[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]






   TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT APPROPRIATIONS FOR
                            FISCAL YEAR 2000

_______________________________________________________________________

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS
                              FIRST SESSION
                                ________

  SUBCOMMITTEE ON THE TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT 
                             APPROPRIATIONS
                      JIM KOLBE, Arizona, Chairman
 FRANK R. WOLF, Virginia           STENY H. HOYER, Maryland
 MICHAEL P. FORBES, New York       CARRIE P. MEEK, Florida
 ANNE M. NORTHUP, Kentucky         DAVID E. PRICE, North Carolina
 JO ANN EMERSON, Missouri          LUCILLE ROYBAL-ALLARD, California
 JOHN E. SUNUNU, New Hampshire
 JOHN E. PETERSON, Pennsylvania     

 NOTE: Under Committee Rules, Mr. Young, 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
 56-459                     WASHINGTON : 1999




                         COMMITTEE ON APPROPRIATIONS

                   C. W. BILL YOUNG, Florida, Chairman

 RALPH REGULA, Ohio                    DAVID R. OBEY, Wisconsin
 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               STENY H. HOYER, Maryland
 TOM DeLAY, Texas                      ALAN B. MOLLOHAN, West Virginia
 JIM KOLBE, Arizona                    MARCY KAPTUR, Ohio
 RON PACKARD, California               NANCY PELOSI, California
 SONNY CALLAHAN, Alabama               PETER J. VISCLOSKY, Indiana
 JAMES T. WALSH, New York              NITA M. LOWEY, New York
 CHARLES H. TAYLOR, North Carolina     JOSE E. SERRANO, New York
 DAVID L. HOBSON, Ohio                 ROSA L. DeLAURO, Connecticut
 ERNEST J. ISTOOK, Jr., Oklahoma       JAMES P. MORAN, Virginia
 HENRY BONILLA, Texas                  JOHN W. OLVER, Massachusetts
 JOE KNOLLENBERG, Michigan             ED PASTOR, Arizona
 DAN MILLER, Florida                   CARRIE P. MEEK, Florida
 JAY DICKEY, Arkansas                  DAVID E. PRICE, North Carolina
 JACK KINGSTON, Georgia                CHET EDWARDS, Texas
 RODNEY P. FRELINGHUYSEN, New Jersey   ROBERT E. ``BUD'' CRAMER, Jr., 
 ROGER F. WICKER, Mississippi            Alabama
 MICHAEL P. FORBES, New York           JAMES E. CLYBURN, South Carolina
 GEORGE R. NETHERCUTT, Jr.,            MAURICE D. HINCHEY, New York
Washington                             LUCILLE ROYBAL-ALLARD, California
 RANDY ``DUKE'' CUNNINGHAM,            SAM FARR, California
California                             JESSE L. JACKSON, Jr., Illinois
 TODD TIAHRT, Kansas                   CAROLYN C. KILPATRICK, Michigan
 ZACH WAMP, Tennessee                  ALLEN BOYD, Florida
 TOM LATHAM, Iowa
 ANNE M. NORTHUP, Kentucky
 ROBERT B. ADERHOLT, Alabama
 JO ANN EMERSON, Missouri
 JOHN E. SUNUNU, New Hampshire
 KAY GRANGER, Texas
 JOHN E. PETERSON, Pennsylvania     

                 James W. Dyer, Clerk and Staff Director

                                  (ii)


 
  TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT APPROPRIATIONS FOR 
                                  2000

                        -------------------------

                                        Tuesday, February 23, 1999.

                       DEPARTMENT OF THE TREASURY

                                WITNESS

JAMES E. JOHNSON, UNDER SECRETARY FOR ENFORCEMENT
    Mr. Kolbe. The subcommittee will come to order. Good 
morning, and we welcome Under Secretary Johnson this morning.
    Before I begin with my comments, let me just welcome also 
one of our new members, Ms. Roybal-Allard, who is with us here, 
and we are delighted to have you on this subcommittee. We know 
you are going to be a good addition to the subcommittee.
    I will yield to the ranking member, Mr. Hoyer.
    Mr. Hoyer. I thank the Chairman for yielding.
    I want to join you in welcoming to our committee Lucille 
Roybal-Allard. I had the great privilege and honor of being 
appointed to this committee in January of 1983, 15 years ago, 
and at that time, I had the great privilege and pleasure of 
serving with Edward Roybal-Allard, who served in the Congress 
for over 2\1/2\ decades, and had been Chairman for at least 3 
years.
    Ms. Roybal-Allard. About 30 years.
    Mr. Hoyer. Thirty years in the Congress of the United 
States and Mr. Roybal-Allard provided great service. I had the 
honor of serving with him on the Labor, Health and Human 
Services Appropriations Subcommittee, and he cared about both 
committees very, very deeply.
    His daughter, elected overwhelmingly to succeed him in the 
Congress, now is a member of the Appropriations Committee and a 
member of this subcommittee. This subcommittee, Mr. Chairman, 
will be advantaged by Ms. Roybal-Allard's addition. 
Congresswoman Roybal-Allard is an outstanding member of the 
House, an outstanding human being, and we are very pleased to 
have her.
    And I might join you--I don't want to anticipate----
    Mr. Kolbe. I will follow.
    Mr. Hoyer [continuing]. But I want to welcome Jo Ann 
Emerson as well.
    Mr. Kolbe. I was just going to welcome her. At the other 
end down here, she slipped in and I didn't have a chance to 
welcome her as well, Mrs. Emerson. We are delighted to have you 
as an additional member of this subcommittee.
    Mrs. Emerson. It is an honor.
    Mr. Hoyer. Mr. Chairman, thank you very much. We have been 
uniquely advantaged on this subcommittee by the addition of two 
outstanding members of the Congress who happen to be related to 
former Members of Congress, one a daughter and one a wife. Bill 
Emerson was our friend, and gave outstanding service to the 
Congress. And Jo Ann Emerson has brought to her representation 
of her district a really great sense of service and, I might 
say, bipartisanship. There is a lot of talk about 
bipartisanship, and I have been quoted maybe too frequently 
recently about that issue.
    But I want to welcome Congresswoman Emerson. I know she 
will work, as you do, Mr. Chairman, in the true spirit, not of 
party but of policy and patriotism in the true sense of the 
word, advancing agencies that we are going to hear from today 
which are critically important to the advancement of democracy.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much.
    Let me just note for the record that the hearing with 
Secretary Rubin scheduled for this Thursday has been 
rescheduled for March 18th to accommodate a change in our own 
schedule here. That will be the same day that, in the morning, 
we have the Customs' integrity program. So I think it is 
actually very good to end with the Secretary talking about some 
of these issues at the end of that, so Secretary Rubin will be 
with us on March 18th in the afternoon.
    This morning we are going to hear from Under Secretary Jim 
Johnson. At the conclusion of his testimony and the opening 
remarks here, I will recognize members for questions related to 
general Treasury law enforcement operations. When we have 
concluded our round of questions for Under Secretary Johnson, 
we will then take the testimony from the Secret Service and 
Federal Law Enforcement Training Center, FLETC. And I don't 
expect Commissioner Kelly and Director Magaw to stay on during 
this testimony, though they are certainly welcome to, because 
we are going to hear separately from them this afternoon at 
2:00 o'clock when Customs Service and ATFare back again.
    Now, just for my own brief opening remarks, let me just say 
again that we are in the first hearing of the cycle of 
Department of Treasury FY 2000 appropriations, and today we are 
going to be focused on what I believe to be the most critical 
of Treasury's missions, and that is law enforcement.
    I am pleased this morning to welcome Under Secretary 
Johnson to our hearing, along with leaders of Treasury's law 
enforcement agencies: Mr. Bowen, who is the Acting Director of 
the U.S. Secret Service, and Ralph Basham, the Director of the 
Federal Law Enforcement Training Center, welcome to both of 
you. John Magaw, the Director of the Bureau of Alcohol, Tobacco 
and Firearms; and Ray Kelly, of course, who has been before us 
before in another capacity and now comes as Commissioner of 
Customs.
    Mr. Secretary, it always pleases me to see Treasury's top 
law enforcement officers here as a team. Our subcommittee has 
made law enforcement a priority.
    Last year we expressed to Secretary Rubin our concern that 
Treasury law enforcement was significantly shortchanged in the 
budget process. We noted the impact on Treasury law enforcement 
of some deficits in personnel and equipment and operating 
expenses, when at the same time we asked them not only to 
continue the missions that we have given them but to fulfill 
new missions.
    The fiscal year '99 appropriation required some heavy 
lifting by this subcommittee, but we succeeded in getting the 
law enforcement bureaus the resources, both money and 
personnel, that were needed to do their jobs. I consider that 
to be only the first act. What we need now in '99, when this 
committee starts in '99, we need an Act 2.
    I have to say, having said that, that I am very 
disappointed with the budget that we are looking at for fiscal 
year 2000 as proposed by the President. I have traveled and my 
staff has traveled and met with numerous Treasury law 
enforcement officials over the last couple of years to see the 
tremendous demands that we are making on Treasury's 
investigative, regulatory and inspection services. And yet the 
initiatives proposed--in ATF's gun law enforcement and Customs' 
integrity program, for example--are overshadowed by the 
reductions in base activities and the likely cost, I think, of 
some disingenuous budget tactics.
    There is no letup in the workload that Treasury law 
enforcement is facing, certainly none that we are seeing or 
hearing about. The volume of contraband and legitimate commerce 
crossing our borders is increasing, so the need for Customs, 
additional Customs inspection and enforcement, is only 
increasing. Financial crime, counterfeiting, money laundering, 
all of these crimes are becoming more sophisticated and they 
also are increasing. The investigative work load is only 
getting partially met.
    A similar story can be told about Treasury's 
counterterrorism mission and continuing responsibilities for 
explosives, for arson, for other regulatory missions that are 
done by ATF and that tie into law enforcement. Given this, all 
of this, this increased work load, how do we explain what we 
see in this FY 2000 budget?
    Specifically, that Customs must absorb $312 million in 
salaries and expenses, in exchange for some very doubtful 
passenger taxes; gets no recurring or inflation cost funding 
for air program operations and maintenance; displaces 
initiatives such as the border inspection technology program; 
and faces another $6 million in unspecified cuts.
    Or the Treasury's reliance on the super surplus for base 
activities, $120 million of the $140 million available, risks 
future shortfalls, and deprives Treasury of flexibility this 
contingency fund affords for special initiatives or unexpected 
new requirements. It is not an approach that Justice Department 
or other major law enforcement agencies of the Federal 
Government, not an approach that they are likely to adopt.
    Or that Secret Service has to sacrifice investigative 
resources, its agents, when it is facing more early departures 
of its younger agents. This jeopardizes important 
investigations where it has unique jurisdiction and expertise, 
such as identity theft, counterfeiting, credit card, electronic 
crimes.
    Or that the President's proposed cuts in the Secret Service 
come when protective duties ramp up and the Service has been 
asked to take on new counterterrorism responsibilities.
    Or that ATF, while receiving increases for some of the gun 
initiatives and to meet obligations for one-time tobacco tax 
collection, continues to have backlogs in its investigative and 
inspection work.
    Mr. Secretary, it really seems a little bit, as Yogi Berra 
says, ``deja vu all over again,'' or maybe it is amnesia and 
deja vu at the same time. We have some charts here that are 
updates of charts that we presented to Secretary Rubin last 
year. We have just updated them, covering 11 years of funding 
and 5 years of staffing for Treasury and law enforcement, 
Justice law enforcement.
    The contrast in the pattern of resources to staff growth is 
striking. Although Treasury law enforcement has seen modest 
funding increases over the past years, they are dwarfed by the 
disproportionate increases received by Justice. When I say 
modest, you can see by that line at the bottom they are very 
modest indeed.
    Chart 1 reflects the funding for Treasury law enforcement 
between '94 and 2000, from $2.6 to $2.8 billion in terms of 
real dollars. That is an increase of 9 percent, while Justice 
goes from $4.2 billion to $7 billion, an increase, a real 
increase of 68 percent. You can see where--Clif, if you would 
just point where '94 is--FY '94 is right there, where, yes, 
where Justice really starts to ramp up very rapidly in FY '94. 
But no idea that Treasury somehow is a part of this law 
enforcement game; there is no thought given or no increase 
given to the Treasury side of law enforcement, which I just 
don't understand.
    The second chart there shows similarly the unequal growth 
in the numbers of law enforcement officers in Justice and 
Treasury. There again, the upper bar showing the Justice law 
enforcement numbers, and the red bar showing the numbers for 
Treasury, as you can see, almost virtually even. It says--my 
testimony says 3 percent increase, but I can hardly see it. 
Three percent increase.
    The third chart takes the two primary border security 
agencies, Customs Service from Treasury and INS/Border Patrol 
from Justice Department, and you can see there that INS has a 
169 percent increase in real terms from 1994 to the year 2000. 
Again, Clif, if you put your finger on 1994, you see there 
where suddenly INS just shoots up and crosses Customs and goes 
up very dramatically, and Customs during that time increased by 
a total of 11 percent in real terms.
    Similarly, the last chart here shows the 
personneldisparity. Customs grew by 7 percent from 1994 to 1998 and INS 
grew by 69 percent, and that is an increase that doesn't take into 
account new INS positions this year that were authorized for FY 2000.
    Cliff, thank you. Let's leave up the first chart as the 
lead one there because that kind of shows everything for 
Treasury versus Justice. Thank you.
    What is worse, these numbers assume that the President's 
request for new taxes is going to happen, and I believe there 
are very few in this room that actually believe that that 
approach is a very credible one. And if this new tax that the 
President is proposing does not occur, the numbers for Customs 
will be much, much worse. In fact, without it Customs would 
have to lop off about 4,900 people. That is a cut of 28 
percent.
    We all know that both INS and Customs have very critical 
missions. However, with the rapid growth in Customs' 
responsibility in the wake of implementing the NAFTA agreement, 
huge volumes of smuggling of drugs and other contraband, the 
need to avoid stopping crime at the expense of trade, there has 
not been a commensurate adjustment of resources.
    As I noted last year, it seems to me there is a failure to 
balance these missions, to treat them in a comprehensive and 
systematic way. And I just do not understand why we can't get a 
comprehensive, systematic way of looking at Treasury and 
Justice together as a comprehensive law enforcement pattern, 
rather than treating one as a stepchild.
    So addressing this in this piecemeal fashion, now the 
illegal immigrant issue, now the drug problem, now trade 
automation, only makes the management problems worse and the 
problems that staff face against their enormous work loads much 
worse.
    Mr. Secretary, I believe you are making an effort to give 
Treasury law enforcement a strong voice within the 
administration, to enhance the law enforcement activities, and 
you work hard to keep good relations with all of your 
colleagues, especially those at Justice. Knowing this, I would 
expect that Treasury would get more credit from your colleagues 
in the administration for the unique and valuable mission that 
they perform.
    Even though they have more than half as many law 
enforcement officers as the Justice Department, more than half 
as many, yes, as law enforcement officers of the Justice 
Department, and one-fourth of all of those that are in the 
Federal Government, any verbal recognition of this seems out of 
sync with the poor bottom line support that we are getting from 
the administration.
    I know you have to deal with the cards, the budget cards 
that are dealt to you, and in this environment of relatively 
tight caps, I am not surprised to see some creative funding 
schemes, but I just don't think many of these are very credible 
to any of us in the Congress. And I cannot accept the budgetary 
pain which has got to be imposed entirely on the least in law 
enforcement, on the Treasury Department.
    I think Treasury law enforcement requirements have to be 
treated in a comprehensive way in conjunction with all Federal 
law enforcement, and especially with the same footing as its 
sister department, Justice. I hope that you and the bureaus 
that are here today and the others in the audience are going to 
plant this message front and center in administration thinking 
as we enter negotiations over the budget and spending levels 
for this coming fiscal year.
    I apologize for the long opening remarks, but I just felt 
at the beginning at the first hearing of this year, we needed 
to make this statement right up front.
    And with that, let me recognize my colleague, the ranking 
member, Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I want to 
join you in welcoming the outstanding law enforcement officials 
that we see before us. Mr. Secretary, particularly I want to 
welcome you and thank you for the job that you are doing. Let 
me say that I join the Chairman in his concern.
    On a broader basis, every subcommittee on the 
Appropriations Committee is going to face similar problems. The 
fact of the matter is that an act for which I voted, the 
Balanced Budget Act of 1997, set caps for this fiscal year, 
fiscal year 2000, which are unrealistic, which are essentially 
not attainable, and which will be changed. Who gets the 
political blame for changing the caps will be the effort we 
will go through over the next few months.
    But the fact of the matter is that within those caps, every 
subcommittee has been squeezed with respect to discretionary 
dollars. It is that which confronted the administration, and 
they have done some things that the Chairman has raised 
concerns about. I share those concerns, as I said at the 
outset. I believe he is correct that the revenue sources, the 
new fees that are in question, are certainly doubtful of 
enactment. If that fails to occur, then we are going to have a 
significant hole in the figures that are recommended.
    In addition, I want to express a concern, which I will ask 
Secretary Johnson and others specific questions about, that as 
we increasingly rely on the forfeiture funds, the super fund 
and the Treasury forfeiture fund, to fund operations, we create 
a situation that may not be healthy. Number one, we may fall 
short of forfeitures and, therefore, fall short of the dollars 
anticipated.
    Secondly, we present law enforcement with I think an 
unfortunate situation, and that is if they do not seize 
materials, they may not be able to fund their operations. I 
think in the citizens' mind that may well give law enforcement 
an incentive which it ought not to have. It ought not, in my 
opinion, be confronted with the alternative of either having 
its operations cut or pursuing forfeitures. Its pursuit of 
forfeitures out to be evaluated on the basis that those items, 
paraphernalia, facilitating capital assets or other assets are 
in fact being used illegally. That ought to be their sole 
incentive, motivation and reason for seizing materials.
    The Chairman's charts, which he brought forward last year, 
I think are very, very concerning when you see from 1994 the 
spike-upward in fiscal year '94 and the spike-upward in 
Justice. Now, I say as an aside, I only serve on the Treasury 
law enforcement subcommittee, others of us serve on both 
subcommittees, and so the Chairman has been confronted with 
both of these issues.
    The Chairman has properly raised the issues of the 
coordinated operations, the putting aside of turf battles and, 
as well, the assigning of sufficient resources to agencies so 
they may do the job that is expected of them, without allowing 
them to be disadvantaged in competition with other agencies 
that have related, though not duplicative, functions.
    Two examples of that are the SES situation in ATF, which I 
am going to talk about when Mr. Magaw testifies, Mr.Chairman, 
and the issue that we have gone through with respect to technical lab 
personnel, levels of salary differing between Treasury law enforcement 
and Justice law enforcement, and the incentive to then have one, i.e., 
Justice raid Treasury's people because they are at any given time able 
to pay them a bonus or a higher salary. That is not conducive, in my 
opinion, to the creation in both Treasury and in Justice the best 
possible complement of personnel.
    Mr. Chairman, I won't prolong my opening statement, other 
than to reiterate that I think you have raised some very 
critical points as to funding sources, funding levels, FTE 
levels. I think all of these are in the next six months going 
to have to be addressed, as will every other subcommittee have 
to address similar issues.
    I know, Mr. Chairman, in the Labor-Health Subcommittee, 
that you can't get there from here, period. The Labor-Health 
bill did not come to the floor in 1998, and the reason it 
didn't come to the floor in 1998 is because some people wanted 
to play let's pretend. The pretend was that we will cut certain 
items so that we can fund other items, but knowing full well 
that we ought not to bring that bill to the floor because 
politically it will not be viable, and even if it were in the 
House, it wouldn't stand a prayer in the Senate.
    So, Mr. Chairman, I look forward to working with you as we 
consider this bill in fashioning, as I know your objective will 
be, a bill which will enhance and enable Treasury law 
enforcement to do the job that is expected of it by the 
American people.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much. If the other members do not 
have opening statements, we will take Mr. Johnson's. Let me 
welcome Mr. Peterson, another freshman--not freshman--to this 
committee, I should say new member to this committee and to our 
subcommittee. We are delighted to have him with us here today.
    Mr. Johnson, it is your turn, and then we will take 
questions from the members to you before we go to our other 
gentlemen.
    Mr. Johnson. Thank you, Mr. Chairman. Congressman Hoyer and 
members of this subcommittee, good morning.
    Mr. Kolbe. May I just say--excuse me, Mr. Johnson--that 
your full testimony will be put in the record and if you can 
summarize it, we would certainly appreciate that.
    Mr. Johnson. I will do my best. It is a pleasure for me to 
be here this morning to support the FY 2000 budget request for 
Treasury's law enforcement bureaus and offices.
    With me are the heads of each of Treasury's law enforcement 
bureaus. Starting from my left is John Magaw, the Director of 
the Bureau of Alcohol, Tobacco and Firearms; Raymond Kelly, our 
former Under Secretary, and the Commissioner of the United 
States Customs Service. To my right is Bruce Bowen, the Acting 
Director of the United States Secret Service, and at the far 
right is Ralph Basham, the Director of the Federal Law 
Enforcement Training Center.
    I am also joined today by Elisabeth Bresee, who is the 
Assistant Secretary for Enforcement and senior staff from the 
Office of Enforcement, Bill Baity, the Acting Director of the 
Financial Crimes Enforcement Network, will not be appearing 
before this subcommittee today, but I ask that his written 
statement be made a part of the record of these proceedings.
    Mr. Kolbe. It will be made a part of the proceedings.
    Mr. Johnson. I welcome this opportunity to share with you 
my thoughts on Treasury Enforcement's mission today and into 
the 21st century, and on how President Clinton's fiscal year 
2000 budget request supports us in achieving this mission.
    Each year, as the world becomes a much more complex place, 
Treasury's law enforcement mission grows in complexity, scope 
and importance. Secretary Rubin has repeatedly noted that our 
bureaus must continue to meet these challenges as they perform 
their critical role in advancing America's law enforcement 
priorities, which include but are not limited to protecting our 
borders from drug traffickers, protecting our leaders, 
protecting our streets from the threat of bombs, arson and gun 
violence. They also include safeguarding our financial 
institutions from money launderers and from fraud. And, 
finally, our bureaus also collect revenue, which is critically 
important.
    To ensure excellence in achieving these missions, and in 
keeping with the spirit of the National Performance Review and 
the Government Performance and Results Act, Treasury continues 
to engage in a comprehensive strategic management process to 
enhance and improve the results we deliver to the American 
people. Overall, the bureaus' performance against the 
established strategic plans was excellent, and while not every 
goal was met, our results were commendable.
    With the objective in mind of continuing to perform our 
mission at the highest level of excellence, the President's FY 
2000 budget seeks a Treasury Enforcement program level of $3.5 
billion and 27,422 direct FTE. This excludes the Internal 
Revenue Service, Criminal Investigation Division. IRS/CID, 
however, does perform an integral role in Treasury law 
enforcement efforts, and their budget request is discussed in 
brief in my written statement.
    We believe these budget requests take a pragmatic approach 
to two goals: contributing towards balancing the Federal budget 
and supporting effective approaches to law enforcement. It is 
also important to note that the requested Treasury program 
level allows us to combat crime while depositing more than $34 
billion in revenues and collections into the United States 
Treasury. This is a tremendous return on investment.
    Mr. Chairman, my remarks for the record focus on two 
things: the role of the Office of Enforcement, and the goals of 
our five-part strategic plan developed by the bureaus in 
conjunction with the Office of Enforcement. This format 
highlights our bureaus' specific areas of expertise, activities 
and budget requests, as well as our crosscutting expertise on 
financial crimes matters.
    As requested, I will summarize that information for you 
briefly. As you know, throughout the strategic management 
process, Treasury and its enforcement bureaus developed a set 
of five goals that provided a comprehensive overview of our 
bureaus' missions: one, reducing the trafficking, smuggling and 
use of illicit drugs; two, combating financial crimes and money 
laundering; three, fighting violent crime; four, protecting our 
Nation's leaders and visiting world leaders; and, five, 
providing high quality training for law enforcement personnel.
    The Office of Enforcement's goal is to assist our bureaus 
in enhancing their performance in the context of these overall 
goals. Accordingly, I will very briefly describesome of the 
activities the Office of Enforcement has undertaken during the last 
year, both during my tenure and the tenure of my predecessor, Ray 
Kelly; and I will provide some highlights of recent bureau activities 
relating to our strategic goals.
    We recognize that the roles of our enforcement bureaus are 
enhanced through the support, oversight and policy guidance 
provided at the departmental level. In this regard, I am 
pleased to report that the Office of Enforcement has worked 
diligently over the past year to fulfill these 
responsibilities.
    During the last year we have worked in support of each of 
our bureaus' individual goals, as well as for the advancement 
of issues of significance common to all of the enforcement 
bureaus. We have often done this by bringing together working 
groups, including bureau personnel, to work on challenging 
Treasury law enforcement issues ranging from the development of 
a fleet management policy to the development of an 
implementation plan for the demonstration pay project. In 
addition, the Office of Enforcement and Enforcement Bureau 
representatives also have joined together to undertake a major 
effort to respond to the congressional requests that we analyze 
the implications of imminent agent retirements.
    I turn next to what we have done in the area of oversight. 
Since we last appeared before you, we have worked with our 
bureaus to identify issues before they became problems and to 
work on problems before they became crises. This subcommittee's 
support of the Office of Professional Responsibility is helping 
us to meet this goal. Since receiving funds in fiscal year 
1998, we have made considerable progress in staffing this unit, 
which assists in the provision of oversight on such important 
issues as internal affairs, training and inspection.
    Among other things, OPR has carried on work begun by former 
Under Secretary Kelly by continuing to make integrity a 
priority. Indeed, last week, in response to a Congressional 
request, the Office of Enforcement issued an OPR report on 
Customs' Office of Internal Affairs. Additionally, during the 
last year OPR has worked with ATF to improve enforcement of the 
firearms laws and operations at the National Training Center 
and to analyze EEO and diversity issues at the Treasury 
bureaus, and participated in the implementation committee 
overseeing renewal of the Federal Law Enforcement Training 
Center.
    I turn next to policy guidance, which is a third major 
function of the Office of Enforcement. In this regard, since 
last year we convened the Financial Crimes Policy Steering 
Committee, which consisted of representatives from all of the 
Treasury bureaus and offices at the Assistant Director level. 
This committee is tasked with helping to formulate policy in 
the area of Treasury's financial crimes jurisdiction.
    Currently this group is working to develop a strategic 
response to what we believe to be an insidious money laundering 
system, the Black Market Peso Exchange. This is a process by 
which Colombian narcotraffickers convert their ill-gotten 
dollars into ostensibly clean pesos. The Financial Crimes 
Policy Steering Committee is also the primary vehicle by which 
the Office of Enforcement is leading the development of a 
nationwide strategy against money laundering.
    The Office of Enforcement also has taken other steps to 
enhance its support and oversight missions. Among other 
activities, we continue to work closely with the Customs 
Service, with ONDCP and others to ensure close cooperation on 
anti-narcotics matters. And in conjunction with the ATF and the 
Department of Justice, we have responded to the President's 
directive to analyze the problem of the gun show loophole, and 
remain at the forefront in firearms issues.
    There are other examples that are set forth in my written 
testimony. I won't go through them at this time.
    On the trade and regulatory side, the Office of Enforcement 
has taken the lead in initiatives to streamline and modernize 
the regulatory trade law enforcement operations of the 
enforcement bureaus.
    I would like to take a moment, because the work of our 
bureaus is central to everything that goes on, and we attempt 
to add value in all of the ways that we can, but it is the men 
and women that serve in the field, the men and women that you 
have visited with, Mr. Chairman, and seen their operations, 
that are the heart and soul of Treasury Enforcement. I would 
like to talk about that and how that fits into the five 
strategic goals mentioned earlier.
    The first goal: reduce the trafficking, smuggling and use 
of illicit drugs. The Customs Service has the primary role for 
the Treasury Department, indeed for the Nation, in interdicting 
drugs and other contraband at the border, and ensuring that all 
goods and persons entering and exiting the United States do so 
in accordance with the law. The Customs Service discovers or 
seizes more illegal drugs than all Federal authorities in the 
United States combined every single year.
    In fiscal year 1998 Customs seized 1,116,000 pounds of 
cocaine, heroin and marijuana, exceeding its target of 953,000 
pounds. Customs' increase in seizures resulted in large measure 
from Operation Brass Ring, a six-month effort to increase the 
amount of narcotics seized.
    Our second goal is to combat financial crimes and money 
laundering. One of the Treasury Department's most important 
missions is the fight against money laundering and financial 
crimes. In addition to its substantial efforts to counter 
illicit drugs, Customs also plays a vitally important role in 
combating money laundering.
    During fiscal year 1998, Customs' money laundering 
investigations resulted in more than a thousand arrests and 928 
criminal indictments. I would also note the significance of 
Operation Casablanca, the largest drug money laundering 
investigation in United States history, which to date has 
resulted in the arrests of 168 individuals. Commissioner Kelly 
will testify in more detail about this ongoing operation.
    I would also note the important roles of IRS/CID and the 
Financial Crimes Enforcement Network, in the Treasury 
Department's efforts to fight financial crime and to fight 
money laundering. The IRS Criminal Investigation Division 
provides valuable investigative expertise in money laundering 
cases as well as tax cases.
    And for its part, as a network, FinCEN serves as a vital 
link between the law enforcement, financial and regulatory 
communities as we all come together to fight money laundering. 
It brings together government agencies and the private sector, 
in this country and around the world to maximize information 
sharing among these communities and thereby further efforts to 
prevent and detect moneylaundering activities. Your support for 
FinCEN's fiscal year 2000 budget request will further strengthen the 
quality of the support that it provides to law enforcement.
    The Secret Service is often noted and widely renowned for 
its protective function, but its strong investigative expertise 
in financial crimes should not be overlooked. They provide 
crucial protection for citizens who are concerned and 
victimized by credit card fraud, or by those who would in fact 
steal the identity of an individual and run up tremendous bills 
and create tremendous debts that have long-lasting implications 
for the individual so affected.
    Turning next to the fight against violent crime, one of the 
goals of this Administration has been to reduce violent crime 
on our Nation's streets. During fiscal year 1998, ATF received 
over 180,000 gun trace requests from Federal, State, local and 
international law enforcement agencies, all of which contribute 
to this effort to reduce violent crime.
    It also expanded its Youth Crime Gun Interdiction 
Initiative from 17 cities to 27 cities. We are grateful for the 
support that you have already provided for this program, which 
is designed to supplement and strengthen ATF's illegal firearms 
trafficking programs. We ask that you support the expansion of 
the program to an additional 10 cities, bringing to a total of 
37 the number of cities that would benefit from this tremendous 
program.
    I would also note, in the context of our efforts to fight 
violent crime, that the Treasury Enforcement bureaus provide 
immediate and effective responses to terrorist attacks. They 
guard against terrorist attacks; they guard against weapons of 
mass destruction; they enforce laws directed at the most common 
instruments of terror; they predict potential terrorist 
targets, and enforce economic sanctions against those countries 
that harbor and promote terrorists.
    Treasury's central role in the counterterrorism effort is 
performed by the ATF, by the Customs Service, by the Secret 
Service, by the Office of Foreign Assets Control, by the 
Financial Crimes Enforcement Network, and by the training 
provided by our personnel at the Federal Law Enforcement 
Training Center.
    As I have mentioned, we protect our Nation's leaders and 
visiting world leaders. During fiscal year 1998 the Secret 
Service successfully managed protective security for its 
protectees as well as for several major events.
    Importantly, last year, the President signed Presidential 
Decision Directive 62, which names the Secret Service as the 
lead agency for security design, planning and implementation at 
designated National Special Security Events.
    During fiscal year 2000, the Service will continue its 
preparations for the year 2000 presidential campaign, and has 
budgeted more than $35 million to cover the costs of providing 
protection for the candidates and nominees involved in the 
campaign and at the two national party conventions.
    We couldn't do all of this without high-quality training, 
which brings us to our next goal: provide high quality training 
for law enforcement personnel, not just in the Treasury family, 
but the 70 other Federal law enforcement institutions, and 
State and local law enforcement institutions as well. FLETC and 
the training that is given at FLETC is a key element to the 
success of Treasury law enforcement personnel. Currently, 71 
agencies participate in more than 200 different training 
programs.
    And as I have mentioned, we have provided training to State 
and locals, but we have also provided training for over 20 
years to international personnel. Indeed, more than 5,000 
foreign law enforcement officials from more than 102 different 
countries have benefitted from training at FLETC.
    As reflected in this brief overview of our Bureaus 
activities, the responsibilities of Treasury law enforcement 
are wide-ranging. Guided by the five strategic goals set forth 
above, we and our bureaus remain committed to ensuring that 
Treasury Enforcement remains at the vanguard of Federal law 
enforcement into the 21st century and beyond. The budget 
requests will enable Treasury's law enforcement bureaus to work 
toward meeting these challenges.
    I am confident you will find this to be, at the program 
level, a responsible budget that considers the growing demands 
of law enforcement in a constrained budget environment. I would 
like to express my appreciation for the support this committee 
has provided to us, but I would also like to underscore the 
support that we in the department seek to provide to our 
enforcement bureaus.
    The members of the Office of Enforcement have traveled 
throughout the nation to see our men and women on the ground, 
the men and women in the field who are the first line of 
defense in many respects for this Nation. It is the Customs 
inspector or the Customs agent that provides the first line of 
defense at our Nation's borders for criminals who would seek to 
introduce contraband, and flood our Nation's streets with 
narcotics.
    Our last line of defense in protecting our leaders is 
provided by the last person on the Secret Service presidential 
detail that is willing to lay down his life to stand between 
the President and a bullet.
    We provide critical support and critical protection to our 
Nation's financial infrastructure as we combat money laundering 
in its various forms with our various tools, whether or not 
they are the tools used by FinCEN, whether or not they are the 
tools of investigative expertise found at the Customs Service 
and the Internal Revenue Service's Criminal Investigation 
Division.
    All of these are critical responsibilities, and all of 
these responsibilities also rely in a critical way on the 
training that we receive at FLETC.
    I thank you for the opportunity to appear before the 
committee and I welcome your questions. Thank you very much.
    [The information follows:]


[The official Committee record contains additional information here.]

    Mr. Kolbe. Thank you very much, Mr. Secretary. And we 
appreciate that statement of your missions and goals and how 
you believe you can achieve them.
    For the new members that are here today, let me just say 
that I am generally pretty strict about the five-minute rule, 
including imposing it on myself, so that we can get through a 
round of questioning and then come back. This first round of 
questioning will be for Secretary Johnson only. We will come 
back to the others later here this morning.
    So, Mr. Secretary, with that in mind, I will note my own 
time that I start here. Let me just begin by asking you to give 
me an assessment what you think the funding impact would be of 
the President's funding, proposed funding levels on some of the 
following objectives, including the consequence if the proposed 
user fees do not materialize.

                       reduction in base funding

    What would be the effect on our effort to continue 
strengthening the Customs inspection mission by continuing the 
technology initiative both on the Southwest border and other 
high threat ports if we have no new funding in FY 2000 and you 
have to absorb unspecified reductions in base funding?
    Mr. Johnson. I think, as both the Chairman and the Ranking 
Member have noted, the budget request that we put forward 
proceeds in a very challenging environment. When onefocuses on 
the issue of fees, the fees are found--the fees that are put in place 
in the Customs budget are not only fees imposed for Customs, but there 
has been a general approach, in dealing with a very challenging 
budgetary environment, to look for fees for specific services that 
specific users would receive from government and seek their payment for 
those fees.
    Should those fees not be enacted, since they form part of 
the program level, it clearly would pose some risk for those 
programs, because clearly part of the program level is based 
on, a significant part of the program level is based on those 
fees.
    Mr. Kolbe. Just some risk. Okay. What impact would it have, 
again assuming that we do not have the proposed user fees 
enacted, what impact is it going to have on staffing of and 
operating Customs air and marine interdiction assets, including 
the new ones that we funded in the current fiscal year, and 
modernizing this when we don't have--actually, I am going to 
come back to this in another question--when we don't have 
additional funding that is provided for operations and crews?
    Mr. Johnson. If the fees are not enacted and no other 
funding were available there clearly would be a significant 
impact on many of the functions that would rely on those fees.
    Mr. Kolbe. And I assume all of this, you had some 
discussions with OMB, most of those fees by the way go to 
support commercial operations. I don't think actually in this 
case, the fees here are not a real direct factor in the Customs 
air arm, I don't believe.
    Mr. Johnson. The fees are not a direct factor in the 
Customs air arm. Given that there----

                 black market peso exchange initiative

    Mr. Kolbe. There is no request for additional funding for 
it. What impact is all of this going to have on the level of 
operation--you mentioned it yourself, Casablanca, the Black 
Market Peso operations, you mentioned that as one of the things 
that you are working on. How is this going to be impacted if we 
don't have the levels of funding to carry this out?
    Mr. Johnson. Well, with respect to the Black Market Peso 
Exchange, which is an effort, a strategic approach that is 
being undertaken within the Office of Enforcement, one of the 
things that we are trying to do is see what we can do to 
benefit from the synergies of our various bureaus working 
together on a particular project.
    The exchange, and I can explain it very briefly, the Peso 
Exchange operates in a way that implicates the investigative 
resources and the tools of the Customs Service, but also to a 
certain extent of the ATF, of the Financial Crimes Enforcement 
Network, of the IRS Criminal Investigation Division. We are 
trying to bring together all of these tools, in addition to 
bringing together some tools from the Justice Department, to 
adopt the most sensible strategic approach, most efficient 
approach to combating this exchange.
    If a portion of those tools were removed from the table, 
then it could undercut our ability to combat that exchange, 
combat that problem. But we are trying to manage our way 
through that.
    Mr. Kolbe. Well, I have more questions, including one that 
follows up on this, kind of summarizes all of this. I think it 
is clear that the pattern of what I am trying to get at is, in 
all of these areas of the new initiatives and continuing the 
initiatives that we have started before and just the basic 
operations, I think clearly the Treasury law enforcement is 
going to be seriously effected if we aren't able to find some 
way to fund this. And I don't think that we have a very 
practical way with the new taxes suggested by the 
administration. But we will--I will come back to some more 
questions.

                        treasury forfeiture fund

    Mr. Hoyer. Thank you very much, Mr. Chairman.
    Again, I agree with the Chairman on that line of 
questioning. I won't pursue that specific line of questioning 
on the fees. However, the $142 million in the super surplus 
that is being utilized, isn't that a level higher than we have 
had before, $142 million?
    Mr. Johnson. I believe it is, sir, yes.
    Mr. Hoyer. If we have a shortfall in the $142 million, what 
specific impact will that have, and have you contemplated that 
in increments, say of $10 million? Let's say we have $132 
rather than $142 million, or $122 rather than $132 million or 
larger increments, if you will? I don't have in front of me the 
history of the forfeiture fund in terms of its dollars. I know 
my staff tells me the $142 million is the highest level ever 
projected.
    Mr. Johnson. It is a high level, and if the level of $142 
million isn't reached, we will then have to go back and 
prioritize, and what we can do is provide the committee with a 
list of the enforcement priorities.
    Mr. Hoyer. I would appreciate it, if for the record you 
would provide the priorities. You can do it in whatever 
increments you believe are reasonable, $10 million I suggest, 
but it could be a larger $20 million increment at levels down 
to, let's say, the average for the last four years----
    Mr. Johnson. We will do that.
    Mr. Hoyer [continuing]. Or such projection as you believe 
to be reasonable. Now, from the Treasury--that was the super 
fund. For the Treasury law enforcement, what important 
activities may be funded if enough assets are not forfeited to 
offset the costs? You may want to do that for the record to 
prioritize, because we have two funds out of which we are 
projecting expenditures. They may or may not materialize. I 
think this committee needs to know, if they don't materialize, 
what will happen.
    I frankly think, Mr. Chairman, that we may want to look at 
the possibility of only allowing forfeited funds in the prior 
year to be utilized for projected expenditures in the coming 
year. I don't know, knowing the fees are a problem, and the 
level of forfeitures.

                      narrow band radio conversion

    Now, in addition, Mr. Secretary--and again, if you want to 
answer these specifically now--but concerns, the spectrum sales 
fee to offset the radio conversion, I am concerned about that. 
I have been involved in this issue somewhat, and I understand 
that $15 million for the Treasury's compliance with narrow band 
wireless radio band requirements is requested under the 
department-wide capital investments account.
    First of all, is this an important project for Treasury's 
law enforcement bureaus?
    Mr. Johnson. It is an important project for the bureaus.
    Mr. Hoyer. Okay. Now, I am concerned about that not only at 
the Federal level, but at the local level as well. 
Communications is a real problem. You may recall, the El Toro 
sank at the mouth of the Patuxent River in the Chesapeake Bay, 
Potomac River. We had five agencies on site, including Pax 
River Naval, Coast Guard,volunteer fire service and the State 
police. They couldn't communicate with one another. It was a real 
problem.
    Is it also true that this $15 million is supposed to be 
offset by FCC's analog spectrum sales?
    Mr. Johnson. Yes, I believe that's correct.
    Mr. Hoyer. How will you fund this radio conversion if the 
fee does not materialize? I am assuming you have said that this 
is an important, maybe critically important initiative. We are 
going to fund it out of spectrum sales presumably. If that 
doesn't materialize, have we got alternatives?
    Mr. Johnson. Mr. Hoyer, we agree with you that the last 
thing we want is an electronic tower of babble as we try to go 
through and enforce----
    Mr. Hoyer. I like that phase. You don't mind if I steal 
that from you, do you?
    Mr. Johnson. I have got to hit one every once in a while. 
But we are confident that we will be able to obtain these fees. 
If we don't, because this is a critical issue for us, then we 
will have to look back and get the benefit from the fee. We 
will have to look back and see how else we can work through the 
funding for this particularly important program.
    Mr. Hoyer. If you would submit that for the record as well, 
because the committee, the Chairman and myself, the members of 
the committee are going to want to know if this doesn't 
materialize, what happens? What do we lose, what capability do 
we lose? How much contingency money might we want to make 
available to you?
    Let me ask you the last question because I know--has it 
expired? Can I just ask one more question, Mr. Chairman?
    Mr. Kolbe. Yes.

                       federal employee pay raise

    Mr. Hoyer. The 4.4 percent Federal employee pay raise is 
approximately 13 points below what the law requires if we were 
complying with the law. Did you contemplate that in your 
budget? That is, did you incorporate that in your budget, at 
4.4 percent?
    Mr. Johnson. I believe that the pay raise we are 
contemplating is in the budget, but let me double-check and I 
will make sure that that is in there.
    Mr. Hoyer. As you look at it, I presume much of that is set 
off against programs. We don't have a separate fund for it as 
we do for retirement and FEHBP. And when you answer that 
question, perhaps look at it on the record, also indicate to me 
what happens if it is 4.8 and analogous to the military pay 
which is being proposed on the floor, I think this week, Mr. 
Chairman, because I certainly am going to pursue parity between 
the military and the civilian work force.
    Thank you very much, Mr. Secretary.
    Thank you, Mr. Chairman.
    Mr. Johnson. Thank you.
    Mr. Kolbe. Mr. Hoyer, staff advises me that it is included 
in the budget, yes.
    Mr. Hoyer. Does that mean that it essentially is absorbed 
or----
    Mr. Ashford. I understand it was budgeted.
    Mr. Hoyer. It was budgeted. Now can you tell me, Mr. 
Chairman, if it was budgeted, how much of a percentage, almost 
10 percent, 9.6 percent increase in Treasury law enforcement? 
Is that what I read?
    Mr. Kolbe. Yes, it is 9. It is about 9, 8-something, 8 
something.
    Mr. Hoyer. For the sake of argument, let's say the 
percentage is 9. What percentage of that is the mandated pay 
raise, do you know off the top of your head? My point being 
that when we look at this, if you look at it as a 9 percent 
increase and we think that is a pragmatic increase----
    Mr. Kolbe. It is not.
    Mr. Hoyer. It is not, because essentially the pay raise is 
included within that framework?
    Mr. Kolbe. That is correct.
    Mr. Hoyer. Thank you very much, Mr. Chairman.

            internet sales of alcohol, tobacco and firearms

    Mr. Kolbe. Mrs. Emerson.
    Mrs. Emerson. First, Mr. Chairman, let me tell you how 
pleased I am to be on this subcommittee, so I thank you very 
much for your kind words, as well as those of the Ranking 
Minority Member.
    Mr. Secretary, I have a 16-year-old daughter, and even 
though my daughter is perfect, I do worry about such things as 
sales of tobacco, alcohol, firearms over the Internet, and I 
wonder if you all have any kind of program within Treasury that 
does monitor these sales.
    Mr. Johnson. At this stage I am not aware of any program, 
at least that has been raised through the departmental level, 
to monitor the Internet. I know that there are certain 
guidelines in place that law enforcement bureaus must follow to 
monitor the Internet or go into or become involved in 
undercover operations on the Internet. But that is very 
different from an overall strategy of monitoring all of the 
transactions on the Internet.
    Mrs. Emerson. Every day I am amazed at how much more one 
can buy over the Internet without any type of control, and with 
a young--fortunately my daughter does not have time to deal 
with this, I hope, but one never knows, and so I was just 
curious, whether--is that something that you all might think 
about in the future, as we become more and more dependent, it 
seems, on the use of our computers and technology and the 
Internet to buy things?
    Mr. Johnson. One of the things we at Treasury have been 
concerned about for some time in a variety of forms in the 
various bureaus is the protection of our young people and the 
protection of our young people from items of harm, whether or 
not it is alcohol, firearms or narcotics. In various components 
of the Treasury bureaus' missions you will find programs 
designed to protect our youth.
    To the extent that it becomes apparent to us as we carry 
forward these missions that there is one more avenue by which 
bad materials, unwanted materials are getting to our children, 
then I think that is something that we would obviously be 
concerned about.
    Mrs. Emerson. Well, I would encourage you to look into this 
as one other avenue, because it does appear to be something 
that is very troublesome to many of us, particularly because it 
is so easy to do.
    Mr. Kolbe. Thank you, Mrs. Emerson. Here is a new Member 
who wins my applause right from the start. She is well within 
her time frame.
    Ms. Roybal-Allard.

                           care of detainees

    Mrs. Roybal-Allard. Thank you, Mr. Chairman. It is an honor 
to serve on this committee.
    Mr. Johnson, in preparation for today's hearing I spent a 
day down on the San Diego-Tijuana border and I met with Customs 
and the DEA, and was very much impressed by the professionalism 
and expertise of the personnel. I was also amazed at just how 
clever the drug traffickers are. While we were there, there 
were two drug interdictions, and it was amazing to see how 
drugs are put behind dashboards and in fake gasoline tanks. But 
I was equally amazed at just how informed and clever the 
personnel were in actually being able to detect these drugs. We 
were also shown a demonstration of how the dogs sniff out the 
drugs.
    Many of the questions that I had were answered by the 
personnel at the time, but I did observe certain things that I 
would like to ask you about. One, for example, is that as 
people were being moved into the secondary inspection, I 
noticed that there were often children in the car, and I was 
wondering what provisions are made if the adults are being 
detained and then the children are left without any adult 
supervision. What provisions do you have for those children or 
for anyone that may be ill?
    Mr. Johnson. I don't have a precise response to the 
procedures that are in place with respect to each particular 
search at the border, and I don't know whether or not it would 
make more sense for us to follow up later on this afternoon 
during the Customs portion of the hearing, or in written form 
to provide you with a written response as to the precise 
procedures that are followed with respect to that issue.
    Mrs. Roybal-Allard. That would be fine. In regards to the 
detention portion, do you have enough room for detention, or is 
part of the problems the lack of funding? Because, quite 
frankly, I was amazed to learn that you have such low funding, 
especially in light of the fact that the personnel do such a 
good job in spite of the handicap that they face. So I would 
appreciate it if you could provide that information for the 
record.

                       enhanced user fee revenue

    Also, there was a recent 6-month report by the Inspector 
General where he discussed both the enhanced user fee revenue 
from three fees, Customs, Department of Agriculture, and the 
INS, and he said that there was nearly $650 million a year that 
is collected through these fees. However, he also said that 
there was another $49 million that could have been realized if 
a single coordinated audit approach had been taken. He also 
refers to a fee that is raised by the, I believe it is called 
the COBRA 85 fee, which is $1.7 billion. The part of the report 
that concerns me is that he says the collections resulted in a 
surplus of $392 million, but that the control environment 
surrounding these activities was weak and did not meet Federal 
standards. Could you elaborate on that and explain what you are 
doing to correct that?
    Mr. Johnson. I think that would be--that is not an issue 
that has been undertaken at this stage in the Office of 
Enforcement, and what I would like, with your permission, is to 
defer the response to that to later on today during the Customs 
portion of the hearing and discuss that issue in more detail 
there.

                        joint border initiatives

    Mrs. Roybal-Allard. Okay. Something else that I learned 
when I was in San Diego is the fact that there has been an 
effort to partner with the FBI and the DEA. It is a pilot 
project, I believe, that was started there in San Diego, and 
based on the information that we have gotten, it has been 
extremely successful. They felt that it was cost-effective and 
that it enabled the different agencies to coordinate their 
efforts and prevented them from running into each other. Could 
you elaborate on whether you intend to expand this program at 
all?
    Mr. Johnson. There are a couple of initiatives ongoing 
between Treasury and Justice or between our Treasury bureaus 
and the Justice bureaus--to enhance the level of coordination 
on a variety of fronts. In the counternarcotics area there is 
an initiative that is largely the brainchild of Commissioner 
Kelly and of Commissioner Meissner, which is the Border 
Coordination Initiative, which is overseen by the two 
departments. What that initiative is designed to do is to bring 
together Customs personnel and INS personnel, and in seven 
different issue areas enhance their level of coordination. It 
is a model that was initially launched in San Ysidro, I 
believe, but it now applies to all of the ports along the 
southern border.
    Ms. Roybal-Allard. Okay. Thank you.
    Mr. Kolbe. Thank you.
    Mr. Peterson.

                       teenage crime and firearms

    Mr. Peterson. I would like to thank the Chairman. First I 
would like to share my pleasure of serving on this 
subcommittee, and I look forward to our opportunity.
    I guess the first question I would have, Mr. Johnson, is 
kind of a general question but it is one that kind of concerns 
me seriously. I know we are looking at national figures where 
violent crime is down, and that is good news, but I guess I 
would like to ask if that is true in youth.
    It seems to me, I come from a very rural part of 
Pennsylvania, cover about 20 percent of Pennsylvania's most 
rural population, and violent youth crime was sort of an urban 
thing that we were aware of, but in the last decade has become 
very much a rural issue. I could list five or six very violent 
crimes that were committed within 50 miles of my home, and 
three of those were people I knew. In fact, this weekend a 
policeman in Cain, Pennsylvania was shot by a 17-year-old youth 
from a neighboring county who was traveling with a group of 
youngsters and when he stopped them, he just plain shot the 
police chief and killed him.
    Is there any data that shows a rise in teenage crime, 
violent teenage crime in this country?
    Mr. Johnson. Well, I don't have the precise figures. I 
understand that the Justice Department data showed that violent 
crime among youth, although it has dipped somewhat, is still, 
historically at a relatively high level. As I mentioned 
earlier, we are very concerned about that. In fact, part of the 
impetus behind the ATF's Youth Crime Gun Interdiction 
Initiative is to target violent crime among young people.
    I think all of us, unfortunately, can share stories about 
people that we have known, people in our community that have 
been affected by this. One of the things that--one of the 
instances that touched me most early in my tenure first as an 
Assistant Secretary, was a visit to a Chicago housing 
projectwhere I spoke with a mother who talked about the loss of her son 
to gang violence. And these stories are repeated far too often and far 
too--they are repeated over a wide, wide stretch of this Nation. We are 
trying to deal with that problem, and I think we are dealing with it in 
a very creative way.
    Mr. Peterson. Well, the ones that--the six I could name 
real quickly, I won't, and give you a brief description, but 
none of them were gangs. They were all individuals, and they 
were from 15 to 18, mostly in the middle there, and crimes 
committed against family or friends or neighbors. One was a 15-
year-old boy who shot his 14-year-old sister because she was 
going to tell on his plan to kill his stepfather.
    But is there any study that has been done on--it seems to 
me there is a pattern, and I have done no official study, only 
some questioning of DAs and so forth, but it seems that there 
is a pattern of drug use among most of these young people 
during those early years where they are trying to grow up 
through puberty, and suddenly they have drugs in their system. 
Is there any pattern or any study that has been done that shows 
the instability of a youngster who is in those very difficult 
years without drugs, and what giving them drugs seems to do to 
them mentally or emotionally?
    Mr. Johnson. I will check and we will report back to you.

                          drugs source country

    Mr. Peterson. Okay. I guess the other point I guess I would 
like to ask is kind of a general question again. We constantly 
hear of the success of Border Patrol and Customs in stopping 
what comes into this country. But I think the bare facts are 
that in the area I represent, and I say this to schools and 
groups constantly, there is no high school or no middle school 
or junior high school in my district where young people cannot 
buy any drug they want any day of the week. So I mean it is 
everywhere, and I have the most rural part of Pennsylvania. If 
it is available there, it is certainly available in all of 
America, so somehow I guess far too much is getting through, so 
we have a lot to do.
    But is there any effort made, and I know the effort--I have 
a 19-year State background, and I know at the State level we 
had our local groups that were working on drugs. We had the 
State police strike force, we had the attorney general's strike 
force, and then we had the Federal agencies that came in on 
occasion. But is there any effort to track where these are 
coming from? Do we know where most of it is getting in?
    Mr. Johnson. Do we have records of drugs that are coming in 
across the borders?
    Mr. Peterson. Well, where we have been able to actually 
capture the drugs and arrest drug dealers. Do we track where 
those drugs came from?
    Mr. Johnson. Yes, we do.
    Mr. Peterson. Do we pretty well know then where the sieve 
is or how it is getting here?
    Mr. Johnson. We know the source countries, we know the 
transit routes, we can identify the choke points. What often 
happens is that once we identify a choke point and we shut down 
that avenue, then the drugs are transited through another area, 
but we do track that.
    Mr. Peterson. What are the leading places now, the traffic 
routes that are the hottest now where we think they are coming 
in?
    Mr. Johnson. One of the primary or the primary source more 
than likely for cocaine would be Colombia. One of the primary 
routes by which it enters the United States is through the 
southern border.
    Mr. Peterson. Mexico?
    Mr. Johnson. Yes.
    Mr. Peterson. How about the islands?
    Mr. Johnson. I see, and I will defer to Commissioner Kelly, 
but I do believe that there is a substantial amount that has 
been coming through the islands as well.
    Mr. Peterson. And Puerto Rico feels that they have 
inadequate resources, and once it comes to the other islands 
and comes to them, it is sort of--it is in. Once it hits Puerto 
Rico, it is here. But I wonder if that has been looked at as 
a----
    Mr. Johnson. Yes, we constantly look and evaluate what the 
trafficking patterns are, and then at the operational level 
decisions are taken as to how to deploy resources.
    Mr. Peterson. Would you agree that our young people have 
never had more access to drugs than they do today in our 
schools, neighborhoods, across America?
    Mr. Johnson. I cannot provide--I don't have a metric 
measurement for their access. I can say that all of us are 
concerned about the level of access. We have as an 
administration a multipart strategy to deal with the problems 
of drugs, that not only involves interdiction but involves a 
significant prevention component. Within Treasury, across our 
bureaus there are various programs that attempt to deal with 
the problem of not only the interdiction of drugs, but also the 
problems that are created by gangs that distribute drugs, the 
problems of young people when they are in this very malleable 
phase and how they might be enticed into joining a gang. We 
have a program within the ATF, the GREAT program, which helps 
to deal with that problem and helps young people avoid gang 
involvement.
    So it is a concern, and we are working on it.
    Mr. Peterson. Just one statement. Seventy-five percent of 
the young people in my district--students claim that 75 percent 
are tinkering with drugs and one-third are using drugs, and if 
that is true, I find that scary.
    Mr. Kolbe. Thank you very much. I hope you will be here 
this afternoon to ask these questions very specifically of 
Customs, of Commissioner Kelly.
    We are going to a second round. We want to get to Mr. Bowen 
and Mr. Basham this morning as quickly as possible, so I am 
going to make my questions very quick, and I think the answers 
can be very short, and we will see if there is a second round 
for Mr. Johnson before we go to Mr. Basham and Mr. Bowen.

                        customs' P-3 Procurement

    Mr. Johnson, this is a budget-related question and it is 
related to Customs, but because it is budget-related, it really 
belongs being asked of you rather than Commissioner Kelly. Can 
you tell me why, given the priority the Congress placed on the 
air interdiction program and the fact that we provided 
substantial funding, as you know, for P-3s and for the 
deployment of them, why no money is requested in this FY 2000 
budget for operation and maintenance of the new aircraft that 
were funded in fiscal year 1999?
    Mr. Johnson. I believe the answer has to do with the 
acquisition time period of the P-3s, when they are actually 
going to be coming on board, and I can explore that further for 
you.
    Mr. Kolbe. You are saying you expect none of those to be on 
board in the course of the next 20 months?
    Mr. Johnson. I can check; just a second.
    Mr. Kolbe. That would be the end of the next fiscal year. 
You have requested nothing.
    Mr. Johnson. Having conferred with Commissioner Kelly, we 
expect two to be coming on board this year, none for 2000. 
[Clerk's note.--The Department amends this to say that the 
first P-3s would arrive in October, 2000, that is, the 
beginning of fiscal year 2001]
    Mr. Kolbe. And how would you propose to provide the 
training and the crews and the maintenance, the operations and 
the maintenance for those, without any new funds for them?
    Mr. Johnson. We will have to manage through the resources 
that we have to deal with the two P-3s previously funded in Fy 
1997.
    Mr. Kolbe. Okay. I think I have got the answer to the 
question.

                           Know Your Customer

    This is kind of an off-the-wall question, but I just would 
like to know. At home during this break there was lots of 
interest in the issue of ``know your customer,'' which may 
sound a little unfamiliar to you. And the reason I am asking 
the question, it is a bank, it is the Treasury, not Treasury--
yes, Treasury Department, FDIC Office of Thrift Supervision and 
Treasury, Comptroller of the Currency and Federal Reserve 
program for banks to know their customer, acquire a lot of 
information about their customers. I don't know if you are 
familiar with this.
    My question is, even though it is not proposed specifically 
by your department, anything in your area, can you tell me 
whether FinCEN has consulted with any of those agencies that I 
just mentioned, the Federal Reserve, Comptroller of the 
Currency, FDIC, Office of Thrift Supervision, in drafting this 
new proposal?
    Mr. Johnson. As you know, FinCEN has broad regulatory 
authorities under the Bank Secrecy Act, and in execution of its 
regulatory authorities it is in regular consultation not only 
with the department, but with the other regulatory agencies, 
including those that issued the ``know your customer'' rule, 
proposed rule. It has not yet been made a final rule.
    Mr. Kolbe. I understand. It is out for comment right now.
    Mr. Johnson. That is correct, and it has received 
substantial comment.
    The Financial Crimes Enforcement Network has discussed with 
the department and we have discussed with other regulatory 
agencies this rule, but we have no plans at this stage to issue 
such a rule.
    Mr. Kolbe. I ask because, although I am certainly 
supportive of what we can do to enforce the laws and to make 
sure that we know about money laundering, which is a key 
element of our drug interdiction effort, it has to be balanced 
with the rights of the public to have--the rights of citizens 
in this country to have some privacy in their financial 
transactions, and this seems incredibly intrusive.

                New Directors--Secret Service and FinCEN

    Very quickly, my last question, can you tell me what is the 
status of the selection of the new directors for Secret Service 
and for FinCEN?
    Mr. Johnson. I can tell you that we have, notwithstanding 
the fact that they are not sitting at the table here today, we 
have been pursuing both projects with energy, and we hope to be 
able to report to you soon that we have filled both positions.
    Mr. Kolbe. Weeks, months? You don't know?
    Mr. Johnson. I hope it will be much less than months.
    Mr. Kolbe. Thank you.
    Ms. Roybal-Allard, do you have another line of questioning 
here for Mr. Johnson?

                             Drug Seizures

    Ms. Roybal-Allard. Well, this question may be better for 
this afternoon, but I would like to ask it.
    With regards to the six-month report of the Inspector 
General, he described in his investigation that Customs drug 
interdiction efforts at the airports and at the seaports were 
increasing by significant numbers, yet the seizures actually 
declined in 1991 and 1996. Is this due to a lack of funding, or 
is there some other explanation for this? If so, what is being 
done to deal with that?
    Mr. Johnson. As I mentioned earlier, when narcotics 
traffickers are bringing narcotics into the United States, or 
attempting to, they use a variety of means and they sometimes 
shift from one method to another.
    With respect to the level of staffing, there hasn't been a 
decrease in the level of staffing that would explain the 
decrease. It is more than likely a result in a change of 
tactics.
    Ms. Roybal-Allard. Okay. Just quickly, and maybe this would 
be for this afternoon, but my understanding is that sometimes 
the way we measure your success is through the number of drug 
seizures. I am just wondering if that is really a fair 
measurement, especially in light of the fact that if you are 
going to expand on pilot projects where you will be working 
with other agencies, who will get the credit for that 
particular seizure? Do you feel that if we measure your success 
solely by number of seizures, is that a fair measurement?
    Mr. Johnson. Well, clearly doing it, it is a measure that 
we take into account but it can't be the only thing that we 
take into account.
    One of the other things that we may want to take into 
account as we move forward is the cost of actual shipping of 
the narcotics. That sort of information we could arrive at 
through informants.
    Ms. Roybal-Allard. It was the cost of--I didn't hear that 
part.
    Mr. Johnson. I am sorry. The cost of shipping the 
narcotics.
    Ms. Roybal-Allard. The cost of shipping the narcotics?
    Mr. Johnson. Right.
    Ms. Roybal-Allard. I am not quite understanding what you 
mean in the cost. Is it the number, or the amount of narcotics 
that are confiscated?
    Mr. Kelly. If I can just answer one question, you are 
right, the measurement of success is too narrow, just in the 
amount of drugs seized, so we are looking at some other 
indicators, one of them being the cost to a drug organization 
to get drugs into the country. That may be arrest, it may be 
time, it may be actual money, how they have to secrete the 
drugs. So we are trying to expand our measurements to address 
precisely your issue, because it ebbs and flows as to how they 
bring drugs into the country, and the seizures alone are not 
the total indicator.
    Ms. Roybal-Allard. Okay. Thank you.
    Mr. Kolbe. Thank you very much, Ms. Roybal-Allard.
    Let me just, before we move on to the next part of this 
hearing, let me just for the record correct a mistake that I 
made in my opening statement where I referred to the increase 
in funding for INS and Customs. Those were nominal figures. The 
real increase in funding from fiscal year 1994 through 2000 
would be 134 percent for INS and a reduction of 3 percent for 
Customs. What we had was the nominal numbers.
    We are going to move now to hear from Secret Service and 
BATF. We will take about a two-minute break so that we can 
excuse Mr. Kelly, and Mr. Magaw will be here this afternoon. 
What I am going to do is ask both of them to give their opening 
statements and ask questions for both of them, so if they want 
their budget people up at the table they can bring them up at 
this time. We will see you this afternoon.
                                        Tuesday, February 23, 1999.

   UNITED STATES SECRET SERVICE AND FEDERAL LAW ENFORCEMENT TRAINING 
                                 CENTER

                               WITNESSES

BRUCE BOWEN, ACTING DIRECTOR, UNITED STATES SECRET SERVICE
RALPH BASHAM, DIRECTOR, FEDERAL LAW ENFORCEMENT TRAINING CENTER
    Mr. Kolbe. Let me begin by just calling on our two main 
witnesses. We will go first with Mr. Bowen for any opening 
comments he has, and then Mr. Basham.
    Mr. Bowen. Mr. Chairman and Members of the subcommittee, I 
am pleased to be here today and to be afforded the opportunity 
to testify on the Secret Service's fiscal year 2000 budget 
request. I have submitted a more comprehensive statement for 
the record, and with the Chairman's permission, I have a 
shorter, condensed statement I would now like to read before 
the committee.
    With me today, Mr. Chairman, are Jane Vezeris, Assistant 
Director for Administration; Brian Stafford, Assistant Director 
for Protective Operations; Barbara Riggs, Assistant Director 
for Protective Research; Kevin Foley to my left, Assistant 
Director for Investigations; Gordon Heddell, Assistant Director 
for Inspection; Charles DeVita, Assistant Director for 
Training; Terrence Samway, Assistant Director for Government 
Liason and Public Affairs; and John Kelleher, our Chief 
Counsel.

                 Fiscal Year 2000 Appropriation Request

    The Service's fiscal year 2000 funding request totals 
$745.9 million and 5,123 FTEs, and is comprised of four 
separate funding sources: the salaries and expenses 
appropriation; the acquisition, construction, improvement and 
related expenses appropriation; transfers from the Violent 
Crime Reduction Trust Fund account; and reimbursements from the 
departmental super surplus forfeiture fund. Together, the total 
budget for fiscal year 2000 is $17.3 million, or 2.4 percent 
above the level of funding the Service has received this fiscal 
year.
    I must add, Mr. Chairman, that if it were not for the 
additional funding we received as a result of the upcoming 
campaign, the Secret Service's budget would have suffered a 
decrease of 2.5 percent over last year.

                              Results Act

    With this funding, the Secret Service expects to further 
advance the attainment of its two mission goals, which are to 
maintain the highest level of protection possible through the 
effective use of human resources, protective intelligence, risk 
assessment, and technology; and to protect the integrity of the 
Nation's financial systems through aggressive criminal 
investigations and assessing trends and patterns to identify 
proactive measures to counter systemic weaknesses. With this 
fiscal year 2000 budget the Service will continue to meet the 
goals and objectives required to further enhance the attainment 
of its overall strategic vision.

                           Protective Program

    This past year, 1998, was an extremely productive and 
demanding year for the Secret Service. The total number of 
stops for all protectees was 9.2 percent higher than the number 
estimated. The President and Mrs. Clinton and Vice President 
Gore continue to maintain extensive foreign travel schedules. 
The President made 44 foreign stops, the First Lady made 62 
foreign stops, and the Vice President made 28 foreign stops 
last fiscal year.
    Our Office of Protective Operations also successfully 
coordinated a number of major protective events last fiscal 
year. The Service provided individual protection for the 53rd 
annual United Nations General Assembly and the 20th United 
Nations Special Session on the world drug problem, as well as 
individual protection and event security at the 17th Congress 
of the World Energy Council. The Congress of the World Energy 
Council was held in Houston, Texas, and was the first event for 
which the Secret Service assumed lead protection 
responsibilities for security in accordance with Presidential 
Decision Directive 62. This Presidential Decision Directive 
names the Secret Service as the lead agency for security 
design, planning and implementation of the events designated as 
national special security events.
    In addition to the usual protective workload, the Service 
this year has successfully met the demands of large protective 
efforts surrounding the visit to this country by Pope John Paul 
II. Also, a summit of the North Atlantic Treaty Organization 
will be held in Washington, D.C. this coming April. This event 
has been nominated as a national special security event in 
accordance with PDD 62.

                         Investigative Program

    Relative to our investigative mission, the Secret Service 
closed 27,429 criminal cases during fiscal year 1998. Thisis a 
remarkable achievement, given the heavier than anticipated protective 
workload.
    As discussed last year, the United States dollar continues 
to be the currency of choice worldwide. Approximately $480 
billion of genuine United States currency is in circulation 
worldwide, and nearly 66 percent of that is in foreign markets. 
As GAO and the Federal Reserve Bank have testified, foreigners 
have a tendency to hold U.S. currency, primarily because of 
their confidence in this dollar and as a hedge against 
inflation affecting their own currency. This willingness to 
hold U.S. currency results in an interest-free loan to the 
United States amounting to nearly $25.4 billion annually. A 
taxpayer of the United States directly benefits from this 
activity.
    Last year the Service's effort led to the level of 
counterfeit money passed being held to $92 per $1 million of 
genuine currency. This was significantly below the $119 per $1 
million of genuine currency in our performance plan, resulting 
in a substantial savings to the American public.
    Mr. Chairman, this concludes my statement. Time permitting, 
I would now like to introduce the Assistant Director of our 
Office of Investigations, Kevin Foley, for our investigative 
presentation, after which I would be pleased to answer any 
questions you or the members may have.
    Mr. Foley. Good morning. With me today are three members of 
our Financial Crimes Division, Agents Steve Sepulveda, Paul 
Ruskowski and George Ryan, who will assist me with the 
presentation this morning.
    Historically the Secret Service's investigative role has 
been to protect the integrity and the public's confidence in 
our currency through proactive and aggressive counterfeit 
investigations. But as time and technologies change, so too 
must the Secret Service. Today, in addition to our counterfeit 
responsibilities, we investigate a number of other violations 
such as access device fraud, bank fraud, counterfeit and 
fictitious financial obligations, and telecommunications and 
computer fraud. Each of these crimes has a detrimental effect 
on the country's financial systems.
    United States payment systems, powered by the development 
of impressive new technologies, continue to merge 
internationally into one borderless web. Electronic banking, 
global payment systems, smart cards and digital currencies will 
soon become a target-rich environment for transnational 
organized criminal groups. We recognize that even though this 
trend in international commerce appears to be moving towards 
electronic payment systems, the U.S. dollar, for a variety of 
reasons, remains the currency of choice worldwide.
    Today, approximately $480 billion in genuine U.S. currency 
is in circulation worldwide, with the majority of that currency 
utilized in foreign markets. In 1998, according to the 
Department of the Treasury, the foreign demand for U.S. 
currency generated $25.4 billion in interest earnings to the 
United States. As the demand for genuine U.S. currency has 
increased, the dollar has become more vulnerable to worldwide 
counterfeiting.

                 investigative program--counterfeiting

    During our investigations, we have seen an increase in the 
amount of counterfeit U.S. currency passed, the number of 
manufacturing plants suppressed, and the individuals arrested 
for counterfeit activity. We believe this increase is directly 
attributable to the ease which with currency can be 
counterfeited using personal computers and advanced 
reprographics.
    With the emergence of these new methods, the percentage of 
computer-generated notes has seen dramatic increases, and 
although many of these computer-generated notes are inferior in 
quality to offset printed counterfeit, as the statistics on the 
screen indicate, the quality of these notes are deceptive 
enough to fool the public.
    As you can see, reading the graph from left to right, in 
1995 computer-generated counterfeit currency represented only 
.5 percent or about one-half of 1 percent of the total 
counterfeit currency passed in the United States. This figure 
grew to 43 percent in 1998.
    Alarmingly, this trend toward computer-generated 
counterfeit currency is not confined to the United States. 
Recently the Spanish National Police arrested three suspects 
and seized in excess of $8 million in counterfeit currency, 
more than half of which was produced by computers and edge 
identity copiers.
    Today, there exists a real misconception that individuals 
using this technology to manufacture counterfeit money and 
commit other financial crimes are computer-literate, white 
collar criminals. More prevalent is the involvement of 
organized criminal groups, repeat offenders, and individuals 
involved in narcotics distribution, weapons use and inherently 
violent crimes, as the rap sheets of these three recent Secret 
Service arrests indicate.
    To illustrate the point, I would like to talk about one 
recent case in Hagerstown, Maryland, where the Baltimore field 
office, working with the Bureau of Alcohol, Tobacco and 
Firearms, the Hagerstown Police, and the Washington County 
Sheriff's Department, completed an investigation into the 
trafficking of computer-generated counterfeit currency. When 
our agents executed search warrants at the residence pictured 
there, the defendant, a former military explosive ordnance 
disposal technician, was found in possession of an elaborate 
computer system used to manufacture not just counterfeit money, 
but false identification and child pornography. Also found in 
the residence was a quantity of explosives.
    This new technology is not only utilized in the 
counterfeiting of currency, but also to produce numerous other 
counterfeit and fictitious instruments, credit cards and false 
identification. Because of these new technologies and the new 
advances in those technologies, the Secret Service has seen 
increased fraud losses in all areas of our jurisdiction.

                    investigative program--skimming

    In addition to the counterfeiting of transaction cards, 
another growing problem identified by the financial industry is 
skimming. Skimming refers to the theft of the account 
information on the magnetic stripe of a transaction card. I 
would like to take this time to show you a short video that I 
think demonstrates the ease with which criminals can steal the 
information off the magnetic stripe of your card. I ask that 
you watch the clock on the bottom of the video, which will give 
you some indication of the speed of the skimming procedure.
    In this video you see three people sitting down for lunch. 
The customer uses his credit card to pay the bill, and as the 
waiter brings the card to the register, he slips a skimming 
device out of his pocket, swipes the account information off 
the mag stripe, returns the device to his pocket, and then he 
goes on to complete the legitimate transaction. The waiter then 
returns the card to the victim, who won't realize that his 
account information has beencompromised until he sees charges 
that he didn't make appear on his monthly bill. I think if you look at 
the clock, it is about 45 seconds. That whole episode was in slow 
motion as well, so I think it gives you some indication of how quickly 
it can occur.
    Although this was just a demonstration, the skimming device 
used in this video was seized by agents during the course of an 
investigation by our New York field office. I will pass this 
skimmer around to you, if I could, to give you an indication of 
just how compact and easily concealed it is, and just how far 
this technology has come. Examination of this particular 
skimming device determined it could hold a minimum of 50 
account numbers, and a conservative estimate of the potential 
fraud loss for this gadget is in excess of $1.4 million per 
week.
    Mr. Hoyer. How does that work? Do you transfer to another 
magnetic stripe?
    Mr. Foley. It is downloaded into a computer, then it is fed 
into the mag stripe on a counterfeit card or an altered or 
stolen card.
    Mr. Kolbe. Who makes these?
    Mr. Foley. There are some legitimate uses for them, and 
there is commercial manufacture of those devices. That is a 
rigged device. If you go to trade shows, Congressman, and for 
instance there are 50 booths and you have an interest in 
information, generally they will issue a card to you as you 
enter the hall with your information on it, and you just scan 
that card and they will send you materials relating to their 
products.
    Mr. Hoyer. Let me ask you, I take it this does not erase, 
however; it simply reads the information, transfers it to this 
device and leaves the card intact?
    Mr. Foley. That is correct.
    Mr. Hoyer. So the owner never knows.
    Mr. Foley. Has no idea he has been compromised.
    May I continue?
    Mr. Kolbe. Yes, please.
    Mr. Foley. Now, unfortunately, there is no geographic area 
immune from these schemes. Within the last six months our 
offices have conducted skimming investigations in New York, 
Florida, Maryland, Ohio, California, North Carolina, Arizona, 
Pennsylvania, and the list goes on and on. Routinely we see 
account information that was skimmed in the United States used 
in foreign locations within 24 hours of the compromise.

                investigative program--money laundering

    Now, with the advent of smart cards, electronic trades and 
global payment systems and the ability to conduct international 
transactions instantly, there has become more of a worldwide 
concern for money laundering. With advances in the technology 
of these monetary systems, the ease of concealing illicit 
financial transactions will significantly increase.
    Much of law enforcement efforts today center on the 
tracking of illicit money flow in the identification of 
deposits and cash transfers. Secret Service believes that no 
money laundering strategy would be complete without first 
attacking the specified unlawful activity or SUA, as it is 
called, that generated the illicit proceeds, and we feel that 
this can be accomplished by developing partnerships with both 
the police and international banking communities.
    A recent case that is a prime example of those partnerships 
involved a fraudulent investment scheme where investors were 
guaranteed an unrealistic rate of return. The investigation 
centered on phoney investment brokers who offered fictitious 
guarantee and investment contracts to unsuspecting victims. 
Brokers based in Arizona, New York, California, Utah and New 
Mexico would routinely fleece their victims out of their life 
savings. The proceeds for these schemes were laundered through 
wire transfers to financial institutions throughout the world.
    Now, although this case is continuing, several suspects 
have been identified and a seizure in excess of $4 million in 
the United States has been made. Additionally, over $25 million 
has been identified in foreign bank accounts, and repatriation 
of those funds is underway in an effort to return that money to 
the victims.
    It is conceivable to picture a major money launderer taking 
advantage of these evolving payment schemes by carrying large 
sums of money across borders via smart cards. These cards, with 
their ability to store and transfer information, including 
monetary value, from one card to another, have far-reaching 
effects on law enforcement efforts to combat money laundering. 
A single card in the wallet of a money launderer would be 
virtually impossible for law enforcement to detect, and could 
replace the paper trail left by today's criminals.

                      investigative program--ecsap

    The Secret Service is committed to continuing its efforts 
to train and equip our agents to address these and other high 
tech crimes in all areas within our investigative 
responsibilities. To that end, our Electronic Crime Special 
Agent Program, ECSAP, as it is known, has evolved into an 
essential component of the investigative and protective 
missions of the Secret Service.
    With the dramatic increase in PC usage by criminal groups, 
the demand by our field offices for ECSAP support has 
predictably and dramatically increased. As the availability of 
low-cost, high-tech computer equipment increases every day, and 
the Internet continues to grow at a rate of over 100 percent 
annually, it is reasonable to anticipate the criminal element 
will utilize these tools at the same levels.
    Agents assigned to this program are trained in a variety of 
electronic evidence and to examine a variety of electronic 
evidence seized in today's criminal investigations, to include 
computers, skimmers, telecommunications devices, electronic 
organizers, scanners, and any other related cloning equipment 
that is used in a wide range of criminal activities. Because of 
our technical expertise and longstanding relationship with the 
telecommunications industry, we have had the opportunity to 
participate in a wide range of criminal investigations 
involving the use of wireless telecommunications instruments. 
As a result, we have been able to successfully assist State and 
local law enforcement in numerous tracking operations, ranging 
from a police killing in Chicago to a kidnapping in San 
Francisco.
    The knowledge derived from our interaction with State and 
local enforcement and the financial communities has resulted in 
an expertise in the overall financial structure of the U.S. 
financial system. The Internet and telecommunications 
industries, two of the fastest growing industries in the world, 
provide the backbone for our evolving cyber infrastructure, and 
the vulnerability of this infrastructure cannot be understated. 
It is one of the most significant threats to the United States.
    We recently investigated a case involving juvenile hackers 
in the Boston area where a telephone switch wascompromised and 
led to the disruption of radar and runway control at a regional 
airport, as well as 911 services and all local telecommunications 
operations in Worcester, Massachusetts. After search warrants were 
executed and computer data analyzed by our ECSAP agents, the method of 
compromise revealed that this vulnerability existed in approximately 
22,000 switches across the country. These systems controlled everything 
from the New York Stock Exchange to a large percentage of 911 systems 
and heart monitoring networks at medical centers around the country.

         Investigative Program--Missing and Exploited Children

    Another area in which the Secret Service continues to take 
an active role, and there is no more noble cause, is in the 
matter of missing and exploited children. We are routinely 
asked to assist other Federal, State and local law enforcement 
agencies by providing assistance and forensic assistance in 
this area. During 1998 the National Center for Missing and 
Exploited Children reported the receipt of over 5,000 new 
cases, and the Secret Service was active in a number of these 
cases because of our expertise in the areas of age enhancement, 
polygraph and handwriting examinations, ink analysis, 
fingerprint research and identification.
    One case in which we provided pivotal assistance to local 
authorities occurred in south Florida. The Florida Department 
of Children and Family Services requested forensic assistance 
in developing a suspect accused of fondling a 3-year-old boy. 
Our polygraph examiners were able to successfully identify a 
suspect who later admitted to the crime.

                      Investigative Program--Fish

    Because of our membership in Interpol we have been asked on 
numerous occasions to provide age enhancements for use in 
identifying missing children throughout the world. Our forensic 
services division continues to provide invaluable assistance 
through the use of the Forensic Information System for 
Handwriting, commonly referred to as FISH. Using this system, 
document examiners are able to scan and digitize text writing. 
These writings can then be searched against previously recorded 
writings and exemplars, enabling the examiner to develop 
identifications.
    Currently, the FISH system has two databases. One relates 
to threats against our protectees and other U.S. Government 
officials; the other contains documents involving the National 
Center for Missing and Exploited Children. Because of our 
databases and expertise in the use of this technology, we have 
been able to assist both domestic and foreign law enforcement 
in a number of cases.
    One recent case involved an unknown subject who was sending 
threatening letters to the Members of the House and Senate, the 
Central Intelligence Agency and Interpol. After the initial 
investigation was unsuccessful in developing any suspects, the 
Secret Service was asked to use our FISH system on the letter. 
Our analysis determined the letter was written by a subject 
known to our Intelligence Division, and we are currently 
assisting Interpol and the CIA in their investigation.
    In addition to our forensic investigative work, the Secret 
Service initiated KIDS, the Children's Identification System. 
This service provides parents with a printed document that 
contains the thumbprints and a photograph of their child. I am 
proud to say that since the inception of this program, the 
Service has processed more than 10,000 children at different 
sites across the country. This program is run strictly for the 
parents' peace of mind and the children's safety, and the 
Secret Service does not maintain any database with this 
information.
    In closing, I would just like to say that the Secret 
Service recognizes the need to remain proactive, innovative and 
nonparochial in our approach to law enforcement. As crime 
becomes more complex and international in scope, we need to 
continue developing the partnerships which will help to 
accomplish our mission. Whether these partnerships take the 
form of an ad hoc task force to address specific problems or an 
international multi-agency strike force, we need to create an 
environment in which the criminal feels he has no place to 
hide.
    [The information follows:]


[The official Committee record contains additional information here.]

    Mr. Kolbe. Thank you very much.
    We are going to go and hear from Mr. Basham, and then we 
will take questions for both of our witnesses.

                              Introduction

    Mr. Basham. Mr. Chairman, Mr. Hoyer, 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 appropriations 
request for fiscal year 2000.
    With me today are members of the senior staff, Mr. John 
Dooher, Senior Associate Director for our Washington 
Operations; Connie Patrick, Associate Director for Planning and 
Resources; Paul Hackenberry, Associate Director for Training; 
and Jeff Hesser, who is the Director of our Artesia Operations.
    While I have only been director of the center for 
approximately one year, I am well aware of the outstanding 
reputation this organization has acquired in over three decades 
of delivering high quality training to law enforcement officers 
from across the country and around the world. Under the 
leadership of Secretary of the Treasury, Mr. Robert Rubin, and 
Under Secretary Johnson, the FLETC has received strong support 
and active assistance for carrying out its responsibility. I am 
especially thankful for the assistance and counsel they have 
provided during my first year as director of the center.
    Throughout the center's 29 years of service to Federal law 
enforcement, this committee has been extremely supportive and 
most generous in its funding of consolidated training. Success 
enjoyed by the center and the success of the consolidated 
training concept are directly attributable to this Committee's 
strong and consistent support.

                           Increased Training

    As I mentioned in my testimony last year, the center 
continues to face an unprecedented increase in its training 
workload. In fiscal year 1998, the center delivered more weeks 
of training than at any other time in its history, and we 
expect the training workload to be even heavier this year. 
Further, based on projections of our participating agencies, we 
expect this trend to continue for the foreseeable future. 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, 
counterterrorism activity, security enhancements at Federal 
facilities, and new Federal prisons coming on line.

                             Strategic Plan

    The initiatives outlined in our request are targeted at 
maintaining the quality of training and increasing the center's 
training capacity in response to this growing workload. They 
tie directly to the goals outlined in the center's strategic 
plan. That plan is now in the process of being revised to 
better align it with the center's mission and make it more 
meaningful to our staff, this committee and our stakeholders. A 
copy of the revised plan will be provided to this Committee and 
our stakeholders for review and comment prior to it being 
finalized.

                        Master Plan Construction

    I would like to take a few minutes to briefly discuss the 
center's master plan and the construction initiatives outlined 
in our request. These initiatives are critical to the continued 
success of consolidated training.
    To meet the rise in the training workload, the center is 
moving forward on its master plan construction program to 
increase capacity at both Glynco and Artesia. The 1998 Congress 
appropriated over $105 million [Clerk's note agency notes: that 
this includes appropriations from 1989-99] for master plan 
construction projects. Additional funds have been allocated 
from other sources such as the Treasury Asset Forfeiture Fund 
for construction of new facilities at both Glynco and Artesia. 
The master plan has been updated several times over the last 
few years and copies of these updates have been furnished to 
the Committee.
    It should be recognized that the cost of fully implementing 
the master plan has increased over time because of inflation 
and changes necessary to meet the training requirements of our 
customers. The center will continue to work through Treasury, 
OMB, and Congress regarding adjustments to the master plan.

                      GLYNCO CONSTRUCTION PROJECTS

    In the past two fiscal years, the center has completed 
construction on two additions to the main classroom building 
and a computer building at Glynco. Additionally, construction 
is well underway at one new dormitory, with the second dorm in 
the initial stages of construction. Further, construction of an 
administration building begun last year is nearing completion.

                     ARTESIA CONSTRUCTION PROJECTS

    In Artesia, construction of a 73-bed dormitory is 
completed, and we expect to award a contract for construction 
of a new classroom and physical exercise building soon. Funds 
for a 300-bed dormitory in Artesia should also be obligated in 
this fiscal year.

                 FISCAL YEAR 2000 CONSTRUCTION REQUEST

    Our fiscal year 2000 request includes $13,129,000 for new 
construction. These funds will be used to complete funding 
already partially appropriated for the construction of a new 
classroom building, construction of specialized facilities 
required for implementation of a new counterterrorism training 
program, and expansion of the center's water cooling system to 
support facilities being constructed.
    The continued expansion of the facilities at both Glynco 
and Artesia are vital if the closure of the temporary training 
facilities in Charleston, South Carolina is ultimately to be 
realized and we are to meet the training requirements of all 
our customers.

                             DEMONSTRATION

    Before closing, I have asked two members of the FLETC 
staff, Mr. Scott Curley and Mr. Hugh Breslin, to briefly 
discuss the FLETC's counterterrorism training. FLETC's fiscal 
year 2000 budget request includes $2.5 million for training in 
the area of weapons of mass destruction. The money will be used 
to develop a specialized training facility and related training 
programs to teach our law enforcement officers and agents how 
to recognize, protect and react to such threats. If you would, 
Scott and Hugh.
    Scott Curley, Mr. Chairman, is the branch chief for our 
Security Specialties Division. Scott comes to the center from 
the Bureau of Investigations in Georgia, I believe. Is that 
right, Scott?
    Mr. Curley. Yes, sir.
    Mr. Basham. And Mr. Breslin comes to FLETC from the Capitol 
Police. So when you are ready.
    We are kind of a low-budget operation here, Mr. Chairman. 
Pardon the delay.
    Mr. Curley. I apologize for the delay, Mr. Chairman.
    Mr. Basham. In the interest of time, perhaps you would like 
to proceed.

                  Weapons of Mass Destruction Training

    Mr. Curley. Let me explain if I can, briefly, our two 
initiatives. One is the Critical Infrastructure Protection 
Training Program. Many of our participating organizations are 
responsible for the security of buildings and installations. 
That particular initiative is in the fiscal year 2000 
appropriation.
    Also, we have a Weapons of Mass Destruction Training 
Program which we would like to establish for our law 
enforcement officers, so they can recognize when there is a 
chemical/biological incident and take measures to save their 
own lives, as well as the lives of others. Mr. Hugh Breslin is 
with us today, and he is going to give us an overview of the 
chem/bio threat.
    Mr. Breslin. Thank you, Mr. Chairman. Presently I am an 
instructor at the Federal Law Enforcement Training Center. I am 
by profession a bomb technician. Within that field, my 
specialty is in the management of weapons of mass destruction, 
specifically the use of biological or chemical agents as 
terrorist weapons.

                            TYPES OF THREATS

    At FLETC we begin our presentation to a student by defining 
what a threat is. It is knowledge. It is the know-how that a 
terrorist gets from such mail order, do-it-yourself guide books 
as the Anarchy Cookbook which devotes a whole chapter to making 
these bombs. It is the terrorist going to the Internet and 
downloading from one of thousands of sites such manuals as the 
Terrorist's Handbook. As its intent, it is the wont of the 
terrorist to actually execute an attack.
    We have all heard about the Tokyo subway gas attack, but 
what about something closer to home? In 1995 a U.S. citizen, a 
young man described as a skinhead, was detained by theCanadian 
Customs Service as he was crossing from Alaska into Canada. They found 
in the back of the trunk of his vehicle large sums of cash and 130 
grams of a white powdery substance which turned out not to be drugs, 
but Ricin, one of the most toxic biological agents known to man. It is 
thousands of times more powerful than any chemical agent. Before the 
authorities had an opportunity to interview the young man, he hung 
himself in his jail cell. To this day, no one knows where he got the 
stuff and no one knows where he was going. Again, it is knowledge 
coupled with intent that equates to threat.

                         chemical agent threats

    Next we define for our officers what a chemical agent is 
and just how easy it is to make. As an example, I heat my oven 
up to about 300 degrees Celsius and I take common table salt 
and I spread a layer of salt on a cookie sheet, and I take the 
cookie sheet and put it into the oven. After X number of 
minutes, I then go ahead and get ahold of some household 
ammonia and I pass it over the salt, and this turns the salt 
into a compound called sodamide.
    I take the sodamide out of the oven and let it cool down 
and then I find some carbon, and probably the best place I know 
is the actual lead graphite from a pencil, and I add an equal 
amount of carbon to the sodamide, and that turns it into 
something called sodium cyanide.
    Next, I get ahold of some sulfuric acid. The best place I 
know is a car battery. Mr. Chairman, if I were to take three 
cups of sulfuric acid and add it to four cups of powder sodium 
cyanide, I could create a cyanide gas to kill 10,000 people.
    This is the replica of a homemade cyanide gas bomb that was 
placed on a Tokyo subway car two weeks after the failed Sarin 
gas attack. Fortunately, an alert police officer spotted it in 
time, it was subsequently neutralized before it could do any 
harm.

                        biological agent threats

    We talked about chemical agents. How about something like a 
biological agent, and none has been in the news more so than 
the ubiquitous spore-forming Bacillus anthracis, also known as 
anthrax. At 1 to 5 microns, the spores are just small enough 
that encapsulated in a little jar, that it performs more like a 
liquid than the actual powdered solid that it is. This is all, 
by the way, inert and safe substitutes.
    The spores are so small that if I were to take a cup of 
anthrax and throw it up in the air, that it would instantly 
turn into a mist and suspend for several minutes. On a breezy 
day, the wind can take that anthrax spore and carry it 60 miles 
downrange to its target, a distance from Frederick, Maryland to 
Washington, D.C.

                        Dissemination of agents

    After we have identified some of the agents, then we 
explore with our students the means by which a terrorist might 
employ or deploy and disseminate such agents into the 
environment.
    You can encapsulate it into a container like a flashbulb 
and then throw it like a breaking device, like a little 
grenade. You can put it in a tank and you can spray it via an 
aerosol generator. This is a mockup of a replica, a miniature 
mockup of a device that was used to disperse the foreign agent 
in Japan in June of 1994. It killed 70 people and hospitalized 
600. It is the other deadly gas attack in Japan that we don't 
often hear about in the United States.
    We can use a low explosive to push it out into the 
environment by shattering the container that houses the agent 
and then forming a cloud of small droplets. You can even build 
a homemade mortar and launch it to its target. I built this in 
about six hours in my office.

                     techniques to manage incidents

    After we have looked at the different means of delivery, 
then we spend a lot of time with our students talking about how 
to actually manage an incident, actually how to survive an 
attack. And in the absence of any high-tech equipment, we 
instruct our officers that by simply taking any available cloth 
like a handkerchief and soaking it in water and then covering 
your nose and your mouth, and then covering yourself with a 
durable piece of cloth or clothing like this police-issued 
raincoat, and then getting out of the incident scene by going 
upgrade and upwind of the actual release sites, can make all 
the difference in the world between ending up in the morgue or 
maybe just a few hours in the emergency room.
    In our advanced classes, we actually encourage the agencies 
to go back and buy and then distribute and issue to their 
personnel such items as a ``use it once and then throw it 
away'' disposable escape equipment such as this item here. This 
is the QUIK mask. It will offer the user about 10 minutes of 
respiratory protection from all kinds of different types of 
toxic atmosphere, and allows the officer to safely get out of 
the hot zone to some area where he can then don the special 
equipment that he needs, such as the MOPP that we see here on 
display, so that he can go back into the contaminated area to 
conduct his rescue and law enforcement activities.
    The measures that we teach at FLETC, we believe can make it 
just that much more difficult for a terrorist to successfully 
deploy such weapons. I hope that this short presentation showed 
to the Committee the approach that we at FLETC take to 
providing the best possible instruction on the management of 
weapons of mass destruction to those young men and women of the 
711 participating agencies at FLETC, and who would protect us 
from those that would do us harm. Thank you.
    Mr. Basham. I thank you, Hugh and Scott. I am available to 
answer questions.
    [The information follows:]


[The official Committee record contains additional information here.]

    Mr. Kolbe. Thank you very much. For the benefit of the 
committee members, let me just say that we were scheduled to be 
finished at this time. Obviously we are not, and there is no 
way we can reschedule, so we are just going to plunge ahead 
here, although we will have to break no later than a quarter 
past 1:00 or 1:20 to allow people to have some time before the 
next hearing resumes at 2:00 o'clock. I am going to make my 
questions as short as I possibly can here, at least first of 
all on this first round here.

                       counterfeit investigations

    Let me just begin here talking to Mr. Bowen. Your budget--
by the way, this goes along with the question I want to ask. 
Clarify one thing. You spoke with some relief or pride, I 
guess, and perhaps you should, that the amount of 
counterfeiting was a $92 per million versus the $119 per 
million in your plan, but it was an actual increase over the 
last year from $77 to $92 per million, I think. Is that not 
correct?
    Mr. Bowen. The actual increase in the volume of 
counterfeiting, sir?
    Mr. Kolbe. Yes. Right. You talked about it as coming down 
but it actually went up. And you had anticipated $119 per 
million.
    Mr. Bowen. Yes.
    Mr. Kolbe. And it was considerably less. So it didn't go up 
that much, but it was still a 20 percent increase over last 
year.
    Mr. Bowen. Yes, that is correct.

                        program reduction impact

    Mr. Kolbe. Okay. I just wanted to clarify that for the 
record. Your budget calls for a cut of about $14 million and 
220 FTE, and you also say that there is not going to be a 
reduction in counterfeiting, with fewer cases closed and more 
counterfeit monies passed.
    Can you be more specific about how this is going to affect 
your investigative and protective missions? Is this exclusively 
a budget-driven shortfall or would it indicate a shift in 
priorities for the Service?
    Mr. Bowen. As you are aware, Mr. Chairman, we have no 
ability to change our mandate protectively. We have to protect 
365 days a year, 24 hours a day. However, we will have to take 
a serious look at changing our priorities investigatively. 
Rather than working every case, we are going to have to 
prioritize cases and work those cases with the highest economic 
impact.
    The 220 proposed reduction in FTE will have an effect on us 
in the investigative realm, will have an effect with the way we 
work with local police agencies, with the way we respond to 
your constituencies, and with the way we man our task forces. 
We would hope that these cuts would not have to be made, but we 
saw no resort than these areas.
    Mr. Kolbe. So is it safe to say that budget shortfalls 
necessitate--your priorities remain the same, so budget 
shortfalls really are what is going to drive this reduction?
    Mr. Bowen. Yes, that is correct.
    Mr. Kolbe. And that would be true also of the cases closed? 
I notice you have an estimate going from this year's estimate 
of 28,000 to an estimate of 21,000 cases closed. That would be 
the same?
    Mr. Bowen. Yes.
    Mr. Kolbe. Same thing. When a case is closed, is that when 
it is accepted for prosecution?
    Mr. Bowen. Not necessarily, no, sir. A case closed means we 
have worked it to where we have availability for prosecution, 
or we have no further leads and we simply close the case.
    Mr. Kolbe. I'm sorry?
    Mr. Bowen. It includes both.
    Mr. Kolbe. It includes both. But it doesn't mean once it is 
acceptable for prosecution, you don't keep it open until there 
is a conviction; it is just once it is taken for prosecution, 
it is closed as far as you are concerned?
    Mr. Bowen. Yes.
    Mr. Kolbe. Okay. And your percent of cases accepted for 
prosecution remains the same. Your estimate is 50 percent, and 
that seems to be historic, even, right at about that, about 50 
percent there.
    Mr. Bowen. Right.
    Mr. Kolbe. So then a reduction of 28,000 to 21,000 does 
mean significant numbers that are not going to get prosecuted 
that would otherwise be prosecuted. I mentioned in my remarks 
that there has been a significant increase in the attrition of 
agents with less than six years service. Can you tell me how 
many have left the service in the last year or two years or 
whatever you have your figure for?

                            agent attrition

    Mr. Bowen. Yes, sir, Mr. Chairman. During the last fiscal 
year we had 43 agents leave the service, 39 of which had less 
than six years on the job. Four others left for family reasons 
and private sector jobs. Those were the agents with more than 
six years on the job. We felt this was the highest number in 
the history of Secret Service since we kept records.
    Mr. Kolbe. Where do those younger agents go, to the private 
sector?
    Mr. Bowen. The vast majority went to other Federal law 
enforcement.
    Mr. Kolbe. Other Federal law enforcement?
    Mr. Bowen. Yes, sir.
    Mr. Kolbe. Considering the prestige that Secret Service 
has, are they going for pay reasons?
    Mr. Bowen. They are going for a number of reasons: the lack 
of time, because of our dual responsibilities, the lack of 
quality family time; the stress brought about by the continual 
travel; the increased travel requirements because of the 
protectees' travel; and a desire, many of these agents had a 
desire to work nothing but quality investigations, and 
therefore went to other sister Federal law enforcement 
agencies.
    Mr. Kolbe. What are you trying to do to reduce that, or can 
you, given this budget shortfall?
    Mr. Bowen. We put together a task force [Clerk's note: 
agency amends ``task force'' to ``focus group''] comprised 
primarily of the agents in the time frame of the people that 
were resigning, and we are taking a look at a number of 
different issues, to include modifying our overtime procedures; 
modifying our travel, where possible; taking a look at fewer 
permanent changes of station, where possible; and better 
communications regarding our travel regulations and policies.
    Mr. Kolbe. Thank you. I have at least one or more questions 
for you and a couple for Mr. Basham. My time is up.
    Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman.
    I think it would be interesting for the record if you had a 
record of the 44 and where they went. I understand the reasons 
here, but it would be interesting to see what agencies they 
went to, whether it is the FBI, ATF, or other sister agencies.
    Mr. Bowen. Yes.
    Mr. Hoyer. I know Mr. Magaw went from Secret Service to 
ATF, but that is probably a little different scenario.
    Mr. Bowen. We will provide that for the record to you, sir.
    [The information follows:]

[The official Committee record contains additional information here.]


                             y2k compliance

    Mr. Hoyer. Thank you very much. Y2K. In your statement you 
indicate that you are going to be ready. I presume that in 
light of what we have seen here, in terms of the threats, that 
being on-line and being up and ready to go is critically 
important. Tell me about your Y2K conversion efforts and where 
you are. Did you get an A, B, C, D, E, F? Or did you get a 
specific grade in this last grading? Was it Treasury generally 
that got the grade?
    Mr. Bowen. I think Treasury generally got the grade, and I 
am not quite sure what that was, but I know from a Secret 
Service perspective we are well on the way to satisfying all 
the needs. I believe 33 of the 59 internal LAN systems and our 
other systems are going to be Y2K compliant. We have oversight 
from Treasury. They are satisfied with our progress, and we 
have assured that prior to the beginning of the millennium that 
we will be satisfactory.
    Mr. HOYER. The reason I ask that question, that is the same 
thingyou said in your statement, that by the year 2000 you 
would be ready. My concern is, I was hopeful that we would be, by 
March, April, or May or June, up and testing for the last six months to 
make sure that when December 31st comes, we are ready. Now, is that 
what you are contemplating when you say ``ready''?
    Mr. Bowen. Yes.
    Mr. Hoyer. It will be a tested system that we have in 
place?
    Mr. Bowen. Yes, sir. We have tests ongoing as we speak. I 
believe it is 27 internal systems that we are upgrading and we 
will have them tested prior to the millennium. But we have 
testing underway as we speak.

                         increased rental costs

    Mr. Hoyer. Okay. Let me ask you another question. On page 3 
of your testimony you indicate you are going to be ready to 
move into your headquarters in the not too distant future. When 
is that?
    Mr. Bowen. I believe we are going to start moving in July 
and we should be completed by the end of November, Mr. Hoyer.
    Mr. Hoyer. Okay. Now, you indicate in your statement the 
fiscal year 2000 budget includes funding to cover the increased 
rental costs the Service will incur. Can you tell me how much 
additional per square foot costs there will be?
    Mr. Bowen. Will you allow me to refer to the record one 
moment, sir?
    Mr. Hoyer. Sure, absolutely.
    Mr. Bowen. We have an additional 92,000 square feet in the 
new building, and the estimated rental cost is going to 
increase by 25 percent over what our rental cost is now.
    Mr. Hoyer. That is attributable to the additional space?
    Mr. Bowen. Additional space, and also because we move out 
of our current existing building during the middle of the 
contract, we have to fulfill the rest of that contract.
    Mr. Hoyer. The middle of the contract. How long is the 
lease for?
    Mr. Bowen. I think we----
    Ms. Vezeris. We will have to pay dual rent until the entire 
move is complete, so we will have two rents to be paying 
through----
    Mr. Hoyer. As soon as you vacate the building?
    Ms. Vezeris [continuing]. Through September.
    Mr. Hoyer. Are you on a month-to-month or an extension of 
some type?
    Ms. Vezeris. Correct. And we will be complete, hopefully, 
by the end of September.
    Mr. Hoyer. And the headquarters to which you are moving is 
a privately-owned leased space, not government-owned?
    Ms. Vezeris. No, it is GSA.
    Mr. Hoyer. GSA?
    Ms. Vezeris. Yes.
    Mr. Hoyer. If you could, for the record, I know you don't 
have it in front of you, I would like to know what GSA is 
charging per square foot on that space.
    Mr. Bowen. We will provide that for the record, sir.
    [The information follows:]

               U.S. Secret Service Headquarters Building

    GSA is charging $43.80 per square foot for space in the new 
headquarters building.

    Mr. Hoyer. Okay. Mr. Chairman, I had a question as you did 
with reference to the reduction of the 220 FTE that has been 
answered, but I am concerned about that.

                            financial crimes

    Let me ask you about the demonstration that we have had 
about the complexity of the financial transaction environment 
in which we are now living and the cashless society that we are 
now looking into, and the smart card that we saw that can 
transfer money over the border incredibly easily.
    I have been over to FinCEN and seen their computer modeling 
and the complexity of transactions as they multiply, and as 
launderers try to hide the money trail. How confident are you 
that we are investing sufficient funds in technology to keep up 
or be ahead of the bad guys?
    Mr. Bowen. From a Secret Service perspective, as it relates 
to counterfeit and financial fraud, I think we are staying 
ahead as much as possible, with particular emphasis in 
counterfeit on the perpetrators. As you know, we have a new 
1996 designed series that is out. The majority of the 
counterfeit we are seeing today is still of the old 
series.However, as the old series is taken out of circulation, the new 
series comes into circulation more and more, we are going to have to be 
able to attack what the new counterfeiters will see as a weak system 
and being able to bring their technology to the forefront.
    With regard to financial crimes, again, with our potential 
cut of the 220 personnel, again we are going to have to 
prioritize rather than work every case, and there could be a 
problem with working impact cases as opposed to working the 
volume of cases.
    Mr. Hoyer. Okay. My time is up. Thank you, Mr. Chairman.
    Mr. Chairman, I have unfortunately a 12:15 meeting with Mr. 
Gephardt, so I am going to have to leave. I apologize for that, 
but look forward to discussing this before markup with all of 
you. Thank you very much.
    Mr. Kolbe. Ms. Roybal-Allard?
    Ms. Roybal-Allard. Thank you, Mr. Chairman.

                             counterfeiting

    Mr. Bowen, in your written testimony, with regard to the 
increase in counterfeiting, you mentioned that in 1998 Treasury 
Secretary Rubin asked the Justice Department to join with the 
Treasury Department in working on the Sentencing Guideline 
Commission to review and enhance the guideline ranges for 
imprisonment in counterfeiting cases.
    Could you please describe this effort in a little more 
detail and tell me whether or not this effort has been 
successful?
    Mr. Bowen. If I may, ma'am, if I could defer to Under 
Secretary Johnson, he has been dealing with the Secretary on a 
regular basis with that.
    Ms. Roybal-Allard. Okay.
    Mr. Johnson. One of the things that we have tried to do in 
the last year or so is to address some of the legal issues, 
administrative issues that have an impact on how our bureaus do 
their job. A key example of this is in the area of 
counterfeiting. What we have been seeing in terms of cases 
prosecuted and defendants' sentences is that notwithstanding 
the fact that some of their crimes are very, very serious or at 
least the potential is very, very serious, the sentencing 
guidelines didn't reflect either the impact on the system or 
the impact on the particular victim.
    The Secretary sent a letter some time ago supporting a 
change in the sentencing guidelines to better address the 
problem created by computerized counterfeiting. In addition to 
that, since that time the Office of Enforcement has engaged 
with the Sentencing Commission to deal not only with the 
problem of computer counterfeiting but also with other 
sentencing enhancements. We are looking at sentencing 
enhancements for certain credit card crimes and also in the 
firearms area.
    Ms. Roybal-Allard. Can you anticipate when that work is 
going to be completed?
    Mr. Johnson. Well, right now, at least as of a couple of 
weeks ago there were no commissioners on the Sentencing 
Commission. So we have the request there. We are working with 
the staff. Once the commission is fully staffed, when there are 
commissioners there, then we will be able to make progress, we 
believe. We have received favorable comment from the staff to 
our proposals.
    Ms. Roybal-Allard. What is the reason for not having the 
commissioners?
    Mr. Johnson. I believe that--I am not certain. The position 
of commissioner is a presidentially-appointed position.
    Ms. Roybal-Allard. I see. Thank you.

                            staff diversity

    Mr. Bowen, also in your written testimony you have said 
that the Secret Service consistently tries to recruit and hire 
a diversified work force. The question I have is, what is the 
current composition of the Secret Service and what kinds of 
efforts are made to recruit more women and minorities into the 
Secret Service?
    Mr. Bowen. If you will allow me to answer the second part 
of that question first, we have a very aggressive recruiting 
campaign not only for our Special Agent branch but for 
everybody within the Secret Service. We have recently put out a 
handbook that gives each person within the Secret Service the 
guidelines for recruiting and suggesting different avenues of 
employment within the Secret Service. It is a step-by-step 
guideline booklet.
    We have been very successful in hiring minorities and 
women. For example, in our last two classes we had 35 percent 
minority and women participation. The honor graduates and class 
presidents of these classes were minorities. We continue to use 
a regional recruiter system, where we have several regional 
recruiters located throughout the country, and they 
specifically target minority and women's universities for 
recruiting.
    Ms. Roybal-Allard. Do you know what your composition is 
right now? I'm sorry, Mr. Chairman. Am I finished?
    Mr. Kolbe. You have time for one more question.
    Mr. Bowen. I will have to get that for the record for you, 
ma'am.
    [The information follows:]

                                                      EMPLOYMENT STATISTICS AS OF SEPTEMBER 3, 1998
--------------------------------------------------------------------------------------------------------------------------------------------------------
                              Type                                 Total    WM      WF      BM      BF      HM      HF      APM     APF     AIM     AIF
--------------------------------------------------------------------------------------------------------------------------------------------------------
Special Agent...................................................   2,271   1,682     172     174      25     137      10      43       3      21       4
UD Officer......................................................   1,097     774      55     175      41      41       1       6       3       1       0
Support Staff...................................................   1,452     431     482     106     307      18      53      27      20       4       4
                                                                 ---------------------------------------------------------------------------------------
      Secret Service............................................   4,820   2,887     709     455     373     196      64      76      26      26      8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Codes: WM--White Male; WF--White Female; BM--Black Male; BF--Black Female; HM--Hispanic Male; HF--Hispanic Female; APM--Asian/Pacific Islander Male;
  APF--Asian/Pacific Islander Female; AIM--American Indian Male; AIF--American Indian Female.

    Ms. Roybal-Allard. All right. Thank you.
    Mr. Kolbe. Thank you.
    Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.

                       protective staff overtime

    I want to thank all of you for being here this morning and 
for your testimony. I would like to concentrate my questions on 
Mr. Bowen, following up on some questions I asked Director 
Merletti last year about overtime and the protective program.
    The Service's fiscal year 2000 budget submission again 
highlights the significant amount of overtime that agents 
assigned to the Office of Protective Operations are working and 
the steps you have taken over the last year to reduce it. When 
we met last year, the Service estimated that agents assigned to 
the protective program were working an estimated 19 percent 
more overtime than your field agents, and your fiscal '99 
budget proposal requested funding for additional personnel to 
try and cut that amount down.
    In fact, you had already reassigned some 63 agents from 
your field offices, which cut the average overtime the 
protective agents were working from 93 hours per month to 77 
hours per month, still a substantial amount. So your request 
for an additional 25 FTEs for fiscal year '99 was intended to 
help replenish field personnel who had been reassigned to the 
protective mission.
    Now, in this year's budget you request 19 additional FTEs, 
but it appears to me that these personnel would be used to 
replace other field agents reassigned last year. You have also 
requested $35 million from the Forfeiture Fund for protective 
activities that will be required for the 2000 Presidential 
campaign.
    Let me focus this concern, if I might. According to the 
information you provided for the hearing record last year, 
other Treasury bureau agents are working an average of 43 hours 
of overtime per month. Your rate of 77 hours is almost double 
this, and you just cited overtime as a factor in your attrition 
rates, as I understood you.
    Now, I am interested to know where your fiscal year 2000 
request leaves all of this, what kind of impact it will have on 
overtime and what, if anything, you are proposing to do to 
further reduce overtime to bring it on par with the rest of 
Treasury law enforcement personnel.
    Mr. Bowen. Yes, sir. Currently we have an aggressive hiring 
campaign. We are going to hire potentially 432 agents and 72 
Uniformed Division officers this year. These agents obviously 
will be assigned to the field offices for the first four to 
five years of their career. We would hope that their assisting 
the permanent protective details will allow those permanent 
protective detail members to incur less overtime. And also with 
regard to the Uniformed Division, these 72 hires will augment 
the White House branch to lessen the amount of overtime that 
they perform.
    However, as you are well aware, sir, we have the 2000 
campaign coming about. Dependent upon the number of protectees 
for the upcoming campaign, we may see a great spike in this 
overtime for the coming year.
    Mr. Price. Now, the 19 additional FTEs you are requesting 
this year, do those replace the field agents already moved into 
protective services?
    Mr. Bowen. That's correct, sir.
    Mr. Price. And then what kind of additional protective 
service personnel are we talking about?
    Mr. Bowen. As you stated, we transferred 63 agents to our 
presidential protective division last year.
    Mr. Price. Last year?
    Mr. Bowen. Right. And we would anticipate the potential of 
more agents being assigned to the presidential protective 
division or vice presidential protective division based on the 
next President and Vice President elect.
    Mr. Price. Well, you have this current average rate, I 
gather, of 77 hours overtime per month. That is, of course, 
still substantial overtime even though it is down from 93 
hours. You say this is a continuing factor in your attrition 
rate, making these jobs considerably less attractive.
    Is there any prospect of improvement on this? I mean does 
this budget add up to a prospect for improvement?
    Mr. Bowen. I believe the 77 hours you mentioned, sir, is 
related to the protective agents only.
    Mr. Price. For the protective agents, that's right.
    Mr. Bowen. It is hopeful with this additional manpower 
pool, personnel pool coming into protection, that those 77 
hours will be reduced.
    Mr. Price. You are confident of that?

                       protective staff overtime

    Mr. Bowen. I am hopeful of that. It is all dependent on the 
amount of travel that the protectees undertake.
    Mr. Price. But is that a factor in the personnel numbers 
that you have included in this budget? Has getting overtime 
within more manageable dimensions been a rationale for this 
budget proposal?
    Mr. Bowen. Yes, it is a factor, as much as we can predict. 
However, there are many unforeseen circumstances during the 
year, sir, that necessitate us working more overtime than we 
would forecast.
    For example, we had King Hussein in the United States for 
six months this year for medical treatment. We did not forecast 
that. We did not forecast the number of foreign trips that the 
President and First Lady and Vice President would take. We did 
not forecast the special session that was undertaken at the 
United Nations. And these have all incurred larger amounts of 
overtime.
    Mr. Price. Well, I understand that it is a challenge to 
anticipate these special demands. At the same time, if the 
overtime rates are out of line, if this is a factor in the 
attrition that you are suffering with respect to personnel, I 
guess I am trying to discern how much of a problem you think 
this is and how much attention you are giving it.
    Mr. Bowen. I think it is a great problem. And the 220 FTE 
that are proposing to be cut, if we were able to keep these it 
would greatly alleviate the overtime problem.
    Mr. Price. Thank you.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Mr. Price. I think you have really 
touched on what I think is the heart of all of this, and I 
think there is a serious problem that we are facing. And all we 
are doing is putting a few Band-aids on it here.
    Mrs. Meek.
    Mrs. Meek. Thank you, Mr. Chairman. And I would like to 
welcome those of you on the panel, and to certainly touch on 
the enthusiasm of your instructor from FLETC who talked to us. 
If your trainees get that kind of training, they will be very 
well prepared indeed.

                          2.5 percent decrease

    My question is to Mr. Bowen. You indicated that the Secret 
Service's budget has in it a 2.5 percent decrease if you pull 
out the funding for the year 2000 presidential campaign. What 
projects have been delayed or are being canceled as a result of 
that level of funding?
    Mr. Bowen. Excuse me one moment, ma'am.
    If that funding were not realized, it would come from the 
investigative side of our house. We have a dual mission, 
protection and investigation. It would come from the 
investigative side of the house. And as I stated before,ma'am, 
we have to prioritize our cases and work the cases with the highest 
economic impact instead of working every case that is presented to us.
    Mrs. Meek. So that prioritization will be done within the 
agency. How is that done?
    Mr. Bowen. We have to take a look at the particular 
investigative case that has the highest economic impact, the 
one that would have the most impact within the particular 
constituency area, and we would continue to work those cases. 
We would do that in concert with the local and State police 
agencies we work with, the task forces we work with. And we 
would have to continue to prioritize those cases.

                  areas in need of additional training

    Mrs. Meek. My last question is to Mr. Basham.
    Mr. Basham, where are the areas in which you have the 
greatest demand for additional law enforcement training? You 
have identified a lot of areas here. You are doing a lot of 
things. I would like to know, are you able to meet the demand 
for the kind of training which you have set forth here in the 
findings? Where are some of the areas that you do not yet offer 
training, but that you know there is a need for training, so 
that you think that you will be offering such training in the 
near future?
    In short, just how thoughtful have you been in predicting 
the requried levels of funding for your training now and in the 
future?
    Mr. Basham. I believe the demonstration that you have just 
witnessed by Mr. Curley and Mr. Breslin really is the area that 
I think needs most attention for law enforcement at this time, 
and that is dealing with terrorism, weapons of mass 
destruction.
    We have been working with the other agencies and bureaus. 
We have been working with a number of private sector entities. 
We have been working with the land transportation companies to 
develop training programs that will present to them the 
training that they are going to need to first of all recognize 
and then deal with these weapons or potential weapons that are 
out there. I think through the Committee and through the 
support of the department and OMB, we have received [Clerk's 
note: agency advises that this actually refers to the FY 2000 
request] funding to start the initial phases of that training. 
I feel very confident that with that cooperative approach, we 
are going to be able to come up with the proper training for 
that.
    The other area, obviously, is the administration's 
initiative as well as the Congress' initiative on the borders, 
to provide additional training to the agents and officers that 
are on the borders dealing with the drugs and illegal alien 
traffic. We are facing unprecedented numbers of students in the 
coming years. We do feel, though, that we are progressing and 
getting the facilities and the resources on board to deal with 
those increases in training requirements.
    Mrs. Meek. Thank you. I am very much interested in that 
area, in that I am from a border State and of course we have--I 
am from Florida--we have a big influx of immigrants and 
everyone coming into that area, plus we have a lot of seaports 
in that area. You mentioned that in your booklet here on 
Federal law enforcement, I am sure that you are looking at 
that.
    My question is, just how much input are you really getting 
from those areas that are being impacted by this?

                      coordinated training effort

    Mr. Basham. Oh, I think we are having great success in the 
coordination. If you are talking about how much support or how 
much information we are getting from the----
    Mrs. Meek. In the coordinated effort.
    Mr. Basham. The coordinated effort, that is the beauty of 
the consolidated approach to training, in that we do have 70-
some agencies that participate in our training, and we are able 
to draw upon the expertise of all of those agencies in putting 
together the curriculum that is necessary to provide the 
training. The center believes we are not necessarily out on the 
cutting edge, but we are out in front in terms of the training 
that is going to be needed to combat this emerging problem.
    Mrs. Meek. Thank you.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Mrs. Meek, I see what is coming here. You have 
identified yourself as a border State now.
    Mrs. Meek. That is right.
    Mr. Kolbe. We get precious little enough along the border 
for law enforcement initiatives, and you are going to claim it 
now as a border State too.
    Mrs. Meek. Any way I can claim it.
    Mr. Kolbe. That is what I figured. Thank you, Mrs. Meek.

                   charleston temporary site closure

    A couple of quick questions. Mr. Basham, a couple years ago 
Treasury and Justice agreed that we would close down the 
Charleston facility, that so-called temporary facility at 
Charleston, when you achieved the capacity to do all the 
training at the Georgia facility. Then it was postponed. It is 
now scheduled to take place in the year 2004, fiscal year, I 
guess, 2004. Can this schedule be accelerated?
    Mr. Basham. We have, through working with Treasury and OMB, 
identified a five-year spending plan in the area of capital 
investment and capital improvement in order to bring facilities 
on line to close down Charleston.
    Mr. Kolbe. Artesia and Glynco.
    Mr. Basham. And bring the training back to Glynco and 
Artesia. We are moving ahead of schedule on that plan as we 
speak, with some funding that we have received. Depending upon 
the level of training requested by the Border Patrol who are 
training at Charleston, if those levels continue at the current 
rate it is still going to require at least two or three 
additional years before we can actually get the facilities on 
line to close down Charleston. If the numbers decrease, then 
obviously we could move up that schedule to close Charleston.
    We are very committed, I think the Department is committed 
to closing Charleston. We know that economically it makes sense 
to close Charleston and bring that training back to Glynco and 
Artesia, and we are on a very aggressive program in terms of 
capital investment to do that.
    Mr. Kolbe. A lot of your instructors go back and forth, 
right?
    Mr. Basham. That is correct.
    Mr. Kolbe. It is a three-hour drive, I believe.
    Mr. Basham. It is a three-hour drive.
    Mr. Kolbe. There will be would some significant cost 
savings if you consolidated all of this.
    Mr. Basham. The majority of the instruction is delivered by 
permanent staff at Charleston. The center does provide 
instructors who do travel back and forth, and I believe it is 
not a large number, but obviously to those individuals who have 
to travel back and forth it is not a very comfortable 
situation. Obviously any increase or any improvements in our 
facilities at Glynco and Artesia will alleviate that problem 
much, much sooner. But there are not a huge number, to bequite 
frank with you, that do that. We try to keep it at a minimum if we can.
    Mr. Kolbe. Director Basham, another question on your--last 
year we spoke a little about the Booz-Allen & Hamilton study 
and about the recommendations. Let me throw this all into one 
question. I would like you to comment on that, on your efforts 
to implement those recommendations, and specifically the 
proposal to change over the status of the instructional staff 
from what is designated as 1811s to 1801s, general law 
enforcement.

                  1811 criminal investigator staffing

    We have received, as I know you have, letters from law 
enforcement organizations expressing concern that there won't 
be enough criminal investigators, the 1811s there, and instead 
it will be overloaded with generalists. Do you share this 
concern?
    Mr. Basham. First of all, I would have to say that there 
are a number of inaccuracies in at least one newsletter report. 
I did try to take the opportunity to explain to them what the 
situation was at the center with regard to 1811s. Having said 
that, I can assure you that the center, FLETC, is committed to 
continuing to provide current 1811 experience in our training 
program.
    As a matter of fact, one of the reasons that we elected to 
go from the 1811 status at FLETC to an 1801 series was to 
provide additional 1811 experience to our students, to the 
extent that we may even increase the number of detailed 1811s 
from our participating organizations to put even more current 
experience before these students as they pass through.
    So although it may appear in that newsletter that we have 
lost sight of our mission at FLETC, to the contrary, we have 
reidentified our mission and recognized that a big part of that 
mission is providing 1811 experience to be instructors at the 
center. So, it [Clerk's note: refers to the newsletter 
commentary] it does not represent the center's position.
    And I can provide you and I intend to provide each of our 
participating organizations with my response to that 
newsletter. And I will be happy to provide that to you----
    Mr. Kolbe. Yes. Would you provide that to me?
    Mr. Basham [continuing]. To you as well.
    Mr. Kolbe. Thank you.
    [The information follows:]


[The official Committee record contains additional information here.]

                  booze-allen report follow-up actions

    Mr. Basham. In terms of Booz-Allen. Sitting here a year ago 
and having just read the Booz-Allen report, I wasn't quite sure 
I made the right decision in taking over as director. But I can 
assure you with the support of Assistant Secretary Bresee and 
her committee, the implementation group, I feel like we have 
made great strides in dealing with the Booz-Allen issues, and I 
feel the men and women of FLETC are focused and are fully 
committed to providing the quality training that is necessary.
    Mr. Kolbe. Thank you very much.

                        protective travel funds

    Mr. Bowen, travel funds. Last year we gave you travel funds 
over a two-year availability term. You haven't requested that 
this year. Is it your view that flexibility was not good, you 
didn't want that, or was this an OMB decision?
    And getting it in at the same time, the question in here, 
are you satisfied you are requesting sufficient funds in 
travel? This next fiscal year takes you up to one month before 
the 2000 presidential election. You are going to have very high 
travel by the Vice President and probably the President as well 
during that time. Do you have sufficient funds in there? 
Because if you don't, you are just hurting the rest of your 
budget. You are going--you have to do it, so you are going to 
take it out of some other place.
    Mr. Bowen. Right. With regard to the two-year funding, sir, 
had that appropriation language been added, we felt it would 
have been most likely sufficient funding for protective travel, 
and it would have sufficed at the end of the year. At the end 
of the fiscal year when we have outstanding vouchers, it would 
have covered that particular period of time. So it would be our 
intent in future years to request that type of funding.
    With regard to our budget, we certainly----
    Mr. Kolbe. Excuse me. Why didn't you request for it this 
year?
    Mr. Bowen. I think it was a----
    Mr. Kolbe. Was it an OMB decision?
    Mr. Bowen. It was a decision made by OMB and Treasury that 
we would not request that this year because of other funding 
shortfalls.
    Mr. Kolbe. Okay. Spend out levels, all right. Go ahead with 
the other--what is sufficient.
    Mr. Bowen. Excuse me, sir?
    Mr. Kolbe. The other part of the question: Do you have 
sufficient funds, have you requested sufficient amounts for 
travel?
    Mr. Bowen. We feel we have requested that amount that is 
necessary for the travel for the upcoming fiscal year.
    Mr. Kolbe. And that includes an anticipated increase in 
travel by the President or Vice President?
    Mr. Bowen. Yes, it does.
    Mr. Kolbe. What is the amount? How much more are you asking 
for in this coming budget than in this year in travel?
    Ms. Vezeris. When we put our budgets together, we used the 
prior year's travel activities.
    Mr. Kolbe. The prior year's travel activities?
    Ms. Vezeris. Yes, we would be using the current year. 
Ifthere is going to be an extraordinarily large event, then those costs 
will be added into the assumptions.
    Mr. Kolbe. We know there is going to be an extraordinary 
event next year. Well, once every four years extraordinary 
event.
    Ms. Vezeris. Right. The assumption is our level of activity 
will be similar to current or present experience, so built into 
the base we have funds for unanticipated activities because 
those recur each year. For instance, if a foreign dignitary 
dies and our protectees are traveling overseas. And in 
addition, for next year there is about $19.3 million dollars 
out of the $35 million for the campaign that is directly 
related to travel costs.

                             identity fraud

    Mr. Kolbe. All right. In the interest of time, let me just 
ask one final question.
    Mr. Bowen, I would like you to have an opportunity to 
comment on the issue of the technical assistance and the $1.5 
million in funding to Image Data. I know this is something that 
you did not seek, it was something this subcommittee did not 
support, and nonetheless you have--it was done at the 
insistence of the other body. And there have now been a lot of 
questions raised about the infringement on privacy.
    Can you tell me what you have addressed, any of these 
concerns, and tell me what the government has gotten for this 
money that has been spent by Image Data?
    Mr. Bowen. As you know, sir, this was a pilot project that 
was put forth by Image Data. We, as the Secret Service, 
provided them with a wide array of crimes that are being 
perpetrated nationally and internationally. We gave them also 
the geographical areas in which those crimes are being 
committed mostly.
    We also provided them with technical assistance in regard 
to the contract itself. We established milestones with Image 
Data to make sure these milestones were satisfied during the 
evolution of the contract.
    It is important to note that with regard to the database 
that they established, the Secret Service never requested, 
received, nor wanted any of the information that was available 
in the database. That was simply never a request of the Secret 
Service.
    Mr. Kolbe. What were you supposed to get out of this?
    Mr. Bowen. We would----
    Mr. Kolbe. You don't get the data, which I think is 
appropriate that you don't get the data. What were you supposed 
to get from this?
    Mr. Bowen. Hopefully----
    Mr. Kolbe. Never mind. You can't answer the question. I 
wanted to give you the opportunity to put that on the record. I 
understand, and I think this is an issue we will certainly want 
to address this year.
    Mrs. Meek, do you have any final questions?
    Mrs. Meek. No, sir.
    Mr. Kolbe. If not, and there is no final--I didn't mean to 
cut you off on that, if you would like to say anything further 
on it.
    Mr. Bowen. Well, I think that when we are talking about the 
identity fraud issue, we obviously welcome any private concern 
that is going to investigate and help the private sector to 
minimize identity fraud. As you know, that is one of our new 
jurisdictions. But at no time would we be welcoming or 
insisting or asking for any of the private considerations that 
Image Data was seeking.
    Mr. Kolbe. To date, has any new technology come out of this 
that is usable by you?
    Mr. Bowen. I don't believe so. Not at this time, sir.
    Mr. Kolbe. Okay. Thank you very much.
    We have gone considerably over, and hopefully there will be 
time enough for you to get some lunch and time enough for me to 
get in at least another meeting until we are back at 2:00 
o'clock here with BATF and Customs and Mr. Johnson again. Thank 
you all very much for participating.


[The official Committee record contains additional information here.]

                           Afternoon Session

                                        Tuesday, February 23, 1999.

                BUREAU OF ALCOHOL, TOBACCO AND FIREARMS

                                WITNESS

JOHN MAGAW, DIRECTOR

                              introduction

    Mr. Kolbe. The subcommittee will come back to order.
    This afternoon, in continuation of our hearing on law 
enforcement programs in Treasury, we are going to hear from two 
of the agencies within the Department of Treasury. We are going 
to hear from the Bureau of Alcohol, Tobacco and Firearms. We 
will have a statement from the Director Mr. John Magaw, and 
then we will take questions--unlike this morning--we will take 
questions on BATF, and when we have completed that, if there 
are no other questions, we will let Mr. Magaw go and we will 
have Commissioner Kelly then here to talk about Customs.
    So we will begin, Mr. Magaw, with you. And your opening 
statement, as always the full statement will be in the record. 
And if you can summarize that would help because we have a 
fairly limited time this afternoon. We expect votes, as a 
matter of fact, at about 3 o'clock here.

                           opening statement

    Mr. Magaw. Thank you, Mr. Chairman, and Congressman Hoyer 
and Congressman Sununu. Once again, I have asked our executive 
staff to accompany me here today so they can listen to what you 
have to say firsthand. With me also is Deputy Director Brad 
Buckles on my left. We welcome this opportunity to discuss the 
budget requests and ATF strategic goals for fiscal year 2000. 
These goals are to reduce violent crime, collect the revenue, 
and protect the public.
    Our direct salary and expense submission is $584 million 
and 4,131 full-time equivalent positions. Additionally, we have 
asked for $13 million and 24 FTEs for the Violent Crime 
Reduction Trust Fund and $15 million for site acquisition of a 
headquarters building. Our total submission of $612 million 
represents an increase of 10 percent over the total fiscal year 
1999 enacted level.
    Mr. Chairman, soon after becoming Director of ATF, I 
requested the assistance of this Committee in restoring ATF's 
base operating level which had become alarmingly eroded. This 
was a situation that had not occurred overnight and would not 
be resolved overnight. However, because of your consideration, 
this Committee's oversight and response, we have gradually been 
able to strengthen our infrastructure, implement more sound 
management controls, and regain a healthier balance in our 
operations.

                     new atf headquarters building

    Permit me to address the initiatives that ATF is expected 
to implement. I remain focused on protection of the dedicated 
men and women of ATF and those customers who come to our 
building for service each day. We will use the requested $15 
million to acquire an appropriate site for a safer headquarters 
location.

                youth crime gun interdiction initiative

    Another initiative responds to the demands from across the 
law enforcement community for the Youth Crime Gun Interdiction 
Program, which targets the sources of illegal firearms 
trafficking to youthful offenders. The program will expand from 
27 cities to 37 cities at a cost of $11.2 million.

                           tobacco compliance

    We are also requesting $5.2 million to collect an estimated 
200 million in floor stock tax revenue, and then also institute 
a permit system for the 15 to 1700 importers of tobacco 
products. They are not currently licensed. We estimate that the 
tax increases, effective January 1, 2000, on tobacco products 
will provide between $2.5 and $3 billion per year in additional 
revenue by the year 2002.
    As we continue to implement the Tax Relief Act of 1997, we 
feel this to be a prudent and wise investment of our resources, 
which enhances our ability to implement one of our key 
strategic goals, that of collecting the fair revenue. The total 
revenue presently collected is $12.4 billion, and by 2002 it is 
projected to be near $16 billion.

                      promotion assessment system

    The $1.1 million requested for implementation of ATF 
Promotion Assessment System and Career Development Plan enables 
ATF to fulfill the last phase of our commitments under the 
African American Special Agent Class Action Settlement 
Agreement, a commitment that I am very pleased to note benefits 
all of our personnel.

                 integrated violence reduction strategy

    Finally, the $12.6 million requested for the Bureau's 
Integrated Violence Reduction Strategy will be utilized for 
several different components of firearms enforcement, aimed at 
reducing the illegal acquisition, the illegal possession, and 
the use of firearms by armed career criminals, firearms 
traffickers and prohibited purchasers in violation of the Brady 
law.

                          financial management

    Once again, we can fully account for the funding that you 
have provided. For the fourth year in a row, ATF has received 
the highest possible rating on the annual general audit of our 
finances and internal controls. This audit was conducted by 
Price Waterhouse/Coopers and the Treasury Inspector General. 
ATF utilizes a unique blend of criminal investigation, 
regulation, and revenue collection to effectively enforce the 
Federal laws governing alcohol, tobacco firearms, arson and 
explosives.
    The resources provided by Congress have enabled ATF to 
achieve many successes in each of these areas. While our fiscal 
year 2000 requests may seem to focus more on ATF's firearms 
programs, we want to reiterate that we are just as committed to 
our alcohol, tobacco, explosives and arson programs. Our 
National Revenue Center in Cincinnati, Ohio, has applied 
technology and partnership to improve the consistency of our 
tax administration and provide timely trend analysis and 
industry statistics.
    In addition to investigating a significant number of arsons 
and bombing cases, 2,500, we developed a first-of-its-kind 
national repository of explosives and arson incidents. You 
funded this initiative in fiscal year 1997. With your 
permission, Special Agent Mike Bouchard, Chief of our 
Explosives and Arson Division, will spend approximately 8 
minutes reporting on how the repository is benefiting the 
citizens that we serve.
    That completes my remarks, Mr. Chairman, and after Mr. 
Bouchard's presentation, I will be pleased to respond to any 
questions.
    [The information follows:]


[The official Committee record contains additional information here.]

                national explosives and arson repository

    Mr. Bouchard. Good afternoon, Mr. Chairman, members of the 
subcommittee, I would like to begin by introducing David 
Pollard, an Intelligence Research Specialist of ATF's National 
Repository. I would like to begin by stating why the National 
Repository was formed. As you know, in the past information on 
bombing and arson cases was collected by a number of different 
agencies for different purposes.
    This committee recognized the need for one system, where a 
citizen [Clerk's note.--agency would change this to refer to 
``an investigator''] can go to one place and collect this 
information, one-stop shopping. The National Repository began 
with ATF's explosive information system, also known as EXIS, 
which has been collecting this type of information for more 
than 22 years.
    We have expanded our EXIS system to make this National 
Repository compatible with other systems. As you know, ATF has 
a unique mission in regulating the explosive industry as well 
as doing criminal investigations for the misuse of explosives 
and fire. As you can see, this system supports Federal, State 
and local investigators. All these agencies, State and local 
police, fire, need a place to go where they can get all the 
information analyzed from arson and explosive cases.
    Some of the data that is contained in the repository has 
been used in such notable cases as Unabomber, Judge Vance, 
Olympic Park and Birmingham bombings, the Vail Ski Resort 
fires, aswell as other notable explosive cases. The information 
is also useful for decisionmakers, because we have used it with our 
Taggant study and our Dipole Might large-vehicle-bomb study to 
determine where the problem areas were so we can dedicate the research 
towards that. As you know, this Committee also supported both of those 
projects.
    Some of the other information in the repository supports 
management decisions so you can decide where to dedicate your 
resources, where the problems are. It is a time saver, and 
hopefully it can help prevent future incidents. It can be used 
for court purposes, such as for commonality of device 
components, et cetera.
    Twenty-two years' worth of computerized information is now 
being applied on a regular basis to arson and explosive cases 
in the country. As you can see, this system contains records 
from more than 80,000 incidents from ATF's original EXIS 
system. About 20,000 of those relate to arson cases and 60,000 
to explosive cases. It is Year 2000 compliant. It is user 
friendly. It can use broad-based queries or very narrow 
queries, depending on what your needs are. The ad hoc queries 
can be used to examine areas such as motives, device 
components, target type, and device placement.
    These are some of the systems that the repository links. As 
you can see, we are going to be gathering data from the United 
States Fire Administration, National Fire Incident Reporting 
System, as well as the FBI Bomb Data Center and other sources. 
Our goal here is to minimize duplication.
    We are working very closely with the Fire Administration 
and the FBI to ensure that we exchange data in a timely manner.

                   example of national repository use

    I would like to show you how this system helped solve three 
incidents. As you can see, a bombing occurred December 30th, 
1997 outside of the Oakwood United Methodist Church, Danville, 
Illinois, and killed one gentleman. The second bombing, May 
24th, happened at the Assembly of God Church. A bomb exploded 
outside the church and injured 33 children who were attending a 
Sunday Mass. Shortly thereafter, a bomb exploded in the garage 
of Richard White, killing him and his dog.
    Now, the investigators are faced with ``Do I have one 
bomber and can I link all of these cases together?'' As you can 
see, the repository promotes the team effort, it incorporates 
the investigative data that the investigators in the field 
collect, the forensic laboratory data such as you see here, 
which are tool marks from a pair of pliers that were taken from 
Mr. White's garage.
    It incorporates all of this information in the one system, 
so that the investigators in the field can have access to it 
whenever it is needed. If I am the investigator in this case, 
this is how I would use this system. It is a simple Web-based 
query. I live in the State of Illinois, I am going to do a 
broad-based query on bombing, all types of motives, because I 
don't know what it is, I am going to use, a broad range of 
target types, use the parameters from January of 1995 to 
February of 1999.
    The system tells me that in that area, with that query, I 
have 750 records. Now I want to query deeper into this system. 
I know I recovered batteries at my scene, so I am going to 
query those 750 incidents to see which ones had batteries in 
them. As you can see on this page--and for illustrative 
purposes I only used one page--a religious institution, Oakwood 
United Methodist Church, Assembly of God, and on a subsequent 
pages is Mr. White's bombing. All of these had batteries used 
in the devices.
    Now my forensic laboratory has given me an analysis of some 
of the other details of the device components. You can dig 
further into the system, you will see that we have 30 gauge 
wire, 25, 24, et cetera, and it links the Assembly of God 
bombings with the Richard White bombings. As you can see--this 
is by date, so the preceding page has the Oakwood United 
Methodist Church--all had similar gauge wiring devices.
    I would like to show you some of these devices right now, 
if I may. The first picture--and these are all harmless, 
honest--is the Oakwood church. The gentleman walked outside, 
saw a cooler on the sidewalk, seemingly innocent, picked up the 
cooler. It detonated and, unfortunately, killed him.
    This device, if I may show you how this works, and I will 
pass it around, is an antidisturbance device. As soon as the 
cooler is tipped, the ball bearings connected two wires, the 
circuit is completed, and the device detonates, setting off the 
pipe bomb. Seemingly innocent, if anyone would like to see 
that.
    The second bomb was the Assembly of God device, similar to 
this one. The bomber placed it on an air conditioning unit 
outside of the church in this area, and walked up, put it up--
it has a timer here to give him time to get away. On top is a 
motion detecting device, so that as he walked away, the timer 
ran down. Now it is active, ready to go off whenever a motion 
sets it off. So a motion sets it off--sound. This bomb was 
filled with smokeless powder, detonated, and injured 33 
children who were inside that building at a church service.
    The next scenario was the bombing at Mr. Richard White's 
home. Mr. White was a person to be interviewed in the Assembly 
of God church explosion, because he had had an argument with 
the pastor. The investigators called his home, spoke with his 
mother, and asked if he would be available for an interview. 
She said he would. When they arrived a short time later, Mr. 
White excused himself from the dinner table, took the family 
dog, walked out into the garage, took a device such as this, 
held his dog in his left hand, put this device to his chest, 
pressed the button and committed suicide.
    So now the investigators tried to link these three cases; 
do we have one bomber, or three bombers, two of which are on 
the loose? So our laboratory examined the component parts, 
found that these were common matches in all the bombings. 
Again, this is just an example of the type of information that 
is in the repository.
    Since this is also a national system, we found that Mr. 
White had lived in Florida previously. We found a storage shed 
that he had. We conducted a search, found some similar 
component parts, queried the system and found that fortunately 
he had not done any bombings in that area using any of these 
types of devices.
    Lastly, these are some statistics for 5 years' worth of 
bombings incident information in States which may be of 
interest to you. And again, this is 5 years.
    I would like to conclude by saying we built a modern system 
that is built for the future. It is a very useful system. It is 
valuable. It becomes more valuable with the more information 
that we can put into it. And I would like to just conclude by 
thanking this committee for supporting this project. Thank you.
    Mr. Magaw. You might have noticed that the bomb truckyou 
saw there was one of the ones you approved about 3 or 4 years ago, and 
they are serving us very, very well.
    Mr. Kolbe. How many of those do you have?
    Mr. Magaw. We have about 17 of them now. We will have 23 
when they are all in. They are kept indoors. They are watched 
on maintenance. They should last us a long time.
    Mr. Kolbe. I had an opportunity to see one of them in 
Tucson a few months ago, and they were excellent.
    I will begin here and note my time. And by the way, I did 
not at the beginning of our hearing acknowledge the presence of 
one of our newest members, Mr. Sununu.
    Mr. Sununu, welcome to the subcommittee. We are happy to 
have you. And of course, Mr. Forbes, happy to have you back. 
The others were all here this morning.
    Mr. Sununu. Thank you.

                 integrated violence reduction strategy

    Mr. Kolbe. Let me begin by asking about the violence 
reduction strategy, integrated violence reduction strategy. 
This is a new initiative, new program; correct?
    Mr. Magaw. Yes, sir.
    Mr. Kolbe. You have $12.6 million and 56 FTEs to implement 
this. And as I understand it, it will permit additional 
enforcement to go to the investigating referrals from the FBI 
of persons denied gun sales based on the background checks, the 
intensive background checks; is that right?
    Mr. Magaw. That's correct, when the checks are made, and if 
it is lying on the application or a convicted felon or 
anything, that makes it a prohibited person.
    Mr. Kolbe. It also goes to other things, like the State and 
local initiatives, like the project EXILE in Richmond and also 
the so-called gun show, a new gun show initiative?
    Mr. Magaw. That is correct.
    Mr. Kolbe. How is this funding going to be allocated among 
these different activities?
    Mr. Magaw. I think it is a little too early for me to tell 
for sure, because we are in the process, as you know, Mr. 
Chairman, of hiring some new personnel. We had not hired for 
about 5 years. As they come onboard, the way the budget is 
broken down now in terms of our expenditure of it, 76 percent 
goes to the reduction of violent crime. And most of this is in 
the area of violent crime, so it is going to be about 76 
percent of our budget. The breakdown specifically for this 
particular function will have to be seen, and we can report 
back as the months go on.

                               gun shows

    Mr. Kolbe. You know, it seems to me that looking at the 
investigative background checks, the NICS, and working with 
local efforts and local initiatives such as the Project EXILE 
are, you are continuing existing ATF programs. They don't 
require any additional legislation to implement them. So why 
are we lumping this in with funding for the gun show initiative 
which does require authorizing legislation to become effective?
    Mr. Magaw. Well, we do have jurisdiction to work gun shows 
and work violations that occur in gun shows, but this whole 
thing ties together. You know, how are the youth getting the 
firearms, where are the convicted felons getting them? And they 
are bringing----
    Mr. Kolbe. Excuse me, let me just interrupt. You said you 
have now responsibility for gun shows. But I believe the 
President's proposed initiative does have a legislative 
component to it, does it not?
    Mr. Magaw. It does have. If this body sees fit to pass it--
it will tighten some of the loopholes. For instance, we can go 
into and work gun shows, and if we find that the dealers there 
are not doing the paperwork, which generally isn't occurring, 
we can take action. What is occurring is that people will come 
in, and they can sell what is known as the private collection.
    So a person will go around and buy three guns from this 
table, three guns from this table, three guns from this table, 
go to another gun show next week and make that their private 
collection. And after you track them around and you see them 
doing this without a license, that is a violation of law, so we 
are trying to do the best we can with that. But the way the law 
is worded, it really makes you follow them for a long period of 
time and causes them to sell more weapons. So there are already 
hundreds of weapons out on the street.
    The gun show program that the administration has put 
forward would close some of those loopholes. It would make 
everybody who bought a weapon at a gun show be background 
checked.
    Mr. Kolbe. Before my time expires, let me just ask one 
other question on the gun show. What is the volume that you 
estimate this taking place, the kind of trafficking that you 
described, how did you come to make that estimate, and how does 
that compare with what would be truly black market operations 
that are totally outside of any kind of legal cover of any 
sort?
    Mr. Magaw. There are about 5,000 gun shows, a little less 
than 5,000 gun shows a year.
    [Clerk's note.--Agency advises the number of gun shows is 
closer to 4,000 a year.]
    Mr. Kolbe. Do you have any idea what kind of volumes of 
these sales take place now?
    Mr. Magaw. In about 314 cases and weekends of working gun 
shows, observing what is going on, we figure that around 30 
percent of the weapons sold at gun shows are sold off record.
    Mr. Kolbe. Thirty percent are being sold, then, as so-
called private collections?
    Mr. Magaw. Private collections or a firearms licensed 
dealer not doing the paperwork like they should. There are a 
few out there who will do that.
    Mr. Kolbe. The selling it off-record is legal, that is a 
legal sale?
    Mr. Magaw. Not if it is done by a firearms licensed dealer. 
If you would walk into a gun show, half of your people selling 
weapons will be dealers, the other half will be selling from 
their private collection. The dealer must do the paperwork. You 
find some unethical dealers who, because they are at a gun show 
and the person next to them isn't doing the paperwork, neither 
are they.
    Mr. Kolbe. And you are saying you find people who avoid the 
licensing requirement by buying two or three from different 
places, taking them to another gun show, and selling them that 
way?
    Mr. Magaw. That is right.
    Mr. Kolbe. They will repeat that over and over again?
    Mr. Magaw. Yes. Or they are fairly big halls, so they may 
have a table already reserved in another corner; they will go 
around and buy 15 or 20 weapons and add them to their 
collection and just sell them off their table.
    Mr. Kolbe. The same gun show?
    Mr. Magaw. That is right, the same gun show. Or go outand 
sell them out of the trunk of their car.
    Mr. Kolbe. I have used up more than my time.
    Mr. Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman.

              linkage from gun purchases to violent crime

    Have we linked any transactions between non-Federal 
Firearms Licensees at gun shows directly to violent gun 
incidents? What incidents do we have, or do we have any such 
records that purchases from these folks then were subsequently 
used in violent crimes?
    Mr. Magaw. In the tracing from these 27 cities, the results 
coming back are showing--these are only crime guns that are 
traced, so they have had to be involved in a crime before they 
are traced--that 20-some percent, I believe off the top of my 
head, Mr. Congressman, but I can get it exactly for you, are 
from purchases at gun shows off record.
    Mr. Hoyer. So there is a significant incidence of use of 
these guns in criminal----
    Mr. Magaw. Many more than we originally thought there would 
be when we started this study.

                             great program

    Mr. Hoyer. Director, as you know, I am very interested in 
the GREAT Program. Senator DeConcini and I were involved in 
getting that program going, along with yourself. Tell me, how 
we are doing on that? The GREAT Program is budgeted at $13 
million. Also, comment on the fact that is from the Violent 
Crime Reduction Trust Fund. Are there plans for funding that 
program after that expires?
    Mr. Magaw. The Violent Crime Reduction Trust Fund, as you 
said, expires in 2000. And we don't know what is going to 
happen after that. We think it is, and it is showing to be a 
very valuable program, one that is needed all around the 
country. We have 316 agencies that have applied for funding now 
that can't function. We talked in other hearings that we have 
had that we would have needed about 40 million or so more money 
to finance all of those this year.
    We currently have $13 million in our budget--$16 million in 
1999, but 13 in the year 2000, and the 10 million for 
cooperative agreements is only a portion of those who want the 
program.
    Mr. Hoyer. And how is the program--obviously, it is 
popular--but how is it working? One of the things were we 
wanted to make sure it had a long-term effect. Do we have a 
linear study and, if so--
    Mr. Magaw. The longitudinal study is going on right now.
    [The Information follows:]

    Mr. Hoyer. And how is the program--obviously, it is 
popular--but how is it working? One of the things were we 
wanted to make sure it had a long term effect. Do we have a 
linear study, and if so--
    Mr. Magaw. The longitudinal study is going on right now. 
They expect to complete the longitudinal study in 18 months. 
The researchers at the University of Nebraska and the National 
Institute of Justice need to measure the impact over five years 
to determine the long-term value of G.R.E.A.T.
    Also, we know that G.R.E.A.T. alone, as with any program, 
cannot be the only effort that any community implements to help 
youth avoid violence and gangs. This is why we encourage cities 
to use G.R.E.A.T. as part of their summer programs. We are also 
working cooperatively with the Boys and Girls Clubs of America. 
With these clubs using G.R.E.A.T. in conjunction with other 
programs, we can have a much better impact on the quality of 
life the youth lead in their communities. We will also be 
partnering with other community-based programs such as Police 
Athletic League, and the Boys Scouts of America. Such 
partnerships can only reinforce the message G.R.E.A.T. sends 
and the life skills it provides.
    I certainly think that by the end of FY 2000, we will have 
a good picture of the type of impact G.R.E.A.T. has by the time 
the students exposed to the program, graduate from high school.

    Mr. Hoyer. I mean longitudinal.
    Mr. Magaw. They expect to complete it, I think, within the 
next 6 months or so. And what they are looking at right now is 
what kind of a value it has initially, let's say the first 
couple of years, and then what value does it have after these 
youngsters get down the road a little bit further. Also, how is 
it working in cities that have summer programs? They are 
finding that the summer programs help it.
    We are also working now cooperatively with the Boys and 
Girls Clubs of America. And we believe with them repeating this 
during the summer, and nights and weekends, that it will have 
even more value. So we are in the process of doing that. I 
certainly think by the time we get midyear, or certainly by 
this hearing next year, we will have a clear picture of what it 
is doing.
    Mr. Hoyer. The police officers that operate this program in 
Prince George's County think it is a great success. They really 
are enthusiastic about it.
    Mr. Magaw. They really are all over the country.

                youth crime gun interdiction initiative

    Mr. Hoyer. Let me talk to you about the Youth Crime Gun 
Interdiction Initiative. If that were an acronym, it would be 
the worst acronym YCGII, or whatever we call it.
    Mr. Magaw. YCGII.
    Mr. Hoyer. YCGII, that has got to be the worst acronym we 
have. Tell me about YCGII. We have substantially increased 
funding for YCG II to $45.2 million. You are suggesting--from 
$27 million last year--adding 10 new cities to this. Expound a 
little bit on the success we are having and how this is going 
to tie in with keeping guns out of teens' hands?
    Mr. Magaw. No program absolutely closes all the loopholes, 
but what this program is doing, as it has expanded from 10 to 
17, to 27, and in FY 2000 to 37, cities are lining up to 
getonboard because they see the benefit of it. We are tracing every 
firearm that they seize or recover in a crime incident. And out of the 
301 investigations that were instituted in 1998, there have been 276 
defendants recommended to Federal court for prosecution and 36 to the 
State courts.
    We have traced almost 80,000 weapons in 27 cities, so it is 
a huge, huge number. It is clearly telling in these cities. In 
fact, the cities are so excited about the report that came out. 
This report has just been out a couple of days. It goes through 
every city, and it tells them what weapon was seized and where 
it was seized, It gives them a picture to where the police 
chiefs now are putting together a mapping, a reinforcement 
mapping program. And they are going to apply their community 
policing to that particular area.
    So, for instance, there is one city that realized their 
weapons weren't coming from out of State, they were coming from 
a county right next to them. And others, without mentioning 
States, thought a lot of their weapons were coming from outside 
the State. They are coming from right inside the State. So it 
is helping local law enforcement help themselves by identifying 
where the problems are and addressing their law enforcement 
operational plans towards that.
    At the same time it is helping us, because if it is going 
across State lines, then we are working it as an organization 
trying to make those arrests, seize those weapons. So it is a 
combination of the Federal force helping when it crosses State 
lines that the States couldn't do for themselves, but it is 
also then helping them do what they can do for themselves.
    Mr. Hoyer. Is there a gross analysis, either at the State 
or national level, in terms of origin, in terms of most common 
to the least common origin, guns in teenagers' hands, how they 
get them? Obviously, we have had some assertions that you have 
adults buying guns for kids, as they buy cigarettes or liquor 
for kids, you know, a 19-year-old or a 20-year-old or a 22-
year-old, and turning it over to the teen right after the sale. 
I have not seen that, Mr. Magaw.
    Mr. Magaw. It is a real mixed bag. Some of them are 
stealing from their parents and their family members, so 
communities are addressing that so that their families will 
protect them more.
    Others are committing burglaries. One of the things that is 
happening is smash and grab, which you have heard from jewelry 
stores for a long time. That is happening in firearms now, 
where a youngster or an adult will take a vehicle, run into a 
store that is not protected and knock the glass out of it, and 
before the alarms can go off and the police respond, they have 
20 or 30 weapons.
    Some of them are being purchased at these gun shows and 
being brought back and sold out of the trunk of the car, if you 
watch where they sell drugs on the corner of the street. A lot 
of local police officers are realizing now when they pull up to 
the car and open up the trunk or people get in, sometimes they 
are trading and selling drugs; other times they are trading and 
selling firearms. And people will take the trade, the firearm 
for the drugs. So it is a real mixed bag. But it is identifying 
that these weapons are coming from virtually everywhere.
    The thing that we need to remember is that most of them 
originally, some way down the road, were purchased legally; and 
then we have to track them from there to see.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you.
    Mr. Sununu.

                      canadian firearms paperwork

    Mr. Sununu. Thank you, Mr. Chairman. Thank you for the 
introduction. I am thrilled to be here as a member of the 
subcommittee.
    Director Magaw, as you may know I represent a portion of 
the State of New Hampshire. It is not uncommon for residents, 
many people in the Northeast for that matter, to travel up to 
Canada with a firearm for sporting purposes. And as I 
understand it, they are required to file paperwork with the 
Canadian authorities; is that correct?
    Mr. Magaw. That is correct, sir.
    Mr. Sununu. Once they file this paperwork with the Canadian 
authorities, do authorities in Canada provide you or any other 
Federal agencies with a copy of the paperwork?
    Mr. Magaw. They do not. And we do not keep any records of 
that. We know of those transactions. We work with Canadians as 
we do other bordering countries, Mexico and others. So we know 
that procedure. But we absolutely have none of those records.
    Mr. Sununu. Did they provide you with a list of the 
transactions, or how are you made aware of the transactions?
    Mr. Magaw. Oh, we are not made aware of the individual 
transactions, but we interface with their law enforcement 
people like you would your brothers and sisters here in the 
Congress. And so we know what procedures they are following. 
But we have taken none of those records, accepted none of those 
records, asked for none of them. And they have not requested 
that we do so.
    Mr. Sununu. Terrific. Thank you very much.
    Mr. Magaw. Yes.
    Mr. Sununu. Thank you, Mr. Chairman.
    Mr. Kolbe. Is that all?
    Mr. Sununu. Yes, it is.
    Mr. Kolbe. Mr. Forbes.
    Mr. Forbes. Director, it is good to see you. Thank you for 
being here.
    Mr. Magaw. Thank you.
    Mr. Forbes. I have a number of questions, Mr. Chairman, 
that I would like to submit for the record if I could.
    Mr. Kolbe. Any questions you would like to submit for the 
record may be. I will say that to all members, of course.

                         import/export of guns

    Mr. Forbes. I thank the Chairman. Director, I was 
particularly concerned about the increased efforts, tracing and 
other initiatives that ATF has put in place to follow the guns, 
if you will.
    Are you seeing large increases in smuggling of illegal 
weapons across our borders? Compared to the last, you know, 5, 
6 years, are we seeing a marked increase in illegal weapons 
being trafficked?
    Mr. Magaw. Not a marked increase in weapons coming from 
other countries to us, but there is a steady increase of our 
produced weapons going to other countries. That is where the 
problem lies for the other countries, especially Mexico, and 
that is why Canada has applied some of the laws that they have, 
because a lot of weapons manufactured here are going there. But 
not the opposite, sir.
    Mr. Forbes. I had also heard that ATF has suspended the 
permits for the importation of firearms and ammunitions that 
might have been made with so-called U.S. technology. Could you 
talk a little bit about what that U.S. technology definition 
means?
    Mr. Magaw. It is really a State Department function. But I 
can explain part of it to you, and it will be very close to 
accurate. The rules and regulations now, whether they are 
congressional rules and regulations or just State Department 
regulations, regulation is if the weapon is made in this 
country and then given to another country to help them in an 
armed conflict or to help them arm their national guard or 
whatever unit, those weapons cannot be brought back into this 
country and sold, so that somebody can't make money on 
something we gave to another country to begin with.
    So as those permits or requests come in to import those 
weapons, if there is any indication that they are U.S.-made or 
tied to a U.S. manufacturer, we then take that to the State 
Department and confer with them to see if we are allowed to 
import it or not. That final judgment is made by them.
    Mr. Forbes. Is that a fairly new policy?
    Mr. Magaw. No, sir, it has been around for quite a while. 
We haven't done any new enforcements. Have we changed over the 
last 5 or 6 years on it at all?
    Mr. Forbes. I am specifically talking about the suspension 
of the permits per se.
    Mr. Magaw. I don't believe we have changed in the last few 
years. I have been here 5 years. I think it has been the same.
    [Clerk's note.--In regard to the issue of import and export 
of guns, ATF has revised its testimony as follows:]

    Mr. Forbes. I had also heard that ATF has suspended the 
permits for the importation of firearms and ammunitions that 
might have been made with so-called U.S. technology. Could you 
talk a little bit about what that U.S. technology definition 
means?
    Mr Magaw. ATF is mandated by Executive Order 11958 to seek 
the guidance of the Secretary of State, in part, on matters 
affecting the foreign policy of the United States. In 
accordance with the guidelines received previously from the 
Department of State, our processing of applications for permits 
to import military defense articles of U.S.-origin has always 
been subject to the recommendation of the Department of State.
    Recently, the Department of State advised ATF that their 
guidelines also applied to defense articles produced abroad 
from U.S.-supplied technology. Because ATF lacks the technical 
knowledge or resources to determine which foreign-origin 
defense articles were made from U.S. technology, we have 
requested guidance from the Department of State. Until that 
guidance is received, we have suspended the processing of 
applications for foreign-origin defense articles that ATF feels 
may have been made utilizing U.S. technology.
    Mr. Forbes. Is that a fairly new policy?
    Mr. Magaw. From ATF's standpoint, yes. ATF first became 
aware of the Department of States' concerns with applications 
to import foreign-made defense articles that were produced from 
U.S.-supplied technology in late 1998. I am specifically 
talking about the suspension of the permits, per se.
    ATF has not taken any action to suspend previously approved 
permit applications for such defense articles. However, since 
learning of the Department of State's concerns, we have 
suspended our processing of all applications to import such 
articles pending receipt of their guidelines on how to process 
such applications. ATF has forwarded copies of these pending 
applications to the Department of State for their reference and 
consideration when formulating their guidance.

    Mr. Forbes. All right, Director, thank you very much.
    Mr. Magaw. Thank you.
    Mr. Kolbe. Mr. Peterson?

                               gun shows

    Mr. Peterson. If we can go back to the gun show issue, 
could you explain again why you can't adequately function with 
the current law with gun shows, and what you want to change and 
why?
    Mr. Magaw. We can function with the law that we have now. 
ATF in these situations must report the statistics we have and 
those kinds of things. And you know it is a report that carries 
the ATF seal. But I want to be very careful, Congressman, that 
we are not trying to, as an organization, change the firearms 
laws. We have to be recognized as a neutral regulator.
    So we were asked to do this study, and this study shows the 
statistics. The problem with the law to enforce now is that it 
says ``in the business of,'' and that is about all it says, 
that if you are ``in the business of '' firearms, you have to 
have a firearms license. Now, to prove beyond a reasonable 
doubt ``in the business of,'' you can imagine what that takes. 
It is tracking people to 8 or 10 or 12 or 15 gun shows and 
watching them sell these many weapons. It takes 4 or 5 or 6 
undercover agents to do that and sometimes a year and a half or 
so to make that case. So, as a result, people know it takes 
that long.
    If you walked into a gun show, it is very difficult to work 
undercover in a gun show, because a huge portion of them are 
very suspect anyway. So what it does, it leaves a loophole for 
those guns to be sold, because it takes an awfullot to convict 
one person. Now, sometimes they will go out and sell them out of the 
trunk of their car as people are coming into the gun shows.
    And again, if you can't prove it isn't from their private 
collection, and the law has ruled that once they buy it, it is 
their private collection--do they have to keep it 72 hours or 
48 hours or a week [Clerks note.--Agency would insert ``to be 
considered part of a private collection'']? It is all so gray, 
that it leaves a huge loophole. So, if you want to close 
loopholes in terms of the felons and juveniles and others 
buying firearms, this is one of the main ones. It isn't an 
absolute answer, but it is a loophole.
    Mr. Peterson. And your proposed law change would do what?
    Mr. Magaw. The administration proposed law change, not ATF.
    Mr. Johnson. Mr. Chairman, if it is appropriate, could I 
answer the broader policy question?
    Mr. Kolbe. Yes, of course.
    Mr. Johnson. I think Director Magaw is correct. In fact, I 
am certain that he is correct that the ATF, in large part, 
gathered the statistics, to survey the field, and give us a 
better picture of what is going on. The determination that has 
been made has been made based on the fact that there are 
anywhere from 4,400 to 5,000 gun shows in a given year.
    And the evidence the case surveys have shown us is that 
this is one avenue by which criminals gain access to weapons. 
What the administration is recommending doing is closing this 
avenue by enhancing the oversight of gun shows. And that is the 
basis behind the rationale behind the legislation.
    Mr. Magaw. Some of the firearms license dealers have a 
problem, too, because they are meeting all the requirements on 
one table, and the person next to them is selling them without 
any of the paperwork or checks. So some of that is coming also 
from the firearms dealers.
    Mr. Peterson. But there is no current limit of how many 
guns you can trade, buy, or sell in a month's time and not have 
a license?
    Mr. Magaw. It is whatever you think you can convince the 
jury of, and you just have to make a very, very extensive case. 
You have to get up into well over 100 weapons in a reasonable 
period of time and be able to show that he purchased the 
weapon. And so you have got to get to a point where if you 
purchase a weapon at this table at a gun show, you have to get 
specific information in order to show that gun was purchased, 
and build your case. As you do that, the word will pass and the 
hall will about half clear out; the gun show will empty out.
    Mr. Peterson. I thank the gentleman.
    Mr. Kolbe. Thank you.
    Mr. Price.
    Mr. Price. Thank you, Mr. Chairman. Let me quickly follow 
up on that line of questioning and ask you to what extent your 
budget request anticipates additional legal authority to 
regulate these gun shows and to what extent you are simply 
making a budget request that you will be in a position to 
utilize without additional authorization.
    Mr. Magaw. None of our funds in our 2000 budget or our 1999 
or our 1998 budget projects any legislation, sir. That will 
have to be funded if it is passed. There is no money in there 
to do anything different than what we are doing now.
    Mr. Price. Well, but you are requesting as part of this 
integrated violence reduction strategy some additional 
positions and additional dollars. And the increased 
surveillance of gun shows is part of that; is that not correct?
    Mr. Magaw. Well, that is why we integrated. We put all the 
systems together that are helping to identify the problems 
throughout the country. So really what we have done is shoved 
those systems together and called it integrated. But with 
additional funds, we will do a few more gun shows in 2000 than 
we are doing in 1999, probably, if those stats continue to tell 
us that those weapons are coming from there.
    But the money we have in our budget for 2000 has nothing to 
do with the gun show legislation. We would not expend $1 or put 
it in our budget in anticipation. [Clerk's note.--Agency would 
amend statement to end ``anticipation of passage''] That would 
be up to the Congress, and up to the funding to occur later.
    Mr. Kolbe. Would the gentleman yield? I will give you extra 
time. You are saying you do not anticipate any increased 
workload as a result of this gun show initiative; you haven't 
projected anything in your budget for increased workload?
    Mr. Magaw. I won't project that you would pass that bill.
    Mr. Kolbe. Okay. So it is not in there.
    Mr. Magaw. I didn't mean that to sound negative.
    Mr. Kolbe. I understand. I thought you did have increased 
workloads in that.
    Mr. Magaw. No, sir. The request is integrated, of which 
part is gun shows.
    Mr. Johnson. Mr. Chairman, might I add just a little bit on 
that?
    Mr. Price. Certainly.
    Mr. Kolbe. The time is Mr. Price's.
    Mr. Price. Well, I understand what you are saying about not 
wishing to presume that legislation is going to be passed. On 
the other hand, you have some very convincing data on what is a 
major loophole in the gun control laws, these gun shows. And, 
of course, you are not the only ones who have seen that. 
Legitimate licensed gun dealers feel the same way. There is 
plenty of evidence that this needs to be addressed.
    My impression was that with this integrated violence 
reduction strategy, your intention was to address it with 
whatever kind of authority and resources you can currently 
muster. And my question was: Can you not do that short of 
having this additional authority? I understand the need for the 
additional authority, but it wasn't clear to me, and still 
isn't, to what extent your 2000 budget submission anticipates 
increased activity in this area.
    Mr. Magaw. What we have been doing the last year or 2 years 
is trying to get a real picture of the gun shows and finding 
out the statistics that you are starting to see now in the 
report and work a few of those cases. And we do have statistics 
of those that have been sent forward for prosecution. But we 
don't intend to increase that a great deal. I don't have the 
personnel to do it.
    I have got church fires; I could just go down the litany. I 
don't have any more personnel to put on it. If the bill is 
passed, then we will work with local law enforcement on task 
forces, task forces at cities that see, through this record, 
that they are getting quite a few cases out of a gun show. They 
ask us to help them work gun shows, and we will try to do it if 
we can. But I just don'thave a lot of personnel and resources 
to put into that.
    Mr. Price. As you testified earlier, you clearly do need 
additional authority to work this area effectively?
    Mr. Magaw. That is correct.

         appreciation of former legislative affairs coordinator

    Mr. Price. Before my time runs out, I just want to take a 
moment to mention someone who unfortunately won't be at this 
hearing next year. I understand that ATF headquarters is losing 
your legislative affairs coordinator Steve Pirotte. Steve came 
to headquarters from Charlotte, North Carolina, where he was 
Assistant Special Agent in Charge of the Charlotte Field 
Division. And during his tenure, the Charlotte Field Division 
was one of the most productive in the country in terms of 
number of investigations. Steve is an accomplished investigator 
himself and, holds the distinction of working the first 
explosives case in the country, I understand, involving 
taggants. So I want to thank him for his excellent work here 
and in North Carolina and wish him well in Boston.
    And, Mr. Director, I do hope that your next Executive 
Assistant for Legislative Affairs will have Steve's same level 
of interest in my home state.
    Mr. Magaw. Thank you, sir.

                         explosives inspections

    Mr. Price. If I have just an additional minute, I would 
like to follow up on an area of questioning that we did raise 
last year. I am aware, through my visit with your agents in 
North Carolina, that crimes involving explosives are on the 
rise. ATF has established an annual goal of 100 percent for 
explosives inspections. And I expect we all think that is a 
desirable goal.
    Last year you requested funding for 26 additional FTEs, to 
take the Bureau to an 80-percent inspection rate. And you told 
me at the hearing that you would have needed an additional 25 
or 26 FTEs beyond your request to get to that preferred 100-
percent level.
    In fact, I think you had included those additional FTEs in 
your budget submission to OMB, but it was reduced in the pass 
back. You also told me last year that you were well below the 
preferred inspection rate for Federal firearms licensees of 
once every 3 years.
    Now I am pleased to see some of the new initiatives 
included in your budget, but there does not seem to be anything 
in your request to shore up your base so you can meet these 
preferred inspection rates. I would appreciate an update of 
where we are on that.
    What impact do you expect your 2000 budget proposal to have 
on inspection rates?
    Mr. Magaw. With the 26 FTEs, the positions that this body 
gave us for 1998, we were able to reach about 85 percent of the 
inspections. I don't frankly think, Mr. Congressman, that with 
all of the things that ATF has to do, I will be able to get 
much higher than that. So my goal is to stay in the 85 percent 
area. That is true, I did ask for 54; we got 26.
    We were able to utilize a few other people with resources 
provided by Congress and got the inspection rate up to 85 
percent. That was a big improvement over 1997, and our goal for 
this year, 1999, is to hold it at about 85 percent. I wouldn't 
need the 26 that I thought I would originally; I could probably 
do it with 14 or 15 more. But with everything that I see, the 
caps and everything else, I was trying to be reasonable in our 
request.
    Mr. Price. Is there anything in particular you are doing to 
help your investigators be more productive in their works. For 
example, the kind of research on explosives you are doing that 
could assist investigators get a handle on this crime and be 
more efficient in the way we are using our investigative 
resources?
    Mr. Magaw. Yes. We are doing 3 or 4 things in that area. We 
are doing an extensive training to have a certified technician. 
It takes a lot of training. But there are a lot of professional 
bomb or explosive technicians out there in the world in the 
military and other places. So, instead of tying all of that 
training up in an agent person and then having that agent 
person being stuck in that area, not being able to advance, we 
are moving and hiring more explosive technicians already 
trained.
    This video showed an example of how--we have a National 
Repository now--a particular bomb has some certain 
characteristics--almost every bomber will leave their signature 
one way or another. And this will help departments all over the 
country, in fact all over the world, with the friendly 
countries coming up with information that will help them better 
investigate these cases.
    Mr. Price. Thank you.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much.

                     proposed gun show legislation

    Mr. Johnson, did you want to make a comment on the gun show 
thing? You didn't get a chance to do that.
    Mr. Johnson. Just a very quick comment. The purpose of the 
gun show legislation is really twofold. There is one component 
that would facilitate additional law enforcement; the other 
component is a preventive component. What we are seeing right 
now in the gun shows is that many of the people who were able 
to make purchases from non-FFLs, from people other than 
federally licensed firearms dealers, can now do so without 
undergoing any sort of a background check.
    So part of the thrust of the legislation is the proposed 
legislation would be to put in place the background check. 
Clearly, if we are doing more in this area, and this is after 
the law would go through, there would need to be a commensurate 
amount of resources added to that. But what we are looking for 
now in terms of the budget request is, just as Director Magaw 
said, the integrated plan is dealing with current law.
    Mr. Kolbe. Thank you.
    Ms. Meek.
    Mrs. Meek. Thank you, Mr. Chairman. I have more than one 
question, but I will submit them for the record.

            hiring of african americans and other minorities

    Mrs. Meek. My question, Director Magaw, has to do with the 
hiring of African Americans and other minorities. If you 
remember, last year I asked a similar question. I did receive 
your response showing what progress, if any, had been made.
    I would like for you to identify any and all costs, broken 
down on an itemized basis, that the Bureau will incur in fiscal 
year 2000, and in later fiscal years, if it is known, to 
implement the settlement of the lawsuit brought by African 
American employees of the Bureau.
    In addition to that, does the Bureau's fiscal year 2000 
budget request allow the ATF to fully comply with the terms of 
the settlement? Are there any steps required to implement the 
settlement fully that involve costs that are not covered by 
your budget request? Does the Bureau presently have reasons to 
believe that the court monitoring this settlement would require 
the Bureau to take any additional steps to comply with the 
settlement? If so, what likely budgetary implications do you 
see with such additional steps?
    Mr. Magaw. I can answer that, I think, to your satisfaction 
today. I was very much involved in the class action settlement 
agreement since I came over here 5 years ago. And I have been, 
I think, committed to seeing that it is carried out. We are 
making great progress. The monetary funds have already been 
turned over to the class. The class is going to decide how that 
is distributed. The nonmonetary claims--there were 79 of those 
claims--of which 46 are on appeal.
    And we selected a person from a university who was 
acceptable to the agents in the class action to monitor those 
disagreements. In other words, they sent 79 in--this is 
oversimplistic--it was agreed that 33 were finished, and 46 
were sent back. They are appealing those 46. We are talking 
with them all the time in a very open and friendly way. Those 
46 are pending for this arbitrator to look at, and we will 
abide by that arbitrator's decision. And I don't think there 
will be any delay.
    I would not want to mislead you at all. I had to, a few 
months ago, make some directed reassignments. We were short in 
certain areas of the country, and I needed to send some people 
from one place to another. Not promotions or anything like 
that; they were lateral. They basically are concerned that I 
violated the settlement agreement in doing that.
    I have looked at it very closely. I can't find that I have. 
And I expect the judge will come back and say that I haven't. 
If he says I have, then I will correct it. And with that, that 
is pretty well finished up. [Clerk's note--Agency clarifies 
that ``that'' refers to the class action settlement agreement]
    Now, the $1.1 million in this budget for 2000 will do the 
final thing that we have agreed to that was very necessary and 
really helps the whole organization--that is redesign the 
appraisal and promotion system of our organization. And that 
would help everyone.
    But, of course, that has been their point all along. All of 
their suit, all of the things that we agreed to and they asked 
for, will make the organization better. And so that last piece 
is coming into place, and that is what this $1.1 million is. 
And we will have that done by professional, competent 
contractors, and it will involve the class action suit 
personnel as we go along with it, as we have all along.
    I would be very surprised if anybody in the class action 
would criticize my intention or my cooperation in working with 
them.
    Mrs. Meek. So your answer is if the court were to come back 
with some additional costs, you have taken that into 
consideration in your budget requests?
    Mr. Magaw. The costs have all been satisfied. These are 
nonmonetary; the pending 46 appealing are nonmonetary.
    Mrs. Meek. I see. All right.
    Mr. Magaw. Whatever the arbitrator decides--that is 
probably a wrong term--but the judge, whatever he decides, we 
will abide by.

                              tobacco tax

    Mrs. Meek. Thank you. Mr. Chairman, I have one other 
question. But it has to do with tobacco.
    Mr. Kolbe. Go ahead.
    Mrs. Meek. Do you want me to go?
    Mr. Kolbe. If you can make it a quick one.
    Mrs. Meek. I will make it quick.
    This has to with the gray market and the black market in 
tobacco. The Balanced Budget Act of 1997 stipulated that 
effective January 1, 2000, tobacco products manufactured for 
export may only be reimported by a licensed manufacturer or 
exporter. The act also directed the ATF to write regulations.
    Number one, what is the status of these regulations? How 
does the Bureau plan to enforce the regulations? Is there 
funding in your proposed budget to enforce the new regulations? 
If not, how much additional funding is needed?
    Mr. Magaw. In our 2000 budget, Madam Congresswoman, there 
is $5.2 million that addresses this particular topic. There are 
two or three things that take place. One, we will license 
importers. Right now, all importers are not licensed. They will 
be licensed. So the fact that they are licensed, we will be 
able to monitor their paperwork. They will have to meet the 
guidelines in the regulations. That will not be very difficult, 
but we will be able to keep track of where these cigarettes are 
going. And once they come back into the country, they have to 
either go back to the manufacturer to be repackaged, or they 
have to go to a distributor. They can't come straight into the 
market like they have now.
    The other thing that we have to face is that those who roll 
their own tobacco are now going to be taxed; plus, when the tax 
law comes into effect, 10 cents in 2000 and 5 cents in 2002, 
there has to be an inventory of everything that is in stock out 
there. That is where you are going to have probably over $200 
million in revenue. And if you are not watching what they are 
doing, they will underreport.
    Mrs. Meek. Do you have any idea what percentage of your 
market is gray market cigarettes?
    Mr. Magaw. Say again?
    Mrs. Meek. What percentage of the cigarettes sold in this 
country are gray market cigarettes?
    Mr. Magaw. I don't know that. Does anybody have that? We 
will get that to you. We can certainly figure that out.
    [The information follows:]

                           Tobacco Diversion

    ATF monitors export cigarettes as follows. When cigarettes 
are produced in the United States they are covered under ATF 
regulations. A tax becomes due upon leaving the place of 
manufacture; therefore any cigarettes that are produced in the 
United States and are due to be exported without the payment of 
tax must be accounted for. ATF regulations place restrictions 
upon how those cigarettes can be exported and those movements 
are monitored through required documentation. The documentation 
can then be corroborated through inspection and audits at the 
manufacturer.
    ATF is currently exploring allegations that some U.S. taxes 
are not being paid upon re-entry. However, the actual 
monitoring of the re-importation of U.S. manufactured 
cigarettes lies with U.S. Customs. They collect the excise tax 
when the cigarettes are re-entered into the U.S. domestic 
market. ATF is currently meeting with U.S. Customs to work on 
procedures for the joint monitoring of re-landed cigarettes.
    To further enhance our efforts, ATF is currently automating 
the export documentation received at the AFT National Revenue 
Center located in Cincinnati, Ohio. Once the export records are 
computerized AFT will be better able to analyze the information 
received and document existing as well as potential diversion 
schemes.
    ATF does not have estimates of all the actual gray market 
cigarettes sold in the U.S. ATF has noted a significant 
increase in the amount of cigarettes removed tax exempt from 
U.S. manufacturers over the past ten years. However, we have 
noted an increase in collections by U.S. Customs on cigarettes 
imported into the United States.

    Mrs. Meek. It is in my list of questions. Thank you.
    Mr. Magaw. We will get that to you.
    Mrs. Meek. Thank you, Mr. Chairman.
    Mr. Kolbe. Ms. Emerson.

                              ffl process

    Mrs. Emerson. Thanks, Mr. Chairman. Director Magaw, thanks 
for being here today. I want to say for the record that I am 
concerned, as others have mentioned previously, about the whole 
issue of gun shows and just want to make that statement for the 
record.
    Let me ask you, Director, over the last 6 years what types 
of changes have been made regarding the FFL process and do you 
anticipate other changes being made in the next year?
    Mr. Magaw. I don't anticipate any changes being made in the 
next year. But over the last 3, 4, or 5 years, there were 
285,000 gun dealers in this country, or approximately that. 
There are 104,000-plus today, not quite 105,000. The rules 
changed in terms of them having to go through a background 
examination. The fees changed somewhat. They have to comply 
with local regulations that they didn't have to before to get a 
Federal tobacco license or firearms license.
    So those changes have taken their toll in terms of the 
numbers of dealers who are out there. The ones that it really 
took out of the market, though, for the most part, were those 
who sold 3 or 4 weapons a year out of their house. So, it was 
not aimed at anybody specific. It just was a change of the 
rules, regulations and costs that caused that number to drop. 
If you weren't in the business of selling and trading guns, or 
a collector, you just simply didn't renew your license.

                    illegal sales over the internet

    Mrs. Emerson. Okay. And, secondly, I asked Secretary 
Johnson earlier today about monitoring of the Internet for 
illegal sales of tobacco, cigarettes, and firearms to minors. 
And I don't know if ATF does anything specific. But I did want 
to tell you that we went back to the office and very easily 
pulled up on the Internet a little shopping form for 
cigarettes, and all it says is that you must be 18. Well, there 
is no way anybody is going to know you are 18 or how old you 
are.
    And then for alcohol, it says that an adult signature is 
required for alcoholic products. And you know as well as I do 
when UPS delivers it, they drop the stuff at your door and then 
leave again. So I just want to ask that you all consider 
looking into this seriously as far as monitoring, because I 
suspect there are a lot of underground sales and particularly 
to minors that causes me great concern.
    Mr. Magaw. Yes, and you are right. Because they can't 
determine the age, the youngsters have the credit cards and the 
cigarettes and the tobacco show up, or the cigarettes and the 
alcohol show up without the seller being able to determine who 
they sell it to.
    Mrs. Emerson. Unfortunately, we tried to buy a gun, but it 
was going to be a little more complicated in the hour time 
period that we had between leaving here and coming back.
    Mr. Magaw. It is a little easier for us to watch the 
firearms, because if they advertise the firearm--unless they 
are camouflaging it--to a specific person they know, you can 
tell that that is a firearm that probably is being illegally 
sold, and then we do try to do some work on that.
    But in terms of monitoring the Internet, I think we would 
have to have some legislation in order to do that. I would have 
to look at that. But I think we might have to have some 
legislation on it. We will have to see. We will look at it, and 
I understand your concern.
    Mrs. Emerson. I appreciate that. Thank you.
    Mr. Kolbe. Ms. Northup.
    Ms. Northup. Thank you. Good afternoon. I'm sorry, I have 
three hearings going on at the same time, and so I wasn't here 
for all of your presentation.
    Mr. Magaw. I understand.

                youth crime gun interdiction initiative

    Ms. Northup. I am, though, very eager to know about the 
Youth Crime Gun Interdiction Initiative. I know that you 
started that program in 27 cities, and have just expanded it to 
10 more cities, and Louisville is included in that, which I 
represent. We have had a terrible problem with youth and 
violence and gangs, and guns go right along with that. So we 
are eager to have your support and your involvement.
    I wondered specifically if you could tell me what--having 
Louisville added to that program means to our local ATF 
presence.
    Mr. Magaw. The local ATF presence there in Louisville, to 
my knowledge, will remain the same as it is now. Is Louisville 
going to change in terms of size?
    Mr. Vita. They are going to get some additional agents.
    Mr. Magaw. How much do you know off the top? Andy Vita is 
the Assistant Director for all of field operations. V-I-T-A, 
Andy is the first name. And we just did a re-alignment of our 
field, and I apologize for not knowing that specifically. But 
he says Louisville is going to get some personnel, and we will 
make sure you understand exactly what that is.
    [The information follows:]

         Youth Crime Gun Interdiction Agents in Louisville, KY

    If Congress allocates additional resources for the 10 newly 
designated cities, ATF will dedicate 6 special agents to YCGII 
efforts in each of those designated cities of which Louisville 
is one. This would bring the total special agent force in 
Louisville to 22.

    Ms. Northup. I would really be very interested in that, 
because despite our growing problem and actually defying what 
is going on nationally, I think that we have been understaffed 
for the last 2 years. So I am eager to know what that will mean 
in staffing and any other resources that will be involved.
    Can you tell me how that will work with the local law 
enforcement system and how you interact in this program to 
counteract juvenile and violent crimes in the city of 
Louisville?
    Mr. Magaw. Usually it is done in a task force, and we have 
various numbers of agents on these task forces--sometimes it is 
1, sometimes it is 3 or 4. And they make sure that, as these 
guns are seized, they are quickly traced. And then once they 
are traced, the information received from these traces is 
runned down, because that is what they have to do.
    It is only traced by the gun and the actual serial number. 
There is no national register. So they have to run it down from 
the manufacturer right up to the current owner. And then what 
does that tell them? It goes into the national system, and it 
may show that you have got a group of people buying weapons in 
Ohio and bringing them there, or in West Virginia bringing them 
there.
    As I was saying before earlier, what we found out in one 
major city when we started tracing them is that they were 
coming from the adjoining county, virtually all of them coming 
from the adjoining county. This is the book that we just put 
out and, Congresswoman, your city will be in there next year 
when it is updated. It will tell the city, almost in what 
sector of the city these weapons are being used, and by whom 
and under what circumstances.
    So they can take their community policing effort to that 
area, and so it really is going to help. If it is coming from 
outside the State, it will help us then do the Federal tracking 
of them, and hopefully shut that flow down.

                          cigarette diversion

    Ms. Northup. We are eager to have your support. I won't 
follow up because I understand Mrs. Meek asked this, but I 
would just like to add my voice to hers about the gray market 
in cigarettes, and hope that the regulations and the 
enforcement of those regulations will be very effective. I 
think it is only fair that those people that abide by the law 
aren't undercut by the huge number of--or certainly the 
potential of, gray market cigarettes flooding the markets.
    Mr. Magaw. This legislation will help that, and I think we 
will correct the problem, clearly. One thing I would mention 
here as a heads-up for this Committee and for those in your 
different States is what you need to think about before you 
increase the taxes in your particular States. You have to 
remember that with that, if you go very high on your taxes and 
there are any States [Clerk's Note.--agency would insert 
``without higher taxes] close by, you are going to have a real 
trafficking problem and we are going to have a real trafficking 
problem.
    So we need to think those things through. For instance, 
Virginia is the lowest tax State, North Carolina is very low. 
Michigan----
    Ms. Northup. Kentucky is fairly high.
    Mr. Magaw. Fairly high. If you get something putting high 
taxes in close to those States [Clerk's note.--Agency clarifies 
that this should read ``in States close to those low tax 
States.''], you have a huge problem. You are going to go down 
in taxes rather than go up probably, so you have to think it 
through, really.
    Ms. Northup. Is my time up? Okay.
    Mr. Kolbe. Thank you very much.
    I am going to forego a second round of questions, because 
otherwise we are cutting now into the Customs' presentation, 
which is a very large agency and very important. And if there 
are other questions from other members that are burning, that 
can't be asked for the record, I would like to--Mr. Price, do 
you--
    Mr. Price. Go ahead.
    Mr. Kolbe. I would like to thank Mr. Magaw for being here. 
Thank you very much, and we are going to go to Customs now.

[The official Committee record contains additional information here.]


                                        Tuesday, February 23, 1999.

                     UNITED STATES CUSTOMS SERVICE

                                WITNESS

RAYMOND W. KELLY, COMMISSIONER
    Mr. Kolbe. Thank you. We are not going to recess, we will 
just change places at the table here. If we can get the 
Commissioner and his staff he needs at the front table, I would 
appreciate it. All right. When you are ready, Commissioner.
    Mr. Kelly. Yes, sir.
    Mr. Kolbe. We welcome once again to the front table here 
Commissioner of Customs, Mr. Kelly, his first time before us in 
this capacity. He has certainly been at this table before us. 
It is kind of a switch of positions here. But we are delighted 
to have you as the Commissioner of Customs. And we welcome your 
testimony as always. It will, of course, be placed in the 
record, and anything you can do to summarize and shorten it 
will help us because I know members have a number of questions.
    Commissioner Kelly.
    Mr. Kelly. Thank you, Mr. Chairman, Congressman Hoyer, 
members of the subcommittee, it is indeed a pleasure to be here 
again, in my new capacity as the Customs Commissioner I have a 
prepared statement that I will attempt to summarize so that we 
can showcase some of the activities that are currently under 
way at the Customs Service.
    Before I begin, however, I want to thank you, Mr. Chairman, 
and the Ranking Member, Mr. Hoyer, and all themembers of the 
subcommittee, for the consistent support that you have given to law 
enforcement and, in particular, the strong support to the U.S. Customs 
Service.
    Mr. Kolbe. Excuse me. Let me just say the bells there 
indicate that we are going to have, apparently, a series of 
votes. So let us see how much of your testimony we can get 
through before we have to interrupt here to go vote.
    Mr. Kelly. Okay. I have been in my job as Customs 
Commissioner for a little over 6 months. Customs is the 
Nation's oldest law enforcement agency. It has a rich tradition 
and a broad, diverse, and complex mission. Customs employees 
carry out their responsibilities with remarkable success.
    Last year Customs participated in the seizure of more drugs 
than any other Federal agency, 1.2 million pounds. This 
exceeded the previous year's total seizure by over 200,000 
pounds. That is more than a million pounds of cocaine, heroin, 
and marijuana that won't find its way into our streets or into 
our schools, or communities.
    Customs continues to display a singular expertise in money 
laundering investigations.
    Operation Casablanca, concluded in May of 1998, was the 
largest, most comprehensive drug money laundering case in the 
history of U.S. law enforcement. The investigations spanned 5 
years, involved the work and dedication of more than 200 
Federal agents and resulted in the arrest of more than 168 
individuals, the indictment of 3 Mexican banks, and the seizure 
of 2 tons of cocaine, 4 tons of marijuana, and more than $100 
million in laundered money.
    Customs has also had success in other enforcement areas. 
Operation Cheshire Cat led Customs agents, via the World Wide 
Web, into the diabolical world of child pornography and sexual 
exploitation. What we uncovered in Cheshire Cat was an 
international alliance of approximately 200 sexual predators 
operating in 47 countries. In the United States, 35 search 
warrants were executed, resulting in 13 arrests, and more 
arrests are currently pending.
    Most importantly, we were able to rescue 18 children--who 
had been sexually molested by strangers, neighbors, and even 
their own relatives--from further abuse and direct them into 
counseling services.
    The demand for illegal drugs in the U.S. remains strong. 
Drug-smuggling organizations continue to transport their 
contraband into our country using every conceivable route and 
method. Drug-smuggling organizations are as resilient as they 
are insidious. Successful dismantling of such criminal 
enterprises requires a balanced and comprehensive strategy, one 
that integrates all Customs enforcement disciplines: 
investigations, intelligence, air, marine and border 
interdiction. Again, I want to thank the committee for the 
substantial additional funding provided in fiscal year 1999 for 
counterdrug operations.
    Funding for nonintrusive inspection technology, air and 
marine procurement, and operations and investigations give 
Customs the tools it needs to carry out the job that Congress 
and the American people expect. As proud as we are of these 
accomplishments, we believe that there are some areas in our 
organization that need to be strengthened. We have developed a 
document we refer to as the Action Plan for 1999.
    It identifies the actions underway to improve Customs 
management and procedures in areas ranging from integrity to 
training to automation. Hopefully, all the members of the 
subcommittee have received a copy of this plan. If not, we have 
extra copies available here today.
    First on our agenda, the issue of integrity. Questions of 
integrity can erode the public's confidence in any law 
enforcement organization. For this reason, we are strengthening 
our integrity programs and procedures throughout the agency.
    We are working to improve the operations of the Office of 
Internal Affairs, the quality of its investigations and its 
focus. Leadership in that office is paramount. We have recently 
appointed an individual who has been a career prosecutor with 
impeccable credentials in public integrity to be our Assistant 
Commissioner of Internal Affairs. William Keefer, who is here 
today, brings outstanding experience and credibility to this 
position.
    We have established working groups throughout the agency to 
ensure that discipline is administered in a fair, uniform and 
consistent manner. We are holding people at the highest levels 
within the agency accountable for disciplining employees for 
wrongdoing. We are establishing a Customs-wide disciplinary 
review board and revising our table of offenses to eliminate 
any question of what discipline will be meted out for 
misconduct.
    We are stressing oversight responsibilities. We are 
establishing new accountability standards for all managers. By 
paying attention to top level oversight for operations in the 
field, we will eliminate any ambiguity about who is ultimately 
responsible for getting the job done. This emphasis on 
integrity and accountability is meant to improve the quality of 
information and services Customs provides to the public.
    Increasingly our face at Customs is one that turns outward 
to millions of travelers from different cultures, to business 
people grappling with the changing conventions of global trade, 
to American industry and the American public whose interests 
more and more frequently converge with ours.
    At Customs we have placed a strong emphasis on training. We 
have created a new Office of Training which will be lead by an 
Assistant Commissioner for Training. Changes such as these 
signal our commitment to provide all of our employees with the 
skills and expertise they need to perform their jobs with 
courtesy, professionalism and respect.
    We will train in virtually every area, every activity: 
passenger interviews, vehicle inspections, rover inspection 
training, outbound currency interdiction, cultural awareness, 
and new training for internal affairs investigators.Training 
will enhance basic instruction on integrity issues.
    We are establishing a customer satisfaction unit within the 
Office of Field Operations at headquarters so we can respond 
more quickly to customer and citizen needs.

                            personal search

    The issue of personal search is high on our agenda. 
Inspection personnel tasked with this responsibility face 
enormous challenges. Because we want the committee to better 
understand those challenges and the new procedures we have in 
place, we have prepared a special presentation on personal 
search. We have a videotape that we will play for the committee 
on the monitors which have been placed in the room.
    Before I get started, I want to provide some background. 
Last year more than 69 million passengers passed through 
Customs at our Nation's airports. Customs conducted 
approximately----
    Mr. Kolbe. Excuse me, Commissioner. Perhaps with just a 
little over 7 minutes remaining, before you get into the 
discussion of this and the videotape, how long is the video?
    Mr. Kelly. About 7 minutes.
    Mr. Kolbe. But you have some discussion first. So I think 
that the appropriate thing for us to do is to break at this 
point. We have two votes, this vote and one immediately 
following it, if members could get back. As soon as I get back 
we are going to resume the hearing, and we are just going to go 
till we can at the end, if you would indulge us while we have 
to cast these two votes.
    Mr. Kelly. Sure.
    Mr. Kolbe. The subcommittee will stand in recess subject to 
the call of the chair.
    [Recess.].
    Mr. Kolbe. The subcommittee will come to order again. My 
apologies. What was supposed to be a 15- or 17-minute vote 
turned into a 30-minute vote there, so I apologize for the 
delay here.
    Mr. Kelly, Commissioner Kelly, you were beginning to 
describe the video we are going to see.
    Mr. Kelly. Yes, sir, I just have a few more comments before 
we do that. I want to say last year more than 69 million 
passengers passed through Customs at our Nation's airports. 
Customs conducted approximately 51,000 personal searches of 
passengers. This is a very small percentage. However, anyone 
who is subjected to a personal search finds the experience 
intimidating and disturbing, and it is certainly not a pleasant 
experience for the inspectors who have to conduct these 
searches.
    One of the first steps I took after becoming Customs 
Commissioner was to look for ways to make the personal search 
experience less unpleasant. Identifying the swallowers who 
routinely ingest 50 to 80 or up to 100 balloons of cocaine or 
heroin is still a priority. In the upcoming video you will make 
the acquaintance of an actual smuggler. You will hear her 
explain the alarming procedures she used to smuggle contraband 
into the United States.
    You will also see what Customs is doing to improve our 
detection capabilities. Our goal is to discover drugs hidden on 
or in a smuggler's body without compromising the dignity of the 
people passing through our ports. Customs has already gone on 
line with nonintrusive body scan technology at two of the 
Nation's busiest airports, JFK and Miami.
    To further our efforts to make the search experience less 
disturbing, we are requesting $9 million in fiscal year 2000 
for additional personal search technology. What this new 
funding will do is provide Customs with yet another tool to 
conduct personal searches in the most inoffensive manner 
possible.
    This funding will allow Customs to purchase mobile x-ray 
facilities that will be placed near or in the international 
arrival areas of airports. These facilities will be used to 
conduct x-rays on passengers suspected of ingesting or 
concealing narcotics.
    In addition, we retained a professional consulting firm to 
look at our airline passenger processing procedures. We asked 
them to make recommendations as to how we can improve the way 
we educate the public and make our inspectors more culturally 
aware. We want the traveling public to know what they can 
expect when they arrive in the U.S. from foreign destinations. 
Customs needs to improve the way our inspectors interact with 
the public.
    Finally, we have asked an outside advisor, a prominent 
member of the Washington D.C. community, to review Customs 
passenger processing procedures, particularly the personal 
search procedures, and to make recommendations to us regarding 
improvements.
    So now we would like to show the video.
    [Videotape shown.]
    Mr. Kelly. Mr. Chairman, just a couple more things, if I 
may. You saw in the video we are taking aggressive steps to 
improve the Customs clearance process at our Nation's airports.

               providing information to traveling public

    We recently contracted with a well-known outside consultant 
on ways to provide better information to the traveling public. 
This consultant made several recommendations: that Customs 
communicate with travelers early in the process; that we use 
simpler language in our forms, signs and brochures; that we do 
a better job of telling the public what they can expect upon 
arrival, especially that they could be searched.
    So let me walk you through some of the changes in the 
inspection process. First, we are making changes to the Customs 
declaration form. It is a form that everyone is familiar with, 
I am sure. That is what you get on an international flight. 
What makes matters difficult with this form is it is difficult 
to read and it has lots of ``legalese-type'' language in it.
    We have a mockup over there of a new dec [Clerk's notes 
``de'' ``refers to declaration form''] that we are preparing. 
It will be this size. It will be easier to write on. It will 
have a message in the beginning. This pamphlet that we are 
putting out now takes OMB clearance and Government Printing 
Office clearance, so it will take some time to actually get 
this out in the field. But this pamphlet that you should have 
in front of you now, at least the one-pager, will be the 
message that will be on the declaration form. The declaration 
form itself will be much simpler to fill out.
    We will move forward to these signs here. Actually, we have 
them in sequence. First it is clear to me that we need to give 
better information to the traveling public. We did not need a 
consultant to tell us this. We need to get information out in a 
more direct fashion to travelers coming into the country.
    Sign number one is ``what you need to do.'' That would be 
the first Customs sign that you would encounter. The second 
sign is more or less when you are waiting for your baggage. It 
tells you the authorities of Customs, general information as to 
what Customs can do, and how someone will be treated.
    Now, in the event that someone goes into secondary and isin 
fact searched, we have a pamphlet that will tell them ``Why me?'' And 
particularly now percentagewise Customs is searching or stopping and 
talking to a much smaller number of people than it did say 10 or 15 
years ago. So the question is in someone's mind, ``Why me?'' We have 
this pamphlet which we will be giving to people to explain, as they go 
into the secondary area, why we are doing it [Clerk's note.--Agency 
refers to personal searches] and what can happen in the process.
    And the third sign is a----
    Mr. Kolbe. Excuse me, Commissioner. Since a large number of 
those going into secondary inspection would be people who would 
be foreign nationals, do you have any plans to translate this 
into other languages?
    Mr. Kelly. Do you want to turn that sign around? We are 
translating all of these into other languages.
    Mr. Kolbe. Including the ones we just saw?
    Mr. Kelly. Yes, sir. We are doing all of these. We have the 
declarations in nine languages now, so we will be moving to 
translate all of these [Clerk's note.--``These'' refers to 
signs].
    Mr. Kolbe. Thank you.
    Mr. Kelly. But you will see on that on the last sign, there 
are forms, customer information, customer satisfaction forms 
that people can fill out and send to us in a self-addressed 
fashion.
    And you are absolutely right, Mr. Chairman, we need to 
translate these because there are people who certainly will not 
be able to speak English.
    In any event, that is our package, along with increased 
training for all of our inspectors, involved in this end of the 
business. We held our first training sessions last week. We are 
using the International Association of Chiefs of Police to do a 
very good sensitivity package for us.
    That is it, sir.
    [The information follows:]

[The official Committee record contains additional information here.]


    Mr. Kolbe. Thank you. Before we begin questions, may I just 
remind members that are here that on March 18th we have an 
entire hearing devoted to the subject of Customs and 
professional integrity in law enforcement. This is an issue 
which is of serious concern to all of us, I know. But I would 
ask the members here today if they would hold their questions 
on that issue until that hearing, because it is going to be 
devoted exclusively to that topic of the problems of corruption 
and integrity within the Customs.

                               user fees

    Let me just begin by talking about the user fees. You and I 
have had some conversation about this. We had some more 
conversation this morning. Mr. Hoyer and I both expressed our 
grave doubts about whether or not this is going to happen. You 
have got $312 million of commercial processing that would be 
switched from direct appropriations to user fees--I call it a 
tax--on air and sea passengers and the carriers that bring them 
into the United States.
    Now, as I understand it, for this to work, that $312 
million that is in the budget for FY 2000, we have to begin 
collecting that fee not on October 1st but on July 1st, a whole 
quarter earlier this year. That is a pretty tight timetable for 
Congress to enact a tax into law. And it has to generate the 
$312 million as an offset for the appropriations, and it has to 
begin now so that it will have the resources available at the 
beginning of the FY 2000 operation.
    First, Mr. Commissioner, would you describe this fee or 
tax, who is going to be charged, how much, to whom?
    Mr. Kelly. Well, it is my understanding that it is all 
passengers coming into the United States, an additional $1.50 
on top of the fee that is already charged. And this is not a 
new--I mean this is throughout the President's budget, the 
charging of fees for services, so it is not singling out 
Customs, but this particular----
    Mr. Kolbe. It is $1.40, is it not?
    Mr. Kelly. It is an increase of $1.50 on existing passenger 
fees. [Clerk's note.--Customs advises that the proposal is for 
an increase of $1.40 on existing passenger fees.]
    Mr. Kolbe. But not all, I mean it is not land passengers 
coming across from Detroit, is it?
    Mr. Kelly. To the best of my knowledge, it is all 
passengers coming into the U.S.
    Mr. Kolbe. Commercial.
    Mr. Kelly. Commercial conveyance.
    Mr. Kolbe. Aircraft, vessels. I don't think buses are 
charged.
    Mr. Kelly. No. I am sorry.
    Mr. Kolbe. So it is not passengers coming into Mexico or 
United States, it is commercial aircraft and vessels?
    Mr. Johnson. Yes, sir.
    Mr. Kolbe. It does not include Canada, Mexico or the 
Caribbean; is that correct? It includes others.
    Mr. Kelly. It will include everyone.
    Mr. Kolbe. This time they would be included?
    Mr. Kelly. Right.
    Mr. Kolbe. I have told you what my understanding is from 
your budget. Would you confirm that you would have to start 
collecting this on or about July 1st for it to have any impact 
on your Customs programs for next year?
    Mr. Kelly. Yes, sir. We would have to do that.
    Mr. Kolbe. That is accurate?
    Mr. Kelly. Yes.
    Mr. Kolbe. Well, I won't ask you this question about how 
likely you think that is to happen, because you can say that is 
Congress' decision. Let me come back to my final question on 
that.
    But what if you don't get this? If it is not implemented, 
what are you going to have to do? I guess that is the question 
I was going to ask. What is your fallback? What is your 
alternative? Under the budget you would have to have RIFs; is 
that correct?
    Mr. Kelly. Absolutely, you would have to have RIFs.
    Mr. Kolbe. What numbers are we talking about?
    Mr. Kelly. Well, the full amount would be about 4,900 FTE 
and----
    Mr. Kolbe. Out of a total of?
    Mr. Kelly. The total of 19,200. So it would----
    Mr. Kolbe. That is very realistic, I am sure.
    Mr. Kelly. It would impact across the board in our 
operations, and have significant, serious--effects
    Mr. Kolbe. I think the number of complaints at our entry 
points might just go up slightly if you cut back 4,900 
inspectors there. I can see the lines we are talking about now 
at New York----
    Mr. Kelly. Yes.
    Mr. Kolbe [continuing]. Kennedy Airport there. Do you know 
if there was any reason--and Secretary Johnson, or you, either 
one--other than the budget caps, was there any reason for 
choosing this means of financing the core business of Customs 
at this time?
    Mr. Kelly. Well, other than the general philosophy and 
approach of the Administration towards user fees, people being 
charged for services that they receive.
    Mr. Kolbe. I have some other questions, but I will come 
back to them.
    Mr. Hoyer.

                          passenger processing

    Mr. Hoyer. Thank you very much, Mr. Chairman.
    Let me ask you, Secretary Johnson, I was very interested in 
your testimony. You mentioned 71 million passengers at 
airports, but you mentioned the fact that we process 459 
million people or twice the population of the United States on 
an annual basis by Customs. That is an extraordinary figure, 
Mr. Chairman, in terms of numbers involved. And that involves 
1.2 billion carriers. I suppose some of those are automobiles, 
trucks, as well as airplanes and ships and boats.
    But I take it, therefore, that really a small percentage, 
less than one-sixth come in through the airports?
    Mr. Kelly. That is correct.
    Mr. Hoyer. Is that what we are talking about? That is a 
phenomenal number. I am not going to repeat the Chairman's 
questions, but obviously I would probably be concerned if you 
tried to RIF 4,900 people. I know that won't surprise you.
    Mr. Kolbe. I would, people would have concerns.

       shipping of drug traffic-southwest border and puerto rico

    Mr. Hoyer. Forty-nine people concern me. You can imagine 
what I would do at 4,900. Let me ask you about the HIDTA 
programs--not so much the HIDTA programs, which are not in your 
bailiwick--but we have done a lot at the Southwest border. Mr. 
Kolbe has been a leader on this and others, Senator DeConcini 
before him beefed up air interdiction. Patty is here and she is 
going to report that back that I said that. But that is true, 
Senator DeConcini did an extraordinary job working on all of 
the aspects of the Southwest border, and Congressman Kolbe, of 
course, has followed up on that and has been equally vigorous.
    Now, what impact has that had on shifting traffic to the 
Caribbean? And I will tell you why I am asking. I am very 
concerned about what is now happening in Puerto Rico, where I 
think we are having a real impact. I would like to hear your 
thoughts on that.
    Mr. Kelly. I think we have seen a significant shift of 
activities.
    Mr. Hoyer. As a matter of fact, you have in your action 
plan on here on page 44, maximize opportunities for dependents 
of Customs employees in Puerto Rico to attend Department of 
Defense schools, which I imagine is one of the reasons we are 
having a greater need in Puerto Rico; is that correct?
    Mr. Kelly. Well, we had some difficulty assigning and 
keeping people there. The FBI and DEA have problems as well. We 
want to put some sweeteners in the package. One of the issues 
is getting children into DOD schools, and keeping them there.
    We unfortunately had two agents killed there last year, one 
in a boat accident, one in an air accident. We have had 
difficulty in keeping their children in the Department of 
Defense schools. In fact, there is legislation on that.
    Mr. Hoyer. Maybe related to the focus of my question, which 
is the shifting of traffic from the Southwest border, because 
of the difficulty and the improvements we have made there and 
the effectiveness we have made there, to the Caribbean and 
particularly Puerto Rico, which when they get into Puerto Rico 
it is easier to get into the United States.
    Mr. Kelly. Right.
    Mr. Hoyer. Would you tell me about that?
    Mr. Kelly. We see an increase in activity, of flights 
coming from source countries, dropping drugs in the water. We 
see fast boats coming up the chain of islands, going to Haiti 
in many instances, Haiti to the Dominican Republic, drugs from 
the Dominican Republic to Puerto Rico by boats. This is kind of 
a standard pattern. Of course, once you get into Puerto Rico, 
you are in the United States.
    So we see increased activity there. Treasury and Justice 
responded two years ago, actually a little more, maybe three 
years ago, with Operation Gateway where we put some additional 
personnel there. I think they are effective, but right now we 
see an increase, no question about it, in business in the 
Caribbean area, particularly in the Puerto Rico area.
    Mr. Hoyer. Thank you. Mr. Chairman, just as an aside, I 
mentioned HIDTA. When we ONDCP testifies, then when we get to 
markup, I think we really need to consider doing something in 
Puerto Rico, which is having a real increase because of the 
effectiveness again on the Southwest border.

                             ses disparity

    I did not ask Mr. Magaw this question, but I did reference 
it. You may have heard me, Mr. Commissioner, reference it. I am 
very concerned about the disparity in SES. You talked about the 
retention of employees in Puerto Rico. I don't know it that is 
a pay issue but do you believe that you have sufficient numbers 
of SES executives within the Customs Service to stay 
competitive, retain and recruit the kind of people you need to 
lead the front line?
    Mr. Kelly. No, I do not. And I was very glad to hear you 
ask Director Magaw that question, because we have a ratio study 
that has come out that shows in ATF they have one SES per 193 
employees. We have 1 SES to 306 employees. We have by far the 
worst ratio in any Federal law enforcement agency that I am 
aware of. In Justice you have the agencies run 1 to 125, 1 to 
130, those sorts of numbers. We are 1 to 306.
    Mr. Hoyer. I am not going to ask Mr. Kelly to provide 
this----
    Mr. Kolbe. I was just going to ask if they would provide 
that.
    Mr. Hoyer. I don't know that I want to ask Mr. Kelly to 
provide statistics comparing himself to FBI and to DEA and 
others, but perhaps your staff can get those statistics.
    Mr. Kolbe. We will get that to you.
    Mr. Kelly. That is from OPM.
    Mr. Kolbe. We will get them. We will put that in the 
record, if that is acceptable.
    Mr. Hoyer. Mr. Chairman, absolutely. I know you share my 
concern on this, because again it is the same issue that we 
were talking about earlier in your chart. It is the same thing 
except in terms of positions, where we have escalated positions 
at the upper levels, again putting real pressure on Treasury 
law enforcement to compete, retain and recruit people at the 
levels where it makes a real difference in terms of the 
leadership, the energy and the focus.
    At Mr. Kelly's level, of course, pay is irrelevant because 
of his status.
    I asked you that question. Let me stop there, Mr. Chairman, 
and let others ask questions, because I have to leave at 4:30. 
They may have to as well.
    Mr. Kolbe. Mr. Forbes.

                            airport staffing

    Mr. Forbes. Thank you, Mr. Chairman, and I will be pretty 
brief here and submit questions for the record. But if you 
would allow me a New York bias here, we are again pleased to 
see Mr. Kelly and appreciate all the many hats he has worn for 
this administration, most notably your newest assignment here, 
and we appreciate that you are there.
    In a recent visit through John F. Kennedy International 
Airport in New York, I went through and there were two Custom 
agents on duty at a time when it was very, very busy in the 
airport, which frankly leads me to ask if that was an anomaly, 
or are we still very concerned about the level of staffing at 
JFK and other key points of entry?
    Mr. Kelly. Generally speaking, airports are adequately 
staffed. However, we are engaged in a resource analysis being 
done by an outside consultant. It is a zero-based look at the 
entire organization. We hope to have that report by the middle 
of next month. That will tell us what we should ideally have. 
But there will be formulas in there so that we can adjust our 
staffing levels based on volume and give us a better picture.
    The initial look at the Port of New York indicates that 
they are in reasonably good shape compared to some other ports 
of entry throughout the country, but we will take a very close 
look at that.
    Mr. Forbes. I appreciate that. And knowing where you come 
from, I am sure we are being adequately taken care of and 
watched over.

                          body scan technology

    Referring to the video that we saw, it talked about the 
body packers or the swallowers, and I think there was a recent 
daily newspaper article on that whole issue. Are you finding or 
are your folks finding that you are going to need to hire 
additional personnel to handle this kind of relatively new, I 
guess, way of smuggling? I know there is reference made that 
the agency hopes to get additional x-ray machines and the like 
at the airports. Are you going to find that you are going to 
need significantly more personnel to handle this equipment?
    Mr. Kelly. I don't think so. I think we need better 
training in this area. I am told that this is not a new 
phenomena. We have had body packers and swallowers for a while, 
but they were much easier to spot. Now the drug dealers, who 
have been all along very sophisticated, are continuing that 
sophistication in terms of training these carriers.
    They will come in dressed as business people or they will 
be mothers with babies, people that the untrained eye or 
untrained person wouldn't suspect. They are given documents to 
bolster the argument that they are from a particular business 
or industry, so it is getting more difficult to spot 
individuals. I think we need to go back and examine some of the 
parameters that we are using to conduct these inspections and 
identify these people. Yes, we do want to use technology, the 
body scanners that you saw on the film, but also regular x-rays 
that look into the body.
    And one of the problems for instance at JFK is that the 
facility itself is a distance from the secondary locations that 
we have in the international arrival terminals. We are looking 
to move an x-ray module closer to secondary there so that we 
don't have to take somebody out in handcuffs. We can do it 
right in a self-contained area.
    So I don't think it is a matter of personnel. I think it is 
a matter of increased training and additional equipment. I 
think the number of people that we need to run that equipment 
is probably minimal. We would look to contract out the x-ray 
part of that, ideally.

                              recruitment

    Mr. Forbes. Okay. I had just one final question. I know in 
a recent report there was a criticism, I guess by the Office of 
Professional Responsibility, about Customs vulnerabilities to 
corruption, and they focused primarily on recruitment. I know 
you made some references to recruitment previously, but could 
you explain just a little bit more about the Customs 
recruitment processes and how you may be making adjustments in 
light of what the Office of Professional Responsibility has 
found?
    Mr. Kelly. Well, we have shifted to a national recruiting 
model. For instance, at the last hiring or the last campaign 
for inspectors we had a national advertising campaign. The 
process is moving towards a centralized vetting that will be 
conducted as opposed to hiring at the local level, which is 
what Customs has been doing.
    We are also asking in our 2000 budget for money to allow us 
to conduct polygraph examinations of people; at least initially 
we are talking about investigators that we will be hiring 
[Clerk's note.--Agency would insert ``to conduct these 
investigations'']. Obviously there are some issues for other 
job classifications that we are still talking to OPM about, and 
in fact, we are still talking to OPM about the investigators as 
well.
    But I am a firm believer in not hiring your problems. I 
think the more you can do at the front end to make certain that 
the quality of people that you are hiring is the best, the 
fewer problems you will have when they are on board. It is 
logical, and I think we have seen that in policing and I think 
we believe that in Customs. So we are looking to do a better 
job of recruiting and a better job of prehiring investigation 
before we bring people on board. The polygraph would be a piece 
of that.
    Mr. Forbes. Thank you, Commissioner.
    Mr. Kolbe. Thank you very much.
    Mrs. Meek.
    Mrs. Meek. Thank you, Mr. Chairman.
    Commissioner, I have been sitting here trying to recall 
what was your other life the last time you approved before the 
subcommittee.
    Mr. Kelly. I was the Under Secretary of Enforcement. We are 
changing seats.
    Mr. Kolbe. He was in the other seat the last time.
    Mrs. Meek. Thank you very much. I am going to be a little 
provincial to start with, and then I would submit my other 
questions for the record.

                            flower importers

    Recently I learned from the Association of Flower 
Importers, a very big industry in Florida, of a problem that 
developed when Customs in Washington and the ITC decided to 
make changes in the TUSA numbers for various products. Flowers 
were included in those products. I am told these changes were 
announced solely through an e-mail issued out of Washington on 
November 16th, 1998, with no other notification given to the 
importers or to anyone at the local Customs offices. The 
changes became effective on January the 1st, 1999. Only after 
the paperwork for flowers that were in Miami after January 1st, 
1999 was deemed defective and had to be redone, did Miami 
Customs issue an information bulletin on January the 12th, 
1999, advising these flower importers of the TUSA changes.
    Now, in this particular instance, Mr. Commissioner, while 
paperwork had to be redone, and I think I am a pretty good 
pothole Congresswoman, the flowers ultimately entered through 
Miami without a commercially significant disruption at that 
particular time. However, without some particular policies and 
procedures in place to provide for additional forms of 
notification, the next time members of the importers are 
affected by this quick change in Customs policy, I'm concerned 
that they won't be as fortunate as they were this time.
    This industry supplies approximately 65 to 70 percent of 
the flowers consumed in the United States over $860 million in 
annual dollar volume in '97 and '98. They think they deserve 
better treatment, and so do I. So do all of the small importers 
who are equally at risk from inadequate notification. What does 
Customs propose to do to solve this problem? That is the first 
part of my question.
    Mr. Kelly. Well, let me say I am not familiar with this 
particular issue. Customs has a tradition of notifying people 
well in advance of regulatory changes. I mean I have seen it in 
my time at Treasury. Let me look into this specific incident, 
and I will get back to you on this.

                           illegal immigrants

    Mrs. Meek. All right. My second one has to do with the 
smuggling of bodies that are coming into Miami by boat from 
Cuba and Haiti. It is a very big problem in Miami. Every day 
there is a new bunch of people coming in, brought in by 
smugglers. Has Customs looked into this? If so, what plans do 
you have?
    Mr. Kelly. It is not really an issue for Customs, more for 
INS, Immigration and Naturalization Service, but we work 
closely with them. We do have marine patrols, but this is an 
issue for the INS to address, smuggling of people [Clerk's 
note.--Agency adds ``since that is in their core mission.''].
    Mrs. Meek. But your boats intervene for them, Customs.
    Mr. Kelly. We try to help each other out, and we have 
obviously a pretty robust marine program, at least in the Miami 
area.
    Mrs. Meek. Yes.
    Mr. Kelly. But it is not one of the things that we are 
looking for primarily.

                    reimbursable inspector positions

    Mrs. Meek. All right. One last question before the Chairman 
calls me: How many reimbursable inspector positions presently 
are assigned to the Miami International Courier Association 
facility at Miami International Airport? Has Customs supplied 
and will it continue to supply all of the reimburseable 
inspectors that Federal Express and the other couriers at the 
facility have requested? This happened last year, Mr. Kelly, I 
made this inquiry last year. If not, why hasn't this happened?
    Mr. Kelly. Your question is will we continue to supply 
reimbursable inspectors that are funded on a reimbursable 
basis?
    Mrs. Meek. When they pay for it, yes.
    Mr. Kelly. I see no reason why we wouldn't do, that. We do 
at other hubs. I am not familiar with the particular problem 
there, but your concern is that we are not keeping up to speed.
    Mrs. Meek. No, you are not.
    Mr. Kelly. It is something else we will have to look at. I 
will get back to you on that.
    Mrs. Meek. All right. I have quite a few more, Mr. 
Chairman, if I can do one more.
    Mr. Kolbe. I would be happy to let you have another 
question right now.
    Mrs. Meek. Okay, thank you. He can't say no to me.
    Mr. Kolbe. That is for sure.

                           opa-locka airport

    Mrs. Meek. There is another big problem in my area, Mr. 
Kelly. I don't know whether you will be able to resolve it. It 
is sort of an intramural battle between the Opa-Locka Airport 
and MIA. The growth of the aviation sector in Opa-Locka, which 
is a small city in my district, it has really been stymied by 
the Customs department's decision to cut back its hours of 
operation there. I thought I had the problem solved last year.
    Opa-Locka Airport can't compete on an even par with its 
competition because it is losing business to other surrounding 
airports. In addition, it is difficult to attract new 
businesses to the airport. If you are able to have some of your 
staff look at Opa-Locka Airport, it might be a good thing for 
some of you to visit that area just to see the many problems at 
this a small airport.
    Last year you were able to help us out a little bit because 
you brought some people from MIA to Opa-Locka, but now the 
problem has recurred again. So I would like to ask your help in 
trying to see that the Customs situation at Opa-Locka Airport 
is improved. That is right in the middle of the district. 
Improving the customs' situation would have quite a bit of 
impact with drugs in that area, and I would appreciate your 
looking into it. Because if you do it, you will do two things: 
You will expand the economic opportunities in that very 
distressed area, and you will help to turn around some of the 
problems we have there with drug trafficking.
    Mr. Kelly. Okay. We will get back to you on that.
    Mrs. Meek. All right.
    Mr. Kolbe. Do you need another question, Mrs. Meek?
    Mrs. Meek. I do. I have lots of them, Mr. Chairman. Do you 
have time?
    Mr. Kolbe. We always have time for you. I have some more 
questions myself, but I will ask mine at the end, if you want 
to go ahead with a couple more.
    Mrs. Meek. Thank you, Mr. Chairman.
    Mr. Kolbe. I have to stay here anyhow. You might as well 
ask your questions.
    Mrs. Meek. All of my questions today, Mr. Kelly, have to do 
with south Florida. I wanted to go on the record to sort of 
surface some of the many problems we continually have insouth 
Florida. You realize we are one of the three largest airports. There is 
JFK in New York, Miami International and Los Angeles.
    I would like to have some information from Customs 
regarding the total number of Customs employees at the airport 
and the total number of foreign passengers arriving from other 
countries, the total number of foreign citizens arriving at 
each airport; if possible, the total amount in tons of imported 
cargo, both freight and mail; the total amount of narcotic 
seizures, including the weight of the seizures. Every day you 
pick up the paper and listen on television about new seizures 
at MIA from arriving passengers, the total number of arrests 
related to narcotics, the total number of narcotics seizures, 
including the weight of seizures from imported cargo.
    Hopefully, when you receive my questions, Mr. Kelly, you 
will be able to respond in writing. I would appreciate it.
    Mr. Kelly. Yes, we would always do that.
    Mrs. Meek. Unless you have all of these answers right now, 
Mr. Kelly.
    Mr. Kelly. Right off of top of my head, no.
    Mrs. Meek. Okay. All right.
    Mr. Kelly. We will take care of that, and in response to 
your other questions as well.
    Mrs. Meek. Thank you. I am smiling, but I am serious, Mr. 
Kelly.
    Mr. Kelly. I know you are serious. We will get the 
information back to you very quickly.
    Mrs. Meek. Thank you.
    Mr. Kolbe. Is that it, Mrs. Meek?

                   foriegn language proficiency test

    Mrs. Meek. What are you doing, Mr. Kelly, about the Custom 
officers, the officers who are proficient in Spanish? I 
understand you give them 5 percent additional pay in their 
basic pay if they are proficient in Spanish.
    Can you tell us something about the foreign language test 
which you are requiring, and how many people have applied to 
take the tests and how many have actually been tested so far, 
and if so, how many of them become certified?
    Mr. Kelly. Well, I can't tell you that off the top of my 
head. Again, we will respond to you in writing.
    Mrs. Meek. All right. Is this language test working?
    Mr. Kelly. It is a test. I don't know if it can be more 
effective, if we need another test. Is that your point?
    Mrs. Meek. That is right.
    Mr. Kelly. Are you asking if it is not working or are 
people not passing it?
    Mrs. Meek. I am asking you a question based on the validity 
of the tests. I would just like to know is it a good test, is 
it measuring what you want to measure?
    Mr. Kelly. I don't know. I hope that it is, I would have to 
look into it. We are using a test. A lot of things that we are 
looking at, Customs maybe hasn't looked at it in a while. Maybe 
this is one of the areas that we want to look at. But I can't 
tell you whether or not it is a valid test. We have been using 
it. I have to assume that it is valid, but we will take a look 
at it.
    Mrs. Meek. Thank you.
    Thank you, Mr. Chairman.

                            x-ray initiative

    Mr. Kolbe. Thank you, Mrs. Meek. I just wanted to follow 
up, Commissioner Kelly, on the questions that were asked by Mr. 
Forbes and also in your video about the x-ray initiative. You 
have--and I think in this year's budget you have got another $9 
million for screening devices which, as you pointed out, reduce 
the stress on not only the passengers but on the employees, the 
Customs agents.
    But there was an article in the New York Times, as you 
know, just a month ago which suggested that your experiments at 
Miami and Kennedy were not working. The people very overtly 
opted not to take the X-ray. They are given the choice; is that 
correct?
    Mr. Kelly. That is right. The purpose of that experiment 
was to give people the choice. There is concern, as we said, 
about being searched, so we wanted to give people the option of 
going to an x-ray. Now, the problem is, you saw in the video a 
body scanner that does not penetrate the body. It is not a 
full-blown x-ray.
    Mr. Kolbe. Then that doesn't discover the ingested drugs.
    Mr. Kelly. That is correct.
    Mr. Kolbe. Okay.
    Mr. Kelly. So we are looking for x-rays, giving people the 
option of being x-rayed rather than being touched by another 
human being. What we want to do is move that x-ray component 
closer to the search area. In JFK, for instance, if someone is 
going to be x-rayed, they are actually handcuffed and taken to 
another facility.
    Mr. Kolbe. That was going to be one of my questions.
    Let me interrupt you right there. Here on your sign here: 
``Welcome to the United States. If you are one of the very few 
travelers selected for examination, you will be treated in a 
courteous, professional, and dignified manner.''
    At this point you haven't arrested them?
    Mr. Kelly. That is right.
    Mr. Kolbe. Are you going to put them in handcuffs? Are you 
going to say,``We would like to take you for an X-ray. Do you 
mind us putting handcuffs on you to take you for an X-ray?''
    Mr. Kelly. You have identified part of the problem. What we 
are trying to do is move that whole X-ray component right to 
the secondary area where no one has to be transported. I think 
we did 700 or a thousand X-rays last year, a relatively small 
number. It is a continuum that narrows until you get to this X-
ray possibility. We don't want to transport people. In Miami 
you have to take people off the airport grounds to a hospital 
to be x-rayed.
    Mr. Kolbe. We heard a woman telling the drug dealers about 
what to say when asked if they are carrying any drugs. Don't 
you think one of the instructions they would get is if you are 
asked to take an X-ray, say no; and if they say you are going 
to have a strip search, you say,``I still say no.''So basically 
your choice is have the humiliation of a strip search or go to prison 
for a few years. Giving them the option of an X-ray is not going to get 
the ingested drugs.
    Mr. Kelly. We have a 25- to 30-percent hit rate of people 
carrying drugs in or on their person. So this was an attempt to 
give people the option of being X-rayed rather than being 
searched. That was an option that we put out there. But in your 
example, people are given laxatives in these small number of 
cases. It is a very difficult and dirty job for the inspectors, 
and certainly traumatic for the individual being subject to it.
    Mr. Kolbe. Before you know that anybody is carrying drugs, 
you can actually require them to take a laxative?
    Mr. Kelly. Yes, sir. That is the process that has been held 
to be valid in the courts. Now you can see why we have a public 
relations challenge on our hands.
    Mr. Kolbe. I can see why. I would not be too happy to be in 
one of those. I have spent a lot of time on that, but just 
because I think it is of some interest.

                           customs automation

    I want to go back to something fundamental here, and 
important, and that is the question of Customs automation. You 
and I have had some conversations about this. You are quite 
aware of the antiquated information technology system that you 
have got. You are concerned about it. I know Mr. Johnson is.
    I know that we have had discussions about this and I know 
that you understand the need to replace your ACS or automated 
commercial system. And I believe last October you had one 
breakdown or meltdown of the system, and I don't know for how 
long it occurred but it is memory starved at this point and 
there is only a certain amount of capacity that you can add in 
terms of memory. We all recognize the need for a new system 
which is identified as ACE, automated commercial environment.
    We have had some experience, as you know, with some other 
Treasury departments and their systems automation, such as the 
Internal Revenue Service. We feel a little wary in this 
subcommittee about the kinds of money that we spend on this 
without knowing where we are going, and that is not to say that 
we don't think that this is important. In fact, I think it is 
absolutely, critically important that we move forward with 
this, and I know that the response of some people, I am not 
saying you, Commissioner Kelly, but some people, when there 
have been inquiries from other members or from other 
organizations, is that ``Congress has not given us the funding 
for ACE and that is the problem.'' That is not the problem.
    Our concern is that we approach this in a manner that will 
assure that we spend the money wisely, as I think you would 
want us to do. What we are asking, of course, is that you give 
us an architectural design of a system and the management 
system for capabilities management, what its capabilities of 
management would be, and then we are going to fund this system. 
That is exactly what we have done with IRS and its tax systems 
modernization, and I think you will find from them that after 
an incredible misuse of public funds in that system, they are 
now on track and that they have had no problems with this 
subcommittee or this Congress in getting the funding they need 
for that because they are moving forward with an architectural 
system for it.
    I am really distressed about the fact that we are not 
looking at any money for the system. You got a system that is 
verging on collapse, on total breakdown, and now you are not 
asking for any money in year 2000 for ACE. Why?
    Mr. Kelly. As you know, Mr. Chairman, there is a give-and-
take process with the Treasury Department and with OMB. Clearly 
the Customs Service asked for money in this process, and we 
didn't receive any money for fiscal year 2000. There is a plan 
to collect user fees--access fees, I should say--for the ACS 
system. We would begin to use those collections in fiscal year 
2001. That is the Administration's budget and I am part of the 
administration. We will make that work if that is what goes 
forward. But clearly Customs asked for significant amounts of 
money for fiscal year 2000. We think that we have been 
complying with the concerns voiced by GAO. We have hired a 
first rate CIO, Woody Hall, who I think is doing an outstanding 
job. We have brought in Peat Marwick to take a look at our cost 
estimates. We have a report from them that says that our cost 
estimates are reasonable and well done. I fully understand the 
concerns of Congress as far as unwise actions in the past by 
the TSM system. We fully expect and understand increased 
Congressional scrutiny.
    I believe that, for instance, the Treasury, Technical 
Investment Review Board has watched everything that we do and 
has passed on it and said that Customs is right on track. I 
believe it is time now for us to consider--because I am not 
certain we are going to be able to get out from this cloud 
easily moving as quickly as we can to a prime contractor, 
someone, as IRS did, which takes over the lead and the planning 
for this.
    Mr. Kolbe. Commissioner, we just need to move rapidly on 
this. We cannot wait. This is a serious matter and there is 
going to be egg on all of our faces if this whole system just 
collapses in a heap, as a lot of users of the system tell me 
that they think is a very real possibility within the next few 
months. You are going to be up before committees here trying to 
explain why everything is backed up at Miami, and containers, 
thousands of containers, are standing on the docks at Long 
Beach and New York because we can't process this stuff.
    Our economic health of this country requires that we be 
able to move cargo in and out of this country and your 
responsibility is getting it into this country. So I am very 
concerned about this. Can you tell me what is the estimated 
total cost of this system that you are talking about going out 
for a prime contract?
    Mr. Kelly. Seven years has been proposed.
    Mr. Kolbe. Seven years, it is going to be totally out of 
date.
    Mr. Kelly. Precisely. Now we are talking about a 4-year 
package which could run anywhere from $1.6 billion to $2 
billion. Again, these are estimates. We don't have any bids, 
but we did bring Peat Marwick in, which said that the process 
that we used to make these estimates is a sound one. It is 
obviously a big-ticket item and we have asked for significant 
amounts of money and it just didn't come our way.

                              ace funding

    Mr. Kolbe. The administration, I suppose OMB is proposing 
that you use a ``byte tax'' for electronic data that is 
transmitted to you to pay for this?
    Mr. Kelly. The notion is an access fee. Anytime anyone 
accesses our system, which is the ACS----
    Mr. Kolbe. The current system?
    Mr. Kelly. Yes.
    Mr. Kolbe. Even if you started that tomorrow, is thatgoing 
to generate the kinds of money that you need? I don't know what you are 
talking about in terms of a fee, but is that going to generate the 
money that you need?
    Mr. Kelly. It is $150 million and there is some additional 
money there for ITDS. But yes, the access fee will generate 
$150 million if we go forward with it.
    Mr. Kolbe. It is like the passenger fee that is not 
probably likely to happen this year, so we just cannot stand by 
and let the system fall apart because Congress is not willing 
to impose additional taxes.
    We have gone way past the time. Let me see quickly here. 
Let me just ask you, and I will submit the rest for the record 
here, but let me ask you about the air assets. And Congress 
went round and round about this.

                          p-3 aircraft funding

    There is no funding in this budget to ensure that the 
aircraft that we funded last year in the fiscal year 1999 in 
the omnibus bill will be able to be put into service once they 
are delivered, and this morning in answer to another question 
of mine, you did say some of these would be operational this 
coming year.
    How do you intend to be able to make use of those assets? 
Do you have any idea where you are going to take the money from 
to make them operational or will they just sit there for the 
coming year?
    Mr. Kelly. These planes are numbered, 5 and 6, and are 
going to be coming on board this fiscal year.
    Mr. Kolbe. This fiscal year or next?
    Mr. Kelly. This fiscal year we will have 5 and 6. Next 
fiscal year we get none. In October of 2000, we will get a 
delivery of six.
    So as far as the two that we are getting this fiscal year, 
there is money in the budget to hire the crews for those 
aircraft. But the problem is that we want to hire the crews for 
these six aircraft coming thereafter.
    Mr. Kolbe. Coming right after the following of the fiscal 
year?
    Mr. Kelly. Right. And we are short those funds. The funds 
have not been released to do those hires.
    Mr. Kolbe. Funding in the 1999 budget was provided to 
support the operating existing P-3s and the Citations, but as I 
understand it that money is being released by OMB, is being 
restricted to funding overtime costs only.
    A, is that the optimal way to utilize our resources; and B, 
what is the impact of that decision on our operations?
    Mr. Kelly. Pilots are restricted by FAA regulations as to 
how many hours they can fly, so overtime doesn't apply in a 
very efficient way when you are talking about pilot hours.
    We believe that there are additional hours that can be 
flown if this money is freed up for hiring pilots. So, you 
know, we would like to see some movement in this area. Right 
now the money is restricted as far as any hires are concerned. 
There is a concern about increasing on-board strength or head 
count by the Administration.
    Mr. Kolbe. I think I will have some other questions that we 
will submit for the record.
    Mr. Kolbe. We have kept you a full day here, and I 
appreciate very much your patience with the hearing and with 
the questions and with the interruption for the vote that we 
had earlier today, and I appreciate the candor of your answers, 
Commissioner Kelly. And, Secretary Johnson, we thank you very 
much for your forthrightness and candor here today.
    As I said, there will be other questions for the record and 
we look forward again to another hearing on a very serious 
topic on the 18th of March when we talk about the issue of 
integrity and potential corruption within our law enforcement 
agencies.
    Thank you very much. This subcommittee stands adjourned.


[The official Committee record contains additional information here.]

                                      Wednesday, February 24, 1999.

                        INTERNAL REVENUE SERVICE

                                WITNESS

CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL REVENUE SERVICE
    Mr. Kolbe. The subcommittee will come to order. Let me just 
note for the record that Mr. Hoyer is on his way. He had 
another important meeting of the Government Oversight Committee 
that he had to be at for a few minutes. He said he would be 10 
or 15 minutes late, so I expect him here at any moment.
    Good morning, Commissioner, and welcome. We are delighted 
to have you here for this kind of first real hearing that you 
have been at. This is your second appearance before the 
subcommittee, but the first one where you have had your feet on 
the ground and had a full year to learn the ropes, and so we 
look forward very much to, as we did last year, to hearing some 
of your philosophy, hearing what you have been able to 
accomplish.
    In my opening statement a year ago, I noted that the 
Commissioner, who had come on board only a few months before, 
was facing a number of tremendous challenges. Among them were 
ensuring that IRS systems didn't collapse at the turn of the 
millennium this coming January, and also the need to move 
forward with the much needed but often failed or postponed 
modernization of the IRS computer systems.
    In addition, Commissioner Rossotti had just proposed a 
broad concept for modernizing the Internal Revenue Service to 
make it more responsible to taxpayers, something that this 
Congress, of course, has endorsed in legislation. So a lot has 
happened between that time of your appearance last year and 
now.
    In July, of course, the President signed the law that we 
were all working on, the IRS Restructuring and Reform Act of 
1998. It embraced the reorganization concept that the 
Commissioner had proposed, but it also imposed a number of--the 
Commissioner statement in here says that there are 82 mandates 
on the agency to improve service and the treatment of 
taxpayers.
    In December, just this last December, the IRS awarded the 
prime systems integration services contract for the long-term 
modernization of the agency's information systems, a process 
that is probably going to take over $5 billion and 10 years to 
complete.
    While both of those are important milestones, because they 
will have a dramatic effect on the way the IRS conducts its 
business for many years to come, the hard work is just 
beginning. Anyone familiar with the past attempts of the IRS to 
modernize its computer systems knows that will be a very 
daunting task and anyone familiar with the workings of the 
Federal Government knows that a major reorganization of an 
agency as large as this one that we are talking to today is 
going to be a very challenging task.
    In the midst of all of these new initiatives, the IRS has 
to continue with its core mission of collecting taxes and, 
although much progress has been made, complete the work of 
ensuring that its information systems are compliant for the Y2K 
or the millennium change.
    The Commissioner notes in his statement that the entire 
process carries with it an enormous, considerable risk and we 
would agree with that. It will also cost a lot of the 
taxpayers' hard earned money and we all acknowledge that.
    So we look forward, Commissioner Rossotti, to working with 
you and your management team as you move forward with a process 
of fundamentally changing the way the IRS interacts with 
taxpayers. It is a little bit like building that interstate 
while it still has to be in use. We see that all the time in 
highway construction but it isn't easy to do, as we know, 
trying to juggle the needs for people to travel on our highway 
at the same time you are trying to reconstruct it. So it is a 
very difficult task, a very difficult challenge that you face 
and we certainly, as an appropriations subcommittee responsible 
for the funding of this agency, intend to exercise our 
oversight responsibilities to ensure that the taxpayers' money 
is used wisely. I say that in a spirit of a constructive 
approach. We want to be helpful to you and work with you in any 
way that we can, but we do have that congressional oversight 
responsibility.
    Mr. Commissioner, we look forward to hearing your 
testimony. I will call on Mr. Hoyer when he comes in for any 
opening comments that he would like to make. But if we might, 
we will go forward unless Mrs. Emerson has any comments that 
she wants to make. We will go forward with your statement. As 
always, your full statement can be placed in the record if you 
wish to summarize this morning.
    Mr. Rossotti. Thank you very much, Mr. Chairman, and Mrs. 
Emerson. I think, Mr. Chairman, you summarized the leadup to 
where we are today very, very well in your opening comments. 
What that really points us to, is that fiscal 1999 that we are 
in now, and fiscal 2000, really represent a very crucial period 
in the history of IRS. Basically this is the period in which we 
are aggressively trying to respond to the problems that were 
described by the Congress and the public over the last few 
years. As we know, the IRRA bill that was passed almost 
unanimously mandated that the IRS is expected to do a much 
better job in serving the public from the taxpayers' point of 
view, and delivering on that mandate is, in fact, our top 
priority in the budget we are presenting to you.
    The problems that led up to this IRRA, I believe, can be 
solved but they do require a fundamental change in almost all 
aspects of the agency in order to bring it up to date. We call 
this modernization. As you noted, I have said, and repeat again 
today, that this process does carry with it not only cost, but 
significant risk, and we know that some of our plans from time 
to time will have to be revised. And we will have operational 
problems along the way. But I believe that there is actually no 
low risk plan for the job that faces us at the IRS.
    Today we have under way already a very significant number 
of major changes and activities which are kind of summarized in 
those bullet points on that chart over there. I think it is 
just worth mentioning them. Of course we are carrying out the 
1999 filing season right as we speak, which is a challenge 
because of the amount of change that has been introduced in 
both technology and tax law. We are completing the Y2K problem 
in which we have a lot of work to do, especially the end-to-end 
task to put all of our technology together. We are implementing 
about 157 near term improvements and initiatives to improve 
service to taxpayers, including about 82 that are mandated by 
the Act. We are implementing this season about 1260 tax code 
changes for the last two or three tax bills. Many of these are 
complex in that they require a significant amount of 
interpretation to guide our taxpayers and our employees. Of 
course, we are completing the planning for our reorganization 
and we are taking the first steps on the long road to redesign 
and replace all of our business systems and our supporting 
information technology.
    Also, as required by IRRA, we are implementing a whole new 
set of ways of measuring performance in a balanced way 
throughout the IRS, and finally, of course, there is a great 
deal of training that we are doing related to all of these 
activities for all of our hundred thousand employees.
    Now, we expect to complete our plan for the reorganization 
this year, in fact, in about 60 days, and we have already begun 
to implement parts of it. Much more implementation will occur 
during fiscal 2000.
    Using authority granted by Congress, we have also put in 
place our new top management team. You met many of the members 
here with me today and we are now continuing to actively 
recruit to fill additional leadership positions as we establish 
new operating divisions. You also mentioned, Mr. Chairman, that 
updating our business practices for dealing with taxpayers 
requires almost a complete replacement of our information 
technology systems, which today are built on what I would 
describe as a 30-year-old fundamentally deficient foundation. 
In simple terms they cannot provide accurate, up-to-date 
information about taxpayer accounts and, of course, as GAO has 
repeatedly reported, also cannot provide reliable financial 
information to manage the agencies.
    So these are fundamental problems that will take some time 
to address. In December, we awarded the prime systems 
integration contract to Computer Sciences Corporation and other 
vendors. We are currently working with them to update our 
strategic systems plan as well as to implement the first near-
term projects which will focus on improved phone service and 
electronic filing.
    Now, despite all of these challenges, we, in preparing the 
FY 2000 budget requests, we are certainly well aware of the 
funding constraints that exist. Therefore we have requested 
what we believe is really the bare minimum in order to achieve 
some progress on our program. We think that without this 
funding, of course, the whole program could stall and we could 
actually increase our risk. In terms of dollars, the FY 2000 
request is $8.105 billion, which is essentially level with the 
total resources we had in FY 1999, which were $8.103 billion, 
including the $483 million from the Y2K emergency fund. I would 
say to you that I think on the surface it certainly seems like 
an unlikely combination to have all these major changes with 
requiring investments, at the same time we have, what amounts 
to a flat budget.
    There are three reasons why we think we can do this in FY 
2000. First because of the stringent fiscal constraints we are 
carrying out many of the changes that we have to make by simply 
diverting resources, especially personnel, from other ongoing 
programs--like compliance, especially. Secondly, the Congress 
did advance funds for the Information Technology Investment 
Account to a level that will carry us with our current 
estimates through fiscal 2000. But in fiscal 2001, of course, 
we will have to have additional funds. And, third, our Year 
2000 program in terms of the costs that are currently estimated 
and known for 2000 are less than those that were estimated for 
fiscal 1999.
    So based on these three particular factors, we were able to 
include in our budget request the money for some absolutely 
essential items to implement the required changes.And these 
include $40 billion for implementing some of the specific IRRA customer 
service and electronic filing initiatives, $17 million for training of 
our employees in some tax law changes that Congress has passed, and 
$140 million broadly for the modernization plan called for in IRRA 
which will increase accountability for service to specific groups of 
taxpayers.
    Mr. Chairman, I would like to particularly stress and dwell 
for just a moment on the need for the money for the training of 
our employees in order to enable them to learn what they need 
to know to deliver on the mandates of Congress. About 70 
percent of IRS employees deal directly with taxpayers, and we 
believe, and I think, Congress and the public expects that the 
taxpayers have every right to anticipate that in every 
encounter that a taxpayer has with an IRS employee, whether it 
is a phone call asking for help in filing a return, filling out 
a return or meeting with a revenue agency on an audit, the IRS 
employee should understand the current tax law, the employee 
should have the skills to understand and respond to the 
circumstances of that taxpayer. When I took office, it became 
very clear very quickly that we had a very serious deficit in 
this area. Of course, since then, we have had, you know, many 
additional tax code changes as well as a mandate to restructure 
the whole way we do business with taxpayers. And I know that 
training can sometimes seem like an abstract concept, so I 
wanted to give you a few examples of what we mean. This is a 
list of 1260 tax code changes that we are currently 
implementing. I picked out three of them just to give an 
illustration.
    This particular material here, this book is related to 
section 3401. It is some of the training material that deals 
with the reform of the whole way the collection process is 
done, which is mandated by IRRA. It is very significant changes 
that gives more rights to taxpayers and more process up through 
courts. There are about 11,000 employees that we currently have 
been training on this, and we learned from the first round that 
that is really not going to do enough. We are going to have to 
revise this and do this over again. I am going to go through 
this quickly. This is section 1203, which deals with a list of 
offenses or requirements for which the penalty for employees--
if an employee violates these ten offenses--is mandatory 
termination of employment. So all of our employees are very 
interested in this section, very concerned about it, frankly. 
This includes even our seasonal employees. So we have over a 
hundred thousand employees that we have been putting through 
training that ranges from about a half day to a day with this. 
And I can tell you that, so far, they are not going to be very 
satisfied with the training. We are going to probably have to 
do more of it.
    And then over here and I am not going to lift this because 
it is too heavy, but if you look at this book here, this is 
known affectionately in the IRS as IRM 21 which is the material 
that all of our customer service reps use, which is about 
21,000 people. These are the people that if you correspond or 
call on the phone and talk to a person, these are the people 
called the customer service reps. This is the latest edition of 
IRM 21 that these folks are supposed to learn. I note that 
these people are generally GS-8s, which means they make about 
$35,000 a year. This is the material that they have recently 
been issued to learn so they can respond accurately to 
taxpayers. So when I say that the money in the budget request 
for training is really essential, I really have to say that I 
believe that very, very sincerely. We cannot deliver the 
service to taxpayers if the people who are delivering it are 
not trained in what they are supposed to know.
    So just to summarize, this budget will continue the trend 
of the last six years in which the IRS work force as a whole 
has been shrinking in relation to the size of the economy. In 
fiscal 2000, of course, the workload will grow because of the 
growth in the economy as well as these additional requirements, 
but the size of the work force will actually remain constant or 
actually decline just slightly. And this trend of keeping the 
work force down, while the service and the economy increases, 
is really only made possible if we make the investments that we 
have requested in organization training and technology.
    So Mr. Chairman, I appreciate your time and we recognize 
the enormous challenge, the long road ahead, but with your 
support and the continued support of Congress and the people, 
we are confident we can do this. Thank you.
    [The prepared statement of Commissioner Rossotti follows:]

[The official Committee record contains additional information here.]


    Mr. Kolbe. Thank you very much, Commissioner, for that very 
helpful opening statement, for the forthrightness of it. We 
appreciate it very much. Let me begin with a couple of--a few 
questions here. I have a number of them so we will have more 
than one round. As always, I will try to adhere to the five-
minute rule, and so that gives everybody a chance to get some 
questions in and we will come back and take other rounds here.
    I wanted to start by talking about your mission statement. 
It is kind of interesting. In reading the old mission 
statement, it refers to the fact that the purpose of the 
Internal Revenue Service is to collect the proper amount of tax 
revenue at the least cost and so on. The new one that you 
issued last September doesn't say anything about that. It says 
your mission is to provide America's taxpayers top quality 
service by helping them understand and meet their tax 
responsibilities, not even obligations, but tax 
responsibilities, by applying the tax law with integrity and 
fairness to all. I like that. I think it makes a lot of sense.
    However, I think we need to also acknowledge that there is 
a huge--a very large component of the IRS that is law 
enforcement. I guess I am likening it a little bit to a police 
department, which we also think should be customer oriented, 
service oriented, helping the public. But they also have a law 
enforcement obligation. If they bring somebody in for 
questioning and he says I didn't do it, they don't just 
necessarily say sorry, I don't mean to hassle you and walk away 
there. So I know this is a little bit--it sounds a little bit 
odd coming from a Congress that has been berating the IRS for 
its lack of service, and I acknowledge that, but I guess it 
kind of reflects my own philosophy, which is kind of centrist. 
And my concern that I am trying to get at is, did the pendulum 
swing too far, that we don't let it swing too far that we 
forget that we have an obligation to all the taxpayers to be 
fair, as your mission statement says, which means that we have 
to collect the taxes that are due from people. So I guess--let 
me begin by asking, do you agree that the fundamental mission 
of the IRS is still to collect taxes that are due?
    Mr. Rossotti. I certainly absolutely do agree, and I 
believe that the mission statement is carefully crafted to 
reflect both of those. In fact we have translated those into 
exactly as you have stated, the two goals. One is to be fair to 
each taxpayer, one at a time, and provide them the right 
service and the right treatment. But the other is to be fair to 
the whole collective group of taxpayers. Actually if you look 
at the statement it has twin parts. It says help each 
taxpayer--help them understand and meet their responsibilities, 
and then, apply the law with integrity and fairness to all. It 
deals with the collective responsibility you have to apply to 
the law. That is what we mean by applying the law with 
integrity and fairness to all.
    Let me just go back to a little bit of a philosophical 
point about mission statements. In the business world, 20 or 30 
years ago, most businesses had a mission statement and started 
off with ``we have to make a profit for our shareholders''. 
Every business, including my own, did have to make a profit for 
our shareholders but I think people learned over the period of 
time that the way that you do that is by providing a 
competitive service to your customers and by executing that 
effectively; and finally by providing a good quality working 
environment for your employees. If you do that you will 
effectively make a profit for your shareholders.
    I do not believe this new mission statement replaces or 
negates the old mission statement. I believe it tries to move 
the whole idea to a higher level. By doing what we say in our 
mission statement, I believe, that we will not only provide 
good service to each and every taxpayer, one at a time, but we 
will also be very effective and move to a higher performance 
level on overall compliance.
    Mr. Kolbe. You may have answered the second part of my 
question then but let me just reiterate it. It is your view 
that this change in the mission statement isn't sending out a 
signal that the IRS is going to be less vigilant in its pursuit 
of those who intentionally fail to pay their taxes?
    Mr. Rossotti. Not at all. I think what we are trying to do 
is recognize that about 98 percent of the money that comes in 
is from people who voluntarily comply without any, you know, 
enforcement-type intervention from the IRS. We want to treat 
them, as they should be treated with the highest possible 
quality of service and treatment. We also have to be fair to 
those people in another way, though, which is by making sure 
that their neighbors and their competitors don't burden them by 
failing to meet their obligations. The reality is if you look 
at our budget, the largest percentage of the money in our 
budget is for compliance functions for exam and collections, 
and so forth.
    This is why I mentioned some concern with how we are 
funding some of the activities we have to do here because we 
are diverting about 2,500 full-time equivalent personnel in 
fiscal 2000 with this budget. I say ongoing activities butthe 
majority of those ongoing activities are compliance activities. If you 
look at what has happened over the last 10 years, and this is going 
directly to your point, we have had a decline of about 25 percent or 
more in the number of compliance people. At the same time, the economy, 
of course, has grown. Therefore if you look at, for example, the 
probability of being audited if you are a high income taxpayer, for 
example if you have an income of over a hundred thousand dollars today, 
your probability of being audited is about 80 percent less than it was 
10 years ago, about 79 percent less. So we have had an erosion and I 
think that we--you know----
    Mr. Kolbe. An erosion of coverage----
    Mr. Rossotti [continuing]. Coverage and compliance 
activities.
    Mr. Kolbe. There has been a similar erosion in voluntary 
compliance; is that correct?
    Mr. Rossotti. Unfortunately, we really don't have any 
measurements of what the voluntary compliance has been for over 
10 years.
    Mr. Kolbe. You have figures about that?
    Mr. Rossotti. We do. We have many figures at the IRS. Some 
of them are more reliable than others.
    Mr. Kolbe. This goes then to my next question. I want to 
organize my questions around this and I will come back to some 
others. My last question here would be in that area. You make 
the point in your budget justification that service, compliance 
and responsibilities are not mutually exclusive, and I agree 
completely with that, that there are different types of 
customer service that can lead to improved compliance. So my 
question is, are you going to develop or are you thinking about 
developing some performance standards that can measure which 
kinds of customer service can actually lead to improved 
customer compliance?
    Mr. Rossotti. We need to do that, Mr. Chairman. That is one 
of the objectives. We do not have any proposal for fiscal 2000 
to do that, but as we go forward with our strategic plans, that 
is one of the deficiencies that I believe we have. We do not 
have good measures of overall compliance. We have measures of 
enforcement but we do not have measures--recent measures. And I 
think this is one of the things that we need to work on as we 
go forward.
    Mr. Kolbe. I think it is very important that you do have 
that. If you think that better service can actually help us 
with compliance, let's find out if better service really does 
do that. That is where we want to put our money, in that kind 
of thing. I have lots more to go here, but I will come back in 
the next round.
    Mrs. Emerson.
    Mrs. Emerson. Commissioner Rossotti, I really have to 
commend you for the job you have done so far. It must be a 
nightmare. And I will say I have gotten a lot of positive 
feedback from my district staff. I have three district offices 
and they are particularly pleased with the addition of the tax 
advocate in St. Louis. It has changed the relationship that we 
have had remarkably. So I thank you for that.
    However, because I represent a real rural area, a lot of my 
taxpayers do not have the ability to do their tax returns 
electronically or to e-file without going through a tax 
preparer, and I think the cheapest we have found for them is 
$80, which a lot of people can't afford quite frankly. Do you 
have any plans in the near future to open other facilities or 
make available in some of your smaller offices around our state 
the ability to e-file through them?
    Mr. Rossotti. We are doing that gradually and we are making 
some progress this year. We have some increased capability with 
our volunteer--we have quite a few volunteer sites around the 
country and some of them are people associated with AARP, and 
others. Some of those do have the capability, with our help, of 
enabling taxpayers to e-file. We have also opened up some more 
walk-in sites. I am not sure about your district. I can find 
out.
    [The information follows:]

    We have one full service location in the 8th District of 
Missouri--Cape Girardeau, one Forms-only location in Pine 
Bluff, and a mobile unit (new for this filing season) that will 
visit the following locations in Ms. Emerson's District:
    3/23--Kenneth Community Center; 8 am-5 pm: Kenneth, MO
    3/24--Poplar Bluff Armory; 8 am-5 pm: Poplar Bluff, MO
    3/25--West Plains Armory; 8 am-5 pm: West Plains, MO

    Mrs. Emerson. Unfortunately, we haven't been able to locate 
any in our district.
    Mr. Rossotti. We are doing that within the limits of our 
resources, but there are some other very positive developments 
that we have worked out with our e-file program. For example, 
through the Internet, there are a number of, or at least one 
private company that we work with, that is offering free filing 
over the Internet for people with under $25,000 of income. So 
that is actually not only a convenience, but it is actually 
free.
    Mrs. Emerson. Who is it?
    Mr. Rossotti. It is Intuit. We have been working through 
various arrangements. In fact there is money in this budget as 
part of that e-file initiative. That is one of the things. I 
will get the exact number for you, but there is a certain 
amount of money in the specific budget request to continue 
trying to work those cooperative programs with companies like 
that. $13 million is in the budget for electronic filing 
issues--part of which is aimed at establishing those kind of 
partnerships with people like Intuit to offer these free 
services. The cost is dropping okay, the cost is dropping year-
by-year. It is not the same, unfortunately, in all markets 
because in some places it is more competitive than others. 
Perhaps in your district there is not as much competition and 
it hasn't dropped. So we are very much interested in doing 
that. You know, within the limits of resources we are trying to 
do it.
    Mrs. Emerson. Well, that is very helpful and hopefully we 
will be able to find some more opportunities throughout my 
district.
    Just on to another subject but one which is somewhat 
related, because I have a very rural district, most of it is 
either agriculture or small business, and I wondered if there 
were any programs that you had specifically in place to help 
small businesses comply more efficiently because we have 
nightmare stories.
    Mr. Rossotti. Mrs. Emerson, I think that that is the area 
that we have probably the greatest opportunity to improve of 
any area in the IRS--the way we work with all small businesses, 
including farms and agriculture. We have some initiatives that 
we are doing right now on some things. We have some cooperative 
programs with the Small Business Administration that is 
establishing various kinds of businesses, information centers 
for example, around the country. We are working with them to 
provide more active outreach information. We have got in 
certain districts some experiments. Up in the Northwest 
district, up near the Seattle area, there is a small business 
lab with which we are experimenting; a whole series of 
education outreach programs which actually has been very, very 
successful, as you say helping people keep out of trouble; and, 
we are trying to work with some of the associations, the 
industry associations. So these are some short-term things. I 
could give you more but the really big thing is in our 
organization plan. We are going to have a whole--a whole unit 
that is dedicated to just dealing with the very small 
businesses and including the self-employed people. I think this 
is what we really need because it is such a complicated and 
such a diverse sector in our economy that we need to have the 
focus of a whole management team that will be devoted solely to 
working with that sector.
    Now, it is going to take us, you know, about another two 
years to get up and running, but we have talked to all of the 
different stakeholder groups, the small business associations. 
I think they are all very excited about the idea that once we 
get this going, we are going to have a set of people that are 
going to be directly in charge of delivering the right kind of 
service. As part of that, we are building in a significant 
amount of increase, we hope, as we get the resources for 
exactly the kind of programs you are talking about, those where 
we get out in front, work with the people, especially the 
startup businesses, the new businesses, help them get it right 
the first time instead of picking up the pieces later.
    Mrs. Emerson. I am pleased to hear that particularly 
because so many of those small businesses can't afford outside 
tax preparers to help them, et cetera.
    Thank you very much. Thanks, Mr. Chairman.
    Mr. Kolbe. Thanks, Mrs. Emerson. Mr. Price?
    Mr. Price. Thank you, Mr. Chairman.
    Commissioner, welcome to our subcommittee. Thank you for 
your testimony and all your good work. I have been looking at 
the new Form 1040 for tax year 1998 and want to ask you a few 
questions about some of the changes that have been made. There 
is one line in particular that gives me great satisfaction: 
line 24, student loan interest deduction. As you may know, for 
10 years I sponsored legislation to restore the deductibility 
of interest on student loans, and we finally got it done. I was 
very pleased that what we called the Education Affordability 
Act, my bill, was incorporated into the Taxpayer Relief Act.
    The way I read the new 1040, you have added this line item, 
line 24 under adjusted gross income, to permit this deduction; 
is that correct?
    Mr. Rossotti. I am going to have to get some help from one 
of my colleagues on this one. This is Mr. Dalrymple. He is our 
Chief Operations Officer.
    Mr. Dalrymple. Good morning.
    Mr. Price. Line 24 is a deduction that is available whether 
people itemize or not. That is my point in asking the question. 
This is not listed like otherdeductions. This isn't an itemized 
deduction but it is an adjustment to income, which means that Americans 
who are in their first five years of loan repayment can take advantage 
of it whether or not they itemize; is that correct?
    Mr. Dalrymple. That is correct.
    Mr. Price. Now, that is of course a very good way to handle 
this deduction because it means people who don't itemize can 
take advantage of it.
    I hope that will mean a broader impact. I suspect it will, 
and I wonder what your estimate would be along those lines. 
What kind of impact do you think this change is going to have? 
Do you have any data on how many filers are eligible for this 
deduction and how many you expect to claim it? What difference 
does it make that it is a deduction off the top, so to speak, 
as opposed to an itemized deduction?
    Mr. Dalrymple. All the questions you have asked are issues 
that I really don't have data with me today to address, but I 
can certainly get that information and get it back to you, Mr. 
Price. The numbers specifically, because it is somewhat 
technical, although we did do--there have been forecasts based 
on this line item. So I would be more than happy to get that 
back in writing for the subcommittee.
    Mr. Kolbe. We will put the response in the record at this 
point.
    [The information follows:]

    IRS does not have any actual data on how many filers are 
eligible to claim this deduction. We had previously estimated 
that 4.5 million would be eligible. Based on more recent 
follow-up contacts with Sallie Mae on taxpayers who are 
repaying student loans, we now estimate that about 5.6 million 
are eligible to claim the new student loan interest deduction 
for 1998. Sallie Mae staff are continuing to review this 
estimate--and may be providing updated information.

    Mr. Price. I wonder if you could let us know what efforts 
you are making to make certain that taxpayers are aware of this 
deduction and are in fact claiming it.
    Mr. Rossotti. Absolutely, we will.
    Mr. Price. What kind of efforts do you have underway to 
make certain--that people know about this deduction and that 
they claim it--to educate people, in other words, about the 
availability of this deduction? What kind of efforts does the 
IRS have under way to publicize this?
    Mr. Rossotti. Let me just say that we can get some more 
information for you specifically about this deduction. I am 
afraid we weren't prepared to give you that detail. But I will 
say this. One of the things that we are trying to do through 
public service announcements, through improvements in our 
publications and through our phone lines, is to try to be more 
responsive to taxpayers who have questions or who need 
information about something new like that, for example 
something that is on the form. That is not necessarily related 
specifically to that one line item but it is related, for 
example, to the child tax credits and all of the other kinds of 
newer items that are available to the taxpayers this particular 
season.
    Mr. Price. On the student loan interest in particular, 
though, I would think it would be very important to work with 
the lenders, for example, to make certain that they are 
providing information in their annual statements to let 
taxpayers know that they may now be eligible to deduct this 
expense.
    Mr. Rossotti. I would agree with that. I don't know whether 
we are doing that, but we will find out and get back to you.
    [The information follows:]

    The Internal Revenue Service developed Publication 970, Tax 
Benefits for Higher Education, which contains a section on 
student loan interest. The front of the tax packages highlights 
student loan interest and educational credits. Each of our IRS 
Communications Managers in the field offices received 
Publication 3171, which mentions student loan interest. The 
product is also available on the IRS web-site. The information 
can be downloaded and printed in color and used as handouts to 
organizations. Our communications offices are sending out 
letters to many organizations, such as college financial 
counselors to alert them of the availability of the brochures.

    Mr. Price. All right. I think the potential of this is 
enormous, and I think that the fact that it is framed the way 
it is--on the 1040 form means that many, many more people will 
be able to take advantage of it.
    Mr. Rossotti. Sure, because everybody--otherwise you would 
have to be an itemized filer to take advantage of it. This way 
you don't have to be an itemized filer.
    Mr. Price. And many of the people who will be claiming this 
are very young taxpayers who wouldn't otherwise itemize. How is 
my time, Mr. Chairman?
    Mr. Kolbe. It is about expired but I will let you ask 
another question.
    Mr. Price. Well, I can wait till the next round, whatever 
you say.
    Mr. Kolbe. We will have several more rounds, I think. I 
know I have several more questions.
    Mr. Price. Thank you very much.
    Mr. Kolbe. Thank you very much. Mrs. Northup.
    Mrs. Northup. Thank you. Mr. Rossotti, it is nice to have 
you here. It is good to know that the IRS is beginning the 
process of changing their relationship with the American 
taxpayers. I can tell you I have plenty of taxpayers in my 
district that will welcome that change. I had the interesting 
opportunity to meet an individual about a year and a half ago 
on an airplane and it wasn't between Louisville and Washington. 
It also wasn't somebody who was still with an accounting firm, 
but he had at one point been with a firm that performed a 
management audit of the IRS. And he told me that the management 
below top management had so many good ideas and he feared that 
they would engage top management in how to restructure and 
address problems, but miss the very good ideas of those who may 
be actually dealing with people out in the field every day. I 
wonder if you would comment on that or at least take that 
advice into consideration. He gave me several examples that I 
thought were pretty good.
    Mr. Rossotti. First of all, let me say I couldn't agree 
with that gentleman more. I have made that observation myself. 
Let me just give you a few examples of how I think we are 
trying to take advantage of that point. As a broad point, let 
me just say that almost all of the changes that we have 
proposed, all these broad changes, the organization, the 
technology, all these different business practices, the 
education outreach programs, there isn't any one of these 
things that is a new idea at the IRS. There are thousands of 
pages of studies that have been on the shelf. Most of them--
many of them have been initiated by employees. What we have 
tried to do is to figure out how to take advantage of this 
wealth of information and put it together in sort of a coherent 
form so we can actually implement it. And one of the ways that 
we are doing that is in--for example, our organizational 
redesign which is also looking at this whole question of how we 
allocate our resources and so forth. We have worked through 
volunteers, and we have gotten thousands but we ended up 
selecting 162 volunteers from around the IRS, to come in for 6 
months and look at the organization. They are actually here in 
Maryland, working on this project that is on the blueprint for 
the new IRS, dealing with the organization as well as other 
issues related to how we are going to interact with taxpayers. 
Of those 162 people, half of them are front line bargaining 
unit employees who volunteered from around the country. And I 
have been personally interacting with these people very 
intensely over the last five months and I can tell you we have 
some of the most motivated, intelligent, thoughtful people that 
I have ever encountered in my previous 28 years in business. 
They are coming up with ideas, you know, based on information 
exactly as you say, on this wealth of experience, and we are 
doing some other things as well. In interpreting the 
regulations and writing the regulations for some of these 
provisions that we have got here, some of these are very, very 
complicated, like offers in compromise, due process and 
collections. For the first time, what we are doing is taking a 
team of our lawyers and our operations people from Mr. 
Dalrymple's shop, and even people from the Treasury, out on 
field visits for a full day to meet with a room full of front 
line employees.
    This is what we are proposing to do in this regulation. Is 
this going to work or not? They usually say, ``not quite. You 
need to change it this way''. I absolutely--I really appreciate 
your asking that question because I think that is one of the 
most important resources that we have in the IRS--taking 
advantage of that wealth of commitment and knowledge that these 
people have from dealing with taxpayers every day.
    Mrs. Northup. Let me go ahead and ask the corollary to that 
it is sort of limited experience that some of the people that 
have been on the frontline and were good employees, honest, and 
well meaning, however, if there was a culture, and there often 
was, that it was us against the criminals and by God they'd all 
be criminals if we are not there to fight them, as everybody 
goes through change, change can be very difficult. It is hard 
wherever we are to change our preconceived ideas of how we 
should handle every teenager, for example, if you are a parent. 
And I am convinced that sensitivity is always important and 
engaging them in the change, and respecting the fact that they 
were very hard working, very committed, still are, feel 
probablyunappreciated at this point and engaging them in sort 
of the new culture. After all, they will also feel better. That the IRS 
is better thought of by taxpayers is very important, it is also 
important that we don't lose good employees or lose the spirit of those 
good employees.
    Mr. Rossotti. I couldn't agree with you more. I have spent 
a lot of my time in the last year traveling around. I have been 
to almost all the 33 districts, 10 service centers and other 
units personally meeting with groups of employees in small and 
large groups. My top management here is doing the same thing. 
That is exactly the message that we are conveying and also 
getting back from the employees in terms of how to do that. 
There is no question, morale suffered significantly. There was 
a lot of confusion, and there still is, over what really should 
be the direction. But I think the IRS employees basically want 
to do a good job at what is expected of them. It is our job and 
I think this is why the mission statement is so important, as 
are some of the other communications activities in which we are 
engaged. That includes how to make clear what is expected, and 
how to achieve the right balance between voluntary compliance 
as well as our audit and collection activities.
    We haven't achieved that fully yet. I have to be honest 
with you. We have work to do, but I think we have made a 
turning point here in the last 6 months, especially when the 
bill was passed; that was kind of a culmination. Here are the 
marching orders; let's go forward. But we have a lot of work to 
do, and I will make a pitch in the budget that some of this 
money that we are requesting for training is precisely for the 
employees. If the employees are saying, look, we want to do a 
good job, tell us in the new world what that means exactly. We 
have to give them some resources and support to do that and 
that is part of what is in here in the budget.
    Mrs. Northup. To conclude, I would just like to thank you 
for our taxpayer advocate. She is fabulous in Louisville. She 
always gets an answer and can find her way through any 
bureaucracy. There are not many people you can say that about 
in this country. So thank you.
    Mr. Kolbe. I don't think you were here when Mrs. Emerson 
said the same about hers. I will add that for ours so you are 
getting plaudits today. Kudos for that.
    We are joined now by our ranking member and I am delighted 
that he is here. We understand that he had a requirement that 
kept him away and, Mr. Hoyer, I will recognize you both for any 
comments you want to make as well as the first round of 
questioning.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I apologize, 
Mr. Commissioner, for being late. We had a meeting of the House 
Administration Committee that was going to last 10 minutes and 
it went 20 minutes, 25 minutes over time and I apologize for 
that.
    I first want to make a comment that I will question about 
later but I of course was pleased to hear your comment. You are 
a person who has managed 8,000 people in the private sector, a 
very, very successful private sector business based on 
entrepreneurship and competition and the ability to meet a 
bottom line. You have therefore had experience with numerous 
people working for you and your comments about the level of 
talent, the commitment to doing an outstanding job, and the 
commitment to productivity that you made in response to the 
gentlelady from Kentucky's question. Since 1983 I have asked 
every major business person who has come into the Reagan, Bush, 
and Clinton administrations to compare their private sector 
employees with their public sector employees and to a person, 
without a single exception, they have echoed the comments that 
you made with respect to the level of talent, ability, and 
commitment that they have found in the private sector. I will 
let you comment on that perhaps a little further. I won't cut 
that out of the record because we always have a problem, and 
the problem is that the overwhelming majority of the public 
deals with employees who are answering telephones, and are in 
many cases overworked and overstressed by the fact that some 
people are just unreasonable on the phone and so they are 
unreasonable back. Therefore, their perception of Federal 
employees is not an accurate one. It is not that they are 
making up stories but sometimes clerks at desks get overwhelmed 
and when they get overwhelmed, they get frustrated, short and 
not as polite and helpful as they could be.
    I was pleased to hear our chairman say and Mrs. Northup say 
about the taxpayer advocates. I really do believe and, Mr. 
Chairman, I know you do as well, Federal employees really want 
to do a good job and really want to help and we get 
extraordinary value for the dollars we pay. That includes 
yourself. I am sure it took a 90 percent pay reduction to come 
into--in that neighborhood. Maybe more. Your boss took a pay 
raise of I guess 4 or 5,000 percent to come into the public 
sector. I am speaking of Secretary Rubin.
    Having said that, let me say that I see your budget request 
for fiscal year 2000 is $8.1 billion and 95,767 FTEs. This 
request is lower than the fiscal '99 request. Both in dollars 
and FTEs. In fact, this fiscal year 2000 request is only $2 
million higher than your total fiscal year 1999 appropriation. 
It represents a decline in FTEs of 220. It looks to me as if 
you have made some really significant changes in just one year 
at the IRS. And withthe many mandates of the IRS Restructuring 
Reform Act of '98 to implement, I am amazed that this is such a modest 
budget request and I hope it is sufficient to accomplish the objectives 
that Members thought they were going to accomplish in passing the 
Restructuring Act.
    Of course, when you read the task force report, Congress 
came in for a substantial amount of criticism. Giving the IRS 
both the resources to do its job and to allow it to have some 
stability in the tax code is critical. I am not sure we are 
going to do it this year. We are talking about some targeted 
tax cuts. We are talking about some across the board tax cuts. 
But as the chairman knows, the task force said that is one of 
the problems. You can't expect to change the rules every 24 
months. I asked what those books were. Apparently it is what a 
local person has to know in order to answer questions.
    Mr. Rossotti. These are the people that you are referring 
to, mostly GS 8 level people, about 21,000 of them, the 
customer service reps who answer the phone. Before you came, I 
was--I was really using it for justification for our training. 
This list here is just what they need to know. It is called 
affectionately IRM 21. It is a well known term in the IRS. The 
customer service reps, this is what they have to know. This is 
their reference material and this is constantly changing 
because of all the changes in the tax code. Frankly, we as an 
agency have not been doing the job in giving these folks the 
support and the training they need to learn all of this stuff. 
For one thing, mostly until this year, it has all been 
distributed in paper so most of the time they don't even have 
an up to date version. We are now starting, thanks to Mr. 
Cosgrave here who has come in, to get some electronic 
distribution of some of this stuff. It really just reinforces 
your point about what the Federal employees are having to learn 
in order to do their job.
    Mr. Hoyer. Not only what they have to learn but your point 
was, if we change that on a regular basis, those 21--28,000----
    Mr. Rossotti. 21,000.
    Mr. Hoyer. 21,000 people have an extraordinarily difficult 
task because of course when we change, it then inundates them 
with calls because everybody says, well, it is changing. I have 
to find out what it does, how does it affect me. But then they 
have to study to make sure that they are giving accurate 
answers. And when you have 21,000 people, we have, as I 
understand it, about 148 million taxpayers.
    Mr. Rossotti. A little less than 130 million individual 
taxpayers, plus about 6 million businesses.
    Mr. Hoyer. I was getting that figure from the numbers that 
are multiple taxpayers in terms of individuals, corporate and 
maybe even charitable who are not taxpayers but have to file. 
But in any event, my point is we have compounded your problem 
and I am pleased to hear you say that about Federal employees 
because they get too much flack publicly.
    Frankly, my concern, as you know, with the whole debate 
that occurred in the Senate Finance Committee was that we took 
some egregious examples and I have been critical of the IRS for 
not solving those problems on their own. You and I have had 
private conversations. I mentioned that when you had me speak 
to the group just the other day that we need to ferret out 
problems on our own so the public has the confidence that we 
are not sanguine about the problems that exist. We want to make 
sure they are treated well. And to the extent IRS ferrets it 
out, the IRS will get the credit for wanting to do a good job. 
Having said that, Mr. Chairman, I have already taken too much 
time. We are going to have a second round obviously. Let me 
yield.
    Mr. Kolbe. Of course we will have a second round but if you 
would like to ask a couple more questions.
    Mr. Hoyer. I will yield to Mr. Price.
    Mr. Kolbe. I think it is back to me for the next second 
round.
    Mr. Hoyer. I didn't know Mr. Price had a first round.
    Mr. Kolbe. You finished our first round here. Thank you.
    Commissioner, my next set of questions go to your IRS 
reorganization plan and the first one is a bit of a softball 
for you. The others are more specific questions. You 
presented--last year you presented us with a concept for 
reorganizing the IRS and that of course became a key element, 
that along with Congress's own ideas, of the IRS Restructuring 
and Reform Act of 1998. So just to kind of set the tone here, 
tell me why you believe this is so important to the future of 
the IRS.
    Mr. Rossotti. Well, I think that the basic reason is 
because we need to achieve accountability internally for 
understanding and meeting the needs of taxpayers, and there is 
a great deal of diversity among the huge group of taxpayers. 
Mr. Hoyer mentioned 130 million. We have been able through much 
more analysis since last year to clearly understand that there 
are four major groupings of taxpayers. There are subgroupings. 
There are about 90 million individual filers which is actually 
about 120 million taxpayers when you count the joint filers who 
only have wage and investment income.They have all third-party 
reported income. More than--almost 80 percent of them get refunds. And 
basically, many of them are taxpayers who need our assistance to help 
fill out their tax return accurately, but there are very few compliance 
problems with them--relatively few compliance problems with the 
taxpayers. What we need to do with them is simply provide them good 
service. They generally interact with us only once a year, and the 
programs that we need to service them are really relatively 
straightforward, but there are large numbers of them.
    Then we have got, as I think with, as Mrs. Emerson noticed, 
a very large group of taxpayers that have much more complicated 
dealings with the IRS. These are the small business and self-
employed taxpayers and we define this group as about 38 million 
if you count both the individual self-employed plus the small 
businesses. And frankly, we have not done as well serving these 
taxpayers today. We have the most room for improvement here. As 
you know, many of the groups that represent small business 
taxpayers are some of the ones that are most unhappy with the 
IRS. Therefore, we spend the most time talking to them and we 
find that, of course, these kind of taxpayers, especially the 
very smallest ones really do need a significant amount of help 
from us. We need to make sure they get their things done right 
in the first place as opposed to just, you know, nailing them 
two or three years down the road for problems when they really 
don't have the money to pay for them. Most of our collection 
problems are with the small business taxpayers. So we need a 
group to service those taxpayers. Then we have a much smaller 
group of taxpayers, only maybe a hundred thousand or so 
taxpayers but these are the large and medium size businesses. 
They pay a great deal of the cash and they have a lot of 
complex issues with tax law interpretation, international 
business, and so forth that require a specialized kind of 
approach to deal with them. And finally we have this vast tax 
exempt sector, five trillion dollars worth of assets that we 
regulate, which is almost invisible today but is an enormously 
important sector to our economy.
    What we are going to do is this. Right now accountability 
for serving any one taxpayer rests really with no one except 
the Commissioner and the Deputy Commissioner. It really doesn't 
have to come together below that. It is just too complicated 
for any one or two people to really get their hands around. So 
what we are taking a leaf out of is the lesson from most 
businesses, which is to break down your market and put people 
in charge who have real accountability for serving that market. 
And that is basically the idea. I think we have already begun 
to make some progress implementing this. As someone noted, we 
have taken a couple of steps. One of the first early steps was 
the Taxpayer Advocate. I think you already heard some of the 
results around the table here this morning by just simply 
putting all the taxpayer advocates under one person, nationwide 
and getting them focused on that job. Now we have taken a step 
with information systems with Mr. Cosgrave. We have put all the 
information system resources under Mr. Cosgrave. It is going to 
take him a while to get his hands around that, but at least we 
will have a centralized program. As we establish these other 
divisions we will have management teams that we think will be 
able to really understand what those specific needs are because 
they are very different. Each of these taxpayer groups and 
different, and we neet to deliver the programs that they need 
to really make those taxpayers benefit from our mission 
statement.
    Mr. Kolbe. Thank you for that answer. I want to come back 
to that, this reorganization, with a couple of philosophical 
questions at the end, but let me just ask some very specific 
questions in my limited time here in the second round. And I 
think the answers can be fairly quick. Do you expect that you 
are going to be closing any offices as a result of the 
reorganization?
    Mr. Rossotti. No. It is management reorganization.
    Mr. Kolbe. The budget states that the regional offices and 
districts no longer will exist in the new structure. How are 
you going to restructure those offices?
    Mr. Rossotti. Those units will not exist. We will not have 
districts as such. We might have regional offices but the 
people that exist in those offices will be reallocated to other 
functions. For example, we have announced only the beginning 
but of the four sort of top level headquarters, one of them 
will be in the New York Metropolitan Area, northern New Jersey. 
We have got regional offices and district offices up there that 
deal with large business taxpayers. We will reallocate those 
people to staff those offices, as an example. So we are not 
talking about closing offices. We are talking about redesigning 
the way they work.
    Mr. Kolbe. Then I guess you have answered my next question, 
which is how are the employees in those regional and district 
offices going to be impacted? You say they are going to be 
shifted to new responsibilities and retrained?
    Mr. Rossotti. And this is what the money we specifically 
requested in the budget is for.
    Mr. Kolbe. Have you been working with the unions on this?
    Mr. Rossotti. Absolutely.
    Mr. Kolbe. How is the morale holding--whenever you have a 
major restructure of an agency, there is always uncertainty and 
people's morale generally tends to plummet. Have you been able 
to deal with that?
    Mr. Rossotti. I think that before we ever got to the 
reorganization, we had a bigger morale problem because of the 
criticism the agency had suffered. Frankly I think thatwhile 
there is anxiety in some quarters about the reorganization, I think 
there is frankly much greater anxiety over some of the other things 
that we are dealing with right now. That includes this section 1203 
provision that has the mandatory termination provisions and all the new 
procedures that are being implemented which we are trying to deal with 
through communication. Actually in terms of the reorganization, 
especially for the frontline employees, I mean, it is remarkable how 
much support we have. I mentioned we have gotten over 2,500 volunteers 
from around the country. They have spent six months away from home to 
participate in this study, the reorganization. I don't mean to say 
there isn't anxiety but I think that because we have engaged with our 
frontline employees and our managers every step of the way and because 
we have indicated, which we believe, that this is not a downsizing and 
we are not closing offices, we are trying to redesign and make things 
work better, I think we have really quite a high degree of support, 
which is not to say there isn't anxiety.
    Mr. Kolbe. How do the service centers fit into this new 
structure?
    Mr. Rossotti. First, let me say we are not finished with 
this redesign. We are still working within the next couple of 
days but basically as it is currently proposed, most of the 
activity from service centers is in the Small Business and Wage 
and Investment, those two groups. There is a much smaller 
amount dealing with the Large Business and there are not many 
taxpayers in the Tax Exempt sector. So basically after a lot of 
analysis it is currently proposed that five service centers 
would be aligned with the Wage and Investment Division and the 
other five would be with Small Business and then they would 
cross service the other two divisions in the smaller units.
    Mr. Kolbe. I have more questions yet on reorganization 
before I get on to some of my others. I will just finish this 
area here very quickly. What is your current schedule for 
implementation of the new organizational structure?
    Mr. Rossotti. Well, our most immediate objective is to 
complete what we call the blueprint of design which will be 
completed in about 60 days. A lot of it has already been done 
in terms of the first round, but we have review and integration 
work to do. However, as I mentioned we are not waiting. Some of 
the things that we can implement immediately like the taxpayer 
advocate, the information systems, we have already implemented. 
Those are important steps. The next two up will be to 
implement--actually the next three up will be to implement the 
others. Two smaller units in terms of staff will be the Tax 
Exempt unit and the Large and Middle Size business unit, and 
then what we called our Shared Services organization, which is 
sort of the support organization that supports everything. We 
are now recruiting people to run those. We hope to establish 
the headquarters of those units by this summer and to begin to 
actually realign the operational functions for those units by 
the end of calendar '99 or beginning of 2000.
    Of course, as you note in the budget request, we expect to 
do a lot more realignment during fiscal 2000, which would be 
probably around the end of fiscal 2000, around October. That 
would get a lot of the new units, most of the new units in 
place at a top level. There would still be more to be done in 
2001.
    Mr. Kolbe. You have $140 million in this year's budget 
request for the implementation of the new organizational 
structure. You refer to different things it is going to be used 
for, the relocation of employees, the realignment of certain 
occupations, voluntary outplacements and so on. Would you give 
us a breakdown how you estimate for the record a breakdown of 
how those----
    Mr. Rossotti. You want me to do that now or for the record?
    Mr. Kolbe. For the record would be fine. I would like if 
you could have some idea now what you think the total cost of 
this reorganization is going to be. I assume the $140 million 
in this budget request is not the end.
    Mr. Rossotti. No. I think we will have more. First of all, 
let me just say the $140 million is just the specific 
increment. As I mentioned, we are also diverting some resources 
from the existing base to do it so it actually gets to, if you 
add up everything, over $200 million. We don't have the precise 
estimate for 2001 yet. I can get you for the record our current 
best guess for 2001 but there will be more money. There will be 
money in 2001 as well probably along about the same amount of 
money in 2001 as we are going to spend in 2000. And after 2001, 
we will still be spending money but I think we will be 
hopefully completed with the major portion of the 
reorganization. At the same time, of course, the big money that 
we will be spending ongoing in 2001 again will be for the 
technology and the business process reengineering that we will 
be doing in those units, specifically the organizational piece. 
We really hope to get the majority of that done by fiscal 2000, 
or almost all of it done by 2001 as we currently see it.
    [The information follows:]

    The IRS is asking for Congressional support and flexibility 
in the FY 2000 appropriation process as it works to finalize 
the modernization blueprint and refine the projected costs to 
modernize the agency. We anticipate that costs will shift 
within the $140 million as projections for staffing and the 
geopraphic footprints of the headquarters of the four new 
operating divisions are finalized. Regarding staffing, the 
``human behavior'' factor, which is difficult to predict and 
will probably cause changes in our cost projections for buyouts 
and relocations, must be considered. In some cases, managers 
and employees will choose new jobs requiring additional skills 
and they must be provided with appropriate training. In other 
cases, they will choose to take jobs in different cities; and 
their relocation expenses must be provided. In addition, there 
will be those who will opt for a buyout. Given those factors, 
the Service currently estimates that the $140 million would be 
applied as follows: $53 million for buyouts, $41 million for 
relocations, $3 million for recruitment, $36 million for 
training related to organizational change, and $7 million for 
moving and realigning computer equipment.

    Mr. Kolbe. I am kind of curious what criteria you use for 
establishing where the headquarters of these new divisions are 
going to be.
    Mr. Rossotti. With the help of our consultants, we did a 
very detailed analysis of many different possibilities but what 
it really boiled down to mainly was because of the very point 
you mentioned where do we already have qualified people, 
predominantly, and facilities. It was mainly people because we 
don't want to disrupt people. It is very, very expensive to 
relocate people. It is obviously disruptive to them as well. So 
we basically built these on where we had people for the 
specific things we have to do. Let me say those are just a 
very, very thin layer of the top headquarters. There are many 
more other kinds of headquarters that we will be developing and 
you will see they will end up being in places where we already 
have headquarters because that is basically the criteria we are 
using. We have people throughout the country because there are 
taxpayers throughout the country so they will continue to be 
spread throughout the country. That is what is helping us to 
minimize the relocation.
    Mr. Kolbe. My last question, this is really the most 
important. There was an article in the February 1 edition of 
Tax Notes entitled Revisiting New Potential for IRS Corruption 
and Captivity. It expresses some concern former IRS officials 
have expressed for the proposed reorganization and they 
suggest, though it is contested in that article by others, that 
it looks an awful lot like the pre-1952 IRS organization which 
they suggest was the most corrupt for the IRS in this century. 
The concern, and I think it is a legitimate concern at least to 
be explored and which I am sure you have thought about, is when 
you reorganize along functional lines that the group, let's say 
mid-size and large corporation becomes very cozy, becomes very 
familiar with those people. They work with them on a daily 
basis. Do you have some--do you share some of those concerns 
that they become a captive of the taxpayer segment they are 
supposed to be monitoring and collecting taxes from?
    Mr. Rossotti. First let me just say I absolutely share the 
concern that integrity is the most fundamental value that we 
have in the IRS and in the tax system. You know, in every 
guiding principle that we have published, in all the material 
we have published, we have stressed that this comes before 
everything. It is in our mission statement and it comes before 
everything. I think it is actually an extraordinarily important 
attribute that is a very positive attribute of the IRS since 
1952. There are many other problems but political influence and 
corruption is really not one of them because it really has been 
at a very, very low level. I think if you go back, and I have 
read and in fact I have the annual report from 1952 that was 
done with the reorganization and it is very interesting. There 
really is very, very little comparison. At that time there were 
something like 90 different tax collectors around the country 
that were basically all political appointees, recommended by 
local officials, and so forth, that were really not hardly 
under the jurisdiction of a national office. And we are not 
talking about anything at all like that. The vast majority, in 
fact all--there won't be any political appointees other than 
myself. All the other people will either be permanent civil 
servants or the few that will be brought in under term 
appointments under the authority granted by the legislation. In 
that sense, there is nothing reassembling that.
    But on the coziness issue, I think that this can happen in 
any organization. I think any group that works together for an 
extended period of time and we are trying to build into our 
plan a number of things to deal with that, the most important 
one, of course, is simply rotation. We are talking about 
rotating people, you know, especially at the executive level. 
They do now rotate in the IRS. That is part of what comes with 
the territory of being an executive, and they will continue to 
rotate. The people that we bring in from the outside, which 
will be very, very few, according to the terms of the contract, 
come under term appointments which are for four years. They can 
be renewable ones but it would be for a term appointment that 
would not continue for an extended period of time beyond that. 
So I think that beyond that, of course, we have also the matter 
of far greater oversight. We have not only what was existing 
before the inspection service but now we have the Inspector 
General for Tax Administration, which is, you know, part of the 
Treasury Department now, and which is very formidable for us in 
terms of overseeing the activities.
    So I believe that there are many safeguards that we are 
building in, and certainly from my personal point of view, the 
last thing that I would want to do would be to create a 
situation that would undermine what I think is the most 
valuable asset the IRS has in integrity.
    I would just finish up with one point. There is actually an 
oddity right now which has the potential to improve in one way, 
at least, the question of oversight and accountability and the 
integrity issue, which is----
    Mr. Kolbe. Did you say oddity?
    Mr. Rossotti. An oddity, what I consider to be an oddity in 
our current arrangement compared to many places that I have 
seen that are large, is that the national office today has 
grown very large and is involved in many, many things. In fact, 
so is the Commissioner involved in many things. In fact, the 
Commissioner is involved in too many things in terms of the way 
it is now because of the way it works. Mr. Dalrymple here and 
Mr. Wenzel, who is my Deputy for Operations, have so many 
detailed items that come upto the national office that it is 
almost remarkable that it works. That really, I think, undermines one 
of the roles of what the Commissioner and the national office should 
be, which is essentially an oversight, a strategy group to look over 
what the operations are, you know. That is what a corporate office does 
in any big company. It looks over what the divisions are doing. It 
says, ``wait a minute, you are getting too close to this group or you 
are not doing that group''. It is hard to do that now because we are 
sort of part of the operations itself. I think we are going to fix that 
in this new structure because all of the operations, all of the 
activities will have a much smaller national office. All of those will 
be in those operating units and my role, Mr. Wenzel, the people at 
national office will be to do exactly what we should do really, which 
is to oversee and to question the people that are actually running 
these operations, and make sure the things that you are referring to 
don't happen. So I think there is actually a potential benefit here, a 
significant one actually, if we do it right.
    Mr. Kolbe. Thank you. I appreciate my colleagues' 
indulgence for this extra line of questioning.
    Mr. Hoyer.
    Mr. Hoyer. Mr. Chairman, let me yield to Congressman Price. 
I understand he has some folks he wants to recognize.
    Mr. Price. I appreciate the gentleman's yielding. Mr. 
Commissioner, a good bit has been said this morning by a number 
of members about the competence and service orientation of your 
employees. I just want to recognize three employees from North 
Carolina who are in Washington for the Treasury employees 
meetings and who are in this hearing with us today: Glenda 
Powell, Joanne Mixner and Will Weddington. We want to welcome 
these North Carolinians who do a wonderful job for us in North 
Carolina. We are very glad that they are here. Of course, many 
Treasury employees from across the country are in town this 
week, and it just happens to coincide with the day that you are 
appearing before us.
    You want to go ahead with your questions. I have a couple 
more questions.
    Mr. Hoyer. Why don't you go ahead.
    Mr. Price. I want to explore the earned income tax credit 
and some of the issues involved in not just compliance but also 
in urging taxpayers to take advantage of the tax credit where 
they are entitled to do so. Some of the similar issues that we 
discussed earlier with respect to the deductibility of student 
loan interest perhaps apply here.
    Your budget request proposes an increase of 123 FTEs for 
the EITC compliance initiative. Now, you say that will be 
funded from realignments within existing resources. So 
basically you will be taking 123 FTEs out of other compliance 
areas to work on the EITC. Is that the implication?
    Mr. Rossotti. Yes, that is basically right.
    Mr. Price. One question obviously is what impact will that 
have on other compliance work in the IRS?
    Mr. Rossotti. I think obviously we will have 123 resources 
diverted, but I think what happened is that the Congress gave 
us some extra money in the previous fiscal year to start up an 
EITC compliance initiative and we were not fully--since it was 
the first year, we didn't get fully started up to what was 
expected from that 140 million. That is what is really 
happening here. I would ask Mr. Dalrymple to make a few more 
comments about what is happening with the EITC program.
    Mr. Dalrymple. Perhaps I would even start with some of the 
questions you did ask around the issue of the tax credit 
earlier. We have done a great deal of outreach around this 
particular issue. We mailed millions of notices to taxpayers 
alerting them of the ability to use the advance earned income 
credit where they were eligible for it. We sent a number of--I 
believe it was over 250,000 letters to taxpayers last year 
alerting them in advance that perhaps they had used incorrect 
Social Security numbers and duplicate identification numbers, 
and actually a substantial number of them self-corrected. We 
have got, as you will notice, in the budget figures a 
tremendous amount of outreach that we are doing to try to 
ensure that people who are eligible for it, are taking the 
credit. We have designated EITC days almost every Saturday 
during the entire filing season so that we have put extra 
people on at all of our walk-in offices to help people who are 
going to come in and take advantage of the credits, so that 
they get help filing. So we have taken quite a bit of activity 
there. The 123 FTE would generally have been doing other kinds 
of work, in this particular case, other kinds of correspondence 
examinations, because that is the kind of examinations work we 
are going to be doing.
    So there was some tradeoff but in effect it is the same 
kind of work.
    Mr. Price. Well, this is an initiative obviously that aims 
at ensuring that the program isn't abused.
    Mr. Dalrymple. Exactly.
    Mr. Price. But it is also important to make certain that 
those who are eligible to take advantage of this program do so. 
I think it was Ronald Reagan who once said that the EITC is the 
country's most effective anti-poverty program, basically 
ensuring that people who are in modest income jobs are able to 
keep more of what they earn, and that is the whole purpose of 
the program. So I am glad to hear that you are continuing to 
make efforts to ensure that people who are eligible for the EITC can 
actually benefit from this credit, not just weeding out overclaims but 
also checking returns to ensure that Americans who are eligible for the 
credit are given it. I think it is very important to continue this 
outreach because otherwise many people who should be getting this 
benefit are simply not going to realize it.
    Mr. Dalrymple. We have tried to bring a real balance to 
this particular program to meet the exact point that you made, 
balance the fact that we want to make sure that those people 
who are claiming the credit are entitled to it but also 
ensuring that the people who are entitled to it are claiming 
it. So that is the balance we have struck here.
    The other area that we have tried to make an investment in, 
in this particular program, is to do a considerable amount of 
research because it is an area we have done very little 
research in the past to ensure that in fact we do understand 
this segment of the population, that we can as time goes on 
fashion different types of programs to help the people who are 
either not complying because the law is complex, to help them 
comply, and then in addition to that, to ensure that the people 
who are actually eligible to claim, do claim.
    Mr. Price. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you. Mr. Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman. Mr. Commissioner, the 
service center mainframe, the consolidation, you have asked for 
$250 million for Y2K conversion. How much of that will be 
involved in this project?
    Mr. Rossotti. I have asked Mr. Cosgrave, our chief 
information officer, to come up. I would ask him to answer that 
question but if I could just ask him to do one thing in 
response to your previous comment about Federal employees and 
observations that people who come in from the outside have. Mr. 
Cosgrave had 25 years in the private sector, just as I did, and 
I would just like to ask him to give just 30 seconds of his 
observations of the employees he has taken over based on his 
previous experience and then answer your mainframe question.
    Mr. Cosgrave. Congressman Hoyer, I would just like to keep 
your track record perfect and I publicly stated this about 20 
times with the Commissioner present that in my prior career I 
have managed organizations as large as 4,000 people. Here at 
the IRS, I am managing an organization of about 107,500 people 
today and I will say that the people that I have are as 
dedicated and as loyal and committed employees as I have ever 
worked with. And I think your observation is 100 percent 
correct on this one. The issue----
    Mr. Hoyer. And as able? Dedicated and loyal but as able?
    Mr. Cosgrave. And as able. The issue that I think gives 
government workers sometimes, at least in our organization, the 
bad rap is that our processes are horrible, to be perfectly 
honest. That is where we have to put our emphasis. In fact, we 
have had some customer surveys done recently that pointed out 
exactly that issue, that the customers are very satisfied with 
the attitude of our people and the way they work. In fact, we 
have not picked up a lot of the issue you referred to, where 
they were overworked or something. Clearly the surveys indicate 
that the processes we go through in terms of how we provide 
that service certainly needs some improvement. Clearly a big 
part of that is the computer systems and that is the job that 
the Commissioner has asked me to assist him in fixing.
    Mr. Hoyer. Let me make a comment on your last point. I have 
dealt with Federal employees, state employees, and county 
employees who I believe did not treat me properly or the public 
properly. They were tired, not pleased with their job, thought 
they were substantially underpaid, et cetera, et cetera. Most 
of those people were at relatively entry level positions who 
may have been there for a short period of time. My point was a 
disproportionate number of the public deals with those people. 
They don't deal with all of you but, much more importantly, the 
middle level employees who are doing extraordinary jobs making 
in some respects ridiculously poor systems work relatively 
better than we ought to expect them to work, which is your 
point. My only point was unfortunately a lot of people do deal 
with folks who are at an entry level position who are not 
really enamored with what they are doing. This is also true 
frankly in the private sector, but in the private sector it 
doesn't equate to the same context. For instance, when I deal 
with Lands End, it may be a relatively low level person on that 
phone but boy, they are terrific. I have my shirt in 2 days. I 
am amazed at how well they do their job. I am thinking to 
myself if I am a taxpayer and I have the same response, I am 
going to think the Federal Government is great. And that is 
where we need to go. I use Lands End as an example because it 
is easy for me to use the 1-800 number and get my clothes.
    Mr. Kolbe. I like their shirts, too.
    Mrs. Northup. They sell nice shirts. One for every day of 
the week.
    Mr. Hoyer. Mrs. Northup notices how eclectic my style is 
but Lands End meets my needs. What can I tell you. Let me tell 
you I sure would like to call up IRS and say what is my status 
right now just as I can do with my ATM.
    Mr. Rossotti. That is exactly what the problem we have 
because we have this system that was built in the sixties and 
it just doesn't do the job today.
    Mr. Hoyer. I appreciate your observation. Cynically I can 
sit back and say the reason all these people say this because these are 
their people and they want to motivate them. And there may be a little 
bit of that. But I hope not much of it because I hope it is an accurate 
view. I think it is an accurate view and I sell it hard when I go to 
the well of the House and say we need to give Federal employees a 4.4 
or 4.8 percent pay increase, keeping them even with the military. Why? 
Because we want to retain our good people and attract young people in 
this country to think that this is something that they should pursue as 
an alternative. I don't know how many of you saw Parade magazine two 
weeks ago, but you can bet everybody in America read that and looked at 
people who are in comparable jobs to see whether they were getting paid 
enough. So we judge how we get paid. Teachers are paid way too little 
for the value we should place on them in society. Federal employees are 
underpaid in my opinion. Not in every instance. In any event, I 
appreciate your observation. We need to convey that story.
    Now, on the service center mainframe consolidation.
    Mr. Cosgrave. As you referred, we are requesting 250 
million for all of Y2K related spending in fiscal year 2000. Of 
that 250 million, a hundred million of that is related to 
service center mainframe consolidation. I will also just add 
approximately about half of the hundred million is actually 
what we would consider to be recurring type costs because in 
effect, the main frame consolidation is replacing programs, 
mainframes that previously had been funded out of our general 
appropriations. So about half of that hundred million is really 
of a recurring nature.
    Mr. Hoyer. Okay. Now, let me ask you a question that 
concerns me. You also asked for 239 FTEs in fiscal year 2000, 
and $250 million to address remaining Y2K compliance problems. 
My concern is that money is not available until October 1. You 
want to have Y2K solved by October 1.
    Mr. Rossotti. We have the FY 1999 in the emergency fund, in 
FY 1999 we have the money to fund those people. This is the 
continuation, I believe.
    Mr. Hoyer. It is the continuation, but you won't have it 
until October 1, presumably, available for expenditure and my 
question to you is, does this need to be in a supplemental so 
that you will have availability of those funds earlier so that 
we can make sure that by October 1, 1999 you will solve the 
problem and you will simply be testing to make sure on December 
31, 1999 you are up and going.
    Mr. Rossotti. That is true. We will be testing and also 
completing the deployment of some of these things that are done 
in terms of Y2K but they have some finishing up to do. I would 
say what is absolutely essential is that we have no 
interruption, we can continue this funding. We can't have any 
delay whatsoever in having the funding or the whole thing will 
not work. So I think that anything we can do to ensure that we 
have the funding as soon as possible would be extremely 
valuable.
    Mr. Hoyer. Mr. Chairman, I know that you and Mr. Young are 
hoping and obviously Speaker Hastert has talked about it 
regularly, but if there were any delay, we need to be cognizant 
because obviously this money has to be on-line, available so 
the Y2K doesn't bite us too hard.
    Mr. Chairman, I have got other questions but I would be 
glad to yield to Mrs. Northup.
    Mr. Kolbe. We will come back for another round. Mrs. 
Northup.
    Mrs. Northup. Thank you. I just have a couple of additional 
questions. I was wondering with the IRS Restructuring and 
Reform Act, as you all work through that, obviously you will 
probably find some provisions in it that obstruct you from 
making the very best judgment between how do you act as a 
taxpayer advocate and how do you make sure that people who owe 
their taxes are fairly and responsibly brought to pay by those 
taxes. Do you expect that you will be making a recommendation 
for future changes? Do you have any idea when that might come? 
Have you seen any glitches so far that are important?
    Mr. Rossotti. I think that your observation that this is a 
very, very complex bill that has many changes that we, you 
know, will certainly find out a lot about as we gain experience 
with them, and may have to come back and request changes and 
adjustments. I think that is a very accurate observation. I 
think in terms of timing, a lot of those provisions just went 
into effect, 180 days after enactment which meant January of 
1999, which is last month. We are just in the process of 
training these employees and I think it is going to be some 
months, maybe the rest of this calendar year, at least, before 
we have the experience.
    A good example of that is this one I illustrated, which is 
called 3401, due process and collections. This is a major 
change in the way the whole collection process works. There are 
at least 3 million additional notices that will have to go out 
to taxpayers that are a whole different thing. Our people 
internally have to go through a whole different process of 
appeals. Some of these could end up in court. It is probably 
going to be 6 months or a year. It just startedin January so we 
really don't know yet how this is going to work. I think by the time we 
are here let's say a year from now, we will probably have a lot better 
idea of how that is going to actually play out.
    Mrs. Northup. Well, it seems to me like you have an 
attitude of: we can make changes, we can make this better, 
let's embrace not only the technical side of the bill but the 
spirit side of the bill and make the IRS an institution that, 
protects us. Protects us from taxpayers that don't want to pay 
but also would never take advantage of us and be an educational 
tool that we could depend on. With that in mind, I think that 
if there is anything we have done that obstructs those goals, 
we are interested in knowing what they are.
    Mr. Rossotti. I appreciate that. That is a very welcome 
comment, and I have gotten that comment from many Members of 
Congress as well as the Senate. I can assure you that we will 
be doing that. We have a provision now with our Taxpayer 
Advocate, for example, which just happened a couple of weeks 
ago, where he is required to report once a year to the Congress 
on specific provisions of the law that are causing impediments 
for good taxpayer service. So we will certainly do that, and I 
would not at all be surprised to find out with these many 
changes that we will learn a lot of things that need to be 
fixed.
    Mrs. Northup. Well, it is made easier by your attitude and 
the spirit in which I feel like the IRS is approaching change. 
We want to be partners in it and that makes it easier to then 
trust your judgments.
    I would like to ask you about finalizing regulations. I 
review every casework request that comes through my office and 
several months ago there was one that involved what I would 
think any common sense person would say is abusive. They were 
two young men that managed a restaurant. They are about 22 
years old. The owner who was also the bookkeeper stopped making 
any of the tax deposits as the restaurant got into financial 
trouble. They then declared bankruptcy. These two kids are they 
asked by the IRS to pay enormous penalty sums. Every tax person 
that looked at this case has said that this is outrageous and 
this is exactly what the law is meant to change and we will 
change it. The problem is the regs are not in place yet so we 
can't make any substantive or subjective analysis of it. When 
will those regs be finalized?
    Mr. Rossotti. I think you are probably referring to one of 
the particular ones which is called the offer-in-compromise 
program regulation, which is one of the major things we 
requested in the bill that Congress gave us. This is--in fact 
this afternoon I am going to work on that reg. It is a very 
complicated major departure from tax administration since the 
history of the IRS.
    Mrs. Northup. Because we are going to actually let people 
think independently, right?
    Mr. Rossotti. When you get into compromising tax liability 
this is not something you want to do very, very lightly. It is 
very, very true that it is taking some time to get and, of 
course, we have all these other provisions that we are trying 
to issue regs with. The answer to that question is that I hope 
we can get this reg out within the next couple of months. I 
mean, I really honestly don't think we are going to get it--it 
is one of the more complex and difficult ones. It is true that 
once you put something like this out, even though it is for 
draft and it still has to be for comment, it is a very 
important document that interprets tax law.
    In that particular case, as was I think appropriate, the 
Congress gave us some pretty broad flexibility as to how to 
interpret this. We are now trying to be very, very serious 
learning what that means and how to apply that to cases. This 
is one of the regs I mentioned, by the way, in terms of your 
question engaging frontline employees. This is exactly one of 
the regs that we have--it is the frontline employees that have 
the examples, like you cited in those cases, that know about 
these things. We have been sending our team around to go to 
districts and get their input from the cases. So I certainly 
wish we could get it out faster but it is going to take a few 
more months.
    Mrs. Northup. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Both Mr. Hoyer and I have some more questions. 
Can you hold on while we cast one vote and come back. I hoped 
to have this finished right about now but we will come back 
just as soon as we can. It is one vote. Thank you very much. We 
stand temporarily in recess.
    [Recess.]
    Mr. Kolbe. The subcommittee will resume here. I guess it is 
back to me. I want to ask one question to close out that 
thought on the whole IRS reorganization. We talked about the 
$140 million that is in the budget, but I think you have 
estimated you are going through a reallocation this year. You 
are going to be spending about $200 million, as I recall, on 
that this year. You have indicated that some of the funds for 
the implementation are going to come from curtailment of 
compliance activities. Is that going to result in a reduction 
of direct compliance revenue and, if so, what is your estimate 
of the lost revenue as a result of diverting funds from these 
activities?
    Mr. Rossotti. Let me just clarify one thing. When I 
mentioned about diverting from compliance, that was really to 
implement these other provisions that are in the Restructuring 
and Reform Act rather than the reorganization.
    Mr. Kolbe. You mean training?
    Mr. Rossotti. No. It has taken people to basically--part of 
it is training but part of it is also writing these procedures 
and doing----
    Mr. Kolbe. Nonetheless it is diverting it from compliance.
    Mr. Rossotti. It is diverting it from compliance. It is 
about 2,500 people all together for the restructuring. It is 
really not related to the reorganization question.
    Mr. Kolbe. You have any estimate on what impact that is 
going to have on revenue?
    Mr. Rossotti. I don't have an estimate on what it is going 
to have on revenue. I do have a number that breaks it down to 
how many people are from specific compliance programs. Maybe I 
will have to get that for you in a second but most of the 2500 
is actually--here it is. Yeah, it is 676 from collections and 
389 from exam. So those would be the principal ones that, have 
direct revenue impact. You know, if you just take an 
extrapolation of what the typical direct revenue is, and these 
numbers are not always that reliable, but it translates into 
about $500 million of revenue.
    Mr. Kolbe. Let me ask you, if you might, a couple of 
questions on e-mail filing--electronic filing. You have asked 
for $13 million to implement the provisions of title II, which 
deals with electronic filing. I would like you to--not now, but 
your staff to provide for the record, a breakdown of how those 
funds are going to be spent. Is this going to be a one-time 
investment or is this a continuing requirement?
    Mr. Rossotti. Well, we don't have the specific number of 
what we are continuing, but I believe that it will be a 
continuing requirement because we are going to have an ongoing 
program for the next--our strategic plan for the next five 
years to increase electronic filing. The main part of this 
money----
    Mr. Kolbe. The money may be spent for different things but 
there will be a requirement for funds for filing.
    Mr. Rossotti. Yes.
    [The information follows:]

    As indicated below, the increase of $13 million is 
allocated among Electronic Tax Administration (ETA) marketing, 
private sector partnering, distributor incentives/ services and 
training, travel and Electronic Tax Administration Advisory 
Committee support.
    ETA Marketing--$5.0 million: $5 million was allocated for 
ETA marketing in FY 1998 and $8 million in FY 1999. An 
additional $5 million is needed in FY 2000 to better inform and 
educate individual taxpayers, small and large businesses and 
practitioners about the benefits of electronic filing and 
electronic payments and to take advantage of the provision 
contained in the IRS Restructuring and Reform Act of 1998 which 
authorizes the use of mass communications to promote and 
encourage the benefits of ETA programs. The majority of the 
funding increase would be spent on paid advertising in the 
print media, radio and television.
    Provate Sector Partnering--$5.0 million: In order to 
achieve significant growth in electronic tax administration, 
the IRS must embark on a new stage in its relationship with 
external stakeholders to deliver enhanced ETA products and 
services through partnership with the private sector. $5 
million is needed in FY 2000 to continue to implement the 
results of ETA's initial Request for Proposals (RFP) in such 
critical areas as signature alternatives and electronic 
payments and to pursue additional pilots and RFPs including 
those affecting business taxpayers.
    Distributor Incentives/Services--$2.5 million: The IRS 
Restructuring and Reform Act authorizes the IRS to pay 
appropriate incentives for electronically filed returns. 
Consequently, the IRS is requesting $2.5 million for 
Distributor Incentives/Services to support the more than 90,000 
IRS-authorized Electronic Return Originators (EROs) who provide 
electronic filing services to taxpayers. EROs will benefit from 
national advertising, promotional kits, education and training, 
management information systems and various products and 
services depending upon their success in marketing ETA products 
and services to the public.
    Training, Travel and Electronic Tax Administration Advisory 
Committee Support--$300K: An additional $300,000 is requested 
to cover the costs of supporting the Electronic Tax 
Administration Advisory Committee (ETAAC) which was required by 
the IRS Restructuring and Reform Act and for additional travel 
and training for ETA employees in such critical areas as 
marketing and finance which will enable Electronic tax 
Administration to operate more like the private sector.
    The funds will be needed on a continuing basis until 
significant progress is made toward the Congressional goal of 
80 percent of all tax and information returns being filed 
electronically by 2007.

    Mr. Kolbe. As you know, the law permits you to implement 
procedures to provide for electronic filing and to provide for 
some incentives for that. We authorized the pilot project for 
this and you made a decision not to proceed with it. Do you 
have a plan to proceed with any kind of an incentive program in 
this area?
    Mr. Rossotti. Actually, I think there was one 
particularkind of incentive which was a cash figure per extra return 
filed and for the various reasons I think we discussed with you, even 
many in the industry do not think that was too practical. But in this 
$12 million, actually there is about $7\1/2\ million of the $13 million 
that is for various kinds of incentives or various kinds of deals, if 
you want to call them that, with private sector partners. This includes 
things like working with the EROs to give them, you know, some 
advertising and marketing kinds of material that they can use to help 
promote their own business, together with e-filing as well as various 
activities we have done with private sector companies. I mentioned the 
initiative with one of the providers to have free filing over the 
Internet for low income people. That was something that was done by the 
provider but with assistance from us, and we are linked up on our 
website, for example, with that provider.
    There is a long list of these things. We can give them to 
you if you want to, but these are the kinds of things that are 
really, very, very targeted, very specific to focusing 
increased filing from different sources.
    [The information follows:]

    In the Fiscal Year 1998 Appropriations Bill, Congress 
authorized the IRS to pay up to $3.00 for each return filed 
electronically when the Commissioner of the IRS determines that 
it is in the best interest of the government to make such a 
payment. In September 1997, the IRS released a draft Request 
for Information (RFI) to explore the industry's interest in the 
cash incentive as well as other arrangements. In response to 
the RFI, private industry responded that the IRS should invest 
first in correcting systemic deficiencies, introducing new 
products and services, and engaging in aggressive national 
marketing before engaging in direct cash subsidies to the 
private sector.
    However, the IRS has decided to engage in an incentive 
program as authorized under the IRS Restructuring and Reform 
Act of 1998. Tax practitioners authorized to electronically 
file tax returns to the IRS (Electronic Return Originators) 
must be recognized, supported and motivated as ETA product and 
service distributors. Much as the private sector employs store 
front operations (whether independent, franchise or corporate 
owned), the IRS depends upon tax practitioners to promote 
electronic filing and payment to taxpayers. In support of this 
vital channel, ETA will seek to support EROs by establishing an 
Extranet consisting of management information system, account 
resolution and tax law capabilities; expanding the marketing 
support available to EROs including national advertising and 
promotional kits; implementing a program of product and service 
incentives, rewards and special recognition depending upon an 
ERO's success in marketing ETA products and services; and 
establishing account management programs.
    The IRS entered into new partnerships with private sector 
companies to broaden the electronic services accessible through 
the IRS Web site this year. As part of these non-monetary 
arrangements, the IRS has placed hyper-links from the ``IRS e-
file Partnerships'' page of its Web site to the partners' Web 
sites. The companies, in turn, have developed initiatives to 
increase e-filing. The IRS e-file Partnerships page currently 
has links to the following companies providing services for 
individuals:
    Universal Tax Systems, Inc.: prepare and e-file all federal 
and state returns; free for active U.S. military and Oklahoma 
residents--charge for others.
    Intuit, Inc.: prepare and e-file federal and state returns; 
free service for some.
    UDS ELECtro TAX LLC: download free software for federal and 
Maryland returns; charge for e-filing.
    2nd Story Software, Inc: free software; charge 
for deluxe package or e-filing.
    Block Financial Corp.: free 1040EZ e-filing online; charge 
for federal and state software includes one e-filed return.
    H&R Block, Inc.: link to e-filing and other tax services.
    Jackson Hewitt: tax information; download discount tax 
preparation coupon.
    Furthermore, some e-file partners provide services to 
businesses to promote e-file to their customers or employees. 
The IRS Web site currently has links to three such partners:
    Electronic Filing TODAY--Peoples Income Tax: newsletter for 
tax professionals; e-filing for individuals; other tax and 
financial services.
    QuickFile USA: free e-filing materials for credit unions 
and employer groups.
    Tax Refund Express: e-file products and services for 
financial institutions.

    Mr. Kolbe. The Restructuring and Reform Act has a goal of 
80 percent by the year 2007 of all taxpayer returns and 
information returns to be filed electronically. Do you 
interpret that to mean 80 percent of each or 80 percent 
combined? How have your peopleinterpreted that?
    Mr. Rossotti. We have been focusing mainly on the 
individual returns, I think.
    Mr. Kolbe. Tax returns, not information.
    Mr. Rossotti. The tax returns, although in our strategic 
plan for ETA which we submitted in December and with our 
advisory committee, we are looking at the other areas. But 
frankly, the top priority is the individual returns because 
that is where you get the most impact for the taxpayer.
    [The information follows:]

    We interpret the goal to mean 80 percent of all tax returns 
and 80 percent of all information returns.

    Mr. Kolbe. Do you think you are on target? It is a little 
early, but on target to meet that goal by 2007?
    Mr. Rossotti. Well, let me just say that we have done a key 
thing that we needed to do, which was to make a strategic plan 
that says how we are going to take various steps. Without 
making some--but I want to qualify my comment with this--
without making some pretty significant changes in several 
things about the way we do business, I don't think we will 
reach the 80 percent. In particular, some of the computer 
systems changes that are behind it. If you look at our e-filing 
program today and what supports it, frankly it is like a face, 
you know, which has like a mask in front of something that is a 
little more ugly behind it. In other words, it is like a front 
end of a system that looks--gives the taxpayer the ability to 
file electronically--but then it takes that, and goes back into 
these really ancient systems and that is one of the things that 
creates constraints, for example, on how fast the refund 
actually gets out after it comes in on e-file. It also gives 
constraints on our ability to accept some of the different 
kinds of forms and documents that people--we can't accept all 
the forms and documents that people want to submit 
electronically, just as two examples. So in our technology 
blueprint that we are working on with the prime contractor, the 
first projects that we are going to implement, the early 
projects that we are going to implement, are aimed at providing 
us some additional capability for electronic filing. And even 
then that won't give us everything we want.
    The answer then is, I think, if we do everything that we 
need--if we make the kind of changes that we are talking about 
in our technology and all these practices, we have a reasonable 
shot at making that goal. Without doing that I think there is 
practically very little chance that we will make the goal.
    [The information follows:]

    In December 1998, the IRS issued for public comment its 
first-ever Strategic Plan for Electronic Tax Administration 
which was designed to make significant progress toward (i) the 
congressionally mandated goal of 80 percent of all tax and 
information returns being filed electronically by the year 
2007, and (ii) the interim goal that, to the extent 
practicable, all returns prepared electronically should be 
filed electronically for taxable years beginning after 2001.
    In conjunction with the issuance of the Strategic Plan, the 
professional forecasters under the Assistant Commissioner 
(Research and Statistics of Income) developed IRS' official 
projections of electronically filed individual returns for 
1998-2007 as indicated below.

E-File Projections

        Year                                                 in millions
1998..........................................................      24.6
1999..........................................................      29.6
2000.......................................................... 32.5-39.3
2001.......................................................... 35.1-44.5
2002.......................................................... 37.4-48.8
2003.......................................................... 39.8-53.0
2004.......................................................... 42.1-57.3
2005.......................................................... 44.5-61.6
2006.......................................................... 47.0-66.0
2007.......................................................... 49.4-70.4

    These projections represent baseline extrapolations of 
current trends, existing market approaches, enacted 
legislation, and confirmed (or reasonably certain) IRS program 
changes including recent enhancements to IRS' e-file programs 
such as this year's credit card and signature alternative 
pilots. However, these projections do not reflect the full 
impact of all of the initiatives contained in the Strategic 
Plan. At this time, the IRS does not have sufficient 
information to make reasonable projections for many of the 
future initiatives. As the IRS gains more experience with the 
impact of the recently announced initiatives as well as the 
additional enhancements reflected in the Strategic Plan, 
increases to the current projections are expected.

    Mr. Kolbe. Last year you had about 24.6 million filed. What 
is your estimate for this coming year?
    Mr. Rossotti. Well, the official estimate by our compliance 
research people is 29.6 million. But I will tell you honestly 
that all of us that have been involved in this have a little 
betting pool, which we put one dollar in each, that has a 
number attached to it.
    Mr. Kolbe. What is yours? Come on.
    Mr. Rossotti. Am I under oath?
    Mr. Kolbe. I am curious as to whether you think it is going 
to do better?
    Mr. Rossotti. I think it will do better.
    Mr. Kolbe. Better?
    Mr. Rossotti. Yes, I think it will do better.
    Mr. Kolbe. Okay. Mr. Hoyer.
    Mr. Hoyer. Thank you. That was interesting.
    Mr. Rossotti. I may be wrong. I may be too optimistic. I am 
an optimist or I wouldn't be in this job.
    Mr. Hoyer. Yeah, us too. The chairman said okay when you 
gave the answer. I want to make sure I heard what you were 
talking about. In the diversion of folks from compliance, you 
think that may cost $500 million?
    Mr. Rossotti. Let me just be clear what that is.
    Mr. Hoyer. Your extrapolation.
    Mr. Rossotti. If you take the number of people and just do 
a multiplication----
    Mr. Hoyer. You recall before you came on board we were 
going to utilize about $2.3 billion of off budget expenditures 
on the theory that it would raise between the estimate of about 
10 and it looked like it was going to raise about $14 billion. 
Notwithstanding that, we didn't continue to off budget. Panetta 
didn't want to do it. The committee didn't want to do it. The 
Congress didn't want to do it. But as I caught that, if we are 
losing a half a million dollars in revenue extrapolated on how 
much we spend on compliance, as I recall, it has been four to 
one. If you spend a dollar, you get four, approximately?
    Mr. Rossotti. This is at the lower end of the range, I 
think, this $500 million.
    Mr. Hoyer. How much are we spending to lose that $500 
million?
    Mr. Rossotti. Well.
    Mr. Hoyer. You get my question?
    Mr. Rossotti. The total diversion is about $200 million.
    Mr. Hoyer. My question. If we are diverting $200 million 
and we are losing $500 million, theoretically if you were doing 
CBO estimates and they are extrapolating on what--so to get the 
$200 million into the places where we need it, we are giving up 
$500 million in revenue. If that is the case, we should to come 
up with $200 million extra on your budget. As I said at the 
outset, you recall your budget last year was 8.1 billion. That 
is a $2 million increase, your budget.
    Mr. Rossotti. That is true.
    Mr. Hoyer. That is without consideration of the 4.4 percent 
raise for your employees that you are going to have to absorb. 
I am not pleased with that.
    Mr. Rossotti. Actually, I think that that may be--I think 
the raise is provided for, as I understand.
    Mr. Hoyer. How is it provided for.
    Ms. Turco. OMB required that we have it in the budget 
submission. I will double check on that.
    Mr. Hoyer. The $8.1 billion you are going to get includes 
the Federal employees raise, right?
    Mr. Rossotti. We believe it does. We will have to verify 
that.
    [The information follows:]

    The IRS confirms that the FY 2000 budget request includes 
the 1999 4.4 percent federal pay increase.

    Mr. Hoyer. I am sure it does. OMB should create a fund that 
is for pay raises. For instance, the IRS gets X percentage 
budget increase plus the salary raise. Because otherwise it 
looks like you are receiving a raise that you are not getting. 
All you are receiving is an enhancement to your salaries. To 
the budget director, that is my point. You ought not allow 
people to put you in a box that they don't understand. You are 
getting $2 million additional money in 2000. That is what you 
are getting. $2 million in an $8 billion budget. That is not 
worth talking about. My point being we would go to a 4.8 
percent if I had my way. I know your people will hate that. A 
full point increase on Federal employees civilian sector 
salaries costs $800 million. If we go another .4 of a point, 
that is $320 million. Your portion of that in terms of salary 
expenses may be relatively small. What do you think?
    Ms. Turco. $30 or $40 million.
    Mr. Hoyer. $30 or $40 million. That eats up that 2 million 
extra real quick.
    Mr. Rossotti. $30 to $40 million is not small for us.
    Mr. Hoyer. So what I am saying to you is if we are spending 
$200 million and losing $500 million, that is a net loss of 
$300 million. You follow me, Mr. Chairman?
    Mr. Kolbe. Yes, I do.
    Mr. Hoyer. When he answered your question I was convinced--
and that is frankly a ratio of two to three.
    Mr. Rossotti. Well, part of the----
    Mr. Hoyer. We use four to one. When we used four to one, we 
put in the $420 million extra off budget in 1995. We 
extrapolated four to one and it ended up being the next year, 
according to IRS, a five to one. We were getting a return on 
our additional compliance money. All I am saying is I don't 
think it is good business or management judgment, not on your 
part but on our part.
    Let me go on. I have other questions. Training I think that 
has already been asked. But do you believe the budget increase 
is adequate for training? Are we going to be able to provide 
adequate training with the money?
    Mr. Rossotti. I think there are really two parts to our 
increased training. One is in our budget, the $17 million we 
asked for, it is just for our technical training. Then there is 
a significant portion of the $140 million for modernization, 
which is training. It all comes together in the end, the 
training. But I believe if we get all of this money, it will be 
a significant step towards rectifying the deficit. But I have 
to stress this is not a one-time problem. We really and truly--
we have a deficit--we have two big deficits in the IRS. One is 
the technology. The other is the training. These are the two 
main things our employees depend upon to do their jobs. So we 
are talking about, I would say, maybe I don't know how many 
years, but four or five-year program, at least, of sustained 
effort to try to upgrade the skills. I mean, we are talking 
about tax law training for all these tax laws, the new 
technology that we are putting in, all these new procedures 
that we are putting in that are taxpayer rights, and so forth. 
We have to train those employees on how those work. We are 
putting a whole new set of program measures as required by the 
law. We are going to have new performance measures that focuses 
both on customer service as well as their business results and 
compliance activities. When you add all these things together, 
plus the organizational changes that mainly will affect a lot 
of the managers, we have a great deal of work to do in terms of 
helping our employees cope with all this change. If we sustain 
it for a period of years, then I would answer your question, 
yes, I think we can rectify the deficit. But we are not going 
to be--we couldn't even--even if you gave us--we couldn't do it 
all in one year, so we have asked for what we think we can 
basically effectively utilize for the coming year.
    Mr. Hoyer. Last question on this round. I think I have a 
bill on the floor, which is why I was beeped. What are we 
calling the information management system now?
    Mr. Rossotti. We are just calling it the Technology 
Modernization Blueprint.
    Mr. Hoyer. How is the blueprint doing?
    Mr. Rossotti. We are just getting started.
    Mr. Hoyer. I understand that. One of the major reasons you 
are on board, as you know, is because this system wasn't 
working and we were in trouble and people were rightfully 
critical of it. And I told you that GAO was going to be the 
arbiter of whether we were succeeding or not. I don't know if 
there has been a recent report on that. But in any event, how 
do you think we are doing?
    Mr. Rossotti. Well, I think we are going carefully. We 
awarded the prime contract. We have the blueprint out. What we 
are doing for the first 6 months of this year, which we are in 
right now, is we are not asking any money be released in the 
Investment Account yet. We are taking the $10 million out of 
our regular budget. We are working with the Prime to update the 
Blueprint. It was done two years ago. We are taking advantage 
of their expertise to update and revise the strategic plan to 
correspond to the way that we know it today. And our goal is by 
July to get the first real project started with the Prime to 
implement the first releases of that Blueprint.
    Mr. Hoyer. I am sorry, what did you say?
    Mr. Rossotti. Our goal is to get the first real projects, 
to implement the first releases as we go, the first projects of 
that Blueprint started by July of this year to be more than 
likely delivered the following calendar year in 2000. Those 
would be focusing on electronic filing, as we indicated, and 
customer service in terms of the phone service.
    So those are the first ones that we are going to be doing 
and we hope to be ready in terms of our management processes 
and so forth. Mr. Cosgrave is here and has joined me at the 
table. Maybe I could ask him to just mention a few things about 
the management processes we have put in place to try to manage 
this whole thing because this is the key to making this whole 
thing work.
    Mr. Cosgrave. I would like to comment on both the governing 
structure we put in place as well as GAO's participation. Let 
me just mention that quickly. We kicked off last week an 
ongoing audit process with GAO on exactly this issue. We are in 
a six-month period now where we are two months into it to 
address a number of issues that need to be put in place, to 
address the issues that are in the appropriations bill from 
last year that need to be addressed before this money can be 
freed up. So we are ongoing and working with GAO right now. 
That process literally started last week. So we understand 
their role and we are cooperating fully with them on that.
    As to the overall governing structure that we have put in 
place, this is a structure that starts with the Commissioner. 
He is chairing a governance committee that consists of the top 
seven executives of the Service. Within each area, we have four 
areas devided up that have each of the executives chairing some 
task groups that are in fact overseeing components of this. 
John, for example, is chairing the overall program to see all 
the short-term activities that are going in place in terms of 
the call routing, improvements and the electronic tax 
administration improvements that theCommissioner has already 
alluded to. I am working with the Chief Financial Officer and Deputy 
Commissioner of Operations, Bob Wenzel, to oversee all the improvements 
on the finance and administration side. There is an overall strategic 
plan that is part of this effort in terms of verifying that the 
Blueprint was correct and that we are in fact working in the right 
areas. The Commissioner is personally overseeing that activity along 
with the Deputy Commissioner from our organization, John LaFaver, who 
is working with him in chairing that specific activity.
    We have a fourth area of infrastructure which includes some 
of the basic things we need in place just to have computer 
systems that are modernized. This includes putting in one 
standard e-mail system throughout the entire service. Today we 
have 13 of them. So some fairly basic things of that nature are 
being examined. That is a task force that is being chaired by 
one of my deputies.
    So it is that level of involvement here across the agency 
with the highest level of executives that are involved. And in 
addition, we also have a subcommittee that has been formed at 
the Treasury level, the IRS MB, management board subcommittee 
to oversee this as well. So we have gotten quite a good 
structure in place.
    Mr. Hoyer. I thank you for that recitation of what you are 
putting in place. I will tell you, as you may know, I have been 
on this committee a long time and have been through tax 
modernization for a long time. I have heard a lot of bright, 
able people sit in front of me and tell me what processes were 
put in place and how is the processes put in place did not 
result in the objective. Obviously that will be the final test 
as your business profit was your final test. Does it work for 
our business? The profit is going to be does it work for the 
taxpayer? I have a lot of confidence in Mr. Rossotti, a lot of 
confidence in Secretary Rubin and Mr. Summers and a lot of 
confidence in the people Mr. Rossotti is bringing on board. I 
look forward to that occurring. But it has been a bear to get 
to.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much. Mr. Sununu.
    Mr. Sununu. Thank you very much, Mr. Chairman. I will 
submit any additional questions I may have in writing. I would 
like to address one point, though. Commissioner, welcome. I am 
pleased to say I have had the chance to meet you earlier and 
certainly wish you luck in your new job.
    My question is about the EITC program. You note that you 
are requesting 144 million. A couple of questions regarding the 
EITC program. First, it says the account is funded outside the 
spending caps. To be a little facetious, that sounds like you 
are saying it is being funded outside the law, so I would like 
you to elaborate on exactly what that means and talk a little 
bit about how you measure success in that EITC program.
    Mr. Rossotti. Let me on the first point, I think it is 
simply that two years ago, the Congress decided as part of, I 
think it was the 1997 bill, that there was a lot of debate 
about this program and what should be done with it. The 
ultimate conclusion was that in order to make sure that the 
program is administered as well as it can be, to eliminate 
overclaims, which have been a significant problem, but also 
make sure the people that should get it do get it. The idea is 
that those who should get it, should get it, and those that 
shouldn't get it, shouldn't get it. They gave us $140 million, 
I think it was over five years, that was, quote, outside the 
discretionary spending caps and that is what that was all 
about.
    As far as how do we measure success, actually I would like 
to ask Mr. Dalrymple, our Chief Operating Officer, who has 
actively been involved in establishing some research programs 
to try to respond to that.
    Mr. Kolbe. Before he answers, if you would just yield for a 
moment. Just to clarify that point, Mr. Sununu, it was Congress 
that said we thought the return on this would be sufficient, 
that we wanted to put the compliance effort outside the budget 
cap, so we specifically by law excluded it from the budget 
caps.
    Mr. Sununu. Thank you.
    Mr. Dalrymple. Let me talk about specifically what we are 
doing to determine if our activities are successful. We have a 
research project that we started last year where we have looked 
at a certain statistically valid example of taxpayer accounts 
and we will be measuring them each year against the baseline we 
have established. That first set of research will actually 
begin sometime near the end of March. We will be able to 
literally look to see whether or not the activities that we are 
taking from a compliance standpoint in the sense we are doing 
examinations and looking at things through our math error 
process, is to stop things on the front end. Also, we will see 
the extent that the nontraditional enforcement activities, 
treatments that we have tried to put in place, are also having 
an effect. I will give you a good example.
    A year ago we sent out over 250,000 letters to taxpayers 
alerting them to the fact that we thought that they had filed 
with -0 a duplicate identification number that had been filed 
by someone else, had been used by someone else. We had a very 
large rate of those people who came in and self-corrected prior 
year returns, and then did not subsequently claim the credit in 
the coming year. So we have taken a number of actions like that 
and we are tracking to see how effectivethose are.
    Mr. Sununu. What was the overclaim rate for your base year? 
I am sorry, your base year was what year? '97?
    Mr. Dalrymple. Our base year was last year. I won't be able 
to tell you that until this analysis is finished in--it should 
be begun sometime around the end of March.
    Mr. Sununu. You are still tabulating the information to 
determine what the overclaim rate was in the base year?
    Mr. Dalrymple. That is right because last year was the 
first year of the program.
    Mr. Sununu. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman. I have one final 
question which has to do with the alternative minimum tax and 
the extent to which we may in the near term be looking at 
greatly increased numbers of taxpayers bumping up against the 
alternative minimum tax. I gather that may particularly happen 
in light of this per child tax credit that was enacted 
recently.
    First of all, can you say something about the alternative 
minimum tax as to the inflation adjustments that have taken 
place over the years? When has that threshold last been 
adjusted?
    Mr. Dalrymple. I have to tell you, Congressman Price, I 
don't have that information with me but we could certainly get 
it back for you. We will have to get you those adjustments.
    Mr. Price. My impression is there have been very few such 
adjustments. In any case, it seems to me that a lot of the very 
people we want to benefit from this child tax credit, namely 
middle-income Americans, bump up against the current AMT income 
threshold and not be able to claim that tax credit. Do you have 
any figures on how many people are affected by the AMT each 
year currently?
    Mr. Dalrymple. Yes, we do. I don't have it with me but I 
will get you the number that have been affected by the AMT.
    Mr. Price. And then do you have any figures about how many 
people will be claiming this tax credit?
    Mr. Dalrymple. I am sure we have done some projections. 
Again I don't have that data with me, but we can get you the 
projections.
    Mr. Price. If you could put some material together for the 
record on the extent to which in the next few years the AMT is 
going to involve many more taxpayers, and to what extent the 
child tax credit is a factor in that. Obviously the policy 
question underlying all this is to what extent our intent in 
enacting the child tax credit may in fact be negated by 
triggering the AMT for many of those very same taxpayers.
    Mr. Rossotti. I don't have the exact numbers, but I would 
like to respond in one way, Mr. Price. At the very tail end of 
the Congressional session last year, there was an adjustment 
made in the tax law for this year to allow some of those 
credits to be done in such a way that they would avoid people 
getting into the alternative minimum tax. We worked with them 
in order to implement a sort of a fix, I would call it, that we 
could implement very, very quickly. It isn't perfect and it 
doesn't cover all the situations, but it would, we believe, 
eliminate a significant number of people from having to be 
involved with the alternative minimum tax as a result of these 
tax credits in the current year, and I think so far as I know 
the tax writing committees are continuing to work on that 
issue.
    Mr. Price. Well, there are obviously taxpayers who ought to 
be paying a minimum tax and the intent of the alternative 
minimum tax is to make certain that they do just that. However, 
if thousands upon thousands of taxpayers now are going to be 
bumping up against that limit and if it is going to be negating 
the child tax credit and other breaks that we have given for 
very specific purposes, then we need to know that and to know 
how many taxpayers are going to be involved. So I would 
appreciate your furnishing that information for the record 
understanding the underlying intent of my question.
    Thank you very much. Thank you, Mr. Chairman.
    [The information follows:]

[The official Committee record contains additional information here.]


    Mr. Kolbe. Thank you Mr. Price. Let me, if I might, try to 
wrap this up as quickly as possible. Some of the questions that 
I have have been kind of covered here. I want to come back, 
though, to the tax systems modernization and now we are calling 
it the blueprint.
    Commissioner, as you know, this subcommittee has had a 
rocky road with the IRS on this issue of the amount of money 
that has been allocated for tax systems modernization and how 
it has been spent. There were some questions from Congressman 
Hoyer about this and I covered some of it and I think it was 
Mr. Dalrymple that pointed out that you covered the processes 
and structure that you have in place to make sure when you 
start issuing the contract orders this next year, you will have 
that system in place. But I had a few other questions that I 
wanted to ask along this line. This one may be a softball and I 
guess the answer is obviously yes, but are you confident you 
have the management team in place that can manage a task of 
this complexity?
    Mr. Rossotti. Well, since Mr. Cosgrave came, I am a lot 
more confident than I was before. All seriousness aside, I 
think we still have to work to build that. We have recruited 
some additional people in the organization and we are 
continuing to recruit some more, but I believe we have made a 
significant amount of progress in establishing that below the 
level of Mr. Cosgrave but also in Mr. LaFaver's organization,we 
have got some people that have the ability to do this.
    But I do want to stress one key point with respect to the 
risk involved in this program. I think what Paul and I both 
share having been in the private sector is that there isn't any 
way to avoid the risk because these are risky programs. But the 
one thing that I think that we can provide a high degree of 
assurance to the committee about is that we are monitoring 
every one of these projects very, very carefully and basically 
in phases. If we believe that there is something that is not 
meeting its business objectives and needs to be adjusted, or 
even taken off the table, we are not going to hesitate to do 
that. That is exactly the way that we have managed the Y2K 
program. We have had many problems in the last year on the Y2K 
program. We haven't obviously had to deal with you on this. We 
have been able to handle them. The key point is identifying the 
risk as early as possible and having the commitment to make the 
adjustments that may be needed. Most of the time you can still 
achieve the business objective with some adjustments but 
sometimes you can't, and you may have to take a different 
course. So we are not thinking about this as a program where we 
are going to launch it, and get down hundreds of millions or 
billions of dollars and then find out something is not going to 
work.
    Mr. Kolbe. Mr. Cosgrave then will be the one that has the 
day-to-day management responsibility for this contract?
    Mr. Rossotti. Right.
    Mr. Kolbe. The press release announcing the award talked 
about the IRS partnering with the contractor. How is this 
partner relationship going to work? Mr. Cosgrave?
    Mr. Cosgrave. We are in the process now getting all the 
details worked out with the integrators, Computer Sciences 
Corporation. We started some initial work that we have funded 
to put all those pieces in place. Essentially, what we are 
responding to are legitimate concerns that have been raised on 
a couple of fronts to make sure we correct them. In the past, 
for example, the IRS found itself in the role of systems 
integrator, which meant that many different contractors would 
be used to do different pieces of the work but the IRS played 
the overall role of being the integrator in trying to pull 
these pieces together, being the overall program manager, et 
cetera.
    I think what both the Commissioner and I bring to the 
service, each with 25 years of being systems integrators in the 
private sector, is the fact that that is probably a function 
that can be best performed by someone out of the private sector 
who is professional at that. We are engaging as part of this 
partnership for the prime contractor to essentially be the 
systems integrator, pull all the pieces together, and 
essentially move the government up to a state of oversight in 
terms of how the contractor does--the prime does--that work, 
rather than trying to perform that work ourselves. That is 
probably the most significant change.
    Mr. Kolbe. There is a huge risk involved in any endeavor of 
this magnitude. I think we would all agree with that. Is the 
contractor sharing in any of that in this case?
    Mr. Cosgrave. Clearly as we go forward and get into the 
actual build of components, we will to the extent that we are 
allowed to, by procurement law, move as much of the sharing as 
we possibly can. The Commissioner, and one of my former 
companies as well, both have worked a lot at the state level in 
revenue systems, and there, actually the sharing arrangements 
have not only been on the cost risk side but also on the 
revenue side. To the extent we are allowed to do things like 
that we certainly entertain those types of structures where 
clearly there was shared risk.
    Mr. Rossotti. One point I think you have to understand is 
the prime contractor is the integrator and in that sense is our 
partner in working this. But as you get into specific projects, 
this will be implemented through a serious of specific projects 
that will each be very well defined and hopefully not overly 
excessively large in and of themselves, although everything in 
the IRS tends to be large. But they will be broken down into 
these pieces and the notion with the prime contract, that is 
the way we set up the RFP, is that in most cases the prime, the 
CSC itself, will not actually do the actual building. Sometimes 
they might but in most cases they won't. That will be done 
through usually a negotiator or competitive process with their 
partners or other vendors. Based on what they commit to, then 
that is what they will be held responsible for and they will be 
held financially accountable at that level. We visualize each 
of these projects having a very defined contractual arrangement 
that CSC will help us implement.
    Mr. Kolbe. Do you have an estimate for the total dollar 
value of this contract?
    Mr. Rossotti. No.
    Mr. Kolbe. None at this point. Is the contract structured 
in such a way that the contractor gets a certain dollar value?
    Mr. Rossotti. No.
    Mr. Kolbe. Since you issued the blueprint in May of '97, 
there have been a lot of changes that have taken place, 
including the Reform and Restructuring Act. Do you have 
procedures in place to assure that this stays current? That you 
can adapt this contract to these kinds of changes?
    Mr. Rossotti. That is exactly what we are doing now with 
CSC. You might want to mention. These different pieces thatPaul 
mentioned, that is exactly what we are doing, we are updating the plan, 
updating the blueprint before we launch into builds.
    Mr. Kolbe. Once you are starting to do this, you may have 
further changes----
    Mr. Rossotti. We will.
    Mr. Kolbe. It is a never ending process.
    Mr. Cosgrave. We have an ongoing, what is called 
configuration management program, in place that would keep 
track of the requirements right down to the actual program code 
for anything that is built into this program, so we are 
absolutely putting that in place. Just to be specific on this, 
you know, clearly the most significant change from when the 
Blueprint was originally begun was this concept of the 
reorganization into the four segments and so that in itself has 
created a fair amount of need to revisit the Blueprint and look 
at the changes. But fundamentally we are executing the 
Blueprint from a technology perspective as it was pretty well 
laid down, reflecting upon the changes that have taken place 
from a business perspective.
    Mr. Kolbe. Thank you. A couple of final questions. The 
questions will be quick. Hopefully the answers will be and we 
can all get out of here and see if Mr. Sununu has more. But on 
Y2K, Mr. Commissioner, I understand that you have told us that 
the systems were made year 2000 compliant in time for this 
year's filing season; is that correct?
    Mr. Rossotti. Most of them.
    Mr. Kolbe. Has any problems surfaced so far? I know it is 
early in the filing season. Have any problems surfaced related 
to the elevation in the systems?
    Mr. Rossotti. We have been prepared for them because we 
think they will surface given the amount of massive change. I 
am happy to say so far there has actually been only one problem 
that is fairly minor in nature that has actually surfaced, and 
we were able to react to that quickly. Our whole point is to 
make sure we identify them, fix them and don't have any 
taxpayer impact. That is what we are equipped to do.
    Mr. Kolbe. Have you gotten all the funds that you requested 
from OMB under the supplemental appropriation last year? Have 
you received all of those funds?
    Mr. Rossotti. They have released it as we require it.
    Mr. Kolbe. You have been getting what you have needed?
    Mr. Rossotti. Yes.
    Mr. Kolbe. No problem with that. Is this budget request the 
last year you are going to make a specific request for funds 
for Y2K?
    Mr. Rossotti. For fiscal 2000?
    Mr. Kolbe. Yes. You think there will be some going over to 
2001?
    Do you have an estimate for your total Y2K costs?
    Mr. Rossotti. I think our total life cycle cost--and this 
includes the main frame consolidation, our current estimate if 
you go back to the beginning to when it is completed, I can get 
the precise number for you but I believe it is around $1.3 
billion.
    [The information follows:]

    The attached chart indicates the life cycle costs for the 
Internal Revenue Service's Year 2000 (Y2k) efforts. The Service 
anticipates completing its Y2k conversion activities in FY 
2000. However, resources will need to be realigned to the 
Service's Operations and Maintenance costs in FY 2001 to 
support ongoing costs of Y2k-compliant systems and products 
such as software licenses and operations of the Integrated 
Submission and Remittance Processing (ISRP) and the Mainframe 
Consolidation program. It is possible that there may be some 
minor Y2k costs required in FY 2001. The Service is formulating 
its FY 2001 budget and approved costs will not be available 
until late in the year.

[The official Committee record contains additional information here.]

    Mr. Kolbe. How much have we either spent or had released to 
you so far?
    Mr. Rossotti. Well, if you count--I can get you those exact 
numbers, but there is $450 million in fiscal 1999 and I have 
forgotten----
    Mr. Kolbe. That is including the supplemental?
    Mr. Rossotti. Everything.
    Mr. Cosgrave. Total today would be slightly over one 
billion and we have a $250 million request here, so that gets 
up to about $1.3 billion.
    Mr. Kolbe. How much was before 1999?
    Mr. Rossotti. We had--I have forgotten what the number is. 
I actually have that number here.
    Mr. Kolbe. Just give us what money has been allocated and 
how much you project.
    Mr. Rossotti. We will give it to you by year.
    Mr. Kolbe. That would be helpful.
    Mr. Rossotti. I have it right here. $171 million in fiscal 
1997. $449 million in 1998. I believe it is about $450 million 
in 1999 and $250 million in 2000 and actually there will still 
be a little bit left for mainframe I think at 2001.
    Mr. Kolbe. That brings you up to $1 billion, $257 million.
    Mr. Rossotti. I misspoke. Actually, a small amount might go 
into 2001.
    Mr. Kolbe. I would suspect. Mr. Sununu?
    Mr. Sununu. No more questions.
    Mr. Kolbe. I think that this has been an extraordinarily 
productive hearing. Again, I appreciate your candor and I 
appreciate the help you give us to do our job. We want to 
reciprocate and help you do your job. We thank you very much 
for coming up and bringing your team here today. Thank you very 
much. We will have additional questions for the record.
    Mr. Rossotti. Thank you very much.
    Mr. Kolbe. This subcommittee is recessed until 2:00.

[The official Committee record contains additional information here.]


                                      Wednesday, February 24, 1999.

                      FINANCIAL MANAGEMENT SERVICE

                    BUREAU OF ENGRAVING AND PRINTING

                               U.S. MINT

                               WITNESSES

RICHARD L. GREGG, COMMISSIONER, FINANCIAL MANAGEMENT SERVICE
THOMAS A. FERGUSON, DIRECTOR, BUREAU OF ENGRAVING AND PRINTING
PHILIP N. DIEHL, DIRECTOR, U.S. MINT
    Mr. Kolbe. The Subcommittee on Treasury, Postal Service, 
and General Government will come back to order again for this 
afternoon's session. Let me just mention again for the record 
that the Ranking Member, Mr. Hoyer, is on the floor carrying a 
bill right now and hopefully will be able to join us before we 
finish here.
    We are very pleased this afternoon to have three 
individuals that manage the three very important agencies of 
our Federal Government responsible for our currency and for our 
coins and for our financial management: Mr. Richard Gregg, 
Commissioner of the Financial Management Service; Mr. Tom 
Ferguson, Director of the Bureau of Engraving and Printing; and 
Mr. Phil Diehl, Director of the United States Mint.
    It is probably fair to say, Mr. Gregg, that your agency is 
not well known to most Americans but it touches the lives of 
millions of them every week, every month. The Financial 
Management Service issues over 900 million payments each year, 
totaling over $1 trillion, including Social Security 
Administration and Veterans' Administration benefits and, what 
everybody loves to hear, tax refund checks. In addition, the 
Financial Management Service manages the systems that collect 
about $1.2 trillion in revenue for the Federal Government each 
year.
    In fact, we had the IRS this morning. I am beginning to 
wonder why we have the IRS since we have you collecting all the 
money.
    Because of the nature of its mission, the Financial 
Management Service is one agency of the Federal Government that 
could not afford to have its information systems not working on 
January 1, 2000. A year ago, Secretary Rubin identified FMS as 
an area of concern with regard to the Y2K or Year 2000 
compliance; that is the millennium compliance.
    It appears that FMS has made significant progress in its 
Y2K efforts in the last year but, as Mr. Gregg will point out 
in his opening statement, there is still work to be done and it 
is important to maintain the management focus that has been 
shown for the last year until this job is completed. We only 
have a very short time left.
    As my colleagues know, neither the Bureau of Engraving and 
Printing nor the U.S. Mint are dependent upon appropriations to 
fund their operations, However, both of these agencies are 
currently engaged in a number of initiatives that are of great 
interest to this subcommittee and to the American public. I am 
also pleased to hear that the critical systems for both of your 
agencies are already Y2K compliant and we hope you don't have 
to eat those words next year when you come here and we find out 
the computers and the presses and the coins stopped coming out 
on January 1.
    Anyone who doubts that concern about Y2K compliance is real 
should take note of the fact that the Federal Reserve has 
ordered an additional 2 billion notes from the Bureau of 
Engraving and Printing to meet what is expected to be a 
tremendous surge in cash held by the public as a hedge against 
Y2K computer problems. I think we will probably want to talk a 
little bit about that.
    Gentlemen, we look forward to hearing from each of you. The 
prepared statements, of course, will be put in the record so I 
would hope that you could summarize your comments since we have 
three of you here, summarize your comments, and then we will go 
to questions, and I will recognize Mr. Hoyer when he comes for 
any opening remarks he would like to make. Mr. Forbes, did you 
have anything you wanted to say?
    Mr. Forbes. No, thank you.
    Mr. Kolbe. All right. I think we will go down the line. We 
will start with Mr. Gregg.

                      fms year 2000 budget request

    Mr. Gregg. Thank you, Chairman Kolbe, members of the 
subcommittee. I appreciate the opportunity to talk about our 
year 2000 budget request and related issues. As you mentioned, 
Mr. Chairman, the FMS makes payments to well over 100 million 
Americans every year. We provide facilities and systems to the 
collection of taxes and other receipts, improvise 
governmentwide accounting and reporting and debt collection 
services for the Federal Government.
    We are requesting an appropriation of $202,670,000. In 
preparing our fiscal year 2000 budget request, we took a 
veryhard look at our requirements and requested no more than was 
necessary to enable us to meet our mission responsibilities. As a 
result, our fiscal year 2000 budget is less than the increase of 
nondiscretionary costs and only slightly above our fiscal 1999 budget 
level. While we have identified some programs where additional funding 
is necessary, these are largely offset by productivity gains.

                          year 2000 compliance

    Let me now turn to the Year 2000 computer problem or Y2K. 
Modifying and testing our 62 mission-critical automated systems 
so they will operate properly in the next century remains 
unquestionably our highest priority. We have given Y2K our full 
and unrelenting management attention, and FMS staff throughout 
the country have worked tirelessly to fix the problem. And I am 
pleased to report that we have made excellent progress since I 
was here a year ago.
    Let me briefly tell you about the status of two of our 
programs that affect most Americans: payments and collections. 
Today the systems that issue 86 percent of FMS's 860 million 
payments are Y2K ready. Social Security payments which affect 
millions of Americans and represent our greatest volume of 
payments have been issued through systems that are Y2K 
compliant since October of 1998. The FMS system that makes 
Social Security payments was certified Y2K compliant on 
December 16, 1998. We plan to have all of our remaining systems 
compliant by March 31 of 1999.

                              collections

    With respect to collections, FMS manages the processing of 
more than $2 trillion of Federal revenues. The Electronic 
Federal Tax Payment System, EFTPS, through which FMS collected 
$1.1 trillion of total collections in fiscal 1998 was 
determined to be Y2K compliant in December of 1998. We plan to 
have all remaining revenue collection systems compliant by 
March 31 of this year.
    While there still remain considerable work to be done, let 
me assure you, Mr. Chairman, that our mission-critical systems 
will be ready for the century date change.

                          electronic payments

    Another important goal for FMS is to increase electronic 
payments. We have made excellent progress in moving towards 
electronic payments and away from checks. Today 73 percent of 
non-tax payments are sent electronically compared to 55 percent 
in fiscal year 1995, and we expect continued growth in the 
months and years ahead. In fiscal 1995, FMS issued 421 million 
checks. Three years later, in fiscal 1998, we issued 325 
million, or 100 million fewer checks. Checks are much more 
costly than electronic payments and are 20 times more likely to 
be lost, stolen, damaged or forged than electronic payments.
    While there are significant advantages to electronic 
payments, we realize that for some individuals, receiving 
electronic payment would impose a hardship or financial burden. 
Therefore, waivers from the EFT mandate are available and those 
who choose these waivers will continue to receive checks. It is 
important to note that if an individual does not take any 
action to request a waiver, they will continue to get paid by 
check and there will not be any delay in their payment.
    For Federal payment recipients who do not have a 
relationship with a financial institution, Treasury will be 
providing the Electronic Transfer Account (ETA), low cost 
account through which financial institutions will provide basic 
banking needs for recipients without bank accounts.

                            debt collection

    Another important program for us is debt collection. FMS 
continues to make good, solid progress towards consolidating 
delinquent Federal debt and building the infrastructure needed 
to collect debts owed to the government.
    By any measure, this has been a successful year for the Tax 
Refund Offset Program. This program allows us to collect 
Federal debts and child support by reducing the amount of tax 
refund payment. From January through December of 1998, Tax 
Refund Offset collected more than $2 billion, $1.2 billion in 
delinquent child support and $864 million in delinquent Federal 
non-tax debt. That $864 million is up from $674 million in 
1997.
    This past year we put considerable effort into getting a 
regulatory structure in place and, to date, FMS has published 
12 rules to implement provisions of the Debt Collection 
Improvement Act. Treasury also has an ambitious schedule for 
expanding the use of offsets through 1999 and 2000. Offset is 
an important tool that allows us to collect debts by reducing 
the amount of Federal payments we make to recipients. Currently 
we are offsetting Federal retirement, vendor and some salary 
payments. Over the next year we will be adding Social Security 
payments for offset and expanding and further automating the 
offset of Federal salary payments. Not only will we be 
offsetting against a greater number of payments but it will 
include new categories of debt.
    The DCIA gave FMS authority to offset Federal non-tax debt. 
More recently, we have been authorized to collect Federal tax 
debt through offset, and under separate legislation we will 
collect State tax debt referred to us for offset.
    One of the most important and challenging issues over this 
past year has been the merger of the Tax Refund Offset Program 
into the Treasury Offset Program. I am pleased to report that 
the merger was successful and the first offsets were executed 
on January 18, 1999. We are in the early stages of the tax 
refund season so it is too early to estimate the dollar amount 
of debt collected. It is clear, however, that as a result of 
the 1999 merger, FMS has significantly increased the value of 
the debts in the debtordatabase for tax refund offset to $64 
billion from $16.7 billion in 1998.

                       government-wide accounting

    The final program I will discuss is governmentwide 
accounting. FMS has recently initiated a project to rethink how 
governmentwide accounting should be done in the future and to 
develop a new accounting system. The goal of the new system is 
to improve timeliness, accuracy, and access of accounting 
information. It will reduce redundant reporting and simplify 
accounting reconciliations by agencies. FMS provides a central 
accounting program function by controlling, aggregating, and 
reporting all transactions related to Federal Government 
receipts and disbursements. This project is not merely a study 
nor will it produce a quick fix. It will, however, be a 
multiyear effort designed to replace many of the current 
systems currently being operated by FMS and meet the changing 
financial management needs of our customer agencies and the 
public in general. It will bring about a fundamental change in 
the way we produce financial information and it will be less 
burdensome to the agencies who produce most of this 
information.
    In conclusion, FMS has many important and challenging 
program initiatives. Clearly our top priority is to ensure we 
have our automated systems operating in the next century. We 
will make sure we will accomplish that priority. At the same 
time, we are committed to moving forward on the other important 
programs that I have described.
    Mr. Chairman, thank you for allowing me the opportunity to 
present this statement.
    [The prepared statement of Mr. Gregg follows:]


[The official Committee record contains additional information here.]

    Mr. Kolbe. Thank you very much, Mr. Gregg. I think you 
heard the bells there for a vote. Since there is only one vote, 
I think if I go now there is less of a crowd in the elevators 
and I can get back faster, so we will take a quick break right 
now and we will resume with Mr. Ferguson when we come back. We 
will stand in recess.
    Mr. Hoyer. I am going to reconvene the hearing. Chairman 
Kolbe, I want to make it clear, said that was all right. I am 
not usurping in the absence of the Chairman. I want to make it 
clear. Not that I wouldn't do that, but bad form.
    Mr. Gregg, I understand you have testified.
    We will wait and see if the Chairman comes back quickly. By 
the way, as I told Phil Diehl, Mr. Portman and I have co-
sponsored a bill to try to simplify the application form for 
States and local governments for Federal programs in requiring 
unification of forms. The reason I was late and did not hear 
your testimony was because that bill was on the floor and so 
Mr. Portman and I obviously needed to be on the floor. But 
because I was on the floor, I voted right away and got over 
here.
    Mr. Gregg, we are very pleased and I hope you still are 
pleased with everything going well out in Hyattsville?
    Mr. Gregg. Yes, sir.
    Mr. Hoyer. They treating you all right?
    Mr. Gregg. Yes.
    Mr. Hoyer. You let me know if they don't. We will get on 
them hard. Every time I talk to any of those folks out there, I 
make sure that they are treating you well and that your people 
are happy and that we have the kind of quality environment for 
your agency and for your people that is required. Your budget, 
as usual, is not very controversial, nor should it be. Your 
testimony delivers a very positive message regarding Y2K. I 
have been killing time, Mr. Chairman.
    Mr. Kolbe. You mean you have gotten both opening statements 
from the other two?
    Mr. Hoyer. It is all done. If there are no 
furtherquestions, the hearing is adjourned. The budgets are approved 
and the hearing is adjourned.
    Mr. Kolbe. You mean you have just been filibustering.
    Mr. Hoyer. Filibustering would not be the adjective I would 
use for what I was doing. I was trying to entertain the group 
while you were away, just killing time until we had your pearls 
of wisdom to listen to.
    Mr. Kolbe. The pearls of wisdom are coming from the table 
down there, and we are ready to go with the BEP and the Mint 
here.
    Mr. Hoyer. Then I will ask Mr. Gregg questions later.
    Mr. Kolbe. We are going to take all three of the opening 
statements. We have gotten Mr. Gregg's opening statement. I 
think Mr. Ferguson is next.
    Mr. Ferguson. Thank you, Mr. Chairman.
    Mr. Kolbe. That is a hint to summarize.

                           summary statement

    Mr. Ferguson. And I will. As you know, the BEP operates 
under a revolving fund; therefore, we are not seeking any 
appropriations. The fund is operating well and efficiently. We 
prepare business-type financial statements which are audited 
independently by a public accounting firm. And for the 14th 
consecutive year, we have received an unqualified opinion on 
all of our financial statements.
    I might also add that we have recently come out with our 
1998 CFO report and I will be leaving a copy for staff at the 
conclusion of this hearing.
    In 1998, the Bureau delivered 9.2 billion Federal Reserve 
notes, including over 3\1/2\ billion of the new $50 and $20 
notes. We delivered 19.7 billion postage stamps to the U.S. 
Postal Service.
    During the year, we continued to pursue an aggressive cost 
reduction program and achieved significant efficiencies. 
Overall productivity increased by 1.5 percent. In addition to 
that, we reduced overhead staff by 8 percent over the past 2 
years.
    The Federal Reserve has estimated its currency requirements 
for fiscal years 1999 and 2000 at 11.4 and 9 billion notes 
respectively. The 1999 spike reflects the concerns, as you 
noted earlier in your opening remarks, about the Y2K issue and 
assuring the public that there is enough currency to meet any 
demands they may have. The Bureau will meet this surge in 
demand by hiring temporary employees and use of overtime rather 
than making long-term commitments to employees that we cannot 
fulfill over the next years.
    At the direction of this Committee, during fiscal year 1998 
the Bureau conducted a study to evaluate the most cost-
effective option to update our production capability in the 
Washington, D.C. area. The study concluded the most cost-
effective approach would be to construct a new state-of-the-art 
facility, assuming that currency demands remain strong. 
However, that study emphasized that no facility investment of 
this type should be made without a better understanding of the 
future demand for currency.
    Because of that need to better determine the long-range 
demand for currency, the Treasury Department has undertaken a 
study to look at the factors that could affect future demand. 
Preliminary work points to the potential of electronic mediums 
exchange, the impending introduction of the dollar coin, and 
the potential of longer-lasting currency substrates to affect 
greatly the potential for future demand of currency. Therefore, 
at this time, the degree of uncertainty surrounding these 
issues makes it extremely difficult to forecast future demand.
    Regardless of our facility's plans, however, we expect to 
be operating the current Washington facility for a minimum of 7 
to 10 years and we will continue to make investments in the 
Facility to keep it safe, effective, efficient, and a good 
environmental neighbor. We are installing four new currency 
presses in the Washington facility this year and they will be 
replacing four of our older models. Once those presses are 
operational, we expect savings of approximately $5 million per 
year.
    The Bureau continues to streamline. We have had buyouts in 
December of 1996 and 1997, resulting in reduction of staff from 
3,000 people in 1996 to approximately 2,500 people today, with 
no loss of manufacturing capability.
    Continued efforts on the redesign of currency: The new $20 
note was issued during this past fiscal year. It presented a 
number of new challenges, as the $20 note is a note used by the 
general public and in a wide variety of vending applications. 
We have worked very closely with that community to mitigate any 
problems in the field. These efforts will be greatly expanded 
and are much more important as we look at introducing a new $5 
and $10 note in the spring of 2000.
    We are also working closely with that community, including 
the National Automated Merchandising Association, transit 
associations, et cetera, and the large vending industries as we 
look at the potential of any change in the $1 note.
    The Bureau continues to be responsive to any requirements 
from the U.S. Postal Service, including 3.3 billion non-denominated H 
stamps during 1998 and supporting them in their efforts for the new 
rate change that they implemented this past month.
    As you noted, we are Y2K compliant for our core management 
systems and we have contracted with an independent third party 
to review the results of the testing and to certify our Y2K 
compliance.
    The Bureau awarded a new 4-year contract for currency paper 
on February 11. Competition was received for this contract. The 
award comes more than 2 years after the Bureau began the 
process with the posting of a draft solicitation for the 
currency paper on the Internet. After industry feedback on the 
draft solicitation, final solicitation was issued on May 2, 
1997. Solicitation was structured to promote competition and to 
eliminate as many of the competitor barriers as we have 
identified without lowering or compromising the specifications 
or the requirements.
    During the past year, the Bureau conducted wage 
negotiations with 13 unions and successfully completed these 
agreements by July of 1998. The negotiations were completed 
without any third-party intervention or litigation, and I would 
like to thank both management and labor in this effort. It was 
a new experience for us. It was one that was challenging but 
resulted in a good contract from both sides and one where every 
Bureau employee understands how their wages will be set for the 
next several years.
    This concludes my opening remarks, Mr. Chairman, and I am 
happy to answer any questions.
    [The prepared statement of Mr. Ferguson follows:]

[The official Committee record contains additional information here.]


    Mr. Kolbe. Thank you very much. We will hear from Mr. Diehl 
and then we will go to questions.
    Mr. Diehl. Thank you, Mr. Chairman. I will summarize my 
remarks.
    First of all, 1998 was a very good day for the United 
States Mint. We shipped 16.5 billion coins, which was a 
substantial rebound from the previous year. We returned $562 
million to the U.S. Treasury from our circulating coinage 
production, profits basically to the U.S. Treasury.
    We continue to make progress in upgrading our manufacturing 
capabilities, increasing our capacity for 25-cent production 
and for the dollar coin in anticipation of two new programs. 
And we also make good progress in reducing the costs of our 
production.
    Our customers at the Federal Reserve Bank awarded us with 
63 percent excellent or very good ratings in our annual 
customer satisfaction survey on the circulating side of our 
business.
    The numismatic side of our business was every bit as 
interesting and busy. We sold over 15 million numismatic 
products last year. We made a profit of $22 million, which I am 
happy to report because there have been some lean years in the 
last few years in the numismatic line of business.
    We also recorded record bouillon eagle sales, particularly 
gold bouillon sales. We sold over 1.5 million ounces of gold 
bouillon in 1998. We took a 58 percent market share in the gold 
bouillon market. I think that is probably our highest market 
share ever.
    Also, with the platinum eagle, we took an 80 percent market 
share in only its first year in the marketplace, so for the 
eagle, it was a particularly good year.
    We also launched a 50 State Quarters Program, beginning 
production of the Delaware quarter on December 7, and just 
Monday, this week, beginning production of the second quarter 
in the 50-coin series, this one for Pennsylvania.
    On the protection side of our business, I am happy to 
report that we didn't have anything interesting happen. We 
successfully protected 2,200 employees, nearly 1 million 
visitors to our production facilities, over $1.6 billion in 
coinage that we produced and nearly $100 billion in assets.
    Mr. Chairman, I would like to take a retrospective look, if 
I can, at what we have accomplished over the last 5 years. I am 
coming to the end of my 5-year term this year and I want to 
reflect back on some of the promises that I made when I 
testified in front of the Senate confirmation hearing and in 
front of the Senate Banking Committee in 1994. I identified 
four priorities for the United States Mint. One was in the area 
of financial management. This was a particularly weak suit for 
us at the United States Mint. We were one of the first Federal 
agencies to come under the requirements of the Chief Financial 
Officers Act and the annual auditing requirements of that act. And our 
first preliminary audit had found that our books were in such confusion 
that they really couldn't render an opinion on the status of our 
financial management.
    At that time I set as an objective of getting a clean audit 
opinion within 2 years. And in fact, we achieved that in 1 
year, and every year since we have had a clean audit opinion. 
We have also reduced our material weaknesses under the 
Financial Management and the Financial Managers Financial 
Integrity Act. We have reduced the weaknesses from 8 to 1, and 
we expect to clear that last material weakness this year.
    Also, in an important area of managing the enterprise, we 
have been able to decrease the amount of time it takes us to 
close our books on a quarterly basis. Five years ago we 
struggled to close our books within 90 days at the end of a 
quarter. In some quarters we couldn't do it. We simply had to 
move on to the next quarter. In 1999, we expect to be able to 
close the books, each and every quarter, within 10 days. You 
can imagine what a profound impact that has on our ability to 
manage the enterprise.
    The second area in which I established as a priority for my 
next 5 years was in the area of ending the proliferation of 
commemorative coin programs. This is really a program that was 
suffering from its own success. As a result, Congress was 
authorizing too many programs and flooding the market with too 
many coins. In 1996, as a result of our work with the Congress 
and the Citizens Advisory Committee appointed by Congress, we 
passed the Commemorative Coin Act of 1996. The result of this 
act is a 90 percent reduction in authorized mintage levels in 
1997, 1998, and 1999 compared with the previous 3 years. It 
also has protected the Mint against any financial losses which 
we were suffering before the enactment of the bill. It also 
ensures financial accountability on the part of the beneficiary 
organizations that receive funds from the commemorative 
programs.
    As a significant measure of the success that this law has 
had on the commemorative program, we now see secondary market 
values of our commemorative coins issued since 1996 actually 
holding their own or, in some cases, going up instead of having 
the precipitous falls we saw during the eighties or early 
1990s.
    But a word of caution here, Mr. Chairman. We came close to 
breaking the discipline of the 1996 act at the end of last 
year. There was a great deal of effort in Congress to attempt 
to pass an omnibus package of commemorative coin legislation at 
the end of 1998. And it was only through the cooperative work 
of the Citizens Advisory Committee, the United States Mint, and 
your office and the chairmanship of the House Banking Committee 
that we were able to prevent that from happening. But it came 
very close and it could happen again.
    The third priority I identified 5 years ago was making the 
Mint a modern manufacturing operation. And thanks to the 
support of this committee, we have had some really stellar 
achievements. Of course, in the last 5 years, we have moved to 
a revolving fund where we are able to invest in a capital 
budget, much like a business would do, a luxury we had never 
had in the past.
    And in the meantime, we have been making up for lost time. 
We have aggressively been investing over the last 2 years in 
improvements in plant and equipment, increasing the capacity in 
the efficiency of the United States Mint. The appearance of the 
factory floors at virtually all of our facilities is 
dramatically different today than it was only 3 years ago.
    We have also invested in communications and information 
systems. We are the first government agency anywhere in America 
to implement an Enterprise Resource Planning System, an 
integrated information system that ties, knits together all of 
our information systems, and we also are proud to say we now 
have modern telecommunications equipment throughout our 
facilities instead of the vintage 1960s equipment we had 5 
years ago.
    We have also invested heavily in environmental health and 
safety equipment and other facilities because as you know, our 
production plants for the most part are in central cities and 
we have not had really a commendable record on the safety side 
in years past. Between 1993 and 1998, we have seen a 44 percent 
reduction in OSHA-reportable incidents as a result of this 
investment. And we have had a dramatic decline, even from these 
levels, here in 1999.
    Also, on our road to becoming a modern manufacturing 
organization, we have greatly increased our investment in our 
employees. We have focused a great deal of attention on 
training our employees, especially front-line supervisors, but 
other employees as well, and we have dramatically increased our 
training budgets over the last 5 years.
    We also significantly reformed the management of the United 
States Mint. Five years ago we had 10 presidential appointees 
with Senate confirmation in this little agency of 2,200 
employees. Today we only have one. I don't know how many PAS 
positions have been eliminated over the last 5 years, but I 
suspect more than half of them were eliminated at the United 
States Mint. That has greatly increased the efficiency in the 
integration of our operations at the Mint. And that was done as 
a result of the support of not only the administration but also 
the Congress, and was enacted by law just 2 years ago. Of 
course, Mr. Chairman, we take great pride in the strong 
relationship that we have with our union,undoubtedly one of the 
strongest in the Federal Government.
    The fourth area that I identified was that we sought to 
secure our current customer base and expand our customer base 
into new demographic areas. And we have had a good deal of 
success in that area and we expect to have continuing success, 
especially with the 50 State Quarters Program.
    Looking ahead to 1999, we have several major initiatives. 
One, of course, is this 50 State Quarters Program that we just 
launched in January of this year. And I can tell you, Mr. 
Chairman, that the public response to that program has been 
overwhelmingly positive. The demand only 2 months into the 
program is easily at the high end of the range that we forecast 
under the Coopers & Lybrand study that Congress authorized 3 
years ago.
    Also, we are making good progress in developing the alloys 
and the design for the new dollar coin. And I know that is an 
area of special interest for you, and I suspect you may have 
questions on that. So I will hold any further comments until 
you have questions. But we are definitely on track, Mr. 
Chairman.
    As you noted, we are now Y2K compliant with the 
implementation of our ERP last year, and we have aggressively 
gone out beyond the borders of the United States Mint, even 
beyond the borders of the United States to ensure that our 
critical suppliers are also Y2K compliant. We have conducted 
audits or we have had consultants conduct audits in 19 of our 
critical suppliers.
    With that, Mr. Chairman, I would like to wrap it up and 
take any questions that you have.
    [The prepared statement of Mr. Diehl follows:]


[The official Committee record contains additional information here.]

    Mr. Kolbe. Thank you very much. Thank you, all three of 
you, for your opening statements. Mr. Hoyer, if you need to be 
some place, I would be happy to let you go for questions.
    Mr. Hoyer. No, I am fine.

                          year 2000 compliance

    Mr. Kolbe. Let me see what I have got here. A few questions 
for Mr. Gregg on FMS and then we will talk with the Mint and 
BEP together here. You talked about the significant progress 
you have made since last year and I think you are to be 
commended for that. What grade, by the way, did you get from 
Mr. Horn's subcommittee, or did they give you a grade 
specifically?
    Mr. Gregg. The Treasury got a B minus, up from a C.
    Mr. Kolbe. I think it is important that we don't get 
complacent with the work that has been done, and I assume that 
still remains, if not the highest, a very high priority for 
you, the Y2K compliance.
    Mr. Gregg. It is the highest.
    Mr. Kolbe. I think it should be, considering the mission of 
your agency. Which of your mission-critical systems are not yet 
compliant?
    Mr. Gregg. We have a total of 62 mission-critical systems 
and right now we have 38 of those that are compliant. We have 4 
more that we actually retired. That gives a total of 42. So we 
have 20 that we are still working on. For any of those, in all 
cases except for one, we have actually completed the coding. 
And what we are doing is testing the systems and we will have 
those implemented by the end of March. The one system that we 
are still doing coding on is an internal government accounting 
system called GOALS. Thirteen of the 16 subcomponents have 
completed coding and are actually implemented and we will have 
the other 3 done between now and the end of March.
    Mr. Kolbe. Even within your 60 critical systems, the ones 
that are now fully compliant are the ones that are the largest, 
the biggest ones--like Social Security, writing those checks.
    Mr. Gregg. The way we went after it was to identify, 
especially in the payments area, the largest customers we have 
such as Social Security----
    Mr. Kolbe. Kind of tackle them in that order.
    Mr. Gregg [continuing]. The IRS, and 86 percent of the 
dollar amounts or the number of payments that we make each 
year, those systems are already compliant. So 86 percent of our 
payment systems are compliant.
    Mr. Kolbe. With a short timetable remaining before the 
millennium, do you have a system in place to deal with problems 
as they arise now?
    Mr. Gregg. We have, I think, an excellent program for 
contingency. One of the features we have is atelecommunication 
network that is around the country and we have that run out of the 
Hyattsville office. We also have at that office a backup generator that 
is, I think, pretty unique and will click in instantaneously if there 
is some power lost.
    Beyond that, we have a backup telecommunications site at 
Kansas City so that if something happened to Hyattsville, which 
is highly unlikely, Kansas City could run the 
telecommunications network.
    For the computer centers that actually make the payments 
and issue the checks, we are configured so that any of three 
computer centers could run the whole operation if they needed 
to--Austin, Philadelphia, or Hyattsville. So we have redundancy 
built in. If something would happen to one of those sites, we 
could shift work and do it at one of the other regional 
financial centers.
    Mr. Kolbe. You have requested and received money from the 
omnibus appropriation bill for, last year, Y2K.
    Mr. Gregg. Last year we got $6 million.
    Mr. Kolbe. Out of the omnibus appropriation?
    Mr. Gregg. Yes.
    Mr. Kolbe. You have requested that out of OMB and it has 
been released.
    Mr. Gregg. Yes.
    Mr. Kolbe. You are getting what you have requested.
    Mr. Gregg. We have the funding we need.
    Mr. Kolbe. Do you expect you are going to have to go back 
for some more of that?
    Mr. Gregg. No.
    Mr. Kolbe. No. You have everything you need?
    Mr. Gregg. Yes.
    Mr. Kolbe. Are all your systems being tested for exchange 
of information with other Federal agencies?
    Mr. Gregg. They are. And with many of them, we are a long 
way away. In other cases, we are going to be doing that in the 
next few months. But, for example, on Social Security, we did a 
lot of testing there. We are going to be doing additional 
testing with IRS and with VA on the payment side, and we are 
going to be doing more testing on the collection side.
    Mr. Kolbe. Going back to my previous question, then, in 
your 2000 budget, you are not requesting additional funds for 
Y2K?
    Mr. Gregg. No, we have identified some money that we are 
going to spend about $800,000 but it is not an additional 
request.

                          electronic payments

    Mr. Kolbe. I was intrigued by some of the comments you made 
about electronic payments. I think your testimony mentions that 
recruits at the Marine Depot are now being paid electronically. 
Does that, from an economic standpoint, have the same impact as 
paying them with a check or with cash? Are we getting the float 
from that? How is that handled? If you give me a card with $100 
on it, is that being debited against the United States 
immediately or is it held there until I actually go out and use 
it?
    Mr. Gregg. I believe it is held until it is actually used.
    Mr. Kolbe. So we basically have the same as we have with 
currency; we have the same advantage of float, basically.
    Mr. Gregg. And the biggest advantage really is getting away 
from the checks and all the currency that has been used for 
those bases.
    Mr. Kolbe. Of course, that is one of the concerns we have 
had about currency here is that as we move towards a 
checkless--and this still would apply as others move in to fill 
the gap as we move towards a ``currencyless'' society--we are 
not going to have the advantage of float.
    Mr. Ferguson, you can jump into this here if you wish. You 
are saying if it is the government cards, it is exactly the 
same as if it is currency. Would you agree with that? Is that 
the way it would appear to be from an economic standpoint?
    Mr. Hoyer. Mr. Chairman, if you would yield. I am not sure 
I follow you. If you send a check as opposed to electronically 
transferring it----
    Mr. Kolbe. I was thinking of it in terms of currency 
versus--if a recruit goes down that day and cashes his check, 
he has got pieces of paper from the Federal Government and he 
is holding onto paper until he spends it.
    Mr. Hoyer. We debit our account presumably right away.
    Mr. Gregg. If it was cash, it would be debited immediately.
    Mr. Kolbe. Go ahead, Mr. Hoyer.
    Mr. Hoyer. On the check, you are right. But if you do it in 
the electronic transfer, obviously you don't have any float. 
The money moves immediately; right?
    Mr. Kolbe. No. They issue me a card with $100 on it, the 
government still holds on to that $100 until I go down to a 
store and it is taken out of there.
    Mr. Gregg. I will double-check this for the record, but it 
is my understanding that we work through financial agents and 
we don't get charged until the card is used. So to the extent 
that that takes place later, if someone came in and got the 
full amount of pay and currency, we would be charged 
immediately. But I can double-check that for the record.
    [The information follows:

                        Holding ``Float'' Value

    For all of our stored value card projects, our agent bank 
establishes a funds pool, which is used to support transactions 
for all the cards that the agent bank issues. While we account 
for the value on each card separately, there is one 
consolidated funds pool account. At the time cards are issued, 
the government makes a payment into the funds pool to back the 
digital value on the cards. For the military pilots, this 
happens daily. The funds pool is used to settle with all the 
merchants that accept the card.
    The float value of the funds pool is remitted to Treasury, 
calculated at the 13 week T-bill rate. Under our agreements, we 
have the option of getting a direct payment from the bank, or 
we can use the float value to obtain additional services, based 
on our discretion.

    Mr. Kolbe. Do you have any idea how many people are not 
going to be receiving payments electronically because we are 
liberalizing the waiver requirements?
    Mr. Gregg. The success of the EFT has, been pretty 
extraordinary. As I mentioned, we had a 50/50 split in fiscal 
1995 between payments and checks, and as of January of this 
year, 73 percent of the payments that we make were being made 
electronically. We haven't seen really any change as a result 
of the more liberal waivers from the EFT-99. Both Social 
Security and VA, for example, have signups running around 75 
percent, in some cases higher for new enrollees. It could 
happen but we haven't seen it yet.
    Mr. Kolbe. You said it is going to be very low cost. Is 
electronic transfer significantly lower cost than issuing a 
check?
    Mr. Gregg. Yes. Overall, the savings to the government have 
been phenomenal. It costs us, on average, to issue a check 
about 45 cents. It costs us about 4 cents to issue an EFT 
payment.
    Mr. Kolbe. I have a few other questions for the Mint and 
the BEP. But, Mr. Hoyer, go ahead.
    Mr. Hoyer. I think we were talking about two different 
things. I see what you are talking about in terms of the cards.
    The electronic transfer I was talking about was where you 
either receive or pay by depositing in the other's account, in 
which case there would be an immediate debit to the Federal 
account and there would be no float for the government. I see 
what you are talking about on the cards,where the cards would 
be outstanding for some period of time until they are drawn down.
    The Chairman was talking about Y2K, also talked about the 
electronic--and you talked about the liberal waiver policy. How 
is that affecting the ability to get people to----
    Mr. Gregg. So far it hasn't really seemed to have affected 
it. The signup rate is still very high for VA and Social 
Security and we hope to see that continue. At the same time, 
the agencies are doing a lot of work and Treasury is doing a 
lot of work to educate the public about what the options are. 
While we would like to see more and more people get their 
benefit payments electronically, we also are doing a lot of 
work around the country to make sure they understand that they 
don't have to if there are reasons, either because of financial 
or geographic or a number of other reasons, why they really 
prefer to get the check.
    Mr. Hoyer. Are you working with the banking or financial 
institutions to try to facilitate electronic repositories for 
people who do not have sufficient funds and don't maintain bank 
accounts?
    Mr. Gregg. Yes, we are. We are in the process of 
establishing an electronic transfer account, an ETA. One of the 
requirements of the Debt Collection Improvement Act was for 
Treasury to establish a low cost account, particularly for 
individuals who traditionally had not had bank accounts. We are 
in the process of finalizing what that account is going to look 
like right now in Treasury, and we plan to begin the process of 
rolling that out sometime this summer and work with financial 
institutions around the country to encourage them to offer this 
account to individuals. It is kind of a bare-bones account.
    Mr. Hoyer. How do you contemplate the institutions making 
themselves whole for that cost? Obviously there is a cost of 
maintaining an account. One of the reasons they require a 
minimum balance is so they will have a minimum balance to get a 
float on it, if you will, that they can then amortize their 
administrative costs in maintaining the account. How will they 
do that?
    Mr. Gregg. There are two things. One is, at least in the 
proposal that has been out for comment and that we are now 
considering, Treasury would pay a fee of $12.60 for each 
account that was established.
    Mr. Hoyer. So you would subsidize, in effect, the 
maintenance of the accounts.
    Mr. Gregg. Right. In addition, our proposal would have the 
individual recipient paying a fee of $3 per month to have the 
account.
    Mr. Hoyer. How much do you project that 12.6 would cost us?
    Mr. Gregg. I don't know if we have made really great 
projections on that, Mr. Hoyer. The question of just how many 
people will be interested and how many financial institutions 
will participate is still something that we are exploring. 
There is an estimate of between 8 and 10 million individuals 
who currently do not have bank accounts so, you know, it could 
be sizable. But we really don't know.
    Mr. Hoyer. If you are talking 12.6 for 10 million people, a 
pretty good chunk of change.
    Mr. Gregg. The one thing that has been happening just in 
the last few months, is that for people who receive the SSI 
payments, the rate of shifting from checks to electronic 
payments has improved quite a bit. Traditionally that has been 
quite a bit lower. So it is shifting across the board.

                            debt collection

    Mr. Hoyer. In your statement you spoke positively about 
FMS's merger of the Tax Offset Program with the Treasury Offset 
Program. What are the advantages of having FMS doing tax 
offsets and how have things been going since mid-January?
    Mr. Gregg. The advantage is really to have one program in 
charge of offsetting all the payments we make. I think one of 
the things we have done in this past year is work to be a 
little more accommodating for agencies to be able to get their 
debts in more than once a year. We have had the window open 
longer and we have also been able to offset some payments that, 
for one reason or another, had not been offset.
    How have things been going? I think anytime you implement a 
major change like that, there are always some bumps along the 
way, and we have had a few of those, but they haven't been show 
stoppers in any way, and they have been dealt with very quickly 
by our folks.
    We have, for example, a facility in Birmingham that is a 
debt collection center, and they have had quite a few more 
calls than they had planned, and they had planned very well on 
having a high volume of calls. They have worked around the 
higher volume than they had planned for. Those sorts of things 
have happened but we have been able to handle it. So far, I 
think, even though we are very early into the tax season, I 
believe we have collected over $300 million already since 
January in offsets.
    Mr. Hoyer. That is terrific. I think in the long term, that 
is going to be a good program.
    Mr. Chairman, I have questions for BEP. You want me to 
proceed?
    Mr. Kolbe. Go ahead.

                           currency equipment

    Mr. Hoyer. Mr. Ferguson, in your testimony you state that 
Fort Worth has brought new equipment online and that 
productivity has increased as a result.
    Mr. Ferguson. The new equipment in the opening 
statementreferred to equipment we were bringing into the D.C. facility.
    Mr. Hoyer. And is the new equipment in--I have heard that 
part of it as well. That is what? I-8 to I-10?
    Mr. Ferguson. I-8 to----
    Mr. Hoyer. I just wanted you to know that I had seen the 
comment that you made there.
    With reference to the new equipment then, do you expect 
D.C.'s productivity to increase or has it increased as a result 
of that?
    Mr. Ferguson. The first of those two presses--there are 
four being installed. Two are being installed right now. They 
will be operational by April, at which time we will see the 
increase in efficiency and productivity reflected with those 
two presses. Two additional presses will be installed starting 
probably next fall to December or so, as we finish that surge 
capacity that we need for the Y2K demand.
    In addition to that, we have put in three new overprinting 
presses in our Washington facility, and those provide a new 
capability in that there is a third more fountains, which is 
the ability to print three inks rather than two, which is 
required for some of our new currency, especially the $20 
denomination.
    Mr. Hoyer. What constraints if any are there to the 
installation of new equipment and the efficient use of that 
equipment by the present structure at the Washington facility?
    Mr. Ferguson. The current 14th Street facility, in order to 
install new, modern, very large, heavy, capital equipment, we 
are limited to normally the first or basement floors, so we 
can't utilize the entire structure to install that kind of 
equipment. So that does require us to think a little bit and to 
plan ahead. There is also, of course, the material handling 
issues that are incumbent to a multistory, multiwing facility 
as opposed to a one-story facility such as Fort Worth. So we 
have to plan a little better. We have to utilize that facility 
and that space. But there is sufficient space and sufficient 
flexibility to meet the demands of today for currency.
    The concern that we have for the future as we look at the 
currencies, the next generations of currency that we will be 
required to produce, that inevitably it will require additional 
manufacturing steps.

                         future currency demand

    Mr. Hoyer. And this is your concern; and what is going on 
now in terms of your projection of future demand?
    Mr. Ferguson. Future demand, as far as both number of 
pieces, which is what we have traditionally thought of as 
demand but now we have to think of value added--how many 
manufacturing steps will be required, what do we need to do to 
add sufficient security to the note to be able to meet the 
challenges of the next century? So that as we look at designing 
a new facility at some point in the future, being able to build 
in flexibility as far as volume as well as capabilities.

                           facility planning

    Mr. Hoyer. When do you expect to have--and this will be my 
last question. I see Mr. Forbes has come in. When do you expect 
to have a good sense of demand and, therefore, what facilities 
you will need to have available?
    Mr. Ferguson. It is probably the most difficult question we 
are facing right now because of all of the uncertainties that 
are out there. There are the issues that are pushing us towards 
additional capabilities requirements, especially in the area of 
security and counterfeit deterrence. And there are a number of 
unknown factors as far as the number of pieces, the issues you 
heard discussing with FMS as they relate to cards and the 
potential of the reduction of the use of cash as a medium of 
exchange, counterbalanced with its ever-increasing demand 
overseas as a store of value. The potential of the dollar coin, 
the potential of new substrates.
    So right now this is a very challenging issue, that the 
Department has established the interagency group that I sit on, 
along with the Mint, the Federal Reserve, that are looking at 
this on a quarterly basis in order to come up with the best 
possible numbers in order to give us an idea of how we want to 
invest in the future of the Bureau of Engraving and Printing.
    Mr. Hoyer. I didn't get an answer. And I understand what 
you are saying, the difficulty of giving an answer. I am just 
following up, Mr. Chairman.
    When do you think you will be in a position to make a 
decision as to what you want to do with the Washington 
facility? Obviously because of its physical constraints, as I 
understand it, at some point in time we are going to have to 
decide whether or not we do need a new facility. What is your 
timeline for that decision?
    Mr. Ferguson. I certainly expect that we would need to be 
making that kind of decision prior to our being in full 
production of a new currency design, and that would be if you 
are talking 5 years out for a new design or 7 years out for a 
new design, certainly within the next 2 years we would need to 
be finished with making all the analysis in determining what we 
need.
    Mr. Hoyer. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Mr. Forbes.

                        treasury offset program

    Mr. Forbes. Thank you, Mr. Chairman. Mr. Gregg, if I might, 
I know that one of our priorities certainly is child care and 
one of the biggest problems associated with child care, of 
course, is affordability. As policymakers we try, Ithink, to 
ensure that child care costs are reasonable and that the taxpayer has 
the resources to pay for child care to an extent that means giving 
credits or the like.
    But another area that is of equal concern, I think, is the 
collection of child support payments from delinquent spouses. 
And I know you referenced in your statement collecting, I 
think, $1.2 billion. I commend you, frankly, for the leadership 
that you are showing in that area.
    Could you elaborate more specifically for me, if you would, 
on the steps that your office is taking to get the States to 
participate more in your program and cooperate, and if you have 
got some thoughts about incentives that we in the Congress need 
to be thinking about to get more participation?
    Mr. Gregg. Yes, sir. The $1.2 billion that we collected 
last year was offsetting the tax refund payments. And I expect 
that this year, my guess would be that that will be matched or 
perhaps exceeded. In FMS we have another program that we call 
administrative offset and there are other types of payments 
that are offset such as Federal salary, OPM annuity, Social 
Security, and some others. And the States voluntarily 
participate in that. We have, I believe, 17 or 18 States that 
are currently participating in that, and we meet quite often 
with the people in Health and Human Services about the program. 
I expect that that will expand over the next year or so as we 
are able to offset more of Federal salary payments--we don't 
have that entire program rolled out--and also as we move into 
offsetting the other benefit payments such as Social Security. 
We have meetings very frequently with people in HHS who really 
are the interface with us with the States, and as we add those 
additional payments to our administrative offset program, I 
expect that the States will be participating more, and 
therefore more child support payments will be collected.
    Mr. Forbes. To what extent is there cooperation from other 
Federal departments and agencies like the Small Business 
Administration and others with your program in that area?
    Mr. Gregg. I think generally it is going pretty well. I am 
not sure I would have said that a year ago, but we have been 
working very closely with all the agencies to do two things. 
One is to get them to refer debt to us so we can offset. Again, 
not the tax refund but the administrative offset. And I think 
in that area, I think our estimate is that a total of about $29 
billion is eligible to be referred to us for offset, and 
currently we have about $21 billion of that referred to us. So 
in that part of it, it is going pretty well.
    The other part of it is what we call cross-servicing, where 
actually FMS goes out through our Birmingham office that I 
mentioned and sends out a letter to the debtor and try for 
about 45 days to collect the debt ourselves. If we are then 
unsuccessful, we pass it along to a private collection agency 
that we have a contract with. There I think the total amount 
that is eligible to be referred to us is about $8 billion, and 
so far we have about $2 billion that has been referred.
    We are working very hard with the agencies to get them to 
refer more debt, and part of it has been the systems that FMS 
has had in place. There is a different system for the offset 
than for the cross-servicing, so we have had to work with 
agencies to try to figure out the best way to get the job done 
at the same time FMS and the other agencies are facing Y2K 
issues. So it is difficult to get everything done in this year.
    Mr. Forbes. Let me ask you again about the SBA. Is that one 
of the agencies that is working with you folks too in the 
collection effort?
    Mr. Gregg. Yes. I am not sure but--we can get that for the 
record. That is one of the larger creditor agencies and I think 
that they have been supportive, but I can provide specific 
information for the record.
    Mr. Forbes. I would appreciate it, perhaps to elaborate on 
that, if you could provide for me a list of those departments 
and agencies that are currently working with your agency in 
those areas. It would be good for us to know, I think, on this 
committee which departments and agencies are working with you. 
And if there are problems, whether incompatible computer 
systems or other reasons, I would like to know that. I think my 
colleagues would probably like to know that as well.
    [The information follows:]


[The official Committee record contains additional information here.]

    Mr. Forbes. Let me just ask you also on the child support 
system, has that been run--all the traps on the Y2K problems 
have been run in that particular area as well?
    Mr. Gregg. Yes, sir. Our Treasury offset program is Y2K 
compliant.
    Mr. Forbes. I would just like to join the Chairman and 
other members of the committee who have applauded you folks on 
getting ahead of that problem. We appreciate it very much.
    Mr. Gregg. Thank you.
    Mr. Forbes. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Mr. Forbes.

                         one dollar note design

    Mr. Ferguson, last year in your testimony, you said there 
were no plans to redesign the $1 Federal Reserve note other 
than a very minor change you were going to make for the 
visually impaired. And following that up, as you know in the 
conference report, we had report language that reiterated that, 
saying that we direct that there be no redesign of the $1 
Federal Reserve note.
    This year in your testimony, you say, quote, ``Although no 
decision has yet been made on the $1 note, we are working 
closely,'' et cetera. What is going on here? Why are you 
changing your position?
    Mr. Ferguson. The decision that hasn't been made is 
relative to that feature for the visually impaired.
    Mr. Kolbe. We are just talking about that feature, because 
I was going to say from a counterfeiting standpoint there 
certainly couldn't be much reason to redesign the $1 bill.
    Mr. Ferguson. There is not. We are working now to determine 
whether that small change will--how that will affect, as is 
directed also in the report language, working with the vending 
machine community to assure that there is not a Draconian 
impact from making some kind of change that would affect them 
and have to require all the machines in the field to be 
reprogrammed.

                             counterfeiting

    Mr. Kolbe. Speaking of counterfeiting, we had the Secret 
Service yesterday, and I suppose I probably should have asked 
this question then of them. But maybe you can help me. You are 
not going to be very helpful here, but it just occurred to me 
that the Secret Service told us yesterday that even though the 
amount of counterfeiting per million dollars was less than they 
had projected, it is still up over last year. Do you know if we 
are finding any significantly smaller amount of counterfeiting 
going on with the new currency? In other words, is the new 
currency having its effect on reducing counterfeiting?
    Mr. Ferguson. Certainly the reports that we have received 
from the Secret Service indicate that the new currency is doing 
its job. There are counterfeits of it--there are no 
counterfeit-proof documents out there--but that the 
counterfeits of the new currency, the features have held up 
very well, that if people were looking at those features--the 
thread, the color shifting ink, that they would in fact be able 
to identify those notes.
    The increased counterfeiting that has been noted by the 
service this past year reflects mainly to those printed by ink 
jet or computer-type devices, and those features in the new 
notes are specifically designed to not reproduce on those types 
of equipment. So it is a matter of a good note design, good 
public education, and good law enforcement all working 
together.
    Mr. Kolbe. As you said, there is no such thing as a 
counterfeit-proof and there are different degrees of how 
counterfeit-proof a note may be. People in retail stores are 
not looking very carefully as they take a $20 bill and so if 
you can pass a few of them off.
    Mr. Ferguson. The number of counterfeits is in the total 
system so small, so that quite often it is difficult to get 
people excited about spending a lot of time looking at it, 
because most of us have never received a counterfeit note in 
exchange and we are very comfortable with the system. Our goal 
is to keep it that way.

                        currency paper contract

    Mr. Kolbe. Mr. Ferguson, regarding the paper used for your 
currency, you indicated in your testimony you awarded a 
contract, a paper contract on February 11. Who is that to?
    Mr. Ferguson. Crane Paper Company in Dalton, Massachusetts.
    Mr. Kolbe. No surprise there, I guess. What is the value of 
this contract?
    Mr. Ferguson. The approximate value total for the 4 years 
is approximately $262 million.
    Mr. Kolbe. The total 262 million.
    Mr. Ferguson. Right.
    Mr. Kolbe. 262.
    Mr. Ferguson. 262; yes, sir. And that is for----
    Mr. Kolbe. Over 4 years?
    Mr. Ferguson. It expires on September 30, 2002 so it is 
less than 4 years.
    Mr. Kolbe. How are the prices under this bid compared to 
what we had under the bridge contract?
    Mr. Ferguson. Using a present value calculation--
    Mr. Kolbe. Present value?
    Mr. Ferguson. Present value calculation because we are 
looking at factoring inflation. The cost for this contract over 
the life of it is approximately $90 million less than if we 
were using, projecting the bridge prices outwards.
    Mr. Kolbe. We are shaking this up a little bit--hasn't 
gotten $90 million--thesubcommittee has been worth its weight.
    Mr. Ferguson. I would say, sir, that certainly the 
competitive procurement that we put out, the interest that was 
generated by----
    Mr. Kolbe. That was going to be my next question. You 
really didn't get any other bids, did you? You had some but one 
withdrew?
    Mr. Ferguson. We had several people that started through 
the process, and one that went very far into the process before 
finally withdrawing due to some technical issues.
    Mr. Kolbe. So in the end, at the final analysis, when the 
final bids were prepared, you only had one?
    Mr. Ferguson. The bids had been submitted so that how many 
people are in the process is not known until it is over.
    Mr. Kolbe. When you had the opportunity, you only had one 
you could consider?
    Mr. Ferguson. Yes.
    Mr. Kolbe. What do you think is the biggest barrier that we 
have got to increased competition?
    Mr. Ferguson. I think GAO did an excellent study at your 
direction last year, at the direction of Congress, and 
identified a number of different issues. And there are some 
significant hurdles, some legislative, some economic, and some 
have a great deal to do with that uncertainty about future 
demands that we talked about a little bit earlier for whether 
or not someone wants to enter into this very small, very 
narrow, very specialized business.
    We have talked to a number of suppliers. We sent out 
packages to over 53 different companies, trying to elicit their 
bids. It tends to be an industry that there is one supplier per 
country and so that there tends to be--there are a few large 
international companies located overseas which produce this 
kind of paper, but domestically there doesn't seem to be 
another supplier online at the moment.
    Mr. Kolbe. You mentioned the IG's report. You have 
obviously had a chance to examine----
    Mr. Ferguson. I mentioned GAO.
    Mr. Kolbe. I am talking now about the IG's report in the 
Department of Treasury. You are familiar with this.
    Mr. Ferguson. Yes. I received it last week, I think the 
16th of this month.
    Mr. Kolbe. Just last week?
    Mr. Ferguson. Yes.
    Mr. Kolbe. It makes some statements about duplicate charges 
and some other things I won't go into. Some numbers are 
redacted and I won't go into that. Would you care to comment 
on----
    Mr. Ferguson. I guess two comments----
    Mr. Kolbe. And I would like to know what procedures you are 
putting in place to prevent this kind of thing from happening 
again.
    Mr. Ferguson. The vast majority of the issues we believe 
now, on initial review of that, were addressed in the 1995 
alternate disputes resolution, during which time we received 
$12 million back from the supplier as a result of that process. 
There are a few other issues in there that we need to look at 
and determine if they are new and if they deserve and merit 
going forward on those. We will be responding to the IG within 
90 days on those issues and would be more than happy to send 
you a copy of that response indicating what we have done.
    Mr. Kolbe. Yes, please. We would like to have that 
response.
    Poor Mr. Diehl has been sitting here waiting for some 
questions. I have a couple for him.
    Mr. Diehl. I don't feel neglected, Mr. Chairman.

                crane & company currency paper contract

    Mr. Hoyer. I wanted to follow up with Mr. Ferguson. Mr. 
Diehl is doing so well he doesn't feel neglected. I have been 
out there and you have, I am sure, as well, Mr. Chairman, and 
he has done an excellent job.
    Let me ask two questions. First of all, one I had not 
planned to ask but I am interested in. Prior to the bridge 
contract for Crane Paper, what was the term of the contract in 
terms of the length?
    Mr. Ferguson. Prior to the bridge, if you--the bridge was 2 
years, approximately 2-year bridge. What had been used before 
was a series of contracts which were a total of 4 years but 
tended to be 1 year with 1-year options after that.
    Mr. Hoyer. My question is this, then. If you take the 
analogous time frame prior to the bridge contract and you bring 
that contract up to date, how does it relate to the $262 
million contract? My point, Mr. Chairman, as I understand what 
you are saying, is that what we may have saved is $90 million 
because the 262 is $90 million less--is that what you are 
saying--than the 2 years extrapolated into 4 years in terms of 
inflated dollars?
    Mr. Ferguson. It is very difficult to make that exact 
analogy because of mixed volume, but yes----
    Mr. Hoyer. Clearly to make that analogy, your presumption 
has to be that the bridge contract was at least as costly or 
as--you have to make the assumption that the 4-year contract 
that preceded the bridge contract was at least as expensive as 
the bridge contract. If in fact the 4 years prior to that was 
cheaper, then what happened is the bridge, because of its 
shortness of its term, cost us dollars, not saved us dollars.
    Now, I don't know whether that analysis is correct, Mr. 
Chairman, but you cannot in my opinion draw the conclusion that 
you drew unless you know the analogous cost of the prior 4 
years and the first 4 years. In other words, if Crane was 
overcharging from your perspective, or if they were charging 
more, not necessarily overcharging but charging, and then 
because of what we have done brought the price down, which may 
have happened, I think you may be correct.
    In order to make that analysis, it seems we need to compare 
apples and apples, and the apples are the prior 4 years and the 
second 3\1/2\ years, I guess it sounds like it is to me. 2002 
so we are talking 3 plus half--well, actually it is already in 
place so it is 4 years. It is 99 plus.
    Mr. Ferguson. It is about 3\1/2\ years. I don't have all 
that data. And we can supply that for you, sir.
    Mr. Hoyer. I would be interested in it not because I want 
to quibble with the Chairman, but the Chairman has raised some 
good issues and his attention to this I think was useful. We 
have a sole source in effect and we need to make sure that we 
are getting proper value. Obviously I think that is an 
appropriate objective of this committee.
    One more question--and I appreciate your providing that 
information to us.
    [The information follows:]

                 Currency Paper Contract Cost Analysis

    The estimated savings attributed to the new contract arise 
from a number of factors. Certainly, the competitive 
procurement process contributed to a favorable pricing outcome 
for the Bureau. However, it is believed that pricing was also 
influenced by the change in term to a multi-year contract, 
inclusion of a pricing matrix, higher production requirements, 
and greater efficiencies realized by the contractor (Crane & 
Co.) as it gained more experience producing the watermark 
paper. Since this contract was competitively awarded, detailed 
cost and pricing data was not required and is not available to 
the Bureau. Without this data, it is difficult if not 
impossible to determine the degree of impact any one of these 
factors had on the price of paper. However, we believe that the 
competitive award process contributed to the savings passed on 
to the Bureau.
    The savings estimate was computed using a net present value 
analysis of the new contract pricing compared to the prices in 
the two-year bridge contract. The bridge contract was 
considered to be the most appropriate basis for comparison 
since the new watermark paper was not ordered under previous 
four-year contracts. Based on an analysis of non-threaded paper 
(D-39) pricing between the last four-year contract that this 
paper type was procured under, compared to the bridge contract, 
the Bureau concludes that the bridge contract was reasonably 
priced and can be used as the basis for cost comparison to the 
new contract. In fact, using a net present value analysis, the 
Bureau estimates it achieved savings of $11-12 million in the 
bridge contract for D-39 paper compared to the cost of this 
paper under the prior four-year contract. The Bureau estimates 
an additional $10 million in savings for D-39 paper as priced 
in the new contract. As previously stated, it is not possible 
to ascertain the individual components of these savings.

                           labor negotiation

    Mr. Hoyer. I won't ask a question of Mr. Diehl. Mr. Diehl 
in his testimony observes correctly that his relationship with 
his labor is excellent. Management and labor have worked very 
closely together to effect their objectives. Now, could you 
describe your recently concluded labor negotiation process, 
particularly in terms of are you satisfied the agreement was 
fair to both the Bureau and to its employees?
    Mr. Ferguson. Yes, I am very satisfied. It is one of the 
issues that I feel probably more comfortable and confident 
about than almost anything in my government career is that it 
was the right contract at the right time; that our work force 
is now duly recognized for its value to the organization and 
its capabilities, its unique capabilities that it provides both 
here and in Texas; and that in exchange for that recognition, 
we are receiving productivity enhancements that will offset 
those costs so that the customer and the public is well served.
    We were able to accomplish that through the joint efforts 
that were led by our management team. Tom Harris, the deputy 
director, took that on as his own project, and several of our 
union people who step forward during the process in which we 
had 13 separate unions that we are going to negotiate, and 
there was a tendency for everyone to sit back and see who was 
going to get the best deal before they all signed up. Some of 
ourunions took it upon themselves to step forward, sit down 
with us and have a very meaningful dialogue. There were a few hiccups 
along the way. But without any third-party intervention, without having 
any litigation involved, we managed to get all 13 contracts signed by 
last July.
    Mr. Hoyer. I want to congratulate you on that 
accomplishment. But in the context of what the Vice President 
wants to do and that is in effect have a partnership, I think 
there have been good examples of how a partnership can enhance 
productivity, enhance the accomplishment of the objectives.
    In Mr. Diehl's case, of course, when you look at Mr. Diehl 
compared to some--I mentioned Land's End at the last hearing. I 
don't know if any of you were in the room. But when you relate 
the Mint to the private sector, the Mint is at the very top in 
terms of customer satisfaction. Now, that is unusual for a 
government agency and is a very positive thing for everybody 
associated with government as well as obviously the customers 
and users of the Mint services. So I want to congratulate Mr. 
Diehl and you because you don't have customer satisfaction 
unless you have got employees who are happy and their morale is 
high and they are motivated to serve the public. And I think 
you are in a little different context but the increases in 
productivity are analogous to the increases in customer 
satisfaction.
    Mr. Chairman, I am going to go. The National Cancer 
Institute is testifying before the Labor Health Committee. I am 
going to leave. Phil, it is not that I don't want to ask you 
questions. It is just that you are doing such a good job. These 
gentlemen are doing a good job too, but we just are speechless 
when we look at these numbers you put up on the boards. Thank 
you, Mr. Chairman.
    Mr. Kolbe. Welcome, Ms. Roybal-Allard. Do you have some 
questions you would like to ask?

                        minority representation

    Ms. Roybal-Allard. Thank you, Mr. Chairman. I apologize for 
not being here earlier, but I had Commerce-Justice conflicting 
with the hearings today.
    My questions are for Mr. Ferguson. I would be interested to 
know the female and minority composition of your work force. 
Could you tell me what that is and what efforts are made to 
recruit more women and minorities?
    Mr. Ferguson. Actually, our overall minority representation 
is extremely high, depending on how you want to break it all 
down, but we have a very high African-American representation, 
especially in our D.C. facility. That represents the 
demographics of the area and the work force in the area and a 
high--women in the overall work force.
    As you break that down, there are some areas that we can do 
better, especially as far as women, especially in the area of 
some of the craft positions, traditionally blue collar work 
force that over the years had traditionally been dominated by 
males. We have done a very good job of bringing in 
apprenticeship and getting that number better. Total Bureau is 
26 percent female and obviously 73 percent or so male and a 
little over 50 percent African American.
    Ms. Roybal-Allard. So in terms of the Latino population, 
there still needs to be some work in recruiting more employees 
in that area?
    Mr. Ferguson. The areas that we are underrepresented in, 
Latino or Hispanic area, Asian Pacific, American Indian, and 
white female.
    Ms. Roybal-Allard. Now, you have reduced your FTEs from 
3,000 to 2,500 since 1996. How is that going to affect the 
diversity of your work force?
    Mr. Ferguson. As far as percentages, it has probably 
increased a number of our areas because of the tendency for the 
reductions to be done through buyouts. They tend to be our 
older employees who tend to be more predominantly male than 
female and more predominantly white or African American than 
Hispanic or Asian or American Indian. But we have not been 
hiring a great number of people. The numbers look good, but 
minority representation doesn't get all that much better 
because you are not bringing in people. And we will be 
selectively hiring people over the next few years in some 
specialized areas, especially in the science area, engineering 
areas, in order to give us a base in the technology areas for 
the future.
    Ms. Roybal-Allard. In terms of your outreach to fill these 
selective areas, will you be making an effort to reach out to 
these underrepresented groups?
    Mr. Ferguson. Yes. We started this year a program. We 
brought in three interns from the Hispanic College and 
Universities Program. We are looking at bringing people in 
through the Outstanding Scholar Program from areas of the 
country that are more prevalent in groups we were 
underrepresented in, yes.
    Ms. Roybal-Allard. Thank you.

                           united states mint

    Mr. Kolbe. Thank you. Mr. Diehl, we don't want you to go 
away. We have an interest in your programs, as good a job as 
you are doing. I notice in an article that appeared a few days 
ago in the ``Washington Post'' said you had been, I think the 
word used was, ``stunned,'' at the overall acceptance of the 
first new quarters under the 50 States Quarter Program. How do 
you measure that when you say acceptance? How do you measure 
acceptance here?

                50 states commemorative quarter program

    Mr. Diehl. One of the things we have done, we have 
instituted for the first time as part of the implementationof 
the 50 States Commemorative Quarter Program, is we are keeping much 
closer tabs on week-to-week demand for circulating coinage than we ever 
had in the past. I get a report on a weekly basis that shows how our 
demand for various denominations compares with previous years' and 
versus a countermetric estimation of what we would expect demand to be.
    We are watching this closely for a number of reasons. One 
of the big reasons is the 50 State Commemorative Quarters 
Program and as you know, Congress authorized, in fact mandated 
a market research study for the Treasury to undertake before it 
chose to endorse the 50 State Commemorative Quarters Program. 
The Treasury Department spent about $300,000 on that market 
research study to ensure that the American people would be 
supportive of this program. And of course that study was very 
positive. It found that about 75 percent of all adult Americans 
intended to collect these quarters, and in fact they intended 
to collect for the most part whole sets, not just individual 
State quarters.
    And the study came up with a range of seniorage profits 
that can be expected in the program over its 10-year life, and 
that range was between about $2.5 billion and 5.1 billion. We 
recognized that range at the time as being on the conservative 
side because it only included demand from adult Americans, did 
not include demand for minors, did not include demand from 
overseas, and we already have strong indications that there is 
demand overseas. We knew all along that minors in fact would be 
very enthusiastic about the program. So we have watched the 
demand very closely.
    This program is unprecedented, not just in the United 
States but anywhere in the world. So we have put a premium on 
reading the market quickly and adjusting production 
accordingly, rather than trying to forecast in any long-term or 
even short-term fashion where demand is going to go. And what 
we are finding is that through the first 2 months of the 
program, the demand that we are seeing for the quarters is at 
the upper end of that 2.5 to $5.1 billion range.
    Of course, this is very early in the program and there 
could be other influences but we are very encouraged that the 
program has been popularly accepted because of those high 
demand numbers and also from the press that we are seeing on 
the program and the anecdotal reports we are receiving from the 
public and through the Federal Reserve banks, it appears that 
the coins are very popular.
    Mr. Kolbe. How many additional quarters are you producing 
so far?
    Mr. Diehl. For example, we are scheduled to produce 3.6 
billion quarters this year, and last year we produced 1.5 
billion. So it is a 140 percent increase in quarters that we 
are scheduled to produce.
    Mr. Kolbe. That will be with five States?
    Mr. Diehl. That is five States, yes.
    Mr. Kolbe. Are five already in place?
    Mr. Diehl. No, just one. We are issuing them in sequence, 
in 10-week intervals. We are going through the States in the 
order in which they ratified the Constitution.
    Mr. Kolbe. I am aware of that. In Arizona, we have a long 
ways to go. It will make ours more valuable when we get there. 
So, 10 week intervals, the first one was just done----
    Mr. Diehl. January 4 is when we issued Delaware. 
Pennsylvania went into production on Monday this week. We will 
release it on March 8.
    Mr. Forbes. Would you yield, Mr. Chairman?
    Mr. Kolbe. Yes, of course.
    Mr. Forbes. Thanks. When will we get to New York? I think 
we are number 11, aren't we?
    Mr. Diehl. I think that is right. You will be in 2001. I 
think it is the first quarter of 2001.
    Mr. Kolbe. Five each year for each of the next 10 years. 
That is very interesting. So what you are saying is a huge 
number of these you expect to be taken out of circulation?
    Mr. Diehl. Yes.
    Mr. Kolbe. Will you continue to produce them?
    Mr. Diehl. We are not producing the old quarters. We have 
retired the old quarters for 10 years, so the only quarters we 
are producing in this 10-year period is the State quarter.
    Mr. Kolbe. But you produce Delaware until Pennsylvania 
comes in; then you produce Pennsylvania?
    Mr. Diehl. That is correct.
    Mr. Kolbe. So I better get out there and start collecting. 
I better get out there right away.
    Mr. Diehl. There are only 750 million of the Delaware 
quarters to find.
    Mr. Kolbe. Then you are going to run into a shortage. They 
will be taken out of circulation. Are you going to have 
sufficient number in circulation? I am quite serious about that 
question.
    Mr. Diehl. This is one of the things we are seriously 
calculating. It is one of the reasons why we are producing 3.6 
billion rather than 1.5 billion quarters, is to ensure that the 
basic requirements of commerce are met with these quarters. 
Now, the thing to remember is that there are about 20 billion 
quarters in circulation today, even before these new quarters 
enter circulation. And those will remain in circulation.
    Mr. Kolbe. Yeah, but is sounds to me like for the next 10 
years, every quarter you produce is going to be taken out of 
circulation.
    Mr. Diehl. What we are estimating, the 3.6 billion quarters 
we are scheduled to produce this year assumes thatabout 2.1 
billion of those will be collected and the other 1.5 billion will 
remain in circulation for at least some period of time.
    Mr. Kolbe. For some period of time.
    Mr. Diehl. But the numbers are admittedly staggering. That 
suggests----
    Mr. Kolbe. It is a great profit. You are making a lot of 
money off of them.
    Mr. Diehl. But the $5 billion high end of that range 
suggests that over the next 10 years, 20 billion quarters will 
be collected by the public.
    Mr. Kolbe. And that is where you get the high range of your 
seniorage value?
    Mr. Diehl. That is correct. Yes.
    Mr. Kolbe. The legislation authorizing this, however, makes 
it clear that they are considered numismatic items; is that 
right? What is the significance of that?
    Mr. Diehl. It really has no significance for the books of 
the government. The seigniorage profit will be treated exactly 
the same. In other words, it costs us just under 5 cents to 
produce a quarter and we sell it basically to the Federal 
Reserve and in turn to the private banking system for face 
value. So it is a 20-cent profit for every quarter. That profit 
for all denominations of circulating coins is taken off books 
and this will be treated the same way.
    Mr. Kolbe. You earlier were talking about trying to 
eliminate or significantly reduce the number commemorative 
coins. This is like a commemorative coin. We are going to take 
them all out of circulation, in which case you are in a huge 
commemorative coin operation now.
    Mr. Diehl. In fact this is called a Circulating 
Commemorative Program.
    Mr. Kolbe. This is generally circulating coin.

                          commemorative coins

    Mr. Diehl. That is right. There are two major differences 
between this program and the old Commemorative Coin Program 
which we still retain but which we sought to get under control 
in the 1996 Act. One is our collectors love this program and 
they were losing their enthusiasm for the old program. So it is 
customer support in the first place and American public support 
as well.
    The second is, this is a coin, that is, the quarter is a 
coin that is collectible out of pocket change at face value. It 
costs you 25 cents to collect one, whereas Congress imposes 
surcharges on the other commemorative programs and they sell at 
well above face value. A silver dollar commemorative, for 
example, typically sells for $35 and $40, and $10 of that would 
be a surcharge that is passed through the government's books to 
a beneficiary organization. That has made these programs 
controversial.
    Mr. Kolbe. Are you selling these coins as package sets?
    Mr. Diehl. Oh, yes, we will.
    Mr. Kolbe. So you will hold back some of them so I can wait 
till the tenth year and get all 50 of them?
    Mr. Diehl. No. The short answer to that question is no.
    Mr. Kolbe. Got to buy them each time.
    Mr. Diehl. You have got to get them as they come out, but 
there are collectible versions of these coins that we will 
produce at a separate Mint. They are very distinctive in how 
they are produced. There are proof and silver proof versions of 
these coins.

                              dollar coin

    Mr. Kolbe. A couple of quick questions here on a subject 
which I have had some interest in over the years, the dollar 
coin, which a few people in this room know about. When is the 
final design going to be selected for that?
    Mr. Diehl. We expect the final design to be announced 
within the next several weeks and we are hoping for a White 
House announcement of it.
    Mr. Kolbe. A big rollout.
    Mr. Diehl. The big rollout. One of the reasons is because 
we want to build--and we are committed to building momentum 
that will ensure the success of this new dollar coin. The 
Nation has never had a successful dollar coin. Most people 
would scoff at the idea, but the fact of the matter is the 
Susan B. Anthony is the most successful dollar coin in terms of 
total demand in the Nation's history.
    Mr. Kolbe. I have been arguing that for some time.
    Mr. Diehl. We want to ensure that public awareness and 
acceptance of this design are very high.
    Mr. Kolbe. GAO, in a report that they released not long ago 
said that--their survey showed that the vast majority of 
Americans prefer the Statute of Liberty to Sacagawea.
    Mr. Diehl. Yes.
    Mr. Kolbe. Your comment?
    Mr. Diehl. A couple of things. One is I think the Statute 
of Liberty would have been a very strong design. I don't think 
there is anything wrong with that design concept. But I think 
the Sacagawea design is also very strong and has a couple of 
distinct advantages. One, I think it is very important to 
remember that with this decision we are removing the only real 
flesh-and-blood woman of history who has ever appeared on the 
Nation's coinage, Susan B. Anthony, from our coinage. And so in 
that context, if you are to make a decision between another 
flesh-and-blood woman of history or an allegorical figure, I 
think there is some argument in favor of selecting another 
flesh-and-blood woman.
    And when Secretary Rubin was given this responsibility by 
the Congress, he in turn selected a group of citizens to advise 
him, and he asked me to chair that committee as a non-voting 
member. And we met last year in Philadelphia for two days, took 
testimony from the public, took a lot of otherinformation from 
the public through website and through mail, telephone conversations, 
and by a vote of 6-1 with one abstention, that committee recommended 
Sacagawea.
    Mr. Kolbe. I might be inclined to agree with you, and with 
Ms. Roybal-Allard sitting here, I certainly would not disagree 
with the idea of a flesh-and-blood woman on our coinage. But 
speaking strictly as the Director of the Mint, you should be 
concerned first and foremost with the marketing and whether or 
not it is going to be an accepted and wanted and desired coin.
    Mr. Diehl. We have no doubt about that. I have no doubt 
whatsoever.
    Mr. Kolbe. Glad to hear it. What is it going to cost to 
manufacture this?
    Mr. Diehl. I don't have a good price tag for you right now. 
I would guess we are probably in the neighborhood of 8 to 12 
cents per coin so it is a pretty good profit margin. And the 
cost depends on what alloy ultimately is chosen and also on 
volumes.
    Mr. Kolbe. Eight to 12 cents. So what did you say the 
quarter was? About 5?
    Mr. Diehl. Just under 5.
    Mr. Kolbe. So, Mr. Ferguson, that compares to a $1 Federal 
Reserve note of about----
    Mr. Ferguson. Just a little under 3 cents.
    Mr. Kolbe. But, as we well know, the factor of how long 
they stay in circulation, how long they stay there is 
important. Do you have the manufacturing capability to produce 
enough of these now? Are you satisfied that you do?
    Mr. Diehl. Yes, we do. One of the reasons why we do have 
that capability is because of the flexibility we have gotten 
under the revolving fund.
    Mr. Kolbe. Aren't we in a race against time with the 
depletion of the Susan B. Anthony?
    Mr. Diehl. We are indeed.
    Mr. Kolbe. When do you expect that to occur?
    Mr. Diehl. It could occur anywhere from December 1999 to 
March of 2000 and so we----
    Mr. Kolbe. December of this year?
    Mr. Diehl. Yes. It could come as early as December of this 
year. We have seen a significant variation from month to month 
and that estimate is changing on a monthly basis.
    Mr. Kolbe. Any explanation as to why? New York has 
introduced it in their transit system; right?
    Mr. Diehl. Yes, that is right. Although my understanding is 
that they are not likely to implement an accelerated 
implementation but they do intend to increase the usage of the 
dollar coin. But I think some of it is just underlying economic 
activity that is driving increased use of the coin.
    Mr. Kolbe. When do you plan to bring the new coin on line?
    Mr. Diehl. Our plan is to have it available in January 
2000.
    Mr. Kolbe. Well, the first ones roll out--but enough to 
start putting out in circulation in January?
    Mr. Diehl. Yes, that is right. We would begin production in 
October 1999.
    Mr. Kolbe. You have any backup in case there is a gap?
    Mr. Diehl. Yes, we do have a backup plan. The legislation 
that authorized the new dollar coin anticipated that we might 
have a situation like this in which there is a potential gap 
between when we run out of Susan B. Anthonys and when we are 
ready to issue the new dollar coin. That legislation gives the 
Secretary the authority to make new Susan B. Anthonys if that 
is necessary. Now, none of us are real enthusiastic about going 
back in and producing those.
    Mr. Kolbe. So you still have the die stamps that you can 
produce those.
    Mr. Diehl. We are actually producing the dies now so we can 
be ready. And the decision whether or not to produce additional 
Susan B. Anthonys will be made by April.
    Mr. Kolbe. You need to make it that much beforehand?
    Mr. Diehl. Yes, we do.
    Mr. Kolbe. You can't just have your guy rush in to you and 
say we are going to be out next Monday, and you say start 
making them.
    Mr. Diehl. We could if we had the coin strip but our 
private coin strip manufacturer, that is a different strip.
    Mr. Kolbe. That would be a different strip than the new 
one.
    Mr. Diehl. It is a different strip than the quarter.
    Mr. Kolbe. You have to make a judgment in April. My last 
question: What is your marketing plan for the new coin?
    Mr. Diehl. We really have a three-part marketing plan and 
the first part has already been implemented. We went to a group 
called Oxford Associates who put together basically a business-
to-business marketing strategy for the Mint, who encouraged 
those sectors of the business economy that currently use dollar 
coins to switch to the new ones and to increase their use of 
the new dollar coin because of the higher functionality of that 
coin compared with the Susan B. Anthony; and also to identify 
other sectors of the economy in which we believe that by making 
the right case to them they will become heavy users of dollar 
coins. That strategy in turn will be turned over to a sales and 
marketing consulting company that we will work with and we are 
currently in the process of competing that bid.
    There is a third element to this as well and that is we are 
looking at the possibility of encouraging retailers aswell to 
convert to the use of the dollar coin. But the retail industry and the 
questions related to converting the retail industry are very different 
from those of the other sectors, which are largely around vending of 
one form or another. And so we are working through a separate 
consulting contract with the retailers. Our objective is to double the 
basic underlying economic demand in the short term for the dollar coin. 
Right now we see dollar coin demand at about 50 million a year. We 
would like to see the basic underlying economic demand for it to double 
within a couple years. We think it is possible to do considerably 
better than that, but that is what our objective is right now.
    I make a distinction here between the underlying economic 
demand and collectible demand. When a new coin like this comes 
out, and especially a coin that we think will be embraced as 
enthusiastically as this coin will be because of its design and 
its gold color and the like, we expect to see a surge of 
hoarding or collecting behavior that is over and above the 
basic economic demands.
    Mr. Kolbe. Even though people know it will be produced over 
a long period of time, still initially there will be a lot of 
that. So the 100 million estimate is on the economic use of 
them?
    Mr. Diehl. That is correct.

               dollar coin impact on currency production

    Mr. Kolbe. Mr. Ferguson, how do you feel about your 
colleague down here? Do you want him to be successful or not? A 
hundred million lets you take how many $1 bills out of 
circulation? It is not exactly a hundred million because they 
don't last as long. How does that translate into production?
    Mr. Ferguson. It is difficult to say. We produce 
approximately 4 billion $1 notes a year.
    Mr. Kolbe. That is what percent of your total?
    Mr. Ferguson. About 45 percent.
    Mr. Kolbe. Just 45 percent of total currency production. I 
thought it was more than that.
    Mr. Ferguson. It traditionally was 50 percent for years and 
years, and that has declined over the last few years as 20s 
have increased and actually the $100 demand overseas has 
increased.
    Traditionally the expectation is it takes two coins to 
replace one note because of circulating patterns, so it is 
difficult to say, but as you say, that pool of 100 million 
coins a year will be out there for a long time. So over 10 
years, you will have a billion coins out there and our 
expectation would be that would reduce our demand by 
approximately half a billion notes.
    Mr. Kolbe. So how many did you say you produced?
    Mr. Ferguson. A little over 4 billion a year, depending.
    Mr. Kolbe. At any one time there are roughly 7\1/2\ billion 
in circulation?
    Mr. Ferguson. Somewhere between 6 to 7 billion in 
circulation and some more in vault storage.
    Mr. Kolbe. Okay. You have been very patient, both of you. 
It is a very interesting subject, certainly has been to me for 
some time. I appreciate all three of you being here today. I 
think this has been a very useful hearing.
    Once again, even though we don't appropriate any money, you 
are very generous with your time in coming up here and talking 
to the Appropriations subcommittee, and I hope you find this 
helpful to you as well. We thank all three of you for 
participating here today.
    Our next hearing is next week. Tuesday. Next Tuesday at 10 
o'clock. The subcommittee will stand adjourned until that time.

[The official Committee record contains additional information here.]


                                          Thursday, March 18, 1999.

                    U.S. DEPARTMENT OF THE TREASURY

                               WITNESSES

HON. ROBERT E. RUBIN, SECRETARY
NANCY KILLEFER, ASSISTANT SECRETARY FOR MANAGEMENT AND CFO

                       Chairman's Opening Remarks

    Mr. Kolbe. The Subcommittee on Treasury, Postal Service, 
and General Government will come to order.
    This morning we have with us the Secretary of Treasury. We 
have gone through most of the respective bureaus of Treasury 
but now at the end we get the Secretary, himself. And this 
actually represents the last of our regular appropriations 
hearing, though, this afternoon we will have an oversight 
hearing on Customs integrity.
    Mr. Secretary, over the past several weeks we have had the 
opportunity to talk in detail with the various component 
agencies and bureaus that make up the Treasury Department. But, 
as we wind down the cycle, I can tell you that I continue to 
have three major concerns as it relates to Treasury.
    The first is what I see as an inconsistent commitment to 
funding Treasury's law enforcement bureaus--and you and I have 
to talk about this privately--I think it is beginning to erode 
the basic investigative capacity of both ATF and the Secret 
Service. Frankly, I think that the President's budget 
significantly short-changes Treasury law enforcement and 
jeopardizes some of the very basic activities that I know you 
believe are so important, including investigations of money 
laundering, counterfeiting, other financial crimes.
    Second, the administration's proposals to fund the base 
operations of the Customs Service through a new tax, 
jeopardizes the core operations of the Customs Service. I think 
it is a disingenuous proposal, one that I believe you know, OMB 
knows is not going to happen and I think by funding the core 
base operations of Customs Service through this, you have left 
us bereft of a way in which we are going to be able to pay for 
that without cutting some place else.
    Finally, the Customs Service continues to show inadequate 
progress in relation to the modernizations of its commercial 
operations. I think we learned, I hope we learned some lessons 
from the $4.5 billion that we spent on IRS' now-failed tax 
systems modernization but I fear that some of those lessons are 
being forgotten down in Treasury. We seem to be repeating some 
of the same mistakes with the Customs Service modernization 
effort.
    Mr. Secretary, having said that, I really am a big fan of 
yours and I am a big fan of the Department of Treasury. I think 
your agencies and bureaus carry out some of the most vital 
functions that we have in Government, certainly as it relates 
to our financial security of this country.
    I support the agencies, what they do in their day-to-day as 
well as the law enforcement aspects of it, and I tend to 
continue that. But I think these are issues that have to be 
raised and I do not think that we can ignore them any longer.
    So, I am looking forward to hearing from you today talk 
about some of these issues and hearing your thoughts about 
this. I know we have had a discussion of some of this 
privately. And I hope we can continue this discussion in a 
public way because I am optimistic that we can work together 
through the coming year to resolve some of these concerns and 
certainly you have my commitment to do that.
    Let me recognize Mr. Hoyer for any opening remarks before 
we go to your statement, Mr. Secretary.

               Ranking Minority Member's Opening Remarks

    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Secretary and Secretary Killefer, welcome; and members 
of your Department, we are pleased to have you here.
    I share the Chairman's very positive view of Mr. Secretary 
of your service and the operations of your Department. The 
country is fortunate that you have agreed to stay on longer 
than you had originally projected and I hope that you are at 
least on for another two years. And I will not make my vote on 
the budget contingent upon that, but it is a strong feeling. 
[Laughter.]
    I note that your 2000 budget is oriented towards five major 
priorities: Reforming the IRS, leadership in international 
economic affairs, strengthening the U.S. ability to fight drugs 
and crime, modernizing financial systems and, of course, the 
Y2K conversion with which we have all been working.
    I would like to focus on the first priority, reforming the 
IRS and take this opportunity to point to the significant changes in 
the IRS brought about by this Committee and under your leadership by 
the Treasury Department.
    Even before passage of the Reform and Restructuring Act--
and I make this point every time you are here or you testify 
because IRS reform of a substantial nature pre-dates the reform 
legislation that was passed by the Congress. In fact, you, 
Secretary Summers and others, undertook very early on, again 
before the Reform Act, to decide that we needed a new 
management structure there, we needed a new relationship with 
the oversight with the Secretary and the Deputy Secretary. You 
are the first Secretary of Treasury with whom I have worked 
since 1983 that has taken a personal interest in the management 
and the efficiency of operations of the IRS, Mr. Secretary, and 
I want to congratulate you.
    This Committee insisted, of course, that the failing IRS 
Tax Systems Modernization Program be rescued. You and Deputy 
Secretary Summers, through your personal leadership, made that 
happen and in December of 1998 IRS awarded the Prime contract 
for this mammoth undertaking.
    I would also like to point out the role of the Treasury 
Department in the establishment of the IRS Problem Solving 
Days, which have now provided assistance to over 35,000 
taxpayers. Mr. Rossotti, at your request, initiated these 
through the Department and they are making a difference. The 
Department was deeply involved in setting these up and you, 
yourself, Mr. Secretary, were at the first Problem Solving Day 
in Baltimore November 19, 1997, with Mr. Cardin and myself and 
others.
    Under your leadership, the Treasury Department has also 
been heavily involved in the formation of the Citizen Advocacy 
Panels and integral in the management of the Taxpayer Treatment 
and Service Improvement Office at Internal Revenue Service.
    You selected a corporate manager--and Mr. Chairman, this 
change, I think, does not get certainly from the public--the 
public really has no conception of what a very substantial 
break with past practice this has been. Mr. Secretary Rubin and 
I and Secretary Summers and I and others talked about the 
problem of tax lawyers are great, but they are not by training 
or by inclination managers. And the problem at IRS was not tax 
policy; it was tax management. It was management of the 
collection system.
    And it was critical that we get in not only a manager but a 
manager that would be there for some period of time, so, that 
they could adopt and then see effected policies which would 
change the management structure and culture of the Internal 
Revenue Service.
    Mr. Rossotti is doing that but it should not go without 
note that Mr. Rossotti is there because Secretary Rubin made a 
determination, along with Secretary Summers, that this was 
absolutely essential if the tax system was going to be 
modernized and if we were going to bring efficiencies and if it 
was going to be a customer-friendly agency.
    And I want to congratulate the Secretary. He will not get 
credit, perhaps as much as he deserves historically, for this 
accomplishment and it does not get the national headlines that 
Asian problems or Central American problems get but it is a 
major contribution to this Government.
    It is apparent that the Department, under your leadership, 
Mr. Secretary, places a high priority on the success of the IRS 
and reform and organizational modernization. This is extremely 
important if we are going to give the American taxpayer a tax 
system that is efficient, collects the revenue, and respects 
the taxpayer.
    I am also pleased, Mr. Secretary, to note that you found 
that the employees at the Treasury are some of the best in 
Government, dedicated, hard-working and committed 
professionals--your greatest resource, obviously.
    Mr. Secretary and Secretary Killefer, I look forward to 
your testimony and, Mr. Chairman, I thank you for yielding me 
the time.

                    Introduction of Secretary Rubin

    Mr. Kolbe. Thank you.
    Mr. Secretary, as always if you want, your statement is not 
that long, but if you want the whole thing will be put in the 
record and if you want to just summarize, we are happy to hear 
from you.
    Thank you, Mr. Secretary.

                  Opening Statement of Secretary Rubin

    Secretary Rubin. Thank you, Mr. Chairman.
    If you would submit it for the record, I would appreciate 
that and let me also summarize it, if I may.
    As you know, we have proposed a program level that totals 
$12.659 billion in the year 2000. It is offset by $454 million, 
including the fees that you mentioned, plus the Treasury 
Forfeiture Fund proceeds.
    There is a detailed presentation, which you have seen. Let 
me just highlight if I may very quickly five priorities: The 
Internal Revenue Service, international affairs, law 
enforcement, financial systems, and Y2K conversion.
    Mr. Hoyer said, last year Congress passed the IRS 
Restructuring and Reform Act but it is equally true that we 
have done a great deal before that to focus on and heighten the 
intensity of IRS reform. A lot has been accomplished, there is 
an enormous amount to do and our budget funds the mandates of 
the Act as well as the commitment to modernization that we have 
made.
    I will basically focus on four areas: Protecting the 
taxpayer and we are involved in implementing roughly 70 tax law 
changes which were mandated by the legislation and also 
improving the Taxpayer Advocates Organization.
    Secondly is customer service and that involves electronic 
filing, 24-hour/7-day-a week phone service, expanded walk-in 
service, a number of other measures that are being taken to 
improve customer service.
    Thirdly, Commissioner Rossotti had developed a new 
organization or really a reorganization, a restructuring, if 
you will, of the IRS which at least in my judgment is extremely 
well suited to meeting the modern needs of the Service so that 
the Service will be organized along the lines of its customer 
base and that involves expenses that are also in our roughly 
$190 million, I think it is $197 million if I remember 
correctly, for implementing the new legislation and modernizing 
the Service.
    Finally, modernizing information systems. I think we have 
learned an enormous amount and we worked very closely with this 
committee in doing so about the development of effective 
systems on a very large scale that is involved in IRS and, to a 
smaller extent, Customs Service. With respect to the IRS, in 
December of 1998, as you know, we awarded the prime systems 
contract and we are now looking to move forward.
    The Systems Modernization, itself, we are not seeking funds 
for in the year 2000 budget, because we can use funds that have 
already been advanced-funded in prior years, but we are seeking 
advance funding for subsequent, for the year 2001.
    With respect to Y2K, I think we are well underway to 
getting where we need to be in the Internal Revenue Service and 
I will comment on that in a moment. We are seeking additional 
funds for what would be the last quarter of this calendar year, 
which will be the first quarter of the new fiscal year. And 
that will be for testing plus contingency items.
    The second major priority is international affairs and 
while this is a very small number in terms of dollars it is 
very important in terms of what we are doing, Mr. Chairman. We 
have, obviously, been enormously and critically involved in 
this financial crisis that has lasted now for a year-and-a-
half. And we are asking for additional slots in our 
departmental offices in order to provide specialized functions 
we do not presently have, at least not in sufficient amount.
    Thirdly, there is law enforcement. And let me focus on four 
key priorities there, if I may. Customs Service, we are 
supporting additional X-ray and telecommunications equipment to 
deal with drugs coming in and drug couriers to be done in a 
more effective and less intrusive fashion.
    In addition, we are seeking funds to help deal with the 
question of money laundering, including X-ray inspection 
equipment which will help to detect efforts to smuggle currency 
out of the country.
    Second is the integrity of law enforcement operations and 
there, particularly we are focused on various initiatives in 
Customs Service, including training, and further support for 
their internal affairs operation.
    We are also focusing on strengthening the Treasury's 
Inspector General operation, and particularly setting up 
regional operations that will help with respect to Customs 
Service.
    Third, is the Secret Service and there we face the year 
2000 with respect to the campaign and providing protection as 
well as additional security measures to the White House.
    And the fourth is firearms area and there we are largely 
focused on building on various ATF initiatives including the 
Youth Crime Gun Interdiction Initiative and full implementation 
of the Brady law.
    Two other aspects of law enforcement. One is we have been 
very focused for a couple of years--two or three years now 
actually--on providing a safe building for the ATF and we fully 
support the funding for the GSA part of this budget with 
respect to providing this new building for the ATF.
    We are also very much focused on the Customs Service 
commercial processing systems problem which you mentioned, Mr. 
Chairman. And I think on the one hand we have a system, ACS, 
which is not adequate, which clearly is facing very serious 
problems; on the other hand, I actually think that we have 
learned a lot from the IRS lesson and the thing that we have 
learned is that we need to know where we are going before we 
start moving there.
    And I do believe that the strategy that we now have derives 
enormously from the lessons that we and this Committee 
developed together from the IRS experience and I think it is 
the sound path toward getting a good system and does draw, as I 
say, on the experience which you mentioned.
    With the IRS, which started out in a number of directions 
and did not work and now, I think, is on a very sound path.
    The fourth major priority is modernizing Government's 
financial systems which include FMS, and the Bureau of the 
Public Debt and, finally, is our Y2K conversion.
    Let me just say with respect to Y2K conversion, Mr. 
Chairman, we expect by the end of this month, March, to be 
virtually complete with respect to our major critical systems.
    Obviously, then going forward, there will be the questions 
of testing and dealing with problems that develop in the 
testing and then contingencies, plus, two or three systems, I 
think, that may not have been critical systems that may not 
have been completed.
    Let me conclude on a personal note. I have been here now 
for a little over four years at Treasury, after two years in 
the White House. As a follow-up to something Mr. Hoyer said, I 
really have been enormously impressed by the quality, the 
commitment, and the effectiveness of the people that, the 
professionalism of the people that we have at Treasury. I think 
the Committee can feel, and the country can feel in very good 
hands with respect to the taxpayer dollars that are being used 
in this Department and the people who are using them.
    I think they deserve our support and we very much look 
forward to continuing what has been a very good and, I think, 
mutually constructive relationship with this Committee in terms 
of providing the funding for this year.
    And with that, Mr. Chairman, we would be delighted to 
respond to any questions you may have. In addition as we, Nancy 
Killefer and I, respond to your questions, we would be 
delighted to address further the three issues that you raised 
in your statement.
    Thank you.
    [The prepared statement of Secretary Rubin follows:]

[The official Committee record contains additional information here.]


funding comparisons between justice department and treasury enforcement 
                                bureaus

    Mr. Kolbe. Thank you very much, Mr. Secretary.
    And, yes, we do look forward to a constructive relationship 
also with you and I think it has been that. As I said at the 
outset, I have enormous respect for you, personally, and I mean 
that very sincerely.
    Let me begin with this issue of the disparity of funding in 
Treasury. I am not going to bore my colleagues with the charts 
again. I think they have got them memorized. I know your staff, 
Mr. Secretary, your legislative staff definitely has them 
memorized by now.
    Secretary Rubin. They are aware of them. [Laughter.]
    Mr. Kolbe. But, nonetheless, let me once again repeat a 
couple of the numbers that I think bear repeating over and over 
again and I have done it with my colleagues, as well. That is 
that since 1994 after adjusting for inflation, Treasury law 
enforcement is increased by 9 percent, Justice law enforcement 
is increased by 68 percent. Take the two major agencies, 
Customs Service has gone up during that same time, by 3 
percent; INS has grown by 134 percent. And I understand. We've 
had a real concern about our border, but our border also 
includes what Customs Service does along the border.
    Overall for law enforcement, Treasury saw a modest increase 
of 3 percent; Justice grew by 45 percent, and so on.So, I think 
that the figures speak for themselves. And I know, Mr. Secretary, that 
you are one that certainly believes in the role that Customs Service 
and other Treasury law enforcement agencies play in our law enforcement 
picture. So, I guess I would like to begin by asking you what is going 
on down there at OMB that consistently we seem to do very poorly in the 
Treasury area of law enforcement?
    Secretary Rubin. Well, as you and I discussed, Mr. 
Chairman, when we were together, I do believe very strongly in 
the law enforcement functions of the Treasury and I think that 
we have--I do not think--I am absolutely confident that we have 
very strong bureaus, strongly led and that they perform a very 
important function and do them very well.
    If you take a look at this year's budget--leaving aside 
just for a moment and I will get back to it in a moment, the 
Customs Service fee--I think what you will find is that whether 
you look at it in terms of current services, you can look at it 
in various ways. And however you look at it, Justice and 
Treasury are increasing by approximately the same amount, on a 
full program basis. That is to say, taking into account the 
Customs Service fee which you raised and I will get to that in 
one second.
    But if you take that into account no matter how you look at 
it they increase by approximately the same percentage.
    If you take a look back from the beginning of this 
administration, in 1993, they roughly increased the same not 
counting the Immigration and Naturalization Service. That is if 
you take out Immigration and Naturalization Service and you 
take all the rest of Treasury law enforcement, all the rest of 
Justice law enforcement, Justice increased slightly more than 
Treasury but it is not an enormous amount.
    I think that the difference in Immigration and 
Naturalization Service--well, I do not think--the difference in 
Immigration and Naturalization Service is a function of a 
decision that was made, as you correctly said, to enormously 
increase the focus on illegal immigration. Whether that 
decision was a correct decision or a wrong decision, I do not 
know, but that was the decision that was made, I guess, about 
five or six years ago. And that has, in almost its totality, 
driven the difference in the increase in the two law 
enforcement functions.
    I think the challenge for us this year, as you said in your 
opening statement and you are right, is to make sure we get the 
full funding for Treasury law enforcement and for program 
funding that we put forward. What we did in Treasury was to 
include in our budget a Customs Service fee which, as you said, 
is controversial.
    What Justice did in their budget, as I understand it, 
although I have not reviewed their budget, is to include about 
a $1 billion reduction, I think, in State and local grants. And 
that was their analog to our Customs Service fee, if you will.
    Mr. Kolbe. Did that proposal for the Customs Service fee 
originate with Treasury or with OMB?
    Secretary Rubin. I do not know the answer to that. Do you 
know that? I assume it was OMB. Yes, it must have been with 
OMB. But the way we--OMB is supposed to originate ways to find 
money. Look, I think the problem we are going to have--the way 
this administration works, I guess every one must be 
different--but ours has a small group of people, I happen to be 
one of them, who sit around a table--I guess I am actually the 
only person--I do not think anybody else actually has cabinet 
responsibility, because agency responsibility is not quite the 
same way--and we look at all this and we try to make the best 
judgments we can.
    I think that as a more general matter, there is a broader 
question than this Customs Service fee. I think we are going to 
have to find some way during the course of this year--this is 
my view--to fund the full program levels if we believe that the 
programs make sense and, in this case, I absolutely do think it 
makes sense.
    And I agree with you that the use of this fee and a number 
of other offsets that we have in the budget are controversial 
but I think we are just going to have to work our way through 
this and find some way to deal with it. We did last year and I 
would hope and trust that we do it again this year.

           treasury's request to omb for enforcement bureaus

    Mr. Kolbe. Well, I want to come back to the Customs Service 
fee and I will in my next round of questioning. So, let me just 
end with this last little question here.
    You know, last year we had this discussion--again, this is 
not a new discussion--and I recall that you made some comment 
about if we had differences, a set of judgments regarding the 
funding for Treasury versus Justice, we should adjust our 
allocations. Well, we were able to do that last year. And we 
boosted the amount of Treasury law enforcement by about $382 
million above the President's request.
    But, now, we are seeing that kind of eroded away again. So, 
my question is, what was the requested level of funding for 
Treasury law enforcement bureaus to OMB for this fiscal year?
    Secretary Rubin. What did we put in, Nancy, do you 
remember?
    Mr. Kolbe. How does that compare with that submitted in the 
budget?
    Ms. Killefer. We requested more than is in the budget. I do 
not have the exact amounts in the original or request.
    Mr. Kolbe. I suppose every agency----
    Secretary Rubin. I was going to say----
    Ms. Killefer. But that is a given.
    Secretary Rubin. I actually saw all the original agency 
requests and let me assure they in their totality vastly--well, 
yes, they did--very substantially and I think probably vastly 
exceeded what we wound up with in the budget.
    Look, I identify enormously with Treasury law enforcement. 
I actually think if you take the full program funding level we 
have got a vigorous program this year. I think the question, as 
you correctly, you 100 percent correctly identified, is how do 
we deal with this question of the Customs Service fee? And I 
think, Mr. Chairman, you and a lot of other Subcommittees are 
going to have very similar kinds of questions. And some of them 
we worked through this year. Just as last year we solved it, we 
have to find some way to solve it.
    Mr. Kolbe. I will come back to that.
    Mr. Hoyer.

                  senior executive service (ses) slots

    Mr. Hoyer. Secretary, I have got a broader question I want 
to ask but let me follow-up on this because it is a small 
subpart but a critical part. One of the disparities that exists 
that was not on the Chairman's charts on money is the 
allocation of high-level spots, SES spots as it relates to 
Justice and as it relates to Secret Service and particularly 
ATF.
    Secretary Rubin. What, SES slots?
    Mr. Hoyer. SES slots. Where we are not competitive in terms 
of the number of SES slots that we have to offer to keep our 
agents in charge on duty. And I would hope that--that is a 
subset. You do not have to answer the question, but it is a 
problem and I know I have talked to, and I am sure you have as 
well, some of the Treasury law enforcement leaders who are 
really concerned that that will be somewhat like the lab. 
Remember the technical disparity we had between Justice, FBI 
laboratories and Treasury's laboratories. Now, we have parity.
    Well, Mr. Chairman asked if it is an authorization issue?
    Secretary Rubin. Could I make a suggestion?
    Why do we not have Assistant Secretary Killefer to respond? 
It is a problem that we can solve.
    Ms. Killefer. Yes.
    Secretary Rubin. Well, Congress can solve everything.
    Mr. Hoyer. This Committee can solve everything with respect 
to that. [Laughter.]
    Ms. Killefer. No. You are exactly right. We have actually 
been engaged in discussions with OPM to present a case for our 
law enforcement bureaus to get additional slots. The problem is 
administrative in nature, not statutory. In the beginning of 
this administration, as I understand it, there was a choice to 
reduce across-the-board, across all the bureaus and departments 
the number of SES available. And that was done, I believe, as 
just a percentage cut across-the-board.
    What that has meant is across Government there are no extra 
slots. So, when we have gone to OPM and they have, quite 
frankly, been very sympathetic and believe that we have made a 
good case and a strong case for our slots, they do not have any 
to give.
    And, so, that is the problem we face. But, you know, I 
think that we know we need them. I think OPM understands that 
as well.
    Mr. Hoyer. If I can interject? Very frankly, with all due 
respect to this administration and other administrations, it is 
very easy to make these policy statements that sound good, that 
we are going to reduce by 25 percent or by 125 percent 
everybody who works for us. And be leaner, meaner, tougher, et 
cetera, et cetera.
    But when it comes down to it, you have to fill slots. You 
have to compete not only within Government but in the private 
sector, but certainly within Government. It does not make any 
sense, whatever the funding levels are, to have the FBI 
disparate from ATF or Secret Service so that a Secret Service 
or ATF agent in charge is asked to do essentially the same 
duties for less pay.
    I might say as an aside, because you participate in those 
rooms as well, we need to get rid of this pay compression which 
we are going to work on as well in Congress as you have been 
reading.
    Ms. Killefer. I might also just inform you that the FBI is 
in an accepted service and not part of these SES caps. So, that 
also makes them unique. They do not have to go to OPM for 
slots.
    Mr. Hoyer. And that is a problem, Mr. Chairman, that we can 
address if not solve, but we could address that.
    Secretary Rubin. But you are raising a very important 
issue, Mr. Hoyer. I do not know technically how it works, but 
if we can work with you all to try to make progress on that 
problem that would be a tremendous accomplishment.
    Mr. Hoyer. Well, I want to work on it. As you know, I work 
very closely with all the employees issues. And we say 
simplistic things and then when you try to really manage with 
them, it just does not work.
    Ms. Killefer. Exactly.

                 Impact of Supplemental Funding Offsets

    Mr. Hoyer. And it is not fair to put our agencies in a 
noncompetitive position. At any rate, that is a very critical 
problem I want to work with you on. I will ask one additional 
question in this round, Mr. Chairman.
    And it does not deal with our budget but it does deal with 
what I think is a critically important thing. We marked up a 
supplemental bill for emergency spending, as you know, in the 
full Appropriations Committee last week. There was a $648 
million offset included in the mark. I know you are very 
concerned about it. I would like you to bring to the attention 
of this Committee the impact that will have on the World Bank, 
the Asian Development Bank, the Inter-American Development Bank 
and the world financial markets, in general.
    Secretary Rubin. Let me try to put this issue of MDB 
callable capitol in a way that is understandable. It is an 
arcane subject in some respects because it gets a little bit 
complicated in terms of the funding of the international 
financial institutions.
    Basically the credit worthiness of the World Bank and the 
other multilateral development banks is very much dependent 
upon the callable capital provided by the major industrial 
nations.
    This is our commitment to actually provide the funding we 
promised to the World Bank and the other multilateral 
development banks if they call upon us to provide it. In the 
United States--and this is a rather unusual situation amongst 
the industrial countries--that callable capital can only be 
provided if it is appropriated callable capital. That is to 
say, if Congress has appropriated it.
    So, we have really two categories of callable capital: The 
total amount promised and the portion of the callable capital 
which actually passed through the Congressional appropriation 
process.
    The rating agencies--and I have spent a lot of time on this 
in the last week, because I frankly had never focused on this 
issue until this recission got included in the supplemental--
the rating agencies and the underwriters--maybe it is more 
important that the underwriters do this--have told the World 
Bank the only callable capital they really care about is that 
callable capital which has been appropriated by Congress.
    Because the rest of it, since it does have to go through 
the Congressional appropriations process, can be withheld just 
like the UN arrears have been withheld and other similar 
matters. The IMF quota increase took over a year to get, for 
example.
    There is a concern amongst people who are knowledgeable 
about this subject that if Congress rescinds a small portion of 
this callable capital for any one of the multilateral 
development banks it will create a skittishness amongst 
creditors of the multilateral development banks which will 
meaningfully increase the cost of money to the multilateral 
development banks, the World Bank, the Asian Development Bank 
and the others.
    If it increases the cost of money to these institutions, 
they obviously will have less money to use for the very 
important purpose that they are involved in. They havebeen very 
central, Mr. Hoyer, as you know, because we have discussed this, in 
dealing with the financial crisis of the last year-and-a-half.
    So, I think this is a very serious issue with respect to 
the institutions upon which we are very dependent.
    I think unfortunately there is also a second ramification 
to this issue and that is that the world is looking in today's 
environment to the United States to provide leadership in all 
of these issues but, particularly, in relation to this 
financial crisis. I think that a rescission, even if a small 
one, would be viewed as a withdrawing by the U.S. from this 
leadership position. I think that perception could adversely 
affect confidence with respect to our dealing with the 
financial crisis, which so affects our economic well-being.
    So, I think this proposed rescission is a very, very 
serious problem and it is for that reason and other reasons 
that the letter has been sent saying that the senior advisors 
to the President would recommend a veto of the supplemental if 
it includes certain of the offsets, very particulary this one, 
that are in that legislation.
    Mr. Hoyer. Thank you, Mr. Secretary.
    Thank you, Mr. Chairman.

                           emergency funding

    Mr. Kolbe. Let me just say before I call on Mrs. Emerson, 
if I might, in response to that last. If you feel strongly 
about that as you do, and the administration sent this letter, 
I think that you also have the responsibility to come up with 
some alternative offsets. Because quite frankly we have all 
gotten hoisted on our own rhetoric on this issue and the issue 
of the caps, the issue of whether or not this should be a true 
emergency or not. We are now going to stay within the caps, 
period, and we are not going to play the game we played last 
Fall with this. So, we are going to have to come up with 
offsets.
    So, you are going to have to--you are going to wring your 
hands about this, you better come up with some offsets or else 
you can veto it and that is the end of it.
    Secretary Rubin. Let me respond to that if I may, Mr. 
Chairman.
    Two comments. One, my personal view, which I know is not 
the view of many in the Congress, is that true emergencies 
should be treated as emergencies. Now, I recognize that there 
are those who have a different view. I think then if Congress 
is not prepared to do that, then you do get to the question of 
offsets. And at least it is our view that the best place to 
deal with that probably would be in conference. And I think 
that when it gets to conference that would be a place at which 
that discussion could be held.
    Although, I say my caveat to that is, at least in my view, 
the 1997 Balanced Budget Agreement which I was very much 
involved in putting together, did include provisions for 
emergencies, and I personally think that we should use that. 
But if the Congress does not want to do that, then I think this 
should be dealt with in conference.
    Mr. Hoyer. I am sorry, Mrs. Emerson, I took so long.

        government obligations to the social security trust fund

    Mrs. Emerson. That is okay, Mr. Chairman.
    Thank you, Mr. Chairman.
    Secretary Rubin, my questions are going to be non-committee 
related. How much money does the Federal Government owe to the 
so-called Social Security Trust Fund?
    Secretary Rubin. How much is owed to the Social Security 
Trust Fund?
    Mrs. Emerson. Yes. I mean how much in IOUs is sitting in 
the so-called Trust Fund?
    Secretary Rubin. Well, I do not think it is so-called. I 
think it is a trust fund. But the specials in the Trust Fund, I 
do not know the exact number but I probably--I actually do not 
know the exact number. I can get it for you.
    Mrs. Emerson. Okay. Yes. I would appreciate that. Let me 
ask you another question with regard to Social Security.
    Many people would----
    Secretary Rubin. By the way, the specials, as you know, 
have the full faith and credit of the United States Government 
behind them and they are, as a legal obligation, the equivalent 
of the publicly held debt.
    Mrs. Emerson. Right. I understand that. I just want to know 
from Treasury the exact amount. Because there are differing 
amounts.
    Secretary Rubin. We can get you that amount.

                   future solvency of social security

    Mrs. Emerson. Many people say that the deficit in Social 
Security can be traced primarily to a longer life span among 
beneficiaries than when the system was set up back under 
Roosevelt. Is it your opinion that we might inevitably have to 
either reduce benefits or raise the retirement age to ensure 
the future solvency of Social Security?
    Secretary Rubin. I think that I would say that you need to 
take a two-part approach. And I think that the President stated 
it very well in his State of the Union. For a whole host of 
reasons, though, I personally think the deficit reduction 
program was sort of the center and in effect the original 
catalyst of all this. We now have what is an extraordinary 
situation and one that I do not think that anybody could have 
imagined seven years ago, and that is we have a very large 
surplus and a very large projected surplus all based on 
conservative assumptions.
    I think we can do an enormous amount with Social Security 
by making wise use of those surpluses. You know, the program 
that we have proposed would extend Social Security's Trust Fund 
to 2055.
    When you get beyond that and you want to make changes in 
the program, itself, I think that these are very difficult 
choices and I think that the best way to move forward on that 
is to have sort of a bipartisan process that is effective.
    I actually do think and I have felt this way all through 
this process, that to try to put forth proposals ahead of that 
is simply to put things up that will then be attacked. And, so, 
I think the best thing to do is to try and get some kind of a 
process, withhold judgment on anything, although the President 
has said he is against an increase in the tax rate, as you 
know, FICA. But leaving that aside, do not take a position on 
anything and to let the process try to develop a sensible 
program.
    But we can go an enormous way if we just use the surplus 
effectively.
    Mrs. Emerson. Well, except for the fact that with a 
shrinking general revenue pie, if you will, and the fact that I 
mean here we are talking about trying to live within the budget 
caps and fund the Treasury Department for that matter. I mean 
how can we possibly take general revenue funds and then put 
them into Social Security and/or Medicare and still fund 
everything else that we want to do?
    Secretary Rubin. Well, we put out a budget, a 15-year set 
of projections on what I think are--if you look at the 
assumptions we had for growth and similar factors--more 
conservative than the Congressional Budget Office.That does not 
mean that we are more right than they are, but I am just saying our 
assumptions were more conservative than those of the CBO.
    And because of the position that we are in right now--and 
you can argue how we got here; I personally gave you my views 
as to what I think was pretty central to how we got here--we 
are in a position where you can have a budget that can actually 
accomplish these multiple purposes and that was exactly the 
plan that we put forward.
    Well, actually, we put forward budget projections way out 
into the future, as a matter of fact.

                      reality of a budget surplus

    Mrs. Emerson. Yes. And I think that is what makes me a 
little bit nervous to base policy on projections particularly 
given the fact that we have got--and I represent a real rural 
district. It is very agricultural. I mean the agricultural is 
in the pits right now. And it is not going to be fixed in the 
foreseeable future.
    We have got a steel industry that is laying off people, oil 
patches laying off people. So, I mean do you really think that 
the budget surplus is going to materialize?
    Secretary Rubin. Well, I will say this, Ma'am, I have been 
around these things for 31 years now, 26 years on Wall Street 
and then 6 years I have been here. And I guess that comes to 
32, does it not? [Laughter.]
    Mrs. Emerson. So, in other words, you still look young 
though, sir?
    Secretary Rubin. I do not usually have to do my own 
arithmetic. That is why we have staff at the Treasury 
Department. [Laughter.]
    But in any event, I think this is--I will repeat something 
Chairman Greenspan has said in here--I think we have the most 
extraordinary economic conditions that I have ever witnessed 
and I do think that they are in some measure a function of the 
policy judgments that were made. The assumptions are very 
conservative. Whether it will eventuate, nobody can tell. I 
think there is a very good chance they will eventuate.
    But if we make sound decisions--and this is sort of what 
the President was saying in his State of the Union, and he did 
not get a chance to fully develop the analysis--if we make 
sound decisions and basically use this money to increase 
savings and pay-down debt, then if it happens we are in an 
extraordinarily good position.
    If it does not happen, we certainly have still accomplished 
a great deal to put ourselves on a sounder fiscal footing and I 
do not mean to get this out beyond the issues you are raising, 
but that is why I at least think it would be extraordinarily 
unsound to use it for a tax cut as opposed to using it for 
increasing national savings.

                  individual retirement account limits

    Mrs. Emerson. Talking about increasing national savings, 
and I am not talking about the President's proposal for USA 
savings accounts, but would you be supportive of proposals that 
would expand existing limits on individual retirement accounts?
    Secretary Rubin. You mean income limits?
    Mrs. Emerson. Yes. Income limits and/or the amount of money 
that you could put in for tax purposes and then additionally 
provide more tax incentives for individuals in an effort to 
promote savings?
    Secretary Rubin. Well, you are getting into another 
question of exactly how much all that does to promote savings. 
We were in favor or IRAs. I think IRAs are actually a very good 
idea. I think the problem that you have when you start 
increasing the income limits is that if you are going to be 
dealing with people who are saving anyway and as you start to 
get the higher income people, you basically are dealing with 
people who for the most part are going to save anyway. Probably 
all you are doing for the most part, at least the data 
suggests, and I think common sense suggests it, too, is you are 
giving people a tax sheltered way of doing the saving they 
would have done otherwise. We are very much in favor or IRAs.
    But I think extending the income limits does not make a 
heck of a lot of sense.
    Mrs. Emerson. How about expanding the amount of money you 
can put in because--and I really ask you from your expertise on 
Wall Street, more than anything else.
    Secretary Rubin. I think expanding the amount of money you 
can put in probably is a little bit like expanding income 
limits because if you are talking about people with incomes 
relatively--we are talking middle income people, I think the 
current amounts you can put in probably capture about as much 
as people like that are likely to save. When you start 
expanding the amounts you put in, I think what you are doing is 
basically getting into amounts that only people with much 
higher incomes are going to save.
    So, we are involved in 1997--I was very deeply involved, 
actually in the negotiations that led to the IRAs. I personally 
think the income limits are a little higher than they should 
be, given the context I have just set out.
    But I think that I would probably not do either one. And I 
certainly would not do them if it was going to take up surplus 
money that could be used to increase national savings 
otherwise.
    Mrs. Emerson. Thank you, Mr. Chairman.
    I guess I am out of time.
    Mr. Kolbe. No.
    Mrs. Emerson. No. That is all right. I was going to make a 
comment. The fact is that I have found that middle income 
people in my district tend to save a lot more money than those 
of us who make more money because they are more frugal.
    I decided to say it anyway.
    Thank you.
    Mr. Kolbe. Mrs. Meek.

              community development financial institutions

    Mrs. Meek. Welcome, Mr. Secretary and your staff.
    Mr. Secretary, I know the last pothole Congressman is not 
here any longer. We had a pothole Senator but he is not here. 
So, I want to take up his role to some extent. I am very much 
concerned about what happens in the neighborhoods and the 
communities. And also I am concerned about the international 
economic policies which you sort of say grace over in those 
areas.
    My first question has to do with your Community Development 
Financial Institutions Fund. That has been steadily growing to 
some extent since you have been here. I get a lot of questions 
about the fund in terms of its validity in reaching the 
communities it is intended to serve.
    What kind of instrument or what kind of process have you 
institutionalized to be sure that these banks and institutions 
that are getting this money are being credible to the 
communities, the distressed communities which they purport to 
serve?
    Secretary Rubin. I appreciate your focusing on that 
program. It is something that we are very proud of. It was 
actually started under this Administration--this was something 
that you remember the President advocated in 1992 and so forth.
    Mrs. Meek. Yes.
    Secretary Rubin. And then it was set up, I guess we started 
about 1994, did we? No. 1995, I think it was, actually. I think 
it was 1995.
    In any event, I think it is an extraordinarily good program 
because what it really looks to do is to try to help--you know 
all of this, I am saying what you know. It tries to help 
community development through sort of a people's capitalism, if 
you will, through helping people start their own businesses or 
fund their own businesses or whatever.
    The question of controls which is I think the issue you are 
raising is a very important one. And we have, after starting up 
and in our initial phase of this program, we focused a lot on 
trying to put in place an effective set of control mechanisms. 
And I can get back to you if you would like on the specifics or 
Nancy Killefer could comment, if you would like.
    But we are also doing something which I think is rather 
unusual for Government programs and that is we are actually now 
going out to the people who received these funds and we are 
going to get those reports--if you will, a survey process going 
on amongst, with respect to those who receive funds to see what 
their reactions are to the program. And we are supposed to get 
those results back, I think, fairly soon, are we not?
    Ms. Killefer. Yes. We are in the process of actually 
evaluating the first grants that were let a couple of years 
ago.
    So, we are actually out there trying to understand what 
worked and what did not work and how they are being perceived? 
Is the process working?
    Mrs. Meek. I would be very interested in seeing the results 
of that study.
    Thank you.

                              debt relief

    My second area that I am concerned about is debt relief. 
Please send someone to me that can explain this thing of debt 
relief. I keep hearing so much about debt relief. I am one of 
the cosponsors of these African trade bills that are floating 
around. And there is a big, big furor regarding Africa and I am 
sure that you do not want to go into that. But I just need you 
to tell me from your point of view what is debt relief? Suppose 
we erase debt, who pays for debt relief? There is no such thing 
as a free lunch. So, I want to know what happens?
    Secretary Rubin. That is, I think, a very good and accurate 
perception. There is no such thing as free lunch. It is an 
extraordinarily complicated subject. Let me just make a comment 
or two and then if you would like we would be delighted to come 
visit with you.
    Mrs. Meek. Send someone.
    Secretary Rubin. But basically it is much more complicated 
than it seems on the surface. And I think you have got to find 
a balance between competing considerations: On the one hand, 
there are countries with unsustainable debt burdens and we do 
think those need to be reduced substantially; on the other 
hand, if private sector creditors believe that there is not a 
credit culture in a country, that there is not the culture of 
commitment to repaying debts, then private sector capital will 
not flow into countries and private sector capital is a 
requisite for long-term growth. So, you have to find a balance 
between those two considerations.
    Let us, if we may, we would be delighted to come visit with 
you, if you would like.
    Mrs. Meek. Thank you.

                         money laundering case

    And one last question. An article appeared in Tuesday's New 
York Times stating that Treasury had failed to aggressively 
pursue a billion dollar money laundering scheme that was 
alleged to lead to Mexico's Defense Minister. Can you within 
the constraints of what you are able to say publicly, clarify 
that or talk a little bit about it?
    Secretary Rubin. Let me do this, if I may, Mrs. Meek. That 
is in the courts right now, as you know, and I have been told 
that I should not comment in public. It may be that our General 
Counsel could visit with you on that. I really do not know what 
the constraints on a private communication would be.

                          integrity assurance

    Mrs. Meek. All right. What are your policies regarding 
integrity and protection against corruption in agencies such as 
Customs Service and the like?
    Secretary Rubin. Oh, we are very focused on that through 
our IG's Office, and through the IG's Office in the various law 
enforcement bureaus.
    And in this budget proposal we put forward, we are asking 
for additional funds both to help Customs Service in that 
respect, which has a very difficult challenge--because they are 
on the borders and there is a lot drug money around--and, also, 
to help strengthen our IG function in that respect.
    Mrs. Meek. Thank you.
    I yield back my time, Mr. Chairman.
    Mr. Kolbe. Thank you.

                      budget surplus alternatives

    Mrs. Northrup. Thank you, Mr. Chairman.
    Mr. Secretary, I also wanted to ask you about Social 
Security. It seems to me we are faced with three questions. One 
is how much of the surplus do we need to save for Social 
Security, whether it be private investment accounts, whether it 
be paying down the debt, whether it means redeeming bonds? How 
much of it? Is it 62 percent? Add the private investment plan 
the President has proposed, 74 percent, I believe. We have to 
establish what amount must be saved.
    Then we have two other questions. What are we going to do 
with the rest? Are we going to have new programs? Are we going 
to have tax cuts?
    They do not compete against each other. Let us set the 
level and then let us have the debate about what we are going 
to do about the rest of the surplus. After that we can have the 
debate about what we are going to do with the amount we save 
for Social Security.
    So, you know, it is very discouraging to me when I hear 
this administration talk about all of their new spending 
programs. But every time we talk about tax cuts, you start 
talking about Social Security solvency. So, my first question 
is, do you agree that the first thing we need to do is talk 
about how much needs to be set aside? At what level do we draw 
the line about what percentage of the surplus or what 
actualamount is needed for Social Security to be saved?
    Secretary Rubin. What we have tried to do and I think have 
done, and the President did in his State of the Union and in 
the budget we have submitted and the plan that we have 
submitted is to meet exactly the questions that you have asked.
    I think those are the right questions. Our judgment or our 
conclusion was if you take 62 percent of the surplus, you 
devote that to Social Security, you do the piece of it in 
equities that we recommend, which is a moderate portion of it, 
and you can then accomplish a number of other purposes with the 
budget surplus. And because of the remarkable situation which 
we are in, which we just discussed with Mrs. Emerson, you can 
accomplish multiple purposes. We would have a small tax cut. 
And that is our USA account, as you know. And for the rest we 
think--and this is the debate you can have--we would rather 
focus on Medicare----
    Mrs. Northup. You would rather spend.
    Secretary Rubin. No. I think we would rather deal with 
Medicare and we would rather have a rather moderate amount go 
to defense, education and other discretionary items rather than 
have a large tax cut. That is the debate. I think that is the 
debate.
    Mrs. Northup. I mean I just think that is important. If you 
want to add the USA savings accounts, if you want to add the 
Medicare into senior security, which I think is the number one 
issue, at some point we have to decide that we are not going to 
spend, period, and that means tax cuts or spending, or we have 
to agree that we are going to leave some of the surplus and 
have another debate on what we are going to do with it.
    Secretary Rubin. Well, I actually do not totally agree with 
that, Mrs. Northup. If you take a look at the President's 
budget and the way that we have done it, I think, because of 
the extraordinary situation that we are in, and as I said to 
Mrs. Emerson, it is a set of projections that are based on very 
conservative assumptions. There is no guarantee that it will 
happen but it was conservatively based if you will on a 
grounded set of projections. I think we actually can try to 
accomplish multiple purposes.
    What we cannot do is accomplish the Medicare, defense and 
education purposes that we are trying to do and have a very 
large tax cut.
    And that I think is kind of where the debate may come out.

              new spending other than for senior security

    Mrs. Northup. Well, let me just say about the spending 
portion, though, the question is what do you do other than what 
is set aside for senior security?
    And we can decide whether that is a tax cut or whether that 
is going to be new spending programs. I know there are many new 
spending programs in the President's budget just from those 
that have been discussed in the committees I sit on. And we are 
certainly looking at those. But I think that they compete 
against tax cut.
    Secretary Rubin. All right. Well, the largest piece 
actually, as you know, is the Medicare piece.
    Mrs. Northup. I am talking about the new programs that come 
before our committees. The ones in HUD, the ones in education, 
the ones in health.
    Secretary Rubin. Yes. There are two sets of those, as you 
remember. One of them for the 2000 budget is all within the 
caps. And you can have debates about the Customs Service fee 
and so forth, but nevertheless, it is all within the caps. And 
then there is longer-term program that is a very small 
percentage of the total use of the surplus.
    Mrs. Northup. Again----
    Secretary Rubin. Medicare is the largest piece that we 
contrast with the tax cuts.
    Mrs. Northup. Well, I know. And every time I hear the 
Administration tax cuts, they are always contrasted against 
Social Security, as you did earlier today. I am just saying 
that is a different question.

                social security alternative investments

    Let me move to the Social Security. At whatever level we 
set aside for Social Security, do you support the President's 
proposal that the Government would actually invest in the stock 
market?
    Secretary Rubin. Well, that is not his proposal.
    I support the President's proposal but his proposal was 
that there be a nongovernmental mechanism developed to invest 
about 20 percent of the 62 percent in some sort of a broad-
based index, and that the entire function be conducted totally 
and completely and absolutely outside of the Government and 
that it be overseen by a totally nongovernmental body.
    Mrs. Northup. Could you give me an example of another 
program that we have like that?
    Especially one where everybody's lives, fate, and income 
depends upon it.
    Secretary Rubin. I do not think there is quite the analog 
to this but you do have the Federal Reserve Board which 
functions independently of the administration.
    Mr. Hoyer. What about the Thrift Savings Plan?
    Secretary Rubin. You have the Thrift Savings Plan. I guess 
that that is similar.
    Mrs. Northup. I would suggest that probably most of your 
colleagues on Wall Street would disagree with you on that.
    Secretary Rubin. Well, they cannot disagree with what I 
said conceptually. They may not like this idea versus some 
other idea but conceptually it is not difficult to set up a 
totally nongovernmental mechanism to oversee private sector 
managers investing in index funds. That is not a difficult 
thing to conceptualize. Then you can argue whether you should 
do it or should not do it.
    Mrs. Northup. Well, I would just say to you that almost the 
next day you would begin to have a zillion arguments about 
that. You would begin to have votes in Congress about whether 
or not they should prefer stocks of companies that have a 
particular environmental policy, have a particular trade 
policy, that have unions or non-unions, etc. Surely after all 
these years here you know that that would become the pressures 
we would deal with.
    Secretary Rubin. Well, I think you could deal with that, 
Mrs. Northup. You know, it is interesting, we set up the 
Federal Reserve Board and it is independent of the 
administration. And under extraordinarily difficult 
circumstances that you will remember over the last say, 30 
years, where administrations have been absolutely furious and 
enraged with what the Federal Reserve Board has done, that 
independence has never been abridged by the Congress and I 
think rightly.
    Mrs. Northup. You know, I would just say that----
    Secretary Rubin. And this is a similar sort of concept.
    Mrs. Northup [continuing]. It in no way starts to decide 
between Coca-Cola stock and GE stock and Pepsi stock and Exxon 
stock.
    Secretary Rubin. No. I mean you could go the direction you 
just suggested if you want to but the President's proposal was 
not that. The President's proposal was to invest in a broad-
based index of some sort.
    Mrs. Northup. Under our Constitution somebody controls that 
board. Either the President or the Congress controls it, and 
the political pressure to make those kind of decisions is part 
of what we deal with every day up here.
    Secretary Rubin. Well, I guess, Mrs. Northup, my view would 
be that the political pressure would not be any greater than 
the vast political pressure that has occurred when the 
Secretary of the Treasury virtually has not spoken to the 
Chairman of the Federal Reserve Board because of anger over 
their policies, and I think that it is possible to create that 
kind of independence.
    Mr. Kolbe. Your time has expired.
    Mr. Price.

        public sector retirement funds: investments in equities

    Mr. Price. Welcome, Mr. Secretary, glad to have you here. 
Continuing in this vein for just a moment, do you know of any 
State retirement fund in the country, in any of the 50 States, 
that does not invest in equities in some measure?
    Secretary Rubin. Oh, Mr. Price, there might be some but to 
the best of my knowledge I do not know of any. One thing I am 
sure of and that is the vast preponderance of all retirement 
funds, whether State, local or private sector invest in 
equities to some extent, whether that is wise or not.
    Mr. Price. And the kind of parade of horribles that Mrs. 
Northup anticipates, has this developed? Has this emerged in 
the States to any appreciable degree?
    Secretary Rubin. As far as I can recollect, there have been 
some isolated instances but that is it.
    There have been some instances of States that have acted in 
this fashion but I do think that at the Federal level you could 
create mechanisms that would prevent that from happening, Mr. 
Price.
    Mr. Price. And you are not talking about picking and 
choosing, the President is not talking about picking and 
choosing, among individual corporations. The investments would 
be through indexed funds?
    Secretary Rubin. Yes. As I said to Mrs. Northup, there 
would be some sort of broad-based index fund.

           overtime practices in treasury enforcement bureaus

    Mr. Price. All right.
    Let me turn now to a little more mundane topic, but one 
that, nonetheless, is important and has come up in our earlier 
hearings with some of your subordinate agencies--the question 
of overtime and Treasury law enforcement agencies overtime 
practices.
    The Secret Service's fiscal 2000 budget submission again 
highlights the significant amount of overtime that agents 
assigned to the Office of Protective Operations, in particular, 
are working and the steps taken over the last year to reduce 
that overtime.
    At this time, your average overtime rate for protective 
agents is down from 93 hours per month to 77 hours per month, 
which is the same amount of overtime that the field agents 
work. That rate is still nearly double what I am told is the 
average for all Treasury law enforcement, which is 43 hours per 
month.
    When Mr. Bowen was here in February he cited overtime as a 
factor in the attrition of your newer agents. He seemed pretty 
definite about that. And I am concerned that there has been no 
additional request to get that rate down further.
    And in addition to the possible attrition problem, I 
believe that kind of overtime has the potential to imperil 
these agents' ability to do their jobs and, thereby, undermine 
the protective mission.
    Even the 43-hour overtime rate for your other law 
enforcement bureaus seems quite high, although I realize that 
Secret Service numbers may inflate that figure somewhat.
    I wonder if we could break this down a little bit. Do you 
have any more detailed information either here this morning or 
for the record on the overtime rates that Customs Service and 
ATF agents are working? And how these might compare with 
analogous agencies in the Department of Justice?
    Secretary Rubin. Mr. Price, let me ask Assistant Secretary 
Killefer to respond.
    Ms. Killefer. I do not have those figures here with me but 
we can provide them. In the case of Customs Service there are 
actual statutory caps on overtime hours that have dollar terms. 
But we can get those to you.
    The thing that I would say about the Secret Service, and it 
is of great concern, for the first time ever we have started to 
lose agents in the 1-to-5-year range, which has not happened in 
the past. And we believe there may be significant lifestyle 
concerns but we are looking at that. We do hope to hire more 
agents but what you are going to see in 2000, where you have a 
candidate nominee program, is a one-time change in the 
requirements for Protective Services. So, we cannot over-hire 
to meet that peak and then have to let people go afterwards.
    So, in 2000, I think that the way to manage a work force in 
those kind of one-time blips in demand is actually to try and 
manage through what are our substantial overtimes. But do it in 
a way that is thoughtful in terms of the people. We are 
looking, and Secret Service has been hiring new agents, at a 
controlled rate. There is an enormous amount of training, I 
think, as you can appreciate for all of our 1811s and it is 
probably like a five-year journeyship in many of the 
departments. So, we have got to start building behind that.
    I would add one other thing that I think should be of 
concern to this Committee which is the retirement bubbles we 
also face in our critical functions that we need to be able to 
hire behind.
    Mr. Price. Well, I would appreciate your furnishing any 
detailed information you can about the Treasury Department's 
long-term plans to try and reduce those unacceptably high 
overtime rates. And there was some concern at the time that Mr. 
Bowen was here that the budget request, in particular, had not 
had any specific declared intent of getting that overtime rate 
down. At least it was not reflected in the budget figures that 
we had.
    Ms. Killefer. Okay.
    [The information follows:]

                      Secret Service Overtime Rate

    The Secret Service's FY 2000 budget justification indicates 
that those agents assigned to the protective program are 
working an average of 77 hours of overtime per month. This has 
prompted the question of how many additional full time 
positions would be required to ensure that Secret Service 
agents assigned to the protective program are working an 
average amount of monthly overtime no greater than the 43 hours 
worked by the rest of Treasury law enforcement.
    Relatively high levels of scheduled overtime usage are an 
unavoidable part of the job for those assigned to Presidential 
and Vice Presidential protection. The need for scheduled 
overtime is driven by the amount of travel being done by the 
President and Vice President and there are limits on how much 
additional staffing can decrease it. However, it remains very 
important to the Service that the amount of scheduled overtime 
required to be worked by these agents be kept as low as 
possible. Based on the current workload of the Presidential and 
Vice Presidential protective details, an increase of 58 full-
time equivalent positions would reduce the usage of scheduled 
overtime to a level significantly closer to the level being 
worked by other Department of the Treasury law enforcement.
    The Secret Service has taken action to reassign additional 
special agents from field assignments to its protective 
division. This should help to reduce the average overtime 
required of individual special agents to some extent. Given the 
nature and extent of protective travel, it is unlikely that a 
reduction to the Treasury-wide average is possible.
    An additional means of reducing overtime worked by Secret 
Service special agents is the use of agents detailed from other 
Treasury bureaus to assist at times of peak protective 
workloads. This is done during Presidential campaigns and such 
events as the United Nations General Assembly, the current NATO 
meeting, the Olympic Games, etc.

                     regulation of subprime lending

    Mr. Price. Let me ask you now about the role of the 
Treasury Department and your Office of the Comptroller of the 
Currency in regulating subprime lending.
    On March the 1st, OCC, FDIC and other Federal lending 
regulators issued the Interagency Guidance on Subprime Lending. 
As I understand it, this document is geared toward ensuring 
lender solvency and preventing something akin to the savings 
and loan debacle. As a former member of the Banking Committee I 
certainly commend that. We need to protect the taxpayers.
    But I am also concerned about the short-term impact of 
subprime lenders on those taxpayers who borrow from them. You 
may know I authored some of the current home equity loan 
disclosure requirements. When I came to Washington, there was 
very little regulation of those loans because the market had 
just developed. And we seem to be in a similar situation with 
the subprime lending market.
    Certainly not all subprime lenders are unscrupulous. No one 
would suggest that, but there is substantial evidence of 
certain subprime lenders targeting people with poor credit who 
own a home but have other sizable debts or expenses.
    These homeowners may be attracted by the promise of low 
interest loans but misled about the ultimate price tag which 
might include huge closing costs that are financed along with 
the loan.
    In some cases, individuals have been approached again and 
again in the span of a year by the same subprime lender who 
repeatedly refinances the loan but always with the sizable fees 
involved. The result is that a borrower who initially needed a 
small loan ends up having fully sapped the equity in his home 
and cannot make the payments.
    I know this is a complex issue but I think we need to do 
something, probably at the Federal level, to address it. In 
addition to improved disclosure requirements and consumer 
education, what do we need to do to ensure that the subprime 
lending industry cannot prey on the American people? And what 
is Treasury doing to develop legislative or other 
recommendations so that both Federally insured institutions and 
non-bank lenders are adequately regulated?
    Secretary Rubin. Mr. Price, let us, if we may, get back to 
you. And this is sometimes referred to as predatory lending. It 
is a subject that I have heard discussed. I cannot give you a 
complete response other than to say that there are people who 
are very much focused on it, and I know that they are very 
focused on the issue of disclosure and very concerned about 
people--exactly what you said--people who are basically lured 
into doing things they cannot afford and misled into doing 
things that are unsound for them. There are people at Treasury 
very, very focused on this. Let us get back to you, if we may.
    Mr. Price. I would appreciate that.
    Thank you.
    Thank you, Mr. Chairman.
    Ms. Killefer. Mr. Sununu.

                      international monetary fund

    Mr. Sununu. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being here.
    I would like to in my time talk a little about the 
International Monetary Fund's, success and failure in 
implementing reforms. As you are more than aware, we passed 
some outlines of reform policy for the International Monetary 
Fund moving forward as part of the replenishment last year. 
Could you talk about the success in implementing those reforms 
and the transparency, interest rate, subsidy and policy 
prescriptions for the International Monetary Fund as well. And 
I know there has been some success but as legislators we are 
looking for more. And could you talk a little bit about where 
we go from here? What the other opportunities are for reform, 
whether they are prescribed by Congress or simply motivated by 
U.S. policy pressure?
    Secretary Rubin. Sure.
    Let me start by saying, Mr. Sununu, I think that if you 
look back over the last year-and-a-half, or more than a year-
and-a-half now, actually, of this financial crisis, the 
International Monetary Fund has been dealing with truly 
unprecedented and extraordinarily complex issues.
    We can have all kinds of debates and I think reasonable 
people can have all kinds of debates about various actions they 
have taken. I think it is extraordinary that the world has come 
through as well as it has.
    And I think, I personally think, that without the 
International Monetary Fund the probability is high that we 
would have had very substantially greater problems than we have 
had, although the world has had an awful lot of difficulty out 
of this crisis.
    In terms of the reforms, themselves, let me give you just 
one example if I may. Korea had about $4 billion of reserves 
and 35 percent interest rates at the height of their 
difficulty. And they now have about $51 billion worth of 
reserves and 6 percent or between 5 and 6 percent interest 
rates.
    Having said that, there is a lot of room for additional 
reform and we are enormously focused on a broad--in fact, we 
would be delighted to come and speak to you about this, if you 
like--a broad-based reform for the global financial markets. 
Within that context we are also in the process of implementing 
legislation.
    On interest rates, an awful lot of the activity of the 
International Monetary Fund is now focused on this new program 
involving shorter maturities and higher interest rates. The 
program began, I think, having been conceptualized about a year 
ago and then, in effect, implemented by virtue of the role of 
the United States and the International Monetary Fund. And 
most, not all, but most of the International Monetary Fund 
activity is now focused on that program.
    With respect to transparency----
    Mr. Sununu. With a much smaller or hopefully nonexistent 
subsidy for private lenders on those interest rates.
    Secretary Rubin. Subsidy for----
    Mr. Sununu. There were loans that were made, I think, in 
the Korean example where some of the interest rates were----
    Secretary Rubin. The banks?
    Mr. Sununu. Sure.
    Secretary Rubin. Oh.

                      below market interest rates

    Mr. Sununu. You know, some of the interest rates on the 
bailout money were at below market interest rates. And, 
obviously, that is one of the stronger arguments made by those 
that are concerned about moral hazard with the International 
Monetary Fund.
    Secretary Rubin. Oh, I think that this is actually now 
cutting very much the other way, Mr. Sununu. There is an 
enormous moral hazard issue here and we are very cognizant of 
it. I think actually, though, the Korean program actually cuts 
the other way.
    The banks basically voluntarily----
    Mr. Sununu. Took a haircut.
    Secretary Rubin. They sure did. Relative to anything that 
you would have considered to have--whatever, how you might have 
measured market value. I sort of orchestrated a lot of that 
voluntary activity so I know how voluntary it was. And I think 
now the moral hazard thing actually has interestingly turned 
the other way where an awful lot of private sector creditors 
are hesitant about getting involved with developing countries 
because they feel that they have been bailed-in, if you will. 
And this is a very serious issue, which we would be delighted 
to come and discuss with you. They feel they have been bailed-
in, too much. I happen to think that they need to be bailed-in. 
They should be bailed-in. And that was in the legislation.
    Mr. Sununu. Are there any instances moving forward where 
you think below market interest rates on the loans being 
provided by the International Monetary Fund are justified?
    Secretary Rubin. I think they will always be below market 
by definition almost because if they could have gotten the 
money in the market----
    Mr. Sununu. Well, I am not----
    Secretary Rubin. Yes, it is a complicated situation.
    Mr. Sununu [continuing]. Talking, you know, 50 basis 
points.
    Secretary Rubin. Well, this is more than 50. Korea in 
December of 1997 could not have gotten a market rate. So, there 
was no market money that would have been available to them. So, 
whatever rate they got from the International Monetary Fund 
would have been below market by definition. What we have tried 
to do though--not tried--what we have done is put in place this 
program which is charging substantially higher interest rates. 
We call it a penalty rate. It is a penalty rate over what it 
would have been otherwise.
    Mr. Sununu. What about transparency?

                    release of financial information

    Secretary Rubin. Well, I think we have made some real 
progress. There are a whole bunch of different reports and 
analyses done by the International Monetary Fund and a goodly 
number of those now are being released in one fashion or 
another. But there is further work to do. We can get to the 
specifics if you would like, the things called PINS, and the 
Article IVs, and all kinds of things. And a lot of that 
information is now being released, though not as much as we 
ultimately expect to get to.
    Mr. Sununu. What is not being released right now that you, 
as Secretary of the Treasury, would like to see released?
    Secretary Rubin. Well, I think it gets into rather 
complicated questions because you get information from 
countries that they feel should be confidential and we feel 
some of it could be released. You get analysis that the 
International Monetary Fund does and the question is how much 
lag time should there be on its release because it is going to 
have market effect, too. And those are the kinds of questions 
we are dealing with and trying to work out with them.
    The International Monetary Fund has not been resistant to 
this transparency. I cannot say there are not individuals who 
have been, but as an institution they have not been.
    Mr. Sununu. There has been less resistant to it in the last 
two years, than they have historically. But I think that it 
would be a misnomer to say that they have historically been 
perfectly willing to engage in the kind of disclosure that we 
might expect of the financial sector here, in the United 
States.
    Secretary Rubin. I would say, Mr. Sununu, that would be at 
the very least a misnomer. [Laughter.]
    Mr. Sununu. And finally----
    Secretary Rubin. In fact, probably a wildly inaccurate 
statement. [Laughter.]

                        imf policy prescriptions

    Mr. Sununu. Policy prescriptions. There was I think a lot 
of sentiment coming from the United States, all sectors of the 
United States, for policy prescriptions that might be in line 
with free market economics, moving away from policy 
prescriptions that a country raise taxes in order to achieve 
economic stability. And I think in many cases that has been the 
path the International Monetary Fund has followed in the past. 
And obviously raising taxes at the time of crisis is not 
necessarily in the economic interest of or devaluations, for 
that matter, are not in the economic interests of their 
consumers.
    Has there been a move away from those kinds of policy 
prescriptions and I guess what is the official position of the 
Treasury on the tax increases as a prescription for achieving 
economic stability?
    Secretary Rubin. We are totally focused on market-based 
economics. This is, really, one of the things we have tried to 
do here at Treasury, and I think we have had considerable 
success. The movement in developing countries around the world 
has been toward market-based systems as opposed to dirigiste or 
State-run systems.
    When you get a country in crisis, the problem that you 
have, Mr. Sununu, I think, is that there is a tension. You want 
to avoid a rampant devaluation for obvious reasons. But at the 
same time, to do that, you have to have some confidence in the 
currency. And probably the only way to do that in the very 
short-term is to have higher taxes and tighter fiscal policy.
    So, the International Monetary Fund's objective is not to 
have higher taxes or tighter fiscal policy but rather the 
objective is to create a macroeconomic framework that will 
provide support to the currency so that you do not have--it is 
not really devaluation, it is more depreciation--but you do not 
have a hyper-depreciation with hyper-inflation. And that is the 
tension that the IMF gets caught up in, and we get caught up in 
every time we face one of these things.
    Mr. Sununu. You are cutting me off, Mr. Chairman?
    Secretary Rubin. We would be delighted to come and speak to 
you about this. You obviously have given a lot of thought to 
it.
    Mr. Kolbe. I would like to have you stay around for a 
second round.
    Mr. Sununu. Well, thank you for the invitation.
    I yield whatever time I do not have back to the Chairman. 
[Laughter.]
    Thank you.
    Secretary Rubin. I think you are in deficit not in surplus 
at the moment, Mr. Sununu. [Laughter.]
    Mr. Kolbe. He is definitely in deficit. [Laughter.]

                           customs user fees

    Let us do begin our second round of questioning. And I find 
this Monetary discussion fascinating because it is something 
that just interests me really a great deal. But I am going to 
return to the work of the mundane of the budget. Though this is 
a very important policy issue, I want to come back to the taxes 
that are proposed. You call them fees, I call them taxes that 
are proposed to pay for Customs Service. I am particularly 
concerned, as I indicated earlier, that the proposal is to use 
this for the base operations, not for new initiatives, but for 
base operations of Customs Service. And as you know, we do not 
have any control over that in this appropriations committee.
    So, I am wondering--that comes under the Ways and Means 
jurisdiction--so I am wondering how much discussion have you 
had and you and your staff had with the Ways and Means 
Committee about this new tax?
    Secretary Rubin. We do not think of it as a tax. We think 
of it as a fee.
    Mr. Kolbe. I am sorry, how much discussion have you and 
your staff had with the Ways and Means Committee about this new 
fee?
    Secretary Rubin. Mr. Kolbe, to the best of my knowledge we 
have not raised this fee with----
    Mr. Kolbe. So, how is this going to happen? Is this going 
to be just something that you just throw out on the table and 
everybody is supposed to rush to adopt a new fee, a new tax?
    Secretary Rubin. My guess is that----
    Mr. Kolbe. I will use tax again.
    Secretary Rubin. My guess is that--we can agree that we are 
both using different terms, referring to the same $300----
    Mr. Kolbe. Right.
    Secretary Rubin. The same $312 million. I do not think it 
is going to be a rush to support it, although there might be. 
But my guess is there will not be. But I think the--you have 
identified a serious problem. Let me tell you what my reaction 
to it is, Mr. Chairman.
    I think that what we have is a full program that is 
extremely important to get enacted. This was our best idea as 
to how to get it funded. I think somehow or another, and I do 
not know exactly how this is going to happen, but I felt 
exactly the same way last year. And I think we even had these 
discussions. But I think some how or another the Congress and 
the Administration have to come to grips with funding this 
year's budget and I think this is one of a number of similar 
problems that we are going to have to find some way to fund.
    Our view was this was a good way to fund it. If the 
Congress does not agree with this way, then we will all have to 
work on some other ways. I do not have a better answer for you 
at the moment other than to say that last year we worked our 
way through it and we did come out with a very good budget. I 
think some way or another we are going to have to all work our 
way through it this year and come out with some way to fund 
these full program requests that are being made.
    Mr. Kolbe. As to whether or not they will or will not, I 
would be happy to put a little even money bet with you on that 
and I promise I will do the same as you will and I will never 
speak to the Ways and Means Committee people about it. 
[Laughter.]
    Secretary Rubin. No. We will take this wherever it needs to 
go. But----
    Mr. Kolbe. Well, but I mean I think that is the point. I 
mean when the Administration has a new initiative you usually 
come up and you talk to the committees and the chairmen that 
are involved with it. In this case, a new initiative for a new 
fee, tax, whatever. And you just cannot just throw it out on 
the table and expect Ways and Means Committee to embrace the 
idea.
    Secretary Rubin. Let me absolutely assure you of this, Mr. 
Chairman, that we, but also I, will do everything that we can 
to try to get this enacted. If we cannot get it enacted then we 
are going to do everything we can to find other ways of trying 
to fund a full program that we think is absolutely essential.
    Mr. Kolbe. I was just handed this morning a new release of 
a letter from a new group, a coalition for Customs Service 
automation funding which I want to get into talking about 
specifically about automation funding. But they say in their 
letter to you which went yesterday, probably it has not gotten 
to your desk yet. But for almost 10 years U.S. industry has 
been assessed $800 million annually in merchandise processing 
fees, which should have included ACE development. A new user 
fee which is merely a new tax is a clear case of double 
billing.
    This is a somewhat different area I realize.
    Secretary Rubin. Well, it sort of relates in a way. I mean 
that suggests that they do not agree with our fee, I think.
    Mr. Kolbe. Yes, I think so. [Laughter.]
    So, you have got a new coalition that is forming against 
that and I suspect that they will be, they certainly will not 
fail to communicate with Ways and Means Committee of their 
views.
    Secretary Rubin. No. We will not fail. I assure you we will 
be going to Ways and Means and we will be working very actively 
with them and everybody else we have to work with to get this.

                 automated commercial environment (ACE)

    Mr. Kolbe. Let me turn to the ACE. And you and I agree on 
that. We are in complete agreement. We have some difference 
about the funding of this thing. But we are in complete 
agreement about the importance of this. And I just cannot 
emphasize enough how concerned I am about whether it happens on 
your watch and my watch in the sense that you are Treasury and 
Mr. Hoyer and I, I will be sure I include him in this, are here 
at the subcommittee level on the funding of this thing.
    If this Customs Service system, automated system breaks 
down, the current system that we have, and I hear from people 
in Customs Service and I hear from the users over and over 
again that it is in danger of really collapsing, possibly this 
year. Do you not agree that a real breakdown in the system 
would have enormous economic consequences?
    Secretary Rubin. You see, Mr. Chairman, we totally--there 
is nothing you said we do not agree with. I think there are 
brown-outs already, are there not?
    Mr. Kolbe. Yes, there are.
    Secretary Rubin. There is nothing you said that we do not 
agree with. I think the only place that is troubling to us, and 
we discussed this with your staff, is that I think that 
something else you said is also very correct. There is a lesson 
from the IRS.
    Mr. Kolbe. Yes, exactly.
    Secretary Rubin. And I think the lesson is to try to get it 
right. And I think Assistant Secretary Killefer ought to speak 
to this because she has been enormously involved in it.
    Mr. Hoyer referred to our new commissioner. I think he is 
doing an excellent job; but also our Assistant Secretary who 
works very closely with our new commissioner is also doing a--
it is really the two of them together that have made this thing 
happen. And I think you might want to speak to this question, 
if you would, Nancy?
    Ms. Killefer. I think the ACS system is out of memory and, 
frankly, in this year we have a $12 million requirement to add 
memory to that system that was not anticipated or budgeted for. 
So we will probably be coming to you for a reprogramming on 
that.
    What we have anticipated in the 2000 budget is, in fact, 
additional funds for the current ACS system to keep it on its 
legs. It is a huge problem if it goes down, but it can be 
expanded, it can be maintained. It is not desirable. We would 
rather have been further along in a new system than we are, but 
I think our feeling is, coming out of the IRS, that to proceed 
without an adequate plan, in terms of how we are going to 
implement what is a massive and decentralized system, would be 
a mistake for all of us.
    Mr. Kolbe. Is there a blueprint to get from here to there? 
I mean, to get here to there means designing a system, and this 
thing is moving at a snail's pace. Maybe we need to go back and 
do what we did with IRS and simply dump it all overboard, go to 
outside contractors, and move to get this thing in place.
    Ms. Killefer. We are actually in the process of doing that 
now. You are not wrong. It is a little different from the IRS, 
let me say, in that the IRS had no conception of what ``there'' 
was. So there was no understanding of what it was ultimately 
going to look like. It was just band aids again and again on an 
old 30-year-old mainframe system.
    What Customs has done, and I think done successfully, I was 
out on Monday in Detroit looking at the system, they have 
prototyped the system. So they know what ``it'' is. They know 
what that functionality is, and they are testing it out with 
their customers. So I think that is very positive. What we do 
not know is how to get from where we are today to that, across 
the country in all of the ports. And we have learned from the 
IRS that doing these things internally is not wise. What we are 
planning to do at Customs and we are working on now is to go 
out, like the prime contract, but, essentially, it won't be 
exactly like the prime, but it will be getting a third-party 
outside integrator to actually develop the system. That doesn't 
mean we give it up, we have to work with them hand in hand, but 
it means we rely on a third-party vendor and outside 
contractors to get the system up and running.

                      ace development partnership

    And we actually talked to some of the industry on Monday, 
when we were out in Detroit, about them partnering with us as 
well, and they are very willing, actually, to provide us 
technical support and other support perhaps beyond technical 
support to get the system up and running.
    Mr. Kolbe. I am sorry. Who is willing to provide that 
technical support?
    Ms. Killefer. Some of the industry people we met with. 
Those were the Big Three auto makers in that case. But I think 
an optimal strategy in this case may be a partnership that 
involves, actually, a prime contractor and private industry, 
who are very much the customers of this system, to get it up 
and running.
    Mr. Kolbe. That is new information for us. It is helpful 
information. I would like you to send us a letter or give us a 
memorandum as to your time table of how you plan to go about 
this and get this done. I just think we do not have a minute to 
spare in getting moving with this thing. I am not convinced 
that you can put another band aid on it this year with another 
$12 million, and then there will be a lot of finger-pointing at 
the end when it goes down.
    Ms. Killefer. I agree. It is a relatively--I hesitate to 
say this--it is a recordkeeping system. So the expansion of 
memory capacity will actually keep it going. It is not a great 
system. It does not have the functionality we need. The new 
system is absolutely required. But I do not think, if we can 
get the memory expanded, we are at the risk that might be 
perceived.
    I would only also echo that Commissioner Kelly is very much 
concerned with this initiative, and we are partnering with him. 
We have a new CIO. The IRS is actually helping us out on this, 
and we will be back to you as soon as we have a plan.
    Mr. Kolbe. Thank you.
    Secretary Rubin. Could I say just one word, Mr. Chairman, 
if I may? I lived through an enormously difficult system 
situation when I was in private sector, and it took us years, 
and years and years, and the amounts of money involved were 
quite stupendous, as it turned out.
    I think if you look at what Charles Rossotti and Nancy 
Killefer--Charles Rossotti would run a very large private-
sector institution and Nancy Killefer would come from McKinsey 
and Company--are doing is up to the standard of any private-
sector systems effort that I, at least, have ever seen. I am 
talking about the IRS effort right now. It is a really 
remarkable thing for the Government to be able to do this. I 
think we should all be very grateful that we have these two 
people.
    What Nancy Killefer is trying to do right now in Customs is 
to replicate that in focusing on the ACS system. I think 
everything you have said--there is nothing you have said that 
is not in that neighborhood of 100-percent correct.
    Mr. Kolbe. Thank you.
    Mr. Hoyer.

         enforcement funding from the treasury forfeiture fund

    Mr. Hoyer. Mr. Chairman, I made an observation at the 
beginning of these hearings, and I mentioned Secretary 
Killefer, but not as pointedly in the context as the Secretary 
correctly observed with reference to her work on the IRS and now with 
Customs. But I did mention, and what I think this is a specific example 
of is the focus that the Secretary has put on making Treasury work as a 
business organization. I also think Secretary Killefer has made a 
tremendous contribution to that, and I want to make that observation. 
It is another example of where we did not have that kind of focus in 
years past, not because anybody was bad, it was just that that was not 
the interest. We were focused on policy, in terms of tax policy, just 
not implementing it.
    We mentioned the $312 million on the fees. I am also 
concerned, as you probably heard, about the $142 million, 
proposed from the Treasury Forfeiture Fund, not only in terms 
of the anticipation of those revenues, but also the incentive 
it gives to law enforcement to forfeit private-sector items 
because without them they cannot run their agencies. I think 
that is a very perverse incentive to build into a system, and I 
am very worried about it, irrespective of what the dollars are.
    What we have historically done, Congress, frankly, has 
dipped into it for projects which law enforcement may or may 
not have cared about or has prospectively, after the fact, 
spent the money. Now, if you spend it after the fact, that is 
not to say that there is a total absence of incentive to get it 
on the theory that you can spend it later. That is always good, 
too. But, clearly, if in order to keep your job you have got to 
have forfeitures coming through the door, it is a very perverse 
and dangerous incentive.
    Ms. Killefer. I agree, Mr. Hoyer, that that is a 
significant problem, and I think one of the things, in talking 
to staff, is how, in fact, we think about this and whether it 
can be used actually prospectively or only retrospectively, and 
even that, I think, presents complications.
    I think, ideally, it had, in the past, provided a very 
important source of funds for actual emergencies, unintended 
things that one did not know about and a very important and 
flexible source of funding. It is a shame, actually, to be 
using it in the ways we are now. So if we could avoid that, I 
think that is the right thing to do.
    Secretary Rubin. Could I just say one other word, if I may?
    Mr. Hoyer. Absolutely, Mr. Secretary.
    Secretary Rubin. Thank you. It will only be one sentence, 
though it may have some semicolons. [Laughter.]
    I think everything Nancy Killefer said is correct. In 
addition, I think we have got to sensitize the IG to the 
potential problems this could create and just have a more 
intense focus there on trying to avoid or avoiding the sorts of 
problems that you have raised, although the concerns are 
legitimate.

                 absorption of non-pay inflation costs

    Mr. Hoyer. One more question, and then I will get to--
because I know you have to close. You are $81 million as well?
    Secretary Rubin. Correct.
    Mr. Hoyer. Which, in effect, is an additional cut because 
it was existing expenditures. If you put the 312, the 142, and 
the 81, you are over a half-billion dollars, I think. Is that 
about right? Thirty-one and 2 are 34, right? [Laughter.]
    Secretary Rubin. I was going to say I have been 
disqualified from commenting, but I do think you are in the 
right area. [Laughter.]
    Mr. Hoyer. It is in that neighborhood. Can you just comment 
on this absorption because, again, we are absorbing some of the 
pay, obviously. We are doing that throughout the Federal 
Government. I am opposed to that. As you sit around that table, 
I wish you would talk to Jack Lew. I have talked to Jack Lew, 
Frank Raines. Dick Darman one time, as you have heard me say, 
did, in fact, in effect, put aside the salary increase as a set 
sum that it would take. As you know, it takes about $800 
million for a point on Federal salaries. To absorb that is to 
cut programs. You pit your normal salary increase. Here, again, 
you are absorbing costs which have to undermine your programs. 
It looks like it is not a cut, but it is.
    Secretary Rubin. You are right. This was $80 million of 
nonpay inflationary cost increases, and we said that, look, we 
have the same problem. We have to live within caps that are 
very difficult to live with, and we said we would find 
productivity offsets, but it, clearly, as you correctly say, is 
a current services inflationary increase that we are absorbing.
    I think on the pay side we got most of that, did we not?
    Ms. Killefer. Yes, we did get all of the pay raise. But I 
would probably emphasize that many of these items that fall 
into the nonpay are not very discretionary. We pay rent to GSA, 
and we cannot independently decide to pay them less, and costs 
like that are very difficult to absorb.
    Mr. Hoyer. Secretary Killefer, what is the percentage 
increase in the Treasury budget?
    Ms. Killefer. What, overall?
    Mr. Hoyer. Yes.
    Ms. Killefer. The pay increase is 4.4 percent that is in 
there for pay.
    Secretary Rubin. Are you talking about the overall budget?
    Mr. Hoyer. You may have 4.4 percent, and I do not know what 
your other increases, like your fixed costs are in terms of 
GSA----
    Secretary Rubin. The money is fungible, too. So you can 
sort of----
    Ms. Killefer. That is a fair point.
    Mr. Hoyer. But it is nice to say you have got the 4.4 
percent, and you get it for pay. But if you get 1.5 percent for 
other operations and other operations are 2.5 percent 
increased, obviously, you are absorbing somewhere.
    Ms. Killefer. Yes, exactly, exactly.
    Mr. Hoyer. The director of OMB told me he put it in there, 
also.
    Secretary Rubin. Yes.
    Mr. Hoyer. But if you look through the agencies, and if 
they received less than--if you take your salary and expenses, 
some of these agencies are 80-percent salary and expenses.
    Ms. Killefer. Yes. That is correct. We are largely pay, and 
the $80 million in non-pay inflation is a burden. $50 million 
of that is at IRS.
    Mr. Hoyer. Mr. Chairman, I just raise that because it again 
points up the problem that you have raised that there is a lot 
of money in here that appears to be money available for 
expenditures, but which may well not be or is, in fact, a cut.
    Thank you.

          international monetary fund loan package for russia

    Mr. Kolbe. Well, I guess we can return to our international 
monetary seminar here.
    Mr. Sununu.
    Mr. Sununu. I am glad we have the Secretary here to make it 
into somewhat of a seminar, and I appreciate the time.
    Getting back to IMF, you talked about some of the strengths 
and weaknesses of the prescription policies that the IMF has 
tried to put in place in the past. Why don't we turn to a 
specific case, that of Russia. The total package was roughly 
$22.5 billion that was agreed upon the middle of last year. 
Obviously, there were a number of assumptions underlying that 
allocation regarding policy reforms, property rights, tax 
reform. The Judicial system, I know, continues to be a problem. 
Approximately, I think almost $5 billion was released to the 
Russians.
    Secretary Rubin. $4.8.
    Mr. Sununu. Thank you. And if you could, please, talk about 
the relative success or lack of success in putting in place the 
kind of market and policy reforms that are essential to 
economic growth in Russia.
    Secretary Rubin. I think that I will start with the end of 
your sentence and then go back to the beginning of it.
    I think that you are right. I think if Russia is going to 
have a successful economy there are going to have to be a whole 
host of reforms that provide the framework for a market-based 
economy. The IMF has attempted over time to promote those 
reforms through loans with conditionality.
    The particular program you are talking about was undertaken 
with the recognition on the part of all involved--the IMF and 
the various G-7 Nations and so forth--that it was very unclear 
whether this was going to work and whether the Duma would do 
what it needed to do, even on the macroeconomic piece, to say 
nothing of the various structural pieces that are very 
important.
    Mr. Sununu. You say it was unclear that it was going to 
work, even after the $4.8 billion was released?
    Secretary Rubin. No, no. Before it was released. No, no. 
Before it was released.
    But the stakes that the world has in having a stable Russia 
are so enormous that it was felt universally, through the G-7 
and at the IMF, that while it was an uncertain prospect, it was 
a wise judgment to provide the money to do everything 
possible--it was $22 billion with tranches, the first tranche 
was $4.8--do everything possible to get the reforms. If it 
worked, then you could hopefully have a substantially increased 
probability, though not certainty, of stability. If they did 
not make the reforms, then there would be no further tranches. 
And as you know, there were no further tranches, and that 
remains a matter of great tension between the IMF and Russia to 
this very day.
    Mr. Sununu. Where do you think----
    Secretary Rubin. But nobody had any illusions. This was a 
question of making a probabilistic judgment, when the stakes 
for the world were vast.
    Mr. Sununu. $4.8 billion is a lot of money.

                 reform conditions for release of funds

    Secretary Rubin. Yes, but----
    Mr. Sununu. And I know there is more to your answer than 
you have provided here, but my point is that I would hope there 
was some promise, some opportunity, some reform that had been 
put into place prior to the release of $4.8 billion. With my 
limited knowledge, I am not really aware of any. I mean, they 
did not implement tax reform. They did not make any real 
progress on privatizations. They certainly have not changed the 
corruption in a good part of their banking industry. Perhaps 
they had, and that is my question. What did they actually do to 
warrant the release of the $4.8 billion?
    Secretary Rubin. Well, actually, if you go back over the 
period of the last four/five years, there has been an enormous 
amount of privatization. Now, there are a lot of questions 
around the privatization, as you know. But this $4.8 was 
conditioned on the Duma taking various actions, a lot of them 
in the tax area. Some things happened. Most of them did not 
happen, and that is why no further money flowed.
    But the essential decision was a decision to provide 
support for the then-Government not on the belief that there 
was a high probability that the reform package would happen, 
but a belief that there was a reasonable chance of it happening 
and it was worth taking that chance to maintain a Government in 
a country where substantial instability could create enormous 
problems for the rest of the world.
    Mr. Sununu. There was a risk, it was $4.8 billion, and, at 
least at this point, the risk has not panned out.
    Secretary Rubin. Like a lot of risks, like a lot of 
judgments you make. Would I do that again, knowing what we knew 
then? Absolutely, 100 percent. I spend my whole life doing 
those kinds of things. You know, you make judgments, and some 
things work and some do not.
    I think the right question is not did it work----
    Mr. Sununu. Although you spent a good portion of that 
career doing it with your own money or with the money of those 
that were obviously providing you with the money, as opposed to 
public money.
    Secretary Rubin. No, but this was the right risk for the 
world taxpayers because what they were doing was trying to 
prevent a destabilization in Russia which, if it had occurred, 
could have had consequences for the rest of the world dwarfing 
whatever amount of money was spent trying to prevent it.
    Mr. Sununu. But to the extent that there wasn't any no 
property rights reform, little success in privatizations and 
certainly no tax reform has been put into place, the risks 
today of destabilization are no less than they were when the 
IMF put up the $22 billion.
    Secretary Rubin. Agreed. Well, we did not put up $22 
billion. The IMF----
    Mr. Sununu. Agreed to a bailout plan totalling $22 billion, 
contingent on the first tranche----
    Secretary Rubin. A support plan, of which $4.8 billion was 
paid out as part of an effort to accomplish the purpose I just 
described. I think we were unsuccessful in that effort, and 
that is why no further tranches were paid.
    Mr. Sununu. And I am not criticizing intentions, to be 
sure. I think the intentions of everyone here----
    Secretary Rubin. No, but I would not even criticize the 
judgments, Mr. Sununu. I think this is a case actually, that if 
you go back over the record you will understand the reason that 
I said I would do it again. In terms of all of the facts then 
known,the purposes being sought, and the chances of success, I 
do not think you can decide the judgment was wrong as to the 
probabilities. I think you just say the probabilities were ``x'' and it 
turned out to be that it did not work.

       differing perspectives on appropriateness of russian loan

    Mr. Sununu. I appreciate the clarity of your point of view 
that you would do it again, but I do believe very firmly 
reasonable people can disagree on this as to whether or not it 
was the right thing to do, and that can be a disagreement as to 
size of the package, of delivery of the first tranche, as to 
other contingencies, or it can be the very reasoned point of 
view of people like George Shultz that thinks that there is 
really no role for the IMF in situations like this because of 
the risks of moral hazard and because of the limited ability of 
the IMF to really put in place good policy prescriptions. I 
know that is not your point of view, but I do not think you are 
taking the point of view that Mr. Schultz's arguments are not 
at least----
    Secretary Rubin. No. Number one, I have enormous respect 
for George----
    Mr. Sununu. Well, you disagree on this point.
    Secretary Rubin. I have respect for George Schultz. I 
think, however, this is an area in which I would say that 
reasonable people can disagree. I would observe that I think he 
is wrong. [Laughter.]
    Mr. Sununu. Well put, at least clearly put.
    Secretary Rubin. You can say well put and not agree with 
it. [Laughter.]
    Mr. Sununu. $4.8 billion with limited success in 
privatization, no tax reform, and I am not an expert on the 
judicial system or property rights, but that is where I 
personally see an enormous weakness, infrastructural weakness.
    Secretary Rubin. I agree.
    Mr. Sununu. The bottom line of those facts, to me, is the 
people in Russia did not benefit, so who benefitted from the 
distribution of the initial tranche of $4.8 billion?
    Secretary Rubin. No, but I would go back one step just 
prior to what you just said. That it did not work I think all 
of us can agree. I think the question is, was it a reasonable 
judgment ex ante, not ex post, and I think ex ante it was a 
reasonable judgment.
    Mr. Sununu. And even if I were to grant you fully that 
argument, it was a good decision at the time----
    Secretary Rubin. Now we agree. [Laughter.]
    Mr. Sununu. If I were to grant you that judgment that it 
was a good----
    Secretary Rubin. Oh, I missed the prefatory statement.

                     beneficiaries of russian loan

    Mr. Sununu. The $4.8 billion certainly went to them, so it 
went to someone. And I am saying the people in Russia did not 
benefit; who did benefit? Where did this money go?
    Secretary Rubin. You know, it is very hard to track money 
in Russia for all of the reasons that you well know. And I will 
tell you we face this problem right now, Mr. Sununu. If Russia 
destabilizes, the costs to the United States are going to be, 
in my view, at least vastly greater than anything we can 
possibly think of in terms of trying to provide assistance to 
Russia. We face these problems, these issues right now.
    Mr. Sununu. Are you talking about economic cost to the 
United States?
    Secretary Rubin. I am talking about financial costs of 
having a country with its national security apparatus 
destabilized.
    Mr. Sununu. Really you are talking about national security.
    Secretary Rubin. Yes, but that has economic costs.
    Mr. Kolbe. Mr. Sununu, would you yield on that?
    Mr. Sununu. Certainly, Mr. Chairman.
    Mr. Kolbe. And we still have not heard where the $4.8 
billion went.
    Mr. Sununu. Thank you for holding that thought. [Laughter.]
    Mr. Kolbe. But was it a case of probabilities or a case of 
bad judgment, what I would call the ``sky is falling'' bit, the 
``Chicken Little, sky is falling'' bit. It has not turned out 
that Russia collapsed quite the way we thought it has. I mean, 
it is still bumbling along in the same God-awful situation that 
it was before, but it has not really changed that much.
    In fact, there was a very interesting article in the 
Journal the other day about this, about how it just kind of 
keeps on bumbling along, and there has been no real change to 
it. We have not made any more tranches, any more payments, and 
it is still there. There has not been a civil war. There has 
not been rioting. It just keeps on going.
    Secretary Rubin. Well, yes, except they now have a 50-
percent inflation. Remember, they had gotten--I apologize for 
not remembering the exact number they got inflation down to, 
Mr. Chairman, but they did get it down to a relatively low 
level. I just do not remember offhand what it was. They now 
have, roughly, 50-percent inflation. Industrial production has 
continued to fall, though some people think now it may have 
stabilized. The ruble has, as you know, depreciated enormously. 
I think there has been a more dangerous deterioration in living 
standards. So the situation has worsened, though it certainly 
has not collapsed. But it has worsened.
    Listen, I think we have to hope that they can continue to 
muddle through, one way or another.
    Mr. Kolbe. So back to his question, where did the $4.8 
billion go to?
    Secretary Rubin. Money is fungible. I honestly do not know. 
There are some people who think that a lot of that may have 
been siphoned off improperly and, Mr. Sununu, the answer is, 
there is no way to know.
    Mr. Sununu. You do not know. And I mean this sincerely, do 
you believe anyone knows, at least within the framework of the 
IMF? I mean, I am sure someone in Russia or Bermuda or the 
Bahamas knows, but does anyone in the IMF know?
    Secretary Rubin. Well, I do not know about Bermuda. I 
happen to like going to the Bahamas, and I would be happy to go 
look if you would like----
    [Laughter.]
    Secretary Rubin. I really do. I had not thought about that. 
That is a very good idea. That had not occurred to me. It 
should have. [Laughter.]
    All that we know is that, the IMF, ordinarily at least, 
distributes this money to the central bank, and then it goes 
into the reserves. What happens to the reserves, one does 
notknow. One knows there has been an enormous amount of capital flight 
from Russia. This funding presumably--I should not say presumably since 
I do not know this for sure--but it may well have financed capital 
flight. What type of capital flight, who they were, I think is probably 
unascertainable.
    Mr. Sununu. I would suggest that, as a minimum requirement 
of distribution of money from the IMF, let alone $4.8 billion 
from the IMF, the central facility that is being used to 
distribute those funds should have some responsibility for 
being able to provide a record of where those funds went. And 
your immediate statement suggests that we cannot trust the 
Russian central bank, and that may be the case. Maybe that is 
not what you meant to suggest. But if we cannot trust the 
Russian central bank to provide its best and most honest 
accounting of where the funds went, then I think it would be a 
mistake to let those funds out in the first place.
    Secretary Rubin. No, no. That actually was not the 
implication of what I said. I think in the first instance, my--
--
    Mr. Sununu. But the funds did go to the central bank. I am 
not mistaken there.
    Secretary Rubin. No, they went to the central bank, and I 
suspect--I do not know this for sure--my guess would be in the 
first instance you could find out where the money went because, 
as you know, when the central bank uses these funds for an 
intervention or auctions them off or however it determines to 
use these funds to meet currency needs, they will go into the 
banking system in some fashion.
    You can probably find--I am not sure about this, but 
because I know a little bit how central banks work--my guess 
would be that you could find out what banks these funds went 
to. What you do not know is, within those banks, where they 
then went to. That, I think, is where the problem would lie in 
terms of where the money ultimately went. I thought that was 
your question. I think in the first instance you could find out 
where the money went, but that does not really answer your 
question.
    Mr. Sununu. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary.

     supplemental appropriation offset: callable capital reduction

    Mr. Kolbe. Well, this really has been a very interesting 
discussion, and I have enjoyed it. I would like to come back in 
final question, and Mr. Hoyer may have one other, to the issue 
that Mr. Hoyer raised at the beginning, and that is the 
supplemental appropriation that we are about to deal with in 
this issue of the reduction of the callable capital.
    When was the last time Congress appropriated any money for 
this callable capital for the World Bank, do you know?
    Secretary Rubin. It has been a long time. I think it was 
the mid or early eighties, but I----
    Mr. Kolbe. To be exact, I think it was 1980, so 18/19 years 
ago.
    And yet, since that time, there has been increases on the 
obligations; is that not right?
    Secretary Rubin. Correct.
    Mr. Kolbe. And I believe in 1994 some of the callable 
capital was removed as part of a--I see a shaking of the head 
behind you there--but that part of the callable capital was 
removed as part of the Public Law 103-211 for the earthquake 
aid in California.
    Secretary Rubin. Somebody can give you the technical 
description if you would like, but that case in 1994 was not 
analogous to this current proposal because the paid-in capital 
had not yet been obligated. The paid-in capital had not yet 
gone through whatever authorization process was necessary to be 
considered obligated. So the 1994 rescission was not a 
rescission of obligated money.
    Mr. Kolbe. I am sorry? There have been no--what do you mean 
it was not obligated? We had not made that----
    Secretary Rubin. That was not money that was----
    Mr. Kolbe. That was not callable capital?
    Secretary Rubin. No, no. The paid-in capital funds had 
actually not yet been approved by the Administration in such a 
fashion that the World Bank considered them obligated. Yes, I 
am quite sure that is right, Mr. Chairman. I do not know 
technically what the right words are. The word ``obligated'' I 
know----
    Mr. Kolbe. I guess the point I am trying to----
    Secretary Rubin. Consequently, the callable capital had not 
gone through the process that it needed to go through in order 
to be included in what the creditors to the World Bank and 
other MDBs relied on. We can get you a letter on that, if you 
would like.
    Mr. Kolbe. Yes, because that does not make any sense. We 
could not have recaptured and counted it if it had not been 
authorized by the Congress. There would be no----
    Secretary Rubin. Well, but it had not gone through whatever 
process it needs to go through--and this I am sure is right. I 
just do not know what the right term is--it had not gone 
through whatever process is necessary in order for it to be 
included in the callable capital that has been committed to the 
MDBs.
    Mr. Kolbe. And you just said a minute ago, though, that we 
have not had any appropriation or we agreed there were no 
appropriations since the early eighties, and yet we have 
increased the obligation, so what difference does it make?
    Secretary Rubin. Because I think, unfortunately, Mr. 
Chairman, what we are facing here is a different situation 
because here we are not talking about whether or not we should 
increase the appropriated callable capital, but we are talking 
about rescinding some portion of the appropriated callable 
capital. I, frankly, had never focused on the question of 
callable capital until the supplemental issue first came up. I 
think about ten days ago or so somebody brought it to my 
attention.

      financial market reaction to rescission of callable capital

    I have since spoken to enough people who are involved in 
this process, including the chief financial officer of the 
bank, whom I knew when he and I were both in the private 
sector, and who was a very sound chief financial officer, but I 
have spoken to enough people about this, so that I am convinced 
this is an important issue. And that is why this mention of a 
possible veto wound up in the Administration's comment letter 
that you all received.
    I am convinced that if there is a congressional rescission 
at this point, it would have the potential for being--I cannot 
assure you absolutely it would be, because I do not know that--
but would have the potential for being a very consequential act 
with respect to the financing of the World Bank. A rescission 
is very distinguishable, even a small one, in terms of how 
creditors react.
    After all, how creditors react is a function of perception, 
and there is a lot of skittishness right now, rightly or 
wrongly, a lot of skittishness about American commitment to 
international institutions.
    Mr. Kolbe. Just for the record, my understanding is that 
the recession that is involved in this----
    Secretary Rubin. Is ADB.
    Mr. Kolbe [continuing]. Supplemental is for unobligated 
balances.
    Secretary Rubin. Well, let me----
    Mr. Kolbe. We may be talking about some technical things 
that I am not sure of.
    Secretary Rubin. I think we are just using the wrong words 
because I have sat down with people whose life is this, and 
they tell me----
    Mr. Kolbe. I question whether it is the ``Chicken Little'' 
or the ``sky is falling again'' thing here or not. But 
hopefully----
    Secretary Rubin. Mr. Chairman, I cannot assure you what 
effect it would have. One thing I am sure of is that the people 
who are involved in funding these institutions are seriously 
very concerned about it.
    Mr. Kolbe. Mr. Hoyer?

                    context of appropriation action

    Mr. Hoyer. Mr. Chairman, I do not have any additional 
questions. I appreciate the Secretary's observations, and we 
are going to have to work very hard on this budget. Neither the 
Chairman, nor anybody on this subcommittee, nor anybody on the 
Appropriations Committee, nor the speaker, nor the minority 
leader right now know how we are going to do appropriation 
bills, period. There is nobody in this House that knows right 
now how we are going to do these appropriation bills.
    They will not be done with the present caps. I am not 
advocating doing away with the caps, but they will not be done 
with these caps because you will not be able to politically 
pass appropriation bills in the context that the Appropriations 
Committee currently sees itself.
    So we are going to have to figure out how to do what needs 
to be done, and the larger issues of what we do with Social 
Security critically important. We are going to have to work 
together and, of course, you are going to be one of the 
critical people in dealing with how we do this.
    Secretary Rubin. I guess, Mr. Hoyer, it was sharing the 
view that you just expressed because we think we have dealt 
with the caps, but we did it through all sorts of transfers 
that, as the Chairman correctly says, not everybody recognizes 
as being appropriate, although we think they are.
    But it was really in the spirit that you just expressed 
that I responded to the Chairman before and said we are all 
going to have to work our way through a very difficult set of 
problems and to get this budget done.
    Mr. Hoyer. Mr. Chairman, I serve as well, as you know, on 
the Labor Health Committee. You and the Republicans, frankly, 
could not pass a Labor Health bill last year. It never came to 
the floor because you did not want your members to vote on it, 
as you recall, Mr. Chairman.
    And, in fact, of course, the Senate would have laughed at 
it if it had gotten over there. Mr. Specter clearly said this 
is not going to happen. We cannot pass a Labor Health bill in 
the current context, period. You cannot get Democratic votes 
for it, and you probably cannot get Republican votes for it. I 
do not know where they are going to get votes. They are going 
to have to look someplace outside the institution.
    But it is going to be an exciting process over the next six 
months of figuring out how we do what we need to do. I voted 
for the 1997 bill. I thought the 1997 bill was an appropriate 
piece of legislation for us to pass, but it was not in the 
context that we now find ourselves two and a half years later. 
We were working on that in early 1997--two and a half years/two 
years later of being in much better economic conditions than 
any of us had the concept we would be in.
    Of course, the deficit situation today is radically 
different than was projected. We had a $392 billion deficit, or 
thereabouts, projected in the Darman submission of January of 
1993. We now have a very substantial surplus, and we are 
comparing apples to apples. People say it is a Social Security 
surplus. That may be, but the $392 without Social Security 
would have been a $492 billion deficit. So it was integrated 
then, it is integrated now. So, to that extent, we are 
comparing apples and apples. But we are in a very substantially 
different position, and I think the test is going to be whether 
politically both parties can find a way to get some place that 
they do not think the other is going to hammer them as a result 
of having gotten there.
    Mr. Kolbe. Well, on that we can agree.
    And with that, Mr. Secretary, thank you very much. As 
always, I find this a very intellectually stimulating 
convention.
    Secretary Rubin. Thank you, Mr. Chairman.
    Mr. Kolbe. We appreciate your coming and answering 
questions today.
    The subcommittee stands in recess.


[The official Committee record contains additional information here.]


                                          Thursday, March 18, 1999.

                          U.S. CUSTOMS SERVICE

                        CUSTOMS INTEGRITY ISSUES

                               WITNESSES

RAYMOND KELLY, COMMISSIONER
WILLIAM KEEFER, ASSISTANT COMMISSIONER FOR INTERNAL AFFAIRS
VINCENT PAROLISI, OFFICE OF INTERNAL AFFAIRS
RICHARD GALLO, PRESIDENT, FEDERAL LAW ENFORCEMENT OFFICERS ASSOCIATION
ROBERT TOBIAS, PRESIDENT, NATIONAL TREASURY EMPLOYEES UNION
    Mr. Kolbe. The hearing will come to order. This is the 
Subcommittee on Treasury, Postal Service, and General 
Government and I know we will be joined by Mr. Hoyer here in a 
few moments. We got permission to go ahead while he is waiting 
to get here.
    We finished our regular appropriations hearings. This is a 
topic, however, that is of great concern to the subcommittee. I 
said at the outset we wanted to have this hearing and we talked 
to the Commissioner of Customs about it.
    The topic is about how we ensure the highest degree of 
confidence in the integrity of the U.S. Custom Service, how we 
reduce its vulnerability to forces that can seek to corrupt its 
employees or exploit the weaknesses that we could find in the 
organization.
    So I am pleased very much to have Commissioner Ray Kelly 
here this afternoon. He is joined by the new Assistant 
Commissioner for Internal Affairs Mr. William Keefer, as well 
as Vincent Parolisi, a staff member of the Office of 
Professional Responsibility who happened to have been one of 
the principal authors of the recently completed OPR report on 
the vulnerabilities of Customs. Mr. Parolisi has been assigned 
to the Customs Service to assist in implementing some of the 
changes recommended in the report.
    After we have some opening statements from Commissioner 
Kelly we will take a couple of rounds of questions, but then we 
will be joined at the table by the other essential element of 
this, and that is those people, the people who represent the 
employees, the agents and the inspectors. We will hear from the 
president of the National Treasury Employees Union, Bob Tobias, 
who is with us today, and the Federal Law Enforcement Officers 
Association, Rich Gallo.
    Commissioner, I think I speak for all the members of the 
subcommittee when I say that we hold--I certainly hold and I 
think we all hold U.S. Customs Service and its employees in the 
highest regard. You really are on the front line of protecting 
the borders of this country. And whether the threat is drugs or 
pornography, weapons of mass destruction, trade violations or, 
as we have seen with the recent focus on espionage from China, 
whether it is the threat of that kind of technological 
espionage, the men and women who serve as inspectors and agents 
in all of the capacities throughout Customs are overwhelmingly 
a very dedicated and diligent group who have shown that they 
are willing to face tremendous risks and hardships in 
exercising their duties, and they often go beyond that, as seen 
in the assistance provided to the U.S. mission group that was 
involved in a car accident just south of Douglas, Arizona last 
week.
    But Customs must do a tremendous job with a limited amount 
of resources. In 1998 alone Customs was faced with clearing 
millions of rail cars, sea containers, trucks, vehicles, 
aircraft and 460 million passengers. These numbers have grown 
very rapidly in recent years. So even under the very best of 
circumstances with the very best of people, such huge numbers 
can overwhelm the systems and organizations that are 
responsible for tracking and policing them, so minor weaknesses 
can grow to become very serious failures of the system itself.
    From where I sit, where my congressional district sits on 
the Southwest border, I see serious problems relevant to 
concern for the maximum integrity of Customs, as well, I might 
add, as for INS and the Border Patrol. For example, we saw the 
failure to observe proper procedures that allowed the theft of 
several tons of marijuana at the Tucson incineration facility 
and I know we are going to hear more about that from you today.
    We have the unrelenting flow of illegal aliens across the 
border, along with the drug trafficking that goes with that, 
and that keeps enormous pressure on our principal border 
security agencies. There has to be a way that we can look to 
address that problem, minimize the pressures that are on 
individual inspectors and agents that they can be manipulated 
or corrupted.
    We have to have ways to improve the management, such as 
unified port management, and those have to be implemented in 
order to strengthen the operations of Customs and other 
agencies with border responsibilities, not leave them again 
vulnerable to corruption.
    And then we have the persistent problem of delays and 
traffic back-ups in the processing of vehicles and passengers 
along the border that have to be solved, as well. The pressure 
to facilitate such movement is going to be in conflict and we 
need to carry out the most thorough border enforcement at the 
same time. I have always argued that we have given both INS and 
Customs dual responsibilities that, on the one hand, 
interdicting illegal, in your case illegal flow of goods across 
the border and, on the other hand, to facilitate the flow of 
legal goods across the border.
    So in what ways can we do that? How do we do that? Well, 
one of the ways we are looking at and that you are looking at 
is use of technology for nonintrusive inspection technology, 
automated screening systems that also serve to ease the 
pressure on Customs employees and facilitate the movement of 
legitimate commerce.
    Customs is not immune to the risks such large issues pose 
for the discipline and integrity of its employees and systems 
failures are possible in any large organization. We can only 
expect you to do the best you can with the tools and resources 
you are provided. However, and I know you will agree, there can 
only be one standard for the Customs Service when it comes to 
the matter of integrity, and that would be zero tolerance--zero 
tolerance for corruption, for any carelessness in management 
that permits such problems to fester. The point is to be 
vigilant and to strive to minimize the occurrence of them in 
the first place, what gives rise to them in the very first 
place.
    So this hearing is not about raising the specter of 
sweeping corruption and mismanagement where none exists. It is 
to give this subcommittee a chance to explore some of the 
issues that have been raised in the very informative report by 
the Office of Professional Responsibility, which I believe can 
serve as a blueprint for improvements, some of which have been 
or are being implemented already. I look forward to hearing 
from you, Commissioner, about the initiatives you are 
undertaking to strengthen Customs integrity programs.
    In a world where customs organizations can be and often are 
notoriously corrupt, the U.S. Customs Service stands out as a 
model of professionalism and achievement. I know that 
Commissioner Kelly is making significant progress in 
strengthening Customs and I look forward to seeing how this 
subcommittee can help support the Customs Service in its 
crucial mission as defender of our borders and our trade.
    Let me turn to my ranking member, Mr. Hoyer, for some 
opening comments before I turn to you, Commissioner Kelly.
    Mr. Hoyer. Mr. Chairman, thank you very much.
    First of all, I want to apologize to you and to the 
committee and to the commissioner for being late. I had one of 
my college presidents in the office and we were going over some 
things that are important to me and, I think, to him, as well, 
so I apologize.
    Mr. Commissioner, I want to welcome you to this hearing, 
which, as you and I have discussed privately, is a critically 
important hearing. Like the chairman, I share the view that 
Customs does an extraordinarily good job. As it relates to the 
customs agencies around the world, it may well be without peer.
    We do know, however, that even a few bad apples can spoil 
the barrel and we know that the allegations of wrongdoing are 
sometimes as harmful as the wrongdoing itself, even if it turns 
out that it is either overstated or does not exist.
    I believe your former career has well qualified you to know 
the importance of ensuring the integrity of your organization.
    This hearing is designed, I believe, by the chairman to 
determine where we are. I appreciate the letter you sent to me 
outlining where Customs is with reference to each one of the 
points raised in the assessment that has been issued. I look 
forward to hearing your testimony and working with you.
    As I said in my office and I want to say on the record, the 
Internal Revenue Service, which is also within the ambit of 
this committee, unfortunately was not perceived as acting as 
vigorously internally with respect to problems that were 
subsequently raised externally as I thought appropriate, not 
only from a perception standpoint but from the reality 
standpoint. They should have acted more definitively. If they 
had, the public would have had more confidence in the 
leadership at the Internal Revenue Service. I have discussed it 
with them. I think they are going to do better and I think they 
understand that.
    But to the extent that you and those who you work with at 
Customs act decisively with respect to any allegations or 
realities that undermine the integrity of your organization 
will redound to the benefit of every person working in that 
organization and, more importantly, to every American and to 
the international community that deals with your agency on a 
regular basis.
    So I welcome you here. I look forward to hearing your 
testimony. I look forward to working with you to make sure the 
public knows that we are doing everything in our power to make 
sure their money is spent wisely and effectively by Customs, 
that their borders are being protected and their commerce and 
the integrity of commerce into our borders and out of our 
borders is being protected, as well. So I look forward to your 
testimony and to that of Mr. Keefer and Mr. Parolisi.
    Mr. Kolbe. Thank you very much, Mr. Hoyer.
    Commissioner, I will make the standard statement that as 
always, your full statement can be placed in the record if you 
want to summarize it and we are looking forward to hearing from 
you. Commissioner Kelly.
    Mr. Kelly. Thank you very much, Chairman Kolbe, Mr. Hoyer, 
other members of the subcommittee.
    There is nothing more important to the functioning of law 
enforcement than integrity. Without integrity, law enforcement 
is a contradiction in terms. Corruption, even when it is not 
widespread, is demoralizing, at the very least. At worst, it 
jeopardizes the lives of law enforcement agents, undermines 
public confidence and facilitates narcotics trafficking and 
other crimes.
    Law enforcement executives who do not recognize integrity 
as a priority put their heads in the sand and put the 
credibility of their organization at grave risk. That is 
especially true when America is awash in illegal drugs and the 
cash that stems from narcotics trafficking. Yet historically 
there has been a temptation by some law enforcement executives 
to keep the internal affairs function at arm's length because 
of its unpopularity with the rest of their agency. This is true 
at all levels, be it federal, state or local law enforcement.
    For corruption-fighting to be effective, the head of the 
law enforcement agency must embrace internal affairs, make it a 
personal priority and let the rest of the organization know it. 
Where there is any doubt about the effectiveness of the 
internal affairs function, the executive must act. That is 
exactly what I have done at the Customs Service.
    Let me first note that every review of Customs to date has 
concluded that no systemic corruption exists within the agency. 
While this may be true, there have been nonetheless manifest 
weaknesses in the Service's corruption-fighting capability.
    While serving as Under Secretary for enforcement at the 
Treasury Department, now as Commissioner of Customs, I have 
identified those weaknesses and have acted upon them.
    Mr. Chairman, in my February 16, 1999 letter to you I 
outlined the actions being taken by Customs to respond to the 
findings of the Treasury Department's Office of Professional 
Responsibility on integrity, a study I might add that was 
started on my watch when I was Under Secretary.
    I ask that that letter be included in the record and I have 
a copy of it here.
    Mr. Kolbe. We will place that in the record.
    [The information follows:]


[The official Committee record contains additional information here.]

    Mr. Kelly. I would now like to summarize our actions to 
date to improve integrity at the U.S. Customs Service. I 
replaced the assistant commissioner for the Office of Internal 
Affairs with a career prosecutor for the post who will fight 
corruption. I elevated this position and had the position 
report directly to me.
    Bill Keefer, who you have just introduced, is here today 
and has an impeccable set of credentials in public integrity 
matters. He is a thorough professional who served as a former 
acting United States Attorney and deputy chief of the Office of 
Public Integrity at the Department of Justice.
    Personnel dedicated to investigating alleged criminal 
corruption in the Customs Service must be the very best. In 
addition to change at the top, I have instituted a full review 
of the Office of Internal Affairs and will be directing 
reassignments when and where appropriate. These reassignments 
will be accompanied by a rotation of senior agents from the 
Office of Investigations into the Office of Internal Affairs, 
both to take advantage of investigative experience and to 
better prepare them for future leadership responsibilities in 
Customs.
    We are working to provide career incentives for internal 
affairs. And with this, we hope to stress to our personnel the 
importance of internal affairs to the mission of the 
organization.
    In December of last year we formed seven working teams of 
senior Customs managers and tasked them with reviewing the 
allegation and disciplinary processes. One of the items 
reviewed was the way by which the Service investigates 
allegations of misconduct. This review has been completed and 
we have identified areas requiring improvements.
    Prior to the review, an employee's option for reporting 
allegations of wrongdoing were several, ranging from a passing 
comment to any available supervisor to direct contact with the 
Office of Internal Affairs. Certain allegations were not 
required to be reported. The procedures for documenting 
allegations, where they existed at all, were similarly broad.
    To correct this, first of all, we have simplified the 
process. All allegations of misconduct, without exception, are 
now reported to the Office of Internal Affairs. Reports are 
vetted by a team of experts on a daily basis. The team decides 
the severity of the complaint and whether or not it warrants 
investigation by Internal Affairs or whether it should be 
referred to management for disposition.
    In addition, we have created a special unit in Internal 
Affairs to handle the most serious and high-level 
investigations.
    It does not end there. We have merged our existing 
discipline tracking system in a manner that will permit us to 
track and follow an allegation from its inception to its final 
resolution. This merged system will contain all relevant 
information--time and date of the charge, names and positions 
of the parties involved, duty locations and, if known, the name 
of the person who initiated the allegation and his or her 
contact point.
    In addition, time limits have been developed governing the 
stages of a follow-up investigation. Absent extenuating 
circumstances, managers will be held accountable for failure to 
adhere to these deadlines.
    Let me talk a bit about disciplinary action. Our review of 
the Customs disciplinary process revealed a fractured and 
inconsistent collection of policies and procedures. We need to 
ensure that discipline is administered in a fair, uniform and 
consistent manner. We are establishing a Customs-wide 
discipline review board and will draw from a pool of trained 
managers to serve on these boards. These rotating teams will 
review cases of serious misconduct and determine the 
appropriate level of discipline. The DRB will provide greater 
consistency and objectivity across Customs in administering 
action against offenders.
    I have ordered a rewritten, plain English code of conduct 
that spells out exactly what we expect of each and every 
individual at Customs. We will also have an improved table of 
offenses and penalties that states in no uncertain terms what 
actions will result from various types of misconduct. We will 
soon be issuing a well defined bright line memo that outlines 
offenses for which Customs will show zero tolerance at any 
level of the organization. We will not hesitate to fire people.
    We are reminding all employees that they have a duty to 
report suspected corruption and face punishment if they fail to 
do so. We have established a stronger whistle-blower program 
located in the Office of the Commissioner. The position will 
provide employees at all levels with information on their 
rights and responsibilities regarding whistle-blowing.
    And to track our handling of complaints, we will be 
conducting a systematic analysis through a new automated 
program of statistics on allegations and resultant actions. 
This will help us to identify trends and problem areas and 
issues for review in the investigative and disciplinary 
processes.
    We are very focussed on recruitment and training. The best 
offense against corruption is recruitment of the very best 
candidates to begin with. The integrity of our workforce 
becomes de facto the sum of the character of the men and women 
wearing the Customs badge. Customs has developed and 
implemented a national quality recruitment program to attract 
the best and brightest into our entry-level Customs inspector 
and K-9 enforcement positions. Quality recruitment is a 
centralized, systematic approach that includes ways to gauge 
integrity in potential new employees.
    The program includes centralized recruiting for inspectors 
and K-9 officers so that we can pick and choose from a more 
competitive national, as opposed to local, pool of candidates, 
written tests to assess reasoning skills, writing skills and 
the likelihood of counterproductive behavior, structured 
interviews to assess judgment, maturity and decision-making 
ability, mandatory reference checks, extensive background 
examination and drug screening.
    Under this program, we have also gone out and identified 
the critical job and interpersonal skills needed for these 
posts. These positions involve direct interaction with the 
public and account for over 40 percent of our workforce.
    We have the same approach under way for our Customs agents 
and pilots. Quality recruitment is a major focal point for us. 
We are counting on it to help Customs both replenish our ranks 
with the high-caliber workforce we need for our increasingly 
complex duties, as well as to help us select only those 
individuals who show strong character and signs of 
uncompromising professionalism.
    Training goes hand in hand with recruitment. In 1992 the 
Customs Service became the first Treasury bureau to institute 
annual integrity reinforcement training for every employee. The 
Service continues to dedicate more formal training time to 
integrity at the Customs Academy, which is located at the 
Federal Law Enforcement Training Center in Glencoe, Georgia, 
more than any other Treasury bureau.
    I directed that annual integrity reinforcement training be 
funded and deployed this fiscal year and continued on an annual 
basis. This year's training will focus upon acquainting our 
personnel with the new allegation reporting and inquiry 
procedures we have already described, as well as with the new 
code of conduct in the table of offenses and penalties.
    In addition, we have created a new Office of Training that 
will be led by an assistant commissioner. This new training 
office will provide uniformity for all employee training 
throughout Customs.
    We are also seeking authority to use polygraphs to screen 
special agents as part of our preemployment processing. The use 
of polygraph testing is an additional tool for helping us 
screen out undesirable or unstable candidates. We will be 
asking for your support in this effort.
    Just as the polygraph is a tool for helping assess future 
Customs officers, the PRI or periodic reinvestigation is an 
effective method of assessing current employees. We have 
reprogrammed funds in fiscal year 1999 to address the backlogof 
PRIs that we are facing right now.
    Personnel security specialists who otherwise would be able 
to process these investigations have been preoccupied with 
processing background checks for our new hires. The funds I 
have reprogrammed into this endeavor will cover the cost to 
out-source the investigations and adjudication of PRIs, thereby 
relieving the backlog.
    We have introduced new accountability standards for 
management. These include establishing a Customs Management 
Center accountability model that clearly identifies the roles 
and responsibilities of management center directors and port 
directors, making assistant commissioners responsible and 
accountable for selection of personnel for all core and 
supervisory spots.
    In the past, this progress was too decentralized and 
vulnerable to questionable hiring practices. Now our assistant 
commissioners will have to answer for it. We are reorganizing 
the Office of Investigations at Customs Service headquarters to 
add three executive agents-in-charge who will have oversight of 
the special agent-in-charge offices and the newly reconstituted 
East, Central and West regions. We are also reorganizing the 
Office of Field Operations at headquarters to improve 
oversight.
    Also key to the early identification of integrity problems 
is our new self-inspection program. We have redesigned the 
existing program with new core standards to help Customs 
managers benchmark the efficiency of their local operations.
    Our Management Inspection Division will shift its 
traditional focus away from doing basic inspections at four-
year intervals to conducting these inspections every 18 to 24 
months.
    In addition, it will concentrate on developing and 
enhancing the self-inspection program. Headquarters and field 
managers, in turn, will evaluate, assess, report and be 
questioned about the state of their operations twice a year.
    I will also continue to seek the guidance and opinions of 
experts from outside Customs. I have asked the highly respected 
former assistant director of the FBI, James Kallstrom, and 
Michael Shaheen, the former director of the Office of 
Professional Responsibility at the Department of Justice, to 
give the Customs Service an outside, objective assessment of 
the effectiveness of our corruption-fighting reforms. Their 
task will be to review the organizational structure, resources 
and function of the Office of Internal Affairs. We are very 
hopeful that their experienced and informed counsel will 
confirm the positive direction we are headed in, as well as 
result in additional recommendations for improvement.
    I know from experience that when you get serious about 
ethics and integrity training, you get results. Recently I 
initiated the Commissioner's Integrity Award to reward anti-
corruption efforts. At the beginning of fiscal year 1999 I 
presented a $10,000 cash award to a U.S. Customs inspector who 
did everything right. Rather than simply accept or ignore a 
bribery offer he had received, he worked aggressively with 
Internal Affairs agents undercover to arrest the perpetrators 
on federal bribery charges. I intend to make the Commissioner's 
Integrity Award an annual recognition.
    This is just a portion of what has been done and is being 
done to improve our corruption-fighting capabilities at 
Customs. Be assured that integrity will remain the highest of 
priorities at Customs as long as I am commissioner.
    Thank you for giving me the opportunity to appear before 
you today and speak to these important subject matters.
    Mr. Kolbe. Thank you very much, Commissioner. I appreciate 
that statement.

              internal affairs and office of investigation

    Let me begin with a couple of questions about the problem 
we have heard about in the past, and that is the conflict 
between Internal Affairs and the Office of Investigations. You 
told us at the hearing we had on the budget, on the 
appropriation, that you had a plan to eliminate those 
conflicts. Can you briefly outline how we are going to do that?
    Mr. Kelly. Well, what we have done is, of course, spoken 
directly to both commissioners, Commissioner Keefer and 
Commissioner Tischler, about the issue and certainly that this 
sort of friction would not be tolerated.
    An order has been developed and sent out to both 
organizations directing when information will be exchanged and, 
of course, highlighting the fact that any sort of delay or 
certainly obstruction of any investigations simply would not be 
tolerated. I think the message has gone out clearly in the 
organization that it is not going to happen anymore.
    I think it is an issue of leadership to a large extent, not 
only my leadership but Commissioner Keefer and Tischler's 
leadership and I think we will not have that problem.
    Mr. Kolbe. Do you have a written statement of policy that 
delineates the lines of responsibility between the two 
organizations?
    Mr. Kelly. I do. I have that here. It is a two-page 
document.
    Mr. Kolbe. If there is any question about overlapping, the 
decision about that gets made by you or at what level?
    Mr. Kelly. If there is a question of overlapping, I would 
hope that it would come directly to me. I meet with the 
commissioners on a daily basis so if there is an issue, I would 
certainly want to be involved in it.
    Mr. Kolbe. Thank you.

                         rotation of personnel

    Mr. Keefer, I understand that you are going to be 
initiating a rotation of agents from Investigations into 
Internal Affairs. Is that going to be considered a career-
enhancing move?
    Mr. Keefer. Yes, and we are working to institutionalize 
that so although this rotation, the initial rotation will be 
fairly large in size, soon we hope to institutionalize the 
process and make a career-enhancing aspect to it. It is 
important that this process be seen as one that helps everybody 
in Customs.
    Mr. Kolbe. Has any thought been given to whether or not the 
same kind of thing, perhaps on a more limited basis, might be 
done with inspectors? It seems to me that inspectors see a 
different range of problems, different kinds of problems. Is 
there any thought of inspectors being included?
    Mr. Kelly. We have thought about it. It is an expensive 
proposition to begin with. I think some of the problems, at 
least the perception of the problems of inspectors is that a 
lot of them revolve around local hiring and that people were 
from the community and stayed in the community their whole 
lives.
    Now we are doing a national hiring initiative of quality 
recruitment, in fact a national program, where people will take 
tests, their backgrounds will be investigated and they will 
select three geographical locations where they want to go to 
but there will be no guarantee that they will go to those 
areas.
    So I believe that approach will address certainly the 
perception and probably the reality of some of the issues that 
exist out there.
    Mr. Kolbe. Mr. Keefer, is there going to be a minimum level 
of experience required for agents that are transferred in?
    Mr. Keefer. Yes, sir. And there is a grade level at which 
you must be in order to go to Internal Affairs, which requires 
approximately four or five years of experience. And what we are 
looking to do is to match best people in the best locations for 
each office. That is going to include 13s, 14s and 15 grade 
levels.

                    internal affairs: more proactive

    Mr. Kolbe. For either you or Mr. Kelly, the OPR report 
noted that only I think it was 12 of the 311 investigations had 
been ones that were initiated by Internal Affairs. That was 
three years, between 1995 and 1997.
    What changes do you anticipate making that are going to 
make Internal Affairs a more proactive unit, rather than just 
reacting to something, some piece of information that somebody 
presents to them?
    Mr. Keefer. We are setting aside funds for special 
operations, that are to fund such things as more undercover 
projects, more things such as risk analysis. We are trying to, 
by having an influx of Office of Investigation agents in a 
rotation policy, also are more used to using the sensitive, 
proactive techniques such as wiretaps and informant 
development, to move our Internal Affairs folks to a more 
proactive stage. In addition, that is my background, that is my 
interest, and I am going to make sure that to the extent that I 
can, it happens and happens with some great frequency.
    Mr. Kolbe. I have some more questions along that line in a 
little bit but Mr. Hoyer?
    Mr. Hoyer. Mr. Commissioner, as a background, will you 
outline just briefly--you referenced in your statement that you 
or the undersecretary initiated the Office of Professional 
Responsibility study on integrity. Would you give us a little 
background of that and your objective?
    Mr. Kelly. Well, in our oversight role at Treasury we came 
in contact with some Customs internal investigators briefing 
cases that they had done and I was concerned about the quality 
of some of those cases, some of the briefings that we had 
received.
    So we looked more closely into the operations of Internal 
Affairs in Customs and then, under the OPR structure, we were 
able to bring on board Mr. Parolisi, who has extensive 
experience with the New York City Police Department in doing 
internal investigations. So we were able to focus his energies 
toward looking at Customs Internal Affairs and the capability 
of the organization to do investigations.
    Then it developed into a requirement from this committee to 
produce a report, but the genesis was an initial concern that I 
had as to the quality of the investigations that were being 
done.

                cooperating with employee organizations

    Mr. Hoyer. In the course of that and as you are now 
developing and looking at this, have you worked cooperatively 
with the NTEU and other employee organizations, so that they 
have a full understanding of what is both expected and what is 
happening so when it does happen, there is an understanding of 
why?
    Mr. Kelly. I think we have done a pretty good job of 
informing people as to the changes that are taking place and 
will take place, not necessarily that we are in total agreement 
but at least that information has been put out as to what we 
expect of them, what the changes are, the series of memos that 
I have sent out. And we have certainly had discussions with Mr. 
Tobias and there have been staff discussions with NTEU people 
and Customs management personnel.
    I would like to think we have done a good job of getting 
information out but, as I say, it is certainly not going to be 
universally accepted and we understand that.

                         rotation of personnel

    Mr. Hoyer. In the course of discussions over the years, one 
of the proposals that has been made is the rotation of 
inspectors among field offices. Obviously that is an expensive 
proposition, yet it continues to be mentioned.
    Do you believe that rotation would help the overall 
integrity?
    Mr. Kelly. I would hope that this new hiring regime that we 
have put in place will take care of a lot of the issues, as you 
said to the chairman, as far as the perception and reality of 
perhaps people staying in their own communities, living there 
their whole lives. There is this belief that they are too 
familiar with local residents or their relatives or what have 
you, and that is where rotation comes up. That is when people 
mention the possibility of going into a rotation program.
    I believe that this national hiring approach will, in 
effect, address a fair amount of those issues. Now granted it 
is going to take time to see that effect take place.
    It is a very expensive proposition. I am not personally 
convinced that rotation is the answer to corruption risks.

                     protection of whistle-blowers

    Mr. Hoyer. One of the ways that have been portrayed 
dramatically, particularly as it relates to the consequences of 
whistle-blowers' actions, are obviously important for Internal 
Affairs to find out, and for the leadership to find out about 
wrongdoing in the organization.
    What protections are we offering and what concerns do you 
have about the integrity of whistle-blowers? I do not mean the 
integrity of the whistle-blowers in terms of their truthfulness 
but in terms of their personal safety and their organizational 
well-being, in terms of their continuing careers.
    Mr. Kelly. I think we have to do everything we can to 
protect them, protect their careers and protect their physical 
safety. No question about it. What we have done is set up a 
discrete whistle-blower contact point. There will be a person 
manning a telephone. And, as you know, Congressman, what 
agencies are supposed to do as far as whistle-blowers are 
concerned is to give them information as to how they can 
register a complaint, that they are referredto special counsel, 
the Office of the Special Counsel, I believe it is called.
    So we have established that position. I say we have--we 
will be doing it in the next couple of days actually. Quite 
frankly, we are just on the brink of doing that, having a 
position, having an 800 number that whistle-blowers can call, 
get information as to how they can contact the special 
counsel's office.
    But as a philosophy, as an approach, it is a policy of the 
administration. It is smart government and good government to 
protect people who come forward. There is no question about it. 
People in the past have risked their careers and sometimes 
their own personal well-being and safety.
    So we are committed to doing that and I think the 
establishment of this position hopefully sends that signal 
clearly.
    Mr. Hoyer. Thank you. I think my time is up. Thank you, Mr. 
Chairman.
    Mr. Kolbe. Mr. Forbes.

                   cyclical background investigations

    Mr. Forbes. Thank you. Thank you for being here today. It 
is great to see my fellow New Yorkers particularly but all 
three of you, thanks for being here.
    The criticism that was in the report relative to the 
significant backlog of cases, Commissioner, could you talk 
about that a little bit and what steps are being taken to deal 
with the backlog, first of all, and then to perhaps prevent us 
from getting into that kind of situation again?
    Mr. Kelly. We are required to do an investigation of 
employees, virtually most positions in the agency, every five 
years. An employee fills out a form and then an investigation 
is done. We have, for the most part, done that through private 
contractors, the investigation.
    And then when their investigation is done, there is an 
adjudication procedure and an adjudicator, either in the agency 
or outside the agency, takes a look at that investigation.
    As I said in my prepared remarks, we have in the recent 
past focussed on processing new hires, doing investigations for 
new hires. As a result, we have a backlog of about 3,700 
investigations. Quite frankly, it is not that unusual in 
government. That is no excuse, but other agencies are in a 
similar position.
    What we have done is we have brought five additional 
personnel into Internal Affairs to expedite the processing of 
these investigations. The sticking point is at this 
adjudication level, sort of a narrowing of the funnel. I have 
reprogrammed about $500,000 to enable adjudication to go 
forward a little more quickly.
    We have in our base, I believe, about $3.5 million to do 
this and we have gotten another $700,000, I believe, this year 
to again bring additional resources on board.
    We hope to be able to reduce that backlog in a two-year 
period of time, where we will have no backlog. However, we are 
generating about 2,500 cases a year and we have to have the 
capability of doing these investigations at the rate of about 
2,500 a year. We will be able to do that. But again the 3,700 
backlog is a big target for us to address now, but we will have 
that done, we believe, in a two-year period of time.

                           employee retention

    Mr. Forbes. Returning to the issue of retention, and I know 
my colleagues have touched on that, as well, aside from the 
idea of rotation, have you given some other thoughts to how to 
improve the quality of life, I guess is the best way to put it, 
so that Customs agents will want to stay in the Service and 
maybe solve that?
    I know that President Tobias of the NTEU is going to be 
testifying shortly and he makes reference, for example, to a 
single mother who is experiencing difficulty with child care 
because of the rotating shifts and the fact that it makes it 
very, very tough when she is rotating shifts around the clock 
to take care of her children.
    I cannot help but, especially coming from Long Island where 
in law enforcement we pay a good wage to our law enforcement 
personnel on Long Island, you know, Customs agents, by 
comparison, of course, are making a lot less and that obviously 
impacts the quality of life, too.
    In response to all of those concerns, which obviously are 
not new to you, have you been thinking about ways in which to 
deal with some of those problems?
    Mr. Kelly. I think we can probably do a more effective job 
in that area. There is probably a need to engage NTEU in 
discussions about these issues.
    As far as quality of life, I can tell you that, as an 
example, in Puerto Rico we have been very concerned about the 
lack of medical facilities for our people. A year and a half 
ago an agent, Manuel Zurita, was killed in a boating accident. 
I went down there and I saw the conditions that existed in the 
hospital, and other people who were injured, as well. Everyone 
there will agree that they are not the best.
    So what we have done is initiated our own training program 
for personnel in Puerto Rico, emergency medical technician 
training program, first responder training programs, and have 
entered into contracts with carriers to enable us to get people 
who may need significant medical assistance off the island.
    So my point is that I think we are focussing on quality of 
life issues for our employees. Can we do a better job? Yes, I 
think we can. I think the issues that you brought up are valid 
issues and I think something we should look more closely at.
    Mr. Forbes. On the issue of child care, real quickly if I 
may, Mr. Chairman, on the issue of child care, does Customs 
have a program to provide child care to its employees or to 
respond to the president's initiatives in that area?
    Mr. Kelly. Well, right in our headquarters building, of 
course, there is a child care center but Customs is at 430 
locations.
    Mr. Forbes. Right, and some of your larger ones, obviously.
    Mr. Kelly. But to the best of my knowledge, we do not have 
a comprehensive child care program and that is something we 
should look at.
    Mr. Forbes. Thank you, Mr. Chairman.
    Mr. Kolbe. Ms. Roybal-Allard.
    Mr. Hoyer. Mr. Chairman, Mrs. Meek has to leave. Would it 
be possible--is that all right, Lucille?
    Ms. Roybal-Allard. Yes.
    Mr. Kolbe. Mrs. Meek.
    Mrs. Meek. Thank you, Mr. Chairman and thank you, 
Commissioner, and your staff. I had a very good meeting with 
the commissioner and I want to thank you for the productive 
meeting that we did have with you. I had some questions 
regarding the Miami situation and you answered them and I have 
a fairly good understanding of what happened there.
    I would like to compliment Customs for the way they handled 
the situation in Miami when we had a big tragedy there about 
three or four weeks ago. I see a strong need for Customs to 
receive certainly more equipment for attacking the smuggling 
problem we have there.
    The question of integrity within Customs, certainly I have 
a feeling that there may be some lack of coordination between 
Internal Affairs and your Office of Investigations. Is there or 
is that just my assumption?
    Mr. Kelly. I think there was. Hopefully we are addressing 
it head-on now and taking care of that problem. As I mentioned 
before, our two assistant commissioners are working directly on 
this issue. We have put a directive out and I think we have 
given a strong message that this will not be tolerated.
    Mrs. Meek. Thank you.
    I thank the member for yielding and I yield back.
    Mr. Kolbe. Ms. Roybal-Allard.

                       local hiring of employees

    Ms. Roybal-Allard. I would like to ask you a question about 
something in the report that you have on page 35. Frankly, it 
was something that I found offensive. Actually I was surprised 
when I read it because I had spent a considerable amount of 
time, several hours down at the San Diego border with the 
Customs and I found actually just the opposite of what has been 
stated in here or at least implied, as I read this.
    On page 35 they are talking about the local hirings and 
they talk about how many of those interviewed by OPR feared 
that this direct hiring authority can create an appearance of 
favoritism within Customs. Then it goes on to say that ``More 
serious, however, is the belief that inspectors who are hired 
locally, particularly along the Southwest border and assigned 
to the local ports of entry,'' and we know the make-up of the 
population that they are talking about along the Southwest 
border, ``could be at greater risk of being compromised by 
family members and friends who may exploit the relationships to 
facilitate criminal activities.''
    I then expected that the report would go on to somehow 
substantiate that belief but instead, it says, ``Although they 
could not offer any solid evidence, senior Customs officials 
expressed a real apprehension over the possibility that 
individuals were attempting to infiltrate Customs by seeking 
jobs as inspectors for the sole purpose of engaging in corrupt 
and criminal behavior.''
    It seems to me that the most serious problem that you have 
here is the fact that you have senior officials who are in a 
position of power who are supervising people whom they have 
these beliefs about that are based on nothing that they can 
substantiate. That they have this fear and this distrust of 
them, I see that as a real problem. What surprises me also is 
that after the statement is made in this book that there is 
also nothing that refers to the fact that maybe this, in 
itself, is a problem that has to be addressed. That is, why you 
would have senior management who have these fears which they 
cannot substantiate or they have no proof of.
    So I think that that is a very serious issue that is 
important for you to look into, the fact that you do have these 
kinds of supervisors, senior people, who have these attitudes 
and fears and they admit that it is based on nothing, other 
than what they believe.
    The next question that I have is on page 39, and this is 
just more for clarification for my understanding, is that it 
says here that there is a diverse opinion, especially among law 
enforcement agencies, on what constitutes a best practice 
approach for conducting employee background investigations.

                     standard for background checks

    Is that to imply that other law enforcement agencies, like 
the Secret Service and BATF, have no standard or best practice 
for conducting background investigations?
    Mr. Parolisi. Congresswoman, that is my comment; it is not 
the commissioner's.
    There has been a long, long history of debate over this 
issue, particularly, as I say, in law enforcement. Many people 
believe that surrendering that responsibility of conducting 
your own background checks, you lose control of the process and 
you are relying on people who you really do not know, who are 
doing your background checks, and you are just relying on their 
good judgment to give you a good product.
    On the other hand, the other argument of contracting it out 
is that it is time-efficient and it is less costly. Those 
issues have never really been examined to make a definitive 
finding. The comment is in there just for consideration and 
there is not a definitive answer to that question.

                         policy of local hiring

    Ms. Roybal-Allard. Are you also responsible for the 
comments that I referred to on pages 35 and 36?
    Mr. Parolisi. Yes, I am.
    Ms. Roybal-Allard. And do you see it as a problem when you 
have these senior officials with these attitudes for which they 
have no basis?
    Mr. Parolisi. I might say to you that those comments were 
not only heard from Customs officials; it was heard through the 
many interviews that we conducted with other federal law 
enforcement officials, including members of the FBI and the 
Office of Inspector General. There is a perception that that is 
true but again we asked, ``Give us evidence. Show us facts that 
support that position,'' and they could not.
    Ms. Roybal-Allard. So that is a very serious problem, then, 
not only with Customs but with other law enforcement agencies 
who have these same attitudes about people for which they 
cannot substantiate the reasons for them. There is no proof.
    I really think, then, that we need to follow up on this. We 
need to find out what needs to be done to make sure that these 
attitudes do not continue and permeate our law enforcement 
agencies, particularly in light of the fact that we had the 
Department of Justice testify yesterday in another subcommittee 
that I am on and they talked about community policing and the 
fact that people who come from the community, who understand 
the customs and know the language, are much better at policing 
the community and that, as a result, the crime rate has gone 
down.
    So I think that it is really important that you look at 
this and that you do something to correct this, not only in 
Customs but I think we need to examine other agencies, as well.
    Mr. Parolisi. Yes, ma'am.
    Mr. Kolbe. I am going to try to let Mrs. Northup get a 
couple of questions in before we have to recess here for the 
vote. Mrs. Northup.
    Mrs. Northup. Thank you.

                    private carriers and post office

    Mr. Kelly, I have been quite interested on this committee 
about making sure that we have a fair playing field between 
private carriers and the post office in terms of the delivery 
of packages.
    Last year when you came before this committee there was a 
GAO report that I had the preliminary copy of but I think it 
was still embargoed but it was released shortly after that. Are 
you aware of this?
    Mr. Kelly. In a general way, yes.
    Mrs. Northup. In there basically the conclusions are all 
that the United States Post Office enjoys an advantage to 
private carriers when they deliver packages, particularly in 
Japan, where most of their package delivery competes directly 
with the private carriers.
    I do not believe that the report is critical of Customs, 
just that the whole system is established in a way to prefer 
the post office over private carriers. And in particular I just 
wanted to ask you a couple of questions about that.
    It is my understanding that you all go into UPS facilities 
when they deliver in Japan and that there is no charge for your 
use of that property or anything, that you are there with no 
cost.
    Mr. Kelly. In Japan?
    Mrs. Northup. Yes.
    Mr. Kelly. Not that I am aware of but I have to refer to 
the experts here.
    Mrs. Northup. And that also private carriers pay Customs 
for your services.
    Mr. Kelly. We have no one in Japan performing that 
function.
    Mrs. Northup. Okay. Well, since we are almost out of time, 
I have some questions I want to submit for the record. It is 
pretty detailed in this book and it is both on space and cost.
    It is particularly interesting to this committee because I 
specifically asked the Postal Service when they were here about 
whether there were any benefits and they said the system was 
different and that, in fact, they did not enjoy any benefits. 
That is different than what the GAO concluded, and I would just 
like your comment on this.
    Mr. Kolbe. The subcommittee will stand in recess. We have 
one vote followed by another vote and we will return as soon as 
the second vote starts and we cast it. Then we will be right 
back.
    [Recess.]
    Mr. Kolbe. The subcommittee will resume, and I would like 
to ask Mr. Gallo and Mr. Tobias to join us at the table here.
    I think a lot of these questions of integrity clearly 
require some input from those who were on the line, and you 
represent those people. So I would like to call on each of you, 
if you would like to make a brief statement, and then we will 
go back to some questions. I have some, and I know Mr. Hoyer is 
coming back, and I will take them in either order.
    Mr. Gallo, do you want to go first, since you are sitting 
there?
    Mr. Gallo. Thank you, Mr. Chairman, and Congressman Hoyer, 
who is not here right now, but members of the subcommittee. It 
is my pleasure to appear before you today to deliver a summary 
of the Federal Law Enforcement Association's position on 
integrity within the United States Customs Service.
    Since this is my first appearance before this subcommittee, 
I request my biography be entered into the record.
    Mr. Kolbe. Without objection, of course.
    Mr. Gallo. Before I begin, Mr. Chairman, I would like to 
thank you on behalf of myself and FLEOA's membership for your 
support of Federal law enforcement and, in particular, your 
efforts in the House to pass the Federal Law Enforcement 
Officer's Good Samaritan Act last year.
    The Federal Law Enforcement Officer Association, or FLEOA, 
of which I am the national president, is a voluntary, 
nonpartisan professional association representing over 15,000 
Federal law enforcement officers and special agents working in 
more than 57 agencies of the Federal Government. FLEOA draws 
its members not only from the Departments of Justice and 
Treasury, but also other agencies as well--all criminal 
investigators and special agents in all Federal agencies.
    FLEOA's main overriding principle, the bedrock of our 
organization, is to provide legal representation and assistance 
to our members involved in a serious incident or disciplinary 
action. Members are provided legal counsel 7 days a week, 24 
hours a day, by FLEOA's general counsel. As a result of FLEOA's 
participation in Agency administrative matters and internal 
affairs, FLEOA has gained valuable insight into integrity and 
other disciplinary issues involving Federal law enforcement 
personnel. Our membership includes over 1,500 special agents in 
the United States Custom Service or from the Office of 
Investigations of the Office of Internal Affairs.
    I am here today representing all FLEOA members in support 
of our Customs' colleagues. FLEOA is proud to represent people 
like Manuel Zurita and Gary Friedli, Customs special agents who 
died in the line of duty last year. It is for men and women and 
like Agents Zurita and Friedli that make this hearing so 
important.
    The issue FLEOA addresses today concerns integrity within 
the United States Customs Service, and its importance cannot be 
overstated. However, everyone must realize integrity issues do 
not just pop up or appear overnight. They ferment like a 
disease from years of neglect. One need only look as far as 
Treasury, including Customs', budget requests over the years. 
FLEOA has heard of doing more with less. We all have. However, 
with the mega-millions of dollars that the drug trade triggers, 
does the administration or Treasury think that by ignoring 
critical funding deficiencies pertaining to integrity would not 
occur?
    In FLEOA's written statement, we refer to the budget issue 
several times. But suffice it to say, in this verbal summary, 
the lack of sufficient personnel and resources causes morale 
problems which, in turn, can breed discipline problems.
    Besides the issue regarding agents not obtaining senior 
special agent status in the same amount of time as agents in 
the FBI, DEA and other Treasury law enforcement agencies, which 
Commissioner Kelly has begun to address with us, agents are 
also required to work a minimum of 40 unscheduled overtime 
hours per month. However, Federal agents, and especially those 
in the Customers Service, commonly work 60, 80 and even 100 
hours of overtime per month and all hours above the original 40 
of overtime are unreimbursed. A lack of proper resources causes 
increased overtime requirements for already taxed agents and 
forces them to find shortcuts to get the job done.
    FLEOA is calling for this committee to ignore the 
administration's and Treasury's budget requests and increase 
the funding to Customs at a minimum of at least 10 percent.
    The recent study performed by the Treasury Office of 
Professional Responsibility, OPR, found there is no schematic 
corruption with the United States Customs Service, and this is 
worth repeating. There is no corruption with the United States 
Customs System. The OPR report noted several weaknesses that 
current management of Customs, led by Commissioner Ray Kelly, 
is already on its way to addressing. FLEOA believes 
Commissioner Kelly is the right person with the right 
experience and determination to project the leadership 
qualities to lead Customs, and we look forward to working with 
Commissioner Kelly to rectify any past problems and to dispel 
the assumption that Customs lacks the integrity to effectively 
perform their duties.
    FLEOA addresses several points in the OPR report in our 
written testimony, and we wish to address just one of the 
recommendations now: OPR's recommendation of a reorganization 
and alignment of the Office of Internal Affairs and in its 
current leadership.
    Not one FLEOA member wants a weak leadership or leaderless 
Internal Affairs. FLEOA and its members recognize the 
importance of the IA function. One of the biggest problems 
agents have with Internal Affairs is the desire and perception 
of being treated fairly.
    While IA should be elevated in importance, as personified 
by the naming of Assistant Commissioner Keefer, in an act of 
fairness and balance, a representative of the agent who is the 
subject of an IA inquiry should be allowed to be present during 
that agent's interview. The representative would only attend in 
an advisory capacity without the right to object or interfere 
with any questions. This suggestion parallels what the FBI and 
many other Federal law enforcement agencies currently do.
    Other points FLEOA covers in our written testimony are 
increasing integrity training. And FLEOA's general counsel is 
willing to instruct new hires at FLETC at no cost to Customs, 
their lawyer giving them, I guess you could say, the ``scared 
straight'' story about his representation of agents in the 
past.
    We also call for the increasing of the entry requirements 
requiring a college degree of special agents. We are in support 
of the headquarters-based Central Review Board. It should 
belong in headquarters. When you have something as important as 
this, headquarters should not be on the sidelines, but should 
be involved in the game.
    An Assessment Center for identification of future managers, 
such as what DEA now currently has. Polygraphs, our only 
question about that is that in District Courts and in the MSPB, 
Merit Systems Protection Board, they have stated that no 
derogatory inference could be made from an agent's refusal to 
take this test. And the Supreme Court has said that it cannot 
be used for inculpatory or exculpatory remarks. However, as far 
as applicants for the position are concerned, we do not oppose 
that.
    In closing, FLEOA believes that integrity and improved 
performance is everyone's responsibility. Employees, members of 
FLEOA have a responsibility to perform their mission to the 
best of their ability with honesty and fidelity to the 
Constitution of the United States. The administration has the 
responsibility to ensure dynamic leadership and direction, and 
the Congress has the responsibility to ensure oversight and 
proper funding.
    Together, we can provide the balance, the motivation, and 
the spark to propel organizations like the Customs Service to 
greater performance and integrity heights.
    Thank you, Mr. Chairman, for holding these important 
meetings.
    Mr. Kolbe. Thank you very much, Mr. Gallo.
    [The information follows:]


[The official Committee record contains additional information here.]

    Mr. Kolbe. Thank you very much, Mr. Gallo.
    Mr. Tobias, we are happy to have your testimony as well.
    Mr. Tobias. Thank you very much, Mr. Chairman. Thank you 
for providing NTEU with the opportunity to present its views on 
integrity issues in the United States Customs Service.
    I would like to state at the outset that no one is more 
offended by or adamantly committed to ferreting out and 
disciplining those who would compromise the success of the 
Customs' mission, and safety and integrity of its employees by 
engaging in corruption than NTEU members who work at the U.S. 
Customs Service.
    I am extremely pleased that the Treasury Department's 
Office of Professional Responsibility report affirmed what I 
believe to be true, ``There is no systemic corruption within 
the Customs Service.'' This is an important fact for the 
Customs Service and for the men and women who daily risk their 
lives and too often lose their lives in service to our country.
    Certainly, the area of most concern in the report was the 
suggestion that the only reason 5 percent to 20 percent of the 
Customs inspectors and K-9 enforcement officers should not be 
rotated on an annual basis is because of the $18 to $93 million 
in costs. While there is no question that using scarce 
resources to fund rotation makes no sense, it is also critical 
to note that the report itself acknowledges ``there are no 
validated studies that establish a correlation between 
personnel rotation and the level of integrity.''
    I believe if the Customs Service institutes a rotation 
policy, it would face an unprecedented recruitment and 
retention problem, especially in light of the high standards of 
integrity, as well as other skills, needed in this very tight 
labor market.
    I do not believe the needed qualified applicants would be 
available if they were required to move their families every 
few years for a job that pays, on average, $40,000 a year in 
base pay, includes constantly changing round-the-clock shift 
work, requires carrying a gun and apprehending dangerous and 
often desperate criminals, that does not provide law 
enforcement pay and 20-year retirement benefits that apply to 
other Federal law enforcement personnel.
    I am reminded of Virginia Rodriguez, an NTEU member and 
Customs inspector from Brownsville, Texas. Ms. Rodriguez 
received the highest honors that exist in the Customs Service 
because not long ago she apprehended one of the FBI's ten most-
wanted criminals as he tried to cross the border in 
Brownsville. Ms. Rodriguez is a single mother of a young child. 
She told me recently that she probably pays more for child care 
than anyone else in Brownsville in order to have quality care 
available for the ever-changing day and nightshifts she works 
in order to keep the port staffed around the clock. I do not believe 
that the Customs Service would be able to retain Ms. Rodriguez and 
other excellent and committed inspectors if they would have to face the 
daunting task of uprooting their families, searching for affordable 
housing and quality child care every couple of years.
    While NTEU strongly opposes rotation for Customs 
inspectors, we are very interested in working with Customs 
officials on other initiatives aimed at preventing corruption. 
NTEU is proud to participate in the Officer Integrity Project 
spearheaded by the Office of Field Operation and supports 
addition integrity training efforts that have been proposed 
both in the OPR report and by Commissioner Kelly.
    As with so much of the work that Customs must do, one of 
the most serious concerns is a shortage of resources. I look 
forward to working with the members of the subcommittee to 
ensure that the U.S. Customs Service receives the resources it 
needs to perform the duties the American taxpayers deserve.
    Thank you very much for the opportunity to present the 
views of Customs' employees represented by NTEU at this 
important hearing.
    [The information follows:]


[The official Committee record contains additional information here.]


    Mr. Kolbe. Thank you very much, both of you, for your 
testimony. And now that we have all of you up here, I have a 
few questions that I would like to get the thinking of 
everybody that is at the table about.

                          polygraph screening

    Let me begin, Mr. Parolisi, with asking you a couple of 
questions about the use of polygraphs for screening applicants 
for Customs.
    As your report mentions, as the commissioner mentioned 
before, you are seeking authority to use such screening for 
special agents, perhaps others, though it is not clear exactly 
what others that might be.
    Did your study look at the value of pre-employment 
processing, pre-employment screening, the use of polygraphs for 
that purpose? And did you look at how it is used in other 
Federal agencies, law enforcement agencies?
    Mr. Parolisi. Mr. Chairman, as part of our study, we did 
not specifically look at that issue relative to polygraphs and 
the pre-employment process. We just noted that that was an 
initiative undertaken by Customs in their----
    Mr. Kolbe. So you made no judgment as to whether it is a 
valuable tool or not?
    Mr. Parolisi. Not in the report, Mr. Chairman. It was not 
part of our focus. Our focus was something quite different.
    Mr. Kolbe. Would you care to make a judgment of your own as 
to whether it is a valuable tool? Do you have one?
    Mr. Parolisi. Of course, Mr. Chairman. My personal opinion 
is that is an extremely effective weapon in the total arsenal 
that you need for selecting----
    Mr. Kolbe. Just one weapon, but it is an effective weapon.
    Mr. Parolisi. Extremely effective weapon.
    Mr. Kolbe. Is that the view, do you know--or maybe Mr. 
Kelly can help me--do most other Federal law enforcement 
agencies use that as a pre-employment screening?
    Mr. Kelly. Well, the Secret Service does----
    Mr. Kolbe. The Secret Service does.
    Mr. Kelly. And the Treasury. I believe the FBI does, also.
    There are some restrictions in State law, but generally 
speaking there is kind of a growing trend using it in local 
police departments for pre-employment investigation or 
examination.
    Mr. Kolbe. Have you given any thought to whether or not it 
should be expanded beyond the special agents to other 
employees, inspectors or anyone else being considered for 
sensitive positions?
    Mr. Parolisi. In my view, Mr. Chairman, I think it is a 
tool that should be used at all levels within the pre-
employment process. It has a deterrent effect, quite frankly.
    Mr. Kolbe. Mr. Gallo and Mr. Tobias, I would like your 
comments on what you think of this as a tool in the screening 
process.
    Mr. Tobias. I think that Commissioner Kelly testified on 
the actions that are currently underway to screen applicants, 
qualified applicants, and I think that that is going to 
increase the quality and solve many of the problems that are 
currently faced by the Customs Service.
    With respect to whether or not there should be polygraph 
testing, I have a lot of concern about that for two reasons: 
One, as was just stated here, it is an extremely effective 
weapon. I do not know where the data comes from making it an 
extremely effective weapon. I think that is a conclusion 
without any data.
    And, second, as you said, Mr. Chairman, when you started 
questioning, it applies to Federal law enforcement agencies, 
and I might add that although those who are inspectors and K-9 
enforcement officers would love to have that law enforcement 
status, they do not have it today.
    Mr. Kolbe. Thank you.
    Mr. Gallo. It is just one tool of many. We would not object 
to it as far as applicants for the position of special agent. 
However, as far as Internal Affairs' investigations that have 
identified a potential problem, we question thejudgment because 
the courts have questioned their use.
    Mr. Kolbe. I am sorry, because the courts?
    Mr. Gallo. The courts, the Federal District Courts and the 
MSPB do not allow it.
    Mr. Kolbe. They are not used as evidence, but a lot of 
agencies, a lot of organizations, use them as a screening 
device.
    Mr. Gallo. As a screening device for applicants, we have no 
problem with.
    Mr. Kolbe. That is far different than being admitted into a 
court of law.
    Mr. Gallo. Absolutely. As far as applicants for the 
position of special agents, we have no objections to its use.
    Mr. Kolbe. Thank you. And, finally, Commissioner Kelly, 
what is the status of your effort to get OPM to agree to this?
    Mr. Kelly. Well, actually, you just move from Treasury to 
OPM, so there is a whole process that you have to go through. I 
think, as a matter of fact, it was actually raised at a meeting 
today, and I do not know what the results of that meeting----
    Mr. Kolbe. It has not even been submitted as a formal 
request.
    Mr. Kelly. No, sir. It has not gone from Treasury 
Department to OPM recently.
    Mr. Kolbe. I still have more questions. But, Mr. Price, you 
did not get a chance on round one here, and if Mr. Hoyer does 
not object, I will call on him for round one.
    Mr. Price.

                positive incentives to avoid corruption

    Mr. Price. Thank you, Mr. Chairman. An expected break here, 
so I will gladly jump in and welcome our witnesses and also our 
friends from the employee organizations.
    I will ask, Mr. Kelly, first, for you to comment on 
something, but I would be happy to hear from any of the 
witnesses.
    I, first, want to applaud the work you are doing to reduce 
corruption and the threat of corruption in the Customs Service. 
I think all of us here today have said that maintaining the 
integrity of the Customs Service is absolutely critical to our 
effort to win the war on drugs, and we commend you for what you 
are doing to attack that problem.
    A lot of the recommendations in the OPR report focus on 
management practices. There are a number of suggestions to 
reform the Internal Affairs Division, to improve your hiring 
practices, to educate your workforce, to ensure 
accountability--and all of that seems very promising.
    The report states that the ``undisputed greatest corruption 
hazard confronting all Federal, State and local law enforcement 
agencies today is the ability of drug traffickers to corrupt 
law enforcement personnel.'' All of these proposed 
recommendations would help ensure that there are clear 
consequences for corrupt behavior, and I know the hope is that 
these consequences will work, that they will deter this 
behavior.
    But I wonder if there are some other kinds of measures that 
maybe you are giving short shrift, and here there is some 
overlap in my concern with what Mr. Forbes was exploring with 
you earlier. What are the incentives, as well as the 
disincentives, to corruption, and are there positive incentives 
that we might employ?
    I notice in your testimony you talk about the 
Commissioner's Integrity Award that you have instituted to 
reward anti-corruption efforts. That is a single award. It, no 
doubt, has a good effect. There has also been discussion of 
rotation policy. I know you have not instituted that. You, 
yourself, said that you were not convinced that rotation was 
the answer.
    I guess the question arises whether, given the attitudes of 
a number of the employees to rotation, whether that might 
actually have a negative effect on morale and kind of work 
against our efforts. There has been a good deal of talk about 
pay scales, and overtime and those kinds of morale issues.
    I hope you see what I am getting at. I am asking you, as we 
think about these various overlapping considerations, to what 
extent do you think we do have a program in place to enhance 
morale, to provide positive incentives to appropriate conduct, 
to reward anti-corruption efforts and to basically offer a 
positive set of incentives to address the challenges that you 
have discussed.
    Mr. Kelly. Well, I believe that morale in the Customs 
Service--of course, I have been around a long time and nobody 
ever admits to having high morale--but I think morale is 
reasonably good. We did an organizational assessment survey. We 
did two, two years running, and people generally like to work 
in the Customs Service and are generally happy about their 
jobs.
    I think one of the issues that did surface in that is a 
sense of unfairness in certain areas of Customs operations; in 
promotion, in discipline and, in some cases, in hiring, and we 
are trying to address that.
    I have come out with bulletins or memoranda to the Customs 
organization saying that what we are about is fairness, to make 
it a fairer organization, and I think people have responded to 
that when I have gone out and met with them. There is the sense 
that the promotion system could be fairer. There is a sense 
that discipline is somewhat uneven. We are in the process of 
installing a Discipline Review Board for their entire 
organization to bring about consistency in discipline.
    We spoke about our quality recruitment program as far as 
hiring is concerned. As far as promotion is concerned, we have 
raised the level of actually promoting people to the assistant 
commissioner level. Obviously, recommendations are coming up 
from the field. But previous to this, you could promote up to a 
Grade 14, I believe, at a very local level, and that, in many 
instances, led to the perception of unfairness. ``Someone was 
promoted. I should have been promoted,'' those sorts of letters 
and complaints are legion in the Customs Service and the 
history of the organization. So I think we are addressing maybe 
a fundamental issue as far as morale is concerned, and that is 
fairness.

                         internal pride program

    I want to mention something that was done on the watch of 
Commissioner Samuel Banks, who is here, when he was the acting 
commissioner. That is a comprehensive integrity program, a 
positive program to instill a sense of pride in the 
organization and to ask the members of the organization to come 
forward with ideas on how we can promote the notion of 
integrity and a sense of pride in that organization.
    We are going to build on that. We are going to have an 
internal pride program, if you will. It will not be called 
that, but it will be a recognition that this organization is a 
great organization. It is the oldest law enforcementagency in 
the country. It began in 1789. We want people to appreciate the rich 
history of the organization, the great work that it does on a daily 
basis. We see it every day because we get briefed every day on all of 
the activities that are going on.
    I think a lot of positive things are ongoing. I do not see 
a major morale problem, although when you ask an employee 
straight on, ``How is your morale?'' you very seldom are going 
to get a positive answer. But I think people feel generally 
good about working in Customs.
    Mr. Price. Mr. Gallo or Mr. Tobias, would either of you 
have something to add here?
    Mr. Tobias. Congressman Price, I think that certainly the 
issue of integrity is an important one and defining the rules 
and creating the sticks are also important. But I think, as you 
are suggesting, providing the carrot is equally as important.
    And I think one of the most important positive carrots that 
can be provided to an employee of the Customs Service is to be 
active and involved in workplace issues. And we saw that with 
Operation Brass Ring. An incredible amount of enthusiasm was 
generated in the Customs Service because, for the first time, 
what happened was employees and managers at the local level 
were challenged to work together to increase drug interdiction, 
and it worked.
    And I think that if you look at those people who do accept 
bribes, and you look at the cases, one of the things that is 
common is that they are disaffected from the Customs Service. 
They feel separate and alienated. So the more that the Customs 
Service can do to bring people in to the work of the Customs 
Service in a meaningful way, I believe the less problem of 
integrity breaches we will have.
    Mr. Price. I understand, of course, that you are not making 
any apology for that kind of behavior, but you are just stating 
realistically that when morale is high and when there is a 
sense of ownership and participation that employees are less 
vulnerable to those kinds of temptations.
    Mr. Tobias. Yes, they are.
    Mr. Price. Do you have something to add?
    Mr. Gallo. Just for a quick response, Congressman.
    The Customs agents that are my members and that are Customs 
special agents of the Customs Service work on many task forces 
with DEA agents, FBI agents and the rest of Federal law 
enforcement.
    Their promotion policy is as follows: With the FBI, it is 
five years and you reach a GS-13. With DEA, you reach your 13 
between four and seven years. With the Secret Service I believe 
it has just come out the 31st of December that it is going to 
be five years on the job. Whereas, when we get in discussions 
with the Customs Service, basically, their average age of a GS-
12 agent is 40 years of age with 15 years of service.
    When you are talking about fairness, you have these agents 
who are working with these other agents on these task forces 
and seeing that they are getting paid less. That is the 
question of morale. That is the question, I think, that relates 
back to the budget issue, where basically OMB has been cutting 
the money from the Treasury Department. So even if they had 
wanted to do this, the funds were not there.
    Mr. Price. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Mr. Hoyer, on round two.
    Mr. Hoyer. Thank you very much.
    Let me just follow up on the issue because I think it needs 
to be addressed and there needs to be a sense of confidence as 
to what we are saying.
    Ms. Roybal raised some questions about your observation in 
the book at pages 35 and 39. Mr. Tobias spoke to it in his 
statement. Mr. Gallo, I have read all but the last two pages. I 
do not know whether you reference the issue of the perception 
that local hires are more subject to being compromised than if 
you had an outside hire.
    Inherent in that, obviously, and Ms. Roybal-Allard and I 
were discussing that on the floor--is I think probably a 
universal sort of sense. If you went to the same high school 
with somebody, you may be more likely to look the other way 
with your high school classmate if something wrong was 
happening. Whether that is true or not, when you start applying 
that to areas of the country where there are ethnic 
similarities and majority/minority populations, obviously that 
can be taken to imply something that I do not think that 
either, hopefully, law enforcement means to imply, but the 
concern was--and I know Ms. Allard would, and as a matter of 
fact I would yield to her after making this observation, if she 
wants to add to it before you answer--the implication is that 
somehow that there will be discrimination in the hiring of 
local people, particularly if they happen to be of, when we say 
``same family,'' then you can extrapolate that into same ethnic 
background.
    I know Mr. Tobias felt very strongly about that and 
responded to it. I know Ms. Allard feels strongly about it. It 
is something that the commissioner needs to make sure that 
there is no sense that there is any kind of discriminatory 
concept behind this and that we are going to try to disabuse 
people of this premise or perception if, in fact, there is 
nothing to back it up and, as you said, there was nothing to 
back it up.
    I would yield to Ms. Roybal-Allard, if she wanted to make 
any further comments, before the panel comments on this.

                          problem: no evidence

    Ms. Roybal-Allard. The point was not just discrimination 
against those that have been hired and attitudes in terms of 
the promotions or where they are placed. And I think one of the 
things that I found most disturbing really in the report was 
the fact that it was not identified as a problem and something 
that had to be addressed. And so that I am hoping that, after 
today, that it is identified as a problem and that something is 
going to be done to correct it.
    Mr. Parolisi. Congressman Hoyer, first of all, it really 
was not my observation. It was something that we heard 
repeatedly, and I thought it was worthy of note to put it in 
the report to dispel if, in fact, it is not true. As you have 
suggested, Congresswoman, maybe we should go back and look at 
that and dispel that rumor if it is not true.
    Ms. Roybal-Allard. I am sorry. Let me just interrupt for a 
minute.
    The fact is that there is this perception out there and 
when asked, ``Well, based on what evidence?'' there was no 
evidence to it. So, in fact, at least based on what we have 
now, it is not true. There is nothing to prove that it is true 
at this point. Let me put it that way.
    Mr. Parolisi. We need to further study that.
    Mr. Hoyer. Mr. Tobias, did you want to make a comment?
    Mr. Tobias. Well, I do not know what there is to study. I 
mean, if there was evidence, it would be in the record. I mean, 
people who are asked to comment would say, ``Hey, I know about 
this'' or there are cases which prove it up orwhatever, other 
than a perception and a belief that is passed on from one person to 
another. And I think the most telling point is that those interviewed 
did not express the same kind of belief for the northern border, and 
that is why it concerns me.
    Mr. Kelly. May I? Maybe it is appropriate to have an 
executive session. There are some investigations that are 
ongoing that may illuminate this issue somewhat. I think there 
is some information out there as to some of the things that you 
spoke about before, Congresswoman. So maybe we can give you 
some information in another session. But it is not fair to say 
that there is no evidence in that regard.
    However, we are encouraging looking for paying premiums for 
Spanish-speaking employees. We want that. There is a concern 
about people being too close for long periods of time in a 
particular community. But this does not, in my view, translate 
in any way to any sort of discrimination. But I will certainly 
make note of your comment about any kind of future, some sort 
of discrimination, because people are in a location for a long 
period of time. We are not looking, in any way, shape or form, 
to hold back anyone's promotion or whatever in that regard.
    But I would like the opportunity, if this is an important 
issue to you to perhaps have an executive session in that 
regard.
    Ms. Roybal-Allard. I would appreciate that.
    Mr. Gallo. Just a short comment. Historically speaking, 
there had been investigations of motorcycle gangs who have been 
engaged in drug trafficking which have placed some people in 
their gang structure in a low-level position in a police 
department, where they would then have access to DMV records. 
This has happened in the Interior, no comment about this 
particular report, since I am not up to speed on page 35 that 
you mentioned, Congresswoman.
    But in the past, there have been criminal gangs that have 
used every means that are available to try to compromise law 
enforcement's work.
    Mr. Hoyer. Mr. Chairman, I do not have any additional 
questions. I know the hour is growing late, and I imagine 
everybody wants to get out of here. But this is an area, as I 
said at the outset, I want to congratulate the commissioner for 
his initiative when he was undersecretary, congratulate him on 
following it through. He sent you and I a letter, and other 
members of the committee a letter, indicating the steps that 
were being taken to respond to the issues raised in the report.
    I think, Ms. Roybal-Allard brings up an issue that is an 
important issue to address. I also understand exactly what the 
commissioner is saying, and I am sure Ms. Roybal-Allard 
understands that as well. We need to figure out what this means 
and make sure it does not mean something that is inappropriate, 
and we should not allow perceptions based upon nonfacts, but 
prejudice or hearsay to stand to the detriment of the 
individual or neighborhoods.
    Mr. Tobias. Congressman Hoyer, I do not know what--maybe it 
is the lateness in the day when we were talking about 
incentives, but I think the one incentive that would have the 
most positive impact on the Customs inspector and K-9 
enforcement workforce would be to recognize them for what they 
do, and that is to provide them with law enforcement status. 
That would, in my view, make a tremendous, tremendous 
difference, both in how they see themselves and how the world 
sees them.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Kolbe. Well, let us see, that was Mr. Hoyer's time. Ms. 
Roybal-Allard, you used some of it, but go ahead. If you have 
another question, then ask it.
    Ms. Roybal-Allard. No questions, Mr. Chairman.
    Mr. Kolbe. Let me just ask, if I might, in one other area 
here before we end, and Mr. Hoyer is right, the hour is growing 
late. But I do want to ask a couple of questions in the area of 
integrity testing.

                           integrity testing

    Commissioner Kelly, you have described it as a Fidelity, I 
think, Program. What do you mean by integrity testing? What is 
it?
    Mr. Kelly. Generally speaking, integrity testing in law 
enforcement means to target an individual law enforcement 
person who is suspected of integrity breaches, somehow put a 
tempting situation in front of this individual, and see if he 
or she succumbs to that situation. That is either targeted or 
random testing.
    Now, the Fidelity Program is a program in Customs that does 
targeted integrity testing, but it is only triggered with the 
assent, acquiescence of the U.S. attorney and you are involved 
in a criminal matter.
    Mr. Kolbe. So there has to be a criminal investigation 
underway.
    Mr. Kelly. Yes, sir.
    Mr. Kolbe. That is quite different then.
    In your career in the New York City Police Department, you 
used it. Did you use both the random and the targeted there?
    Mr. Kelly. No, we did not use the random--well, long ago, 
in my career, it was used on a random basis, but that was 
stopped in the seventies.
    Mr. Kolbe. It was stopped.
    Mr. Kelly. Yes, sir. It was only used on a targeted basis 
when I was commissioner, and I believe that is still the way it 
is now. In other words, you have an allegation, and it looks 
like you have the possibility that an individual is committing 
corrupt acts, then you would present them with a situation, 
with either money or drugs, and you would set up filming of 
that situation, that sort of thing. But it is targeted. You 
need reasonable suspicion to move forward.
    Mr. Kolbe. What makes it different from entrapment?
    Mr. Kelly. Well, entrapment is a defense to a criminal 
proceeding. The difference is that the person is showing a 
tendency towards doing this act. You need some information, 
some basis, before you go forward and do that.
    Mr. Hoyer. Mr. Chairman, I think entrapment is essentially 
a but-for defense, and that is, ``But for the actions of law 
enforcement, the crime would not have been committed by the 
defendant.''
    Mr. Kolbe. Mr. Keefer, as a U.S. attorney, would you agree 
with that?
    Mr. Keefer. Yes, sir. I think in the Fidelity Program each 
of the target individuals would be given a choice of whether to 
commit a crime or walk away, and that, in my experience, is 
never considered the equivalent of entrapment. The will is not 
overborne. There is no inducement by a Government informant. 
The situations that one would call entrapment just would not 
exist in this program.
    Mr. Kolbe. Should it be used in a random fashion?
    Mr. Keefer. I do not think so. I think you need the 
organization to kind of buy into this concept, and if you doit 
randomly, there is just a sense of unfairness that people react 
against. And that is, quite frankly, what happened in the seventies in 
the New York City Police Department. That is why it was ended. It was 
just universally disliked. I think most people can accept the notion of 
people who show a certain disposition towards committing crimes. You 
set up a situation where they have a choice, I think most people will 
accept that as being a reasonable law enforcement tactic.
    Mr. Kolbe. Mr. Tobias or Mr. Gallo?
    Mr. Gallo. In targeted situations, sir, it is legitimate.
    Mr. Kolbe. It is legitimate. You both agree with that. But 
you would not agree with the idea of it being used on a random 
basis of just seeing whether people are honest or dishonest.
    Mr. Gallo. Correct.

                            ethics training

    Mr. Kolbe. Finally, in the area of your training, how many 
hours of training does an agent or inspector get in the area of 
ethics and professional responsibility?
    Mr. Kelly. The number of 16 comes to mind. I am not 
certain. This is an entry-level training. I just want to 
emphasize the fact that we are bringing a training director on 
board--it has been a slow process--hopefully, within the next 
month, and we will have someone to be held responsible and 
accountable for training throughout the Agency, establishing a 
training philosophy and looking at issues such as this. Whether 
or not 16 is an adequate number, I know the report says there 
is a significantly larger amount of training done in the New 
York City Police Department as far as ethics is concerned. I do 
not know. I think that number might be a little inflated. But 
it is something that I would like Commissioner Keefer to look 
at and also our new training director as to just what is the 
right package of ethics training, and integrity training, how 
much should it be, what should it consist of.
    Mr. Kolbe. You just made a statement that fascinates me. 
You are just bringing on board a training director. There has 
never been a person in charge of training for Customs for 
ongoing training after their initial training?
    Mr. Kelly. No, sir, no position.
    Mr. Kolbe. There is no continuing training in Customs?
    Mr. Kelly. We are talking about an organization that has 
almost 20,000 people, and it does not have a training director 
and, as far as I know, never had a training director. Now, it 
has a director of training at FLETC that does entry-level 
training.
    Mr. Kolbe. But that is when the agent or inspector is first 
being trained.
    Mr. Kelly. Yes.
    Mr. Kolbe. You can be with Customs all your life, and the 
only training you ever get is that first initial training?
    Mr. Kelly. You get your training, but the training was very 
decentralized. For instance, you will get port-specific 
training or in the CMC you might get certain training or in 
Office of Investigations. But to the best of my knowledge, 
there was no monitoring of this. There was no central 
repository of information as to who was trained.
    Mr. Kolbe. Or if there was a new technology, a port 
director might send somebody off to a school to learn about 
using this new technology or something?
    Mr. Kelly. Right. That is true.
    Mr. Kolbe. It is all just kind of random and haphazard.
    Mr. Kelly. Some places were doing very good training and 
are doing good training. Other places were doing training that 
is not adequate, and that is what we are doing.
    Mr. Kolbe. Wow. This is an area that really needs some 
work.
    Mr. Kelly. That is what this training director will do to, 
in essence, develop curriculum and monitor training, and make 
it homogeneous.
    Mr. Kolbe. But back to the ethics and professional 
responsibility, are you getting enough or do you have a plan to 
increase that?
    Mr. Kelly. We have a plan to increase it, but we want to do 
it in an intelligent way with the training director, with 
Commissioner Keefer, Commissioner Banks. We want to take a look 
at it. There is a tendency maybe to just throw more hours at 
it, and I do not want to do that. I want to get a reasoned, 
well thought out integrity program for the entire organization.
    Mr. Kolbe. You said you did not think the figure in New 
York was right. Can you recall, offhand, how many hours of 
training New York received in ethics and professional 
responsibility when you were commissioner?
    Mr. Kelly. Well, there is entry-level and there is post-
entry-level training. The number--I do not recall--in the book, 
it seemed very high to me. I think it was lower than that. 
Maybe there are some definitional issues here as to just what 
encompasses ethics training. But I would say the 16 hours that 
we get, if that is a correct number, is too low. But I do not 
just want to just add hours just to increase the number. I want 
to do it in a more reasoned way.
    Mr. Kolbe. This $5 million for training initiative with FTE 
and the new assistant commissioner is that what you were 
referring to a minute ago when you were talking about bringing 
on a training coordinator or director?
    Mr. Kelly. Yes, sir, exactly.
    Mr. Kolbe. Mr. Hoyer or Ms. Roybal-Allard?
    Let me just say thank you all very much for being up here 
today, and I found this a very useful hearing. We may have some 
other questions that we want to submit for the record here, but 
I appreciate very much your being with us today.
    This is an issue which I am pleased to see the Customs 
Service has responded to. Two years ago, as you know, of 
course, this committee asked for the OPR to look into this 
issue and for you to make this a priority, and you have done 
so, and I appreciate that. I think that from this I hope good 
things will come that will benefit the Customs Service and help 
to assure the ongoing credibility of its good name and 
reputation, and I know that is the wish of everybody that is 
sitting at the table here and certainly the wish of every 
member of this subcommittee.
    So we see this not as an adversarial kind of a thing, but a 
way in which we can help to make the Agency a better and more 
effective agency, and we appreciate the efforts that each of 
you are making in that regard. Thank you very much.
    With that, the subcommittee stands adjourned.


[The official Committee record contains additional information here.]




                           W I T N E S S E S

                              ----------                              
                                                                   Page
Basham, Ralph....................................................    39
Bowen, Bruce.....................................................    39
Diehl, P.N.......................................................  1049
Ferguson, T.A....................................................  1049
Gallo, Richard...................................................  1733
Gregg, R.L.......................................................  1049
Johnson, J.E.....................................................     1
Keefer, William..................................................  1733
Kelly, R.W....................................................397, 1733
Killefer, Nancy..................................................  1285
Magaw, John......................................................   249
Parolisi, Vincent................................................  1733
Rossotti, C.O....................................................   649
Rubin, Hon. R.E..................................................  1285
Tobias, Robert...................................................  1733


                               I N D E X

                              ----------                              
                                                                   Page
Bureau of Alcohol, Tobacco and Firearms..........................   249
    Appreciation of Former Legislative Affairs Coordinator.......   277
    Canadian Firearms Paperwork..................................   272
    Cigarette Diversion..........................................   284
    Example of National Repository Use...........................   266
    Explosives Inspections.......................................   277
    FFL Process..................................................   281
    Financial Management.........................................   250
    FY 2000 Appropriation Request................................   340
    GREAT Program................................................   270
    Gun Shows....................................................   268
    Gun Shows....................................................   274
    Hiring of African Americans and Other Minorities.............   279
    Illegal Sales over the Internet..............................   282
    Import/Export of Guns........................................   273
    Integrated Violence Reduction Strategy.......................   250
    Integrated Violence Reduction Strategy.......................   267
    Introduction.................................................   249
    Linkage from Gun Purchases to Violent Crime..................   269
    National Explosives and Arson Repository.....................   265
    New ATF Headquarters Building................................   250
    Opening Statement............................................   249
    Promotion Assessment System..................................   250
    Proposed Gun Show Legislation................................   278
    Questions Submitted for the Record by Congressman Peterson...   320
    Questions Submitted for the Record by Congresswoman Northup..   312
    Questions Submitted for the Record by Congressman Hoyer......   323
    Questions Submitted for the Record by Congresswoman Emerson..   314
    Questions Submitted for the Record by Congresswoman Roybal-
      Allard.....................................................   333
    Questions Submitted for the Record by Congresswoman Meek.....   325
    Questions Submitted for the Record by Congressman Price......   335
    Questions Submitted for the Record by the Committee..........   285
    Questions Submitted for the Record by Chairman Kolbe.........   296
    Questions Submitted for the Record by Congressman Forbes.....   310
    Statement by John W. Magaw, Director, Bureau of Alcohol, 
      Tobacco and Firearms.......................................   252
    Tobacco Compliance...........................................   250
    Tobacco Diversion............................................   281
    Tobacco Tax..................................................   280
    Youth Crime Gun Interdiction Initiative......................   250
    Youth Crime Gun Interdiction Initiative......................   271
    Youth Crime Gun Interdiction Initiative......................   283
    Youth Crime Gun Interdiction Agents in Louisville, KY........   283
Bureau of Engraving and Printing.................................  1071
    Summary Statement............................................  1071
    Currency Equipment...........................................  1100
    Future Currency Demand.......................................  1101
    Facility Planning............................................  1101
    One Dollar Note Design.......................................  1105
    Counterfeiting...............................................  1105
    Currency Paper Contract......................................  1106
    Crane & Company Currency Paper Contract......................  1107
    Labor Negotiation............................................  1109
    Minority Representation......................................  1110
    Dollar Coin Impact on Currency Production....................  1117
    Questions Submitted for the Record by the Committee..........  1130
    Questions Submitted for the Record by Congresswoman Northup..  1135
    Questions Submitted for the Record by Congressman Hoyer......  1137
    BEP Congressional Budget Justification.......................  1209

Federal Law Enforcement Training Center..........................   140
    1811 Criminal Investigator Staffing..........................   177
    Areas in Need of Additional Training.........................   175
    Artesia Construction Projects................................   141
    Biological Agent Threats.....................................   143
    Booze-Allen Report Follow-Up Actions.........................   181
    Charleston Temporary Site Closure............................   176
    Chemical Agent Threats.......................................   143
    Coordinated Training Effort..................................   176
    Demonstration................................................   142
    Dissemination of Agents......................................   143
    Fiscal Year 2000 Construction Request........................   141
    FY 2000 Appropriation Request................................   194
    Glynco Construction Projects.................................   141
    Increased Training...........................................   140
    Introduction.................................................   140
    Master Plan Construction.....................................   141
    Questions Submitted for the Record by Congressman Hoyer......   189
    Questions Submitted for the Record by the Committee..........   184
    Questions Submitted for the Record by Congresswoman Emerson..   188
    Response to Newsletter on 1811 Criminal Investigator Staffing   179
    Statement by W. Ralph Basham, Director, Federal Law 
      Enforcement Training Center................................   145
    Strategic Plan...............................................   140
    Techniques to Manage Incidents...............................   144
    Types of Threats.............................................   142
    Weapons of Mass Destruction Training.........................   142

Financial Crimes Enforcement Network (FINCEN)....................   599
    FY 2000 Appropriations Request...............................   609
    Questions Submitted for the Record by Congressman Hoyer......   608
    Statement of William F. Baity, Acting Director, FINCEN.......   599

Financial Management Service.....................................  1049
    FMS Year 2000 Budget Request.................................  1050
    Year 2000 Compliance.....................................1050, 1096
    Collections..................................................  1051
    Electronic Payments..........................................  1051
    Debt Collection..........................................1051, 1100
    Government-wide Accounting...................................  1052
    Electronic Payments..........................................  1097
    Treasury Offset Program......................................  1102
    Questions Submitted for the Record by Chairman Kolbe.........  1118
    Questions Submitted for the Record by Congresswoman Northup..  1149
    Questions Submitted for the Record by Congressman Hoyer......  1153
    FMS Congressional Budget Justification.......................  1154

Internal Revenue Service.........................................   649
    Advanced Funding for Technology Investment...................   745
    Brookhaven Service Center....................................   739
    Child Tax Credit and the Alternative Minimum Tax.............   749
    Citizen Advisory Panels......................................   743
    Commissioner Rossotti's Statement............................   654
    Computer Systems Modernization...............................   708
    Earned Income Tax Credit Compliance Initiative...............   692
    Earned Income Tax Credit Compliance Initiative...............   678
    Earned Income Tax Credit Compliance Initiative...............   728
    Effect of the Restructuring and Reform Act on the Alternative 
      Minimum Tax................................................   693
    Electronic Filing............................................   684
    Electronic Filing............................................   717
    FY 2000 4.8% Pay Raise.......................................   741
    Implementation of the IRS Restructuring and Reform Act of 
      1998.......................................................   713
    Information Systems..........................................   733
    Informing Low Income Citizens of their Rights................   746
    Involvement of NTEU in Restructuring.........................   747
    IRS Facilities in the 8th District of Missouri...............   664
    IRS Restructuring and Reform Act.............................   682
    IRS Mission Statement........................................   702
    IRS Reorganization...........................................   703
    IRS Technology Modernization Blueprint.......................   690
    IRS Mission Statement........................................   662
    IRS Reorganization Plan......................................   672
    IRS Restructuring and Reform Act Expenses....................   714
    IRS Training.................................................   743
    IRS Restructuring and Reform Act of 1998.....................   741
    Justification for Appropriations, Internal Revenue Service...   751
    IRS Buyouts..................................................   745
    IRS Restructuring and Reform Act of 1998.....................   744
    IRS Reorganization in Pittsburgh, Pennsylvania...............   750
    IRS Training.................................................   740
    Low Income Taxpayer Clinics..................................   729
    Management of the PRIME Contract.............................   696
    Offers in Compromise.........................................   683
    Performance Measures.........................................   746
    Processing Assistance, and Management........................   731
    Revenue Effects of Diverting Compliance Personnel............   684
    Revenue Effects of Diverting Compliance Personnel............   688
    Role of National Office......................................   677
    Service Center Mainframe Consolidation.......................   681
    Small Businesses.............................................   665
    Student Loan Interest Deduction..............................   748
    Student Loan Interest Deduction..............................   666
    Talent of Public Sector Employees............................   670
    Tax Law Enforcement..........................................   732
    Y2K..........................................................   741
    Y2K..........................................................   723
    Y2K Funding..................................................   698

Secretary of the Treasury........................................  1285
    Absorption of Non-Pay Inflation Costs........................  1321
    ACE Development Partnership..................................  1319
    Automated Commercial Environment (ACE).......................  1318
    Below Market Interest Rates..................................  1314
    Beneficiaries of Russian Loan................................  1325
    Budget Surplus Alternatives..................................  1307
    Chairman's Opening Remarks...................................  1285
    Community Development Financial Institutions.................  1304
    Context of Appropriation Action..............................  1329
    Customs User Fees............................................  1316
    Debt Relief..................................................  1305
    Differing Perspectives on Appropriateness of Russian Loan....  1324
    Emergency Funding............................................  1301
    Enforcement Funding from the Treasury Forfeiture Fund........  1320
    Financial Market Reaction to Rescission of Callable Capital..  1328
    Funding Comparisons Between Justice Department and Treasury 
      Enforcement Bureau.........................................  1296
    Future Solvency of Social Security...........................  1302
    Government Obligations to the Social Security Trust Fund.....  1301
    IMF Policy Prescriptions.....................................  1315
    Impact of Funding Offsets for Supplemental Appropriation.....  1299
    Individual Retirement Account Limits.........................  1303
    Integrity Assurance..........................................  1306
    International Monetary Fund..................................  1313
    International Monetary Fund Loan Package for Russia..........  1322
    Introduction of Secretary Rubin..............................  1287
    Justification for FY 2000 Appropriation:
        Summary..................................................  1405
        Departmental Offices, Salaries and Expenses..............  1434
        Departmental Offices, Treasury Building and Annex Repair 
          and Restoration........................................  1505
        Interagency Crime and Drug Enforcement...................  1518
        Treasury Forfeiture Fund, Permanent, Indefinite Authority  1527
        Department-wide Systems and Capital Investments Program..  1546
        Office of Inspector General, Salaries and Expenses.......  1561
        Treasury Inspector General for Tax Administration........  1610
        Treasury Franchise Fund..................................  1622
        Community Development Financial Institutions Fund........  1643
        Community Adjustment and Investment Program (CAIP).......  1683
        Violent Crime Reduction Trust Fund.......................  1689
        Bureau of the Public Debt, Administering the Public Debt.  1699
        Bureau of the Public Debt, Reimbursements to the Federal 
          Reserve Banks..........................................  1731
        Bureau of the Public Debt, Government Losses in Shipment 
          Act....................................................  1732
    Money Laundering Case........................................  1306
    New Spending Other Than for Senior Security..................  1308
    Opening Statement of Secretary Rubin.........................  1288
    Overtime Practices in Treasury Enforcement Bureau............  1310
    Public Sector Retirement Funds: Investments in Equities......  1310
    Questions Submitted for the Record by Congresswoman Roybal-
      Allard.....................................................  1365
    Questions Submitted for the Record by Congresswoman Meek.....  1360
    Questions Submitted for the Record by Congressman Sununu.....  1356
    Questions Submitted for the Record by Congresswoman Northup..  1347
    Questions Submitted for the Record by the Committee..........  1331
    Ranking Minority Member's Opening Remarks....................  1286
    Reality of a Budget Surplus..................................  1303
    Reform Conditions for Release of Funds.......................  1323
    Regulation of Subprime Lending...............................  1312
    Release of Financial Information.............................  1315
    Senior Executive Service (SES) Slots.........................  1298
    Social Security Alternative Investments......................  1308
    Summary of the President's Budget from the Treasury Budget in 
      Brief......................................................  1386
    Supplemental Appropriations Offset: Callable Capital 
      Reduction..................................................  1327
    Treasury's Request to OMB for Enforcement Bureaus............  1297

Under Secretary for Enforcement..................................     1
    Black Market Peso Exchange Initiative........................    27
    Care of Detainees............................................    30
    Customs' P-3 Procurement.....................................    34
    Drug Seizures................................................    36
    Drugs Source Country.........................................    33
    Enhanced User Fee Revenue....................................    31
    Federal Employee Pay Raise...................................    29
    James E. Johnson, Under Secretary for Enforcement............     1
    Joint Border Initiatives.....................................    31
    Know Your Customers..........................................    35
    Narrow Band Radio Conversion.................................    28
    New Directors--Secret Service and FINCEN.....................    36
    Reduction in Base Funding....................................    26
    Statement of James E. Johnson, Under Secretary for 
      Enforcement................................................    13
    Teenage Crime and Firearms...................................    32
    Treasury Forfeiture Fund.....................................    27

United States Customs Service....................................   397
    ACE Funding..................................................   438
    Airport Staffing.............................................   430
    Body Scan Technology.........................................   431
    Customs Automation...........................................   437
    Flower Importers.............................................   432
    Foreign Language Proficiency Test............................   435
    FY 2000 Appropriation Request................................   479
    Hearing on Customs Integrity Issues..........................  1733
        Cooperating With Employee Organizations..................  1749
        Cyclical Background Investigations.......................  1751
        Employee Retention.......................................  1751
        Ethics Training..........................................  1785
        Integrity Testing........................................  1783
        Internal Affairs and Office of Investigations............  1747
        Internal Affairs: More Proactive.........................  1748
        Internal Pride Program...................................  1780
        Local Hiring of Employees................................  1753
        National President of National Treasury Employees Union 
          (NTEU).................................................  1770
            Integrity Testing....................................  1783
            Internal Pride Program...............................  1780
            Polygraph Screening..................................  1777
            Problem: No Evidence.................................  1782
            Statement of Robert M. Tobias--NTEU National 
              President..........................................  1771
            Policy of Local Hiring...............................  1754
            Polygraph Screening..................................  1777
            Positive Incentives to Avoid Corruption..............  1778
        President of Federal Law Enforcement Officers Association 
          (FLEOA)................................................  1759
            Biography of Richard J. Gallo--FLEOA President.......  1759
            Integrity Testing....................................  1783
            Internal Pride Program...............................  1781
            Polygraph Screening..................................  1777
            Problem: No Evidence.................................  1783
            Statement of Richard J. Gallo--FLEOA President.......  1760
        Private Carriers and Post Office.........................  1755
        Problem: No Evidence.....................................  1782
        Protection of Whistleblowers.............................  1750
        Questions Submitted for the Record by the Committee on 
          Integrity Issues.......................................  1788
        Questions Submitted for the Record by Congresswoman Meek 
          on Integrity Issues....................................  1798
        Raymond Kelly, Commissioner of U.S. Customs..............  1736
        Rotation of Personnel....................................  1748
        Rotation of Personnel....................................  1750
        Standard for Background Checks...........................  1754
        Statement of Raymond Kelly, Commissioner of U.S. Customs 
          Service, on Integrity Issue............................  1738
    Illegal Immigrants...........................................   433
    Opa-Locka Airport............................................   434
    P-3 Aircraft Funding.........................................   439
    Passenger Processing.........................................   428
    Personal Search..............................................   399
    Providing Information to Traveling Public....................   401
    Questions Submitted by the Committee.........................   441
    Recruitment..................................................   431
    Reimbursable Inspector Positions.............................   433
    SES Disparity................................................   430
    Shipping of Drug Traffic-Southwest Border and Puerto Rico....   429
    Statement by Raymond W. Kelly, Commissioner of the Customs 
      Service....................................................   403
    User Fees....................................................   427
    X-Ray Initiative.............................................   435

United States Secret Service.....................................    39
    1998 Separations for all 1811's..............................   164
    2.5 Percent Decrease.........................................   174
    Agent Attrition..............................................   161
    Counterfeit Investigations...................................   161
    Counterfeiting...............................................   171
    Financial Crimes.............................................   170
    Fiscal Year 2000 Appropriation Request.......................    39
    FY 2000 Appropriation Request................................    79
    Identify Fraud...............................................   182
    Increased Rental Costs.......................................   169
    Investigative Program--Money Laundering......................    43
    Investigative Program--Skimming..............................    42
    Investigative Program--Missing and Exploited Children........    45
    Investigative Program--ECSAP.................................    44
    Investigative Program--FISH..................................    45
    Investigative Program........................................    40
    Investigative Program--Counterfeiting........................    41
    Program Reduction Impact.....................................   161
    Protective Travel Funds......................................   181
    Protective Staff Overtime....................................   172
    Protective Staff Overtime....................................   174
    Protective Program...........................................    40
    Question Submitted for the Record by Congressman Price.......    59
    Questions Submitted for the Record by Congressman Hoyer......    76
    Questions Submitted for the Record by Chairman Kolbe.........    59
    Results Act..................................................    39
    Staff Diversity..............................................   171
    Statement of Bruce J. Bowen, Acting Director, U.S. Secret 
      Service....................................................    47
    U.S. Secret Service Headquarters Building....................   170
    Y2K Compliance...............................................   169

United States Mint...............................................  1111
    50 States Commemorative Quarter Program......................  1111
    Commemorative Coins..........................................  1113
    Dollar Coin..................................................  1114
    Questions Submitted for the Record by the Committee..........  1237
    Questions Submitted for the Record by Congresswoman Northup..  1242
    Questions Submitted for the Record by Congressman Hoyer......  1244
    U.S. Mint Congressional Budget Submission....................  1245