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




                 TREASURY, POSTAL SERVICE, AND GENERAL

                     GOVERNMENT APPROPRIATIONS FOR

                            FISCAL YEAR 2001

_______________________________________________________________________

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION
                                ________

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

                      JIM KOLBE, Arizona, Chairman
 FRANK R. WOLF, Virginia            STENY H. HOYER, Maryland
 ANNE M. NORTHUP, Kentucky          CARRIE P. MEEK, Florida
 JO ANN EMERSON, Missouri           DAVID E. PRICE, North Carolina
 JOHN E. SUNUNU, New Hampshire      LUCILLE ROYBAL-ALLARD, California
 JOHN E. PETERSON, Pennsylvania
 VIRGIL H. GOODE, Jr., Virginia     

 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, Jeff Ashford, Kurt Dodd, 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
 64-729                     WASHINGTON : 2000



                        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                 MICHAEL P. FORBES, New York
 RODNEY P. FRELINGHUYSEN, New Jersey    CHET EDWARDS, Texas
 ROGER F. WICKER, Mississippi           ROBERT E. ``BUD'' CRAMER, Jr., 
 GEORGE R. NETHERCUTT, Jr.,             Alabama
Washington                              MAURICE D. HINCHEY, New York
 RANDY ``DUKE'' CUNNINGHAM,             LUCILLE ROYBAL-ALLARD, California
California                              SAM FARR, California
 TODD TIAHRT, Kansas                    JESSE L. JACKSON, Jr., Illinois
 ZACH WAMP, Tennessee                   CAROLYN C. KILPATRICK, Michigan
 TOM LATHAM, Iowa                       ALLEN BOYD, Florida
 ANNE M. NORTHUP, Kentucky              
 ROBERT B. ADERHOLT, Alabama            
 JO ANN EMERSON, Missouri               
 JOHN E. SUNUNU, New Hampshire          
 KAY GRANGER, Texas                     
 JOHN E. PETERSON, Pennsylvania         
 VIRGIL H. GOODE, Jr., Virginia     

                 James W. Dyer, Clerk and Staff Director

                                  (ii)

 
  TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT APPROPRIATIONS FOR 
                                  2001

                              ----------                              

                                           Tuesday, March 14, 2000.

                          U.S. CUSTOMS SERVICE

                               WITNESSES

RAYMOND KELLY, COMMISSIONER
JIM JOHNSON, UNDER SECRETARY OF TREASURY FOR ENFORCEMENT

                                WELCOME

    Mr. Kolbe. The Subcommittee will come to order. We will be 
joined very quickly, I understand, the ranking member, Mr. 
Hoyer is here, and I am sure that we will hear his opening 
statement before we get into any questions. But we are very 
pleased this morning to welcome Commissioner Ray Kelly, I think 
your third appearance before this Subcommittee, as 
Commissioner; and we, again, welcome Under Secretary Jim 
Johnson, as we review the 2001 fiscal year budget request for 
the U.S. Customs Service.
    This is an agency that has a tremendously proud history as 
guardian of our nation's borders. It is the first line of 
defense in overseeing the goods in commerce that crosses 
through the complex system of ports and entry points that we 
have along our borders. For over 210 years, Customs, and the 
men and women who make up its force, have risen to meet changes 
in trade and transportation and national security and in the 
international environment.
    This Subcommittee is very focused and very intent on 
helping Customs Service meet its external challenges in the 
form of drugs, weapons, illegal trade, cyber-smuggling or money 
laundering crossing our borders; and internal ones, the need to 
automate information technology, improve management and 
training, preserve the high standard of integrity that is 
displayed by the 20,000 dedicated inspectors, agents, trade 
specialists, scientists and other employees that work for the 
agency.
    The challenges have certainly not let up. You made record 
narcotics seizures in fiscal year 1999, and you are likely to 
set new records this year, as I understand, including the new 
threat that we see, the synthetic drug known as ecstasy.


                          CUSTOMS REQUIREMENTS


    But Customs Service still lacks the inspection technology 
and information technology to deal with the growing volumes of 
trade and the new patterns of smuggling that we find. The 
explosive seizure at Port Angeles last year demonstrated once 
again in very dramatic fashion why Customs Service needs to be 
increasingly vigilant against the threat of terrorism and yet 
Customs lacks the information systems and the personnel to 
anticipate and guard against such threats and had to go on an 
expensive alert to counter these threats.
    The U.S. counter drug strategy depends on Customs' thinly 
spread air and marine units, whether they are in South America, 
the Caribbean, at our borders, these military assets are too 
often unavailable. Yet, Customs lacks air assets in the source 
zones, surveillance technology along our border and marine 
assets in the arrival zones where fast boats bring contraband 
into our country. Security of our sea, land and airports of 
entry depends upon having the best personnel, equipment and 
technology.


                           CHANGES AT CUSTOMS


    Internally we have seen you take significant actions in the 
last 19 months, instituting a comprehensive approach to 
integrity training and management discipline. Morale seems 
strong and I commend you for the spirit and the pride that I 
think you have inspired, Commissioner Kelly, in the men and 
women that work under you.


                       RESOURCE ALLOCATION MODEL


    But Customs still has its vulnerabilities. The need to 
manage this force well was the reason you undertook to develop 
a staffing allocation model and that, as we understand it, is a 
year overdue. The value of inspection technology to assist 
stretched inspectors has not been realized in continuing 
investments in border inspection capability.


                        FISCAL YEAR 2001 BUDGET


    The goal of a streamlined, strong and well-equipped air and 
marine interdiction division is only partially addressed in 
this budget. There is no new resources for marine operations, 
and there is not an approved strategic plan. But there is a 
crying need to modernize Customs aging information technology, 
beginning with its trade processing systems, which will be the 
subject of another hearing, a special hearing that we will have 
in April; with import values up over 20 percent, entry 
summaries up 10 percent last year with regular brownouts in the 
system, the current ACS system, that occurred, as I understand 
it, just as recently as last week; the risks of failure for the 
system are unacceptably high and that is putting it politely.
    The administration has to support Customs and Customs has 
to fully cooperate in rectifying this short-coming. We are 
really playing with a very dangerous situation, in my opinion, 
when one realizes that $8 billion a day flows through the ports 
of the United States.
    So, Mr. Commissioner, Mr. Secretary, I look forward to 
hearing from you this morning and to discussing these and other 
issues with you.
    And let me turn now to my distinguished ranking member, Mr. 
Hoyer, for some comments before we go to your opening 
statement.

                                WELCOME

    Mr. Hoyer. Thank you very much, Mr. Chairman, I apologize 
for being a little late. I would like to welcome Secretary 
Johnson, again, to the Committee and Commissioner Kelly, to 
this 2001 budget cycle.
    Mr. Commissioner, the men and women of the Customs Service 
are truly on the front line. I didn't hear all of the 
Chairman's statement but I think that was consistent with what 
he had to say, protecting our borders not only from incursion 
by drugs and contraband, but also against terrorism and the 
ever-growing threat of financial crimes such as money 
laundering.


                        LAW ENFORCEMENT SUPPORT


    Your fiscal year 2001 request for the Customs Service is 
$2.4 billion and 17,544 FTEs, a substantial increase over 2000. 
I want to say, as I have said to you privately, that Ithink the 
Chairman of this Committee, who serves on both the Commerce, State, 
Justice Subcommittee on Appropriations, as well as chairing this 
Committee, has made it very clear to the administration--I have 
supported him in that effort and reiterate--that we need to pay very 
close attention to Treasury law enforcement, not as opposed to or 
versus Justice Department's law enforcement, but to ensure that the law 
enforcement component which is about 40 percent in Treasury receives 
the kind of resources necessary to confront the challenge that we in 
America face.

                               AUTOMATION

    In addition to funding the core mission of Customs, this 
budget also addresses the critical need to modernize the 
failing computer system. I understand we are going to have a 
separate hearing on that issue. I congratulate the Chairman for 
that. As someone who went through, as I told you, Mr. 
Commissioner, the fits and starts of systems modernization at 
the IRS, I understand what a challenge this is and how careful 
we have to be.
    I was pleased to see that $3 million will be reprogrammed 
to continue the National Customs Automation Plan prototype. 
However, Mr. Commissioner, I still have concerns about the 
remaining shortfall in fiscal year 2000. We need to bring 
Customs into the modern technology world. You are in the 
forefront of that leadership, saying that we need to do that. 
Secretary Johnson, I know, has discussed that with me as well 
and feels very strongly about it.
    Obviously, we found out at IRS, it is not a bandaid 
approach that is required; it is a comprehensive systemic 
approach and I am glad to see that you are undertaking that.

                          PASSENGER PROCESSING

    Mr. Commissioner, I also look forward to hearing about your 
efforts to ensure that every passenger is treated fairly and 
not singled out because of his or her gender or race or 
appearance, per se. Last April you created the Personal Search 
Review Commission to review the policies and procedures used by 
Customs employees to process passengers, and I will be 
interested in hearing how that is going.
    I want to thank both of you for appearing here today. I 
look forward to your testimony and I congratulate you on a 
successful year that we have had and look forward to your plans 
for the future.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much, Mr. Hoyer.

                              INTRODUCTION

    Mr. Secretary, I understand you have a brief statement and 
then we will go to Commissioner Kelly. And let me say to both 
of you the full statements will be placed in the record. If you 
can summarize that will help us get directly to questions.
    Mr. Secretary?
    Mr. Johnson. Thank you, Mr. Chairman and members of the 
Committee, Mr. Hoyer, good morning.

                            CUSTOMS MISSION

    As with the other Treasury bureaus, I am here with 
Commissioner Kelly in support of the Department's fiscal year 
2001 budget request for the U.S. Customs Service. In 
Commissioner Kelly, we have an innovative and dynamic leader in 
law enforcement. Over the last 19 months, he has brought 
invaluable experience and significant change to the Customs 
Service.
    He reflects quite ably the very dedicated men and women of 
the Customs Service who have a mission that in some respects 
seems as large as the borders that the Service oversees. The 
complexity of that mission is reflected in its range of 
responsibilities, from the inspectors who protect our borders 
from smugglers of such varied products as narcotics, 
counterfeit intellectual property, textiles, and tobacco, to 
the investigators who pursue not only money laundering schemes 
but terrorist plots and attempt to dismantle drug cartels.

                        FISCAL YEAR 2001 REQUEST

    Our fiscal year 2001 request for the Customs Service 
presents a program level of $2.36 billion and 17,544 full-time 
equivalent employees. This request would enable the Customs 
Service to draw upon enhanced tools that further strengthen its 
ability to carry out its critical responsibilities.

                           USER FEE PROPOSAL

    As a follow-up to Thursday's hearing, I would like to bring 
to your attention, Mr. Chairman, that the user fee proposal to 
offset the cost of the Automated Commercial Environment program 
has been submitted and it is my understanding that a copy of 
that proposal was delivered to the Subcommittee last night.
    Mr. Kolbe. That is correct.
    Mr. Johnson. My formal statement has been made a part of 
the record of the earlier hearing and I would defer to 
Commissioner Kelly's presentation this morning. He has been not 
only an able manager of the Customs Service but a decidedly 
effective advocate.
    Thank you, Mr. Chairman.
    [The information follows:]



    Mr. Kolbe. Thank you very much, Mr. Secretary.
    Commissioner Kelly, we welcome you and we will hear your 
statement.

                          RECENT ACHIEVEMENTS

    Mr. Kelly. Thank you very much, Chairman Kolbe, Congressman 
Hoyer, and members of the Subcommittee.
    It is, indeed a privilege to appear before this 
Subcommittee today to discuss the U.S. Customs Service's recent 
achievements, our challenges and our fiscal year 2001 budget 
request. Before I begin, I want to thank the Committee members 
for their steadfast support of the Customs mission over this 
past year. Our trade and enforcement successes would not have 
been possible without your counsel, your assistance and your 
oversight.
    When I last addressed this body a year ago, I alluded toa 
host of changes we were making, changes that I believe would 
reinvigorate a proud agency. Those changes have since been implemented 
and many others have followed. We established integrity as our most 
important organizational value and laid out a clear and unambiguous 
code of conduct for our employees. We instituted new accountability 
standards for management and restructured our Office of Internal 
Affairs. We rebuilt our system of discipline and reorganized and 
streamlined our investigative and field operations. We created a whole 
new division for training and development. We have revamped our entire 
passenger processing environment and we initiated a whole range of 
reforms aimed at bolstering professionalism in our inspector corps. 
Those reforms include new uniforms and a new Customs logo that you see 
displayed on the model patrol cars we have given out today.
    Mr. Chairman, I am truly proud of the way our employees 
have responded to these and other reforms. Yet, the fact is 
that these changes could not have come at a more important 
time. Perhaps at no other moment in its great history has the 
Customs Service been so challenged by its vast 
responsibilities. A spiraling volume of trade has put immense 
pressure on our capacity to process goods. At the same time an 
unrelenting illegal drug trade continues its daily assault on 
our front lines. Add to this the specter of international 
terrorism on our borders, a threat the Customs Service is 
prepared to counter.

                                WORKLOAD

    If I could draw the members' attention to the chart on your 
left. Here you see the dramatic rise in trade and passengers 
entering the U.S. over the last 10 years. Trade entries or the 
number of individual shipments of goods have jumped an 
astounding 132 percent, from 9.1 million to over 21 million 
entries per year. Likewise, the number of air and sea 
passengers we process has climbed 62 percent, from 52 million 
to 84 million people per year; 120 million more people came 
into the United States in 1999 than in 1989.
    Yet, the Customs Service has increased the number of full-
time staffing over the last 10 years by only 4.5 percent. That 
is the bottom line that you see there.
    Some might wonder how we continue with such a challenge. 
Thankfully we have some of the most dedicated men and women in 
Federal law enforcement to help Customs prevail against tough 
odds.
    [The information follows:]



                        CUSTOMS PATROL OFFICERS

    Now, sitting on my left are Officers Kevin Carlos and 
Lambert Cross. They are both members of the Select Customs 
Patrol Officers or CPOs. The CPOs work in the Sonoran Desert in 
Southern Arizona tracking drug smugglers who try to cross into 
the U.S. from Mexico across the wide expanse of open land 
between our border checkpoints. The CPOs, all Native Americans, 
use tracking methods developed centuries ago by their 
forefathers to find smugglers carrying contraband on foot, 
horseback and other means. They have been so successful that 
their skills are sought after by other countries. Officers 
Carlos and Cross are just stopping by here. They are on their 
way to Kazakhstan and Uzbekistan as part of the joint Customs/
DoD Nonproliferation Program. They will instruct authorities in 
those countries on how to search for smugglers carrying 
contraband across mountain and desert terrain; contraband that 
includes weapons-grade materials from former Soviet nuclear 
stockpiles. We are very proud of our CPOs and of all our 
special agents and inspectors who have contributed to yet 
another record year in drug interdiction for the Customs 
Service.

                     BORDER COORDINATION INITIATIVE

    In 1999, we seized close to 1.5 million pounds of illegal 
narcotics. That is a 17.5 percent increase over the previous 
fiscal year. That success was also fed by our Border 
Coordination Initiative, or BCI. In September 1998, Customs set 
out to rewrite the book on border enforcement with our partner 
inspection agencies, notably the INS. As a result of this 
effort, cooperation between border enforcement authorities has 
never been better and seizures have never been higher.

                      AIR AND MARINE INTERDICTION

    Despite this success, we are under no illusions. The drug 
cartels adapt with blinding speed. When frustrated on the 
ground, they turn to the seas and skies. Customs' answer to 
this smuggling blitz is the Air and Marine Interdiction 
Division. This is our fleet of boats and planes deployed 
throughout the drug source, transit and arrival zones. Thanks 
in part to the guidance of this Subcommittee, we combined our 
air and marine assets last year under one command. Though in 
need of upgrades, it is today a more effective counter-drug 
force.

                            NEW INITIATIVES

    This year's budget also includes two key funding requests 
aimed at exposing other smuggling flanks. One enhances our 
resources to conduct out-bound examinations for illicit drug 
caches. The other provides funding for the hiring of 214 
additional special agents. Again, the Subcommittee's support of 
these initiatives would be greatly appreciated by Customs.
    New technologies are also helping us immensely in our fight 
against drug smugglers. We have deployed fixed and mobile truck 
X-ray systems and gamma imaging devices to look for drugs where 
we could not have found them before.
    We also now have eight state-of-the-art body scan machines 
installed at major airports around the country. The body scan 
is offered as an alternative to physical inspections, to any 
traveller detained by Customs. This technology has been 
complemented by a thorough revamping of our personal search 
policies. We will soon have in hand the full report from our 
Personal Search Review Commission, anindependent body we 
appointed last April to review our personal search policies after 
allegations of racial bias were levelled at the Customs Service. Their 
recommendations will join a litany of change that has already taken 
place, changes that I am confident will help Customs protect the rights 
of travellers while enabling us to accomplish our mission.

                               AUTOMATION

    To many, Customs' twin mission to facilitate trade and 
enforce the law may seem at odds. Yet our ability to protect 
the nation from fraud and contraband is bound tightly to the 
very same systems that foster its prosperity. I am referring to 
our automated system for processing trade. Last year, we 
processed a little over $1 trillion in trade. That volume is 
expected to nearly double in the next five years alone. The 
growth of international trade, while absolutely great for 
America, threatens to overwhelm us. But Customs has a strategy.
    We have developed a comprehensive program of risk 
management to help us zero in on cargo and conveyances more 
likely to contain corrupted goods and allow speedy processing 
of the vast majority of shipments that comply with the law. 
Risk management, however, depends in large part on the 
construction of our new automated system, ACE, as we call it.
    Again, thanks in great part to the oversight of this 
Committee, Customs has made huge strides in developing ACE. We 
addressed all of the issues that had surfaced in GAO's critique 
about our ability to build and operate the system, and we 
assembled a capable management team to carry out the job. The 
remaining issue now is funding. Until that funding is obtained, 
we must continue to seek resources to maintain our current 
antiquated system or ACS as we call it. It is imperative that 
we keep ACS working. I look forward to the day when we can 
focus all of our resources and attention on ACE.

                               EMPLOYEES

    While we depend much upon technology to help us accomplish 
our mission, the fact remains our people are our greatest 
resource. We need look no further than the events of last 
December 14th for proof of that. On that day, Customs 
inspectors at Port Angeles, Washington, seized a trunkload of 
powerful bomb making materials and arrested the would-be 
terrorist trying to smuggle them into the United States. Those 
inspectors became heroes that day.
    But there were many more unnamed Customs heroes in the days 
and weeks that followed. In the aftermath of that arrest and 
seizure, we immediately ordered all 301 Customs ports of entry 
into a heightened state of alert. I cannot stress enough the 
commitment of our people in making our last holiday season a 
safer, more secure one for all Americans and I do not doubt 
their readiness to answer the call again.
    But there is a lot of ground to cover when such an event 
occurs. The Customs Service cannot be every place at every 
time. In an effort to help us maximize the deployment of future 
assets, we developed a resource allocation model, constructed 
by a leading consulting agency. The model offers agency-wide 
projections of our most critical staffing needs. We expect it 
to become an effective planning tool.

                               CONCLUSION

    Mr. Chairman, it is a great privilege for me to appear 
before you and highlight the work of the U.S. Customs Service 
in promoting America's prosperity and its security.
    I truly believe there is no more diverse mission in 
American law enforcement today than that of the Customs 
Service. But the truth is, Customs Service has arrived at an 
important crossroads: How we respond now to the challenges I 
just laid out will impact greatly on our mission to facilitate 
and enforce for years to come.
    Again, I appreciate all the help this Committee has given 
Customs Service in meeting its mission to date. We look forward 
to your continued guidance and support as we face the demanding 
times ahead.

                                 VIDEO

    Mr. Kelly. With your consent, Mr. Chairman, I would like to 
show a brief video that spotlights the men and women of the 
Customs Service and, of course, I would be happy to answer any 
of your questions.
    Mr. Kolbe. Certainly, go ahead and show that.
    [Videotape shown.]

                        CUSTOMS PATROL OFFICERS

    Mr. Kolbe. Thank you very much, Commissioner. It is a good 
little video that gives a good, I think, background for the 
service.
    Mr. Hoyer. With low-key music.
    Mr. Kolbe. With low-key music, right. [Laughter.]
    Let me just also say, if I might, that I appreciate you 
bringing Officers Carlos and Cross here today, having lived and 
grown up in that area of the border myself, I know what a tough 
job they have there, and we admire very much the work that you 
do, and hope that you are able to help your colleagues or 
counterparts over in those countries a long ways away from 
where you are. I know that will be an interesting experience 
for you.
    Mr. Commissioner, you were a star on NPR this weekend. I 
was hearing you talk about the Turkish antiquities. That was a 
very interesting story of how those were caught and how you 
were able to return those to Turkey. So the word of your work 
certainly gets around.
    We will adhere to the 5-minute rule here, and I have many, 
many questions, most of which I will submit for the record, but 
come back in a second round.
    As I mentioned--and I would like for all the members to 
realize--we are going to hold a hearing specifically on the new 
modernization of technology, the A-C-E system, the ACE system. 
And so we will try to--that hearing is on April 4th. And as 
much as possible, I would like--obviously, if you want to ask 
questions today, you may, but I hope you will hold the 
questions on that issue until that time.

                             REPROGRAMMING

    I do however, on that, since it is relevant to today, 
wanted to ask you one question about where we are on the 
reprogramming. I know we have got one reprogramming for us, but 
I think we are still waiting. You are still working on 
reprogramming for somebody else; is that correct? I do not know 
whether the Secretary wants to answer that, or, Commissioner, 
you would like to answer that.
    Mr. Kelly. Well, I think we have worked with Treasury and 
reached agreement on the $3,000,000 to keep NCAP going.
    Mr. Kolbe. 3,000,000, yes, right.

                        MODERNIZATION SHORTFALL

    Mr. Kelly. There are still some outstanding issues 
concerning money that we need this fiscal year to keep our 
modernization office going and to keep Mitre, our consultant, 
on board. That is approximately $12,000,000. We are continuing 
to have discussions with Treasury to see ifwe can find the 
money to do that.
    Mr. Kolbe. Well--yes, go ahead, Secretary.
    Mr. Johnson. The only thing I would add is that it is not 
simply a matter of looking at the Customs budget. We are 
looking in other areas, and we are going to have to make, at 
the end of the day, probably some difficult choices, but we are 
prepared to do that. We are committed at the departmental 
level, and obviously at the Customs Service, to make sure these 
programs----
    Mr. Kolbe. So will you expect to have another reprogramming 
up to us sometimes in the near future?
    Mr. Johnson. There may be a reprogramming request. We may 
be able to identify some other assets that we could use.
    Mr. Kolbe. The dollars that you have now though for the 
current effort with Mitre Corporation, when does that run out?
    Mr. Kelly. It is----
    Mr. Kolbe. Because we had understood that it was the same 
as closing down the end-cap, was March 13th, and I guess you 
have forestalled that, but what about this with Mitre 
Corporation?
    Mr. Kelly. Well, we need money to do that in the next 
month, it is critical.
    Mr. Kolbe. You do have a time frame of a month or month and 
a half that is facing you?
    Mr. Kelly. Yes, sir.
    Mr. Kolbe. Well, let me save some of the others of these 
questions about the problems of ACE until later if I might, for 
the next hearing.

                     AIR AND MARINE STRATEGIC PLAN

    I wanted to talk about the Marine--you spoke at some length 
about the Marine & Air Interdiction problems, and the work that 
you are doing there. And yet we still have not seen the 
strategic plan for the Air & Marine Interdiction Modernization 
Program. What is the status of that?
    Mr. Kelly. That plan has been submitted to Treasury and to 
OMB, I believe, and it is awaiting release.
    Mr. Johnson. We are working on final clearance, and we hope 
to get it. As I mentioned last week, we want to move this 
forward, as you----
    Mr. Kolbe. Why is it taking so long to get this done? Was 
it that complex, that difficult?
    Mr. Johnson. There were a number of issues that were raised 
on our review of the plan. We are attempting to resolve those 
issues before it is submitted to the Hill.

                      AIR AND MARINE INTERDICTION

    Mr. Kolbe. Has it been fully integrated? Is the marine 
program fully integrated into the Air & Marine Interdiction 
Division's mission to support the overall drug interdiction 
effort and the national drug control strategy?
    Mr. Johnson. On paper, marine and air have been merged. 
However, we still have a lot of work to do, no question about 
it. I think they need more resources. I just met with MEO----
    Mr. Kolbe. But you have not requested any additional 
funding for this I think.
    Mr. Kelly. Well, it did not survive the process, but 
certainly we--I believe we need additional resources for--
virtually all of our boats, all of our marine assets are 6 to 8 
years past their life cycle. I think we need more personnel. We 
will----
    Mr. Kolbe. What is the total number of boats that you have?
    Mr. Kelly. The total number of boats that we----
    Mr. Kolbe. That are operational, we will say.
    Mr. Kelly. We have about 85 boats.
    Mr. Kolbe. The entire United States?
    Mr. Kelly. Yes, sir.
    Mr. Kolbe. Now, granted that the Coast Guard has the 
responsibility for most of the ocean interdiction, but I mean, 
that is still astonishing.
    I was in Florida, as you know, looking at your operations 
down there in Miami not long ago, and that is a mess. I mean, 
you have got stuff coming in from the Bahamas in all 
directions, through those little islands, and through the 
boats, mixing in with the general population of boats there. It 
is a tough challenge, and you just do not have enough assets 
there to cover that.
    Mr. Johnson. Yes, sir.
    Mr. Kelly. Again, I think we need more assets. We brought 
the two entities together under the direction of Mr. 
Stallworth. We have a lot of work to do. We need a career path 
for our marine enforcement officers. We need more of them. As a 
stopgap measure, we are going to detail some of our 1811s, some 
of our investigators who were marine enforcement officers, back 
into marine operations. We will be looking to put some more 
boats on the waters.
    I know you are familiar, Mr. Chairman, with the program 
that we have where we lend boats to local law enforcement. We 
will be looking, perhaps, to bring some of those boats back, 
but they are all well past their life cycle. We need to focus 
on this issue. It is very important, I think, for the country.
    Mr. Kolbe. You mentioned that your request for additional 
funds for this did not survive the budget process with OMB. How 
much did you request and what would that have supported? What 
were you hoping to get done with the amount you were 
requesting?
    Mr. Kelly. I can give you the exact figure. I just do not 
have it offhand--I will have someone look it up now.
    But we believe that we need as many as 300 marine 
enforcement officers. Right now, in that particular job 
classification, we have 53 marine enforcement officers.
    Mr. Kolbe. You need 300 now?
    Mr. Kelly. Well, we have a plan that says we need 300.
    Mr. Kolbe. What is your timeline for getting to that?
    Mr. Kelly. We need the money. Obviously, that would entail 
significant hiring probably over a 3-year period. If you 
recall, Mr. Chairman, in 1994 the marine program was in essence 
halved. We lost a lot of personnel, and the boats were lent to 
other law enforcement agencies.
    Mr. Kolbe. Well, it is obviously not a priority with the 
OMB, with the other part of the administration then to get this 
done.
    Mr. Kelly. We had requested a total of 156 positions.
    Mr. Kolbe. 156 positions.
    Mr. Kelly. An additional----
    Mr. Kolbe. Additional or going from 50 to 150?
    Mr. Kelly. I'm sorry. An additional 156 FTE. And we had 
requested 45.7 million dollars.
    Mr. Kolbe. All right. Mr. Hoyer.
    Mr. Hoyer. Thank you very much.

                                WORKLOAD

    Let me pursue the chart you have here, because I am 
interested in that chart. I think it is pretty dramatic if I 
understand it. If we start in 1990 being the base--that is what 
that has--where you are starting both your formal and informal 
entries at that level, your air-sea passengersand RFTEs.
    Now, as I understand that, in 10 years, what you say is 
there has been 100 and 30 percent, in the ballpark?
    Mr. Kelly. 132 percent increase.
    Mr. Hoyer. 132 percent increase in formal and informal 
entries.
    Mr. Kelly. Yes, sir.
    Mr. Hoyer. And the air-sea passengers have gone up 
approximately 60 percent, ballpark.
    Mr. Kelly. Yes, sir.
    Mr. Hoyer. Now, the FTE level, am I correct in looking at 
that chart, is approximately what it was in 1993?
    Mr. Kelly. It is up about 4 percent.
    Mr. Hoyer. Look at 1993. If I am looking at that chart 
correctly, the FTE level in 1993 appears to be at or slightly 
above the 1990. So if you compare it with 1989, I understand 
from 1989 to 1993, we had a--I do not know, I cannot read that 
chart, because 0 to 20 is a pretty big spread, but a 4 to 5 
percent increase.
    Mr. Kelly. Yes, sir.
    Mr. Hoyer. Then a decrease, and then a slight increase 
starting in 1996, up to 1997, 1998 and 1999. Now, this does not 
include 2000 on here.
    Mr. Kelly. That is right.
    Mr. Hoyer. What would our level be in 2000, and under this 
budget, 2001?
    Mr. Kelly. Well, it would be an increase. We are talking 
about 214 additional agents. We are talking about an increase 
of 98 inspectors. So those two figures of course would be----
    Mr. Hoyer. So assuming the budget is approved essentially 
as submitted, we will be at the highest point we have been in 
10 years, 312 new positions related to this chart. But 
essentially, it is still a very substantially less percentage 
than the increases in either air-sea passengers or formal and 
informal entries.
    Mr. Kelly. Yes, sir.

                        MARINE PROGRAM SHORTFALL

    Mr. Hoyer. All right. Now you talked about needing, for 
instance, on marine, you said we need 300 and we are at what, 
56?
    Mr. Kelly. Yes, sir.
    Mr. Hoyer. Or one-sixth of what--approximately one-sixth of 
what you say the need is. Now, in looking at the Air & Marine 
Operations and Maintenance, we go from 108.7 to 156.9. Am I 
correct in that?
    Mr. Kelly. I am not certain exactly what document you are 
looking at, but----
    Mr. Hoyer. I am looking at my staff's sort of synopsis of 
your figures.
    Mr. Kelly. Okay.
    Mr. Hoyer. Not that I am questioning my staff's accuracy, 
you understand. [Laughter.]
    Because they are outstanding people. I have not made a 
video of them yet, but they are good. [Laughter.]
    I will talk to you about that.
    But I am looking at this, going from 108 to 156 ballpark, 
or a 48 percent increase--excuse me, a 44 percent increase. Do 
you see what I am talking about? Now, some of that, I 
understand, 12.8 is for air assets that are going to be 
coordinated with the Secret Service.
    Mr. Kelly. Yes, sir.
    Mr. Hoyer. My question to you is, I think the same--and you 
are perhaps going to submit that, so you do not have to give it 
to me specifically, of what will we need to get to the 300?
    I was not down in Florida with the Chairman, but I 
understand that we are under-equipped and understaffed to 
accomplish the objectives that we expect of you in that area, 
so I think the Chairman is right, if we get those figures, it 
will be helpful to us.
    Mr. Kelly. Yes, sir.

                           MANAGEMENT LEVELS

    Mr. Hoyer. Okay. Now, let me go to management levels, 
because we have had some discussion about your SES complement. 
Would you tell me briefly, do we have sufficient management 
personnel to affect the kind of operation that you think is 
necessary?
    Mr. Kelly. We increased our SES levels to 75 from 64, and 
of course, we are appreciative of that, but we need a lot more. 
I believe we need a minimum of 150 SES positions. If you look 
at our ratio, it is now roughly 1 SES position to approximately 
260 employees. If you look to that of the FBI or DEA, it is 1 
to 135 or 130. So I think we are significantly short in that 
area. It impacts on our ability to fully accomplish our mission 
and to have the right level of management controlling 
operations in the field. I think Customs needs and deserves a 
significant increase in SES allocations.
    Mr. Hoyer. Mr. Commissioner, if you would then, if you 
would provide me--I presume your staff, as you have discussed 
this issue with OMB and with the administration and with the 
Secretary--provide me with comparable charts dealing with FBI 
and DEA, and any other agencies that you think are comparable 
in terms of numbers and management requirements, so that we 
could make that analysis, see if we can help you there.
    Mr. Kelly. Yes, sir.

                            JOURNEYMAN LEVEL

    Mr. Hoyer. Now, let me talk about the journeyman level for 
inspectors. What is the journeyman level of Customs inspectors?
    Mr. Kelly. 9, GS-9.
    Mr. Hoyer. GS-9. And how does the journeyman level for 
Customs inspector compare with similar positions in other 
agencies?
    Mr. Kelly. Well, we would like to raise the journeyman 
level to GS-11. I think the complexity of the work and the 
demands that we place on inspectors warrant that. We have been 
trying to do that. I know the members of the committee know 
that INS and Customs work very closely and are co-located at 
our 301 ports of entry. There is apparently money in the INS 
2001 budget that allows the border patrol agents and inspectors 
of the Immigration and Naturalization Service to have a GS-11 
as their journeyman level. We would very much like that for 
Customs inspectors as well. We have been trying to do that. 
However, again, there is an issue as far as funding, and the 
relationship that exists between Customs and INS. This has been 
one of the reasons given in the past, that in fact, if one 
agency moves forward, then it is going to impact on the other 
agency.

                            PARITY WITH INS

    Mr. Hoyer. I take it, Mr. Secretary--perhaps you would want 
to comment on this--in considering this issue, do you agree 
that there are comparable responsibilities and qualifications 
for these two positions? In other words, theyare comparable 
positions, or have you made that judgment?
    Mr. Johnson. I believe that they are comparable positions. 
And you were discussing a while back the SES issue.
    Mr. Hoyer. Yes.
    Mr. Johnson. We have studied that issue, and we can provide 
you those charts as well. And I would only add that in addition 
to the need to provide management oversight and to raise people 
to a certain level, as we embark on hiring within all of the 
Treasury enforcement bureaus, we need to make sure that people 
who are looking at the ATF, the Customs Service, the Secret 
Service, or looking at the FBI and the DEA, know that at the 
end of their career path, they will have the same sorts of 
opportunities within Treasury enforcement as they do within 
other enforcement bureaus. Both the GS-11 issue as well as the 
SES issue are issues that we are focused on.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you.
    Ms. Roybal-Allard.
    Ms. Roybal-Allard. Thank you, Mr. Chairman.

                               INTEGRITY

    Mr. Kelly, last year I expressed some concern about an OPR 
report on Customs integrity, that said that personnel along the 
southwest border were more susceptible to corruption than 
personnel in other parts of the country. That was not 
substantiated by any facts or data, and the concern that I had 
was that it put a cloud of suspicion over a whole group of your 
personnel, those that worked along the border, without anything 
to substantiate it. Not only did it reflect on the personnel 
themselves, but the report also reflected on the families of 
these workers, because it mentioned the fact that they were 
more susceptible to negative influences by their families. I 
would think this would be tremendously demoralizing to your 
employees to have their families seen under this cloud of 
suspicion, and it could result in unfair treatment and even 
discrimination within your agency.
    When I asked about this issue, you gave the impression, 
unintentionally perhaps, that you had data to substantiate the 
statements that were made in this report for--and you also 
volunteered to have meeting in executive session to present us 
with this information. For one year my office has been trying 
to get that information unsuccessfully, and so as a result, I 
took it upon myself to do a little detective work and try and 
get some information.
    What I have found is that Customs' own data of cases 
accepted for prosecution does not substantiate the statement 
that was made in the Customs report. During the questioning, I 
believe one of your employees said that this was also the 
belief of other law enforcement agencies. So I wrote to the 
various agencies, gave them a copy of the transcript in which 
this statement was made. With the exception of the FBI, which 
says that they felt that there was some correlation, however, 
it was only one factor of many when they determined the 
assignment of personnel, the Secret Service wrote back and 
said, quote, ``The Secret Service has no concerns regarding the 
integrity of criminal investigators we hire from any area of 
the country including the southwest border'', end of quote. The 
Bureau of Alcohol, Tobacco and Firearms responded, quote, ``In 
fact, we have not received any complaints of corruption along 
the southwest border against any of our personnel'', end of 
quote. The Drug Enforcement Administration wrote back, quote, 
``The review of these allegations showed no indication of a 
pattern or problem of corruption by DEA special agents assigned 
along the southwest border'', end of quote.
    My question to you is, first of all, why we were unable to 
get the information that you said that your agency had, and 
more importantly, given that the facts do not support the 
statement in the report, nor the statement that was made during 
the hearing about the feelings of other law enforcement 
agencies, my question to you is also: does this report reflect 
the thinking of Customs about its personnel along the border?
    Mr. Kelly. First, that was not a Customs report. That was 
from the Treasury Department. That was not a statement that was 
made by the Customs Service. The individual who made that 
statement said that this was a belief that some people had.
    Let me apologize for you not receiving the information you 
requested. I was unaware of this. I will certainly take 
responsibility for it, but I thought that your staff had been 
briefed about some information that we have regarding this 
issue.
    During this discussion that went on with the representative 
from Treasury, I was at the table and I had just added that 
there was some information about cases, ongoing cases that I 
was aware of that we wanted to present to you in executive 
session. Obviously, the executive session did not happen, and 
again, I apologize for not providing that information to you. I 
did send you a letter just recently, because I just found out 
that you had not received any information.
    There are some cases that I think would be relevant to this 
issue, 7 cases, 7 closed cases that the Customs Service has, 
and I would be more than happy to brief whomever you want 
briefed in this regard. That is by no means to say that there 
are any conclusions or any determination that there is 
something amiss with people who live near the border and are 
hired to work in the Customs Service. By no means did I mean, 
or do I mean to imply that now. But I would just like to 
present this information to you, because I think in that 
discussion a year ago, there seemed to be the notion that there 
was absolutely no information that indicated that perhaps 
family members of close acquaintances were involved in some of 
the investigations that we were conducting. Again, I apologize. 
But I ask you to allow us to present to you or your staff 
information that we have in this regard.
    Ms. Roybal-Allard. Okay. Well, Mr. Kelly, the issue or the 
concern was not that there may be some cases. It was the way 
that the report was written implied that personnel hired along 
the border were more susceptible to corruption than others. 
Even in the 7 cases you have noted, that was 7 out of 56 cases, 
hardly anything that supports the statement in the report that 
personnel along the border are more susceptible to corruption. 
That was the only thing that I wanted to clarify. It was not 
the fact that it does not exist, but the point is that it does 
not exist in a disproportionate percentage or number simply 
because of the personnel along the border. I think that was an 
unfair statement in the report, and did put this cloud of 
suspicion over a group ofpeople who work very, very hard trying 
to stop drugs and other contraband from coming across the border.
    Mr. Kelly. Yes, ma'am. Thank you.
    Mr. Johnson. Mrs. Roybal, may I add something there? That 
was a report that was issued out of my office, out of the 
Office of Enforcement, although I did not participate in this 
hearing. And one of the things that my predecessor in that job, 
Ray Kelly, made clear throughout our entire approach to law 
enforcement issues, and in particular, when this report was 
something that he was the moving force behind is not only the 
commitment to integrity, but also the commitment to fairness. 
Whether or not it is the Customs Service or the Department of 
Treasury, to disparage an entire category of people or region 
of the country clearly was not our intent. It is not a position 
that we would adopt overall. And we can view that particular 
portion of the report.
    Ms. Roybal-Allard. Great. I wanted to just make that clear.
    Mr. Kelly--is my time up? Okay.
    Mr. Kolbe. We will go back.
    Ms. Roybal-Allard. Okay.
    Mr. Kolbe. Mrs. Northup.
    Mrs. Northup. Thank you.

                                COURIERS

    Welcome, Commissioner Kelly and Under-Secretary Johnson. I 
would like to just make sure that I can summarize briefly where 
I am going for the rest of the committee, and then ask you some 
pertinent questions.
    I have talked a lot about fairness, fairness for the 
private carriers that bring packages into this country compared 
to the post office. There have been a lot of claims that have 
been made by the post office, and so this summer, the air 
carriers hired somebody to go to 10 different countries and to 
mail 90 packages through these countries via the mail service, 
and the identical packages claiming exactly identical 
merchandise by the private carriers, and they were all mailed 
to one address here in the United States. Of the packages that 
were mailed by the private carriers, 94 percent of the duties 
and the fees were paid on those packages when they were 
delivered. Only 6 percent of the duties and the fees--all of 
them needed to be paid; all of them were merchandise upon which 
duties should have been collected--were actually collected.
    So this is a grave concern, because in taking this 
information further, it means that about $1,000,000,000 of 
Customs duties are not collected and turned over to the 
Treasury every year. And it also means that if you are trying 
to get something into this country that you do not want to have 
to pay on, either something upon which there is a trade cap 
like textiles, money laundering, guns, drugs, you would be 
pretty sure of avoiding all Customs inspections by going 
through the Postal Service.
    You may remember several years back, fellow committee 
members, when we talked about exporting and the post office 
that had special deals with a number of countries in order to 
bypass foreign customs. They said the reason they were able to 
do that is because of their advanced technology and their 
ability to put together manifests, that these countries were 
willing to help them bypass time-wise and money-wise these 
Customs in those countries. It seems that now there is a 
technology difference, but it is on the other side.
    So I would like to go to Mr. Kelly, and ask you first of 
all, whether or not the United States Post Office has even the 
technology capacity to provide the manifests that allow you to 
look at what every single product coming into this country by 
virtue of their carriers, and to assess the Customs duties and 
fees that are to be paid on them?
    Mr. Kelly. To the best of my knowledge, they do not. We 
receive a lot of information from express carriers and couriers 
because of their automated systems. And no question about it, 
we are able to do a more effective and more efficient job 
because we know to a much greater extent what is coming into 
the country than we know what is coming in through regular 
mail.
    Mrs. Northup. In fact, every single thing that comes in is 
automatically assigned into what sort of trade category that 
would apply, and all the Customs and duties are added right in 
by the computer, and when the plane lands, you know the total 
amount that is due.
    Mr. Kelly. Yes, ma'am, that is right. Now, as far as Postal 
Service mail is concerned, we do not know what it is.
    Mrs. Northup. There is no manifest.
    Mr. Kelly. We have a general manifest of what is coming in, 
is a bag of mail. And if you go to one of our----
    Mrs. Northup. And that is what it says is one bag?
    Mr. Kelly. Right. And if you go to one of our 14 mail 
centers in the United States where we have Customs employees, 
you will see a tremendous in-pouring of mail that comes in, 
that is increasing all the time. Basically a Customs inspector 
has about 1 second to make a determination as to whether or not 
to look at a particular package.
    Mrs. Northup. Is it not true that he is standing way up 
here, and he is looking down at a conveyor belt of pouring in 
packages and judging mostly from that?
    Mr. Kelly. Well, he is actually standing right next to the 
conveyor belt. There are actually two inspectors. For instance, 
at the open mail facility--I was just there----
    Mrs. Northup. Why don't you require them to do a manifest? 
Let me ask you, if a private carrier called you up and said, 
``We just had a plane leave France just now. Our computer is 
broken. When it lands, just stand there and look at packages. 
We are not going to be able to give you a manifest.'' What 
would you say?
    Mr. Kelly. Well, your first question, why don't we require 
the postal service to do that, our lawyers tell us we cannot 
require them. It is another governmental agency. This requires 
legislation to put these mandates on the Postal Service.
    Mrs. Northup. Now, Mr. Kelly, it says right in the Customs 
regulations, ``Mail importations are subject to the same 
requirements and restrictions as importations by any other 
means.'' I mean, that seems to me--I realize it is a little 
tougher to do that, and it may be that this administration has 
made a decision that you will not do that, but it seems to me 
that by your very regulations, that that is--that you have the 
authority to do that. And you know, I realize--you know, I am 
not going to ask you to put yourself in the middle of that, but 
I would contest that decision.
    Let me go back though to the hypothetical question so the 
private mail carrier say maybe UPS says, ``Our computersystem 
has broken down. We have 3 planeloads that are on the tarmac. Would you 
just ignore the manifest?'' What would you say to them?
    Mr. Kelly. Well, it is a hypothetical question, and 
difficult to answer. We work closely with the couriers. They 
have been very cooperative. That has not happened to the best 
of my knowledge.
    Mrs. Northup. Has not happened because probably they would 
assume that that would not be an alternative to just ignore it. 
In fact, the private carriers, when the plane lands and the 
package comes in their building, they pay right then and there 
all duties and fees before the package ever leaves to go--to be 
sent within the United States; is that correct?
    Mr. Kelly. Correct.
    Mrs. Northup. So if they do not actually collect the fee 
and duty when it gets to the final destination, they are the 
ones out the money, not the U.S. Government.
    Mr. Kelly. Yes. I think it is important to go back in 
history though. A lot of these services were provided to the 
private carriers, were contracted for, because they sought them 
out. We have Customs employees at locations that we would not 
normally have them. The private carriers pay for the service.
    Mrs. Northup. Exactly. But the point is, if they do not 
remit the money to the U.S. Government after they collect it; 
they remit it and then they collect it when they deliver the 
package.
    Mr. Kelly. Yes.
    Mrs. Northup. And the United States Post Office though, 
they actually bring it all in, and there is no manifest, nobody 
knows what is due. If they collect it, and 6 percent of the 
time they do, when they deliver it to a certain address, then 
they remit it. Do they always remit it?
    Mr. Kelly. We have had some issues with them in the past 
about remitting appropriate fees. We did just get a payment in 
the last year or so after we had----
    Mrs. Northup. After it was raised. How much was that 
payment?
    Mr. Kelly. Oh, it was a few million dollars.
    Mrs. Northup. Millions. The fact is, is that the few times 
they did collect it, they did not necessarily remit it.
    Mr. Kelly. That is correct.
    Mrs. Northup. Well, Mr. Chairman, I know that my 5 minutes 
is up. I am going to continue these questions. There is a whole 
lot more to the unequal justice here. This is just the tip of 
the iceberg, and I plan to pursue this.
    Mr. Kolbe. We will come back to you in a little while.
    Mrs. Northup. Thank you.
    Mr. Kolbe. Mrs. Meek.
    Mrs. Meek. Thank you, Mr. Chairman. I will yield to Mr. 
Price so that I can review my questions.
    Mr. Kolbe. Mr. Price.
    Mr. Price. Thank you. I appreciate Ms. Meek is yielding.
    Commissioner, welcome, and Secretary Johnson, we appreciate 
your being here as well.

                    INTERNATIONAL TRADE DATA SYSTEM

    Let me first bring up one matter very briefly, and then 
enter into some questions about your requested personnel 
levels. There is one item I would like to bring to your 
attention. It concerns the International Trade Data System 
Office, known as ITDS, which I understand was transferred from 
main Treasury to Customs late last year. It is a relatively 
small office with a budget of just over $5,000,000, staffed 
mainly by detailees from other agencies. It is important to me 
because of a project an organization in my district is doing 
for ITDS on a contract basis. The U.S./Thailand Trade 
Information Project involves the establishment of a streamlined 
Customs processing prototype for Southeast Asia. It was funded 
through ITDS in fiscal 1998 and 1999, and I think the transfer 
of the ITDS office to Customs, which may or may not have been 
fully forewarned, has left this initiative without a project 
manager. It simply cannot proceed without one, and we have been 
informed of some pretty frustrating delays.
    So I would like to ask you today to look at that and to 
direct the appropriate staff in the agency to assign a project 
manager as expeditiously as possible so that this work can be 
completed.
    Mr. Kelly. For ITDS?
    Mr. Price. For this U.S./Thailand Trade Information Project 
within ITDS.
    Mr. Kelly. Yes, sir. We are moving forward with ITDS. I 
will take a look at this specific issue that you mentioned, 
Congressman.
    Mr. Price. Right. It seems to have gotten somehow lost or 
dropped in the shuffle with this transition.

                    ADDITIONAL AGENTS AND INSPECTORS

    Now, let us turn to the fiscal 2001 budget request. I would 
like to ask you about--the very small number of additional 
agents, inspectors and support personnel you are seeking for 
the coming year. You asked for 270 additional FTEs, an increase 
of just 1.6 percent, and only 47 of those are inspector 
positions.
    Now, given the security risk that came to light along the 
northern border late last year, given the huge increase in 
commercial entries since the passage of NAFTA, I am concerned 
that you might not have the personnel you need to carry out 
your core mission, particularly with respect to inspections. I 
wonder if your more focused risk management strategy will 
suffice, in fact, when this ACE computer capacity is not yet 
operational. Does your fiscal 2001 request represent the number 
of FTEs Customs submitted in its initial budget, or is it the 
product of reductions included in the pass-back? I know a 
related question was asked earlier. I do not know if you can 
give me an answer on this one.

                       RESOURCE ALLOCATION MODEL

    Mr. Kelly. Well, obviously, I guess every agency wants more 
resources. Certainly there is a process that is undertaken 
between the Department and the Office of Management and Budget 
and the agencies. Surely we wanted more resources. But our hope 
is that the resource allocation model (RAM), which I mentioned 
before, now being examined by Treasury and OMB, will give a 
comprehensive picture of what the agency needs to accomplish 
its mission. That is exactly what we told our private 
contractor to construct. What do we need to do our job? This is 
the first time, I am told, that any federal agency has had this 
kind of zero-based examination as to what its resources should 
look like. I am hopeful that our RAM is the vehicle that will 
take Customs to the levels that I believe it needs to be at.
    You mentioned the numbers of FTE. I think it is a little 
higher than that. We are looking for, I think, 98 FTE 
inspectors in the money laundering project, that $10,000,000 
piece, so it is slightly higher than the numbers that you 
mentioned. Obviously, we would like to have more resources.We 
understand that this is the normal process that goes on in government, 
but the resource allocation model, in my view, is the vehicle that will 
ultimately take Customs to the levels that it needs to be.
    This is a living document. As workload increases, which it 
surely will, which again is very good for the country, then 
this document will adjust to that and tell us what we need at 
each of our ports of entry.
    Mr. Price. And that will be a comprehensive assessment, 
presumably. Let me just try to break it down a little bit 
though into certain functions and see what kind of estimate you 
have now, maybe based on the initial request you made to OMB. 
What is your target inspection rate for commercial vehicles 
crossing our northern and southern borders? Are you meeting 
this rate, and if you are not, how many FTEs would you need to 
achieve it?

                             RISK ANALYSIS

    Mr. Kelly. Well, when you say ``target inspection rate'', 
we look at maybe 3 percent of all items, commodities coming 
into the country. With the Mod Act passage in 1993, it was a 
given that we could not look at everything that comes into the 
country, so we have to do this risk analysis. We need 
information to help us do that. My concern is, as trade expands 
in the future years, which it surely will, that we do not have 
enough resources to do even 3 percent inspections. We have 
automated targeting systems. We have ways of gathering 
information. I think we need, obviously, more effective ways of 
doing that. That is why we have put such hopes on our new ACE 
system. But 3 percent, if in fact we have the adequate 
intelligence, adequate information, adequate resources to do 
that, is probably a representative sample. We are never going 
to get much above that.
    Mr. Price. So your goal is not a simple percentage rate, 
but a more targeted kind of system?
    Mr. Kelly. Yes, sir.

                                WORKLOAD

    Mr. Price. But what is the benchmark, and on what do you 
base right now a judgment that a certain number of FTEs is 
adequate, or on what did you base the request that you 
initially made to OMB? I mean, how do we get a handle on the 
adequacy of a request like the one before us?
    Mr. Kelly. Well, again, we look at the number of items, 
commodities examined. We look at how long it takes to get 
something through a particular port of entry. We have some 
locations where you can wait an hour, two hours to get into the 
United States, even longer than that. We factor that in. Some 
of the ports of entry themselves are not constructed in such a 
way that allows for significant increases in the flow of 
traffic. Clearly, NAFTA has resulted in a lot more goods coming 
into the United States. It has put pressures on us. So, we have 
to look at each of our ports of entry kind of individually to 
see if we are adequately staffed or not. That is what this 
resource allocation model in fact does. We want to get traffic 
through as much as we can in 20 minutes, certainly passenger 
traffic, passenger cars. That is, to a large extent, a function 
of staffing. It is complex. I cannot give you an absolute 
number. We do kind of a port-by-port examination of it. Again, 
the resource allocation model has done that in a more 
scientific way.
    Mr. Price. Mr. Chairman, I know my time has expired. If I 
could just ask a couple of things for the record here which 
might help you elaborate on this.
    How many agents and inspectors were moved to the northern 
border in December? How many of those are still in place? Where 
did those come from? How does that factor into the request or 
does it? And then I would also like to know what kind of 
information you could furnish about overtime rates, to see if 
that gives us any kind of benchmark or any kind of indicator. 
What are the overtime rates for personnel at your ports of 
entry? What is the average overtime monthly rate, and how does 
that compare, let us say, to the rest of Treasury law 
enforcement?
    Mr. Kelly. Yes, sir, we can do that.
    Mr. Kolbe. Thank you, Mr. Price.
    Mrs. Meek.
    Mrs. Meek. Thank you, Mr. Chairman.
    Welcome Commissioner Kelly and also Director Johnson.
    My question--I have quite a few questions about ACE, but I 
understand they have been answered already. I will submit the 
others for the record.

                            RACIAL PROFILES

    I need you to talk a little bit also about your personal 
search policy, particularly the racial profiling which Customs 
and most law enforcement agencies have been accused of. I would 
like to know something about the commission you have appointed 
to look into this, and whether or not--what will happen when 
their report becomes available? What do you expect to learn and 
what are your views about Customs' personal search techniques?
    Mr. Kelly. Congresswoman, we made major changes in our 
personal search processes and procedures. Yes, we were accused 
of racial profiling as other law enforcement agencies have 
been. Racial profiling is against our policies and will not be 
tolerated.

                            PERSONAL SEARCH

    What we have done is undertaken a in-depth training program 
for all of our inspectors who do personal search. We have 
brought to bear technology in which many of our major airports 
have body scanning, body imaging machines that give people who 
have been selected for a pat-down, the option of going before 
that x-ray machine and not being touched by another human 
being. Obviously, inspectors of the same gender will be the 
ones that are looking into that machine.
    My belief is that there was not enough supervisory or 
management involvement in the personal search regimen that was 
being followed by Customs. We have now mandated that every pat-
down, every touching of another human being, must be authorized 
by a supervisor. Before any passenger will leave the immediate 
location to go for an in-depth medical examination, the Customs 
inspector must have the approval of the highest-ranking person 
in charge of that port, in fact, the port director. We have put 
in place 24-hour attorney availability. That manager must 
confer with our attorneys before any passenger is taken away 
for a medical examination. We have totally rewritten our 
personal search handbook, in which the directions to inspectors 
as to how they should conduct themselves are much clearer.
    Previously we were not recording in headquarters every 
search that was being conducted throughout the country. Some 
locations were recording their searches. Other locations were 
not. We now mandate that every personal search is certainly 
recorded to include location, the gender, the ethnicity of the 
individual. That information comes to headquarters every day, 
and I look at it every day. I see personal search data every 
day.
    So I think the process is much better managed. It has much 
more oversight. The number of personal searches has gone way 
down, no question about it. But the number of finds, if you 
will, the actual successful hits in finding drugs, has remained 
relatively constant, which I think is an indication of better 
management and closer supervision.
    As far as the commission is concerned, the commission is 
chaired by Under Secretary Constance Newman of the Smithsonian 
Institution. They have visited several of our ports and 
interviewed many of our employees. That report, I anticipated 
that we would have had that report several months ago. 
Hopefully, we will have that report by the end of this month. 
It is overdue, but we certainly had a hands-off approach as far 
as that report is concerned. We just facilitated the 
Commission's visits and helped them get information. So I am 
confident that the personal search procedures that we use now 
are more effective, are more sensitive, or are more civil than 
they were in the past, and we are going to continue to monitor 
it.

                         CUSTOMER SURVEY CARDS

    I just want to mention one more thing if I may. In the 
secondary area, after someone is searched, or their luggage has 
been examined, we have put in place customer survey cards. We 
are asking individuals who have been searched--in other words, 
they have been interrupted in their travels, or perhaps their 
luggage has been gone through or they may even in fact have 
gone through a personal search--to fill out a card if they so 
choose, and tell us what their impressions were of this 
experience. Over 8,000 of these cards have been sent back to 
us. Eighty-two percent of the cards that we have received are 
positive. 11 percent are negative. And the other percents are 
not relevant; they apply to other agencies, that sort of thing. 
I think that is a phenomenal number, and I think it is a 
testimony to the recognition of how important the personal 
search issue is to the Customs Service. It is a recognition on 
the part of the Customs employees and how sensitive they have 
been to responding in a positive, favorable way. So I am very 
impressed with that 82 percent positive response.

                               FORFEITURE

    Mrs. Meek. Thank you. I have one other question. It has to 
do with a statement that you made, Mr. Commissioner, having to 
do with a South Florida drug smuggler, and it had to do with 
forfeiture. You were able to get 50 million from this smuggler. 
You shared 25 million of the proceeds with the Monroe County 
Sheriff's Department as a result of the help that they gave in 
the investigation. How did you decide what you would do with 
these proceeds? What criteria did you use to make this decision 
or did a court decide? Who makes that decision, Mr. 
Commissioner?
    Mr. Kelly. There is a strict formula. The Treasury Asset 
Forfeiture Office is involved in that decision. It has to do 
with the amount of involvement of local law enforcement, and 
that decision was based on that formula. It was not arbitrary. 
It was not----
    Mrs. Meek. Does Treasury ever relegate some of the money to 
drug treatment or drug prevention?
    Mr. Kelly. Certainly. It depends on the locality or 
municipality involved in assisting federal law enforcement in 
effecting the arrest or the seizure, but the localities 
themselves can make those determinations.
    Mrs. Meek. So there is some flexibility in the way that 
they use the funds from [forfeitures]?
    Mr. Kelly. Yes.
    Mrs. Meek. Okay. Certainly, I would like to see some of it 
used--I know what happens in fraud and in most law enforcement 
communities; whenever there is any type of forfeiture, law 
enforcement usually takes it all and buys cars and the like 
with it, but I do know that it would be good if some of it were 
placed into treatment and rehab and prevention.
    Mr. Kelly. Yes, ma'am.
    Mrs. Meek. It is a tremendous amount of money always.
    Mr. Kelly. Yes, ma'am.
    Mrs. Meek. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Mrs. Meek.

                       RESOURCE ALLOCATION MODEL

    Commissioner, in response to a question by Mr. Price about 
the staffing at airports, you said--I think you said the 
document was a living document, it was an ongoing thing. Last 
year you said--in answer to a question by Mr. Forbes, you said, 
``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.''
    Mr. Kelly. I do not know if the Congressman asked about 
airports specifically.
    Mr. Kolbe. I thought it was, or staffing in general.
    Mr. Kelly. He was asking about staffing in general.
    Mr. Kolbe. What about that study?
    Mr. Kelly. That is the resource allocation model. Oh, the 
airports--well----
    Mr. Kolbe. This one you were referring to last year in an 
answer to a question about airports. You said, ``We are engaged 
in a resource analysis being done by an outside consultant.'' 
Were you referring to the overall staffing model or to just the 
airports?
    Mr. Kelly. No, overall staffing model. But I thought you 
meant COBRA fees, which is a different way of funding 
personnel. It is paid by the air carriers.
    Mr. Kolbe. Okay. You said then--if you are talking about 
overall staff, you said, ``It is a zero-based look at the 
entire organization that should be done by the middle of next 
month.'' This was last--when was this? March.
    Mr. Kelly. It should come in. It is delayed. No question 
about it. I am talking about the same study. We anticipated 
this resource allocation model being published and being 
available much sooner than it has been.

                            JOURNEYMAN LEVEL

    Mr. Kolbe. Mr. Hoyer spoke about your level of your 
journeyman, which is GS-9. And my understanding is that OPM has 
recommended, and I think it is in the budget request--no? There 
is some thought that INS may go to GS-11. Is that your 
understanding, that there is going to be some disparity here? 
What is the ongoing continuing problem, Mr. Secretary, Mr. 
Commissioner, that we--and Treasury just cannot seem to get the 
other parts of the federal government to look on your law 
enforcement in the same way?
    Mr. Kelly. Well----
    Mr. Johnson. We are going to have to share both the 
question and this microphone. The----
    Mr. Hoyer. It looks to me like the Commissioner might yield 
to you for both. [Laughter.]
    Mr. Johnson. Yes, I had that feeling.
    Mr. Chairman, this is clearly an area that--in which you 
have been focused, the issue of disparity between Treasury and 
Justice, and in a number of areas we have taken steps to 
address that.
    Mr. Kolbe. Well, I think you have, and that is why I did 
not ask any specific question or did not make any specific 
comment about that in my opening remarks, because I think you have done 
some things. But I mean, here again, once again we see it, in a 
different area now, in a specific staffing issue here and coming up. Go 
ahead.
    Mr. Johnson. This is an area where we will have to pursue 
it further within the administration, but this has highlighted 
an area of concern.
    Mr. Kolbe. Have they ever given you any clue as to why they 
think of it differently in Customs versus Immigration? Have you 
ever had any conversations with them, as to why they view it on 
a different light?
    Mr. Kelly. [Shakes head negatively.]

                                WORKLOAD

    Mr. Kolbe. One other question. On this chart, you looked 
at--and it is pretty dramatic, the increase here and the number 
of entries, and the increase in the number of passengers coming 
through airports, and the small increase or almost no increase 
in FTEs personnel, and something that we have certainly 
complained about. But it seems to me that there is something 
missing here on this chart, technology. I mean, if you were the 
CEO of AOL and you showed me a chart showing the number of 
customers you had and the number of FTEs you had, would you 
expect the number of FTEs to go up with the same number of 
people that are signing up with--just to use one example--of an 
Internet provider like AOL? Of course not. What you do is you 
add a lot more technology, put more computers on to handle the 
same kind of thing, and you get more efficient on the way you 
use it.
    I guess what I am trying to get at is does your resource 
allocation model that you have been talking about that you have 
been working on, delayed as it is here, are you taking into 
account the effects of technology and how that can help you do 
the job better?
    Mr. Kelly. Yes, I think we are. The technology, Customs ACS 
system was state-of-the-art in 1984, no question about it. But 
what company that has----
    Mr. Kolbe. Agreed.
    Mr. Kelly [continuing]. This type of volume would have a 
17-year-old computerized system?
    Mr. Kolbe. I agree. And we agree when it comes to ACE, ACE 
replacing ACS, but there are other technologies that are 
available to you using every day, of scanning and other kinds 
of technology equipment, don't you agree?
    Mr. Kelly. Yes, sir.
    Mr. Kolbe. That makes it--you do things in a more efficient 
way hopefully.
    Mr. Kelly. Well, we have an ambitious, non-intrusive plan 
that we are in the process of deploying primarily along the 
southwest border, but also in some of our seaports. It is a 
$134,000,000 plan. We are in the second year of deploying the 
technology in that plan. It calls for 130 individual pieces of 
technology, primarily x-ray, and gamma-ray systems along the 
southwest border. Obviously, that will be a help. But I think 
ACE, the importance of ACE cannot be overstated. This current 
system that we have is port specific. It does not allow for 
national management of the system. It does not allow us to do 
account management. All the things that business does, we are 
struggling to keep up with. So we have to do business the way 
business does business. That is what ACE enables us to do. If 
you are saying that someplace in the middle of that, that we 
should have new technology, Mr. Chairman, I agree with you. The 
Mod Act was passed in 1993, and that was really grounded on the 
concept that there would be a new automated system coming down 
the pike 7 years ago. We have had funding for ACE development 
in every year since 1995. Of course, this year, we did not have 
that. So, yes, I think we need the technology that is long 
overdue.
    Mr. Kolbe. We are on the same wavelength. Our questions and 
answers are going a little bit past each other. I was really 
trying to say, now do we need ACE. Of course we need ACE. You 
know my view on that and we will have a hearing on that. But 
just simply that when you do a resource allocation model, it 
has to include the effects of technology on doing your job as 
well as the number of personnel you have, and I think that that 
needs to be factored in.
    I still have lots of questions. I hope that before we 
finish here at 11:30, I will be able to get back and ask a 
couple more of them.
    Mr. Hoyer.

                             PRIVATE SECTOR

    Mr. Hoyer. Mr. Chairman, of course in the private sector, 
as the Commissioner points out, what AOL would have done is, 
they would have issued either new stock or raised capital in 
some way, modernized and amortized that over their future 
profits. As their customers increase, their revenue would 
increase as well, presumably by some factor there, which we do 
not have in the public sector, so it is a little more difficult 
to keep that up, because we in the Congress, of course, are 
confronted on an annual basis, which constrains what we have to 
compare with other enterprises that we run.
    AOL, of course, would make its determination based upon its 
own business, but I think you are right. Obviously, you have to 
factor in increased productivity made possible by technology, 
and obviously we cannot, nor should we, given the technologies 
available, increase personnel at the rate you increase 
business. I think you are absolutely right on that.
    Let me try to do some quick questions, because of our time 
frame. How does the Customs provide air support to Secret 
Service now?

                     AIR SUPPORT TO SECRET SERVICE

    Mr. Kelly. There are major events that the Secret Service 
asks us to provide resources--over-flight capability and also 
the ability to transport some of their quick forces. We have 
done that for the State of the Union speeches. We actually did 
that for the Olympics in 1996.
    Mr. Hoyer. Here, for the Millennium?
    Mr. Kelly. We did it for----
    Mr. Hoyer. In New York and here?
    Mr. Kelly. In essence it is focused on Presidential events, 
so, we do it when the Secret Service asks us to do it.
    Mr. Hoyer. Okay. Now, based on the budget request, will the 
air assets provided to the Secret Service, additional air 
assets that you are going to provide to the Secret Service, 
take away assets from current interdiction efforts?
    Mr. Kelly. Yes, minimally. We are looking for two A-Star 
helicopters in 2001 budget and then we would have to look for 
medium-lift helicopters in 2002. In 2001 and also 2000, we will 
be using some of our Black Hawks to participate in these 
operations. So, we have done a calculation that says it is a 12 
percent reduction in our drug interdiction capability when 
those assets are devoted to the Secret Service support.
    Mr. Hoyer. Okay. That is the bad news. Now, the good news 
is what kind of--if it is 12 percent down at the time you are 
utilizing them to support the Secret Service and its 
activities, which I understand from the Secret Service can be 
about 6, 7 times a year?
    Mr. Kelly. Yes, sir.
    Mr. Hoyer. The good news presumably is the accretion, the 
addition to capabilities during the balance of the year.
    Mr. Kelly. Precisely. Yes, sir.
    Mr. Hoyer. What would that be?
    Mr. Kelly. Well, those assets will be used; when they are 
not being used for Secret Service, they will be used for 
Customs mission-specific events.
    Mr. Hoyer. Okay. If you don't have it now, could you give 
me the comparable figure to your 12 percent reduction?
    Mr. Kelly. Yes, sir.
    Mr. Hoyer. Is that what you are saying?
    Mr. Kelly. Yes, sir.
    Mr. Hoyer. Okay. Because over a much longer period of time 
you will have a substantial increased percentage of capability?
    Mr. Kelly. Yes, sir. Correct.

                            PERSONAL SEARCH

    Mr. Hoyer. Personal Search Review Commission. We have 
talked about that. So, let me go over that. But, you, 
obviously, share that attitude. Everybody on this Committee 
shares that attitude and we need to make sure that our public 
is convinced that neither is there racial profiling nor any 
kind of discriminatory behavior on behalf of any of our agents. 
You have talked about that.

                            SOUTHWEST BORDER

    In 2000, the budget year we are now in, $25 million was 
provided through the Treasury Forfeiture Fund to the Southwest 
border. I know the Chairman is very interested in that, as we 
all are. Has Customs provided a plan for this money yet?
    Mr. Kelly. Yes. We have a plan that calls for 157 
inspectors, I think 23 canine officers, and some technology. 
However, there have been concerns about the money in 2001 to 
continue those positions. We have proposed an alternative 
solution to Treasury--Mr. Johnson and I were just discussing 
this--to see if we can extend the funding into 2001. Since the 
hires now would be very late in the fiscal year, in essence, we 
have a plan to roll it over into 2001. But we would still be 
able to bring those positions on board and get some of the 
technology funded by those forfeiture funds in 2000 and bring 
the remaining people on board in 2001.
    Mr. Hoyer. How much of the $25 million would you project 
spending for fiscal year 2000 and how much would you want to 
roll forward?
    Mr. Kelly. I think we are talking about $9 million for 
people for FY 2000.
    Mr. Hoyer. And the $16 million being spent next year?
    Mr. Kelly. Yes, sir.
    Mr. Hoyer. Okay. Mr. Chairman, I have no further questions 
at this time and I thank the Commissioner for his presentation.
    Mr. Kolbe. Ms. Roybal-Allard.

                      COMMENDATION TO COMMISSIONER

    Ms. Roybal-Allard. I thank you, Mr. Chairman.
    Mr. Kelly, at the beginning of the year my staff went down 
to see the Customs operation at LAX and to the warehouses where 
the containers are taken off the docks for extensive searches 
for drugs. The feedback that we got from the personnel there 
was very positive. They hold you and your efforts in the 
highest regard. And I, myself, was impressed by the fact that I 
learned that you have travelled around the agency's stations, 
even to some of the most remote stations, to get first-hand 
information and feedback from the personnel and I think you are 
to be commended for that.

                       PERSONAL SEARCH PROCEDURES

    I would like to go back a little bit to the question that 
Mrs. Meek raised with regard to profiling. I think that the 
efforts and the changes in procedures along the border, by all 
reports, has been very successful. There has been a decrease in 
the number of searches while at the same time you have either 
maintained or even increased the number of seizures of drugs. 
However, there are still allegations that African Americans and 
Hispanic Americans are being targeted by Customs along the 
border.
    My question is, do you have any plans to review and to 
maybe revise some of the procedures that are now being used 
along the border to address some of these problems that have 
been identified?
    Mr. Kelly. Well, we are constantly monitoring the data as 
far as personal searches are concerned. And quite frankly, we 
were not able to do that a little over a year ago. We simply 
did not have the information. So, we are looking at it as we 
now know who is being searched and where they are being 
searched. We are engaged in an ongoing training program for all 
of our inspectors, telling them, you know, the needs to be 
sensitive, to be civil. We are also reinforcing the fact that 
we are 100 percent against racial profiling; that we are not 
going to tolerate it. That is we will not select someone for 
personal search strictly because of their race.
    We are reinforcing that message and also communicating to 
the travelling public that we do have a difficult job. If you 
go out to Dulles Airport, you will see new TV monitors that we 
have installed, just in the last two weeks, that puts this 
message out. We will be changing the language of it and we will 
be using that system in other ports of entry as well. This is a 
pilot project. We have to do a better job of communicating to 
the public of the possibility of people being searched.
    I think doing better training, monitoring the searches at 
the headquarters level and communicating more effectively with 
the public will go a long way in lessening some of these 
tensions.
    Once you are selected for a search there is always a 
question of why me, and that is very understandable. Fifteen 
years ago, Customs used to talk to everybody coming into the 
country. Now, because of volume we simply cannot do that. So, 
when you start selecting people out, it is very understandable 
to say why me? Am I a particular race or a member of a 
particular group and that is why I have been picked? Those 
allegations in some way, shape or form, will probably always be 
there. We are doing our best to reduce them, to make our 
employees more aware of the awesome power that they have.
    Customs has tremendous power. Border search authority is 
much greater than the search authority of other law enforcement 
agencies. For instance, we do not need probable cause to 
conduct a search. We have to be aware of that just how potent 
and powerful that authority and the need to use it judiciously.
    I think continual training is the way to go. I think our 
employees have been sensitized but we have to continue to do 
that to minimize the appearance and certainly the reality of 
any sort of abuse.
    Ms. Roybal-Allard. Okay. No further questions, Mr. 
Chairman.
    Mr. Kolbe. Thank you.
    Mrs. Meek.

                    INTERNATIONAL TRADE DATA SYSTEM

    Mrs. Meek. Would you give me, Commissioner, an update on 
your international data system, the ITDS? I understand it was 
transferred from the Enforcement branch of Treasury, to 
Customs. Can you give me any comfort that Customs will continue 
the kind of service and that attention received over in 
Treasury? A lot of my constituents in South Florida are very 
interested in this particular component of what you do.
    Mr. Kelly. Well, absolutely. We are going to give it the 
utmost attention. I think the move of ITDS from Treasury to 
Customs was the right move to make. ITDS, in many ways, is the 
front end of the ACE system. What it enables us to do or will 
enable--it is not developed as yet, it is being developed along 
with ACE--it enables one-stop shopping, if you will.
    Right now, agencies have to fill out--or I should say, 
importers have to fill out a myriad of forms and provide 
information to a whole host of Federal Government agencies. 
What ITDS will enable us to do is to collect that data and 
distribute it to the appropriate Federal agency. So, it is much 
less of a burden on the importer.
    We fully support it. I think it is in the right agency. 
There is a multi-agency board of directors, if you will, that 
are involved in development of ITDS but we intend to fully 
support it and make certain that it moves forward in 
conjunction with ACE.
    Mrs. Meek. Thank you.

                         CHILD LABOR INITIATIVE

    I want to commend you, Mr. Commissioner, on your child 
labor initiative. I think that this is an important initiative. 
The fact that you are now going to have 8 special agents 
working in that capacity will certainly strengthen your effort. 
Child labor is a big concern of mine and I know there are 
certain cities where you have more trouble than others in terms 
of child labor. Please comment on that.
    Mr. Kelly. Yes, Ma'am. We are anticipating an additional $5 
million in the 2001 budget to enable us to expand our forced 
child labor initiatives. We will add additional agents to this 
function. We will be able to do more on-site visits. We visited 
11 countries. We will be able to expand our outreach effort. We 
have had some successes, some detention orders, but we need 
additional resources to do these on-site inspections.
    We will be establishing offices in Panama, in Uruguay, in 
Hong Kong, and in Thailand that will enable us to, as I say, do 
more effective inspections. We hope to also set up a presence 
in India, where we have a lot of concerns in that regard.
    Mrs. Meek. Thank you.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Mrs. Northup?

                                COURIERS

    Mrs. Northup. Thank you, Mr. Chairman.
    Mr. Chairman, I would like to follow-up on a few of my 
earlier questions. First of all, just to expand the discussion 
a little bit. Let me review what Customs has to do. It 
appraises the value of the merchandise coming in, and 
classifies it in terms of where it would fit under the 
harmonized tariff schedule. That is a very complicated 
schedule, isn't it, Mr. Kelly?
    Mr. Kelly. Yes, Ma'am.
    Mrs. Northup. And then they have to assess the duty for 
each of those. In addition, they have to collect fees--fees 
that for any of those materials go between $25 and $485, just 
the fee for collecting it is added to the duty. In addition, 
they have to assess special fees and duties; those are the 
anti-dumping duties, the textile quotas and on any other type 
of special imported product.
    With that basis, it would be almost impossible to 
efficiently assess fees and duties and collect them if you 
don't have a manifest that is entered into the computer and 
able to be searched by way of computer, if you are talking 
about a huge number of packages; is that not true, Mr. Kelly?
    Mr. Kelly. Yes, Ma'am, very challenging.
    Mrs. Northup. So, if Customs should decide to enforce the 
law as it applies to every carrier as your regulations say, you 
would almost have to insist that the Post Office put together a 
manifest that is computerized in order to do that; isn't that 
true?
    Mr. Kelly. Well, that would be very helpful, yes.
    Mrs. Northup. And considering the limitations on your 
budget, to be able to any other way enforce a budget would be 
almost impossible?
    Mr. Kelly. It would be very difficult, yes.
    Mrs. Northup. In addition to that, to those issues of cost, 
something we discussed last year, but let me go over that 
again. The private carriers, they actually pay the Customs 
inspectors to come in and perform the work for them; is that 
correct?
    Mr. Kelly. That is correct.
    Mrs. Northup. But in the case of the Post Office, Customs 
actually not only provides their inspectors free of charge but 
they also pay to rent space. And let me ask you about a couple 
of other incidental expenses. For example, as they come down 
the conveyor belt, if the conveyor breaks, who pays for the 
repair of that conveyor?
    Mr. Kelly. The Customs Service.
    Mrs. Northup. Customs does.
    So, essentially all of those added-on costs cut into your 
already over-stretched budget. If, in fact, the Post Office had 
to assume the same costs that the--forget processing fees and 
all of that--but if they had to assume the same costs in terms 
of managing space, paying for the inspectors and you didn't 
have to pay for the rental, that would help you stretch those 
dollars to other essential purposes; isn't that true?
    Mr. Kelly. Yes, Ma'am.
    Mrs. Northup. Let me ask you now about enforcing the law. I 
think I was just getting to this when my time ran out the last 
time. We are already finding a higher percentage of the Postal 
Service mail packages having drugs in them than we are in the 
private carriers; is that true?
    Are you aware of that?
    Mr. Kelly. It depends, I guess, on what mail facility you 
are talking about. As a general proposition I would have to 
take a hard look at that but again we have better information, 
no question about it. We have more specific information as to 
what is coming in through the private carrier mode versus the 
Postal Service.
    Mrs. Northup. I guess what I would say is that the evidence 
shows that the carrier of choice for drug dealers is becoming 
the Post Office, because they don't, you know, the information 
is not available. So, it would seem to me that it wouldn't be 
long before people that are exportingtextiles, exporting things 
that are subject to the tariff, the harmonized tariff fees that they 
would figure out how to avoid those, too; wouldn't you think that would 
be reasonable? If you have an export house, they know how often their 
customers end up paying the fees.
    Mr. Kelly. Well, as I say, there is no question that we 
have more information about what is coming in through the 
private carrier mode than we do as far as the postal mode is 
concerned. So, you could, deduce that someone knowing that may 
choose to go the postal route rather than through private 
carriers.
    Mrs. Northup. And in addition, isn't it true that Customs 
inspectors have, by definition, what we call border authority. 
That means that they have the right to inspect any package that 
they think is suspicious, whereas Postal inspectors have to 
have probable cause and then they have to go get a warrant to 
open the package.
    Mr. Kelly. Yes. They are more restrictive in their 
authority to open packages than the Customs Service is.
    Mrs. Northup. Okay. Because I think we will hear the Post 
Office claim that they have postal inspectors that do what 
Customs does but the truth is that they are under stricter 
inspection laws than the border authority.
    Mr. Kelly. That is my belief, yes.

                           INSPECTOR TRAINING

    Mrs. Northup. Can you give us any comparison between the 
training of postal inspectors and the training of Customs 
inspectors?
    Mr. Kelly. I am not familiar with the training of postal 
inspectors. I was at their training facility once. It was very 
impressive. But our inspectors go through 11 weeks of training 
at the Federal Training Academy in Glynco, Georgia. We then 
have in-service training and we are trying to buttress that 
training, quite frankly, and increase it.
    I think our inspectors are adequately trained, but also a 
lot of it is experience. Working these mail facilities you see 
the tremendous volume of mail that comes in, and they learn 
quickly. We put some of our most experienced inspectors right 
near those conveyor belts to make judgments. As I say, really 
they have a second to make a determination based on--absent any 
intelligence information, which sometimes we get--based on the 
return address or how a package is wrapped.

                               MANIFESTS

    Mrs. Northup. Right. Based on--let me just follow-up on 
that--based on return address. So, for example, if you have a 
manifest that is computerized and you know that return 
addresses tend to be one of the triggers, then it is much 
easier to catch a package than if you have to stand by the 
conveyor belt and there is no manifest but you have to pick 
that up that fast.
    Mr. Kelly. Yes, Ma'am, no question about it. A specific 
manifest would certainly help us.

                              ENFORCEMENT

    Mrs. Northup. Well, Mr. Chairman, I am going to include 
some other questions. I am concerned, I think, Mr. Kelly, what 
I don't want to do is turn you into the cause of the problem. 
But I would say I am disappointed that there isn't a request or 
even a regulatory movement in your direction to stop this hole 
in the system. The fact is--and you know I am not trying to get 
the private carriers off paying the fees, the duties, and, I 
think we ought to enforce those very aggressively--my question 
is--it is like a child that has access to vending machine to 
buy cigarettes, if 100 stores turn that child down from buying 
them, as long as there is one vending machine that they know 
how to get cigarettes, in a sense, there is no limitation on 
them buying.
    And it is the same way with postal inspection, if the U.S. 
Post Office delivers packages without the controls, all you 
have to know is one way to get around fees and duties which 
cost us a fortune in this country and to get illegal drugs or 
bypass our trade laws and bring contraband into this country. 
And, so, all the aggressive efforts that you are making, with 
every single private carrier, are for naught as long as there 
is one well understood way to avoid all of that.
    And it seems to me like your agency should take the lead on 
this. If there is a prohibition against that, if someone higher 
up in the administration is saying, you won't go there, I would 
appreciate knowing that.
    Mr. Kelly. Yes, Ma'am.
    Mr. Kolbe. We have got time for a couple of more questions. 
I just want to ask one item and I will submit about 95 
questions for the record.
    I just wanted to follow-up. I thought that that was an 
interesting comment you made about the Southwest Border 
Initiative, the $25 million that was, of course, the initiative 
directed by Senator Kyl and I, supported over here on this 
side. My understanding is that we still--that money is the one 
piece from last year's budget that still has not been released 
yet because we have not had the formal allocation of how it is 
going to be used; is that correct, Mr. Secretary?
    Mr. Johnson. We still have not released the money. We are 
working to resolve this issue in the next couple of days with 
respect to the $25 million initiative.
    Mr. Kolbe. Yes. This is the first time, so, you will be 
submitting something to the Committee. This is the first time I 
have heard about--the money was allocated for this fiscal 
year--this is the first time I have heard about it being split 
between two fiscal years.
    Mr. Johnson. Well, there has been significant discussion 
between Treasury and Customs on this issue. The Commissioner 
sent us a proposal that dealt with this issue recently but we 
have been discussing a number of ways with which to fund this 
initiative, and to do it with a package that is consistent with 
the President's budget.
    Mr. Kolbe. Okay. But if you are going to spend $9 million 
in this fiscal year and the other $16 million in the next 
fiscal year, what would be the division between that $9 million 
in this fiscal year between technology and FTEs; do you have 
any idea?
    Mr. Johnson. Mr. Chairman, I am certain that Commissioner 
Kelly can answer the question about what is in the $9 million.
    Mr. Kolbe. It looked like he was about to.
    Mr. Johnson. But we have not. My concern is that we discuss 
this package before we make a final decision on it and we hope 
to----
    Mr. Kolbe. I understand no final decision. I am just trying 
to get some idea of how you are going to allocate this between 
personnel and technology here.
    Mr. Johnson. I will pass the mike.
    Mr. Kolbe. Okay.
    Mr. Kelly. We would like to get the technology thisyear. I 
think it is a $4 million piece of the $25 million package that would 
give us technology and relocations. We are looking to do that----
    Mr. Kolbe. What kinds of technology are you looking at?
    Mr. Kelly. We are talking about busters, you know, those 
devices that we use, some limited portable X-ray equipment 
mounted on vehicles; that sort of thing. We would like to get 
that this year if possible. But, again, this is very much in 
the discussion stage. This is something we just recently sent 
over to the Treasury and Mr. Johnson is right, we really 
haven't had a chance to fully discuss it.
    Mr. Kolbe. Well, we will look forward anxiously to that. 
Those of us on the Southwest Border are very anxious to see 
that this does move ahead as rapidly as possible.
    Other members of the Subcommittee?
    Mrs. Meek.

                     COMMENDATION FOR COMMISSIONER

    Mrs. Meek. I just want to take this opportunity, Mr. 
Chairman, to commend Commissioner Kelly for the kind of 
leadership he has brought to Customs. And I appreciate it. It 
is a very significant issue in the area of the country I 
represent. It is very important. And I certainly want Secretary 
Johnson to realize that we think a lot of Customs and we know 
how important it is.
    We know much of the success we have in solving the problems 
we have in South Florida is due to the efficacy of Customs and 
in their having the means resolving them. So, it is extremely 
important and I do hope that you will continue in your 
capacity, sir, to support them. Sometimes I feel that they are 
the step-child of this whole network but with some of the new 
efforts that are being made, I am hopeful that they finally 
will receive the status which they deserve.
    Mr. Kelly. Thank you, Ma'am.

                         CHANGES IN LOUISVILLE

    Mr. Kolbe. Mrs. Northup, do you have a question?
    Mrs. Northup. Just one final question. I have been so 
involved in the question of the air carriers. I would just like 
to say how much I have appreciated particularly in Louisville, 
your responsiveness to the changes with our airport, the 
international packaging that comes in, the willingness to move 
the headquarters to the airport which is so much more efficient 
for both the people we serve and the people that are trying to 
service that facility. And there is just a lot of respect for 
the professionalism that you have.

                   COMMENDATION FOR CUSTOMS EMPLOYEES

    I don't in any way want to discount the importance of my 
fellow Committee members about racial profiling. I think that 
that is a very serious concern and that we will all be better 
if we address it. But for myself, I have had several 
opportunities in the last two years to travel overseas to 
remote areas--I don't go with a Congressional group; I go with 
my husband, I don't have a Congressional passport--and I 
purposefully look wherever I go at anybody that is involved in 
Federal Government. Unfailingly, the people at the Customs 
counters are polite, they are respectful. I look around to the 
people around me to see, if students, are treated the same way, 
and I have to tell you that there is at least some customer 
service effort going on because we have walked away and our 
friends have walked away and said that we wish that every 
Federal employee could be such a good representative of the 
government.
    So, I say that without wanting to diminish the very 
important concerns of my fellow Committee members, but I do 
want to say that I have at least in my own experience been very 
impressed with the sense of service that I see out of the 
Customs people.
    Mr. Kelly. Thank you very much. They do a great job. We 
appreciate that.
    Mr. Kolbe. Thank you very much, Mrs. Northup, for those 
comments.
    All the members of the Subcommittee thank you. Mr. 
Secretary, we thank you and Commissioner Kelly very much for 
being here today. I think this was a very good hearing.
    The Subcommittee will stand in recess until this afternoon 
when we have the Federal Law Enforcement Training Center.



                                           Thursday, March 9, 2000.

  UNDER SECRETARY FOR LAW ENFORCEMENT BUREAU OF ALCOHOL, TOBACCO AND 
                                FIREARMS

                               WITNESSES

JAMES E. JOHNSON, UNDER SECRETARY FOR ENFORCEMENT
BRADLEY A. BUCKLES, DIRECTOR, BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
    Mr. Kolbe. The Subcommittee on Treasury, Postal Service and 
General Government will come to order.
    This is our first budget hearing of the 2001 budget cycle 
appropriations cycle, and we welcome this morning to open us 
Under Secretary Jim Johnson, as well as our first time to greet 
the Director of the Bureau of Alcohol, Tobacco and Firearms, 
the ATF Director Brad Buckles. We welcome you as well. 
Secretary Johnson, of course, has been before us several times 
before.
    As I said, this is the first hearing in our appropriations 
cycle, but I am not going to display charts comparing Treasury 
law enforcement personnel and funding with those of the Justice 
Department. We were fortunate I think last year to be able to 
keep agencies above water in the face of a very inscrutably 
concocted budget. I am encouraged that this year we see 
requests coming from the administration which I think do a 
better job of funding the law enforcement requirements--
certainly maintain basic services and staffing, addressing I 
think some of the imbalances of the Secret Service.
    I am also glad to see progress that has been made in the 
Department's attention to recruiting, training, compensating 
and retaining skilled law enforcement professionals. I believe 
that is critical for the Treasury if it is going to meet its 
enforcement mission.
    This is but a start. The Customs Service continues to have 
very significant unfunded requirements, ranging from their 
marine programs, inspection technology, modernization funding--
and that, I might add, will be the subject of a separate 
hearing that we intend to do in April--and staffing for an 
ever-growing inspection workload. ATF I think has great 
difficulties meeting its inspection targets.
    The Secret Service, while aided by recent funding, faces 
significant difficulty in carrying out its dual missions of 
protection and investigations; and the Federal Law Enforcement 
Training Center, FLETC, has increasing demands for space from 
agencies, challenging the long-held principle of a consolidated 
law enforcement center.
    Finally, I am concerned that Treasury agencies have 
vehicles with age and mileage that is well in excess of what 
the GSA has as a standard for those vehicles and certainly 
substandard compared to other agencies.
    I think there needs to be a continuing focus, from the 
Secretary on down, on getting the resources Treasury's law 
enforcement agencies need to do their jobs--and advocating for 
them. The Department and the administration must use every 
means at its disposal to further the performance and success of 
its law enforcement mission.
    Mr. Secretary, I will continue to be a strong advocate, as 
I have in the past, for Treasury law enforcement and for the 
role that they play in trying to reduce violence and keeping 
drugs off our streets, protecting our Nation's currency, 
guarding against cybertheft. But, Mr. Secretary, I also need 
your cooperation.
    Related to this, I note that we have concern that there are 
several key reports that have been requested by the 
subcommittee that are not always getting submitted in a 
reasonably timely manner, including the report of the Seaport 
Security Commission, Customs Air and Marine Modernization and 
the Customs staffing allocation model. These are all reports 
that we have asked for and not yet received. It is difficult 
for us to act as an advocate and to conduct what we believe is 
legitimate oversight of these activities when information on 
programs and operations is not being provided in a timely 
manner. So, Mr. Secretary, we hope we can improve the record in 
these reports in this regard during the upcoming year.
    Let me just say our intention is certainly not to add a 
needless number of reports. We try to hold these to a minimum. 
We believe these are the ones that we really need to do our 
job. If they are a particular burden we need to hear from you 
about that and work with you on that.
    Turning to ATF, the administration proposes significant 
increases of 25 percent, that is $150 million above last year, 
to follow the winning approach that we have been urging for 
years--provide the muscle to enforce our existing tough 
firearms laws. The goal of stopping violent firearms crimes is 
one we all share, and the subcommittee will carefully review 
the administration's request as it relates to this effort. At 
the same time, I recognize that ATF has an extremely diverse 
range of duties, requiring some of the most sophisticated 
technology, expertise and diligence of any Federal law 
enforcement agency, ranging from enforcement for crimes 
involving explosives, arson and firearms, as well as diversion 
of alcohol or tobacco products.
    At the same time, it must serve industry and the public as 
a responsible and responsive regulator. In your fiscal year 
1999 performance report, ATF cites the avoidance of over 
542,000 crimes and $1 billion in crime costs due to 
investigation and incarceration of criminals, as a result of 
your efforts and which, when you combine that with the $12 
billion in taxes that ATF collects, it gives us some ability to 
see the kind of payback on investments that we can get from 
making that investment in ATF.
    So I look forward to hearing the testimony of Secretary 
Johnson, and that will be followed by Director Buckles. After 
that, we will proceed directly with questions.
    Mr. Hoyer has stepped out. I believe he is next door in the 
other subcommittee. When he comes back we will take his opening 
statement. But we will go ahead with you, Secretary Johnson.

             STATEMENT BY UNDER SECRETARY JAMES E. JOHNSON

    Mr. Johnson. Thank you, Mr. Chairman.
    Mr. Chairman, Mrs. Meek and members of the subcommittee, I 
am pleased to join Director Buckles as he presents for the 
first time ATF's budget request for fiscal year 2001. In 
addition to supporting Director Buckles' request, I will take 
this opportunity, as the first of the committee's hearings on 
the Treasury law enforcement to bureaus to discuss in broad 
terms the overall Treasury enforcement budget request for 
fiscal year 2001.
    With your permission, Mr. Chairman, I would ask that my 
full testimony, which has been previously submitted, be 
included in the record of these proceedings.
    Mr. Kolbe. Mr. Secretary, may I just remind you, as I 
forgot to, this being the first of the year, of course the full 
statement can be put in the record. Shortening will help. We 
have had a meeting called at 11:30, so we only have an hour and 
15 minutes for the hearing this morning.
    Mr. Johnson. I consider myself duly advised and will 
shorten appropriately.
    I would like to say a quick word about the man sitting to 
my left, who is appearing before this subcommittee for the 
first time as the Director of ATF.
    Director Buckles has spent his entire professional career 
at ATF and has a great appreciation for and an understanding of 
the complex and controversial issues that this Bureau faces on 
a daily basis. The Treasury Department has benefited from his 
insight and intellect on countless occasions over the years. I 
have personally benefited from both his insights and his 
intellect, and we are especially pleased with this appointment.
    As to the departmental budget, our request reflects the 
funding that we believe is necessary to most effectively carry 
out the important law enforcement missions for which we are 
responsible and which so directly impact the lives of the 
citizens that we serve.
    The budget also reflects, Mr. Chairman, the insights that 
we have gained from the oversight and advocacy that you have 
exercised over Treasury's law enforcement bureaus. We take 
seriously your need for information, and we will take steps to 
address the problem of not getting reports to you in an 
expeditious manner.

            LAW ENFORCEMENT WORKFORCE: QUANTITY AND QUALITY

    Turning back to the budget, if enacted, this budget would 
provide the United States Customs Service with a net increase 
of 273 full-time equivalent (FTE) positions, which includes 120 
FTE for counter-narcotics work. The United States Secret 
Service would be enhanced by 400 additional full-time 
equivalent agents. [Clerk's note.--Agency corrected this to say 
Customs would have 156 FTE would be for counter-narcotics work, 
and that ``the Secret Service would be ehanced by a net 
increase of 193 full-time equivalent agents''.] These agents 
would help carry out its dual mission of protection and 
investigation. ATF would benefit from a net increase of over 
500 full-time equivalent agents, inspectors and other staff, 
with an emphasis on substantially enhancing our 
firearmsenforcement efforts.
    Overall, the President's fiscal year 2001 budget proposal 
would add more than a net increase of 1,400 full-time 
equivalent positions to Treasury enforcement above the fiscal 
year 2000 estimate. This represents the largest increase in 
Treasury law enforcement staffing in over a decade.
    Funding is not the only element of strong law enforcement. 
Equally important are clear policies and a means for setting 
priorities. The Treasury Department seeks to provide support, 
oversight and policy guidance to enhance the performance of our 
enforcement bureaus and to facilitate an even stronger and more 
coordinated enforcement presence. That presence must also 
reflect the changing demographics of our population. Our need 
to recruit and retain the best qualified and diverse work force 
will gain even greater salience if the proposed budget is 
enacted and we embark on rather substantial hiring.
    That goal has also been aided by the decision of the Office 
of Personnel Management to grant Schedule B excepted hiring 
authority to ATF and the Customs Service. We have also been 
granted 20 additional Senior Executive Service positions by OPM 
for our enforcement bureaus, partially filling a long-standing 
and critical need to provide benefits more aligned with high-
level skills and expertise. While we still have significant 
challenges in this area, this number represents a 15 percent 
increase over the number of SES positions we had before.
    Another component in ensuring a high caliber work force is 
the ability to deliver the highest quality training available. 
The Federal Law Enforcement Training Center is key to this 
goal. The expansion in recent years in the number of employees 
hired by the 73 law enforcement agencies that participate in 
FLETC has tested its ability to meet all training requests. 
Moreover, advanced training to keep law enforcement officers 
abreast of the latest trends in fighting crime can't be 
compromised. You will hear later from Director Basham about his 
efforts to provide that advanced training.

                          TREASURY PRIORITIES

    With those broad features of the fiscal year 2001 
enforcement budget discussed, I would like to use the remainder 
of my time to discuss a few specifics related to Secretary 
Summers' priorities.
    Counternarcotics Enforcement. One of the highest priorities 
for the Department of the Treasury is reducing the supply of 
dangerous drugs entering the United States. The budget proposes 
several important initiatives, including: a $55 million request 
to aid Customs' investigations, enhance its outbound currency 
program, and make necessary enforcement infrastructure 
improvements; and a supplemental request for 2000 and a fiscal 
year 2001 request totalling $5 million and 31 FTE for the 
Office of Foreign Assets Control to aid in its enforcement of 
existing programs and meet the requirements of the recently 
enacted Foreign Narcotics Kingpin Designation Act.
    Counter Money Laundering. Fighting money laundering is 
clearly a priority of Secretary Summers. Just yesterday, Deputy 
Secretary Eizenstat and Deputy Attorney General Holder released 
the National Money Laundering Strategy for 2000. This plan 
draws on the contributions of all Treasury law enforcement 
bureaus and offices, other offices within the Department of the 
Treasury, and other law enforcement and regulatory members of 
the counter money laundering community.
    The plan follows a comprehensive review of all programs in 
this area and articulates a coherent, broad-based approach to 
unveiling the hidden proceeds of crime. Among other things, it 
designates the first four High-Intensity Financial Crime Areas 
for the United States: the New York and New Jersey metropolitan 
area; Los Angeles; San Juan, Puerto Rico; and cash smuggling 
across the southwest border, particularly Texas and Arizona. 
Additionally, the strategy outlines the administration's plan 
to issue guidance to financial institutions to apply enhanced 
scrutiny to certain high-risk accounts.
    We also announced a final rule requiring money services 
businesses to report suspicious transactions, and we announced 
the intention to expand this coverage later to include casinos 
and securities brokers and dealers. Those programs will be 
discussed in greater detail by FinCEN Director Sloan.
    Protection. Mr. Chairman, you referenced the Secret 
Service's needs in your opening remarks. One of our priorities 
is making sure that the Secret Service has the resources it 
needs to perform the difficult dual functions of providing 
protection to our Nation's leaders and investigating financial 
crime.
    To better address these concerns, the Office of Enforcement 
established an Interagency Working Group on U.S. Secret Service 
Retention and Workload Balancing. This group included 
representatives from Treasury's Office of Management, OMB, and 
the Secret Service. Assistant Secretary Bresee, who has been my 
partner for many years, was one of three cochairs of that 
effort.
    The Working Group's analysis revealed that in the last few 
years the Secret Service has had to deal with increases in 
travel, working hours, and the number of protectees, while 
enhancing the level of protection necessary in light of 
emerging terrorist threats. The significant increase in Secret 
Service staffing in Treasury's fiscal year 2001 budget proposal 
will begin in a very significant way to alleviate this problem.
    Firearms Enforcement. Firearms enforcement is obviously a 
critical concern for this President and for the Treasury 
Department. President Clinton has fully committed his 
administration to the continued reduction of firearms violence. 
To enhance our ongoing efforts, Treasury's budget proposed 
funding 300 new agent positions, 200 new inspector positions, 
and 100 other positions for ATF. We also are calling for $9.9 
million to support State and local law enforcement capability 
to trace recovered crime guns and $23.4 million to establish 
ballistics imaging capability to identify shooters and 
traffickers where the firearm itself is not recovered at a 
crime scene.
    ATF remains committed to establishing comprehensive crime 
gun tracing and youth gun violence reduction efforts with law 
enforcement agencies, and the Department is committed to 
supporting those efforts.
    In fiscal year 2001, ATF hopes to expand the Youth Crime 
Gun Interdiction Initiative from 38 cities to 50.
    Customs' Automation. I wanted to add a final word about an 
issue that will be the subject of at least one hearing next 
Tuesday and then a subsequent hearing, and that is Customs' 
automation.
    The Automated Commercial System (ACS) is Customs' current 
mechanism for allowing importers, carriers and others to 
transmit required information electronically and enabling 
Customs to process and store the information electronically.We 
expect to spend up to $79 million in the current fiscal year, and we 
are requesting $123 million in fiscal year 2001 to assure Congress and 
the American public that there will be effective enforcement of our 
trade laws at the border.
    Customs is, as you know, impeded somewhat from modernizing 
its business practices because of the difficulty and cost of 
modifying the obsolete and poorly documented programming 
language on which ACS runs. The Automated Commercial 
Environment, or ACE, is the proposed new Customs automated 
commercial system. It would operate on modern software, and the 
programming would be fully documented to facilitate subsequent 
programming changes.
    ACE also includes equipment enhancements to increase 
reliability and upgrade connectivity among Customs' offices 
around the country and between Customs and the trade community.
    In our budget for fiscal year 2001, we are requesting $210 
million for development of ACE. We estimate the cost of ACE 
development over the next four years to be around $1.25 
billion.
    We are proposing to offset the cost of ACE over the next 
several years through a user fee to be collected from all 
parties that use Customs' automated systems. The amount 
collected from each user would be based on its volume of use of 
Customs' automated systems.
    We acknowledge that a similar user fee proposal last year 
was not well-received. We made some changes to our proposal 
this year that we believe go at least part of the way to 
meeting the objections of last year. For example, we are not 
asking, as we did last year, for the user fee to be collected a 
year in advance of appropriations for ACE. The administration 
looks forward to working with Congress to fund and continue 
work on ACE as soon as possible.
    Beginning with Director Buckles today, each Bureau head 
will address his programs in greater detail.
    In closing, I wanted to express again my appreciation for 
the outstanding support of Treasury's law enforcement programs 
by the Chairman, by Mr. Hoyer, and by the entire committee and 
staff. Our law enforcement bureaus have grown, they are better 
equipped, they are more professional, and they are stronger as 
a result of your oversight and support.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you.
    [The information follows:]



                STATEMENT BY CONGRESSMAN STENY H. HOYER

    Mr. Kolbe. Before I call on Director Buckles, let me call 
on the ranking member, Mr. Hoyer, for any opening comments that 
he would like to make.
    Mr. Hoyer. Thank you, Mr. Chairman. I apologize for being 
late, but, as I had told Secretary Johnson and Director 
Buckles, I was next door listening to Secretary Riley's opening 
address.
    Mr. Chairman, I have a prepared statement that I would like 
included in the record at this time. But let me simply state 
that I am very pleased to see the substantial increase in the 
ATF budget. I think that is warranted. I think it is to some 
degree a result of the chairman's focus on the disparity of 
funding in law enforcement. So I think the chairman can 
rightfully take some credit for that.
    I want to say that we are obviously making some progress in 
reducing crime in our country, a fact I think we can take some 
of the credit for at the Federal level. Crime is 20 percent 
lower than it was in '92, violent crimes with guns 35 percent 
lower, and homicides have gone down an average of 7 percent 
over the last few years--all very, very positive.
    We continue, of course, to see very terrifying acts, 
particularly acts committed by children against one another, 
some mistakes perhaps, but some intentional. The availability 
of guns to small children is still I think a crisis in our 
country and something that ought to worry all of us.
    I have a statistic in my statement, Mr. Chairman, when we 
know that ATF deals with what I refer to as some of the most 
dangerous, violent and deranged persons in America who would 
hurt large numbers of people indiscriminately to make a point, 
to make a political point or some other point that they wanted 
to make through the use of both firearms and explosives, we 
charged the ATF with that responsibility.
    In addition, we will continue to grapple with the issue of 
gun dealers. Mr. Chairman, I don't know whether you know this 
statistic, but I was shocked when I read this statistic when it 
was included, 1 percent of the gun dealers in America account 
for 57 percent of all the criminal gun traces in America. Let 
me repeat that. One percent of the gun dealers in America 
account for 57 percent of all the criminal gun traces in 
America. Now that means we have not inadvertent sales that may 
be used in criminal conduct. But they are obviously a small 
number, a very small number, of gun dealers who are lending 
themselves to criminal enterprise. We ought not to blink in the 
face of NRA criticism or any other criticism in getting at 
those gun dealers who are undermining the safety of our 
communities, our neighborhoods and our families.
    Mr. Buckles, let me welcome you to this hearing. You are 
new as director, but if I remember correctly you are a quarter 
of a century plus into your experience in working with ATF. So 
we have somebody, Mr. Chairman, who is very well-qualified to 
lead this agency and has a critical, critical responsibility in 
this area to make our communities as safe as we can make them.
    Mr. Chairman, I thank you for giving me the opportunity to 
make a brief opening statement and welcome Mr. Buckles along 
with you to the agency and again congratulate you, Mr. 
Chairman, on your leadership and focus on assuring that we pay 
attention to treasury law enforcement. Thank you sir.
    Mr. Kolbe. Thank you, Mr. Hoyer. And I would also say that 
you certainly have been very helpful as we have in the last 
year drafted our appropriations bills, have been very 
constructive; and I appreciate that.

              STATEMENT BY ATF DIRECTOR BRADLEY A. BUCKLES

    Mr. Kolbe. Director Buckles, again, we will put your full 
statement in the record. You may make a summary, very short. It 
will help us get to the questions.
    Mr. Buckles. Certainly.
    Mr. Chairman, Congressman Hoyer, other members of the 
subcommittee, thank you for allowing me this opportunity to 
appear before you to support ATF's fiscal year 2001 budget. I 
can't tell you how proud I am to be appearing before you today 
representing the outstanding men and women of ATF. I think they 
provide an unprecedented value to the American public, and it 
is a tremendous honor for me to represent those men and women 
here today.
    Thanks to the remarkable leadership of my predecessor John 
Magaw and the guidance and leadership that he received from 
this committee, the ATF you see today is strong, focused and 
ready to perform.
    For fiscal year 2001, we are requesting $755 million and 
4,671 FTE. As you noted, that represents a 25 percent increase 
in funding and approximately a 12 percent increase in staff 
growth. The majority of this growth is going to be found in two 
previously funded and proven initiatives--the Integrated 
Violence Reduction Strategy and the Youth Crime Gun 
Interdiction Initiative. Both of these initiatives have been 
focused around the concentrated enforcement of existing Federal 
law, the use of state-of-the-art technology and, most 
importantly, teamwork with our State and local partners in 
pursuit of a goal of safer neighborhoods.
    The majority of our attention here today will be on the 
firearms initiatives of ATF, no doubt. But I urge that, as we 
go through this process, we continue to focus and support the 
other activities that ATF is involved in. Our alcohol, tobacco, 
explosives and arson initiatives are also vitally important to 
the mission we perform and the value we provide to the American 
public.
    One other major initiative that you will see in our budget 
is for $5.5 million and 44 FTE to protect and collect hundreds 
of millions of dollars of revenue that are being generated by 
the recently enacted cigarette tax increase.
    We also learned at ATF that increased scrutiny of our 
actions should not be treated as a threat. In fact, it 
strengthens us. We invite this committee's oversight, as we 
have invited the oversight of the Inspector General in auditing 
the condition of our financial management system. For 5 
straight years we have achieved clean financial audits with the 
highest possible rating. But each year as we have done that, 
the IG has raised the standards that we must meet in the 
succeeding year to continue to achieve that standard, and I am 
proud to report that each year we have met that new and higher 
standard. That continuing pressure to improve is something that 
has improved our agency immensely and we encourage that same 
kind of demand for improvement by the committee.
    In the past, this committee has insisted that before you 
would consider growth at ATF it was important that we become 
fiscally sound because our budget was seriously out of balance. 
With your help and former Director Magaw's leadership, we have 
corrected those budget imbalances. We are now in a position to 
grow and to achieve the goal that we all share, which is a 
sound and safer America.
    Thank you again for this opportunity to appear before the 
committee, and I would be pleased to answer any questions that 
you have.
    Mr. Kolbe. Thank you very much.
    [The information follows:]



    Mr. Kolbe. Let me begin my questions for Secretary Johnson.

                         PROPOSED CUSTOMS' FEE

    You made some reference in your remarks about the fact that 
last year's fee, Customs' fee, was not well-received here on 
Capitol Hill. I think the truth is it was not ever received on 
Capitol Hill. I don't believe any legislation was ever sent to 
Congress on that. So my question to you is, has legislation 
been sent or when can we expect to see legislation dealing with 
this issue?
    Mr. Johnson. The legislation hasn't been sent, but we 
anticipate finalizing it, and I hope we will have it before the 
hearing next week.
    Mr. Kolbe. Is this the hearing before the Ways and Means?
    Mr. Johnson. This would be your Customs' hearings.
    Mr. Kolbe. Here. Okay. Good. We will look forward to seek 
that. I hope it will be at a--that we can at least take a look 
at that and have some discussions with the Ways and Means 
Committee. Obviously, we don't have jurisdiction, as you know, 
over that, but we certainly would like to at least be able to 
see that.

                    LAW ENFORCEMENT PERSONNEL ISSUES

    On your personnel initiatives, you made reference to the 
progress that is in your written statement, the written 
progress that has been made on personnel matters, getting the 
Schedule B hiring authority, the SES allocations, scientific 
technical pay demonstration and talked also about the 
retirement bubble. Is the Department--I am talking Department-
wide--are you planning to hire the 600 additional investigators 
per year that you expect to lose in attrition and retirement? 
Where do you stand?
    Mr. Johnson. We are working with all our bureaus to develop 
those plans. That is particularly as we go into the--if this 
budget is passed, there is a substantial increase in people 
that we would have to bring on board. We are dealing----
    Mr. Kolbe. Can you do that? Can you meet that target?
    Mr. Johnson. We are working to develop that.
    Specifically with respect to ATF, Director Buckles and I 
have discussed this plan; and he has developed and I have been 
briefed on a plan to do as much preparation in advance. We 
obviously can't hire for a budget that is not yet enacted but 
to lay all the groundwork that needs to be laid so that we will 
be in a position to do the hiring.
    With respect to Secret Service, they have embarked on a 
very aggressive recruitment campaign. Each member of the Secret 
Service is not just agents but every single employee is viewed 
as a recruiter. They have embarked on a very broad-based public 
relations campaign to do more hiring. And so far at least the 
results have been good.
    With respect to the Customs Service, an issue that I 
havediscussed with Commissioner Kelly and I have been briefed on what 
they call their quality recruitment program, which is an--I was briefed 
in connection with our concern about diversity hiring issues, and that 
also represents a very aggressive hiring program. But it is clearly an 
area of concern of ours, and it is something that we need to maintain 
continued focus on.
    Mr. Kolbe. Mr. Buckles, you want to comment specifically 
from your agency's point of view?
    Mr. Buckles. We are in a fairly good position in moving 
into this increased hiring because we have been hiring smaller 
numbers over the last 2 years based upon increased funding that 
we have had from this committee. What that has allowed us to do 
is we have had vacancy announcements and recruitment processes 
in place over the last 2 years. Now we have thousands of people 
who are basically in the pipeline, that we have reviewed 
applications, in many cases done the background checks and that 
sort of thing. So we are in a fairly good position to move 
rapidly once we are assured we have funding to move forward 
with these positions.
    Mr. Kolbe. Are the 20 SES positions that OPM has given you 
sufficient for what you need or are you going to need more? If 
so, are you going to ask for them? Where do you need them?
    Mr. Johnson. Our original request was higher. We still have 
challenges in this area, particularly in the Customs Service. 
We continue to work within the Department and the 
administration to push for greater flexibility in terms of 
using a floating system to get SES positions to our bureaus, 
and we need to continue to work with OPM as it goes through its 
reallocation process for SESes--for greater SESes for the 
bureaus.

                  TOBACCO COMPLIANCE ON MEXICAN BORDER

    Mr. Kolbe. Okay, let me ask a little bit of a parochial 
question, one that has kind of come up recently for me in my 
area here.
    I have gotten some phone calls and comments from people 
recently that ATF has changed the rule or at least its 
enforcement policy with regard to cigarettes coming back across 
the border from Mexico, that you no longer allow cigarettes 
that are marked ``for export only'' coming across. I know there 
is a limitation on the amount of alcohol you can bring back and 
a limitation on the amount of cigarettes. I think it is two 
cartons for personal use. I say this as a nonsmoker. But I am 
curious about this change here. Does the law permit you to do 
this?
    I thought that I had a right to go to Mexico and bring back 
to the United States, dealing with Customs now, $400 per trip 
or in a month's time. And if I buy a pair of boots that was 
made in El Paso and it happens to be down in Mexico, you don't 
say you can't bring that back unless it was made in the USA. 
Why do we do that with cigarettes? What is the authority for 
doing that?
    Mr. Buckles. Mr. Chairman, there was a specific statutory 
change a couple years ago. It was the same statute that 
increased the cigarette tax that I referred to earlier and also 
imposed a new licensing system on importers of cigarettes. And 
that statute requires--and it is only in connection with U.S. 
cigarettes that are exported and marked for export--that when 
we return to the United States the only way they can be re-
entered into the United States is either through a manufacturer 
or an export warehouse provider proprietor. So it does not 
apply for cigarettes purchased outside the country and brought 
back in. The same rules would continue to apply on those. So 
this is a specific statutory change that dealt with cigarettes 
marked for export only.
    Mr. Kolbe. See, things happen. I vote for things sometimes 
I don't even know about. I was not aware of that. It would be 
helpful just for me if you could give me the provision of where 
that is. You think it was about 2 years ago that we made that 
change?
    Mr. Buckles. Yes.
    Mr. Kolbe. Let me--for time purposes, let me go to Mr. 
Hoyer here.

              FIREARMS INITIATIVES--ENFORCE EXISTING LAWS

    Mr. Hoyer. Thank you, Mr. Chairman.
    If we limit ourselves to voting on that which we know 
about, there are going to be a lot fewer votes cast in the 
House of Representatives.
    Mr. Buckles, we have a 25 percent increase in your budget 
essentially. Some of the critics of the Clinton administration 
said that we ought not to have new laws regulating guns, either 
gun shows, age requirements, et cetera, et cetera, because we 
are not enforcing the laws that we already have. The 25 
percent, will that be used, applied to the enforcement of 
existing laws or are we going to apply that to expansion as 
well?
    Mr. Buckles. All of the funding that we were asking for in 
this budget relates to the enforcement of existing statutory 
authority.
    Mr. Hoyer. So we ought to be meeting our critics' concern 
about enforcement of existing laws.
    Mr. Buckles. Yes, sir.

     BUDGET REQUEST--PROVIDES POSITIONS TO CARRY OUT ATF'S MISSION

    Mr. Hoyer. When--let me go to the numbers of employees. 
When Director Magaw came before us some years ago, 2 years ago, 
he said that he needed approximately 2,600 agents and 1,000 
inspectors to effectively carry out ATF's mission. At that 
point in time, we were about 1,700 agents and about 745 
inspectors. The fiscal year 2001 budget, as I understand it, 
comes pretty close to Director Magaw's objectives, is that 
correct?
    Mr. Buckles. That is correct. This would move us to 
approximately 2,400 agents, and it would move us very close to 
the thousand inspectors that he described in that testimony.

             COORDINATION BETWEEN LAW ENFORCEMENT AGENCIES

    Mr. Hoyer. Because our time is so quick, I am asking quick 
questions.
    I happened to turn on C-SPAN and saw the colloquy that was 
going on between former FBI Director Webster and Senator--I 
forget his name--the Senator from--one of the senators; I can't 
remember his name--in which he was reporting on the 
Commission's finding about coordination. Could you comment on 
the present coordination between law enforcement agencies--the 
proposal that apparently the Webster Commission has made is one 
that has been made from time to time and concerned me. Mr. 
Secretary, you and I have had an opportunity to discuss 
briefly, but I would like your comments on it.
    Mr. Buckles. In terms of coordination, I think the Webster 
Commission report even recognized that ATF probably has one of 
the longest histories of partnerships and working closely with 
other agencies as can be found. So we don't see that as a 
problem. We work very closely with our other Federal agencies 
as well. I have met personally withDirector Freeh on issues of 
coordinating our activities, and we are close to submitting an 
agreement on how we are going to be working together in the explosive 
jurisdiction that we share.
    You will notice that in my long statement I spoke to the 
recent agreement we had with the FBI on the National Integrated 
Ballistics Imaging System, where I think that is an example of 
how when we get together and work towards a common goal. We 
have each agreed to do what we do best in the system, and the 
need to address that by some larger organizational 
restructuring is really not necessary.
    Mr. Hoyer. As you know, there has been some concern over 
the years expressed that there hasn't been the cooperation 
coming to ATF or coming to the Secret Service that we might 
expect. I hope that is improving because it is important to do 
so.
    Mr. Chairman, because of our time being so brief and other 
members maybe want to get a question or two in, let me save the 
balance of my questions.
    Mr. Kolbe. Mrs. Meek.

                            DIVERSITY ISSUES

    Mrs. Meek. Thank you, Mr. Chairman; and welcome to 
Secretary Johnson and to Mr. Buckles.
    Over the years, Treasury and ATF have stated their 
intention to improve their diversity. It has been mentioned in 
all your reports. And, Secretary Johnson, in your prepared 
testimony you note that last year OPM granted ATF and the 
Customs Service Schedule B excepted hiring authority, and you 
stated this will provide greater flexibility in targeting 
recruitment to meet skilled requirements and diversity goals. 
What are your diversity goals?
    Mr. Johnson. A couple of quick things in response to your 
question.
    First, it has been a commitment of the Department and my 
own personal commitment and the commitment of Director Buckles 
and Director Magaw before him to make sure that we take all 
appropriate steps to ensure that our law enforcement reflects 
the diversity and the richness of our Nation.
    As Under Secretary, just in reference to the issue of 
recruiting, I had asked last fall for all of our bureaus to 
present to me what their recruiting practices are, how they go 
about addressing the issue of diversity. There were significant 
improvements that had been made. There were some significant 
practices that we discussed. But we concluded that we needed to 
pull all of our bureaus together for a diversity conference 
which we will be having next April to go through the issues of 
recruiting, not necessarily establishing fixed goals, because, 
under the Supreme Court decision in U.S. versus Adarand--it 
wasn't versus, U.S. versus Adarand, but Adarand, we can't 
establish fixed goals and timetables, but we can embark on 
targeted recruiting.
    In the absence of the target hiring authority which 
Schedule B gives us, our ability to embark on targeted 
recruiting was very much constrained. We have Schedule B hiring 
authority. We still have a couple of elements that we need to 
work within the administration to get an executive order that 
would enable us to convert the Schedule B hires to permanent 
career hires. But then we need to focus on what the best 
practices are for recruiting and advancement. That is what this 
conference is going to address.
    Mr. Kolbe. Mrs. Meek, we have 5 minutes. We will resume 
with you when we come back.
    Mrs. Meek. All right. I must go to HUD after this.
    Mr. Kolbe. We don't have 5 minutes. We really need to go.
    Mrs. Meek. I will submit the rest for the record.
    Mr. Kolbe. Or we will come back to you, if you come back.
    The subcommittee will stand in recess.
    [Recess.]
    Mr. Kolbe. The subcommittee will come back to order.
    Other members will be drifting in here, but until they do I 
will get some of my questions in, since we have a very limited 
time. We have to adjourn in 25 minutes or thereabouts.

                 INTEGRATED VIOLENCE REDUCTION STRATEGY

    Mr. Buckles, Director Buckles, I wanted to ask a couple of 
questions about the Integrated Violence Reduction Strategy. You 
are proposing to expand that to $62 million--that is five times 
the current level of funding--and add 385 positions to it. How 
much of this is going to go--of this funding and these 
positions are going to go to support legal efforts to reduce 
firearms violence by keeping guns from criminals as opposed to 
doing just the Brady violations investigations?
    Mr. Buckles. The Integrated Violence Reduction Strategy is 
as much a process as it is an initiative. Because it calls for 
and its central feature is to work with local officials to come 
up with a plan that they agree with, that we agree with, that 
the prosecutors agree with. So all of the resources that we are 
getting are being put into plans that are being developed 
jointly by all enforcement officials in each community.
    Mr. Kolbe. Is the idea of giving some of this, the local 
effort, supporting the local effort a way to give an 
alternative venue for prosecution?
    Mr. Buckles. In some cases, that is the way it works, there 
are situations where a Federal venue is a better prosecutorial 
basis to address the crime. It also involves, apart from venue, 
just different tools that ATF can bring to bear, tools that 
relate to trafficking and the sources of firearms, so that 
there are different aspects of it.
    You mentioned the Brady law. There are situations where we 
will be able to use the Brady law as a tool to be addressing 
the violent crime problem in a focused way. It won't be 
enforcing so much Brady itself just for the sake of enforcing 
Brady, but what we are trying to do with all of these resources 
is to be able to use them in a focused way to address the most 
serious crime problems in each community.
    Mr. Kolbe. What is the criteria you are going to use for 
determining where you are going to locate these people, these 
new positions?
    Mr. Buckles. It is going to be based upon staffing models 
we have already in place and building up our forces in offices 
around the country. I could provide you with a more detailed 
list of where we believe the staffing is low and where we need 
to build up our offices, but we will basicallybe instituting 
this strategy throughout the country throughout every one of our 
offices and working with the Department of Justice trying to come up 
with plans in all 92 judicial districts.

                        BRADY BACKGROUND CHECKS

    Mr. Kolbe. In your testimony, you referred to getting 
104,000 reports of background check denials as a result of the 
NICS check. You said about a quarter of these were referred to 
ATF for evaluation; and, looking at my figures, you had 437 
cases, a hundred arrests and 14,000 referrals for possible 
investigation. You think you will get at least 86,000 reports 
this fiscal year alone. Seems like the number of cases and/or 
arrests or prosecutions--I guess the right indictments might be 
the better word--seems relatively small compared to the number 
of overall reports. Can you give me an explanation as to why 
there are so few investigations compared to the number of cases 
that are referred?
    Mr. Buckles. The reason is we balance the use of our 
resources in the Brady area with other violent crime problems. 
We are addressing it with other statutory authorities we have. 
Some of the Brady cases blend in to providing defendants that 
can have the most direct impact on violent crime in a 
community.
    What we found with the large number of Brady referrals that 
we get on denials is that some of them we may find out after we 
originally look at them that the conviction or the record was 
not accurate. There was some sort of pardon or later 
disposition of the case. We find out that some of them, our 
cases simply don't have prosecutorial merit, where you have a 
defendant that was convicted 30 years ago when they were 19 and 
there is some question about whether they knew that what they 
pled was to actually a felony.
    So there are a variety of reasons that, as we go through 
this large number of cases and sort them out, we attempt to 
identify those cases that provide the best prosecutorial merit 
for the U.S. Attorney's Office.
    Mr. Kolbe. Do you think that the workload generated by NICS 
is going to peak and then decline?
    Mr. Buckles. That is certainly what we are hoping. That as 
people learn that making a false statement on that form or 
simply trying to check the form with ``no'' and see if they are 
approved, people are finding out that that doesn't work. The 
most serious offenders are finding out that there is 
prosecution that will take place in those cases. So we are 
certainly hoping that those numbers will begin to go down as 
people understand that the system will repeatedly tell them 
that they cannot purchase a firearm by going into a store and 
filling out the form and hoping this time it goes through.
    Mr. Kolbe. I have gone into a second round of questions in 
here. I started before the other members were getting back. Let 
me just--if it is acceptable with you, Mr. Hoyer, we will go to 
the people who haven't had a question. Is that acceptable with 
you?
    Mr. Hoyer. I have at least one question I do want to ask, 
but go ahead.
    Mr. Kolbe. Why don't you ask that question? Then we will 
move along.

         CONSOLIDATED TRAINING FACILITY IN WASHINGTON, DC, AREA

    Mr. Hoyer. I want to ask Secretary Johnson if you will give 
me an update of your efforts to locate a consolidated training 
facility in proximity to the greater Washington area for 
Treasury level and other agencies needs.
    Mr. Johnson. Mr. Hoyer, as you know, we have been concerned 
that the Department of Treasury, that our Treasury enforcement 
personnel within the Washington D.C. area have an adequate 
means to maintain their sharpness with their weapons. Right 
now, Customs agents, IRS, CIA agents, ATF agents very often 
have to scramble together and ask other people to borrow 
facilities at which to shoot. We have, just in Treasury alone, 
about 1,500 agents that need regular qualifying facilities. It 
is a very serious need. We do need to keep our skills sharp.
    In my office we are coordinating a working group that 
brings together not only the IRS and the ATF and the Customs 
Service but is also working closely with the Metropolitan 
Police Department, with Capitol Police and with Park Police to 
develop a plan for a training facility within the D.C. Area.
    I can tell you a little bit about the requirements that we 
would have. It would need to be within 50 miles of downtown 
D.C. Those training there would have to be able to drive to the 
facility within about--in less than an hour.
    Again, it is something that we are working on. We don't 
have a final plan yet. We are working within the administration 
to develop a final plan.
    But the thinking behind it, by bringing together not just 
Treasury enforcement but also bringing--forming partnerships 
with the MPD, with Park Police, and with Capitol Police is that 
whatever the final plan develops we will be able to drive the 
cost down for any particular agency and make it much more 
likely that when we do find a place we can get this set up at 
minimum cost to everyone involved.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary.
    I have other questions I will submit them for the record.
    Mr. Kolbe. Mr. Sununu is next, and then follow through with 
Mr. Goode.

        ATF PROPOSED EARMARKS OF TREASURY ASSET FORFEITURE FUND

    Mr. Sununu. Thank you, Mr. Chairman.
    Director Buckles, I just want to ask a couple of brief 
questions about the Treasury asset forfeiture. The funds that 
come from Treasury asset forfeiture, what are those proposed to 
be used for in fiscal year 2001?
    Mr. Buckles. In fiscal year 2000, the asset forfeiture fund 
monies that we are requesting are limited to some issues that 
are one-time expenses.
    The first one is the ATF headquarters construction. We are 
asking for a little over $7 million. There are funds that we 
are required to provide to the GSA. Total funding for the 
building will be in the GSA, but GSA has advised us that, as 
the tenant agency, we would be responsible for paying for 
certain issues that are above cost--special wiring and 
security, that sort of thing.
    Mr. Sununu. I am sorry, is this fiscal year 2000 for----
    Mr. Buckles. I was addressing what was in our budget 
request for 2001.
    Mr. Kolbe. You did say 2000.
    Mr. Buckles. I am sorry. I misspoke.
    Another set of money is about $3 million that is being 
requested for funds that are necessary for the completion of 
our laboratory facility that is being constructed at thistime. 
And the last one is for the National Integrated Ballistics Information 
System, to continue to bid that system out, and that is about $3 
million.
    Mr. Sununu. Is the $7 million portion for GSA included in 
the submission?
    Mr. Buckles. The $7 million, yes.
    Mr. Sununu. Where is it shown?
    Mr. Buckles. I am not sure where that--I am not sure.
    Mr. Sununu. I am looking at the cover page. It shows a 
forfeiture funds reimbursements of $6 million. I may be missing 
something. And a breakdown of that is shown for the portion for 
the ballistics center and--which is $3 million, and then 
another $3 million is shown.
    Mr. Buckles. If I could, I would like to offer to maybe sit 
down with you later and go through those, because I am not 
finding where----
    Mr. Sununu. If there was another $7 million for GSA, that 
might answer my second question, which is why the estimate of 
forfeiture reimbursements, at least on the estimate page that I 
have, is so much less. In fiscal year 1999 and 2000 the 
forfeiture reimbursements were $14 million and $20 million, but 
the estimate for 2001 is only $6 million.
    Mr. Buckles. The reason that number has gone down is, 
fortunately, we have been able to move some items that were 
being paid for out of the forfeiture fund into our base direct 
funding budget. We have tried to keep the forfeiture fund money 
limited to those kinds of things that are really more 
appropriate for the forfeiture fund to pay for one-time 
expenses, that any ongoing expenses we moved into our direct 
budget.
    Mr. Sununu. So the amount of those reimbursements are based 
exclusively on requests that you make rather than in 
proportional amount of forfeitures in the fund?
    Mr. Buckles. Yes, sir.
    Mr. Sununu. Thank you.

                    TOBACCO COMPLIANCE AND DIVERSION

    Question about the program changes, particularly for the 
tobacco division and tobacco compliance. Over the last 2 years 
there has been a 15 percent increase in the number of personnel 
in tobacco and tobacco compliance. You are requesting another 
15 percent increase in personnel this year, so that would be 
over 30 percent increase over a 3-year period. I certainly 
understand the complexities of tobacco excise taxes, and they 
vary from State to State, and that does cause some problems. 
You mentioned a small change in export provisions. But I would 
like you to elaborate a bit more on the rationale for such a 
dramatic increase in personnel.
    Mr. Buckles. Yes. The principal reason relates to the 
Federal tax increases that were passed several years ago. It 
required an increase in Federal tax of 5 cents a pack that went 
into effect this January, and in January of 2002 there will be 
another 10 cents a pack increase in tax.
    That in and of itself doesn't sound like it would generate 
a whole lot of work for us, but where the problem comes in is 
that, while we normally collect that tax at the manufacturer 
level today and have a fairly finite number of people we 
collect it from, when there is a tax increase, each time there 
is something called a floor stocks tax that goes along with it. 
It is a one-time tax that attempts to catch that increase on 
existing inventories, and it goes to the retail level. So for 
this year and for 2002 we are dealing with somewhere in the 
neighborhood of 400,000 new taxpayers that we don't normally 
deal with. So a lot of these funds are being used----
    Mr. Sununu. Did you say 400,000?
    Mr. Buckles. Four hundred thousand. Because the floor 
stocks goes down to retail stocks that are in place at the time 
the tax increases. These are people that we do not normally 
regulate. So there is a great deal of effort of finding the 
retailers who hold these stocks, inventorying these stocks to 
determine that they have actually paid the tax, and processing 
400,000 returns that we do not normally process. So most of 
this is we are talking about two separate tax increases that 
are happening over the course of 2 years. And there is almost a 
2-year cycle on dealing with these floor stocks taxes.
    Some of this increase would go away after the second floor 
stocks tax goes into place in 2002. Once we have dealt with 
that 400,000 taxpayers again, some portion of these resources 
would not be necessary for ongoing tax collection.
    Mr. Sununu. I wish I could share your optimism that 
reducing the head count for this particular purpose will be as 
easy as increasing the head count, but that is hard for me to 
do so. It also seems that the cost of this compliance effort is 
quite significant.
    It is my understanding that the tobacco revenues, revenues 
from tobacco excise taxes, have increased about 4 percent over 
this time period and $200 million or so. You know, I see the 
annual increase in expenditures for collection is close to $30 
million. That is a pretty hefty price to pay for collection. Is 
there a plan in place for the reduction in personnel that you 
described once this effort is completed?
    Mr. Buckles. Well, that would be issues that will be 
addressed in our later budgets. We would certainly expect 
scrutiny from this committee, and I can guarantee you that the 
Office of Management and Budget will also scrutinize that as to 
why those resources are necessary once this floor stocks tax 
increase takes place.
    Mr. Sununu. All of the personnel--the increase in the FTEs 
in this revenue collection, that is exclusively for revenue 
collection, is that correct?
    Mr. Buckles. There is a portion of it that is also--
particularly with the special agents there are some agents 
associated with this. And this goes to the second item that you 
mentioned in your initial question that has to do with 
diversion. There can be large-scale diversion attempts to 
defraud either the United States and also on an ongoing basis 
State governments.
    Mr. Sununu. That is essentially an attempt to evade.
    Mr. Buckles. Yes.
    Mr. Sununu. Thank you very much.
    Mrs. Emerson [presiding]. Mr. Goode.
    Mr. Goode. Thank you, Madam Chairman.

                             PROJECT EXILE

    I want to say thanks for your participation in Richmond 
with Project Exile. How many ATF agents are involved with 
Project Exile in Richmond?
    Mr. Buckles. I believe we have 10 agents approximately in 
the Richmond area now that are working on Project Exile, either 
full time or with part of their duties.
    Mr. Goode. And the murder rate in Richmond which was 
approaching at one time one a day, it was less than 100 last 
year, is that not true?
    Mr. Buckles. I believe those are the numbers, yes.
    Mr. Goode. What other cities are you going to expand 
Project Exile to, rural areas even?
    Mr. Buckles. We have expanded Project Exile and different 
forms of that to different portions of the country already. We 
have a program that is similar to that in Philadelphia.
    What we have tried to do under our Integrated Violence 
Reduction Strategy is to work with the local officials, local 
prosecutors to come up with plans in each one of these cities 
that provide a basis for directly impacting on the violent 
crime rate. ATF's role, for example, in the Boston gun project 
called Cease-fire was slightly different than it was in 
Richmond. But Boston saw a reduction in the murder rate of 
almost 70 percent for individuals 24 and under. So our role was 
slightly different. We were focusing on the trafficking angle 
of the problem in Boston, a little bit different than we were 
in Richmond.
    But what we are trying to do around the country and through 
the additional resources that we are seeking is to follow the 
approach of working with local people to come up with a 
solution so that our efforts are coordinated with what is going 
on in each community.
    Mr. Goode. I think in Richmond a key focus was getting 
those that did the crimes, whether they were the shooters or 
whomever, and imposing long sentences. They weren't back.
    Mr. Buckles. Correct. We also----
    Mr. Goode. Cut out the repeat evidence.
    Mr. Buckles. We were also tracing all of the firearms 
involved and looking for sources of those firearms as well. But 
a major portion of Exile was, hence its name, to take the most 
violent criminals and simply remove them from the community. 
And Federal law, in many cases, provided the most severe 
penalties and the longest prison times.

                              TOBACCO TAX

    Mr. Goode. Again, I want to say thank you for that and to 
ask you one question about this cigarette tax. As I understand, 
you go to the retailer, they don't prepay the tax, do they? 
They don't pay the tax until the cigarette pack is sold, of 
these 400,000.
    Mr. Buckles. They are required to file returns based upon 
what they had in inventory as of January 1, 2000. Exactly when 
they have to file that I would have to check, sir, and let you 
know. I think it is--I think they pay it before they are sold, 
but I couldn't swear by that, and I will get you that 
information.
    [The information follows:]

                              TOBACCO TAX

    Entities such as a corporation, company, partnership, or 
individual holding tax-paid cigarettes for sale were required 
to take an inventory as of January 1, 2000. This typically 
would include wholesalers, stamping companies, vending 
companies or retailers. They were required to pay the tax 
increase--from $12 per 1,000 cigarettes to $17 per 1,000 
cigarettes--by March 31, 2000, based on this inventory. The 
increase translates to $5 per 1,000 cigarettes or $1 per 
carton. Each entity was given a credit offset of $500. This 
means that the first 500 cartons had no tax liability. 
Cigarettes readily available on January 1, 2000, and sold by 
March 31, 2000, were sold before the tax was paid. Cigarettes 
still on hand after March 31, 2000, were tax-paid before the 
sale. Manufacturers basically have non-tax-paid product in 
their inventory.

    Mr. Goode. So your advice to retailers should be sell it 
down. Don't have any in stock.
    Mr. Buckles. Right. I believe that--again, I can't say with 
certainty--I think there is a lag time. The inventory is done 
on January 1. The tax is due at some later point in time. I 
think that it is a period that Congress determined was a 
reasonable period by which those stocks would have been 
depleted in the normal course of business.
    Mr. Goode. Virginia has a lot of cigarette wholesalers. I 
don't know if that is true in other States. Not a lot but they 
have some. Do you do the same procedure with them?
    Mr. Buckles. Yes, it is anyone that is holding stocks of 
cigarettes over a certain threshold on the date of the tax goes 
into effect.
    Mr. Goode. Do all manufacturers still have cigarette stamps 
or not in every State?
    Mr. Buckles. No, they do not.
    Mr. Goode. Thank you, Madam chairman.
    Mrs. Emerson. Mr. Price.
    Mr. Price. Thank you, Madam chairman.

                            FIREARMS ISSUES

    Mr. Buckles, I would like to join my colleagues in 
welcoming you here today, congratulate you on your appointment 
and say how much we look forward to working with you. I also 
want to congratulate you and the administration on this budget 
with its strong emphasis on enforcement.
    You know, we have heard around here from people who oppose 
closing the gun show loophole and the background check law or 
those who oppose laws that would encourage the child-proofing 
of guns, we have heard this litany of opposition that said 
enforce the existing laws. Never mind that many of these people 
opposed those laws when they were first passed. But that seems 
to be the litany, enforce the existing laws. Well, you are 
going to enforce the existing laws. Of course, that is not--
that shouldn't exclude improving the laws and closing loopholes 
in the laws. But we need to do both. We need to make sure our 
laws are strong and are free of loopholes. We also need to 
enforce those laws. And this budget, as I read it, says you 
intend to do just that, stress on enforcement.
    I would like to focus in on my time here on a little more 
closely on the commerce in firearms report that ATF released 
last month and to see how it fits into this budget request for 
firearms initiatives.

                 INSPECTIONS OF FIREARMS AND EXPLOSIVES

    Since joining the subcommittee some years ago I have been 
particularly interested in the Bureau's personnel needs and how 
well you have been able to meet your inspection rates for 
explosives and for your Federal firearms licensees. Last year, 
Director Magaw testified that ATF had reached an 85 percent 
annual inspection rate for explosives licensees. That is still 
a little short of an ideal 100 percent rate, but it was a 
substantial improvement over the prior year when you believe 
you were in the 70 percent range.
    You were not, however, faring as well with your licensees 
where the goal was to reach each licensee once in the 3-year 
license period. According to the information Director Magaw 
provided for the record last year, the Bureau conducted about 
6,500 inspections in fiscal '98. That is a 6 percent inspection 
rate for all FFLs.
    If we drop the collectors from the equation, that figure 
increased to a little over 7 percent. But, either way, you were 
way below the ideal annual rate of 33 percent.
    Now the commerce in firearms report indicates that 
achieving the ideal 3-year inspection cycle would require 650 
new inspectors, and your budget request, although it is a 25 
percent increase, it is an ambitious request. It only 
anticipates 200 additional inspectors for your firearms 
initiatives, that is, the Youth Crime Gun Interdiction 
Initiative and the Integrated Violence Reduction Strategy.
    The budget reflects, I understand, your new model for FFL 
inspections, and that is really what I want to ask you to 
comment on, the focused inspections approach that was 
implemented in October of '98.
    According to your testimony, ATF has determined that it is 
not practical to conduct a regular cycle of inspections for all 
licensees. The commerce in firearms reportindicates that such a 
policy makes sense. I believe Mr. Hoyer referred to it in his statement 
the fact that, in 1998, just 1.2 percent of dealers, roughly 1,000 out 
of 83,000 licensed retail dealers and pawnbrokers, accounted for over 
57 percent of the crime guns traced to current dealers. So it does seem 
to make sense to target resources toward those dealers who are clearly 
bearing a disproportionate share of the traffic in crime guns.
    That is a cost-effective approach which might be a model 
for other agencies as well, whether we have a budget surplus or 
not. I am not sure, though, that it makes sense entirely to 
abandon the prior annual inspections goal, and that is why I 
want to ask you these related questions.
    First, what kind of annual inspections rate are you going 
to achieve for fiscal 2000, and are you at least seeking to 
maintain the floor rate of 6 to 7 percent? Secondly, is the 
development of the focused inspections model primarily an issue 
of resources or are there other more positive arguments that 
you would want to make for it? And then, finally, do you 
anticipate any repercussions from backing away from the 3-year 
preferred cycle?
    Mr. Buckles. I believe our performance during fiscal year 
2000 will be in the neighborhood of 11,000 inspections of 
licensees, so that number will be up.
    Mr. Price. In percentage terms that will be?
    Mr. Buckles. A little less than 10 percent. So that number 
has gone up.
    In terms of the focused inspection--well, let me back up. 
In terms of additional resources, we would need to reach a 3-
year cycle. I believe that we still need additional resources, 
and the appropriate cycle is probably still 3 years. We are not 
asking for that in this budget. We have got a very aggressive 
budget as it is, and even if we would want more, I am not 
confident, sir, that we could have absorbed any more inspectors 
or employees than we can in the budget we have.
    But what we are trying to do, and this will help us in the 
focused inspection system, is that we are learning how to use 
those resources more wisely. Until we started doing the 
comprehensive tracing just a few years ago, we had for the most 
part only anecdotal information about which dealers were the 
biggest problems, what the sources of firearms were. But as we 
have moved from doing I think less than sixty or seventy 
thousand traces in a year just a few years ago to over 200,000, 
we are getting a clearer picture of where firearms are actually 
coming from, and that will help us focus our resources so we 
are not scattering them to the winds and hoping we find the 
people we need to look at. So this is an important process.
    Some of the 1 percent dealers has been kind of 
characterized as we are going after these people because they 
are the problem. We are viewing this from an open mind in terms 
of why these 1 percent of the dealers represent such a high 
percentage of the number of firearms traced, and we suspect we 
will find a lot of different reasons when we do it. All of 
those things will help us then refine and focus our inspections 
as we move forward into the future.
    Mr. Price. So you see this as a positive strategy, not 
merely a response to the limits in resources.
    Mr. Buckles. That is correct. I think it is a little bit of 
both. We never have the resources to do everything we need to 
do, just like IRS can't audit everybody's tax return and they 
have to learn how to focus the resources to get the most for 
the amount of resources you have. That is what we want to do. 
Rather than just coming up with an across the board, we ought 
to do every one in a certain cycle. We would like to have that 
focused into an area where it is a more thoughtful approach of 
how we deploy our resources.
    Mr. Price. Good. Thank you very much.
    Mrs. Emerson. Unfortunately, gentlemen, the committee 
Republicans have a meeting at 11:30. So I am going to submit my 
questions for the record, and that will save a little bit of 
time.
    But certainly, Director Buckles and Secretary Johnson, we 
thank you very much for being here today and appreciate the 
good work that you are doing and look forward to talking to you 
all soon. Thanks for being here.
    The committee is adjourned.



                                           Tuesday, March 14, 2000.

                FEDERAL LAW ENFORCEMENT TRAINING CENTER

                               WITNESSES

W. RALPH BASHAM, DIRECTOR,
JOHN DOOHER, ASSOCIATE DIRECTOR, WASHINGTON OPERATIONS
RAY HAVENS, ASSISTANT DIRECTOR FOR ARTESIA OPERATIONS
ROBERT GIBBS, INSTRUCTOR, FINANCIAL FRAUD INSTITUTE
JAMES E. JOHNSON, TREASURY UNDER SECRETARY FOR ENFORCEMENT
CARLTON FITZPATRICK, ACTING CHIEF, FINANCIAL FRAUD INSTITUTE
ALAN TITUS, BUDGET OFFICER
    Mr. Kolbe. The Subcommittee will come to order. Mr. Hoyer 
is managing a couple of suspensions on the floor, and said we 
may go ahead. He will get here in time for questions and 
perhaps some remarks of his own.
    And since this hearing was rescheduled from this morning 
because of Customs getting rescheduled because of the House 
session, I will have somebody here to take my place for a brief 
time this afternoon in order that I can say hello to an 
important group that is going to be in my office, so I will 
duck out very briefly here.

                                WELCOME

    We welcome this afternoon Mr. Basham, the Director of the 
Federal Law Enforcement Training Center, and our old friend, 
who seems to be with us quite regularly these days, Under 
Secretary Jim Johnson.

                   STATEMENT BY SUBCOMMITTEE CHAIRMAN

    Mr. Director, as FLETC begins its fourth decade, it faces a 
tremendous number of demands on the resources that you have 
available to you. And this Subcommittee has been strongly 
committed to the principles of consolidated law enforcement, 
and frankly, I am worried about some of this. I do not think 
that any of the law enforcement that we have been talking about 
here the last few days, and we will continue to talk about as 
we have other hearings, can work if we do not have the adequate 
training facilities and programs for them. And I am concerned 
about whether FLETC has the support and means to accommodate 
the demands of expanded federal law enforcement on its 
resources. And I am concerned about whether or not you are 
going to be able to fend off the efforts to open up a duplicate 
of law enforcement training facilities in other locations.
    I want to see that FLETC is on track to accommodate the 
increase on the Border Patrol training so that we can shut down 
finally and permanently the inadequate Charleston training 
site. I want to be sure that FLETC is on top and fully 
evaluates any proposal to expand or establish new facilities, 
those that are being called for now in the capital area. And 
when new training areas--when new areas for training are 
identified, be it anti-terrorism or money laundering in 
functional areas, I want to see that FLETC is engaged in the 
planning for the curricula for that training, and that they are 
involved in looking at how best to implement such training in 
ways that are most effective and efficient.
    Finally, while FLETC has a first-order obligation to ensure 
basic training is provided to all law enforcement agencies, I 
believe it should be fully engaged as appropriate in providing 
for planning--or providing or planning for significant in-
service or advanced training for agencies, where there can be 
some economies that can be gained through consolidation. It was 
by aggressively supporting that principle of consolidated 
training that I think FLETC has gained the confidence of the 73 
plus federal agencies who do some or all of their training 
using FLETC facilities and curriculum and trainers, and the 
many other non-federal customers that use you as well, and I 
think it is important to maintain that confidence.
    So from setting the highest standard for professional 
training for new law enforcement officers to providing 
international legal training or rural drug law enforcement, 
FLETC must support a wide range of the very diverse group of 
customers that use your services. It is going to always be your 
challenge to satisfy needs while staying focused on the mission 
to provide the best possible value training.
    Director Basham, we are looking forward to hearing from you 
today about the performance of FLETC and productivity, your 
changing student body, how you are getting the most from your 
facilities and technology, and what plans you have to develop 
them further. The work of FLETC is fundamental to building the 
most competent, professional and productive law enforcement 
community possible, the human infrastructure of federal law 
enforcement, the human beings that make it work.
    Now, I will turn to Mr. Basham and Mr. Secretary, Mr. 
Secretary first, for any statement you would like to make, and 
then Director Basham, and the full statements will of course be 
placed in the record.
    Mr. Secretary.

             STATEMENT BY UNDER SECRETARY JAMES E. JOHNSON

    Mr. Johnson. Mr. Chairman, thank you.
    It is my pleasure to join with Director Basham in support 
of the Department's Fiscal Year 2001 budget request for the 
Federal Law Enforcement Training Center.
    Director Basham assumed and maintains the leadership of the 
center during a time when its resources are stretched by a 
greatly expanded clientele, eager for the most progressive 
training possible.
    In our view, Director Basham has done an outstanding job in 
meeting these challenges. Indeed, these are the kinds of 
challenges that we are pleased to have, the challenges of 
trying to train more and more personnel and that you have made 
possible with your continued support.
    In order to continue to most effectively train the nearly 
40 percent of federal law enforcement personnel who are taught 
the skills and professionalism at FLETC, that will, in large 
measure, guide the course of their careers, we have requested 
an increase of $9,456,000 and 35 FTE above what was in the 
fiscal year 2000 budget for the Federal Law Enforcement 
Training Center.
    As you correctly pointed out, the skills that are required 
at the beginning of the careers, the skills that are the most 
significant weapons for the men and women in law enforcement, 
are vitally important, and they are taught very well at FLETC.
    Director Basham will address the specific details of our 
request, but I would be happy to respond to any questions that 
you have for the department.
    [The information follows:]



    Mr. Kolbe. Thank you.
    Director Basham.

              STATEMENT BY FLETC DIRECTOR W. RALPH BASHAM

    Mr. Basham. Thanks for those kind remarks.
    Mr. Chairman, I am pleased to be here today to report on 
the current operation and performance of the Federal Law 
Enforcement Training Center, and to support our appropriations 
request for fiscal year 2001.
    But before I start, I would like to take this opportunity 
to introduce members of my staff who are accompanying me here 
today. Mr. John Dooher, who is the head of our Washington 
Operations, our associate director, and I am particularly 
pleased to introduce Mr. Ray Havens as the new assistant 
director of our Artesia Operations, who has just come to us 
from the Marshals Service. He was a deputy director there for 
approximately five years, and we are very happy to have him on 
board and running that operation.
    Under the leadership of the Secretary of the Treasury, Mr. 
Lawrence H. Summers, and Under Secretary for Enforcement James 
E. Johnson and his staff, the FLETC has received strong support 
and active assistance for carrying out our responsibilities. We 
are indeed fortunate to have these two individuals playing a 
leadership role as the FLETC enters into the 21st century. I 
also want to thank this Committee for the support it has 
provided to the Center. This Committee has been extremely 
supportive and most generous in its funding of consolidated 
training. We extend our appreciation and look forward to 
working with you in the coming years.
    The Center provides two essential levels of training for 
federal law enforcement organizations from all three branches 
of government. Entry-level training to the federal service is 
conducted for police officers and criminal investigators, and a 
full range of advanced training programs are conducted for 
journey-level personnel in areas such as marine law 
enforcement, anti-terrorism, financial and computer crimes and 
weapons of mass destruction. Additionally, the Center provides 
facilities and services to its participating organizations to 
permit them to conduct agency-specific basic and advanced 
training programs. Over the years the Center has also been 
called upon to conduct training for state, local and 
international law enforcement officers. Today more than 200 
separate training programs are available at our sites in 
Glynco, Georgia, Artesia, New Mexico, as well as a temporary 
site in Charleston, South Carolina.
    Our fiscal year 2001 request contains three important 
initiatives. With regard to our salaries and expense account, 
we are seeking an increase of $6.9 million and 26 FTE in our 
mandatory workload. This funding will be used to address entry-
level training for additional agents and inspectors for the 
Bureau of Alcohol, Tobacco & Firearms, and additional agents 
for the United States Secret Service.
    Our other two principle initiatives relate to our 
construction account request. One initiative is for $4.4 
million for major renovation of existing structures in Glynco. 
As you know, the Center acquired the Glynco site in 1975, and 
many of the structures were built in the '50s and '60s and 
reflect serious infrastructure problems that cannot be 
sustained further through regular cyclical maintenance only. 
These problems involve asbestos abatement, leaking roofs, 
safety code measures and major mechanical systems work. We 
believe this funding request for any renovations proposed over 
the next several years must be undertaken in order to protect 
the government's substantial investment of nearly a quarter of 
a billion dollars at the Glynco physical plant.
    The second construction account initiative of immediate 
importance is in the new facilities construction. The $11.7 
million requested in Treasury asset forfeiture funding will 
permit the Center to construct a new dormitory in Glynco and a 
firearms range and office structure in Artesia. This proposal 
is part of our 5-year plan to expand capacity ofboth sites to 
accommodate the US Border Patrol training now conducted in part at our 
Charleston facility and other participating agencies' projected 
training requirements. This request is for the second year of the plan, 
and if approved, will keep the Center on track for closing the 
temporary site at Charleston by 2004.
    In that connection, I would like to mention that the Center 
is exploring all options available within our resource 
capabilities to determine how projected Border Patrol and other 
agency training can best be undertaken in a manner consistent 
with the purposes for which this Congress created the 
consolidated training concept. We will keep this Committee 
appraised of the results of our review.

                     INTERNET PROGRAM PRESENTATION

    Before closing, I would like to invite the Committee to 
view a brief demonstration of an illegal use of the Internet 
that is fast becoming a major problem. Our Financial Fraud 
Institute is focused on preparing law enforcement personnel to 
address a wide array of computer-related crimes from money 
laundering to illegal intrusion. But no area is of more concern 
than that of child exploitation. Robert Gibbs, who is with us 
today, a senior instructor in our Financial Fraud Institute, is 
going to discuss an awareness program entitled ``Your Child and 
the Internet'' that FLETC currently has under development. 
While there are no easy or quick answers to this problem, it is 
essential that law enforcement does its part, not only to shut 
down these predators, but to also make the public, and more 
importantly, the parents and society aware of one of the real 
dangers on the Internet.
    So if I could, I would like for you to address--direct your 
attention to Mr. Gibbs, and he will give a brief overview of 
this program.

   INTERNET PRESENTATION WITH A LAPTOP PROJECTION ON DISPLAY SCREENS

    Mr. Gibbs. Thank you, Director Basham.
    Our program, ``Internet and Your Child'' is an initiative 
to train local law enforcement officers in the skills to 
present a program to train parents of the dangers and the 
problems that their children will encounter on the Internet.
    I would like to describe an on-line tragedy example to you. 
This statement is from a ``Frontline'' documentary about Kip 
Kinkle of Springfield, Oregon. Even though Kinkle's parents 
were raising him in a loving and safe environment, one of his 
friends lamented the fact that all of Kinkle's problems were 
described on the computer and his parents did not know how to 
retrieve that information.
    Another case is depicted in this statement from a police 
report from a family whose young daughter met someone on the 
Internet and ran away with him, and, in fact, was enticed to go 
to another city. She thought it was a 21-year-old male, when, 
in fact, it was a 34-year-old convicted pedophile. The parents 
knew that the daughter had been doing something on the Internet 
and were able to preserve the computer's content as evidence 
for law enforcement. The child escaped and the data that was 
recovered from that computer will be used in the pedophile's 
prosecution.
    She met this man in an Internet chat. An Internet chat is a 
virtual town hall. It is where people meet to talk about any 
topic they want to. Young teens can go and talk about other 
things that are of concern to them. Girls can talk about boys. 
Boys can talk about girls, their pets, whatever they want to 
talk about. While at the same time they are in this Internet 
chat, cyber stalkers can come by these virtual rooms and look 
in there and see who is in the room, and pull up the profile, 
their description of themselves, and look at who they are and 
what they are doing.
    I would like to introduce you to Angela, and as you can see 
from her profile, she is 14-years-old. She recently moved to a 
new city, and she is trying to make new friends and is probably 
a little lonely. Well, in Internet chat rooms the topic should 
be what is identified by the label of the room. If you are in a 
teen chat, it should be teens talking to teens. Well, the cyber 
stalkers are out there looking for vulnerable children, and 
perhaps Angela is a little bit vulnerable. The questions she 
will receive are going to involve sexual questions. If she 
answers that she has never seen a man without clothes, then 
very quickly a digital picture will be sent to her in most 
cases with a man without clothes.
    The stalkers want to take these children to a private chat 
room. Most Internet service providers monitor the chat rooms 
that are visible and close down the ones that are dangerous. If 
you go into private chat, however, there are no rules, there is 
no record, and there is no way to monitor it. They will attempt 
to lure the children to offline meetings. Between 17 and 80 
percent of the children that meet people on the Internet, admit 
to taking the risk of meeting them offline. They could meet 
them at the mall. They could meet them at the movie theater. 
They could meet them in another city or in a hotel. These 
stalkers will try and find out what the children like to do, 
and no matter what that topic is, they like to do it also.
    What follows is a transcript of a chat that Angela had with 
a man she met on the Internet. She had been on for less than 2 
minutes, and was asked to go to a private chat room. The text 
will scroll from the bottom to the top and the last line will 
be highlighted in red. She met a guy who called himself The 
Rhode Island Sport Guy, and after a very short time, he asks 
her what kind of underwear she is wearing. She demurs, she is 
just a 14-year-old child. He continues, ``What are you 
wearing?'' She answers, ``Just jeans.'' He presses the 
question. And now he is asking about her underwear. If it was 
my 14-year-old daughter, I would be terrified to have an older 
man asking her what kind of underwear she has on. He then asks 
for pictures of Angela. She does not have any, and to my 
surprise, no digital picture came of him online. But she is 
asked to describe herself, and in shorthand says, ``Okay.'' She 
is 5-6, 120 pounds with long red hair. He insists on asking her 
for her measurements. And then over the next minute or so he 
will ask her five times what is her bra size? A 14-year-old 
girl being asked these questions, to me is terrifying. Again, 
``What is your bra size?'' And she blushes. She is concerned 
about this. He claims to hit the wrong button. I do not know 
what he was doing offline, but he was not paying attention. 
Again, she tells him--and he tries to find out her home 
situation, what is her sexual experience, is she horny? It is a 
problem. And he insists he now wants to call her. He wants to 
groom this child to arrange a meeting. He is sympathetic with 
what the child's problems are, what their concerns are. He 
wants to have a meeting. And he insists. She does not want to 
talk any more. She is scared that the conversation will show up 
on Caller ID and she would be in trouble with her parents. He 
insists.
    You understand the point of this, that children can be 
lured away very quickly online, but oftentimes they give out 
information that they do not really know whether they should 
give it out. If you look at the right-hand side of the screen, 
there is a scroll bar which indicates that there is 
furtherinformation down on this page. This young man goes on to say 
that his father works 8:00 to 5:00 Monday through Friday. He goes out 
and plays golf every Saturday morning, and on Saturday night his mom 
and dad go out and leave him alone at home and vulnerable. Our children 
give away too much information.
    Our program to train law enforcement officers to train 
parents about these vulnerabilities is one answer. Parents have 
to know where their children go online. They have to be able to 
tell law enforcement, if something really goes wrong, what 
happened, and provide them the documentation of what the child 
has been doing.
    Our program first stresses that parents have to talk to 
their children. They have to have an agreement to set down the 
rules, to set down the guidelines that they want the child to 
follow. This program has a number of building blocks, not the 
least of which is what makes a computer tick? In many homes the 
parents are terrified of the computer. They are more 
comfortable on a telephone than they are with the computer. 
Parents have the right to know how their computer has been 
used. The program will develop the skills so that the parents 
can go in and see what Websites have been contacted, see what 
the records are of the chat, and see what has been going on on 
that computer. Perhaps they want to diconnect the child is use 
of the Internet. Well, it is almost an automatic process to get 
reconnected to the Internet. We will show the parents how to do 
that. We spoke about Internet chat. It can be the best thing 
that happened, and yet it can be the worst thing that happened. 
Everybody is getting electronic mail these days and the parents 
have to know from whom their children are getting electronic 
mail from. And hacking has certainly been in the news lately. 
If a child is involved in hacking, a parent has to know what 
programs to look for to see what they have been doing. There is 
filtering software out there that can set guidelines for use by 
parents. We will give them some instruction in this program on 
how to use it and whether or not it is going to be of value in 
their situation.
    And as we saw in our second profile, the young man gave 
away very crucial information that should be kept private. We 
will give instruction on how to maintain privacy.
    And lastly, once parents have taken the course, we will 
give them some instructions on how to go into their community 
and, perhaps, distribute this information to other adults in 
the community.
    The initiative is very simple. We want to train local law 
enforcement officers and agents to put on a program for parents 
that can educate them in how their children are using computers 
and using the Internet. This is community policing. It is crime 
prevention. We want to prevent the victimization of children by 
these cyber stalkers and pedophiles.
    At this point we have about completed Phase I. We have 
offered the basic class for patents in a number of cities 
throughout the country. We have had a pilot offering of the 
trainer program with another scheduled later this Spring at the 
FLETC. And we are beginning to put the basic infrastructure 
together to provide the books, the information, and the 
resources to deploy this across the country. The final phase 
will be to make this infrastructure permanent. With the 
evolving Internet, we have to modify the lesson plans and 
support information to continue a public information and 
education process for the parent. This is one of 18 advanced 
programs offered by the Financial Fraud Institute at the 
Center, and I think one of the more important ones.
    Mr. Basham. Thanks, Bob.
    Again, as was expressed, I think this is an opportunity for 
law enforcement, and in particular the Federal Law Enforcement 
Training Center to get out in front on an issue which is to us 
a critical one dealing with the computers, computer crime and 
that sort of thing.
    Mr. Chairman, in closing, I would just like to say that I 
want to thank you for your interest and your long support of 
Federal Law Enforcement Training Center's mission, and I am now 
available for any questions you may have on any of these 
subjects.
    [The information follows:]




                           INTERNET TRAINING

    Mr. Kolbe. Thank you, and thank you for that presentation. 
That is very interesting. Is this a course that is now under 
way? Are you doing this now?
    Mr. Basham. We are now in the process of developing the 
course and----
    Mr. Kolbe. When will you start doing this?
    Mr. Basham. Pardon?
    Mr. Kolbe. When will you start it, do you think?
    Mr. Basham. We have actually started to do this now. We 
have had a pilot program that we have put on, and we intend to 
expand this program through the trainer program concept so that 
we can get out to the parents and the citizens out there, that 
this is an issue that they need to be paying attention to.
    Mr. Kolbe. And what is your target audience of who are 
going to be the trainers? Is it all going to be local law 
enforcement?
    Mr. Basham. It would be local law enforcement, although 
there may be an opportunity to train others outside law 
enforcement, those that are in support functions within a 
community.
    Mr. Kolbe. Yes, work with children's groups or counselors.
    Mr. Basham. Family services, groups who are out there that 
are not familiar with this problem. And this will enable the 
law enforcement officers to put on these programs for the 
citizens to alert them, to not just alert them, but to suggest 
what to do? How do you determine if your child has been 
involved in these kinds of discussions online or offline? Who 
do you report it to? What is the system? What is the support 
system out there to deal with it?
    Mr. Kolbe. It seems to me like we need to get some of this 
training to teachers.
    Mr. Basham. And that is a target audience--not children.
    Mr. Kolbe. Have the trainers train the teachers.
    Mr. Basham. Not the children, because, believe me, my 9-
year-old granddaughter, who really sort of alerted me to this 
problem, spent about 2 hours on our computer in our office at 
home unsupervised, and for the next week or so we were getting 
these kinds of questions coming to our 9-year-old 
granddaughter. The children know how to get into these systems. 
It is the parents that do not understand the depth of this 
problem, so we are putting this program on to help them to 
understand.
    Mr. Kolbe. I have some questions. I just wanted to ask 
about that program you just described to us, and I am going to 
have some questions.
    All right. We will go to Mrs. Meek--or Mr. Hoyer, do you 
want to make a statement to begin?
    Mr. Hoyer. No, go ahead.
    Mr. Kolbe. Okay. We will call on Mrs. Meek, and then Mrs. 
Northup, if you would take the chair for just a few minutes.

                          UNIT COST INCREASES

    Mrs. Meek. Thank you, Mr. Chairman. I must apologize. I did 
not hear the first part of your testimony, but I read the 
testimony that you submitted to the Committee, and you referred 
throughout your testimony of a failure of projected training 
levels to materialize in fiscal year 1999, and you also said 
that they will not materialize in the year 2000 due to 
shortfalls in the Border Patrol's demand for service.
    Does this have the effect of training--of raising the 
variable unit cost for basic student training above the FLETC's 
performance plan?
    Mr. Basham. Yes, ma'am. To be quite frank, we enter into 
contractual relationships with those who provide us services at 
the Glynco center or in Artesia or wherever it may be, or 
Charleston. A service contract cost is based upon what we think 
the need is going to be. If that need does not materialize in 
terms of services requested, then the cost per student week of 
training goes up. The more--the higher the number of 
participants, the lower the cost per participant. Because of 
the difficulties that some of the participating organizations 
have had in recruiting and hiring personnel, those numbers that 
we had projected for 1999 and 2000 have not fully materialized. 
We do expect, however, that at some point in time those numbers 
will in fact materialize, because agencies are under some 
mandates to reach a specific level of staffing. We have had 
many discussions with the Border Patrol and other participating 
organizations, and they expect to reach those numbers in 2001; 
so eventually that cost per student week and those service 
efficiencies will come back into line with what we had 
projected.
    Mrs. Meek. So when you learned that the Border Patrol 
demand would be below the projected--that was projected, you 
did take some steps at that time to insure the capability that 
you were supposed to have?
    Mr. Basham. Yes. The problem that we have in terms of----
    Mrs. Meek. I am trying to find out how did you do it? Did 
you suspend new hiring or what kind of management steps did you 
use to----
    Mr. Basham. There is a tremendous need for all levels of 
law enforcement training, and what we do, when we have 
sufficient lead time, is to schedule other types of training to 
fill in for those classes that do not materialize. For 
instance, in the case of the Border Patrol, if we have enough 
lead time to know that we are going to have a block of training 
that is available, we will offer to our other participating 
organizations those blocks of time, and it may be in basic 
training or it may be in advanced training. We try to fill 
those open spaces. Many times there is just not adequate time 
in order for us to do that, and there are times when we do in 
fact have open space on the schedule due to our lack of 
opportunity to reschedule other types of training. So at times 
there is literally nothing we can do to offset that lack of 
requirements.
    Mrs. Meek. Thank you.
    Thank you, Madam Chair Lady.
    Mrs. Northup [presiding]. Thank you.
    Now let us go to the ranking member, Mr. Hoyer, for his 
statement and questions.

                STATEMENT BY CONGRESSMAN STENY H. HOYER

    Mr. Hoyer. Thank you very much, Madam Chair.
    Mr. Basham, I am sorry that I was late. I was on the floor 
handling two bills. I want to welcome you to the Committee. All 
I would say is that FLETC growth since 1970 is indicative of 
the increasing responsibilities federal law enforcement has 
been undertaking and the need to have high quality centralized 
training. The key there is of course centralized, because the 
centrifugal force is ever present of folks who want to have law 
enforcement training in a lot of different places, and while, 
obviously, we need to have localfacilities for locally assigned 
law enforcement officers to keep up their skills, the basic training 
premise was to have it in a centralized facility, and I am pleased to 
see that we are keeping FLETC, both from a capital standpoint and an 
operating standpoint, up to date.
    And, Madam Chair, did you want me to go to questions now? 
Is that it?
    Mrs. Northup. Sure.

                      STATUS OF CONSTRUCTION PLANS

    Mr. Hoyer. Now, I am sure you discussed this in your 
opening statement, and discussed the--I know you did--discussed 
the 5-year construction plan at Glynco and Artesia, and if you 
have already discussed this----
    Mr. Basham. We have no detail on it.
    Mr. Hoyer. If you have not done that, can you give us the 
status of that plan?
    Mr. Basham. Currently we are in the second year of the 
plan. If you do not take into consideration some forward 
funding that occurred in our 1999 budget, 2001 represents the 
second year of the plan. We are on track. We are on schedule at 
this point. If in fact the funding does materialize as it has 
been requested, we will be in a position to provide all of the 
training necessary at our Glynco and Artesia locations, which 
would mean that we would be also in a position to discontinue 
the temporary facility in Charleston.
    We are also looking at all of the possibilities that may 
exist by utilizing all of our resources that we currently have 
at our locations in Glynco and in Artesia. We are doing a study 
to determine whether or not we can effectively provide the 
Border Patrol what it needs as well as all of the other 
participating organizations, maybe even before the 2004 
deadline, and we are still working with the department on 
putting together some numbers and facts and figures, and we 
will be coming back to you to provide you with that in the very 
near future. But our 5-year plan is currently on track, and we 
are very appreciative to the Committee for providing us with 
the funds to do this.
    Mr. Hoyer. You might want to supply a copy of that plan for 
the record if you could.

                    REFRESHER SKILLS TRAINING NEEDS

    I asked Under Secretary Johnson at the previous hearing 
about any plans for a consolidated facility, primarily for 
firearms requalifications. Has such a need been identified, and 
if so, is it included within your five-year plan?
    Mr. Basham. The need has been identified. There is a 
critical need, in our opinion, in the Washington Metropolitan 
area for a facility to provide requalification opportunities 
for both firearms and driver training. As you aware, sir, those 
skills are very perishable skills, and they have to be 
revisited frequently to maintain proficiencies. That was not 
included in the five-year plan because that plan was put 
together a couple years ago. This initiative has just been 
identified--or this need has just been identified in the very 
recent past. But there is clearly a tremendous need to provide 
that kind of facility. And we are in the position though, I 
believe, to provide some documentation on what the need is and 
how we would propose that need be met.

                            STUDENT HOUSING

    Mr. Hoyer. Okay. I note that student housing has been an 
issue for FLETC. I note that 7.6 million requested for a new 
dormitory at Glynco. Would you please tell the Committee or 
provide for the record the percentage of students that cannot 
be accommodated in government housing at Glynco in 1999 and 
also the cost to the government for non-government housing in 
1999?
    Mr. Basham. If I could----
    Mr. Hoyer. Well, if you do not have that----
    Mr. Basham. Could I provide that for the record?
    Mr. Hoyer. Sure.
    Mr. Basham. I am not sure exactly what--they are constantly 
changing depending upon the workload and the populations. But I 
can say this, that in terms of the basic training, all core 
basic training was provided with on-center housing in 1999. I 
believe I can say that. And where we do not have the--that 
would be including Charleston, I might add, Charleston, Artesia 
and Glynco. But the advanced student----
    Mr. Hoyer. Let me get that again. All basic trainees were 
housed on base?
    Mr. Basham. In order to explain it, I suppose, there is the 
core basic programs which FLETC provides to our participating 
organizations. There are also follow-on agency specific basic 
programs where students remain at Glynco. Some of those agency 
specific basic classes were not able to be accommodated in on-
center housing at Glynco. So I can provide you with that 
information.
    [The information follows:]



                         NON-GOVERNMENT HOUSING

    Mr. Hoyer. All right. Obviously, that serves as a basis to 
make a judgment on how cost effective providing housing for 
people on site as opposed to purchasing housing, and obviously 
that is contingent upon how close to capacity we are or over 
capacity we are, so we fill up those rooms on a regular basis. 
Obviously, if we only have a need 30 days out of the year, then 
it may be cheaper to continue purchasing housing off site. I do 
not know if that rationale is valid or not.
    Mr. Basham. I think that is valid. But I think what needs 
to be pointed out is that we will never be able to provide 
housing for all of the students on-center just because of the 
magnitude of the number. In 1999, I believe we trained 
something in excess of 25,000 at our three locations. Close to 
20,000 in Glynco alone. We would never be in a position to 
house everyone on the Glynco Center.
    Mr. Hoyer. What is our capacity at Glynco now?
    Mr. Basham. With the new dorm, which we hope to come on 
line in the very near future, approximately 1,450 to 1,500 
rooms will be----
    Mr. Hoyer. At any one time?
    Mr. Basham. At Glynco, yes. But I think we also have to 
take into consideration that our Artesia site will be able to 
provide an additional almost 700 rooms on center at that 
location in the very near future, which would put us at 
something in excess of 2,000 available rooms at both locations.
    Mr. Hoyer. 2,100, I guess--700 and 1,400.
    How many weeks would we have that kind of complement? In 
other words, if you had 50, say we processed 25,000 students 
through both Glynco and Artesia and Charleston?
    Mr. Basham. Yes.
    Mr. Hoyer. So presumably if we have 2,000 beds available--
what is the training session? How long does it last?
    Mr. Basham. That is one of the problems in meeting this. 
The Border Patrol itself consumes about 20 weeks of training 
versus, let us say, the Bureau of Prisons, who may only require 
three weeks, versus the Secret Service or ATF at 9 plus weeks.
    So it is the combination of those programs and the 
requirements of the participating organization that really 
dictate the capacity and the availability of on-center housing. 
So it is hard to define it in those terms.

                      HOUSING FACILITY CONDITIONS

    Mr. Hoyer. If you put that together because it seems to me 
that dictates what we are going to do in terms of additional 
housing, I have not been to FLETC in some period of time. When 
was I there?
    Mr. Dooher. 1994, I believe.
    Mr. Hoyer. Was it 1994? It was sometime ago. And some of 
the housing there was--I do not know whether you have been down 
there, Madam Chair, but some of the housing in 1994 was awful.
    Mr. Basham. Can I extend you an invitation this spring to 
come down?
    Mr. Hoyer. Sure. It was awful and we would not want to send 
people down there to live in that housing. The roof was bad. 
The air conditioning was nonexistent. And water leakage in a 
lot of the apartments or rooms. It was in bad shape.
    Have we rehabbed all that space?
    Mr. Basham. No. In fact, in my opening statement one of the 
issues that I discussed, one of the initiatives is to try to 
devote more funds toward capital improvements, if you will, 
renovating some of the current structures because they were 
built in the '50s and '60s and they are literally falling down 
around our ears.
    In fact, a couple of dorms are going to have to be taken 
off-line immediately for renovations because they are literally 
uninhabitable.
    So we are trying to focus on getting those facilities up to 
a level that would be acceptable.
    Mr. Hoyer. I do not know whether I want to go back and 
visit six years later and have people tell me, ``Well, you said 
you were going to do something about this six years ago.''
    Mr. Basham. Oh, I can assure you, sir, this Committee has 
been very helpful to the Center in getting its resources in 
order. And there are fortunately fewer of those types of 
facilities that now exist there. The new construction--I think 
if you come down you will see--is vastly superior to that which 
was in place in 1975. So I think you will be applauded very 
seriously for the changes that have occurred.
    Mr. Hoyer. Well, I am glad to hear that. I am not sure that 
that is justified but I am glad to hear it, anyway.
    Madam Chair, I think my time is probably expired. I have 
more questions but I will do them on the second round.
    Mrs. Northup. Thank you.

                           WORKLOAD INCREASES

    I would like to follow up with the workload that all have 
and your budget and your capacity. I know that you indicated 
that there was an increase of 26 FTEs for instructor positions 
and this is a result of increases for training AFT and Secret 
Service. I assume you mean Customs, too?
    Mr. Basham. Actually, Customs had already been factored 
into our planning. They had notified us during the initial 
stages of our preparation that there were going to be these 
increases, so we had factored that Customs increase in our 
plans. We did not, however, factor in the ATF or Secret 
Service.
    Mrs. Northup. Okay. So the FTE additional slots that were 
discussed in this morning's hearing are already factored in, or 
are they the increases from this past year?
    Mr. Basham. These positions are the mandatory workload 
increases that we would normally ask for under any other 
situation. But the 26 FTEs, I believe takes into consideration 
those additional resources that ATF and Secret Service were 
taking up.
    Mrs. Northup. Well, I think what you have told us, too, is 
that that will cover your mandatory increase.
    Mr. Basham. That is right.
    Mrs. Northup. Due to those, assuming that your base funding 
stays the same and that you capture the carry-over funding.
    Mr. Basham. Well, we were only budgeted--the final budget 
numbers would only meet 79 percent of our workload at this 
time. We lost the carry-over in another action this particular 
year.
    Mrs. Northup. From the reprogramming?
    Mr. Basham. Yes.
    Mrs. Northup. Is that where you lost the carryover?
    Mr. Basham. Yes.
    Mrs. Northup. And I guess what my question is is if you get 
the increase for those 26 positions, because of the 
reprogramming, is that going to be enough to cover those new 
hires, because of the reprogramming that has----
    Mr. Basham. The funding that is made available in the 
request would cover those additional positions, yes.

                         FUTURE STAFF INCREASES

    Mrs. Northup. And will that cover the new agency hires 
expected over the next several years to offset the increases 
you are going to have from the anticipated number of retirees? 
Do you have 2,400 scheduled?
    Mr. Basham. I believe law enforcement is anticipating that 
level.
    Mr. Johnson. Over the next two years, across Treasury 
enforcement, 600 a year just to cover agent attrition.
    Mrs. Northup. Right, and all the responsibilities you have. 
So my question is are you going to be able to cover the costs 
of training the replacements for those 2,400 with the new 
hires?
    Mr. Basham. We will have to look very hard at the resources 
that we have available and we will probably have to do some 
things differently, but we will meet the needs of the federal 
law enforcement community. Any time that we sustain only a 79 
percent funding level, it is going to have some impact on our 
training but we do believe that with some innovations and 
perhaps some changes in our programs, we can provide the 
training.

                        STATE AND LOCAL TRAINING

    Mrs. Northup. Besides the increased new federal 
responsibilities and the growing need for federally trained law 
enforcement officers, do you expect to be able to continue 
accommodating the state and local demands that you all have?
    Mr. Basham. The answer to that is yes because the majority 
of the training that is delivered to state and local officers 
is done through export training. We send our people to these 
various sites around the country and work primarily through 
train-the-trainer programs. We do not anticipate that we will 
have any problem in meeting and also increasing our ability to 
deliver additional training to state and local.

                          DUAL SHIFT TRAINING

    Mrs. Northup. I would like to just ask you one more 
question about your capacity. I know that you have experience 
in the dual shift training and I just wondered if you had to go 
back to that. Do you all feel like you have the capacity to do 
that and do that well?
    Mr. Basham. We feel that with our experience in the past 
year with the dual schedule that we have the capability, when the need 
arises, to move back into that scheduling scenario. Obviously our 
preference is to maintain a single shift scenario but we can, if 
necessary and if the numbers do drive it, we will move back into the 
dual schedule.
    Mrs. Northup. Do you anticipate that that is how you would 
accommodate the transition from Charleston? Would that be part 
of the plan, to do that?
    Mr. Basham. At this point we do not believe, with the 
expected resources and facilities that would be made available 
through the five-year plan, that that would be a necessary part 
of meeting the needs. At this point we do not think we would 
have to do that.
    However, I must say that with the increase in federal law 
enforcement across the board, whether it be Secret Service, 
ATF, Customs, IRS or any other--Border Patrol--that remains a 
possibility, that we may have to do that in the future. But at 
this point, with current plans, that is not a part of that.

                         DUAL SCHEDULING COSTS

    Mrs. Northup. When you do that, what in the process do you 
feel like you have to sacrifice? I mean the quality, the 
individual accommodation? What is lost when we go to that?
    Mr. Basham. For one thing it is more expensive in that the 
contractual arrangements cost more money. Because we extend the 
training day, it also requires us to extend the contracts that 
support the training day, whether it be dining facilities, 
transportation, cleaning, that sort of thing, which costs more 
money, obviously.
    The other area I think that is of concern is after a while, 
if this scheduling goes on indefinitely without the proper 
staffing levels, then the effectiveness of the instructors and 
the morale of the employees starts to be impacted.
    A further concern--it exacerbates the problem of trying to 
maintain the facilities. When the facilities are being utilized 
for a longer period of time, it does not give us the 
flexibility of going in and actually doing the kind of 
maintenance that needs to be done in order to maintain the 
level of quality in facilities.
    So there are a number of issues but I think the important 
fact is that if called upon to provide the training, we do not 
want to become a chokepoint in the process of getting law 
enforcement officers on the street; so whatever is necessary to 
deliver that, we intend to do just that.
    Mrs. Northup. Thank you.
    Thank you, Mr. Chairman.
    Mr. Kolbe [presiding]. Mr. Hoyer, did you have other 
questions?
    Mr. Hoyer. Go ahead.

                WASHINGTON AREA REQUALIFICATION TRAINING

    Mr. Kolbe. Mr. Hoyer touched on, while I was gone, I think, 
the question about the consolidated law enforcement 
requirements here in the metropolitan Washington area and the 
need for new training facilities. In fact, just a few days ago, 
last week, Secretary Johnson referred to the review that is 
under way about how Treasury is going to meet its law 
enforcement training requirements here in the Washington area.
    As I understand it, we are talking about inherently short-
term training requirements--firearms qualifications, driving, 
those kinds of things.
    Mr. Basham. That is right.
    Mr. Kolbe. Not the basic training that we are talking about 
here. And I also understand there is interest in establishing 
capacity for longer-term in-service training in the 
metropolitan area for Customs Service inspectors, which Mr. 
Hoyer has talked about.
    Tell me how FLETC is involved in this process, this 
planning and review that is going on.
    Mr. Basham. If we are referring to the plan that affects 
the Washington metropolitan area----
    Mr. Kolbe. Right.
    Mr. Basham. The Under Secretary has brought it, I am sure, 
to everyone's attention here that there is a critical need in 
Washington and the Washington metropolitan area to provide some 
kind of facility to deliver these kinds of training that you 
pointed out--firearms----

                   TYPES OF REQUALIFICATION TRAINING

    Mr. Kolbe. Are there other things that I am not thinking 
about? I mentioned firearms and driving. What else?
    Mr. Basham. I think those two are the primary training 
needs that have been identified. There have been some others, 
such as, I know, the ATF has expressed some need in the area of 
explosive training, I believe, which may be necessary at some 
future date. But right now what we are looking at is the 
possibility of firearms training and driver training, a 
facility here in the area.
    What I think FLETC can deliver here--because we are in a 
unique position--is that FLETC does not have any operational 
requirements in the area of law enforcement. We do not graduate 
any FLETC agents. We are there to provide the support and 
training to others.
    So what we feel is that if we could establish a facility 
here in the Washington area and manage that facility here 
locally, that it would, in fact, improve tremendously on the 
training and efficiencies of the agents and officers who are 
here. It also would be cost-effective in that they do not have 
to travel great distances to get that training.
    And, as you said, this training is very short in terms of 
duration. It is usually a half a day to a day's training. So 
agents and officers would literally be able to go to this 
facility, get the training and be back on the street doing 
their job the same day.

                         SITE SELECTION FACTORS

    Mr. Kolbe. Either for you or Secretary Johnson, what 
locations are you considering for this?
    Mr. Basham. Well, we feel that it needs to be within an 
hour's commute of Washington.
    Mr. Kolbe. That was the other part of my question. What are 
the parameters you are considering?
    Mr. Basham. Within an hour.
    Mr. Kolbe. Within an hour.
    Mr. Basham. It has to be in an area that will lend itself 
to the type of training that needs to be done. Obviously it 
cannot be in a residential area. It needs to be in an rural 
sort of environment.
    Mr. Kolbe. What kind of security needs do you have?
    Mr. Basham. Security, noise, just all sorts of things that 
that kind of training--the problems that could come if you did 
not place it somewhere that is sort of stand-alone and somewhat 
remote.
    So we are looking at several locations. We are looking at--
--

                        POTENTIAL SITE LOCATIONS

    Mr. Kolbe. That was my next question. Do you have specific 
locations you are looking at?
    Mr. Basham. We do have a location that we have looked at. 
In fact, several years ago FLETC was involved in possibly 
establishing a site out in Prince George'sCounty, I believe, 
Indian Head.
    Mr. Hoyer. Charles County.
    Mr. Basham. Charles County? I am sorry.
    Mr. Hoyer. I just happen to know that by chance.
    Mr. Kolbe. Pure coincidence that he has some interest in 
this.
    Mr. Basham. And I might say that this Committee did support 
us at that time but the facility did not, in fact, materialize. 
Now, I think the need has become very critical.

                     SITE LEADERSHIP RESPONSIBILITY

    Mr. Kolbe. Well, if such a facility is going to be 
established, Mr. Secretary, should FLETC own and operate it? 
Maybe I should not ask Mr. Basham because he has an interest in 
this.
    Mr. Johnson. We are still working through this with a group 
and I can describe that group. It is not just Treasury 
enforcement but the Park Police and the Capitol Police are also 
involved.
    The institution that is best suited to provide training for 
such a group of agencies would be, what many refer to as the GM 
of training on a consolidated basis, FLETC. Ralph put it, I 
think, fairly gently when he made the point about his 
institution, FLETC, being in a good position to provide this 
sort of training because they do not have operational 
responsibilities.
    What is very important when we are talking about a scarce 
resource like firearms training facilities or driving pad 
facilities and the scheduling of classes is to have an 
institution in the position of being a neutral broker. And in 
my view, FLETC is ideally suited to that. They are ideally 
suited to develop a training facility because of their past 
expertise. And while we have not made any final decisions, as 
we develop this project, and we are working within the 
administration to do that, clearly FLETC is ideally suited to 
perform that function.
    Mr. Kolbe. Well, Mr. Basham, I am sure you would see this 
as a challenge but what kind of challenge is this going to pose 
to your management and the organization of FLETC as it exists 
now? I am sure you have thought about this.
    Mr. Basham. Mr. Chairman, we are in the process now of 
putting together a proposal, a business plan, if you will, for 
establishing such a facility. It will clearly require 
additional resources, both in facilities, as well as human 
resources, to do that.
    We are presenting to the Under Secretary a plan on how we 
would go about developing it. We could certainly provide that 
to the committee.

                AGENCIES INVOLVED IN WASHINGTON, DC SITE

    Mr. Kolbe. I would be interested. We want to be kept 
apprised of this as it moves forward.
    Mr. Secretary, you talked about a review going on. Is it 
totally in Treasury or does it involve others from other law 
enforcement, like the Capitol Police and Park Police that you 
mentioned?
    Mr. Johnson. The leadership of the team is within Treasury 
enforcement but clearly partnering very closely, with other 
personnel and working closely with personnel from FLETC.
    Mr. Kolbe. And these other agencies?
    Mr. Johnson. Yes. IRS, ATF, Customs Service--they are all 
part of the group. About two months ago, I had a conversation 
with Chief Ramsey of the Metropolitan Police Department. He is 
very much interested in participating with us as we develop 
this plan because, as you know, they have a very serious need 
for this sort of training here in the District.
    The Park Police and the Capitol Police, as well, have 
joined as part of this effort, either on an informal basis in 
consultation with us or more formally, as part of this group 
that is putting together a plan.
    It makes sense to me for us to develop the plan, try to do 
it expeditiously because if we can get contributions from the 
various agencies, it is not going to cost anyone as much as if 
one agency were to try to go forward alone to put together this 
project.

                 U.S. CUSTOMS TRAINING--SPECIFIC NEEDS

    Mr. Kolbe. The issue of the in-service training for 
organizations like Customs is a different one and I recognize 
that. It is more long-term. But I think the question here with 
that is can FLETC accommodate that or are the agencies going to 
end up going their own way on this kind of training?
    Mr. Basham. We have not had discussions at this point with 
Customs in terms of what their in-service needs are. We, 
however, believe that we could, in fact, meet those needs at 
our Glynco and Artesia facilities. At this point though, 
without knowing specifically what it is that they are asking, 
it is hard to answer that question. But I do believe that we 
can accommodate them at our current facilities.

                        ADVANCED TRAINING NEEDS

    Mr. Kolbe. How many requests for advanced training, 
specialized training programs do you get that you have to turn 
down at Glynco or Artesia because you just do not have the 
capacity to do it?
    Mr. Basham. I would say close to none, although I think 
what has happened--and there may be several that we have turned 
down over the last couple of years and generally that is due to 
a lack of instructional requirements for facilities.
    But right now it is minimal, but what I believe is 
happening is that the agencies who participate know that our 
capacities are such at this point that we probably could not 
provide all of it, therefore, they are not asking for advanced 
training. I think there has been identified a need and I think 
certainly in the case of the Border Patrol and some others--the 
Justice Department has expressed a tremendous need for advanced 
training that they just have not requested this due to 
operational needs or whatever the case may be. So it is hard to 
say.
    Mr. Johnson. If I could just add one thing, while it may be 
the case that some institutions have not come forward, it is 
essentially because they know of FLETC's situation. Director 
Basham has undertaken an initiative to deal with at least some 
of the in-service advanced training demands.
    There are essentially two categories of work that an agent 
would need to do in-service. One is classroom work. There are 
changes in the law, there are changes in technologies and 
officers need to be apprised of that. The other is of a more 
physical variety, where you would need to hone your skills in 
shooting and where you might need to engage in tactical 
practice of your skills.
    There are challenges that we face on both fronts but with 
respect to the former, the need for classroom training, Ralph 
has an initiative that he and I have discussed in which there 
is an effort to use technology to provide training on a distant 
basis, a remote basis. And whether or not that is using CD-
ROMs, whether or not that is using television, remotely located 
television classrooms, to provide training to remote locales so 
that you do not have to ship the agents orthe inspectors down 
to the FLETC and worry about housing them, that is an issue that I 
asked Ralph to look into and he has made a fair amount of progress on 
that. I am sure if the committee wanted to hear more about that, Ralph 
could give a status report on where that stands right now.
    Mr. Kolbe. Let me turn to Mr. Hoyer.

                          CYBERCRIME TRAINING

    Mr. Hoyer. Thank you, Mr. Chairman. I just have two few 
additional questions. Cybercrimes obviously has become a major 
problem. How is FLETC involved in this from a training 
standpoint and what is your plan to address this problem and 
how much funding and/or other resources may be needed?
    Mr. Basham. At this point I do not believe that we have 
identified or requested any funding for this kind of training, 
although our Financial Fraud Institute has--and will continue 
to put on--a number of programs for state and local. I believe 
just last year alone we graduated something in the neighborhood 
of several hundred or so in computer-related crime training. 
But there is no specific funding that we have requested to deal 
with that particular problem. We are doing it with current 
resources.
    Now as that problem grows and more training is requested or 
needed, then we may be asking for additional funds for that.
    Mr. Hoyer. It seems to me it is a relatively large problem 
right now in terms of shutting down commercial enterprises, 
shutting down government agencies through hacking, as well as 
crimes of solicitation and other ways that people are using 
electronic means to disrupt and/or commit crimes, that we are 
going to have to have increasingly sophisticated law 
enforcement capabilities to confront that.
    Mr. Basham. We are currently putting on somewhere between 
15 and 20 programs that deal with money-laundering to 
pornography, all sorts of computer-related crimes.
    I could turn to Mr. Fitzpatrick to maybe expand on that a 
little bit.
    Mr. Kolbe. Identify yourself for the record.
    Mr. Fitzpatrick. My name is Carlton Fitzpatrick. I am the 
acting chief of the Financial Fraud Institute and we do the 
training for financial crimes investigations, as well as 
technical crimes investigations. We have 32 programs planned 
for FY 2000.
    Mr. Hoyer. Okay, thanks.

                    FOREIGN LAW ENFORCEMENT TRAINING

    Now I understand the requests for training from foreign 
governments have increased in recent years, which ties in with 
the chairman's question of what is our capacity, what are the 
requests for training and who can we accommodate?
    Can you discuss the status of the Center's involvement in 
international law enforcement training?
    Mr. Basham. Well, the Center currently is involved in 
training foreign law enforcement through delivering that 
training in their locale. For example, there are a number of 
programs in the former Soviet Union. There also are programs 
that are being provided in South America.
    We also do provide training for international students at 
our Center in Glynco, Georgia in marine enforcement and those 
sorts of things.
    I believe we are close to establishing an ILEA, an 
International Law Enforcement Academy, somewhere west of the 
Mississippi, hopefully in the next year or so to provide 
additional international law enforcement training.
    It is not, in fact, a large segment of our workload but it 
is increasing each year and at this point in time we spend a 
great deal of resources transporting our training to foreign 
sites.
    Mr. Hoyer. What kind of numbers come to Glynco or Artesia?
    Mr. Basham. From international?
    Mr. Dooher. It is not very high.
    Mr. Basham. In 1999 we had approximately 600 foreign 
students who came to Glynco, so it's not a large number.
    Mr. Hoyer. What is that? About 4 percent?
    Mr. Basham. Yes, it is very small.

                       RACIAL PROFILING TRAINING

    Mr. Hoyer. Now last question. I said I had two questions 
but I am thinking of another question as I ask this one.
    We have another school in Georgia that is very 
controversial that trains foreign armed services persons, 
controversial to the extent that there are a lot of armed 
service groups throughout Central and South America who 
egregiously abuse the human rights of the citizens they are 
sworn to serve.
    In our own country, I know Mrs. Meek has been very 
concerned about it and a lot of us are concerned about racial 
profiling, which has been a law enforcement problem. We were 
talking with Mr. Kelly today about Customs in terms of 
profiling of possible objects of scrutiny.
    What components are there of FLETC's training that deal 
with both human and civil rights concerns and concerns about 
racial profiling, which are obviously part and parcel of the 
first question?
    Mr. Basham. An integral part of our basic training for all 
law enforcement deals with the respect for human rights but we 
have, in fact, increased the amount of training in this 
particular area as a direct consequence of this issue emerging.
    We have also been working closely with the Justice 
Department in developing a training program that is going to be 
delivered to state and local officers, as well. I believe the 
program development has been completed and we are just about 
ready to start the training through instructors as well as 
videos and those sorts of things. But it has been a very 
important part of FLETC's basic training program and we have 
certainly revisited that in our curriculum review and we have 
worked with a number of groups to identify where there needs to 
be more work done.
    So we are very aware that this problem needs to be dealt 
with at FLETC at the very inception of these individuals 
becoming law enforcement officers.
    Mr. Hoyer. Mr. Secretary, this is an observation, not 
necessarily a question. I have been on this committee a long 
time and we had, long before you were here--I think Mr. Basham 
was here--how long have you been at FLETC?
    Mr. Basham. Two years.

                          SENSITIVITY TRAINING

    Mr. Hoyer. It was long before you were at FLETC. We had 
some concerns at ATF in terms of racial and ethnic assertions 
on the boards in various offices, a swastika appearing in one 
of the offices, obviously of great concern to the leadership of 
ATF.
    We need to be very sensitive to that. I know you are, but 
would you like to comment on what efforts we have made recently 
as there have been problems in New York, Los Angeles, frankly 
in my own county of Prince George's County being a problem and 
consequently sort of having to upgrade the consciousness of 
people?
    Mr. Johnson. I think there is a multi-part answer to that. 
If we could use as a framework the President's commitment to 
fairness in law enforcement and the executive order he issued 
last spring in which he made it very clear--last June--that 
federal law enforcement needs to conduct itself consistent with 
the highest standards of respect for civil rights.
    In that order, he asked the Treasury Department, the 
Justice Department, and the Department of Transportation to 
take a look at what we are doing; how are we exercising, in 
many respects, the awesome powers of law enforcement in our 
everyday dealings with citizens?
    As you heard this morning from Commissioner Kelly, the 
Customs Service was to a certain extent on the leading edge of 
an approach that entailed getting a better picture in terms of 
data about the nature and caliber of our interactions with the 
public and really looking at the data along the lines of the 
racial and ethnic demographics of those who are coming in 
contact with the Customs Service.
    The President ordered Treasury to develop a plan. The 
Customs Service already had their plan, and that was followed 
through and endorsed. The Secret Service Uniformed Division in 
the Washington, D.C. area is also taking a look at these 
issues, but it is not just enough for us to take a look at the 
issues.
    We are informed not only by the caliber of our interactions 
with the public but also the composition of law enforcement 
generally. And from the Department's perspective, as we begin 
to take on new people in the ATF and the Secret Service and the 
Customs Service, we are very concerned that we take every step 
possible to engage in aggressive recruiting efforts to get the 
best qualified candidates but also to get those candidates 
that, consistent with that, reflect the richness and diversity 
of the nation.
    Early in April we will be having a conference in which our 
EEO officers and some of our senior managers will be looking at 
best practices in the recruiting area.
    To Ralph's credit, and he is often quiet about mentioning 
these things, and the team that he has put in place in FLETC as 
well as a lot of the people who remained on at FLETC, were very 
committed to making sure that opportunity was quite even across 
the board so that the young men and women who were going 
through the classrooms not only learned about the importance of 
treating every individual fairly, but also saw reflected in 
FLETC's management, in their management style and the people 
who were providing training at the Center, that the ideal of 
fairness and equality without regard to color is one that not 
only FLETC taught, and teaches, but is an ideal that they live 
by.
    So there is a fair amount going on.
    Mr. Hoyer. Thank you.
    Thank you, Mr. Chairman.
    Mrs. Meek. Mr. Chairman.
    Mr. Kolbe. Mrs. Meek.
    Mrs. Meek. Thank you very much.

                         MINORITIES IN TRAINING

    I just wanted to follow up with Secretary Johnson. I come 
from South Florida and there are a lot of Hispanics, Haitians 
and other nationalities that come into Florida illegally, as 
you know, and many times it is the Border Patrol--it is not 
Customs--it is the Border Patrol that intercepts the vehicles 
and all of that.
    My question is how many minorities do you have in the 
Border Patrol? I have not seen that many on my end. There are 
probably quite a few of them. Could you give me some accounting 
of how many minorities you have--Hispanic and African-
Americans--in the Border Patrol?
    Mr. Johnson. The Border Patrol is not a Treasury agency so 
I could not give you that response, but----
    Mrs. Meek. It is part of the Justice Department, right.
    Mr. Johnson. But we can make sure that that information 
gets to you.
    Mrs. Meek. The reason I ask that question, you are training 
Border Patrol agents, FLETC is, and in terms of your cross-
section of trainees, can you give me just a capsule of the 
number of people you are training where you find minorities 
represented in that training sector? It does not give me 
absolute figures but it would give me some idea.
    Mr. Basham. So if I understand you correctly, you would 
like for us to provide you with the Border Patrol personnel 
that we train and how many of those that we have trained?
    Mrs. Meek. Yes.
    Mr. Basham. We can certainly do that.
    I do want to add one thing to the under secretary's 
comment. What I feel strongly about is that FLETC has a very 
unique opportunity in that many times the individuals who come 
to FLETC, their first exposure to law enforcement is in 
training. I believe that FLETC has to portray a diverse 
workforce in order for these new officers to understand that it 
is not just white males who are involved in law enforcement, 
but there are all varieties of individuals who are involved in 
law enforcement, and they do a tremendous job. Whether it be 
women or African-Americans or Hispanics, when they are being 
trained by these individuals, these individuals are 
professional law enforcement officers and it then, I think, 
builds on these students' ideas of what a law enforcement 
officer is--not just a white male but anyone out there who is 
qualified can certainly do a tremendous job in enforcing our 
nation's laws.
    But we will provide you with the numbers on the minorities. 
Again all----
    Mrs. Meek. Having said that, I do not want anyone to 
underestimate the importance of having someone who understands 
the people for whom they are giving some service. I have 
noticed this a lot in Miami, where we have a lot of Hispanics 
and we have a lot of foreigners coming in there. I would think 
that FLETC and all the other agencies should look for--
certainly they should look for capable people. Notwithstanding 
that, they should also look for other characteristics in racial 
and gender--women and African-Americans and Hispanics--in order 
to show the profile of America. Otherwise if you come into the 
area where I am and you do not really understand, you have no 
sensitivity to the Hispanic plight or to African-Americans or 
to Haitians. No matter how well trained you are, sometimes that 
person who has that sensibility can do a better job or would 
help to train those people who are going into that area.
    To me, that is sometimes an advantage of that person who 
has that. I notice a lot of times when people are interdicted 
or intercepted near the shores, many times Customs officers and 
Border Patrol officers are overwhelmed because they do not 
really know what to do. They are not used to the cultural 
things that they see manifested there. And I am not sure 
whether that is going into your training or not, so that they 
will really understand these kinds ofsensibilities and they 
will understand the cultural background of some of the people they are 
interdicting and intercepting.
    Mr. Basham. What we have tried to do and not just through 
the instructional staff but we also try through our scenarios 
that we develop to bring in people who play roles of different 
individuals of ethnic backgrounds so that the students are 
exposed early on to the kinds of issues that you are talking 
about. We try very hard to make sure that our workforce, as 
well as our role-player workforce, represents a diverse group.
    There is still a lot of work to be done obviously in this 
area but we do think we are making some strides, both in the 
workforce, as well as the folks that they are coming into 
contact with.
    Mrs. Meek. Thank you.
    Mr. Kolbe. Mr. Goode?
    Mr. Goode. Thank you, Mr. Chairman.

                       TEMPORARY CHARLESTON SITE

    Let me ask you this. The temporary site at Charleston, you 
have been there for about four years; is that right?
    Mr. Basham. Yes, sir; that is correct.
    Mr. Goode. Who has title to the site at Charleston? Is it 
your agency or GSA or who?
    Mr. Basham. Actually it is my understanding that the Navy 
owns the property that is being utilized by the temporary 
facility, Border Patrol facility.
    Mr. Goode. And you pay rent for it? Is that how it works?
    Mr. Basham. Right now it is my understanding that it is on 
a nonreimbursable agreement.
    Mr. Dooher. Agreement between the Justice Department and 
Border Patrol with the Navy.
    Mr. Goode. When the new facility is completed you are just 
going to close Charleston, right?
    Mr. Basham. Our intention is to--in fact, we are mandated 
at this point to close Charleston by fiscal year 2004 and that 
is what we are on target for.
    Mr. Goode. The facilities there, who gets the facilities? 
Do they just go back to the Navy and the Navy decides?
    Mr. Basham. It is my understanding, sir, that there have 
been discussions there between the Navy and the redevelopment 
authority there in Charleston, that at some point there is a 
possibility that the redevelopment authority may take over that 
property. I do not know where that is at the moment. I know 
there has been an extension at this point for at least a couple 
of years to allow for continued training of the Border Patrol 
there now.
    Mr. Goode. Do you anticipate the Navy giving that to the 
Charleston Redevelopment Authority or you all have not gotten 
that far along?
    Mr. Basham. I would suspect that the Navy would love 
nothing more than to give that property to the redevelopment 
authority. It is a difficult place to manage. It has a lot of 
environmental problems. I do not know that the Navy has any 
operations there now.
    Mr. Goode. It is in North Charleston?
    Mr. Basham. Yes, that is correct.

                         EXPORT TRAINING SITES

    Mr. Goode. Your export programs, where are they conducted?
    Mr. Basham. At various sites around the country, primarily 
at existing law enforcement academies, whether it be state 
police or local academies. We normally would send anywhere from 
two to five instructors to those academies, to train, in what 
we call train-the-trainer programs. So it is primarily at the 
local sites.
    Now, we have gone to hotels and that sort of thing to 
provide the training, as well, but most of it is done through 
various academies.
    Mr. Goode. Have you ever been to, for instance, the 
Virginia State Police Academy?
    Mr. Basham. I do not believe----
    Mr. Dooher. I am not aware that we have at Virginia State. 
We probably have done some training in Virginia, though.
    Mr. Goode. That is all I have, Mr. Chairman.
    Mr. Kolbe. Thank you, Mr. Goode.

                       CLOSURE OF CHARLESTON SITE

    Just to follow up on that, I am not sure I understood 
exactly what you said, Director Basham. Are we on target for 
completing the transition by fiscal year 2004, for Charleston?
    Mr. Basham. Yes. If the funding materializes that we have 
requested, we feel very strongly----
    Mr. Kolbe. For facilities at Glynco?
    Mr. Basham. Glynco and Artesia. I think it is important 
that----

                      U.S. BORDER PATROL TRAINING

    Mr. Kolbe. What is the current mix of the training now for 
the Border Patrol between Glynco and Charleston? You are not 
doing any of the Border Patrol at Artesia, are you?
    Mr. Basham. We are doing some advanced training----
    Mr. Kolbe. Advanced training. But the basic training, in 
terms of the number of weeks that students spend at both of 
those two facilities----
    Mr. Basham. The Border Patrol training program is 
approximately 18 weeks in length. To date for this particular 
year we have trained 425 Border Patrol agents; 300 that were 
trained in Charleston and 125 have been trained in Glynco. 
Border Patrol has not met the numbers that they had 
anticipated. But we try to keep about a 60/40 split when the 
numbers materialize between Glynco and Charleston.

                  BORDER PATROL TRAINING CANCELLATIONS

    Mr. Kolbe. That was one of my questions. What has been the 
impact of the fact that Border Patrol has not met their 
numbers, their commitments? What impact has that had on you? I 
mean do you reserve space for a certain number of people?
    Mr. Basham. Normally during the spring we ask the agencies 
to provide us with what they expect their training requirements 
are going to be for the next fiscal year. We then block out 
those times for that training. When that training does not 
materialize, then it causes us to have scheduling spaces that 
are unused at the Center. But normally we have enough lead time 
to fill in those spaces so that we do not have those vacant 
weeks of training. Sometimes we cannot do it because they 
cancel literally at the last moment and we just cannot fill in 
for them.
    Mr. Kolbe. When you have a cancellation like that, where do 
you make the reduction? At Glynco? Do the students come out of 
Glynco or do they come out of Charleston?
    Mr. Basham. We have an agreement that it will be done on a 
percentage basis. We try to maintain certain levels of training 
classes at Charleston just because if we are going to be at 
Charleston we need to at least try to keep some efficiencies 
there.
    So we will take one out of Charleston or we will take one 
out of Glynco. We will try to continue to fill the classesto 
their capacity as best we can.

               USE OF ARTESIA FOR BORDER PATROL TRAINING

    Mr. Kolbe. Are you giving some consideration to 
consolidating all the Border Patrol training at Artesia?
    Mr. Basham. We have been looking at all of the options that 
would be available to us to close down Charleston and to 
consolidate training. We certainly must take Artesia into 
consideration when it deals with the long-term needs of the 
Border Patrol or any of our participating organizations.
    We are in the process of putting together a plan, I guess a 
business case to present to the under secretary for 
consideration as to how we can deal with the Charleston 
situation and still meet the required closure date in fiscal 
year 2004. So in the very near future we will be discussing 
this plan with the under secretary and I think it is a plan 
that will certainly allow us to close the Charleston facility 
by 2004, if not sooner.

                       MONEY LAUNDERING TRAINING

    Mr. Kolbe. One other brief line of questioning. Your budget 
request includes $15 million for the National Money-Laundering 
Strategy. None of this appears specifically for training but 
training is mentioned as one of the activities to be supported 
under the Crime-Free Community Grant Program.
    What is FLETC's involvement in money-laundering training 
for Treasury law enforcement, other federal law enforcement and 
state and local?
    Mr. Basham. Well, through our Financial Fraud Institute, we 
currently are putting on a number of programs, training 
programs, at the state and local level that deal with--I think 
the program is Money-Laundering and Asset Forfeiture, I believe 
is the title of the program. And last year we put about----
    Mr. Kolbe. That's the local law enforcement?
    Mr. Basham. That is state and local.
    Mr. Fitzpatrick. That one split, and we have one Federal 
program at present.
    Mr. Basham. Okay. But that particular initiative, I am not 
sure that we are----
    Mr. Kolbe. Is any curriculum on this being incorporated 
into the basic training of some of your other----
    Mr. Basham. These would be advanced programs.
    Mr. Kolbe. Oh, advanced. Is there any money-laundering 
included in any of your basic training programs?
    Mr. Basham. Not to my knowledge, no, sir.
    Mr. Kolbe. So you have the specialized training.
    How many FTEs, how much funding do you devote to this 
money-laundering training? Do you have any idea?
    Mr. Basham. Again I would have to defer--we have seven 
instructors and I am not sure. We can provide the committee 
with that information if you wish.
    Mr. Kolbe. The Money-Laundering Strategy that was released 
a week ago says that a ``new investigations training 
curriculum'' will be distributed this summer for state and 
local law enforcement professionals.
    Are you involved in developing that?
    Mr. Basham. I am sorry; I am not quite sure----
    Mr. Kolbe. Well, I think it says that you are going to have 
a new investigations training curriculum on money-laundering 
under the new strategy. What is FLETC's role in that?
    Mr. Johnson. Within the strategy----
    Mr. Kolbe. Objective 4, yes.
    Mr. Johnson. There are many, many action items. The lead on 
that particular action item, to the best of my recollection, 
was the Assistant Attorney General in the Criminal Division.
    Mr. Kolbe. But the complete revision of a model curriculum 
for financial investigations for state and local law 
enforcement agencies, both train-the-trainer and national 
conferences, distribute the curriculum. The lead is Assistant 
Attorney General. FLETC is not involved in that?
    Mr. Johnson. That is correct. Well, at the end of the day, 
before any curriculum is approved, there is going to have to be 
clearance between Treasury and Justice on that and it is my 
anticipation that FLETC would be involved in that process.
    Mr. Basham. We do feel we have the resources and the 
expertise----
    Mr. Kolbe. That was my last question. Do you have the 
resources and the trainers, the people to do the kind of 
specialized money-laundering training that you are talking 
about?
    Mr. Basham. Yes. If we are called upon to provide that, we 
feel we do have the expertise to deliver that sort of training.
    Mr. Kolbe. Mr. Goode, do you have other questions?
    Mr. Goode. I do not have any more questions.
    Mr. Kolbe. If not, I want to thank both Secretary Johnson 
and Director Basham for being here today and for this 
presentation. I think it has been very helpful to us as we 
proceed to consider the budget request.
    Thank you very much. The subcommittee will stand adjourned.
    Offset folios 587 to 647 insert here.



                                         Wednesday, March 15, 2000.

                      UNITED STATES SECRET SERVICE

                               WITNESSES

BRIAN L. STAFFORD, DIRECTOR
JAMES E. JOHNSON, UNDER SECRETARY
BRYAN VOSSEKUIL, EXECUTIVE DIRECTOR, NATIONAL THREAT ASSESSMENT CENTER
BARBARA RIGGS, ASSISTANT DIRECTOR, OFFICE OF PROTECTIVE RESEARCH
MARISA PYNCHON, RESEARCH PSYCHOLOGIST, NATIONAL THREAT ASSESSMENT 
    CENTER
    Mr. Kolbe. The subcommittee on Treasury, Postal and General 
Government will come to order. We will be joined very shortly 
by the ranking member, Mr. Hoyer, and other Congressmen will 
also be coming in at the same time.
    We want to welcome this morning for his first appearance 
before the subcommittee in his capacity of director, Brian 
Stafford, the director of the United States Secret Service, and 
of course, once again, Under Secretary Jim Johnson for his many 
multiple appearances that he gets to make before our 
subcommittee here.
    Let me just say, Director, at the outset, that I thought it 
was an impressive appearance last night on ``60 Minutes II'' 
that the Secret Service made. It is clear that the experiences 
that you are having in identifying and addressing threats 
through the Exceptional Case Study Program is an important one 
and needs to be shared with our Nation's educators, with 
parents and the law enforcement community. In fact, I'm looking 
forward very much to an opportunity to do this with you in my 
city in Tucson next month. So I think you are to be 
congratulated on getting that message out there to a national 
TV audience, and I hope we will see a lot more of that.
    Director, last year this subcommittee took action to 
address some of the shortfalls in funding for the Secret 
Service for the staffing and operations components. The Agency 
at that time was experiencing significant early departures by 
seasoned and promising young agents, not because they were 
dissatisfied with the mission or the work of the Secret 
Service, but because they were being tasked with really 
extraordinarily long hours and inordinate travel time that take 
them away from their families and from what would be a normal 
life.
    I think all of us recognize that a Secret Service career, 
very much like the military, has always meant a tremendous 
amount of personal sacrifice guarding the safety of our 
Government by protecting the President and world leaders, by 
protecting our financial system, and of course through its 
historic jurisdiction over counterfeiting operations and other 
financial crimes, and this requires a tremendous amount of 
dedication and certainly particularly that of the security for 
leaders requires an amount of personal sacrifice. But I think 
we recognize that the very best of us, best agents, have 
limits. And clearly the departure of so many of these agents 
was a serious matter that needed to be addressed.
    So I am looking forward to hearing from you this morning 
about the measures that you have taken to retain the existing 
agents and to be able to recruit new agents to fill the gaps 
that you have had. You are going to need these agents to carry 
on the traditional missions and the new areas that you are 
entering into. In particular, I want to hear about how you are 
going to carry out your responsibility to plan and provide 
security for major events, and I have some questions that I 
want to address to you on that topic and the role that expanded 
aviation support may have for your current and new mission.
    This, of course, is a presidential election year, and we 
know that you are going to be faced with very heavy demands 
throughout this election season. At the same time, we are 
interested in seeing that this priority does not starve the 
investigative work in which you play such a key role and the 
other kinds of financial crimes that are so important. So we 
are anxious to hear about that.
    And, finally, something that has been a favorite of many 
members of this subcommittee and of Congress, I might add, 
being anxious to hear from you about the contributions of the 
work of the National Center on Missing and Exploited Children 
and how you are using the fruits of your protective 
intelligence research to bear on the security planning for 
public and school safety.
    I will ask Mr. Hoyer for some remarks when he gets here, 
unless Ms. Roybal-Allard has something. We will begin, Mr. 
Secretary, as always, with an opportunity for you to make some 
opening remarks, and then we will hear from Director Stafford.
    Mr. Johnson. Thank you, Mr. Chairman. Good morning, and Ms. 
Roybal-Allard, good morning to you as well. I am pleased to 
once again appear before this committee to discuss Treasury's 
fiscal year 2001 budget proposal, this time for the United 
States Secret Service. This morning I am happy to join Director 
Stafford who, in his first year as director of the Secret 
Service, has been outstanding in his efforts to resolve 
workforce and retention issues. This request of more than $821 
million and 5,543 full-time equivalent positions represents an 
increase of approximately $123 million and 193 FTE over the 
fiscal year 2000 appropriated level. If enacted, this budget 
would enhance the quality of life for the dedicated men and 
women who carry out what you have identified as a most 
challenging mission, dual mission, of providing protection to 
our Nation's leaders and investigating complex financial crimes 
cases.
    I respectfully defer to Director Stafford who, I am sure, 
will answer the bulk of your questions and present the key 
components of this budget request. I look forward to responding 
to any questions that you may have of the Department.
    Thank you.
    Mr. Kolbe. Thank you very much.
    Director Stafford.
    Mr. Stafford. Mr. Chairman, Congresswoman, I am pleased to 
be here today, and to be afforded the opportunity to testify 
onthe Secret Service's fiscal year 2001 budget request. I have 
submitted a more comprehensive statement for the record, and with the 
committee's permission, I will proceed with a shorter statement.
    Mr. Kolbe. Please, yes. Your full statement will be placed 
in the record.
    Mr. Stafford. Seated with me today are Barbara Riggs, 
assistant director for our Office of Protective Research; Brian 
Vossekuil, our executive director for our National Threat 
Assessment Center; and Dr. Marisa Pynchon, also a research 
psychologist with the National Threat Assessment Center. Seated 
in the row behind me are members of the Secret Service 
executive staff, deputy director, assistant directors, chief 
counsel and others that worked very hard on this 2001 budget.
    My presentation to you today will briefly outline our 
continuing commitment to Congress and the American people to 
maintain the highest level of protection possible for 
designated individuals and to protect the integrity of the 
Nation's financial systems.

                   NATIONAL THREAT ASSESSMENT CENTER

    Assistant Director Barbara Riggs will discuss the work of 
our National Threat Assessment Center. The Center highlights 
our efforts at preventing assassinations and how the same 
methodology has been useful to our colleagues in State and 
local law enforcement as they, too, have increasingly been 
asked to respond to such problems as stalking, and workplace 
and school violence. Through the National Threat Assessment 
Center we intend to continue our partnership approach and share 
what we are learning.

               WORKFORCE RETENTION AND WORKLOAD BALANCING

    The Secret Service's fiscal year 2001 budget request 
continues to build upon the efforts this committee has 
supported to reverse a critical personnel shortage within the 
Secret Service resulting from mandatory workload increases. As 
you know, during 1999, the Department of the Treasury 
established the Interagency Working Group on Secret Service 
Workforce Retention and Workload Balancing. This working group, 
which included representatives from Treasury and the Office of 
Management and Budget, analyzed the underlying causes for the 
decreased ability of the Secret Service to retain younger 
special agents, and the degradation of their quality-of-life 
brought about by increased mission demands.
    The working group found that the current workload is 
causing significant morale and retention problems. It 
recommended that, among other actions, the size of the special 
agent workforce be increased. With your support and leadership, 
the Secret Service is already in the process of adding 227 FTEs 
to its workforce or about one-third of the additional 
requirement identified by the Interagency Working Group. 
Accomplishing our mandated dual protective and investigative 
mission is a very labor-intensive effort, and the workload is 
growing.
    The Service's protective responsibilities continue to 
expand and become more difficult. The variety and destructive 
magnitude of terrorist acts continue to expand, and the nature 
of terrorist activity has become more technologically 
sophisticated. Likewise, the country's banking and financial 
infrastructure is under attack. Transnational criminal activity 
has dramatically increased use of technical schemes to 
counterfeit U.S. currency.
    In the area of national special security events, the Secret 
Service is the lead agency in the planning, coordination and 
implementation of security measures for a number of significant 
major events. These include the Republican and Democratic 
National Conventions, Op-Sail 2000 in New York City, and the 
2002 Winter Olympics in Salt Lake City. The amount of work 
associated with preparing for these significant events cannot 
be overstated.
    As society rides the wave of advancing technology, the 
challenges facing the law enforcement community grow 
exponentially. This advancing technology has enabled an 
expanding criminal element to conduct a variety of financial 
crimes, which are often extremely sophisticated in nature. 
These criminal schemes are challenging the Secret Service's 
investigative resources as never before.
    We take our role seriously as the lead agency for ensuring 
the safety of the banking and finance sectors. Our Electronic 
Crimes Special Agent Program is evidence of that. By having 
agents trained in electronic crime in every field office, the 
Secret Service is taking a proactive position in identifying 
frauds as they occur throughout the Internet. We remain current 
with new emerging trends in the areas of network intrusion and 
telecommunications compromise activity.
    Mr. Chairman, at this time, I would like to reintroduce 
Assistant Director Barbara Riggs, who will provide the 
committee with a brief overview of the National Threat 
Assessment Center. She will also discuss how the Secret Service 
works in partnership with State and local law enforcement in 
the prevention of school and workplace violence.
    Ms. Riggs. Thank you, Director.
    Mr. Kolbe. Welcome, Director Riggs.
    Ms. Riggs. Thank you.

                     EXCEPTIONAL CASE STUDY PROJECT

    Mr. Chairman and members of the committee, good morning. I 
am very pleased to have this opportunity today to present a new 
and exciting program, the National Threat Assessment Center. 
Two members of the Center staff are here with me today, 
Executive Director Bryan Vossekuil and behavioral research 
psychologist, Dr. Marisa Pynchon.
    Before I discuss the National Threat Assessment Center, I 
will first mention an earlier study conducted by the Secret 
Service, the Exceptional Case Study Project, a study which 
examined the thinking and behavior of 83 persons known to have 
attacked or come close to attacking a prominent public official 
in the United States during the past 50 years.
    Several noteworthy findings have resulted from the 
Exceptional Case Study Project which indicate that 
assassination is the end result of an understandable and often 
discernible process of thinking and behavior. So, in fact, 
there may be time to intervene and prevent such an occurrence;
    Second, there is no useful profile of an American assassin. 
They come from a range of backgrounds, education, achievements, 
occupations, marital status and age, and they are men and 
women;
    Third, potential attackers often switch targets;
    And, fourth, potential attackers usually communicate their 
intentions to someone such as a friend, a family member, a 
fellow worker, a neighbor or even write their ideas and plans 
in a diary or journal.
    Now, I would like to show you a short videotape that 
illustrates some of these findings.
    [Videotape played.]

                   NATIONAL THREAT ASSESSMENT CENTER

    Ms. Riggs. As a product of the Exceptional Case Study 
Project, its broad acceptance and the large number of requests 
for assistance that we have received, the SecretService 
established the National Threat Assessment Center in the fall of 1998. 
The Center has been designed to provide Federal, State and local law 
enforcement agencies with knowledge and tools in the developing area of 
threat assessment and to help law enforcement officials in their 
efforts to prevent crimes of targeted violence, such as attacks on 
public officials and public figures, domestic violence, stalking, 
workplace violence, and school shootings.
    We are very pleased with the progress that the Center has 
made in a number of areas in a relatively short time. My 
allotted time today, however, will allow me to mention only one 
of the Center's current activities: the School Shooting Case 
Study Project. We have been working with the Department of 
Education to develop threat assessment protocols and training 
materials that will be useful to school administrators, law 
enforcement personnel and anyone else who has a responsibility 
for preventing targeted violence from occurring in schools.
    To achieve this, the National Threat Assessment Center is 
conducting an operational study of approximately 40 school 
shootings that occurred between 1976 to the present. So far, 
more than 20 cases have been examined, six school shooters have 
been interviewed, and two training videotapes have been 
developed from these interviews. I would like to show you 
excerpts from these two training videotapes.
    The first tape is from an interview conducted with Evan 
Ramsey. On February 19, 1997, 16-year-old Evan Ramsey took a 
shotgun to his high school in Bethel, Alaska, and killed his 
principal and another student. During his interview with the 
Secret Service, Ramsey explains his motive for the shootings, 
what he hoped to accomplish and whom he told beforehand.
    [Videotape played.]
    Ms. Riggs. The second tape I would like to show you is of 
Luke Woodham. Early in the morning of October 1, 1997, Luke 
Woodham killed his mother, then drove to his high school in 
Pearl, Mississippi, where he shot and killed two students and 
wounded seven others. One of the students he killed was his 
former girlfriend, Christina, who had rejected Luke nearly a 
year before the shooting. In this portion of the interview, 
Woodham describes pre-incident planning and reasons for the 
killings.
    [Videotape played.]
    Ms. Riggs. Our school shootings study is still a work in 
progress, and we have much work to do. It is apparent from the 
cases we have already analyzed, however, that these school 
shootings are not impulsive acts. Like an assassination 
attempt, these school shootings appear to be the end result of 
an understandable and often discernible process. Also, as an 
assassination, it appears that profiles of a school shooter 
would not be helpful in preventing these types of acts. There 
is no single demographic, psychological, or personality 
snapshot of a school shooter. Instead, a better understanding 
of pre-incident communications may offer an opportunity for 
earlier intervention in similar cases.
    In conclusion, through the National Threat Assessment 
Center, we intend to learn more about prevention of all types 
of targeted violence. We will share the results of these 
efforts with educators, our law enforcement colleagues, and 
other criminal justice and mental health professionals as they 
become available.
    This concludes my presentation. Thank you for your 
interest.
    Mr. Kolbe. Thank you.
    Mr. Stafford. Mr. Chairman, that concludes our statement 
and presentation. We would like to thank you and the committee 
for your ongoing support, and we will answer any questions you 
may have.
    Mr. Kolbe. Thank you, Director, Secretary, Assistant 
Director. We appreciate the presentation we have received.
    Before we begin the questions, let me see if Mr. Hoyer 
would like to make some opening remarks.
    Mr. Hoyer. No. I will just include my statement in the 
record. I apologize for being late. I went to the wrong room.
    [The information follows:]



                        AIR INTERDICTION PROGRAM

    Mr. Kolbe. Let me begin with a question or two about the 
air interdiction initiative. It is the only really new program 
that you have got in your budget proposal this year, and as I 
understand it, you are looking at about $3.5 million and 10 
FTEs or 19 positions, special agents for the air security 
program, and this will go largely to getting those additional 
agents, the training costs, equipment, and utilizing Customs 
air assets.
    What is the purpose of this program? Don't you already have 
responsibility and don't you already secure airspace in the 
vicinity of your protectees?
    Mr. Stafford. We do, but the purpose of this initiative, 
Mr. Chairman, with Presidential Decision Directive 62, which 
was signed back in May of 1998, the Attorney General and the 
Secretary of the Treasury were mandated to provide air security 
and air support for designated national special security 
events. These numbers, these FTEs and these three additional 
counterassault teams, which would be the Secret Service portion 
of this initiative, are specific to those national special 
security events.
    Mr. Kolbe. So this program will not be part of the regular 
protectee program?
    Mr. Stafford. It will be. It will supplement our existing 
counterassault teams.
    Mr. Kolbe. It will supplement. Okay.
    Mr. Stafford. It will. But what we have found--and wehave 
only had a few--since national special security events are new, we have 
only dealt with those three times so far, and we found that we weren't 
able to satisfy----
    Mr. Kolbe. Well, that is the question. You have had these 
special events since 1998. You are saying that your existing 
assets are not sufficient?
    Mr. Stafford. That is correct. To satisfy the national 
special security events and also satisfy our day-to-day 
operational requirements that we have with the President and 
others, we need additional CAT teams.
    Mr. Kolbe. Is that because these events are becoming more 
intensive or they are more frequent or what?
    Mr. Stafford. The national special security events?
    Mr. Kolbe. Yes.
    Mr. Stafford. Well, both. I mean, the activity of our 
protectees is much more frequent. Our stops, our trips, our 
protectees are way up.
    Mr. Kolbe. So does the program operate anywhere in the 
country that one of these events or the protectees are? It is 
not just in the D.C. area then, in the capital area?
    Mr. Stafford. Well, the national special security events 
obviously would be wherever they are.
    Mr. Kolbe. Wherever they are.
    Mr. Stafford. The conventions, one in Philadelphia, one in 
L.A.
    Mr. Kolbe. Right.
    Mr. Stafford. Of course, the 2002 Winter Olympics, which is 
the big one coming up. So this air interdiction program would 
involve normally these three counterassault teams, and as you 
mentioned, the Custom platforms, which are Blackhawk 
helicopters, they would move to wherever the events are.
    Mr. Kolbe. So you would double the number of your special 
assault teams?
    Mr. Stafford. No, not double.
    Mr. Kolbe. You have three of them now, is that not correct, 
counterassault teams?
    Mr. Stafford. No. We are asking for three. The 19 positions 
would be----
    Mr. Kolbe. You don't have any of those now?
    Mr. Stafford. Yes, we do.
    Mr. Kolbe. How many counterassault teams do you have now?
    Mr. Stafford. Numbers, I would really like to stay away 
from, and I can provide that to you in executive session.
    Mr. Kolbe. Okay.
    Mr. Stafford. We have a number, but we don't----
    Mr. Kolbe. But these do go for additional assault teams, 
then?
    Mr. Stafford. They would. When they are not involved in 
national special security events--and, again, we have no idea 
how many of those there will be, and we are anticipating it 
would be three to four a year. It would supplement our existing 
counterassault team program, which provides the air support and 
ground support for the President and others.
    Mr. Kolbe. What are these people going to do in between 
these major events, which sometimes can go months between major 
events?
    Mr. Stafford. Well, as I said, they will actually be 
incorporated into our counterassault team program to provide 
security for the President and others, which they do every day.
    Mr. Kolbe. Has Customs been involved in developing--because 
you are using air assets from Customs; is that correct?
    Mr. Stafford. Yes, that is correct.
    Mr. Kolbe. Is Customs involved in developing this program?
    Mr. Stafford. They have been from the beginning.
    Mr. Kolbe. And there is something in their budget request, 
too, for this; is that correct?
    Mr. Stafford. That is correct.
    Mr. Kolbe. All right. Aren't there assets that are 
available either from the military or police agencies, air 
assets that you could use? Do we need to have a dedicated air 
branch of the Customs Service dedicated for this purpose?
    Mr. Stafford. There are assets. Obviously, the military 
assets create some problems for us as far as Posse Comitatus 
and being involved in law enforcement. The local assets, there 
are issues there as far as availability and as far as training. 
Focusing this on the law enforcement arm of Treasury, as the 
PDD mandates that it do between Secret Service and Customs, 
enables us to train together, which we do, and that is part 
of--that $3.5 million is not only for the people, but for the 
training and for the mission-specific equipment.

                    NATIONAL SPECIAL SECURITY EVENTS

    Mr. Kolbe. Let me slip sideways from that into--just a 
couple quick questions, before my time is up here, on the issue 
of special events or major events. I am concerned about whether 
you have got enough time to accurately budget for these events 
once they are designated and how we handle this in the budget. 
What is a major event and how is it determined? Who makes that 
determination? What is your role in making the determination?
    Mr. Stafford. Well, a major event, I think you are using 
``major event'' synonymously with national special security 
event.
    Mr. Kolbe. That is correct. It is national security special 
events, and sometimes it is just shortened to major event. So 
when I say ``major event,'' that is what I am talking about.
    Mr. Stafford. We think it is a major event every time the 
President leaves the White House for us, but----
    [Laughter.]
    Mr. Kolbe. We understand that.
    Mr. Stafford. But the national special security events are 
something very different.
    Mr. Kolbe. Somebody said if you had your druthers, you 
would have the President sleep in his limousine parked in the 
basement of the White House. That would be just fine as far as 
you are concerned.
    Mr. Stafford. In fact, a number of Presidents have 
mentioned that to us. [Laughter.]
    Mr. Kolbe. Anyhow, the special events, how are they 
designated?
    Mr. Stafford. They are designated by the National Security 
Council, and there is a recommendation made by a subgroup 
within the National Security Council. That recommendation goes 
to the Attorney General and the Secretary of the Treasury. If 
they concur, it is designated as a national special security 
event.
    Mr. Kolbe. You participate in that decision?
    Mr. Stafford. We do, and normally that is----
    Mr. Kolbe. The initial request can come from outside, oris 
it this group that looks at an event and says, oh, this is one we ought 
to take a look at?
    Mr. Stafford. It is usually fairly obvious, but it can be 
generated from anywhere, and they will take a look at it. But 
they are usually--and the purpose of it is any time that 
Americans come together for national significant events, we 
bring the full force of the U.S. Government to protect that 
event. The Olympics is a perfect example of that.
    Mr. Kolbe. And what is your role at one of these special 
events, major events?
    Mr. Stafford. The Secret Service role in that, is we have 
had the lead in the planning, designing, and implementation of 
the entire security for these events.
    Mr. Kolbe. Do you have a separate budget for this? How do 
you budget for this?
    Mr. Stafford. Well, that is a good question.
    Mr. Kolbe. Yes. That is kind of what we are about here, 
trying to get to the bottom of.
    Mr. Stafford. In the past, we have absorbed the costs of 
some of these national special security events. We can't 
continue to do that.
    Mr. Kolbe. So you are not like FEMA. You don't set aside a 
certain amount and we know there are going to be so many 
disasters, or in this case we know there are going to be so 
many special events so we will set aside X amount of dollars 
for this?
    Mr. Stafford. It would be nice to do that, but usually the 
timing isn't correct. For example, the OpSail 2000, which is a 
government-sponsored event in New York, will happen in July. 
There have been 61 countries invited to that, but it has not 
yet been designated a national special security event, and it 
probably will----
    Mr. Kolbe. OpSail has not been? I thought it had been.
    Mr. Stafford. Well, it is on the cusp. I don't think it has 
been signed off on yet, but it----
    Mr. Kolbe. Okay. You expect it to be?
    Mr. Stafford. We expect it to be. Obviously, that could not 
have been introduced in the normal budget process.
    The Olympics is something very different, the 2002 
Olympics. We have been there for a year. We will continue to 
dispatch more people there and to plan, and we are working 
through that process with Treasury right now as to how that 
will be funded.

                    NATIONAL SPECIAL SECURITY EVENTS

    Mr. Kolbe. Okay. I have definitely exceeded my time. One 
last question on that. On those that you can anticipate, like 
the Olympics and the national conventions--we have known for a 
long time we are going to have two national conventions this 
year. Did you include those in your budget for this year?
    Mr. Stafford. The Olympics, no.
    Mr. Kolbe. The Olympics is next year, so it is not 
included. And the conventions for this year?
    Mr. Stafford. The conventions, no.
    Mr. Kolbe. Why?
    Mr. Stafford. Well, again, the PDD requirements that we 
have, those are issues, again, that are cross-cutting. They 
involve ATF, they involve all the law enforcement bureaus of 
Treasury. And whether we set up a central funding mechanism, or 
whatever, some place that we can all draw from, I mean, that is 
still under discussion. But we have not received----
    Mr. Kolbe. But at the moment, you are just planning to 
absorb these costs? You are just absorbing----
    Mr. Stafford. At the moment we are. But obviously we can't 
with events such as the Olympics. It is too expensive.
    Mr. Kolbe. Well, we need to come back to this and talk 
about this some more. We need to have a system, then. If you 
can't absorb it, you know the event is coming, you need to be 
requesting the money for it.
    Mr. Stafford. I agree.
    Mr. Kolbe. Mr. Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman.
    I agree with the chairman, although Congress is not unknown 
to do that, for instance, Congress used emergency-funds for the 
Census, which surprised us since it comes up every 10 years. 
[Laughter.]
    So it is not unknown to the Congress itself to appropriate 
emergency funding.
    Mr. Stafford. I wish I would have known that.
    Mr. Hoyer. I just thought I would help you out a little 
bit. [Laughter.]
    My experience is we all need a little help.
    Mr. Stafford. Yes, thank you.
    Mr. Hoyer. Let me say, however, the chairman is right. If 
we fund, as we do, to anticipate Presidential years and 
increase Secret Service responsibilities over time, we do fund 
for that or we do anticipate the Presidential cycles, clearly 
we should at the same time--and the chairman's point is--
anticipate not only specific events like the Olympics and the 
conventions, which are clearly well known to us, but also 
contingency events which we know by experience will arise even 
if we do not know the specific contingency.
    Mr. Chairman, I think you are absolutely right. We ought to 
address that and perhaps have a portion of the budget 
specifically set aside for contingencies which we know are 
going to arise.
    In any event, let me ask some specific questions unless you 
want to respond to that.
    Mr. Stafford. Could I just comment on it?
    Mr. Hoyer. Sure.
    Mr. Stafford. And maybe I should clarify. This is new. 
National special security events are new. It is new to our 
country. It is new to the Secret Service to be in this role. We 
do budget, try to budget as well as we can for events that we 
know we are going to be involved in, like the Republican and 
Democratic conventions. But in the past, our role has been--we 
carve out what we need. We carve out the day or the days that 
our protectees, the President and others, will be there and 
then we leave. That is very different than our mandate now 
under the national special security event, which involves a lot 
more lead time, a lot more planning, and obviously a lot more 
funding.
    So this whole concept is new. It is working well among the 
agencies that are involved, and it is a three-tier concept: the 
Secret Service, the FBI, and FEMA. We are working extremely 
well together. The funding mechanism just hasn't been sorted 
out yet.
    Mr. Hoyer. Mr. Secretary.
    Mr. Johnson. Yes, Mr. Hoyer, if I may, we do have in this 
year's budget $25 million set aside for the counterterrorism 
fund. Clearly, we wouldn't want to oversubscribe that fund, but 
this is the sort of fund that we would hope to be able to use 
just for these sorts of contingencies. It wasn't funded last 
year, but it is proposed in the President's budget for fiscal 
year 2001.
    Mr. Hoyer. And that falls within your budget?
    Mr. Johnson. That would fall within the Department's 
control.
    Mr. Hoyer. The Department's budget.
    Mr. Johnson. That is correct.
    Mr. Hoyer. Okay.

                    NATIONAL SPECIAL SECURITY EVENTS

    Mr. Johnson. And in terms of the national special security 
events, it has represented a budgetary challenge. We have 
during the last year used small amounts of asset forfeiture 
funds to pay for the cost of the Customs air wings, the Customs 
support. But the point of this $15.6 million budget initiative, 
which has about $3 million for the Secret Service and then 12 
and change for the Customs Service, is to deal with what we had 
perceived an ongoing strain. Every time you have an event, if 
we have to draw on Customs assets, there is not only the cost 
of putting the planes and the helicopters in the air, but there 
is the opportunity cost from other missions.
    By funding new aircraft, by providing new CAT teams, we are 
dealing with not only the ongoing costs of having this cadre of 
personnel ready to provide this service, but also dealing with 
the issue of opportunity costs. As the Director mentioned, the 
national special security events are in addition to the ongoing 
responsibility of the Secret Service to provide protection for 
the designated protectees.
    Mr. Hoyer. Thank you, Mr. Secretary. I am sure the chairman 
and I and the members of the committee will want to discuss the 
pattern of repetitive expenses, notwithstanding the fact that 
they will relate to different events. Your contingency fund to 
which you refer, the $25 million, is obviously directed at 
that. We will review that as well.
    Mr. Johnson. Directed in part. There are other uses to 
which we would want to put these funds as well as the 
contingencies.
    Mr. Hoyer. Okay. Well, we should discuss that so we know 
whether or not we are budgeting properly.

               WORKFORCE RETENTION AND WORKLOAD BALANCING

    Mr. Director, workload demands on the Secret Service have 
resulted in an increase in pre-retirement and separation from 
the agency, which is unusual. Would you address that?
    Mr. Stafford. I will. As you know, Congressman, I have been 
Director about a year. That was my first priority, to address 
the workload and the balance in people's lives. It got a little 
out of whack at the Secret Service. The average agent in the 
field was and still is working an average of 78 hours of 
overtime a month. The average agent on a protective detail is 
working about 85 hours of overtime a month, which is huge. It 
is too much.
    My goal is to reduce that and put some balance back in 
their lives. We have been working with Treasury, this 
interagency group that Treasury put together, along with OMB. 
They found that we needed to hire additional people. We needed 
to hire them immediately. We have already started that process, 
and we are on track this year to hire the numbers that we need.
    Our goal this year is to hire 480 agents. Right now we are 
at 205 agents, which is 43 percent of our goal, so we are about 
right on track.
    Mr. Hoyer. Mr. Director, if we reach 480--when do you 
contemplate reaching that? By the end of the year?
    Mr. Stafford. Yes.
    Mr. Hoyer. If we reach 480, what impact will that have on 
the overtime you have referred to, both in terms of the 
protective details and the non-protective details?
    Mr. Stafford. Well, the goal is to get the overtime hours 
down into the mid-sixties, which is still high but it is 
reasonable. We think we can do that on a 3-year cycle. It would 
require us to come back again in 2002 for approximately 200 
additional agent positions, for a total over the 3 years of 680 
positions, which would be the goal.
    Mr. Hoyer. Mr. Director, this is not unique to the Secret 
Service. As you know, one of the problems we are having in 
retention in the uniformed services is the so-called OPSTEMPO. 
We are putting people overseas frequently in spots and keeping 
them there, although I might say as an aside, the morale of 
those deployed is higher than those who are not deployed. But 
that aside, it puts a tremendous strain on families.
    If we get down to the 60, do you believe that we will stem 
the pre-retirement terminations or transfers out of Secret 
Service, which is a very unusual phenomenon. We haven't had 
that before. Am I correct?
    Mr. Stafford. You are correct. We have not. Our attrition 
rate used to be minuscule. In 1994, we lost nine people pre-
retirement. This last 2 years, we were in the 45 and 46 range, 
which was about a 400 percent increase for us in that period of 
time, which is huge.
    Right now, most of the agents we are hiring are obviously 
in the hiring process, in training. They haven't come out to 
the field offices yet. So our agents--plus we are in the middle 
of a campaign. So we haven't seen any relief yet. But what we 
have seen is the agents see, particularly the ones on the front 
line, that there is light at the end of the tunnel. With your 
support, this is going to get better with numbers. We have also 
implemented some other things, a career track, for example, 
that we have never had, that none of us here have ever had the 
opportunity to take advantage of. We can actually give people 
some choices in their careers as far as where they go 
geographically and what they do in the Secret Service. Those numbers 
are going to enable us to do that. We have never had that opportunity 
before.
    Mr. Hoyer. I think, Director, my time is up, but I might 
sneak in a last question in terms of on the pre-retirement 
transfers or terminations. Are they going to other law 
enforcement agencies?
    Mr. Stafford. A number of them are. Last year we lost 46 
agents. Ten of them went to other Federal law enforcement 
agencies.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much.
    Ms. Roybal-Allard.
    Ms. Roybal-Allard. Thank you, Mr. Chairman.

                 COOPERATION WITH LOCAL LAW ENFORCEMENT

    My Los Angeles office is in the same building as the Secret 
Service, so I have an opportunity at times to observe some of 
the agents as they are going in and out of the building and up 
and down the elevators. But I had an opportunity to really see 
firsthand some of the difficulties that you encountered when 
the Vice President recently went to a southeast portion of my 
district at the beginning of this month. I want you to know 
that I was very, very impressed by the efficiency and the 
professionalism as well as the courtesy of your agents, and you 
should be commended for that, particularly because of the 
difficult circumstances under which your agents operate.
    Mr. Stafford. Thank you.
    Ms. Roybal-Allard. But it led me to start thinking about 
the fact that the Democratic National convention is also going 
to be in my district in Los Angeles. I know that you can't 
discuss any of the details of it, but in general, are there any 
particular problems that you are anticipating in Los Angeles or 
challenges that Los Angeles presents? More importantly, are you 
getting the kind of cooperation that you need from the local 
officials in Los Angeles?
    Mr. Stafford. We are. I mean, it will be a challenge for 
us, but our effort out there is working extremely well. We have 
been involved in it since February. We have done our site 
surveys at the Staples Center and other venues. We have met 
with the local law enforcement entities that support us every 
day. We have tremendous cooperation and support from them.
    From our perspective, everything is going extremely well.
    Ms. Roybal-Allard. Fine. Because if you do anticipate any 
problems at the local level, I would appreciate it if you would 
let me know.
    Mr. Stafford. I will.

                         DIVERSIFIED WORKFORCES

    Ms. Roybal-Allard. On page 12 of your testimony, you 
detailed a very aggressive recruitment strategy to hire a more 
diversified workforce. My question is, have you had success 
with this effort? Or are you experiencing difficulties in 
trying to get a more diversified force?
    Mr. Stafford. In this current recruiting effort?
    Ms. Roybal-Allard. Yes.
    Mr. Stafford. I think we are doing fairly well. Right now 
we have over 1,000 people in the pipeline, in the system to be 
hired. Of that 1,000, about 13 percent are minorities. So it is 
not where we would like to be, but we are experiencing some 
success there.
    Our recruiting effort is ongoing. We require and we task 
our employees to recruit, and we specifically earmark black 
universities and Hispanic institutions, and we think we are 
doing fairly well.
    Ms. Roybal-Allard. Okay.
    Mr. Stafford. The current workforce, we have a very strong 
diversity program, and the current workforce reflects that.

                            ELECTRONIC FRAUD

    Ms. Roybal-Allard. All right. Also in your testimony, you 
mentioned that there were a lot of challenges presented by 
today's electronic commerce through money laundering, smart 
cards, and high-technology crime. Do you feel that you are able 
to keep up with this explosion of new types of electronic 
fraud?
    Mr. Stafford. Well, I am not sure anybody can answer 
whether or not we can keep up, because it moves so fast. But we 
are very proactive in that regard, and we have been involved in 
electronic crimes for many years before it became popular.
    The focus for us is an Electronic Crimes Special Agent 
Program. Those are special agents of the Secret Service that 
are trained forensically in electronic crimes and capturing 
that type of evidence. We have 150 of those agents trained, and 
we have them, which is very unique, in every one of our field 
offices so that we can respond immediately.
    We have also published local law enforcement best practices 
for seizing electronic crimes evidence, which has been a big 
help to everybody, I think.
    Ms. Roybal-Allard. Because of the fact, as you said, that 
it moves so quickly, is there some form of measurement that you 
and this committee could use in terms of how successful you are 
in dealing with this kind of fraud?
    Mr. Stafford. Well I think the measurement really comes 
from U.S. Attorneys. It comes from the industry itself that we 
have a very strong relationship with. We have very positive 
feedback from both of those entities. As far as where it is 
going and how much of it there will be, I am not sure anybody 
can tell us that.
    Ms. Roybal-Allard. Do you anticipate increased costs from 
meeting the growing need?
    Mr. Stafford. Oh, there is no doubt about that. The 
technology that we need to combat it is expensive. The people, 
again, to retain those people is getting more difficult. 
Private industry can offer them a lot more money. We have 
recently lost some technical people that we wouldn't have liked 
to lose. So, yes, I mean, we need--it is going to be more 
expensive to stay abreast of this problem.
    Ms. Roybal-Allard. And that will be included in future 
requests that you make to this committee?
    Mr. Stafford. It will be.
    Ms. Roybal-Allard. Okay. Thank you, Mr. Chairman.
    Mr. Kolbe. Ms. Meek.
    Mrs. Meek. Thank you, Mr. Chairman.
    First of all, I would like to welcome Director Stafford and 
the staff and Secretary Johnson to our hearing. I think, like 
all Americans, we have great respect for the Secret Service. I 
don't know of any other law enforcement agency that carries the 
high respect the Secret Service carries.
    Mr. Stafford. Thank you for saying that.
    Mrs. Meek. And I am pleased to say today that you have 
tremendous protective and investigative responsibilities, and 
you have developed an expertise which is used throughout the 
world, and we commend you for that. We understand that it does 
take resources, and I am sure that the committee in the past 
has looked upon this in a very positive way, and hopefully we 
will be able to do it this time within therestrictions of the 
budget.

                         DISCRIMINATION LAWSUIT

    I say that first to create the kind of atmosphere that I 
want to create about the Secret Service before I mention 
something to you which some may perceive as being negative. But 
it is not negative. It is just my way of trying to reach out to 
get the truth in terms of the Secret Service. So I want to 
spend some time this morning, not too long, asking you about 
the recent lawsuit that was brought about because of African 
American employees under your jurisdiction. You did not mention 
it in your prepared testimony, which I have read.
    I recognize that charge, Director Stafford, is not proof. I 
mean, it is not anything that I could assume is true just 
because it is in the newspaper. I understand they purchase ink 
by the barrel. But I needed to ask you some questions about it.
    In the past I have seen quite a few lawsuits brought 
against Federal law enforcement agencies, ATF and FBI, where 
racial discrimination has been proven. It was just not assumed, 
but it was proven. And I know that it is challenging to you and 
your staff this year, and it is challenging to you personally. 
I have spoken to you about this.
    No person of good will wants to be accused of this kind of 
thing by employees or anyone else, and I know it is sensitive 
because it involves pending litigation.
    What I would like for you to do, tell us whatever you and 
Under Secretary Johnson are prepared to say publicly about this 
matter, and I underline publicly about this matter. We all read 
the newspapers, and we have seen the charges. I am concerned 
whether or not this is a pattern with the Secret Service.
    I have read and I have seen the kinds of hiring you are 
doing. They are accusing you of discrimination in terms of 
sequential progression going up in the Secret Service. I am not 
sure how many plaintiffs were involved in this lawsuit and 
whether or not it was just turned into a class action suit. I 
think the actual number of plaintiffs in this case is very 
important. One or two plaintiffs may perceive inaccurately the 
way the Secret Service works, but when it begins to take a 
pattern, when 50 or more accuse the Secret Service, I think 
perhaps under certain constraints you can perhaps provide the 
committee with some reason or some explanation of this 
particular action, and more or less I am interested in fairness 
in all Federal agencies. As a matter of fact, I am interested 
in fairness wherever. So I wish you would address that, Mr. 
Stafford or Secretary Johnson.
    Mr. Johnson. I think in fairness to your question, both of 
us need to address the issue.
    We share your commitment at the department and at Secret 
Service. And we have had, within the department, within the 
Office of Enforcement, a longstanding commitment to addressing 
EEO issues fairly and appropriately.
    When Ray Kelly was the Under Secretary, he actually brought 
into the immediate staff of the Office of Enforcement, a 
specialist who would focus on EEO issues. And as a routine 
matter, we get within the Office of Enforcement, information 
about our bureau's performance on the EEO front.
    I have been briefed numerous times about the Secret 
Service's diversity program, but also about what is going on in 
terms of the outcomes, although we look to recruitment, and we 
don't look necessarily to outcomes or what the demographics of 
the Secret Service look like. I think that Director Stafford 
can speak very persuasively to what his organization looks like 
and his organization's commitment. That is not to say that 
we've all reached a stage of perfection. We are not afraid of 
self-examination, and we always want to improve in these areas. 
But the commitment is strong, and I think the performance has 
been quite good as well.
    Mr. Stafford. Congresswoman, I would just like to say that 
this is a sensitive issue. I was dismayed when I heard about 
the two EEO complaints. All of us were dismayed, because that 
is not what the Secret Service is about. We are about an equal, 
an even playing field, an opportunity for everybody. We have 
had a very strong diversity program since 1987. We have zero 
tolerance for this sort of thing in the Secret Service. And if 
you take a look at us, I think it speaks well of our program. 
My assistant directors, three of the seven are minorities; two 
happen to be African-American. Of our 11 largest field offices, 
SES offices, 7 of the 11 are headed up by minorities, 4 of 
which are African-American. Of our SES positions, 28 percent 
are occupied by minorities, 17 percent happen to be African-
American. There are a number of other statistics I could sit 
here and spout, but--and I have to admit this, before I heard 
about these complaints, I could not tell you what these 
statistics were, because, again, that is not the way we do 
business. We pick the best people for the jobs, and we just 
happen to have a lot of African-Americans, a lot of minorities, 
that are outstanding people in the Secret Service.
    We hire unique people. We hire outstanding people. When 
promotion time comes around, it is very competitive, and 
unfortunately, some people go away not happy that they were not 
promoted. But again, I feel very comfortable with where we are 
with diversity, and again, have been very uncomfortable with 
this situation.
    Mrs. Meek. Thank you. And you do feel that your promotion 
process is one that can stand scrutiny?
    Mr. Stafford. Very much so. Very much so. There is no glass 
ceiling in the Secret Service. We have--our population right 
now of African-Americans is a little over 8 percent. We have 11 
percent of supervisors that are African-American in the Secret 
Service right now. And I mentioned some of the other important 
positions that are occupied by African-Americans. So I feel 
very strongly that it can withstand any scrutiny.
    Mrs. Meek. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Ms. Meek.
    Mr. Peterson.
    Mr. Peterson. Thank you.

                      DANGEROUSNESS OF THE MISSION

    Director Stafford and Under Secretary Johnson, I welcome 
you this morning and want to share with you that I think you 
are one of the finest agencies we have, and I think the number 
one role of the federal government is to keep us safe, and you 
have one of those roles of several agencies that keep this 
country safe and keep our leader safe.
    And I have had numerous interactions over the years. I 
spent 19 years in state government before coming here, and so 
over the years--and I have never had a situation where I could 
ever be critical of how your people function. I have always 
been impressed. And maybe I was just lucky, but I hold your 
agency in very high regard.
    But in listening to the discussion here this morning, 
andhaving been a businessman for 26 years and like people, I share your 
concern of losing people the way you are. And, I guess the first 
question I would like to ask you, is it a measurably more dangerous job 
today than it was a decade or two ago?
    Mr. Stafford. More dangerous?
    Mr. Peterson. Yes.
    Mr. Stafford. It is because the world is more dangerous. 
Terrorism and what we have seen over the last few years, there 
is no doubt it is more dangerous. I mean, we lost 6 people in 
the Oklahoma City bombing, so it is still very fresh to us how 
dangerous it is.
    Mr. Peterson. And we are losing citizens also from very 
young people in our society, who we did not really--who were 
not dangerous to us a few years ago. The movie I was watching 
when I came in, with the youth crimes that are in this country 
that you have been doing a study on, I guess----
    Mr. Stafford. Overall, we are not as safe a society as we 
used to be.

                             OVERTIME HOURS

    Mr. Peterson. That is very true. Well, I guess the issue 
of--what was the normal overtime issue? You said you were at 78 
hours a month. That is like working six and a half weeks a 
month in reality.
    Mr. Stafford. Correct.
    Mr. Peterson. And my wife would say that parallels our job. 
But we choose this, we run for it. And I guess we expect it. 
But not many folks I know want to work six and a half weeks a 
month, especially if they are raising children. And I guess--
what was normal prior to that figure? And I am sure overtime 
has always been a factor. I mean, you do not work 40 hours a 
week and work for the Secret Service. What was normal before?
    Mr. Stafford. And you are exactly right. I mean, overtime 
is always a factor. I mean, this is not--and we belabor this 
point before we hire agents, that it is not a nine to five job, 
there is a lot of overtime, there is a lot of travel, there is 
a lot of sacrifices, and there is a lot of time away from the 
family. But as I said earlier, we got to the point with these 
numbers of hours, that it was creating problems for us, and it 
was creating retention problems for us.
    A normal figure for us, and again, we use--we go back to 
the '94 figures when overtime hours per month were in the mid 
60s. Sixth-four, sixty-five hours was a normal situation for 
us. That is what we would like to get back to.
    Mr. Peterson. How did we get to 78? I mean, what got us 
there?
    Mr. Stafford. It is a combination of a lot of different 
factors.
    Mr. Peterson. You do not save money by not hiring people, 
because overtime costs more than regular time, so I mean there 
is no cost savings.
    Mr. Stafford. In the past, what has happened, I think what 
has happened before I got involved in this process, is 
oftentimes we did not really even hire to our ceiling because 
we needed the money for other things. The number of Protectees 
has expanded. Right now we have 17 full-time protectees in the 
Secret Service. We have never had that in our history. At the 
end of this year we will have another former President to 
protect. The State Department now recognizes 20 more countries, 
so we have 191 different foreign heads of state, heads of 
government that now visit this country that we have to protect, 
so it is--the national special security events, which we talked 
about earlier. So our protective responsibilities and our 
investigative responsibilities have drastically increased, and 
yet we have not been able to keep up with that in our hiring.
    This year, next year, and hopefully in 2002, with your 
support, we will be able to do a much better job.

                               RECRUITING

    Mr. Peterson. Do you have lots of people wanting to be 
Secret Service agents? I mean, is it a popular job? Are they 
lined up?
    Mr. Stafford. It is. I mean, right now we have over 1,000 
people in the system somewhere in the hiring process.
    Mr. Peterson. But do you have lots--I know at the state, in 
Pennsylvania the number one job was state police. You know, 
they had thousands of applicants annually. It was the most 
sought after job in Pennsylvania historically.
    Mr. Stafford. I am not sure how we compare to local law 
enforcement or to other federal agencies as far as numbers, but 
we have never had an issue with that. In fact, years ago we 
never used to recruit. People just came to us, but we were much 
smaller then. We have a nationwide recruiting effort now to 
include--we put an article in USA Today that got a lot of 
publicity, and actually got more publicity than we thought, and 
helped us out quite a bit with our recruiting effort.
    Mr. Peterson. Do you normally recruit college graduates, or 
do you recruit people who have already had some experience in 
police work?
    Mr. Stafford. It depends what position you are talking 
about. If it is for a special agent position, that is a 
prerequisite, a college degree. Many of them now have graduate 
degrees. Our uniform division, some have college degrees, some 
do not. And we have various other technical, professional, 
administrative positions in the Secret Service that require 
various backgrounds.
    Mr. Peterson. My granddaughter, a couple months ago, told 
me she was interested in criminal justice, and I did not smile, 
I guess, and so Sunday at the dinner table she said she was 
interested in the Secret Service. I will be asking your people 
for your information.
    Mr. Stafford. How old is she? [Laughter.]
    Mr. Peterson. She is only a sophomore in high school.
    Mr. Stafford. Maybe I could make a few--change a few rules 
for her. [Laughter.]

                   MAINTAINING TECHNICAL CAPABILITIES

    Mr. Peterson. My time is getting short, but I have one 
question I think is very, very important, to me anyway. You 
talked about losing technical people. Now, I think that is a 
crisis that is going to face this country, is going to face 
this nation. We are not adequately prepared for the technology 
of today. Every company, every agency, everybody needs high-
tech people. We are not training them. They are training 
themselves, and then we are stealing them from each other. And 
until our educational system somehow catches up with this and 
we put the money behind technical education, or a combination 
of academic/technical--I mean, I just think we are so far 
behind that curve, and I think the greatest challenge of all 
government agencies is going to be technical people. And I am 
not sure--plus the complicated purchasing process you go 
through to buy the technology. I mean, I know at the state 
level, it was awful, and we were so far behind. And I think the 
federal government is equally or further behind. And I see 
having the technology--you have to monitorthe technology, so 
you certainly have to have the latest technology to monitor the new 
technical crimes that are going on out there, and people. You know, 
Microsoft will outbid you every day, and those kind of companies. I 
mean, I see that as a huge problem. In a lot of agencies I would 
suggest purchasing the services, because companies you can purchase 
them from will keep the technology, but I am not so sure with your 
security purposes that would work quite as well. But would you be 
willing to respond to that, that problem?
    Mr. Stafford. Well, I agree with everything you have said, 
and particularly what you said about Microsoft. We just lost a 
few people to them, and they are people that we would not want 
to lose. And that is not to pick on Microsoft, but it is an 
issue that we have to deal with. We do have to go to vendors. 
We do have to go outside the Secret Service for expertise. That 
is very expensive for us to keep up with that. And then of 
course, there is always that lure of what is going on in the 
private sector that we have to compete with. We are trying to 
come up with a stipend from time to time to keep key people, 
and this past year it has worked pretty well for us, other than 
a few exceptions. But I am not sure what the answer to--I share 
your concern there.
    Mr. Peterson. Mr. Johnson.
    Mr. Johnson. Mr. Peterson, one of the projects that we have 
been working at the Department of the Treasury is to address 
precisely the question you raise. How do we keep highly 
talented people from being either drawn into other bureaus, 
that is, outside of the Treasury Department into another 
government agency, or into the private sector?
    And we have worked with our bureaus on a demonstration pay 
project. Right now the ATF has put in place that plan to 
increase pay banding, and to see if we can use greater 
flexibility to insure that we retain these highly-skilled 
technical people.
    Mr. Peterson. I think my time is up. I think I heard a 
noise over there.
    Mr. Kolbe. You are correct.
    Mr. Goode, you got here just in time to get in on this 
first round of questioning. Mr. Goode?
    Mr. Goode. I do not have any questions.
    Mr. Kolbe. No questions.
    Mr. Goode. Except in the Secret Service----
    Mr. Kolbe. Fine. Well, we will come back to you on a second 
round if you would like.

                    NATIONAL SPECIAL SECURITY EVENTS

    Just one question that I did not get when we were talking 
about major events, and it just occurred to me afterwards, and 
I wanted to follow up. Do you get any funding from these major 
events, from, let us say, the conventions, from the Republican 
or Democratic National Parties, or the Olympics, from the 
Olympic Committee? Do they bear any of the cost of this 
security for the work that you do on this? And if not, why not? 
I understand if you are doing a G-7 meeting, it is entirely 
government. But I mean, they are private corporations, private 
organizations, political parties, and the Olympic Committee 
that does these other kinds of events, OpSail, I assume the 
same thing.
    Mr. Stafford. Right. Again, these national special security 
events are new. In the past we have not--we are still working 
through that mechanism. We are still dealing with the 
Olympics----
    Mr. Kolbe. This is kind of a nice freebie for them to get 
the Secret Service thrown in to plan their security, right?
    Mr. Stafford. I am not sure I would phrase it that way, but 
it is----
    Mr. Kolbe. Well, for them it is. I mean, sure, they get 
this kind of added support for security.
    Mr. Stafford. That is correct.
    Mr. Kolbe. At no cost to them.
    Mr. Stafford. But we sure have not--well, I do not know 
that it is at no cost. We have not--you know, that has not been 
sorted out yet as to who--and the Olympics is a perfect 
example--who pays for what?
    Mr. Kolbe. I will be interested in hearing how that comes 
out.

                        SCHOOL SAFETY INITIATIVE

    Since we had the presentation on National Threat Assessment 
Center, and we have these people with us, I do not want them to 
have to think that we are not interested in their program, 
because we are very interested, and several members have spoken 
of that. I do have a couple of questions. Do you have a 
partnership with the Department of Education on this, in terms 
of the kind of work you are doing on this?
    Ms. Riggs. Yes, sir. On the School Safety Initiative, we 
have a partnership with the Department of Education.
    Mr. Kolbe. I mean, I know the kind of stuff you--this, for 
example, ``Protective Intelligence Threat Assessment 
Investigations'' here, ``A guide for state and local law 
enforcement officials.'' Are you trying to reach out to 
educators as well, so that they will have--is there another 
brochure that would reach out to them, that they would have 
some--because they are the front line really on this area.
    Ms. Riggs. Right. This pamphlet was prepared as a product 
of the Exceptional Case Study Project, and we worked as 
partners with the National Institute of Justice and the Bureau 
of Prisons in publishing this. Our goal is to have a similar 
product at the conclusion of the school study project. Working 
with the Department of Education, we will have something 
similar; video training tapes, and where the Department of 
Education would be the host, conducting training seminars at 
probably a state level. I do not think our idea is to go into 
individual schools, but to work at the state and local levels 
with associations and groups of that sort. And our goal is to 
work with the Department of Education and probably have a 
product like this, yes.

                   NATIONAL THREAT ASSESSMENT CENTER

    Mr. Kolbe. What is the budget for the National Threat 
Assessment Center and the staffing for it?
    Ms. Riggs. Right now we are working with existing--within 
our existing budget, but in order to expand, we would have to 
get additional funding.
    Mr. Kolbe. There is not a request in this 2001 budget for 
this, is there?
    Ms. Riggs. No.
    Mr. Kolbe. You are going to continue to work on--well, from 
the expressions here, maybe I should ask a little further 
question. Was it asked for but not given? Was there a----
    Ms. Riggs. It was in our initial budget request.
    Mr. Kolbe. It was in your initial budget request.
    Ms. Riggs. Yes, yes.
    Mr. Kolbe. If Congress does not see fit to go beyond what 
the OMB has given you on this, are you going to be able 
tocontinue this work or not?
    Ms. Riggs. We will continue to work, but in order to expand 
the work, I believe we would need additional funding, and we 
have it in our 2002 budget request again.
    Mr. Kolbe. Where did it get taken out, at OMB or at 
Treasury; can you tell me, Director or Mr. Secretary?
    Mr. Stafford. I don't think any of us are sure where it got 
cut out, but I think----
    [Laughter.]
    Mr. Stafford. Mr. Chairman, I would just like to reiterate 
what Assistant Director Riggs said, that this is such an 
important study for us and for all of us, and we think that we 
can make a contribution here, and so the funding--although 
everything comes back to budgets and funding, I found, but that 
is not what drives this. I mean, we will stay involved in this 
as long as we can.
    Mr. Kolbe. I understand the need to stand up and defend the 
budget as it is presented, but it is just helpful for us to 
know at what level it was decided this was not the priority. 
Was it the OMB or was it in Treasury's level, law enforcement?
    Mr. Stafford. I am not defending that at all. I am just 
saying basically how important this is to us, and I think it is 
very important to the American people that we stay very much 
involved in this. There is nothing else like this. No other 
operational study like this has ever been done. And I know our 
findings are going to contribute to alleviating some of the 
situation, so we will, as Barbara said, we will continue to 
request funding for it. We want to expand this project. We want 
to do some expansion at our training facility that will 
hopefully incorporate an auditorium and a multi-purpose 
building that will enable us to bring in schools, enable us to 
bring in local law enforcement to impart some of this 
information that we are learning. So we will continue to 
request the funding.
    Mr. Kolbe. Does this program assist you in your core 
mission, your basic mission in terms of making assessments of 
threats against your protectees? Is there a value to this that 
goes beyond the programs you have now?
    Mr. Vossekuil. Yes. The National Threat Assessment Center 
is located within our Office of Protective Research, and as was 
described earlier, the study that talked about the prevention 
of assassination is a process that is ongoing within the 
National Threat Assessment Center. We continue to conduct 
analyses and research on learning more about the prevention of 
assassination, and that is related to our core mission and will 
always be.
    Mr. Kolbe. But also there is an additional benefit in terms 
of public awareness.
    Mr. Vossekuil. Absolutely, sir, yes.
    Mr. Kolbe. Where does the greatest benefit for this lie 
outside of your agency? Is it with local law enforcement or is 
it with school officials? Where do we have the greatest need to 
make people aware of the problem and how to initially identify 
this kind of a threat that exists?
    Mr. Vossekuil. As it relates to the targeted violence 
occurring at schools, we have approached this with the 
Department of Education on the idea that we are trying to lay 
down, in effect, a baseline of knowledge about the school 
shootings that might aid anyone who has preventive 
responsibilities. In some instances that may be primarily law 
enforcement in a certain school system, and in others it would 
be principals and counselors and teachers. But we are not doing 
this for a particular professional community, but rather, 
anyone who has preventive responsibilities.
    Mr. Kolbe. Okay. Well, darn it, my time is up again, and I 
still have some other areas I have not gotten into. Hopefully, 
I will have a minute before we adjourn to ask a couple more 
questions.
    Mr. Hoyer.
    Mr. Hoyer. Thank you.

                   NATIONAL THREAT ASSESSMENT CENTER

    I agree with the Director, that obviously, this has broad 
application and societal worth, obviously will be utilized 
particularly by people who encounter persons who will be a 
threat to others. Obviously, school officials, I presume, in 
the auditorium, are going to be talking mainly about people who 
come into contact with large numbers of people that may in fact 
be threats, and to give them a better opportunity to identify 
who those particular people might be. To some degree, 
psychological, environmental and behavioral profiling that--we 
are concerned about profiling, but, obviously, it has a 
utility. I am sure all of us were struck by the students on the 
``60 Minutes'' video that Assistant Director Riggs commented on 
that were on. Obviously, sitting here as Monday-morning 
quarterbacks, all of us have got to say, ``Boy, you know, that 
was pretty obvious.'' If you are a school official, there are 
probably 50 pretty obvious in a school of 1,000, maybe 100, and 
you are overwhelmed with trying to deal with them and come to 
grips with the kind of interface they need in order to get, as 
that one boy said, ``Somebody just to listen to me.''
    We all need a sense of self-worth. And if we lose any sense 
of self-worth--Reverend Jesse Jackson refers to it as ``I am 
somebody''--and it is critically important. We lose its sense 
sometimes in the repetition of it, it becomes sort of a slogan, 
but it is a very meaningful, deep reality with respect to human 
beings, who have got to feel that they have some attachment. 
So, obviously, this is a very important effort, and I again 
agree with the Chairman, as I do most of the time, that we 
ought to look at this in terms of funding. And if it was--it 
really does not matter why the funding did not get there, we 
have the opportunity to put some funding in the budget to 
insure that it continues and that we have a place to operate 
effectively, and in cooperation with other agencies such as the 
Department of Education, Health and Human Services, and 
Department of Labor. We find a lot of employees--these were 
young people--but we have had just recently, witnessed a person 
who got angry in the apartment because somebody did not come, 
and then went to two fast food agencies, Mr. Chairman, and 
murdered some people and injured others. So this I think is a 
critically important study. And I am sure there are other 
studies academically going on as well, and I am sure you are 
utilizing those resources in your study.

                              AIR SECURITY

    Let me ask a couple additional questions if I can. Mr. 
Director, do you believe that the air security is a critical 
component that we need to pursue vigorously? We have talked 
about the Customs Service assets that they are going to share, 
assuming Congress fund those assets, but can you give us a 
thought as to why this is increasingly important?
    Mr. Stafford. Well, Congressman, we----
    Mr. Hoyer. Not that I would want to suggest the answer to 
you. [Laughter.]
    Mr. Stafford. No. I mean, I do think it is extremely 
important. We are always looking for ways to better our 
security plan. We are always looking for vulnerabilities. We are always 
testing ourselves, as you are well aware. The air is something we have 
always been concerned about. There are some--we do have some safeguards 
in place, but there are also some vulnerabilities there that we need to 
address. The money we have for this--in this budget to initiate 
additional counter-assault teams is a start in that direction.
    Mr. Hoyer. Can you explain specifically what the benefits 
are of having the Customs air assets and the Secret Service 
counter-assault teams based here together in Washington, DC? It 
may be obvious, but would you comment on that? Because I think 
that is important in terms of why we want to support this.
    Mr. Stafford. I could not speak to the Customs portion of 
it. I can speak to the Secret Service of it. Again, the 
counter-assault teams would not just train and sit idly by 
waiting for the next national special security event, which is 
what this money is specific to. Again, they would be 
incorporated into the Presidential Protective Division to 
satisfy our daily operational concerns, tactical operational 
concerns, whether it be on the ground--and they are trained 
both on the ground in motorcade situations, hotel situations, 
and also in the air. So it is very important that our people on 
these additional counter-assault teams be stationed here.
    Mr. Hoyer. I asked Commissioner Kelly the other day about 
the air assets that would be added for use by the Secret 
Service in these special national security events. He said the 
same thing you did, and I think it is important that the 
appropriators--let all the others who do not hear the testimony 
know that these are not assets that will be simply used at any 
specific given time during the year, but will be assets that we 
will utilize throughout the year. Commissioner Kelly pointed 
out on the southwest border and other places in the country 
that these assets will be used regularly, and then will be 
redeployed from time to time to be used as assets with the 
Secret Service in meeting the responsibilities on these 
specific events. So you are saying the same thing. I think it 
is important for us to understand that these are not just 
assets that are going to be used on specific events. They will 
be, but they will be used generally as well.

                    ROWLEY TRAINING CENTER EXPANSION

    Mr. Stafford. That is correct.
    Mr. Hoyer. The Rowley Training Center, obviously, I am very 
interested in that. I have worked with your predecessors and 
other members of the Secret Service on that.
    Let me ask you: with the large growth of agent population 
that we are anticipating hiring this year and over the next few 
years, is the infrastructure at the training center adequate to 
meet your training needs?
    Mr. Stafford. We are, as you know, we are extremely proud 
of the training center. We have over 400 acres there right now; 
there are 29 buildings. The two most recent that we opened, 
with your help, are the new administration building that we 
occupied in January, and a new classroom building that we will 
occupy and begin classes in this April. So, those additions 
have helped us tremendously.
    We have also built a new protective operations building. We 
have an Air Force One Fuselage and an HMX-I fuselage helicopter 
coming to help us train, and a state-of-the-art shoot house, 
which we have never had before, for our counter-assault teams 
and our emergency assault teams to train in. So, we have made 
some tremendous progress out there. We would like to continue 
with that progress.
    We have some problems right now as far as supporting the 
infrastructure. There are six miles of roads there. We have a 
lot of contracts as far as custodial contracts that we may not 
be able to meet this year. Again, because of funding issues. We 
have been supporting that entire facility that is approaching 
300 employees now with about $3 million a year. We requested 
another $1.6 million which did not survive the budget process. 
And we are very concerned about being able to satisfy those 
obligations.
    Mr. Hoyer. Now, those are operational funds? That $1.6 
million?
    Mr. Stafford. It is all operational funds for the 
preventive maintenance, utility----
    Mr. Hoyer. That $1.6 million operational?
    Mr. Stafford. It will be about, actually it will be about 
what we requested was a total of six operational.
    Mr. Hoyer. Now, I understood what you just said. Let me 
reiterate the question. With the additional people, will we 
have adequate facilities at Rowley to accommodate our growth in 
FTEs?
    Mr. Stafford. For the immediate future, we do, we have to, 
but it is extremely overcrowded. We have a high priority to 
build next a multi-purpose building that I mentioned to you. It 
would include a dining facility that we do not have now for 
employees. So, we feel very strongly that that multi-purpose 
building is something necessary, something we would like to go 
after immediately.
    We would also like dormitories to truly realize a vision 
that we have of making that a law enforcement university, and 
in partnership with Johns Hopkins.
    Mr. Hoyer. My time is up.
    Mr. Kolbe. Before I call on Mr. Goode, I cannot resist 
talking about the need for the infrastructure here. You are 
going to have one of these major events out West with the 
convention. You have the Olympics out there. Maybe we should 
locate these counter-assault teams somewhere out West. You are 
going to do some of the training, I think, with Customs Service 
at their Air Branch in Tucson. We have lots of space there.
    Mr. Stafford. We do the air training in Tucson; that is 
correct.
    Mr. Kolbe. And we have a lot of space there for this. I 
think it would be a good location. [Laughter.]
    Mr. Hoyer. I wonder why he thought of that? [Laughter.]
    Mr. Kolbe. I was kind of curious about why Mr. Hoyer was 
asking about Rowley and about need for new facilities at 
Rowley.
    Mr. Hoyer. I don't think we have any new facilities needed 
at Tucson if we locate them there.
    Mr. Kolbe. It all depends where you sit, I suppose, as to 
what your perspective of the needs are. [Laughter.]
    Mr. Goode?
    Mr. Hoyer. The good news is that the Chairman, however, has 
a very expansive national view that all of us are very pleased 
about. [Laughter.]
    Mr. Kolbe. Mr. Goode.
    Mr. Stafford. Mr. Chairman, we will be happy to spread 
those counter-assault teams out if we can get some more of them. 
[Laughter.]

                          CAMPAIGN PROTECTION

    Mr. Goode. Thank you, Mr. Chairman.
    One point the Chairman made that was somewhat intriguing is 
the Democratic National Convention and the Republican National 
Convention, as I understood you to say, they do not reimburse 
for coverage; is that correct?
    Mr. Stafford. Well, it is not totally correct. I mean we, 
obviously, we know those were coming. We budget for our 
traditional role in those events, which as I explained earlier, 
that, you know, traditionally we would go in and carve-out what 
we need as far as what protectees are there.
    Now, with this new role that we have as the lead for the 
planning and implementation of the entire security package for 
a national special security event, which both those conventions 
will be named, that portion of it we are not, that requires 
more people and, obviously, more funding. And, again, that 
funding mechanism we are still working through with the 
Department.
    Mr. Goode. When you are providing services to former 
Presidents, if they say, President Clinton would go on a 
campaign swing with Vice President Gore, you don't bill the DNC 
for that, do you?
    Mr. Stafford. No, we don't. We don't get involved in that.
    Mr. Goode. Or if like former President Bush was in Roanoke, 
Virginia, campaigning for his son, that is----
    Mr. Stafford. We don't, the Secret Service doesn't get 
involved at all in the purposes of the trip. We are there, as 
the Chairman mentioned earlier, to keep them safe, whether it 
is a vacation or a campaign trip or an official trip, it 
doesn't make any difference to us and there is no billing 
process that takes place.
    Mr. Goode. On the providing services for Presidential 
candidates, did you provide services for Gore and McCain?
    Mr. Stafford. Well, we have been with the Vice President.
    Mr. Goode. I don't mean, Gore. I meant Bradley and McCain.
    Mr. Stafford. Senator Bradley we did. We were with him for 
33 days. We are no longer with him. I had a conversation with 
him yesterday to thank him for being so gracious to the Secret 
Service. And he said he wished we still were with him. 
[Laughter.]
    The Governor, Governor Bush actually we picked him up at 
midnight last night. We assigned a protective detail with him. 
And, of course, the Vice President, we have been with in the 
capacity of the Vice President.
    Mr. Goode. Right. Your minor candidates, say if the Reform 
Party nominated somebody, what level do they have to rise to? 
Or like the Prohibition Party, you are not guarding those 
candidates, are you?
    Mr. Stafford. Actually that is up to all of you. The 
petition has to come from the candidate regardless of what 
party. The petition comes to the Secretary of Treasury and the 
Secretary then collaborates with Congress as to whether they 
feel that the candidate meets certain guidelines and they are 
just guidelines that they look at from campaign to campaign.
    Mr. Goode. Thank you.

              RESIDENCE SECURITY FOR NEXT FORMER PRESIDENT

    Mr. Kolbe. I think we can make a little news here today. 
Does your budget have anything in it calculated for the primary 
residence of the next former President?
    Have we worked that in or has President Clinton declared 
where his residence will be?
    Mr. Stafford. He has. And we have.
    Mr. Kolbe. And that is?
    Mr. Stafford. Where the President's residence is?
    Mr. Kolbe. Yes.
    Mr. Stafford. Chappaqua, New York.
    Mr. Kolbe. Okay. So, that is the primary residence?
    Mr. Stafford. That is what they said.
    Mr. Kolbe. And that is what you are calculating your budget 
expenses for next year on?
    Mr. Stafford. That is correct.
    Mr. Kolbe. And that is in your budget?
    Mr. Stafford. It is.

                   NATIONAL THREAT ASSESSMENT CENTER

    Mr. Kolbe. Okay. I wasn't aware that he had actually 
declared that. I want to come back, if I might for a minute, to 
the center, the threat assessment center here. And I am really 
bothered by the fact that this is not in the budget. And I 
really don't think that I am and I try not to be very partisan 
here, but it really ticks me off sometimes, the President gets 
up and talks about--this, I guess, is really is more directed 
to you, Secretary Johnson--the President talks about the need 
to do something about this school violence and he talks 
eloquently about the need for new gun laws and, yet, here we 
are with something that is very, very practical, and something 
that can do a real, make a real contribution to heading this 
kind of thing off before it actually occurs. And, yet, we don't 
find it in the budget, anything to sustain this kind of work. 
And it is exactly taking on these kinds of responsibilities, 
Director Stafford, and not having the funding for it that has 
gotten you in trouble with your overtime.
    Now, you take on these new responsibilities, doing these 
kinds of interviews, and doing this kind of work isn't easy and 
it is not inexpensive in terms of the amount of time that has 
to be dedicated to doing this kind of thing.
    And, yet, here we are without any funding included to 
either expand or even really to sustain this. If you even 
continue it at the level that you are doing, you are adding, is 
it not true, Director Stafford, you are adding to your overtime 
problems because you don't have any specific funding for this.
    Mr. Secretary?
    Mr. Johnson. A couple of quick points on this, sir.
    First of all, as we were putting together the budget there 
were a set of priorities that we looked across all of our 
Treasury bureaus to be responsive. Dealing with the issue of 
violence was clearly one that was on the horizon in this 
Committee's hearing last year and it has been on the horizon 
for some time.
    The way we sought to do that was to address the critical 
need in the ATF to respond to what had been a significant 
enforcement issue. The strategy to deal with the enforcement 
issues was really twofold. It was to go after the violent 
criminals and, two, to deal with those who would put guns or 
weapons in the hands of those who shouldn't have them, like 
youngsters who ended up on school grounds. The agents that we 
have asked for address very seriously within the ATF those 
concerns.
    Secondly, we had a series of priority issues that we had to 
deal with, within the Secret Service. One that has been spoken 
about repeatedly in this hearing, which is and it actually was 
Brian's first priority when he came on, the Director's first 
priority when he came on the Secret Service is the dealing with 
this alarming retention issue.
    The budget that is put forward in establishing the 
priorities that it has attempts to deal with these priority 
issues. Violence is dealt with in a substantial increase in 
funding within the ATF. The retention issues and the pressure 
of all the new responsibilities that the Secret Service has is 
attempted to be dealt with by the substantial plus-ups not only 
in this budget but also in the supplementals in the 
reprogramming that we have done with the Department to support 
the Secret Service and to deal overall with this issue.
    That is not to detract at all from the fact that we think 
that this is a valuable program and a valuable effort. But we 
have had some difficult choices to make and we attempted to 
strike the right balance.
    Mr. Kolbe. Well, I appreciate that and I appreciate what 
you are doing to deal with the problems of retention and to 
make sure that we are able to recruit good people and retain 
them. But I just have to say that in my view we could have a 
greater impact on this problem of school violence with this 
program than all the gun enforcement, the new gun laws or even 
current gun law enforcement if we can head it off by giving 
school police resource officers and teachers and counselors and 
administrators and parents the kinds of tools that this program 
looks at to help identify this and to stop it before it occurs.
    Mr. Johnson. Mr. Chairman, I would not quarrel with the 
notion that, as some have said, by the time we get to the point 
of arresting people or putting them in jail----
    Mr. Kolbe. The tragedy has occurred.
    Mr. Johnson [continuing]. The tragedy has already occurred 
and we have already lost. And prevention is a very important 
component of enforcement strategy. That said, we made some 
tough choices as we came forward with overall a fairly strong, 
very strong enforcement budget.
    Mr. Kolbe. I have a series of other questions that I will 
put into the record here.
    Mr. Hoyer?
    Mr. Hoyer. Thank you, Mr. Chairman. The good news is that 
the cycle is not over. So, we have an opportunity to fill in 
that oversight. And I understand what Secretary Johnson is 
saying, there are obviously budget constraints, there are a lot 
of good programs one could add on and, as Secretary Johnson 
pointed out, the Administration dealt with two critical areas, 
both in ATF and in Secret Service and those are good steps 
forward and I hope we support them.
    But it is, I think, Mr. Chairman you are correct, an 
opportunity for us to perhaps focus on this priority as well 
because clearly giving to all of the employers, including 
school administrators, law enforcement officials, medical 
personnel at hospitals a better understanding of where we can 
see danger lurking, and to interface at a time when prevention 
might be possible as opposed to subsequent arrest and 
punishment, would obviously be much more preferable. So, I 
think, Mr. Chairman, we ought to address that and hopefully 
can.

                             COUNTERFEITING

    Director Stafford, let me ask you about counterfeiting. We 
haven't talked about counterfeiting. We sometimes talk about it 
a lot and it was a major problem, I know in the 1980s, and we 
have been very concerned about it. We changed the $100 bill, 
which I guess is the denomination of choice for counterfeiters; 
am I correct on that, essentially?
    Mr. Stafford. You are.
    Mr. Hoyer. Can you tell us where we are and whether or not 
the stretch on your resources had adversely affected our 
ability to dedicate sufficient resources to the counterfeiting 
issue, relevant to the problem that exists?
    Mr. Stafford. Congressman, we are stretched, not only on 
the counterfeit issue but across-the-board investigatively. 
Counterfeit trends are up. They were up last year. They are up 
again this year. Again, with technology, ink-jet technology, 
half of our counterfeits now we are finding are printed on a 
computer versus the old-fashioned offset method. They are 
printed on demand. Last year and this year are the first years 
we have ever experienced in our history--and, of course, as you 
know we were created in 1865 to suppress counterfeiting--these 
are the first two years that there has actually been more 
counterfeit money passed than seized. So, the trends are 
definitely up in counterfeiting. We received close to $200 
million this year, seized and passed. It is global.
    We have recently opened up two additional offices overseas; 
one in Moscow and one in Pretoria, South Africa, specific to 
address the counterfeit problem.
    Mr. Hoyer. Am I correct in remembering that the majority of 
counterfeit bills are trafficked overseas?
    Mr. Stafford. That is correct.
    About 60 percent of our money is overseas. Right now, I 
think we have about $450 billion of U.S. currency. I mean it is 
the de facto currency, the currency of choice. Most of our 
money is overseas, thus, the opportunity to counterfeit it 
everywhere.
    We found that we need to be there, to be able to respond 
immediately to suppress the problem. And, yes, I mean our 
resources are drastically stretched in that area and, again, 
our most important investigative function is to stay on top of 
the counterfeit issue.
    Mr. Hoyer. Thank you.
    Mr. Chairman, I have no other questions.
    But I would want to conclude with--I think everybody has 
said it--I thought Mrs. Meek was particularly eloquent in the 
preface to her question. And I think we all share her view that 
the United States Secret Service is an extraordinary agency. 
The men and women of the Secret Service are extraordinary 
Americans, doing critically important events. I saw this ad 
about defending America. That is, indeed what you do. Yes, you 
defend individuals and you defend events, but in a very real 
sense you defend democracy because democracy is all about 
making decisions in a peaceful, civil environment. And without 
the Secret Service and all of the law enforcement components 
with which you interface we couldn't do that.
    We are tragically in an increasingly violent society, in 
some respects, although crime is down. That is good news. The 
bad news is indiscriminate violence, unplanned violence, 
violence which is motivated not by a need for money or a need 
for goods or even animus towards the objects of violence--as we 
heard on the interview of the man who said, well, I kind of 
like President Clinton, he is a pretty good fellow, cares about 
the country, his targeting of President Clinton had nothing to 
do with his, obviously personal feeling-and if we cannot have a 
prophylactic effect on that spread of violence we will not live 
in a civil society. We will live in a much different society, 
much less open society, much less freer society than we have.
    So, I share Mrs. Meek's and the Chairman's and all of the 
members' of this Committee, Representative Goode mentioned as 
well, an extraordinary agency and we thank you for what you do, 
we thank you for the courage and commitment that your people 
show every day when they put on that badge and strap their gun 
to their shoulder or hip and go out every day to protect, not 
just the individuals, but to protect our very democracy.
    Thank you.
    Mr. Stafford. Congressman, you know, on behalf of the men 
and women of the Secret Service, thank you, for those comments.
    Mr. Kolbe. Thank you, Mr. Hoyer, Mr. Goode.
    I want to thank Secretary Johnson, Director Stafford, our 
Assistant Director, the Executive Director of the agencies for 
being here today. This has been an extraordinarily good 
performance and presentation, I think, and I think we learned a 
lot. And, as Mr. Hoyer said, we are very grateful for the job 
the men and women of the Secret Service do every single day and 
we hope you will take that message back to them, that they are 
very much appreciated by this Subcommittee and I believe by the 
Congress and by the American people.
    We thank you. This Subcommittee will stand in recess until 
this afternoon.



                                         Wednesday, March 15, 2000.

                  FINANCIAL CRIMES ENFORCEMENT NETWORK

                               WITNESSES

JAMES SLOAN, DIRECTOR
ELISABETH BRESEE, ASSISTANT SECRETARY FOR LAW ENFORCEMENT
    Mr. Kolbe. The subcommittee will come to order. I am very 
pleased today to be able to welcome Mr. James Sloan, the FinCEN 
director, as he makes his first appearance before the 
subcommittee. We also welcome Elisabeth Bresee, assistant 
secretary of Treasury for law enforcement.
    One of the primary functions of FinCEN is to provide 
support to law enforcement efforts in countering money 
laundering and other financial crimes. Money laundering permits 
the proceeds of a crime to enter the legitimate stream of 
financial commerce. It is a global phenomenon and has enormous 
consequences for the financial stability of this Nation and all 
the trading and the developed world.
    The most conservative estimates by the IMF of the volume of 
laundering at a global level is about $600 billion. That is a 
staggering amount. And obviously, that amount is capable of 
exerting enormous influence on economies, influencing 
government actions and, of course finances, as we know, a great 
deal of crime and terrorism.
    FinCEN is on the front lines of giving us the law 
enforcement tools to combat this insidious and corrupting 
threat to the integrity of our financial system and 
institutions as well as the integrity of all of our political 
institutions. The attention to money laundering as a core 
element of crime and terrorism, and therefore a strategic 
target of Government and law enforcement, took center stage 
last week with the Secretary's announcement of a new strategy.
    FinCEN, of course, has been fighting this good fight for a 
number of years, so we are pleased to see it advance to a new 
level of attention and we look forward to hearing about the 
progress that you are making in producing a model that can 
estimate the magnitude and trafficking patterns of money 
laundering as well as FinCEN's role in developing and 
participating in the Treasury Department's recently announced 
money laundering strategy.
    One area that I have sought to see FinCEN expand its 
authority into and seems to be gaining ground is improving 
access to FinCEN databases and analyses for State and local law 
enforcement agencies as well as the Federal enforcement 
agencies that use this data on a regular basis. So I am looking 
forward to hearing about your plans for continuing to pursue 
this initiative further, both in terms of how you are going to 
use the technology to increase the availability of your 
resources but also showing how FinCEN is gaining recognition 
and is being used to make a significant impact in the fight 
against money laundering and other financial crimes.
    This subcommittee, obviously, strongly supports vigorously 
attacking laundering wherever it occurs and enforcement of the 
Bank Secrecy Act. But we do not believe that burden should be 
unduly placed on the private sector. So I look forward to 
hearing your thoughts as to how we balance the need for new law 
enforcement information with administrative costs and the 
privacy considerations that exist in the face of expanding the 
Bank Secrecy Act reporting requirements.
    Let me call on Mr. Hoyer for some remarks before we begin 
with your testimony and questions.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I want to 
welcome the secretary and the director to this hearing. The 
director brings a wealth of experience to this job, having been 
in the Secret Service for 21 years dealing with both protection 
and financial investigations. Your budget, obviously, reflects 
the Administration's concern about FinCEN's ability to do the 
job that is asked of it.
    As the chairman has pointed out, the problem of money 
laundering has probably never been more acute than it is today, 
or with more ramifications. Obviously, to the extent that the 
criminal element in our international society can make money 
illegally and convert it to legal status, their enterprise will 
be advantaged and enhanced. Your job, obviously, is to track 
how they do that and to stop them from doing it.

                          INTRODUCTORY REMARKS

    I am pleased, Director, to see that Secretary Summers and 
Attorney General Reno have acted to set forth a national money 
laundering strategy. I hope this strategy will set a course of 
tackling this global problem. When I say that, I think we have 
already a course set on global events.
    As you know, two of the folks who were on my staff at the 
Helsinki Commission are with you; two extraordinary people. I 
have talked to both Mary Sue Haffner and Jane Fisher, about how 
we are focusing on this issue around the world, cooperating 
with other countries. Obviously, as it is in our country State 
and jurisdictional borders are being irrelevant for criminals, 
they are too internationally.
    I think FinCEN is going to be an increasingly important 
element in law enforcement. However, you must continue to 
educate your law enforcement partners about the financial 
information that is available to them from you. Mr. Director, 
one of the most effective means I think to provide the 
information to State and local enforcement is through the 
Gateway program. Through this program law enforcement officials 
can gain access to reports filed under the Bank Secrecy Act. 
According to FinCEN's performance measures, the number of 
queries to the Gateway system increased by 18 percent in 1999. 
That is good news because it means that more people are aware 
of the kind of help that you can give.
    I was also very pleased to learn from you that Prince 
George's County will be the first county accepted into the 
Gateway program as an agency partner. I am sure the second 
county will be located in Arizona, I have no doubt, Mr. 
Chairman. This will be a great benefit to John Farrell and the 
men and women of the Prince George's County Police.
    I hope you saw in the paper the other day, the recent bust 
which was the largest seizure of cocaine and crack ever in the 
metropolitan area--$30 million street dollar if converted to 
crack or about $8 million in street value in its cocaine form, 
$547,000 in cash at two homes, vehicles, and a large cache of 
weapons. I pointed out at that press conference that I 
understood the reason people go to this risk and do this is to 
make money. And to the extent that they can hide it, they will 
keep doing it. To the extent that we can find them through your 
services, we will not only take the profits out but that would 
be a real disincentive to try to make money illegally.
    So Mr. Chairman, I want to welcome again the secretary. We 
are very pleased to see you at the table, and Director Sloan, 
with your people. FinCEN is an agency that most people do not 
really have the faintest idea exists. I really think it is a 
James Bond kind of agency. Mr. Chairman, I do not know if you 
have been over there and sat in their auditorium and seen the 
graphic portrayal of money trails. You really ought to go over 
there and take a look. It is not far away. It is 15, 10 minutes 
from here. Go over there and see how they track deposit to 
deposit and how they clean up that money. It is an amazing 
tracking system that they have in place that identifies all the 
players who are involved and will be, very critical, in these 
increasingly complex money transactions.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you. Mr. Hoyer, why don't we recess and go 
vote and then come back and we will get to the statements and 
questions as soon as we get back? We stand temporarily in 
recess.
    [Recess.]
    Mr. Kolbe. We will resume. Mr. Hoyer will be right behind 
us. Why don't we go ahead with your opening statements, and of 
course, we will begin with assistant secretary Bresee and any 
statement you would like to make, and then we will go to 
Director Sloan.

                        UNDER SECRETARY REMARKS

    Ms. Bresee. Mr. Chairman, I am pleased to join Director 
Sloan as he presents the Financial Crimes Enforcement Network's 
budget request for fiscal year 2001. I am here on behalf of 
Under Secretary James Johnson who is at the National Summit for 
Identity Theft this afternoon.
    Before Director Sloan's presentation I wanted to take a 
moment to express the department's support for the work of 
Director Sloan and the men and women of FinCEN. I have had the 
privilege of working with Jim Sloan for over five years; first 
in his positions at the Secret Service and now as the director 
of FinCEN. During that time I have come to appreciate his 
outstanding leadership skills and his devotion to public 
service. As we move into this new century, Director Sloan's 
leadership along with the expertise of FinCEN's employees will 
be important to the success of the Federal Government's fight 
against money laundering and financial crime.
    As the chairman noted, last week Deputy Secretary Eisenstat 
and Deputy Attorney General Holder unveiled the blueprint for 
this fight, the national money laundering strategy for 2000. 
Although FinCEN is a relatively small agency, its role in 
implementing this strategy is considerable, and I know that 
Director Sloan will talk more about their efforts in that 
regard.
    The agenda set out for FinCEN is an ambitious one but we 
have complete confidence that Director Sloan and the dedicated 
men and women of FinCEN are up to this task. This confidence is 
supported by FinCEN's performance over the past year. Since Jim 
Sloan became director in April 1999, he has taken a number of 
steps to enhance the support that FinCEN provides to law 
enforcement and to strengthen its regulatory programs. Of equal 
importance, he has restructured FinCEN to ensure that it uses 
its limited resources in more integrated and efficient ways.
    Even with these organizational improvements, however, 
FinCEN will need additional resources to fully meet its mission 
in fiscal year 2001. We believe that the President's 2001 
budget provides for FinCEN's growing workload by the addition 
of 16 FTE and $5.1 million over and above the 2000 budget. In 
addition, Treasury's $15 million initiative aimed at 
implementing the national money laundering strategy includes 
approximately $2.8 million and 13 FTE for FinCEN. These 
additional resources will assist FinCEN in meeting its 
increased responsibilities under the strategy.
    The Treasury initiative also includes an additional six FTE 
for the Office of the Under Secretary for Enforcement and these 
resources will assure that Treasury enforcement can also 
implement the strategy fully and effectively.
    I want to express my appreciation for the support that the 
committee has given to FinCEN and to all of the Treasury law 
enforcement bureaus. Our efforts have been more successful as a 
result of your oversight and your continuous support.
    Thank you.
    Mr. Kolbe. Thank you. Director Sloan, your full statement, 
of course, will be put in the record, if you wouldlike to 
summarize it so we can go to questions.

                            FINCEN TESTIMONY

    Mr. Sloan. Thank you, Mr. Chairman. First, if I could just 
step aside from the prepared remarks for a minute and comment 
on the invitation that Congressman Hoyer extended on our behalf 
to FinCEN.
    Mr. Kolbe. I accept. I do need to do that.
    Mr. Sloan. Yes, absolutely. Ironically, or positively for 
us, you both represent States that have had incredible success 
at the State level in anti-money laundering efforts. In fact 
Arizona is among the leaders in the country in developing 
statewide anti-money laundering laws, so I think that we are 
fortunate to have you both sitting in this capacity.
    I also have with me, by the way, Bill Baity, the deputy 
director of FinCEN and most of the senior managers of FinCEN 
who represent the range of FinCEN responsibilities from law 
enforcement support to regulatory activity to our international 
programs.
    I want to thank you and Congressman Hoyer and the 
subcommittee for giving me the opportunity to discuss FinCEN's 
fiscal year 2001 budget request. As you noted earlier, this is 
the first time I have appeared before this subcommittee so I 
look forward to working with you and your staff, and I do have 
written remarks that I would like to include in the record.
    I have been Director of FinCEN for almost a year now and I 
am very impressed with this small but very effective 
organization. With a diverse range of talents and skills, the 
men and women of FinCEN support hundreds of law enforcement and 
regulatory agencies. I have learned just how broadly these 
talents and skills must stretch to effectively support FinCEN's 
many customers.
    As you are aware, the core mission of FinCEN is to provide 
support for law enforcement and to foster interagency and 
international cooperation to combat financial crime. Our 
agency's unique network fosters cooperation by connecting law 
enforcement at all levels to each other and to their 
counterparts around the globe. Our request of $34,694,000 will 
enable us to continue this important work.

           EFFICIENT DELIVERY OF ``VALUE ADDED'' INFORMATION

    In carrying out its mission, FinCEN uses various methods 
for analyzing and delivering information to law enforcement. 
Our main objective is to add value to the information we 
receive from financial institutions under the Bank Secrecy Act, 
or BSA, and deliver it in the most effective way possible to 
investigators. The systems we use involve sophisticated 
technology tailored to meet the needs of our customers. We 
support about 150 Federal agencies and State and local law 
enforcement investigators in each of the 50 States.
    Among our primary objectives this year is to begin 
implementation of a new regulatory program--Registration of 
financial service providers known as money services businesses 
or MSBs. The outreach associated with this registration process 
will ultimately provide the framework through which this 
industry will report suspicious activity. Towards this end, 
FinCEN, in conjunction with the Treasury Department, announced 
just last week the final rule which requires MSBs to report the 
suspicious activity. To allow us to begin this critical new 
program, we have included $2,275,000 in our budget request.

                      STABILIZE EXISTING PROGRAMS

    While FinCEN continues to reach out to potentially 
vulnerable industries such as MSBs, we must also ensure the 
maintenance of programs which have become critical to our law 
enforcement customers. We are requesting therefore that the 
following programs be included in our salaries and expense 
accounts. Each of these programs secure outreach, data mining, 
and the study of the magnitude of money laundering is critical 
to ensuring that the information, with important value-added, 
reaches its users in the most efficient way.
    I would briefly like to discuss each of these programs.

                          DATA MINING PROGRAM

    Data mining is rapidly proving to be one of the most useful 
analytical tools available. To further our efforts in this 
area, FinCEN has been working with information technology 
experts to design software tailored to meet the unique needs of 
law enforcement. The next step will be the development of a 
specially formatted database at FinCEN that will enable very 
complex data mining to occur. Funding for this valuable program 
is critical to our organization's ability to perform effective 
information processing.

                            GATEWAY PROGRAM

    In addition to developing and employing such state-of-the-
art technology, FinCEN continues to efficiently deliver 
information through programs such as the Gateway system. 
Through Gateway, State and local law enforcement agencies 
around the country have direct access to BSA support. Delivered 
through a secure and carefully monitored system, this 
information provides invaluable assistance for investigators 
not readily available from any other source.

                        SECURE OUTREACH PROGRAM

    Also very valuable as a communications tool is the secure 
outreach system. At present it provides to all Treasury bureaus 
the ability to communicate securely among themselves through a 
secure e-mail system and in the very near future will permit 
the exchange of sensitive case information. The funding 
requested in the 2001 budget will provide FinCEN with the 
ability to further expand the secure outreach program.

                     MAGNITUDE OF MONEY LAUNDERING

    The programs that I have described are key to FinCEN's goal 
of leveraging resources to more efficiently and effectively 
deliver information to investigators. But it remains difficult 
to truly gauge the effectiveness of our Nation's battle against 
financial crime until we establish a measure of the magnitude 
of money laundering. This effort has not been easy.
    As noted in prior testimony, FinCEN has been working with 
the financial action task force to identify a uniform effort of 
approaching this effort. Those discussions have led us to 
believe that we must move forward in our national study. Our 
2001 request would provide FinCEN with the resources to 
continue funding the primary research contract scheduled for 
award in June of this year.

                         MAINTAIN CORE PROGRAMS

    In addition to incorporating these important programs, 
FinCEN must continue to strengthen its core activities.

                        TRADITIONAL CASE SUPPORT

    Direct case support is at the very heart of the FinCEN 
mission. Through the use of advanced technology and numerous 
data sources, FinCEN links information to assist law 
enforcement in forming a more complete picture of a financial 
investigation. The analysis of such information has become much 
more complex and time consuming over the last few years. In 
light of these challenges we are asking that the analyst 
positions approved in the 2000 budget be annualized into fiscal 
year 2001 in order to improve the timeliness of FinCEN's case 
support.

              ENHANCE SARS AND OTHER BSA DATABASE ANALYSIS

    As we provide such value-added case support to law 
enforcement, the ability to identify trends and patterns 
associated with money laundering and other financial crimes 
adds an important strategic dimension. The positions forthis 
strategic analysis initially funded in the 2000 budget allow FinCEN to 
provide proactive analytical support to many multi-agency task forces.

                  EFFECTIVE COLLECTION OF INFORMATION

    But before we can deliver meaningful information and 
analysis to the law enforcement community we have to collect 
useful data from the financial institutions. More than 220,000 
financial service providers from the largest money center banks 
to currency exchanges scattered throughout the Nation and 
hundreds of variations in between are subject to BSA rules. 
This information reported through the BSA preserves a financial 
trail for investigators to follow as they track criminals and 
criminal assets.

              EXPANDING THE COLLECTION OF BSA INFORMATION

    The BSA reports are the foundation of FinCEN's analysis and 
information delivery systems. Since beginning with depository 
institutions in 1996, much of FinCEN's regulatory effort has 
been focused on reporting suspicious activity. This information 
has proven vital to money laundering investigations and other 
financial crimes.
    As I mentioned earlier, FinCEN is extending similar 
requirements to the money services businesses and ultimately to 
other institutions vulnerable to money laundering such as 
casinos and the securities industry. This expansion of SAR 
filings will require FinCEN to coordinate outreach efforts with 
these industries on a national level to provide appropriate 
guidance with the regulatory oversight agencies.

                   INCREASE IN EXISTING REQUIREMENTS

    An important role for FinCEN in this process is to ensure 
that financial institutions are adhering to the reporting 
requirements that provide the critical information. With the 
assistance of the Federal financial regulators in the Internal 
Revenue Service's examination division, FinCEN investigates 
violations of the recordkeeping and reporting requirements of 
the BSA. These agencies refer to FinCEN, specific cases 
involving potential violations of the BSA by financial 
institutions. FinCEN determines if violations warrant monetary 
penalties after a very complex review process.
    In order to meet these expanding requirements, increased 
staffing was approved in fiscal year 2000. We are asking that 
it be annualized in fiscal year 2001. These positions will 
allow FinCEN to maintain case processing time at a reasonable 
and manageable level and provide greater guidance and training 
to regulators on BSA requirements.

                  A NEW REQUIREMENT--MSB REGISTRATION

    As I mentioned, an important new program is underway; the 
registration of money service businesses or MSBs. These include 
money transmitters, issuers, redeemers and sellers of money 
orders and traveler's checks, check cashers, and currency 
retail exchangers. The requirement to register MSBs was part of 
the Money Laundering Suppression Act of 1994. In setting the 
requirement, Congress found that such businesses are largely 
unregulated at the Federal level. Also, evidence gathered from 
several enforcement actions revealed that some of these 
businesses are susceptible to money laundering on a very large 
scale.
    Using funding provided in fiscal year 1999 and carried 
forward into fiscal year 2000 from the Treasury forfeiture 
super surplus fund, FinCEN will implement an extensive public 
awareness campaign, develop necessary forms, other public 
information documentation, and develop data system 
requirements. These activities will be accomplished in 
conjunction with Treasury's public education office and the 
IRS' Detroit computing center and examination division. The 
2001 budget request of $2,275,000 will provide funding to 
contract with the IRS to ensure that sufficient and continuing 
resources are available to conduct regulatory oversight 
associated with this program.

                    INFORMATION COLLECTION FROM FIUS

    We have also been very active in encouraging other 
governments around the world to develop and implement effective 
anti-money laundering controls. Foremost among these efforts is 
the continued development of an international network of 
financial intelligence units. These now number 48; an 
impressive increase from the handful that existed just six 
years ago. FinCEN relies on its counterparts in the global 
network of FIUs to provide information in support of domestic 
Federal investigations. This is information that might only be 
obtained with difficulty or not at all through other channels. 
We appreciate the committee's ongoing support of this important 
and unique ability to strengthen our network.

                 THE NATIONAL MONEY LAUNDERING STRATEGY

    Finally, just last week the Treasury and Justice 
Departments released the second national money laundering 
strategy. This strategy mandated in the Money Laundering and 
Financial Crimes Strategy Act of 1998 sets forth an ambitious 
agenda. Thus, FinCEN's responsibility will significantly 
increase over the next year in order to assist in achieving 
these goals. The $2,900,000 requested in the Department of the 
Treasury's appropriation will afford FinCEN with the resources 
needed to begin to carry out its requirements under the 
strategy; requirements which dovetail with FinCEN's ongoing 
activity.

                          RESTRUCTURING FINCEN

    When I began I mentioned that FinCEN's limited resources 
have served many varied constituencies very well. However, when 
I came to FinCEN almost a year ago it was evident to me that 
the existing structure was not adequately coordinating the 
efforts of each element of FinCEN into the integrated 
collection and delivery system I have been discussing today. It 
was also obvious that the allocation of very limited resources 
could not sustain an organization that was often going in 
several very important but sometimes very different directions.
    After consulting with the Treasury Department, law 
enforcement agencies, regulators, the regulated industry, and 
most importantly, our employees, I undertook a restructuring of 
FinCEN. I believe this step will better coordinate, integrate, 
and deliver our products to the law enforcement community while 
at the same time enabling us to be more responsive to the 
regulated community. We are already seeing the benefits of 
these changes in improved analysis and support to our 
customers.

                               CONCLUSION

    FinCEN's management structure and the integration of the 
activities which I have described today are coming together at 
a time when our Nation's anti-money laundering efforts have 
coalesced into a comprehensive money laundering strategy. It is 
clear in the strategy and from the increasing demands of our 
law enforcement partners that FinCEN is being looked at as one 
of the Nation's key centers of money laundering expertise. The 
support and guidance that this subcommittee has given over the 
past 10 years has been invaluable.
    Thank you and I would be happy to answer any questions.
    [The statement of Mr. Sloan follows:]



                        MONEY SERVICES BUSINESS

    Mr. Kolbe. Thank you very much, Director, Madam Secretary. 
There was an extensive discussion in your statement there about 
the money service businesses and your new activity reports. You 
are asking this year for about $2,275,000 for your money 
service business regulatory program to, as I understand it, 
contract with the IRS and other regulatory partners to help 
ensure compliance with the national registration of the MSBs, 
and you have talked about that being a framework for a 
reporting system.
    But I am not clear how the registration then becomes the 
framework for reporting. I know you have increased your efforts 
to ensure compliance with the Bank Secrecy Act as it relates to 
casino and other security industries. What efforts has FinCEN 
taken to educate the MSBs, money service businesses, not only 
of the regulatory requirements but also ways in which they can 
assist you in doing your job by identifying suspicious 
activity? What role do you play in that?
    Mr. Sloan. Mr. Chairman, first of all the extension of 
suspicious activity reporting under the BSA to the casino and 
the securities industies is forthcoming. But as far as the 
money services business are concerned, in August of last year 
we issued the rule to register them. This universe is 
estimated----
    Mr. Kolbe. What is the universe?
    Mr. Sloan. It is approximately 200,000 entities. It is 
40,000 Postal Service facilities that issue money orders--
instruments--that are vulnerable to money laundering. We have 
worked very closely with the Postal Service both on the 
compliance side and with the Postal Inspection Service, which 
by the way, has a full-time presence at FinCEN, in order to 
address those vulnerabilities.
    But MSBs also include about 160,000 non-Postal Service 
facilities that range from the so-called mom-and-pop store on 
the corner of a neighborhood that has the ability to transmit 
money through a provider such as Western Union or Moneygram to 
the money exchangers and the check cashers that are located 
around the Nation.
    Mr. Kolbe. And banks? Are banks not in your jurisdiction?
    Mr. Sloan. We do require suspicious activity reporting from 
banks but we share that regulatory authority with the Federal 
bank regulators.
    Mr. Kolbe. And brokerage firms with securities?
    Mr. Sloan. With respect to Brokerage firms, we have been 
working with the Securities and Exchange Commission in order to 
develop a proposed rule for the expansion of the SAR programs 
to the securities industry. I anticipate that the proposed rule 
will be available for public discussion by the end of this 
calendar year.
    As far as the education of money services business is 
concerned, this is of great concern to me. We have individuals 
and businesses, many of which as I indicated in my statement, 
have not really had a great deal of Federal regulation or 
Federal presence involved in their business in the past. 
However, we do recognize from information that has been gleaned 
over the course of the last several years in investigative 
activity that they are very vulnerable to money laundering.
    We need to educate them of that vulnerability and we need 
to educate them as to the need for expanding suspicious 
activity reporting into their regulatory responsibilities. To 
do that we have contracted with Treasury's Office of Public 
Education. The Office of Public Education has, I think it was 
just last week, issued a request for proposal from a contractor 
to begin the education process and the outreach program.
    I might also add that the regulations for registration of 
the MSBs and for suspicious activity. Reporting for the MSBs do 
not become effective until the end of 2001. So we are giving 
ourselves an opportunity to make sure that we adequately 
educate and reach out to this community before these 
regulations kick into effect.

                       BSA REPORTING REQUIREMENTS

    Mr. Kolbe. Are you satisfied that the current reporting 
requirements that you have that are leveled against banking and 
other financial industries are sufficient for you in terms 
getting the data that you need?
    Mr. Sloan. At present, the short answer is yes, provided 
that it is effectively and efficiently obtained, which 
obviously is what we are striving to do in coordination with 
the regulated industry and the law enforcement community. I do 
know that there is discussion at the Treasury Department 
regarding specialized cases which may require attention at the 
departmental level relative to bank accounts that are impacted 
by overseas correspondent accounts.
    But as far as the BSA data that I collect or we collect at 
FinCEN for the purposes of delivery to law enforcement, I do 
believe that it is adequate for the needs that we have.
    Mr. Kolbe. What are going to be your performance 
requirements? Here you have got all this new data and you have 
got all these new requirements for reporting and regulatory, 
new universe of MSBs as you have described it there. How are 
you going to measure whether any or all of this is successful 
or not? What are your measurements?
    Mr. Sloan. The measurement of the value of the Bank Secrecy 
Act reporting, particularly SARS, is of great concern to me 
because I think that we need to demonstrate to the people who 
are actually supplying this information that it is of value.
    Since I have come to FinCEN I have asked for, in the case 
of depository institutions, the cooperation of the members of 
the Bank Secrecy Act Advisory Group. We have put together a 
feedback and utility Subcommittee that is co-chaired by members 
of the American Bankers Association and FinCEN personnel to 
develop measures by which we can establish value, utility, and 
feedback to the community relative to what they have to report. 
The subcommittee includes law enforcement officials, and 
members of every range of financial services. They have begun 
discussions that I think are going to bear fruit as far as 
being able to establish the measures of value.
    In addition to that, we want to make absolutely certain 
that the information that we do get by virtue of the Bank 
Secrecy Act is being utilized. Various U.S. Attorneys offices 
around the country have established suspicious activity review 
teams. We would like to see OSE expanded and the Secretary and 
the Attorney General have both issued a memorandum to all of 
the bureaus within their jurisdiction, Treasury and Justice, 
encouraging additional suspicious activity review teams to be 
established. I might also add, more dialogue at the local level 
is needed between the Federal agencies that receive the 
information that we provide and the financial industries that 
are providing it to close the circle, in order to help 
everybody understand the value of this information.
    Mr. Kolbe. Do you feel comfortable that the requirementsof 
the Bank Secrecy Act are not placing undue burden on the private 
sector, particularly among the large institutions that regularly are 
involved in large transactions, whose customers are regularly involved 
in very large transactions? Are you getting feedback on this?
    Mr. Sloan. Yes, sir, we are. In fact, the Bank Secrecy Act 
Advisory Group which is----
    Mr. Kolbe. Consists of?
    Mr. Sloan. It consists of representatives of the regulated 
community, regulators and law enforcement community.
    Mr. Kolbe. Both sides come together then?
    Mr. Sloan. Yes, sir, and it was chartered for that specific 
purpose. It was chartered to provide to us, through the office 
of enforcement to the Secretary, not only information, advice 
and counsel to the Secretary relative to the implementation of 
the BSA, but also to bring to the Secretary's attention the 
burdens that the BSA may impose upon the regulated industry. We 
do, on a regular basis, meet--in fact our next meeting is April 
12th, and this is always a topic of discussion.
    Mr. Kolbe. What kind of feedback are you getting?
    Mr. Sloan. One of the feedback comments of late pertained 
to reducing the number of CTRs. CTRs, as you may know, are the 
reporting of currency transactions by depository institutions 
in excess of $10,000, and the feedback dealt with the exemption 
process. We allow certain industries like Sears, WalMarts, 
Giant Food, companies that deal in large sums of cash on a 
daily basis, to be exempt from the reporting, but industry has 
been slow to use exemptions which has been of some concern to 
the regulated industry.
    We had a rather lively discussion at the last Bank Secrecy 
Act Advisory Group on that exact topic and we learned, quite 
frankly, that activities dedicated to preparing for the Y2K 
issues had caused a lot of people not to take advantage of the 
exemptions. Since the turn of the year, we have seen a 
significant increase in the use of exemptions and a significant 
increase in the number of inquiries that have come to FinCEN on 
the exemptions themselves.
    But this is an example of the types of discussions that can 
go on at the Bank Secrecy Act Advisory Group relative to the 
impact of the Bank Secrecy Act on the regulated industry. I 
think it also demonstrates our responsiveness to those 
discussions.
    Mr. Kolbe. Thank you. Mr. Hoyer?
    Mr. Hoyer. Thank you, Mr. Chairman. Secretary Bresee, let 
me follow up on I think what the director has talked about in 
response to some of the chairman's questions.

                   NATIONAL MONEY LAUNDERING STRATEGY

    According to the national money laundering strategy we now 
spend about $1,000,000,000 on money laundering efforts to 
combat it. Explain to me the difference we will have as a 
result of this national strategy.
    Ms. Bresee. I think if you are referring to the appendix in 
the back of the strategy I will just caution that that was kind 
of a first attempt OMB made to gather all the numbers. We are 
still really making a look through to make sure that those 
numbers are accurate, and to be honest I think we need to do a 
more careful analysis of that chart to see if in fact it is. It 
was done fairly quickly at the end to just try to pull 
everything together to find out how much in fact we were 
spending on money laundering. But it was a first cut at doing 
this and I think we need to refine how we have done it.
    What we have done in our 2001 request is ask for this 
additional $15,000,000. That is certainly on top of all the 
requests that are in the individual bureau budgets including 
FinCEN's budget and Customs' budget that already would be 
towards money laundering. But this was really an attempt to do 
an increased kind of enhanced focus on money laundering both 
within the department and in the bureaus and at FinCEN.
    Mr. Hoyer. Will all the agencies spending this money 
communicate with FinCEN or with a central source so that it can 
be digested, correlated, and so that conclusions can be drawn 
from the information that we gather?
    Ms. Bresee. I think that this whole effort of issuing the 
strategy has made all of us communicate in a way that we did 
not before. By that I mean, both the Treasury bureaus and the 
Justice bureaus. I have been holding regular meetings with all 
of our law enforcement bureaus with Jim Robinson, the assistant 
attorney general for criminal division at Justice with all of 
the Justice bureaus where we are sitting around and talking 
about money laundering operational issues that we have never 
done before.
    So I think that through the law that requires us to write 
this strategy every year for the next five years we will 
continue to be pulling all of this information together, and 
FinCEN is certainly a central aspect of all of that information 
gathering.
    Mr. Hoyer. I agree with that. One of the things that has 
concerned me with law enforcement over the years was that we 
are spending a substantial amount of resources on law 
enforcement at Federal, State, and local levels and on multiple 
agencies within each of those levels, FBI, DEA, ATF, Secret 
Service, FinCEN, but we have not had the kind of coordination 
at each level or between levels that we should have.
    HIDTA, as you know, is an effort to overcome that and has 
done so, I think, relatively successfully. In my area, the law 
enforcement agencies will tell you that HIDTAs greatest benefit 
is not the $12,000,000 that comes to the Washington-Baltimore 
region, or the southwest border who gets a similar amount, but 
the coordination that has resulted. It strikes me as we gather 
this information and we have increasing capability to store 
this information, it is going to be critical to correlate it, 
digest it, and be able to use it effectively, and that is one 
of the primary objectives of the strategy.
    Ms. Bresee. I agree with you completely.

                            GATEWAY PROGRAM

    Mr. Hoyer. Let me go back to the Gateway program, which I 
mentioned it in my opening comment. Obviously, this ties in 
with what I just said. You pointed out, as I said in my 
statement, you have an 18 percent increase in the number of 
queries from State and local law enforcement partners around 
the country. Of the information they are getting, I presume it 
is too early to know how effectively that information is being 
used, or am I incorrect in that?
    Mr. Sloan. I think we can say that the information is 
effective. It is certainly measured in the coordination of 
activities among the various levels of law enforcement. One of 
the most important parts of the Gateway process is the ability 
for FinCEN as a network to be able to pair with other agencies 
the investigative needs of the agency that is making an 
inquiry. FinCEN looks at the Gateway inquiries on a regular 
basis--weekly--and determines whether or not we can alert two 
agencies to the fact thatthey are in the process of 
investigating the same issue.
    To the degree that those connections are made, several 
hundred a year I think, is a demonstration of certainly a good 
product that is coming out of the Gateway process. In addition 
to the fact that we are providing information to the States, 
ultimately, as you indicated earlier, we will be providing it 
to a financial investigative unit at the level of Prince 
George's County, this is information that they otherwise would 
not have available to them. We recognize that the need to 
follow illicit cash, the byproduct of narcotics trade or other 
crimes, is as important at the state and local level as it is 
at the Federal level.
    I think the response that we are getting from the Gateway 
partners and from the law enforcement community at the state 
and local level across the country of late has been encouraging 
and is a measure of success of the Gateway program.
    Mr. Hoyer. Thank you. Mr. Chairman, I have a meeting of 
ranking members with Mr. Gephardt at three o'clock, but if I 
might take a minute of personal privilege.
    I mentioned earlier in a question to the director or in my 
opening statement, the very substantial seizure that occurred a 
few days ago in Prince George's County and Anne Arundel County 
of many millions of dollars worth of drugs, many weapons, and 
$500,000 in cash laying around in plastic bags. By the way, Mr. 
Chairman, apparently the drug dealers no longer count the 
money. They weigh it because it takes too long to count it. So 
they weigh it, then separate it by dollars, tens, twenties, and 
hundreds.
    Mr. Chairman, the reason I want to take this point of 
personal privilege, I meant to mention this yesterday with all 
the TV cameras on. We added $500,000 in the FY1999 emergency 
supplemental for HIDTA's cross border initiative. Mr. Chairman, 
we did it because you agreed to add it in the bill. The cross-
border initiative includes local surrounding suburbs and 
Washington, D.C., so they could share jurisdiction and go 
across jurisdictional lines.
    Chief Farrell of the Prince George's County police, and the 
Drug Enforcement Administration folks who participated with 
them, attribute the cross-border initiative to their success in 
this effort because the original stop was a traffic stop which 
related out of a sting operation of an undercover policewoman 
who was propositioned in Mount Rainier. Mount Rainier is right 
on the District of Columbia border on Route 1. If you go up 
Route 1, it is just as you get into Maryland.
    The fact that they had both D.C. and Prince George's police 
involved, as well as Federal agents involved, allowed them to 
make a relatively small seizure of cocaine in that car, which 
they did not realize they were going to do, which led to this 
largest seizure ever.
    But I want to thank you, Mr. Chairman, for your assistance 
in that. John Farrell, the Chief of Police of Prince George's 
County says it was that money that allowed them to undertake 
the cross-border initiative within the HIDTA and have this 
success. So I thank you very much for that and I wanted to say 
that before too much time went along.
    Mr. Kolbe. Thank you, Mr. Hoyer. It is a good example of 
how, working together, we can accomplish some things. I think, 
as I recall that, it probably initiated with you, however.
    Mr. Hoyer. It could not have happened without you, Mr. 
Chairman. Thank you very much.
    Mr. Kolbe. Thank you very much, Mr. Hoyer. Mr. Goode.

                     MAGNITUDE OF MONEY LAUNDERING

    Mr. Goode. Mr. Sloan, in the Chairman's opening statement, 
he indicated that IMF estimated the volume of laundering is 
$600,000,000,000 annually. What would you say the amount of 
money laundering in the United States is on an annual basis?
    Mr. Sloan. The quick answer, sir, is I am working on trying 
to find out exactly what it is. As you know, we are tasked with 
developing a model to determine the magnitude of money 
laundering, not only domestically but internationally. We could 
probably discuss it in terms of proceeds of crime.
    For instance, I think proceeds of crime relative to 
narcotics have ranged up to $57,000,000,000 to $60,000,000,000 
a year in the United States. But I think it would be unwise for 
me to estimate any level of magnitude of money laundering per 
se until this model is at least underway.
    The model has not been an easy task but it is a task that 
we will fulfill. We have been working with the Office of 
Economic Policy at Treasury. We also have been working with the 
Minerals Management Service of the Department of Interior, 
because they have the research procurement expertise that we 
need in this regard.
    In January we put out a Commerce Business Daily request 
asking for vendors to come forward who believe they have the 
capability of helping us develop this model. We are examining 
their capabilities. We intend, in the next 45 to 60 days, to 
issue an RFP relative to those vendors. And we hope to be on 
our way to developing this model for the magnitude of money 
laundering.
    But I will be honest with you, until we have such a model 
in place I think even estimating the magnitude would be unwise 
for me.
    Mr. Goode. The $50,000,000,000 to $60,000,000,000 from 
crime, what about from non-reported income? Would you say that 
is real high?
    Mr. Sloan. The $50,000,000,000 to $60,000,000,000 that I 
was referring to is the estimate that we were receiving that 
relate to the proceeds of narcotics crimes. The reason that we 
have that information, and I do not know if I have the 
information beyond that at this moment but I certainly could 
find it out as far as the proceeds, but we are looking to weave 
into the model of magnitude program the proceeds of crime to 
see if it can become part of the measure.
    Mr. Goode. That does not include illegal gambling?
    Mr. Sloan. I am only referring, in that regard, to what I 
understand to be the estimates for narcotics. I do not have the 
other estimates available. We certainly can provide them, to 
the degree that we have them, for the purposes of determining 
magnitude.
    Mr. Goode. You do not have any idea like on non-crime? 
Gambling would be a crime in most jurisdictions.
    Mr. Sloan. The proceeds of gambling?
    Mr. Goode. No, not just of gambling?
    Mr. Sloan. Illegal?
    Mr. Goode. Yes, illegal gambling and then, if it was legal, 
it would just be laundering of unreported income.
    Mr. Sloan. We can find out, if we have that figure, and we 
can certainly supply it to you.
    Mr. Goode. Well, that in and of itself would be a crime, 
not to report it, so that is within your purview, too, is it 
not?
    Mr. Sloan. Well, if there is an attempt to put the proceeds 
of crime, place them into the financial system in order to 
launder it, yes. We would be involved in capturing that 
information.
    Of course, FinCEN does not investigate that sort of 
activity but we would provide that sort of information to the 
relevant law enforcement agency.
    Mr. Goode. If a mom and pop grocery wrote like 50 or 60 
money orders, you would go in and investigate that?
    Mr. Sloan. We do not investigate at all. But if they wrote 
50 or 60 money orders, knowing that it was being written in 
order to transfer money that was known to be the proceeds of 
crime, it would be captured under the MSB suspicious activity 
process and we would provide that to the relevant law 
enforcement agency necessary to investigate it, yes.
    Mr. Goode. How much do you work with state and local law 
enforcement?
    Mr. Sloan. A great deal. In fact, they are, I believe, 
among our most important clients, if you will. In fact, prior 
to my time at the Federal government over 23 years ago, I spent 
10 years as a local police officer and detective. And the need 
for this sort of information at the local level is, I think, 
incredibly important and valuable to the state and local 
authorities.
    Through our Gateway process that I described a few moments 
ago, we provide a great deal of BSA data that would be 
otherwise unavailable.
    Among the first things that I did when I became director 
was to travel to Charlotte to work with the International 
Associations of Chiefs of Police. And I was fortunate enough to 
have them allow me to be essentially the cover story in one of 
their monthly periodicals. The article focused on the support 
that we can provide to state and local law enforcement.
    I think, partially because of my background, and because we 
are a network, and mainly because it is good law enforcement, 
FinCEN's role with the state and local law enforcement 
community is absolutely essential. We are striving to make it 
as good as we can.

                       PERSONNEL AND CONTRACTING

    Mr. Goode. How many persons do you have working for you 
right now? Just ballpark?
    Mr. Sloan. We have 173 full-time employees who are actual 
Government employees that work at our facility in Vienna, 
Virginia.
    Mr. Goode. And then of your request, what percent of it 
would be contracted out, work or services?
    Mr. Sloan. We do have a contracting program, and I would 
have to double-check on the exact percentage.
    Mr. Kolbe. You can submit that for the record.
    [The information follows:]

    FinCEN's FY 2000 appropriation of $34.694 million includes 
$10.663 million or 30.7% for contractual services. In addition, 
$2,225 million request for Money Services Businesses will also 
be a contractual service, where FinCEN will be reimbursing IRS 
for its services.

    Mr. Sloan. I can provide that information to you.

                  MAGNITUDE OF MONEY LAUNDERING STUDY

    Mr. Goode. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Mr. Goode.
    Back on this, you have been discussing this magnitude of 
money laundering study that you are doing. I think the money 
for this study was included in this current year's budget? Is 
that right, about $500,000?
    Mr. Sloan. Yes, sir.
    Mr. Kolbe. Is that what you are going to use for the 
solicitation of this RFP? What you are going to use the RFP 
for?
    Mr. Sloan. That is correct. We would use the monies to fund 
the vendor that would be part of the model.
    Mr. Kolbe. You do not have anything more in 2002 for that, 
do you?
    Mr. Sloan. We do, yes. The money that we currently have is 
Crime Bill money that we are attempting now to annualize.
    Mr. Kolbe. Is it another $500,000?
    Mr. Sloan. Yes, for 2001.
    Mr. Kolbe. Will that also be going to the vendor for the 
development of the model?
    Mr. Sloan. We would hope that we would be going beyond the 
model at that point, and we would be up and running and trying 
to get a model operating.
    Mr. Kolbe. So what are the operational requirements for it?
    Mr. Sloan. Operationally, we would expect that once such a 
model exists that this model would be an actual analytical tool 
that could remain available to law enforcement in the long run.
    Mr. Kolbe. Then an annual appropriation will be needed to 
maintain the analytical tool and the use of that?
    Mr. Sloan. That is correct.
    Mr. Kolbe. Personnel?
    Mr. Sloan. Personnel, but whether or not it would be at 
that level, I could not anticipate into the outyears just yet.
    Mr. Kolbe. The ONDCP has a flow model on drug trafficking. 
Have you looked at that? Or does your RFP contemplate 
coordinating with that? Or do you expect the vendor to work 
with the ONDCP in using that model?
    Mr. Sloan. Yes, sir. Among the first people that we dealt 
with, at least to the degree that I have been involved, is with 
ONDCP. We are working with them and trying to see if we can 
weave their research into our need to develop this model.
    Mr. Kolbe. What kind of analytical tools do you think this 
model is going to give you that you do not have available to 
you now?
    Mr. Sloan. Well, in the long run--and I cannot anticipate 
whether it would be next year or the year after--we would 
anticipate that this tool, in addition to giving us a measure 
of the level of magnitude of money laundering, would also be 
able to help the law enforcement community in assessing the 
allocation of resources vis-a-vis money laundering activity. We 
could then have some estimation of how resources could and 
would be allocated.
    But I think another important byproduct is the fact that it 
would provide us with the ability to either verify or fine 
tune, if necessary, the proceeds of crime issues that I have 
discussed in the last few minutes. And I think that would be 
important as well, in order to get a good handle on exactly 
what we are looking at, both from the proceeds of crime and the 
monies that are being laundered.
    Mr. Kolbe. Your RFP contemplates how long to develop this 
model, to get it up and running?
    Mr. Sloan. I would have to double check on that. I can find 
out exactly what the RFP specifies in that regard.
    Mr. Kolbe. A year, two years, three years?
    Mr. Sloan. Well, I would hope it would be less than two 
years. It is not an easy process, but I think it is an 
important process. We have certainly, as evidenced by my 
testimony, made it a very important priority.
    Mr. Kolbe. Yes. Will this be able to assess, as well, not 
just the impact of money laundering but the impact of our money 
laundering law enforcement efforts?
    Mr. Sloan. I think that there is a nexus between the 
measurement of the magnitude of money laundering, and resource 
allocation.
    So the answer is yes, I do think that it will have some 
impact on the ability for law enforcement to apply its 
resources.

                   NATIONAL MONEY LAUNDERING STRATEGY

    Mr. Kolbe. Just a couple of questions here very quickly on 
the Administration's national money laundering strategy that 
was announced last week. Included in the $15,000,000 is 
$2,800,000 for FinCEN. How is this strategy going to impact 
FinCEN in terms of new responsibilities? Especially in light of 
the strategies planned for identifying four of your, what did 
you call them, high intensity financial crime areas, HIFCAs?
    Is this a new area of responsibility for FinCEN or an 
expansion of what you are already doing?
    Mr. Sloan. Well, it is an expansion of what we are already 
doing. Now the HIFCA, the high intensity financial crime areas, 
are new and they are the product of the money laundering 
strategy of 1999 which has been articulated even further in the 
strategy of 2000.
    FinCEN does play a role in the HIFCA process. We are the 
receiving point, if you will, of requests for HIFCA designation 
from the law enforcement community in a particular region. We 
then are responsible for providing the request to the HIFCA 
working group that is made up of the principal law enforcement 
agencies at the Federal level, as well as the executive office 
of the U.S. Attorneys.
    FinCEN provides information that is essentially an 
assessment of criteria, geographic assessment dealing with 
demographics, an assessment of Bank Secrecy Act reporting in 
the particular region, an assessment of criminal prosecutions 
relative to crimes that are affected, financial crimes. We 
provide all of the data necessary for the working group to 
develop a recommendation to the Secretary of the Treasury and 
to the Attorney General as to whether or not the requested area 
should, in fact, become a HIFCA.
    As the strategy points out, there are three regional HIFCAs 
announced in the 2000 strategy, New York, New Jersey, San Juan, 
and Los Angeles, and one system HIFCA. In this case the system 
is bulk cash shipments across border on the Arizona-Texas 
border back and forth into Mexico.
    Mr. Kolbe. Explain that. Why is that a system and not a 
geographic area?
    Mr. Sloan. Because we are examining in this regard the fact 
that cash is being smuggled back and forth across the border. 
This approach essentially goes beyond any specific political 
subdivision. It cuts across several States and is a system of 
an attempt to get money out of the country that may be the 
proceeds of crime.
    We at FinCEN will be supplying, as a result of our expanded 
responsibilities in that regard, analysts who will be working 
with the action teams assigned to these HIFCA locations, and we 
will be providing analysis as we do now in a task force 
environment but specifically designated for the HIFCA activity.
    Mr. Kolbe. Mr. Goode, do you have additional questions?
    Mr. Goode. No.
    Mr. Kolbe. I may have one or two others that we will submit 
for the record. But I want to thank you both for appearing 
today and for this very helpful testimony as we consider your 
budget. Thank you very much and I do look forward to coming 
over and visiting with you.
    The subcommittee will stand adjourned.



                                          Thursday, March 16, 2000.

                        INTERNAL REVENUE SERVICE

                                WITNESS

CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL REVENUE SERVICE
    Mr. Kolbe. The Subcommittee on Treasury Postal Service and 
General Government will come to order. We are welcoming this 
morning Commissioner Rossotti. Before I proceed with my opening 
statement, let me just say that, Commissioner, I have one of 
those conflicts you don't ever like to have, especially when we 
have a hearing as important as this. But the Resources 
Committee has scheduled a bill that I have been working on for 
5 years this morning over in the Resources Committee. Mrs. 
Northup will be coming up and will be chairing for part of the 
time here. So I will be leaving shortly but be back as quickly 
as I possibly can.
    Commissioner, again we welcome you this morning. This is, I 
think, your third appearance before the subcommittee as 
commissioner of the Internal Revenue Service. You completed 2 
full years, you are in your 3rd year. We are looking forward to 
your testimony about the progress that you have made since you 
have been commissioner of the IRS and, of course, about your 
budget request for this year.
    I am delighted to note that both the commissioner and all 
of your systems survived the Y2K event and looks like all of us 
did around the world. Certainly, though there are many other 
important challenges that face the IRS that haven't been 
completely resolved: the complete reorganization of the agency 
which you have had under way for some time, the modernization 
of your information systems and related improvements to the 
business practices for the Internal Revenue Service.
    None of these proposed actions are trivial nor can they be 
accomplished individually. Modernization of the IRS is a 
daunting and an extraordinarily difficult task as I think you 
have probably found out and certainly as we have come to 
realize but it is certainly one of the most important tasks 
that not only this agency but, I think, the entire Federal 
Government faces. Concurrent with these reforms, the IRS has to 
continue to collect and manage tax revenues while respecting 
taxpayer rights. I think many of the reforms that you have been 
talking about are really at a very critical stage. That is why 
I think the hearing this morning is very, very important.
    Mr. Commissioner, I need to be frank with you and tell you 
that I have a lot of concerns about the current state of 
affairs at the IRS. First among these is the financial 
management of the Internal Revenue Service, particularly in 
light of the GAO report, financial audit for fiscal year 1999 
on the financial statements of the IRS. To me, I think it is 
fairly inexcusable that IRS continues to have significant 
material weaknesses in its financial management and internal 
control systems. This is something that you don't tolerate in a 
company that owes taxes to you and you shouldn't, and yet here 
is the very system, the very agency that is supposed to be 
collecting the taxes and you are not able to get a clean audit 
yourself. This is more than just a matter of pride or of 
anything that is theoretical. This bears directly on your 
ability to manage Federal appropriations and on our judgment 
regarding the request for additional funds this year. Your 
budget proposal for fiscal year 2001 asks for an increase over 
the enacted level of $769 million. That is, by any stretch, an 
enormous amount of money. Yet GAO's findings raise serious 
questions about whether these funds are actually needed or how 
they would be used.
    I point to one of the issues that is identified in the 
audit. It says that they found at IRS inadequate budget 
controls, resulting in IRS' inability to assure that its 
budgetary resources are being properly accounted for, reported 
and controlled. You are asking us to give you another $769 
million even when you can't account for what you are spending.
    Another area of concern that I have concerns the extent to 
which the IRS is achieving the appropriate balance between its 
compliance duties and customer service. By all accounts, IRS 
compliance and collection activities have severely declined. I 
acknowledge the role that this Congress has played with the 
passage of the legislation a couple of years ago that was in 
the end supported widely in the Congress and, of course, signed 
into law by the President. I acknowledge our role in that. But 
I also would point to the fact of what Chairman Roth said, 
there is nothing in that legislation which says we are not to 
collect taxes. Yes, make it more consumer friendly, customer 
friendly but we are still supposed to be collecting taxes. Yet 
by all accounts, IRS compliance and collection activities have 
severely declined. I am concerned that your budget request, 
particularly the proposed transfers among appropriation 
accounts is going to result in further reductions in IRS 
compliance and collection efforts.
    I need to be convinced that we have got the right balance 
between collecting taxes and respecting taxpayers' rights, that 
we are achieving that balance. I know it is something you are 
struggling with and that we need to struggle with as well but 
we need to have a dialogue on that issue.
    A third area, of course, is one that has been ongoing for 
such a long time--the information systems modernization effort. 
We have just received a request from you to release $176 
million from the information technology account, but your own 
recent assessment of the entire IRS information systems 
modernization effort identified first, an insufficient capacity 
on the part of IRS to do the work in the time allotted, second, 
ineffective control and management procedures, and, third, a 
dangerous inattention to managingrisk and implementing risk 
mitigation procedures. That is an assessment, an internal assessment by 
the agency, that hardly increases our confidence in the IRS' ability to 
manage the information systems modernization effort or its need for 
additional funds for the information technology investments account.
    There are other areas that I think also need scrutiny. One 
is your new initiative which is called STABLE, staffing tax 
administration for balance and equity, which proposes to hire 
2,833 new people, and second is the status of your electronic 
filing efforts.
    The STABLE initiative seems to represent a major change by 
IRS in its approach to modernization. It seems that we have 
been moving towards a more information technology oriented 
system, reducing the number of personnel and now we are 
reversing that and going towards a staff-intensive bureaucracy. 
Electronic filing on the other hand provides some indications 
that the IRS is at least moving into the 21st century and a 
digital environment.
    Mr. Commissioner, I think it is fair to say that every one 
of us wants you to succeed in reforming, modernizing, and 
improving the Internal Revenue Service. It doesn't do for some 
taxpayers to have to pay more taxes because others are not. We 
need to make sure that we have adequate compliance. The 
Congress, I think, has supported your efforts and your previous 
budget requests.
    Change, particularly when you are dealing with such a 
gigantic bureaucratic entity as the Internal Revenue Service, 
is often risky; and it rarely comes about very smoothly. So I 
think we are looking forward to hearing the testimony you are 
going to give us, and the answers to our questions on the 
budget request, the status of the reforms, the progress that 
you anticipate during the coming year and the milestones that 
are planning for the fiscal year 2001. Before we take your 
testimony, I will ask Mr. Hoyer for his opening remarks.
    [The information follows:]



    Mr. Hoyer. Thank you very much, Mr. Chairman. I want to 
welcome Mr. Rossotti again to our committee. I congratulate 
him, and reiterate what I have said so many times, but it bears 
repeating.
    The Internal Revenue Service for many, many years has been 
confronting substantial management problems. This committee has 
been concerned about that for, frankly, at least a decade. The 
leadership under this administration and Secretary Rubin in 
addressing the management problems, I think, is unparalleled 
certainly since my service on this committee. No secretary 
prior to Secretary Rubin focused on the management issues at 
IRS the way Secretary Rubin and then Secretary Summers did.
    In furtherance of that concern, the Treasury Department 
went out and tried to find and, in my opinion, did find an 
outstanding private sector manager, not a tax lawyer. I am a 
lawyer as the committee knows and do not criticize in any way 
lawyers, but lawyers' major focus is not management. We needed 
somebody whose major focus was how do we manage an agency of 
the size of the Internal Revenue Service with the critically 
important responsibility that confronts it.
    Mr. Rossotti was recruited from the private sector. I have 
never asked him and don't know, but I am sure his salary today 
is a very small percentage of what his salary was 4 years ago. 
He is smiling which indicates to me that he perhaps is 
remembering fondly the days of high incomes. But 
notwithstanding that, he agreed to come to the IRS. Not only 
that, did he come to the IRS but we asked him to come in for at 
least 5 years so that the IRS would have the stability in 
management oversight that would effect the changes the Congress 
wanted.
    Mr. Chairman, I want to remark on your concerns because I 
share them, and I have shared them with Mr. Rossotti as the 
challenges that confront the agency between enforcement and 
service. Very frankly, this Congress has sent very, very 
conflicting messages, Mr. Chairman, and we have had a lot of 
demagogs in the Congress who have railed against trying to 
collect revenues due, owing from deadbeat taxpayers, taxpayers 
who consciously, with scienter as we lawyers say, that is, 
criminal intent, tried to avoid the share of taxes which was 
due and owed. So that, as you point out correctly, their fellow 
citizens would not have to pay a share greater than their 
appropriate share.
    In the Reform and Restructuring Act, the members of that 
committee made a number of observations, one of which is this. 
The budget process must ensure that the IRS has an adequate 
long-term plan for financial resources, recognizing the IRS' 
unique role as the Nation's revenue collector and the only 
Federal agency that interacts with almost every citizen. Now, 
within that framework of that, of course, Mr. Chairman, were a 
number of issues.
    One obviously, we have to collect the revenues necessary to 
properly run the government of the United States, to defend our 
borders, to enforce our laws, and although it is a very small 
part, to run the executive, legislative, and judicial branches 
of our government. The Reform and Restructuring Commission, Mr. 
Chairman, went on to say that the commission recommends that 
Congress provide the IRS certainty in its operational budget in 
the near future. The reason they said that was because they 
concluded, correctly in my opinion, that the fits and starts of 
budgetary process and numbers were incompatible with the kind 
of management that we wanted to see applied at the IRS.
    The massive modernization effort that is now under way with 
the computer system in my opinion is finally working. We also 
went up the hill and down the hill on a number of occasions, 
Mr. Chairman, before you were a member of this committee and we 
didn't do as well as we should have. Frankly, I think under Mr. 
Lightfoot's leadership and the leadership of the staff on this 
committee, we really got IRS' attention. I was somewhat 
concerned about the cuts that were proposed at the time and 
they didn't ultimately go into effect but they certainly did 
have the effect of getting the attention of the IRS--this was 
before Mr. Rossotti was the commissioner.
    Mr. Rossotti, with respect to the FY 2001 budget, I see 
that you are requesting a 9.5 percent increase, $769 million, 
which the Chairman referred to. This is in contrast to last 
year's amount which was a reduction both in dollars and FTEs 
from the previous year. While I believe that the increase in 
technical capability ought to result in greater productivity 
and therefore less reliance on FTEs or persons per se, I know 
full well that one of the objectives, Mr. Chairman, as you 
know, of the reform act was to ensure that we treated each and 
every taxpayer with real concern and knew their problem, talked 
to them, and gave them the kind of customer-friendly service 
that we wanted them to receive. That cannot be done by a 
computer. That is personnel intensive. So on the one hand our 
computerization and modernization is going to help us on that, 
but on the other hand as we properly try to deal with taxpayers 
in a sensitive way so that we know individually what they are 
doing, that requires more personnel. The commission on 
restructuring the IRS recommended that Congress provide the IRS 
certainty, as I have said, in its operational budget.
    Mr. Rossotti, I am also interested in your plan to reverse 
the decline in IRS employment. This will probably be somewhat 
contentious, because it is very fine and well to say we are 
going to treat people in a customer friendly way but we need 
fewer personnel. If we don't know the facts as to what is 
happening, Mr. Rossotti, I think the debate won't be as clear. 
I hope you will go into that in your statement.
    Mr. Chairman, I would conclude by saying that I think Mr. 
Rossotti, the administration, and this Congress have a 
continuing and ongoing challenge to properly make the balance 
between wanting to collect that which is due from people who 
are trying to avoid their taxes and the necessity to treat 
citizens who are trying to comply but who through either 
complexity or mistakes have not complied.
    We certainly want to make sure we make a distinction 
between those two types of people so that we are not confronted 
with some horrific anecdote which then gets all of us in a 
lather, properly so, about the mistreatment of our fellow 
citizens. Mr. Commisioner, I know that is your challenge. I 
also know from talking to you, it is your objective, and that 
the ultimate result of the plan that you have put into place, 
which obviously is some years away from completion, will be an 
IRS that performs the way the American public wants it to.
    I might also say in closing, Mr. Chairman, you mentioned 
the GAO report. I am not going to read it, but also in that 
report, as you know, Mr. Chairman, references a number of very 
positive aspects in which GAO says, ``has demonstrated 
significant improvement in the form and content of its 
financial statement in fiscal year 1999, specifically noted 
improvements in seven areas of financial reporting, records of 
accounts payable, amounts held in suspense, documentation of 
unpaid tax assessment, reconciliation of fund balance with 
treasury, computer security, and handling of hard copy taxpayer 
receipts and data including courier security.''.
    I think, Mr. Chairman, you are absolutely correct in 
pointing out the deficiencies because we need to overcome 
those, but I do want to congratulate Mr. Rossotti and the 
people at IRS for the progress that they are making.
    Thank you very much for giving me a more extended time than 
I usually take.
    Mr. Kolbe. Mr. Hoyer, take as much time as you need. Your 
comments are always very constructive.
    Commissioner, you may begin your statement. As always, of 
course, your full statement will be put in the record, if you 
would like to summarize.
    Mr. Rossotti. Thank you very much, Mr. Chairman and Mr. 
Hoyer, for your opening comments. Mr. Sununu, good morning. 
What we are doing at the IRS is following what we believe was 
some clear direction given to us by the Restructuring and 
Reform Act.
    Under that direction, we are planning and implementing the 
most significant set of changes to our organization structure, 
our technology and most importantly the way we deal with 
taxpayers in a half a century. We are already witnessing some 
positive results.
    You noted, Mr. Hoyer, that progress in the GAO report. I 
think it is also worth noting that we have now virtually 
completed the virtually flawless transition past the century 
date change which was a major challenge. We have implemented 
about 71 new taxpayer rights in the RRA, and this filing season 
we are delivering on some better phone service and more 
electronic filing.
    Nevertheless as the chairman noted in his opening 
statement, it is a fact today that the IRS, despite some of 
these improvements, is not meeting the legitimate service 
expectations of all the taxpayers that we serve, the compliant 
taxpayers, while at the same time, unfortunately, our 
compliance activities are dropping.
    In addition, as GAO pointed out, we have severe 
deficiencies in some of the systems that we use to manage and 
account for $1.9 trillion of tax revenue. I think it is fair to 
say that these problems really are severe and if not addressed 
would, over time, really undermine the viability and the 
fairness of the entire Federal tax system.
    But these problems are not newly identified, and they are 
not impossible to solve. I believe that we now have in place a 
set of plans that, over time, will allow us to address them. We 
have implemented the RRA taxpayer rights provisions, we have 
completed the first phase. An implementation of a new system of 
balanced measures of performance, reorganization, aimed at 
increasing customer focus and manage accountability is 
progressing rapidly and we have a new top management team in 
place.
    Building on this foundation, we are now beginning the long-
term program to reengineer our business practices and 
technology that I believe, over time, will allow us to deliver 
on RRA's mandates both for improved service and taxpayer 
treatment and for compliance effectiveness. As these 
improvements take place, we also will become more efficient. 
But to succeed in this tremendous program, we must have 
adequate budget resources in fiscal 2001, both to address 
critical operational needs and to invest in new technology.
    [Charts.]
    Mr. Rossotti. As shown in this chart, and I think the 
Members have copies of these three charts in front of them so 
you can see the three charts because I think they really make 
the point visually that I really want to stress in my 
testimony.
    The first one, it really just shows that the economy 
continues to expand rapidly. That increases IRS' workload every 
year. For example, since 1993, the number of individual tax 
returns with income over $100,000 which happened to be the ones 
that tend to be the most complex, have increased by 63 percent. 
At the same time, the IRS staffing as you can see in that 
bottom chart steadily decreased, a total decrease of 17,000.
    On top of these general trends which have been in place for 
a number of years, beginning in 1998, we had the Restructuring 
and Reform Act. As we now know, and we have details in the 
chart in front of you, the specific provisions of this act for 
taxpayer rights have required and are requiring at the present 
time an additional about 4,500 equivalent personnel to 
administer. These are shown by code section.
    Now, since compliance personnel represent the largest 
component of the IRS budget and most of the staff and since 
they are the ones that are required to administer most of these 
provisions, the net compliance staffing has declined even more 
rapidly and that is shown on this third chart.
    The bottom part of this chart really shows, the top line is 
the total compliance staffing and the bottom line shows the net 
compliance staffing after we have taken out what we need to 
administer these new provisions and the other things that we 
are being required to do. So you can see that red line is 
dropping rapidly. That is why the compliance activities that 
you have seen, that is one of the main reasons the compliance 
such as exam and collection has dropped so much.
    In addition to those causes, there are also some other 
factors having to do with the sum total of the pervasive change 
that our employees are facing. This has without doubt increased 
uncertainty, confusion, and most importantly a need to relearn 
basic jobs of the way things are done in collecting taxes.
    So that has compounded the effect and one of the specific 
effects has been that, much as Mr. Hoyer said in his opening, 
has simply increased the time required to do each case, to 
complete each exam, each interaction with a taxpayer. The net 
effect of this is that our completed number of, for example, 
exam and collection cases has about dropped in half since 1997.
    To address these, what I call pressing operational, 
immediate operational requirements, we have a requested 
increase in staffing that is referred to, as the chairman said, 
as STABLE, and this initiative requests a total of 2,833 
additional staff and it is split between in the budget request 
a 2000 supplemental and a 2001 budget request but the total 
annual cost is $188 million.
    With this staffing level, if we are granted it by Congress 
in 2001, we will be able to stabilize the level of enforcement, 
the level of compliance activities while continuing to comply 
with the taxpayer rights provisions and to maintain or slightly 
increase our staffing level. We view this staffing increment as 
essentially an immediate need to just meet critical operational 
requirements while we transition to what we believe will be a 
new, more efficient organization structure and reengineered 
technology.
    Of course, that is the other key factor in our budget, is 
the technology. As I think the members of this committee know 
all too well, the IRS depends entirely on our computer systems 
to administer the tax system and to properly account for $1.9 
trillion of tax revenue. Yet I think, as we have discussed many 
times and as GAO has pointed out, these systems are beyond 
repair. They are fundamentally inadequate to manage the tax 
system in the United States. They are the source of many of the 
problems that are identified from many different sources.
    We have submitted, of course, the plan as the chairman 
noted for this year, for reengineering these systems and there 
is more detail in my written testimony. To sum it up, in 2001 
we are requesting an appropriation of $119 million for the 
information technology investment account. We are also 
requesting $40 million for the most extremely high priority 
near-term investments during fiscal 2001 in our information 
systems account.
    Let me mention the topic of risk which the chairman in his 
opening appropriately identified, and I must say as I think I 
have said before this committee, in the kind of program we are 
dealing with, there is no way to avoid risk. As a matter of 
fact, if we were to do nothing, we would not avoid risk because 
I believe we have severe risks in the way we operate the tax 
system today.
    The question is, can we manage these risks? And I think we 
can manage these risks and achieve our goal much as we did with 
the recently completed 1.4 billion dollar Y2K program which I 
believe we can truly declare at this point fully successful, 
very, very few problems, job accomplished.
    I would like to mention some of the elements that we think 
we have in place to manage this program that were perhaps not 
in place in the past when previous efforts were not as 
successful. These include a single and centrally managed 
information systems organization, a very active top governance 
process for the entire program, which I personally chair, which 
Mr. Cosgrave who has 25 years in the information technology 
business manages on behalf of the agency, and which includes 
active engagement by every key top executive that is involved 
in IRS programs.
    It includes very rigorous adherence to architectural, 
technological and methodical standards, reliance on a PRIME 
contract to manage and develop our integration activities, get 
the best from the private sector, and I think perhaps most 
importantly, the most important element of all is an unwavering 
commitment that I have and that my top management team has to a 
completely open process. This includes regular, open and I will 
tell you very sometimes fiercely difficult meetings with GAO, 
TIGTA, OMB, Treasury. We have even invited staff members from 
this committee to come over if they would like to, where we 
confront in a very forthright manner the issues and the 
adjustments and the risks to schedules and projects that we 
need to make.
    As was somewhat noted by the chairman again in his 
comments, we have already seen this process in action because 
we have already unhesitatingly revised some of our initial 
proposals to slow down certain projects that we felt were not 
ready to proceed at the desired pace and to rearrange some 
other activities to make sure that architectural and methodical 
concerns were adequately addressed.
    I think this is the sign that we are actively managing this 
program. Mr. Chairman and Members, I believe we are making real 
progress on the goals and mandates that the Congress actually 
set forth in the restructuring act. If the Congress will 
provide us continued support for this program, including our 
2001 budget request, I think that we will be able to produce 
visible, tangible increases in service, compliance, and 
productivity, all three, which is the three goals that we have, 
and which is what I think the American taxpayers expect. Thank 
you.
    [The information follows:]



    Mrs. Northup [presiding]. Thank you, Mr. Commissioner. I am 
filling in for Chairman Kolbe while he is testifying before 
another committee. We will go in 5-minute rounds, and I will, 
of course, recognize the Ranking Member, Mr. Hoyer, next and 
then the Members in the order in which they have come.
    I would like to start with asking you more questions about 
the financial management at the IRS, and the GAO report and ask 
you specifically--let me start by saying that the General 
Accounting Office did note that there were improvements, there 
was a commitment on behalf of IRS to bring the financial 
management of the IRS into acceptable practices. Now I know 
that you have been in the private sector and that you have 
managed large companies.
    I just wondered--if you audited a company and saw the sort 
of financial situations and problems that the GAO is telling us 
about at IRS, you would think that that was pretty typical of 
large organizations or whether you would say that it is beyond 
that.
    Mr. Rossotti. I would say that it is beyond that. I would 
say, though, however, that the problems identified here in this 
GAO financial audit unfortunately are only one set of problems 
and in some cases are actually symptoms of deeper problems.
    The GAO has been making these audits since I think it was 
1992, and many of these problems remained on the agenda 
unfortunately year after year without being resolved and in 
some cases they pointed, especially in the systems area, to 
deeper problems. So I think that as GAO noted, some of these 
will take a number of years. They are really quite fundamental, 
in some cases, some cases they are not that fundamental; and we 
can solve them earlier.
    Since this is such an important topic, could I just take a 
minute and try to summarize a little more what we need to do 
about some of these. I think they fall into three categories.
    One is the financial statements themselves, that is what 
they are called, the financial statement. Of course there are 
two financial statements, one that deals with the $1.9 trillion 
of tax revenues. Fortunately that part of our financial 
statement did get an unqualified opinion from the GAO, 
notwithstanding that it took a lot of work to get that but it 
was done. And I think that is important to the taxpayer because 
what that basically says, the tax money that is coming in is 
getting to the Treasury, the money is not being lost along the 
way. That is a most fundamental thing. I think that is 
important.
    The other statement which is our internal administrative 
budget got a qualified opinion, there were still some things 
that were not acceptable to GAO or to ourselves. And we can 
solve those problems. We are working on them very hard; and I 
hope that perhaps next year, we will be able to resolve those 
particular remaining issues in the administrative statements 
that interfere with getting a clean opinion. Those are the 
financial statements themselves.
    Frankly, the deeper problem is the material weaknesses that 
are identified behind the financial statements. There are 
several of those. If you look at them, and I have a chart that 
tracks them from year to year. Most of them were on there last 
year.
    There are fewer bullet points under each one fortunately 
this year than there were last year, but they are still there. 
Some of them can be solved as we have in the last year by just 
better management and better process internally. We are 
absolutely committed to doing that. But as GAO noted, the more 
significant ones really are a function of the fact that we have 
30-year-old computer systems which were never designed to meet 
proper accounting standards. They were just never thought of in 
that regard.
    While we can get clean financial statements, I believe, and 
solve some of the problems through better management, really I 
think there is no solution other than really to replace these 
systems. I said in my testimony they were medieval, I really 
would have to say they are. We will have to work on that in two 
tracks.
    Finally just briefly, let me mention there is a third set 
of topics covered in here which are really, I would say, 
related to the financial statements in the sense that the 
financial statements report on the results. These have to do 
with basic issues of tax collection. The GAO, for example, has 
noted that we don't follow up on all the matching items. Where 
we get reports from third parties on 1099s and W-2s, we can 
match those against the income tax returns and sometimes find 
discrepancies.
    We do not have the resources. This is strictly a resource 
issue. We do not have the resources to match and to follow up 
on every single--we get a billion documents. We do not have the 
resources to match--we have the resources to match them but to 
follow up on every one of those. If we did get the resources, 
then we would have another decision which is would that be the 
best place to put our compliance resources. These tend to be 
relatively low- to middle-income individuals where you find 
those kind of issues as opposed to putting those compliance 
resources in things like corporate tax shelters or other kinds 
of, let's call them more abusive kinds of noncompliance that 
wouldn't show up by just matching somebody's income tax 
returns.
    That third category really has to do with what I would call 
basic policy decisions and tax administration. They are 
reported in the financial statements because the financial 
statements reveal that these issues exist. But I think they are 
in a somewhat different category from the other two areas.
    Mrs. Northup. I have to say that I have a lot of confidence 
in you as somebody that has experience in a large operation, a 
large organization, and I think that Congress believed that IRS 
had fundamental and systemic problems when the bill was passed 
last year and not only a demand for fairness and balance, but 
also to bring IRS under some sort of financial control.
    My concern is, is that we have spent billions on a computer 
system, and sometimes if you don't know exactly what you are 
going to track and what the systems are, putting a computer in 
doesn't help you accomplish those goals, because the software 
that is needed to accomplish them doesn't match up with what 
the objectives are. But I would say, overall, that even though 
the small dollar amounts compared to large corporate tax 
shelters and so forth may seem small in amount, it sends a 
message to taxpayers, those that are paying their fair share 
every single year, that are sitting down and assessing what 
their responsibilities are in following through, and if the IRS 
deems it to be insignificant or the last thing on their agenda, 
to begin to make sure that the computers, whatever we invest, 
are able to track and systemically recover money, to make sure 
that refunds arepaid, and that as the GAO said, over returns, 
returns that were incorrect, they talked about unpaid assessments, if 
that is allowed to continue, that is the sort of man on the street sort 
of information that is easy to put out on the Internet that develops a 
culture and a mind-set about what our system is. I would ask you not to 
diminish its importance.
    Mr. Rossotti. I certainly did not mean to diminish its 
importance. I was just trying to illustrate that we have a 
fundamental dilemma at the IRS which we will always have but we 
have it particularly now, which is we have more different kinds 
of problems that demand attention than we have the capacity to 
address in the short term. And so we have no choice but to make 
choices.
    We have, for example, as you noted, a large number of 
documents that come in, that could represent potentially unpaid 
taxes; and we can identify those through the computer system. 
It does take people to follow up on those and to find out if 
they are indeed unpaid taxes or if they are not unpaid taxes.
    We have a significant number of businesses that, for 
example, report taxes on their return but simply do not pay the 
taxes and have therefore receivables balances building up. We 
have several million of those accounts, some of them are quite 
old. We do not have the resources to follow up on each and 
every one of those receivables. It is impossible with the staff 
that we have and with the technology we have. We have no choice 
and this would be true in a business, too, you would prioritize 
and go for the ones that are the most significant, but we have 
no choice but to set priorities and determine where we are 
going to put our resources.
    And what we try to do is to provide a balance where we 
don't completely ignore any one area but we try to make sure, 
the reason you say, for fairness, that we put some resources on 
each one of these noncompliance problems and at the same time 
as Mr. Hoyer says, try to deal with the compliant taxpayer so 
that if somebody is actually coming in and trying to pay their 
taxes, we don't give them just a busy signal.
    Mrs. Northup. I know my time is up. Mr. Hoyer.
    Mr. Hoyer. Thank you very much. Let me ask some specific 
questions, but preface those with, I am looking at your charts.
    Mr. Rossotti. Let's put the third one up with the front 
line compliance. You can see that one very easily. This just 
summarizes the trend.
    Mr. Hoyer. I wanted to ask a question, because I know 
during the 1980s we were concerned about the number of audits 
that were occurring and the enforcement was decreasing at that 
point in time. These are FTEs.
    Mr. Rossotti. This shows you FTEs, but this is basically 
what you need to do. If you would look at audits, you would see 
there was a long-term trend down through 1997. It continued to 
go down but at a faster rate. It is roughly about half of what 
it was 3 years ago now. That is partially, mainly because of 
this trend, fewer people to do them but also because of some of 
the other provisions of RRA.
    Mr. Hoyer. I am going to ask you some specific questions 
about that. What has been the effect from your observation on 
revenues?
    Mr. Rossotti. The total amount of tax revenue, of course, 
has continued to go up significantly. The portion of that----
    Mr. Hoyer. As the GDP has substantially increased?
    Mr. Rossotti. It has actually gone up faster than the GDP 
because of the growth in the high income returns. People have 
continued to comply by and large. We haven't got any, although 
we have very minimal data on this, there is no real evidence 
that there has been a systematic reduction in compliance.
    Of course, the enforcement revenue that comes in from 
audits and collection is a very tiny percentage, less than two 
percent of the total. The issue is not so much revenue in the 
long term but is fairness; I think both you and Mrs. Northup 
mentioned. This is the concern.
    If the person paying all of that $1.9 trillion begins to 
believe that their neighbor or competitor is not paying, we 
undermine potentially the whole system. No one can predict when 
that happens. There is a lot of positive momentum, a lot of 
good things about the system.
    I do want to stress that as much as we have fewer audits, 
the IRS has not gone out of the enforcement business. We are 
still spending 70 percent of our resources on compliance, and I 
wouldn't want any taxpayer listening to this hearing to get the 
wrong idea because those numbers still are on the books. It may 
take us a while to get there, but the person that thinks they 
are going to get away with it is going to be making a big 
mistake.
    Mr. Hoyer. Furthermore, Mr. Commissioner, we wouldn't want 
any IRS employees to think that the Congress does not believe 
that enforcement and collection are important. Yes, we want 
fairness and yes, we want each individual treated fairly. 
However, as I stressed when I was one of four to initially vote 
against the restructuring act, not because I was opposed to the 
act, I ultimately voted for the conference report, but because 
the point I made there was that simply pretending that the IRS 
was dealing with 100 percent of citizens who were dying to pay 
their taxes would be an erroneous assumption.
    There are, unfortunately a very small percentage of 
Americans who do everything in their power to avoid paying to 
keep this country great and viable. We need to make sure, as 
Mrs. Northup pointed out, that the overwhelming majority who 
are paying their fair share don't feel that others are getting 
away with not doing it.
    Mr. Rossotti. I couldn't agree more. Our whole goal, this 
is actually established officially in our strategic goals, we 
need to do both. We need to make the compliant taxpayer feel 
like they are being treated properly, and we need to be 
effective in dealing with noncompliant taxpayers who won't pay.
    Mr. Hoyer. Mr. Commissioner, if you would submit a form 
similar to that in terms of audits that are occurring.
    Mr. Rossotti. We will do that.
    Mr. Hoyer. Obviously if we go out of the audit business, 
every taxpayer is going to know that and particularly the 
taxpayers who are inclined to avoid their taxes.
    Of course, it is usually the average working person who 
gets it in the neck. The reason the average working person gets 
it in the neck is because he can't play games. Every week we 
take it out of his paycheck or her paycheck. We got it. It is 
the folks that are not in that business of having everything 
withdrawn at the time they get paid on a weekly, biweekly, or 
monthly basis that are not affected.
    Let me go to the specifics of this. Your biggest single 
funding increase is $144 million for the staffing tax 
administration for balance and equity initiative which you 
refer to as STABLE. STABLE ties right in with what the reform 
commission said. What is the impact of this initiative of not 
receiving the supplemental funding that was theoretically going 
to be in the fiscal year 2000 budget?
    Mr. Rossotti. We had divided it into two parts. There was 
$40 million for the supplemental and $144 million in the 
budget. We did that in order to try to get some hiring done 
this summer before, so we would have them ready before next 
filing season which would help us. If we don't get it in the 
supplemental, we won't be able to do that and it will delay 
things.
    I do want to stress that what is most important though is 
that we get in some form the funding for the entire 2,800. The 
purpose of this is not to deal with all of our problems just by 
adding staff. I think Mr. Kolbe correctly said that the 
strategy that we have been pursuing is primarily based on 
improving management and technology not just by throwing 
resources, but the reality is as I showed you, we have over 
4,000 specific requirements right now just from RRA. If we can 
get, let's put it this way, if we don't get any of the STABLE, 
either the supplemental or put it into 2001, what is going to 
happen is that red line is going to continue and we are going 
to really be in a situation where we neither can--as it is now, 
we are still not answering the mail so to speak for the 
compliant taxpayer. We still have really marginal service for 
people who are trying to pay, and we are reducing our number of 
audits and collection activities because of the mandatory 
requirements we have to meet.
    That trend I think is very dangerous. The point of STABLE 
is exactly as the name says, to stabilize this. If we get this 
money, we will be able to stop this down trend and at least 
stabilize or maybe slightly increase our levels.
    Mr. Hoyer. Mr. Commissioner, if the $40 million is not 
included in the supplemental, would that mean that we need $184 
million rather than $144 million?
    Mr. Rossotti. It would indeed, because we just put it into 
two parts. Really what is most important is that we get funding 
for the full 2,800 people.
    Mr. Hoyer. And if we didn't fund at all the full STABLE 
account in 2001, what would be the impact?
    Mr. Rossotti. This is just I think what I have been saying. 
In the short term we are hurting. We simply are hurting. We 
cannot meet the legitimate needs of the taxpayer as expressed 
in RRA, and we are taking it out of compliance because that is 
only place we have got it. So this trend is going to go down 
for another year. I think that is dangerous. I think we have to 
level this thing off and keep it stable, which is why we use 
the word "stable," until we can get this technology and the 
other improvements in place.
    Mr. Hoyer. Said another way, if we didn't get this 
initiative, could we be customer friendly?
    Mr. Rossotti. Well, we are trying to be customer friendly. 
We are trying to deal with customers in an appropriate way but 
it takes resources and time to do that. I think we are pulled.
    If you talk to our average employee right today, I was down 
in Florida yesterday, what they will tell you is they are out 
there trying to deal with taxpayers who are coming because they 
want to pay their taxes. What they are doing is they are 
setting aside their cases of people that they are trying to 
audit who have identified problems on their tax returns, which 
we are not really giving good service even to that taxpayer 
because basically it is elongating the period for the audit.
    So we have a dilemma that is very excruciating right now 
because of the needs to meet these competing demands. We are 
doing the best that we can to balance them. I really believe 
that we have done as much as we can in that regard, and we do 
need some help in the form of some additional resources for the 
near term. I do want to stress that we are not asking for 
anything close to what it would take to even take the full, as 
you saw the 4,600 under RRA, or even to go back to where we 
were in 1997. We would have to add about 8 to 9,000 staff from 
where we are today to just deal with RRA and go back to where 
we were 2 years ago. We are not asking for that. We don't think 
we need to go to that level. We think with the other 
improvements we are making together with a limited amount of 
staff we can balance these things. But some effort is required.
    Mr. Hoyer. Thank you, Mr. Commissioner.
    Mrs. Northup. Thank you. Mr. Sununu.
    Mr. Sununu. Thank you very much. Thank you for being here, 
Commissioner. You are requesting an increase of a little bit 
over 2500 FTEs. Is that correct?
    Mr. Rossotti. Yes.
    Mr. Sununu. I almost--I was looking at the mandatory 
number. I was confused for a moment. 2500. How many of those 
are management positions?
    Mr. Rossotti. None. These are all, except there might be a 
few front line positions in there but there are no management 
positions. We are actually in our reorganization reducing the 
number of management positions.
    Mr. Sununu. So when you use the term front line position, 
is that a management position?
    Mr. Rossotti. No. A front line position, people that deal 
directly with taxpayers or their first line managers.
    Mr. Sununu. EITC claims. This is obviously something that 
IRS has been working on, doing a better job administering the 
EITC program in general. What is the rate of fraudulent claims 
made? How does that compare to maybe 1998 or 1999? And what are 
we doing to either, one, better understand the rate of 
fraudulent claims and to improve performance?
    Mr. Rossotti. First let me say in terms of looking at 
claims, I think as several Members said, there can be erroneous 
claims for a lot of reasons, including errors, it is really 
quite complex in some cases to determine what an eligible 
person is.
    We are looking really more broadly, not just fraudulent but 
all forms of erroneous claims. We did do a study that we have 
in progress, we have not completed it yet. I hope we will 
complete it and be able to release it relatively soon,but I 
don't have it yet to give you the numbers. But we did do the study for 
the specific purpose of determining a baseline of all sources of 
errors, not just fraudulent claims, on the EITC claims.
    So I can't give you the number from that yet because I 
don't have it, but what I will tell you is what we have been 
doing to try to deal with this. It boils down to having two 
things, one is to try to prevent erroneous claims in the first 
place, and the second is to find them and not pay them out as 
much as possible.
    On the second part of it which is the audits, as GAO 
pointed out in here, we pointed out on the potentially 
erroneous refund claims, we were able to, we think, find about 
70 percent of them or at least of the ones that we did identify 
as potentially erroneous, we held 70 percent of them and 
checked them before we sent out the refunds. The other 30 
percent were in a category that was ambiguous so we paid those 
and checked up later. The other thing that we----
    Mr. Sununu. Excuse me. Was that on a review of all claims 
or was that a subsample that you took?
    Mr. Rossotti. Subsample. We have a statistical formula that 
tries to identify, it first screens out things like matching 
the identification number of the child and so forth. Then it 
identifies some other characteristics based on past----
    Mr. Sununu. Approximately what percent of the EITC requests 
did you review?
    Mr. Rossotti. I think it was 735,000 out of----
    Mr. Sununu. I see the number here. 573.
    Mr. Rossotti. Yes.
    Mr. Sununu. Thank you.
    Mr. Rossotti. The other thing I think that we did that was 
unique this year, we don't have the results of it yet, but we 
found out--many of the EITC returns are prepared by preparers, 
individuals, not necessarily sophisticated accountants but 
people who prepare tax returns. We found that there was 
actually a significant error rate in the preparer-prepared 
returns. Probably in most cases just because of certain types 
of due diligence that they didn't know they were supposed to 
do, there were certain errors.
    We actually completed in December of last year a first-of-
a-kind outreach program for preparers. We had 10,000 visits, we 
had an analysis, we figured the preparers that had the greatest 
number of returns that had errors, we sent out people for a 
visit, a personal visit to walk through what the requirements 
are, how to prepare the EITC return.
    For a smaller group of preparers that we thought perhaps 
were deliberately or potentially seriously preparing wrong 
returns, we did a more thorough audit of their previous returns 
and in some cases imposed penalties. And in a very small number 
of cases, we actually felt that they were potentially 
fraudulently preparing returns and we may have initiated some 
criminal investigation. So we had a program proactively this 
year, we don't know the results of that yet but we hope and we 
expect that that will for the preparer-prepared returns reduce 
the number of errors that we come----
    Mr. Sununu. When do you hope to issue the final report of 
that evaluation?
    Mr. Rossotti. We hope to do it this year. We are working on 
it right now.
    Mr. Sununu. I will anxiously await that.
    I point out, it is of great value because the statistics we 
hear most often dealing with the EITC program are an 
assessment. I have heard roughly 20 percent fraudulent claims, 
and I think that was based on an assessment done a couple of 
years ago. Things have obviously changed since then; you are 
making an effort here.
    As someone with a modest technical background, I respect 
the fact that a statistic that lingers out there for too long 
at a certain point doesn't do anyone any good any more because 
it doesn't represent an accurate baseline. I think that study 
will help us a great deal in our work here.
    I would like to turn to property and equipment. Some of 
the, well frankly some of the most critical language that I saw 
in the GAO report dealt with property and equipment. I think 
this is an extremely important area because there is so much 
technology, so many computer systems that the IRS relies on 
constantly. And obviously the history of computer modernization 
prior to your arrival was a bleak one to say the best, with the 
amount of money that was invested in computers with a lot of 
claims being made about the ways in which it would modernize 
the system and goals not being met.
    In doing the review, the GAO says the IRS does not have an 
integrated property management system, appropriate records for 
property and equipment additions and disposals for--covering 
additions and disposals as they occur. As a result of this, 
there had to be an estimate, an upward adjustment of over $1 
billion which is an adjustment of 600 percent to the accounting 
records as a result of a disparity between what was on the 
books as net property and equipment and what an actual 
inventory turned up. I am sure you weren't pleased with that. I 
am sure you recognize the importance of having a P&E system 
that can accurately keep track of additions and disposals.
    My question is, if you could address briefly, what kinds of 
steps are being taken? And the GAO, to be clear on the record 
here, was clear that as a result of this, changes have begun to 
be made. There wasn't a lot of coverage of the specifics. I 
would like to give you a chance to talk specifically about what 
is being done on property and equipment here to improve the 
controls.
    Mr. Rossotti. I think the property and equipment--first of 
all I agree with your summary of what the situation was and 
equally your conclusion about whether I was pleased.
    Clearly, we are not pleased to have this. It is, however, I 
think an example of one of the areas that is really a symptom 
of some of the problems that have existed because property and 
equipment has been identified in audits for years and years and 
years at the IRS as a problem, and it is true. We do have a 
heck of a lot of equipment in a lot of different locations. So 
it is not a trivial problem to get ahandle on it.
    So what really are the problems and what are the solutions? 
One of the fundamental problems is you can't manage something 
unless you have somebody in charge clearly of who is going to 
manage it. That is basic. While most of the property and 
equipment, most of the issues have to do with computer 
equipment, that is what most of the property and equipment that 
the IRS has is.
    As of 3 years ago, we had 15 different information systems 
organizations in the IRS, just in information systems; and that 
was just organizations. They probably had equipment in upwards 
of 4 or 500 different locations spread across the country. 
There was no single person or authority or system that kept 
track of this.
    I think as the GAO noted in some of its more colorful parts 
of their discussion in describing some of the procedures that 
were used where one person would call up and tell another 
person that there was a piece----
    Mr. Sununu. I was very careful not to read those parts into 
the record.
    Mr. Rossotti. I appreciate that very much but nevertheless, 
they made their point. I can't dispute this. The system was not 
there to do this. I don't mean that there were evil people that 
wanted to not account for equipment. It wasn't that there was a 
lot of equipment being stolen or misused, it was just that 
there was no real good management system in place.
    Today we have one, I stress, one information systems 
organization in the IRS. And there are a few stragglers around 
but--of places that aren't on it yet but it is about 95 percent 
in one organization. That is under Mr. Cosgrave who many of you 
have met who is an outstanding person that came in also from 
the private sector.
    We have, as a result of Y2K and as a result of some of the 
work that was done in this audit, put together in effect a one-
time cleanup to get these records up to speed of most of the 
information systems material.
    And then we have, as indicated in some of the letters that 
we responded here, an activity to continually manage this 
inventory going forward through this one single information 
systems organization. That is the steps that we are taking.
    Mrs. Northup. We are going to have to move on. If you can 
summarize.
    Mr. Rossotti. That is fine. I have covered it.
    Mrs. Northup. Thank you, Mr. Sununu. Mrs. Emerson.
    Mrs. Emerson. Thank you, Madam Chair. Mr. Commissioner 
before I start my questions, let me first say to you seriously 
how helpful and willing to extend herself the St. Louis 
taxpayer advocate is. I do want to put that on the record.
    Mr. Rossotti. Thank you very much.
    Mrs. Emerson. She has been tremendous and a big help to us.
    Mr. Rossotti. Thank you.
    Mrs. Emerson. Last year I asked you about programs that 
were in place within the IRS to specifically assist small 
business owners and farmers to comply more efficiently with IRS 
filings. You responded that this was an area of great potential 
improvement. I would be curious to know what improvements have 
been made over the past year.
    Mr. Rossotti. I think that one of the things that we have 
been doing is working cooperatively, and this is really going 
to be the strategy going forward to a much greater extent, 
working cooperatively with a number of organizations that are 
already in touch with small business.
    The first one is the Small Business Administration. We have 
got cooperative programs, we have put out a CD-ROM that has 
been very successful, and a number of different workshops that 
we have put together with them. There is also, I think, a great 
deal of potential in something called the Small Business 
Development Center Program which is almost a thousand different 
around the country--mostly based in community colleges, almost 
a thousand different programs that exist to basically primarily 
focus on start-up small businesses or businesses that are 
growing.
    They already have a set of programs that are very, very 
popular that reach a lot of small business owners to educate 
them on a broader range of things. What we want to do is 
satellite the tax thing on top of those kinds of things 
because, A, people don't always trust the IRS directly. 
Frankly, I hope to change that, but they trust other people 
more than they trust the IRS. To the extent that we can work 
with people----
    Mr. Hoyer. We appreciate that radical disclosure that you 
make.
    Mr. Rossotti. I didn't think I was revealing anything that 
was really big news. But I think as much as that is 
unfortunate, maybe it will take years to change that, if we 
work with these kinds of organizations to get the message 
across, we will be much more successful.
    There are also many other, like industry associations and 
groups that have been willing to work with us on specific 
educational programs. But frankly, that is just the tip of the 
iceberg.
    One of the problems that we have now is that we have nobody 
really in charge at any significant level of this kind of 
activity. It is kind of an afterthought. In the new 
organization which we are now implementing, we are going to 
have a whole unit and a whole subunit that is going to be 
responsible for just nothing else than taxpayer education in 
the small business arena and work these kinds of issues.
    Mrs. Emerson. It seems to me that the SBDC would be a real 
good place to start given the fact that the GAO study says that 
roughly, what $37 billion a year is lost in tax revenue from 
small businesses. And if there is a mechanism in place already, 
delivering taxpayer education through an SBDC would have to 
help some of those problems and reduce the level of 
noncompliance.
    Let me ask you just one further question to follow up on 
that. Normally the funds for that type of taxpayer education or 
compliance workshop would have been funded through the Small 
Business Administration, and it has been through some kind of a 
grant program. I am told, too, that those funds are going to 
run out at the end of this fiscal year. So my question to you 
is, do y'all at the IRS have the resources to continue and 
expand these types of tax compliance education pilot programs? 
Or are you going to need extra funds to do that?
    Mr. Rossotti. We have been doing it on a cooperative basis. 
The Small Business Administration has been providing some of 
that grant money because we don't have that money. We have been 
providing them a significant amount of technical support and 
additional work that we can do out of our funds.
    As of 2001, I think that is the situation that we arestill 
in. I think what we need to try to do is to work with the Small 
Business Administration and we have good relations with them and see if 
we can find some way to keep this going, because it would really be, in 
my view, a tragedy for this to fall down.
    Of all the programs that I have come across, I really think 
this is one of the most promising. We also have, by the way, in 
place with them a little research study to try to measure in a 
controlled way the compliance effect of doing this kind of work 
because that is one of our problems, we don't. We have got a 
little issue to do that. I hope that we can work with the Small 
Business Administration for them to provide some grant money 
somehow for their piece of it and for us to continue our piece 
of it.
    Mrs. Emerson. When do you suppose you will find out the 
answers to this research project to see if in fact it has been 
successful?
    Mr. Rossotti. I don't know exactly, but I would imagine 
next year would be my guess.
    Mrs. Emerson. Okay. If you know anything further or can 
give my office more details, I would be grateful. Thank you, 
Commissioner.
    Mrs. Northup. Mr. Commissioner, I would like to follow up 
on Mr. Hoyer's statement that we do not want to convey the 
message that Congress does not want the IRS to enforce the law.
    Compared with levels--I am looking at something that was in 
the report. Compared with levels reported several years ago, 
fiscal year 1999, lien filings were down 69 percent, tax levies 
were down 86 percent, tax seizures were down 98 percent, 
collections from delinquent taxpayers were down about $2 
billion. David Williamson, Treasury Inspector General for Tax 
Administration recently testified that the decrease in tax law 
enforcement is an IRS trend that worries him the most.
    My question to you is, and it is a serious question, with 
the enormous reduction in collections that has been widely 
reported, editorial writers around the country are busy 
editorializing that in a sense, quote, ``this is what we get,'' 
unquote. The interpretation has been that Congress caused it, 
created an anti-IRS sentiment and made it impossible for the 
IRS to enforce the law.
    I have to tell you that I think this is a claim that is 
mistaken. The fact is, is that we did not create the problem, 
that the reason there was the bill in the testimony is because 
all of us in our individual districts were hearing complaints 
about the type of enforcement that was going on.
    I think that balance was exactly what we expected. I think 
the claim that this is what we get is something that the IRS 
can make a self-fulfilling prophecy.
    My questions to you are, was employee morale hurt by the 
IRS bill last year? Is there an explicit or implicit culture 
within the IRS that is retaliatory considering the incredible 
reduction in enforcement, have you initiated any action to 
delve into this slowdown and hold your organization accountable 
to perform its standards?
    Mr. Rossotti. Let me just first of all say that there are 
many statistics in the IRS. Some of the ones that are cited 
there on things like enforcement actions are just one dimension 
of the whole process of collecting taxes. It is really the 
piece that comes out at the extreme end.
    I think we would have anticipated some reduction in that 
area and probably would not be surprised if there would be some 
reduction in that area because I think some of the problems 
that existed was that there was an overemphasis in the past on 
the use of some of those tools such as seizures. I just want to 
put that qualification in. Nevertheless this is certainly a 
worrisome trend and something that we are spending a great deal 
of time on.
    I think that you have to basically again really try to 
analyze what is going on in order to understand what to do 
about it. There are three basic points again. One of them is 
that simply the number of resources that is available to 
institute enforcement actions as I showed on some of these 
charts has gone down significantly. This has been true in both 
exam and collection, it has gone down significantly. That is 
point number one.
    Point number two is the specific procedures in the RRA. It 
is true that they do not take away any of our enforcement 
powers, they allow us to go ahead and do an enforcement, the 
same enforcement actions that we could before, but procedures 
require a much greater amount of time to do them, a much 
greater amount of time. For example, to seize a personal 
residence which was something that could be done on the 
authority of the IRS in most cases in the past, and would be 
initiated by a revenue officer, did require some higher level 
approvals, now requires a process which first of all notifies 
the taxpayer of appeals, if the taxpayer takes advantage of 
their appeal rights, they then have the ability to go through 
appeals and so forth, they can then appeal that to court if 
they want to. If that is accepted we then have to go to another 
channel to go to the Justice Department to get a specific 
district court order to do the seizure of residence. It goes on 
and on. Even in the more simple cases, it can take a 
significantly greater amount of time, both elapsed time and 
people time to do these kinds of actions. That is a major 
reason why in collection particularly some of these actions 
have not taken place.
    The third reason, though, is I think more intangible and 
gets to some of your points. There is no question that, I will 
call it broadly morale but I think it gets to a lot of 
subjects, such as confusion over what my job really is, what am 
I really being expected to do. Those questions are very much on 
the minds of people, especially in the collection area in the 
IRS.
    They are reinforced by one particular section of the law 
called section 1203 which is popularly known as the 10 deadly 
sins which basically calls for mandatory termination for 
violating certain provisions. One of those has to do with 
violation of procedures with the intent of harassing taxpayers. 
Given the fact that there are a lot more procedures and there 
is a 1203 provision that says if you violate these procedures, 
and that is found to be for the reason of harassing taxpayers, 
you are going to be fired, it tends to cause a considerable 
amount of concern on the part of the employees.
    The final point to note is, as you mentioned, holding 
people accountable. There was another major section, probably 
the one that has gotten less attention but in my view is 
probably the single most important in the enforcement area is 
actually section 1204 which had to do with prohibiting the use 
of enforcement statistics for the purposeof evaluating any 
employee or for setting goals or targets. There is now a quarterly 
certification that every manager in the IRS up to the Commissioner has 
to sign that says we have not used any enforcement statistics to 
evaluate any employee or set any targets. If we were to say, well, 
would we set a target to go out and take a certain number of 
enforcement actions, that is no longer allowed.
    Mrs. Northup. My time is up, Mr. Commissioner, but there is 
a lot of difference between having collection standards and 
having enforcement performance standards. You can do it by 
audit to see whether cases have been disposed of correctly. You 
can look at--when actually there are delinquent taxpayers, 
there is a determination that they were supposed to pay and 
there is no action on those cases. Now, that is a question. 
There are lots of ways.
    I think our charge to you and our expectation for you is 
that you come up with those creative ways that are somewhere 
between these sorts of abuses that we had in the past and still 
collect the taxes that this government is due. Our faith in you 
is dependent upon that.
    Change is hard. You see that in many different ways. Police 
departments when there is criticism, the question is, are 
arrests going to stop happening. And we expect public 
employees--and most public employees are so committed to their 
job and to doing it right and want to be part of making this 
country better, that is why they are public employees, that I 
am not convinced that with inspiration and reassurance that we 
couldn't have both.
    Mr. Rossotti. I agree with you. That is exactly what we are 
committed to do. There are those creative ways. But when you 
talk about changing an organization of 100,000 employees that 
have been doing it a certain way for a certain number of years, 
there is a little bit of confusion along the way, in all 
honesty.
    Mrs. Northup. Thank you. Mr. Hoyer.
    Mr. Hoyer. Let me pursue the 1203 and 1204 issues a little 
bit, the ``deadly sins'' as you referred to them. My perception 
was, and I had discussed with the leadership in IRS over the 
last 5 or 6 years, that one of the problems was the public 
perceived the IRS, the Congress perceived the IRS as not taking 
seriously enough and acting to either terminate or discipline 
employees who clearly did egregious things.
    My experience has been that is usually a very, very small 
percentage of people, usually less than one percent. However, 
they become then magnified. The Roth hearings obviously 
magnified a very few number of cases, relatively speaking, but 
which got the public's attention and the Congress' attention 
and were examples of egregious activities.
    One of the frustrations I had, Mr. Commissioner, as you 
probably know is the law prohibited IRS from discussing the 
facts of those cases, either from the taxpayers' standpoint or 
from the employee's standpoint. Now, what I want to ask you is 
under 1203, have we had dismissals?
    Mr. Rossotti. We have. But it has been really a relatively 
small number. The latest numbers I have is at the beginning we 
have had about 14 individuals dismissed under section 1203, and 
I think it is fair to say that all of those have been cases 
that would have required, if not termination, at least severe 
disciplinary action, whether they were 1203 or not.
    I think as Mrs. Northup was saying, it is not my view that 
we cannot properly administer this provision if we are given 
some time. I was just simply making the point that it causes 
concern, it causes confusion, it causes delays, it takes time 
to reeducate, to relearn how you operate in this kind of an 
environment.
    Our employees have been very concerned about 1203. It is 
our job to help to administer this in a way that makes it clear 
to them they are not going to be fired for a simple mistake or 
an honest mistake.
    Mr. Hoyer. What are we doing to make sure that employees 
better understand 1203?
    Mr. Rossotti. We have been doing an enormous amount of 
training, an enormous amount of communication. To give you an 
example, not just related to 1203 but 2 weeks ago we had a 
meeting. For the first time, I am told, ever in the IRS, we 
brought every first-line manager from our collection operation 
together, there were about 550 managers, for 3 days' worth of 
discussion over these issues. 1203 was prominent of them.
    We brought together scenarios and examples of what this 
really means, what it doesn't mean. Much as Mrs. Northup was 
saying, going over case examples of here is really where you 
should take enforcement action and here is how you should use 
judgment. I think from the evaluations we got, we got a 
tremendously good response from that. That is one of the things 
that we have done. We have a large job ahead to help people in 
our organization understand that they do have to take 
collection action, they do have to take the proper action, they 
also have to respect taxpayer rights, it is possible to do both 
if we learn how to do this.
    Mr. Hoyer. One of the things, Mr. Commissioner, I am told 
by colleagues is we cannot expect Federal employees to take 
risks and that is to try to do their job in the best possible 
way--if they believe that the consequences of making a mistake 
are so great that we make them risk adverse. It is a fine 
balance to draw, but I think, to some degree, we may have gone 
over that.
    The last question on this round, and you may or may not 
have a specific answer, hopefully you will have an observation. 
Congressman Wynn and I have met with a number of employees in 
the IRS multimedia division. Some of them are here today, as 
you know, Mr. Commissioner, and they are very concerned about 
what they perceive to be a systematic exclusion of African 
Americans from promotions and from favorable job actions. I 
don't know whether you have a specific observation about it 
today, but it is a matter of great concern to Congressman Wynn 
and myself and I would very much appreciate receiving from you 
at some point in time both your personal concern and 
management's concern on this and your conclusions.
    Mr. Rossotti. Let me just say that one of the areas that I 
have actually put forth as a major goal in the IRS is to create 
the right kind of a working environment for every employee so 
that they can be productive and realize their full potential. 
That includes making sure that people of different backgrounds 
are given opportunities, equal to everyone else. I think we 
have an individual who is an outstanding director of EEO and 
diversity, maybe you have met him before, Mr. Fowler, a former 
Secret Service agent, somebody that has been at the IRS. Any 
time there is a group of employees or an employee who expresses 
a complaint or a concern, if there is any subarea that is not 
taking this seriously and doing it right, we are concerned 
about that, and certainly look into any individual complaint. 
That is all I can say about this particular matter.
    Mr. Hoyer. I understand that, but I would appreciate it, 
Mr. Commissioner, if you would get back to me and perhaps the 
committee at some point in time in the near future to give me 
your personal conclusions as to what actions if any are 
required.
    Mr. Rossotti. I will do that. Yes, sir.
    Mr. Hoyer. I think my time is up; however, we don't have a 
buzzer, Mr. Chairman. Mrs. Northup and I were discussing, if 
you have a buzzer after 5 or 6 or 7 minutes, it really does 
help Members and it also helps the respondent.
    Mr. Kolbe [presiding]. Mr. Sununu, do you want to take a 
second round? I haven't gotten any questions in, but I would be 
happy to have you take a second round.
    Mr. Sununu. I don't think it would be in my best interest 
not to defer to the Chairman so why don't you go ahead.
    Mr. Kolbe. I will take a short round, and then I will come 
back to you. Commissioner, again my apologies for having to 
leave in order to testify on my bill that was up for a hearing. 
I know that some of the questions I ask may be redundant, about 
what may have been touched on in the earlier questions, I 
apologize for that, but I will try to approach it from a little 
different angle in what you answered in the questions as they 
were asked before.
    I wanted to talk a little about this issue of financial 
management and the GAO audit for the fiscal year 1999. I want 
to, by the way, acknowledge something that Mr. Hoyer touched 
on, and I should have touched on in my opening statement. That 
is, that the GAO does commend you for making significant 
improvements. I should have been more explicit in saying that. 
But nonetheless, I guess maybe because it is the job of this 
subcommittee to focus on areas where we need improvement and 
particularly since we are talking about it as it relates to 
budgetary issues here, that I have this tremendous concern when 
they talk about the inadequate budget controls. You are asking 
for a large increase in funding, and they are saying there 
aren't adequate budget controls to tell us what we have spent 
or are spending now.
    Tell me how you justify coming back with this large 
increase in spending when we don't seem to have a control on 
what we are spending today.
    Mr. Rossotti. I think if you look at one level in here, 
what those items refer to, and I am not minimizing the 
importance, but they basically refer to, many of them refer to 
timing of when certain items are recorded by fiscal year and 
when they are obligated and expended. I don't think there are 
any implications that there is money that was improperly spent 
in the sense of being spent for something that should be.
    Mr. Kolbe. That gets very much to the heart exactly of what 
has to do with this committee and how much we appropriate for 
the next year, as to how you report what you spend.
    Mr. Rossotti. I think the most important thing, this area 
of unobligated balances and of timing of issues was an area 
that had not been given apparently an adequate amount of 
attention in prior years. It is getting a lot of attention 
right now. I think as was even noted in the report, there was a 
significant amount of work done, unfortunately too late in the 
fiscal year to reconcile everything to the GAO's satisfaction, 
but there was a significant amount of work done to go through 
systematically and review all of these old balances that were 
on the books, clean them up and make them right. I can assure 
you, Mr. Chairman, that that is an extremely high priority work 
for this fiscal year, to clean those up. That happens to be one 
example of something that I believe we can deal with 
appropriately in the short run, and I think I can give you my 
personal assurance that we will.
    Mr. Kolbe. Looking here, this is the summary of the report 
itself--it says here in the GAO study that the financial 
statements were affected by material amounts that are either 
not recorded in the general ledger until a subsequent year or 
not recorded in the general ledger at all. So it is more than 
just when it gets recorded, it is whether or not these things 
are ever recorded, if they are recorded at all. When do you 
think you might be able to have an unqualified audit?
    Mr. Rossotti. I think it has to do with the administrative 
statements because the other one is unqualified. Making 
predictions is a risky business----
    Mr. Kolbe. Do you have a goal?
    Mr. Rossotti. I think our goal would be to do it this year, 
in this coming year. Obviously we are going to have to do it as 
GAO acknowledged with various clever techniques to be able to 
deal with certain things.
    Mr. Kolbe. GAO says some of it can be fixed in the short 
term and some require long-term solutions.
    Mr. Rossotti. Exactly. We have a plan in place to work on 
the short-term ones. We have taken a significant amount of--I 
have somewhat of a limitation in this area I have to tell you 
because of a recusal that I have. I cannot be as deeply 
involved in this particular area as in other areas of the IRS 
because I have a conflict issue, so one of the things that is 
done is that my deputy commissioner has been assigned to be 
personally responsible for overseeing this area.
    Mr. Kolbe. On the long-term stuff, are you taking steps to 
be sure that the whole architectural plan for information 
technology modernization incorporates the financial needs?
    Mr. Rossotti. That is actually an excellent question and a 
very important area. The answer is resoundingly on that one, 
yes. We are building in--two of the fundamental architectural 
principles that we are building into everything we are doing is 
security and privacy controls and financial controls. We have 
the opportunity in the architectural rebuilding to build those 
in at the front end of every system in the proper way. That is 
what we are doing. As we roll out new systems, I think we can 
be very confident that these will incorporate the proper 
controls.
    Mr. Kolbe. I am going to come back--let me ask you one last 
question here, just a flat-out question. Do you agree with the 
finding that there are billions of dollars owed in taxes that 
are lost by undercollecting or overrefunding?
    Mr. Rossotti. Absolutely. But I have to be clear that it is 
not necessarily because of financial management systems. I 
mean, in round numbers, the best numbers we have, about $200 
billion a year, and these are very, very rough numbers, but the 
so-called tax gap from all sources which represents the amount 
of money that would be--the difference between what would be 
collected if everybody paid everything that was owed and what 
we actually collect is somewhere in the range of around $200 
billion.
    That is from all sources, including some of the things that 
are identified in here, things of just people underreporting 
income, taxes that are not paid, the various kinds of abusive 
techniques that are engaged in by companies and other 
individuals to hide income. There is a whole array of things 
that result in people not paying the taxes that are due.
    Our job in the IRS is to try to figure out how to direct 
our resources, which are limited, to those areas that require 
the most attention which have the greatest potential 
fornonpayment. And also for the fairness of the system. We try to not 
put all of our resources in any one area but to spread them as best as 
we can so that we in effect don't give anybody a free ride, if you 
will. But there is a very--it is a huge economy, there is a huge tax 
base, and there is probably on the order of $200 billion from all 
sources that is out there from noncompliance of all sorts.
    Mr. Hoyer. Mr. Chairman, could I ask to clarify?
    Mr. Kolbe. Yes.
    Mr. Hoyer. Does the $200 billion take into consideration 
underground economy?
    Mr. Rossotti. It is an attempt to estimate everything. 
Underreporting of income, underpayment of income, nonfiling.
    Mr. Hoyer. My point, Mr. Chairman, with respect to legally-
earned income that should be reported, should be paid on, and 
the other thing, the guy that sells a million dollars' worth of 
drugs a year is not going to tell IRS I sold a million dollars' 
worth of drugs, so you have a different problem. Is the $200 
billion contemplated in a legal economy or both?
    Mr. Rossotti. First of all let me just tell you this is a--
I made it a round number, we haven't had a study since 1988, it 
is all extrapolating from old data. It is an attempt to be a 
comprehensive number but I would not take it as anything very 
precise. It is just an extrapolation of some old data that we 
have. As a rough magnitude of what we are dealing with, it is 
probably not a bad number but if it was 210 or 188, I wouldn't 
know.
    Mr. Hoyer. With respect to the figure, Mr. Commissioner, I 
think it is important to make the distinction between what 
we're not collecting because the drug dealer isn't reporting 
income and what people earn legally through all sorts of 
devices.
    Mr. Rossotti. The vast majority of that number--as I 
recall, the study was legal income. It was not illegal income.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Kolbe. I have some more questions. Mr. Sununu.
    Mr. Sununu. Thank you very much, Mr. Chairman. 
Commissioner, you said something which surprised me but maybe 
bothered me just a little bit. That was, that the meeting you 
had with the 500 or so front line managers was the first time 
ever that they had all been brought together. I think it is 
terrific that you undertook that, it is stunning that it had 
never been done before. I only want to comment that I think the 
value in terms of training and direct communication with them 
is enormous. I hope it is something that is made part of your 
formal and regular management practices at the agency. Your 
budget for information systems is $1.583 billion, the budget 
request. What portion of that is new capital equipment, new P&E 
purchases?
    Mr. Rossotti. That is a number that I don't have at the tip 
of my finger but I could get it for you very easily. It is 
about 11 percent.
    Mr. Sununu. Are all new capital purchases, certainly all 
new capital purchases for computer systems, included in that 
number or do you spread information technology purchases 
throughout the other line items, tax law enforcement 
processing----
    Mr. Rossotti. Not anymore. They are now all in one place. 
Not only that, they are managed through one single source. The 
only other place they would be besides the information systems 
number is in the information technology investment account 
which is $119 million which is all investment. That is mostly 
development investment. There would be some hardware in there. 
I think that wisely was set aside by the Congress as a separate 
investment account for a long-term investment.
    Mr. Sununu. So information systems for law enforcement 
would be in the information systems account?
    Mr. Rossotti. Yes.
    Mr. Sununu. Of the 11 percent, that is about $170 million 
in that account and $119 million in the technology account. 
Roughly what kind of systems are we talking about for those 
funds? How is it allocated? Main frames distributed, computing, 
and other capital investments?
    Mr. Rossotti. The money that is in the information systems 
account, the 11 percent is just basically replacement 
equipment. It is just replacing--we have 120,000 or something 
like that personal computers, and we have then many computers, 
just because of the way technology works, we have to replace a 
certain amount of those every year. That is basically what that 
is. That is routine replacement of just hardware and software 
releases.
    The other two investments are the information technology 
account, that 119 is part of this long-term program which we 
have submitted the plan for this committee last week, that is 
aimed at reengineering and replacing the systems that support 
our basic tax processing activities, submitting of returns, 
keeping track of taxpayer records, doing collection actions and 
those systems. Those are very big and are being replaced over a 
period of many years. We have set priorities to do those step 
by step.
    Mr. Sununu. Do you have any unobligated balances remaining 
from the funds that were appropriated to deal with the Y2K?
    Mr. Rossotti. From the Y2K? Is there anything left in Y2K? 
I guess there is some.
    Mr. Sununu. What is the size of the unobligated balance and 
what will it be spent on?
    Mr. Kolbe. If we are going to have a conversation, we need 
to get it on the record here.
    Mr. Rossotti. I will answer then. I am informed that there 
is $20 million that we are still spending. There are still some 
cleanup activities that we are doing in terms--we put in some 
systems like, for example, for keying paper returns that we got 
what we needed to do for the filing season but there were still 
a few things that could be deferred after the date change.
    Mr. Sununu. If I back out 11 percent for capital equipment 
from the information system account and divide by the number of 
FTEs in the information systems group, the rate per FTE is more 
than twice that than the rate for FTE for, say, law 
enforcement. Why is that?
    Mr. Rossotti. Because there is a lot of contract money in 
there. We do a lot of our information systems activities by 
contract with the private sector. In the operations and 
maintenance of the information systems, it is not just for the 
internal IRS people, it is for contracts for private sector.
    Mr. Sununu. To what extent, though, should we take that 
much higher level of contract work into consideration in 
looking at the historic trends for FTEs? You point to the issue 
that FTEs have been declining over a 5- or 6-yearperiod but 
shouldn't we also take into consideration the growth in contract work?
    Mr. Rossotti. We would, except for the fact that the 
contract--there is relatively little contract work that is done 
in the other areas besides information systems. Those are done 
almost inclusively by government employees.
    Mr. Sununu. I am very pleased to hear that we have gone 
from 15 capital P&E systems to one and wish Mr. Cosgrave good 
success. In saying that there is one system now, though, is 
there one online information system that also tracks P&E?
    Mr. Rossotti. The 15 was the number of organizations. There 
also is one system that we have put in, that we have that we 
used for Y2K to track all the property, at least the 
information systems property. That is the system that we are 
using and we are going to be continuing----
    Mr. Sununu. It is active now?
    Mr. Rossotti. It is active.
    Mr. Sununu. It covers the entire agency?
    Mr. Rossotti. It covers the entire agency.
    Mr. Sununu. It is integrated and unified, shall we say?
    Mr. Rossotti. As with many systems, it is a system that has 
been in existence for some time. I wouldn't----
    Mr. Sununu. But if someone in an office in Manchester, New 
Hampshire, buys a new personal computer, it would be entered 
more or less in real time, not necessarily day of purchase but 
end of month purchase?
    Mr. Rossotti. By the end of the year. We started with the 
bigger facilities in the bigger places first, and now we are 
going out to the smaller field offices.
    Mr. Sununu. It would seem to me that putting in place this 
kind of a system that is a dramatic improvement over what was 
previously in place would result in a modest if not significant 
improvement in productivity and potentially a reduction in the 
number of personnel previously needed to track the property and 
equipment. To what extent do you expect that will be realized 
and at least provide resources to make your job a little bit 
easier?
    Mr. Rossotti. It would have reduced the number of resources 
required to track it if it was being tracked. But I think, as 
was noted, in the honest statement of the word, I can't say 
that it was really being tracked. That is why we had all these 
problems.
    I think the better way to put it is that without 
significantly increasing staff resources, we will be able to 
take advantage of the technology to really get true tracking. 
There also is the issue that we started with just physical 
tracking, and now we are going to financial valuation as well 
which was the point you made in your statement about the reason 
that this large increase took place is not really because there 
was a large increase but because there was no real valuation 
done before. What we are trying to do is increase the financial 
valuation of the property and equipment in the same place that 
we do the physical tracking.
    Mr. Sununu. Thank you very much. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Mr. Sununu. That was a very helpful 
line of questioning. Even though it went a little longer, I 
didn't want to interrupt that. Mr. Price, it is your turn.
    Mr. Price. Thank you, Mr. Chairman. Commissioner, welcome 
back to the subcommittee. I first want to start out with a 
heartfelt thank you to you and to your agency for the special 
effort you have made to accommodate North Carolina and 
particularly eastern North Carolina after last fall's 
unprecedented hurricane season and the attendant floods which 
were so devastating. North Carolina was hit by three major 
hurricanes in a few weeks' time, Floyd being the most powerful. 
The damage from these storms and flooding simply devastated our 
State, and we will be trying to recover for a very long time. 
The timing of the storms was particularly problematic with 
respect to taxpayers because it coincided with the due date for 
many quarterly tax payments and business returns, and IRS was 
very responsive to our congressional delegation in extending 
those deadlines and abating penalties, to give those who had 
lost businesses and business records time to regroup.
    IRS also established a special post office box at the 
Memphis service center to handle and expedite processing of 
amended 1998 returns for those claiming losses, and we are 
gratified that you are continuing that expedited procedure for 
the 1999 returns.
    We were also able to work with you to abate penalties on 
quarterly tax payments that arrived late in January when my 
district was hit by two feet of snow and mail service was 
suspended for several days in some areas. All of this is 
firsthand evidence, I believe, of your success in implementing 
a customer-service based culture at IRS. I don't know how we 
could have a more convincing demonstration.
    Mr. Rossotti. Thank you very much.
    Mr. Price. I want to commend you and your agency and 
particularly Jackie Bracey, our Taxpayer Advocate, for being so 
responsive to the need of our State in this time of crisis.
    Let me turn now to another subject that we took up last 
year when you were before us and that is the new deduction, 
actually an adjustment to gross income, for interest on student 
loans. At my request, you provided some information for the 
record about the number of taxpayers you believed to be 
eligible for that deduction and about what IRS was doing to 
inform them of it. You indicated that IRS initially had 
estimated an eligible pool of about 4.5 million. Then that 
information from Sally Mae led you to revise that estimate up 
to 5.6 million students and/or families. I would like to know 
first if you have any new information about the number of 
Americans eligible for the student loan interest deduction, and 
secondly if you can tell me how many Americans in fact claimed 
that deduction on their 1998 returns.
    Mr. Rossotti. I do have the number that took the deduction 
actually right here. It was 3,801,945. That was for tax year 
1998 which would have been reported in 1999. They claimed 
$1.745 billion of interest deduction. That is how many took it. 
That is pretty firm.
    It is a little hard to know exactly how many would be 
eligible. We do have one piece of information which is more 
than would really be accurate because there is a lot of things 
that can reduce the number below this, but there were about 7.8 
million individuals who had a potential eligibility based on 
information that we have. That would have to then be reduced by 
certain other kinds of requirements, such as whether they had 
the proper adjusted gross income and certain other 
requirements.
    I don't have any way of estimating at this point how many 
reductions that would have to be. But those are the two 
quantitative pieces that we have bookends, if you will, on this 
particular provision.
    Mr. Price. Assuming that estimate that we got last year of 
the number of eligible taxpayers is roughly accurate, how does 
that participation rate compare with areas to which it could 
properly be compared and what do you think we might do to 
increase that participation rate to make sure that the people 
who are eligible are in fact taking advantage of this? After 
all, it is not for itemizers only, it is a uniquely designed 
tax incentive. How does that compare with other----
    Mr. Rossotti. I don't have any way of comparing it with 
other provisions like that as to how much is eligible, but I do 
agree that we need to do a good job on this and other benefits 
that are important to particular groups of taxpayers, to let 
them know that we have this. We have done some things. I think 
the typical kinds of things that we do, of course we put them, 
try to highlight them in sections in some of our instructions 
and publications, such as our 1040 instructions, for example, 
when you get that to try to highlight what you can do. We have 
put it on our Web site, especially for college students, people 
get pretty Internet savvy so we have put some things on our Web 
site. We have also worked with the media. We usually give out 
before the filing season different kinds of fact sheets which 
they then use, to in typical fashion, put out different kinds 
of newspapers you see frequently during the filing season. We 
put out this fact sheet so that they would have that. Then we 
work with some liaison groups.
    Mr. Price. What kind of materials, for example, have been 
made available to financial aid offices in colleges and 
universities?
    Mr. Rossotti. We had a publication called Ways to Save on 
Your Taxes which I believe covered this particular item. I can 
get you--I don't have one right with me but I can get you a 
copy of it. That is the kind of thing we distribute to 
different kinds of organizations such as financial aid offices.
    Mr. Price. Those are designed not just to inform the 
financial aid officers themselves but also to be passed along 
to the student population?
    Mr. Rossotti. Yes.
    Mr. Price. I would appreciate an update on your outreach 
efforts in this regard because clearly we want people taking 
advantage of this and using it for its intended purpose.
    Mr. Rossotti. Absolutely. We will get you that material.
    Mr. Price. Let me quickly ask you about a final subject 
which has to do with e-filing. I am getting word from my 
district that people are increasingly taking advantage of e-
filing. I know that is true. There are some complaints about 
the fee they have to pay. I don't know how you would respond to 
that. They claim that e-filing ought to save the IRS time, 
money, and staff resources. Of course, they are choosing a 
service that then subjects them to spam and other e-mail lists 
and solicitations. I don't know to what extent that is 
widespread. Concerns raised about privacy in filing through a 
third party, although I understand you have strict regulations 
about maintaining privacy and confidentiality.
    You have a requirement to reach 80 percent e-filing by 2007 
so I expect we may be hearing more about some of these 
complaints and concerns. I would like to know what you are 
hearing about any of these topics and what you are doing to 
take these concerns into account.
    Mr. Rossotti. I appreciate the opportunity to address that. 
E-filing is one of our strategic initiatives. I think it is a 
place that we have an opportunity to improve the way we serve 
the taxpayer, reduce the number of errors, and improve 
efficiency all at the same time. Our feedback on the service so 
far has been very good. As a matter of fact just to give you 
the latest, we expect to hit about 35 million, close to 35 
million e-filed returns this year which will be up from about 
29 million last year. So it is a significant growth that would 
represent about 27 percent of all the filed returns. So that is 
a good progress.
    With respect to the fee, there is a provision, this is an 
interesting, the fee is coming down, we have been working with 
different groups to encourage competition and to drop the fee. 
For example, on several Web sites, you can--several providers, 
you can sign on to the Web site, for $9.95 you can prepare your 
return and e-file and some offer it for free. But in the 
President's budget proposal that was submitted to Congress in 
the tax section, there actually is a provision in there that 
requires us, requires the IRS, by tax year 2002 to develop a 
plan to provide free electronic tax preparation and filing over 
the Internet by 2002. It gives us flexibility of how to do that 
working with the private sector and so forth which we would 
attempt to do. We got that direction, and we are going to be 
working on trying to look at creative ways to do that.
    Mr. Price. Right, because as I said there are these 
complaints that when one takes advantage of these free services 
or these low rates for services, then that subjects them to all 
kinds of unsolicited----
    Mr. Rossotti. The privacy issue is paramount when it comes 
to electronic filing. We have this direction in thePresident's 
plan, budget to develop this plan, we are very pleased to get that. We 
think that working with our groups, we have a good chance of coming up 
with a plan which would merely just build on what has already happened. 
These costs have been coming down and the services have been increasing 
and the number of returns filed has been going up. I think that is what 
we are going to try to do.
    Mr. Price. Thank you.
    Mr. Kolbe. Mr. Hoyer, I am going to come back. The 
commissioner has agreed to wait a little bit until after this 
vote. Do you want to try to get in a question here?
    Mr. Hoyer. Could I ask a couple of quick questions? RIFs. 
When I asked you about this last year, I want to assure myself 
that there are no contemplations of any RIFs that might occur 
this year.
    Mr. Rossotti. There are none. We aren't going to do RIFs. 
In the reorganization which we are implementing right now, we 
have got an agreement, we have worked on this very well with 
the union, there will be some employees whose jobs will go 
away, even though the total is increasing, there will be some 
positions that will be no longer present and we are going--we 
have got a whole plan as to how to work that. We do have the 
authority that was given in the bill for buyouts and early outs 
and that is what we will be using them for. Some people may 
say, if you are increasing why would you be buying anybody out. 
The reason is because in certain locations and certain 
occupations, we have more than we need, in other places we have 
less. In order to make them, we have to put the people where we 
need them.
    Mr. Hoyer. Mr. Commissioner, I argued pretty strenuously 
for the authorization of the buyouts for exactly that reason. 
It is so much cheaper to buy out than it is to RIF. Under the 
government's rules, which I think are appropriate in many 
respects to protect employees but nevertheless, it is very 
expensive to have RIFs. The private sector does exactly the 
same thing in any event. So it is not like we are adopting 
something that is unique to government.
    Would you comment on the levels of audits that IRS is 
undergoing just from the GAO and the Treasury IG for Tax 
Administration? We have talked a lot about it. Do you think it 
is the appropriate level, do you think it is effective in 
helping you manage?
    Mr. Rossotti. I think I have the numbers here. There are a 
significant number of audits under way from both GAO and the 
Treasury IG for Tax Administration. Here they are. Last year, 
we had 58 reports from audits from TIGTA and 74 from GAO. Right 
now there are at the moment 27 with TIGTA and 36 from GAO. 
Basically we have full-time teams auditing many things all at 
the same time.
    I think we find that most of these audits address important 
topics and often come up with useful recommendations. Most of 
the time we agree with the recommendations in general and most 
of the time in detail. The problem that we have, the difficulty 
is that at the moment we have many, many problems at the IRS 
that have already been identified from the past. We have talked 
about many of them here this morning. Our capacity to just 
change things in the organization and to address problems is at 
the limit.
    There is a difficult problem that we have in responding 
sometimes to these recommendations, not because they aren't 
good ones but because our capacity to make changes in response 
to recommendations from any source is limited and sometimes it 
is less than the capacity that they have to come up with these 
recommendations. It is the prioritization process within the 
resources we have to respond to these that creates our 
management challenge.
    Mr. Hoyer. Thank you. Obviously that is a significant 
number of audits that are ongoing at any given time. I 
understand the answer to my question. You have just recently 
requested the drawdown of 176 million. Let me switch quickly to 
computer modernization. There is an additional 119 million for 
this account in fiscal year 2001. Can we expect that, A, you 
will spend the 176 now and that the 119 will be spent in 2001?
    Mr. Rossotti. I think you know that we are managing this in 
a very, very careful process. There is first the appropriation 
and then there is the request that we come to the committee for 
it to give us the authority to obligate and even though, for 
example, the 176, we do not spend that money until we are 
satisfied ourselves through our own process that each milestone 
has been met and release this money. What I think is the 
appropriate way to answer your question is that doing an 
extrapolation of the level of effort that we are currently on, 
we would need the 119 million as well as what we have. But I do 
want to assure the committee, in the way I look at this, I 
wouldn't spend this money no matter what authority you give us, 
any other way I would spend it if it was my own company. That 
is exactly the way I feel about this.
    We sit down every time weekly or monthly with Cosgrave and 
the rest of them and go through each and every request for each 
project up to the next milestone and determine if it is 
appropriate to do that because we think we are going to get our 
money.
    So yes, the answer is if we go on the track we are on, we 
will need that money. It is important we have the assurance the 
money is there so we don't have a start and stop issue. The 
other side to it is I don't want to give the committee the 
impression that just because there is money out there, we are 
going to spend it. We have not done that so far. As a matter of 
fact, you know the money has been appropriated some years ago 
and we are only now getting to it because we are not going to 
spend it unless the money is going to be well spent, at least 
to the best of our ability.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Kolbe. Commissioner, we will stand in temporary recess 
while we go vote, and we will come back and finish the 
questions as quickly as possible.
    [Recess at 11:20.]
    [Resumed at 11:35.]
    Mr. Kolbe. We will resume our hearing. I hope we can finish 
it fairly quickly. Mr. Goode has joined us here. I will ask a 
few questions. Mr. Goode would like to discuss something, and 
then hopefully we will be able to finish this up.
    I want to come back to the information system modernization 
which is such a key component. This subcommittee has struggled 
with this as has the Internal Revenue Service and this goes 
back over more than one administration, it has been an 
extraordinarily difficult time and frankly as has been freely 
acknowledged by both sides, a lot of money has gone down the 
drain on this, and I think you are supremely conscious of that.
    We want to make sure that it is done in the right way. 
Icontinue to be concerned about that, though, particularly as it 
relates to the efforts to modernize the systems in a way that 
adequately reduces the risk of failure. There seems to be a continuing 
lack of an enterprise system architecture and enterprise life-cycle 
methodology in this effort. That is one of the things where I have a 
concern.
    Do you agree with the General Accounting Office that the 
enterprise system architecture needs to be completed and the 
enterprise system life cycle has to be implemented prior to 
conducting individual system modernization projects? In other 
words, before we start to do individual projects, get all of 
this in place? Do you agree with that?
    I ask that question because I believe you have said that 
there are some pieces which you think we can go ahead, we don't 
need to wait for the architecture to be done. If so, I would 
like you to tell us what those are, to describe those. And how 
they are going to fit in finally with what you do design.
    Mr. Rossotti. Basically the answer to your question is yes, 
I do agree. But as with all things, you have to balance some 
competing factors.
    In the plan that we have sent to you, that you have just 
received last week for this year, what we have done is 
precisely, or at least in part for those, because of those 
considerations. We have delayed the initiation of some of the 
individual modernization projects and scaled down the request 
in that regard so that in the current target by September 30 of 
this year, which is not that far away, in other words, the end 
of this fiscal year, we will have completed a complete update 
of the modernization architecture.
    There was, as you know, an architecture document done in 
1997 before we began this whole thing. It has been updated at 
the margin but not completely updated. It will be updated by 
the end of this fiscal year. That will be before the 
development activities begin on the other major modernization 
activities.
    Similarly with the enterprise life cycle. The enterprise 
life cycle is actually already in place and implemented. There 
are some training activities and some additional refinements 
that are needed. So the answer to the question is we are doing 
that in the plan that we have submitted to you with one 
exception.
    We have one project which has been also scaled down in size 
but it is the customer communications project which was 
actually designed and initiated as part of the original RFP, 
part of the original blueprint. It has very, relatively few 
interconnections with the other pieces. So I think there is 
relatively little risk with respect to that particular project, 
and we want to move forward with that because it will help us 
with the efficiency of our phone service in the 2001 filing 
season.
    Mr. Kolbe. How about the procurement integration deployment 
of the new examinations for 2002?
    Mr. Rossotti. That again is a very, very small piece of a 
broader architecture that just deals only with what we will 
have to do no matter what which is tax calculation support for 
the revenue agents. I forgot to mention that one. Those pieces 
will move a little bit ahead of the completion of the 
architecture but really not a whole lot ahead because we are 
going to be targeting to finish this update of the architecture 
by September 30.
    Mr. Kolbe. Okay. That was part of the answer to my 
question. Your contract with the architect, the one who is 
doing the architecture plan, is a long-term contract, it 
stretches over a period of time. Maybe this question isn't 
fair, but you just talked about having an update done in 
September of this year. Does that mean we have an architectural 
plan in place at that time or is it just something that is 
constantly undergoing revision?
    Mr. Rossotti. The way an architecture plan works is it is 
always under revision. You have different releases of it. That 
is how technology works. You have a baseline, you update it 
periodically to reflect what you have learned in the meantime.
    The plan that we are going to put in place in September is 
an update basically of what was done in 1997. Many of the 
elements of 1997 of actually that plan turned out to be quite 
good and is really still guiding us in many respects, that is 
what we are using for what we do know. But there are some 
things that have changed both in technology and the 
architecture in terms of what we have learned. That is what we 
will be incorporating in this September update of the 
architecture, the blueprint as we call it.
    Mr. Kolbe. If that is the case, then, and we have this 
update done in September of this year, would you anticipate 
that in the next budget cycle the IRS will actually be 
requesting substantial sums to actually implement some of this 
rather than just updating it another time?
    Mr. Rossotti. We are doing more than updating. Besides just 
updating the architecture, we are doing detail planning and 
analysis of several of the projects. There are certain 
activities in analysis and design that can go on before you get 
into implementation.
    Mr. Kolbe. Will we be seeing implementation of some of 
these projects before the next budget cycle?
    Mr. Rossotti. We will. We will be implementing every year. 
My view is that we will be implementing every year. If we get 
the request as we have submitted it to you and we succeed in 
what we have proposed, the net result will be that we will have 
the first actual deliverable of tangible product in the fiscal 
2001 area for those two projects that we mentioned. Then the 
other projects will be under way and every year essentially, 
2002, 3, 4, and 5 you will see an increasing number of 
deliverables coming out.
    Mr. Kolbe. Just give me a guess or an idea of what you 
think the next major deliverable will be, the next system that 
might be implemented that you would be requesting funds for?
    Mr. Rossotti. The ones that are moving forward at the next 
pace after the customer communications are the electronic 
filing services and the tax account database. Those are the two 
that are the most immediate.
    Then the third one which I really can't comment on because 
of my conflict but has to do with some of the financial 
management systems that are addressing some of the issues that 
GAO had. But leaving that one aside, the other two, the e-
services one, electronic services is really designed to 
facilitate our electronic commerce strategy. Right now it is 
primarily filing. In other words, you can file your return 
electronically but to really make the whole thing as robust as 
it needs to be, we need to communicate with our stakeholders, 
and the first stakeholder would be our practitioner groups on 
more than just filing.
    We need to have electronic interchange, secure 
electronicinterchange of messages about taxpayer data so that we can 
resolve these things electronically rather than sending paper back and 
forth. That would be one of the key things that we would be putting in 
for the following release.
    Then finally, the one that is probably the most 
significant, in fact, I consider it the most significant of all 
the modernization projects, the most fundamental of all, is the 
tax-accounts database. The situation the IRS is in today is 
that our taxpayer accounts, our basic records about every 
taxpayer in America are built on a system that was written in 
the 1960s and it runs on a tape file, a sequential tape file.
    Mr. Chairman, I was in the business 28 years, the last 
customer system I saw on a tape file was about 1979. That is 
not a lie. This is such a fundamental impediment to the way 
that the tax system works. I can't even--if I spent the rest of 
the hearing talking about what this did to us, it wouldn't be 
long enough. It is a very hard system to figure out how to get 
out from under because it is the center of everything, but I 
think we do have a plan, in fact I know that we have a plan now 
that will work for the first time.
    That is the other big project that we are in the planning 
stage on now--I hope in conjunction with this architecture that 
we will be in a position by the end of this year to go outside 
that milestone and request development, to be implementing. 
That will be implemented in many releases over a period of 
years. But if we can do that, that would be an extremely 
important and significant project.
    Mr. Kolbe. It is encouraging that you say you have a plan 
in place because that leads me to the last question in this 
area that I wanted to ask about, and, that is--and I know that 
the last time we attempted this modernization back in the early 
part of the last decade, early part of this decade, it is not 
entirely accurate to say it failed, because there is equipment 
and there are pieces that are working, being used, but it 
failed in the sense that it wasn't an integrated system that we 
needed to have. Are you willing to go out on a limb and say 
what you think the probabilities are that this will fail to get 
the integrated systems done and what are we doing to reduce 
that probability of failure?
    Mr. Rossotti. Let me just say, I will go out on a big limb 
here and say that I think the probability that it will fail in 
the same sense that you just described, I think that was an 
accurate statement of what happened, I think the probability of 
that, if we sustain it and do the things that we are doing now 
is extremely low.
    I think that probability is low, because we are not going 
to let that happen. On the other hand, the probability that 
there will be, I will call them more limited failures, certain 
things that will go wrong and certain pieces is extremely high. 
The entire management process is to manage risk, so that the 
things that go wrong are limited to being small pieces that go 
wrong in a short period of time as opposed to growing into big 
pieces. That is what our whole management process is about.
    I will tick them off for you. The first thing is that we 
have one information systems organization now rather than 15. 
You simply cannot modernize when you have 15 different ways of 
doing things. We had really no standards across the 
organization technologically. That is rapidly being fixed. We 
do have one. That is already fixed in terms of the 
organization, and we have rapidly implemented those standards. 
That is kind of the foundation.
    The second thing is the top management responsibility and 
engagement in it. I have to tell you that we have a management 
process at the top level of this which is run by this executive 
steering committee which I personally chair and spend a great 
deal of time on and Mr. Cosgrave whom you have met is the agent 
for. Then we have a whole bunch of other executives, that is at 
the top level of the agency. We are engaged at a very active 
level in addressing risks and issues and that is important. We 
are using the PRIME contractor to do the development and 
integration activities. They are bringing the best practices 
from the private sector. That is extremely important. We are 
adhering to the architectural and methodological standards that 
are accepted practices and we are using that in a rigorous way.
    And I think the last one, and I think is the most important 
one actually, is that we really have a commitment here, an open 
process that I would say forthrightly addresses where these 
risks are and where these issues are. It is very open. We have 
invited people from GAO and the IG and even OMB and others to 
participate in this process to get their insight, to let them 
observe what we are doing.
    I think they would tell you, those who have been at some of 
these meetings, that they are pretty difficult sometimes. We 
are not unwilling to confront issues and make decisions to 
change course very regularly if we need to. We have already 
done it. As you know, I think you know, the request we gave you 
is scaled down from what was an earlier version that we had 
been working on because of just these very reasons, we were not 
ready to move on some of these projects. So those are the kinds 
of decisions that you have to make if you want to manage this 
so that you don't let the little risks grow into the big risks.
    That is the best answer that I can give you. I think that 
we can make this work, and it will not fail and be very little 
risk that it will fail in the sense that you described it. I 
think as long as we are willing to accept the fact that there 
is risk and we are willing to recognize that when the problems 
occur, we are willing to cut them off and change direction that 
is necessary. That is the real answer to how you make this 
thing work. There is no way to eliminate the risk.
    Mr. Kolbe. Thank you. Mr. Goode.
    Mr. Goode. Thank you, Mr. Chairman. Mr. Commissioner, I 
sent you a letter a few weeks ago, and I think y'all knew who 
was on the committee. You sent me a fax this morning saying you 
were going to respond. Let me just briefly go over that letter.
    I represent an area that has a number of tobacco growers in 
it, and you know between the tobacco companies and the States, 
they set up a trust to reimburse some of the tobacco growers. 
The trustee handling the program in Virginia mailed out the 
checks on December 30. Some of the growers have already filled 
out their tax returns and included it as 1999 income. Most, if 
not all, did not receive the checks until 2000. They mailed 
them on December 30 and most of them got them after January 1. 
Possibly some did not. I think the initial reply to someone, I 
don't know if it was me or someone else, was that you would not 
be required to report it as 1999 income.
    Mr. Rossotti. That is correct.
    Mr. Goode. If the State Department of Taxation asked 
aquestion and I was told, I haven't seen this in writing, that their 
reply was in talking with someone at the IRS that the income had to be 
reported, the written statement, your first letter to me was, I believe 
it was not required to be reported in 1999. I had one lawyer tell me, 
not affiliated with the IRS, that that was what they call, quote, 
``swing income'' and it might be in 1999 or it might be in 2000. But if 
you would take a look at that.
    Mr. Rossotti. I certainly will. I have looked at some of 
that correspondence. I will check it again. It is my 
understanding that what we replied was that it was not required 
in 1999. But I will just so I----
    Mr. Goode. That was what you said. But does that mean that 
they have to report it in 2000, or can they report it 1999?
    Mr. Rossotti. I see.
    Mr. Goode. That is the whole issue.
    Mr. Rossotti. I see. I will check that detail. I did note 
that we did reply, and I think I have had some correspondence 
with Mr. Payne down in Richmond that it was not required to be 
reported in 1999, but on the other issue we will get back to 
you on that.
    Mr. Goode. The 1099 says it has to be--if you went by the 
1099, and some did, they went ahead and filed their returns. 
You are going to make a sizeable chunk of them have to go back 
and do amended returns.
    Mr. Rossotti. We wouldn't want to do that. I don't know the 
answer to that, but we will find that out.
    Mr. Kolbe. Mr. Goode, if you will yield for a moment, I 
just wanted to point out that this is proof that the IRS is 
becoming more customer friendly when you give prompt advice to 
taxpayers right here in front of C-SPAN, it is very, very 
prompt.
    Mr. Rossotti. It is risky when this particular commissioner 
who is not a tax lawyer does that. The chances of it being 
inaccurate are greater than it should be.
    Mr. Kolbe. Mr. Goode.
    Mr. Goode. Thank you, Mr. Chairman, I do appreciate your 
response in this because there are a number of concerns. My 
question in general relates to your ability to be able to tell 
someone if they were looking at gross income figures, if I 
wanted to get from you the gross reported on all schedule Cs 
for the tax year 1998, could you provide line 1 of schedule C? 
Could you provide that?
    Mr. Rossotti. We could. It would just be a question of 
timing as to when we get that data compiled, but certainly we 
could get that data.
    Mr. Goode. Would you have it already compiled for 1997?
    Mr. Rossotti. 1997 tax year?
    Mr. Goode. Yes.
    Mr. Rossotti. Yes.
    Mr. Goode. I know you wouldn't have 1999 because they 
haven't done the returns yet but may have 1998; is that right?
    Mr. Rossotti. I can see my colleague in the back agreeing, 
yes. It is just a question of when we get it all tabulated, but 
the answer is yes.
    Mr. Goode. And if I wanted the gross income figure on 
interest, not on the 1040 but when you add up the gross of 
interest on the front side of schedule B, do you have that for 
1997?
    Mr. Rossotti. Yes.
    Mr. Goode. And you would have it for dividends too, for 
1997, pretty readily available?
    Mr. Rossotti. Yes.
    Mr. Goode. What about for gross income on 1041s for trusts, 
simple or complex, would you have that readily available? For 
1997?
    Mr. Rossotti. That one we have to check. We don't always 
capture all the information on 1041s. We would have to get back 
to you on that one.
    Mr. Goode. I guess your answer would be the same for States 
too that are on 1041?
    Mr. Rossotti. Yes.
    Mr. Goode. For W-2s, you have that certainly, for 1997?
    Mr. Rossotti. Yes.
    Mr. Goode. Would you have the gross on schedule D? Not what 
is on the 1040 but what is on schedule D, on the front page of 
schedule D?
    Mr. Rossotti. Yes. The answer is we get most of this data 
off the return. We don't always capture every line. So it is 
just a question of what we capture. Then when we have compiled 
it all, we can get it available statistically.
    Mr. Goode. I read an article, maybe it was in one of the 
Washington papers or a news magazine saying that you had done 
some comparisons between the corporate income tax returns of 
some of the major companies and what was reported in the annual 
reports and they didn't always square.
    Mr. Rossotti. Yes.
    Mr. Goode. So you do have, I guess, those figures for, say 
1997 on corporate income taxes, gross figures?
    Mr. Rossotti. Yes, we do.
    Mr. Goode. Let me ask you this. Do I need to send you a 
letter or will you send me that information?
    Mr. Rossotti. We will be glad to send it to you.
    Mr. Goode. I would appreciate that.
    That is it, Mr. Chairman.
    Mr. Kolbe. Thank you very much, Mr. Goode.
    If I might ask a couple of questions about electronic 
filing. I know this is, you referred to it as, a strategic 
initiative--to have free electronic filing. What is your time 
frame for when you think taxpayers will be able, all taxpayers 
can be able, to file their returns electronically?
    Mr. Rossotti. The answer is all----
    Mr. Kolbe. Do you envision a time frame?
    Mr. Rossotti. Yes, the answer is all individual taxpayers, 
the business is a different story but the individual taxpayers, 
our goal is in the 2002 tax filing season, which is 2 years 
from now, that we will be able to accept all 1040 schedules and 
forms so that everybody would be able to file electronically in 
2002.
    Mr. Kolbe. When you say to accept, does this mean to be 
able to accept without having to go through a transmitter?
    Mr. Rossotti. No, that is a different issue. Right now, the 
issue is whether you can--we can't even, no matter how you do 
it, there are certain forms that can't be filed.
    Mr. Kolbe. I know.
    Mr. Rossotti. That is a major impediment, because in the 
practitioner world especially, many of them tell us that they 
would like to file either all of them electronically or none 
and they don't want a mix between paper and electronic.
    One of our first goals is to be able to accept all 
individual tax returns in an electronic format which we expect 
to be able to do in the 2002 filing season. As far as how they 
come in, whether they come in at a charge or how they come in 
through other parties, I think an important thing there is to 
recognize that you can't file a return electronically unless 
you prepare it electronically. You have to have software to 
prepare it electronically and then you produce a file which is 
transmitted to us.
    Those two things are very, very closely tied together. So 
the Restructuring and Reform Act actually has a section in it 
which--they had a section on electronic tax administration, 
electronic filing. They encouraged us to work with the private 
sector to address this particular need, because preparing 
consumer software to do an individual's electronic--to do an 
individual's, say, 1040 tax return is a pretty sophisticated 
product if you have ever used one of them, there is a lot in 
that. The IRS is not well equipped to compete with those kinds 
of providers.
    Mr. Kolbe. You are talking about the tax preparers kind of 
stuff?
    Mr. Rossotti. The tax preparation software. You really 
can't file unless you prepare and once you prepare, it is a 
relatively trivial thing to then transmit it and send it in. 
The two go closely together.
    What is in the President's budget request, and I think we 
worked with him on this, is a statement that the IRS should be 
required to offer free electronic tax preparation and filing 
over the Internet by tax year 2002. What that would mean would 
be it gives us flexibility. And we have to work with the 
industry as to how to do that, but essentially what that would 
mean would be that anybody with a 1040 return of any kind would 
be able to sign on to the Internet, prepare their return in an 
interactive way with all the benefits that that brings with it 
and transmit it to the IRS for free.
    Mr. Kolbe. Your goal is to have tax preparation software?
    Mr. Rossotti. It doesn't mean that we would provide it 
ourselves, that we can work with the industry to provide it. We 
don't think we are well equipped to actually write that 
software and provide customer service.
    Mr. Kolbe. Whether they provide it, it is going to be 
yours, you are going to buy it, contract to buy it?
    Mr. Rossotti. We haven't figured out exactly what the best 
way to manage that process is.
    Mr. Kolbe. I guess my question is, with all the other 
things that we have going and that we need to do, why should 
the IRS be concentrating in that area? For example, can I get 
on the Net and find out the status of my refund?
    Mr. Rossotti. No.
    Mr. Kolbe. That is something that only you can do. An 
outside contractor can't do. Why wouldn't you be focusing on 
that kind of thing?
    Mr. Rossotti. We are. Let me make sure I clarify. We are 
not going to go into--that is the point I was making. We are 
not going to go into the tax preparation software business. We 
are not going to bring the software, it is not our intention 
under this provision to supply or otherwise develop any true 
software ourselves.
    Mr. Kolbe. It sure sounds like it.
    Mr. Rossotti. No, what we want to do is work with the 
industry, basically to reinforce the trend that already exists, 
to bring down the cost of filing over the Internet. That is 
basically what we want to try to do. We expect that we would do 
this the way we have done these other kinds of activities with 
the industry, through a process of consultation and probably 
putting out some sort of request for proposals or request for 
suggestions as to how this could be done. But it is not our 
intention to actually acquire or develop tax preparation 
software ourselves.
    Mr. Kolbe. Isn't it true that the actual, the cost, I think 
Mr. Hoyer was talking earlier about having it free and you 
talked about having it free but the tax credit you get from 
filing electronically is usually as much, no more anyhow than 
the charge that the tax preparation firms----
    Mr. Rossotti. The President has proposed a $10 tax credit.
    Mr. Kolbe. It has actually been done. That $10 tax 
deduction is more than the tax preparation access.
    Mr. Rossotti. It is now, because we have been working with 
the industry to bring the cost down. Really what is in this 
proposal is to just find a way to reinforce that trend, to 
bring it down eventually to zero. Actually it is already at 
zero. There are already some places where you can sign on and 
do tax preparation and filing for zero cost. But there is only 
a few of them. We would like to see it get to the point----
    Mr. Kolbe. Some of them have it for lower income and the EZ 
form.
    Mr. Rossotti. Some have it for lower income. But some have 
it for a broad array of taxpayers. There is a reason why that 
makes sense for them. We want to work with industry. I did not 
want to give the impression that we were going to go into that 
business for precisely the thing you said, we need to work on 
only the things we can do and not for things that can be done 
by industry.
    Mr. Kolbe. Just to clarify this once more, you do not see 
yourself getting into the position of competing with industry 
in software preparation.
    Mr. Rossotti. We do not.
    Mr. Kolbe. What are the issues involved in electronic tax 
filing, and how difficult are those to deal with?
    Mr. Rossotti. They are very important, and they are very 
difficult. That is one of the main things that, the main 
problems that we have to address in order to deal with, for 
example, you said being able to sign on to the Internet and 
find out what your refund is. We could do that today if it 
weren't for the security and privacy issues. That basically is 
just because those are the most difficult issues that need to 
be solved.
    In the information technology investment account request 
that we submitted to you, one of the early projects that we 
have anticipated, that we are in the planning stage now and we 
would hope to be able to go into implementation for the 2002 
filing season would address precisely that area. It would 
address the area of being able to communicate initially with 
practitioners, because they would be the first group to work 
with on, to communicate with practitioners in a secure way over 
the Internet so that they would be able to communicate with us, 
and remember half the taxpayers file their returns through 
practitioners and they tend to be the more complex returns, so 
if we could communicate with those practitioner groups in a 
secure way over the Internet, we could really increase the 
productivity for everybody. It is more practical to focus on 
them first because they are arestricted number, and then after 
that to go to the individual taxpayer.
    Mr. Kolbe. Is one of the projects in the modernization to 
create an environment where you don't need to have 
transmitters, you can link directly with the IRS so I can file 
directly with the IRS?
    Mr. Rossotti. No, because that is the other--again that 
links into this whole tax preparation business. If somebody 
provides you the tax preparation software, they are in a better 
position to do the transmission than we are.
    Those two are very hard to separate out. That is the whole 
point, what we want to do is we want to continue to work with 
the industry, those people that provide the software and find a 
way to reduce the cost of the transmission so that that whole 
thing will be free to the taxpayer.
    That is that whole point. You can't transmit something 
unless you prepare it. Once you are into the preparation 
business, you are in the best position as the person who 
provides that software to provide the customer service to that 
taxpayer.
    Mr. Kolbe. Let me shift gears one last time. This will be 
my final area of questions. Back to the issue of enforcement 
and compliance. We keep hearing figures bandied about about the 
level of compliance, various percentages. It is never clear to 
me what that refers to. Are we talking about a percentage of 
the total taxes that should be collected, that are collected or 
are we talking about a percentage of filers that should file 
who do file?
    Mr. Rossotti. The numbers that you probably are thinking of 
are numbers like 87 percent.
    Mr. Kolbe. What does that refer to?
    Mr. Rossotti. What it refers to is the percentage of the 
total amount of taxes that would be paid if everybody filed, 
reported, and paid everything that was due. So if everybody 
filed every return that was required, reported all the income 
that was required and paid it, if that was 100, the amount that 
we actually collect then is the percentage. The number that you 
hear is 87 percent.
    Let me tell you where that number comes from, because it is 
not a very reliable number. What it comes from is a study that 
was done in 1988 and which has not been repeated since and 
which has been extrapolated over those years. So much has 
happened since that period, it is questionable how reliable 
that is, even if it was reliable at the time. But if you go 
ahead and extrapolate up to today's world, the results of that 
study, what you come up with is that there is about $200 
billion that is not--that is the gap, if you will, between what 
we actually collect and what we would if everybody filed, 
reported and paid what was due.
    Mr. Kolbe. Is that still roughly around 13 percent then?
    Mr. Rossotti. Yes, but only because we are still using the 
same study so we have no better information.
    Mr. Kolbe. Are plans in the works for a study?
    Mr. Rossotti. Yes, there were proposals made in the early 
1990s before I got here that were not accepted well by the 
Congress because they were viewed as too intrusive. What we 
have been working on and I have been working with staff on this 
internally, to come up with a way of doing this measurement 
that would be less intrusive, more acceptable. We are getting 
close I think to having something that will be ready for that.
    Mr. Kolbe. Commissioner, is it your gut feeling that 
compliance is declining?
    Mr. Rossotti. It is hard to say, because there are 
conflicting trends. On the one hand, we have the reduced audits 
and we have an expanding economy but there is one thing that 
goes in the other direction which helps us which is that a lot 
of the income on the individual income side that is coming in 
is from securities transactions, I have some numbers here if I 
can find them. There is a substantial increase, for example, a 
very substantial increase in capital gains; 23 percent, 23.8 
percent increase in capital gains reported from 1997 to 1998 
for example.
    Mr. Kolbe. What is your explanation----
    Mr. Rossotti. Those are reported on third party 1099s. 
Those tend to be, therefore, pretty accurately reported. You 
have the advantage that some of the income that is coming in is 
coming in in forms that tend to be more compliant.
    On the other hand, you have things like frankly some very 
abusive kinds of transactions that are starting to develop 
where people are hiding money offshore, you have some corporate 
kinds of transactions that are happening that as the Secretary 
has made in his speeches are really growing. So you have these 
conflicting trends. I think what we need to do is we do need to 
get better measurements so we know where these are but with the 
information we have, we need to take our compliance resources 
and put them where they will really do the most good.
    Mr. Kolbe. We have the Secretary this afternoon. I will 
have some questions along that line. Let me end by asking this. 
In response to the GAO audit, the IRS has said that its 
decision not to pursue the collection of some of the delinquent 
taxes has been a result of the lack of resources. Yet you have 
proposed transferring $100 million out of the 2000 budget and 
another $41 million in fiscal year 2001 from tax law 
enforcement. Will that make it even more difficult?
    Mr. Rossotti. Let me just say that there is a little 
confusion about that. Of that transfer request, about, I would 
say two-thirds of that is just an accounting shift due to some 
things in the RRA. In other words, the taxpayer advocate 
service, for example, is set up under RRA as an independent 
unit and it is under the processing and management account. We 
moved--because of that a lot of the people that were doing PRP 
case work, taxpayer advocate case work were actually part of 
the exam and collection division and were accounted for under 
exam and collection. Now they are treated under the taxpayer 
advocate service. We have had to make that accounting 
adjustment. About two-thirds of it is that character. One-third 
is just filing season.
    Mr. Kolbe. Exclusive of what you put under one or the 
other, I think you have telephone tax collections under 
taxpayer advocacy. Why is that?
    Mr. Rossotti. That is not quite----
    Mr. Kolbe. Under taxpayer service? Customer service.
    Mr. Rossotti. I am not going to try to go back and explain 
why it was but it was decided before I did. Let me just say we 
are going to change it. In the new structure it is going to be 
much cleaner, we are going to divide everything into the three 
basic things that we do, which is prefiling, which is helping 
the taxpayer get the return in, filing the return and managing 
their accounts and then everything is postfiling and 
compliance, which would be exam, collection, and those other 
things. Because mainly of the way the organization structure, 
it was mainly done to conform to some organization structure 
things. Internally in the IRSbasically all the phone traffic 
was put under one place.
    But I agree with GAO that it is confusing, and we have in 
our whole reorganization, we are fixing up also our whole 
planning process and our whole way of developing these 
financial numbers. We are going to recast everything as soon as 
we possibly can. When we get done with this reorganization in a 
way that I think will make it much easier for the public and 
for this committee to understand the way it works.
    I cannot deny, I just have to accept the fact that it is 
confusing, it took me a while to figure out when I got in here. 
There was a reason for it. I am not sure it was a good reason 
but in any case in the future as soon as we can get this done, 
what we are going to have is a very clean and I think clear way 
of the three basic tax administration things that you do are 
prefiling, help the taxpayer get the return in, taxpayer 
education, give them advice over the phone lines, all of those 
activities.
    The filing point which is getting the return in, recording 
it and keeping track of the taxpayer's tax accounts, and then 
postfiling is compliance, intervening when there is a case such 
as exam, collection, criminal investigation, all the rest of 
that. We basically have everything set up in those three main 
categories. It will take a little while to transition to this 
but I think when we do, it will make it a lot easier for the 
committee and everyone else to really understand how things 
work.
    Mr. Kolbe. Commissioner, thank you very much. I will 
undoubtedly have a few other questions for the record, I do 
have some for the record. I just want to thank you very much 
for appearing here today and for your answers and for the work 
that you are doing and all of your staff as well. We look 
forward to continuing the level of cooperation that I think is 
built on the trust that is developed between this subcommittee 
and your organization.
    Thank you very much. The subcommittee will stand in recess 
until this afternoon.



                                          Thursday, March 16, 2000.

                          TREASURY DEPARTMENT

                                WITNESS

TREASURY SECRETARY LAWRENCE H. SUMMERS
    Mr. Kolbe. The Subcommittee on Treasury Postal Service and 
General Government will come to order again. We were in session 
this morning with the Internal Revenue Service before us, but 
this afternoon we are very pleased to welcome Secretary Summers 
for his first appearance before the subcommittee in his 
capacity as Treasury Secretary, but his umpteenth appearance, I 
am sure, before the subcommittee.
    Secretary Summers, I think everybody believes and 
recognizes and brings to this position a very keen intellect 
and incredible knowledge of the Department itself, the workings 
of the department. So we are really looking forward to working 
with you on the 2001 appropriations cycle.
    Mr. Secretary, over the past several years, I have been 
steadfast up to the point of probably sounding very repetitious 
talking about the inadequate funding levels proposed by the 
administration for Treasury law enforcement. I must say that 
this proposal this year in the fiscal 2001 request is a vast 
improvement over previous years. Fiscal year 2001 is a vast 
improvement over previous years, and in most instances it 
accommodates the core requirements of the Treasury law 
enforcement bureaus.
    Though I am pleased with the request, Mr. Secretary, it is 
just a start. In my opinion, given what I know of the 
challenges we face in the areas of financial crime, drug 
interdiction, and enforcing our gun laws, the request only 
scratches the surface in terms of the resources I think the 
Bureau and Treasury needs in order to get their jobs done.
    On Tuesday of this week during testimony from the customs 
service, I was struck by the workload increases we have seen 
over the past decade in formal and informal trade entries as 
well as air and sea passenger processing. While workloads are 
increasing and trade is expected to double by the year 2005, 
staffing levels have remained relatively constant, and there 
doesn't seem to be any relief in sight. Technology as a force 
multiplier is an essential component of Treasury's ability to 
meet growing workloads, and here too I think investments have 
been limited.
    I also have continuing concerns about customs inspection 
rates. I think it is unacceptable that we are only able to 
inspect 3 percent of the cargo that is coming across our 
borders. It is certainly not the fault of the hard-working and 
dedicated inspectors and agents who work along the border. They 
simply don't have the manpower. They don't have the tools they 
need in order to do the job. As a result, there is a really 
critical shortfall in our capabilities, in our inspection 
capabilities.
    I think just as alarming, the administration fails to 
request even another dollar for the Customs Marine program. The 
existing national fleet of 85 boats certainly can't serve as 
any kind of a credible deterrent to smuggling along our shores. 
I will have some questions about that, but I really think the 
marine program has been neglected for too long.
    I am also concerned about the lack of funding and the 
administration's budget for both the Secret Service's 
initiative on school violence as well as their protective 
responsibilities associated with the upcoming winter olympics 
and other national security events.
    Mr. Secretary, these are just a few of the examples of 
areas where I think the president's budget misses the mark in 
terms of supporting Federal law enforcement and more 
importantly the safety of the American people.
    I have other areas of concern, but I will only mention two 
right now involving the information systems modernization 
efforts of both customs and the IRS I am struck by the 
contrasts in the budget requests for these two bureaus 
regarding their systems modernization efforts. For years, IRS--
for the Internal Revenue Service.
    You are asking for a significant increase though we haven't 
completed the plans and designs for spending the already 
appropriated funds. There are also indications that the risks 
for this effort, I think, are growing. For the customs service, 
you are asking for a much-needed systems modernization but 
linking it to a very questionable new user fee for which this 
committee has no jurisdiction whatsoever. I just have to tell 
you it doesn't really look to me like the Department is really 
serious about customs modernization.
    Mr. Secretary, I look forward to addressing these issues as 
we proceed here this afternoon. I hope you can give the 
committee some assurance that the administration is committed 
to giving the Treasury bureau the resources they need to 
investigate to stop financial crimes, to stop drugs at our 
borders, to enforce our gun laws, to reduce school violence to 
ensure that both customs and IRS have the capacity and the 
resources to upgrade their information technology systems.
    I mention these things, Secretary Summers, because you are 
a man of action and you have proven yourself time and again to 
be that. Several years ago it was with your cooperation that 
this subcommittee was successful in calling a halt to what was 
an acknowledged and failed tax systems modernization program. 
That took some real guts to do that. And I know and I hope you 
are just as committed with working with us to address these 
critical needs that exist now for Treasury law enforcement and 
during what perhaps could be your final year as Secretary of 
the Treasury. I hope you are committed to leaving behind the 
legacy that will prepare Treasury for the challenges it faces 
as we go into this new century.
    Let me call on my colleague, Mr. Hoyer, for some remarks 
and then we will take your opening statement, Mr. Secretary.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I must, 
however, observe that in my recent conversations with him, that 
Vice President Gore had not decided that he wouldn't ask Mr. 
Summers to continue as Secretary in the next administration. We 
will just see what he does.
    Mr. Secretary, welcome. Pleased to see you back. I think as 
the chairman has suggested and stated the respect with which 
you are held in the Congress on both sides of the aisle, 
certainly I share that. We had Mr. Rossotti testify earlier 
today, and at that point in time I made the observation that no 
Secretary with whom I have served has paid as close attention 
to the administration of the tax system and the management 
issues confronting the Treasury Department as had Secretary 
Rubin and yourself as deputy.
    You and I had countless discussions, and we had discussions 
about the necessity to hire a manager at IRS; and you were 
certainly one of the key factors in that along with Secretary 
Rubin, and I congratulate you on your choice of Mr. Rossotti, 
who I think is doing an outstanding job and his testimony today 
was excellent in which he was very candid in terms of the 
shortcomings that still persist at IRS that have to be overcome 
and I think raised a great deal of confidence in the committee 
that he was focused on those and was about that business.
    In addition, Mr. Secretary, we are living in very 
prosperous times. While there are an awful lot of people who 
are obviously responsible for that, most of whom are in the 
private sector, we on our side of the aisle obviously are very 
pleased with the fact that the 1993 program which was predicted 
by so many of the leaders on the other side to be the preface 
for disaster economically in America, Mr. Kasich, Mr. Armey, 
Mr. Gingrich, everybody said that if we adopted the 1993 
program, we were going to go absolutely down the drain 
economically. Disaster would occur within seconds of its 
passage and signing by the President of the United States.
    Of course exactly the opposite has happened. We have had 
notwithstanding what some claim in the 1990's the most 
successful period of economic growth in the history of this 
country. Unemployment the lowest rate in 30 years. Inflation 
the lowest rate in 35 years. Employment is up. An incredible 
job. I might say also I believe that President Bush played a 
very significant part in that in having the courage to sign the 
1990 deficit reduction bill. I think the 1990 bill and 1993 
bill together got us on the right fiscal track and has led to 
that success, but clearly Bob Rubin and yourself were 
absolutely essential to forging that policy and to getting us 
where we have gotten.
    I note, Mr. Secretary, the FY 2001 budget request is 
oriented, by five major priorities continue support for IRS 
modernization which we think is critical; strengthening 
Treasury's law enforcement which the chairman has spoken about. 
Frankly, I don't think anybody on Capitol Hill has been more 
pointed in their plea and effective in their plea that we need 
to beef up Treasury law enforcement than Chairman Kolbe, who 
has done an extraordinary job on that; modernizing customs-
automated commercial system, which we all think is critical, 
and enhancing financial management supporting your core 
management functions.
    Let me focus, if I can, on the first priority of the IRS. 
As I said, Commissioner Rossotti testified on the steps he has 
taken to achieve the goals set by the 1998 restructuring act to 
respect taxpayers' rights and provide high-quality service to 
every taxpayer and to ensure that taxes due are paid and to do 
those two things in an efficient customer-friendly way.
    The Restructuring Reform Act of 1998 required the IRS to 
institute as you know 71 new taxpayer rights and massive 
organization, technological modernization, which we discussed 
this morning; and I was very impressed. Mr. Sununu and I 
discussed Mr. Rossotti's candor. I know the chairman also 
remarked on that that particularly with respect to GAO report, 
said that he agrees with it. We were confident that he could 
have quibbled with it, didn't and said we have got to fix those 
things that are not working. And he didn't want to avoid risk 
but wanted to man the risk. I thought that was a particularly 
telling statement.
    Mr. Secretary, I want to commend you for your personal 
attention to making the Treasury Department work well. The 
chairman mentioned your reputation and intellect as one of the 
great economists of the world. You played an extraordinary role 
in stabilizing what could have been a very, very big problem. 
It was a problem and continues in the Far East and Asia. You 
were a critical player in stabilizing that effort and working 
with the Congress and giving to Americans the confidence, as 
well as the world markets confidence, that we were going to be 
engaged and would assist in that matter. I have some other 
comments, but I have already run over time. Bottom line is, Mr. 
Secretary, we are very pleased you are there; and we look 
forward to hearing your testimony.
    Mr. Kolbe. With that, Mr. Secretary, we will proceed with 
your statement. As always, of course, the full statement will 
be placed in the record. You are welcome to summarize it if you 
prefer, and we will go to questions.
    Secretary Summers. Thank you, Mr. Chairman. I was looking 
forward to Michele's opening statement.
    Mr. Hoyer. I was looking forward to Marty Thomas' opening 
statement.
    Secretary Summers. Very good. Mr. Chairman, Congressman 
Hoyer, members of the committee, I am glad to have this 
opportunity to discuss the Treasury's fiscal year 2001 budget 
request and to continue to work in the cooperative spirit that 
I think the Treasury Department has had with this committee 
over the years.
    This is my eighth year in the Treasury Department. It 
occurred to me a couple of months ago that the Treasury is the 
first institution that I have been part of for as long as 8 
years, and it is a very special institution; it is one that I 
think has grown stronger over the last 7 years, thanks in large 
part to decisions that have been made by this committee. And it 
seems to me that for all of us as political appointees who 
serve in these positions, it is perhaps as important as any 
other responsibility that we have, to try to leave the 
institution stronger than we found it, and that was Secretary 
Bentson's objective. That was Secretary Rubin's objective and 
it is my objective during my tenure as secretary.
    I am accompanied by Lisa Ross, our acting assistant 
secretary for management, who over the last several years along 
with Nancy Killefer has done a great deal to improve the way in 
which the Department's operations are managed.
    Our budget totals $14.25 billion for all operations. I have 
not got a long statement. Let me highlight our five priorities: 
first, continuing to modernize the IRS. As chairman Kolbe 
recognized in his statement, the IRS with Commissioner 
Rossotti's leadership has pledged to work towards providing 
America's taxpayers top quality service by helping them 
understand and meet their tax responsibilities and by applying 
the tax law with integrity and fairness to all.
    Commissioner Rossotti has brought a necessary management 
focus and a focus on technology to the IRS. This year's budget 
seeks to build on the progress of the last several years and in 
particular the progress of the RRA legislation of 1998 by 
providing an adequate basis for continued revenue operations. 
Under this budget for the first time in a number of years, IRS 
staffing will be permitted to increase modestly. I believe this 
is a necessary step if we are to assure the continuing 
integrity of our tax system.
    A crucial element in the IRS's strategy this year provided 
for in the budget is really organizational modernization. We in 
the Department strongly support Commissioner Rossotti's 
judgment that the IRS should move from a geographic to a 
functional approach so as to better serve the needs of 
different categories of taxpayers and so as to be better able 
to detect compliance problems. The budget contains support for 
this reorganization as well as continued support for 
information technology modernization within a carefully 
disciplined private sector reliant framework.
    Let me say that if you look at the way the phones are being 
answered, you look at the way deposits are being made, you look 
at the use of credit cards to meet IRS obligations, technology 
is making a difference. It makes a much bigger difference, and 
it will over time if we are able to carry through on the 
Commissioner's plans.
    The second broad priority--I would entirely associate 
myself with Mr. Hoyer's comments about your own leadership with 
respect to Treasury law enforcement, Mr. Chairman--is to 
increase our capacity to fight drugs, violence, and crime. The 
budget includes initiatives in a number of areas. First, 
increase support to reduce the trafficking and smuggling of 
illicit drugs. This includes requests for aircraft with updated 
interdiction and surveillance, increased use of non-intrusive 
inspection equipment and additional personnel to support 
Customs' counterdrug initiative.
    Second, combatting financial crime. This has been a 
particular priority for me as Secretary because it has always 
seemed to me that the Department combining a financial focus 
and a law enforcement focus is a natural locus for a major 
attack on financial crime. We have proposed and are now working 
very hard to implement the Nation's first and second national 
money laundering strategies. We seek a modest increase in 
appropriation to support, in particular, law enforcement in 
zones that have been designated as high-risk financial crime 
areas.
    Third, protecting our Nation's leaders becomes ever more 
important with the dramatic rise in global terrorism and the 
significant increase in the number of protectees. We are 
requesting some 250 new positions at the Secret Service. Let me 
highlight the importance of this request, Mr. Chairman. As I 
have traveled in this position, I have had a chance to meet 
many members of the Secret Service. And I have learned that 
typically in many cities Secret Service agents are being asked 
to work 80 hours or more a month in overtime, and there is 
really no choice because foreign dignitaries and the like have 
to be protected.
    Inevitably, because of the toll that takes on families, it 
is leading to increased attrition at rates that are 
unprecedented for the Secret Service. I think it is very 
important that we provide the additional staffing that is 
necessary not just to reduce the workload but also to create an 
environment in which the Secret Service once again has a stable 
source of career employees.
    Fourth, in the law enforcement area is increasing firearms 
personnel. We have all been very much affected by recent 
incidents pointing up the level of gun crime in our country. 
There is room for debate, debate which I do not propose to join 
today, about the right kind of policy response, but I think 
most would agree that it is essential that at a minimum the 
existing laws be enforced to the fullest extent. That is why 
the President's budget provides funding for 300 new agents, 200 
new inspectors, and 150 new support staff at the Bureau of 
Alcohol, Tobacco, and Firearms.
    The third broad area reflected in the President's budget is 
modernizing our trade systems. As was noted in the opening 
statements, since the Customs Modernization Act was passed in 
1993, imports into our country have grown by more than half. 
Existing technology simply cannot cope with this sharp rise in 
volume. The President's request in this area has two main 
elements: first, to maintain the existing technology system 
which is what we have for the moment and minimize the outages 
or brownouts that pose continuingproblems to the work of 
Customs; second, to work on the automated commercial environment, a 
system that will eventually replace ACS. Let me say this system is 
essential to the maintenance of an open-economy approach in our 
country. We have learned from our experience with the IRS of the 
overriding need for private sector discipline in a complex information 
technology operation. It is being managed with care in a way that is 
mindful of the pitfalls pointed up by the TSM experience.
    We believe that the proposed fee contained in this year's 
budget appropriately captures a portion of the benefits that 
will accrue to private sector businesses from modernization, 
but the appropriate funding source can be debated. We have put 
forward our proposal, which we believe is appropriate; but let 
there be no doubt: moving ahead with this is crucial for 
Customs to be able to perform its vital mission.
    Fourth area of focus in the President's budget is enhancing 
financial management within the Department. We have seen 
important changes in the nation's money with the successful 
introduction of the new soon-to-be, I trust, successful 
introduction of the new $5 and $10 bills and the new dollar 
coin. We have seen the Bureau of Public Debt carry out a new 
mission of buying back debt as a complement to issuing debt, 
and a successful operation in that regard was carried out 
today. The Financial Management Service continues to provide 
core services. It is important that we maintain funding for 
these programs.
    Let me mention one other initiative contained in the budget 
that I think is an important one. That is the President's First 
Account proposals that aim to bank the unbanked. With all the 
revolution in technology that our financial sector is 
producing, it cannot be right that approximately 15 percent of 
our population does not have access to a bank account and in 
many cases pays thousands of dollars over a lifetime for the 
most routine financial services. Working through the financial 
sector, through the Community Development Financial Institution 
program, we seek to broaden access to bank accounts for low-
income Americans.
    Fifth, maintaining our management systems in the Department 
offices. The budget provides for continued support for the 
Department's offices. These include necessary resources for 
domestic finance to oversee the implementation of last year's 
Financial Modernization Act, maintaining core infrastructure 
technology, and the necessary restoration of the main Treasury 
building and annex.
    Let me mention one issue that is of concern to me, and I 
think over time should be of concern to members of the 
committee. And that is the capacity of the executive branch to 
attract first rate staff by paying competitive salaries. And if 
I might use as an example my own field of economics, the salary 
that we are able to pay in the Treasury is only about 60 
percent for a new Ph.D. of the salary that the Federal Reserve 
is able to pay or that a young Ph.D. economist can expect to 
earn in academia, let alone the private sector.
    While this is probably a particularly pronounced gap, it 
does point up what I think is a continuing issue for all of us, 
the need to reward dedicated professionals in public service if 
they are to continue to serve. Mr. Chairman, thank you for 
everything that you and members of this committee have done in 
the past to strengthen Treasury as an institution. I have come 
to be very proud of the people of the Treasury Department and I 
look forward to working with you and all the members of the 
committee through this year's budget process to strengthen 
Treasury's ability to carry out both its important economic 
management and its vital law enforcement functions. Thank you 
very much.
    Mr. Kolbe. Thank you, Mr. Secretary.
    [The information follows:]



    Mr. Kolbe. Let me begin here by noting the time so I keep 
within my time frame. I want to start by asking, I am very 
complexed and very concerned about this new fee, the user fee 
that you are proposing here, that the administration has 
proposed. As I understand it, it would be done through amending 
the Consolidated Omnibus Budget Reconciliation Act, or COBRA, 
which provides for collection of certain fees, processing 
passengers and conveyances and so forth. Do you have the figure 
for how much is now collected under COBRA fees?
    Ms. Ross. I do not have that figure right now. I am sorry.
    Mr. Kolbe. Can you tell us how those fees are being used?
    Ms. Ross. The fees are currently being used to pay for the 
cost related to trade processing with many of the very--in many 
cases the same companies are being asked to pay an additional 
fee for ACE development.
    Mr. Kolbe. But they go to the general revenues.
    Ms. Ross. That is right.
    Mr. Kolbe. They have to be appropriated for that. We have 
to appropriate the money for those services.
    Are fees being collected already for customs services that 
are provided to members of the trade community we expect to pay 
for this new automation user fee?
    Ms. Ross. Fees are not being collected already for the new 
system.
    Mr. Kolbe. Not for the new system, but they are paying 
other kinds.
    Ms. Ross. They are paying fees.
    Mr. Kolbe. Between that and the merchandising processing 
fee, the MPF, the merchandising processing fee is an ad valorem 
tariff that is based on the cost of providing customs services; 
but since it is an ad valorem, it is based on the value of the 
property, so it does not have a direct relationship to the 
service that is being provided. Between those and the COBRA, is 
it safe to say that we are collecting more in processing fees 
and ad valorem and MPF than is being spent totally to process 
these kinds of transactions?
    Ms. Ross. We have looked at the merchandise processing fees 
that are collected. I believe the collections are below 
Customs' level of effort on merchandise processing and trade 
compliance but adding in some of the other fees you are 
mentioning----
    Mr. Kolbe. I guess it would depend of course on what you 
include as being covered services. They might not think that 
some of the Customs law enforcement efforts would directly come 
under the merchandise processing. Your estimate for the current 
year we are in is $953 million on merchandise processing fee, 
so it is a substantial amount.
    Secretary Summers. I think, Mr. Chairman, that the question 
or the allocation of the cost versus the benefit can be done in 
a variety of ways. Of course one relevant standard in thinking 
about the fee is the magnitude of the benefit to industry of 
being able to facilitate the flow of trade across the border in 
an efficient way; and perhaps it would be more convenient if we 
did not seek to enforce a variety of the laws; but it is of 
course necessary that we enforce those laws.
    So I think the question of what to ask in this area would 
go to the benefit--whether a portion of the benefit that 
industry would receive from these fees, from the ACE system 
would be recaptured through these fees. Clearly from industry's 
point of view, it would be preferable for the benefits to be 
provided and no fee to be--no fee to be collected, but we live 
in a world of--even in these good times, we live in a world of 
constrained budget resources; and it is our judgment that the 
fees to be collected are less than the benefits that will be 
realized, and an arrangement in which these fees are collected, 
in which the system moves ahead will be in the interests of law 
enforcement and in the interest of the Customs and ultimately 
in the interest of industry because of the greater efficiencies 
that will result.
    Mr. Kolbe. Well, that is a complicated answer. I am not 
sure if I am cutting through it and know exactly what was being 
said there, but you are absolutely right the industry would 
just as soon not have to pay additional fees; but that is not 
what we are looking at. I will come back to what I think is a 
legal and trade-related issue with regard to that, but do you 
people have a breakdown on what you consider to be the cost, 
the constitute processing cost, how much is spent on 
processing? Do you break that down as to what part of Customs 
is processing?
    Ms. Ross. We do have those estimates. I'm sorry, I just 
don't have those with me.
    Mr. Kolbe. It would be helpful to have them because of 
looking at COBRA fees and MPF to see where we are with that. Do 
these refer to current operating costs and not to the costs of 
continuing investment and processing systems such as ACS and 
the proposed----
    Secretary Summers. In contrast, last year's proposal the 
objection was raised which, I think upon reflection, we felt 
was an entirely reasonable one that while it might be 
appropriate to ask industry to bear a portion of the cost of 
improvement and the creation of a new system; it was not 
appropriate to ask industry to bear the cost of keeping the 
existing system going; and, therefore, the proposal was 
reformulated this year so as to assure that the only cost 
industry was being asked to bear were the costs associated with 
the new system and the greater efficiencies that would benefit 
them because I think there is a legitimate concern that 
having--the Government having provided the previous system, it 
would not be appropriate to ask the industry to bear the cost 
of maintaining that system.
    Mr. Kolbe. My question to you whether you feel that you and 
your staff, and you feel comfortable yourself, in looking at 
this proposal that this is not a violation of our GATT 
agreements. You have a 1987 GATT panel that found that the MPF, 
merchandising processing fee, when that is in effect that 
Customs is precluded from assessing other charges for cargo 
inspection or clearance services. Now, there was a cap put on 
it and the point--at that point the case was dropped. But does 
not this new fee possibly violate this understanding with the 
gap panel and be regarded as a new and illegal tariff?
    Secretary Summers. To be very honest with you, Mr. 
Chairman, that is the first time I have heard that argument 
made.
    Mr. Kolbe. The Europeans make it quite often.
    Secretary Summers. With respect to this fee. And so that is 
not a concern that has been raised with respect to the fee, and 
I assume if there was a general perception on the part of the 
Department's lawyers that there was such a problem, that it 
would have been brought to my attention; but I am happy to add 
to the record of this hearing an evaluation of that issue.
    Mr. Kolbe. I would very much appreciate that because I 
would tell you my assessment that you will have a--if this is 
imposed and it is not related directly to the ACE investment, I 
would--or even if it is based on what is already being 
collected, I think you will have a WTO case brought in the 
flesh in an eye blink against this on this.
    Secretary Summers. That is obviously a very important 
issue, Mr. Chairman. Let me check on that. It would certainly 
not be our intent to subvert the WTO--to do something that was 
not WTO-consistent.
    Mr. Kolbe. Mr. Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman. Mr. Secretary, you 
recently announced that the most serious compliance issue 
threatening the American tax system is the rapid growth of 
abusive corporate tax shelters. I guess abused corporate tax 
shelters it may be abusive to the rest of us, but they are 
abused. I note that commissioner Rossotti's IRS budget states 
that last year receipts fell by 2 percent in the midst of an 
unprecedented economic expansion in this country.
    I suppose one could argue whether or not we ought to have a 
corporate income tax. That is, I think, a rational debate; but 
as long as we do, it seems to me we ought to 
collectappropriately when you estimate the amount of revenue lost to 
illegitimate tax shelters.
    Secretary Summers. It is very difficult to estimate, 
Congressman Hoyer, simply because we do not know about the 
shelters we do not know about, but I can suggest a couple of 
figures that may be helpful. The shelters that have been 
brought to the Department's attention and that we have closed 
through various kinds of regulatory actions, to my knowledge in 
no case have these regulatory actions been seriously 
challenged, would have cost taxpayers an estimated $830 billion 
over the next 10 years.
    We have every reason to suspect that given that we hear 
about these transactions in an anecdotal kind of way, and there 
is much that we do not hear about; plus the indications that 
are available from the figures on total corporate tax revenues 
as well as the anecdotes that we are exposed to from some in 
the tax bar suggest to us that this is a very sizable--a very, 
very sizable issue and that $830 billion figure almost 
certainly underestimates the potential losses over 10 years.
    Mr. Hoyer. Given that, what, if any, legislative changes do 
we need?
    Secretary Summers. I think there are--I think the 
legislative changes really fall into two areas. First, I think 
it is very important that we fully fund the IRS budget. We 
support the reorganization that has many, many motivations; but 
it will have as one of its impacts the creation of a large 
taxpayer unit that will facilitate the knowledgeable evaluation 
of these issues in the context of large corporations.
    Frankly, it makes much more sense to have an expert in the 
sale of lease-backs be the person who looks at one of these 
transactions in the context of an individual company than an 
IRS agent who happens to be stationed in the city in which that 
company is headquartered; and that is the kind of change that 
we bring about with this reorganization. The second part falls 
outside the appropriations area, but it is a set of tax law 
changes that have three objectives: increasing the necessary 
disclosure by those who use shelters and those who promote 
shelters; providing in cases of abuse for more serious 
penalties than now exist; and, third, codifying the so-called 
economic substance doctrine so that there are--is a clear set 
of rules of the road for what constitutes an abusive shelter 
and what does not, so that people know what the rules are; you 
know what you have to disclose and so forth.
    It is not--and I want to emphasize this--it is not our 
intent to change the law or to scale back what have been 
traditional business tax incentives in this regard. It is only 
our intent to improve our capacity to enforce against 
transactions such as the notorious story of a Swiss city hall 
that was leased for a 4-hour period resulting in hundreds of 
millions of dollars of tax deductions that represent reductions 
in taxable income with no concomitant economic activity.
    Mr. Hoyer. The commissioner discussed the budget request, 
and I asked a number of questions. The chairman did as well in 
terms of enforcement. You mentioned the fact that it is 
important to fully fund the IRS at the levels requested so that 
it can do its job. Does the 2001 budget request contain, do you 
think, adequate IRS staffing to deal with this initiative?
    Secretary Summers. I think it is an appropriate and fully 
necessary budget, and I think we have learned in the past that 
it is very important to be mindful of absorption capacity as we 
make changes. But I think we will have to be very attentive 
that we ensure that we are providing what is inevitably in a 
number of areas an appropriate but somewhat more labor 
intensive tax to taxpayers in the past in issues like the 
innocent spouse area where we have taken a big step forward for 
fairness, but it involves people spending a lot more time than 
they used to spend. I think if we are going to be able to do 
those things that Congress in my view has rightly decided that 
we should do, that we are going to need robust funding of the 
IRS if we are to be sure that the IRS is acting with sufficient 
frequency to maintain the tradition of voluntary compliance 
which is the essence of our income tax system.
    Mr. Hoyer. I think perhaps that would be a short-hand 
answer to the next question I was going to ask. We discussed 
with Commissioner Rossotti--and Mrs. Northrup brought up the 
issue as well--that on the one hand Congress has sent a message 
that we want the taxpayer treated in a manner befitting the 
fact that he or she is a citizen trying to comply, et cetera, 
with the law and we want to have a user-friendly IRS, if you 
will.
    On the other hand, we also know that there are some 
individuals who consciously want to cheat not only the 
Government but all the rest of us by not paying their fair 
share of maintaining our government. There is concern as you 
know, that has been expressed about whether or not we have 
gotten that balance directly, whether IRS agents know exactly 
what is expected of them. The commissioner commented on that. I 
would be interested in your comment.
    Secretary Summers. Let me say this is something that 
Charles and I have discussed a fair amount. I think it is our 
common view that we need to try to move beyond what might be 
called the pendulum theory at the IRS. You know, for 30 years, 
in response to pressures for a few years, we have got to have 
good customer service and then for a few years we have got to 
make sure we enforce the tax law and it sort of swings back and 
forth.
    I think if you look at the history of business, it is 
increasingly shown that you can cut across traditional trade-
offs. So, for example, businesses all over the country are 
adopting so-called SIGMA programs that have as their premise 
that increasing quality is actually a strategy for reducing 
cost.
    It seems to me in the same way, the focus at the IRS should 
be on measures to cut across that trade-off. Let me give you 
some examples. If you have tax examiners who are knowledgeable 
about the business of the taxpayer, they are examining, 
somebody who knows about restaurants looking at a restaurant, 
that is going to both make it easier for somebody to comply 
because they are going to be dealing with somebody who 
understands what is going on and it is going to make it more 
likely that any wrongdoing is going to be detected.
    If we have better information technology that facilitates 
electronic filing and reduces the error rate and permits more 
elaborate matching arrangements, that is going to mean fewer 
erroneous messages sent out to taxpayers and it is going to 
mean when there are problems, we pick them up earlier.
    And so the approach that we have settled on is really 
Commissioner Rossotti's approach is one of working very hard to 
provide the most accurate and intense feedback on each tax 
return and that will both be better customer service and will 
be a firmer response in those cases where taxes are warranted. 
It seems to me that putting the focus on that offers us the 
best prospect of moving beyond what I think could become an 
increasingly sterile debate between those who wanted compliance 
and those who wanted customer service towards a view of finding 
the most efficient way to provide both.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you. Mr. Sununu.
    Mr. Sununu. Thank you, Mr. Chairman. Welcome, Mr. 
Secretary. I would like to talk about a few areas of policy and 
begin I guess with the hot topic of the day and there is a 
small intended pun there which is energy. Could you describe or 
lay out for the committee what Treasury has estimated as the 
economic impact and the revenue impacts of the current near 
historic high level per barrel cost of oil?
    Secretary Summers. Let me comment on that generally. 
Clearly the increased price of oil to levels that represent a 
high for this decade but are still very much within the 
historical range since the price of oil in year 2000 dollars 
was in the mid-80s, in 1980 is a source of concern and the 
Administration has responded vigorously to those who have been 
most affected through the----
    Mr. Sununu. But has Treasury evaluated what the year 2000, 
the current year, impact will be on our rate of economic growth 
or on revenue collections?
    Secretary Summers. I don't have any direct Treasury 
estimates. I would say to you that I think most and of course 
it depends on how the price of oil moves in the future but I 
think most estimates would put it--would put the impact at 
under 1 percent of GNP and very much within the range of the 
already present uncertainties in the economic forecast though 
clearly there are important concentrations of impact. Those are 
things to which we have to be attentive.
    Mr. Sununu. On policy, aside from trying to work or work 
over members of OPEC, the administration has proposed borrowing 
program from the strategic petroleum reserve. Has Treasury 
assessed what the likely price impact would be in the 
marketplace of that borrowing program?
    Secretary Summers. The impact of any such program, 
Congressman Sununu, would depend very much on the context in 
which--the context at the moment in which it was put in place 
in terms of the oil market. It would depend on the magnitude of 
such a program and the Administration has indicated that it is 
prepared to consider such measures but has not taken any 
decision with respect to any kind of swap or----
    Mr. Sununu. I understand they haven't implemented it but 
have they done a cost estimate or would Treasury be responsible 
for or be interested in trying to assess what the market impact 
would be on pricing?
    Secretary Summers. We would certainly, we as one of the 
major economic agencies of the government, certainly have a 
role in the discussions of that policy issue, but I think it is 
not possible to make a kind of abstract estimate of the impact 
of such a program absent a judgment of the magnitude and 
duration of such a program and absent a judgment about the 
particular context of the oil market at a particular point in 
time.
    Mr. Sununu. I appreciate that. Debt buyback, you mentioned 
briefly you, I guess, are in the process of buying some debt, 
treasuries in the market now. Could you describe a little bit 
about how much has been purchased, which of the maturities you 
are going after, and what the long-term plan is for debt 
repurchase.
    Secretary Summers. About 2 weeks ago, we completed the 
first buyback in 70 years of approximately $1 billion of debt 
in the 15- to 20-year maturity range. Today we completed the 
second buyback. This buyback was in a somewhat longer maturity 
range.
    Mr. Sununu. What was the size of the second buyback?
    Secretary Summers. One billion dollars also. This is a tool 
that enables us to manage the average duration of the debt. It 
enables us to maintain greater liquidity in our issuances, and 
these--we are very satisfied with the way these first two 
reversed auctions have gone.
    Mr. Sununu. On what basis are you selecting the maturities 
to retire?
    Secretary Summers. It is based on our objectives of 
managing average duration, increasing liquidity, and minimizing 
cost to taxpayers.
    Mr. Sununu. What is the target for average duration?
    Secretary Summers. Since this is market sensitive, let me 
do no more than repeat what we have said which is to express 
the concern that absent such a buyback program, there would be 
quite sharp increases in average duration.
    Mr. Sununu. What is the goal for buybacks for the year and 
has Treasury put together a comprehensive proposal for managing 
those buybacks over the course of the year?
    Secretary Summers. Again, because this is market sensitive, 
I am only going to repeat what we have said which is that we 
have indicated that we are prepared to buy back up to $30 
billion in debt this year. We indicated that we were prepared 
to carry out initially two $1 billion auctions and after seeing 
the results of that, we would assess how best to proceed in 
light of our debt management objectives.
    Mr. Sununu. Given that fact, which I certainly appreciate 
that is market sensitive, wouldn't it seem to encourage greater 
level also of market stability and a more even response by the 
capital markets if you were to prepare an outline of how that 
up to $30 billion would be retired, what the goals or at least 
policy ranges of goals are for average maturity, for timing, 
for the amount to be done at any one time. Wouldn't that 
actually enhance the sort of stability and predictability 
within the capital markets rather than create a situation where 
the markets are trying to anticipate or guess what you are 
going to do and that will create, it would seem to me, an 
environment that is more right for speculation or movement 
based on rumor.
    Secretary Summers. I think you raised an important issue, 
Congressman Sununu. As very similar issues arise on the debt 
issuance side, there is basically a trade-off between the set 
of considerations that you adduce which do indeed point to 
setting plans and laying them out in advance versus the 
capacity to respond flexibly to changing conditions and that is 
what we are always trying to balance. In designing the debt 
buyback procedures, we have in manyways tried to follow the 
procedures of the Fed which in the context of its coupon pass 
operations has been routinely involved in the repurchases of debt 
across a large part of a maturity spectrum for a number of years. We 
have tried to use, wherever possible, the same kinds of procedures that 
they use.
    Mr. Sununu. Thank you very much, Mr. Chairman.
    Mr. Kolbe. Ms. Emerson.
    Mrs. Emerson. Welcome, Mr. Secretary. Thank you, Mr. 
Chairman.
    Mr. Secretary, I represent a very rural district in 
southern Missouri that has 26 counties. Fifty percent of my 
counties have poverty levels of 50 percent or higher, and I 
read everywhere--I see in cities and perhaps in the suburbs 
evidence of our economic boom, if you will, but it is not 
reaching rural America.
    As a matter of fact, my colleague Eva Clayton from North 
Carolina and I have just recently put together or re-put 
together a rural caucus here in Congress so that we might be 
able to try to level the playing field, if you will, for folks 
in rural areas. Can you just give me an indication of what the 
administration proposes to do to bridge this gap?
    Secretary Summers. Let me say first that I think we all 
share your concern and at a time when our economic problem is 
much more--becoming increasingly jobs looking for people as 
well as people looking for jobs, making sure that we take 
advantage of our whole population becomes not just a moral and 
southeasterly issue but also a macroeconomic issue in terms of 
keeping the expansion going.
    The Administration has many things under way emphasizing 
education, issues of that kind. Let me highlight what has been 
our emphasis at Treasury. It has been the idea that it is very 
important that capital be available in all parts of the country 
and so we have worked through our strong support of the CRA 
program, through the establishment of community development 
financial institutions, many of which operate in rural areas, 
through the new markets program which includes measures on both 
the tax side and on the expenditure side to support the 
availability of capital to areas of the country that have 
traditionally been left behind.
    We have learned increasingly that the availability of funds 
to borrow is not really enough to promote economic development 
and that is why key thrusts of the President's new markets 
policy are the provision of equity because it is often equity 
capital that is in short supply and our--and the need for human 
capital in the form of businesses that really can use money 
well and know how to make investments.
    Therefore, we have worked to create the BusinessLINC 
program which brings together executives of major businesses 
with executives of smaller businesses in areas that have 
traditionally been left behind such as, for example, I expect 
to be involved in the announcement of the BusinessLINC program 
for the Mississippi Delta sometime in the next several--
sometime in the next few weeks.
    So I share your sense that this is a very important concern 
and would urge that support for programs directed at promoting 
private sector investment in the areas that have traditionally 
been left behind is one of the most important economic 
development strategies that we can pursue.
    Mrs. Emerson. I don't disagree with you. And I am very 
supportive of the President's new markets initiative and the 
whole area that we are dealing with with the Mississippi Delta. 
I might add and I don't mean this with any disrespect that I 
wish you all had started it 6 or 7 years ago as opposed to this 
year but better late than never. But we have been left behind, 
and then obviously on top of that is an incredibly depressed 
agriculture economy that only is projected to get worse in the 
next couple of years. And there is nothing that we can do about 
it in the short term.
    However, I am interested in what Treasury Department, how 
you all assess the possibility of having permanent trade 
relations with China and its potential impact economically on 
agriculture, number one, and on our economy in general and 
whether that might help bridge the gap to some extent.
    Secretary Summers. Since you asked, I am glad to answer on 
PNTR. I think PNTR is enormously in the interests of our 
country. It is for us, not for them. It should not, in my 
judgment, be a referendum on how we feel about China but how we 
can best advance American interests. I think American 
commercial interests and American agricultural interests are 
substantially enhanced by a more open Chinese market.
    I think over the longer term, our interests are enormously 
enhanced by strengthening the forces of change in China, the 
forces that believe in markets, that believe in openness in 
China. I think it is very important to remember that this is 
not about whether China will be in the WTO. China will be in 
the WTO, whichever way we vote. It is not about whether the 
United States will have the opportunity to speak out on human 
rights practices. We will, either way. But it is an issue that 
will have a very direct bearing on the ability of American 
firms and American farmers to export their products. That is 
why we strongly support it.
    Mrs. Emerson. That was a good lobbying you did. Let me ask 
you though, economic projections just the bottom line, have you 
all been able to project out the financial impact that this 
will have on our economy in dollars and cents?
    Secretary Summers. I don't have concrete figures to share 
with you at this moment, but there are certainly calculations 
of agricultural exports that are well into the billions of 
dollars. I would be happy to provide those to you.
    Mrs. Emerson. This will in fact close the gap on our trade 
deficit as well or just potentially?
    Secretary Summers. I wouldn't want to hold out the prospect 
in all honesty that this will close our trade gap. I don't 
think that would be realistic, but if we have PNTR, our trade 
deficit will be lower than it otherwise would be.
    Mrs. Emerson. I would be grateful for any kind of 
supporting information you could get to me. Thank you.
    Secretary Summers. Absolutely.
    [The information follows:]

                   China Trade Relation Working Group

    According to USDA estimates, as of February, 2000, China's 
WTO accession would result in $1.6 billion annually in 
additional U.S. exports of grains, oilseeds and related 
products, and cotton by 2005. Tariffs would also be reduced 
significantly for other products, such as poultry, pork, beef, 
citrus, other fruits, vegetables, tree nuts, and forest and 
fish products. This could result in an additional $350-450 
million in U.S. export growth, bringing the total gain to about 
$2 billion annually by 2005.

    Mr. Kolbe. Ms. Meek.
    Mrs. Meek. Thank you, Mr. Chairman. Welcome, Secretary 
Summers and welcome, Ms. Ross. I am pleased to meet you for the 
first time. I know of the work which Treasury has done in the 
past. As a matter of fact, you have big shoes to fill, 
Secretary Summers, following Secretary Rubin.
    I am very interested in your first accounts initiative. You 
talked about it in your testimony, and I am sure you mentioned 
it in your opening statement. I believe that this pilot program 
that you are going to initiate can go a long way to improving 
access of low-income people into financial services. I think we 
all are aware that too many of our citizens are paying a whole 
lot of money to check cashing companies. If you have ever been 
a part of a low-income community or if you ever had any access 
to one, both rural as well as urban, and where they have to pay 
money in order to receive the services that you and I can go 
into a bank and get, it is a very costly endeavor and I am glad 
to see us explore some options to prevent this. And it gives 
Treasury a little bit better picture too, because it sort of 
whittles you down to the size where most of the people are, and 
that is paying quite a few very large fees for these things.
    Tell me more about this initiative. When are you going to 
start it? Who would be the partners, and if this is successful, 
do you expect to seek a broader role than just this pilot 
program?
    Secretary Summers. Let me say first, Congresswoman Meek 
that this initiative builds on what, I think, has been a very 
important program. The ETA program, is directed at creating 
bank accounts for Federal beneficiaries who haven't had bank 
accounts, but of course millions of the unbanked don't receive 
Federal benefits payments.
    Our intent would be to proceed in a number of ways under 
this First Accounts initiative. The first would be to promote 
access to financial services by putting more ATMs in post 
offices which is something that we have seen over time, 
particularly in less fortunate areas, can be an important 
source of basic financial services and can reduce the need to 
turn to check cashers or other types of non-standard financial 
institutions.
    Second, we would hope to work through the Community 
Development Financial Institutions Program which has--which 
provides awards to banks for very successful programs that they 
have carried on, reimbursement for such programs. The 
traditional focus has all been on the provision of capital; but 
we think that the next dimension is the provision of banking 
services, such as the setting up of low-cost consumer accounts. 
We are also exploring in other ways providing for the 
possibility of making reimbursement to institutions that are 
successful in reaching out to large numbers of individuals. 
This is increasingly an element in our dialogue with the 
banking community.
    Mrs. Meek. I am happy you mentioned the post office. My 
mother used to do all of her financial services at the post 
office and anyone who has lived in an urban area many, many 
years ago would know that is where people went to buy their 
money orders, their checks. They had money they stored it in 
the post office so I am glad to see you are going back to that 
as a source. Your ETA program has been successful. Have you in 
any way assessed these two programs CDFI and ETA? I know they 
haven't been there a long time, but have you made any kind of 
assessment as to how well they have operated?
    Secretary Summers. With respect to the CDFI program, I 
think anyone who goes to one of the events and speaks with the 
awardees about how they have used that money and what a 
difference it has made in their institutions, their 
communities, has to be impressed by the success of the program. 
You are seeing people who otherwise wouldn't have had a chance 
to own homes, owning homes, a whole set of stories of people 
whose lives literally have been changed by the opportunity to 
borrow a few hundred or a few thousand dollars.
    With respect to the ETA program, we have been very pleased 
with the take-up which numbers in the several hundred. Banks 
and increasingly those accounts are being used. It is a little 
early to evaluate the ETA program, but we are pleased with the 
progress so far.
    Mrs. Meek. My last question has to do with the IRS. 
Commissioner Rossotti indicated in his testimony that the money 
to implement the taxpayer protection provisions of the 
restructuring act would come largely through a curtailment of 
compliance activities and that this could result--this cost 
could result in reduced revenue. In the prepared testimony for 
this morning's hearing, Commissioner Rossotti stated that in 
part as a result of the 1998 Reform and Restructuring Act 
changes and increased workload demands, the number of IRS 
examination and collection cases declined by 50 percent. What 
is Treasury's current projection of how much direct compliance 
revenue has been affected as a result of such reduced 
compliance activities? Could you give me your overall position 
regarding the IRS's need for examination and enforcement 
resources, Mr. Secretary?
    Secretary Summers. I think there is no question that there 
has been an adverse impact associated with the fact that while 
very desirable, a number of the provisions of the RRA such as 
innocent spouse relief have proven to be more labor intensive 
than was anticipated.
    This is something we are going to have to address over time 
if we are going to maintain the right kind of level of 
compliance. There is no question there have been revenue 
losses. I believe the President's budget, which does for the 
first time in a number of years provide for increased staffing 
at the IRS, does put us on a path to doing what is necessary to 
collect enforcement revenue and in an appropriate way above all 
to find the right kinds of approaches that pursue both customer 
service and better enforcement.
    Mrs. Meek. Thank you, Mr. Secretary. Thank you, Mr. 
Chairman.
    Mr. Kolbe. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman. Mr. Secretary, welcome 
to the committee for the first time in your capacity as 
Secretary. I would like to pick up on the question of personnel 
needs focusing particularly on law enforcement. As you know, 
this committee has directed the Department to prepare a 
departmentwide assessment of personnel needs which is due on 
November 1 of this year. It is critical we have this kind of 
systematic review of personnel needs and shortages; and I 
commend our chairman, Mr. Kolbe, for his thorough oversight in 
this area.
    I have two specific concerns about the current state of 
affairs. First, I wonder about the overtime that men and women 
in law enforcement are being asked to work, how wemight deal 
with that, and what kind of underlying problems it might point to.
    And secondly, I am concerned about the impact that the lack 
of adequate personnel resources has on our enforcement 
capability and on the functioning of our agencies themselves. 
Let me give you a couple of examples. As you noted in your 
testimony, Secret Service is in the midst of hiring 600 
additional FTEs--over a 2-year period as I understand--to try 
and reduce overtime, which is way out of whack at that agency, 
particularly for the protective program. Protective agents are 
working an average of 77 overtime hours a month. The Service is 
experiencing an unprecedented increase in attrition.
    When these additional agents are in place, Director 
Stafford anticipates being at the fiscal 94 overtime level of 
the mid-60 hour range. That is an improvement, but I am 
concerned that it doesn't go far enough in easing the burden on 
personnel. While law enforcement clearly doesn't lend itself to 
a strict 9 to 5:00 regimen, I am not sure this level of 
overtime is the most fiscally responsible approach either. As 
Mr. Peterson noted yesterday, it costs more to pay overtime 
than to hire another full-time worker.
    The second example is the situation with A.T.F. inspections 
of federal firearm licensees. Director Buckles has informed the 
committee of A.T.F.'s implementation of what he has termed a 
focused inspections policy of the licensees that was begun in 
late 1998.
    A.T.F. had previously indicated that the preferred 
inspection rate would be once every 3 years, but evidently 
because the agency only has the personnel to achieve a rate of 
11 percent, they are backing off of that. I understand that a 
small number of licensees are responsible for a majority of the 
guns involved in violent crimes. I think about 1 percent of the 
FFLs are responsible for 57 percent of the guns used in violent 
crimes. But that after all does leave 43 percent of the guns 
left used in violent crimes and it does raise questions about 
whether scaling back an inspection policy could have an impact 
on enforcement. I wonder what kind of comments would you have 
on that and about personnel levels generally.
    Secretary Summers. Congressman Price, I share your concerns 
both generally with respect to personnel and with respect to 
the specific issues that you raised. We have taken steps to the 
maximum extent possible given the overall budget constraints to 
address what I think is a serious concern with excessive 
overtime leading to attrition at the Secret Service. And the 
President's budget provides for a very substantial increase in 
resources at the A.T.F., some 326 people precisely around the 
concern of being able to more fully and adequately enforce the 
firearms laws.
    Mr. Price. If I could just interrupt you for a moment. If 
you could clarify for us, though, those new personnel--as I 
understand--are primarily going to be assigned to these youth 
violence and crime initiatives. To what extent are those 
personnel actually going to be involved in inspecting licensees 
and having some kind of impact on inspection rates?
    Secretary Summers. That is--the substantial focus--Mr. 
Buckles could speak with more precision than I am capable of, 
but the substantial focus of the initiative is on increased 
enforcement in a targeted way with respect to Federal firearms 
licensees so the focus is on FFLs. There will also be some 
resources for the youth crime interdiction initiative and the 
like. But the focus is on enforcing the law with respect to 
FFLs, and I would expect rather more resources to go to the 
inspection function than to the youth crime gun initiative 
which is just one component of a multipart strategy.
    Mr. Price. Fine. I interrupted you. Go ahead. What would 
you say about the effect of these personnel levels and the 
personnel requests on the actual ability of the agency to 
perform inspections at the optimal level?
    Secretary Summers. I think this increase would be the 
largest increase in personnel in the history of the A.T.F. It 
would, I think, correspond this year to probably as much as 
could be prudently absorbed given the needs for training and 
for staffing and would, I think, be the most constructive step 
we could take to enforce to an adequate extent the firearms 
laws that we have on the books.
    I think there is a lot of debate about whether those laws 
should be stiffened in a variety of respects or not. Our 
perspective, we obviously favor such a stiffening but 
regardless of whether one favors that or one doesn't, it seems 
to me difficult to escape the conclusion that the laws that we 
already have on the books should be fully enforced with respect 
to that small minority of FFLs who account for a quite large 
fraction, as you pointed out in your question, of gun crime. 
That is really what this budget request is about.
    Mr. Price. Well, it is interesting to see even those people 
who resisted those laws and opposed those laws when they were 
first proposed are now saying that they should be enforced. So 
that does seem to be something that we can agree on and I 
commend you and the President for giving it the kind of 
priority you have. Anything you'd like to say regarding the 
earlier question about the trade-off between this focused 
inspections policy and the kind of standard that apparently 
preceded it which had to do with an overall inspection rate?
    Secretary Summers. In many ways the issues here have a 
certain parallel with the issues that Mr. Rossotti and his 
colleagues face at the IRS. On the one hand, it is important 
that they have an audit strategy that goes efficiently after 
the categories of taxpayers where violations are most likely. 
On the other hand, it is quite dangerous for anybody to think 
they have a completely free pass, and won't be looked at under 
any circumstances. So it requires a good deal of careful 
analysis to frame a targeting strategy that finds the right 
balance between those two objectives and that is what Mr. 
Buckles and his colleagues at A.T.F. are trying to do.
    I think we really have all been struck by the extent to 
which we have learned through research that has been carried on 
just in the last year or two how high a concentration of crime 
guns emanate from how small a fraction of sources. And so I 
think the idea that there needs to be a substantial increase in 
the focusing of our resources is relatively uncontroversial but 
as with everything in life, the pendulum could swing too far. I 
think Mr. Buckles and his colleagues are very mindful of that 
risk.
    Mr. Price. Thank you.
    Mr. Kolbe. Mr. Peterson.
    Mr. Peterson. Thank you, Mr. Chairman. Mr. Summers, it is a 
pleasure to meet you. I don't believe we have ever met. I look 
forward to getting to know you and working with you. Mr. Sununu 
asked you a question, and I guess I didn't quite understand 
your answer. Maybe I'll come back at it again.
    We are looking at a spike in energy costs, especially oil. 
It has tripled which will have a huge impact in transportation. 
It is the largest part of our energy source. It is still our 
largest. It is just under 50 percent. Forty something percent 
of our energy comes from oil. I think yesterday Secretary 
Richardson said that the cost to the Federal Government alone 
was going to be $8 billion. I hope I got that straight. I know 
that figure was spoken in a hearing yesterday. I know that the 
cost of moving goods, the cost of moving people, the cost of 
heating homes is going to have a huge impact because that money 
will increase the cost of merchandise, will lessen the amount 
of money people have to spend. Does that concern you with--is 
our economy robust enough to handle that?
    Secretary Summers. There is no question that it is a 
concern, and there is no question that it will have some 
adverse impacts. And there is no question that those adverse 
impacts will be somewhat concentrated in some areas of the 
country and among those who engage in the most energy-intensive 
activities.
    I am convinced, though, that the fundamentals of our 
economy are strong. If you look at private sector forecasts 
over the last couple of months, the revisions for year 2000 and 
for year 2001 have fairly consistently been upwards and that is 
a reflection of the robustness of our economy. Consensus 
forecasts for this year and for next at this point are quite 
strong.
    I think we have all benefited--this is a point that the 
Vice President likes to make--from what might be called the 
information technology supply shot. In many ways information 
technology is to a modern economy what energy was to the 
economy we had 25 years ago, an important input in one sector 
that flows into many other sectors affecting their cost 
structure and just arrests the adverse supply shock of the 
1970s that in today's dollars sent oil from the range of $15 a 
barrel to the--to a range in the 1980s--to the 80 plus dollars 
range. Just as that had a very adverse impact on inflation and 
unemployment creating stagnation and a very deleterious impact 
on productivity growth so that ongoing information technology 
supply shot which flows through the economy is producing a kind 
of mirror image effect in the form of lower inflation and 
unemployment and higher productivity growth. So, yes, the 
situation and energy markets certainly is a concern. Certainly 
it is something we are monitoring very closely. Certainly it is 
something we should act on where we can act constructively, but 
I do believe the fundamentals of the economy are strong and our 
economic expansion will continue.
    Mr. Peterson. Might we all be wise to encourage the Fed 
maybe to be a little more cautious with their interest rate? 
The two of those is what bothers me the most. You know, I 
wasn't really happy with those to begin with. I come from rural 
America as the lady who spoke here briefly before and the 
economy is not as great in rural America as it is in urban 
suburban America. We are not as--we have not been as 
successful. We haven't enjoyed it as much and I guess the 
rate--the interest rate increases maybe if we could--with your 
great influence you could convince the Feds to be cautious. Is 
that wise advice?
    Secretary Summers. Congressman Peterson, the approach we 
have taken in the Administration since the beginning has been 
to respect the independence of the Fed both in public and in 
private. I think that is a policy that has served us well in 
terms of increasing the credibility of monetary policy and 
controlling inflationary psychology, and I think has 
contributed to a lower interest rate environment than we 
otherwise would have had.
    I think people often lose sight as they look at whatever 
the issue is at the moment. It is really quite a remarkable 
thing. We are now at--we are now past our hundredth month of 
expansion, longest expansion in our country's history and long-
term interest rates are nearly 150 basis points lower than they 
were in 1992. That is not what you would normally expect to 
have happen during a long-term expansion, and it is certainly 
not because there is no demand for capital. Given the strength 
of investment, there is tremendous demand for capital and it is 
really a reflection of--really a reflection, I think of two 
things.
    It is a reflection of the pressure being removed from 
credit markets because we have gone from big deficits to 
surpluses. And it is a reflection of the fact that economic 
policy now has a kind of credibility with respect to price 
stability and the absence of an inflationary psychology that we 
didn't have a few years ago. And I think we should all be very, 
very loathe to do anything that would jeopardize that. Anything 
we did that would jeopardize that I think would be 
counterproductive just even in terms of the objective of what 
it did on interest rates.
    Mr. Peterson. Computer modernization in the IRS, you talk 
in your document here--we still have 1960 technology working 
there?
    Secretary Summers. We are one of the last holdouts for the 
vacuum tube.
    Mr. Hoyer. As I understand it, they still have 1960s 
technology there. Whether it is working there is apparently 
questionable.
    Mr. Peterson. Are we--when are you going to be in the 
1980's or the 1990's?
    Secretary Summers. We are--Commissioner Rossotti who spent 
a lifetime--who spent a lifetime in this information technology 
industry can speak much more knowledgeably than I.
    We are trying to proceed with all deliberate speed to 
modernize our information technology capacity, but we have 
learned some painful lessons in this area. It was some 3 years 
ago that I had the unfortunate obligation of testifying before 
this committee that the modernization program was, as I put it 
at the time, way off track. And that was in part a reflection 
of the fact that the IRS had bit off more than it could chew in 
terms of a desire to move quickly to have all modern technology 
and did so without adequate reliance on the private sector, 
without adequate blueprints before investing, and so 
Commissioner Rossotti took on the position as Commissioner of 
the IRS.
    I think he did so with the recognition that one of his most 
important challenges over his term was going to be to get a 
properly disciplined program that could win the confidence of 
Congress, could win the confidence of those who are expert in 
this area in place. And I think we are making good progress 
towards doing that, but this is not the work of a single--of a 
single year or a single presidential term. We will be at the 
task of modernizing information technology at the IRS for a 
long time just as American businesses are engaged in continuous 
modernization of their information technology investment.
    Mr. Kolbe. Thank you. Mr. Goode.
    Mr. Goode. Mr. Secretary, thank you for being here, and I 
asked this of your A.T.F. Director when he was before the 
committee. I wanted to ask you, you are familiar with Project 
Exile in Richmond and the good job that that has done on 
reducing homicides and crime in that city. Can you tell me, and 
I am not asking you to name the cities but what areas or how 
many are you going to expand that to? That is where you know 
you put the persons that do the crimes away for a long time.
    Secretary Summers. I know about Project Exile. With respect 
to other cities, I will either say I don't know to that 
question or I will get handed a note in the next 30 seconds 
that I can read to you.
    Mr. Goode. Philosophically you are in accord with taking 
that type of approach to reduce crime, are you not?
    Secretary Summers. Yes. Mr. Buckles informs me that we are 
and I am now quoting his note, developing plans in every 
judicial district. I think there is no question that we as a 
country need to reduce our tolerance for gun crime and the 
approach that has been taken in Richmond has been an important 
example in this regard.
    Mr. Goode. Do you know when you will get some under way?
    Secretary Summers. Some are under way. If I could suggest, 
perhaps I could submit an answer to--perhaps I could submit an 
answer for the record that would lay out our plans in this 
area.
    Mr. Goode. One other question. I heard this morning a 
Member of Congress talking on National Journal and it was 
indicated that the number of seizures by Federal agents, and I 
think most were Treasury personnel, without a judicial hearing 
had dropped because of the recent law change I think the year 
preceding the change and in the next year--it was 10,000 plus 
in the year prior to and then the year after the law changed it 
was 161.
    Secretary Summers. Mr. Goode, are you referring to the IRS?
    Mr. Goode. Yes.
    Secretary Summers. I don't know those precise numbers but 
there was a precipitous--there was a precipitous drop of 
roughly that magnitude. I am familiar with that and I think it 
is a--it obviously is a concern. It undoubtedly reflects a 
number of factors, one is I think the Congress has expressed 
itself and we certainly shared this probably there were 
seizures that were taking place without appropriate process. 
Before frankly it took some time to put in place procedures 
following the passage of the RRA that allowed appropriate 
seizures that were consistent with the safeguards of the RRA so 
I would expect the number of seizures to rise--to rise over 
time.
    It is my own view very generally that the RRA was an 
appropriate corrective to a set of practices that had built up 
over time that really were not what they should have been but 
that we do need certainly to be very mindful of the fact that 
service to taxpayers and our tax systems' reliance on voluntary 
compliance does require that there be consequences for non-
compliance. And those are consequences we would like to 
administer as infrequently as possible, but there do have to be 
consequences for non-compliance if our tax system is to be 
viable.
    Mr. Goode. So as a general statement you would concur that 
statutory change has helped the IRS in obeying taxpayers's 
rights or citizen's rights in general?
    Secretary Summers. I think the President was very pleased 
to sign that bill into law, and I think certainly it has made a 
very constructive contribution. As with any piece of 
legislation there has been some unanticipated impacts, and I 
think in some ways there probably have been some larger impacts 
than were intended but on the whole it has been enormously 
constructive.
    Mr. Goode. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Mrs. Emerson. Mrs. Northup.
    Mrs. Northup. Thank you. Mr. Summers, I don't want to nit 
pick, but I thought it was Mr. Greenspan's considerable 
emphasis on what information age and technologies have done to 
productivity and the contribution that it has made to the 
economy. I have heard Mr. Gore repeat it recently, but I 
believe it was Mr. Greenspan that expanded on that first--a 
number of years ago.
    Secretary Summers. I think there is no question that 
Chairman Greenspan was one--in many ways probably the first 
prominent person in economic life to extol the difference that 
information technology is making in the economy. When Ireferred 
to Vice President Gore I was only referring to his use of the analogy 
between the supply shock analogy, between information technology and 
oil. That is the analogy that I was drawing with respect to the Vice 
President.
    Mrs. Northup. I also wanted to ask you--last year I asked a 
couple of questions about the possibility of the government 
directly investing Social Security funds, possibly up to 20 
percent. It is something that I have opposed and President 
Clinton stated a few minutes ago that that was still a viable 
option.
    I have something here I think that is attributed to you 
that says State-run enterprises, including State-owned banks, 
have a disappointing record of performance in which you noted 
that the reality is that politics usually intrudes in the 
operation of a public enterprise, and efficiency, financial 
performance, and the quality of services are often sacrificed. 
I just wondered if you wouldn't feel that the same reservations 
would hold if the Social Security system began directly 
investing the Social Security funds in the stock market?
    Secretary Summers. Congresswoman Northup, there is a sharp 
distinction between operating a public enterprise, which is 
something I have made clear in general is not an appropriate 
role of government, and simply allowing funds to be passively 
invested in an index fund by an intermediary. Indeed if one 
looks at the States in the United States, every State pension 
fund includes investments in equities. Every defined benefit 
pension fund includes investments in equities. It seems to me 
that it is wrong to deny the beneficiaries of what is the 
largest defined benefit pension plan in our country, Social 
Security, the opportunity to----
    Mrs. Northup. I would never deny them that. I just wouldn't 
have the government--let me just go back. You said State 
pensions. Isn't there a record of then-State legislators 
beginning to require certain investments to achieve 
environmental goals, to achieve labor goals, other political 
goals, social goals, that are totally separate from return on 
investment?
    Secretary Summers. In cases where the pension fund was set 
up in part with that as an objective, there certainly are such 
cases, Mrs. Northup. But even where those have been the case, 
the investment performance of State and local pension funds, 
frankly, has been very substantially better over any 10-year 
period or 20-year period or 40-year period than the investment 
performance of Social Security by virtue of not--by virtue of 
investing only in government bonds.
    Mrs. Northup. That wouldn't be a fair comparison. It is not 
Social Security versus ones who are invested with societal 
limitations on it. It would be a comparison between that and 
one that is invested in only with the goal for return on 
investment. We know Social Security--I mean compared to 
nothing, anything looks good. The return on investment is 
minimal with Social Security. The question is does a State 
pension fund that starts to be politically manipulated return 
as well as a pension fund that isn't politically manipulated?
    Secretary Summers. Let me say that I think there are--I 
share your concern with respect to political manipulation. 
There are a variety of devices that can be used--requirement 
that the funds be indexed, the use of a nonpartisan independent 
board to administer the choice among vendors, the requirement 
that the Social Security funds be commingled with other private 
funds--to guard against the kind of political interference that 
you described.
    That may be--that is I believe the best approach. Where we 
do have a substantial Social Security trust fund it seems to me 
to be appropriate that we invest it in as effective a way as 
possible and investing that trust fund for the defined benefit 
portion of Social Security in an efficient way, which does mean 
taking advantage of some of the return characteristics of 
equities, does seem to me to be something that we should work 
toward.
    Mrs. Northup. And finally, I know we all have to go vote, 
but last fall the World Customs Organization confirmed its 
earlier decision in opposition to the U.S. Government's 
position on the reclassification of predrilled framing 
softlumber. I know that both the Chairman and the Ranking 
Member were part of an effort to solve this problem--my 
question--to reverse that, reverse the administration's 
persistence in that. My question to you is--is the U.S. going 
to comply with the World Customs Organization's ruling?
    Secretary Summers. We are going to--the Customs Service 
will comply with the law as its lawyers--as its lawyers define 
it. There are complicated legal arguments on support of both--
support of both sides, and we will certainly comply with any 
binding international agreements to which we--to which we are a 
party. But what I have asked the Customs Service to do in line 
with our policy on a wide range of issues is to simply 
interpret the law in the best way that its lawyers are able to 
and that is what it has done in the softwood lumber area as it 
does in other areas.
    Mr. Kolbe. Thank you, Mrs. Northup. I know I have 
questions. I think many of us have other questions but I think 
in the interests of time--at least we have all gotten through 
one round of questioning--we will allow other questions to be 
submitted for the record and allow you to be on your way. I 
saved all of the tough questions for my second round, Mr. 
Secretary, so you are off the hook.
    Secretary Summers. I am saved by the bell.
    Mr. Kolbe. Saved by the bell. Mr. Secretary, we thank you 
very much for appearing today and the subcommittee will stand 
adjourned.
    Secretary Summers. Thank you, Mr. Chairman, and members of 
the committee.



                                            Tuesday, April 4, 2000.

             U.S. CUSTOMS' AUTOMATED COMMERCIAL ENVIRONMENT

                               WITNESSES

JIM FLYZIK, DEPUTY ASSISTANT SECRETARY OF THE TREASURY FOR INFORMATION 
    SYSTEMS
JOHN SIMPSON, DEPUTY ASSISTANT SECRETARY OF THE TREASURY FOR TARIFFS 
    AND TRADE
S.W. HALL, JR., ASSISTANT COMMISSIONER, UNITED STATES CUSTOMS SERVICE 
    FOR THE OFFICE OF INFORMATION TECHNOLOGY
RON SCHOOF, COALITION FOR CUSTOMS AUTOMATION FUNDING
HARRIS MILLER, PRESIDENT, INFORMATION TECHNOLOGY ASSOCIATION OF AMERICA
    Mr. Kolbe. The Subcommittee on Treasury, Postal and General 
Government will come to order. Good morning, gentlemen. We are 
very pleased this morning to be able to have what I think is a 
very important oversight hearing on the subject of 
modernization of Customs information systems. We have had the 
hearing earlier on the budget for Customs so this one is 
focused very specifically on the information systems, 
particularly the proposed ACE, or Automated Commercial 
Environment, and the existing system that it is intended to 
replace, the Automated Commercial System, or ACS. So we are 
going to have lots of acronyms here. ACE and ACS. And then we 
also have the International Trade Data System, or ITDS.
    We are welcoming five panelists this morning. The first 
three are here with us on this first panel. First we have Mr. 
James Flyzik, the Deputy Assistant Secretary for Information 
Systems and Chief Information Officer for the Treasury 
Department; Mr. S.W. Hall, the Assistant Commissioner for 
Information Technology and the Chief Information Officer of the 
U.S. Customs Service; and Mr. John Simpson, Deputy Assistant 
Secretary of Treasury for Regulatory Tariff and Trade 
Enforcement. After we complete this panel, we will try to stick 
to one hour on this, so we do have time to hear from a private 
sector panel, which will consist of Mr. Harris Miller, 
President of the Information Technology Association of America 
and Ron Schoof of Caterpillar Corporation, who is Chairman of 
the Joint Industry Group and represents the Coalition for 
Customs Automation Funding.

                         MODERNIZATION CONCEPT

    As we think about investments in technology and information 
technology, I am reminded of the saying that the goal of 
computer science is to build something that will last at least 
until we finish building it. It is essential, I think, that 
Customs avoid instant obsolescence in a new system that it will 
put in place, but at the same time understand that changes will 
be constantly occurring.
    Customs generates and consumes phenomenal amounts of 
information in overseeing the movement of $2 trillion in trade 
and half a billion passengers that cross our borders and enter 
and leave the United States each year. The workload is really 
overwhelming. At the same time the rapid evolution of 
electronic communications completely changed the way in which 
business, government, and individuals exchange information.
    Customs, however, remains tethered to processes that are 
the legacy of a traditional way of doing business transaction 
by transaction and in most cases it is still very much paper. 
The current ACS system is over 16 years old and funding 
requests are now tellingly described as life support, and we 
are tied to its idiosyncrasies no matter how obsolete they are. 
The urgency of the requirement to modernize Customs' import 
information processing system, for that matter systems for all 
of Customs' core business activities I think is not a matter 
for debate. However, we have only reached this point after a 
number of false starts and after this committee slowed funding 
down until Customs had completed the necessary prerequisites 
for moving ahead to the new ACE system, that is, developing an 
architecture framework, ensuring the competencies were in place 
to develop and implement the new system when we had it in 
place.

                            FUNDING QUESTION

    Now, while we agree on the need for action, the question is 
how can we get started and how are we going to pay for a 
project that is going to cost anywhere from between 1 to $2 
billion. The administration proposal for a user fee, offset 
user fee is controversial at best and raises questions, I 
think, of how committed the administration is to really moving 
forward in a timely fashion when they know the political 
problems that such a fee faces. But this is going to be a long-
range task and we have to ensure that it is done and make sure 
that it is going to get done right.
    I would expect our panels this morning to tell us why 
waiting is not one of the options in front of us, and I welcome 
in-depth explanations about the magnitude of need for change in 
requirements for the new ACE system, the statusand continued 
requirements for ACS backstops until we have a new system in place and 
how Customs is implementing the GAO architecture and systems 
development recommendations.
    We will, as I said, then hear from two key leaders in the 
trade community and information technology industry to describe 
how Customs can meet the best practices of industry and 
government. We will also hear how Customs will implement an 
international trade data system to better streamline our 
present diverse collection of trade data to the benefit of 
government and the public. So I am looking forward to what I 
think is a productive and I know a very important hearing.
    Before we ask for statements from our witnesses, let me 
call on Mr. Hoyer for his comments.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I certainly 
want to welcome the witnesses here. I think this is an 
important oversight hearing. This subcommittee, as I have said 
in the past, has gone through the efforts of the Internal 
Revenue Service to update its information technology 
capabilities and we had some real fits and starts. Hopefully we 
will overcome those and not repeat that lesson again.
    Customs is collecting $20 billion of revenue each year or 
thereabouts, 55 percent of which involves merchandise subject 
to quota regulations or other trade programs. Since we have 
broken down our trade barriers, volume has increased 
significantly and is expected to double by 2005. We have seen 
these statistics in terms of your transactions going up 
geometrically. Formal entries are going to reach, I think, 30 
million per year by 2005.
    One thing is certain, Mr. Chairman, to everyone in this 
room. The current system, the Automated Commercial System, 
won't keep up with the demand. Customs has already experienced 
brownouts to the system which translates into a serious problem 
in forcing trade compliance. We are paying a significant price 
just to provide life support to the current system. It is my 
understanding that we have $56 million in this present request 
simply to maintain the existing system.
    With regard to the development of ACS replacement, I'm 
pleased to see that Treasury and Customs have made significant 
strides in satisfying GAO's concern. I mentioned GAO because 
frankly as we went through the IRS design, architecture and 
implementation, it was GAO who was essentially the arbiter of 
whether or not progress was being made. It is positive to hear 
GAO say, and I quote, to complete the architecture and 
implementation process for ensuring that systems like ACE 
comply with the architecture, and they have made some positive 
observations about our efforts.
    In fact, the Federal Architecture Working Group recognized 
Customs as the most improved agency in terms of completing an 
enterprise architecture. I know that you are very proud of 
that. Customs can be proud of that. Treasury can be proud of 
that. And perhaps we have learned from our predecessors. 
Progress is obviously being made but, like the chairman, I have 
concerns with the shortfalls in funding to maintain the 
modernization office, MITRE support and where the effort fits 
in Treasury's overriding priorities.
    Mr. Chairman, I look forward to this hearing and testimony 
and to working with you and members of the committee and with 
the Treasury Department and Customs to ensure a successful 
implementation of this new system.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Mr. Hoyer. Gentlemen, we will take 
your statements. As I understand it, in the interest of time, 
Mr. Flyzik, you are going to make a brief statement. The entire 
statement will be placed in the record as will the others. I 
think we will forgo the verbal statements from the others, is 
that correct, this morning?

                       STATEMENT OF TREASURY CIO

    Mr. Flyzik. I am going to make a brief statement along with 
Mr. Hall. We will divide up the 5 minutes.
    Mr. Kolbe. Go ahead.
    Mr. Flyzik. Mr. Chairman and Mr. Hoyer, members of the 
subcommittee, I appreciate the opportunity to appear today to 
discuss the U.S. Customs Service modernization and more 
specifically the Automated Commercial Environment Program. 
First, I want to thank the chairman and the other members of 
the subcommittee for your continued support and encouragement 
toward the development of a modernization program for the U.S. 
Customs Service.
    As many of you know, I serve as the Deputy Assistant 
Secretary for Information Systems and Chief Information Officer 
for the Treasury Department. My office provides strategic 
direction and oversight for all information technology programs 
within the Treasury Department and its 14 bureaus. Since 
February of 1998, I have served as the Vice chair of the 
Federal CIO Council, where I play a key role in the strategic 
direction of the Federal Government's use of information 
technology.
    In October of 1997 when the fiscal year 1998 funds for ACE 
were on hold pending the resolution of several technical 
issues, the Treasury Department made the decision to have the 
Treasury Investment Review Board take an active role in the 
oversight of the program. Since that time, Treasury and Customs 
have worked very closely to make the necessary changes in the 
program toward a successful development and implementation. The 
Customs CIO and I have met with the appropriations staff on a 
regular basis to discuss our progress.
    The General Accounting Office described three weaknesses in 
the ACE program. These weaknesses were a lack of complete 
enterprise systems architecture, a lack of effective investment 
management practices relating to ACE, and a lack of sound 
software engineering rigor and discipline.
    Treasury is working with Customs to comply with the GAO 
recommendations. Customs has developed an architecture and 
instituted a process to make sure that ACE complies with the 
architecture. Customs has hired a Federally funded research and 
development center contractor to develop and implement plans 
for Customs to achieve a Software Engineering Institute Level 2 
capability for software development. This contractor will also 
assist Customs in bringing on a prime integration contractor 
for ACE, serve as an independent verification and validation 
agent to monitor the prime contractor's performance, and ensure 
the prime contractor processes are at the Software Engineering 
Institute Level 3 capability. Both Treasury and Customs have 
investment review boards in place to monitor all phases of ACE 
development.
    The Customs Service has also revamped the cost-benefit 
analysis for ACE. An independent cost-benefit analysis was 
performed to determine the most cost effective approach for 
modernization. The cost-benefit analysis consisted of 
estimating both internal and external benefits, and included a 
risk analysis to account for estimating uncertainties. Included 
in the cost-benefit analysis were options to revamp the old 
system or to design a new one. The results indicated that a new 
system would offer the Government the greatest return. This CBA 
cost-benefit analysis was provided to the Appropriations and 
GAO staff late last year.
    In addition to the steps outlined above to address the GAO 
recommendations, Customs also hired additional skilled IT 
professionals such as their CIO and their Chief Architect. I 
believe Customs has made significant progress towards adopting 
best practices in the areas of reengineering business 
processes, building to an architecture, developing sound 
project management skills, and developing the complex system in 
manageable incremental stages. To further institutionalize 
these improvements, Customs has developed an enterprise life 
cycle methodology as the framework for planning, development, 
and deployment of ACE. The Enterprise Life Cycle methodology 
will be used to guide and prioritize the development of systems 
and infrastructure.
    During this process of management improvements, Customs was 
able to maintain reasonable momentum in the development of ACE. 
The first two releases of the ACE prototype were rolled out 
within budget and according to the schedule proposed by 
Customs. The prototype proved the basic concept of a paperless 
border crossing.
    In summary, I would like to reiterate that although the 
Customs modernization has faced funding delays, the time was 
used very effectively to better plan and build the program and 
project management capacity to minimize risk and better assure 
a successful outcome. We look forward to working with Customs 
to achieve a world class information technology environment.
    Mr. Chairman, Mr. Hoyer, members of the subcommittee, this 
concludes my opening remarks. I thank you for the opportunity 
to present to you this morning and will continue to keep you 
apprised of progress on this most important endeavor.
    I will be happy to respond to any questions.
    Thank you.
    [The information follows:]



    Mr. Kolbe. Thank you. Mr. Hall.

                        STATEMENT OF CUSTOMS CIO

    Mr. Hall. Mr. Chairman and members of the subcommittee, I 
appreciate the opportunity to speak with you today about 
Customs automation and to share with you some of our recent 
accomplishments in ongoing activities in this critical 
endeavor. Before beginning, I would like to take this 
opportunity on behalf of Commissioner Kelly to thank the 
chairman and other members of the subcommittee for your 
continued support and guidance in overseeing Customs 
modernization. I have provided a copy of my written testimony 
separately but will touch on the critical points here.
    Today as never before, the challenges facing Customs are 
twofold, to protect our borders from the threat of narcotic 
smuggling, terrorism and money laundering while simultaneously 
addressing the explosion in international trade. Customs is 
sorely pressed to meet this expanding workload with relatively 
static resources. To address these challenges in the most 
efficient manner, we have embarked on a long-term strategy of 
modernizing our major commercial enforcement and administrative 
systems.
    Modernization begins with the replacement of the current 
16-year-old trade system with a new automated commercial 
environment, ACE. With guidance from this subcommittee, the 
Treasury Chief Information Officer, and the GAO, we made 
significant progress in developing and implementing the 
necessary improvements to ensure the success of this program. 
An independent cost-benefit analysis of modernization options 
demonstrates the net present value of $2.3 billion and a 13.7 
percent return on investment. As Customs' Chief Information 
Officer, I assure you that next to keeping the existing systems 
viable, implementing modernization is my organization's number 
one priority.
    To prepare for this effort, we reorganized the Office of 
Information and Technology, hired several experienced senior 
managers to help lead this effort, created a program office to 
manage modernization activities, and contracted with the MITRE 
Corporation, a company with expertise in supporting government 
projects of this size and importance.
    Our immediate need is for $12 million to complete the 
acquisition for a prime contractor in preparations to manage 
modernization. We also need an additional $17 million for ACS 
life support. Customs has identified sufficient funding to 
continue MITRE support and partially fund ACS requirements. We 
continue to work with Treasury to identify remaining funding 
for the modernization program support and critical ACS needs. 
For fiscal year 2001, we are requesting $338.4 million for our 
automation efforts.
    In summary, upon receipt of adequate funding, Customs is 
ready to proceed with modernization. We have prepared the 
groundwork to partner with industry experts to assist us.
    Mr. Chairman and members of the subcommittee, this 
concludes my opening remarks. I would be happy to respond to 
any questions.
    [The information follows:]



    Mr. Kolbe. Thank you very much. Of course, Mr. Simpson, 
your statement also will be placed in the record.
    [Clerk's note.--Mr. Simpson had no written statement.]

                    REPROGRAMMING FOR SUPPORTING ACE

    Mr. Kolbe. Let me begin with a question on the current 
status of reprogramming to keep the ACE program going. The 
administration proposes a new account, $338 million for three 
activities, $123 million for the current ACS system, $210 
million, and I have some questions on that in a minute, $210 
million for the ACE development and then $5.4 million to 
continue the International Trade Data System. We are pleased to 
see that we are making progress in the area preparing for the 
major systems acquisition and developing the architectural 
blueprint or the architecture plan for the Enterprise 
Information System.
    Now, at our hearing that we had on March 14, Commissioner 
Kelly and Under Secretary Johnson described efforts that were 
under way to fund the ACE program office to retain the services 
of MITRE Corporation and involved reprogramming some funds so 
that we would keep this project going, and we were told that if 
we didn't have that opportunity, they would have to close the 
office down within a month and a half.
    Can you tell us where we stand with regard to the 
reprogramming? We have had silence since that date from 
Customs.
    Mr. Flyzik. Mr. Chairman, I believe at this point we have 
identified funding to keep the program going in the interim. We 
have identified some funding which will allow us to keep the 
MITRE work ongoing to keep the momentum. We continue to look at 
other means and for the latter part of the fiscal year where 
funds may become available to keep this project on target. It 
is a major priority in the Treasury Department and it is being 
viewed at the highest levels.
    Since the testimony you are referring to, we have 
identified funds to keep the pilots up and running and to keep 
the MITRE work ongoing.
    Mr. Kolbe. The pilots were--we have already received the 
request for that, but we haven't received any reprogram request 
for the ongoing development of the architectural system.
    Mr. Flyzik. We are in the process of preparing that for 
you.
    Mr. Kolbe. Do you expect we will receive that shortly?
    Mr. Flyzik. Yes.

               LIMITATIONS OF AUTOMATED COMMERCIAL SYSTEM

    Mr. Kolbe. I'm going to come back to some other questions 
on ACE but I want to turn for a second to the current system. 
I'm trying to start with where we are with what we have in 
place today and then move forward to the system we are trying 
to get in place.
    The ACS, or Automated Commercial System, went into service 
in 1984 I believe it was. Can you tell me what of the features 
that are in there now are obsolete, what functions can't be 
carried out to support Customs' needs with the current system 
of ACS, what other functionality is desirable either from your 
standpoint or as far as you know from the private sector 
standpoint that can't be met with ACS?
    Mr. Flyzik. Let me make a few comments and then I will ask 
Mr. Hall to fill in some of the more specific details. Clearly 
with ACS, we work on a transaction by transaction basis. What 
the ACE program or modernization program allows us to do is to 
begin managing national accounts which will greatly simplify 
the entire process of moving goods across the border.
    Mr. Kolbe. Tell us what that means, management of national 
accounts.
    Mr. Flyzik. Today with the ACS system, essentially each 
movement of goods across the border constitutes an individual 
transaction, and there is no way of tying those individual 
transactions to, say, a national account for a company. What we 
want to do in modernization is, like the private sector, manage 
accounts, especially large accounts, so we no longer need to 
deal with individual transactions, but with overall companies.
    Additionally, another thing that, from my standpoint is 
extremely important, is getting Customs into the mainstream of 
the market and the mainstream of technology. The existing 
legacy systems do not allow us to take advantage of some of the 
e-commerce initiatives, Internet initiatives and the 
modernization programs. Therefore, they are going to 
continually keep us constrained from making Customs able to 
interoperate and keep up with its private sector counterparts.
    With that, I would also ask Mr. Hall if he can elaborate 
perhaps on some of the specific details of ACS deficiencies.
    Mr. Hall. Primarily what we are trying to do is on the 
functional side of ACE provide a system that allows much more 
flexible operations by the trade. What we are looking at in 
addition to moving away from transaction-based accounting and 
work processing at the port, we would like to be able to do 
remote filing, for example, where you could do business in a 
port from a remote location. That presents the opportunity for 
companies to do business in a fundamentally different way. 
Instead of having to maintain presence everywhere they do 
business, they could do business from a central location, for 
example.
    It allows us to move towards more modern technology, which 
makes it easier to upgrade and modify the system as new 
technology becomes available. The current system really is very 
dependent on not only older standards and ways of operating 
systems, but it also locks us into a certain set of vendors 
which can have price consequences and problems in terms of 
long-term support.
    So I think as we move toward the new design, what it does 
is create an opportunity to be more electronic, more adaptable 
to the way people want to do business with us, they can 
communicate in many formats, and I think it will make it easier 
not only for large companies to conduct business with U.S. 
Customs but it also will make it easier for smaller companies 
to communicate with us.
    Mr. Kolbe. So there is no way that simply expanding ACS, 
that adding more memory, more capacity to ACS is going to be 
able to do what you want to do. You have to have a new system?
    Mr. Hall. That is correct.
    Mr. Kolbe. Is the basic problem the transaction-based 
nature of ACS that you just can't get without moving to a new 
system?

                   MODIFYING ACS VERSUS BUILDING ACE

    Mr. Hall. That is a symptom of the problem. The problem is 
the current system is programmed, it is designed to do business 
the way Customs did 12 years ago. We have moved on. We have 
reorganized. We have reengineered our business processes to try 
to accomplish the objectives of the Modernization Act. For us 
to modify ACS to do business the way we need to do business 
today would require a complete redesign. We priced that out and 
that would be as expensive as building a new system, but you 
would still be locked to these old technologies. So clearly the 
right thing to do is to move forward and build a system that 
operates in the new millennium.

                              ACS OUTAGES

    Mr. Kolbe. Customs told us in the year up to the end of 
June of last year that you would experience somewhere between 
59 and 102 outages in the ACS system each month. And I think 35 
of these were at least 24 hours in length. What has been your 
experience since then? Can you provide us with a list of--a 
chart--some data that shows the monthly reporting on outages 
through March of this year?
    Mr. Hall. Yes, sir. If I could direct your attention to the 
chart on your left labeled ACS outages, we have brought that 
data up to date through February of this year.
    [The information follows:]



    Mr. Hall. On your left, the blue figure reflects outages 
that would be apparent to the trade, what we call the front end 
of the system. You can--it is in minutes but you can see that 
in many months the period of time that these are major system-
wide outages that we reflect here, that there are hours of 
downtime in that month which has a tremendous impact on the 
timeliness of the business that we are able to support and you 
can see these outages are recurring over time.
    The first big peak that you see there was the month where 
Customs and the industry was most concerned about the onset of 
major outages and brownouts. As you can see, we had a recent 
month that had almost identical amounts of downtime. The right 
side of that chart in red and yellow showed the network outages 
which is what Customs employees see and these reflect the total 
number of outages per month. As you can see, those tend to peak 
around 250 locations per month. That is almost a third of 
Customs operating locations have an outage every month. The red 
piece----
    Mr. Kolbe. Some I assume are multiple in a month.
    Mr. Hall. Multiple in a month. And the red part of the 
chart indicates outages in excess of 24 hours. Sometimes those 
outages----
    Mr. Kolbe. What is the impact of this on the trading 
community?
    Mr. Hall. Several. At a minimum, they have to revert to 
paper processing.
    Mr. Kolbe. Is that what you do when this happens? Let's say 
there is one for 24 hours, you revert to paper processing 
during that time?
    Mr. Hall. If the outage lasts more than a few hours, then 
we revert to paper. The other impact there, particularly on the 
law enforcement side, is unless the location is able to 
communicate with a nearby port via some other means where they 
basically have someone logged on in the system in another 
geographic location and they are trying to communicate limited 
information over the telephone, you can lose track of shipments 
that you are trying to keep an eye on and it raises the risk of 
smuggling in other illegal activities.
    So these are not desirable operating levels and if we were 
trying to optimize this, what you would like to see is that 
these outages would kind of go along the bottom of the chart. 
They should be near zero in both cases.
    Mr. Kolbe. One other question before I go to Mr. Hoyer 
here. You have asked for $123 million for life support, it is 
titled life support for ACS here. Last year's was $67 million, 
I believe. You have built that into the base. Then you have 
added another $56 million. I don't understand why what you had 
last year in the way of data center hardware, software 
facilities and network would be added--would become part of the 
base. Isn't that a one-time cost last year, what you spent last 
year to add new capacity to ACS?
    Mr. Hall. No, sir. Part of the problem has been the lack of 
sufficient budget to do ongoing operating and maintenance. When 
you buy these systems, they have to be maintained just like 
your automobile, and so you have to build that into your 
operating budget so that you can do periodic maintenance, 
upgrades, and so forth. It is more than just increasing the 
capacity by buying more memory or buying more boxes. You have 
to upgrade licenses and so forth. So that is what this money is 
about and the adjustment to our operating base last year----
    Mr. Kolbe. Excuse me. It says increase the processing 
capability and storage capacity.
    Mr. Hall. That is part of it. We are doing two things with 
these increases. Part of it is addressed to increasing capacity 
because our workload is going up and part of it is maintaining 
existing equipment so that it operates at peak performance and 
replacing some of the old equipment that is in the inventory 
that is unreliable or may no longer be supported by the vendor 
that we originally purchased it from.
    Mr. Kolbe. I am not entirely satisfied or convinced by that 
answer just because I am not sure I understand why all of 
that--everything in there would be an ongoing cost and not a 
one-time cost. Let me go to Mr. Hoyer.

                  FUNDING DELAY AND CORRESPONDING RISK

    Mr. Hoyer. Thank you, Mr. Chairman. The chairman has 
discussed the fee. We know the problematic nature of the fee 
last year. If we did not get funding, what would be the 
ramification of a year delay?
    Mr. Flyzik. Clearly going into the budget cycle this year, 
what we looked at in our priorities were the fact that the ACS 
system was dealing with these various outages, which is why the 
budget is requesting significant funding for the continuation 
of the ACS existing system. It should be noted that in the ACS 
so-called life support, we are acquiring some hardware that 
would essentially support the modernization in the future. So 
we do believe we are moving in the right direction even with 
our current priority to fund the ACS life support.
    As to the ramifications of not having the funding, we will 
continue to have to reprioritize to find out ways to keep the 
system that is in place now, to keep it moving in order to keep 
up with the trade activity growth and the trends going on at 
the border crossings. We would have to continue to find ways to 
make that system work within the budget restraints that we are 
facing. Clearly it is not ideal and clearly where we want to go 
in the future is find ways to fund this program in its 
entirety.
    Mr. Hoyer. Is it a viable option? In other words, what you 
are saying, as I understand it, is if we don't get the funding 
you are going to try to keep the system going? I understand 
that and would expect no less, but I want to know how high the 
risk is as we discuss the markup and the limited resources 
available. How high is the risk of not fully funding the 
request?
    Mr. Flyzik. Clearly the risk grows. The risk continues to 
grow. When faced with budget constraints, we have no 
alternatives other than do everything in our power to make sure 
we address the most pressing needs, the most pressing areas 
where we think we are at the greatest risk. I am working with 
Mr. Hall at Customs to try to make sure every dollar we spend 
addresses the most pressing issue facing us today. Clearly we 
will continue to look for ways to fund this program in its 
entirety and do what we allbelieve is the right thing to do, 
and that is to modernize the Customs Service right across the board.
    Mr. Hoyer. Failure to fund, what is the risk of a crash? 
You recall in 19--when was it?--'88, '86, '87, the IRS 
essentially crashed in Philadelphia. We have had some 
brownouts. Brownouts are one thing. A crash is another where 
you can't get on-line, can't get up to speed and you are in 
fact reverting to paper. How high a risk do we have of that?
    Mr. Flyzik. I believe Mr. Hall went through the process of 
the fact that these outages continue to be more severe. As we 
worked through the Y2K efforts, we did look at contingency 
plans, none of which are ideal. However, in a total crash we 
would have to revert back to complete paper processing and 
clearly we would see significant backups at the borders, which 
would impact the trade community and the economy in general if 
we cannot get things into the country in the way we are 
accustomed. Just in time manufacturing is very important to the 
trade community. Clearly from a government standpoint, 
organization prestige would be on the line and we would have to 
look at what we need to do. I am familiar with the history of 
the IRS and issues that impacted us there. And it takes some 
time to recover from those types of things. I don't know if Mr. 
Hall can add to any of the risk factors in terms of the 
percentages.

                            ACS LIFE SUPPORT

    Mr. Hall. I think the key to avoiding a total failure of 
the ACS system lies in the funding stream we have requested for 
ACS life support. That is absolutely minimum essential. That is 
the funding that would allow us to maintain the computer 
capacity at the National Data Center, to maintain the adequacy 
of the communication links that connect that computer to both 
internal and external users, allows us to do some long overdue 
engineering of this major database, which is one of the largest 
databases in the world, continuing to modernize the front end 
of that computer system which interfaces with the trade.
    These things all need to be done not only to keep up with 
the growing workload which continues to add stress and strain 
to the system's overall capability but to also allow us to 
continue the replacement of some of the older equipment that is 
in the inventory that is no longer viable equipment, is hard to 
maintain. If that were all we were to do, though, we would 
never be able to achieve the benefits, this cost savings, the 
streamlining, the more modern operations, the improved 
enforcement that comes with the ACE system, the new system, and 
that is where that request pays off is the investment in the 
new system allows us to achieve this net $2 billion in improved 
revenue and operations.

                    INTERNATIONAL TRADE DATA SYSTEM

    Mr. Hoyer. Congressman Price could not be here but he has a 
specific question which deals with how quickly we are getting 
on-line here. He asked a question of Commissioner Kelly with 
reference to the ITDS program, specifically U.S.-Thailand Trade 
Information Project, which involves the establishment of 
streamlined Customs processing prototype. An organization in 
his district obviously has contacted him. They are involved in 
this, as I am sure you know. At the time of the March 14 
hearing, project management had not yet been assigned.
    Do you know whether that has been effected at this point in 
time?
    Mr. Hall. That has been done very recently. The individual 
is in the Office of Field Operations. We plan to make a trip 
shortly, both information technology staff and field operations 
staff to visit the folks in North Carolina who work on that 
project to make sure we have a full appreciation of where they 
need support and how that project is doing.
    Mr. Hoyer. In preparation for going down there, you might 
contact Congressman Price's office and let him know you are 
going down because I know he has been very concerned about 
getting that project moving.
    Mr. Chairman, I have further questions. I will ask them on 
subsequent rounds.
    Mr. Kolbe. Mr. Sununu.

                      APPROPRIATENESS OF USER FEE

    Mr. Sununu. Thank you very much, Mr. Chairman. I apologize 
in being delayed in getting here and possibly the reemphasis on 
some of the points that I would like to make. I know you are 
concerned about the nature of the fees to fund this program and 
I would like to at least begin my questioning in that area.
    Thank you for being here, gentlemen. In our subcommittee 
hearing with Secretary Summers, he stated--he indicated that 
the goal or the approach taken in setting these fees for the 
ACE system was to consider--rather than considering simply the 
transaction costs, to have the fees more closely reflect the 
value of the services offered and the value to a corporation of 
allowing goods to come into the United States. And I would like 
you to describe a little bit about sort of or expand a little 
bit upon that approach to fees for the system.
    Mr. Simpson. The fee would be based on volume of system use 
by all categories of users, Mr. Sununu, and that would include 
importers, exporters, and carriers. There are a couple of 
different metrics we could use. One is data bytes and the other 
is, I am going to say, the electronic equivalent of the old 
lines of data in a paper document. But either of those metrics 
fairly reflects the volume of use and the tax, if you will, on 
Customs resources.
    Mr. Sununu. But volume and value are different things. You 
are suggesting that at least in this case perhaps the Secretary 
wasn't choosing the right words?
    Mr. Simpson. I think the distinction he intended to make 
was between the fee we are proposing and the current 
merchandise processing fee, which is an ad valorem fee based on 
the value of the goods in the transaction. We created, actually 
Congress created a merchandise processing fee in the Omnibus 
Budget Reconciliation Act, I am going to say 1986, thereabouts, 
and that fee was an ad valorem fee based on the value of 
merchandise imported. We as a result of a ruling from the GATT 
panel have had to modify that fee to put a cap on it and to put 
a floor under it and make some other modifications to it.
    I think that is what Secretary Summers was alluding to when 
he talked about value. In the proposed fee, we are not looking 
at the value of merchandise because we don't think that is a 
fair reflection of the use of Customs' automated systems.
    Mr. Sununu. I appreciate that. I would suggest that that is 
a very important distinction. I don't think in his response to 
the questions he was making quite that distinction. We didn't 
get into a discussion of the ad valorem. So your feeling is 
that this isn't a fee structure that is reflective of the value 
of the services you offered, that it is reflective of volume 
which is being used as aproxy for the cost of--per transaction 
cost?
    Mr. Simpson. It is reflective of the value of services but 
it is not related to the value of merchandise, which the 
current merchandise processing fee is. The value of the service 
we provide by making available to the trade community an 
automated system for filing is fairly directly related to the 
volume of data transmitted. So it is related to the value of 
the service. It is not related to the value of the merchandise 
involved in the transaction.
    Mr. Sununu. Well, I think you are doing quite well. The 
value of the service is different to different importers. The 
value of being allowed to import a computer is different than 
the value of being allowed to import a bag of potato chips. And 
the Federal Government extracts revenue based on that value by 
levying corporate income taxes on those companies doing 
business in the United States. It is my understanding that 
taxes based on the value of the service or the value of being 
allowed to import products is tantamount to an ad valorem tax 
and not allowed by GATT. I don't want to quibble over words 
like cost and value but I think there really is a distinction 
to be made.
    Mr. Simpson. Let me try to approach it from a different 
angle. An importer may have a profit margin of 80 percent on 
the products he imports or a profit margin of 30 percent. And 
the value of importing is reflected in the profit margin. Both 
importers will have to file let's say arbitrarily, 1,000 bytes 
of data in connection with each of those imports. The cost of 
being able--the cost of having to do that on paper is the same 
for each one of them. The benefit of being able to do it 
electronically is the same for each one of them and it is 
unrelated to the value of the importing activity itself. One of 
them has a 30 percent profit margin. The other has an 80 
percent profit margin but they are both filing the same volume 
of information.
    Mr. Sununu. Are you suggesting there be any difference on 
the fees levied on the two importers?
    Mr. Simpson. There would not be because the value of the 
service we are providing, which is access to an automated 
system, is unrelated to the nature of the goods they import or 
their profit margin.
    Mr. Sununu. I truly think you are being contradictory. You 
said that the value that they are being offered isn't 
different--is different on the one hand because it is reflected 
in the different profit margins but you are saying the value of 
the taxes that you are levying on them or the fees that you are 
levying on them aren't different because the volume is the 
same. You can't have it both ways. It seems to me that you are 
being quite clear in saying that there would not be different 
fees assessed on the two importers and in my mind that is 
rational, that is consistent with GATT and that is a system 
based on transaction cost, on the cost of services being 
offered, not on the value of services being offered. When you 
start talking about taxing value of services and trying to 
assess fees based on the value to the big corporations or small 
corporations doing importing, then there are probably a lot of 
people with very valid concerns about trade harmonization, 
about lowering import barriers, that are going to become very 
uncomfortable.
    Mr. Simpson. Mr. Sununu, I am saying simply that in setting 
the fee, we don't take account of the relative shrewdness of 
various importers.
    Mr. Sununu. No one used the word ``shrewd.'' I used the 
word ``value.''
    Mr. Simpson. Some businessmen may be good negotiators and 
have a very profitable transaction, others may have a very slim 
profit but the value to them of being able to substitute an 
electronic transmission for a paper transmission is the same. 
The piece of paper has 50 data elements and the cost of filling 
out that piece of paper is the same for both of them.
    Mr. Sununu. We are not talking about the value of 
substitution. We are talking about the value of a system once 
it is implemented on an ongoing basis or the cost of a system 
once it is implemented on an ongoing basis and the cost of that 
electronic system is getting to be the same for all. The value 
of that electronic system is going to be different for all. And 
taxing the former rather than the latter I think is going to 
make a very significant difference when it comes to whether or 
not we are complying with international trade agreements.
    Mr. Simpson. Let me try to offer a happy end for my 
explanation.
    Mr. Sununu. Just to be clear, if we had a paper system and 
we are just talking about improving the efficiency of our paper 
system, all of these arguments, these concerns that I have 
raised would still be the same. Are you taxing the cost of the 
service that is being offered on the basis of volume or some 
proxy for costs incurred by the Federal Government or are you 
taxing the value of the service being provided by different 
importers, which clearly runs afoul of international 
agreements?
    I appreciate your patience if you have any other comments. 
We are done. And again, I compliment you on I guess the clarity 
of your initial statements in looking at this from the 
standpoint of bytes, from the standpoint of volume, or in 
making sure that the transaction of the computer importer on a 
per transaction basis, the fees are the same as someone who 
might be importing paper or potato chips for that matter.

                 VALUE OF CUSTOMS' INFORMATION SYSTEMS

    I have one final question, hopefully a little bit more 
brief, on information systems for the information officers. 
What is the current value of your information system property 
and equipment that is carried on your books?
    Mr. Hall. I don't have that on the tip of my tongue. We 
could get it. We do have inventories.
    Mr. Sununu. I would appreciate for the record information 
about the value of the information system property and 
equipment currently and perhaps changes in that financial 
position over the last 3 or 4 years. When was the last time you 
did a physical audit of your property and equipment in the 
information systems area?
    Mr. Flyzik. We did two things. One is there is an annual 
inventory that is done in all of the bureaus, and secondly for 
Y2K, our year 2000 program, we needed to inventory everything 
in the Treasury Department. So I do believe we can provide that 
information for the record.
    Mr. Sununu. You did a physical audit of all your 
information systems?
    Mr. Flyzik. We did not do a physical audit at every 
location. We did in the IRS in certain locations.
    Mr. Sununu. Then this is the nature of my question. We did 
in the IRS and they did a great job on the physical inventory 
and fortunately or unfortunately discovered an enormous 
discrepancy in what they carried on the books and what they 
actually had in house, and my question is what was the result 
of any similar audit that was done for Customs?
    Mr. Hall. We do a physical audit annually but I will have 
to get you the value of the equipment.
    Mr. Sununu. Thank you very much. Thank you, Mr. Chairman.
    [The information follows:]



    Mr. Kolbe. Thank you Mr. Sununu. I hope you will stick 
around because maybe we can double team on your first line of 
questioning in a second here. Mr. Hoyer has to go to another 
meeting so I will call on him for a couple of questions.

                      RFP FOR ACE PRIME CONTRACTOR

    Mr. Hoyer. When is the Treasury scheduled for releasing the 
RFP, prime contractor for the ACE system?
    Mr. Hall. Once we have full funding for the program office 
to go ahead, we would be in a position to release the RFP, 
which is complete within 60 days. The plan is to have a 45-day 
period for interested vendors to bid and then we would expect a 
6 to 9-month evaluation period that would presume no pre or 
post award protests and at the current time we are aware of 
four major teams that are planning to bid. Now, if that number 
were to substantially increase, it would take longer to 
evaluate the proposals.
    Mr. Hoyer. Your contingency there was availability of 
funds. In fiscal year 2000, I take it there are not sufficient 
funds to issue the RFP, are there?
    Mr. Hall. We have partially resolved the shortfall. We need 
12 total to move ahead. We found 7 to keep the MITRE contract 
in place but we need additional five to hire some additional 
program office support to primarily address GAO program control 
issues that we need to work on.
    Mr. Kolbe. Would you yield?
    Mr. Hoyer. Yes.
    Mr. Kolbe. I think that answers the question. I am going to 
get very specific. When you said full funding you mean 12, not 
the 7 million you found?
    Mr. Hall. Right.
    Mr. Hoyer. Is the answer that we don't have the fiscal year 
2000 money at this point in time to issue the RFP?
    Mr. Hall. That is correct.
    Mr. Hoyer. We are still looking for it.
    Mr. Hall. Right.
    Mr. Flyzik. It does remain a top priority and before we are 
ready to say we have the money, we need to come up and talk to 
the appropriations staff to see if there is agreement with the 
reprogramming request we would make. So we are not in a 
position to say we have money until we have your approval on 
reprogramming funds that we are working to identify.
    Mr. Hoyer. Last question. What if we don't release the RFP 
in fiscal year 2000?
    Mr. Hall. It extends the amount of money we basically have 
to operate with the current system, which is risky.
    Mr. Hoyer. Which is what we discussed before?
    Mr. Hall. Yes, sir.

                         ACE COST VERSUS VALUE

    Mr. Hoyer. Mr. Chairman, because of the time, I am going to 
go but just let me make an observation on Mr. Sununu's line of 
questioning. Without any criticism at all, the IRS kept talking 
about tax policy, which is essentially what you are talking 
about and a very worthy objective, and discussion between cost 
and value. The chairman and I were discussing as you were 
asking the questions as to whether or not, A, we understood 
what the answers were and, B, if we understood what the 
questions were. That is not a criticism in terms of how you 
assess what an appropriate charge is on either value received 
or in terms of incremental value added.
    In any event, it is always intriguing to discuss those 
policy issues when we find ourselves defeated by the technology 
issues. My point is that that is an important issue, but 
however we value it, as I understand it, if we don't get about 
this business, we are not getting to do it right, whatever 
criteria we use. We don't have the capability yet to handle 
these transactions and the volume we are confronted with 
appropriately.
    Thank you.
    Mr. Kolbe. Thank you very much, Mr. Hoyer. I am going to 
follow up on some of the questions that I think Mr. Sununu 
asked some very valid questions here. Mr. Sununu, join me if--
interrupt my questions here if you can help me get this clear. 
Maybe it was all clear to you at the end of your line of 
questioning.
    Mr. Sununu. I would use the word ``clearer.''.
    Mr. Kolbe. Well, back here talking with my staff and the 
others here, we were not quite sure what we were hearing, Mr. 
Simpson. I am a very simple kind of person so I am going to 
give you a very simple question and maybe this will make it 
closer to me. If I am importing a supercomputer that is worth 
millions of dollars, I don't care what my margin of profit is. 
The profit may be 2 or $3 million and that may only be a very 
tiny margin of profit. I don't care what the margin is, but I 
am dealing with a very high value computer that I am importing 
here and over here, my other company is importing a box of or a 
container of potato chips, which a couple thousand dollars 
worth in that container of potato chips, a few thousand 
dollars. Now, the paperwork that is required or the data 
entries, since we are going to have an automated system, the 
data entry that is required for that is approximately the same. 
Is the fee going to be approximately the same?
    Mr. Simpson. Yes, sir.
    Mr. Kolbe. That is not what I heard you say. So it is going 
to be the transaction cost that you are trying to get at.

                        GATT COMPLIANCE OF FEES

    Mr. Simpson. Yes, sir. We have to do it that way. It is 
fair in the first place and in the second place, it is 
consistent with articles 2 and 8 of the GATT.
    Mr. Kolbe. I agree. That is not the way--you agree that is 
not the way the MPF is calculated.
    Mr. Simpson. We had to modify the MPF in order to bring it 
in compliance with the GATT panel finding and we believe that 
the current merchandise processing fee is GATT compliant.
    Mr. Kolbe. I thought you only modified it by putting a cap 
on it?
    Mr. Simpson. That is the way we modified it in order to 
comply with the panel finding that the previous fee in some 
cases exceeded the cost of the services being provided because 
it was related to the value of the merchandise rather than the 
cost of the transaction. So we capped it and we put a floor 
under it. We made some other modifications to bring it into 
compliance with the GATT. But we are satisfied that the 
proposed fee is fully compliant with GATT articles 2 and 8.
    Mr. Kolbe. Okay. However, if you did--if you do a fee for 
ACE and it is anything other than used directly for supporting 
these costs, would you agree you will be in danger of being out 
of compliance?
    Mr. Simpson. Yes. The amount we collect cannot exceed the 
cost.
    Mr. Kolbe. The cost of doing the ACE?
    Mr. Simpson. Yes, sir.
    Mr. Sununu. Just for my own clarification, who is 
responsible for the accounting and evaluation of the cost? Do 
we have external auditors? Are those costs just determined in-
house? In other words, if another country were to make a claim 
that we are collecting too much in revenue, who is the arbiter?
    Mr. Simpson. Of course they are determined in-house. In the 
past the General Accounting Office has also audited Customs' 
user fee programs, so that is an external review. I think we 
would have no reason to object to any other sort of external 
review if our accounting methodology was called into question.
    Mr. Kolbe. Let me follow that up too with this question. 
You said that the current MPF you believe is fully GATT 
compliant, that this as long as it is being used to support 
ACE, this fee, we would be compliant. It seems to me there is a 
question as to whether--we never had a determination, nobody 
ever really took a case on the MPF. We just kind of reached an 
informal agreement to let it go the way it was. As long as we 
didn't increase it, there would be no further action after the 
GATT panel decision on that.

                    RESURGENCE OF OBJECTIONS TO MPF

    Don't you think there is a possibility that no matter how 
you structure the ACE fee, no matter what assurances you give 
that it is being used only for that, that this is going to be 
like scratching the dog--the flea or this is going to be like 
waking Rip Van Winkle, somebody is going to say, I knew I 
always wanted to go after that MPF fee. I never thought itwas 
compliant and now they are doing something else and are we going to go 
after it, and you are going to find yourself with a case on your hands?
    Mr. Simpson. I think that could happen, Mr. Chairman. We 
are not here to tell you this morning that we think this fee 
idea is palatable to everyone, but it is a way of solving a 
budget problem. We think it is GATT compliant and, most 
important, we think it is fair.
    Mr. Kolbe. Mr. Sununu?
    Mr. Sununu. Just for my own clarification, would the MPF be 
completely supplanted by the new fee structure?
    Mr. Simpson. No, sir.

                        APPLICABLE CUSTOMS FEES

    Mr. Sununu. If you could elaborate on that. In addition to 
the MPF, what other fees, transaction based fees would still 
remain in place for an importer of products?
    Mr. Simpson. We basically have two fees now. We have the 
COBRA fee which is a processing fee for carriers and 
passengers. We have the merchandise processing fee, which is a 
fee to recover the cost of processing merchandise, the 
commercial cost. Those are the current costs. In addition, if 
we develop the automated commercial environment, we will have a 
cost that we don't have now and that we are not recovering now. 
So we would have--in the future we would have three fees. We 
would have the COBRA for recovering the cost of processing 
carriers and passengers, the merchandise processing fee for the 
cost to the current automated commercial system, and the new 
fee to recover the cost of building a new system at the same 
time we are operating the old one.
    Mr. Kolbe. Mr. Sununu, just to confuse you thoroughly here, 
the first fee, the passenger conveyance fee is COBRA from 1985. 
1986 the MPF, merchandising processing fee, is under OBRA. Now 
we are talking about this third fee for ACE.

                 FEE FOR USING BOTH OLD AND NEW SYSTEMS

    Mr. Sununu. But you are talking about a future environment 
in which a fee is being collected for the new ACE system and 
another fee is being collected for the system that the new ACE 
system replaced; is that correct?
    Mr. Simpson. Yes, sir, that is correct.
    Mr. Sununu. That doesn't make any sense to me. I would ask 
what the point is of implementing a new system that is better 
than the old system and continuing to collect a fee to cover 
the cost of operating and maintaining the old system.
    Mr. Simpson. We believe, as I think any business enterprise 
would believe, that modernization of current systems is a 
normal and expected cost of doing business. It has to be 
recovered. Businesses recover that through their ordinary 
revenues. They anticipate the cost of having to rebuild and 
they recover that through their revenues. We don't have a way 
of doing that other than by proposing a new fee. The current 
fee is capped.
    Mr. Sununu. Are you going to continue to operate the old 
system?
    Mr. Simpson. Yes, sir, we have to.
    Mr. Sununu. Why do you have to continue to operate the old 
system if we have a new system?
    Mr. Simpson. Because the new system won't become 
operational immediately. It will take several years to build 
it. And during the time we are building it we will be spending 
a lot of money on it but we won't be able to operate it.
    Mr. Kolbe. Once you have the new ACE system in place, and 
you are collecting a fee for that, does the monies that are 
collected now under the merchandise processing fee, the MPF, 
which supports ACS, what happens to that? What do you use that 
for?
    Mr. Simpson. We would propose to terminate the new fee----
    Mr. Kolbe. Terminate the old fee or new fee?
    Mr. Simpson. Terminate the new fee and let the merchandise 
processing fee support what would then become the main Customs 
automated system, which would be ACE.
    Mr. Kolbe. Then that is something I am not quite clear on. 
How long do you expect to have this new ACE fee in place?
    Mr. Simpson. Mr. Hall tells me that he is looking at a 4-
year window for putting ACE on-line. So we have a 4-year period 
during which we have the cost of operating the current system 
and the cost of developing a new system that is not 
operational. At the end of 4 years we shut one down, start the 
new one, and we terminate the new user fee.
    Mr. Kolbe. So the ACE fee would be solely for the 
development of the new system or development and maintaining it 
for those first 4 years.
    Mr. Simpson. Solely for development.
    Mr. Kolbe. The merchandise processing fee would be for 
maintaining the current system and operating the ACE system as 
it is up and running?
    Mr. Simpson. It would be for maintaining the current system 
which in 4 years will become ACE rather than ACS.
    Mr. Kolbe. For a while you are going to have two running 
simultaneously, right?
    Mr. Simpson. To some extent that may be true, Mr. Chairman, 
because we will put ACE into operation incrementally.
    Mr. Kolbe. Mr. Sununu.
    Mr. Sununu. Mr. Chairman, I am not an expert in this area, 
certainly not an expert on trade law, but first this is new 
information to me. I haven't previously heard any discussion 
about phasing in or phasing out fees and I would--perhaps the 
subcommittee already has information in this area but I would 
certainly like to see a more detailed description and/or 
proposal of how these two separate fees are going to dovetail 
over one another or coexist with one another.
    Second, this is the first I have heard of this matter, 
certainly first I have heard in my brief service in Congress of 
imposing a fee for a service that isn't yet being provided and 
this is again of real concern. You are talking about imposing a 
fee for the ACE system during a period which no one is 
benefiting from the ACE system. I understand the economic 
rationale for collecting a fee that would cover the capital 
cost of the investment necessary to run the system in the 
future but you still can't get around the fact that you are 
collecting a fee to cover a service that isn't being provided. 
It would seem to me that that is going to raise very 
significant red flags again in the trade community that is 
looking at whether or not this is an inappropriate practice.
    Can you give me an example, an international trade law, 
where there is an import fee, transaction fee being collected 
for a service that is not being provided?
    Mr. Simpson. That is a very good question, Mr. Sununu. To 
tell you the truth, I have thought a lot about that myself. I 
think the trade community is aware of the fact that the 
Government doesn't have a capital account. We haveto pay for 
development of our capital equipment out of current revenues. We don't 
have the option of building this system, this new system, out of our 
capital account and then charging to recover the investment. We have to 
pay as we go and that is one of the awkward things about being in 
government financing. We don't have the latitude that we would have in 
the private sector to build this system in that sort of a way.
    I will acknowledge, frankly, that when I think of the two 
or three lines of attack that can be made on our user fee 
proposal in the GATT, that is the one that concerns me most 
because it is a case of first impression for the GATT. I am not 
aware that there has ever been a case where a user fee was 
charged to build a new system that was not currently providing 
services.

                   FUNDING ACE THROUGH APPROPRIATIONS

    Mr. Sununu. I would suggest that we do have the latitude to 
fund this initiative in such a way. We could appropriate $200 
million or $400 million or $2 billion. Congress appropriates 
and the President approves those appropriations. So we 
certainly have that latitude. Moreover, if I am a trading 
partner, I don't think I would--the argument that, well, we 
don't have a budgeting process that is quite designed to take 
care of this particular methodology of capital accounting and 
so therefore look the other way while we put in place a fee for 
a service that isn't being rendered. I don't believe that that 
argument is going to carry a great deal of weight even with 
those trading partners that we have the strongest historic 
relationship with.
    Mr. Flyzik. If I may make one quick clarification, I don't 
want to leave the impression that for 4 years there is no ACE 
functionality in that we run ACS and at year 4 we turn one off 
and turn the other one on. We decided to build ACE 
incrementally, so ACE functionality will begin coming on board 
throughout that 4-year period. There is kind of a time line 
wherein ACS winds down and ACE ramps up, so at the end of 4 
years we are fully in an ACE environment. But there will be a 
lot of ACE functionality being added incrementally through 
those 4 years.
    Mr. Kolbe. Mr. Sununu, I hope you will stick around because 
we will hear now from the private sector, and we will be able 
to ask them their thoughts about these same questions here.
    Just a couple of quick questions before we end and go to 
the private sector because we only have a limited amount of 
time. By the way, I might make one comment. If indeed, 
Secretary Simpson, the ACE fee is phased out at the end of 4 
years, it will be the first time voluntarily that the Federal 
Government has ever phased out a fee and what do you want to 
bet you are back before Ways and Means saying you have got to 
have it for another 4 years after that. The $50 million that 
you have in ACE this year for your network, is any of that 
going to be compatible with ACE?
    Mr. Hall. Yes, most of it.

           COMPATIBILITY OF ACS HARDWARE AND NETWORKS FOR ACE

    Mr. Kolbe. It is not a total loss? We are not just throwing 
it into this and it is going to be all thrown out the window?
    Mr. Hall. No, sir. It is all compliant with Treasury and 
Customs architecture and it would basically be needed. Once ACE 
was fully developed it is just a matter of what application is 
using it today.
    Mr. Kolbe. Finally, your $210 million that is requested for 
ACE this year, if indeed you are not able--if, God forbid, you 
are not able to go ahead with the RFP, which is not something I 
hope is the case, if that happens, though, is this number going 
to change?
    Mr. Hall. No, sir.
    Mr. Kolbe. Why? Wouldn't it change if you pushed the RFP 
backwards back 6 months say?
    Mr. Hall. What we need to know is how much funding we have 
available to size the project. What we have done is figured out 
how to deliver the total capability in 4 years. We are getting 
to deliver that in four to five pieces. The first piece needs 
to be sized so that we know what we are asking the contractor 
to design and build and that first piece prices out at about 
$210 million. So whether it is all expensed or not, we need to 
know whether that is the amount we have got the authority to 
obligate.
    Mr. Kolbe. Okay.

           TRANSACTION COSTS AND FEES FOR FULLY DEVELOPED ACE

    Mr. Sununu. Mr. Chairman, I have one last question and I do 
think it is a very brief one. Five years from now when the ACE 
system is on-line and the old system has been fully replaced, 
how much lower would the transaction fees for the ACE system be 
than the fees currently being paid approximately?
    Mr. Simpson. I think we would have to go back and recost 
the services that we are providing. Mr. Hall could probably do 
that better than I. It is fair to say we cannot support a user 
fee that exceeds the cost of the services we are providing.
    Mr. Kolbe. What is interesting, Mr. Sununu, they are 
proposing to phase out the ACE. At the end of 4 years after it 
is developed we will go back and continue using an ad valorem 
tax to operate the system for the future.
    Mr. Sununu. Is that correct?
    Mr. Kolbe. The MPF would be used to operate the system 
after it is in place.
    Mr. Sununu. My assumption was and I may be incorrect is it 
is called the MPF but it is really going to be a transaction-
based fee rather than ad valorem.
    Mr. Kolbe. They are not talking about changing the current 
fee that is being used. They are talking about the system for 
ACE. We are going to be using an ad valorem tax. Gentlemen, 
thank you very, very much for your testimony here. And if you 
would like to stay around or can stay around while, we have the 
private sector in case there are questions that come up at the 
end, we can recall you. It might be helpful but if you can't, I 
understand. We will excuse you and we will call Mr. Schoof and 
Mr. Miller up. Thank you very much.
    Gentlemen, thank you very much. We welcome Mr. Ron Schoof, 
who is with the Coalition for Customs Automation Funding, and 
Mr. Harris Miller, who is President of Information Technology 
Association of America. Gentlemen, obviously both of your 
statements will be placed in the record. Mr. Schoof, I 
understand you are going to give us a short verbal statement 
and then we will go directly to questions. The floor is yours.
    Mr. Schoof. Mr. Kolbe, Mr. Sununu, my name is Mr. Ron 
Schoof, and I am the chairman--not chairman, I'm Customs 
Compliance Manager of Caterpillar in Peoria, Illinois. I am 
also chairman of the Joint Industry Group, JIG. I am also 
appearing today on behalf of the coalitions for Customs 
automation funding. My written statement includes a full 
description of both of these organizations.
    I have been asked today to relate to you the position of 
JIG and CCF on plans to maintain the existing ACS system in the 
development status of its replacement system, ACE.
    Our members are deeply concerned about the state of U.S. 
Customs' commercial system and not a bit encouraged by the 
administration's latest budget proposal to fund ACE by creating 
a new tax on business.
    ACE currently processes about 20 million shipments 
annually. That number is expected to double in 6 years. The 
present system is headed for a train wreck. It has already 
experienced crashes and brownouts, as we have heard, the last 
one occurring only a few weeks ago. I will leave it to Customs 
to tell you how they deal with the enforcement aspects of such 
crashes. But I can tell you each time we have one, someone 
somewhere in the supply chain pays a price, including our 
Nation's carriers, manufacturers, retailers, and port 
authorities.
    To give you a couple of examples, General Motors and other 
automobile manufacturers operate in an environment where the 
supply chain is just 4 hours long. If parts from Canada are 
delayed for just 4 hours, automotive plants in Detroit and 
along the Canadian border will shut down. Workers go home. 
Retailers cannot afford to be out of stock on products 
advertised as going on sale. In addition, delays of seasonal 
merchandise, such as the current season Easter apparel, can be 
extremely costly. Importers of perishable goods have no time to 
lose at all. When the system goes down, they lose their 
product.
    The private sector has embraced modern technology and our 
country's robust growth in raising productivity is proof that 
information technology is largely responsible for our 
prosperity. Yet, when it comes to managing our critical supply 
chain to do business in the global environment, we must deal 
with a computer system that was developed in the 1980s, ancient 
by modern standards. Our internal systems literally have to 
stop and convert to paper at the borders, forcing us to do 
business on a transaction-by-transaction basis. Please allow me 
to expand on this point, for every import made by Caterpillar 
is treated by Customs as a new event. They treat our imports, 
compliance and payment of our duties as separate events. To 
draw an analogy, that is like filing a tax return to the 
Federal, State and local governments with each paycheck.
    Our members agree with Customs' approach to build ACE using 
a prime contractor but we are deeply concerned that the program 
office managing ACE acquisition could be closed at the end of 
this week. If this happens, we will lose all the work that has 
gone into the process and ACE development will be delayed for 
yet another year.
    We need to understand that new ACE is more than a revamped 
ACS. ACE will allow Customs and the private sector to interact 
on an account-based environment providing efficiency, 
predictability and transparency to this critical link in the 
supply chain.
    The current ACE prototype known as NCAP is being tested on 
the land borders. It uses transponder base technology that 
allows shipments to clear Customs in just 15 seconds as opposed 
to the average 3 to 4 hours under the present ACS system.
    Finally, lest you think that only the private business 
sector draws benefits from this computer system, let me remind 
you it affects more than $20 billion in tariff revenue. It is 
the first line of defense against contraband and security and 
plays an important role in import and also export controls, 
something that everybody tends to lose. It is a good government 
issue and we hope the Appropriations Committee will recognize 
it as such.
    Our members believe the administration is wrong to hold up 
developing ACE by tying it to new user fee. In fact, U.S. 
business already pays more than $900 million per year in 
merchandising processing fees, MPF. Since 1993, industry has 
paid a total of $5 billion, enough to purchase a new computer 
four times over. MPF currently goes into the general fund and 
we are asking the general funds be used to pay for ACE 
development. Industry will continue to oppose any additional 
fees outside the current MPF.
    In conclusion, almost 7 years ago, the Government made a 
deal with U.S. businesses in the form of the Customs Mod Act. 
We and the trade community at enormous expense took on the task 
of informed compliance, reasonable care, new record keeping 
requirements, and penalties. Indeed, many importers have gone 
through extensive and I might add expensive compliance audits. 
In return, we were promised a more transparent, efficient 
process for releasing goods and paying duties. It is time for 
Congress to ensure that Customs keeps its part of the deal.
    We look to you, Chairman Kolbe and members of this 
committee, to do what it takes to fund development of Customs' 
automation system out of appropriated funds. Thank you.
    [The information follows:]



    Mr. Kolbe. Thank you very much, Mr. Schoof.
    Mr. Miller, your full statement will be placed in the 
record.
    Mr. Miller. Thank you, Mr. Chairman.
    [The information follows:]



    Mr. Kolbe. We thank you both for being here today. I will 
leave the questions about the fee for Mr. Sununu. I can see he 
is chomping at the bit here. I will take much less sexy 
questions to start with here. Let me just ask a couple about 
some of the technical aspects here.
    Tell me, how would you describe the level of cooperation 
that exists between Customs and industry today as they proceed 
to develop the RFP for the ACE system? Have you been pleased 
with the consultation that you have had with Customs?
    Mr. Schoof. I have been coming to Washington since 1996 
meeting with Customs as part of the Joint Industry Group 
developing the prototypes, also attending the trade support 
network groups. Very satisfied with it. I think they have 
opened and asked for a consultation.
    The thing that was dissatisfying was that when we went down 
the road, we found out there was no money. We were led to 
believe in 1997 it is coming, in 1998 it is coming, 1999 and 
now we are 2000 and we are not there. We have the design. We 
have the concept.
    Now, GAO has come in and we have gone back to the prime 
contractor, which I think is very helpful. So I would have to 
say Customs has been very cooperative in getting the trade 
support for the system.
    Mr. Kolbe. I hope I am not sounding defensive here but I 
think the reluctance of Congress--we have had some discussions 
actually--our reluctance of Congress to perhaps provide the 
funding as rapidly as some would have liked stems from the 
experience we had with the IRS, where we didn't have the 
architecture system in place and the money turned out to be a 
loss there. But I think we are at least headed in the right 
direction.
    So you think the system that they are looking at and what 
they are doing so far is taking advantage of the private 
technology--private sector technologies, the systems and 
information requirements that you have a need for?
    Mr. Schoof. As an outsider looking in, yes. I see that with 
the----
    Mr. Kolbe. Do you have any recommendations to improve it? 
If you don't think of any right now but if other members of 
your industry group do, would you give us those for the record 
here?
    Mr. Schoof. Yes.
    Mr. Kolbe. We would be very interested in hearing about 
suggestions.
    Mr. Harris.
    Mr. Miller. Thank you very much for your leadership on 
behalf of the information technology industry. We really 
appreciate that. Secondly, to your specific question, we are 
very, very pleased with the leadership that Mr. Hall has shown. 
He has been very, very open to dealing with industry. We have, 
as he indicated, four huge contracting teams, the leading IT 
companies in the world working with him. The GAO has given very 
strong support now, which I know Congress did not always have 
in the past for some of these projects. So we are very 
comfortable.
    The only recommendation you might think about is just 
trying to get the system implemented in a shorter time period. 
As the previous panel explained, they are talking about a 4-
year time period. Maybe it can be done in 2 or 3 years, but 
again that would be up to the appropriators and Congress to 
decide how rapidly they want to move this along. But I think 
given the advantages that the information technology would 
bring to the American taxpayer by collecting more revenues from 
Customs, cutting down the cost of that collection, you might 
think about actually speeding up the process for getting the 
system implemented. But that is just a question of dollars and 
how quickly they will be provided to the Customs Service to 
implement this new system.
    Mr. Kolbe. We have been talking about the costs here this 
morning for getting this new system in place, but can either of 
you tell me what kinds of costs does industry contemplate once 
this ACE system is up and running, what costs are you going to 
have to make your systems compatible and make it interface with 
this?
    Mr. Miller. The money is already being expended just on 
these prototype programs, in several cases into the millions of 
dollars. Again, industry believes that in the long term this is 
going to save them money. As Mr. Schoof said, talking about 
processing delivery in 15 seconds as opposed to 4 hours, 
industry is willing to make those IT investments to save that 
kind of money because it pays off in terms of their cost and 
ultimately they can pass that benefit along to their consumers.
    So industry doesn't begrudge spending the money to make our 
systems compatible. What they do begrudge, as Mr. Schoof said, 
is spending that money and finding out at the end of the day 
for whatever reason the money isn't available to actually 
implement the modifications that the ACE system will bring to 
the system.
    Mr. Schoof. Many large corporations have already expended 
the money to put general systems in a framework that will be 
compatible with ACE. A lot of people are not making the last 
connection, not knowing what it is going to be, but our company 
went through it and already had set up a new system on global 
trade and this is in 1998, is the annual Quality Improvement 
award. We were within Caterpillar in the top 5 for that award 
for our systems that we have developed. I think you are going 
to find that, that the industry is there waiting. We come. We 
are there, but did we interface with Customs, we step back 10 
years.
    Mr. Kolbe. I just have this nagging fear that somehow after 
this RFP goes and we are moving along with development that 
somehow the communication will break down with industry and we 
will end up with a system that is not compatible with the kinds 
of systems that are out there in industry today and you are not 
going to be able to interface or communicate with us.
    Mr. Miller. It is always possible, Mr. Chairman. I think 
there is minimal chance for that for a couple of reasons. 
Number one, the IT team, whoever is selected as the prime 
contractor, has a great existing relationship already with most 
of the major importers. They work with them independently of 
this Customs modernization. They already have communication, so 
it is certainly in their best interest both to make the 
Government as its customer very happy. Plus the companies like 
Caterpillar and all the others which are major importers, I 
think you are going tosee a tripartite communication between 
the IT community that ultimately wins the contract, the U.S. Government 
Customs officials, Mr. Hall and his team, and the community that 
actually does most of the importing because it is in the best interest 
of all three to work as closely together as possible.
    Mr. Schoof. I think one of the things that is different 
with this than it was with the IRS, the user is very vocal.
    Mr. Kolbe. I have a couple of questions about the ITDS 
system, but let me come back to that. Let me turn Mr. Sununu 
loose on you.
    Mr. Sununu. Thank you, Mr. Chairman.
    Mr. Schoof, can you describe a little bit the nature of the 
transaction, of an import transaction now and what the hope is 
or the pilot program has indicated that it would be. You in 
your remarks mentioned briefly a 3-hour transaction versus a 
15-second transaction. Could you give us a little more detail, 
as specific as possible, use a typical example that might be 
very common for your company in terms of how much product is 
coming in, how much time and again the fees that you would pay 
for a given transaction?
    Mr. Schoof. We import--our imports over the last 3 years 
from 1997 through 1999 have doubled. We went from 15,000 to 
30,000 entries during the time period. Our import value doubled 
during that time period. Our duty payments during that time 
period reduced 65 percent because of the GATT rates. Our 
merchandise processing fee is at 25 percent of our duty.
    Mr. Sununu. I am sorry. The fees you pay are 25 percent of 
the duties. What is the duty rate for engines? Is it uniform? 
Can you give me an average?
    Mr. Schoof. GATT rate on construction has gone to zero 
starting in 1999. Some engines and engine-related equipment is 
2\1/2\ percent. We import a lot of bearings and other things 
that we pay double duty on, component parts.
    Mr. Sununu. So the MPF is obviously a fraction of that. 
What is a typical transaction?
    Mr. Schoof. Typical transaction is we take possession of 
our product oversees, Caterpillar, we buy, we take possession. 
We have a forwarder that takes an entry, consolidates the 
shipments. If it is a shipment coming out of our facility, like 
a parts depot, it may be three or four containers. We give on 
electronic feed the information to that forwarder to do the 
export. This includes a detailed part number, description, 
classification, and the value. That forwarder then prepares for 
the export, books it on a vessel, and then ships it to the U.S. 
We take that same information electronically, give it to our 
broker in the U.S. They then prepare the Customs entry, no 
paper yet, and the entry is done especially on a vessel. 
Usually we can have that before the ship docks.
    Mr. Sununu. So it is a paperless transaction now?
    Mr. Schoof. Right.
    Mr. Sununu. Continue.
    Mr. Schoof. And then it will come in and the broker will 
prepare the entry for Customs. Customs--and then file it with 
Customs through their ABI system, which is the current ACS 
system. If they want to look at anything or have any questions 
at all, they ask for the paper. Then we must submit the paper 
and give it to them.
    On land borders because you don't have the time, you are 
dealing in paper most all the time because you don't have the 
transactions. To take it a step further, now we bring this one 
container in, we assign an entry number, and then that is 
recorded, and put it in a transaction with Customs. So now if 
they come in and they want to audit, they will audit that entry 
number. We have to try to go back because we don't pay by 
paper. We pay electronically. The commercial invoice comes into 
our accounts payable department and we pay it. The problem with 
business is we are not structured internally to keep track of 
transactions. We do it in an IRS function where everything is 
rolled up and it is very difficult to keep track of each 
invoice for payment.
    Mr. Sununu. On the land shipments then, where does the 
delay come into play?
    Mr. Schoof. The land shipments is where you have a truck 
driver that picks up a load of material. He has an invoice and 
a packing list bill of material. He comes to the border. If the 
information is not provided, he stops, goes into the broker. He 
gives him the paper. He then takes that information and an 
entry is--or a release is prepared manually by paper and given 
to Customs.
    Mr. Sununu. How often does it usually take? How long can it 
take?
    Mr. Schoof. If there is any confusion or anything, it can 
take hours. If it is not, if it is a normal routine that goes 
through, I think the gentleman from General Motors was asked 
that question. It can be 3 to 4 hours.
    Mr. Sununu. Under the new system, transponder based, it is 
only a minute, seconds?
    Mr. Schoof. Here what can happen is the supplier when he 
cuts the load, he can do electronics transmission and that will 
go to Customs. When it gets to Customs, they can read the 
information, bar code it. The information is there about the 
driver. The trucking company and the driver have to be 
preapproved, so all of that data is available.
    Mr. Sununu. That is a pretty dramatic improvement, dramatic 
savings, time, effort, obviously the cost of the 
transportation. Wouldn't you be willing to pay quite a bit more 
for that service?
    Mr. Schoof. We are already paying a merchandise processing 
fee.
    Mr. Sununu. But under the revised plan, it is a pretty 
dramatic improvement, 3 hours to 15 seconds. Wouldn't you be 
willing to pay more?
    Mr. Schoof. No.
    Mr. Kolbe. Would you yield?
    Mr. Sununu. Certainly.
    Mr. Kolbe. Let me see if I understand this, going back to 
the first couple of questions he asked. You said the MPF is a 
percent, 25 percent of your duties; is that right?
    Mr. Schoof. Yes.
    Mr. Kolbe. It is not an ad valorem then.
    Mr. Sununu. That is not how it is levied. That is what it 
amounts--at the end of the day it happens to be equal to 
about----
    Mr. Kolbe. The bulk construction equipment has no duties 
and you are paying 25 percent of zero?
    Mr. Schoof. No, I pay x number of dollars in duty. I pay 
duty x amount per year.
    Mr. Kolbe. For you it works out 25 percent of total duties 
paid.
    Mr. Schoof. Right.
    Mr. Kolbe. Is that true in other industries? Is that 
roughly the same? What would be the variation?
    Mr. Schoof. Depending on the industry----
    Mr. Kolbe. It is not calculated as a percent of duty.
    Mr. Schoof. It is calculated as a percent of value up to a 
maximum of $485 per entry.
    Mr. Kolbe. It just happens that that works out to be about 
25 percent. Can anybody--can you tell me in other industries 
would that 25 percent be high, low in, let's say, retail, in 
shoes or clothing?
    Mr. Miller. Certainly in the digital world it is incredibly 
high. To respond to Mr. Sununu's question, when you go to a 
brokerage and go on-line, they charge you lower fees, not 
higher fees because they are saving a lot of money. Not having 
to process all that paperwork and all the high overhead cost 
associated with that, that is the beauty of the digital age 
that you can do transactions so much more cost effectively.
    Mr. Sununu. If I can interrupt, my question wasn't should 
you be paying more or less. My question was would you be 
willing to pay more.
    Mr. Miller. I understand. The justification that they are 
trying to make on the side of the advocates of a fee is well, 
you are getting so much more. What we are saying if you look at 
the whole commercial digital world, what we know is effectively 
implemented information technology dramatically drives down the 
cost to the business community of providing those services. 
There is no reason that effectively implemented IT within the 
new ACE system won't drive down the cost of the government of 
processing all of these Customs transactions. So if anything 
the fees should be lower, not higher.
    Mr. Sununu. I would tend to agree. I appreciate your 
elaboration and I would also point out that while you may be 
perfectly willing to pay more, it would be a violation of the 
GATT. What we are allowed to charge is simply what it costs, 
and so in this particular case, what you might be willing to 
pay or what the market would even bear is somewhat irrelevant.
    Thank you very much, Mr. Chairman.
    Mr. Kolbe. Thank you. If I might, Mr. Goode, do you want to 
jump in at this point.
    Mr. Goode. I defer to you.
    Mr. Kolbe. On the fee itself, you said that it is your 
view, you are paying the MPF and that should cover the cost of 
the new ACE system. Do you believe that the ACE system can be 
developed--the cost of development can be done with the current 
fees that are being collected under the MPF or do you 
acknowledge the development costs may be extra but that should 
be an appropriated cost?
    Mr. Schoof. That is correct, it should be an appropriated 
cost.
    Mr. Kolbe. You don't think it should be an added fee that 
you pay?
    Mr. Schoof. That is right. I have a concern also in 
structuring on a transaction because we are trying to get away 
from data bytes and transactions. And so even the merchandise 
processing fee is done on a transaction and that has tended to 
hold up modernization because the fee drives the business.
    Mr. Kolbe. You mean a modernized system would have fewer 
numbers of transactions and therefore the number goes down.
    Mr. Schoof. Right.
    Mr. Kolbe. So there is a perverse incentive not to 
modernize.
    Mr. Schoof. We have to be very careful on any fees that you 
don't drive behavior and Customs to keep the fee.
    Mr. Kolbe. We just heard we are going to keep the fee.
    Mr. Sununu. Could you elaborate on that? What are you 
suggesting as an alternative? I understand your point if it is 
just a fee based on transaction, there may be an incentive 
within government, bureaucracy, what have you, to maximize the 
number of transactions therefore maximize the revenue. What 
would you suggest----
    Mr. Kolbe. How should the fee be calculated to maintain the 
system once it is in place?
    Mr. Schoof. That is a difficult question but I think we 
need to explore the possibility of a minimum fee per 
transaction or group of transactions rather than structured on 
data bytes. The reason I am saying that is that Customs also 
controls in the ACS system--ACE system exports. If we get into 
data bytes, we can get into data bytes on exports.
    Mr. Kolbe. You would be talking about modifying the MPF in 
order to accommodate this new technology, new system----
    Mr. Schoof. Our position is we are paying the MPF currently 
today and it goes into funds. The ACE system should be paid out 
of appropriated funds.
    Mr. Kolbe. If the new system works as we think it would, 
the number of transactions would go down so the MPF would go 
down, right? No? So it is ad valorem. It doesn't have anything 
to do with per transaction.
    Mr. Miller. Again, Mr. Chairman, it is an interesting 
observation but it is still a fiction that the MPF is being 
used to pay for the current operation of the computer system. 
MPF is now bringing to the Treasury $950 million a year. Just 
maintaining the ACS system, you just heard a request for 126 
million. That is a huge Delta.
    Now, the reason it is a fiction is because, as Mr. Schoof 
said, the $950 million goes into the general treasury. It 
doesn't go to Mr. Hall's operation or Mr. Flyzik's operation to 
specifically be used for modernization. And that is why I think 
at the end of the day the business community fundamentally 
rejects the idea of additional fees because they thought the 
trade-off initially, as Mr. Schoof said, was we are going to 
pay this MPF and under GATT, as Mr. Sununu was suggesting, that 
is supposed to go specifically for modernization. At the end of 
the day we haven't gotten either.
    Mr. Kolbe. Customs should in your view step up to the plate 
and honestly say to Congress we are collecting or we are not 
getting it but it is being collected and going into the general 
revenue fund, all this additional money and, hey, Congress, you 
should use some of this money for the development of the 
system?
    Mr. Schoof. We don't really look at it as a fee. We look at 
it as a tax because of the negotiated----
    Mr. Kolbe. It is a tax.
    Mr. Schoof. If you are bringing in NAFTA from Canada and 
Mexico, there is no fee. It's a tax.
    Mr. Kolbe. There is no question about it, it is a tax.
    Mr. Sununu. I am sorry, could you clarify that point? What 
do you mean if you are bringing it from Canada or Mexico there 
is no fee? There is no MPF?
    Mr. Schoof. If the goods qualify for NAFTA.
    Mr. Sununu. It is zero?
    Mr. Schoof. It is zero.
    Mr. Kolbe. Not everything goes immediately to zero 
underNAFTA.
    Mr. Schoof. The MPF does. There is no MPF. If the goods 
qualify for NAFTA in Canada, and I believe it is in place for 
Mexico now also, that the MPF----
    Mr. Kolbe. I am seeing a nod over here that it is. This is 
new information to me. So the MPF is collected only on goods 
coming from Europe, Japan, Asia?
    Mr. Schoof. If it is not NAFTA, then it is collected. But 
if it is NAFTA eligible, then it was negotiated away in the 
NAFTA agreement. It is a tax. All taxes are used to pay 
government business.
    Mr. Kolbe. So the advantage of NAFTA is even more 
pronounced than the reduction of the tariffs or elimination--
reduction or elimination of tariffs. It is an elimination of 
this fee.
    Mr. Schoof. Right.
    Mr. Kolbe. You told me 25 percent of duties.
    Mr. Schoof. I was shocked. I have been tracing those 
figures and MPF is now--because of the duty rates has dropped 
on our particular commodities, it is a major part of doing 
business.
    Mr. Kolbe. With over a trillion dollars of goods coming in, 
though, at even $900 million, it is less than a tenth of a 
percent total in value.
    Mr. Schoof. Right.
    Mr. Kolbe. Mr. Goode, do you have anything? I think as we 
have gone around, I have gotten most of my questions in here. I 
did want to ask one other question. Do you have anything, Mr. 
Goode?
    Mr. Goode. The chairman said a trillion dollars. I know 
when you get up----
    Mr. Kolbe. It is actually about $2 trillion in imports. 
That is total both ways.
    Mr. Goode. How much imported? A trillion?
    Mr. Schoof. How much what?
    Mr. Kolbe. What is the value of goods imported?
    Mr. Goode. Total value of goods imported.
    Mr. Miller. 955 billion, according to the Customs 
department for fiscal year 1998.
    Mr. Goode. Total exported was about the same?
    Mr. Miller. About the same. The total gross revenue 
collections, according to Customs; $22.1 billion includes 
tariff, duty, user fees, IRS excise tax and other assessments 
and fines and penalty collections of $57.4 million.
    Mr. Kolbe. Earlier when you said the amount collected under 
MPF is 950 million and the total amount actually used to 
process was--what was the term you used there?
    Mr. Miller. I am just saying for the maintenance of the 
current system, the figure that Mr. Hall gave you that you 
questioned him about for fiscal year 2001, they are asking for 
$126 million to do the life support work to keep that system up 
and running while they are developing the new----
    Mr. Kolbe. Maintain and expand it. That of course doesn't 
include actual O&M, operation and maintenance, salaries of 
people that are at the ports and so forth, all that kind of 
thing. Can you tell me what you think the actual cost of doing 
the processing? As we are collecting 900 million, what are we 
actually spending--your view what do you think Customs is 
actually spending to process all this stuff?
    Mr. Miller. We have never gotten a simple answer.
    Mr. Kolbe. I don't think there is a simple answer.
    Mr. Miller. My understanding is the total Customs budget 
annual is about $1.8 billion.
    Mr. Kolbe. That doesn't help us much.
    Mr. Miller. If they can't tell you, they certainly can't 
tell us, I guess. Can't tell the appropriators.
    Mr. Kolbe. Let me, if I might, ask a question on the 
International Trade Data System, the ITDS, which is supposed to 
get integrated into ACE and other trade information systems 
such as the Automated Export System, AES, yet another acronym 
for us today, and of course ITDS is designed to help streamline 
the collection of trade information the government needs.
    What issues in your view exists in putting this system into 
effect?
    Either one of you.
    Mr. Schoof. Well, ITDS was an effort by Treasury to make 
common a lot of data elements among the governmental agencies 
and simplify and try to consolidate. The trade supports that 
but our concern was it was a front end system used to control 
and regulate, not just gather data. It has since been turned 
over to Customs and I don't know that we have that same 
concern, the concern being is that more data than what is 
needed to clear the goods at the time of entry could be 
required because of that system. That is the biggest issue that 
we have now with that. It is a system, gathering system that 
then makes distribution to all agencies. It has been kind of 
quiet since it has been turned over to Customs.
    Mr. Kolbe. Do you think there is going to be additional 
burdens on the trade community to implement the ITDS? Is it 
going to pose problems for----
    Mr. Schoof. That concern is there because it could require 
additional data up front more so than what is needed to clear 
the goods by U.S. Customs.
    Mr. Kolbe. You are saying this kind of information is 
nothing that benefits you. It may benefit government. It may 
benefit us as we collect trade data and statistics but it 
doesn't benefit you.
    Mr. Schoof. It doesn't--it doesn't need to be known by the 
Government at the time the truck hits Detroit. It needs to be 
known later but not----
    Mr. Kolbe. Is data collected later?
    Mr. Schoof. Yes. We give Customs a lot of detailed 
information after the entry is passed.
    Mr. Kolbe. If it can be integrated in, is there a 
difference in cost? If it can be integrated into the system, 
wouldn't it be simpler to do it all as it comes through the 
border?
    Mr. Schoof. It is not all known.
    Mr. Kolbe. Not known till later.
    Mr. Schoof. Right. You have got a supplier that is 20 miles 
from the border and he loads a truck up and comes in, you don't 
know everything that is--that information is there. So it is 
not all known at that time what information is there. Today 
Customs gives the importer 10 days after the goods are released 
to file a detailed entry summary data. And we are working on 
projects now on the entry process with Customs. I have got a 
meeting at 1:00 with Customs to go through this entry process 
to determine the data elements and everything to simplify that 
process.
    Mr. Kolbe. You are talking about entry elements that will 
be included in the ACE system.
    Mr. Schoof. It would require up front so Customs can 
determine whether the goods----
    Mr. Kolbe. This is an ongoing issue, live issue between you 
and Customs as far as you are concerned; at least the 
conversations about it are ongoing as to whether or not they 
need all this information up front.
    Mr. Schoof. That is correct.
    Mr. Kolbe. But you continue to have this concern about 
trying to force--push too much of this information, front load 
it into the system as goods come across the border.
    Mr. Schoof. Right. We saw it as an avenue for other 
governmental agencies other than Customs to have a way of 
getting additional information up front.
    Mr. Kolbe. You don't see that--you are saying get that 
information later, you don't see that that causes a delay in 
trade statistics? We are trying to get much more current and 
timely information about trade data.
    Mr. Schoof. That is going--that will be an issue that has 
got to be addressed.
    Mr. Kolbe. That is one of the reasons Customs would argue 
push the stuff into the front end of it.
    Mr. Schoof. Census is.
    Mr. Kolbe. Census. I am sorry. Are there other things like 
safety that may be related, law enforcement.
    Mr. Schoof. Those are items--those will be in the front 
end.
    Mr. Kolbe. You don't have a problem with them.
    Mr. Schoof. Right.
    Mr. Kolbe. The ITDS just has to do with data.
    Mr. Schoof. It is a data collection front end to ACE is my 
understanding.
    Mr. Kolbe. Mr. Goode, do you have any questions?
    Mr. Goode. I have a question about NAFTA if I might, Mr. 
Chairman. Under NAFTA, could you have a truck inspection fee 
for every vehicle coming in from Mexico? Say if you could 
theoretically perform a CAT scan of a load of strawberries, 
could you charge the sender of that load or the truck when it 
came in to inspect that truck for drugs? Could you do that 
under NAFTA?
    Mr. Schoof. I don't know. I don't know whether that is an 
option----
    Mr. Kolbe. I think it would be an additional fee that I 
don't think is permitted. I don't think it is permitted. We can 
try and find that out by submitting the question to Customs.
    Gentlemen, thank you very much. This has been very helpful 
in enlightening us and certainly suggesting other avenues for 
us to consider as we move forward. I want to thank Customs, the 
Treasury, and I want to thank the private sector for their 
ongoing efforts to cooperate and work together. I am hopeful 
that working with Congress that we will be able to have a 
system in place soon that will be satisfactory for everybody, 
and we very much appreciate the tremendous commitment that you 
have made and the efforts you have made to make this happen. We 
thank you very much.
    Mr. Schoof. Thank you for allowing us to come.
    Mr. Kolbe. The hearing is adjourned.
    [Statement of the Coalition for Customs Automation funding 
appears on page 1602.]
                                           Tuesday, April 11, 2000.

                           UNITED STATES MINT

                               WITNESSES

JOHN P. MITCHELL, ACTING DIRECTOR, UNITED STATES MINT
JAMES SMITH, AMERICAN BANKERS ASSOCIATION
JAMES C. BENFIELD, COIN COALITION
DAVID CLAYTON, NATIONAL AUTOMATIC MERCHANDISING ASSOCIATION
JIM MILLER, SAVE THE GREENBACK
    Mr. Kolbe. Good morning, the subcommittee on Treasury, 
Postal Service and General Government will come to order. Mr. 
Hoyer, the Ranking Member, was in Maryland this morning for the 
PEPCO spill and got tied up there and will be somewhat late. We 
will be joined shortly at least by Mr. Price on the Minority 
side and probably perhaps by some other Members as we go 
through the hearing, but we will get started here.
    We are very pleased today to have the Acting Director of 
the U.S. Mint with us today, Director Mitchell.
    Director, we are looking forward to your testimony about 
the operations of the U.S. Mint and particularly the recent 
roll-out of the golden dollar.
    Alfred Lord Tennyson once said, ``But the jingling of the 
guinea helps the hurt that honor feels.'' That expresses the 
sense of wealth and pride that I think people have when they 
feel coins that are jingling in their pocket. You don't get 
that with paper, jingling. I think it is still true today. I 
don't think any of us mind hearing money jingling in our 
pockets, and certainly the new dollar coin does that.
    The history of money and the great American dollar is 
fascinating. The first dollar coin eagerly sought in the early 
American colonies was the Spanish milled dollar known as the 
pillar pieces of eight. The Continental Congress established 
this as the official monetary unit of the United States in 
1785.
    Today the U.S. Mint manufactures our Nation's coins, and 
the Federal Reserve System distributes them, but Congress has--
continues to have the power under the Constitution to coin 
money, and on December 1, 1997, Congress enacted the United 
States Dollar Coin Act directing the Secretary of the Treasury 
to place into circulation a new $1 coin. Now, this year, 215 
years after the Continental Congress established the Spanish 
pieces of eight as our official monetary unit, the Mint has 
made these new coins available.
    The Sacagawea coin, I think, brings many benefits, not the 
least of which we will be talking about today, not the least is 
the considerable savings that the U.S. Government enjoys as a 
result of this. GAO estimates the savings at almost $50 million 
for this year. If the dollar coin completely replaced the $1 
Federal Reserve note, those savings could jump to $522 million 
a year. I think these are very conservative estimates because 
the Mint has an 833 percent markup on its product, which could 
yield more than $1 billion per year in gross proceeds.
    Today I want to look at how the Mint has addressed the 
introduction of the new golden dollar, what has been done 
right, what we need to do to make it work better, and where we 
go in the future, because I think a lot of policy decisions 
still remain to be considered.
    So, Director Mitchell, I am looking forward to your 
testimony. After we hear from you and have questions with you, 
we will proceed to a panel of four witnesses. We will have Mr. 
James Smith from the American Bankers Association, Jim Benfield 
from the American Coin Coalition, David Clayton with the 
National Automatic Merchandising Association, and Jim Miller 
representing Save the Greenback.
    When Mr. Hoyer gets here, we will certainly take his 
comments and questions, but let me go ahead and begin with your 
testimony, Mr. Mitchell. As always, of course, the full 
testimony can be placed in the record. If you would like to 
summarize it, then I understand you are going to show us at 
least a couple of your commercials you are using. Mr. Mitchell, 
the floor is yours.
    [The information follows:]



    Mr. Mitchell. Thank you, Mr. Chairman. It is my pleasure to 
appear before you today to discuss our beautiful new golden 
dollar. My testimony, as you so graciously allowed, is 
submitted for the record, and with your permission I would like 
to summarize the success, the challenges and some of the 
background.
    Let me cut to the chase. In a word, Mr. Chairman, the 
future of America's new dollar coin is golden. Over 500 million 
of these coins will be shipped by the end of April to meet 
demand, and in just those 14 weeks, we will have accomplished 
what it took the Susan B. Anthony 14 years to accomplish. Later 
this summer or early fall, we will have shipped at least 1 
billion of these golden dollars. This will generate nearly $900 
million in profits, and as you noted, the GAO estimates are $50 
million in scoreable revenue.
    The golden dollar has captured the imagination of the 
public with its beautiful design. It has the same 
electromagnetic signature as the Susan B. Anthony, which is 
crucial to expedite its entry into some 6 million vending and 
other coin acceptance machines. Our goal is to get that rate up 
to 80 percent. We have had significant success in a number of 
industry segments, including the transit authorities where we 
have 18 of the 20 largest transit authorities in the United 
States that are participating in this coin, and that will cover 
something like 60 to 65 percent of our Nation's ridership.
    As you know, it is distinctive in color, has a smooth, not 
reeded, edge and a wide border, something that is going to make 
it easily distinguishable by both the sighted and visually 
impaired. We learned the lessons from the Susan B. Anthony.
    Our $40 million, 6-month ad campaign launched last month 
will reinforce our message to the public and Congress. The 
campaign was paid for in the first few weeks of the issuance of 
this coin. Our key focus remains the distribution 
infrastructure. We now have a dollar coin that successfully 
cocirculates with the dollar note.
    Let me tell you a little bit about the story or background 
of this. As you know, the United States Dollar Coin Act was 
signed in December of 1997. In the summer of 1998, the Dollar 
Coin Advisory Committee that was chartered by former Secretary 
of the Treasury Robert Rubin chose Sacagawea to be honored on 
this coin. In December 1998, we narrowed down 121 designs to 13 
finalists and posted them on our Web. The first date on the 
Web, we had 11, almost 12 million hits, and we received over 
120,000 e-mails commenting on the design, overwhelmingly 
favorable.
    We have tested over 20 alloys to come up with the golden 
color on the dollar coin, and manganese is the key component of 
getting that color.
    We said that after the legislation was passed, we would 
deliver this coin in 30 to 36 months, and we brought it to 
market in 25. As you know, last year circulating coin demand 
was robust. We shipped a record 20.4 billion circulating coins 
of all denominations to the Federal Reserve. This year that is 
going to be increased from last year's record to nearly 30 
billion circulating coins. We will meet this challenge.
    We have added extensive dollar coin stakeholder meetings 
for the last 2 years beginning in the spring of 1998 that have 
included banks, coin operators, transit and retail. We have 
made over 11,000 calls to over 4,000 institutions representing 
100,000 banks and branches. Unfortunately half have expressed 
either a lack of interest or declined to participate, and they 
also issued a challenge to us that they would be interested in 
carrying the coin if we proved that there was demand for the 
coin. As you know, when your traditional distribution channel 
does not carry an inventory of coin, it makes it difficult to 
supply that coin to commerce to meet demand. In fact, the 
initial orders from the financial institutions were in the 
proximate estimate of 60 million coins.
    In the legislation it specifically says, and I am quoting, 
before placing into circulation $1 coins authorized under this 
section, the Secretary of the Treasury shall adopt a program to 
promote that use of such coins by commercial enterprises, mass 
transit, and Federal, State and local government agencies. We 
worked with approximately 60 different commercial enterprises, 
and two stepped forward and seized the opportunity, General 
Mills and Wal-Mart. With General Mills, the pictures and 
depictions of Sacagawea and the golden dollar were on 11 
million boxes of Cheerios. In each box we had a 2000-dated 
penny, and every 2,000th box we had a golden dollar. With Wal-
Mart, the promotion ran through February and closed on March 2, 
and in their stores across the country, approximately 3,000 
stores, they gave this dollar coin in change out of cash 
registers across the country.
    The buzz in the press and public was tremendous. Consumer 
awareness and excitement was ignited, and market demand began 
to be realized. The General Mills deal gave us approximately 
132 million impressions. The Wal-Mart deal gave us 
approximately $9 million in free advertising from their 
circulars and other promotions. This is not to mention the fact 
that they both paid face value for the coin, and that realized 
us a little bit more than $80 million in profit.
    I also hasten to add that the Wal-Mart deal was never 
exclusive. When the Wal-Mart spokesperson misspoke, we 
corrected that immediately. Unfortunately the same quote ran 
through the press for a period of time. Anyone could and still 
can participate with us in promoting this new dollar coin.
    In September 1999, we created the Financial Institutions 
Advisory Committee. Along with the Mint, the membership 
includes the ABA, the America's Community Bankers, Credit Union 
National Association, Independent Community Banks Association, 
National Association of Federal Credit Unions, the Federal 
Reserve Board and Product Office. Our initial goal was to 
launch this coin in January of 2000. Because of concerns about 
armored car capacity and the flow-back of currency from Y2K 
preparations, we agreed in the fall of 1999 at the request of 
the financial institutions to delay the launch until March.
    In our December financial council meeting when we announced 
that we had just closed the deal with Wal-Mart, we were asked 
to move the launch back to January, and we did so. We began 
shipping to the Fed on January 18, and almost all the banks and 
branches had the coins in their inventory for shipment out to 
their commercial institutions on the formal day of launch, 
January 27. Wal-Mart officially began their promotion on 
January 30.
    The coins caught fire. All FRB orders have been met. By the 
end of February, we had shipped 102 million coins to the Fedand 
an additional 94 million coins to fulfill the Wal-Mart contract, and in 
March we shipped 130 million coins, and again this month we expect to 
ship an additional 165 million coins. At the same time, we received a 
request from a number of small banks and community credit unions, et 
cetera, that they were frustrated they could not get the coins sooner, 
so we created what we call the direct shipment program. We mailed over 
34,000 letters to over 112,000 financial institutions telling them that 
from March 1 to 31st, we would set aside up to 50 million coins, golden 
dollars, that they could contact us directly through our Web site, or 
if they did not have that technology, that by calling our customer care 
center, and place up to three orders for 6,000 coins which we had and 
have already wrapped so they can go straight out to the public. At the 
request of the financial institutions, we extended this deadline until 
the end of this week, April 15.
    Despite the full support of the financial council, the ABA 
and all of the members, only 4,000 of those 112,000 financial 
institutions have participated in this program. They have 
ordered a little bit more than 10 million coins from us.
    Our remaining challenges: We must continue to educate the 
public and the commerce that this coin is not only a beautiful 
collectible, but can be a workhorse in commerce. The Susan B. 
Anthony, a number of people don't realize, is the most 
successful dollar coin in the history of the United States, and 
it accomplished that mantle in issuing--demanding a little bit 
more than 900 million coins over a 21-year period. In less than 
1 year, the golden dollar will blow that record away.
    We must reinforce and reinvigorate the traditional coin 
distribution channels, our financial institutions, to make this 
coin readily available to public and commerce.
    In closing, Mr. Chairman, I would like to express my 
appreciation. This committee under your leadership, Steny Hoyer 
and Jim Lightfoot before has provided the Mint through 
legislation the flexibility to operate as a model agency in 
business, to generate profits for the American people, while 
upholding the higher standards of integrity. This year not only 
because of the strong economy, but because of our business 
practices and the creation of demand for the 50 State quarters 
program and the golden dollar, we will return nearly $3 billion 
in profits to the general fund. That is nearly $3 billion that 
will fund government programs, and that same $3 billion of debt 
that will not have to be issued to do so.
    On behalf of all of the dedicated employees of the United 
States Mint, I thank you, Mr. Chairman, and would invite you to 
view our two commercials, television ads, promoting the golden 
dollar.
    [Videotape played.]
    Mr. Mitchell. Mr. Chairman, I welcome any questions that 
you or the Members may have.
    Mr. Kolbe. Thank you.
    [The information follows:]



    Mr. Kolbe. Just by way of information, how much--what has 
been the marketing size of that campaign with those 
commercials?
    Mr. Mitchell. In terms of dollars?
    Mr. Kolbe. Yes.
    Mr. Mitchell. The entire budget for the commercials, radio, 
everything, transit, magazines is going to be approximately 
$43, $44 million in total. It is going to run--the television 
ads will run for 4 months. The entire ad campaign will run for 
6 months total.
    Mr. Kolbe. Is it targeted in markets, or is it national? I 
know I have seen them on television here and I think also in 
Arizona. Are they national in market?
    Mr. Mitchell. Yes, they are. We also tried to hone the ads 
to different market segments, but they are national.
    Mr. Kolbe. Let me start by just--you alluded to it. Let me 
just get it on the record here, a couple of questions about the 
coin production. As of this date, or, say, April 1, whatever 
you got as the latest figure, how many coin dollars have you 
produced?
    Mr. Mitchell. We have shipped to the Fed and the Wal-Mart 
deal a little more than 350 million coins. That was as of the 
end of last month. By the end of this month, that will exceed 
500 million.
    Mr. Kolbe. Do you know if those are--have been distributed? 
Are they out there? Are they still hanging out at the Fed?
    Mr. Mitchell. Well, they are everywhere basically. They are 
going through the distribution channels. One of the issues that 
is being addressed is the armored carriers and wrappers need to 
get up to speed to wrap the new golden dollar, because 
obviously they didn't have a use, most of them, to wrap the 
Susan B. Anthony. Most of them went into the transit or postal 
machines. That is one challenge. We are working closely with 
the Federal Reserve and financial institutions to encourage 
them to get these things out there to the public and commerce 
as quickly as possible.
    Mr. Kolbe. When you say wrap, coin wrappers?
    Mr. Mitchell. Coin wrappers, 25 to a roll.
    Mr. Kolbe. That is done with all coins. What is the big 
deal about that?
    Mr. Mitchell. They have not traditionally over all these 
years wrapped dollar coins, so they have had to add that 
functionality to their equipment to do that. The last estimate 
we got was hopefully by June, most of the major carriers and 
wrappers will be able to do so.
    Mr. Kolbe. What is happening in the meantime? I didn't 
realize they weren't wrapping them.
    Mr. Mitchell. Traditionally the Federal Reserve bank takes 
receipt of our coins through bagged coin. With the golden 
dollar, it is a 2,000-coin bag. What we did last fall is in 
talking with the coin wrappers, we realized they would not be 
ready in time, so we contracted with two private companies 
ourselves, and we have provided wrapped coin, and whenever the 
Fed accepts wrapped coin from us in their orders, we ship the 
coins to them in wrapped form already so that it does not have 
to go through the additional step to be wrapped and then can be 
delivered directly to banks, commerce, the public in that 
manner.
    Mr. Kolbe. Technology wrapping can't be too difficult, is 
it?
    Mr. Mitchell. I don't think so, Mr. Chairman, but with 
everything else, it is a business decision. There is--with both 
the distribution channels and some of the businesses out there, 
there is the lingering effect of the old Susan B. Anthony and 
its failure. That is why this ad campaign continues to be 
crucial not just for the public, but for commerce. And if I 
could, I received a postcard last Thursday or Friday and had 
the opportunity to talk to this gentleman over the weekend. His 
name is Jack Harrison. He is from Cocoa Beach. I want to read 
this to you because this captures what our challenge is. He 
says, John Mitchell, Deputy Director: Sir, don't rest easy 
about the Sacagawea golden dollar. I love them, but I have been 
told the following by different banks in this area--and these 
are all quotes. They aren't going to mint any more after this 
first batch. The minimum order is 2,000, and we won't order 
that many. We don't have room to store them. They come 
unrolled, so we don't like them. We can't get any. And my 
favorite, after this initial flurry of coin nuts, no one will 
want them. They are--and then he goes on with the rest of his 
postcard.
    They are something new, so I can see banks are resisting 
carrying them. If you ask a teller for a Susan B. Anthony or $2 
bill, they look at you like you have asked for an Argentine 
peso. I love them, and people I spend them with love them. I 
don't know how you can force the banks to make a space for 
them. Many financial institutions are supporting this, but a 
number are still fearful of carrying too many coins and being 
stuck with them in their inventory.
    Mr. Kolbe. They, like some of the public, remembers the 
Susan B. Anthony experience, but it looks like the public is 
faster to adopt this than some of the financial institutions, 
which doesn't surprise me. They are pretty conservative by 
their very nature here.
    Back to the production. Are you expecting to produce 
approximately 1 billion in 2000?
    Mr. Mitchell. Yes, at least 1 billion.
    Mr. Kolbe. Your estimates last fall were for only 300 and 
some million?
    Mr. Mitchell. That is correct.
    Mr. Kolbe. What are you attributing the huge increase in 
production?
    Mr. Mitchell. I think it is a number of things. First of 
all, it is a beautiful design, and it really has captured the 
imagination of the public. We also had a wonderful foundation 
to work from with the 50 States quarters program, and for the 
first time in decades, people began paying attention to their 
coins. And all age groups have become fascinated with this 
coin, including the target market that we are directing these 
ads for of 18- to 49-year-olds, because they traditionally have 
not been interested in coinage. We have partnerships with 
schools across the country where children are fascinated as 
well.
    On the heels of that came the Sacagawea depiction on the 
golden dollar and her place in history with the Lewis and Clark 
expedition. I think the design is the first part. The second 
part is it is easily distinguishable, by both the sighted and 
visually impaired, in terms of its features, from the quarter, 
which was one of the failures of the design of the Susan B. 
Anthony. We have also had a very aggressive campaign and one, 
frankly, that we are continuing to get some criticism for about 
encouraging the public and commerce to use this coin, and I 
think that is a very essential part of this is constantly 
reinforcing the fact that this coin is notgoing away, it is not 
a passing fad, it is not a 2000 millennium collectible that will then 
disappear. It is going to be in America's cash registers.
    Mr. Kolbe. I am thinking up a lot of my questions as I go 
along from things that you have said because this topic is so 
fascinating to me. Are we suffering, actually suffering from 
the State quarters program because they are produced for only a 
few weeks, and then they go away. I want to come back to this 
because I find this one also fascinating, this program.
    An awful lot of these are obviously not getting into 
circulation. They are just disappearing very quickly. Is that 
hurting us with the Susan B.--with the Sacagawea golden dollar 
coin? Is that hurting us with this?
    Mr. Mitchell. The way I would answer that question is where 
I think it is helping us is that people are fascinated by the 
coin, and what you are exactly saying is they are pulling them 
out of circulation. So what our challenge is is to get these 
coins out there to both the public and transit authorities.
    Mr. Kolbe. What are your plans to try to improve the 
circulation?
    Mr. Mitchell. We are continuing with two different partners 
that we have, Double Eagle and Fleishman-Hillard, to work 
closely with all these financial institutions. We have attended 
conferences, conventions, face-to-face meetings, phone calls, 
and we are going to continue to aggressively do that throughout 
commerce, and what we are doing is we are taking those--the 
requirements for golden dollars, which are very, very--we 
estimate, that when fully fulfilled, that those requirements on 
a monthly basis will probably average at least 200 million 
coins per month for the golden dollar, and we are then working 
with the Fed to take those orders, organize them by region, and 
then ensuring that the Federal Reserve banks and branches and 
depots in those regions have the coins to quickly get them to 
commerce.
    Mr. Kolbe. The kind of complaints you got there on that 
postcard, is that pretty prevalent? Are you getting a lot of 
those?
    Mr. Mitchell. Yes.
    Mr. Kolbe. So we are having a problem with the 
distribution?
    Mr. Mitchell. Yes.
    Mr. Kolbe. When you said going to conventions, you meant 
banking?
    Mr. Mitchell. Everything; grocery, bankers.
    Mr. Kolbe. Retail as well as your financial institutions?
    Mr. Mitchell. Absolutely. Major department stores, both 
national and regional. We have a number of different companies 
that we are working with. There are a number of companies 
across the country that we are working with to have them use 
this coin in their cash registers, but we are also working with 
other companies----
    Mr. Kolbe. Was the initial enthusiasm that we had helping 
to open the doors?
    Mr. Mitchell. Absolutely.
    Mr. Kolbe. I would think people would say, oh, this isn't 
the Susan B. Anthony. Susan B. Anthony never from the very 
beginning was not accepted by the public, but this one is.
    Mr. Mitchell. That is helping us, Mr. Chairman. The public, 
the Jack Harrisons of the U.S., and there are a lot of them, 
are very frustrated that they can't get these coins, and they 
are asking over and over again for their banks and credit 
unions and other distribution channels to get them to them. So 
we are working on two strategies: A pull strategy by both the 
public and commerce to pull these through the distribution 
channels, and we are working closely with the Federal Reserve 
and with the financial institutions council that I mentioned 
with all the financial representatives to push them through the 
distribution channels as well.
    Mr. Kolbe. There would be a third thing, wouldn't there, 
and that is the increased uses of the coin. What programs do 
you have to get to more transit systems, to more places that 
can use the coins?
    Mr. Mitchell. As an example of that, we have already 
received commitments from 18 of the 20 largest transit 
authorities in the U.S. That includes New York mass transit, 
New Jersey, Chicago, Dallas, a number of them across the 
country. Eighteen of twenty have committed to this coin and 
either are using it or are committed to using it sometime this 
year. They are enthusiastic about it because it is economical 
for them.
    Mr. Kolbe. Sometime this year?
    Mr. Mitchell. Yes.
    Mr. Kolbe. Some of them are already?
    Mr. Mitchell. Yes, 18 out of 20. That represents between 60 
and 65 percent of our national ridership.
    Mr. Kolbe. One of your success stories, however, is not 
here in Washington, is it?
    Mr. Mitchell. No, Mr. Chairman. We are aware of your letter 
to the chairman of the board for Washington Metro, and, 
unfortunately, while the coins are accepted in the buses, they 
are still not accepted in the Metro for D.C., in the metro D.C. 
area.
    Mr. Kolbe. I have some more questions, but let me stop mine 
for a little bit and let Mr. Price have a go at this. Mr. 
Price?
    Mr. Price. Thank you, Mr. Chairman.
    Welcome, Mr. Mitchell. Glad to have you here. Let me just 
pick up along the Chairman's line of questioning because we 
are, of course, interested by this, intrigued by the uses of 
George Washington and other aspects of your ad campaign.
    You mentioned in your testimony that the Mint kicked off 
this $40 million television, radio, print, mass transit and 
Internet advertising campaign. How long do you think that 
campaign will last, and do you expect the $40 million will 
cover the entire length of the campaign, or might there be 
additional costs?
    Mr. Mitchell. The $40 million--and that is an approximate 
number. It is probably closer to $43 million--that will cover 
the entire cost of that campaign that you just described in all 
of those mediums. The television campaign and those two ads 
will run for 4 months. We have two radio ads that will continue 
to run for 6 months, as will all of the print, Internet, and 
other mass transit advertising we are doing. So the entire 
length will be 6 months all paid for by that roughly $40 
million.
    Mr. Price. Are there any legal limitations on the amount 
you can spend on such a marketing campaign?
    Mr. Mitchell. The limitation that we abide by at the Mint 
is what is a good business decision. So what we do is work 
carefully via focus groups and with some excellent technical 
advisorsto develop a campaign that hits the right market 
penetration for our ads. So, for example, the television ad campaign is 
going to be hitting something like 90 percent of the age group, the 
target age group of 18- to 49-year-olds, and that television ad is 
going to be seen at least 15 times by people in that segment of the 
population. We have those sort of demographics and splits for all of 
the different ads in the promotions that we do.
    Mr. Price. I am not certain what the appropriate point of 
comparison is. I know the promotional campaign for the new 
hundreds, fifties, and twenties was considerably less, I think 
around $17 million. You might have other comparisons you could 
make to private sector marketing campaigns or other Federal 
agencies' marketing campaigns. How does this compare?
    Mr. Mitchell. It stacks up very well. I am glad that you 
asked that question. The $40 million in the first several weeks 
of this new program have already been paid for. That is one of 
the things that we like to indicate, and the return on that $40 
million is going to be roughly $900 million in profits. So in 
that respect alone, we know we have got an excellent business 
decision.
    In addition, you are right about the--at least as I know 
them, the currency numbers are approximately right. The key 
difference here is that Americans are--the goal of that was to 
inform the public that this was going to continue to be legal 
tender, and this is the new look in terms of gaining 
acceptance. With the golden dollar, it is overcoming the 
resistance to the old Susan B. Anthony dollar coin, so we have 
a different challenge in addressing that.
    I am aware of another campaign that I believe is in the 
$200 or $300 million range that one of our Federal agencies is 
spending in terms of drug awareness and other concerns. So 
there is a range of promotional budgets out there from the 
Postal Service to Treasury for currency, to the other 
campaigns, Census, IRS, et cetera. This is very comparable, if 
not less, has a great return on the dollar, and I think 
fulfills the mission, which is to create and gain acceptance 
for this coin across the country.
    Mr. Price. What about the Postal Service? It strikes me 
there might be some relevant comparisons there. Could you say a 
little bit more about that?
    Mr. Mitchell. Unfortunately, I don't officially have those 
numbers. I believe their ad campaign for their new stamp 
programs, et cetera, is less than the $40 million that we have 
spent. How much less I couldn't tell you.
    Mr. Price. Well, of course, a lot of the discussion has to 
do with the replacement of the dollar note. What is your 
Department's position on the dollar coin as a replacement of 
the dollar note, and what sort of impact on the dollar note do 
you anticipate, or have you projected that with any precision?
    Mr. Mitchell. Well, our mandate from Congress was to 
successfully launch and continue to issue to the public a 
successful golden dollar or successful dollar coin, and that is 
what we are very enthusiastic about. That is where the mandate 
stops, and in terms of the Mint and Treasury's position, it is 
that the dollar coin and the dollar note will cocirculate at 
the same time.
    Mr. Price. Do you have any reliable estimates of what, in 
fact, is likely to happen?
    Mr. Mitchell. In terms of--I guess two quick answers. In 
terms of Treasury's position, that does continue to be 
Treasury's position that the note and coin, dollar note and 
coin, will cocirculate, and in terms of hypotheticals as to 
what might happen if the dollar note was withdrawn, I will 
defer to GAO and others' estimates on that.
    Mr. Price. Let me ask you about the delivery of the coins 
to Wal-Mart, which I understand is part of the promotion and 
acceptance campaign. You say in your testimony that Wal-Mart, 
which agreed to dispense 94 million golden dollars in change 
throughout stores nationwide, was the equivalent of $9 million 
in free advertising. I wonder what efforts you made or perhaps 
plan to make to ensure that a variety of qualified companies 
are given the chance to participate in this promotional effort. 
You are aware, probably, of the complaints, for example, from 
the National Grocers Association. Would you say there was a 
fair opportunity for smaller business to join with the Mint?
    Mr. Mitchell. Absolutely, Mr. Price. We have actively 
sought partners to both use the coin and to promote it for a 
number of months going back to last summer when we started 
phasing from our update and collaboration type of meetings, 
which we call dollar coin stakeholder meetings, which began in 
the spring of 1998, to actively going out and seeking business 
with individuals. The General Mills deal could have provided 
that opportunity, but most grocery stores did not want to take 
or chose not to take that in terms of using that as an 
opportunity.
    What we have recently done and launched early last month is 
a promotion, a co-promotion, with Coinstar, which is a company 
that recirculates circulating coins, and the vast majority of 
their machines, something like over 7,000 of them, are in 
grocery stores. And with that promotion, which is if you bring 
in $20 or more of coins to be recirculated by the Coinstar 
machines, you will receive two golden dollars in return, as 
well as, of course, the receipt for your coins, less the fee 
that Coinstar charges. Because they are located in the grocery 
stores, it is a great opportunity for the national grocers to 
take advantage of that promotion, and, in fact, so far 
approximately 89 or 90 have done so.
    That promotion ends the latter part of this month, and all 
last fall and continuing into this spring, we have attended 
something like--I have the numbers here--about 32 retail 
grocery chains and four retail grocery wholesale conventions 
and meetings in terms of face-to-face meetings. We have 
attended nine conventions with them. I use that as an example 
of what we have done with any other segment of business. So we 
are hopeful that they will enthusiastically take advantage of 
the opportunities with this coin.
    Let me also hasten to add that some of the concerns about 
the coins not getting out there quickly are understandable. 
That is one of the reasons I wanted to make the comment about 
the numbers at the end of February. We had actually shipped 
more coins to the Federal Reserve and then, therefore, out to 
the market than we had to the Wal-Mart deal, 102 versus 94 
million. So in the first few weeks of any new product launch, 
it is going to be a challenge to get any product out through 
all the distribution channels.
    We were happy that having shifted, at the financial 
institutions' request, from a March launch back to January, 
that we did a pretty good job of adjusting to that 6 weeks 
advance of our production and shipment schedule, and we thinkwe 
have recovered from that in terms of getting the coins out, and these 
other programs we have set up to direct ship we hope has helped as 
well.
    Mr. Price. Thank you.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Mr. Price.
    Following up a little bit on some of the questions that Mr. 
Price was asking, because obviously we have heard the 
complaints also, when you initially approached the banking 
community about this last year, what kind of a response did you 
get? It wasn't terribly enthusiastic, was it?
    Mr. Mitchell. No, Mr. Chairman. They basically--at least 
half of the financial institutions--and I am talking about 
roughly 4,000 that represent over 100,000 banks and branches--
--
    Mr. Kolbe. Did you go to the financial institutions 
individually as opposed to going through the banking 
associations?
    Mr. Mitchell. We went through all channels. That included 
the 11,000 phone calls. We had something like 22 face-to-face 
meetings with different conventions and associations that were 
being held, speaking engagements. And then, as I mentioned in 
September of last year, we created the Financial Institutions 
Advisory Committee with all of the oversight and sponsoring 
organizations. The challenge they basically gave to us was 
prove the demand, and then we will start carrying the coin.
    Again, I want to quickly add there were a number of 
financial institutions that did enthusiastically want to be a 
part of this coin and made those orders to the Fed earlier. A 
lot of financial institutions did not.
    Mr. Kolbe. So it is not true that you purposefully kept it 
away from the banks and made it available only to retail 
outlets first?
    Mr. Mitchell. Not at all.
    Mr. Kolbe. There were--simultaneously with making it 
available to retail outlets, there were banks that were getting 
them. Was one of the complaints you received about Y2K that 
this was--they were just too concerned about the Y2K problem to 
deal with this right at the same time?
    Mr. Mitchell. Yes. The impact that that had was that we had 
planned a January 2000 launch. When we--as the summer and fall 
of 1999 came about, and we, by working very hard, came up with 
an alloy that was going to work, one that was going to wear 
well in terms of the coin, and one that was going to give the 
golden dollar the golden color, we knew then we would be ready 
for a launch in January. We also knew because of the 
electromagnetic signature being the same as the SBA, that the 
vending industry would not have to retool their equipment to 
accept this. All of those that accepted the SBA would accept 
the golden dollar.
    When we planned that January launch, the financial 
institutions, because of their concerns about the flow-back of 
currency and armored carrier capacity, asked us to delay until 
March. In our December meeting when we informed them that we 
had just closed the deal with Wal-Mart, they asked us to move 
that schedule ahead again back to January, and that is when we 
coordinated the launch of January 27 with the beginning of the 
January 30 promotion with Wal-Mart.
    Mr. Kolbe. I want to ask a couple of questions about what 
you call your direct shipment program. You mentioned that in 
your testimony. Normally you distribute coins through the 
Federal Reserve; you ship through to the Federal Reserve. The 
Federal Reserve ships them to banks. Tell me what the direct 
shipment program is and how it works.
    Mr. Mitchell. The direct shipment program, which will run 
from March 1 to April 15, is a program where over 112 
thousand--basically any financial institution out there--it is 
targeted at community banks and credit unions, but frankly any 
bank can participate because we have set the system up so that 
it will accept orders from anyone. They come into our Web site, 
or, again, if they don't have the technology, call our customer 
care center, and they can place up to three orders of either 
1,000 or 2,000 dollar coins for a total of 6,000 prewrapped by 
us so it is ready to go out straight to the public or to 
commerce, and any of these institutions are eligible to 
participate.
    We created the program, the Mint and the Financial 
Institutions Advisory Council, with the ABA and the other 
members I noted earlier, in response to concerns that the coins 
were not getting out to them quickly enough. Out of these 
orders, we then over the course of 7 to 10 days through the 
Postal Service process shipped these directly, registered mail, 
to all of these banks and branches to get the coins.
    Mr. Kolbe. It is an intriguing program. If I am a financial 
institution, why do you do it? I am a financial institution. I 
am ordering my pennies and nickels and dimes and quarters from 
the Federal Reserve. Why go to this route to get the dollars?
    Mr. Mitchell. I think two key points. One is we absolutely 
are going to do everything we can to make the traditional FRB 
distribution channels work. That is the ultimate solution. They 
have got to work, and through the financial institutions.
    Mr. Kolbe. Are you saying the banks are complaining they 
are not able to get the orders filled through the Federal 
Reserve banks?
    Mr. Mitchell. The community banks and savings and loans 
wrote many, many letters to us. You may have received some as 
well. What they said is they weren't getting them fast enough. 
So in response to that, we did two things. We created the 
direct shipment program so we could ship directly to them. We 
also ratcheted up our production of coins, so we are now 
minting over 6 million a day so that we could fill the pipeline 
with these coins to get the traditional channels working 
better.
    Mr. Kolbe. What has been the response of the direct 
shipment program?
    Mr. Mitchell. Disappointing, frankly. We mailed something 
like 34,000 letters to the heads of all of these various 
financial institutions that covers something like 112,000 
community banks and credit unions and other financial 
institutions. Of that 112,000, less than 4,000 chose to 
participate in this program.
    Mr. Kolbe. What is going on here? I guess we will have a 
chance to ask some of the representatives of the banking 
community. They are complaining they are not able to get them 
through the Federal Reserve. You give them a chance to get 
them, and they don't respond. Is that--the problem has been 
dealt with now by the Federal Reserve, so they don't need it 
anymore?
    Mr. Mitchell. Some of the answers I can't give you. I think 
what we are clearly doing, and at the risk of being redundant, 
is we are working very hard with the Federal Reserve, all of 
their offices across the country and theFederal Reserve Board 
and Product Office to make the traditional channels work. I think they 
are working better now. I think they still need more work and need to 
work even more efficiently. Frankly, I think that most of the financial 
institutions that voiced a concern were those who initially were not 
interested in participating in the program, and once there was a 
concern with Wal-Mart, they then chose to.
    Mr. Kolbe. Final question in this area, though. For all the 
orders that you have received from the 4,000 plus institutions, 
you have been able to fill those?
    Mr. Mitchell. Yes, sir.
    Mr. Kolbe. So in essence, it really can't be said that 
there is a financial institution out there today that can't get 
the coins if they want them either through the Federal Reserve 
or through your direct shipment program?
    Mr. Mitchell. That is right.
    Mr. Kolbe. How quickly on this direct shipment do you fill 
an order?
    Mr. Mitchell. Because it goes through registered mail, 
because of security concerns----
    Mr. Kolbe. I hope it would go through the registered mail, 
6,000 coins.
    Mr. Mitchell. Roughly 7 to 10 days. But the Postal Service 
regularly beats that timeline, but that is what we tell folks, 
7 to 10 days.
    Mr. Kolbe. Let me ask a couple of questions about the coin. 
You mentioned earlier about finding the alloy. How is this 
alloy different from the alloy that was used in the Susan B. 
Anthony?
    Mr. Mitchell. The key difference is that it includes about 
4 percent manganese. That is what gives it the golden color.
    Mr. Kolbe. I have been carrying one--I don't have it with 
me right now--in my pocket for quite some time. I notice it 
does tarnish fairly rapidly. Was that anticipated?
    Mr. Mitchell. Yes. A couple of things along those lines.
    Mr. Kolbe. It is so pretty the way it looks here, but when 
it tarnishes, it isn't quite so pretty.
    Mr. Mitchell. I actually had in my head a more humorous 
one, but I will give you the serious one. It is really no 
different than a bright new penny. Over time it is going to age 
and acquire what we are calling an antique patina.
    Mr. Kolbe. I am sorry, it didn't tarnish. It is an antique 
patina.
    Mr. Mitchell. The coin is going to wear very, very 
successfully. In terms of a mass-produced coin, we think it is 
going to wear very successfully, and it will, and we knew this 
would happen. It is going to get a darker look, not as dark as 
the penny eventually becomes, but a darker look which actually 
will enhance some of the features and add some depth to the 
field in terms of relief of the coin. But this coin wears very 
well, and quality is always a high priority for us in terms of 
the usage of these coins for decades.
    Mr. Kolbe. What are the other main components in the alloy?
    Mr. Mitchell. It is roughly 87 percent copper. It also has 
nickel and zinc in it; again, 4 percent manganese. That nickel 
and zinc combination is what will basically prevent this coin 
from tarnishing too severely.
    Mr. Kolbe. At the peak, after the initial introduction of 
the Susan B. Anthony, and, of course, its use declined to 
almost zero, and then gradually through the years the demand--
as the economy was demanding a dollar coin, there was some use 
for it. At the peak, towards the end there, what was the peak 
number you were distributing in a year or you were getting out?
    Mr. Mitchell. The peak demand averaged those last couple of 
years annually about 60 million coins per year, Susan B. 
Anthonys.
    Mr. Kolbe. This year you expect over a billion on this 
first year. That is at least your production level.
    Mr. Mitchell. Yes, that is correct. And if it goes beyond 
that, we will meet that demand. We are prepared to do that.
    Mr. Kolbe. Okay. Let me, if I might, and I will turn to Mr. 
Hoyer for his questions--let me just ask on a couple of other 
questions. On the penny itself--back on this one, the dollar. 
It cost you about how much to produce this?
    Mr. Mitchell. It is going to average about 12 cents per 
coin.
    Mr. Kolbe. When you sell it to the Federal Reserve, you get 
100 percent profit margin?
    Mr. Mitchell. That is right.
    Mr. Kolbe. Most companies would love to have that 800 
percent markup.
    Mr. Mitchell. With your permission, we would love to go 
IPO.
    Mr. Kolbe. I am ready. Seriously. It is a tremendous 
markup.
    How about this penny? I know you don't like to talk too 
much about this. What kind of a margin do you have on this?
    Mr. Mitchell. Two-tenths of a cent, sir.
    Mr. Kolbe. It costs you eight-tenths of a cent to make it.
    Mr. Mitchell. Right. It is still returning in the $20 to 
$30 million profit each year, so it is a profitable coin for us 
to mint. It pales in comparison to the other----
    Mr. Kolbe. $20 to $30 million in profit for this. How much 
profit on this?
    Mr. Mitchell. At least approximately $900 million.
    Mr. Kolbe. How much of a production is in this penny?
    Mr. Mitchell. This year we are going to be minting a little 
more than 13 billion coins. That is 13 billion out of about 30 
billion coins that we will be minting this year.
    Mr. Kolbe. Not quite 50 percent in pennies?
    Mr. Mitchell. That is correct.
    Mr. Kolbe. And this is what percentage of the--this is 
about 4 percent?
    Mr. Mitchell. I would say approximately 4 percent, yes.
    Mr. Kolbe. And your profit is--the money that you make from 
this is how many times? What did you say here? How much are you 
making?
    Mr. Mitchell. That is about $20 to $30 million per year 
versus $900 million approximately.
    Mr. Kolbe. Well, if you are in business, and, of course, 
you are not totally just in business because you make coins 
that the government requires you to make, but you would like to 
have a lot more reproduction of this, wouldn't you?
    Mr. Mitchell. My answer, Mr. Chairman, is our mandate is to 
provide coinage for the public and for commerce, so we are 
happy to fulfill that mandate.
    Mr. Kolbe. Mr. Hoyer, if you will indulge me one more on 
the quarters. This has been tremendously successful, Ithink. 
What is your profit? What kind of a profit are you making on this?
    Mr. Mitchell. The quarter is costing roughly 4 cents. We 
make about 21 cents per quarter. To give you a couple of 
numbers, our base demand for quarters over the last 10, 15 
years averaged about a billion and a half quarters per year. We 
will be minting at least more than 5 billion of those this 
year.
    Mr. Kolbe. A fourfold increase.
    Mr. Mitchell. Absolutely. That is part of what is driving 
the tremendous profits we are able to generate and turn over to 
the Treasury Department.
    Mr. Kolbe. Would you say that the same number is 
circulating as before so that three-fourths of these are 
disappearing?
    Mr. Mitchell. Absolutely. In fact, we constantly survey and 
focus-group our customers. It is part of our culture at the 
Mint to make sure we are delivering the products and services 
that they want. As part of the quarter program, I can tell you 
that we have statistically valid data that indicates that we 
have got 112 million Americans that are collecting between 12 
and 16 of each quarter. They are pulling them out of pocket 
change. And we have got 160 million people in total that know 
about the coin and intend to collect the coin.
    Mr. Kolbe. I am one of those. Every time I go home to 
Arizona--since they are much more distributed, I guess, because 
the early States are back here, on the east coast, I go out to 
Arizona, and my district director out there insists that I take 
all the coins out of my pocket, and she wants to look and see 
if there is--from each of the mints, whether there is a coin 
there from each of the States. I have to give them up to her 
each week I go home.
    Mr. Mitchell. We do distribute approximately equal between 
the Philadelphia and Denver mints to ensure as consistent a 
distribution across the country, but you are right about the 
Philadelphia and Denver mint marks, depending on which coast 
you are on.
    Mr. Kolbe. There is no question they are much more 
circulated and available on the east coast right now. Hopefully 
when we get 10 years from now--8 years from now when we get the 
Arizona coin out there, we will have them out there in Arizona.
    Mr. Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman. I apologize for being 
late. As I think you probably told everybody we had a very 
significant oil spill on the Patuxent River, and I was there 
this morning and did not have the opportunity to get away 
earlier enough to hear your opening statement. I have had an 
opportunity to look at it.
    I understand Mr. Price asked a number of questions that I 
would have asked had I been here. Let me make an observation. 
There is a difference, apparently, between district directors 
and grandchildren. Neither one of my grandchildren really care 
much about who minted or where they minted it, nor do they 
intend to save the quarters that they ask me for. They just 
want the quarters. I am one of those that--we have a crabhouse 
that I am going to take Mr. Kolbe to at some point in time 
because I owe him a crab dinner back when Arizona was winning 
games in the NCAA.
    Mr. Kolbe. Mr. Hoyer, have your grandchildren figured out 
this is worth four times as much as a quarter? Because they 
will want these even more.
    Mr. Hoyer. Mr. Chairman, maybe I am not going to ask you to 
come down and meet them. They have enough information right 
now. Thank you very much.
    I am one of those folks that does the same thing millions 
of Americans do, take my change out of the pocket at night and 
put the quarters in one place and all the other change in 
another. We have a crabhouse there that has all the kids' games 
I need to go with at least $5 worth of quarters when we take 
all our family there because we have about six or seven of them 
who love those machines. We do recycle them at some point in 
time.
    Let me ask you something that I would like you to 
hypothesize on. If the dollar coin does not circulate as a 
medium of exchange as opposed to collection, can you elaborate 
on the problems that will result from that?
    Mr. Mitchell. From the manufacturing process, we are 
minting to demand, so we will not have any large inventories of 
coins that we would have to absorb a humongous amount of costs. 
So from a manufacturing and minting perspective, we are very 
much in touch with the market through the Federal Reserve and 
from our own market communications, and so that will not cause 
a problem. Our goal, of course, is to ensure that this coin is 
widely distributed and very popular, and that it sustains that 
momentum going into future years.
    Mr. Hoyer. Maybe these questions have been asked, and, 
again, I apologize for being late. How much did we spend on 
promoting the Susan B. Anthony coin?
    Mr. Mitchell. Unfortunately I don't have those figures--
accurate figures or precise figures, but not much, a few 
million dollars probably.
    Mr. Hoyer. At some point in time did we stop spending money 
on promoting the Susan B. Anthony coin?
    Mr. Mitchell. Yes, sir.
    Mr. Hoyer. Because we made a judgment that it was not 
having an impact?
    Mr. Mitchell. Yes, and there were tremendous amounts of 
inventory of them out there in the banks and Federal Reserve 
and mint vaults.
    Mr. Hoyer. At what point would you make such a decision 
about this coin?
    Mr. Mitchell. Well hopefully we would never make that 
decision because the demand for the coin would continue to be 
so strong. What we do is we adjust our manufacturing and 
minting of the coin to demand, so while demand--if, for 
example, demand rises from a billion to a billion and a half or 
2 billion this year, we will ratchet up production to meet 
that. If next year instead of a billion coins it is 800 million 
or 700 million coins, then, again, we adjust our minting levels 
so that we meet that demand with a certain reserve inventory 
that both we and the Federal Reserve maintain.
    Mr. Hoyer. This question may have also been asked, or maybe 
it is included in your statement. How much profit--the Chairman 
went through individual profits, $900 million on the dollar 
coin and $20 million on the penny. What sort of profit margin 
did you have last fiscal year?
    Mr. Mitchell. Our profits last year, which was near a 
record profit, was about $1 billion that we turned over to 
Treasury based on revenues of about $2.4 billion.
    Mr. Hoyer. Your operating costs were?
    Mr. Mitchell. The operating costs were included in that 
difference between the $2.4 and the $1.0.
    What we do is we recover all of our operating expenses from 
that revenue. The vast majority of those expenses are for metal 
costs, base and precious metals.
    Mr. Hoyer. Mr. Chairman, I have no further questions at 
this time. Thank you.
    Mr. Kolbe. Mr. Mitchell, I think that is all the questions 
that I have got right now. I don't know if you will be able to 
stay around while we have the public panel here, but if you 
are, maybe perhaps we will think of questions; but if you 
can't, I understand if you can't stay. Thank you very much.
    We will take a brief moment while we get the other panel up 
here. Thank you.
    Mr. Mitchell. Thank you both.
    Mr. Hoyer. Mr. Chairman, while we are waiting for the new 
panel to take its seat, Congressman Jay Johnson is approaching 
the rostrum. I know you know Congressman Johnson. Congressman 
Johnson is the President's designee as Director of the Mint. I 
am presuming that he has overwhelming support, but there is 
consternation, as you know, over in the Senate about other 
appointments, so there is a logjam there, but I am hopeful that 
Congressman Johnson's appointment will be soon approved by the 
Senate. He will be an outstanding Director of the Mint, and the 
President has done, I think, a good job in selecting him to 
fill a very important post.
    Mr. Kolbe. Thank you, Mr. Hoyer, for bringing that to our 
attention. We do welcome you today and look forward to having 
your testimony before this subcommittee when you are the 
Director of the Mint.
    We welcome today a distinguished panel of public 
representatives here on the issue of our currency and coinage. 
We will be happy to take your statements. The full statements 
can be placed in the record. We hope you will summarize so we 
will be able to have time for questions.
    I have not had a chance to ask beforehand if there is a 
particular order you wish to go in. Can you identify for me who 
is going to go first here, how you want to do this, or do you 
care? You want to just go down the line? We will start this 
way.
    Mr. Benfield.
    Mr. Benfield. Thank you.
    Mr. Chairman, Mr. Hoyer, today is a celebration of 13 years 
of work that have resulted in a new dollar coin. This coin has 
the potential to transform the way small transactions are 
conducted. We know that coins are tools of commerce whose 
values must be adjusted for inflation if they are to work 
efficiently in the marketplace. And we know that people around 
the world, not just Americans, are resistant to change.
    There is one man in Congress who has had the tenacity and 
leadership to pursue the challenge of keeping our currency 
modern. That person, of course, is Jim Kolbe, and the Coin 
Coalition is deeply appreciative of your efforts. We thank you 
for your continued involvement by holding today's hearing.
    Now we have a golden dollar. It is exactly the same size 
and weight as the Anthony dollar, and guess what? We don't 
confuse it with a quarter. The Mint's introduction strategy has 
been brilliant. The Mint faced a banking industry that had 
aligned itself with dollar coin opponents since 1990, had asked 
for a delay in its introduction until March, and was reluctant 
to inventory coins until there were proven orders for them. So 
the Mint simply bypassed this reluctant distributor and, using 
the U.S. Postal Service, delivered the coins directly to a 
ready customer, Wal-Mart.
    If the Mint made an error in the early stages, it was in 
not having sufficient inventory in January. The American public 
has hoarded over 600 million quarters every 10 weeks as each of 
the first 50 State quarters were released. So it was not 
unreasonable to expect that the demand for a keepsake golden 
dollar would approach 600 million in the first 10 weeks after 
introduction.
    But will the coin circulate? Will it be a success? Let me 
throw out some observations to help paint a picture.
    I have yet to receive my first dollar coin in change from a 
drugstore, grocery store, or other retail establishment. Why 
would a retailer want to stock up on dollar bills and dollar 
coins to begin each business day? He wouldn't any more than 
Blockbusters would want to have a library of beta--formatted 
videotapes and a second library of VHS videos. Two standards 
are more complex to process than one.
    The obvious solution is to eliminate the dollar bill. That 
is what all other major economic powers have done. Most likely 
it won't happen here any time soon. Nine of the top 12 subway 
systems currently give dollar coins in change at ticket vending 
machines. The MTA New York City Transit is converting to the 
new dollar coin and will dispense upwards of 60 million golden 
dollars annually by end of next year. Most bus systems, 
including those here in Washington, have fare boxes that accept 
golden dollars.
    The U.S. Postal Service likely will continue to be one of 
the largest users of golden dollars in the country. The self-
service car wash and coin laundry industries have shown 
remarkable interest in using the dollar coin in their 
operations. Special issues of their trade publications have 
been devoted to a dollar coin. This is a special issue. It is 
about 20 pages. It is nothing but dollar coin with a little bit 
on the new currency.
    On parking meters, on March 22, Richard Daley, and I have a 
photograph of it here, called a press conference to announce 
that the city of Chicago would modify all 7,000 parking meters 
in the central business district to accept the golden dollar, 
and he urged Chicagoans to use them. When a big-city mayor 
calls a press conference to talk about coins, you know you have 
got a hot product. However, further actions by Congress could 
facilitate its use while generally making all cash transactions 
more efficient.
    I am going to change graphics here. The Mint currently 
views the golden dollar as a new product that should be 
promoted like any new consumer product, so they have a business 
approach to the dollar coin. Because virtually all coins and 
dollar bills begin to circulate from a cash register drawer, we 
should view the cash drawer as sort of a store. This is a 
store, and it has very, very few shelves, five for coin and 
five for notes. If you look here, you can see they are pretty 
well spoken for: 1, 5, 10, 20 [dollar bills] checks, penny, 
nickel, dime and quarter, and usually rolls or postage stamps 
over here. New products have a tough time finding a spot.
    The Mint argues for retention of the penny because it 
continues to make a profit on them. This is an oddrationale. A 
dollar's worth of pennies costs about 81 cents to manufacture, while 
the dollar coin costs about 12 cents. The product with the highest 
profit margin is having to fight for shelf space with a product with 
the smallest profit margin, and you were making that point in your 
questions.
    Once such a law legalizing the rounding of cash 
transactions up or down to the nearest nickel passes, the use 
of pennies would evaporate in a matter of 2 or 3 weeks. The 
countries of Australia and New Zealand and overseas U.S. 
military bases currently use the rounding concept--as put forth 
in legislation introduced by James Hayes and Jim Kolbe back in 
1989.
    The number one consumer argument against the dollar coin--
and this is the connection between these two coins--the number 
one argument is too much weight in the pocket. That complaint 
would be mitigated if the penny were removed. Pennies make up 
42 percent, on average, of all coins given as change. Groups 
such as Save the Greenback and Americans for Common Cents may 
be able to block such modernizing steps as removing dollar 
bills and pennies, but such actions will only speed the 
introduction of other cashless payment systems. The Coin 
Coalition endorses any action that will keep legal tender 
payment convenient and cost-effective, and I think that Save 
the Greenback would share my goals on that count.
    In conclusion the efficiencies that the golden dollar can 
bring to the small transactions such as mass transit, newspaper 
racks, parking meters and vending machines will not be realized 
until the dollar bill is removed from circulation. Because most 
coins begin circulation from a cash drawer, the Mint's $45 
million marketing and advertising resources should be allocated 
more to the retail users of the golden dollar and less for 
consumer awareness. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much.
    [The information follows:]



    Mr. Kolbe. Mr. Clayton.
    Mr. Clayton. Mr. Chairman, members of the subcommittee, I 
want to thank you for the opportunity to testify this morning.
    My name is David Clayton. I am the owner of Automatic Food 
Service in Nashville, Tennessee. I have been in the food and 
refreshment vending industry for over 30 years, and I am the 
past chairman of the National Automatic Merchandising 
Association, the national trade association representing the 
food and refreshment vending industry for this country. This 
morning I am speaking for thousands of companies like mine, 
some larger and some smaller, that employ over 250,000 people 
across the Nation serving food and beverage items through 
vending machines to tens of millions of Americans in the 
workplace every day. You might say, Mr. Chairman, we keep 
America working.
    I think the most important thing I can do this morning is 
to say two words: Thank you. Mr. Chairman, we remember the days 
in September 1987 when you first introduced legislation calling 
for a new dollar coin. We supported that legislation 
enthusiastically as well as the dollar coin measures you 
introduced in the succeeding years. Now after 13 years of hard 
work, meetings, press conferences, congressional hearings, 
letter writing, and telephone campaigns in support of this 
legislation, the coin that you, our industry, and other coin-
dependent industries so desperately needed is finally here, and 
it is beautiful.
    Because the new golden dollar is the same size as the Susan 
B. Anthony, the new coin will fit in the coin slots of about 80 
percent of the merchandise vending machines in this country. In 
contrast, when the Susan B. Anthony dollar was introduced to 
the public in 1979, not a single vending machine in the United 
States would accept this coin.
    Now a brief but very important word about the metal alloy 
chosen for the coin. As recently as April of last year, we 
learned that the U.S. Mint alloy for the new coin would not--
would require substantial retooling of the machines' coin 
mechanisms of all 5 million merchandise vending machines at a 
cost of at least $250 million to our industry. Knowing that 
time and expense of this retooling program would seriously 
decrease the acceptance of the coin in vending machines during 
the time of the coin's introduction and accompanying 
advertising campaign, we urged Mint officials to go back to the 
drawing board to see if an alloy can be found that would 
require no retooling. They did.
    Then in September 1999, Mint Director Philip Diehl 
announced that the men had discovered an alloy that would match 
the electronic signature of the Susan B. Anthony, thus 
requiring no retooling cost to the vending industry. We cannot 
overstate the importance of this development. We commend Mr. 
Diehl and the entire staff of the U.S. Mint for their work in 
this regard. It demonstrates the benefit of true partnership 
between the public and private sector.
    But, Mr. Chairman, coins are more than a mere metal--more 
than mere metal, more than combinations of copper, nickel, 
zinc, and manganese that give off a particular electronic 
signature. Coins speak of the Nation's history, of a Nation's 
value. While our industry's interest in the coin is primarily 
commerce, we do share in the excitement of millions of 
Americans, especially the young, in the coin's theme, the young 
Native American woman Sacagawea. We hope the courage 
exemplified by Sacagawea carrying her baby on her back as she 
guides Lewis and Clark on their expedition in the Pacific 
Northwest almost 200 years ago will inspire Americans for 
generations to come.
    But to do so, the Sacagawea coin must circulate, and that 
leads me to the core of my testimony this morning. What will 
the effects of the new coin be on our industry? The answer to 
this question hinges largely on the degree to which the coin 
actually circulates. Mr. Chairman, we cannot predict the future 
any more than anyone else can, but we can--what we can do is 
sketch three possible scenarios for the new coin, each 
reflecting a different degree of circulation, a different role 
for the coin in everyday commerce, and a different consequence 
for our industry.
    The first scenario, the pessimistic one, the coin merely 
replaces the Susan B. Anthony. The golden dollar does not 
circulate. Instead it simply is supplied by vending companies 
to customers through bill changers for use in vending machines. 
In this scenario, a vending purchase is a two-step process. 
First get change, then make the purchase. In this scenario the 
coin plays the role of a token.
    If the golden dollar plays this role in commerce, our 
efforts in pursuit of a circulating dollar coin will have been 
in vain. The new coin will not substitute, will not stimulate 
sales or reduce cost to our industry. The only possible bright 
spot for our industry is in this scenario we call the four-coin 
payout. This involves acceptance of a $5 bill for payment for 
products and dispensing change in dollar coins. For example, 
customers could put in a $5 bill for a soda in a 20-ounce 
plastic bottle selling for $1. The customer could receive four 
$1 coins in change, thus bypassing the bill changer.
    The extent to which the golden dollar will accelerate the 
move to four-coin payout remains to be seen, but thankfully we 
do not believe this scenario in which the new coin merely 
replaces the Susan B. Anthony will come to pass. The new coin's 
superior design, its acceptance in millions of automated 
devices, and the Mint's imaginative, aggressive marketing and 
advertising campaign weigh heavily in the new coin's favor.
    The second possible scenario, the optimistic one, takes us 
to the other extreme, the golden dollar is a total success and 
replaces the Nation's supply of 7 billion $1 bills in a 
relatively short period of time, thus becoming the new American 
dollar. In our view, this can only happen if Congress mandates 
the elimination of the dollar bill. This would be the ideal for 
our industry and other coin-dependent industries in America. 
The coin would capture all vending machines sales now lost to 
worn-out dollar bills and would stimulate vending sales by 
returning us to the convenience of a one-coin purchase of the 
1960s. And it would reduce equipment maintenance cost and money 
processing costs. It also would save money for the government 
and the taxpayer by replacing a paper bill that lasts 18 months 
with a new coin that lasts 30 years.
    But we know that it would take political courage to mandate 
the elimination of a dollar bill. Nevertheless, we still 
advocate this course of action. Canada, Germany, France, the 
U.K., Japan, and other nations have all eliminated the paper 
note shortly after introduction of a coin of the same value.
    The third possible scenario lies somewhere between the 
virtual failure and the mere replacement of the Susan B. 
Anthony and the coin's total success, which is a replacement of 
the dollar bill. In this setting the coin and the bill 
cocirculate, with the bill by sheer force of habit remaining 
the dominant currency. In this scenario, we would consider the 
coin a moderate success if a majority of our customers 
routinely carried out--carried one or two golden dollars into 
the workplace each morning, just as they carried one or two 
quarters into the workplace in the early 1960s, then the 
quarter--when the quarter purchased what a dollar buys today. 
In this situation, these same customers would probably have a 
few dollar bills with them, but they would virtually always use 
the coin instead of the bill. Why? Because everyone knows the 
coin works better than a bill in a vending machine.
    Our industry would benefit from this moderate success of 
the dollar coin. We would lose a few sales--we would lose fewer 
sales to worn-out dollar bills, and some bill changers could be 
eliminated, but this moderately successful dollar coin will 
materialize only if the Nation's retail community where 
Americans receive their coins make the coin available to 
customers who prefer it. And who will these customers be? They 
will be the tens of millions of Americans who ride the bus and 
subway each day, who purchase stamps through vending machines 
in our Nation's post offices, who buy a soft drink and a snack 
from a vending machine, people who are entitled to the 
convenience of a dollar coin.
    We urge our Nation's retail community, particularly the 
more progressive segment of the community who are open to new 
ideas, that segment of the retail sector who might see a 
competitive advantage in offering the new coin to customers who 
prefer it to the bill, to give it serious consideration--give 
serious consideration to the new coin.
    In conclusion, Mr. Chairman, again, I want to thank you for 
the opportunity to testify today, for your leadership and your 
continued effort to bring the convenience and economics of a 
circulating dollar coin to the American people. I will be happy 
to answer any questions you might have. Thank you.
    Mr. Kolbe. Thank you very much, Mr. Clayton.
    [The information follows:]



    Mr. Kolbe. Let us, Mr. Smith, before you proceed, remind 
that full statements can be put into the record. We have a 
meeting of all the subcommittee chairmen with Chairman Young in 
25 minutes, so we have to be out of here by that time. I hope 
we have some time for questions.
    Mr. Smith. Chairman Kolbe and Mr. Hoyer, my name is James 
E. Smith. I am president and CEO of Union State Bank and Trust 
in Clinton, Missouri. I am first vice president of the American 
Bankers Association. I am pleased to be here today on behalf of 
the ABA.
    Mr. Chairman, I would like to thank you for your leadership 
in convening this public hearing to focus on the golden dollar 
and the U.S. Mint's marketing program. The ABA supports such 
congressional oversight.
    The U.S. Mint's decision to place tens of millions of 
golden dollars in general distribution through a nationwide 
retailer before banks had these coins for their customers 
angered and embarrassed many bankers. To them a core competency 
of the banking industry, the distribution of U.S. coins, had 
been undermined. Bankers had to refer their customers to a 
retailer instead of the retailer obtaining its coins from 
banks. Banks and their customers were shortchanged.
    In December 1999, the ABA first learned of the U.S. Mint's 
plan to market the golden dollar through the retail sector 
prior to banks having access to the coin. In objecting to this 
plan, the ABA cited the negative impact such a plan would have 
on the banking industry and its customers.
    Responding to ABA and other financial trade associations' 
concerns, the U.S. Mint, in cooperation with the Federal 
Reserve System, accelerated the distribution program for banks, 
moving the initial delivery date from March 2000 to late 
January 2000. This was a good faith effort to address a portion 
of the banking industry's concerns. Unfortunately the 
scheduling and production adjustments needed to ship, 
inventory, wrap and distribute these coins more than a month 
earlier than planned were formidable. While banks were still 
awaiting their dollar coins, the retailer had received its 
golden dollars by direct shipment, registered U.S. mail.
    Our experience at Union State Bank and Trust tracks that of 
banks across the country. Even though we had ordered our golden 
dollars from our Federal Reserve bank, we only received our 
first coins on March 14, and those were obtained through the 
U.S. Mint's special direct shipment of golden dollars program. 
So far we have received 6,000 golden dollars and have none in 
inventory. In fact, we have a golden dollar waiting list.
    I can also vouch for the fact that these coins are not 
being used in commerce. As of March 31, our bank has received 
in commerce fewer than 10 golden dollars. I have personally 
observed our customers receiving golden dollars from our 
tellers and then immediately proceed to their safety deposit 
box, where I am sure the coins have found a permanent home.
    The problem at Union State Bank and Trust and at thousands 
of banks across the country in obtaining golden dollars would 
have been much worse if the U.S. Mint had not established the 
Financial Institutions Advisory Council. We appreciate the U.S. 
Mint's efforts in this regard. This committee of financial 
institution trade associations has met on a periodic basis with 
the Director of the U.S. Mint to discuss issues surrounding the 
golden dollar program. At the urging of the ABA and other 
associations in early March, the U.S. Mint and Federal Reserve 
System established a direct shipment program for the golden 
dollar. As of March 31, 2000, over 6,500 financial institutions 
have received over 9 million golden dollars. The ABA thanks the 
U.S. Mint and the Federal Reserve System for initiating and 
implementing this special program.
    Even though millions of golden dollars had been placed in 
circulation, very few are currently found in commerce. They are 
taken out of circulation as quickly as they enter. At the point 
of collectors' saturation, the future of the golden dollar will 
depend on the public's willingness to use this coin. Based on 
the banking industry's experience with the Susan B. Anthony 
dollar, the ABA has concerns for the public's long-term use of 
the golden dollar.
    Mr. Chairman, the ABA appreciates the opportunity to 
address you this morning on the issues arising from the 
marketing of the golden dollar. We look forward to working with 
you and the other Appropriations Committee members. Thank you.
    Mr. Kolbe. Thank you very much, Mr. Smith.
    [The information follows:]



    Mr. Kolbe. Mr. Miller, welcome.
    Mr. Miller. Thank you, Mr. Chairman.
    Mr. Hoyer, how are you?
    Mr. Hoyer. Fine, sir.
    Mr. Miller. I appreciate the opportunity to be here today 
on behalf of Save the Greenback.
    I have a prepared statement that you graciously allowed 
into the record, but I would also like to place an op-ed that I 
had in today's Washington Times in the record, if that is 
possible.
    Mr. Kolbe. We will put those in the record with your 
statement.
    [The information follows:]



    Mr. Miller. Thank you, Mr. Chairman.
    I would like to summarize my statement briefly here. I 
think it is quite clear that people prefer the dollar bill to 
the dollar coin, and we know that from polls. We also know that 
they object strenuously to the elimination of the dollar bill. 
We know that from polls. We also have some evidence of the 
acceptance or the nonacceptance of the dollar coin from the 
Susan B. Anthony experience.
    I would say that the evidence thus far on the dollar coin 
is inconclusive at best, because as I was listening to Mr. 
Smith testify, and it is consistent with my own experience, it 
appears that the major demand for the dollar coin is for 
holding it as a curio or as a collector's item rather than its 
being used in commerce.
    Of course, there is no reason that the coin and the bill 
need not cocirculate, but what disturbs me are allegations of 
huge savings from substituting the dollar coin for the dollar 
bill and accomplishing that by eliminating the dollar bill. If 
you look at the reports of GAO and the Mint and others, what 
you find is that the major portion of the alleged savings to 
government are because of the interest-free loan given by 
consumers to government. So what GAO is careful to characterize 
as benefits to government or the net benefits to government are 
really a tax--an implicit tax on consumers. There is no net 
savings there between the two. It is a wash. When you take that 
element out, and you compare production costs, you usually do 
find some savings for the coin, but they are small, and, in 
fact, they are about the same as the promotion costs for the 
coin.
    Moreover, the analysis of production cost is very sensitive 
to the assumptions you make. If you do a sensitivity analysis 
on those assumptions, what you find is you vary the assumptions 
just a little bit, and you get different results mainly because 
the benefits appear over a long period of time, but the costs 
of the coins are front-loaded.
    And I know, Mr. Kolbe, given your background at Stanford 
and the economics training you have received, you really 
understand that present value calculations matter here. I have 
a recent report just finished by Dr. Robin Cantor of the Law 
and Economics Consulting Group which does a sensitivity 
analysis on these assumptions, and I would like to submit it 
also for the record, Mr. Chairman.
    Mr. Kolbe. We will take that for the record.
    [The information follows:]



    Mr. Miller. What this shows is if you make just a few 
changes, for example, if instead of assuming that the discount 
rate is 6 percent, you assume it is 6.8 percent, the production 
``savings'' turn into net cost to government. Or, similarly, if 
the production cost of the coin is greater than .125 dollars 
per coin the same is true.
    What I am suggesting here is that with regard to the great 
cry about savings--they are not there. They are not there 
because it is a swap between the so-called savings to 
government and a tax on consumers.
    Not when you focus on the production costs, they are very 
small, and they could actually go negative if you just make 
some assumptions, and who knows, we are talking about a stream 
of benefits out 30 years. Thirty years from now, 20 years from 
now, we may be making most of our transactions through 
electronic means, not through exchange.
    In any event, it seems to me that consumers ought to make 
the decisions. The Federal Government's sovereign power to mint 
money is a monopoly power, and consumers don't have choice. And 
just as a monopolist might raise prices and earn more profit, 
the harm to consumers is more. And if the Mint reduces the 
choices that consumers have here, they might be able to save 
money in some production costs, but the costs they impose on 
consumers is greater.
    Mr. Chairman, I know you as well as I am a free trader. I 
wouldn't characterize you, Mr. Hoyer. You may have the same or 
similar point of view. The dollar is the world's currency. The 
dollar is not only an emblem of America, but it makes commerce 
happen in foreign countries. I am not suggesting that if you 
eliminated the greenback you would defeat dollarization. But it 
would be impaired somewhat, and if that happened the costs 
would be rather significant.
    Consider the gains we have from trade with countries which 
dollarize and the more stable economies they have because of 
dollarization. Any risks, and the potential costs are very 
large. I haven't seen those costs considered in any analysis of 
the benefits of eliminating the dollar bill.
    If I were in your shoes, I would ask a number of questions 
before I would even address a proposal to eliminate the dollar 
bill. Specifically I would ask what evidence there is of the 
new dollar coin's use by consumers as a medium of exchange as 
opposed to a collector's item. What are the explicit goals of 
the marketing program?
    I have heard Mr. Mitchell, Acting Director of the Mint, 
claim that the promotion program doesn't cost anything that it 
pays for itself. But we didn't fall off a hay wagon from 
somewhere. The money the Mint makes in ``profit'' is returned 
to the Treasury, and if it is spent out of a revolving fund, 
the Treasury, i.e., taxpayers, don't get the money. So it is 
not for free.
    I would want to know to what extent the new dollar coin has 
substituted for a dollar bill and so forth. I have such a list 
of questions on page 5 of my prepared statement.
    In conclusion, Mr. Chairman, what the Mint characterizes as 
a benefit to the government is really a tax on the American 
people. The sovereign power of the Mint or the government to 
print money or to mint coins is a monopoly power, and just as 
monopolies are bad or can raise more revenue and create more 
profits in the private sector, they impose more costs on 
consumers, and the same thing happens when the Mint forecloses 
choices for consumers.
    And finally, it would seem to me that in view of this, and 
the need for consumer choice, and the inconclusiveness at best, 
of the evidence so far, the notion of eliminating the dollar 
bill from circulation is really absurd.
    Mr. Chairman, that finishes my presentation. I will be glad 
to respond to your questions.
    Mr. Kolbe. Well, thank you very much, Mr. Miller.
    [The information follows:]



    Mr. Kolbe. Obviously some very provocative statements all 
the way around. There are many things that I wanted to get 
into. I am not sure we are going to have as much time as we 
would like to get into all of this.
    Let me just start, if I might, with the savings and the 
issue that was raised by Mr. Mitchell, and also by you, Mr. 
Miller. You are correct that the profits or the power--the 
ability of the Mint to make money for the Federal Government 
stems from its monopoly power. I am not prepared to get into 
that debate today. I don't think that is one area where we are 
likely to change. I happen to be a strong free trader and 
strong advocate of privatization, but I don't think we are 
going to change that.
    Where the marketplace will have its effect is, as you 
correctly noted, we may end up going to a cashless society, 
more electronic transactions, and the Mint and Bureau of 
Printing and Engraving is out of the picture altogether.
    It seems to me the issue here is if we do believe we are 
going to keep a currency as an alternative to a cashless 
society, and government is going to have that monopoly, then we 
have to have a currency that works, and that is what we are 
really talking about here today. With the gradual impact of 
inflation over the years, do we have a currency that is--has 
adapted to the times and is able to be usable, what we call 
pocket transactions. Going out and getting your newspaper out 
of the vending machine or a Coke out of the vending machine, 
which used to be easy to do with a quarter or two quarters, now 
requires six or eight quarters to do for your Sunday paper. Why 
not have a coin dollar to replace that?
    Let me bring that around to the issue of the savings. You 
said that it doesn't make any difference. In the end you have 
just taken it from the taxpayer to the government, and you are 
correct on a very theoretical basis, but the fact from a very 
practical matter is as long as the government is going to 
retain this monopoly and people want the convenience of having 
coins, whether they are dollars or quarters or whatever, in 
their pocket in order to do transactions, that is why they 
carry them. It enables them to carry on the commerce of the 
day.
    I think most of us perhaps do not think about it every day, 
but instinctively we know somebody is holding onto some money 
of ours while we are holding onto some coins, and they are not 
worth anything until we use them in a transaction, but we hold 
them for that convenience. The result of that is that you have 
a significant gain to the Federal Government in terms of the 
net interest saved through the seigniorage. That is a direct 
savings to the Federal Government. It may not show up on the 
budget, which is one of the things we are looking at this 
point, but it is still--in the overall scheme of things, it is 
a net savings to the government. I don't know if you want to 
respond to that.
    Mr. Miller. Yes, Mr. Chairman. I think the best I could say 
in response is that consumers ought to have that choice. To the 
extent they would prefer to have bills, carry bills, that is 
their choice. To the extent they would prefer to pay for coins 
and hold as a store of value or to use later as a medium of 
exchange----
    Mr. Kolbe. Would you advocate paper quarters?
    Mr. Miller. It is important, I think, for the government to 
make a survey to find whether people would like to use paper 
quarters before introducing such denominations. When the 
initial proposal was made for a new coin, I was contacted and 
asked what I thought about this, and I said, well, I can't get 
too excited against a new coin, even though the evidence so far 
is that the Susan B. didn't work.
    There is not a whole lot to lose if the Federal Government 
introduces a coin, but I take issue with some of the 
promotional activities of the coin. But in any event, I take 
great umbrage at the notion of eliminating the bill from the 
choices the consumers are allowed.
    Cocirculation does not bother me. But I think we ought to 
be realistic about what it is that is being accomplished with 
this new dollar coin. We ought to investigate whether it is 
being used as a store of value or as a medium of exchange. If 
the representative of the American Bankers Association is 
correct, what you are going to have is a great demand until 
that is satisfied, and then very little beyond that. In that 
case the production costs for use as a medium of exchange are 
going to be higher than it would be with the dollar bill.
    Mr. Kolbe. Mr. Benfield, on the seigniorage first, and then 
you can address the cocirculation, and then I want Mr. Smith to 
comment on that. On the interest savings, is it real, or is it 
not?
    Mr. Benfield. It is very real. As a matter of fact, at any 
one point there is about $8 billion worth of travelers' checks 
in circulation, and American Express seems to have figured out 
they can take that money [or float], invest it, and make more 
money. So the private sector is quite happy to see legal tender 
go down the tubes.
    I have a press release here from the Federal Reserve. Last 
year they earned about $29 billion in interest on Treasury 
notes, and they returned it to the American public. If we go to 
a cashless society, not only do you lose the $25 billion a 
year, but you also lose the $600 billion interest-free loan.
    I think to call that seigniorage a tax, to say that the 21 
cents here is a tax, is really a stretch. At any instant, I can 
go down and deposit this in a bank and get an instant tax 
refund. Well, what kind of tax is that that I can get a refund 
the moment I spend it? That is unlike any other tax I have ever 
heard of.
    To say this would prevent dollarization is a stretch. If we 
ship a lot of dollar bills over to Ecuador, we are going to 
have great difficulty in repatriating those dollar bills. They 
would look like unbelievable dirty rags in 4 or 5 years because 
there is no system to repatriate them. Actually I think dollar 
coins in those kind of environments would actually help 
dollarization.
    Mr. Kolbe. This was the first time I ever heard that 
argument about the dollar bill. Very few dollar bills, I think, 
circulate out of the United States.
    Mr. Miller. That is incorrect, Mr. Chairman.
    Mr. Kolbe. I will accept that if it isn't correct. I 
certainly have not experienced that.
    Mr. Benfield. Not many dollar bills, but in Panama and 
places like that, they do circulate.
    Mr. Kolbe. Mr. Smith, did you want to comment about the 
issue of savings or cocirculation?
    Mr. Smith. I am not sure. All I know is what I read here 
about the savings and the profit in the coin versus the dollar, 
and so I am not sure I would be qualified to give an opinion.
    Mr. Kolbe. Could I ask you then in response to 
yourtestimony, you are complaining about the Mint, but--and you said 
the first shipments were made on March 14, but the testimony by the 
Mint was that they proceeded simultaneously to ship to Wal-Mart and to 
the Federal Reserve. Is that not true?
    Mr. Smith. I think that is correct. My first shipment was 
March 14 at our bank in Clinton, Missouri. We got the coins 7 
weeks after the coins were available to the retail sector.
    Mr. Kolbe. When did you make your first order?
    Mr. Smith. We ordered from our Federal Reserve bank in 
Kansas City, and they kept telling us they could not supply the 
coins. They did not have them. So we went to the special direct 
shipment program that the Mint put in to help fill these 
orders.
    Mr. Kolbe. We are told today more coins have circulated 
through the Federal Reserve than through the retail programs.
    Mr. Smith. We are on the waiting list again. I checked 
yesterday morning when I left the bank. We did not have any 
golden coins, and we are still waiting for some.
    Mr. Kolbe. One more question before we go to Mr. Hoyer. Mr. 
Benfield, the velocity of coins in circulation is a very major 
factor here. I think the various studies that have been done 
show that coins circulate with less velocity, so there is a 
need for more of them in order to fill the need. Is that not 
correct?
    Mr. Benfield. That is correct.
    Mr. Kolbe. I think the study of GAO or the Mint is using it 
2 to 1 over the paper dollar, but isn't there some evidence 
that that is--that should actually be higher, and there will be 
more coins needed?
    Mr. Benfield. Senator Domenici wrote the Central Banks of 
Australia, Canada, and England back in 1990 or 1991, and we 
found out in those three countries there is at least a 3 to 1 
replacement rate. It is because the coins tend to pool. I have 
the written responses to Mr. Domenici in my files.
    Mr. Kolbe. By pooling, you mean pooling in vending machines 
and parking meters and transit more than paper dollars do? You 
use paper dollars in vending machines and transit machines. Why 
is there more pooling?
    Mr. Benfield. There is not much pooling of paper dollars. 
It is rather small. Cash retailers tend to deposit their green 
stuff every night and tend to hold their coins back. Coins also 
pool in the bottom of a vending machine or fare boxes or at 
Brinks. The velocity of coins is much slower, so you need more 
dollar coins to replace the dollar bills.
    Mr. Kolbe. We have estimated the life of the coin to be 30 
years, and yet it really doesn't wear out at all. Where do we 
come up with that 30-year figure?
    Mr. Benfield. It remains in circulation 30 years, and then 
it disappears. They lose it. It falls out of canoes, winds up 
in landfills. A lot of people throw their change away. There 
have been garbage studies at McDonald's. A lot of pennies and 
dimes wind up in the trash. It has a circulating life of 30 
years, but doesn't wear out in 30 years.
    Mr. Kolbe. Mr. Hoyer, please.
    Mr. Hoyer. No, you go ahead.
    I am finding this pretty interesting.
    Mr. Kolbe. It is very interesting.
    Mr. Benfield. Can I make one quick comment on the public 
opinion polls? We also did polling, and when we said, ``do you 
want to replace the dollar bill with the dollar coin,'' we got 
the same responses as Mr. Miller's poll showed. However, when 
we asked the next question, ``if it saves the government 
hundreds of millions of dollars a year, would you be willing to 
make the change?'' and then the response is, ``yeah''. We got 
more than 50 percent of the public to say yes, but you have to 
provide them with that information. The public is very willing 
to save money. You can't ask that first question in a vacuum. 
You have to ask both questions.
    Mr. Kolbe. You just reminded me of something. Didn't they 
find in Canada the initial resistance to the loon was quickly 
replaced when there were little signs put up over retailers 
saying how much it saved?
    Mr. Benfield. When I talked to the Royal Canadian Mint, 
they said, there is a mantra we have at the Royal Canadian 
Mint: Saves the government money, saves the government money, 
saves the government money. Forget all other arguments. Forget 
vending, forget everything. It saves the government money.
    Mr. Kolbe. And in England when they went the other 
direction back at the early part of the last century, the 20th 
century, from the coin to the paper note, there was resistance 
to that going in that direction.
    Mr. Benfield. Sure. If we went to paper quarters, I am sure 
you would have a hue and cry saying, that is the most idiotic 
thing I have ever heard. The public is resistant to change.
    Mr. Kolbe. Mr. Miller, you want to respond?
    Mr. Miller. Yes, but it is the people that ought to be 
making the decision. It shouldn't be imposed on them by 
government fiat. It is a cost to consumers to have to give up 
the interest free over a large number of coins, and if it is 3 
to 1, that makes the amount of the loan even larger than if the 
ratio is 2 to 1. We shouldn't lose sight of that fact. The 
analysis that is pushed on us by the Mint, by GAO and by some 
others, if carried to its logical extreme, means we could 
finance the Department of Defense, we could finance eliminating 
the debt, and we could finance all manner of new domestic 
programs simply by issuing enough coins, because we have 
seigniorage on those coins.
    Mr. Benfield. That law was changed. That statement was 
accurate 10 years ago, but now it is not accurate.
    Mr. Kolbe. In the past the seignior is counted the moment 
of production. It is now counted only when it goes to the 
Federal Reserve, when the Federal Reserve distributes it. You 
can only finance defense or any other program to the extent 
there is a need for money, whether it is bills or dollars or 
coins in circulation.
    Mr. Miller. But the principle is if you force people to 
take the coins rather than use the dollars, you can increase, 
quote, profits, quote, to the government, and it is offset by 
costs to consumers. It is a wash.
    Mr. Hoyer. It appears to me that Mr. Miller is suggesting 
that Mr. Benfield is talking about supply-side coinage.
    Mr. Miller. I am afraid to step into that, Mr. Hoyer. I am 
afraid you have got some secret response.
    Mr. Hoyer. What you are saying he is saying is the more 
coins you put out--the more money you make----
    Mr. Benfield. If you find buyers for it.
    Mr. Miller. The advocates strike me as saying you are going 
to use the coin whether you like it or not, and I thinkit ought 
to be up to consumers to decide whether they like it.
    Mr. Kolbe. You are right. There is a bit of a difference, 
it seems to me. Ultimately it is up to the consumers I 
mentioned earlier, because you would go to a cashless society. 
But as long as you are going to have a monopoly, and I think it 
is a monopoly of the government in the coinage business, then 
you have to make some policy judgments, and you have to make 
some decision about that. Ultimately--should the consumer be 
allowed to have a decision about tenths of a cent, about mills, 
because that is what gas is priced at, tenths of a cent, but 
you round it off. Should you carry mills in your pocket?
    Mr. Miller. Mr. Chairman, I think the logical implication 
of what you just said is that if you are a monopolist, you 
ought to bend over backwards not to limit choices to consumers. 
If you did a poll that said that people wanted paper quarters, 
then I would encourage you to think seriously about doing that, 
a really scientific poll and you saw a demand for it. I suspect 
you would not. Therefore, it would not be something that 
consumers would want.
    We all know that one of the problems monopolists have is 
they don't do very much consumer research to find out what 
people want. They are going to sell it to them the way they 
want it, and people are going to buy it or go without.
    Mr. Kolbe. Let me ask--I don't want to leave Mr. Clayton 
out of this discussion. Let me ask you a couple of questions 
about the conversion of equipment. How many of the vending 
machines that are currently out there in the marketplace are 
going either now or will be very quickly able to accept the new 
coin?
    Mr. Clayton. About 80 percent of all machines on the 
street. They may not immediately, but the industry is in the 
process of----
    Mr. Kolbe. Are you going to put a label on them saying 
``Accepts Coin Dollars''?
    Mr. Clayton. My company will, and that is being supplied to 
be put on every vender in the country, a decal.
    Mr. Benfield. The Mint is providing those free of charge.
    Mr. Kolbe. Have we got them in this building here yet?
    Mr. Clayton. Yes, sir, they are. You can try any building 
machine in the building, and they will accept the new golden 
dollar.
    Mr. Kolbe. We have heard in the past this just means you 
will raise prices.
    Mr. Clayton. Well, competition is competition. I have to 
live against my competitor next door, and it will not raise 
prices. It will only reduce expense in buying bill accepters 
and money handling processes. It reduced the cost of processing 
money because I can count approximately 6,000 coins a minute, 
and just think how long it takes me to process 6,000 paper 
bills.
    Mr. Kolbe. If I have one of those 20 percent of the vending 
machines that does not accept a coin dollar, and I am thinking 
of converting it versus getting a bill accepter on it, what is 
the difference?
    Mr. Clayton. You have got to have the coin mechanism to 
accept the coin whether you accept the bill or not. These are 
roundabout numbers, but to accept the coin would cost about 
$300 to convert. To accept a coin or currency is about $600. So 
about half the cost.
    Mr. Kolbe. There is a savings there which presumably this 
competition gets passed along.
    Mr. Clayton. Yes, sir. And about 25 percent of my service 
calls are on bill accepters, that they are not working or 
accepting bills properly.
    Mr. Kolbe. Where is machine acceptance of the dollar coin 
flourishing? Where do we see it most? In vending machines, the 
kinds of things--vending machines for soft drinks and snacks, 
that kind of thing?
    Mr. Clayton. Where is it used primarily?
    Mr. Kolbe. Where do you see the greatest market for it?
    Mr. Clayton. Well, I think not only the vending industry is 
getting to benefit from this, but also mass transit and the 
Postal Service and all the other things that have been 
mentioned here this morning. Vending is only one of the few 
things that does use the coin to a great degree.
    One of the problems that I have seen in dealing here in 
Washington is the fact that the bulk of the people in this room 
this morning, we, you and I and the bulk of the people here do 
not use coins. We have a very limited number that we use. But 
my customers, the workplace customers, the blue collar, the 
factory worker, the office worker that is dependent on coins 
and currency to operate a vending machine or to park in a 
parking lot or drive to and from work, these are the people 
that really use coins. And I, like you, take mine home and put 
them in a jar and recycle them with the grandkids or whatever. 
But we have a large majority, probably 50 percent I have been 
told, of this--of the American population that use coins and 
currency on a daily basis, and a great majority of these people 
still don't even have a bank account. They live out of their 
back pocket and front pocket on a daily basis from one week to 
the next. So the thought of a cashless society, in my opinion, 
is a very long way off.
    Mr. Kolbe. That was going to be my final question and see 
if Mr. Hoyer has any other. For all of you, the reality is are 
we moving towards a cashless society? Will we have where 
everything takes a card--go down now to the cafeteria here and 
you buy a card, and you use that to buy your lunch. Will we be 
using those in the parking meters? You can use them now in 
phone machines. Will we be using them everywhere? Is that the 
direction we are going? You don't think we are headed that way 
that fast.
    Mr. Benfield?
    Mr. Benfield. Not real, real fast. Currency is going to be 
around for a very long time. I point out a story that appeared 
in the Washington Post a couple of weeks ago. McDonald's is now 
accepting payment by a radio transponder, and they are tied in 
with the highway system----
    Mr. Kolbe. I drive under the McDonald's thing, and it takes 
the money out of my card?
    Mr. Benfield. How do you want to pay it? Oh, transponder, 
boom, transponder, and it debits your highway toll, and 
McDonalds collects its money from the Highway Toll Authority.
    McDonald's has tried this in Orange County. Don't think of 
the Mint as a monopoly or even legal tender as a monopoly. 
There are all kinds of folks out there who are looking for the 
float, whether it is credit card, savings account, easy pass, 
radio transponders. There are all kinds of folks competing for 
the float.
    Mr. Kolbe. I have dozens of those cards in my wallet, and 
everybody wants my float there. Mr. Smith?
    Mr. Smith. I don't think there is any question that we are 
moving toward e-commerce really very rapidly. For instance, my 
bank, our debit card transactions are increasing four and five 
times each year. It is going up in magnitude. I think we are 
headed to the smart card, the debit card society. I am not sure 
what that speed is going to be, but we are seeing a very 
significant increased level of activity.
    Mr. Kolbe. I like my credit cards as opposed to debit cards 
because I like to have the float for the month, pay it off at 
the end of the month. I will prefer to use the credit.
    Mr. Miller.
    Mr. Miller. The monopoly power is the sovereign power of 
the government to mint and to print money and to maintain the 
medium of exchange and store of value. We don't have private 
money anymore as we did during a large fraction of our history. 
If I were to forecast, I would forecast with great confidence 
that 20 years from now a much greater proportion of our 
commercial transactions would be made through electronic means. 
Whether the quantity of transactions made through currency or 
coins would actually decrease, I am not quite sure.
    Mr. Kolbe. Mr. Hoyer.
    Mr. Hoyer. I have nothing further.
    Mr. Kolbe. This has been fascinating. I have dozens more 
questions that I could go on with this discussion the entire 
day, but I really appreciate all of your being here today and 
participating in this, and I think it has been very 
enlightening. Thank you very much. The subcommittee stands 
adjourned.





                           W I T N E S S E S

                              ----------                              
                                                                   Page
Basham, W.R......................................................   351
Benfield, J.C....................................................  1365
Bresee, Elisabeth................................................   559
Buckles, B.A.....................................................   221
Clayton, David...................................................  1365
Dooher, John.....................................................   351
Fitzpatrick, Carlton.............................................   351
Flyzik, Jim......................................................  1297
Gibbs, Robert....................................................   351
Hall, S.W., Jr...................................................  1297
Havens, Ray......................................................   351
Johnson, Jim...........................................1, 221, 351, 463
Kelly, Raymond...................................................     1
Miller, Harris...................................................  1297
Miller, Jim......................................................  1365
Mitchell, J.P....................................................  1365
Pynchon, Marisa..................................................   463
Riggs, Barbara...................................................   463
Rossotti, C.O....................................................   623
Schoof, Ron......................................................  1297
Simpson, John....................................................  1297
Sloan, James.....................................................   559
Smith, James.....................................................  1365
Stafford, B.L....................................................   463
Summers, L.H.....................................................   965
Titus, Alan......................................................   351
Vossekuil, Bryan.................................................   463


                               I N D E X

                              ----------                              
                                                                   Page
United States Custom Service.....................................     1
    Additional Agents and Inspectors.............................    35
    Air and Marine Interdiction..................................22, 26
    Air and Marine Strategic Plan................................    26
    Air Support to Secret Service................................    42
    Automation................................................... 3, 23
    Border Coordination Initiative...............................    22
    Changes at Customs...........................................     2
    Changes in Louisville........................................    50
    Child Labor Initiative.......................................    45
    Commendation for Commissioner................................    50
    Commendation for Customs Employees...........................    50
    Commendation to Commissioner.................................    44
    Conclusion...................................................    24
    Couriers.....................................................32, 46
    Customer Survey Cards........................................    38
    Customs Mission..............................................     4
    Customs Patrol Officers......................................22, 24
    Customs Requirements.........................................     1
    Employees....................................................    23
    Enforcement..................................................    48
    Forfeiture...................................................    39
    FY 2001 Budget...............................................     2
    FY 2001 Congressional Budget Justification...................   141
    FY 2001 Request..............................................     4
    Inspector Training...........................................    48
    Integrity....................................................    30
    International Trade Data System..............................35, 45
    Introduction.................................................     4
    Introductory Statement of James E. Johnson, Under Secretary 
      for Enforcement............................................     5
    Journeyman Level.............................................29, 40
    Law Enforcement Support......................................     3
    Management Levels............................................    29
    Manifests....................................................    48
    Modernization Shortfall......................................25, 28
    New Initiatives..............................................    22
    Parity with INS..............................................    29
    Passenger Processing.........................................     3
    Personal Search Procedures...................................    44
    Personal Search..............................................38, 43
    Private Sector...............................................    42
    Questions Submitted for the Record by Congressman Hoyer......   120
    Questions Submitted for the Record by Congressman Price......   140
    Questions Submitted for the Record by Congresswoman Emerson..   110
    Questions Submitted for the Record by Congresswoman Meek.....   124
    Questions Submitted for the Record by Congresswoman Northup..   105
    Questions Submitted for the Record by the Committee..........    52
    Racial Profiles..............................................    37
    Recent Achievements..........................................    19
    Reprogramming................................................    25
    Resource Agents and Inspectors...............................    35
    Resource Allocation Model.................................2, 35, 39
    Risk Analysis................................................    36
    Southwest Border.............................................    43
    User Fee Proposal............................................     4
    Video........................................................    24
    Welcome......................................................  1, 3
    Workload.............................................19, 27, 36, 41
Alcohol, Tobacco and Firearms....................................   221
    ATF Proposed Earmarks of Treasury Asset Forfeiture Fund......   275
    Brady Background Checks......................................   274
    Budget Request--Provides Positions to Carry Out ATF's Mission   271
    Consolidated Training Facility in Washington, DC, Area.......   275
    Coordination Between Law Enforcement Agencies................   271
    Diversity Issues.............................................   272
    Firearms Initiatives--Enforce Existing Laws..................   271
    Firearms Issues..............................................   279
    FY 2001 Congressional Budget Justification...................   313
    Inspections of Firearms and Explosives.......................   280
    Integrated Violence Reduction Strategy.......................   273
    Introductory Statement of Bradley A. Buckles, Director of ATF   245
    Introductory Statement of James E. Johnson, Undersecretary 
      for Enforcement............................................   227
    Law Enforcement Personnel Issues.............................   269
    Law Enforcement Workforce: Quantity and Quality..............   223
    Project Exile................................................   278
    Proposed Customs' Fee........................................   269
    Questions for the Record Submitted by Congressman Price......   311
    Questions for the Record Submitted by Congresswoman Emerson..   298
    Questions for the Record Submitted by Congresswoman Meek.....   302
    Questions for the Record Submitted by Congresswoman Northup..   295
    Questions for the Record Submitted by the Committee..........   283
    Statement by Bradley A. Buckles, ATF Director................   243
    Statement by Congressman Steny H. Hoyer......................   242
    Statement by James E. Johnson, Under Secretary for 
      Enforcement................................................   223
    Tobacco Compliance and Diversion.............................   276
    Tobacco Compliance on Mexican Border.........................   270
    Tobacco Tax..................................................   279
    Treasury Priorities..........................................   224
Federal Law Enforcement Training Center..........................   351
    Advanced Training Needs......................................   392
    Agencies Involved in Washington, DC Site.....................   392
    Border Patrol Training Cancellations.........................   399
    Closure of Charleston Site...................................   399
    Cybercrime Training..........................................   393
    Dual Scheduling Costs........................................   389
    Dual Shift Training..........................................   388
    Export Training Sites........................................   398
    Foreign Law Enforcement Training.............................   394
    Future Staff Increases.......................................   388
    FY 2001 Congressional Budget Justification for Construction..   450
    FY 2001 Congressional Budget Justification for Salaries and 
      Expenses...................................................   408
    Housing Facility Conditions..................................   386
    Internet Presentation with a Laptop Projection on Display 
      Screens....................................................   370
    Internet Program Presentation................................   370
    Internet Training............................................   381
    Introductory Statement of James E. Johnson, Under Secretary 
      for Enforcement............................................   354
    Introductory Statement of W. Ralph Basham, Director of FLETC.   374
    Minorities in Training.......................................   396
    Money Laundering Training....................................   400
    Non-Government Housing.......................................   386
    Potential Site Locations.....................................   391
    Questions from the Hearing During Testimony..................   407
    Questions Submitted for the Record by Congresswoman Meek.....   406
    Questions Submitted for the Record by the Committee..........   402
    Racial Profiling Training....................................   394
    Refresher Skills Training Needs..............................   383
    Sensitivity Training.........................................   395
    Site Leadership Responsibility...............................   391
    Site Selection Factors.......................................   390
    State and Local Training.....................................   388
    Statement by Congressman Steny H. Hoyer......................   382
    Statement by W. Ralph Basham, FLETC Director.................   369
    Statement by Subcommittee Chairman...........................   351
    Statement by James E. Johnson, Under Secretary for 
      Enforcement................................................   352
    Status of Construction Plans.................................   383
    Student Housing..............................................   384
    Temporary Charleston Site....................................   398
    Types of Requalification Training............................   390
    U.S. Border Patrol Training..................................   399
    U.S. Customs Training--Specific Needs........................   392
    Unit Cost Increases..........................................   381
    Use of Artesia for Border Patrol Training....................   400
    Washington Area Requalification Training.....................   389
    Welcome......................................................   351
    Workload Increases...........................................   387
United States Secret Service.....................................   463
    Air Interdiction Program.....................................   471
    Air Security.................................................   488
    Campaign Protection..........................................   490
    Cooperation with Local Law Enforcement.......................   477
    Counterfeiting...............................................   493
    Dangerousness of the Mission.................................   481
    Discrimination Lawsuit.......................................   479
    Diversified Workforces.......................................   478
    Electronic Fraud.............................................   478
    Exceptional Case Study Project...............................   466
    FY 2001 Congressional Budget Justification for Construction..   551
    FY 2001 Congressional Budget Justification for Salaries and 
      Expenses...................................................   517
    Maintaining Technical Capabilities...........................   483
    National Special Security Events......................472, 474, 484
    National Threat Assessment Center................465, 467, 486, 491
    Overtime Hours...............................................   482
    Questions Submitted for the Record by Congressman Hoyer......   513
    Questions Submitted for the Record by Congressman Price......   512
    Questions Submitted for the Record by Congresswoman Meek.....   510
    Questions Submitted for the Record by Congresswoman Roybal-
      Allard.....................................................   516
    Questions Submitted for the Record by the Committee..........   496
    Recruiting...................................................   483
    Residence Security for Next Former President.................   491
    Rowley Training Center Expansion.............................   489
    School Safety Initiative.....................................   485
    Statement of Congressman Steny H. Hoyer......................   469
    Workforce Retention and Workload Balancing.................465, 476
Financial Crimes Enforcement Network.............................   559
    A New Requirement--MSB Registration..........................   566
    BSA Reporting Requirements...................................   579
    Conclusion...................................................   567
    Data Mining Program..........................................   564
    Effective Collection of Information..........................   565
    Efficient Delivery of ``Value Added'' Information............   563
    Enhance SARS and Other BSA Database Analysis.................   565
    Expanding the Collection of BSA Information..................   565
    FinCEN Testimony.............................................   562
    FY 2001 Congressional Budget Justification...................   598
    Gateway Program............................................564, 582
    Increase in Existing Requirements............................   565
    Information Collection from FIUS.............................   566
    Introductory Remarks.........................................   560
    Magnitude of Money Laundering.........................564, 583, 585
    Maintain Core Programs.......................................   564
    Money Service Business.......................................   578
    National Money Laundering Strategy.........................580, 586
    Personnel and Contracting....................................   585
    Questions Submitted for the Record by Congressman Hoyer......   591
    Questions Submitted for the Record by Congresswoman Meek.....   594
    Questions Submitted for the Record by the Committee..........   588
    Restructuring FinCEN.........................................   567
    Secure Outreach Program......................................   564
    Stabilize Existing Programs..................................   563
    Statement of James F. Sloan, Director of FinCEN..............   568
    The National Money Laundering Strategy.......................   566
    Traditional Case Support.....................................   564
    Under Secretary Remarks......................................   561
Internal Revenue Service.........................................   623
    FY 2001 Congressional Budget Justification...................   821
        Earned Income Tax Credit Compliance Initiative...........   951
        Information Systems Appropriation........................   921
        Information Technology Investments Appropriation.........   940
        Processing, Assistance, and Management Appropriation.....   850
        Summary Data.............................................   822
        Tax Law Enforcement Appropriation........................   885
    Opening Statement............................................   626
    Questions Submitted for the Record by Congresswoman Meek.....   814
    Questions Submitted for the Record by Congresswoman Northup..   801
    Questions Submitted for the Record by the Committee..........   693
    Testimony of Charles O. Rossotti, Commissioner of Internal 
      Revenue....................................................   634
Treasury Department..............................................   965
    FY 2001 Congressional Budget Justification...................  1088
        Community Development Financial Institution Fund.........  1266
        Departmental Offices' Salaries and Expenses..............  1088
        Departmental Offices' Treasury Building and Annex Repair 
          and Restoration........................................  1122
        Department-Wide Systems and Capital Investments Program..  1152
        Expanded Access to Financial Services....................  1219
        Franchise Fund...........................................  1227
        Interagency Crime and Drug Enforcement...................  1252
        Money Laundering Strategy................................  1166
        Office of Inspector General..............................  1175
        Treasury Forfeiture Fund.................................  1134
        Treasury Inspector General For Tax Administration........  1197
        United States Community Adjustment and Investment Program  1291
        Violent Crimes Reduction Trust Fund......................  1262
    Introductory Statement by Lawrence H. Summers, Treasury 
      Secretary..................................................   649
    Opening Statement............................................   972
    Questions Submitted for the Record by Congresswoman Meek.....  1087
    Questions Submitted for the Record by Congresswoman Northup..  1043
    Questions Submitted for the Record by Committee..............   999
    Testimony of Lawrence H. Summers, Treasury Secretary.........   974
U.S. Customs' Automated Commercial Environment...................  1297
    ACE Cost Versus Value........................................  1335
    ACS Life Support.............................................  1329
    ACS Outages..................................................  1325
    Applicable Customs Fees......................................  1337
    Appropriateness of User Fee..................................  1330
    Compatibility of ACS Hardware and Network for ACE............  1340
    Fee for Using Both Old and New Systems.......................  1338
    Funding ACE Through Appropriations...........................  1340
    Funding Delay and Corresponding Risk.........................  1328
    Funding Question.............................................  1298
    GATT Compliance of Fees......................................  1336
    International Trade Data System..............................  1329
    Limitations of Automated Commercial System...................  1323
    Modernization Concept........................................  1297
    Modifying ACS Versus Building ACE............................  1325
    Reprogramming for Supporting ACE.............................  1323
    Resurgence of Objections to MPF..............................  1337
    RFP for ACE Prime Contractor.................................  1335
    Statement by Harris N. Miller, President of Information 
      Technology Association of America..........................  1349
    Statement of Customs CIO.....................................  1310
    Statement of S.W. Hall, Jr., Asst. Commissioner Office of 
      Information & Technology...................................  1311
    Statement of Treasury CIO....................................  1299
    Testimony of Jim J. Flyzik, Deputy Assistant Secretary IS and 
      CIO........................................................  1303
    Testimony of Ronald D. Schoof, Caterpillar Inc...............  1344
    Transaction Costs and Fees For Fully Developed ACE...........  1341
    Value of Customs' Information Systems........................  1332
United States Mint...............................................  1365
    FY 2001 Congressional Budget Justification...................  1460
    Introductory Statement of John P. Mitchell, Acting Director 
      of the United States Mint..................................  1372
    Opening Statement............................................  1367
    Questions Submitted for the Record by Representative Jo Ann 
      Emerson....................................................  1455
    Questions Submitted for the Record by the Committee..........  1442
    Statement of James C. Miller III, Save the Greenback.........  1431
    Statement of R. David Clayton, National Automatic 
      Merchandising Association..................................  1404
    Testimony of James E. Smith, American Bankers Association....  1413
Bureau of Engraving and Printing.................................  1486
    FY 2001 Congressional Budget Justification...................  1492
    Introductory Statement of Thomas A. Ferguson, Director of the 
      Bureau of Engraving and Printing...........................  1486
Financial Management Service.....................................  1511
    FY 2001 Congressional Budget Justification...................  1518
    Questions Submitted for the Record by the Committee..........  1511
Bureau of the Public Debt........................................  1555
    FY 2001 Congressional Budget Justification...................  1561
    Questions Submitted for the Record by the Committee..........  1555
U.S. Customs Service Automation Hearing..........................  1583
    Questions Submitted for the Record by Representative Jo Ann 
      Emerson....................................................  1597
    Questions Submitted for the Record by Representative Steny 
      Hoyer......................................................  1599
    Questions Submitted for the Record by the Committee..........  1583

                                
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