered guns.] And 
it is also a resource issue with local Government. So they 
signed up to this do, to participate in the program, and that 
is what we are giving them back in return--a report. [Clerk's 
note.--The Department adds that the report shows them crime 
facts about their jurisdiction, and something that can serve as 
a basis for federal and local collaboration on specific 
localized strategies.]
    Mr. Forbes. Are we going to be running into computer 
problems, the whole idea of trying to have a national computer 
system in which I think there has been some question raised 
about the lack of an efficient national computer system, and 
keeping track of, for example, the tenets of the Brady Bill, it 
has been difficult to get that system up and running.
    Are we going to run into a similar problem?
    Mr. Kelly. No, it is certainly not our intention. We think 
that [Clerk's note.--Department clarified that this refers to a 
national computer system.] is not authorized in the law. I am 
notclear what database you are talking about, but if guns are 
submitted, that are traced----
    Mr. Forbes. For law enforcement, sir. I mean, in other 
words, if a local police department is trying to participate in 
this program, are they not going to be having to tap into a 
national computer system to see traces of where weapons are, 
and how they could contribute to that national system? Is that 
part of this at all?
    Mr. Kelly. That information comes back through the ATF, and 
again, John Magaw can give you more specific information on it.
    Mr. Forbes. Thank you.
    Mr. Kelly. They do not tap directly into that system. 
[Clerk's note.--Department clarified that there is no national 
computer system, but ATF provides trace information to police 
departments.]
    Mr. Kolbe. Thank you.
    Mr. Price.

                            softwood lumber

    Mr. Price. Thank you, Mr. Chairman.
    Mr. Kelly, Mr. Banks, I would like to add my welcome this 
morning, and to thank you for your testimony.
    Mr. Banks, I was able to visit last week with some of your 
agents and inspectors based at the ports of Wilmington and 
Morehead City, and also at Raleigh-Durham Airport. We had a 
good, informative visit. I very much appreciate the work that 
they are doing there.
    Mr. Kelly. We appreciated that visit, too, sir.
    Mr. Price. It is very important to our State.
    This morning, I want to focus on softwood lumber. I have 
some questions that are rooted in a concern for the price of 
lumber, and ultimately, for the price of homes in this country.
    I would like to ask you about the status of the efforts of 
Customs to review the interpretive ruling on lumber, 
particularly predrilled studs.
    As I understand it, Customs ruled last year that predrilled 
studs fell outside the scope of the U.S.-Canada Softwood Lumber 
Agreement. I thought that was a sensible ruling and supported 
it.
    So I was concerned about some language that was included in 
the conference report on the Treasury appropriations bill, 
which essentially directed Customs not to enforce its own 
ruling.
    The language was not included in either the House or Senate 
versions of the bill, but apparently was slipped in at the last 
minute at the Senate's insistence. I believe our distinguished 
Chairman and Ranking Member have some of the same concerns I 
do, and have expressed those concerns, about telling Customs 
that they must ignore their own best judgment on a matter such 
as this.
    Now, as I understand it, Customs is attempting to adhere to 
the conference report language, and you requested comments on 
the prior ruling as a precursor to issuing a revised ruling.
    I realize you are in the midst of a review, but since the 
matter was not discussed publicly during our last hearing 
cycle, I would like to ask you what was Customs' justification 
behind the original ruling on predrilled studs. I would also 
like to know the logistics of this review process you are 
undertaking now to ensure that the final outcome is a fair one. 
I would like to know when you anticipate a final ruling or 
recommendations to the Congress on this matter.
    Mr. Banks. Well, Congressman Price, it was in February of 
1997 that our New York office actually received a ruling 
request about these wooden studs with the holes drilled in 
them. They did a ruling like they normally do. We issue 8,000 
plus rulings a year in order to try to help importers have a 
predictable import process.
    This obviously ended up being a very controversial ruling. 
When our officer in New York actually classified the product, 
we did not put it outside the scope. Technically, the scope of 
the softwood lumber agreement has specific harmonized tariff 
numbers in it but when we classified in a category it just did 
not fall within that scope.
    When the issue became somewhat more difficult, and somewhat 
more controversial, we do what we have done on a number of 
other occasions. We actually publish this issue. We go out for 
comments. We solicit comments from industry representatives. We 
ask for experts in this field to come back and comment to us on 
what is the appropriate action to take.
    So, really, we are just soliciting input from the industry 
and from the public. I believe our ruling closed recently. We 
received, I believe, in excess of 5,000 comments.
    Mr. Price. Excuse me. Your comment period was closed?
    Mr. Banks. Our comment period closed, and we received in 
the vicinity of 5,000 comments. We have done the analysis on 
those comments and we have just recently forwarded our analysis 
to Treasury for a discussion on this issue.
    My estimation is this spring we will have a decision on 
this issue. I do not think I could say in the midst of this 
process what that decision would be, or, you know, any 
direction that we might be leaning. But we are trying to take 
as candid and objective an analysis of this issue as possible.

                             peanut imports

    Mr. Price. Good. Well, as I said, I think there was sound 
reasoning behind your initial ruling, and I would hope that its 
thrust would not be greatly changed. But that essentially 
answers my question as to the process you are undertaking and 
the time frame within which the review is going to take place.
    I would also like to ask you, very briefly, about an issue 
I raised last year with Mr. Weise about Customs' monitoring of 
peanut imports. There were some delays in Customs' 
implementation of certain provisions of the North American Free 
Trade Agreement designed to protect domestically produced 
peanuts, as you know.
    NAFTA included a rule of origin requirement and a provision 
stipulating that peanut imports be subjected to the same 
quality controls imposed on domestically produced peanuts, as 
laid out in USDA Marketing Order 146.
    I want to take note of, and applaud the efforts you have 
made over this past year to correct that situation, and to 
begin the proper monitoring of peanut imports.
    I understand you have uncovered some violations of both the 
rule of origin requirement and the prohibition of reimportation 
of U.S. peanuts.
    What I would like to ask you to comment briefly on, either 
here, this morning, or for the record, is the enforcement 
actions that you have taken, or anticipate.
    You do share enforcement responsibility with USDA in this 
matter. What are you doing, and what do you anticipate doing, 
to follow up on the findings that you have made, and, in 
general, to enforce the peanut provisions of NAFTA?
    Mr. Banks. Well, Congressman Price, when this issue 
wasraised in NAFTA, we made a commitment that we would insure that, 
like other products, peanuts would not be transshipped through NAFTA 
countries, for example peanuts from China or peanuts from Argentina or 
other countries would not be transshipped.
    One of the things that I did not even mention in our 
presentation--is we have a laboratory system, and we are 
actually able to do analysis to determine where peanuts were 
grown. This is how we enforce the pistachio embargo against 
Iran, and things like that.
    We have actually taken, I think, 167 samples of these 
peanuts. We do trace analysis on them, and we can tell whether 
they came from Mexico or not. In fact, we found one case so far 
where the imports of the peanuts were not from Mexico and we 
have taken action against that particular importer.
    In doing the analysis of this whole issue, we have actually 
sent teams down to do audits on, I believe, three importers and 
three shippers, that actually constitute over 90 percent of the 
peanuts that come in from Mexico. For the most part, they are 
in compliance with the law as we have seen it to this date.
    It is just in the one case for sure, that we have an issue. 
We are still looking at a few other importers at this point.
    Mr. Price. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. The time of the gentleman has expired.
    Mrs. Northup.

                       coordination of resources

    Mrs. Northup. Yes. Mr. Kelly, I would like to ask you a 
question about coordination of resources. I was visited 
recently by the Louisville police department who brought me 
pictures of their work at the UPS hub, and there is quite a 
connection of drugs coming across the border, then going to the 
nearest shipping center.
    They can be any carrier--FedEx, UPS--across State lines, 
across the whole country. It is a very easy way, a very cheap 
way, very sort of undetectable way to spread drugs that have 
just come across the border throughout the United States.
    The Louisville police department I think is questioning 
whether this should be, sort of, their responsibility. They 
have actually taken drugs to the overnight hub and the dogs 
have been able to sniff out--I mean, you should see the pile, 
in one night, of boxes they pulled out. They are very 
identifiable. They use certain mailing services. So they spot 
them, they open them up. There is a computer inside.
    It is completely gutted. It is filled with narcotics. At 
that point, for anything to be done other than just 
confiscation, they have to reseal the boxes.
    They get shipped to New York City, Richmond, Virginia, and, 
at that point, they have to work with the local police there in 
order to catch the person to whom these drugs are being 
delivered, and then of course back up and figure out who sent 
them.
    A question I have is, number one, Is this the drug czar, 
because at that point it is going across State lines? or 
because most of these seem to be coming in across international 
lines, would there be a role for the Department of the 
Treasury?
    Mr. Kelly. Yes, there would be a role. I would have to look 
in specifically at what is happening in Louisville.
    I can say, in general terms, law enforcement, State, local, 
Federal, are working much closer these days than ever before. 
There are lots of task forces throughout the country.
    I do not know specifically what is going on in Louisville 
but it is something that we should certainly look into.
    Mrs. Northup. You understand of course the concern is not 
that the drugs are winding up in Louisville on our streets, 
although some of them may be, but the concern is that the 
Louisville police department is entirely understaffed and 
unprepared to bear the brunt of this.
    Mr. Kelly. I understand.
    Mrs. Northup. The other question that exists, that I would 
like to ask you about, is the sort of protection that we have 
in place for the companies that cooperate. UPS has been very 
cooperative. I have it raised to me that at least maybe not all 
of them are quite so comfortable.
    Because in fact these are private packages, they have to be 
opened to--even after the dogs sniff them, they have close to a 
100 percent incident, where the dogs sniff, they open the 
package, and in fact there are drugs there.
    But what sort of protection does UPS have? Do we need to 
look at that and could you make a recommendation, so that we 
can have--they are protected from any suits, or threats in 
their cooperation.
    Mr. Kelly. Let me say that Federal law enforcement 
certainly is involved in operations like this to control 
deliveries, where the delivery would go through and you would 
have a Federal agency involved in that--Customs, DEA, perhaps, 
so we have got to look into this more specifically in 
Louisville.
    I think we should probably--if that is a concern of the 
companies, we should probably meet with them and talk with 
them. I would just like to have an opportunity--maybe we can 
talk after this--and we can have some people direct some 
attention to the situation in Louisville and try to address it.
    Mrs. Northup. But your office would be involved in this?
    Mr. Kelly. We would certainly coordinate it; yes.
    Mrs. Northup. Okay.
    Mr. Banks. If I could mention something.
    We currently have partnership agreements with over 3,200 
companies, mainly air carriers, steamship lines, and even some 
of the courier companies that operate. We are trying to work 
with them on their security issues and to improve their 
security process, so that we have those currently in play 
today. The liability issue is only a concern if there is 
complicity on their part.
    So we would be more than happy to sit down and talk to that 
company and others.
    Mrs. Northup. Okay. I am finished.
    Mr. Kolbe. Thank you.
    Mr. Istook.

                               corruption

    Mr. Istook. Thank you, Mr. Chairman.
    Gentlemen, I appreciate your taking the time to be here and 
I know that when it comes, especially to the interdiction of 
illegal drugs being smuggled into America, that it is a job 
that is sometimes routine, and in an instant it can turn 
deadly, and I appreciate the people that undertake that 
mission.
    I wanted to ask about something that is an inherent 
problem, not just with you, but with everyone that is involved 
in trying to stop the smuggling of drugs at the point where 
they enter the country.
    In the hearing last year that we had focused a lot on the 
problem of corruption that can come in because of the extreme 
amounts of money that are involved.
    If someone, simply by looking the other way, or arranging 
to be absent at a particular time, can make more in 15 minutes 
than they earn all year, that is a terrible temptation that 
confronts people, and I know that you are greatly concerned 
with that difficulty.
    We discussed this at some more length last year. The 
subcommittee attempted to appropriate some funds for some 
special inquiry into that area, and some measures for you to 
undertake. I understand that those measures are only part way 
in process and I would appreciate hearing from you, what you 
have done so far, in differentiating what has actually been 
done from what you intend to do with the extra resources we 
have tried to make available to address this problem.
    Mr. Kelly. Sir, last year, we directed $11 million to the 
set-aside, or used to increase Internal Affairs of the Customs 
Service by, I think, 55 positions. Most of that has been done. 
In addition----
    Mr. Istook. And those positions are filled?
    Mr. Kelly. Yes. Close to being totally filled.
    Mr. Banks. Or in the process.
    Mr. Kelly. Right.
    Mr. Istook. Well, how many have been filled?
    Mr. Kelly. In the forties.
    Mr. Istook. Okay. Go ahead, please.
    Mr. Kelly. We had purchased vehicles and computer equipment 
for the Internal Affairs operation. We had a consultant come in 
and do an analysis of the Internal Affairs operation of the 
Customs Service, and in fact he has produced a draft report. We 
hope to have a final report from him, I would say in a month's 
period of time.
    Some of the recommendations that were made in that report 
have already been enacted or have been started to be put in 
place by the Customs Service.
    This year, we are looking for an additional $6 million. Or 
your question, sir, is on what we have done already. So we are 
looking for more resources.
    But we have done an analysis of it. We have brought in OPR 
personnel that have started looking at specifically the Customs 
Internal Affairs operation. They have already started that. And 
again we added equipment and personnel to the Internal Affairs 
function.
    Mr. Istook. And I, as well as the other Members of the 
Subcommittee, I know would have an interest in the draft as 
well as the final report. Sometimes there are important 
differences, as we all know, between the two.
    What are the recommendations which have been implemented so 
far?

                          personnel rotations

    Mr. Kelly. There were some equipment recommendations that 
were made regarding vehicles, that we have responded to.
    There is a recommendation concerning rotation of people out 
of the Internal Affairs Division back into the Office of 
Investigation.
    That is in the process of being implemented. It is not that 
easy just to kick in a rotational program, but we--Commissioner 
Banks can address this more directly--have met with members of 
the Internal Affairs component and discussed the rotational 
policy.
    We are going to go forward with it. The question is what is 
the right mix? Permanent cadre versus people that are going to 
be rotated in and out. How frequently will the rotations take 
place? These things have not been finally determined but this 
is part of the recommendation of the consultant.
    Mr. Istook. The rotation of people.
    Commissioner?
    Mr. Banks. Yes, sir, and we actually had to dedicate $2.5 
million in order to provide for that rotation and pay for those 
costs.
    In addition to that, we have actually increased the number 
of special operations and undercover operations that we have. 
We have put people on joint FBI task forces around the country.
    We have brought in forensic computer people because a lot 
of our work is done through automation and you actually have to 
trace back through the audit trail in order to determine if 
there are issues or if there are problems. If there is a 
violation it must be determined who did it. You looked at that 
tape of that vehicle ramming through the port; every one of the 
cars that comes in gets punched through the computers so we 
have audit trails on them.
    One of the things we are trying to do is build in internal 
controls. The reason those two officers were out in front of 
the booths is because we are trying to take away the capacity 
of a ``bad guy'' to pick which particular booth he can go to.
    In other words, no one's got total control over this. We 
have got a layered process, so that there is no predictability 
for the traffickers that are trying to operate in our systems. 
We have got people operating ahead, as well as behind the 
booths. We capture the people after they go through, and try to 
do blitzes. It continues to add to the unpredictability of the 
process.
    We try to build integrity and internal controls into the 
system.
    Mr. Istook. I will look forward to the furtherinformation 
on that because we all know this is a very significant problem that is 
inherent in trying to stop the smuggling of the drugs.
    Thank you, gentlemen. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much, Mr. Istook.
    As Members and the audience know from the bells, we have a 
vote that is underway now.
    Unfortunately, I know a lot of us have other questions we 
would like to ask, particularly of Commissioner Banks, on 
Customs, but we are going to break now and we understand Mr. 
Magaw will be able to return this afternoon, when we have the 
Secret Service, FinCEN and law enforcement with us.
    So we will recess from now until that time.


[Pages 477 - 613--The official Committee record contains additional material here.]



                                      Wednesday, February 25, 1998.

                             SECRET SERVICE

                               WITNESSES

LEWIS C. MERLETTI, DIRECTOR
MARY RILEY, SPECIAL AGENT
    Mr. Kolbe. If everybody would take their seats. We only 
have a few minutes before we have two more votes, and then we 
are going to be completed with the votes here, but I think we 
have enough time to get one more presentation in. So we will go 
to Mr. Lew Merletti.
    We welcome you. This is your first appearance before this 
subcommittee as the Director of Secret Service, and we 
appreciate your appearance. Lew Merletti, thank you.

                    Secret Service Opening Statement

    Mr. Merletti. Thank you.
    Mr. Chairman, members of the Committee, I am privileged to 
come before you today for the first time in my capacity as the 
Director of the United States Secret Service. I have the 
members of my executive staff with me here today.
    While this is my first appearance as Director, my career in 
the Secret Service spans 23 years, and I am well aware of the 
historically strong relationship between this Committee and the 
Secret Service. This Committee has been most supportive of the 
agency's employees and its mission, and I intend on continuing 
my agency's tradition of working with all of its members 
cooperatively and honestly.
    Of the many lessons I have learned from my predecessors, 
one which I will apply today, is the value of keeping my 
comments brief and to the point.
    As you know, my agency is charged with a vital mission of 
protecting the President, the Vice President, foreign heads of 
state, and others. It also contributes to the protection of the 
Nation's financial stability by ensuring the integrity of the 
Nation's currency, financial obligations, and institutions.
    Having worked as a special agent in three field offices, 
and as a supervisor on the protective details of Presidents 
Ronald Reagan, George Bush, and Bill Clinton, I know firsthand 
that the protective and investigative missions appear distinct 
but are, in fact, inseparable.
    The skills developed by agents during their investigative 
and protective assignments are invaluable to both missions. 
Most, if not all of our training, carries with it dual 
applicability.
    The Service's unique forensic and technical capabilities 
are also applied regularly to both our investigative and 
protective missions. They, too, are inseparable.
    The Secret Service will work vigorously to meet the unique 
challenges posed by our protective and investigative missions. 
The fiscal year 1999 budget request totalling $612.8 million 
provides the funding necessary to meet those challenges.
    New technologies present sophisticated threats to our 
protectees, and we continue to meet those challenges by 
developing and applying appropriate countermeasures to detect 
and neutralize those threats.
    In fact, today, I will personally speak on one of two 
demonstrations we have planned for this hearing. My 
demonstration, which studies the recent assassination attempt 
on President Shevardnadze of the Republic of Georgia serves as 
a reminder of the ever-present threats we face in our 
protective mission and the need to stay current in technology, 
equipment, and training in order to deal with these threats.
    I know that my predecessor provided closed-session 
briefings to members of this Committee on the subject of our 
protective limousines. Those briefings will have even greater 
meaning to you today following my presentation.
    With the development of highly innovative technologies 
relating to financial transactions, such as electronic banking, 
the Internet, and wireless telecommunications, there has 
emerged new methods of defrauding financial institutions, 
commercial enterprises, and individuals. You will see a 
presentation by one of 5,000 dedicated employees of the Secret 
Service, Special Agent Mary Riley from our Electronic Crimes 
Branch, who will demonstrate a sampling of these emerging 
schemes.
    As an agency, we will meet these investigative and 
protective challenges, as we have throughout our 133-year 
history.
    We have been conducting criminal investigations since our 
inception in 1865 and have provided protection to the President 
and others for nearly a century.
    During the past eight months that I have served as 
Director, I have become stronger in my long-held belief that 
the strength of the U.S. Secret Service lies in its people. The 
Secret Service personnel are career civil servants. They carry 
out their duties with commitment, dedication, professionalism, 
and competence day in and day out in the United States and 
throughout the world. They take great pride in their agency's 
history and mission. For that, I am proud of them.
    Mr. Chairman, with your permission, I am submitting a more 
detailed statement for the record and will commence our 
presentations. I know that following these demonstrations, you 
may have questions for me.
    Before closing, I again wish to thank this Committee for 
its support, and as the Director, I pledge my continued 
commitment and cooperation.
    Members of the committee, Special Agent Mary Riley.

                            financial crimes

    Ms. Riley. The United States Secret Service has spent a 
great deal of time perfecting its ability in the area of high-
tech crime, specifically as it relates to the traditional 
financial crimes-related violations that we have worked for a 
very long time.
    As you know, the Internet has become a very important tool 
in both electronic commerce, and to the criminal element. For 
example, within the financial institution community itself, the 
Internet has become a vehicle for the financial institutions to 
very effectively deal with their consumers.
    For example, these banks here from Arizona, these from 
right here in Virginia, very effectively use the Internet to be 
able to communicate with any of their customers that are out 
there.
    On the flip side of that, however, the criminal element has 
been able to utilize that to victimize individuals as well. 
This is a perfect example.
    This summer, a group of individuals put together an 
Internet page that looked very legitimate. They advertised a 
Visa credit card available at a very low interest rate, about 
seven percent, enticing people to sign up for that credit card.
    As people would fill in all of their personal financial 
identity information, that information was fed back into an 
illegitimate source who eventually disappeared after about 30 
days, taking with them all of that personal financial identity 
information that could be used to open up accounts in other 
locations.
    The credit unions are also using it in very much the same 
manner. The credit unions are able to use the Internet to 
communicate not only with their customers, but also with the 
merchants that need that valuable information to carry on day-
to-day business. The flip side of that, however, is illustrated 
by organized fraud groups that are able to use the Internet to 
put together, for example, a credit repair service. Again, by 
making their page look very legitimate, they are able to go in 
and entice people to provide their personal financial 
information and then disappear after a very short time.
    Because of the global implications of the Internet, people 
that put these pages together could be located anywhere in the 
world, making our international law enforcement responsibility 
even more important than it was before.
    One tool that is currently available on the Internet is 
illustrated by this program known as Credit Wizard. This 
program was put together by a group of bank employees who, 
using the education they had and knowing how the mathematic 
formula was put together that generates credit card numbers, 
put together this very user-friendly piece of software.
    First of all, if you see the list there on the right, they 
loaded up a large number of the institutions that issue credit 
cards. For example, Citibank Arizona, they have their credit 
card account listed there. I can just choose that from the 
list, go over to the number of cards that I would like to 
generate. I will just generate 15 for this demonstration and 
hit the ``generate'' key.
    That list you see come up on the left-hand side is actually 
a valid list of credit card numbers that can be used. Now, of 
that list, we did some tests with authorization centers. We 
found that probably only about 10 percent were good chargeable 
account numbers that are ready right now. The rest of them 
either have not been issued yet or were canceled for whatever 
reason.
    The way that they test to find out if those are good 
numbers is by typically making long-distance telephone calls. 
If you try to make a long-distance call without a current 
calling card number, the operator will automatically ask for a 
credit card number. So trying to complete that call using one 
of these will give them the verification that they need to know 
if they have got a good number.
    Once they are able to identify good account numbers, they 
can also generate personal information. Using a simple white 
pages database that is also available on the Internet, I can go 
in and choose an individual's name, address, and phone number. 
For example, today it could be Carol Talbert in Hartford, 
Connecticut, and give up that address and phone number when 
applying for accounts at any of a variety of merchants. If 
those merchants, to protect themselves, checked the database to 
make sure there really is a person in Hartford, Connecticut, by 
that name, they would find out that that is, indeed, true.
    So it is a very valuable tool, and the Visa and MasterCard 
group are not the only ones that are vulnerable. The credit 
card generators have been put together for American Express, 
AT&T calling cards, and just about anyone who has account 
numbers out there and employees who would share that 
information and put together packages like this.

                            financial crimes

    In addition, desktop publishing has become a very big 
problem within the industry. Any document, both official and 
financial, can be scanned into a computer with the lower cost 
of very good computer systems and software that are out there. 
Valid documents can be produced from personal checks to 
commercial checks. Signatures can be taken, and so can false 
identification.
    You will see in front of you a couple of boards that we put 
together. We put a board together in front of you there using 
your photographs that were taken right from the Internet and 
produced false identification using the photograph that came 
right from your home page. Because of the quality of the 
information that is out there, it has become something that is 
of great concern to us in protecting the financial 
infrastructure that really rely upon this type of 
identification.
    The other type of information that is out there 
iscounterfeit currency. Counterfeit currency--for example, this page 
was put out on the Internet about six months ago, where they instructed 
people how to make counterfeit currency using desktop publishing 
techniques. Using photographs and images of currency that are currently 
available, they were able to produce a document like the one you see on 
the lower right. This image was seized from a case that we did in 
Kansas City, Missouri, and as you can see here, they made a very good 
attempt at duplicating some of the security features that protect our 
currency.
    From the fibers that you see here, the red and blue fibers, 
to an attempt at duplicating the micro-printing around the 
portrait. That is something we really have to watch closely as 
far as the education that is being provided out there, and 
being able to effectively work our investigations in the area 
of counterfeit currency.

                        telecommunications fraud

    Another area that we are looking at and very much trying to 
stay on top of is the area of telecommunications fraud. In 
addition to the telecommunications industry itself, suffering 
very great losses from the fraud that occurs out there, we also 
recognize the telecommunications industry as the backbone of 
the financial industry, and that they use that to be able to 
transmit their information between institutions and carry on 
their day-to-day business.
    Regarding this scanner that you see, I actually have one 
running right here in the hearing room today. Right now, since 
we set this up, we have captured 113 account numbers that have 
been used in the vicinity of this room. The information you see 
on the lower right is created every time a cellular phone is 
turned on and used in this vicinity. The scanner will capture 
everything you see there on the right, from the phone number in 
the phone, the electronic serial number, and everything there 
is to know about that account number.
    We worked a case in West Palm Beach, Florida, in which we 
had individuals utilizing scanned information like this to 
clone cellular phones, one after another, that they used to 
fraudulently place calls to the Middle East.
    This list up here in the upper left reflects a disk that 
was seized from that location in which account number after 
account number was used to clone back into other cellular 
phones to continue that call cell operation. Approximately 
26,000 account numbers were seized from one apartment, 
representing $7 million in losses.
    One thing that we found from the type of cloning activity 
that occurs out there is that it is very commonly used to 
facilitate other crimes.
    For example, in a hearing that was held before the 
Judiciary Committee last November, DEA testified that 80 
percent of the drug traffickers out there today are using 
cloned phones to facilitate their business, and this is exactly 
the type of equipment that is being used.
    One of the things that we have also very adeptly tried to 
make sure is that our forensics teams are capable of 
identifying all of this electronic equipment as we seize it 
from the defendants out there. From that type of scanner that 
you saw there to this type that is commonly used on the side of 
a road, to capture cell phone information as people drive by. 
It has a very limited range, but it is very effective.
    Once the account numbers are stolen, the equipment is very 
easy to obtain and this enables one to clone the account number 
into another phone. A box this small provides that capability, 
and it is very inexpensive and can be gotten from locations 
right out on the Internet.
    Because of the expertise that we have been able to gain 
specifically from telecommunications crimes, we have been able 
to perfect our ability to track locations of people using 
cellular telephones very effectively.
    For example, within our protective mission, if a threat 
call comes in from someone using a wireless telephone, from the 
background we have gained in telecommunications, we can 
actually assess the location of that phone and relate it to our 
protective mission as well.
    In that regard, I would like to turn this back over to 
Director Merletti.
    Mr. Merletti. Mr. Chairman, would you like me to go with 
the second presentation?
    Mr. Kolbe. How long is it going to take, about?
    Mr. Merletti. About 10 to 12 minutes.
    Mr. Kolbe. We only have 10 minutes left on the vote. So we 
cannot get through it all. So we might as well----
    Mr. Hoyer. What is that agent's name?
    Mr. Merletti. Mary Riley.
    Mr. Hoyer. Can I ask a question of the Director?
    Mr. Kolbe. Sure.
    Mr. Hoyer. How many times has Ms. Riley given that 
presentation?
    Mr. Merletti. Today was the first time she--no, sir. No, 
sir. Many times.
    Mr. Hoyer. However many times she has given it, it was 
excellent, Ms. Riley. Agent Riley, I thought that you did it 
very, very well.
    Ms. Riley. Thank you.
    Mr. Hoyer. I think it was fascinating and very scary at the 
same time.
    Mr. Kolbe. It certainly is.
    Mr. Hoyer. We are all living through electronic devices 
nowadays. At the same time you are talking about being 
connected, how everybody is connected, of course, everybody 
being connected is also everybody being intercepted. I mean, 
what they are connecting about. It is a very, very scary 
``1984,'' which we are long past, but George Orwell would have 
said, ``I told you so.''
    Mr. Kolbe. Since we do not have time to get through your 
second presentation before these two votes, we will recess, and 
when these two votes are over, we will be back and then we will 
be here until we finish.
    [Recess.]
    Mr. Kolbe. The Subcommittee will come to order.
    Mr. Merletti.
    Mr. Merletti. Thank you, Mr. Chairman.

                           armored limousines

    The U.S. Secret Service armored limousine project is one of 
the most critical elements of our protective mission. Last year 
in an executive session, my predecessor, Eljay Bowron, briefed 
you on this program. Another important aspect of our protective 
mission, which is crucial to developing new strategies and to 
maintaining state-of-the-art equipment, is our practice of 
dispatching U.S. Secret Service experts to the scene of any 
assassination attempt throughout the world.
    On February 9, 1998, just 16 days ago, there was a 
sophisticated, well-organized, and very violent attack in 
Tibilisi, Georgia, upon President Edwarde Shevardnadze.
    Our team left on February 12th and returned February 20th. 
Today, I would like to share with you some of the team's 
findings and afford you the opportunity to view a most dramatic 
film clip of the actual attack.
    Our team evaluated the performance of President 
Shevardnadze's limousine. We will look at how the limo 
succeeded and how it failed.
    This shows the armored limousine. It took two rocket-
propelled grenade hits. It was immediately rendered inoperable 
and burst into flames.
    Now, this vehicle--well, we are switching slides here. Do 
you want to go back to that one?
    This vehicle had been built by Mercedes Benz in Stuttgart, 
Germany, and they have been armoring vehicles in a factory 
setting for 50 years. They produce approximately 150 vehicles a 
year.
    The level of protection provided by these mass-produced 
vehicles is considerably less than that offered by our armored 
vehicles. The vehicles built in the Mercedes factory provide 
minimum under-the-hood protection. If you could see these 
rocket-propelled grenade hits, the vehicle was rendered--it was 
crippled immediately.
    The Secret Service provides armoring in our vehicles that 
is far superior to the commercially available vehicles. This is 
accomplished by engineering our vehicles from the ground up. 
That allows us to put in more mass, which enables us to apply 
more armor material to the vehicle itself.
    We are also able, because we are building it from the 
ground up, to relocate those important electronic parts that 
keep the engine running.
    I feel confident in saying that our vehicle would not only 
have survived this attack, but that we would have been able to 
continue to drive right through the kill zone and safely drive 
to the residence without ever stopping.
    Could we go to the next slide?
    In summary, there were two security personnel killed, two 
security personnel wounded, and one assailant was killed. The 
attack lasted between 10 and 12 minutes, during which 
approximately 14 rocket-propelled grenades and hundreds of 
rounds were fired.
    Mr. Chairman and members of the Committee, I feel that the 
significance of the film you are about to see will demonstrate 
very quickly some of the points that we discussed last year in 
executive session.
    This is a photo of the follow-up vehicle. You can see there 
are hundreds of rounds of bullet impact along the doorways.
    This is another one of the security cars.
    I would like you to take note of this slide. You can see 
where it says ``camera location.'' It is approximately 300 
yards from the actual kill zone, and it was across the river.
    Now, in a few moments, we are going to show this VHS film 
that our team brought back, but I want you to orient yourself 
because you are going to be looking across the river and across 
the street, and, again, this attack took place at about 11:10 
p.m. at night. So it is dark. You will see street lights, and 
then the motorcade itself will come into view.
    Again, the camera angle was such that the fellow recording 
this dipped it down at times because he was trying to look over 
the viewfinder, and he actually places the camera lens into the 
view of a reflection off of the river. So just bear with the 
fact that it is a bit shaky, but you will be able to very 
clearly see how the attack develops.
    Mr. Hoyer. What was he taking pictures of?
    Mr. Merletti. He was there to record the attack. He was one 
of the terrorists. They wanted to record it for posterity.
    Mr. Hoyer. How was he there to record this for posterity?
    Mr. Merletti. He was one of the terrorists.
    Again, those are the rocket-propelled grenades that you are 
seeing detonated.
    Following the attack, the cameraman fled, and he left the 
camera there.
    Mr. Kolbe. So much for posterity.
    Mr. Merletti. The significance of showing you this ambush 
is to demonstrate that this type of attack is a reality. It is 
the very reason that the Secret Service transports the 
President's limousines to every location he goes, whether it is 
domestic or foreign.
    I believe that this film clearly demonstrates just how 
important these armored limousines are to us and to the success 
of the protective mission.
    I would like to thank you for your time, and our portion is 
concluded.
    [The information follows:]


[Pages 623 - 641--The official Committee record contains additional material here.]



    Mr. Kolbe. Thank you very much, Director Merletti. These 
have been fascinating presentations for us.


[Pages 643 - 731--The official Committee record contains additional material here.]



                                          Wednesday, March 4, 1998.

         U.S. DEPARTMENT OF THE TREASURY, DEPARTMENTAL OFFICES

                               WITNESSES

HON. ROBERT E. RUBIN, SECRETARY
NANCY KILLEFER, ASSISTANT SECRETARY FOR MANAGEMENT, AND CHIEF FINANCIAL 
    OFFICER
    Mr. Kolbe. The subcommittee will come to order again. Let 
me just at the outset inform Secretary Rubin and other members 
of the subcommittee that there is a meeting of the chairmen of 
the subcommittees--fondly known as ``the Cardinals''. I have 
certainly advanced here, got my red hat--at 4:00 o'clock. So we 
will need to be completed by that time. But I see no reason 
that we shouldn't be by that point.
    Mr. Secretary, thank you very much for coming and making 
your second appearance before the subcommittee this year. There 
are a number of critical issues that face the Department that I 
think we are going to want to explore today.
    The first is one that we touched on last week when you were 
here, and I will want to follow up with a few more questions. 
And that is funding levels for the Department's law enforcement 
areas.
    We showed you last week a number of charts that illustrated 
the dramatic difference between funding and staffing for 
Treasury law enforcement, as compared with Justice law 
enforcement.
    And just in case those have slipped your memory here, we 
have them here again today. That's okay, Frank, we will hold on 
just one minute before we get to those. Let me get to the 
questions here.
    We also expressed our frustration and dissatisfaction about 
the lack of attention and stature that has historically been 
given to the Treasury law enforcement bureaus, as vital 
participants in our national anti-crime and drug control 
strategies.
    I would say, Mr. Secretary, that if we were to dissolve 
these bureaus today there is no other agency in government that 
could pick up the ball without losing a beat, and maintain the 
same level of national security and protection that our 
citizens expect, and I suspect you would agree with that 
statement.
    For this reason, I continue to be baffled at the disregard 
of the administration, and I would have to say to some extent 
of the Congress, itself, for having an integrated law 
enforcement strategy. I think we need that very much.
    The fundamental issue here is not comparing Treasury to 
Justice, but the operational survival of these critical law 
enforcement bureaus that have been neglected as they 
desperately struggle to meet our level of expectations.
    The other area that I think we want to talk about--at least 
I do--is the issue of insuring that our information systems 
which are responsible for the Nation's finances are going to be 
fully operational on January 1, 2000.
    The failure of those systems would quite obviously be a 
disaster for this country, and some of the most critical ones 
are in Treasury.
    We are particularly concerned about the whole Financial 
Management Service, which provides for the payments, the 
collections, the accounting information and debt collection 
services for most of the Federal agencies, and individuals who 
receive money from the government, and every individual who 
pays a bill that is owed to the government.
    I continue to think that there is reason to believe that 
FMS, the Financial Management Service, is far behind where it 
needs to be in addressing this problem. And we really are at an 
absolutely critical, last minute stage, it seems to me, in this 
issue.
    If we are going to provide an adequate time for testing, 
agencies have less than a year to either renovate their systems 
or replace those that cannot be renovated.
    Certainly it is not something that can be done in the last 
half of 1999. We are committed to providing the resources 
necessary to address this problem, but we cannot provide the 
management emphasis and push that is going to be needed to 
insure the success of this program.
    Mr. Secretary, we talked about this with Mr. Rossotti last 
week. But in the end, Mr. Secretary, it is up to you and all 
the other senior managers in the Department. We certainly look 
forward to hearing your testimony, and of course, as always, 
your full statement will be placed in the record.
    Before I ask you for your comments or a summary of your 
statement, let me ask Mr. Hoyer for some opening remarks.
    Mr. Hoyer. Thank you, Mr. Chairman. I will be very brief. I 
want to welcome the Secretary, and Secretary Killefer to the 
committee.
    As the committee knows, and I have stated before, I think 
Secretary Rubin has been the most engaged Secretary of the 
Treasury with whom I have had the opportunity of working, as it 
relates to the workings of the Treasury Department.
    Now, quite clearly, Secretary Rubin is perceived nationally 
and internationally as an expert on the issues of finance 
confronting our country and the international community. And 
that he is.
    But as well he has engaged himself in making sure the 
Treasury Department as a department is not only managed well, 
but runs well and is responsive. So I am pleased to welcome him 
here.
    Mr. Secretary, I want to say that I have also had the 
opportunity to meet with and discuss the Treasury Department 
and her role with Secretary Killefer, and I think she is an 
excellent addition to your team.
    So I welcome you here, and look forward to discussing with 
you some of the issues that we are concerned about.
    Secretary Rubin. Thank you. You don't want to expand on 
your introductory comments? [Laughter.]
    Mr. Hoyer. I could obviously get unanimous consent, I 
suppose, to revise and extend my remarks.
    Mr. Kolbe. Mrs. Meek, did you have an opening comments?
    Mrs. Meek. No, Mr. Chairman. I just wanted to welcome 
Secretary Rubin and Ms. Killefer.
    Mr. Kolbe. Mr. Secretary.
    Secretary Rubin. Thank you, Mr. Chairman. I do have a 
written testimony, and we will submit that for the record. I 
have oral testimony as well, but I think what I am going to do 
in the interest of time, Mr. Chairman, is just pick a few 
highlights and mention those, and then we can get to our 
discussion. And Nancy Killefer and I would then be delighted to 
respond to whatever you would like.
    We are requesting, as you know, $12.3 billion. It is a 7.2 
percent increase. In our judgment is requisite for three 
purposes: one, to maintain current operations, including 
mandatory cost increases as well as an anticipated work load 
increase; to invest in critical capital improvement; and also 
to accomplish enhancements that we think are very important.
    As you well know, the Treasury Department has an enormously 
broad range of activities ranging from tax enforcement, revenue 
collection, law enforcement and financial management, to tax 
policy, banking policy, and then very importantly international 
economic policy and domestic economic policy.
    We have tried to focus very carefully on the question, 
given the range of our activities, of providing customer 
service, and also lowering our costs. And we, as Treasury, but 
also I as Secretary, have tried to take the GPRA process and 
make it not just an exercise, but make it an integral part of 
our lives at Treasury so it will help frame and form the 
decisions we make with respect to strategic and tactical 
matters, and I think we are having considerable success in 
that.
    We provided the committee with a detailed presentation with 
respect to the 1999 budget. Let me just focus on four areas 
that are of particular concern that I would like to highlight 
in this testimony.
    First, the Departmental Offices. It is an area that often 
gets overlooked, but I think the request for an increase with 
respect to Departmental Offices is critically important given 
the issues we face, and I would like to touch on that for a 
moment.
    In tax policy we have the question of implementing the 1997 
tax bill, and that is an enormous additional burden in terms of 
issuing regulations. And I can tell you from having worked 
closely with these people, they are enormously over-stretched.
    Secondly, in the international area, we are providing 
leadership, not only for the United States, but the reality of 
life is for the world with respect to both the crisis in Asia, 
and then the broader question of restructuring the architecture 
of the international financial institutions.
    In economic policy, we are deeply involved in the issues I 
just mentioned on the international side, plus entitlement 
reform and the economic initiatives in the President's budget.
    And in law enforcement, we have expanded policy and 
oversight objectives.
    In addition, in Departmental Offices, we have our central 
management functions. And, with Nancy Killefer's leadership, we 
have been very focused on a whole host of management concerns--
human resources, technology, and then the repair of our 
building from the fire we had several years ago, plus the 
restoration or revamping of the systems which are old, outmoded 
and in many cases put us in code violation. That's Departmental 
Offices.
    Internal Revenue Service, you met with Commissioner 
Rossotti, so you have a good sense of what we are doing there. 
Let me just say that we started about two and a half years ago 
in what we view as a highly intensified focus on reform.
    I became aware of the problems there largely, I think, 
because of this committee, and that in turn directed us toward 
trying to get our arms around this, and move the process 
forward on reform and change.
    I think we have accomplished a great deal. On the other 
hand, there is an enormous amount to do, and certainly the bulk 
of that which needs to be done lies ahead.
    Our request includes additional resources to improve 
customer service, including improvement with respect to 
telephone access--although a good deal has been accomplished 
there already--rewriting of notices and forms, expanding the 
taxpayer advocate staff--although let me say there, too, we 
have greatly strengthened it over the last year--and 
implementing Citizen Advocacy Panels.
    Second, we feel it is absolutely imperative that we move 
forward with the Modernization Blueprint. The systems underlie 
all of the efforts that we need to make at the IRS, including 
customer service, efficiency, tax compliance and financial 
reporting.
    And on a broader basis, we need seed capital in order to 
implement the organizational reform concepts that Commissioner 
Rossotti has described to you.
    And finally we have business-line investments. These are 
issues that we have deferred over the last couple of years as 
we have reallocated money to Y2K, but the fact is that we have 
outmoded computer equipment that is being used by frontline 
personnel throughout the IRS, and it is essential in our 
judgment that it be replaced and upgraded.
    And then, of course, we have very important Y2K 
requirements in the IRS and I will get to that in a minute.
    With respect to law enforcement, we have, as you said, Mr. 
Chairman, an extensive and critical law enforcement set of 
responsibilities. In order to better perform those, we have 
requested an increase of 5.7 percent above last year's budget.
    A portion of the 5.7 percent is required to meet mandatory 
cost increases, part of it is required for various enhancements 
with respect to our mission operations, including initiatives 
in narcotics trafficking, reducing illegal firearms trafficking 
to young people--that's the ATF Youth Crime Gun Interdiction 
Initiative--improving presidential protection and White House 
security, training in FLETC, and fighting financial crimes.
    You raised the question, when I was last here, Mr. 
Chairman, about the comparison with Justice. What we have tried 
to do in the administration, within the constraints of fiscal 
discipline, which in our judgment is absolutely central to 
economic performance, is to make the most sensible allocations 
we could of scarce resources.
    But I think that, as we discussed a bit when I was here 
last time, it would be constructive for this committeeto take a 
look at the comparisons between ourselves and Justice and try to see 
whether or not the administration is correct in its allocation of law 
enforcement resources and to the extent we can be helpful in that 
respect, we obviously would be happy to be.
    Let me also say--and I think I said this when I was here 
last week--that both the people at Treasury and the people at 
Justice feel that there is a cooperation that exists today 
between our two agencies, both at the management level and in 
the field, that is substantially better than it has been at 
many times in the past. And I think it is very important in 
terms of our Nation's law enforcement effort.
    We have enormous pride, as obviously you do, too, from the 
comments you have made, Mr. Chairman, in the Treasury's law 
enforcement bureaus, and we have been committed to fully 
supporting them, including support in some very difficult 
issues--the Secret Service's White House security enhancements, 
ATF's reforms and their defense against strident attacks by the 
NRA, and then obviously the securing of appropriate funding.
    Finally, Mr. Chairman, let me say a word about Y2K which 
you raised in your opening remarks. That, obviously, is a 
critically important problem, and as you correctly say if we 
get that wrong, then that can create horrendous problems, 
especially at Treasury, where many of our systems interrelate 
to the rest of the Government or to the outside world and the 
economy at large--particularly in the IRS.
    In that respect, our 1999 budget requests additional 
funding for this area of $253 million. And we are putting in a 
supplemental request of $250 million in 1998 for additional 
flexibility.
    Now, how much of that we are going to have to use is not 
clear at this point. We have identified something close to $200 
million--I think about $175 million--of additional monies that 
are needed in 1998. My guess is we will ultimately wind up with 
something above the $175 million. But the $250 million we think 
will give us adequate flexibility to fund these requirements.
    It is absolutely essential for the reasons you said, Mr. 
Chairman, that the work be done in 1998. It's particularly true 
of the IRS, with a filing season coming up in 1999, so you lose 
a whole chunk of time there.
    So we cannot defer these activities. They need to be done 
now, and that is what we are focused on doing.
    I meet biweekly--that's every two weeks, roughly speaking, 
with Nancy Killefer, and also the Treasury CIO--it is every two 
weeks, isn't it?
    Mrs. Killefer. Yes.
    Mr. Hoyer. Thank you for the explanation of what biweekly 
meant. [Laughter.]
    Secretary Rubin. Oh, that wasn't for this committee, which 
obviously would know that. I was actually thinking to myself 
was it biweekly or semi-weekly. So I was defining it for 
myself.
    In any event, we meet biweekly on this, and we are totally 
focused on identifying problems where they exist, and trying to 
do the best we can with them. As you correctly say, Mr. 
Chairman, the area we are most concerned about at this point is 
FMS.
    Let me conclude on one personal note, and then we will be 
happy to respond to questions. When I became Secretary, I had 
dinner with a friend of mine who had been in two 
administrations. What he said was the secretary of any 
department faces a lot of challenges, management and policy.
    What you have to do is make a judgment about your 
priorities, and his very strong advice was that your number one 
priority ought to be management of the Department. You have a 
terrific institution, both in Main Treasury and also in its 
bureaus, and what you ought to do is do everything you can to 
build that institution.
    And I think he was right, and that is certainly what we 
have tried to do. And in that respect I think that you all can 
feel very good about the people at Treasury. I have been 
enormously impressed, both at the political appointee level and 
the career level, in the quality and the commitment of people, 
and how they work weekends and nights, and I think with 
enormous good effect on the issues that they are dealing with.
    And secondly, in the time I have been here working with 
this committee has been very constructive. There is no question 
that in the computer technology area it was you all who really 
brought to our attention--I'm now speaking about Larry's and my 
attention--the enormous problems we faced and we've done our 
best to try to respond to that, and I think we have made a 
dramatic change in that area.
    With that, Mr. Chairman, we would be delighted to respond 
to questions.
    [The statement of Secretary Rubin follows:]


[Pages 739 - 742--The official Committee record contains additional material here.]



    Mr. Kolbe. Thank you very much, Mr. Secretary, and let me 
just say that on that last point I appreciate your comments. It 
is certainly the intention of this subcommittee, and I know I 
speak for all the members, Republican and Democrat, to be 
constructive in our efforts, to work with you.
    And I certainly feel that you and I personally have had a 
very constructive relationship. That is not, however, to say 
that that is a carte blanche approval of everything that you 
asked this subcommittee to do, because we may have different 
ideas about the priorities--all with the same goal in mind, 
however.
    Mr. Secretary, let me just ask you one very little 
question. This is a tiny little gnat on your side, and I 
realize that, but I just feel compelled to ask it. We just 
received today a letter that had been requested, or actually 
was required by last year's bill with regard to this little 
issue of the paper for the Bureau of Engraving.
    Secretary Rubin. Oh, yes.
    Mr. Kolbe. Yes. I just wanted to ask, the letter says in 
the first paragraph, we had asked you to certify it personally 
as secretary.
    Secretary Rubin. Yes, I noticed that.
    Mr. Kolbe. You noticed that. It's your signature at the 
bottom. The letter says, ``I am satisfied that the price of the 
bridge contract is fair and reasonable in the context of United 
States Government critical need for currency paper.''
    Would it be a fair interpretation, if I translated this 
into English, as saying we have a critical need and we may be 
getting ripped off, but we don't have any choice about it right 
now?
    Secretary Rubin. Well, it is an interesting problem. What 
we did here--or I should speak for myself, because I don't know 
the contract myself. We brought in, or Nancy did, I should say, 
outside people. We brought in the Defense Department--I've 
forgotten what they called--well, it says in the letter, 
doesn't it?
    Yes, Contract Audit Agency, and then we brought in some 
others from the outside--IRS, if I remember correctly, their 
procurement people--to take a look at it. And they told us that 
this was a fair pricing and fair terms.
    It is a bit of a problem, because it is a very small 
market, and the question is how do we--let me say, if your view 
is that we should have competition, I agree with that view. The 
problem is how do we get competition in such a narrow area.
    We brought in these outside people, and they tell us these 
are fair terms and a fair price. The RFP is out now, and I 
think--have the responses come in yet, Nancy?
    Mrs. Killefer. Yes. Responses have come in, but we 
arewaiting the GSA audit of the previous contract before we make any 
awards. I think Secretary Rubin brings up a good point. It is a 
difficult issue. We would like competition. We have here a small and 
declining market. Hence, it is difficult to get anybody to invest in 
what is significant capital equipment to enter a declining market.
    I believe that as technology changes in the currency, as we 
go to things like plastic substrate and other materials, we 
will actually get significant competition in this market place.
    Mr. Kolbe. I'm sorry. Would you say that again? As you go 
to what?
    Mrs. Killefer. As we go to new materials. We are looking 
at----
    Mr. Kolbe. Plastic?
    Mrs. Killefer. Plastic substrate, which is now available in 
Australian currency. So it is out there in the market place.
    Secretary Rubin. What is plastic substrate, for the benefit 
of the Chairman?
    Mr. Kolbe. Thank you, Mr. Secretary, for asking the 
question that I was too embarrassed to ask. They are not using 
paper in Australia?
    Mrs. Killefer. In Australia they are using a plastic 
substrate, so it is paper combined with plastic that creates a 
kind of in between material.
    Mr. Kolbe. I think I have seen it.
    Mrs. Killefer. It extends the life four-fold of the 
currency, and has some other properties, in terms of anti-
counterfeiting.
    Mr. Kolbe. But that is not what this RFP is about?
    Mrs. Killefer. No, it is not. It is about paper.
    Mr. Kolbe. Okay. I do not want to dwell on that. I just 
wanted to ask that question.
    I do want to go back to this issue we discussed last week, 
the disparity between Treasury and Justice law enforcement. And 
I am wondering if we could put that chart up, to show the 
differences in the resources that we have.
    There again, we see what is clearly a pattern. And again I 
want to make it clear that this goes back, although the real 
disparity does begin in the 1995 budget, where we really 
started to accelerate over in Justice, and we continue a pretty 
flat line over here in Treasury.
    So I continue to be pretty baffled about this, and I know 
this sounds a little parochial, I guess, for us on this 
subcommittee to be saying this. I do serve on the other 
subcommittee that funds the Justice law enforcement, as well. I 
am not chairman of that, but I serve on that.
    But it just seems to me that we are not really getting an 
integrated approach to law enforcement. I ask this question 
only slightly tongue in cheek, Mr. Secretary. What about--well, 
I don't ask it tongue in cheek at all.
    What about transferring all of Federal law enforcement to 
Justice?
    Secretary Rubin. Oh, I think that's a----
    Mr. Kolbe. Bad idea?
    Secretary Rubin. Well, I don't, you know----
    Mr. Kolbe. Well, what about putting it all under one----
    Secretary Rubin. I think that is a separate question that 
was debated extensively about three years ago as a result of 
issues with ATF.
    The question raises many interrelated issues. I think the 
funding question is one issue. My own view is that there would 
probably be a benefit from having a very careful look at it. 
That is something that you can direct to get done, particularly 
since you are on both committees.
    I think there are at least two problems there, Mr. 
Chairman. This was, as I say, debated at length approximately 
three years ago. One problem is that from the very beginning of 
the Republic there was no national police force. I think there 
are probably a lot of good reasons for that, when one thinks of 
the history of various agencies in that regard.
    Secondly, with the exception of the Secret Service, or even 
in some respects with respect to the Secret Service, what you 
have with the Treasury law enforcement agencies is a very 
useful combination of regulation, of revenue collection and of 
law enforcement.
    If these interrelated functions were not kept together, if 
you took the law enforcement function move it to Justice and 
kept the other two functions, regulation and revenue 
collection, within Treasury, you would have to re-create the 
connection.
    John Magaw, at the time of the ATF debate, made the point 
that his people were cross-trained and they actually crossed 
functional lines in their work. I can tell you at the IRS, 
because I have been very involved with them myself, the IRS CID 
people and the rest of the IRS work very closely together.
    So I think that you have a lot of practical, synergistic 
benefits from keeping these functions together within Treasury. 
Even the Secret Service, in its counterfeiting mission, works 
closely with our banking people and our domestic finance 
people.
    So I don't think that, in a substantive, conceptual sense, 
that the transfer of all Federal law enforcement to Justice, is 
too sensible an idea. I do think the question of the funding is 
one that you could probably very constructively try to direct 
people to take a look at.
    Mr. Kolbe. This is just----
    Secretary Rubin. A lot of it is driven by the focus on the 
INS and border enforcement and this business view. I don't know 
whether it is a right view or a wrong view, but I have heard it 
explained at great length, that there was a need for tremendous 
enhancement in the INS.
    And Nancy just gave me these numbers. It looks like, if 
this is correct, about a doubling there.
    Mr. Kolbe. Well, that's true. But, I mean, it is also 
there, if you look at FBI, which is not border enforcement.
    Secretary Rubin. Mr. Chairman, I do not disagree with you. 
As I say, I think that an unbiased and serious analysis, would 
be a useful thing.
    Mr. Kolbe. Is that an invitation for us to ask you to 
participate in such an analysis?
    Secretary Rubin. We would cooperate with anything Congress 
wants to do, including this.
    Mr. Kolbe. Most everything; most everything.
    Secretary Rubin. No, but if you go back to OMB or to CBO, 
and request an analysis, we would obviously be happy to 
participate.
    Mr. Kolbe. You are certainly right about the border, but we 
also have a great attention in this Congress, and nationally, 
to the drug issue, obviously. In fact, probably even more than 
the border issue, and I do not think anybody doubts that, 
really, Customs is the first line of defense there. DEA 
performs a critical role, but they are not the first line of 
defense on interdicting drugs coming into the United States.
    So I am just puzzled about--and I do not think the 
historical thing answers it. I am just kind of puzzled about 
why you think we have this persistent continuing mismatch of 
resources here. I am asking, really, a question I have already 
asked, I know, so----
    Secretary Rubin. I have sat through debates, internally, on 
how to allocate resources, and I do not know whether the 
comparison to Justice is the right way to do this, or not. My 
recollection--somebody can check me on this--is that with 
Justice you have had a very large increase in prisons. Bureau 
of Prisons had an enormously increased load for all the reasons 
we know, and INS has been built up. I think that was partly 
drug-driven. Part of it was illegal immigration, but I think 
part of it, was drug-driven.
    But having said that, I go back to what I said before. I 
think that you raise a very useful and worthwhile question. I 
think you just have to figure out what process you think would 
be best in evaluating the issue.
    You know, the other thing, the Crime Bill--I do not 
remember, is the Crime Bill about $4 billion, or something like 
that?
    Mr. Hoyer. Seven years, wasn't it?
    Secretary Rubin. Yes. So it's in the neighborhood of 4, 
$4.5 billion, something like that.
    Mr. Kolbe. I think that is about right.
    Secretary Rubin. And that I guess is done in Judiciary, 
right? Yes. Justice. State.
    Mr. Kolbe. Well, it was not done in any----
    Secretary Rubin. Partially.
    Mr. Kolbe. Part of it, yes.
    Secretary Rubin. Well, I guess it is done at the full 
committee.
    Mr. Kolbe. It was done at the full committee, but it was of 
course authorizing legislation. The funding of it was----
    Secretary Rubin. Right. But my impression is that when the 
appropriations are done from there, we get very little and 
Justice gets more than half.
    Mr. Kolbe. You get very little, and that is really what we 
are trying to get at.
    Secretary Rubin. But, again, my impression is that when you 
all do that in Congress, it is done with sort of a mindset that 
Justice represents law enforcement, and Treasury people are not 
thought of in the same way.
    Mr. Kolbe. I agree.
    Secretary Rubin. But I think that as you raise the profile, 
and I know that Congressman Hoyer did the same thing when he 
was Chairman, raise the profile of Treasury enforcement, 
hopefully that would be helpful in that respect.
    Mr. Kolbe. Well, I agree, and that is why I said this is 
not just--I am not pointing the finger just at you. Let me just 
say--and my time has definitely expired here--but let me just 
say we know what the numbers tell us. I mean, right there, you 
have got it charted there in terms of personnel and in terms of 
resources. What I guess we really need, and what any analysis 
has to look at, is what is the real life effect that we are 
having here on law enforcement is.
    Secretary Rubin. You know how your processes work far 
better than I do, but maybe--well, it might be hard to do this. 
But if you could get the Joint Committees to request some kind 
of analysis, that would be very useful. Now, they might not 
want to do that.
    Mr. Kolbe. Thank you. I hope we have time. I have a couple 
more questions I would like to ask.
    Mr. Hoyer.
    Mr. Hoyer. In just following up on that question, I have a 
sheet here, and I agree 100 percent with the Chairman's 
premise, that we ought to look at this and see whether 
disparity is justified, and I also agree with your observation, 
that this may or may not be the right criteria on which to 
judge whether or not we are properly funding Treasury law 
enforcement.
    Our needs may not be as great, our emphasis may not be the 
emphasis of the day, if you will, or of the year, or of the 
decade. But law enforcement, as I understand it, from 1996 to 
the President's budget today, is a 25 percent increase.
    Secretary Rubin. Treasury law enforcement.
    Mr. Hoyer. Treasury law enforcement.
    Secretary Rubin. Yes; that is approximately correct.
    Mr. Hoyer. So that what we are really saying is--which is 
approximately over 3 years, obviously--about 8 percent a year, 
which is substantially above inflation, so that there are real 
increases incurring in that----
    Secretary Rubin. Oh, yes. I actually had it in my statement 
but I did not read it out. You will also find that Treasury law 
enforcement has increased about 40 percent more, if I remember, 
than NDD overall. Nondomestic discretionary overall. That is 
correct. Over the last 5 years.
    Mr. Hoyer. In other words, we have in fact, as a 
percentage, directed, in terms of the nondomestic discretionary 
programs, we have got a bigger portion of that non-
discretionary spending than we otherwise would have gotten.
    Secretary Rubin. That is correct.
    Mr. Hoyer. That is taking it across the board.
    Secretary Rubin. Yes.
    Mr. Hoyer. And I think that is useful to note. It does not 
undermine, in any way, the Chairman's analysis with respect to 
the disparity. Let me say as an aside: Federal employees paid 
all of that money, because that money comes from the trust fund 
created by Senator Byrd out of the 278,000 Federal employees 
that were reduced in size, as you know. That is where that 
trust fund money----
    Secretary Rubin. You are talking about the Crime Bill?
    Mr. Hoyer. The Crime Bill.
    Secretary Rubin. The Crime Bill; yes.
    Mr. Hoyer. The Crime Bill Trust Fund comes from laid off, 
or not filled Federal employees.
    Secretary Rubin. Yes.
    Mr. Hoyer. Positions filled. I just thought I would make 
that observation, that we gave at the office, and Mr. 
Secretary, I know, because the economy is going so well, that 
you will certainly weigh in and say that we ought to follow the 
Federal Employee Pay Comparability Act because economic times 
are good, and we ought to give a full comparability adjustment.
    My advice is you probably do not need to answer that in the 
affirmative until you talk to people, but----
    Secretary Rubin. Oh, I actually have discussed that issue 
with people. I actually commented on this, publicly. Maybe I 
should not have, but I did. In fact it was even reported in the 
press.
    Mr. Hoyer. I missed it. What did you say?
    Secretary Rubin. I have forgotten, so I am a little afraid 
to repeat myself. [Laughter.]
    No. I think I said something to the effect, it seems to me 
that people who are in public service, who are performing vital 
functions, they should be paid fairly and in ways that are 
consistent with the way the private sector is paid.
    Now, how you reconcile that with our budget situation, it 
seems to me is the question.
    Mr. Hoyer. Well, I appreciate your saying that because----
    Secretary Rubin. Oh, I do think that, very strongly. Then 
the question is just how you reconcile with your budget 
situation.
    Mr. Hoyer. In fact as a manager, if you are going to pay 
attention to management--and by the way, I do not know who 
advised you to pay attention to management but they had not 
talked to some of your predecessors, he says, charitably.
    The fact that I presume, in the management area, all of 
your managers are telling you you are having a tough time 
retaining really good people.
    As you know one of the things the Chairman and I both did 
and worked on was making sure that some of our technical people 
in ATF and Secret Service got comparable adjustments, that FBI 
was getting, or we would have lost all our people just walking 
across the street.
    Secretary Rubin. That is absolutely correct and I think you 
have got, now, a very serious problem in the IRS with respect 
to these legacy programmers, and we cannot afford to lose those 
people because that is the basis on which the Y2K is going to 
be done, and we have put----
    Mr. Hoyer. Yes. Mr. Rossotti spoke of that.
    Mrs. Killefer. We put a program in place last week to 
retain legacy programmers.
    Mr. Hoyer. And the fact is Mr. Rossotti I believe said that 
in some instances there was as much as 36 percent, on average--
that was on average. There was obviously a higher--36 percent 
disparity between private sector pay and IRS pay.
    Mrs. Killefer. That is correct.
    Mr. Hoyer. In those specialties.
    Secretary Rubin. And am I right? We are losing one a day or 
something, out of a total of 900?
    Mrs. Killefer. One a day; yes.
    Secretary Rubin. It was a very serious problem.
    Mr. Hoyer. You know, it bears repeating. In the Reagan 
administration, Ed Meese was the strongest proponent of pay 
comparability, and the reason was because he had a broader 
political perspective as well, in terms of filling positions in 
the administration.
    It is not hard to fill a Secretary's position. You cannot 
replicate, really, in the private sector what you do in the 
public sector.
    Mrs. Killefer. That is true.
    Secretary Rubin. I agree with that. [Laughter.]
    Mr. Hoyer. But you know, there is a lot of opportunity 
there.
    Secretary Rubin. There are supposed to be advantages to it; 
right.
    Mr. Hoyer. Yes. And there are. The fact of the matter is, 
though, when you get to the younger folks who are making a 
decision--I have got kids in college, can I take this 
responsibility?--pay does really become a factor, not so much 
in the fact they do not want to do the job, but they cannot 
afford to do the job.
    Secretary Rubin. I agree with all of that, and if you had 
enough flexibility in the system so you could do it, that would 
make it a lot easier. By the way, you know, the IRS--well, you 
do know all this--but we are trying to get some flexibilities. 
But I think your general proposition is right.
    Mr. Hoyer. You spoke to two of the questions that I was 
going to ask about law enforcement. We have covered that, 
briefly.
    On IRS, which I think has been your major management 
problem, the good news is under your administration you have 
been fortunate in that in our law enforcement sector, we really 
have not had major management problems.
    We had major management problems before you came, and they 
were worked on them. But in IRS, obviously, that is not the 
case. As I have said, you have paid a lot of attention to it.
    We see changes coming to the IRS. You have effected changes 
and led change. How do we insure that the highest levels of IRS 
personnel are engaged in insuring that the agency is customer-
driven, and that they are committed to weeding out the poor 
performance that gives IRS a bad name?
    With a little more expansion on that because I want to hear 
you.
    The testimony that we heard before the Roth Committee had 
to anger everybody in America. There were only four incidents, 
but that was four too many. I think all of us would accept 
that, and we all need to be committed to insuring that does not 
happen.
    The overwhelming majority of taxpayers, they want to pay 
the least amount they can, but they want to be honest. They 
want to pay the proper amount, and they do not want to be 
abused or misused by arbitrary, capricious, illegal action in 
some cases. What are we doing, Mr. Secretary, to make sure that 
that does not happen?
    Secretary Rubin. Well, it is a big question. Let me try to 
give you a brief answer.
    You have a Commissioner who is totally committed to 
everything you have just said. His view, which I think is 
right, is that the way to get the best compliance rate in the 
country is to basically have an IRS that people feel 
comfortable with and with which they can work out their 
problems. I think that is right.
    Now, where there are people who are intentionally evading 
their taxes--tax cheats--then it seems to me you have got 
tohave an effective enforcement arm. Otherwise this thing is not going 
to work. But his view is that you are primarily going to make 
compliance work by making the IRS a place that people can work with 
effectively, and I think that is right, and that is what he is 
committed to doing.
    I must say, we had dinner about three or four weeks ago 
with a group of Senators, and it had nothing to do with any of 
this, but somehow, the IRS came up--I do not remember how--and 
it was very interesting. A number of them said that they have 
noticed a change in attitude at the IRS over the last several 
months, since the Roth hearings, and since Charles Rossotti has 
taken over.
    I think there is reason to feel IRS can correct these 
problems though it has a long way to go. On the question of the 
people involved in the abuses, not just those abuses, but I 
think one could be even more troubled in some way because those 
were four cases, by the audits that came out--whenever they 
came out, a month or two ago. I have forgotten. Charles 
Rossotti has set up what I think is a very good process because 
it involves DOJ and other places.
    It is DOJ, and where are the others from?
    Mrs. Killefer. It is from Customs, DOJ, and one person from 
IRS, and a deciding official in the Department.
    Secretary Rubin. To put in place a process that is 
independent of the IRS, to take a look at these things, and 
then to recommend disciplinary action, and I think you will 
find, from having talked with Charles Rossotti about this, at 
length, that he will be very serious about doing what needs to 
be done.
    Mr. Hoyer. Thank you, Mr. Secretary.
    I know my time is up, Mr. Chairman. Thank you.
    Mr. Kolbe. Mrs. Meek.
    Mrs. Meek. No questions, Mr. Chairman.
    Mr. Kolbe. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    Mr. Secretary, I would first like to second the comments 
which you made about the people of your Department. I had 
occasion, in anticipation of this hearing, to visit with agents 
of ATF and Customs, and the IRS, that are based in North 
Carolina, doing a good job, working hard.
    A number of the questions that I raised in their superiors' 
appearances before us last week were based on those 
discussions, so we do appreciate the work they are doing on the 
ground in North Carolina.
    Secretary Rubin. Thank you.
    Mr. Price. I have one rather narrowly focused question and 
one broader one. I think I will start with the narrower 
question because it is a matter of considerable importance and 
it does contain some details. So if you will bear with me, I 
want to revisit an issue that I raised with Sam Banks when the 
Customs Service was before us last week, and that is the 
question of Treasury's review of its interpretive ruling on the 
importation of pre-drilled studs and ultimately, the 
affordability of housing.
    As I understand it, Customs ruled last year that pre-
drilled studs fall outside the scope of the U.S.-Canada 
Softwood Lumber Agreement. That seemed, to me, to be a sound 
ruling. So I was concerned about some language that was 
included in the conference report on Treasury, Postal 
appropriations, which essentially directed Customs not to 
enforce its own ruling.
    That language was not included in either the House or the 
Senate versions of the bill, but apparently was slipped in at 
the 11th hour, at the Senate's insistence, in the conference. I 
believe our distinguished Chairman and Ranking Member, as well 
as many other Members in both bodies, have some of the same 
concerns I do about telling Customs that they must ignore their 
own best judgment on a matter such as this.
    Mr. Banks testified that Customs had completed its 
evaluation of the comments received, and that this matter had 
been forwarded on to Treasury to determine the final ruling.
    I understand you are trying to work with both Customs and 
the U.S. Trade Representative which negotiated the U.S.-Canada 
Softwood Lumber Agreement, and wants the Custom ruling 
reversed.
    Mr. Secretary, this matter was not discussed publicly 
during our last hearing cycle. Many of the Members on relevant 
committees have voiced concerns about reversing this ruling.
    I remind you--Treasury has reversed a Customs ruling only 
three times in 20 years, and on the most recent occasion, in 
1993, that decision was overturned by the Court of 
International Trade.
    So for all of these reasons, I think it is very important 
to procedure cautiously in this matter, and I hope you will 
proceed cautiously.
    I understand that a decision may be imminent. I urge you to 
pay close personal attention to this matter, and I would 
welcome any light that you would want to shed on the question 
now, or on your decision process.
    Secretary Rubin. Well, I would be happy to. The thing that 
confuses me a touch, Mr. Price, is that there are about 6,000 
comment letters. I think that is right, is it not?
    Mrs. Killefer. That is right.
    Secretary Rubin. There are about 6,000 comment letters. The 
comment closed off some time in December, and I do not think--
it has not come to my desk yet, but I had not realized they had 
completed their evaluation. But I can tell you it has not come 
to my desk yet. I was told they were still looking at those 
letters.
    But in any event, wherever it may be, it is ultimately 
going to wind up with us, and----
    Mr. Price. Well, I am relying on what Mr. Banks told us 
last week.
    Secretary Rubin. Oh, no, if he said it, I am sure he is 
right. He runs the Customs agency. In any event, when it comes 
over, I can assure you we will look at it with great care, and 
as you correctly say, it is both a very controversial and a 
very important and difficult issue, and we will look at it with 
great care, and I suspect this probably will get to my desk.
    Mr. Price. Well, there were a flood of comments, I 
understand. I also understand about 4,000 of the 5,000 were a 
flood of postcards, and if you are looking at substantive 
comments, I think the bulk of those will be the sort of 
comments that question the wisdom of reversing this.
    Secretary Rubin. Let me promise you one thing, Mr. Price. I 
understand this is a very sensitive issue to a lot of people. 
We will look at it with great care and seriousness.
    Mr. Price. Good. Thank you.
    Well, let me now go to the opposite sort of question, a 
very broad one, which is not actually within our ambit 
thisafternoon, but I nonetheless want to raise it with you because you 
of course have been very centrally involved in drawing up the 
administration's budget request. I am very pleased, as I am sure you 
are, that the administration has been able to propose a balanced budget 
for the coming fiscal year, three years ahead of projections, and that 
we in fact plan to end, or it looks like we can end fiscal year 1998 in 
the black.
    So I want to thank you for your efforts to make this state 
of fiscal solvency a reality, and ask you about an aspect of 
this budget debate that has received a great deal of attention, 
namely, the President's focus on Social Security and the idea 
that we should forego spending any surplus until we have made a 
long-range plan with respect to Social Security.
    As I understand it, the effect of that proposal--that the 
spending of any surplus be reserved pending a resolution of 
Social Security's long-term demographic problems--would be to 
reduce the debt held by the public.
    You have appropriately emphasized the wisdom of this. Let 
me ask you this, though. What if the budget surplus were used 
more directly to redeem Treasury bonds held by the Social 
Security Trust Fund, and the cash from that transaction were 
invested, then, in a more diverse portfolio including equities, 
obviously under appropriate governance procedures.
    Couldn't the trust fund be strengthened and the national 
debt held by the Government be reduced, and would this be a 
good small, first step, towards both extending the solvency of 
Social Security, and providing, systematically, for debt 
reduction?
    Secretary Rubin. Well, I will give you my view. I think you 
are raising, in a longer term sense, you are raising one of the 
questions I imagine will be central to this whole debate over 
the course of the year, and then the legislative process, 
hopefully next year, with respect to Social Security.
    Now should it be invested in equities? There are a lot of 
strong arguments in favor of it. I think there are also some 
concerns and risks which should be taken with great 
seriousness. I rather suspect that if the market had not gone 
up as much over the last 4 or 5 years, people might be looking 
at this a little bit differently.
    But having said that, there are a lot of powerful reasons 
to do it, and I at least think there are a lot of concerns and 
risks that should be taken with great seriousness.
    I do not think we should do anything different than--I 
think we should do exactly what we are doing right now.
    I think until Social Security gets addressed--and we 
debated this a lot before the President determined what he was 
going to do--I think until it gets addressed, I do not think we 
should do any of the various kinds of things that, ultimately, 
might become part of a program.
    I think we ought to stay just where we are, and as you say, 
the surplus, to the extent it exists, will go to retire debt, 
and meanwhile, I think maintains a continuing pressure to try 
to get a serious program to deal with the long-run issue. That 
is what I think.
    Mr. Price. But tremendous pressures are going to be created 
down the road to redeem all that debt held by the trust fund, 
isn't that true?
    Secretary Rubin. Oh, absolutely, and one advantage of 
repaying, or paying down public debt with the surplus we have, 
until this gets resolved, is it puts the Federal Government in 
a stronger position to then raise the funds that it needs to 
pay down the special debt securities that are in the Social 
Security Trust Fund.
    Mr. Price. At the same time you could begin to pay down 
that debt held by the trust fund, directly?
    Secretary Rubin. You could do that. I do not know that it 
matters that much, which debt you retire, but you can take that 
one step further and then say that the money should be invested 
in equities, or whatever.
    Mr. Price. Well, I am asking whether that might be a good 
idea, basically on a limited basis. I am not suggesting that 
you change the basic policy of investing the trust fund surplus 
in Treasuries. What I am suggesting is that the general fund 
surplus might be used to redeem that debt and then invest a 
like amount in the equities market.
    Secretary Rubin. Well, just to speak for myself, I think 
the question of whether any Social Security resources should be 
invested in equities is a very big, and I think not easy 
question. So I think it will be part of the general long-term 
debate.
    You know, if Social Security reform actually happens over 
the next couple of years, the amount of surplus that you are 
going to be talking about is relatively small, although it is 
certainly very nice to think there will be a surplus.
    Mr. Price. Thank you.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Mr. Secretary, let me just ask you a couple of 
questions on an issue that I do not think we had alerted your 
staff to, so I am not trying to catch you by surprise.
    Secretary Rubin. Oh, that is okay.
    Mr. Kolbe. This just came up in some discussions with my 
staff, prior to the meeting here. I just want to ask a couple 
of questions about our Treasury economic and financial advisers 
that we have overseas with foreign governments. You know, you 
have a number of those.
    Secretary Rubin. You mean the technical assistance people?
    Mr. Kolbe. I guess they are called technical assistants, 
but you have a number of advisers in Russia, and I met one in 
South Africa last year who was working down there with them.
    Secretary Rubin. Yes, we have some in South Africa on 
inter-governmental budgeting, right.
    Mr. Kolbe. What is your view of that function? Do you think 
it is working well?
    Secretary Rubin. Oh, yes, I think that is really sort of 
almost--to overstate this slightly maybe--but it is sort of a 
crown jewel of Government. I think the problem with it is that 
we do not have the funding for doing what we ought to be doing.
    You know, we talked before--Mr. Hoyer had raised the 
question, How do you get good people in the Government?--we can 
get very good people to do this sort of thing because they 
think it--and they are right--they can make a real 
contribution, they can take their work experience, and apply it 
in a practical fashion overseas. We can get really good people 
to do this, and in Central Europe--well, you said you met some 
in South Africa. In Central Europe, where this has been done 
extensively, and we now have a special arrangement with the 
State Department so we can facilitate funding. It is a 
terrifically good program.
    The problem, when you get away from Eastern Europe, is that 
we have to get the funding through AID, and it is an enormously 
complex process. We are fortunate we do have--we have one 
person in South Africa? I have forgotten.
    Mr. Kolbe. We had one, I think, when I was there last year.
    Secretary Rubin. Yes. We get requests for this sort of 
thing from countries all over the world, and our problem is 
getting the funding, and we did in the 150 Account this year 
request a very small amount of money so we could do some 
independent funding. I think we requested $5 million or $3 
million. I have forgotten. Was it $5 million or $3 million? 
Five.
    Mr. Kolbe. For the record, since you may not be able to 
tell me this offhand, would you provide how many of your FTEs 
serve in this capacity overseas. Some are in contract, I think, 
and some are your own FTEs, is that not correct?
    Secretary Rubin. Yes, a lot of them are in contract, and I 
do not know the answer to that. Do you know?
    Mrs. Killefer. I do not know either.
    Mr. Kolbe. For the record, I wish you would provide that 
and also how they are funded.
    [The information follows:]



[Pages 755 - 760--The official Committee record contains additional material here.]



    Mr. Kolbe. Do you know if you get reimbursed by USAID for 
these?
    Mrs. Killefer. Yes, we do.
    Mr. Kolbe. I think that is one of the problems with it, it 
was a very expensive program, and I think it is about $500,000 
per individual, I think.
    Secretary Rubin. When you say ``reimburse,'' I mean, they--
correct me if I am wrong----
    Mr. Kolbe. They reimburse you for salary, if it is your 
FTE.
    Mrs. Killefer. It is a combination. When you describe that 
number, it includes relocation costs, housing costs, you know, 
equipment and office costs, the actual salary component.
    We can give you that breakdown as a fraction of that 
number, so I think when people talk about that number, that is 
what I would describe as a fully loaded number.
    Mr. Kolbe. I will give you a whole series of questions but 
I would also like to know what countries you have them, and how 
many you have, and what----
    Mrs. Killefer. We will do that.
    Secretary Rubin. Let us get you a full response to this. 
This is really a very good program.
    Mr. Kolbe. I think it is, too.
    Secretary Rubin. The United States Government would be 
well-advised to very substantially increase it, if we could 
figure out a way to get the funding.
    Mr. Kolbe. I think you have got $5 million in your budget 
for 1999 for this.
    Secretary Rubin. That is our request and that was to give 
us some independence of the very cumbersome process we have 
right now.
    Mr. Kolbe. And at the cost of $500,000 per individual, that 
would give you only ten, I guess, total, overseas.
    Secretary Rubin. We will have to get you information on 
that, Mr. Chairman.
    [The information follows:]


[Pages 762 - 763--The official Committee record contains additional material here.]



    Mr. Kolbe. Okay. Quickly, on year 2000 compliance, you 
know, I continue to be nervous about this. I guess like this 
subcommittee was before I came on to it, about the tax system's 
modernization, whether we are really on track with this.
    So Mr. Secretary, let me just ask: Does the Department or 
the administration have a contingency plan to postpone the 
millennium in the event that we are not successful?
    Secretary Rubin. We do not.
    Mr. Kolbe. Do not? So, in other words, we really have to do 
this, don't we?
    Secretary Rubin. I think we are operating on the assumption 
that the postponement of the millennium is relatively unlikely, 
and if it is going to be postponed, it is powers way beyond the 
administration that I think are going to do that.
    Mr. Kolbe. It goes to a higher pay grade than yours and 
mine, I think.
    Secretary Rubin. Yes.
    Mr. Kolbe. Are you satisfied with the progress that is 
being made?
    Secretary Rubin. I think we have done a heck of a job, and 
I think, frankly, Nancy Killefer deserves a lot of the credit 
for it, for energy and focus.
    But I think we have some problem areas, particularly the 
FMS, which you identified, and if you want to ask Mrs. Killefer 
to comment for a minute----
    Mr. Kolbe. You know, it is a computer problem but it is 
really a labor-intensive issue. I mean, it is a matter of 
changing computers, and I was interested in the article that 
appeared in, I believe it was Business Week, just last week, 
about the problems that the private sector is having in this 
area, that a lot of companies are not focused on this enough, 
and that we are going to find ourselves terribly, terribly 
short of the people that are just needed to do this work, and 
it is just very labor-intensive work.
    Mrs. Killefer. You are exactly right. Since I have been 
here, as the Secretary points out, we have started an intensive 
process.
    Jim Flyzik, who is our CIO, is shepherding this effort at 
Treasury. We have four working groups at Treasury. We have a 
war room. We meet on a weekly basis, intensively, with each 
bureau, and we invite the bureau heads to come, and they have 
come, and we have seen in the process of this--and then we meet 
with the Secretary every other week to update him, and we hold 
our own report card meetings--we have seen significant 
progress.
    Places like Customs, that, frankly, were in trouble, are 
now back on track. With Commissioner Rossotti coming to the 
IRS, we have a task force at his level, that he leads, that I 
sit on, where we meet monthly and we clear up issues, 
immediately, to insure that we can keep this progress going.
    I believe now that we are in a situation where, at 
Treasury, we will meet our critical systems needs. My concern 
remains FMS, but I want to assure you that we----
    Mr. Kolbe. That is a big concern.
    Mrs. Killefer. It is a big concern. What we have done at 
FMS is we have new leadership, as I think you all know, which 
is very focused on this issue. We have prioritized their 
systems to insure that those systems that directly affect the 
American public are fixed, and in fact some of those systems 
have already been fixed.
    The ones that may slip, and I think will still get done by 
the year 2000, but late, are ones that are intergovernmental.
    So they will be, if you will, invisible to the American 
public. The American public will get their Social Security 
checks on time, their tax refunds on time. We will assure the 
public that that will occur.
    Most of those systems are already fixed at FMS. So I think 
while your point is absolutely right, it is people-intensive, 
and that is why we put in the retention program at IRS.
    If you do not have the people, you can throw all the money 
you want at it and you cannot get it done. So we arevery 
concerned with our critical resources.
    Also, some of it is equipment replacement and we have a 
diverse set of locations, so you have the logistics of getting 
out to every location and replacing that modem or switch, and 
that is why we believe that it is absolutely critical that we 
get full funding in 1998. 1999 is too late for many of these 
initiatives.
    Mr. Kolbe. Well, I appreciate those comments, and it is 
encouraging. Yes, Mr. Secretary?
    Secretary Rubin. Correct me if I am wrong. I am just 
repeating something you said, but the place we may have trouble 
is the intragovernmental accounting, and that is the one area 
that we are most--it is called GOALS or something?
    Mrs. Killefer. The GOALS Program. We actually still think 
we will be finished but we will be finished later than anybody 
would like, I believe. You know, we will still get done in 1999 
but it will be late in the year.
    Mr. Kolbe. Well, we will all be nervous all the way through 
this thing, until we see this actually take place.
    I appreciate your comments and am encouraged by the 
response that we are getting.
    I am going to ask Mr. Hoyer to take the gavel and complete 
the hearing, but before I go, I just wanted to say, Mr. 
Secretary, that with regard to my questions about law 
enforcement, I really do not want to sound like I am picking on 
you because I am going to be asking these same questions of the 
director of ONDCP and some of the other agencies that come 
before my subcommittee, because I think they are very much 
involved in this analysis that you are talking about, and 
decision. So I am really not trying to put all the 
responsibility in your shoulders for this analysis.
    Secretary Rubin. Oh, no. I think they are very 
constructive--the notion of whether the resources are actually 
being optimally allocated, it seems to me are very constructive 
and should be raised, and I think when you look at those 
numbers it at least raises a question that somebody ought to 
have a very good tight, analytic answer to. So I think it is a 
very constructive thing to do.
    Mr. Kolbe. Thank you very much and I would yield to Mr. 
Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman.
    I think 4:00 o'clock is the magic hour, so nice to see all 
of you. [Laughter.]
    Mr. Hoyer. Finally, Mr. Secretary, the only thing between 
your leaving is me. Let me just ask a couple of questions and 
we will conclude the hearing. Thank you, Mr. Chairman.
    As I understand your answer, you have asked for some 
flexibility in transferring funds for Y2K work.
    Mrs. Killefer. That is correct.
    Mr. Hoyer. To apply those. As I understand your answer, 
money may not be the problem on FMS, it just may--a lot to do, 
or is it money?
    Mrs. Killefer. There are funding issues in FMS. It is one 
of the three bureaus that we are asking for additional funds 
for in 1998. We need, desperately, to bring in contract 
resources to shore up some of the programs. So we need to add 
resources at FMS.
    Mr. Hoyer. Do you think we will need any supplementals? 
Assuming we adopt your fiscal year 1999 budget as proposed, are 
we going to need some 1998 supplementals, later on, in the 
fall?
    Mrs. Killefer. Well, I think we have identified a series of 
offsets that we have shared with your staff. They are 
difficult. I will say that.
    We have also identified, as we have gone through this 
process, we have pushed some stuff that probably we would 
rather not, into 1999. So we have got, actually, an additional 
request in 1999, above our current budget, and so that is to 
the tune of about $60 million. Once again, we have shared that 
with the staff.
    Mr. Hoyer. Well, I think the Chairman reflects the view of 
this committee in a very bipartisan way, that there is great 
concern about this. It is something that we cannot finesse, we 
must get this done, and therefore, this committee, I am sure, 
is going to be very engaged with you in trying to make sure 
that we have the resources to get it done, because it is not an 
option.
    Mrs. Killefer. We appreciate that support.
    Secretary Rubin. The only thing I would add is if, as time 
goes on, it looks like we are going to need more 1998 money, we 
will just have to come back and talk to you all about it, and 
hopefully, the $250 million will give us more than enough to 
deal with 1998, but if we need more, we will have to come back.
    Mrs. Killefer. Yes. I do not anticipate that we will in 
1998. If you found a way to actually give us some of the 1999 
money, the additional money that we are requesting, we could 
actually use it, frankly, but we have gone through a very 
difficult offset process, so we have tried to minimize our 1998 
needs to the extent we could.
    Mr. Hoyer. That may be a useful thing for us to look at in 
terms of acceleration of some expenditures, which may be 
easier, in some ways, depending upon what obviously the surplus 
is going to be for saving Social Security, but we may have some 
flexibility in 1998 that we do not have in our fiscal year 1999 
302(b) allocation. So we may want to look at the possibility of 
some acceleration of 1999 expenditures, that we know have to be 
met, which may fit more easily in our 1998 numbers.
    Mrs. Killefer. And we have identified those, so your staff 
has actually seen some of that, and we are more than happy to 
work with you because we actually have almost fully identified 
all our needs. So we can work with you on that.
    Mr. Hoyer. All right. Thank you.
    Mr. Secretary, you were not there. Linda was there. Bob, 
were you there on the fire? You were there as well.
    Secretary Rubin. You were there.
    Mr. Hoyer. I was there when the fire--I heard about it, and 
came down. I want to ask you just a couple of questions about 
what you are now doing.
    As I understand it, some of the money that we have 
appropriated has been utilized for our Y2K problem. Is that 
correct?
    Mrs. Killefer. What we are proposing in the offsets is that 
$17 million that we have, that would go toward restoration of 
the building, be used for Y2K. That is correct.
    Mr. Hoyer. Now it is my understanding further, which I 
think makes good sense, that in light of the fact we need to do 
some general restoration and in light of the fact we need to do 
repair on the fire damage, that we are now putting those two 
together. Secretary Killefer, perhaps you could comment on 
that.
    Mrs. Killefer. That is correct. I was not there during the 
fire, but what has happened is that we have expended some of 
the fire funds to obviously complete the roof and make 
necessary repairs.
    When we did that and actually opened up the walls, we found 
that we have parts of systems, and they are 150 years old. So 
we did basically the minimum to get people back in their 
offices and have a working building and went forward, then, 
with a plan for a major renovation of the building as kind of 
the prudent way to go about this fix, rather than fixing parts 
of one system, knowing that we would have to rip open the walls 
again to fix another.
    We then constructed and put the rest of the fire money 
together with a major restoration program of what is a very 
important historic building.
    Mr. Hoyer. Clearly, because of its historic aspect, of the 
Treasury building and its obviously critical location, it is a 
great tourist attraction and all tourists see it as they go 
down Pennsylvania Avenue past the White House, I think it makes 
a lot of sense, personally, to combine the two activities and 
to insure that we get it done--it may cost us a little more but 
it is going to save us a lot more in the longer run.
    So I am sure this committee will want to work with you on 
doing that.
    Mr. Secretary, I had a question but I think you have really 
answered it, on the relatively small sum of money relative to 
your budget, on the $8 million and the staffing increase of 33 
FTEs in the departmental offices.
    Secretary Rubin. Yes. I would just repeat what I said in my 
statement.
    Mr. Hoyer. Yes.
    Secretary Rubin. I really do think that is critically 
important, that people are enormously overstretched, given all 
that is going on at the moment.
    Mr. Hoyer. Mr. Secretary, let me ask you a final question, 
which like David Price's question, is not directly related to 
the the budget numbers but is very critical and very much in 
your portfolio. You have been the leader on this.
    I would like you to comment on the IMF issue. We are 
obviously just about to get, or have already gotten in the last 
hours a supplemental dealing with that.
    Secretary Rubin. You actually got it already.
    Mr. Hoyer. We have it already.
    Secretary Rubin. Yes.
    Mr. Hoyer. Could you comment on that because I think the 
American public needs to know why it is so critical that we do 
that. It is controversial, obviously. We had problems with it 
last time, to some degree, for unrelated reasons, but 
nevertheless, I would like you to comment on that.
    Secretary Rubin. I would be happy to. It is a very complex 
issue, but the bottom line of it is we have been dealing for 
the last, oh, six months or whatever it has been, with the 
crisis in Asia that has enormous ramifications for economic 
well-being in this country, and also our national security.
    There came a time as you got toward Christmas, where I 
think there was a real threat--and I have said this publicly 
before--a real threat or a real possibility that in South 
Korea, the 11th largest economy in the world, you could have 
had a default, a systemic default in the private banking 
sector. Had that occurred, that could have had profound 
ramifications around the world and then for this country.
    I am not saying it would have but it could have. What we 
need to do--and fortunately we--Treasury and the Fed together 
took leadership and we got banks around the world to coalesce 
on a voluntary basis around a refinancing plan for the debt 
which is in the process of being worked through now.
    There are enormous challenges ahead in Korea but it is on a 
constructive path.
    The key, now, and Chairman Greenspan and I have both 
testified to this effect a number of times, is that while the 
probability of a truly major crisis in the world system may be 
low--and I believe it is low, probability is low--should it 
occur, it could have severe effects on our economy and that is 
a risk that we should not take. In order to be able to 
effectively cope with that kind of a crisis, should it start to 
develop, you have to have an adequately funded IMF, and the IMF 
right now is at funding levels that are very substantially 
short of what it would need to deal with a truly major crisis. 
That is the basic thrust of the very strong request we made of 
Congress to approve on a supplemental basis the full $18 
billion--three and a half billion for the New Arrangements to 
Borrow and 14 and a half billion for the quota increase--the 
full $18 billion, and do it as quickly as possible.
    And while it is obviously a very difficult congressional 
issue, I think we are making headway. In any event, 
independently of its current status, legislatively, it is, I 
think, absolutely critical in terms of protecting our economic 
interests in this country.
    Mr. Hoyer. Thank you, and again, Mr. Secretary, 
congratulations to you on your leadership, both here, in this 
country and around the world on that issue, and others, which I 
think have been a very important factor in our stability. I 
think you have a lot of confidence throughout the world, and 
credibility throughout the world and I think that is helpful.
    Secretary Rubin. Thank you.
    Mr. Hoyer. I know you would like to stay here longer.
    Secretary Rubin. We would be delighted. We can order in 
dinner; whatever you would like.
    Mr. Hoyer. Discuss the issues of the day.
    But again, we thank you for appearing, and we look forward 
to working with you over the next three months as we try to 
forge a budget on an appropriation bill for the Treasury 
Department, which both in terms of its law enforcement 
responsibilities, its fiscal responsibilities, and its revenue 
collection responsibilities, meets the needs of the American 
public.
    Thank you very much.
    Secretary Rubin. Thank you.
    Mrs. Killefer. Thank you.
    [Questions for the record and budget justification material 
follow:]


[Pages 770 - 937--The official Committee record contains additional material here.]



                                       Thursday, February 26, 1998.

                        INTERNAL REVENUE SERVICE

                               WITNESSES

CHARLES ROSSOTTI, COMMISSIONER, INTERNAL REVENUE SERVICE
JOHN DALRYMPLE, ACTING CHIEF, TAXPAYER SERVICE AND COMPLIANCE
ARTHUR GROSS, ASSOCIATE COMMISSIONER FOR MODERNIZATION/ CIO
    Mr. Kolbe. The meeting of the Subcommittee on Treasury, 
Postal Service, and General Government will come to order. We 
are here this morning for our second in our series of hearings. 
And this morning we welcome the Commissioner of the Internal 
Revenue Service, Mr. Charles Rossotti, in his first appearance 
before this subcommittee. And having been sworn in, I think on 
November 13th of last year, Mr. Rossotti comes on board at a 
time that there are enormous changes going on within this 
agency. He faces a number of tremendous challenges.
    Among these challenges are assuring that the IRS will 
continue to function and not collapse on January 1, 2000; 
continuing to move forward with the much needed and oft failed 
or postponed modernization of the IRS computer systems; and 
implementing the restructuring legislation that is now being 
considered by Congress, and which I am confident will be 
enacted into law very soon with the strong support it has in 
the Senate and with the Administration. On top of all of these 
items, the Commissioner has now placed his own proposal for 
modernizing the Internal Revenue Service onto the table.
    Mr. Commissioner, we are looking forward to working with 
you as you address some of these extraordinarily complicated, 
and we know very tough, issues. We are pleased that you are 
taking an active role in both the management and technology 
issues that face the service. For too long, these critical 
components of IRS operations have been without adequate 
leadership at the top.
    And I think it is a tribute to the Secretary and to the 
Administration that they have gone out and sought somebody with 
your background and your talent and caliber to make sure that 
we are leading the IRS at this very critical moment.
    We are particularly interested in your concept of 
modernizing the IRS as described in the opening statement which 
you have submitted and which I have read. We hope that you will 
keep us fully informed as you go through the process of 
validating this concept. The IRS can only benefit--I think all 
of us would agree--from some very fundamental restructuring.
    Last year, as we heard in the hearings that took place in 
the Senate Finance Committee, there are too many examples of 
the IRS becoming an organization that has been unresponsive to 
its customers, which are the taxpayers.
    These kind of taxpayer abuses cannot and will not be 
tolerated, which is why we have the restructuring legislation 
now being considered. The subcommittee will certainly use its 
oversight role and aggressively use performance measures to 
make judgments about appropriate funding levels for the IRS.
    I also want to take this opportunity to welcome back, and 
in this case not for the first time but for the last time, Mr. 
Arthur Gross. This will be his last appearance before the 
subcommittee as he has decided to leave the IRS to pursue other 
interests.
    I think I speak for my colleagues, not just those that are 
on this subcommittee, but a lot of others that have worked on 
the Ways and Means Committee and on the tax system's 
modernization program, to say that we are very grateful for the 
service that Mr. Gross has provided.
    You have done a remarkable job, Art, of turning around the 
IRS tax modernization program. And I think you have clearly 
left the building blocks, that are going to be needed, to make 
sure that this works for whoever your successor is, and that 
will make it easier for Mr. Rossotti.
    Having said all of that, I do want to point out that the 
TSM, tax systems modernization, is something that we are very 
concerned about. The General Accounting Office just this week 
issued a report, if you will, an interim report on TSM. And 
they express a number of concerns. Among them, they express 
their doubt as to whether the IRS is going to have the ability 
to implement and enforce the modernization blueprint once that 
it is completed.
    So we will perform what we think is a vital role, to 
monitor this program closely so that we don't wind up in a 
position that we were in a couple of years ago where we had 
literally poured billions of dollars down a drain and had 
nothing at all to show for it, or precious little to show for 
it.
    Let me just say a word also about the IRS budget request 
for FY '99. It is $529 million above the amount we appropriated 
last year. We certainly recognize the importance of the 
programs for which you have requested increases, but I have to 
be candid in telling you though, that the realities of the 
budget and what is likely will be our allocation on this 
subcommittee, are going to make it very, very difficult for us 
to meet and accommodate all of those increases.
    So as we go through the appropriations cycle, you could be 
very, very helpful to us if you would help prioritize these 
requests for new funding. It would be very useful for us. We 
will do everything we can to be sure that you get what you need 
to carry out the job. But you must help us by telling us where 
the highest priorities are.
    Mr. Commissioner, we look forward to hearing your 
testimony, and, of course, your full statement will be placed 
in the record, if you want to summarize it. But before I do 
that, let me turn to my friend and colleague, Mr. Hoyer, for 
his opening statement.
    Mr. Hoyer. I thank the Chairman for yielding. I want to 
join him in recognizing and welcoming to the committee our new 
Commissioner, Mr. Rossotti. This is his first time appearing 
before the committee, and I know he will do well. And I think 
you will find this committee to be an ally, not an uncritical 
ally from time to time, but an ally in trying to build an IRS 
that is effective, customer friendly, and perceived by both 
internal observers and external observers as being an 
organization that works as it is designed to do.
    I want to also add my words, which I have done privately 
but want to do publicly as well; Art Gross I think was a very 
significant addition to the IRS. I want to congratulate him 
once again. I mention this frequently, but, unfortunately, not 
very many people hear it in America, the role that Secretary 
Rubin and Secretary Summers have played, and for the first time 
of any Secretaries that I have been involved in or Central 
Administration of Treasury, focused on how IRS is operating and 
how they can respond to assist in upgrading the management of 
IRS.
    Art Gross was a very, very significant addition, very 
significant management decision that was made by Secretary 
Rubin and by Larry Summers. And, Art, I want to say to you that 
I have enjoyed working with you. I believe that some of the 
positive things that have happened at IRS, some of the 
observations that have been made by GAO this year, are a direct 
result of the focus that you brought to what we call tax 
systems modernization, what can be called modernization, 
whatever the name that applies, is to making sure that 
technologically we are able to do the job that IRS needs to do 
to ensure that this government operates hopefully in theblack, 
but at least effectively and efficiently in collecting the revenues due 
and owed.
    Art, I want to wish you the best of success in whatever 
endeavors you pursue and thank you again for the contribution 
that you have made during your short, in my opinion too short, 
tenure at the IRS and congratulate you.
    I was one of those, Mr. Chairman, who sat down with 
Secretary Rubin approximately 18 months ago and said to him 
that I thought we needed a manager at IRS. Tax lawyers are 
great. I happen to be lawyer myself. I am not one of those who 
has a jaundiced view of lawyers, obviously.
    On the other hand, it is somewhat like education. We have 
some master teachers who are hired to teach children who are 
then promoted to principals and management, not so much because 
they have shown management skills, but because that is the only 
way we can pay them in the system.
    The analogy limps somewhat because the lawyers we were 
hiring to run IRS were good, smart, able people, and they would 
all make a lot more in the private sector than they were making 
in the public sector, unlike Mr. Rossotti, who I am sure got a 
raise when he took the Commissioner's job.
    Mr. Kolbe. He says it facetiously in case anybody may have 
taken that with anything other than a grain of salt.
    Mr. Hoyer. But I suggested to Secretary Rubin and to Larry 
Summers we needed a manager. We needed somebody who could bring 
business practice skills to the operations of the IRS, and, 
furthermore, that we needed somebody with tenure.
    I didn't mean tenure in terms of not being fired if they 
did a lousy job, but a long enough period of time in which to 
implement management decisions, not simply in the door-out the 
door, again in somewhat of a jaundiced view, to enhance one's 
private sector worth.
    And I say that with no criticism of prior Commissioners, 
many of with whom I have worked and I enjoyed my relationship 
with. But I think the fact that the Administration, Mr. 
Chairman, has brought in somebody with the management skills 
that Mr. Rossotti has is a very, very positive step forward, 
and I am pleased to see it.
    Your budget request is $8.196 billion, 99,829 FTEs, 
representing an increase of, as the Chairman has pointed out, 
529 million or 6.9 percent. The Chairman observed it might be 
difficult to get that sum. I voted against the reform bill, 
which was the result of this report. I was one of four to do 
so. It was somewhat of a pyrrhic vote, a little bit quixotic I 
suppose.
    But what it was was a statement that I made on the floor, 
and sometimes, Mr. Chairman, your relevant statement doesn't 
get picked up by the press. But in this case, when it was 
reported in the Washington Post, my statement was that the 
relevant sentence was picked up.
    And I said if you are going to be for IRS reform, you need 
to be for IRS reform at budget time, i.e., appropriation time, 
and at taxwriting time. And if you are not for IRS reform, at 
budget time and taxwriting time, you are not for IRS reform, 
notwithstanding the pretty words in a bill that passes that 
beats our chest and says we want to be taxpayer friendly.
    Of course, we want to be taxpayer friendly. But I want to 
tell you, Mr. Chairman, I am not friendly to people who cheat, 
connive, and commit fraud on their tax forms because they cause 
my kids and me and my family to pay more taxes. To some degree, 
I don't expect the police to have necessarily friendly 
relations with criminals. There are some criminals who commit 
tax fraud in America.
    Now, the four examples that were used by the Senate 
Committee out of thousands and thousands and thousands of 
people that were interviewed were egregious, and I hope we fire 
the people who were responsible for committing those abuses, 
Mr. Commissioner.
    We ought to be angry about them. I am angry about them. I 
am angry at those people because they undermine the credibility 
that 98 percent of the IRS employees are due for the hard work 
and conscientious work that they do on a daily basis. Mr. 
Chairman, I know I--oh, you are not getting--I thought you were 
going to start gaveling.
    Mr. Kolbe. No, not at all, Mr. Hoyer.
    Mr. Hoyer. And I know I am going a little longer, but this 
is a critically----
    Mr. Kolbe. I am listening with interest to every word.
    Mr. Hoyer. Thank you, sir. The Chairman and I, you could 
say, have an extraordinarily good relationship. I have been 
blessed with having very friendly Chairmen and very positive 
Chairmen. The Chairman is one of the most positive people that 
we have in this Congress on either side of the aisle. And IRS 
and the other agencies that come within his purview are lucky 
to have him as Chairman.
    But in saying further, it is easy to pick egregious 
examples. When you have almost 100,000 people working for you 
and you are dealing with 128 million taxpayers, maybe more, in 
that neighborhood, people are going to mess up, and we need to 
get at that. And you are getting at that, and I think that is 
good.
    But on the other hand, we need to make sure, Mr. Chairman, 
that our colleagues understand that this agency is [a] critical 
and [b] needs resources to accomplish the very gargantuan task 
that it has been assigned.
    Furthermore, we are about to complicate the tax code even 
further if we adopt some of the proposals of this 
Administration, some of which I support, by the way. But I 
agree with those that say we ought to have a much simpler tax 
system because if we had a much simpler tax system, those 
99,000 people would have a lot easier job. I heard Steve Forbes 
last night, Mr. Chairman, at the Business Council.
    Mr. Kolbe. I was there.
    Mr. Hoyer. Were you there?
    Mr. Kolbe. Yes.
    Mr. Hoyer. And you heard him say nobody in America 
understands the tax code. They may understand segments of it 
because people pay them a lot of money to be up on it, but 
nobody understands the tax code. He makes the point that it is 
now over 7.5 million words long, as opposed to the Gettysburg 
Address and the Bible, which is less than a million words in 
length.
    Nobody understands the tax code, and IRS is not responsible 
for that. We are, the Congress, and the private sector, who all 
wanted special deals or a particular consideration, some of 
which, Mr. Chairman, as you well know, had very, very, very 
worthy objectives and have worked very well to accomplish the 
ends--economic, social, whatever ends that we wanted to 
accomplish.
    In any event, I want to congratulate you and thank you for 
agreeing to take on this task for an extended period of time. 
Five years I know is your contract. I hope it is longer than 
that, if need be--if you determine need be.
    Mr. Chairman, I am pleased with this GAO report that has 
just come out, which points out that right now the custodial 
financial statements are for the first time now in order. When 
I say the first time, maybe it has been--is it the first time?
    Mr. Rossotti. The first time.
    Mr. Hoyer. That is a very significant step, and I want to 
say that has been accomplished through the efforts of myself, 
Mr. Lightfoot, and Mr. Kolbe on this committee, and all the 
members of the committee--Mrs. Meek and others--in saying to 
IRS you need to get your act together. The critics are not all 
wrong by any stretch of the imagination, as you know. So we 
need to admit, yes, we have got some things that need to be 
fixed, and we better be about the business of fixing them.
    But both this report and happily the more general report 
that you read from--in my opinion, I read the most recent GAO 
report as the glass is half full, as opposed to it being half 
empty in previous reports. They say that they see light at the 
end of the tunnel, that we are getting together. Mr. Gross, I 
think you are, as I said, in large part responsible for that 
step forward.
    Mr. Chairman, I look forward to going through this budget 
with you. There are obviously a number of issues here in 
dealing with a little bit of a spike-up in FTEs, but as you 
know, FTEs have come down very substantially, over 10 percent 
in the last five years, as we have done more with less.
    I know Mr. Rossotti in his testimony is going to say he 
intends to continue that, but we need to spike up a little bit 
because this report correctly--I don't want to be 
misinterpreted when I say there are crooks out there that I 
don't want to be customer friendly with. I don't want to be 
tough on them and make them pay up because I have got to pay up 
and my colleagues have to pay up, and they need to pay their 
fair share.
    But this report correctly emphasizes being customer 
friendly. There is no reason why we shouldn't treat honest 
taxpayers who want to comply, but it is a complicated code, and 
they make mistakes or their spouse makes a mistake, why we 
shouldn't bend over backwards to make sure that they are good 
citizens, and we want to help them, not harass them.
    Now, perhaps I am haranguing at this point in time, and I 
do not mean to do that. But this is a very, very important 
issue. Yesterday, as I told Mr. Rossotti, we had some 
outstanding people--$3.2 billion law enforcement people in 
Treasury--critically important people. We had the cameras here. 
We had all sorts of things here. This is, in many ways--this 
activity funds them and funds everybody else.
    We don't have the interest here that we had on the four 
people in Mr. Roth's hearings. That is understandable. That 
makes good PR. But this is the focus. This is where we are 
going to solve those problems, and, Mr. Rossotti, we have a 
great deal of confidence in you and very high expectations for 
you.
    And I look forward to your testimony, look forward to 
working with you, and look forward to supporting those efforts 
which will allow you and your people to do the job that we 
expect in a manner that the taxpayer will feel good about. 
Thank you, Mr. Chairman.
    Mr. Kolbe. I want to thank my friend and ranking member for 
his comments. I could have just skipped mine and listened to 
his because I think they said it all, and I agree completely 
with what you are saying particularly about that if we are 
going to make the whole--not only the modernization, but the 
restructuring of IRS work, it has got to be done in this 
subcommittee. Mrs. Meek, did you have any opening statement?
    Mrs. Meek. Thank you, Mr. Chairman, and I would like to 
congratulate Mr. Rossotti for taking on this challenging 
endeavor.
    I want to say to each of you that a lot has been said 
before about IRS, but we need the IRS. I am convinced that we 
need it. We need a reformed IRS, but I would like to say to you 
that computers and things will not make IRS what it should be. 
It may bring you up to date with all of the new data and 
technology, but it will not maintain the credibility that you 
aspire for.
    Only people will do that, the people who manage the agency, 
the people who work with the people, the people who give 
service to the people. So it is very good to know that you are 
ready now to take on some changes within the agency.
    I noted that from 1995 to 1998 the number of your employees 
fell by 10 percent, and that your total funding grew by only 
seven percent during the last three years. You barely kept pace 
with inflation. Now, your new budget does speak to that, and 
that you are asking for $8.2 billion, an increase of seven 
percent over this year's level.
    I think this committee should give you that. They have 
given you a mandate to improve. They have given you a mandate 
to reform. And along with those mandates should go the kind of 
funding you need to do the kind of upgrading, to improve the 
credibility of the IRS. And I am sure that my Chairman and the 
ranking member are going to take that into consideration. And 
if they listen to me, they will.
    Mr. Kolbe. Mrs. Meek, we always listen to you.
    Mrs. Meek. Thank you. I repeat that the good, conscientious 
service that I know you must give is going to be there. And I 
also want to congratulate Mr. Rossotti and the members of your 
management team for reaching out in the community and 
establishing citizens advisory councils so you can get feedback 
from the people. I think that is essential. And I want to 
congratulate you and tell you Godspeed. Thank you, Mr. 
Chairman.
    Mr. Kolbe. Thank you very much, Mrs. Meek. Well, we have 
done all the talking. It is your turn, Mr. Commissioner.
    Mr. Rossotti. Thank you very much, Mr. Chairman, and 
distinguished members of the committee. I just want to say on a 
personal note that I really appreciate the welcoming and 
generous comments you have made about me. The only trouble is 
it makes me lose even more sleep because I keep worrying about 
how I am possibly going to live up to all these expectations, 
but I am going to do the best I can.
    What I would like to discuss----
    Mr. Hoyer. It is a motivational technique.
    Mr. Rossotti. It is a motivational technique. What I would 
like to talk about in my oral testimony is to summarize how I 
think we can use the FY '99 budget as a start in transforming 
the IRS into the kind of agency that I think we all want, which 
is one that provides the right kind of level of service to 
taxpayers while, of course, also ensuring the compliance is 
fair. And I think we can do that while actually continuing to 
shrink the size of the IRS in relation to the economy, which is 
something that hasn't been happening. I believe that is 
possible to do.
    I think the essential shift that we need to make at the IRS 
is away from solely a focus on the internal operations of the 
IRS itself and make it an agency that is like a lot of modern 
businesses are, which actually looks at things from the 
taxpayers' point of view and tries to help taxpayers solve the 
problems that they encounter in attempting to cope with the tax 
code that does exist on the books. And I think that the budget 
that we have before you is a start. I have said many times that 
I think this is a long-term effort, but I think this can be a 
start.
    In order to accomplish the kind of goals that we need, we 
are going to have to modernize pretty much top to bottom the 
business practices, the organization structure, and the 
technology. And these are going to take some investments over a 
period of time, both in technology and in the organization 
itself. And so the FY '99 budget is a start in this direction.
    Although it is a long-term effort, I think we have to make 
progress step by step. We have to deliver some things right 
away to the American taxpayer, and there are some key service 
improvements, some of which we have already started to do, and 
more which we can do with your help with this budget in '99.
    But before talking about the budget in detail and some of 
the near-term steps, let me just briefly describe some of the 
concept, which is in more detail in my written testimony, which 
I think sets kind of a direction of where I think weneed to go 
to make these kinds of things happen.
    There are five areas of change that I believe encompass 
everything we need to do over the long term at the IRS, and 
these are summarized on the chart that is in my written 
testimony, chart two. But the first one of them is really to 
revamp all of the business practices of the IRS.
    These are everything from the way we educate taxpayers, the 
way we file, the way we collect money, the way we enforce 
compliance. If we emulate the things that are known to work in 
the private sector, all of these practices have a great deal of 
prospect for improvement. I mean, that is the good news.
    And I think one of the key principles here is that we need 
to do a better job of understanding specific problems for 
different kinds of taxpayers. I mean, college students and 
senior citizens and small businesses and large businesses, have 
really quite different kinds of problems. And, as a matter of 
fact, different parts of the tax code apply to these people, 
not the whole code to each person.
    So I think if we can adopt that principle and try to tailor 
these practices to each group of taxpayers, over time we can 
dramatically improve the level of service and also our 
compliance to taxpayers.
    I think in order to do that, we are going to have to 
rethink the entire organization structure of the agency. The 
structure that exists today, which consists of 10 service 
centers, 33 districts, four regions, a national office, and 
three computing centers, is very complex. It has been built up 
over 45 years, and there is a chart which I think pretty well 
shows how complex it is.
    I think most of the managers in the IRS agree that although 
not everyone may know exactly how to do it, they know that this 
structure really does not allow us to fully achieve the goals 
that we want for the agency, nor I believe will it enable us to 
succeed in the modernization program. And some of the points in 
that GAO report actually made that point.
    I think what I have proposed as a logical way to deal with 
this problem is to simply take a play out of the playbook of 
most of your large private sector companies and simply divide 
up the taxpayers into logical groups--there are actually four 
that make a lot of sense--and put a management team in charge 
of understanding those particular problems of those taxpayers 
and solving those problems.
    We can then convert the national office to more of a 
corporate-style office, which wouldn't have to be as large, and 
which I think could then do a better job of fulfilling its 
oversight responsibilities, as opposed to being sort of a mixed 
staff and line operation as it is now.
    And as you can see from chart four in the testimony, there 
are four groups of taxpayers that fall pretty logically. You 
have 100 million filers that are individual wage earners. You 
have small businesses, which are very particular kinds of 
taxpayers and where some of the most significant problems are 
right now in terms of service.
    You have large businesses, which have a different set of 
problems in regulations and multinational operations, and then 
you have an enormous tax-exempt sector, which has still a 
different set of problems.
    If we can set up a management team that would have full 
responsibility for serving each of these groups of taxpayers, 
one of the big benefits that we would get is that these 
management teams would be able to really understand more 
specifically the problems of small business, the problems of 
individual taxpayers, and would be able to be held accountable 
to a much greater degree than people can be held accountable 
today in this complex structure.
    I think that there would also be more attractive roles for 
people to come in from outside the agency, as well as be 
developed inside the agency because they would be more clearly 
responsible for a particular set of activities.
    We have had a lot of problems with performance measures 
that have been highlighted in a number of hearings, as your 
members know. It is essential in any organization to have 
performance measures, and the key thing, of course, is that 
they have to measure what you really want. And we want 
taxpayers to be satisfied. We want compliance to be fair. And 
we need our employees, who are the people, as Mr. Hoyer said, 
to actually deliver the service to the taxpayers, to feel that 
they are getting what they need.
    And, finally, in order to deliver to the American taxpayers 
broadly, we need to do this in a way that uses our resources in 
a highly productive way. I think performance measures can be 
devised that can do that. I don't think we have them today, but 
we are going to work very hard. And I think the structure--this 
modernization concept--provides us a way to move in that 
direction.
    And, finally, of course, of great concern to this committee 
is the need for new technology. We absolutely need to replace 
the old base of technology which exists in the IRS today and 
which really does not adequately support our business; to build 
new computer systems that try to support what is essentially an 
obsolete set of business practices in an excessively complex 
organization structure that will not work--again, this is a 
point that GAO correctly observed in their report.
    What my colleague here, Mr. Gross, has done in a remarkably 
short period of time is to begin to establish the right kind of 
a professional information systems organization. It needs more 
work, and that is part of what we need in the '99 budget. He 
has also issued a technology blueprint, which I believe is at 
the appropriate level of detail, and which provides the 
guidepost as to where we need to go longer term.
    I think that the revamped business practices in the 
organization structure that I have discussed will be the other 
missing piece that we need to have in place in order to 
successfully implement the blueprint. And, again, I cite the 
GAO report, which I think basically in not quite as much detail 
said essentially that same thing.
    Let me now shift a little bit to how we can begin this 
process in '99. I indicated that it will take a number of years 
to accomplish all of these changes, of course, but we need to 
deliver some things in the short term. And, of course, in the 
short term we also have some mandatory requirements of which 
the two most important are to accomplish the century date 
change update to our computer systems and also the tax law 
changes that have been recently passed in the recent tax bill.
    So to accomplish this, as well as move in the direction 
that we want to go longer term, we have put forth for fiscal 
'99 basically five areas of initiatives, five particular things 
that we have to focus on in '99. The first one is just 
completing--I say just--it is a huge job--completing thecentury 
date change program. And this, of course, is one of the most critical 
elements in the '99 budget.
    Because of the way that the schedule works in the IRS, many 
of the renovations to our systems that need to be done will 
actually have to be completed this calendar year--in other 
words, before January of '99 when the next tax season starts. 
Then during '99 itself, during calendar year '99, we will have 
a huge job of completing the testing and the certification.
    And there is $234 million in the FY '99 budget request for 
this century date change program, which is obviously an 
essential element so that we really can continue the basic 
operations of the IRS without the kind of major problems that 
would exist if we didn't accomplish this.
    A second major area for fiscal '99, Mr. Chairman, is just 
making some highly focused improvements to service to 
taxpayers. And these are in areas such as clarity of notices by 
rewriting some of the forms and publications and notices; 
better phone service; more walk-in service in retail locations; 
expanding electronic filing where are making good progress, but 
we have a lot of way to go; improving the training of customer 
service representatives, which I must say is one of the most 
important areas of all in terms of not only delivering service 
to taxpayers accurately, but also keeping our employees in a 
state in which they feel comfortable in actually delivering 
service.
    There is nothing that makes the employees feel more under 
pressure than being caught between taxpayers who want accurate 
information on the tax law and not having the materials and the 
information they need. And believe me, I have heard this from 
many employees.
    We also want to do some things for small businesses and 
begin the increased staffing for the taxpayer advocate office 
and the creation of the citizen advocacy panels, which Mrs. 
Meek mentioned. The total cost for these, and they are detailed 
in chart five of the testimony, is $103 million in FY '99.
    Third is that we need to do some things in the very near 
term in fiscal '99 to invest in some important near-term 
technology initiatives simply to maintain an acceptable level 
of service. There is just a certain amount of investment, in an 
organization the size of the IRS that needs to be made.
    These are listed in the testimony. Some of the more 
important ones are a new call router, which is part of the 
customer service improvement program for phone service; 
deploying some computers to field collectors who don't have any 
computers at all right now; and replacement of some of the 
computers for the field agents who go out to customers' offices 
and who depend on these computers so they can do examinations 
in a reasonable period of time.
    And, finally, the one other place where Mr. Gross put a lot 
of emphasis on and still, as GAO has noted, needs a lot of work 
is what we call product assurance. This is testing these 
computer programs before we put them into production and start 
sending out material to millions of taxpayers. And we are not 
at an industry standard right now on that, and we really need 
to do something about that quickly. So you can see in chart six 
in the testimony all of these near-term investments.
    And, fourthly, there is the beginning of the long-term 
program, which is going to take a number of years to actually 
replace the base of technology that we have today. The 
blueprint was a very important beginning. We have under Mr. 
Gross's leadership begun to establish what is called a 
methodology of systems life cycle to manage this. And we have 
recently just finished what we hope is the final draft of the 
RFP for the Prime contractor. And we are really expecting to 
issue this to the contractors before the end of March.
    In '99, we will continue this step by step, carefully 
managed process of long-term modernization by strengthening, as 
GAO has said we need to do, some of the management 
capabilities, the systems life cycle, and the other internal 
management processes. And we will work with the Prime once the 
contract is awarded on two subreleases, which are two 
individual projects that are the first two in the blueprint.
    These are relatively small. Nothing is that small in the 
IRS, but there are relatively small releases that focus 
basically on generic telephone and communications operations 
that will be essential no matter what we do elsewhere. And 
chart eight shows the FY '99 budget for the long-term items.
    And, finally, we have an item in the budget, $25 million, 
to begin the support of the organizational changes that I 
outlined. These will be the kind of funds that will be needed 
to complete the planning, as well as to begin potentially 
recruiting and relocating and retraining some of the people 
that will be required to have their jobs changed as a result of 
the modernization.
    We have a management consulting study that we are about to 
begin with the aid of an outside firm that will help us to 
provide more detail around these organizational modernization 
matters. And as the Chairman requested, we will be in very 
close touch with the committee over the next four or five 
months as we go through this study. We will obviously provide 
more details on what we propose to use the money for in fiscal 
'99.
    Finally, let me just conclude with a little bit of a 
historical perspective. As I came in as the new guy on the 
block. I tried to look back a little bit and see what has 
happened, and there are some charts in there, charts nine and 
ten, that really show what has happened to the IRS budget over 
the last three years.
    And it actually has declined about seven percent in actual 
dollars, while the amount of money that is collected has gone 
up by about 24 percent, and the number of returns has increased 
by eight percent. And, of course, we have now got 800 tax law 
changes from the tax law that was just passed.
    And these changes and these increases in activity do ripple 
through the entire system of the IRS, not just the processing 
and returns, but all the people who are answering phones who 
have to be trained and the auditors, the forms and 
publications, and the technology.
    So, you know, we have had somewhat of a conflicting trend 
here, and I certainly understand why this has happened and why 
there has been a cut in the budget for the IRS over the last 
few years. But it does present some challenges for us as we 
move forward.
    Let me say, however, though to the committee that I am not 
one who believes that money is the only answer to these 
problems. I do not think that at all. And I think that in order 
to really solve the problems of the IRS, yes, we aregoing to 
need the assistance of the committee to have appropriate money for the 
right purposes, which we hope we can justify to you. It will only 
produce the results that we seek if we can do the other things that we 
need to do from a management standpoint, which I have outlined in terms 
of business practices, organization structure, and, of course, 
technology.
    So let me conclude and say I hope it is a new day at the 
IRS. I think people in the IRS want it to be a new day 
actually, and I really believe that we can transform the IRS 
into an agency that views its mission as helping taxpayers meet 
the obligations that they have because there are tax laws on 
the books while ensuring that compliance is fair so everybody 
pays their fair share.
    And I even believe that we can do this while actually 
improving our productivity and actually shrinking the size 
gradually of the IRS in relation to the size of the economy 
because the economy is growing. It will take some investments 
in improving the organization and some technology, but I 
believe that with the support of Congress, as well as the 
Administration, and certainly I have gotten that so far in my 
short tenure, I really believe it can be done. So that is a 
summary of my thinking, Mr. Chairman, and I am certainly more 
than happy to answer any questions that you or the members 
have.
    [The statement of Mr. Rossotti follows:]


[Pages 951 - 972--The official Committee record contains additional material here.]



    Mr. Kolbe. Thank you very much. I think that statement was 
certainly very helpful to us and, I think, gives us some of the 
structure for some of my questions and I suspect others on the 
subcommittee. And we hope that this questioning will be helpful 
for both sides, for us to understand your work and your efforts 
and for you to understand some of the concerns that we have.
    Let me begin with some questions on the modernization 
proposals--your concept. I am intrigued with--and you talked to 
me when you were in my office about your concept of 
restructuring the IRS. By the way, the four areas that you are 
talking about, that would be both taxpayer service and 
enforcement in each of those areas--for example, large 
businesses? You would include service to large corporations, 
but you would also include collecting the taxes from them. Is 
that correct?
    Mr. Rossotti. That is exactly right.
    Mr. Kolbe. You don't separate enforcement from the service?
    Mr. Rossotti. No.
    Mr. Kolbe. Is there any dichotomy there, that the same 
people doing the--going out and nailing people for taxes are 
also providing the services?
    Mr. Rossotti. Well, I think that when you look at it 
though, what you find out, Mr. Chairman, is that in any 
business that I am familiar with, you have different functions 
in order to provide a complete round of service to a customer. 
Take a bank. You have people lending money, and then you have 
people collecting money, just like we do.
    I think the most important thing is to recognize that what 
you want to do is understand the problems of that particular 
customer, and you want to tune all of your resources, whether 
they be helping the taxpayers understand how to file returns, 
or also helping them to stay in compliance. You want to have a 
set of people who are responsible so that taxpayers--or 
customers if you were in a bank--don't get bounced around from 
one person to another.
    This is one of the biggest problems that created, for 
example, the four taxpayers who testified at Senator Roth's 
hearings. They were being bounced around from different 
districts and service centers and other people that were 
responsible. So the idea would be that you have a management 
team that would be responsible for everything that is required 
to provide all of the services that are needed for a taxpayer.
    Now, we have more work to do with the aid of this 
management consultant, we would certainly have, you know, some 
subdivisions of responsibilities within each of those. You 
would have, you know, one set of----
    Mr. Kolbe. I guess that is what I was trying to get at. So 
even though they would be in the same management team, there 
would be some subdivision? I am just thinking of the guy----
    Mr. Rossotti. Yes, there would be.
    Mr. Kolbe [continuing]. The small business guy who calls up 
and asks for some advice, and the next week the guy who gave 
him the advice at IRS shows up on his doorstep and says, hey, 
you know what you told me last week, I want to audit you now 
and all that.
    Mr. Rossotti. No, it wouldn't be like that. I mean, 
obviously you would break it down. I mean, just like in a bank, 
you have a different group that collects money. But, you know, 
most of the taxpayers don't deal with the people in compliance. 
I mean, there is only one percent of the taxpayers that are 
ever audited, and there is a tiny percent that ever get in 
collections. So, I mean, you don't want to make the whole----
    Mr. Kolbe. A lot of people worry about it.
    Mr. Rossotti. They do.
    Mr. Kolbe. Which is what they are supposed to do, of 
course, worry about it, and you want to make sure they all 
worry about it.
    Mr. Rossotti. Well, you know, I think that my view is that 
most people are willing to pay their taxes. And they may not 
like to do it, but they are willing to do it. And, as Mr. Hoyer 
said, we should not treat the majority of people who are 
willing to do it or even may get into trouble from time to time 
for some reason that they are willing to acknowledge, we should 
not treat those people as people who are recalcitrant and 
unwilling. And, I mean, that is the thing that we have to try 
to turn around.
    Mr. Kolbe. Back to your plan, your reorganization plan or 
your modernization plan. You have said you are going to do a 
study to validate the concept. First of all, you might give me 
a little understanding of what validating the concept is, as 
opposed to actually--or is that designing it, and what is your 
schedule for that?
    Mr. Rossotti. Okay. That is a very good question. As a 
matter of fact, we have spent most of this week meeting with 
the consultants and talking about those topics. At this time, 
we don't have all the answers to many questions that we need 
to--for example, the kind of questions you were asking--would 
compliance within one of these units be separate from service 
and so forth--we don't have those answers yet because we have 
only designed this at a very high level.
    We need to go down one more level of detail in order to 
understand some of the answers to those--not every detail but 
enough to be able to ensure that there aren't any 
fundamentalflaws or problems with this; to actually compare it more 
specifically to practices in the private sector, which is what we are 
trying to emulate wherever we can; and then to get some better cost 
estimates of what we have to do to actually make this happen.
    And those are the basic things that we are trying to do. We 
are going to hire--through a competitive process--one of the 
large management consulting firms to study the existing 
organization, to study the proposed concept, and to compare it 
to private sector practices, to basically give us their views 
as to whether and how we could do this, how long it might take, 
and whether it would, in fact, in their opinion, meet the goals 
that we set out for us.
    And that is what we are going to do over about the next 
four to five months. Now, that will not provide all the 
details. That will not provide every detail to every answer. It 
will give us, however, I think enough assurance to know whether 
it makes sense to actually proceed in this direction.
    Mr. Kolbe. Well, I am trying to get a handle as to whether 
or not you would expect some of the--if this works and it is 
validated--whether you would expect to begin to implement that 
in FY '99? In other words, does this budget proposal 
contemplate that you will be doing that reorganization or that 
structure modernization?
    Mr. Rossotti. It contemplates that we would begin in a 
small scale way in FY '99. We would have to begin to do a 
detailed plan. Even after this first four or five months, 
assuming we go forward, there is a great deal more of detailed 
planning to figure out. I mean, there are 100,000 people in 
this organization. You know, there are 10 service centers. 
There are many things that would be changing if we move with 
this concept.
    So in FY '99, of course, I am anticipating the results of 
this study, but assuming it works, we would be going into a 
much greater level of detail of exactly how to implement this 
plan from where we are now to get to the new concept. And we 
would I hope begin to make some of the moves to actually 
implement it in FY '99 after the 1999 filing season. And then, 
of course, in the following year, it would probably be when the 
biggest number of changes would take place.
    Mr. Kolbe. Well, we will need to know whether that is going 
to mean a supplemental or a reprogramming or what kind of 
changes would be required for that. I have so many more 
questions. I will come back. I want to try to keep everybody to 
the five-minute rule, and that way we can keep going through 
and get different rounds of questioning. But I will turn to Mr. 
Hoyer.
    Mr. Rossotti. Could I make just one final comment, Mr. 
Chairman?
    Mr. Kolbe. Yes, of course.
    Mr. Rossotti. I just want to assure you that we hope to 
keep in very close touch with you and your staff during this 
next four or five months.
    Mr. Kolbe. I certainly hope so.
    Mr. Rossotti. We will be sharing everything that we are 
doing in this way.
    Mr. Kolbe. Good. Thank you.
    Mr. Hoyer. Thank you, Mr. Chairman. I mentioned the Roth 
hearings, which were dramatic, highly publicized, and brought 
forward egregious actions about which Americans were and should 
have been angry. What actions have been taken with respect to 
those particular cases? What adverse personnel actions have 
been taken--I don't want the names per se--as a result of those 
cases? And what are we doing to preclude them happening in the 
future?
    Mr. Rossotti. Those are sort of two questions. With respect 
to what we have done, not only with those cases, but with other 
potentially abusive kinds of situations, we have--and some of 
this was done before I got there--launched some rather 
intensive internal audit and then some internal security 
investigations in a number of different districts to determine 
whether taxpayer rights were abused and whether the taxpayer 
bill of rights was not followed in a serious way.
    Some of those audit results have already been made public. 
At the audit result level, they are being followed, and they 
did conclude that, in fact, there was misuse of statistics and 
mismanagement of some of the seizure activity, for example, in 
certain districts, which was certainly a very troubling 
finding.
    Following up on that, we have had internal security, which 
is the other arm of our inspection service, investigating 
certain particular cases of employees, managers--primarily at 
the management level--who may have been responsible for this. 
In those investigations, the first ones are just being 
completed right now.
    Now, the special thing that we have done in addition to the 
investigations and audits though is that because these things 
did cover a number of different areas of the IRS and had 
persisted for a number of years, in order to be totally 
objective in understanding what kind of actions to take on 
these reports, we should get some input on this from outside 
the IRS.
    So we have set up a panel of three senior government 
officials, two of them from outside the IRS. One of them is a 
senior official from the Customs Service, the other one is from 
the Justice Department, and the third person is from the IRS.
    This panel will review all the results of the 
investigations on these initial cases and will make a 
recommendation as to what kinds of actions should be taken, if 
any, for the individuals involved. And then there will be, as 
is called for by the Federal Personnel Rules, a citing official 
who will also be outside the IRS--a Treasury official--who will 
make the final decision on what to do about this. So we are 
taking it very seriously.
    We also want to be very objective about this and not go off 
the track in either direction the wrong way, either not take it 
seriously enough and not implement enough sanctions if they are 
required, but also not to overly be unfair to the employees. We 
want to make sure that we are completely fair, and I thought 
this process, which is a very extensive process compared to 
other things that have been done, was the best way that we 
could respond to that.
    Mr. Hoyer. Mr. Commissioner, I think it might be useful if 
you provide--if not wide dissemination--that is, every member 
of Congress--but certainly to the relevant committees, the Ways 
and Means Committee, this, the Appropriations Committee, and 
the Finance Committee, and Appropriations Committee on the 
Senate side--either in-room sort of progress reports on those.
    Because I think the American public had these hearings, 
Newsweek, Time, you know, they were front page, and one of the 
things I think citizens get frustrated about is they hearabout 
problems, but they don't hear about solutions. Because the problems, of 
course, are a lot sexier and sell more magazines, and I understand 
that. We all understand that.
    But we need to convince them that, yes, we are angry about 
it too, we are concerned about it too, and we have responded 
and we have solved this problem, or we have addressed this 
problem. Particularly, with respect to--I just asked staff 
whether we had an interim report from IRS regarding the four 
cases that were spotlighted.
    Mr. Rossotti. Yes. We did respond to the Senate Finance 
Committee on what has happened on those four cases.
    Mr. Hoyer. I am sure the Chairman would like--I know I 
would like to have a copy of that response.
    Mr. Rossotti. Okay. We will do that. We can do that. And 
there are other things that we are doing besides that. We have 
been basically doing it back to the Senate Finance Committee 
because they have been the ones----
    Mr. Hoyer. That makes sense.
    Mr. Rossotti. But we will give it to you, and some of it is 
a work in progress. I guess the other big point I wanted to 
make is that besides these individual cases, we have also 
really pulled the whole statistics business back and have 
withdrawn all of those statistics that were being used to 
measure districts. We haven't got the new ones in place yet. We 
are working on figuring out what they are going to do. But, in 
the meantime, we are not going to use those enforcement 
statistics as they were used in the past.
    Mr. Hoyer. I have got a lot of questions. Let me ask one 
more question in this round. You referenced it but can you be a 
little more specific about the impact you foresee at least 
preliminarily on the workforce by the modernization plan?
    Mr. Rossotti. The long-term concept?
    Mr. Hoyer. Yes.
    Mr. Rossotti. Of course, we are still studying, but 
basically what I believe from looking at information from the 
private sector that I have seen in other institutions as well 
as what I can access from the IRS, is that on the one hand we 
have an increased workload because the economy is growing, 
which ripples through everything, as well as the tax law, and, 
of course, we have a huge service deficit. I mean, we are just 
not providing the service to the taxpayers on a number of 
fronts where we need to be providing it.
    But at the same time we have an opportunity to improve 
productivity through a number of different things such as all 
these revamped business practices, better filing, new 
technology. And I think that what we can do over a period of 
years, is handle the increased workload of the economy.
    And I think we can dramatically improve service with 
basically the goal of keeping the workforce stable, not 
increasing the workforce, investing in the workforce for better 
training and better technology, not through more people. Now, 
we have a very slight requested increase mostly for temporary 
folks this year to answer the phones, but it is on the order of 
one percent.
    Mr. Hoyer. That is what you referred to as trying to meet 
the service deficit----
    Mr. Rossotti. Yes, exactly, the service deficit.
    Mr. Hoyer [continuing]. Which is what the report wanted to 
accomplish.
    Mr. Rossotti. But basically if we can do that, I think what 
we will be doing is shrinking the IRS in relation to the size 
of the economy because the economy is growing quite rapidly. 
And, you know, as has happened in the last number of years, the 
IRS has shrunk in relation to the size of the economy, but, 
unfortunately, it has not met the service goals that we seek.
    So I think the big difference is that we need to do both. 
We need to not only shrink it by having the economy grow while 
our workforce, more or less stays stable, but we need to do a 
better job in providing service.
    Mr. Hoyer. Thank you.
    Mr. Kolbe. Mrs. Meek.
    Mrs. Meek. Thank you, Mr. Chairman. In your testimony, Mr. 
Rossotti, you mention the fact that the workforce had been 
reduced through attrition and buyouts and resulting in less 
than optimal deployment. And what is critical here to me in 
your statement is in your historical perspective, you mention 
there are fast growing economic areas of the country.
    Those with the highest demand for IRS employee skills have 
seen the largest reductions in the workforce. In places where 
the demand for IRS employees was weakest, the opposite has been 
true. Now, in terms of your management strategy, how are you 
going to accomplish that or balance that out?
    Mr. Rossotti. Yes. Well, I think that that is a very 
significant issue that is going to take, a while--a number of 
years to resolve. Part of it has to do with the organization. I 
mean, right now these people are divided up into these 33 
districts and 10 service centers.
    And while there is an attempt to balance across the 
country, it is quite difficult because of the fragmentation of 
the organization. I think if we can begin to look more broadly 
across the whole nation at different groups of taxpayers, we 
will get a better picture of where we need the resources and 
how we can use them.
    The other thing simply though is that if we can't stabilize 
the workforce, what we can do with attrition and replacing 
people that are leaving, we can put the new people in the 
places where we need them the most, as opposed to not doing 
that. So we are going to have to work on this.
    I would say it is going to take a period of four or five 
years at least of sustained effort to gradually deal with 
balancing and getting the people in the right jobs and the 
right places.
    Mrs. Meek. And the second question is relative to the first 
one a little bit. You also mentioned that across the board many 
of your workers need additional professional training to do 
their jobs well, to keep up with the tax laws. Explain to me 
what your training program is like and how your budget 
addresses that concern.
    Mr. Rossotti. Okay. Let me just make some general comments, 
and then I am going to ask Mr. Dalrymple here to say a few 
comments about it. There are a number of different training 
programs for employees. But I think that what has happened over 
the last few years just at a general level is that there has 
been an increasing number of changes to the tax law. As we 
know, there is a lot of them now.
    And there has been an increasing number of regulations and 
other kinds of procedures to implement those tax laws. And then 
on top of that, we have been trying to improve the level of 
service by putting more people on the telephones tobe able to 
answer questions from taxpayers.
    And what has happened is that the demand for the service 
has exceeded the ability of the IRS with the programs that it 
has in place to actually provide materials and training and 
information to the front-line workers. And this has caused a 
great deal of stress in the workforce, but, most importantly, 
it impedes our ability to provide good service to the 
taxpayers. Let me ask John to answer a few more of these things 
on training.
    Mr. Kolbe. Mr. Dalrymple, just for the record, would you 
identify yourself?
    Mr. Dalrymple. I am John Dalrymple. I am the Acting Chief 
of Taxpayer Services, Acting Chief Compliance Officer of the 
Internal Revenue Service. I guess what I would say to really 
address your point, Mrs. Meek, is to talk about what we are 
going to do, as opposed to what we haven't done because I think 
that is probably more important to you.
    We have seen a substantial deficit in our training 
abilities over the last couple of years, and we have really 
tried to address them specifically this year, and then ongoing 
in 1999, and then try to set sort of a mark, if you will, that 
we will maintain for training purposes.
    And I think the restructuring report that was done and 
other studies that have been done recently have rightfully 
criticized us for not providing adequate training to our 
technical employees, folks who are doing examination, 
collection work, and, in addition, our customer service 
employees. So we have tried to react to that.
    In the '99 budget, specifically we have asked for about 300 
FTE that will allow us to train our customer service 
representatives, while at the same time ensuring that we 
maintain the ability to answer the telephones as people are 
calling us.
    And in addition to that, I think we have somewhere in the 
neighborhood of $70 million we have asked for in training and 
specifically in the budget, which will get us back to ensuring 
that all of our technical employees have appropriate CPE, 
continuing professional education, each year, that basic and 
advanced training is provided to all the employees who need it 
each year.
    And I think once we do catch-up this year, which we are 
doing--we have actually diverted some funds into training this 
year--it will put us in a pretty good stead next year if we are 
able to get the budget we ask for in training and then maintain 
that over the long haul.
    And as the Commissioner mentioned earlier, we have what we 
consider to be some temporary needs in 1999, specifically in 
customer service, which will allow us to train and not allow 
our level of service to diminish, which I think is everybody's 
objective here.
    Mrs. Meek. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you. Mr. Aderholt.
    Mr. Aderholt. I don't have anything right now.
    Mr. Kolbe. All right. We will go to round two here. I have 
a couple of other questions--I am still not quite finished here 
on your concept of modernization. We have tax systems 
modernization. We have the congressional restructuring, and I 
am going to call yours the reorganization, just so we keep 
these straight. I have a couple of other questions on your 
proposal for reorganization here.
    Specifically, I wanted to ask how it relates to those other 
two, to the congressionally driven restructuring legislation 
and also to the tax systems modernization. Are there specific 
elements of this restructuring legislation that you believe 
will be critical for you to have in order to carry out this 
reorganization?
    Mr. Rossotti. Yes, Mr. Chairman. Actually, there are and we 
have been working right now with the Senate Finance Committee 
on these. We do need some additional authority, some language 
in there that would allow us the authority to do this 
reorganization.
    The current code has little references all over the place 
to the current IRS organization, and there is some technical 
language, but it is very important language that we need to 
just provide authority to be able to do this kind of a 
reorganization.
    The other that is more of a substantive point, and there is 
a provision in the bill that the House passed, but we really 
were going to try to broaden a little bit, and add some 
additional provisions to bring in some senior executives from 
the outside.
    I think that one of the things that will benefit the IRS as 
we go forward here is to bring in selectively, not in mass 
quantities, but selectively some individuals, some senior 
executives, and it is a little bit difficult to do that right 
now with the legislation. So that is the other key provision.
    Mr. Kolbe. Well, let me just turn the question around on 
the other side then and ask about the tax systems 
modernization. Is that also critical to this, or is that a 
little different?
    Mr. Rossotti. Yes. I think that the tax systems 
modernization, the technology blueprint, as we call it, which 
is actually a very good term, is one of the dimensions of what 
we need to do to basically make the agency what it is. And as 
many people have observed, including most recently GAO, 
technology in an organization like the IRS does not exist in a 
vacuum.
    It is not something that you go off and build and then, you 
know, some day it comes back. It is part and parcel of the way 
the organization works. And there have been a number of 
organizational problems I think that have impeded our ability 
in the IRS to successfully execute a technology modernization 
program on the huge scale that is anticipated here. And 
basically I view that there are two organizational problems 
that I believe will be addressed by what I have proposed.
    One of them is to just basically complete a process that 
has already been underway, to actually have a centrally managed 
and professionally staffed information systems organization. 
And Mr. Gross here, my colleague, has begun that process, as 
you noted. It is not complete yet, but as part of the proposal 
I have, we would complete that, and we would end up having 
ultimately a single professionally managed information 
technology organization, which would be supplemented by the 
Prime contractor for the development effort. So that would one 
of the issues that would be resolved.
    The other one though is you have to have clients. You have 
to have people on the business side, the people that are 
actually running the operations, who work very closely with the 
technology organization and actually have built new systems 
because that is a what a system is. It just codifies the way 
that business is done, the way the structure, theprocess is 
worked, and the way you talk about collections, for example, I mean, a 
computer system has to support collections.
    Right now we have three different kinds of collection 
groups that are spread over 43 different organizational units. 
If you try to build a computer system to support that, you have 
major problems. You really are going to have a very difficult 
time succeeding.
    By focusing this organization in much simpler terms and 
with people who are specifically knowledgeable about a 
particular set of taxpayers' requirements, I think we will 
complete the loop. We will have the final piece that we need in 
place in order to really make technology modernization work.
    Mr. Kolbe. You have put into your budget $25 million, 
basically as kind of a placeholder I guess you would say. Do 
you expect to use that to begin to implement these 
reorganizational changes? And, if so, what do you think the 
full cost will be, or do you have any idea?
    Mr. Rossotti. Well, this is--honestly--that is why we are 
doing this study, Mr. Chairman, and really I know that we will 
have costs in '99, and they will be partly to complete the 
planning and to begin the initial steps. But until we complete 
the study, which we hope to do by early summer, as I said, we 
will be sharing this with you every step of the way, I can't 
say precisely, you know, what that would be.
    I know that we will have to do some additional planning 
work. We will have to use some consultants to help us do that. 
We will begin to recruit some people from the outside to help 
to fill out these new units. And we will be undoubtedly 
relocating some people. Those are the kind of things that we 
will begin to do in FY '99. And we will certainly get back to 
you with more detail on that, you know, by early summer.
    Mr. Kolbe. I want to get back to the Y2K in my next round, 
but my time is up. Mr. Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman. I think you have taken 
some significant steps, and I want to commend you on the 
proactive efforts that IRS has taken to improve customer 
service. Clearly, that is critical. We have got to have our 
people thinking that we are serving them.
    Again, I am not talking about the bad guys who are 
consciously, with intent, trying to defraud us. That is a 
different category of people. It is the overwhelming majority, 
90 percent plus maybe, of the people who don't want to comply, 
but they are prepared to comply and trying to figure out how to 
comply best with paying as little as they have to pay, which 
makes them like all the rest of us.
    To that extent, I participated with you in the first 
customer service day; went to Baltimore; very, very positive 
effort. Can you speak just a little bit about our problem-
solving days, and the effect it has had, and where you think 
that effort is going?
    Mr. Rossotti. Yes. That was almost the first thing I did 
when I took office. It was literally the second day I think I 
was in office. We have instituted these problem-solving days 
around the country. They have continued every month in every 
district, and they have been moved into different towns or 
cities in each of these districts in order to accommodate 
different taxpayers. And they have been not all on the same day 
because in different districts, some people like to do it on 
Saturday, and some people like to do it on weekdays.
    But the effect of this--I think at this point we have 
served about 17,000 taxpayers, and we have had an independent 
consultant do a survey of these taxpayers to basically 
determine whether they were satisfied with the service they 
got. And I must say we got extraordinarily good results on 
that. I think the first survey I saw showed that on a weighted 
average it was about a 6.4 out of 7 score that the taxpayers 
gave us.
    And what is interesting to me about that is that we got 
these scores from the taxpayers even though a significant 
number of taxpayers did not actually get the resolution that 
they were hoping for. I mean, as you can imagine, some 
taxpayers were hoping that they would find a solution that 
would require them to pay less money than they wanted to, and 
that wasn't always possible.
    And, nevertheless, they did give us these scores for 
providing the right kind of service to them. So I think it 
provides kind of a model. I think these problem-solving days 
provide an excellent model of the kind of behavior that we want 
to encourage in the IRS longer term.
    Mr. Hoyer. I think that the 6.4 out of a 7--I don't know 
what our score was in Baltimore, but as you recall, we had a 
number of taxpayers who were extraordinarily pleased because we 
paid attention to them and listened to them.
    One of the frustrations is, I don't know about the rest of 
you, I hate when the answering machine answers the phone to my 
call. It just drives me bonkers, and I know it is very 
efficient. And I sometimes hang up and then say that was 
stupid, I should have left the message. It would have saved me 
time, saved the other person time, et cetera. But we like to 
know that, you know, whatever our problem is it is very 
important to us, and that I thought was a very good step 
forward for us.
    You have asked for $103 million. And, by the way, the 
Chairman has gone to vote. He will come back. When it gets down 
to five minutes, why don't you let me know, and I will recess. 
And then as soon as he gets back, we will continue. The $103 
million--you have talked about the $103 million, but if you 
don't get the $103 million or a significant increment of that, 
what is the impact on customer service?
    Mr. Rossotti. Well, you can look at the items--I mean, I 
think you can probably see it for yourself pretty well by just 
looking at this chart, which is chart five. It is really quite 
specific as to what we are going to do. The biggest item has to 
do with phone service.
    I mean, even though we have improved phone service a lot in 
this filing season, we are still not providing a level of phone 
service that is anywhere comparable to the private sector. 
People call up their Visa card, and then they call IRS the same 
day probably, and if they have more trouble getting through, 
they think we don't do as good a job, and they are right.
    So the big part of this is improving phone service, which 
includes some technology improvements, a device called the call 
router, which will help us to move calls around the country to 
where they can be best serviced, as well as to provide some 
more staffing in order to get our level of access up.
    And then, of course, the customer service training that is 
down here, which is the second biggest item, is directly 
related to that because that is the point that John here was 
mentioning. If you put people on the phones to answerquestions 
from taxpayers and you don't train them as to what the answers are, you 
are not helping the taxpayer and you are not helping the employee. So 
those are the two most important things.
    Now, some of these other ones, the next biggest one here is 
the taxpayer advocates, office. As a result of the successful 
problem-solving day, as well as some of the other publicity 
about the IRS, people have come to expect that this service 
will be provided to them, which is what we want. But we have to 
provide some additional staffing and some additional phone 
lines and things like that for people in these taxpayer 
advocate's offices. So if we don't get this money, obviously we 
are not going to be able to do these kinds of things.
    Mr. Hoyer. Would it be correct to observe then that if we 
don't get the $103 million, we are not going to be able to 
accomplish the objectives that this very useful report, 
although I voted against the bill--and I may vote against it 
when it comes back from the Senate if it isn't a decent bill--
but very useful report. I thought this crowd did a good job. 
The Kerry-Portman report I think is a very useful, positive 
contribution.
    But as I said on the floor when I voted against it, if you 
are not there at budget time and not there at taxwriting time, 
adopting a bill which says we are going to modernize and have 
reform is somewhat specious and a little bit of demagoguery, 
maybe a lot of demagoguery.
    So am I correct--because we are going to have to argue 
this. The Chairman is right. We are going to have a shortage of 
money, and to get this $529 million, the $103 million component 
of it, we are going to have to show pretty strongly that this, 
in fact, accomplishes what we all said we wanted to do.
    Mr. Rossotti. I couldn't agree with you more. I mean, it is 
a step, and it doesn't even accomplish all of it. I mean, it is 
just a step in that direction.
    Mr. Hoyer. I don't have to yield to anybody else. 
Interestingly enough, Mr. Rossotti, one of the first hearings 
that I had when I became chairman of this committee in 1993 was 
to invite I believe it was City Corp, but it might have been 
City Bank--a couple of the very large card members, Visa, 
MasterCard, to come in and testify on tax system modernization 
as to why I could go to an ATM machine and they could give me 
money, and they could give me the balance within seconds, and 
why I can't call the IRS and get similar information.
    Now, to their credit, they said, frankly, Mr. Hoyer, it is 
a lot easier for us because we are dealing with very specific 
information. They were very candid. They did not try to 
demagogue and say because we are the private sector and 
government can't do it. They made it very clear that what we 
are doing at IRS is a much more complicated response, and the 
nuances of differences between taxpayers is much more complex 
than the nuances of differences between people who, you know, 
charge something, have it on the list, and then owe for it.
    But we did exactly that. Because you are right. Taxpayers 
don't understand. If I can get this information, when I know 
there are millions of people, and I can go to Europe and put my 
ATM card in and get money out, you know, why can't I do it with 
the IRS.
    Now, customer satisfaction and the measurement program. 
What exactly is it? Is this the first program of its kind? How 
optimistic are you that we can get a solid report back?
    Mr. Rossotti. Well, I think this is another one of these 
major steps. I think it is a major step, but it is going to 
take, again, as a lot of them are, a number of years to play 
out. I mean, the basic idea is to follow another playbook out 
of the private sector. If you want to know what your customers 
think of you, the best way to do it is to ask them when you 
have provided them service.
    The IRS has done customer satisfaction surveys in the past, 
but they have been fairly general of the population. The big 
difference here is we are actually going to ask taxpayers who 
had a specific interaction with the IRS, including exams, 
collections, appeals, and phone service. I mean, those are the 
main ways we interact.
    In the case of the phone service, it would be a sample, of 
course, because you couldn't ask everyone, but in the case of 
the other ones, we would generally in most cases have a form 
that people would fill out for each one. And we have an 
independent contractor that is working with us that has done 
this kind of survey work for the private industry.
    There is a series of questions. It is really modeled after 
what we did on the problem-solving day survey, and we would 
then get these answers back. And we would be able to determine, 
you know, what the taxpayers think of the service that they got 
and what the weak spots are in terms of improvement for the 
future.
    Now, I think that as far as what the results will be, we 
don't know. I mean, we are going to wait. That is why we are 
doing the survey. It will be the first time that this has ever 
been done. Is that right, John?
    Mr. Dalrymple. In terms of this survey of this type and 
this magnitude, we have done a couple of general surveys but no 
case-specific surveys in the past. And so it will be a first 
for us.
    Mr. Hoyer. I have got to go, but what do you mean by case 
specific?
    Mr. Rossotti. Each transaction--in other words, you come in 
and get an exam, we ask you what you thought.
    Mr. Dalrymple. So you will randomly be selected for a 
letter that will go out later anonymously back to the 
contractor so it doesn't come back to the Internal Revenue 
Service, the contractor will then develop the analysis and send 
that analysis back to us so that we can then take whatever 
necessary steps we think to improve service. So it is an 
anonymous survey too.
    Mr. Hoyer. Mr. Commissioner, the Chairman has asked me to 
recess the hearing, and he will be back. He has gone over just 
to take a couple of minutes so he will be back. As soon as he 
gets back, he will start obviously with his questions. Then I 
will be back as well. This hearing is recessed until the return 
of the Chairman.
    [Recess.]
    Mr. Kolbe. The subcommittee will come back to order. We 
didn't lose much time at all on that, and we have finished our 
heavy voting for the day so we are done. We won't have any more 
interruptions here, and we will go to Mr. Price for his first 
questions.
    Mr. Price. Thank you, Mr. Chairman. Mr. Rossotti, I want to 
add my welcome to you and your colleagues. We appreciate your 
being here today and your testimony. As many have mentioned, 
and as you well know, there is a great effort underway in 
Congress to make some positive changes in the Internal Revenue 
Service and to make it a good customerservice oriented agency.
    I visited one of the IRS service centers in my district 
last month, and I was able to talk with a number of your 
personnel about both their desire to see change and their 
frustrations in this whole process. I am no stranger to helping 
constituents resolve problems with the IRS, and I very much 
hope that some of those kinds of problems will be less frequent 
in the future.
    But I also disagree with the tendency some have had in the 
Congress to vilify IRS agents. It simply isn't productive. We 
have got to remember how this kind of IRS bashing affects the 
morale of people on the front line because we all know we will 
not be able to make the kind of changes that need to be made in 
the IRS without the full engagement and participation of the 
workforce there.
    Knowing the atmosphere you have been operating in over the 
last six months, I want to tell you how pleased I am to see 
that you are not waiting for the Congress to enact reform 
legislation to be making the kinds of changes that need to be 
made at the agency. I commend you for that. I especially 
applaud your efforts to develop performance criteria that 
properly balance customer service with tax law enforcement. And 
I look forward to watching you put them in place and a 
cooperative process of evaluation as that gets done.
    Let me ask you a couple of specific questions, first about 
the Earned Income Tax Credit Compliance Initiative. I supported 
expansion of the EITC as part of the 1993 Budget Reconciliation 
bill, and I believe that by and large it sends the right signal 
to working families by letting them know that hard work pays 
off.
    Unfortunately, it sent some Americans the wrong signal. IRS 
uncovered a fair amount of fraudulent noncompliance, prompting 
Congress to provide $138 million for a new EITC Compliance 
Initiative, almost $31 million more than the Administration had 
requested. I would like to know how this initiative is 
proceeding.
    I spent a fair amount of time talking with the IRS service 
center employees about this issue. It was very much on their 
minds. They expressed particular concern about the use of post 
office box addresses, for example, on tax returns. There were 
lots of details of enforcement and compliance that we got into.
    Because eligibility is sometimes granted only when married 
couples are not living together, they believe there is a great 
deal of potential for individuals to provide information they 
cannot easily verify in order to receive the EITC. So I wonder 
if you could comment on the trends you are seeing in fraud and 
abuse and what IRS is doing to address these and related 
issues?
    Mr. Rossotti. Let me make just a few general comments, and 
then I am going to ask Mr. Dalrymple here because he is the one 
that is really taking the point on this. This new additional 
funding, as you know, came up towards the end of the last 
fiscal year, and so we have been working hard to put as quickly 
as possible some new things in place.
    In general, I think the strategy, which is the right 
strategy, is to look not at any one solution to this problem 
because there isn't any one solution but a number of different 
activities. Part of it is up front, trying to educate people 
and tax preparers especially on what their responsibilities are 
so we head off some of the problems in the first place.
    A second one is getting more information on a research 
basis to try to figure out more specifically what the 
vulnerabilities of the system are that create the most risks 
that we can target resources most effectively. And then, of 
course, where the biggest part of the money goes is in the 
actual checking of returns and in various ways to head off 
potential refunds or potential money that is sent out that 
shouldn't be sent out. And there are a variety of ways to do 
that.
    Mr. Price. Let me just amplify my question one bit. I think 
what you say about education up front of taxpayers and tax 
preparers is important. Do you have any figures either now or 
later for the record as to the number of eligible people--a 
percentage of eligible people who are, in fact, taking 
advantage of the EITC?
    Mr. Dalrymple. Let me address that. We really don't have 
much information yet, Congressman, because it is very early in 
the filing season at this point in time. We have really tried 
to take this program this year with the money that the Congress 
gave us towards this program to make sure that we spend the 
money wisely.
    And as the Commissioner mentioned, we want to also make 
sure that we deliver what we promise. So we have sort of broken 
it into four areas. One is research and in that vein, we are 
really making sure that our activities that we are taking this 
year have the desired results because we are setting up a 
system to actually measure compliance this year, and we will 
start a baseline so we will be able to tell in '99 then what 
effect our activities this year had and each year thereafter.
    And in addition to that, the research that we are doing in 
addition to setting that baseline is to understand different 
taxpayer segments within that market because not all of these 
folks are the same.
    Then, second, in prevention and that is really specifically 
around education and outreach, and we have got a number of new 
initiatives there. I will just give you a feel with a few 
examples. We sent informational letters to the top 100 
employees most likely to employ taxpayers who would be eligible 
for the credit. We sent a notice to over 6 million EITC 
recipients informing them of the advanced earned income payment 
option. We sent a notice to about 2.5 million taxpayers who did 
not claim the credit last year but appear that they would be 
eligible.
    Mr. Price. What number is that?
    Mr. Dalrymple. 2.5 million.
    Mr. Price. I see.
    Mr. Dalrymple. We have expanded our efforts to service EITC 
eligible low income and elderly taxpayers by providing tax 
information and return preparation. So you can see we have got 
a number of initiatives there. And the research that we are 
doing should be able to tell us how effective these programs 
are.
    The next area that we really focused on is detection, and 
we have improved and are continuing to improve our system so 
that we identify what we think are the most likely returns that 
may have some abuse in them to poll. And then, finally, 
enforcement where we deny EITC claims to those who are not 
eligible. And I have some data from last year which, of course, 
predates our initiative, but the numbers this year are so small 
because we are so early in the filing season.
    And then to address the issue on the post office box 
return, it is a dilemma in terms of our enforcement activities, 
but one of the things that sometimes our front-line employees 
don't understand and don't realize, and perhaps it is because 
we haven't done a good enough job communicating this to them, 
is that a number of these folks use post office boxes because 
they literally live in areas where they can't trust having mail 
delivered without its being stolen, especially if it looks like 
it might have a refund check in it. So the reason that they use 
post office boxes in many cases has nothing to do with 
fraudulent activity. It has to do with the nature of the areas 
where they live.
    Mr. Price. But could that be combined with the street 
address, even though the street address were not the one used 
for mailing?
    Mr. Dalrymple. It could be.
    Mr. Kolbe. Mr. Price, do you have more questions? Would you 
like to just continue, or do you want to go back and alternate 
as we have been doing here?
    Mr. Price. It is your call, Mr. Chairman.
    Mr. Kolbe. Well, I mean, if you only have a few more 
questions, I will just let you finish. But if you have a whole 
other series of questions, I would like to----
    Mr. Price. No, just a couple of brief ones, if I can----
    Mr. Kolbe. Okay. Go ahead and finish then.
    Mr. Price [continuing]. And you let me know when you need 
to resume.
    Mr. Kolbe. Go ahead and finish.
    Mr. Price. Well, I appreciate that answer, and if you would 
like to elaborate further for the record, that----
    Mr. Dalrymple. Well--as we get filing season data--if you 
would like that information, we could provide it as we get it.
    Mr. Price. Well, just keeping the subcommittee up to date 
on the progress on all fronts of this initiative. We want 
people who are eligible for this to take advantage of it, 
obviously. The best welfare program as I think President Reagan 
once said was for people to be able to keep more of the money 
that they are earning. At the same time, there have been 
serious problems, and I commend your effort to address them.
    Let me ask you briefly about browsing. I would like to ask 
you about the efforts to stop the unauthorized access of 
taxpayer records. Some of the employees portrayed that as a 
two-edged sword. They are worried that they might be accused 
wrongly of browsing simply for responding to a taxpayer, for 
example, calling to check the status of their case, which could 
have been assigned to another agent. How are you distinguishing 
between authorized and unauthorized access of taxpayer records? 
How is this policy being communicated to your employees?
    Mr. Rossotti. I will let Mr. Dalrymple answer that one as 
well.
    Mr. Dalrymple. Well, we have actually listened to our 
employees as we set this program up. They had a number of 
suggestions for us to ensure that that actually didn't happen. 
And, in fact, any time that they believe that they are at risk 
there, we developed a form and format for them to document 
that, share it with their manager, and sort of be held at no 
harm in that kind of situation. So we have tried to be 
responsive by reacting to the concerns as they raised them with 
us.
    Mr. Price. My final question has to do with the data center 
consolidation. Last year very late in the cycle, IRS revised 
its budget request for fiscal '98 based on new estimates of the 
needs for year 2000 compliance. As I understand it, you 
determined that you could address some of your modernization, 
and year 2000, and consolidation needs by utilizing contracts 
for new equipment that had been negotiated some time ago.
    We appropriated roughly $165 million for that effort, 
including $7 million for retraining and relocation of employees 
who might be affected by the consolidation. I would like to ask 
how much you have been able to accomplish in terms of the 
consolidation, and what effect it is having on personnel, and 
anything else you would want to say about the status of that 
effort?
    Mr. Rossotti. Let me just make a brief comment, and I would 
like to ask Mr. Gross to comment. This is one of the biggest 
pieces of the entire program that we need to do to deal with 
the century date change. It is one of the pieces that has some 
long-term benefits.
    In other words, rather than just strictly fixing up 
something, it will have the benefit of centralizing the 
management of some of those mainframe resources, which is a 
trend that is pretty common throughout the private sector, as 
well as the public sector.
    And it will also not only give us better control, but also 
save some money long term by having fewer personnel required to 
manage these multiple data centers. And that program is going 
underway. I would like to ask Mr. Gross to give you a few more 
details on where we stand on it.
    Mr. Gross. Thank you, Charles. The status is as follows: as 
you know, there are 67 mainframe computers in the 10 service 
centers that we aim to consolidate into the two computing 
centers. We have completed the first of the 10 service center 
consolidations successfully, and we are still on schedule to 
complete the remaining nine.
    I think that the project is not only material because of 
the potential savings and long-term benefits in terms of a 
future mainframe platform for modernization, it is also the 
first instance in which the IRS is using contractors as Primes, 
the principal program managers for this program. And hopefully 
it will be a bellwether for future modernization efforts in 
which the IRS successfully partners with the private sector to 
effectuate major technology change.
    A little known piece of the project but critically 
important to us is not only the consolidation of mainframe 
computers, but it is also the conversion of one of our major 
networks comprising 20,000 workstations. And that piece of the 
project is also well in hand. We have completed the replacement 
of 4,000 of the devices in that network.
    Mr. Price. What kind of PC needs does this involve?
    Mr. Gross. That is what we are achieving. We are achieving 
the replacement and upgrading of those 20,000 PCs in the 
network, and we are also creating what is called an open 
architecture, a TCPIP architecture, rather than the customized 
network that we have used to date.
    Mr. Price. All right. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much, Mr. Price. Let me return to 
some--not return but ask some questions about the Y2K issue. I 
read the article not long ago, and you may have seen it in 
Forbes about how they believe that a lot of the private sector 
is really not addressing this issue.
    If the private sector isn't addressing it, I just have an 
instinctive feeling that a lot of our government agencies are 
probably not addressing it very well since they usually are 
less up to speed when it comes to technology and modernization 
of systems. And I just wanted to know, Commissioner Rossotti, 
where does this issue fit into your list of priorities?
    Mr. Rossotti. It is the first issue that I turned my 
attention to--literally the first issue that I turned my 
attention to when I got to the IRS just because the date is one 
thing that can't be moved.
    Mr. Kolbe. Well, you know, in Congress that is what we 
would do. We will just have an appropriation to postpone the 
millennium.
    Mr. Rossotti. Yes. Well, actually, on just a slight light 
note, Secretary Summers came back from a conference in Europe a 
couple weeks ago and was talking to me. And he said that he was 
talking to a Frenchman who is the head of a large bank who was 
saying that he didn't understand why all of the Americans and 
British were spending so much time on this so-called century 
date change.
    He thought it was just because the Americans and the 
British were litigious and that that was why we were working on 
this. So we got kind of a chuckle about that. I said maybe what 
they will do is just postpone the date for a couple of years 
over there. But it is a very serious problem.It is an extremely 
serious problem.
    Mr. Hoyer. It is an English problem.
    Mr. Rossotti. Yes. It is a very serious problem. It can't 
be postponed. And, as a matter of fact, Mr. Chairman, I have 
made the point on a number of occasions I think to you and to 
others that in the case of the IRS, our key date is actually in 
a material way one year earlier than for other places because 
we really have to get a good deal on most of our renovation 
work done prior to the 1999 filing season.
    There isn't too much you can do during a filing season. You 
have to stabilize everything because we need the period after 
the '99 filing season to do this final testing and 
certification. So as a result of the work that Mr. Gross here 
and his colleagues did, they really began, on a very large 
scale quite some time ago to to get this process underway.
    When I came in, I added a few things to it to try to make 
sure that we had all of the components together. I mean, there 
are about, I would say, a dozen different major pieces of this. 
The mainframe consolidation is one of them. The data entry 
system is another whole one. There are all the application 
programs, the telecommunications network--you go down all these 
different elements.
    I would say that at this point I have a reasonably high 
degree of confidence that there is not going to be a disastrous 
result at the IRS. I really believe that. I think we have that 
underway, and I think we have a program to identify what the 
risks are.
    Having said that, it is an enormous program. If you add 
everything together, all of it over all fiscal years, it is 
over a $900 million program, and it includes, you know, many, 
many, many thousands of different components and different 
kinds of pieces that all have to come together.
    So I don't think it is without risk. As a matter of fact, 
it has a great deal of risk associated with it, and it could 
very well be as we get into the '99 season that there will be 
some things that will go wrong. We are going to try to make 
sure that nothing goes wrong, but with the number of pieces, 
there could be some.
    However, I think that in putting it in the correct 
perspective, there is a great deal of management attention at 
the IRS that is going to this. I am personally chairing this 
Executive Steering Committee that is reviewing every month 
every one of these programs. And we are taking action where we 
see risks, and there are risks. But we are taking action as 
early as we can to fix them.
    Mr. Kolbe. Well, that answers part of my question. The 
direct day-to-day management responsibilities for this is in 
Mr. Gross's office. Is that right?
    Mr. Rossotti. Correct.
    Mr. Kolbe. And are you satisfied with Mr. Gross's departure 
that it is going to be in hand and that these pieces are----
    Mr. Rossotti. Well, I am not satisfied with Mr. Gross's 
departure.
    Mr. Kolbe. I understand. None of us is satisfied with that. 
But are you satisfied that this issue is in hand?
    Mr. Rossotti. Yes.
    Mr. Kolbe. Mr. Gross, do you feel that way in your office--
--
    Mr. Gross. Mr. Chairman----
    Mr. Kolbe [continuing]. There that there are people that 
have a handle on this thing?
    Mr. Gross. Mr. Chairman, just two comments. One is that 
this is an opportunity for me to thank the subcommittee for the 
extraordinary support that they have provided to the service in 
my short tenure here. And in one of the most paramount ways you 
have supported the program for funding a critically growing Y2K 
program.
    When we first began this effort, we were looking at a $20 
million budget, and now, as Charles indicated, it is well over 
$900 million. And we have identified the problems and 
identified the funding for this program, the subcommittee has 
been extraordinarily supportive in funding and supporting the 
effort.
    In terms of the management, from the first day that Charles 
landed, he has grabbed hold of this issue, and he has 
personally managed it through the steering committee that he 
just identified within the CIO organization. We have 
established it as our highest priority, and we have placed our 
strongest, most senior management in this program, most notably 
Bob Albicker, our Deputy Chief Information Officer, and John 
Yost, who is our Y2K Project Director.
    They are without qualification among our strongest, most 
dedicated managers. And, in fact, it is indeed their efforts 
over the last 18 months that have brought this program as far 
as it has come. So I am quite confident that with Charles's 
leadership and direction and both Bob and John focused on this 
as their highest priority, it will, as Charles indicated, have 
a successful outcome.
    Mr. Kolbe. Are you on target to meet your conversion date 
of January '99?
    Mr. Gross. Yes, we are. We have completed 62 percent of the 
renovation of the application code, which is the first critical 
piece. I think the exposure areas are in the platforms at a 
tier two and tier three level and in our telecommunications.
    Mr. Kolbe. Mr. Hoyer, if you will just indulge me to finish 
this line of questioning for just a couple of questions on the 
budget?
    Mr. Hoyer. Mr. Chairman, I want you to know I will indulge 
you as long as you want to be indulged.
    Mr. Kolbe. How much are you requesting in the '99 budget 
for this?
    Mr. Rossotti. I think the number is $234 million. Isn't 
that right? It is $234 million for all parts of it.
    Mr. Gross. It breaks down into three components; $140 
million for Y2K conversion, $18 million for ISRP or DISRPS, and 
$76 million for the data center conversion.
    Mr. Kolbe. You expect to have a budget amendment, do you 
not, for equipment? My notes here from staff suggest that there 
is going to be a $49 million additional request?
    Mr. Rossotti. Yes. Since this budget was put together, you 
know, quite some time ago, in the area of primarily tier two 
hardware and the nonIT components there are some additional 
money needs. I don't think the exact number is settled on yet. 
That is still being worked with Treasury and OMB, but I think 
there will be a need for some amendment along the lines of what 
you have said to cover these areas.
    What has happened, Mr. Chairman, is that as this process 
has gone forward, the areas that were most critical to focus on 
earlier, which were the application programs of which there are 
about 90,000, the critical tax application programs, and that 
is what they focused on first. And they got a very goodhandle 
on those. There is nothing more required for those.
    As we have gotten down into it, some of the other areas 
that were given attention as a second priority but are still 
critical are the minicomputers, of which there are about 1,421 
minicomputers, and the telecommunications network, and what is 
called the nonIT; in other words, building systems like 
security systems for buildings and things like that. Those were 
not identified as early, and I think that was appropriate 
because you have to start with the things that are most 
critical.
    As we are getting down to the end here now, we are really 
getting down to identifying these other areas, the tier two 
hardware, the telecommunications network, and the nonIT. That 
is primarily where we still have a little uncertainty in terms 
of money.
    Mr. Kolbe. Two other quick questions I think you can give 
me very quick answers to. Last year, we appropriated $376 
million for this or provided $376 million. We appropriated $289 
million, and said that you should reprogram $87.5 million. You 
have not come to us yet with those reprogramming requests.
    Mr. Rossotti. They are pending.
    Mr. Kolbe. They are pending. Okay. But that is not the 
supplemental, and you also have a supplemental you are going to 
be asking for?
    Mr. Rossotti. That is right.
    Mr. Kolbe. That is my question. Why do we have a 
supplemental? Why didn't we get a handle on this last year for 
the right amount?
    Mr. Rossotti. Well, Mr. Chairman, I have to tell you that--
--
    Mr. Kolbe. I know you weren't onboard at that point.
    Mr. Rossotti. No, I know but even if I had been, I don't 
think we would have. Because if you look at the number of 
components--let me just give you a few numbers. There are 
90,000 application programs that are just the internally 
developed application programs. There are how many mainframe 
computers?
    Mr. Gross. Sixty-seven.
    Mr. Rossotti. Sixty-seven mainframe computers, each of 
which has thousands of software components. Those pieces were 
pretty well identified earlier on because those were the most 
critical ones. Now, we are getting into 1,421 minicomputers 
which have 15,000 different components that have to be 
identified. There are 134,000 of what are called the tier 
three, which are basically the PCs and the desktops that have 
236,000 components.
    And then on the telecommunications network, which is the 
one, frankly, that has the most risk associated with it still, 
we don't, frankly, have all of them identified even now. But 
there are several hundred thousand just in the 
telecommunications network, probably somewhere between--I would 
guess--100 to 200,000 individual components.
    A component is a particular product, a particular serial 
number of a particular item, that may or may not have to be 
replaced. There is the process of identifying every single one 
of these things and determining, for example, in the case of 
the products, if it is Y2K compliant, is it not Y2K compliant, 
which vendor do we have to go to, is the vendor under contract 
today to provide that, or do we have to get a new piece of 
hardware to replace it. You know, each one of these things 
requires research, and, of course, in some cases there is cost.
    So in the early stages of this--and I can assure you I 
worked on this until three months ago in the private sector--
there wasn't any company that I knew of that a year ago had a 
complete handle on exactly what it was going to cost because 
they had the same issue. They had to go through these hundreds 
of thousands of components. So I really believe that the 
process here that has been applied has worked pretty well 
relative to anything I have seen in the private sector.
    I do think we are getting to the end here though. I think 
we have most of these components identified. What we have got 
left are these tier two and tier three platforms, and some of 
the things in the telecommunications network, and the building 
components. And we are sort of getting down finally to the 
point where we have all these things in the database.
    Mr. Kolbe. So maybe I should have somewhat more confidence 
that next year there won't have to a supplemental at least in 
this area?
    Mr. Rossotti. Yes. I think that we are getting a lot closer 
to this.
    Mr. Kolbe. Thank you. Mr. Hoyer.
    Mr. Hoyer. Thank you. Let me ask you a question which is 
not particularly on point to us individually, but it follows up 
on the Chairman's comment, and perhaps also evidences my 
ignorance of the whole computer information technology area.
    The Chairman observed, well, the private sector gets on top 
of this earlier, and I am not confident the public sector does. 
And we hear that, and that seems to be the traditional bias. My 
premise is the government didn't produce any software. My 
premise is the government has produced no hardware. It has 
bought from the private sector.
    The private sector has sold us computers and software and 
apparently were incredibly surprised by the fact that the 
millennium was coming. I think we ought to sue the private 
sector vendors. I think they ought to pay for this. You know, 
maybe it is my ignorance.
    I don't understand why the hell these computers didn't 
understand that the year 2000 was going to come when they sold 
us computers in '85 and '90 and '91 and '92 and '93. I don't 
know why we don't sue for breach of contract and breach of 
warranty and let them pay for this--the great private sector 
that we talk about.
    Now, I am a big proponent of the private sector. That is 
what made this country great and builds our economy. But, 
frankly, Mr. Chairman, with all due respect, I don't think 2000 
coming is a surprise, and I don't know why this stuff we bought 
for millions and millions and billions of dollars in terms of 
the Federal Government doesn't work, and we now have to spend a 
lot of money getting back up to speed. Why is that, Mr. 
Rossotti?
    Mr. Rossotti. Well, first of all, in the interest of full 
disclosure I have to say I was until about three months ago in 
the private sector producing some of that stuff that was sold 
to various people. So, I mean, I have a little bit of----
    Mr. Hoyer. Then perhaps you can answer my question.
    Mr. Rossotti. Well, actually, I think I can. It isn't that 
people didn't know--actually, this is the second time this 
problem has arisen, not the first time. Because it arose the 
first time in 1970.
    In the '50s and '60s when they put the first 
computersystems together, they only used one digit for the date field 
in order to save storage. So when 1970 came--of course it was much 
smaller because there weren't that many computers--they had to go back 
and renovate all the programs to make it to two digits to go to 1970. 
Now, was that because people didn't know 1970 was coming? It wasn't.
    What has happened is that one of the principal costs of 
computer technology is storage, both internal storage inside 
the memory of the computer and external storage in the form of 
disk drives, and that is a very expensive resource. The cost 
per unit has been coming down dramatically over the last 20 
years. I mean, that is what technology has done with the 
Intels.
    And in 1985, and I did a study of this on one application 
in my previous job, it turned out if you had known and you had 
done a complete calculation, it would not have been economical 
to make a four-digit date field in 1985, even if you had 
factored in what it was going to cost to renovate it in 1998, 
because the cost of having that much storage for that many 
years would have far exceeded the cost of actually doing the 
renovation. And that is basically the reason why people used 
this thing. It was to save on storage. It was not an irrational 
economic decision to do that.
    Mr. Hoyer. Well, now that is a point, for instance, that we 
ought to make clear then that this is not the government being 
dumb, which some people said we were to spend all this money to 
get up to speed because we apparently didn't contemplate that. 
In fact, the money that we are now spending, if I understand 
you correctly, is less than we would have spent to buy the 
capacity at the time we purchased the software?
    Mr. Rossotti. It is generally true. Of course, in every 
case it might not be, but it is generally true. And the same 
thing has happened in the private sector. All private sector 
people have bought this, and it was basically that it was just 
storage--programmers spent incredible amounts of energy trying 
to figure out how to save a small amount of storage because it 
was so expensive. And that was the fundamental reason why it 
was done that way.
    Mr. Hoyer. Okay. Now, I am sure I have got time for one 
additional question.
    Mr. Kolbe. You just go ahead.
    Mr. Hoyer. Obviously, funding has been transferred out of 
information systems account to fund Y2K--not all of it, but a 
substantial part of it. Mr. Gross and I discussed that, and he 
discussed it with the Chairman. And we worked on that last 
year, and we tried to do as much as we could with the best 
information we had available at the time.
    IRS has a $227 million increase you are asking for in this 
account for fiscal year '99. Can you tell me how time sensitive 
these initiatives are and what the impact would be for further 
delay? Now, I asked the question--I think it is an important 
question, but what is going to happen? The Chairman is right. 
We are going to come up--he is going to come up, sit down with 
the other 12 chairs of the subcommittees, and he is going to 
say we need this extra money because.
    And if he doesn't have a good follow-up to ``because'' and 
what will happen if we fail to do this, then he is going to 
have a tough time, because I have participated in those 
meetings, getting the 602B allocation to do this half billion 
dollars that we are talking about at IRS of which this is $227 
million.
    Mr. Rossotti. Let me just say, Mr. Hoyer, that I really 
believe that the IRS technology base today is in dire, dire 
need of improvement. And I understand very, very well that a 
great deal of money was spent in the past and probably did not 
produce anywhere near what was expected. And I can only say I 
was paying the taxes along with everybody else back then.
    So I regret that, but the practical fact is that because 
those systems in many cases did not come in from the previous 
modernization effort and because this committee appropriately 
required that money be reprogrammed out of other IRS 
initiatives in the last two years in order to deal with these 
urgent requirements of the century date change, there has been 
really very, very little just even ordinary renewal of basic 
computers in the last two years. And that is the situation that 
we are in.
    So what we are looking for in this $227 million is what I 
would consider extremely important near-term things that we 
absolutely need. On chart six, those are basically shown, and 
you can see that the two biggest ones are just replacement of 
computers for front-line people that either don't have them at 
all, or where the computers are just falling apart.
    I have been out with the people that do this. It is very, 
very simple to see what happens. If you send the person out to 
collect money from somebody and they either don't have a 
computer or they have one that is broken down or can't get the 
information, it simply imposes more time to do that job on the 
taxpayer, as well as on the employee, and increases the risk of 
inaccuracy, which then goes directly back into the kind of 
problems that we have with serving taxpayers.
    The other two on here are the increases for customer 
service, which we have already talked about--the call router in 
order to be able to increase handling the telephone calls. And 
the final piece is the money for product assurance.
    I mean, one of the things that Mr. Gross pointed out to me 
when I first came here, which, frankly, horrified me, is that 
there are a considerable number of changes to systems that are 
made at the IRS to respond mainly to tax law changes and things 
like that, which are not subject to a separate testing process 
before they are put into actual production to actually take 
care of taxpayer records.
    I mean, this is unheard of in the private sector. It is 
just unheard of. You would not take a complex piece of software 
and have some programmers do the job on it without having a 
separate group test it separately. I mean, it is just basic 
standard practice.
    We have not had the resources to do that recently so it is 
something like 70 percent at the present time of the changes we 
made don't go through a separate product assurance process. 
And, I mean, I can't imagine that we would do something like 
this in a tax agency. I mean, this is the kind of thing that 
can cause problems directly for taxpayers by having wrong 
notices or wrong pieces of information in their accounts. So 
these are the kinds of things that we are talking about.
    Now, the only other piece of this is getting ready for the 
longer term modernization, which is the kind of things that GAO 
has recommended. This is putting in the methodologyand the 
performance matrix so that we can be in a position to actually manage 
the beginning of this modernization program.
    The net of it is that I understand very well the difficult 
task of this committee. You definitely have your job cut out 
for you. As far as the technology base of the IRS is concerned, 
we have a situation where we have a real deficit. We have a 
real problem. And what we have to do is to take what money you 
can make available to us and put it to work as effectively as 
we can, and over a period of years we can perhaps, and, in 
fact, I believe we can, fix this problem. But there are 
definitely some urgent requirements in this fiscal year.
    Mr. Hoyer. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you. Mr. Istook.
    Mr. Istook. Thank you, Mr. Chairman. Thank you, gentlemen, 
for being here. On the course, all the operations of the 
Federal Government, the fiscal operations depend upon the flow 
of cash received by the IRS. The huge flow, of course, is 
associated with all the 1040s, which we file January, February, 
and March, and then 99 percent I guess on April 15.
    Now, in looking at the problem of the year 2000, because 
come the year 2000 when you get all those millions of returns, 
if you can't process them, everything comes to a grinding halt. 
And it is my understanding that the distributed input system 
handles 169 million returns each year, and that the IRS reports 
it is not and cannot be made compliant with year 2000.
    My question that I am coming to you on this, when we are 
trying to understand the deadlines--you know, a plane takes 
off. There is a point rolling down the runway, I think it is 
called V-1, they say it is a point of no return. We are 
committed to a takeoff, especially on an overseas flight. They 
know when they have passed the halfway point of the fuel that 
it is better to go on than to turn back if there is any sort of 
problem.
    When it comes to being able to handle things, what are the 
deadlines working back from that I suppose it is going to be 
January 1, the year 2000, but by when do you have to have new 
systems functioning and in place as an absolute necessity? And 
then backing that up, you know, what are the deadlines working 
back from there? We tend to work on deadlines here from the 
congressional process.
    Working backwards, seeing that the entire system becomes 
nonfunctional because the heart of it is not compliant with 
year 2000, 169 million returns cannot be processed as of 
January 1, 2000, what are those drop-dead dates, points of no 
return, whatever you may wish to call them, working back from 
there? We need to know those dates.
    Mr. Rossotti. Well, your characterization of it is correct. 
There are drop-dead dates, and, you know, beyond a certain 
point, you are beyond the point of no return. And in terms of 
the specific system that you mentioned, which was referred to 
by--you know, there are too many acronyms in this business--the 
DISRPS, which is the distributed input system, it is, in fact, 
the one that processes all these returns.
    And, fortunately, my colleagues here, long before I got 
here, recognized that that was a drop-dead requirement because 
it could not be made. These things are almost 20 years old and, 
in fact, they can't even be moved from one place to another 
without breaking. That is how old they are.
    Fortunately, they did issue a contract to a Prime 
contractor to replace that. That contract was awarded last year 
in 1997, and that new equipment has already been delivered as 
we speak and is in testing in one of the service centers in 
Austin, Texas.
    Mr. Istook. When you say it has been delivered, you mean 
the entirety for the whole nation or just the equipment for 
Austin has been delivered?
    Mr. Rossotti. Well, it has been delivered for Austin, but 
the hard part is really the software that supports it. And most 
of that software for everything that we need has already been 
delivered as we speak and is being tested in Austin. And the 
plan would be to have the remaining service centers up and 
running before the end of this calendar year. Do you want to 
comment on that? Go ahead.
    Mr. Gross. That is correct, Charles. We are in the process, 
Mr. Congressman, of completing our first test in Austin in one 
of the 10 service centers. And the software schedule that 
Charles alluded to is correct. We are on schedule to complete 
the software development and testing through two phases now and 
a second phase in July. And then the schedule provides for us 
to roll out the equipment and to deploy the applications prior 
to next filing season, to be completed in December of '98. The 
project is on schedule.
    Mr. Istook. This is using manual data entry instead of the 
earlier plans to do it through scanning in?
    Mr. Gross. That is correct. Although I would say that this 
system would be replaced--it is not only a Y2K compliance 
system, but it is projected to improve productivity of those 
data entry operators by approximately 10 percent.
    Mr. Istook. And how many individual workstations are 
involved?
    Mr. Gross. There are about 4,500, Mr. Congressman. There 
are about 450 in each of the 10 service centers. That is 
correct.
    Mr. Istook. And what is already onsite in Austin, are they 
working through terminals, working off of some other server? 
Are they working through PCs?
    Mr. Gross. It is a server-based solution.
    Mr. Istook. And each workstation is a PC or a terminal?
    Mr. Gross. It is a PC.
    Mr. Istook. Okay. And what----
    Mr. Gross. I also might add that if we ever do move to an 
imaging solution, the concept is to be able to migrate those 
workstations into some of our critical customer service needs 
as well so there is no potential for throw-away of that 
investment.
    Mr. Istook. And the system which you intend to have, you 
have two stages of testing, one that is going on I guess in the 
next month or two I believe you said?
    Mr. Gross. It is in progress as of this moment, Mr. 
Congressman.
    Mr. Istook. And the other is in July. Is it intended that 
the transition then to fully using that system rather than DIS 
in Austin at least will happen this calendar year?
    Mr. Gross. The pilot in Austin represents about one-half of 
the workload for that service center.
    Mr. Istook. Okay. So part of the testing is you are 
processing returns as they are coming in right now--about half 
of them?
    Mr. Gross. That is correct. This is a pilot. It is not a 
prototype. It is a pilot. And what we mean by that is we 
areusing live tax return data. We are processing live tax return 
information.
    Mr. Istook. Okay. And do you expect that the other half of 
the Austin personnel will be utilizing the new equipment during 
this calendar year, or you are keeping it about half and half?
    Mr. Gross. We are limiting it to a half, and then there is 
what is called a software drop on a second application roll of 
the remaining form types scheduled for July of '98, which 
represents only about five percent of the total workload of the 
system. Ninety-five percent of the system in terms of its 
functionality and scope is being tested in this initial pilot 
that is ongoing at this moment, even though we are only 
processing about 50 percent of the returns through a few of 
those new devices.
    Mr. Istook. If you are then pilot testing it with Austin, 
which represents I guess about one-tenth of the total returns 
approximately, and then the new system will be processing about 
half of those--namely, five percent of the total returns--that 
means that if you are taking the rest of this calendar year to 
do that, then all of the other 95 percent of the return 
processing capability must be put online during calendar year 
1999?
    Mr. Gross. Actually during calendar year '98. Our goal is 
to have the entire rollout completed by December of '98 for the 
'99 filing season.
    Mr. Istook. Okay. I thought you had indicated otherwise a 
while ago that you were just going to be continuing that pilot 
testing in Austin through this calendar year. But you intend to 
have the equipment onsite to the service centers this calendar 
year?
    Mr. Gross. That is correct.
    Mr. Istook. And the intent is to have not only the 
equipment there, but to have it functioning and processing 
returns at the other service centers when?
    Mr. Gross. Beginning in the '99 filing season.
    Mr. Istook. Beginning in the '99 filing season. Okay.
    Mr. Gross. And could I just add one point to that?
    Mr. Istook. Please.
    Mr. Gross. I think that the most difficult part of this 
effort, as all of these efforts, is the development of the 
application code. And it is not so much the deployment of the 
equipment and the operationalization of the equipment. It is 
the application code.
    And the Lockheed project plan is structured to provide us 
with the earliest possible validation of that application code. 
And that is why the pilot now, which represents about 95 
percent of that application code, and the remaining five 
percent this July, represent the most critical portion of the 
project effort.
    Mr. Istook. Are all of these with funds that we have 
already appropriated, or is some portion of it depended upon 
this year's?
    Mr. Gross. There is a piece of appropriation required for 
fiscal year '99. I believe it is $18 million.
    Mr. Istook. But the----
    Mr. Gross. It is correct. It is $18 million for fiscal year 
'99.
    Mr. Istook. Okay. But the remainder is budget authority--
that you are laying out is budget authority you have already 
received then?
    Mr. Gross. That is correct.
    Mr. Istook. Very good. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Mr. Istook. Those are very helpful 
questions. I am going to submit the rest of my questions for 
the record so that we can finish as soon as possible. Mr. 
Hoyer.
    Mr. Hoyer. I will ask one last question. I understand the 
IRS has been having problems retaining information technology 
experts. Can you tell me what efforts are underway to retain 
these highly skilled and obviously essential employees?
    Mr. Rossotti. Thank you. As a matter of fact, that was one 
of the first items that I turned my attention to. Remember I 
said that I came in and looked at the Y2K. I wanted to identify 
the risks that I thought we had. And one of the first risks 
that I identified was that we were simply losing the people 
because of the increase in salaries that was taking place in 
the private sector, but also because----
    Mr. Hoyer. Because you get onto also because, what is the 
disparity between what we are paying these folks and what they 
are getting paid or the offers they are getting and receiving 
in the private sector?
    Mr. Rossotti. Well, that, of course, is a very individual 
thing, but I will say this. And just if you look at increases 
in the last two years of the private sector increases for 
qualified programmers, it has been in the range of 12 to 15 
percent a year. And, of course, we in the government have been 
more like three percent a year. So whatever it was, they have 
been falling further behind.
    Mr. Hoyer. Let me see if I understand what you just said. 
Twelve to fifteen--let us take the low side--last three years--
36 percent increase in the private sector, less than three in 
the public sector. So nine percent in the public sector, if we 
take three percent, versus 36 percent in the private sector?
    Mr. Rossotti. I mean, those are not unrealistic numbers. I 
mean, it may not apply to any individual, but yes.
    Mr. Hoyer. Yes. Or 27 percent less in the public sector 
than in the private sector?
    Mr. Rossotti. I think that there could very well be many 
cases where there could be that much difference, and as a 
result, we have been losing the people.
    Mr. Hoyer. Okay. Now, let us get to the but also because.
    Mr. Rossotti. Well, and the point is that at this point in 
time, for the people that are in this specific group, that is 
basically the ones that are maintaining and updating these 
application programs, while it is important to fill vacancies, 
I mean, there really is no way to replace those skills. I mean, 
it just takes a period of time to learn these old programs.
    And so one of the first things that we have decided that we 
had to do is something special to retain these people. And, as 
a matter of fact, it was only this week that after a 
considerable period of figuring out how to do this, we came up 
with a plan, an announcement out in New Carrollton to come up 
with a six-point program to help retain these people.
    One of the specific components was specifically targeted at 
the group of the programmers, which is the ones who were the 
most skilled. It was a 10 percent retention allowance, which we 
said would be for this fiscalyear and depending on what we get 
in the budget for the following fiscal year.
    But equally important to that, it doesn't close the gap, 
but it was at least something to tell people we were trying to 
help close the gap a little bit. But equally important, I 
think, is we tried to lay out a vision of what we were going to 
try to do in the way of training for these people and in some 
cases some grade upgrades where it was appropriate that the 
grades needed to be changed slightly; and I think, more 
particularly, giving the people a vision that there was hope 
here that they weren't going to be left with a sinking ship on 
this year 2000 problem.
    And I think we got a tremendous response from the technical 
people out there--a very tremendous response. Far in excess of 
what the money is, just the notion that we were recognizing the 
problem that they were in helped. So that was a step that we 
have just recently taken this week, and I think it is one of 
the most critical steps we can take to reduce the risk of not 
being able to update the programs on time.
    Mr. Hoyer. Thank you. Mr. Chairman, I am not going to ask 
any more questions, but let me make the observation. As you may 
have seen on the Federal page yesterday, we had a little press 
conference the other day--two days ago I guess--about trying to 
comply with the Federal Employee Pay Comparability Act.
    What we have not been doing because of so-called economic 
crises in the Federal Government is giving the full 
comparability adjustment; in other words, the comparison that 
Mr. Rossotti has just drawn between what we are paying for 
skills in the private sector and what we are paying in the 
public sector.
    Obviously, if we do not pay comparable wages, we won't be 
able to compete for comparably competent people. And, 
particularly, what will happen, you will lose your best people 
because obviously they are the most competitive in the private 
sector.
    I know it will be perceived that Hoyer is trying to take 
care of his Federal employees. That is perceived absolutely 
correctly. I am. But I am doing so on the premise that if we 
don't, it won't be just Federal employees, my constituents or 
Frank Wolf's constituents or, frankly, your constituents along 
the border, the customs people, it will be America that loses 
because we will lose these kinds of competent people.
    Now, in this instance, we are taking a 10 percent because 
we have got some flexibility in employees, and one of the good 
things I think in the bill that we passed, which I had in my 
bill too that Matsui and I and others sponsored, had 
flexibility in it so you could deal with these particular 
problems.
    But in addition, Mr. Chairman, we are going to really--and 
I would hope that you would sort of give attention to this as 
well and all our Chairmen would--that we need to focus on 
complying with comparable wages. We need to play comparable 
wages, and then, Mr. Chairman, what we need to do, and I have 
told this to my union friends, we need to expect performance.
    And if you don't perform and you are not good, then, you 
know, you are going to have to leave. But we can't not pay 
people and then expect high performance and outstanding 
productivity. The private sector doesn't expect that. There is 
no athletic team in America that expects that. Don Devine once 
said, ``Well, you know, I have got a lot of people standing in 
line to fill up these jobs,'' and that is correct.
    Let me tell you I could get 10,000 people within 24 hours 
to play ball for Abe Paulie. There is no shortage of lines. 
People want to play in the NBA. The problem is there is a real 
shortage of people who can win in the NBA. And that is really 
the issue we are talking about, not whether there are long 
lines to take jobs.
    There are long--you know, even in this economy, we can hire 
people, but it is hiring those people that will give us the 
kind of quality performance that we need so we can solve these 
problems that are tough problems, both in the private and 
public sector.
    Thank you for this time, Mr. Chairman. Thank you, Mr. 
Rossotti. And, again, in closing, Art, I want to tell you how 
impressed I have been with your accomplishments, with the 
spirit you have brought to your job, and I think you have made 
an incredibly important contribution to solving a very 
difficult problem that appeared to be one that was intransigent 
for many, many years. So I want to thank you for your service 
to the American people.
    Mr. Kolbe. Thank you, Mr. Hoyer. And, Mr. Rossotti, thank 
you and welcome again on your maiden voyage here before our 
subcommittee. Mr. Dalrymple, thank you for your answers, and, 
Mr. Gross, I would echo certainly what Mr. Hoyer said. We 
certainly thank you for the service that you have given us and 
wish you well.
    We know that we are going to be relying on your--that Mr. 
Rossotti is going to continue to rely on your advice in the 
months ahead, and we appreciate that. And we thank you for what 
you have done to launch us in the tax systems modernization, 
Y2K, and get us on the right track. This subcommittee is 
adjourned.
    [Questions for the Record and budget justification material 
follow:]


[Pages 1002 - 1477--The official Committee record contains additional material here.]



                                           Thursday, March 5, 1998.

                      FINANCIAL MANAGEMENT SERVICE

                    BUREAU OF ENGRAVING AND PRINTING

                           UNITED STATES MINT

                               WITNESSES

RICHARD L. GREGG, COMMISSIONER, FINANCIAL MANAGEMENT SERVICE
THOMAS A. FERGUSON, ACTING DIRECTOR, BUREAU OF ENGRAVING AND PRINTING
PHILIP H. DIEHL, DIRECTOR, UNITED STATES MINT
NANCY KILLEFER, ASSISTANT SECRETARY (MANAGEMENT), CHIEF FINANCIAL 
    OFFICER, DEPARTMENT OF THE TREASURY
DONALD V. HAMMOND, ACTING FISCAL ASSISTANT SECRETARY, DEPARTMENT OF THE 
    TREASURY
    Mr. Kolbe. The subcommittee will come to order, and we want 
to welcome all of our agency people here today for this multi-
purpose hearing.
    We are pleased today to welcome the two agencies of the 
Federal Government that manufacture our money--the United 
States Mint and the Bureau of Engraving and Printing--and the 
agency that, as its name implies, is responsible for managing 
the nation's finances and payments--the Financial Management 
Service.
    The Mint is represented this morning by its Director, Mr. 
Philip Diehl. Bureau of Engraving and Printing is represented 
by its Acting Director, Mr. Thomas Ferguson. And Financial 
Management Service is represented by its Commissioner, Mr. 
Richard Gregg. And we are pleased to have Assistant Secretary 
Killefer with us again today.
    As my colleagues know, both the Mint and the Bureau of 
Engraving and Printing operate through revolving funds and do 
not require appropriations. However, both agencies are 
currently dealing with a number of issues that are of interest 
to the subcommittee and to the Congress as a whole, and it is 
important that we continue to have a dialogue with them as we 
work together on these issues.
    The Financial Management Service certainly does require an 
appropriation. It has requested $202 million plus for fiscal 
year 1999. This is just slightly above the amountappropriated 
in fiscal year 1998.
    As I mentioned to Secretary Rubin yesterday when he was 
before this committee, we are very concerned about the 
Financial Management Service, where it is, and where it needs 
to be with regard to its computer systems and making them year 
2000 compliant. We certainly heard concerns from the Secretary 
yesterday about Financial Management Service being the weak 
link in this chain at the moment. Because of the nature of the 
mission, FMS is one agency--one of the two or three top 
agencies, I would say, of the government--that simply cannot be 
allowed to fail when it comes to being Y2K compliant.
    We are also concerned about the lack of progress that has 
been made in the implementation of debt collection provisions 
that were established under the Debt Collection Improvement Act 
of 1996. We will be monitoring the progress of the Financial 
Management Service in these and other areas.
    In order to expedite matters this morning, we will hear 
each of your statements and then open it up for questions from 
the members of the subcommittee. And, of course, as is always 
the case, the full statement will be placed in the record, and 
you may summarize as you wish. But before I call on you, let me 
see if Mr. Hoyer has any opening remarks.
    Mr. Hoyer. Mr. Chairman, I just want to welcome the 
witnesses, look forward to hearing from them, and I will not 
take any time of theirs. I do not have anything to pontificate 
on this morning, so we will hear from you.
    Mr. Kolbe. I do not believe you have a statement, is that 
correct, Ms. Secretary?
    Ms. Killefer. That is correct. That is right.
    Mr. Kolbe. All right. Then I think we are going to begin 
with Mr. Gregg and the Financial Management Service. Mr. Gregg?
    Mr. Gregg. Thank you, Chairman Kolbe, Congressman Hoyer. I 
appreciate this opportunity to appear before you to talk about 
our fiscal 1999 appropriation.
    Before I begin, I would like to introduce Don Hammond, who 
is to my left here. He is Acting Fiscal Assistant Secretary.
    Mr. Kolbe. I apologize for not introducing him.
    Mr. Gregg. With your permission, I would like to request 
that my full statement be submitted for the record----
    Mr. Kolbe. Yes, of course.

                           summary statement

    Mr. Gregg [continuing]. And I will summarize my remarks.
    The Financial Management Service is requesting $202.5 
million and 2,006 FTE for fiscal 1999. The mission of FMS is to 
make the government's payments, to handle its collections, 
manage the debt collection responsibilities for the government, 
and to do government-wide accounting.
    In performing our mission, each year we make 850 million 
payments totaling about $1 trillion, and handle collections of 
$1.4 trillion. So that these payments and collections, as well 
as the other important functions of FMS, are not interrupted, 
we must ensure that our automated systems are modified to run 
in the year 2000.
    Doing what is necessary to be year 2000 compliant is our 
top priority. To make the necessary modifications for the 
century date change requires a massive, all-out effort in every 
part of FMS. And here is a brief summary of our actions.
    We have carefully identified and assessed our mission 
critical systems. We are well underway with making changes to 
our software code to have our systems in compliance. Our 
payment and collection systems are on schedule and will be 
completed by the end of 1998. Coding for other systems will 
also be done by 1998, except for a portion of one system that 
will extend into early 1999. That is an intergovernmental 
accounting and processing system, and there are a number of 
components to that. But we are monitoring that carefully and 
moving ahead on that as quickly as we can.
    This summer we will begin testing internally, and with all 
of our customers, and testing will continue until all systems 
are ready. In summary, while there is much to be done over the 
next 22 months, all of our efforts will be marshalled to ensure 
that systems will operate on January 1, 2000.
    There are other important initiatives taking place at FMS. 
The Debt Collection Improvement Act of 1996 mandates that all 
non-tax payments be made electronically after January 1, 1999. 
This is referred to as EFT 99. Currently, 66 percent of all 
non-tax payments are made by EFT, and the percentage is 
climbing steadily.
    Under EFT 99, one of the most difficult and sensitive 
issues involves providing federal payments to individuals who 
do not have bank accounts. To accomplish this, we will 
establish an electronic transfer account, known as an ETA, at 
federally-insured financial institutions. These accounts will 
be provided at reasonable cost and with the same consumer 
protections as other accounts at financial institutions. We are 
currently working on structuring the ETA account.
    The second part of the Debt Collection Improvement Act is 
also receiving extraordinary attention and work. This is a 
responsibility to manage the collection of past due non-tax 
debt owed to the Federal Government. While much work remains to 
be done, I believe that we recently have made good progress. We 
are moving quickly to issue a host of regulations to implement 
this law.
    We are analyzing the debt portfolios of the largest 
creditor agencies to categorize and assess the value of the 
debt. FMS is conducting administrative offset by matching debts 
against vendor and federal retirement payments, and later this 
year will begin phasing in salary and benefit payments.
    Agencies are referring more debt to us for offset. In 1997, 
the amount was $9.4 billion, and currently it is $16.5 billion.
    We are working to collect past due child support debt. 
Through the Department of Health and Human Services, we have 
agreements with 13 states to assist in the collection of child 
support.
    And finally, we have contracted with 13 private collection 
agencies to assist in the collection of delinquent debt. We 
will continue to press forward to use all of the debt 
collection tools provided to us under the Debt Collection Act.
    Finally, let me briefly mention that FMS is responsible for 
managing the preparations of the new government-wide 
consolidated financial statements, and working with every 
federal agency, OMB, and GAO to meet this requirement.
    Mr. Chairman, this concludes my remarks. I would be happy 
to answer any questions after you finish with the panel.
    [The prepared statement of Mr. Gregg follows:]


[Pages 1482 - 1492--The official Committee record contains additional material here.]



    Mr. Kolbe. Thank you very much. We will have questions, of 
course, but we will do that after we hear the other statements.
    We will go now to the Bureau of Engraving. Mr. Ferguson?

                           Summary Statement

    Mr. Ferguson. Thank you, Mr. Chairman, Congressman Hoyer. 
It is indeed a pleasure to be before you this morning 
representing the outstanding men and women of the Bureau, and 
to report on our progress for 1997 and our plans for the 
future.
    As you noted, sir, we operate under a revolving fund and 
are not seeking any appropriation. I would note that in our 
area of finance that for the 13th consecutive year we have 
received an unqualified opinion from our outside accounting 
firm. We are very proud of that fact, and that represents the 
efforts of our former Chief Financial Officer, Paul Blackmer, 
who retired, and our current CFO, Greg Carper.
    The financial status of the Bureau is reported in our CFO 
report of 1997, and I will provide copies for the members and 
staff after the conclusion of the hearing.
    In 1997, the Bureau delivered 9.6 billion Federal Reserve 
notes, including over one billion of the newly-designed $100 
note and $50 note. And we also delivered 22 billion stamps to 
the U.S. Postal Service, the vast majority of that being in the 
new format, the peel and stick, as opposed to the lick and 
stick variety, that the public seems to prefer greatly. 
[Laughter.]
    Our operating costs were significantly below budget. We had 
an overall productivity increase of 4.7 percent in 1997, while 
reducing overtime by 40 percent. These activities allowed us to 
reduce our billing costs in both of our major product areas to 
our customer agencies.
    These reductions were a result of efficiencies and also of 
a streamlining effort that has been ongoing for the last 
several years. In the first quarter of FY97, the Bureau offered 
a voluntary separation and incentive package and had 254 
employees take that package and retire off of the government 
rolls.
    In December of 1997, we offered a second voluntary 
incentive program for people to retire, which reduced our rolls 
by an additional 128 employees.
    In the area of the new currency program, as I mentioned 
earlier, we produced over a billion of the newly designed notes 
last year. The $50 note went into circulation in October of 
this past year. The newly designed $20 note will go into 
production this spring for issuance in the fall of 1998. Five-
dollar and ten-dollar denominations will follow in the next 
year or year and a half.
    An area that the Bureau considers extremely important is in 
our Y2K compliance area. In 1997, the Bureau completed an 
upgrade of its major computer systems. This put all of our 
major financial and management systems into compliance for Y2K. 
We will have all of our systems fully compliant and tested by 
the end of this fiscal year.
    A couple areas which deserve specific note are in the area 
of contracts. We are currently involved in a major currency 
paper solicitation which has been ongoing for a while now. We 
issued a draft solicitation, one of the first solicitations 
that was put out on the Internet. That draft was put out for 
over eight months for the private sector to be able to comment 
on and assure that we are leveling the playing field for 
competition.
    The bid was officially released in May of 1997 and closed 
January 6, 1998, and we have received competition.
    In 1993, the Bureau ordered four currency presses and three 
finishing lines, in response to projected demand increases from 
the Federal Reserve System. Subsequent to that, the demand has 
leveled off. Approximately two years ago we initiated a study 
to determine how best to utilize this equipment.
    Currently, we are installing the three finishing lines, 
those are cope presses, at the D.C. facility. Those presses can 
replace our older equipment in D.C. and can be fit into the 
existing production system with minimum capital expense.
    The four intaglio presses, I10 brand name, are currently 
being stored at our Fort Worth facility pending resolution of a 
study to determine how best to maximize the value out of that 
equipment.
    Sir, this concludes my opening remarks, and I will answer 
any questions that you or Mr. Hoyer may have.
    [The prepared statement of Mr. Ferguson follows:]


[Pages 1495 - 1498--The official Committee record contains additional material here.]



    Mr. Kolbe. Thank you.
    The Mint, Mr. Diehl? If you will just turn that microphone 
towards you. Thank you.

                     Summary Statement of Mr. Diehl

    Mr. Diehl. Thank you, Mr. Chairman, Mr. Hoyer. It is a 
pleasure to be here in front of you again this year, and, of 
course, I am delighted that we are working under a revolving 
fund rather than asking for appropriations. That, of course, is 
a product of the work of this Committee which only three years 
ago passed legislation authorizing the United States Mint to 
operate under that revolving fund after many years of working 
in that direction.
    You have also been an essential support for us in a number 
of other crucial reinvention initiatives that we have 
undertaken at the United States Mint, including granting a full 
procurement waiver from the requirements of the Federal 
Acquisition Regulations, which has allowed us to completely 
reinvent how we acquire goods and services that we require in 
the production of the nation's currency.

                             strategic plan

    What I want to talk to you about today is our strategic 
plan. And I know that your Committee, as well as the 
authorizing committees, have a great deal of interest in our 
agency's accommodations to the requirements of the Government 
Performance and Results Act (GPRA), so I want to focus on that 
today.
    As you know, we have three primary missions at the United 
States Mint. The production of circulating coinage is, of 
course, what we are best known for. We also manufacture and 
market about $400 million worth of commemorative and bullion 
products, which we sell around the world. And we protect about 
$100 billion worth of assets, mostly gold and silver that is 
stored at Fort Knox and at our other facilities.
    Our strategic plan has been designed to focus our efforts 
in these three areas. And it is increasingly driving the way in 
which we are making decisions at the United States Mint. I 
would say that we are one of the few federal agencies that is 
now operating under annual business plans with concrete 
performance measures that are tied to a mature organization-
wide strategic plan.
    We are now four years into our strategic planning effort, 
and it is beginning to bear fruit in very concrete ways. We 
began our formal planning process in October 1994, not so much 
out of adherence to GPRA, because we were well ahead of the 
requirements of GPRA, but because we recognized that strategic 
planning was crucial to our efforts to reinvent the United 
States Mint and become more customer friendly, customer 
focused, and more efficient.
    Our strategic plan also became the central crucial means of 
building a partnership between Mint management and our union, 
AFGE, the American Federation of Government Employees, for 
changing the Mint's culture and making it more businesslike, 
and for boosting the performance of our people.
    In a nutshell, Mr. Chairman, our plan examines each of our 
three missions--circulating, numismatics, and protection. It 
addresses each as a discrete operation and sets for each 
specific challenges to be met by the year 2003. It sets eight 
goals for those three lines of business, plus four enabling 
goals which support our ability to run the enterprise across 
all of those mission areas.
    The plan defines 25 objectives under those goals and 
numerous strategies for the attainment of those objectives, and 
there are 31 concrete measures which are tied to those goals 
and objectives to help us gauge our performance and our 
progress in meeting the objectives by the year 2003.
    We have indicated some of our goals and performance 
measures as an addendum to my testimony, but I would like to 
highlight a few of those in each of our three mission areas. 
These are areas in which we can probably say that we have made 
great progress, and there are also some in which we are 
disappointed with the progress that we have made. We believe we 
will need to intensify our efforts in the years ahead to meet 
those goals.
    In the circulating coinage area, our foremost goal is to 
meet Federal Reserve requirements for our product. This calls 
for us to forecast coinage demand, to produce to meet that 
forecast, and to maintain inventory sufficient at both the Mint 
and the Fed to meet their near-term requirements.
    In 1997, we produced 14 billion coins, which is well below 
what we had been running for the three previous years. We had 
been averaging close to about 19\1/2\ billion coins between 
1994 and 1996. So coin demand at the Fed dropped significantly, 
and that showed up in our production schedules in 1997.
    We also refined our econometric models of coinage demand to 
meet our standard of a 95 percent confidence interval. And we 
are working further in that direction over the next year or so 
to develop forecast models that go down to the regional Federal 
Reserve Bank level rather than just at the national level.
    A second of our four goals we have set for this mission is 
to reduce overall costs of producing circulating coinage by 25 
percent by the year 2002. This is a very aggressive goal, and 
it really reflects the kind of philosophy that we have taken 
toward our strategic plan. And that is to set aggressive goals 
and know that those aggressive goals will lead us to higher 
accomplishments, even if we cannot actually meet the goal 
itself in the timeframe we have required.
    A key measure for determining our progress on this goal is 
average unit cost for each denomination of U.S. coinage. In 
1997, we met those goals for all denominations except the 
quarter. We also reduced average total cost of circulating 
coinage production, and we will continue to pursue our average 
unit cost goals by acquiring new technologies, amending 
procedures that add more expense than value, and reducing cycle 
times on processes.
    In the numismatic area, our numismatic business plan called 
for selling 13 million commemorative, bullion, and other 
numismatic products, and achieving $363 million in sales. We 
exceeded both of those objectives by wide margins in 1997. Part 
of our success is attributable to favorable market factors. The 
falling price of gold, for example, and, ironically enough, the 
rising price of silver stimulated demand for our bullion 
products, which was very helpful.
    But we also get some of the credit for meeting these goals 
as well. We made several crucial business decisions that have 
paid off already, and will pay off in the future. For example, 
we strengthened relationships with bullion coin distributors in 
the U.S. and abroad, and in 1997 it paid off when the United 
States Mint became the number one bullion seller in all three 
of our markets--gold, silver, and, of course, the new platinum 
program.
    New commemorative collectors would welcome stellar product 
options at reasonable prices in restrained mintages. And in 
1997, we provided them, thanks largely to commemorative coin 
reform legislation that Congress passed in 1996 and which we 
began implementation of in 1997, which greatly reduced the 
mintages and the flooding of the markets that we have seen in 
the last 10 years.
    We also knew a platinum coin would increase revenues, so we 
sought and received congressional authority to make them. And 
acting on that knowledge, we were able to reach a handsome 
profit of about $18 million in our numismatic line of business, 
probably about half of that coming from the new platinum coin 
program.
    Of course, one goal has been signature for us over the past 
three years, and that is our commitment to match the best in 
business and product quality and customer service. And in a 
1995 customer satisfaction survey from an independent firm, 85 
percent of our numismatic customers rated us as excellent or 
very good as a supplier of coins and other products.
    We repeated that survey in 1997, and our rating of 
excellent or very good went from 85 percent up to 90 percent. 
Also, we just received the University of Michigan Business 
School's customer satisfaction survey, which is done for major 
companies all over the world.
    And the United States Mint, for a second consecutive year, 
received the highest satisfaction rating ever accorded to any 
government agency. Of all the government agencies and private 
sector companies that the University of Michigan surveys, only 
one company had a higher rating than us and that was Mercedes-
Benz.
    In the third area, Mr. Chairman, of protection, last year, 
as every year, Mint police safeguarded 2,000 employees, nearly 
a million visitors, $400 million in customer payments, $675 
million in circulating coinage, and about $100 billion of the 
American people's bullion reserves.
    Officers and their supervisors faced threats of increasing 
subtlety and seriousness, ranging from high explosives to 
credit card fraud. In our protection mission, our foremost goal 
is to provide security commensurate with changing threats to 
our environment. Our foremost performance measure is losses as 
a percentage of reserve value, and we are performing. Our 
losses are minuscule--pennies on the millions of dollars.
    Mr. Chairman, there are a number of other initiatives I 
know this committee is interested in that I will be happy to 
address in questions, including our proposal for a performance-
based organization, our capital investment plan, the dollar 
coin, the 50-state commemorative quarters, the year 2K efforts, 
and our enterprise information resource system.
    Thank you.
    [The prepared statement of Mr. Diehl follows:]


[Pages 1502 - 1506--The official Committee record contains additional material here.]



    Mr. Kolbe. Thank you very much, Mr. Diehl. Very impressive 
statistics you gave us there about your customer work.
    Lots of opportunities for questions here. This is what I 
call target rich. [Laughter.]
    And I mean that in the most friendly way. There are lots of 
things I am curious about and interested in, but I will try to 
alternate here. I will take a first round of questions here, 
and I will start with Mr. Gregg.
    Just so that I am clear, you said you had about--you make 
about 850 million payments a year?
    Mr. Gregg. Yes.
    Mr. Kolbe. Is that right? And is it $1 trillion?
    Mr. Gregg. Yes, sir.
    Mr. Kolbe. So your mean payment, then, is a little over 
$1,000, is that right? That would be the mean, obviously. But 
the median would be much less, because a lot of those are 
Social Security payments that would be very small, is that 
right?
    Mr. Gregg. Yes.
    Mr. Kolbe. And then you have large payments to hospitals, 
and so forth, so your mean is over $1,000.
    Would you pull the mike just a little closer to you, to 
make it easier for us to hear and for it to get recorded here.

                year 2000 information systems compliance

    Let me start with some questions on the Y2K, because we are 
very concerned about that. You hit it head on. Your view is 
that you are--I think you said that you believe you are on 
schedule and you will be fully compliant. Is that correct?
    Mr. Gregg. Yes, sir.
    Mr. Kolbe. You say that with great confidence.
    Mr. Gregg. I say it with confidence. I also say that it is 
not where--we are not where I would like to be. But I came to 
the Financial Management Service on December 15th. That 
afternoon I had a meeting with all of our senior managers, and 
I said our top priority is year 2000. We have got a lot of 
other things on our plate, but if we do not succeed in that, 
then nothing else is going to matter. And that especially is 
true in the payments area.
    One of the first things I did was made clear to everyone in 
the organization that the assistant commissioner in charge of 
our information resources had authority to speak for me on 
issues dealing with Y2K, and I think that action alone has 
helped to clarify the importance but also who is responsible.

                               y2k budget

    Mr. Kolbe. How much do you have in your budget request this 
year for Y2K compliance activity?
    Mr. Gregg. Just about $2 million in our '99 budget has been 
requested.
    Mr. Kolbe. That is going to be sufficient for an agency of 
the scope that you are talking about?
     Mr. Gregg. We are going to redirect a couple more million 
within our other resources within FMS. So we have--in our 
direct appropriation for '99, we have approximately $4 million. 
I think my own view is that the resources are tight, but I do 
think that we have sufficient resources to do what we need to 
do for Y2K.
     Ms. Killefer. Mr. Chairman, if I could just add to the 
question on '98. As part of the supplemental flexibilities that 
we have asked for, one of the bureaus that we are requesting 
additional funding for is FMS for $7.4 million to actually get 
in contract support and speed up some of the changes that Dick 
is talking about.
    Our feeling is we need to do this in '98, and so the level 
in '99 is much lower because most of the work actually will be 
completed in '98. But we do need additional funding in '98.
    Mr. Kolbe. Your submission here shows $4 million in the 
base level and $2 million in the '99 request, for a total of $6 
million for FMS in the Y2K. Is that----
    Ms. Killefer. For '99?
    Mr. Kolbe. For '99.
    Mr. Gregg. For '99. I believe----
    Mr. Kolbe. That is what I am trying to talk about here.
    Mr. Gregg. Just four.
    Mr. Kolbe. Just four?
    Mr. Gregg. No, it is just four. I am pretty sure I was 
right.
    Mr. Kolbe. This is from the Department of the Treasury.
    Mr. Gregg. One thing that could be confusing, Mr. 
Chairman--and I do not know exactly which one that is--but we 
do have some other sources of funds. Other than our direct 
appropriations, we have some reimbursables from other agencies 
that we----
    Ms. Killefer. We do. It is four in the base level, which is 
what Dick is referring to, and then the additional two comes 
from other sources. So it is six.
    Mr. Kolbe. It is six. Okay.
    Ms. Killefer. Sorry for the confusion.
    Mr. Kolbe. I have not even started here. [Laughter.]
    I am on the first line with the first----
    [Laughter.]
    Mr. Kolbe. But I am going to pass to Mr. Hoyer.
    Mr. Hoyer. Well, I was ready to have you continue, Mr. 
Chairman. I was interested in that.

                       debt collection initiative

    The debt collection initiative--obviously, there has been a 
lot of controversy about that, one of the highest priorities. 
You referenced this, but are you confident that FMS has the 
necessary resources and manpower to accomplish this task?
    Mr. Gregg. I think we do, Mr. Hoyer. There is a lot to be 
done, but the approach that we are taking is to manage and 
direct this effort, as opposed to having a huge number of 
people within FMS do the work. And we have, for example, 
contracts with 13 private collection agencies that will assist 
us. We are doing computer matching.
    So there is certainly a lot of work to be done. I think 
that we do have the resources, and we have--since I have been 
there, we have reorganized that area of FMS, and I think we 
have got some very good managers in there. And they are focused 
on getting the things done that need to be done, and also 
focused on I think, making sure that the expectations are 
realistic, to say how much of the debt that is out there is 
actually collectible, and then focus on what is the best way to 
collect that.
    Mr. Hoyer. On the 13 contracts to which you refer, what is 
the total value of those contracts? Do you know, sir?
    Mr. Gregg. I do not have that right off the top of my head. 
I do know that for the most part--and, well, the contracts are 
set up where they are paid by what they collect. They get 28 
percent of the collections that they obtain, so I am sure there 
is some cost to setting up thecontracts themselves. But I do 
not think there is any payment at all coming out from FMS.
    Mr. Hoyer. So these are contingent contracts?
    Mr. Gregg. That is correct.
    Mr. Hoyer. Sort of like a regular debt collection agency 
would take a percentage of----
    Mr. Gregg. Yes.
    Mr. Hoyer [continuing]. The debt collected. What is the 
total amount of debt that that 28 percent might possibly be 
attributed to?
    Mr. Gregg. We are in the midst of trying to figure that 
out, to be quite blunt.
     Mr. Hoyer. Right.
    Mr. Gregg. The total amount of delinquent debt, of non-tax 
delinquent debt, is $52 billion. And we have gone through the 
largest five agencies, to work with them to assess how much of 
that is, first of all, available for transfer to us for offset, 
how much of it is available for cross servicing.
    And in the process of that effort, which has gone on the 
last two months, the numbers declined quite dramatically 
actually. Beyond that, we have contracted with a private 
contractor to further analyze the debt of not only those five 
agencies but other large creditor agencies to analyze and come 
back to us with a report to say, ``This is our assessment of 
how much of that debt is likely to be collected.''
    Mr. Hoyer. And have you made a determination of that yet, 
ball park?
    Mr. Gregg. No, we have not yet.
    Mr. Hoyer. That is still in process?
    Mr. Gregg. We are still in the process. I expect that by 
the end of March, or very early April, we will have at least 
the first round of evaluations with the large agencies and the 
report from the contractor that we have engaged to help us in 
this. And we would be happy to provide you with that 
information as----
    Mr. Hoyer. Do we have any of the private sector that--maybe 
not analogous debt, obviously. But of the $52 billion to which 
you refer, are we talking about 40 percent, 30 percent, 20 
percent probably being--10 percent?
    Ms. Killefer. Well, I think, as Dick mentioned, it is 
unusual. It does not actually compare with private debt because 
we talk about debt that is already 180 days old, and private 
collection is much closer into the time that the debt goes 
delinquent.
    I think what we are talking about is of the $52 billion, a 
fraction of that--we do not know yet what it is--but it may be 
as low as 10 percent will actually come to FMS for cross 
servicing. And then, of that, given the age of the debt, one 
can look at, once again, small fractions of that being 
collectible, frankly, because of the age of the debt. We do not 
know that yet, though. That is why we are having an outsider 
look at the status of those assets.

                      Debt Collection, Age of Debt

    Mr. Hoyer. What are we doing to accelerate the time of 
initial action that we take vis-a-vis the age of the debt? In 
other words, moving 30 days, 60 days, subsequent to the debts 
being delinquent.
    Mr. Hammond. Well, I think the statute calls for FMS to be 
in receipt of the debt once it becomes 180 days delinquent. So 
the responsibility for managing delinquent federal obligations 
does not even begin at FMS until the debt is six months old.
    Mr. Hoyer. Based upon what Secretary Killefer said, it 
may--well, let me back up. What percentage of their debt are 
the agencies collecting prior to sending them to you? In other 
words, you only get them when they are really tough and the 
probability of collection is pretty small.
    Mr. Hammond. I think one of the issues that is really 
challenging on debt collection across the government is that 
the quality and the type of debt varies widely among agencies. 
You can be looking at secured obligations at HUD, for example, 
dealing with multi-family apartment structures. On the other 
hand, you may be dealing with delinquent judgments and fines at 
other agencies.
    So the quality of the collection capability is really asset 
dependent or debt dependent in many cases. That is why this 
portfolio evaluation is so key to understanding what the 
expectations for this program are really going to be. As far as 
dealing with debt prior to 180 days, though, I think it is 
important to note that OMB has taken the lead as encouraging 
agencies to find ways to create obligations that do not even 
become delinquent.
    And as part of the '99 budget submission, one of the 
President's management's initiatives is, in fact, trying to 
create a better front-end process, which will in turn lead to 
hopefully fewer delinquencies to deal with at the back end.
    Mr. Hoyer. I am not sure I understand the phrase--it is 
certainly desirable--of creating obligations that do not ever 
become debts. And as soon as the private sector learns how to 
do that from the Federal Government, which is pursuing that 
objective, they are going to do it, I am sure. All of us would 
like to do that. What does that mean?
    Mr. Hammond. I apologize for the confusion. In essence, 
what I am saying is that----
    Mr. Hoyer. You do not have to apologize. I would just like 
to know what it means.
    Mr. Hammond. The notion is to try to create obligations on 
the front end which become more collectable, and, therefore, 
are performing such that while they are debt--for example, 
student loans. Student loans are, by definition, debt.
    They should be, however, performing and collectable, and 
there is a number of steps that can be taken at the beginning 
of that process to make the loan more collectable during the 
life of the obligation, such that it never becomes delinquent. 
You never have to send it to a private collection agency. That 
is the point I was trying to make.
    Mr. Hoyer. Obviously, one of the problems with public 
sector debt is that the level of angst regarding collection is 
substantially lower. That is why these debts are so old, 
because the angst of the agency to collect and the consequences 
of non-collection, are not as high as they are in the private 
sector, obviously.
    Now, the larger the organization is in the private sector, 
of course, they simply pass it along to the other consumers, 
and then the other consumers have a one percent or one and a 
half percent premium on whatever their payment is for whatever 
the product or service is, which amortizes that debt that the 
private sector owns. We do not do that, although--well, we do 
do that. We do that at a higher tax rate.
    Mr. Chairman, I will yield to you. You wanted----

                   Debt Collection, Collectable Loans

    Mr. Kolbe. Just one question, just on that issue of 
thestudent loans. I am not sure I understand how you make them better 
collectable. I mean, we set the parameters for who is going to get 
them. Sure, you can make your--do better risk analysis, but then you do 
not--the students do not get the loans.
    Mr. Hammond. I think, you know----
    Mr. Kolbe. I mean, only rich parents' kids get loans.
    Mr. Hammond. I think the question is, really, there are a 
number of steps, as I understand it, and I would really refer 
that to OMB and the Department of Education. But there are a 
number of initiatives that they have underway for improving the 
origination process.

                   Debt Collection, Value of the Debt

    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Gregg, one of the things I think that we need to do in 
FMS, as you look at this, is to make a recommendation to us and 
perhaps the authorizing committees as to whether or not 
receiving debt 180 days old is a realistic enterprise, and 
whether we are spending more money to accomplish it, whether it 
is through contracts to private sectors or through public 
sector employees trying to provide that service.
    That is why I asked you what the value of the debt is--$52 
billion. Obviously, these are all contingent contracts, so 
presumably there is no cost to the Federal Government other 
than the administrative costs of processing the debt notice to 
the debt collector, so that they know what they are trying to 
collect.
    I was not very involved with the Act, but in light of the 
fact that we do oversee the agency that is responsible for 
doing the old debt, the most difficult debt, we ought to 
determine whether or not there is any use in doing that.
    Mr. Gregg. My own----

                  Debt Collection, Percent Collectable

    Mr. Hoyer. If we get down to 10 percent, and then what I 
understand Secretary Killefer saying, it is a small percentage 
of that 10 percent that may be collectable that is actually 
collected.
    First of all, I presume the private sector would start 
dropping out at some point in time, although the sums are very 
large, even at small percentages. At $5.2 billion, you do not 
have to collect $2 million to have a profit, if you--
    Mr. Gregg. I think a couple of things, Mr. Hoyer. First of 
all, the Debt Collection Act is new, and some of the $52 
billion is--the debt there has been there for years and years, 
and that is just something we will have to assess.
    I think on an ongoing basis the idea of having debt 
referred to us after it is six months delinquent is actually 
soon enough, because of the processes that we have for using 
offset, for using cross servicing, for using garnishment, and 
those sort of procedures. I think actually we have many years 
of some debts that have been on the books that probably are not 
collectable. They probably need to be written off. But I think 
going forward, I think the six-month timeframe is probably very 
realistic, in my opinion.
    Mr. Hoyer. Sufficient time in which to get it, and the 
agencies need to work on it in that timeframe.
    Okay. Mr. Chairman, I have a lot of other questions, but I 
will yield back to you and then go a second round.
    Mr. Kolbe. Keep going back and forth here. I am going to 
just follow up quickly on the debt collection there.
    Did I hear you say that there is about $52 billion of 
uncollected debt but only about 10 percent of that is in your 
hands? No?
    Mr. Gregg. There is $52 billion of debt. We are assessing 
this----
    Mr. Kolbe. That is past due?
    Mr. Gregg. Yes, that is past due.
    Ms. Killefer. One hundred eighty days past due.
    Mr. Kolbe. Oh, that is--all of that is 180 days past due?
    Mr. Gregg. Yes.
    Ms. Killefer. That is correct.
    Mr. Kolbe. But only 10 percent of that has been turned over 
to you? I thought it was all supposed to be turned over to you.
    Mr. Hoyer. Mr. Chairman, I think what they are saying is 10 
percent of that is probably collectable.
    Ms. Killefer. Collectable, yes. It could be referred.
    Mr. Hammond. I was going to say, there are two different 
programs. One is administrative offset, where we match federal 
payments against those delinquent debts, and a very high 
percentage of that $52 billion will be put into a debtor 
database for matching against those payment streams.
    There is a very small percentage, just the 10 percent, 
which will ultimately be referred to FMS to be passed on to the 
private collection agencies for independent collection action. 
The statute contains a number of exemptions from referral for 
cross servicing, as well as there are other administrative 
issues with regards to passing that debt through.
    Mr. Kolbe. If 10 percent of that is collectable, roughly 
5.8--we will say $6 billion of that is collectable, and yet I 
think you also said when fully implemented you expected to have 
revenues of about $85 to $100 million annually. So we are 
talking 60 years to collect all of this?
    Mr. Hammond. Keep in mind that of the collectable number, 
we do not know, of that $52 billion, what is collectable. The 
10 percent that you were talking about, the $5.2 billion, is 
the upper range of what may be referred on to the private 
collection agencies for other collection action. It will be a 
percentage, and for some of those debts a very small 
percentage, of that $5.2 billion that those private collection 
agencies will ultimately be able to collect.
    What we do not have for you are meaningful assessments of 
that $52 billion as to its ultimate collectability. That is the 
analysis that is going on right now. It is----
    Mr. Kolbe. The idea of your making some suggestions to us 
in this area, and to the authorizing committees, that Mr. Hoyer 
put to you I think is a very good one.
    It just occurred to me that if this was a private business, 
at the end the private business would have to take a writeoff 
of its debt, and that goes against the bottom line. We do not 
have any system for making the agencies write it off and take 
it against their bottom line.
    Mr. Hoyer. They do have a synergy, though. The taxpayer 
pays in both instances.
    Mr. Kolbe. Yes.

                       Debt Collection, Write-off

    Mr. Hoyer. If they write it off, the taxpayer pays for it 
for lack of revenues against profits. If we write it off, we 
pay for it directly.
    Mr. Kolbe. What I was getting at is if there would be some 
kind of system that might make some of these agencies, before 
they turn it over to you and say, ``This is uncollectible,'' 
give them more of an incentive for collecting some of that if 
they knew that it was going to go against their budget the next 
year or something.
    Mr. Hammond. It is my understanding that OMB is, in fact, 
working with the agencies to try to refine the agencywriteoff 
policies, and then build that into some of the credit program analysis.
    Mr. Hoyer. Mr. Chairman, could I clarify--when you say--am 
I correct that the $47 billion, is what you are saying is there 
may be a set off for payments going to the debtor from the 
Federal Government?
    Ms. Killefer. That is correct.
    Mr. Hoyer. Either in terms of taxes, contract dollars for 
services or goods----
    Ms. Killefer. Or wages.
    Mr. Hoyer [continuing]. Or wages. Is that what you are 
saying?
    Mr. Hammond. Yes.
    Mr. Hoyer. How much of that $47 billion do you think we 
will collect in that way? Because that puts a lot better spin 
on it if you are not talking about losing the $47 billion. See 
what I am saying, Mr. Hammond?
    Mr. Hammond. Yes. What I cannot tell you at this point is 
what we know the additional tools will bring us in collections. 
What I can observe is that what the success of the tax refund 
offset program has been over the past few years.
    In last year's filing season, about $1.8 billion was offset 
through tax refund offset for delinquent federal debts and the 
collection of child support combined. This year, even though we 
are only in the first week of March, we have already offset 
through the tax refund process over $500 million in delinquent 
federal and state child support obligations.
    Mr. Kolbe. I have a series of more questions on electronic 
transfers, but I do not want Mr. Ferguson and Mr. Diehl to feel 
neglected at that end of the table. [Laughter.]

                              new facility

    Mr. Ferguson, let me ask you a few questions. Last year you 
were directed to undertake a study of the most effective option 
for replacing your production facility here in Washington, and 
that was to be submitted by May 1st. You have just sent us a 
letter in the last month asking for a 90-day extension. What is 
the problem? What is going on here? Why do we need that 
extension?
    Mr. Ferguson. Sir, we have requested that extension in 
order to complete the study in its most thorough form. I would 
not classify it or define it as a problem, but rather an 
extremely challenging study that requires a great deal of 
thought, and effort. We have assigned a senior executive to 
lead this study.
    We have put forth a great deal of effort, but there are a 
number of factors that need to be considered--engineering, 
environmental, financial, transportation, security--and we are 
addressing all of those things. We want it to be a 
comprehensive document that the Department and the committee 
can trust and use to make a very, very challenging decision.
    Mr. Kolbe. And when would you expect to make that decision, 
that final decision?
    Mr. Ferguson. Sir, we have asked for 90 days. The report 
then becomes due by August 1st, and that document will then 
serve as the basis for making the decision, which will rely on 
a lot of other people to make that decision in the end.
    Mr. Kolbe. Yes. Ultimately, the Congress, I suppose.
    Ms. Killefer. In consultation with you.
    Mr. Kolbe. In consultation with the Congress on that.
    But you would not expect anything to happen on that in the 
current fiscal year, then?
    Mr. Ferguson. Certainly not the final decision. We will be 
back up here and provide briefings, whatever is required.
    Mr. Kolbe. I want to just turn it back to Mr. Hoyer for 
some more questions. But let me just follow up on that one, if 
I might, to the issue of the new facility--you have all told us 
that about 40 percent of your total capacity--I think that is 
total, or maybe that is just the Washington facility is in $1 
production, is that correct?
    Mr. Ferguson. Currently, about 45 percent of our production 
is in $1 notes, sir.
    Mr. Kolbe. Both facilities.
    Mr. Ferguson. Total facilities.
    Mr. Kolbe. It is about the same at each of them roughly?
    Mr. Ferguson. A little higher in Fort Worth, actually.
    Mr. Kolbe. Mr. Diehl is going to be introducing a new 
design for a dollar coin. If that coin were more successful 
than perhaps people had anticipated, would that not suggest 
something about the size and scope of a new facility that you 
need?
    Mr. Ferguson. Obviously, sir, a number of factors, as far 
as demand projections relate to currency, are of great interest 
in the study. Things that are difficult to project--the impact 
of the new dollar coin that you mentioned, the impact of smart 
cards, debit cards, electronic funds transfer, things that are 
new and coming onto the horizon. Chairman Castle on Banking 
feels very strongly that these things will take over 
completely.
    But, certainly, there are a number of factors that we are 
trying to get our hands on which will, in fact, have a major 
impact on the size and scope of the Bureau of Engraving and 
Printing in total.
    Mr. Kolbe. All of those are going to be included in the 
study, or is the study just of the facility?
    Mr. Ferguson. To the best extent possible, sir, we are 
trying to look at what level demand is a driver in the 
decision. We cannot project all of those factors, and the 
Federal Reserve cannot at this point. So what we are looking at 
is at what point is demand itself a decision factor, and we put 
that in and say if it is more than this, that would force the 
decision in one direction. If it is less, it no longer is a 
driver.
    I will say, though, that we can longer look just at numbers 
of notes as our business. Notes are going to become more and 
more complex. They are going to require more and more 
manufacturing steps as we keep ahead of the counterfeiting 
threats of technology. So, therefore, one of the space issues 
will, in effect, be the potential of adding new manufacturing 
steps to the production of U.S. currency.
    Mr. Kolbe. I have some more questions, but I will yield to 
Mr. Hoyer.

                    current manufacturing capability

    Mr. Hoyer. An issue in terms of--we do not take the same 
steps on one-dollar bills that we do on hundreds and fifties, 
do we, or do we?
    Mr. Ferguson. Currently, at the Bureau, as opposed to in 
the base materials, they go through the same manufacturing 
steps. However, we use more of the capabilities of our 
equipment in putting more features on the high denomination 
notes.
    I will say, though, that if you think of the total 
capabilities of our equipment, we have utilized every possible 
capability on our new currency, and to add any additional 
materials, different features, we will have to add new 
manufacturing steps.

                           facility security

    Mr. Hoyer. Going on to the things that are going to go into 
this, it is my understanding security obviously is a 
significant concern. And I also want to say you are trying to 
quantify in this study the various aspects. Tell me about 
quantifying security. How does that work?
    Mr. Ferguson. Well, sir, you cannot live in our business 
and not go to bed every night worrying about security.
    Mr. Hoyer. We are in the same business, by the way. 
[Laughter.]
    Mr. Ferguson. Right.
    Certainly, a new facility offers the potential of greatly 
enhanced security, especially in the area of perimeter 
security. Director Diehl mentioned protecting against new and 
different types of threats from the outside, as opposed to 
internal theft.
    The issue of the perimeter--protecting the perimeter of an 
urban downtown facility is much more difficult than protecting 
a new site, putting up adequate setbacks with double fencing, 
etcetera. So there is the issue of external security which 
could be enhanced.
    Internal security at a new facility offers better sight 
lines, better camera lines. Designing a building from the 
outset with that in mind provides for the optimization of new 
security technology. However, we cannot, even if we are looking 
at a new facility--sit back and not take advantage of every 
possible security enhancement in our current facility.
    We currently produce about five billion notes in our 
current Washington facility every year, and we will not step 
away from making increased security investments in Washington. 
Trying to quantify that comes down to looking at costs, looking 
at the threat, looking at the potential losses, and trying to 
come up with an analytical way of doing that. It is very 
difficult, but it is one of the major issues in the study.

                        ongoing security issues

    Mr. Hoyer. Continuing on that, it is my understanding the 
Peat Marwick recommendations have been almost fully 
implemented. Is that correct?
    Mr. Ferguson. Yes, sir, they have been almost fully 
implemented, along with the Secret Service recommendations that 
were made several years ago. We are currently going to begin 
this summer a review of all of those recommendations to 
determine that what we said we had done three years ago have 
been maintained. In two years we will have the Secret Service 
back in again for a full evaluation.
    Mr. Hoyer. I think you mentioned this in your statement, 
but obviously there are still some security lapses, which is 
why you stay awake at night or do not sleep quite as soundly at 
night, worrying about whether they have occurred. Assuming that 
we will never get to 100 percent, but that you want to get 99 
point something, pretty high, where did you say we were in 
terms of security breaches at this point in time? Where do you 
want to be?
    Mr. Ferguson. Since our last testimony last year, we have 
had seven incidents reported. These are reports from the field 
where a currency has been reported short in shipments that we, 
upon investigation, feel has the potential to have occurred in 
one of our facilities. They represent approximately $17,500 in 
face value.
    So that would be 99.999 percent, I believe. However, I will 
tell you that that is not an acceptable number.
    Mr. Hoyer. The issue is not so much the amount, although 
presumably the more you steal the more likely one is to find 
out about it. But obviously, if you steal anything, there is 
the possibility you can add volume to the process you are using 
to steal it. Got me? If you have got a wheelbarrow going out of 
the bank and you have got a dollar in it, not much problem 
there. But if you put $100 million and the same wheelbarrow 
goes out, it is a big problem.
    That was my point in terms of how did this--you have not 
found out presumably how this was done at this point in time 
and how----
    Mr. Ferguson. Yes.
    Mr. Hoyer [continuing]. That relates to Peat Marwick's 
recommendations, and do we need to go beyond Peat Marwick's 
recommendations to--that is my point.
    Mr. Ferguson. Yes, sir. I understand it completely now. And 
yes, we have identified how this occurred, and have identified, 
we believe, the individuals responsible who are no longer 
employed. It goes beyond what was recommended and points out 
additional areas that we need to take efforts.
    As I said, we will not step away from those. We are putting 
new efforts in place to address this pilferage level of theft. 
And, again, certainly not to minimize that. It is something we 
take very seriously, and if allowed to proliferate would be a 
big issue. We have 2,600 employees. If they were all taking a 
little bit, that adds up very quickly. Fortunately, we have 
excellent employees, and only a few have availed themselves of 
this and have been identified and removed.

                         workforce skill level

    Mr. Hoyer. Let me ask you one last question on this round. 
The Chairman has been very generous with the time.
    Skill level of the workforce at BEP--I want to know how 
important you think that is, particularly as it relates to the 
existing workforce, and how that will compute into your study 
of siting of new facilities.
    Mr. Ferguson. Sir, we have--perhaps I may be a little too 
self-involved in this, having worked my career there. We have 
the finest workforce of any security plant I have seen anywhere 
in the world, and I have seen a number.
    Our employees are dedicated, they are highly skilled, they 
possess a wide range of skills that could not easily be 
replicated without them, and it is something that, as we look 
at relocation of a facility, we always look at relocating our 
workforce also. We are not thinking of leaving them behind and 
replacing them. That would not be possible in the short term.
    Mr. Hoyer. I hope you are not thinking of leaving them 
behind, period.
    Mr. Ferguson. Oh. Never.
    Mr. Hoyer. Hopefully, you are not thinking of leaving.
    Thank you, Mr. Chairman.
    Mr. Kolbe. I think there was a message there. [Laughter.]
    And it was well received.
    Mr. Hoyer. However subtle it might have been. [Laughter.]
    Mr. Ferguson. It is duly noted.

                              coin demand

    Mr. Kolbe. Mr. Diehl, why is coin demand dropping?
    Mr. Diehl. Coin demand is dropping for a couple of reasons. 
First of all, we know that coin demand is a cyclical business. 
And as an economic cycle matures, coin demand fallsoff as we 
get deeper into it. And this has been an extraordinarily strong and 
long economic growth period. In fact, in 1994, 1995, and 1996, as I 
said earlier, we averaged about 19\1/2\ billion coins a year in 
production to meet the Federal Reserve requirements. And two of those 
three years set all-time records for us.
    So we knew that this period of very high demand would not 
last forever. In fact, we were crossing our fingers that it 
would not last much longer, because we were really stretching 
the production capacity of our people and our equipment through 
1996.
    1997 saw a sharper drop in coin demand than what our 
economic forecasting models indicated we should expect. I think 
it is very clear that most of the reason for that additional 
drop is related to some new technology that has come into the 
market from the private sector, which we call coin recycling or 
coin recirculation technology.
    There are two or three companies that are offering this 
service. One, in particular, is probably the best known, has 
gotten the most media coverage, and its name is Coin Star. 
Since early 1995, they, as an industry, have expanded very 
rapidly. It has been remarkable how quickly they have expanded 
the number of machines and the number of markets that they are 
in. We have seen a substantial impact on coin demand resulting 
from their penetration of more markets.
    Mr. Kolbe. So it just means less coins in circulation?
    Mr. Diehl. What it means is that coins----
    Mr. Kolbe. Coins are circulating faster. They are not--
people are not holding them, so they are----
    Mr. Diehl. That is right. The large stockpiles of coins 
that people store in mason jars and piggy banks and sometimes 
big five-gallon plastic water barrels, are being recycled much 
more rapidly in these markets.
    Mr. Kolbe. Well, is the demand for coins dropping in all of 
the categories of coins?
    Mr. Diehl. They are.
    Mr. Kolbe. The pennies?
    Mr. Diehl. No, it is dropping faster in pennies, and to a 
lesser degree----
    Mr. Kolbe. There were periods of places with severe 
shortages of pennies. Is that no longer true?
    Mr. Diehl. Well, there were some transitory shortages of 
pennies during the peak demand periods of 1994 and 1995, during 
the summer months. But no, there are no shortages. We are not 
getting any kind of reports of shortages like that at this 
time. That is not surprising, because coin demand, in general, 
has fallen off.
    But what we have seen happen is that, as you would expect, 
as people have taken these coins into grocery stores to be 
recycled, they have had a tendency which I think is a natural 
human tendency, when I leave my coins on my dresser top in the 
evening, the next morning I pick out the quarters and the dimes 
and maybe some of the nickels, and it is the pennies I leave 
behind and maybe some of the nickels.
    What we are seeing is that the impact of Coin Star and its 
competitors is very clear on the penny. It is statistically 
significant on the penny and on the nickel, but we are not 
seeing a statistical impact on----
    Mr. Kolbe. Okay.
    Mr. Diehl [continuing]. Demand for the dime and the 
quarter.

                        Susan B. Anthony Dollars

    Mr. Kolbe. How many Susan B. Anthonys do you have in stock 
at the moment?
    Mr. Diehl. We have----
    Mr. Kolbe. And how many did you put into circulation in 
that last year?
    Mr. Diehl. Okay. We have right in the neighborhood of 
around 120 million. Is that right? About 120 million are 
currently in our stockpile. In the last 12 months, demand has 
been at around 48 million a year. That is a significant dropoff 
from what we had seen a year or even two years ago, where it 
had bounced up to around 60 million a year. We are seeing a 
continual month-by-month slow deterioration in demand.
    Mr. Kolbe. And what do you attribute that to? Surely not 
the coin--faster circulation.
    Mr. Diehl. No. We think that the dropoff is related to the 
fact that when the United States Postal Service began 
introducing change machines and stamp machines----
    Mr. Kolbe. I wondered whether that was the biggest----
    Mr. Diehl [continuing]. That use the Susan B, that they 
have stopped their aggressive expansion of the use of those 
machines.
    Mr. Kolbe. Okay. Nonetheless, even at roughly 48 million, 
you are looking at, by the end of 1999, roughly being pretty 
much out of these things.
    Mr. Diehl. Yes. We are currently looking at the April/May 
timeframe of the year 2000 when we would exhaust the supplies.

                            New Dollar Coin

    Mr. Kolbe. When are you going to be prepared to introduce 
the new $1 coin design? What is your plan for the new design 
coin?
    Mr. Diehl. We intend to be in production of the new design 
by January 1, 2000.
    Mr. Kolbe. Do you think you are going to be able to meet 
that?
    Mr. Diehl. I think so, yes.
    Mr. Kolbe. You and I discussed in our office--would you 
share with the committee some potential problems you might have 
in being able to meet that deadline? That is a very tight 
deadline. That is----
    Mr. Diehl. Oh, it is. It is a tight deadline.
    Mr. Kolbe. That is 20 months away.
    Mr. Diehl. Yes, it is very much a tight deadline. We are in 
the process of determining what is the best coin alloy or clad 
material to use to meet the requirements of the legislation--
that it be gold in color, have similar anti-counterfeiting 
characteristics as current coinage does. We have not selected, 
at this point, which clad material. We do not really need to 
select at this point which clad material or which alloy we 
would use.
    We have focused on two possibilities, but we continue to 
work with coin strip manufacturers and suppliers to narrow down 
the range of options and make sure that we are looking at the 
full range of options that should be considered.

                         New Dollar Coin Design

    Mr. Kolbe. Is design holding up the process?
    Mr. Diehl. No. Design is not holding up the process. The 
issue of what image goes on the obverse of the coin or on the 
reverse side of the coin is one that was left to the Secretary 
of Treasury in the legislation that was passed and signed into 
law by the President on December 1, 1997.
    We are working with the Treasury Department to come up with 
an appropriate process by which the Secretary would be advised 
and----
    Mr. Kolbe. So you expect to be able to put that decision in 
front of them at the appropriate time and not have a delay on 
that account.
    Mr. Diehl. Yes, I do.
    Mr. Kolbe. You did mention something about your advisory 
committee and the concerns about the timeframe of getting that 
advisory committee in place.
    Mr. Diehl. Yes. Unfortunately, we are, of course, subject 
to the requirements of the Federal Advisory Committee Act, 
which would impose certain kinds of requirements in terms of 
public hearings and the like. If an advisory committee is 
created to advise the Secretary on this, and if it is subject 
to those FACA requirements, then----
    Mr. Kolbe. The legislation did not require the creation?
    Mr. Diehl. It did not require the creation of----
    Mr. Kolbe. And you do not automatically do that? So you may 
not have to do that?
    Mr. Diehl. It is at the option of the Secretary as to 
whether an advisory committee of some kind is created. And, of 
course, the FACA requirements apply in certain circumstances. 
In other circumstances, they do not apply. For example, my 
understanding is that if the committee were all government 
employees, then the FACA requirements would not be imposed on 
the committee. But if there is anyone from outside the 
government who is not a full-time employee of the government, 
then the FACA requirements would have to be met.
    Mr. Kolbe. Presumably, if you want a real advisory 
committee that is going to help with the acceptance of this new 
design, you are going to want people from outside.
    Mr. Diehl. I think in the best of all possible worlds, we 
would have broader representation.
    Mr. Kolbe. Secretary Killefer is nodding at that. Then, 
does not that suggest that you need to make a decision and 
get--if you are going to have to comply, that you need to get 
moving?
    Mr. Diehl. Yes.
    Ms. Killefer. Just to be clear, because we have been 
working closely on that, we already have a memo in front of the 
Secretary laying out options, and we will be meeting on that. 
So we are moving very quickly.
    We are also proceeding with OMB to request a FACA 
committee, if we need one. So we are kind of parallel 
processing to ensure that nothing holds us up. And I think--as 
we have been working closely on this, I agree with Phil that 
that will not hold us up in the process.
    Mr. Kolbe. Well, but you did say it is how many months, 
roughly, it could be to get a FACA-approved committee?
    Mr. Diehl. Well, we have indications that we can do it 
quickly. We are hoping that we are going to be able to do it 
quickly.
    Ms. Killefer. We have the support of the administration to 
do it quickly.
    Mr. Kolbe. I will believe that when I see that it actually 
happens that way, just knowing how these things actually work.
    Mr. Diehl. The schedule we are on is that by this fall we 
would need to know what the design is going to be on the 
observe. By sometime this fall, we need to know what that 
design is going to be. So we still have five or six months 
ahead of us to make this decision.
    Mr. Kolbe. I have more than taken my share of time here.
    Mr. Hoyer?

                           Labor Negotiations

    Mr. Hoyer. Mr. Ferguson, let me go back to you. Tell me 
about the status of relations with your employee 
representatives.
    Mr. Ferguson. We are in the midst of an extremely 
challenging labor relations issue. A number of years ago, 15 of 
our craft and non-craft unions sought to have the pay-setting 
system become negotiable. After a variety of FLRA and court 
intercedings, the decision was made approximately 14 months ago 
that, in fact, the wage-setting system was negotiable. And 
after a ULP decision in December, it became obvious that, 
negotiations needed to occur.
    We are in the midst of an extremely challenging issue of 
trying to negotiate the wage-setting system with 15 separate 
unions. It is something that in the federal sector there is not 
a lot of experience, quite frankly, on either side of the 
table. And I think that perhaps there were some unrealistic 
expectations on both sides of the table when we started.
    We have made some progress. We are in negotiations with a 
total of nine unions, with six more to come in. And it is my 
firm belief that at the end of the negotiations that our mutual 
interests far outweigh our disagreements, and that we will come 
up with, at the end of this painful process, a much better 
system and actually a much better labor relations. But during 
the process, it is difficult.
    Mr. Hoyer. Okay. When you say you have completed the 
negotiations with nine of the----
    Mr. Ferguson. I said we are in negotiations.
    Mr. Hoyer. In negotiations.
    Mr. Hoyer. With six or----
    Mr. Ferguson. Six are pending to come in to the table. And 
as I said, with the nine, they are at various stages of having 
met and potentially seeking federal mediation to assist us.

                    Cost to Produce New Dollar Coin

    Mr. Hoyer. Okay. Mr. Diehl, what are the costs to produce 
the dollar coin? Have we projected that?
    Mr. Diehl. We are estimating that it is going to cost about 
eight cents per coin to produce the dollar coin. That is based 
on our experience with the Susan B. Anthony, and it is a rough 
estimate but I think it is a pretty good estimate at this 
point.
    Mr. Hoyer. How does that relate to, for instance, the 50-
cent piece? What does that cost us to produce?
    Mr. Diehl. Right about the same, I think. It is right 
around seven cents.

                       Demand for New Dollar Coin

    Mr. Hoyer. Okay. The Chairman, of course, has been a strong 
proponent of this and knows much more about this than I do. But 
my understanding is there is a new poll from CBS News that 
shows about three-quarters of the people do not want a dollar 
coin. That may, obviously, change. And five percent believe 
that the dollar coin should replace the dollar bill. 
Legislation provides that that would not happen. We will have 
both available.
    Do you have any projections as to what those present 
sentiments will have on demand for the dollar coin?
    Mr. Diehl. We expect the demand for the dollar coin to be 
modest, quite frankly. As I indicated earlier, the current 
demand level for the Susan B. Anthony is right around 50 
million coins a year. When a new dollar coin is issued in the 
year 2000, we expect the novelty of that coin to generate a lot 
of publicity, and to create a lot of at least temporary demand 
for the coin, where demand might be as high as 100- to even 150 
million coins. That is a very tiny fraction of our 15- to 20 
billion coin production capacity.
    What I get from the CBS poll that you are referring to, is 
that it showed 74 percent of the American population sayingthat 
they did not want a new dollar coin, I took a couple of things away 
from that. One was that that question has been asked in a number of 
polls over the last seven or eight years, and I think that is the 
highest I have seen that number.
    Usually, there is a little more acceptance of the dollar 
coin, as long as it is not linked to the elimination of the 
dollar bill. That is when it begins to get more controversial.
    The second thing I think it indicates very clearly, is that 
we have a public education campaign to do when we roll out the 
new dollar coin. We need to inform people as to why we are 
producing the dollar coin, what the uses of the dollar coin 
are, and to make sure that we come up with a dollar coin that 
does not suffer the disadvantages that the Susan B did, and 
that it is not confused with the quarter. That is one of the 
reasons why the legislation requires it be gold in color. Also, 
it will have a distinctive edge, so that the sight-impaired can 
tell the difference by touch with a quarter.
    We think that by working with the vending industry, with 
the banking industry, the other intermediaries between us and 
the American public to make sure that we have the kind of 
support for the implementation of this dollar coin, that we are 
going to be able to cover any kind of public resistance to a 
new coin.

                          Mint Reorganization

    Mr. Hoyer. Last question on this round. Your 
reorganization----
    Mr. Diehl. Yes.
    Mr. Hoyer [continuing]. What ramifications will that have 
as it relates to level of workforce? And have you had your 
employee representatives involved in the process?
    Mr. Diehl. Yes. We are going through a reorganization as we 
speak, we are aiming for implementation of that reorganization 
by the end of March. We have worked hand in glove with 
representatives of AFGE as we have put together the 
reorganization plan, the implementation plan, and our 
communication plan with our employees.
    AFGE representatives from each of our facilities have been 
at the table with us the whole time. And we have undertaken the 
reorganization as part of our partnership agreement.
    The reorganization, for the most part, is affecting our 
headquarters employees. It is having very little effect on the 
field facilities. It is rearranging the boxes of our 
organization in order to help us overcome organizational 
obstacles, that we have faced to higher performance for many 
years.
    I think that there are some significant efficiencies that 
will come out of this reorganization, but I think the 
reorganization itself is unlikely to have a significant impact 
on the number of employees that we have at the headquarters.

                             FTE Reductions

    There are some other things that are going on at the United 
States Mint, which are not a part of the reorganization, that 
are more likely to have an impact on our manpower requirements. 
For example, over the last three years we have reduced the 
number of FTEs involved in human resource functions by about 27 
percent. And we are aggressively looking at some options where 
we can reduce that by another substantial percentage over the 
next 12 to 18 months.
    When we finish the implementation on October 1 of our coins 
project, our enterprise-wide information system which includes 
financial management information, manufacturing information and 
is also our primary means of fixing our year 2K problem, when 
that is implemented it will make us far more efficient in the 
way in which we do our financial accounting. And because of 
that efficiency, we will not need as many people doing 
financial accounting work at the Mint as we have today.
    So those two initiatives, in particular, much more so than 
our reorganization, are likely to have an impact over the next 
12 to 18 months on our manpower requirements.
    Mr. Hoyer. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you. We are just starting a vote here. I 
think we can finish this up here.

                      REDESIGN OF ONE DOLLAR NOTE

    I have a couple more questions. Mr. Ferguson, and then I do 
want to come back to Mr. Gregg--Mr. Ferguson, you did not 
mention anything about redesigning the one-dollar bill. Do you 
plan to have a one-dollar bill redesign?
    Mr. Ferguson. Currently, sir, we have completed preliminary 
designs on fives and tens. We are looking at the potential of a 
minimal redesign, if you will, or a minimal alteration to the 
one-dollar note, to incorporate the feature that we added 
starting with the 50 that helped the sight-impaired.
    So we are looking at a minimum issue on the one dollar note 
currently, and I will say that the potential, though, is we are 
looking longer term at the potential of what--the benefits of 
perhaps looking at the substrate and going to new technologies 
in that area, which would require a further redesign in, you 
know, the next century.
    Mr. Kolbe. The $100 bill, with all of the counterfeit 
measures in it, anti-counterfeit measures in it, costs about 
what to produce?
    Mr. Ferguson. Approximately 5.2 cents as compared to our 
mean--our mean cost is about four cents; a one-dollar note is 
about three.
    Mr. Kolbe. Three. So it is not a huge difference there 
between the amounts, even with all of the counterfeiting 
measures in there.
    Mr. Ferguson. Well, it is not huge until you multiply it by 
billions.
    Mr. Kolbe. That is right. I guess, actually, it is. I mean, 
I guess the differential seems less than it was on the coins 
that I was hearing about earlier here, the cost of doing a 
penny versus the cost of doing a dollar coin.
    Mr. Ferguson. I think it is probably the material cost.
    Mr. Kolbe. The material cost, yes, in that. So I would have 
thought the counterfeiting measures would have added more cost 
to that--to the production, but you are saying it does not 
really add all that much.
    Mr. Ferguson. Well, it is close to doubling it.
    Mr. Kolbe. Yes. Actually, you are right; it is close to 
doubling it there.
    Do any of you, either of you, have any concern about four 
separate one-dollar currencies in circulation--Susan B. 
Anthony, a new coin, an old one-dollar bill, and a new one-
dollar bill?
    Mr. Ferguson. From our standpoint, from the issue of 
counterfeit deterrents, which is a major concern for us, having 
consistency is a major plus. It allows the public to only know 
one instrument or a smaller number.
    However, in the case of the one-dollar note and 
thepotential of an altered one-dollar note, they will be so similar 
that the public will easily and readily recognize those two as being 
the same instrument, and counterfeiting of one-dollar notes is not a 
big concern.

                          CURRENCY SUBSTRATES

    Mr. Kolbe. What about the different substrates that you are 
talking about?
    Mr. Ferguson. Yes, sir. Well, we are in the process, as a 
number of the countries that I talked to, of looking at the 
potential of using polymers, plastics, or laminates.
    Mr. Kolbe. Laminates. Yes, I have seen a lot of those. The 
reason is they last significantly longer?
    Mr. Ferguson. Yes, sir. The life cycle costs potentially 
could be greatly reduced, although the substrate itself is more 
expensive. If they last four times the circulation life, then 
the Federal Reserve will recognize----
    Mr. Kolbe. At what point do you think you might actually 
get into doing that?
    Mr. Ferguson. We are looking at it, experimenting with it, 
constantly. And I would not project the note being in 
circulation before, you know, the end of the decade.
    Mr. Kolbe. Okay. Mr. Hoyer, I am just going to ask a couple 
questions of FMS, but go ahead, Mr. Hoyer, if you have a couple 
more questions.
     Mr. Hoyer. No. I think we are probably running pretty 
short on time, if you want to ask a couple of questions.
    Mr. Gregg, just let me wish you the best of luck in your 
new responsibilities. Of course, as you know, I have a 
particular focus on FMS, because it is, obviously, in my 
district or a large part of it. And I am very pleased that the 
setting--which was a little controversial some 10 years ago, 
has worked out well. And I want to make sure that they treat 
you right out there, that our employees feel comfortable and 
healthy and well cared for in the physical setting in which 
they find themselves.
    Thank you, Mr. Chairman.

                       Electronic Funds Transfer

    Mr. Kolbe. Mr. Hoyer, do you have any reason to want them 
to come back after the vote? I want to make sure you have all 
of the opportunities to ask questions.
    Just very quickly, Mr. Gregg, on this electronic transfer--
and for all of you, I will have some other questions for the 
record here. I am really concerned about this electronic funds 
transfer. That is supposed to go into effect next January, is 
that not right?
    Mr. Gregg. That is correct.
    Mr. Kolbe. What steps are we taking to make sure people are 
going to have an account? What is the status of the pilot 
program?
    Mr. Gregg. There is a lot going on here. Just generally, 
first of all, a lot of people are already moving to convert to 
electronics. We have gone from 50/50 in 1995 to 66 percent of 
the payments, the non-tax payments are going electronically 
today. We are working with the Department to establish the 
structure of this ETA account, and we expect within a couple 
months to be able to go out and describe that to the public and 
have a 30-day comment period.
    Mr. Kolbe. Thirty-day comment period? Okay. So when do you 
expect to go to the consumer, the people that are actually 
getting the checks now, and say, ``Hey, January 1st is coming. 
You are going to have a new electronic account.'' Or else you 
have to go through this process, I guess, of filling out a form 
asking for a waiver for this.
    Mr. Gregg. If I may defer to Don Hammond. He has been 
involved in this for quite a while.
    Don?
    Mr. Hammond. I think you have to look at it in just a 
couple of phases. The first component, where January '99 is 
truly the statutory deadline, deals with those individuals who 
have bank accounts today. And, you know, we see no obstacles to 
going out and talking to the individuals who----
    Mr. Kolbe. That deadline applies--okay. Then I was not 
clear on that. That deadline applies only to those who already 
have this----
    Mr. Hammond. The way we have structured it--and we went out 
with a proposed regulation in September--the Secretary has 
broad waiver authority under the statute, so it----
    Mr. Kolbe. And the statute is going to say you are supposed 
to have had it done by January. So you have already conceded 
you are not going to get it done by January.
    Mr. Hammond. The statute gave us kind of a split 
responsibility. It said we should achieve 100 percent 
electronic payments, but it also said that before we could 
require anyone who did not have an account to receive their 
payment electronically, we had to assure access at reasonable 
cost with the same consumer protections.
    So, in essence, we have been struggling with that 
significant other requirement, which is that in order for 
someone to receive payment electronically, they have to have an 
account. And we have to be able to either find that low-cost 
accounts exist throughout the marketplace, which we have been 
unable to conclude, or, alternatively, then come up with 
alternative means of providing them electronic access to funds, 
which is what this ETA account is that is----
    Mr. Kolbe. It is more than just Social Security checks. We 
are talking food stamps are included in this number.
    Mr. Hammond. No. Food stamps are----
    Mr. Kolbe. No. Food stamps are not.
    Mr. Hammond [continuing]. State-administered federal 
payments.
    Mr. Kolbe. State-administered. But you have----
    Mr. Hammond. Those are under----
    Mr. Kolbe [continuing]. A pilot that includes trying that.
    Mr. Hammond. We have an eight-state pilot in the southern 
alliance of states which is a combination Electronic Benefits 
Transfer program, riding the food stamp technology, but at the 
same time allowing the capability of putting a Social Security 
payment on the same delivery device--an electronic card in 
those states. That is already being rolled out in five of those 
eight states. Alabama is statewide.
    Those are optional components. That is one more option for 
someone who does not have an account who--for example, if I was 
a food stamp recipient, this would give me the capability--and 
also an SSI recipient--I will now have the capability of 
receiving both payments on the same delivery request.

                  Electronic Benefits Transfer Pilots

    Mr. Kolbe. Do you consider those pilots a success?
    Mr. Hammond. At this point, it is way too early to know.
    Mr. Kolbe. Do you have an evaluation underway?
    Mr. Hammond. Well, we do have an evaluation underway, 
because, as I said, of the eight states, three of them have not 
even implemented the pilot programs of the states.

                  Electronic Funds Transfer Education

    Mr. Kolbe. Are you designing an--I am sorry I am going so 
quickly, because I have about 60 more seconds here. Are you 
designing an education program that is going to inform people 
how this is going to work? Is that component underway?
    Mr. Hammond. We have a----
    Mr. Kolbe. This looks to me like a massive education 
program.
    Mr. Hammond. It is a huge undertaking for us, and it is a 
massive education campaign to which we have already budgeted 
over $10 million between ourselves and the Social Security 
Administration.
    Mr. Kolbe. Well, it sounds to me like the Y2K people are 
really working on that problem and trying to keep abreast of 
it. I do not see that we are giving the same attention to this, 
and it does not have the urgency I----
    Mr. Hammond. No. I think that perhaps that is--it may be--
you know, we would be happy to come up and explain to you in 
more detail the efforts going on. But I think it is safe to say 
that EFT 99 has received considerable attention within the 
Department.
    Mr. Kolbe. Thank you. I will have some other questions for 
all of you to submit to the record. We thank you all very much 
for coming today and for the candor of your testimony, the 
forthrightness, and the answers you have given.
    The subcommittee stands adjourned.
    [Questions for the record and budget justifications for the 
Financial Management Service follow:]


[Pages 1528 - 1719--The official Committee record contains additional material here.]



                                          Wednesday, March 4, 1998.

                      OFFICE OF INSPECTOR GENERAL

                               WITNESSES

RICHARD B. CALAHAN, DEPUTY INSPECTOR GENERAL
DENNIS SCHINDEL, ASSISTANT INSPECTOR GENERAL FOR AUDIT
    Mr. Kolbe. The subcommittee will come to order. I have just 
been advised by staff that our ranking member, Mr. Hoyer, will 
be a little late, but we have been urged to go ahead and start, 
which we will do, Mr. Calahan.
    This afternoon's hearing will be in two parts. We will be 
hearing from the Deputy Inspector General of the Department of 
the Treasury, and then following that we will be getting into 
general Treasury issues with the Secretary of the Treasury.
    So I would begin by welcoming today Mr. Richard Calahan. 
Mr. Calahan, the role of the inspector general is critical to 
the integrity and effectiveness of the programs in the Treasury 
Department. This is an office that is charged with performing 
financial audits to determine if the agency's financial 
condition is fairly presented, and each of the components of 
it; assessing the adequacy of accounting controls; compliance 
with laws and regulations; overseeing and conducting 
investigations of alleged fraud and abuse; performing program 
audits to promote economy, efficiency and effectiveness; and 
performing audits of contracts awarded by Federal agencies.
    Unfortunately, as recent reviews of the Treasury's 
Inspector General's Office have revealed, the very office that 
is charged with prevent and detecting fraud, waste and abuse in 
the Federal agencies was and perhaps still is fraught with its 
own abuse and problems.
    On January 30th of this year the Permanent Subcommittee on 
Investigations of the Senate Committee on Governmental Affairs 
reported that former Inspector General Valerie Lau and members 
of her staff violated Federal laws, misled Congress, destroyed 
documents relating to ongoing investigations.
    I will be just very candid with you and tell you that I am 
very pleased that Ms. Lau has resigned from the position that 
she held.
    Nonetheless, I think some of the issues still remain. In 
regards to some of the findings of the Senate committee I will 
say this: It is now clear from reading that report that this 
subcommittee was the target of much or some at least of the 
misleading testimony.
    I find this completely unacceptable. I will state for the 
record that in the event this subcommittee is given again 
misleading information in testimony that I will do everything 
in my power to terminate the Office of Inspector General, 
period.
    Our goal today is not only to insure that we have adequate 
funding provided to the Office of Inspector General so it can 
carry out the legitimate responsibilities that it is required 
by law to carry out, but that these responsibilities are 
carried out in an effective and efficient manner, and one that 
is fully compliant with the law itself.
    Mr. Calahan, you are only the Deputy Inspector General, but 
you are in charge until there is a new Inspector General that 
is nominated by the President and confirmed by the Senate.
    It is my understanding that your office has been 
experiencing significant problems with regard to morale as well 
as a very high turnover of staff, and we have what I would say 
lingering questions related to integrity within that office.
    So these are issues that cannot and must not be ignored by 
this subcommittee, nor will they. Given the roles and 
responsibilities of the Inspector General in Treasury, I think 
it is critical that these problems be addressed as quickly as 
possible, and we certainly expect to hear from you on that 
today.
    We certainly look forward to the testimony that you would 
have for us, Mr. Calahan, and at the appropriate time when he 
comes I will recognize Mr. Hoyer for any remarks he would like 
to make.
    I will now turn to you for an opening statement, and per 
our normal custom your full statement will be put in the 
record, and you can summarize it or give as much of it as you 
feel necessary. Mr. Calahan.

                            Opening Remarks

    Mr. Calahan. Thank you, Mr. Chairman.
    I am pleased to be with you today to discuss the Office of 
Inspector General, its current status, and the fiscal year 1999 
budget request.
    Accompanying me today at the table is Mr. Dennis Schindel, 
who is the Assistant Inspector General for Audit.
    I would like first to assure you that there was never any 
intention on my part to mislead you in any way at last year's 
hearing.
    While it is true that we have had a difficult year, it is 
also true that we have accomplished a great deal and are poised 
to do more in the coming year, and this is largely due to the 
fact that we have a very dedicated group of career civil 
servants working in our office.
    For example, we have one of the strongest financial 
statement auditing capabilities in the IG community. Perhaps 
our greatest contribution this year was our audit work on the 
Department's financial statements.
    This year Treasury will issue the first fully audited 
Department-wide financial statement. We have played a big part 
in making this happen.
    Regarding the future, we have identified eleven issues that 
we believe are the most important challenges facing the 
Department. These are described in more detail in my prepared 
statement, and we have provided committee staff a copy of our 
letter to Congressman Armey.
    We have work planned or in process in each of these areas, 
which are detailed in an attachment to that letter.
    One area that is very important is Year 2000 compliance, 
and I would like to briefly describe what we are doing to 
address this issue. We have a two-phased approach for 
evaluating the Department's efforts, to make its information, 
telecommunications and other systems Year 2000 compliant.
    In phase one we are reviewing the Department's financial 
systems for compliance with the Federal Financial Management 
Improvement Act. In phase two, we will assess whether the 
Department and the Bureaus are effectively managing the Year 
2000 conversion.
    At a minimum, we will look at the systems certification 
process, contingency plans, and cost estimates. Our goal is to 
alert the Department to any major risks which need immediate 
attention.
    Our audit will be coordinated with GAO and the IRS Chief 
Inspector who also have work ongoing and planned in the 
Department.
    We are also reviewing the Financial Management Service's 
strategy for implementing the Debt Collection Improvement Act, 
including its development of information systems to identify 
issues which could delay collection activities.
    In addition, we plan to continue monitoring and reviewing 
the activities of the IRS within our existing resources. We 
currently have more requests for oversight and investigative 
work at the IRS than ever before.
    We are moving forward from the problems of the past to turn 
the focus of the OIG to increase productivity and efficiency.
    Thank you for your support and with your help we will look 
forward to a future of productive service.
    [The statement of Mr. Calahan follows:]


[Pages 1724 - 1736--The official Committee record contains additional material here.]



    Mr. Kolbe. Thank you very much, Mr. Calahan. As I suggested 
at the outset, when Mr. Hoyer got here I would call on him for 
any remarks he may have. We did go ahead, at the suggestion of 
your staff and begin, and I have made my opening statement, 
which I just provided you, Mr. Hoyer.
    So I would like to call on you for any opening remarks you 
would like to make before we go to questions. And I understand 
that you have to be in and out. So as a matter of fact, after 
you finish your opening remarks, if you would like to begin 
with questions, please go ahead.
    Mr. Hoyer. Thank you, Mr. Chairman. I am not going to ask 
any questions. I have a couple for the record, because we have 
a bill on the Floor that I am involved with.
    I have had an opportunity to read the statement of the 
Chairman, and I share the Chairman's views. I want to say, as 
well, that I have a certain degree of reticence about the 
Inspector General's position. I think it is--and I mean 
generally, not in terms of particular performance.
    I think inspector generals need to be very careful. My 
concern is that the IG position will become a discouraging 
factor as it relates to innovation and entrepreneurial spirit, 
which the Vice President and all of us hope occurs in 
government.
    Risk taking is not necessarily the first rule of government 
service. And it is not the first rule of government service, 
first of all because if one takes risks and wins, the profits 
are not necessarily observable.
    You do not necessarily get the praise, and certainly you 
don't get the profits, because we are not in business with a 
bottom line. But on the other hand, if you fail, this 
committee, Senate committees, House committees, the newspapers, 
the public and the inspector general will be looking over your 
shoulder.
    And while we want to be vigorous in our attempt and 
commitment to get rid of fraud, waste and abuse in government, 
the taxpayers expect that and we expect it. I know Secretary 
Rubin expects it, and we need to do that, because we need to 
have the confidence of the American public that their tax 
dollars are being spent wisely and efficiently.
    But if the actions of the inspector general in each of 
these Departments is perceived to be sort of a Robespierre 
looking over the shoulder, what it does is it makes everybody 
hide and take the more careful route, and keep their head down, 
and not express dissent, and not take risks.
    We will have saved a dollar of fraud and lost a hundred 
dollars of entrepreneurial, innovative spirit which may have 
made a real difference.
    That does not deal with the specifics to which the 
Chairman's statement spoke. But it seems to me throughoutthe 
Government we ought to really be talking within the fraternity of 
inspector generals that they be very careful that that is not 
happening.
    We have abroad in America today an evil, denigrating, 
negative inclination to investigate everybody for everything. 
And we do not stop until we get something, and the more money 
we spend on it, the more incentive there is to get something.
    And I am very concerned about it. I have been concerned 
about it not just in the recent investigations of the 
President, which I think have gone far beyond the pale, and are 
deleterious to our democracy--not just to this President, but 
to our democracy.
    I was concerned about it in my own State and on a 
continuing basis. Again, going much broader than your 
particular responsibility and certainly there is no allegation 
that you are doing anything wrong. I want to make that clear.
    I just make these as general remarks following up on the 
Chairman's remarks. I share the Chairman's deep concern over 
the actions of the Inspector General. I, too, am pleased that 
she has resigned.
    Resignation, perhaps, was the quietest way to go in this 
instance. But in a much broader sense, without allegations of 
any wrongdoing, simply the office itself, if it has a chilling 
effect on executive and employee innovative action, will not be 
helpful.
    Thank you, Mr. Chairman. I appreciate that opportunity and 
I will probably run out as soon as the staff tells me I am 
going to get ready to do something on the Floor. Thank you, 
sir.
    Mr. Kolbe. Mr. Hoyer, if you would like to ask a couple of 
questions--if you have any that you would like to ask I would 
be happy to yield to you for that.
    Mr. Hoyer. I may have a couple of questions but I would 
just as soon have them included for the record.
    Mr. Kolbe. For the record. Okay.
    Mr. Hoyer. Thank you.
    Mr. Kolbe. Thank you very much.

                          internal operations

    Let me begin by talking a little bit about--you talked 
about the problems of this last year in your statement, and you 
alluded to that in your opening comments, and I understand that 
you have had a study which has been done to try to evaluate 
employee morale, and I think diversity is the term that was 
used.
    And I would wonder if you would characterize the results of 
that study for us, and how you would grade the current morale 
of your Department.
    Mr. Calahan. Well, in regards to the study, I do not 
believe this study was very effective. In regards to current 
morale, I think current morale has some serious problems.
    Mr. Kolbe. On the study, let me interrupt. Am I correct, it 
was $345,000? Is that correct? Do you know?
    Mr. Calahan. I want to be really careful with that.
    Mr. Kolbe. Well, I am not trying to trap you. I was trying 
to get some idea of what was spent on that. Is that roughly 
correct?
    Mr. Calahan. That is roughly correct. And you are referring 
to the KLS study?
    Mr. Kolbe. Yes, the KLS study. Go ahead with regard to the 
comments about morale.
    Mr. Calahan. With regard to morale I think there are three 
really significant things that we need to do. We need to hold 
employees accountable. You have indicated that there are carry 
over issues, if I may allude to them that way. And I think 
that's true. We must hold employees accountable and we must do 
it fairly and judiciously and with all due deliberation.
    I think that we need to make procedural changes, and I have 
outlined broadly what some of those changes would be in our 
long statement. And then I think we need to have a focus on 
productivity and quality of production in the Office.
    I think the only way that you really develop morale in the 
Office is for employees to have pride in the products they are 
producing. So that would be my response to your question.

                            staffing levels

    Mr. Kolbe. What is your current staffing? How many do you 
have on board right now? What is your authorized staffing, and 
how many do you have on board?
    Mr. Calahan. We have 292 FTEs, and right now we have on 
board 264.
    Mr. Kolbe. How many, can you tell me--and if you cannot, I 
will ask it for the record--but how many of your employees have 
you had that resigned or transferred out of the IG's office in 
the last six months?
    Mr. Calahan. I do not know that I have a six month figure. 
I would have to provide that for the record. We had 40 
employees leave in fiscal year 1997, and 15 so far this year.
    Mr. Kolbe. Does that constitute, roughly, a normal 
turnover?
    Mr. Calahan. No.
    Mr. Kolbe. That is higher than normal?
    Mr. Calahan. Sure.
    Mr. Kolbe. Were some of those 40, when you say left, were 
they transferred out?
    Mr. Calahan. The word, transfer, would be inappropriate. 
Some of those folks left for promotions. There was a new Postal 
IG that just started last year. The new IG at the Postal 
Service used to be an employee at the Treasury IG's office, so 
this person hired many of our staff members.
    There has also been some hiring by a couple of the other IG 
offices, and we lost several people to promotions to other 
offices.

                               new hires

    Mr. Kolbe. Are you actively seeking replacements for the 
ones who have gone?
    Mr. Calahan. Of course.
    Mr. Kolbe. Are you having any success? Are you getting 
people in?
    Mr. Calahan. Oh, yes.
    Mr. Kolbe. How many people have you hired in the last 
couple of months, or since the first of the year?
    Mr. Calahan. We have a large number of people that are 
currently going through security clearance. I think we had a 
group of nine or so that was just cleared last week, and so we 
are hiring people.
    It is not a situation where people are reluctant to come to 
work for the Treasury IG's office. I just interviewed a couple 
of folks last week. They both very much wanted the job, and 
they were both high quality employees.
    So I do not think that is a problem.
    Mr. Kolbe. What kind of impact is all this having on your 
office and your missions?
    Mr. Calahan. I think that the answer to that has some 
complexity, I think. In terms of Mr. Schindel's office, I don't 
think the impact was very great.
    The Office of Audit continued performing its mission, I 
think, at a very high level. I think the same is probably true 
of our Office of Evaluations and the Administrative Office.
    But for our Office of Investigations this has been a 
difficult period of time.
    Mr. Kolbe. I have a number of other questions. But let me 
see if Mrs. Meek has any questions.
    Mr. Meek. No questions, Mr. Chairman.
    Mr. Kolbe. All right, Mrs. Meek, then I will proceed.

                 administrative problems and operations

    Turning the focus of the questions here from your staffing 
numbers, it is likely that you are going to be the acting IG--
knowing the problems of getting and vetting people, and getting 
them through the process, and then naming them and then getting 
them confirmed--that you are likely to be the acting Inspector 
General for some time. I am wondering if you could describe for 
me some of your plans to address the management issues that 
have troubled this office for the last few years.
    Mr. Calahan. Again I think that we have repair work to do. 
I think that in response to the GAO report there are several 
procedural changes that both the Department and the IG's office 
has undertaken.
    Regarding the Office of Investigations, I think there are 
some procedural changes that are appropriate and are under way, 
the largest of which would be to put in place a new management 
information system, so that we have better communication on 
cases, and so that management has a better opportunity of 
knowing what is occurring on cases, and more of an opportunity 
to supervise cases.
    That is a real key, I think, to what we are undertaking. We 
are providing for better security for investigative documents 
to help assure that in the future it will never again become 
public knowledge that there are folks who are subjects of an IG 
investigation.

                            internal affairs

    And then in terms of another issue that has been at least 
raised by inference is the issue that the IG's office doesn't 
really have an internal affairs office. And we are studying 
ways to approach that problem.
    Mr. Kolbe. I'm sorry. Would you repeat that last--what did 
you just say?
    Mr. Calahan. That the Office of Inspector General needs an 
internal affairs office to----
    Mr. Kolbe. An internal affairs within your own IG office.
    Mr. Calahan. That's right.
    Mr. Kolbe. That's what I thought I heard. Is there any 
other IG that has an internal affairs office?
    Mr. Calahan. Absolutely.
    Mr. Kolbe. Is that right?
    Mr. Calahan. Absolutely. I think several of the other IG 
offices have already taken steps along those lines to provide 
themselves an independent, internal way of providing for 
accountability. I think it is something that has been fairly 
well discussed, even in the papers, is the issue having to do 
with how do the IGs hold their own employees accountable.
    And there is something called the President's Council on 
Integrity and Efficiency PCIE Integrity Committee that has 
jurisdiction over the IG and the Deputy Inspector General, but 
not over the staff.
    Mr. Kolbe. Excuse me for interrupting. PCIE is an 
abbreviation there that we need for the record.
    Mr. Calahan. The President's Council on Integrity and 
Efficiency.
    Mr. Kolbe. And what is that?
    Mr. Calahan. That is the group of--all of the IGs are 
members of the PCIE, and it is chaired by the Deputy Director 
for Management at OMB.
    Mr. Kolbe. Kind of the club.
    Mr. Calahan. People refer to it that way.
    Mr. Kolbe. Go ahead. Excuse me.
    Mr. Calahan. And the Integrity Committee was established in 
effect to police the PCIE community at the higher levels with 
the thought that if there is a problem with an employee at a 
lower level, the inspector general would be able to find a way 
to deal with that internally.
    And sometimes that doesn't work out too well. And so 
several of the IGs have established in effect a small cadre of 
investigators, reporting directly to them, who do high level 
projects and internal affairs investigations.
    Mr. Kolbe. Have you sought counsel, or independent 
evaluation from the PCIE?
    Mr. Calahan. Yes. We sought----
    Mr. Kolbe. Since you have been the acting?
    Mr. Calahan. No.
    Mr. Kolbe. That took place earlier?
    Mr. Calahan. No. The answer to that question is yes, I 
have.
    Mr. Kolbe. Yes you have since you have been the acting.
    Mr. Calahan. That's right.
    Mr. Kolbe. And just give me the nature of what you have 
asked. Have you asked them to come in and do a formal review? 
Or what?

                               psi study

    Mr. Calahan. Well, the PCIE report made no recommendations 
to the IG's office. The PCIE report made recommendations to--
I'm sorry, the Permanent Subcommittee on Investigations (PSI) 
report. I think I said PCIE.
    The PSI report made no recommendations to the IG's office, 
but rather to the PCIE Integrity Committee. And so when we 
received that report, we weren't actually charged with doing 
anything as a result of it, but I sent it back to the PCIE 
Integrity Committee and asked them for advice, in terms of 
would they be able to provide us advice on how to deal with the 
matters reported in that report.
    Mr. Kolbe. Mr. Calahan, is anyone who is accompanying you 
today currently being reviewed by the PCIE and/or the 
Department of Justice Office of Public Integrity as a result of 
this Permanent Subcommittee on Investigations Report?
    Mr. Calahan. I think it would be better if we did not 
discuss that.
    Mr. Kolbe. All right. I assume then, I take it thatthere 
may be individuals who are under review.
    Mr. Calahan. I would be happy to be totally open with you 
on this matter in a smaller setting.
    Mr. Kolbe. When an individual is named or when you are 
informed that somebody is under review, what kind of action do 
you take under those circumstances, normally? Is there 
suspension of the individual, or is it noted and that is it?
    Mr. Calahan. There is a great variety in terms of what 
could occur. It depends on the situation.
    Mr. Kolbe. As noted in the PSI report here, last year in 
testimony before this subcommittee, when asked about the Office 
of Inspector General's investigation of Secret Service agents, 
the Inspector General, Valerie Lau stated, and I quote, ``This 
has never been an investigation of the agents, as you 
mentioned. It was an investigation regarding the process by 
which the Secret Service develops and maintains access lists to 
the White House in that they may have been relied on to obtain 
FBI files.'' unquote.
    I realize that is not your statement, but I am wondering if 
you would on behalf of the OIG's office, whether you would 
maintain that that statement is an accurate statement today?

                      secret secret investigation

    Mr. Calahan. Mr. Chairman, I think it is knowledge at this 
point that the investigation was begun on October the 2nd of 
1996, and was recorded in our files as an investigation of two 
Secret Service agents.
    And what I want to tell you is that I did not become aware 
of that myself until April the 11th of 1997, when members of my 
staff informed me of that.
    I was sitting before you when the Inspector General made 
that statement, and when she made it I did not think it was an 
inaccurate statement. The day I found out that the two agents 
had been listed in our files as subjects of the investigation, 
I called--including a staffer of this committee--I called 
staffers all over the Hill all afternoon, letting people know 
that.
    And all I can do is apologize to you for the occurrence. I 
do not know what more I can do at this point.
    Mr. Kolbe. So you are saying you took, as soon as you knew 
of it, you took the corrective action.
    How did it come to your attention, you said, on April 11th? 
What was it? A staff meeting?
    Mr. Calahan. Yes, it was. What occurred in terms of 
background, it became disconcerting to me that we had a real 
problem, I think, in terms of communication with the Hill. From 
our perspective we were looking at that investigation from one 
point of view, and from the perspective of several staffers in 
some of the key offices, they were looking at it from a totally 
different point of view, and we just could not understand the 
situation.
    So I asked the Inspector General if she minded if I would 
go up and just hold some meetings with staff people. And we met 
with folks from several of the Senate offices, and as a 
result--and I brought the investigators along with me.
    I was later informed that as a result of those meetings 
there were conversations between our investigators, that it 
looked like the Hill probably knew that these people were 
subjects at one time and it was time to inform the boss that 
this was the situation.
    And so I was informed that there was something important we 
have to tell you, and they set up a meeting with me and they 
just flat told me.
    Mr. Kolbe. They just flat told you?
    Mr. Calahan. They just told me. They just told me what had 
actually occurred that first week of the investigation.
    Mr. Kolbe. And you took steps to correct that, and you did 
it verbally, but not with a letter? Is that correct? I don't 
believe there was a letter.
    Mr. Calahan. There was.
    Mr. Kolbe. There was? To the committee?
    Mr. Calahan. The Inspector General signed a letter out to 
you, and I don't remember who else. The matter was immediately 
referred to the PCIE Integrity Committee. There was a letter to 
you, and I would be happy to find it.
    Mr. Kolbe. Acknowledging----
    Mr. Calahan. Yes. I would be happy to find that letter and 
get it to you.
    Mr. Kolbe. I do not doubt your word on that. I just do not 
remember that letter, and I would have thought I would remember 
that letter. It would have been dated around that time?
    Mr. Calahan. I think it was dated the following Tuesday. So 
it would be the 15th or something. I would be happy to find 
that for you.
    Mr. Kolbe. Mrs. Meek?
    Mrs. Meek. Thank you, Mr. Chairman.
    Mr. Calahan----
    Mr. Calahan. Mr. Chairman, I have the letter in front of 
me. Could I give it to someone to provide you?
    Mr. Kolbe. Yes, of course. And we will put it into the 
record at this point as well.
    [The information follows:]


[Pages 1744 - 1745--The official Committee record contains additional material here.]



                      audit and investigative work

    Mrs. Meek. Mr. Calahan, perhaps the chairman has asked you 
a similar question, but I would appreciate it if you would 
address this one.
    Why is it that your Department does not have single audit 
and investigative responsibilities? Why is that not in one 
entity? It seems to be proliferated between these other 
agencies.
    It would seem to me in any management kind of organization 
that this would in some way inhibit your propensity for doing 
good audits.
    Mr. Calahan. Thank you for the question. That is in fact 
true. In fact, one of the central tenets of the IG concept, as 
it was originally formulated, back in the old days when I 
worked at the HEW Office of Inspector General, the first 
inspector general's office was at HEW.
    One of the central tenets was to put the non-program audit 
and investigations functions in the IG's office. And when they 
established the IG's office at the Treasury Department, that 
was not done.
    There are internal affairs components in each of the 
enforcement bureaus. There is, in fact, a larger office at the 
IRS. The IRS Chief Inspector's Office is four times larger than 
ours.
    In fact, that is a major flaw that I think Senator Roth is 
looking at now, in seekingways to correct this very important 
function at the IRS, by providing independence, that is at least 
comparable to what IGs have.
    Mrs. Meek. It appears from your statement that most of your 
audit reports are concluded after the activity is finished. Is 
that normal procedure? Would it not help the unit more if you 
were to do some proactive kinds of audits, so there would be 
some things that could be pointed up ahead a time, and not 
cause trouble later?
    Mr. Calahan. That's a very good question. The audits, as 
they have historically existed in terms of just functional 
responsibility, audits look at the past. And historically that 
has been the case in the audit community, that audits look at 
past issues, develop information on past issues, report on past 
issues.
    I think one of the great success stories that we have had 
in the Office of Inspector General is that, particularly in 
terms of our financial statement audits, where we find material 
weaknesses, other difficulties that put the different 
components of our Department in a situation where they cannot 
get a clean opinion on their financial statements, we provide 
them assistance and give them advice on how they can improve 
operations so they can get a better report next year.
    And I think that is one of the real successes that our 
office has had.
    Mrs. Meek. Thank you.
    Mr. Schindel. I would just like to add that we have a 
number of other audits that take that approach. We are 
currently looking at FMS's, the Financial Management Service's, 
planning of implementation of the Debt Collection Act. That is 
not fully operational yet, and we are looking at how 
effectively that is being brought on line.
    Mrs. Meek. Thank you.
    Mr. Calahan. And I could also talk about our evaluations 
office and the work it does to look to the future of 
organizations. Right now our Office of Evaluations is reviewing 
the strategic planning function at FMS to determine what they 
are doing now to plan for the future.
    I think that is an important role that IGs can perform. I 
totally agree with you.
    Mrs. Meek. Thank you, Mr. Chairman.

                       timeframe of investigation

    Mr. Kolbe. I just have a couple of more questions, but one 
first follow up, and I thank you for providing me with the 
letter which as I said we will place in the record.
    But I am a little puzzled. The Inspector General was here, 
and on February 26th of last year, in response to a direct 
question, says there has never been an investigation of the 
agents as you mentioned.
    Why would not someone from the IG's office in the audience 
or reviewing this, would not know about that earlier than seven 
weeks later or six weeks later, when you apparently were 
informed, seven weeks later when the letter was written?
    Why would it take that long to find this discrepancy in the 
testimony?
    Mr. Calahan. It is actually worse than that. The prior, I 
think December the 3rd, Senator Shelby held----
    Mr. Kolbe. Asked the same question.
    Mr. Calahan. Asked the same question, got the same answer, 
and folks intimately involved with the investigation were at 
that hearing.
    Mr. Kolbe. And knew.
    Mr. Calahan. Did not choose to inform either her or me.
    Mr. Kolbe. All right. We will leave that for the moment 
here.

                          oversight of the irs

    Let me just ask you a couple of questions about OIG's role 
with the oversight of the IRS. I think you testified a month 
ago before the Senate Finance Committee in connection with the 
IRS restructuring legislation, about the importance of 
establishing an independent oversight of the IRS.
    Is that correct? Or would you just summarize briefly the 
testimony you gave then?
    Mr. Calahan. I would be happy to. Succinctly, my testimony 
boiled down to the fact that the IRS chief inspector's office 
performs one of the most critical investigative and audit 
functions in the Government and has a staff of 1,200 people, 
but does not operate under IG independence.
    And you have, really, a proliferation of IGs. You have 
almost 60 IG offices, and many of them performing functions 
that are--I mean, they are important functions, but they are at 
a lower level, I think, in terms of criticality.
    And therefore for some reason the Government over this long 
period of time has chosen to leave in place this critical 
function at the IRS without IG independence. Chief Inspector is 
not presidentially nominated with Senate confirmation. IGs can 
only be removed by the President. This is not true of the Chief 
Inspector. IGs have a non-interference clause. That is, the 
Secretary cannot interfere with an audit or an investigation.
    Most IGs have their own legal counsel. There is a large--in 
fact, in my testimony I provided a list of elements of IG 
independence that the Chief Inspector's Office does not have.
    And so basically my testimony was it is time to reconsider 
this.
    Mr. Kolbe. But your office has that independence, does it 
not?
    Mr. Calahan. It does.

                      ig's oversight role with irs

    Mr. Kolbe. And do you not have any current 
oversightresponsibilities for IRS?
    Mr. Calahan. We do have oversight, dotted line 
responsibility. But understand, the chief inspector reports to 
the Deputy Commissioner of the IRS.
    Mr. Kolbe. I'm still not perhaps following. If something 
develops that requires your attention, you are able to go in 
independently and look at that, is that not correct?
    Mr. Calahan. That's true, within resource constraints. You 
understand that we have an FTE limit of 292 to devote to----
    Mr. Kolbe. All of Treasury.
    Mr. Calahan. That's right. And the chief inspector's office 
has an FTE complement of 1,200, although I think that is 
declining some, to devote just to IRS.
    In fact, we just finished a review of their planning 
process to see what are they doing, and how are they deciding 
what to do. And we do get involved in terms of critical 
activities. And we get a lot of Congressional requests these 
days asking for specific oversight of specific investigations 
or audits that are being performed to insure that independence 
is in place.
    But your concept is correct. We have that. In fact, one of 
the key issues over the years that we have been involved in is 
Integrated Data Retrieval System (IDRS), which is a computer 
snooping problem that the IRS had with their employees 
reviewing tax files that they had no need to be reviewing.
    And we have done two reviews on that over the last couple 
of years.

           future structure of IRS' Chief Inspector's Office

    Mr. Kolbe. Just so I understand, then, would it be your 
contention that the independence of this office, or raising 
this office of the status of an IG, within IRS, is more related 
to the sheer size of IRS and the need to separate this out from 
the other functions, the other responsibilities that you have?
    Or is it because of the nature of the work that is done? In 
theory you could put all 1,200 of those people directly under 
your responsibility, and you would have one IG for Treasury. 
And some of them are devoted to IRS and some are devoted to 
other functions.
    Mr. Calahan. Theoretically, you could. There is a variety 
of suggestions that have been made to resolve this matter.
    One was that. Another would be for there to be a separate 
IG for IRS reporting to the Deputy Secretary of the Treasury. 
Another would be for there to be a separate IG for the IRS 
reporting to the new board that is being discussed for the IRS.
    Another would be for there to be a separate IG for the IRS, 
but have it report to the IG at the Treasury Department. And so 
there are a variety of different options that are being 
discussed.
    Mr. Kolbe. Okay. Mrs. Meek, do you have any other 
questions?
    Mrs. Meek. No, Mr. Chairman.
    Mr. Kolbe. Mr. Calahan, we will probably have other 
questions for the record.
    [Questions for the record and budget justification material 
follow:]


[Pages 1750 - 1813--The official Committee record contains additional material here.]



    Mr. Kolbe. After that I think that completes our questions 
for the day, and we thank you very much.
    Mr. Calahan. I thank you.
    Mr. Kolbe. We expect to have Secretary Rubin here in less 
than 15 minutes so we will stand briefly in recess until that 
time.





[Pages 1815 - 1956--The official Committee record contains additional material here.]













                           W I T N E S S E S

                              ----------                              
                                                                   Page
Baity, W.F.......................................................   279
Banks, S.H.......................................................   441
Basham, W.R......................................................   339
Calahan, R.B.....................................................  1721
Cottini, Matthew.................................................   279
Dalrymple, John..................................................   939
Diehl, P.H.......................................................  1479
Ferguson, T.A....................................................  1479
Gregg, R.L.......................................................  1479
Gross, Arthur....................................................   939
Hammond, D.V.....................................................  1479
Kelly, Raymond...................................................     1
Killefer, Nancy...............................................733, 1479
Magaw, J.W.......................................................   135
Merletti, L.C....................................................   615
Riley, Mary......................................................   615
Rossotti, Charles................................................   939
Rubin, Hon. R.E..................................................1, 733
Schindel, Dennis.................................................  1721













                               I N D E X

                              ----------                              
Department of the Treasury:
                                                                   Page
    Community Development of Financial Institutions..............   464
    Coordination with Justice....................................   463
    Customs--South Florida Area..................................     5
    Funding Disparity Between Treasury and Justice............3, 13, 15
    FY 1999 Budget Request.......................................     7
    Introduction.................................................     1
    Law Enforcement Resources....................................    14
    Law Enforcement Summary......................................     6
    Prepared Statement of Under Secretary Kelly..................    20
    Prepared Statement of Secretary Rubin........................    10
    Questions Submitted for the Record by Congressman Alderholt..   108
    Questions Submitted for the Record by Congresswoman Northup..    32
    Questions Submitted for the Record by the Committee..........   107
    Treasury Justification for FY 1999--Summary..................   110
    Under Secretary for Law Enforcement..........................    17

Bureau of Alcohol, Tobacco and Firearms:
    ATF Chief Financial Officer's Audit Opinion..................   136
    ATF Explosives Inspections.................................370, 371
    ATF--Gang Resistance Education and Training Program..........   364
    ATF GREAT Program............................................   367
    ATF Opening Statement........................................   135
    ATF Personnel................................................   137
    ATF Staffing.................................................   368
    ATF Strategic Plan...........................................   136
    Bureau of Alcohol, Tobacco and Firearms Budget Justifications   227
    Conclusion...................................................   137
    Federal Firearms Licenses....................................   372
    National Integrated Ballistic Imaging Network................   368
    Prepared Statement of the ATF Director.......................   138
    Questions Submitted for the Record by Congressman Alderholt..   218
    Questions Submitted for the Record by Congressman Forbes.....   203
    Questions Submitted for the Record by Congressman Istook.....   187
    Questions Submitted for the Record by Congresswoman Meek.....   224
    Questions Submitted for the Record by Congresswoman Northup..   206
    Questions Submitted for the Record by the Committee..........   172
    Semiautomatic Firearms.......................................   373
    Violent Crime Coordinator Program............................   136
    Youth Crime Gun Interdiction Initiative......................   136
    Youth Crime Gun Interdiction.................................   468

Financial Crimes Enforcement Network:
    Artifical Intelligence System................................   284
    Case Support.................................................   279
    Financial Crimes Enforcement Network Budget Justifications...   310
    Financial Intelligence Units (FIUs)..........................   282
    Prepared Statement of FinCEN Deputy Director.................   288
    Progam Initiatives...........................................   287
    Questions Submitted for the Record by Congresswoman Northup..   308
    Questions Submitted for the Record by the Committee..........   301

Federal Law Enforcement Training Center:
    Charleston Facility..........................................   375
    Conclusion...................................................   377
    Federal Law Enforcement Training Center Budget Justification.   382
    FLETC Management.............................................   374
    FY 1999 Initiatives..........................................   340
    Intelligence Units...........................................   375
    International Law Enforcement Training.......................   341
    Master Plan Construction.....................................   340
    Opening Remarks..............................................   339
    Prepared Statement of the Director of FLETC..................   342
    Questions Submitted for the Record by Congresswoman Northup..   379
    Questions Submitted for the Record by the Committee..........   378
    Strategic Plan Goals.........................................   340
    Video on Center Operations...................................   341
    Workload Increases...........................................   340

United States Customs Service:
    Chart of Cocaine Seizures in Commercial Cargo................   467
    Coordination of Resources....................................   472
    Corruption...................................................   474
    Customs FY 1999 Budget Request...............................   441
    Customs--Drug Seizures.......................................   365
    Customs--Rail Car Inspections................................   366
    Customs--Workload............................................   465
    Demonstration of Inspection Technologies.....................   442
    Disparity Between Treasury and Justice.......................   461
    Law Enforcement Resources....................................   460
    Peanut Imports...............................................   471
    Personnel Rotations..........................................   475
    Prepared Statement of the Acting Commissioner of Customs.....   447
    Questions Submitted for the Record by Congresswoman Meek.....   516
    Questions Submitted for the Record by Congresswoman Northup..   511
    Questions Submitted for the Record by Congressman Price......   519
    Questions Submitted for the Record by the Committee..........   477
    Softwood Lumber..............................................   470
    United States Customs Service Budget Justifications..........   522
    United States Customs Service Budget Justifications..........   522
    Videotape....................................................   445

United States Secret Service:
    Armored Limousines...........................................   620
    Financial Crimes...........................................617, 618
    National Center for Missing and Exploited Children...........   369
    Prepared Statement of the Director of the U.S. Secret Service   623
    Questions Submitted for the Record by Congressman Istook.....   657
    Questions Submitted for the Record by Congresswoman Northup..   660
    Questions Submitted for the Record by Congressman Price......   665
    Questions Submitted for the Record by the Committee..........   643
    Secret Service Opening Statement.............................   615
    Secret Service Staffing......................................   369
    Telecommunications Fraud.....................................   619
    United States Secret Service Budget Justifications...........   667
    White House Security.........................................   374

Secretary of the Treasury:
    Adequacy of Funding for IMF..................................   768
    Budget Surplus and Social Security...........................   752
    Currency Paper Contract......................................   743
    Departmental Offices Staffing................................   767
    Departmental Offices Budget Justifications...................   838
    Federal Employee Pay Comparability Act.......................   747
    Financial Technical Assistance for Emerging Democracies......   753
    IRS Management...............................................   749
    Law Enforcement Resource Disparity Between Treasury and 
      Justice....................................................   744
    Prepared Statement of Secretary Rubin........................   739
    Questions Submitted for the Record by Congressman Istook.....   795
    Questions Submitted for the Record by Congressman Kolbe......   770
    Questions Submitted for the Record by Congresswoman Northup..   801
    Questions Submitted for the Record by Congressman Wolf.......   837
    Social Security Trust Fund Investment in Equities Market.....   753
    Treasury Building Restoration................................   767
    U.S.-Canada Softwood Lumber Agreement........................   750
    Year 2000 Compliance.........................................   764

Internal Revenue Service:
    Data Center Mainframe Consolidation..........................   988
    Distributed Input System.....................................   996
    Earned Income Tax Credit.....................................   985
    Federal Pay Issues...........................................  1000
    FY 1999 Budget...............................................   948
    IRS Budget Trends............................................   949
    IRS Budget Justifications....................................  1289
    IRS Customer Service.........................................   982
    IRS Customer Service Satisfaction............................   983
    IRS Customer Service and Enforcement.........................   973
    IRS Employee Training........................................   978
    IRS Enforcement Abuses.......................................   975
    IRS Organization Modernization...................945, 973, 974, 979
    IRS Problem Solving Days.....................................   981
    IRS Technology Modernization...............................947, 994
    IRS Technology Blueprint.....................................   980
    IRS Workforce................................................   977
    IRS Workforce Distribution...................................   978
    Mr. Hoyer's Opening Statement................................   940
    Mr. Kolbe's Opening Statement................................   939
    Mr. Rossotti's Prepared Statement............................   951
    Mr. Rossotti's Opening Statement.............................   945
    Mrs. Meek's Opening Statement................................   944
    Questions for the Record Submitted by Congressman Aderholt...  1283
    Questions for the Record Submitted by Congressman Forbes.....  1271
    Questions for the Record Submitted by Congressman Hoyer......  1287
    Questions for the Record Submitted by Congressman Istook.....  1075
    Questions for the Record Submitted by Congresswoman Northup..  1275
    Questions for the Record Submitted by the Committee..........  1002
    Retention of Programmers.....................................   998
    Size of IRS vs. the Economy..................................   977
    Y2K Date Conversion........................................989, 992

Community Adjustment and Investment Program (CAIP):
    Community Adjustment and Investment Program Budget 
      Justifications.............................................  1473

Bureau of Engraving and Printing:
    Bureau of Engraving and Printing Budget Justifications.......  1618
    Currency Substrates..........................................  1524
    Current Manufacturing Capability.............................  1515
    Facility Security............................................  1515
    Labor Negotiations...........................................  1521
    New Facility.................................................  1514
    Ongoing Security Issues......................................  1516
    Prepared Statement of the Acting Director of the Bureau of 
      Engraving and Printing.....................................  1495
    Questions Submitted for the Record by the Committee..........  1607
    Redesign of One Dollar Note..................................  1523
    Summary Statement............................................  1493
    Workforce Skill Level........................................  1517

Financial Management Service (FMS):
    Biographical Information on FMS Commissioner.................  1482
    Debt Collection, Age of Debt.................................  1510
    Debt Collection, Collectable Loans...........................  1511
    Debt Collection Initiative...................................  1508
    Debt Collection, Percent Collectable.........................  1511
    Debt Collection, Value of the Debt...........................  1511
    Debt Collection, Write-Off...................................  1513
    Electronic Funds Transfer Education..........................  1526
    Electronic Benefits Transfer Pilots..........................  1526
    Electronic Funds Transfer....................................  1525
    Financial Management Service Budget Justifications...........  1551
    Prepared Statement of the Commissioner of the Financial 
      Management Service.........................................  1483
    Questions Submitted for the Record by Congressman Forbes.....  1543
    Questions Submitted for the Record by Congressman Kolbe......  1528
    Questions Submitted for the Record by Congresswoman Northup..  1544
    Summary Statement............................................  1480
    Y2K Budget...................................................  1507
    Year 2000 Information Systems Compliance.....................  1507

United States Mint:
    Coin Demand..................................................  1517
    Cost to Produce New Dollar Coin..............................  1521
    Demand for New Dollar Coin...................................  1522
    FTE Reductions...............................................  1523
    Mint Reorganization..........................................  1522
    New Dollar Coin Design.......................................  1520
    New Dollar Coin..............................................  1519
    Prepared Statement of the Director of the U.S. Mint..........  1502
    Questions Submitted for the Record by Congressman Forbes.....  1646
    Questions Submitted for the Record by Congresswoman Northup..  1643
    Strategic Plan...............................................  1499
    Summary Statement of Mr. Diehl...............................  1499
    U.S. Mint Budget Justifications..............................  1650

Bureau of the Public Debt:
    Bureau of the Public Debt Budget Justifications..............  1689

Office of Inspector General:
    Administrative Problems and Operations.......................  1740
    Audit and Investigative Work.................................  1746
    Future Structure of IRS' Chief Inspector's Office............  1748
    IG's Oversight Role with IRS.................................  1748
    Internal Affairs.............................................  1740
    Internal Operations..........................................  1738
    New Hires....................................................  1739
    Office of Inspector General Budget Justifications............  1769
    Opening Remarks..............................................  1722
    Oversight of the IRS.........................................  1747
    Prepared Statement of Deputy Inspector General...............  1724
    PSI Study....................................................  1741
    Questions Submitted for the Record by Congressman Kolbe......  1750
    Questions Submitted for the Record by Congresswoman Northup..  1766
    Secret Service Investigation.................................  1742
    Staffing Levels..............................................  1739
    Timeframe of Investigation...................................  1747

Additional Budget Documents:
    Community Development Financial Institutions (CDFI) Fund.....  1815
    Comptroller of the Currency..................................  1900
    Departmental Offices, Office of Professional Responsibility, 
      Salaries and Expenses......................................  1837
    Interagency Crime and Drug Enforcement.......................  1849
    Joint Financial Management Improvement Program...............  1948
    Office of Thrift Supervision.................................  1919
    Treasury Forfeiture Fund--Permanent, Indefinite Authority and 
      Appropriated Authority.....................................  1858
    Treasury Franchise Fund......................................  1888
    Treasury Proposed Legislation: Targeted Merchandise 
      Processing Fee Adjustment..................................  1947