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




      DEPARTMENTS OF COMMERCE, JUSTICE, AND STATE, THE JUDICIARY,

              AND RELATED AGENCIES APPROPRIATIONS FOR 2001

                 DEPARTMENTS OF COMMERCE, JUSTICE, AND

                   STATE, THE JUDICIARY, AND RELATED

                    AGENCIES APPROPRIATIONS FOR 2001

_______________________________________________________________________

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS
                             SECOND SESSION
                                ________
  SUBCOMMITTEE ON THE DEPARTMENTS OF COMMERCE, JUSTICE, AND STATE, THE 
                    JUDICIARY, AND RELATED AGENCIES
                    HAROLD ROGERS, Kentucky, Chairman
 JIM KOLBE, Arizona                 JOSE E. SERRANO, New York
 CHARLES H. TAYLOR, North Carolina  JULIAN C. DIXON, California
 RALPH REGULA, Ohio                 ALAN B. MOLLOHAN, West Virginia
 TOM LATHAM, Iowa                   LUCILLE ROYBAL-ALLARD, California
 DAN MILLER, Florida
 ZACH WAMP, Tennessee               
                    
 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.
    Gail Del Balzo, Jennifer Miller, Mike Ringler, and Christine Ryan
                           Subcommittee Staff
                                ________
                                 PART 8
                              THE JUDICIARY
                                                                   Page
 The Supreme Court of the United States...........................    1
 Architect of the Capitol.........................................   15
 The Federal Judiciary and the Administrative Office..............   43
                            RELATED AGENCIES

 Legal Services Corporation.......................................   69
 Small Business Administation.....................................  131
 Securities and Exchange Commission...............................  169
 Federal Communication Commission.................................  211

                              

                                ________
         Printed for the use of the Committee on Appropriations
                                ________
                     U.S. GOVERNMENT PRINTING OFFICE
 68-612                     WASHINGTON : 2001

                                  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)

 
DEPARTMENTS OF COMMERCE, JUSTICE, AND STATE, THE JUDICIARY, AND RELATED 
                    AGENCIES APPROPRIATIONS FOR 2001

                              ----------                              

                                         Wednesday, March 15, 2000.

                             SUPREME COURT

                               WITNESSES

JUSTICE DAVID H. SOUTER, SUPREME COURT
JUSTICE CLARENCE THOMAS, SUPREME COURT
JAMES C. DUFF, ADMINISTRATIVE ASSISTANT TO THE CHIEF JUSTICE
DALE E. BOSLEY, MARSHAL
BILL SUTER, CLERK
TONY DONNELLY, DIRECTOR OF BUDGET AND PERSONNEL

                            Opening Remarks

    Mr. Rogers. The committee will come to order. Good morning. 
We are here today regarding the fiscal 2001 budget request for 
the Supreme Court. We welcome again before the subcommittee 
Justice David Souter and Justice Clarence Thomas. Welcome. 
Justice Souter has been here I think six times, which I think 
may set a record. And Justice Thomas, this is your second 
appearance in this unique process in your position at the 
Supreme Court. But we were privileged to have your presence 
when you were head of the EEOC here at this subcommittee a 
couple of years ago. This hearing is an extraordinary 
opportunity for the Congress to interact with the Court, the 
highest court of the separate independent branch working within 
the system of checks and balances envisioned by the Founding 
Fathers.
    One of the constitutional bases of our government is that 
no money may be spent from the Treasury, except as a result of 
an appropriation, enacted into law, to paraphrase Article 1, 
Section 9. And that's what leads to your appearance here, and 
we are, of course, pleased to welcome you.
    Our role is to exercise oversight over the expenditure of 
public funds, but obviously not over the deliberations of the 
Court. The independence and the integrity of the judicial 
process is, of course, a binding principle of our government 
that we hold dear. We know that this hearing always sparks some 
media interest, and we suspect that it has more to do with your 
being here than us. So welcome.
    After hearing from the Justices, we will hear from the 
Architect of the Capitol, who has responsibility for the care 
of the Supreme Court Building and the grounds that will follow 
this hearing. Mr. Justice Souter, we will make your prepared 
testimony a part of the record. And we will be delighted to 
hear from you as soon as I yield to my fellow worker and 
friend, Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman. It gives me great 
pleasure as always to join you in welcoming Justices Souter and 
Thomas again this year. As one who has served in public office 
for over 25 years and who has met and worked with Presidents 
and Governors, Senators and foreign dignitaries, and many other 
public servants, I still get a little chill facing Justices of 
the Supreme Court. Their world seems so different from ours and 
their decisions have such far-reaching impact that it is hard 
to believe the same Constitution that created our position, Mr. 
Chairman also created theirs. I am looking forward to their 
testimony today, and stand ready to assist in supporting their 
request and the work they have to do. I also have to be 
especially nice to them, since I know that some day they may 
decide whether they think Puerto Ricans' American citizenship 
is statutory or constitutional. And I am still trying to find 
out from them if a guy born in Puerto Rico can run for 
President, but feel no pressure on any of the questions that I 
will ask you today. Thank you, Mr. Chairman.

                      Statement of Justice Souter

    Mr. Rogers. Mr. Justice Souter, and each of you will be 
recognized for your remarks.
    Justice Souter. Mr. Chairman, thank you and thank you for 
welcoming us as usual. As you mentioned earlier, you have 
already placed on the record the summary of the request that we 
have. And I will be even briefer than the summary in just 
adverting to what is remarkable, if it can be called that, 
about this year's budget. I think there are two things.
    We have not historically asked for many increases in 
position. We have, in the last couple of years, most notably 
for security last year. This year we are asking for two, and 
those two positions account for virtually all of the budgetary 
increase above those increases that are simply mandated as a 
matter of law for mandatory pay increases and inflation and 
whatnot.
    The two positions that we are asking for this morning are 
each necessitated by the world of computers that some of us 
increasingly live in. I try to avoid it. But the Court itself 
does not. One of those positions is, in fact, for an expert on 
computer security. As we get closer and closer to a greater 
integration with the Internet and the Court's computers, the 
security issue of course becomes more intense. So we need help 
there.
    The second position is for that of research librarian. And 
the reason we need the first new research librarian in, I 
think, 18 years is due to the proliferation of computer 
programs, which are, in effect, the means of access to the 
kinds of data that these people have to be looking up for us. 
As the programs have proliferated, and the access to that data 
becomes more complicated, the librarians simply have to spend 
more time familiarizing themselves with the technical regimes 
that they have to know to get from us to the information. And 
they have reached the point where they are spending so much 
time on that that they feel, and we agree, that they need some 
further help. So those are the two new positions.
    The second thing to remark upon is something that you will 
probably spend more time discussing with the Architect of the 
Capitol than with us, but I should just anticipate it. The 
Architect of the Capitol, certainly with our understanding and 
agreement, is asking for a total of about $3\1/2\ million in 
his budget to continue both planning work and preliminary 
design work for the renovations and the security beefing up 
that we have been considering for the Court for the last couple 
of years.
    I think my recollection is that when we were over here a 
year ago, both the Architect and Justice Thomas and I guessed 
that by this time we would have sugared off with a 
specificrequest to you and we have not. It has simply proven a much 
more complicated process than we thought. In the course of the year, 
the court itself has got a couple of independent architectural 
consultants to help us in trying to evaluate the proposals that we have 
got, and to work with the architect to get the costs of it, or the 
estimated costs of it, down. And that still goes on. My guess is and I 
think it is probably a sounder guess than last year's, is that by this 
time next year, we will have a definite proposal. But for now, the only 
proposal is to keep on planning. And with that, I have nothing further 
to say by way of anticipation and defer to my brother.
    Justice Thomas. I have nothing additional to add, Mr. 
Chairman.
    Mr. Rogers. Well, you are being very judicious in your 
comments this morning.
    Justice Souter. He learned from me.

                        USE OF MODERN TECHNOLOGY

    Mr. Rogers. New England terseness. Let me ask you briefly 
about computers and the Court. When I practiced law 20 years 
ago now, computers were a relatively unknown thing. Word 
processors were a new invention that was to overtake the law 
profession. And we have seen actually the computerization of 
the practice of law in many of the lower courts in the last 20 
years.
    I have not seen as much of that in the appellate courts, 
and particularly the Supreme Court, as we have seen in other 
levels in the law. Why is that? And is that a problem?
    Justice Souter. I am not sure that it is so, actually. As 
we have said before, you are talking to a Luddite when you are 
talking with me, because I am computer illiterate, unlike 
Justice Thomas. But the fact is, I can sit over there as a 
Luddite, but everybody around me is using computers. I mean, I 
get away with it simply because my clerks, my secretaries, 
don't get away with it and the librarians don't get away with 
it.
    So I am guessing, although I am not much of an expert 
witness on the subject, I am guessing that, at least my 
appellate court is probably as computerized as it is helpful 
for appellate courts to be. I am not sure that our computer 
situation is as up to the moment as it should be. Justice 
Thomas has told me and the others on more than one occasion 
that the problem that we all have, or those who do the computer 
work have, is simply keeping up with the technology. On that 
subject, I will claim ignorance. But I am not sure in terms of 
the basic approach that we are doing less with computers than 
it would be helpful to do.
    Mr. Rogers. Justice Thomas.
    Justice Thomas. I think, Mr. Chairman, that the courts are 
moving, I think, rather effectively. I can't speak for all the 
courts of appeals. I think the courts may have gotten into the 
ball game at a slower pace than some of the other parts of our 
lives. I tended to be rather aggressive in automation when I 
ran an agency. I don't know whether the courts can afford to do 
that with the volume and types of data that we use. But the 
Supreme Court is moving at a steady pace. We have a more 
complicated system. We have to prepare our opinions, for 
example, in a way that they can then be printed in the form 
that you ultimately see them.
    And so our internal work interfaces with that system. And 
we have to--it is a delicate balance and it is rather 
complicated. I think we are beginning to use more in our 
clerk's office for tracking systems and filing systems, that is 
being automated. And this is a process, remember that only 
began about a decade ago. I would probably be--personally it 
would like to be a little bit more aggressive. I can understand 
the pace, the measured pace that we are taking. I think we are 
moving very effectively in the right direction.
    To give an example, our job is rather portable with 
computers. As a result of, say, laptops and the encrypted 
systems, we are able to work anyplace in the world. With access 
to Lexis and Nexis, to my law clerks, to draft opinions, to 
edit and then transfer those opinions back to the court. Last 
night, for example, we had a late night execution. I was able 
to work on that just simply by sitting in my study at home and 
effectively get the files by the individual involved, read 
those and then communicate with my clerk.
    So we are moving, I think, quite effectively with 
automation. And it is changing our jobs. I think the court is 
slower than some of the other institutions for a variety of 
reasons. But I don't think it can be said that we are not 
automating in an effective manner. I think we are.

                         SUPREME COURT WEBSITE

    Mr. Rogers. You said last year before the subcommittee that 
the Court had begun to develop a Web site. We found that many 
agencies have discovered that those Web sites yield big cost 
savings in such areas as distribution of public documents and 
the like.
    First, tell us where we are with the Web site that you 
talked about last year, and tell us whether or not your staff 
has studied opportunities for cost savings that might be 
achieved through the use of technology in general.
    Justice Thomas. Oh, I don't know that I have an answer to 
the latter question. I am sure we have, but again, we are not 
like most of the other agencies. We don't have as many filings, 
we don't have Federal Register filings, we don't have public 
notifications. We have a certain number of opinions, and 
ultimately we have the U.S. reports. Now we have had cost 
savings in preparing our opinions for the U.S. reports. Our Web 
site is actually quite inexpensive. It will be--it is developed 
by GSA--by the Government Printing Office. And it is due to be 
in operation in the near future. I can't give you an exact date 
but it will certainly be up and running long before we come 
back before this committee.
    Mr. Rogers. Mr. Serrano.

                           COMPUTER SECURITY

    Mr. Serrano. Thank you. On the issue of using technology 
and security, you know one of the issues that this committee 
and my colleagues are following is that issue in Miami of the 
Elian Gonzalez case. It seems that the judge will issue a 
decision in the next 24 to 48 hours, and he will do it online. 
I am sure that is being done quite a lot now. But it just 
seemed to me a little strange that he would notstand in a 
courtroom and say something, that he would issue it online. First, how 
are Supreme Court decisions issued? And second, as you are working to 
reach a decision, what security measures are you taking so that the 
press, or somebody else for that matter, doesn't end up knowing about 
where you are going before you make your final decision?
    Justice Souter. Well, on the issuance of opinions, ours are 
online, I think, within minutes of the literal handout. But the 
Supreme Court still follows, at least in a shadowy way, the old 
tradition of announcing its judgments right from the bench. 
There are those who were on the court in the time that I have 
been on who remembered the day when the justices literally read 
every word of their opinions from the bench in that courtroom. 
Justice White told me that that is why he became a devotee of 
crossword puzzles because everybody sat there while these 
things were read. I am happy to say that I came along after 
that day.
    But there is, even though we issue our judgments with a 
summary of what is behind them now rather than reading them 
verbatim, there is something, I think, symbolically wonderful 
about it. Because it is the only occasion when you come right 
down to it that the court, in a literal sense, is speaking to 
the country represented by the people in that room, as opposed 
to talking to lawyers or talking to ourselves.
    But the fact is, when that ceremony is over, I say 
literally within minutes, maybe on the instant that we arise 
from the bench, the complete opinion is available online.
    Mr. Serrano. And the security issues?
    Justice Souter. On security, you know, we have been lucky 
on the security up to this point, I think, in large part 
because we have limited the Internet hookups to just a couple 
of individual computers within the court. There is no hookup to 
the system as such. So that our security has basically, up to 
this point, been a dependence on individual integrity. And that 
is why we have haven't had a problem of leaks. I can think of 
only one instance in the time that I have been on the court 
that even a fax has gone astray. And so we have, you know, 
knock on wood, but we have been lucky up to this point. But the 
reason, as I said a minute ago, the reason we are asking for a 
new position is we realize we can't continue to live with the 
luxury of that kind of independence.
    Mr. Serrano. So you're saying you hook into yourself, so to 
speak, and not into the outside world.
    Justice Souter. That is basically it.
    Mr. Serrano. Mr. Chairman, I have a series of questions on 
the issue of minority clerks that we discussed last year. But I 
am not going to ask those questions at this time because I know 
that my colleague, Mr. Dixon, is not only very interested in 
it, but an expert on the issue. I will let him ask those 
questions. You are an expert on the issue.
    Mr. Dixon. I don't know if there is an expert on the issue. 
I was reading Mr. Taylor's comments from last year. He seems to 
be the expert, at least in written form.

                           FEDERALIZING CRIME

    Mr. Serrano. Okay. Let me ask you, last year we discussed 
the workload of the court and one of the issues we discussed 
was the impact that the federalization of crimes by Congress 
may have on the court. We discussed that. Any update on that, 
any thoughts?
    Justice Souter. There is really nothing new to say. The 
court, as a policy matter, like the judicial conference, has 
continued, and we continue this morning, to recommend great 
caution in federalizing crime. We think of the workload frankly 
in the first instance in terms of the district courts, but 
sooner or later it all filters up to us. And so it is going to 
have an effect on us. I will be candid to say that I think just 
as important as the concern institutionally that we have for 
ourselves and for the other courts in the Federal system, is 
simply the concern for preserving basically a sensible Federal 
balance of responsibility.
    There is, I think, an undeniable tendency when the national 
government federalizes crime for the responsibility over that 
criminal prosecution to gravitate in the Federal direction. And 
as a general proposition, I think that is a very unsound way to 
run a Federal union. The criterion ought to be, basically, is 
Federal prosecution needed because State prosecution for any 
number of reasons, including perhaps the interstate character 
of the activity, going to prove itself ineffective. If the 
Congress will ask that question, and abide by the answers to 
that question, I am not going to worry where this goes. But I 
do worry about indiscriminate federalization.
    Mr. Serrano. Thank you, Mr. Chairman.
    Mr. Rogers. Mr. Latham.

                      CONSOLIDATION IN AGRICULTURE

    Mr. Latham. Thank you, Mr. Chairman. And welcome gentlemen, 
it is an honor to have you here. I wanted to thank Judge Thomas 
in particular for the kindness when I had a group of Iowans in 
to be admitted to the bar, and the time he spent and the 
generosity that of your time with those people. That was great. 
We appreciate it very much.
    Actually, several questions that I had really have been 
covered talking about federalizing a lot of the crimes. One 
area that is of particular interest in Iowa and throughout the 
midwest in agriculture today is the consolidation, vertical 
integration question. I think a lot of the cases that the 
Justice Department has seemed to take up focus more on high 
tech companies and trying to look at lack of competition in 
certain areas.
    I guess my question to you would be do you think that the 
laws on the books currently are adequate to safeguard not just 
high tech or telecommunications, but in agriculture, and if you 
had any comments on that. We had testimony from the Attorney 
General last week, she basically said that she didn't think she 
could do anything as far as consolidation or in agriculture and 
various areas, that the laws weren't there.
    Justice Souter. I will be candid to say it is a subject on 
which I don't have an opinion. We get, as you probably know, 
occasional antitrust appeals. But we have had nothing that I 
can think of in the time that I have been on the court that 
would, you know, give me a basis to give you a helpful answer 
on that subject.
    Justice Thomas. I agree with that. I don't have a clue. And 
we certainly haven't had any major antitrust cases since I have 
been on the court. We have had a few. But not of the sort you 
are talking about. And we have had other large cases that 
involved telecommunications, but that was as a result of 
specific legislation by Congress. But I would just be 
speculating, and not even on any firm basis, on how to solve 
your problem.
    Mr. Latham. To me, I guess just the fact that it has not 
been, I guess, brought to the court's attention on any kind of 
frequency, when we look at the consolidation and 
telecommunications financial industries, agriculture, 
petroleum, all through the economy, there is massive 
consolidation going on, that I think it is interesting that 
there hasn't been anything brought up on the subject. Anyway, 
that is all I have. I thank you very much.
    Mr. Rogers. Mr. Dixon.

                       COMPUTER SECURITY POSITION

    Mr. Dixon. Thank you very much, Mr. Chairman. And I 
certainly join in welcoming the Justices here today. And Mr. 
Justice Souter, I notice that you highlighted the fact that you 
want to hire computer security position. And my staff thought 
it was quite unusual that it is only going to cost $52,000; 
$42,000 for salary and $10,000 in benefits. He thought that was 
exceptionally low in this competitive world. What is your view 
of that?
    Justice Souter. We drive a hard bargain.
    Mr. Dixon. Apparently so.
    Mr. Rogers. It is the honor of the job.

                    LAW CLERK SELECTION--LAW SCHOOLS

    Mr. Dixon. It is the honor of working for the court, isn't 
it. I do want to pursue just briefly, but first I would like to 
thank Justice Thomas and Justice Souter for their dialogue last 
year. I thought it was very open, very candid. It brought to 
light some of the issues that I was not totally familiar with. 
And it is the issue of sex and race, as it relates to the 
hiring of clerks in the Supreme Court. Last year, Mr. Latham 
asked a question in writing, and he asked if in regards to the 
Supreme Court clerks, would you be able to provide an annual 
list of Supreme Court clerks who served each of the last 10 
years.
    Would you also be able to include their race, sex, the law 
school from which they received their degree, in which state 
they resided before law school, and under which Supreme Court 
Justices served? Your response was that the names, law schools 
and employing Justices of law clerks of the Supreme Court 
during the last decade are available. Sex could be determined 
on the basis of names in most instances. But the clerks are not 
categorized by sex, race, or state of origin. And my question 
to you is why is that?
    Justice Souter. I guess my answer would be why not? Those 
simply are not criteria on which we hire. And they are not 
indices of quality and we simply have never had any reason to 
treat people on a sex or a race or ethnicity basis.
    Mr. Dixon. Well, do you keep track of the law schools they 
attend?
    Justice Souter. I don't know. I mean, I don't. I couldn't 
tell you over the--I have been on the court for 10 years, I 
couldn't tell you offhand whether there is an annual pattern in 
the law school hiring. I can tell you, without any question, 
that the bulk of my clerks have come from Harvard or Yale law 
schools, but I think over the course of that same 10 years, 
probably there have been seven or eight or nine other law 
schools that I have hired from. So I don't keep track of it.
    Mr. Dixon. Mr. Justice, let me ask you this: I didn't 
really plan to pursue this at length today, but you do 
recognize that there is a pattern as it relates to the law 
schools that the Justices hire from? I mean, that was well 
documented, has consistently been well documented and we talked 
about it last year.
    Justice Souter. Please note there is no question, as I just 
said, where the bulk of mine come from. But I don't--you know I 
don't make a list either before or after hiring to keep track 
of it. As I said, I know that there is a spread of about, in my 
case, of about oh, nine or ten law schools. I think in the case 
of one of the members of the court, that spread is about 30 law 
schools. That is unusual. But there is no question about the 
source of the bulk of my clerks, and generally for the court.
    Mr. Dixon. Have you provided to Mr. Latham the list that he 
requested?
    Justice Souter. I have not. I don't know whether there was 
a specific request for the list. That is something I never 
heard any more about.
    Mr. Dixon. I am wondering since you say that they are 
available, could you provide to the committee the list?
    Justice Souter. Sure.

    [Clerk's note.--Subsequent to the hearing, the Supreme 
Court provided a complete list of all of its law clerks and the 
names of the law schools they attended, dating from its 1990 
term. The list is on file and available for review in the 
offices of the subcommittee, Subcommittee on Commerce, Justice, 
State, and the Judiciary, H-309 Capitol Building, Washington, 
DC.]

             LAW CLERK SELECTION--FEDERAL COURT EXPERIENCE

    Mr. Dixon. Last year we had a dialogue about the clerks as 
it related to the pool from which you draw. And you indicated, 
I believe, that many of the clerks come from the circuit courts 
or other courts; is that correct?
    Justice Souter. It is rare that somebody comes from outside 
of the Federal system. It has happened. I think today I 
probably would not hire a clerk from outside of the Federal 
system. I won't say I wouldn't, but it would be an exception. 
And the reason has nothing to do with the work that they do on 
the cases that we actually take. Where the Federal experience, 
as a practical matter, I think, is a necessity, is on the cert 
work, because there is no break-in time for it. It is the kind 
of thing, if you are not at square 2 when you start, you can't 
very well keep up with. I know that, as a matter of fact, from 
what it is like to be a first-year justice, and a law clerk is 
in about the same boat.
    Mr. Dixon. I was not challenging that practice at all. I 
thought you made that statement to indicate that a lot of this, 
as it related to women or minorities, was out of the control of 
the Court because the pool that you are selecting from did not 
have many minorities or women in it. And since that is the 
practice, that these courts are the feeder, that we would not 
anticipate a large number of minorities. I thought that was 
your point.
    Justice Souter. No, I think that is fair. My guess is that 
the pool, the pool of all district and circuit court 
clerkships, has probably got a pretty good spread. It does not 
have anything that you would call a proportional representation 
in terms of the general population.
    Mr. Dixon. I was not suggesting that. I just thought that 
one of the reasons was that there were not a large number of 
either minorities or women to choose from since they are coming 
primarily from the circuit courts.

               LAW CLERK SELECTION--WOMEN AND MINORITIES

    Justice Souter. That is true. The only thing I would add to 
that is my impression that the number of women continues to 
grow. I was surprised at one number that I have learned as a 
result of a speech that Justice Ginsberg gave some time within 
the last 6 months. She was talking about just the history of 
women law clerks at the court, which began actually with 
Justice Douglas during the war.
    But in any event, she was talking about numbers. And I 
don't recall her numbers exactly, but I think they boil down in 
recent years to something in the neighborhood of about 35 to 40 
percent of our clerks being----
    Mr. Dixon. 40.
    Justice Souter. And frankly, I would have guessed the 
number was a little bit lower than that. But in any case, that 
number has continued to rise.
    Justice Thomas. May I add something. I think it is--with 
respect, I think, that the women pool is different from the 
minority pool. And I think that the pool, it has to be 
segmented. It is not that difficult to find women law clerks. 
It is far more difficult to find others in that pool. I have 
one woman clerk this year, I have two for next year, and two 
for the following year. It is just not that difficult. And so 
the--I think if you go back to the courts of appeals, they are 
fairly well represented there. But we do draw very extensively 
from the courts of appeal, as one criterion for hiring law 
clerks. But I do think that the women law clerks are quite 
different than the minority law clerks.
    Mr. Dixon. It would appear from the statistic that that is 
true. Would it be a fair statement to say, Mr. Justice Thomas, 
that it is not difficult to find white women law clerks?
    Justice Thomas. I think it is not difficult to find any 
white law clerks, or it is not difficult, in many instances, to 
find a significant number of Asian law clerks.
    Mr. Dixon. But have there been a significant number of 
Asian law clerks?
    Justice Thomas. From a representation standpoint, I think 
so.
    Mr. Dixon. And you mean, based on the population in law 
school?
    Justice Thomas. That is right.
    Mr. Dixon. Mr. Justice Souter, let me just ask, has the 
court or any of the justices made any effort to have any 
dialogue with the circuit courts as it relates to their 
selection process at all?
    Justice Souter. The court, as an institution, has not, 
because the court doesn't do the law clerk hiring. That is 
radical federalism within the court. Every justice does his 
own. And I literally can speak only for myself on that because 
I have not canvassed the others. But I can tell you, two things 
that have happened, and I have no doubt, that in part, they 
have happened as a result of a conversation we had a year ago. 
I have had calls from circuit judges and I have had 
conversations with law professors initiated by them that I 
probably wouldn't have had five years ago. There is no question 
the subject is on the minds of those who are pushing people in 
our direction. And I presume that that experience of mine is 
probably represented in every other chamber too.
    Mr. Dixon. Mr. Justice Thomas, have you made any effort to 
talk to the circuit courts or other Federal courts that may be 
recommending, people for the pool from which you draw?
    Justice Thomas. Oh, I think we all in response to anything, 
it is just routine matter for me, we don't talk necessarily to 
the courts as institutions. We talk to Federal judges we know, 
people we respect in the law schools. And we keep our eyes and 
ears open for kids we are interested in. But I agree with 
Justice Souter, there has certainly been heightened awareness 
of this. And there have been any number of conversations I 
would say on an informal--in an informal way about it. But I 
will underscore, and we keep repeating this, we don't have a 
central approach to hiring law clerks at our court.
    I don't discuss my approach with Justice Souter, and he 
doesn't discuss his hiring processes with me. We may refer to 
them from time to time, there is just simply no uniform way of 
doing it, and that may be a part of the problem in responding 
to some of your questions. We just can't speak for the others.
    Mr. Dixon. I think we both made that point last year, 
because in looking at Justice Sandra Day O'Connor about half of 
her clerks, 34 out of 76 have been women. And she is a woman. 
So that would tell me that she had some pattern of looking for 
women. And compared to the others she has certainly, you know, 
hired more women. And I want to assure both of you that I 
understand thoroughly that it is a very complex issue, and I 
appreciate the fact that both of you are aware that it is a 
very complex issue. But it is an issue that I don't think is 
going to go away. It isn't going away in Congress, and there is 
legislation although I question its Constitutionality. But as 
long as I serve on the committee, it is not going to go away. I 
hope it just isn't cumulative in the fact that a year or 2 or 3 
years from now, there is no change. But I would say that I 
notice that in this year's law clerks that there is some 
improvement from my perspective. And that is that out of the 34 
clerks, five are minorities, there are two blacks and three 
Asians who are now working for Justices of the Court. Are any 
of these blacks or Asians working for either one of you 
gentlemen?
    Justice Thomas. Not for me.
    Justice Souter. I will be candid to say that that is a 
subject I don't want to get into. When my clerks come on board, 
they make a deal with me that they are going to do a certain 
amount of work for me. If they want to become public figures 
and the object of public attention, I want them to go ahead and 
take the initiative. All I feel that it is fair to say is that 
I am looking with as broad an eye as I have traditionally 
looked. And if some of them turn out to be minorities, that is 
great. I would, in fact, keep an even sharper eye for a good 
minority clerk, but I don't want to make a clerk a public 
figure. I want the clerk to do that if he wants to.
    Mr. Dixon. You feel by stating the ethnicity of one of your 
clerks they would automatically become a public figure?
    Justice Souter. I think a clerk whom I mentioned is 
probably going to be the subject of public attention.
    Mr. Dixon. Thank you, Mr. Chairman.

                         BUILDING IMPROVEMENTS

    Mr. Rogers. Now, we need to talk about the building. The 
architect who testifies momentarily is going to, I think, tell 
us that he has settled on a plan to request $100 million for 
the renovation of the Supreme Court building. And I have to 
tell you that that would be very difficult for us to find. This 
modernization effort really has climbed Jacob's ladder. In 
1998, when the project was first described, it was described as 
only a $7 million project, with us replacing some of the 
systems in the building. And then since that time, the 
estimates have gone up and down, even as high as $140 million, 
down to $85 million and now it looks like the plan is to 
request $100 million in 2002 that would be used in the year 
2003.
    This is a unique relationship that we share, the Congress 
and the Court, two separate independent branches of government. 
When we appropriate funds for executive agencies, many times 
there are strings that we attach to the accidental detour of 
those funds to affect some policy that the agency is involved 
in. That is just the way thepolitical process in this 
government works.
    We have never done that, of course, to the Supreme Court, 
and wouldn't think of it because the Court is independent, we 
recognize that, we would be derelict if we attempted to, in any 
way, suggest how you spend the money. We do have a duty to 
oversee the proper expenditure of all tax dollars, including 
the monies that we give to the court. But when it comes to the 
physical plant in which the court works, it has to be a 
different story. Because we are talking about a huge 
expenditure of funds, number one, and we are ultimately 
responsible for the security that you have at the building 
among other things. We want to find every dollar we can to help 
you perform your duties in a safe, efficient and expeditious 
way, and that is our obligation. We will do that. But at the 
same time we have to be mindful of the limited amount of monies 
we have for everything that we deal with in this subcommittee 
from the State Department, foreign Embassy security to the FBI, 
to the Immigration Naturalization Service, Commerce Department, 
the lower courts and so on, the prisons. And we have not 
shirked or shied away from being critical and tight, I guess 
you will say, with the monies that we allocate for many of 
these projects. This one has raised a lot of eyebrows. I would 
be interested to know what you think about the Architect's 
plan, and whether or not every aspect of what he has planned is 
necessary. And have you thought about alternatives, given the 
amount of money that we find would be very difficult to raise?
    Justice Souter. Well, Mr. Chairman, you are preaching to 
the choir in a way on the problem of the size of the bill. I 
didn't get specific authorization to say this, but I think it 
is fair to say that everybody on the Supreme Court would like 
to postpone the whole thing until he retires. We look upon this 
with a certain degree of horror. Justice Kennedy and I, as you 
well remember, were those who sat here for several years on the 
assumption that the bill might be around $10 million, and we 
were among those who had heart failure when we heard the figure 
of 140-something last year.
    And I think the only things that I can say at this point 
are these: Number one, there is no final decision on what is 
going to be done, as I think the architect has said. We have 
worked the probable cost of the likely project elements down to 
from 140 at the high side down to around 100. Whether--and the 
extent to which we can work it below that is an open question. 
I will be candid to say my guess is we are not going to get it 
very much below that.
    On questions of necessity, I think it is a fair statement 
that most of the subjects, most of the elements of the planned 
renovations that are contributing to the very high dollar 
figure are elements that either are pretty close to pure 
security elements that nobody 5 years ago was thinking much 
about, or they are elements of architectural update, which we 
now realize have tremendous security implications.
    That is not salve to cover the soreness of the price tag 
completely, but it goes at least some way towards an 
explanation of why the figures are coming in the way they are 
coming in and why we think it is necessary to get into them.
    In the course of the past year, as I said very briefly in 
my statement before we got going this morning, the court itself 
has availed itself of the services of two outside architectural 
consultants, one of whom is the Dean of the architecture school 
at the University of Virginia. We felt the need of help because 
although there is a committee of which I am unfortunately a 
member that has been studying this thing for about the last 
year and a half, we are still babes in the woods on this. And 
one of the charges that we gave to our own consultants is to 
alert us to what they saw as unusual cost estimates. And at 
this point where the number is down from the 140 to somewhere 
close to 100, maybe a little under, what they are telling us is 
they don't see a way to squeeze many more nickels out of it.
    Which is to say that if we get to the point where that is 
the estimated bill and the money isn't there, as with 
everything else in life, we are going to have to come up with 
priorities and decide what most needs to be done.

                           PERIMETER SECURITY

    Mr. Rogers. Well, that is exactly right. And now, as far as 
security is concerned, that will be prime on our list as well. 
But I understand from the Architect that the perimeter security 
of the building will be handled in the overall Capitol Hill 
perimeter security plan that is being developed. And the cost 
of that perimeter security is not a part of this cost, the $100 
million.
    Justice Souter. I think some of the cost is in there, and I 
couldn't give you a number, but the amount of it that was 
within the 100 million is pretty low. I agree, I think we all 
agree, that it does not make sense for us to make independent 
security plans without knowing what else is going to be done on 
Capitol Hill.
    Mr. Rogers. I understand that that overall Capitol Hill 
perimeter security plan is being developed by the Capitol Hill 
police and will come under another budget category. But the 
security within the Supreme Court building obviously is--will 
have to be--a part of the cost of the renovation. But to be 
perfectly honest with you, there is no way, I don't think, that 
we can find that amount of money given the tight budget 
constraints that we are still operating under up here until we 
can be satisfied that every penny of it is absolutely 
necessary.
    We scrub, we will give this kind of scrubbing to every 
embassy that we build around the world through this 
subcommittee, or any security renovation of any public building 
that we have jurisdiction over. And we have to treat everyone 
alike in that respect. So I would hope that the Court and the 
Architect can scrub the number a lot more.
    Justice Souter. I am going to file a tax return a month 
from today so more power to you.
    Mr. Rogers. Justice Thomas.
    Justice Thomas. I was just going to say, Mr. Chairman, you 
have got the right person here to scrub that budget. Not a 
penny escapes his eyes. But----.
    Justice Souter. If you will make me pay for the whole 
project, I will get it down fast.

                 TELECOMMUNICATIONS WIRING IMPROVEMENTS

    Justice Thomas. But you asked me earlier about technology 
and the movement of the court, et cetera. I will just give you 
one example of what our problems are. Our internal 
communications systems now cannot be handled by the wiring of 
that building. To go back and rewire that building because of 
the way it was constructed is a major undertaking. The duct 
work has to be changed in the building. Right now it has 
significant problems. Whether it is fire hazards or the 
ventilation, et cetera, just because of the way it is designed. 
That is, the building isn't constructed like modern buildings 
where you can go and just rip the ventilation out without doing 
major damage to the building.
    And, you know, I think, and I know that working with these 
older buildings is far different than working with a newer 
structure. And so I think that the entire conference at the 
court has agonized over these numbers and had the same shock 
that you had in seeing the escalation, even when we were 
halfway up Jacob's ladder. And I would, as the architect 
testifies on this, I think you will see that this has nothing 
to do with the amenities of the building. It has everything to 
do with infrastructure and maintaining.
    Mr. Rogers. He explained that last year. I understand that. 
We are dealing, of course, with the historic building whose 
architectural integrity we all want to preserve. And we realize 
that the building was built at a time when no one anticipated 
the kinds of problems we have today with security or 
communications and the like. And we want to--we want the 
renovation to take place. We are still suffering from sticker 
shock, as Justice Souter, I think, has spoken about. Anyway, we 
hope we can have more conversations about this and see if there 
is a way to scrub.
    Anyone else with questions?
    Mr. Serrano. No.
    Mr. Dixon. No.
    Mr. Rogers. Thank you very much for your time and your 
testimony. We will be scrubbing our budget. We don't know yet 
what the full committee allocation will be for our 
subcommittee, so we think we are very forthcoming at this 
moment about the success of your request, but we, of course, 
will give great weight to your testimony and to the request.
    Justice Souter. Thank you.
    Justice Thomas. Thank you, Mr. Chairman.
    Mr. Rogers. My regards to the Chief Justice.
    Justice Souter. I will tell him. Thanks.
    Mr. Rogers. The committee will come to order. We are 
pleased to have with us the Architect of the Capitol, Alan M. 
Hantman, who has jurisdiction over the Supreme Court building 
and grounds among others. The budget request for us is 
$7,530,000 for Fiscal Year 2001. But it also contains an 
ambitious outyear plan for some $100 million to be presented 
within the 2002 budget request for use of fiscal year 2003 
funds for renovation of the Supreme Court building. So we will 
have a bit to chew on as we consider this request.
    Mr. Hantman, we want to welcome you and your staff that are 
with you. We will make your statement, written statement, a 
part of the record, and we will be delighted to have a summary 
of that if you would like. You are recognized, Mr. Serrano.
    Mr. Serrano. Just to join you in welcoming Mr. Hantman. In 
my earlier life, I was Ranking Democrat on the Legislative 
Branch Appropriations. We did a lot of work together, 
especially on the renovation of the U.S. Botanical Garden, and 
the security upgrades at the U.S. Capitol. So I certainly 
welcome you and look forward to your testimony.
                                         Wednesday, March 15, 2000.

                        ARCHITECT OF THE CAPITOL

                               WITNESSES

ALAN M. HANTMAN, AIA, ARCHITECT OF THE CAPITOL
MICHAEL G. TURNBULL, AIA, ASSISTANT ARCHITECT OF THE CAPITOL
STUART PREGNALL, BUDGET OFFICER/DIRECTOR OF FINANCIAL SERVICES
JAMES MILLER, FACILITIES MANAGER

                           Opening Statement

    Mr. Hantman. Thank you, sir. Good morning, and thank you 
for that welcome, Mr. Chairman and Mr. Serrano. First, may I 
introduce to you Mr. Michael Turnbull, who is the Assistant 
Architect of the Capitol and Stuart Pregnall, who is our Budget 
Officer joining me here today. We also have other supporting 
staff if we need to get into some technical areas. I am pleased 
to appear before this subcommittee to present the budget for 
the care of the building and grounds of the Supreme Court. As 
Mr. Serrano alluded to, we have responsibility in this agency 
for basically all the buildings on Capitol Hill, including the 
Supreme Court itself. We are responsible for the building and 
grounds, the basic operation of that facility although the 
Court itself is responsible for basic maintenance and cleaning 
facilities management within the structure itself. So we work 
hand in glove together on that.
    As you mentioned, Mr. Chairman, our request this year is 
for $7,530,000, which represents a net $442,000 decrease from 
last year's budget. Within that amount, we are providing for 
ongoing staffing for maintenance costs as well as funding to 
continue the design of the building improvements project that 
you alluded to. I would certainly be pleased to answer any 
questions that you and the committee have on our budget or the 
building improvement project itself.
    [The information follows:]
            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 


                    SUPREME COURT RENOVATION PROJECT

    Mr. Rogers. Well, that really is a major part of what we 
will be talking about--the Supreme Court renovation project. As 
has been said, the first scope of the project, I guess in 1998, 
that I was aware of at that time, describes about a $7 million 
project to replace systems, improve security and the like, 
which was a doable-type figure. Since that time, though, as we 
have said, that $7 million project has gone down, grown now to 
at one time $140 million, which I think is what, 20-fold? And 
then went back down to $85 million, now it appears you have 
settled on $100 million, which is a size that I don't think we 
can quite swallow without some real hard justifications for 
spending that kind of money.
    I guess my real question is why has this project grown in 
scope and size so dramatically in just 2 years?
    Mr. Hantman. Excellent question, Mr. Chairman. In 1998, 
this committee funded $225,000 to do a master plan, a 
conceptional study of the Supreme Court. This had never been 
done before. The approach had been piecemeal, Scotch tape and 
glue to keep things together that basically have been 
functioning since 1935. When we first discussed this, the 
results of that $225,000 study last year, clearly it was a 
shock to all of us that the magnitude of the dollars really 
were in the range, as I pointed out $120, $140 million. It was 
certainly very appropriate for this committee to direct us to 
go back and take a look at that master plan study, build onit, 
really analyze it, and see what was, in fact, truly necessary, no bells 
and whistles, basic life safety, basic security, basic concerns about 
the mechanical electrical systems.
    We took you very seriously on that. In the year since our 
last hearing, we have done an awful lot to check into it, to 
revise it, to modify it and to bring it down to the point where 
we think it truly is in the right ballpark, as you indicated, 
about $100 million after the design request that we are talking 
about for this fiscal year. What we have done over the past 
year is working with the Court very strongly on the conceptual 
master plan. We proceeded to the 50 percent completion level of 
schematic design, more detailed design. When you talk about a 
master plan, a concept, you are talking about square foot 
costs, you are talking about comparing it to additional 
projects that may be of a similar landmark or occupied status. 
But when we got to the 50 percent mark on schematic design, we 
brought in an independent peer review team to evaluate the 
project scope and its costs. The team was composed of prominent 
experts in several aspects of building design. It included a 
historic preservation architect, structural engineer, 
mechanical engineer, and a fire protection and life safety 
engineer. Fire and life safety work was not included in any 
budget request prior to what we are talking about right now.

                     RENOVATION PROJECT PEER REVIEW

    Mr. Hantman. We also brought in an independent cost 
consultant. All these people, in fact, were independent, in 
other words, no prior connection to the project. As a belt-and-
suspenders type of thing, the Court brought in independent 
practicing architects to represent its part and its concern. 
The overall peer review process proceeded. The peer review 
group analysis focused on the basic needs of the project, that 
is, replacing critical building systems. They looked at whether 
or not there were opportunities for reducing the scope by 
cutting back or eliminating any of the building renovation 
systems we were talking about as part of a no-frills system 
modernization.
    Some scope elements previously planned, such as exterior 
stone renovation, was deferred to a future date. This resulted 
in an ability to more tightly focus design options on the 
issues really being reviewed, the basic concerns of the 
building. We also reviewed construction methodologies, the 
concern about how do we minimize overtime premium costs on a 
project of this nature with an occupied building where the 
Court is truly functioning.
    The peer review team results confirmed that the schematic 
design information which was built on our master plan, was 
proceeding in a logical and a consistent manner, that it was 
consistent to critical building system needs. They also found 
that there were no viable options for cutting back or 
eliminating major scope elements. The building systems have 
simply outlived their useful life expectancy. Further 
investment to sustain them for a period of 3 to 5 years would 
be money wasted, as they would soon have to be replaced fully 
and at greater cost than today. We would then have to get into 
the Court and do another project disrupting the operations of 
the Court a second time. This peer review committee found that 
the overall scope related to life safety, fire protection, 
basic mechanical, electrical, telecommunications systems, all 
of these retrofits were consistent with the nature of working 
in a historic building and the difficulties associated with the 
effort of working in a building that, in fact, was continuing 
to operate, and we have to do it in phases and segments.
    The peer review team also validated that the order of 
magnitude of cost for renovating this occupied monumental 
building was, in fact, reasonable. They did find some 
opportunities for cost reduction, however. Examples of 
potential reductions as a result of this in-depth review 
includes selection of a design for the mechanical system that 
utilizes the existing vertical duct system, it substantially 
reduced the impact on interior finishes. We don't have to cut 
holes in the floor, cut open walls to get major ducts and 
utility runs up into the building. So that, in itself, is a 
savings, which is why we are down from the $120- to $140-
million range.
    Consensus also was created that there be no major intrusion 
for life safety systems say in the Great Hall, because 
sprinklers are really not necessary in an area where you have 
hard surfaces, you have marble floors and walls, there is very 
little that can burn. So it is a refinement of an overall 
concept looking at individual spaces that we need to work on. 
Also, a design solution for creating new mechanical equipment 
space was developed that did not involve potentially costly 
subbasement excavation. We have gone through, Mr. Chairman, in 
this last year, 17 to 19 iterations of the basic system. The 
major cost is in mechanical systems and distribution. One of 
the major options was that, in order to leave the functions of 
the basement, which includes a lot of shops and support 
facilities intact, we could excavate beneath the parking pods. 
There are four quadrants, and a parking pod in each quadrant of 
the building. If we excavated in those pods, down to a new 
level giving us 18-foot headroom, and were able then to run the 
ducts effectively while the basic building systems were still 
in operation, that would be one major methodology, and a very 
viable method to do it.
    But there is some level of risk involved in terms of 
underpinning the existing foundations. There were also concerns 
there that it might drag on another year or so into the 
renovation process. And that the dollars would be more 
expensive than an existing basement scheme. The key here of 
course is the existing building systems need to be kept in 
operation while we are putting in the new systems and that we 
cut over to the new systems once they are proven and tested. We 
are now looking at a basement scheme rather than a subbasement 
scheme, which we think can give us significant savings as well. 
So based on the peer review team's analysis, the Court has now 
approved the overall scope of the project, and it agrees that 
the order of magnitude of cost is reasonable and necessary. 
Much progress has been made in the planning of the building 
renovations since last year.
    In closing, basically this part of the discussion, the 
buildings really have been in a 65-year-old time capsule. We 
really need, and all the consultants and the peer experts 
agree, it is time to open that time capsule and make sure that 
the base building systems and this wonderful historic movement 
itself will continue to serve the Court, and serve the American 
people well into the new millennium.

                          BUILDING APPEARANCE

    Mr. Rogers. Correct me on this now, as I understand it, 
there will be no real change in the appearance of the building 
inside or out?
    Mr. Hantman. This is the basic approach.
    Mr. Rogers. The idea is to preserve the 
architecturalintegrity of the building, the appearance of the building 
outside and inside.
    Mr. Hantman. That is correct, sir.

                           MECHANICAL SYSTEMS

    Mr. Rogers. But what you are attempting to do then, inside 
and outside, for that matter, but inside especially, is to 
renovate the heating and air conditioning systems?
    Mr. Hantman. Yes.
    Mr. Rogers. The electrical wiring?
    Mr. Hantman. Right. Telecommunications.
    Mr. Rogers. Telecommunications.
    Mr. Hantman. Life safety systems. This building does not 
meet current codes in many areas. It is not an unsafe building, 
but it needs to be brought up to code, and ADA as well.
    Mr. Rogers. In what respect?
    Mr. Hantman. Sprinklers. We have areas that are not 
sprinklered at this point in time. We have concerns that there 
are open stairways, monumental stairways, a similar process 
that we are beginning to address in the Capitol building 
itself. This building is of landmark proportions, having 
monumental stairs, the concern being able to detect any fire to 
get alarms appropriately sounding in time, to quash them at an 
early stage. Those facilities don't exist in the court right 
now.

                        SECURITY IN THE BUILDING

    Mr. Rogers. What about security, not perimeter security, 
but security in the building itself, will that be incorporated 
into this plan?
    Mr. Hantman. In the analysis that I described relative to 
the basement versus subbasement scheme, if we had gone to the 
subbasement scheme, most of the facilities could have been 
accommodated within the building shell. We are looking now at 
issues of basic building operations and security control. For 
instance, there are no truck docks in the building right now. 
No place outside of the base building structure where you can 
inspect mail.
    So what we are looking at now, Mr. Chairman, as one of the 
options we are working with the Court on as we are concluding 
the schematic design phase, is the possibility of building an 
underground structure to replace those functions that have been 
dislocated by the basement scheme.
    On the north side of the building, there is a triangular 
piece of land off Maryland Avenue between the court and 
Maryland Avenue. We are looking at the option of building 
underground, and an allowance for that type of construction is 
within this $100 million order of magnitude that we are talking 
about to accommodate some security-related, some truck dock-
related, some other operations that are important to the day-
to-day functioning of the court.

                     RENOVATION PROJECT CHALLENGES

    Mr. Rogers. Well, we are looking here at the renovation of 
one of the seats of one of the branches of government. And 
sometimes we forget that the Supreme Court building itself is 
the home of the third branch of government. The same as the 
White House, I guess, and the Old Executive Office Building, 
are the home of the executive branch, this Capitol Building is 
the home of the legislative branch. And we think nothing, I 
guess, of spending a lot of money on the homes of both of those 
branches. But it has not occurred to us it has been 65 or 66 
years since the Supreme Court building opened, and was 
constructed at a time when practically none of today's marvels 
were even dreamt about--telecommunications, terrorist threats, 
computers and the like. And you are dealing with a building 
that is constructed without false ceilings in which you can 
insert ducts. So you really do have a problem in that building, 
do you not, in trying to bring it up to modern-day standards?
    Mr. Hantman. We do indeed. The telecommunications part of 
the project is proceeding with design right now. We have done 
some preliminary probes through walls to find out if there are 
chases, there are no hung ceilings, as you pointed out, Mr. 
Chairman, to hide wires behind to change duct work 
configurations, to find chases that will allow us not to chop 
through marble, not to chop through fine finishes in this 
building so that we can retain what we are all concerned about 
which is the grandeur and the majesty of this building, so that 
future generations will really be able to respect the fact that 
the Supreme Court, as you pointed out, is the third branch of 
our government and a necessary and critical one.

                        RENOVATION PROJECT COSTS

    Mr. Rogers. Suppose we were unable to find that kind of 
money. What happens then?
    Mr. Hantman. I think what we need to do now, Mr. Chairman, 
with the funds that we are requesting we will be finishing up 
the schematic design and going into the detailed design phase. 
In that detail design phase, we will be further refining and 
doing more exploratory work of what we can do to minimize again 
chopping those fine finishes, spending all the general 
condition dollars for repairing, replacing, repainting critical 
areas within the court. Hopefully, we can find that much of 
this work can be accommodated in double wall systems, in 
cavities within ceilings that we can find and find that we can 
run our wires and our cabling through. That hopefully will then 
reduce the cost. The issue of what we can phase for future 
times is really problematic, Mr. Chairman, in that there is so 
much of this that has to be done in virtually all the spaces of 
the Supreme Court, that if we delayed a piece of the work until 
later on, we will have to come back and disrupt the court and 
their operations once again in the same spaces. Which is why we 
need to look at, during this design development phase again, 
what needs to be done, what potentially might be deferred. 
Anything that we could consider to be bells and whistles, et 
cetera. We took you very seriously last year, Mr. Chairman, I 
have no intention of coming back here again saying there are 
any such bells and whistles in this project.
    Mr. Rogers. Well, you are asking for $1,971,000 for this 
study of the further construction design, I guess, for this 
coming year.
    Mr. Hantman. Over and above the base.
    Mr. Rogers. Over and above your base?
    Mr. Hantman. That is correct.

                           PERIMETER SECURITY

    Mr. Rogers. Now, we have not talked about perimeter 
security. But as I understand it, now as opposed to 1998, we 
are talking about the perimeter security for the Supreme Court 
building being a part of the overall Capitol Hill perimeter 
security plan; is that correct?
    Mr. Hantman. That is correct. I think that is the only way 
we can appropriately address it. We have created a task force 
that involves the Library of Congress, the Senate Sergeant at 
Arms, the House Sergeant of Arms and myself, whocomprise the 
Capitol Police Board, as well as the police force itself, to make sure 
that whatever we do with the Court is consistent with what we are 
proposing to do throughout the Capitol.
    Mr. Rogers. When do you anticipate that that plan would be 
available?
    Mr. Hantman. There are some studies under way right now, 
which are expected to be coming in within the next 2 to 3 
months dealing with the threat level on the Senate and the 
House side as well. Some of those studies had been completed on 
the court but not on the Senate or the House side. Once those 
studies are at the Capitol Police Board, the task force will 
focus on the implications of those studies and what the board 
as a totality wants to bring to the Congress as well as to your 
committee, and the court itself to again come up with a 
comprehensive plan. We are hoping that we can do that this 
year.
    Mr. Rogers. Now, under what category in the budget would 
that perimeter construction be?
    Mr. Hantman. Thus far, we had had a separate line item, 
separate from this $100 million that we are talking about from 
the basic building itself. We had requested--I think you had 
granted us some $500,000 in fiscal year 1999 and that is what 
we have been building on, and we have been deferring the 
completion of that study until we get the input from the rest 
of the people on Capitol Hill.
    Mr. Rogers. When it comes time to build perimeter security, 
what subcommittee will that be under?
    Mr. Hantman. I believe it will be this subcommittee, 
because we are still talking about for the Court itself. 
Although we are talking about a comprehensive integrated plan, 
anything that deals with any of the streets that surround the 
court deal also with the Senate and the House side, also with 
the Library of Congress. So this has to be thoroughly thought 
out. But I think, since we are talking about court grounds, 
that we would still be coming to this committee.
    Mr. Rogers. But there are no monies in your present request 
for perimeter security?
    Mr. Hantman. That is correct sir.
    Mr. Rogers. Okay.
    Mr. Serrano.

                    Historic Building Modernization

    Mr. Serrano. Let me ask the dramatic question. In listening 
to you I wonder if, in the long run, it would cost less to take 
the present Supreme Court building make it a museum, and build 
them a new building. I mean, it seems to me that so much needs 
to be repaired, it seems to me there is no guarantee that we 
are going to pull this off and bring them to the point of where 
they should be. Of course, the same argument could be made 
about the Capitol building. And we are certainly not intending 
on building a new Capitol building. But as we look at these 
issues, are these doable? Are all these structures that we have 
to repair and bring up to this modern day, is this a doable 
situation?
    Mr. Hantman. They are indeed doable, sir. We had looked at 
the issue of what if the Supreme Court were to relocate. 
Clearly the Court itself has no interest in relocating to 
another facility. They are very clear on that. This is the 
building they want to remain in. In fact, the costs of building 
a building that was appropriate for the Supreme Court somewhere 
in the district and then still having to come back and retrofit 
this building--the mechanical systems, they would have to be 
replaced, even if the building were to be a museum. I think the 
overall dollar value would still exceed the retrofit, although 
it may be a 6-to-8 year period that we are going to. We 
recognize the court is going to be in session, that the 
justices are very sensitive to disruptions to their work. But 
we can do the work. In fact, we are going to have to be doing 
the same thing in the Capitol itself. We have not yet gotten 
carte blanche access to any portion of the totality for us to 
do life safety elements. That is why it is going to take longer 
to do that building as well while it continues to be occupied.

                      OCCUPANCY DURING RENOVATION

    Mr. Serrano. So you expect the Court to stay in residence 
during the renovation?
    Mr. Hantman. Absolutely, sir.
    Mr. Serrano. And they agree with that.
    Mr. Hantman. They do agree with that. Quite frankly, I 
think anything we do, despite the fact that we will be doing a 
lot of work on overtime hours and at times that the court is 
not in session, will create some level of inconvenience.
    Mr. Serrano. What are their periods that they are not in 
session?
    Mr. Hantman. July 1st through the end of September is the 
primary block of time. And the noisiest work could certainly be 
reserved for the period of time that they are not here. But as 
for the issue of inconveniences, I don't think anybody, quite 
frankly, whether you are talking about the Capitol building 
renovation or the Supreme Court building renovation, or we are 
talking about the visitor center on the east front of the 
Capitol, appreciates that there will be disruptions, there will 
be noise, there will be dirt. And that is a normal part of, an 
unfortunate part of retrofitting existing buildings. And that 
will, in fact, be the case.
    Several weeks ago I had the pleasure of meeting Senator 
Voinovich, who was recently elected to the Senate from Ohio. He 
had been the Governor of Ohio prior to that. And there had been 
an article in the Roll Call newspaper at that point in time 
that we were discussing. And it was an article about life 
safety systems and going in and renovating the buildings. He 
said, you know, when he was Governor of Ohio, he had a real 
problem with the State capital. He had, as governor, to vacate 
the state capital for 3 years to do half the building. It was a 
400,000-square-foot building, so 200,000 square feet was 
vacated for 3 years. They went to another structure that had 
been built for the expansion of the government services. When 
he moved back, and the other half of the building was done in 
another 3 years, a total evacuation of the building. Poor word, 
perhaps, but they evacuated the building for that period of 
time.
    That is certainly an approach that people around the 
country are taking to some structures. That is not the case in 
the Capitol nor--certainly in the Supreme Court. They had just 
built another building in Ohio in which they had turn around 
space unoccupied at that point, where there was no other costs 
to build another facility to house them during that period of 
time. So they were able to do their renovation. I don't believe 
we have that option.

                       ANTICIPATING FUTURE NEEDS

    Mr. Serrano. I am just concerned. I don't want to question 
the abilities of any of you gentlemen, but it worries me that 
by the time these projects are finished, we are going to have 
folks before these committees again saying that some things 
were not taken care of. I just wonder if the present structures 
lend themselves for us to understand everything that needs to 
be done withthem and everything that has to be changed and 
renovated.
    Mr. Hantman. We are undergoing----
    Mr. Serrano. We are dealing with security issues, right? 
But you are also dealing with rewiring, if you will.
    Mr. Hantman. That is correct.
    Mr. Serrano. Then the normal aging problems of replumbing 
and other structural situations. I am hopeful that we have 
taken a very close look at everything that has to happen here 
so that when the 6- or 5-year period is over, we don't find we 
have to do something else. You know, I remember in 1974, I got 
elected to the State assembly in New York and in 1975, we 
inaugurated the Rockefeller Plaza. By the time I left there in 
1990, it was being rebuilt. That is a different story, whoever 
built it didn't--in 1975 didn't anticipate what they needed in 
1990. And everybody was moved out of this whole complex 
downtown and people had to be-- the whole thing had to be 
attacked again.
    Mr. Hantman. Your concern is a real concern. Any time you 
go into an existing structure, no matter what you do you will 
find some surprises. We think that we have looked at the major 
systems, the major issues that need to be addressed in the 
renovation. As we go through design and construction documents, 
we will be looking, in more detail, at what the real issues are 
before we come to you with a full construction budget. We think 
it is in the magnitude of $100 million at this point in time. 
We will be doing a lot more cost estimating and detail design 
work before we come back to you.
    Mr. Serrano. A 100 million dollars for everything that 
needs to be done in the Supreme Court or the whole complex?
    Mr. Hantman. The Supreme Court, in addition to the dollars 
we are asking for the design phase right now.
    Mr. Serrano. Thank you, Mr. Chairman.

                            CLOSING REMARKS

    Mr. Rogers. Well thank you very much for your testimony. 
You have got a tough job. It is hard to get the money out of 
these lemons up here.
    Mr. Hantman. Quite frankly, you have real allies in wanting 
to look at belt-and-suspenders methodologies. The court, as you 
are well aware, sir, is a very deliberative body. We have met 
many times with three of the justices on the court who took it 
back to the full court themselves, coming back with lots of 
questions, lots of iterations and which we have had to study 
and study productively for this last year. So for the court to 
be convinced at this point in time, I have never pleaded a case 
before the Supreme Court before, but they are committed to it 
right now. They recognize that it needs to be done. Quite 
frankly, they need to all recognize that there, by necessity, 
will be some disruptions, but we will try to minimize that.
    Mr. Rogers. I can only imagine the difficulty of getting 
those people in a consensus on reconstruction of that facility. 
And I am sure that has been a tedious process that you have 
gone through.
    Mr. Hantman. It has been a constructive one, sir.
    Mr. Rogers. Thank you very much.
                                         Wednesday, March 22, 2000.

                JUDICIAL CONFERENCE OF THE UNITED STATES

                               WITNESSES

JOHN G. HEYBURN II, CHAIRMAN, COMMITTEE ON THE BUDGET OF THE JUDICIAL 
    CONFERENCE OF THE UNITED STATES; JUDGE, UNITED STATES DISTRICT 
    COURT, DISTRICT OF WESTERN KENTUCKY
ROBERT C. BROOMFIELD, MEMBER, COMMITTEE ON THE BUDGET OF THE JUDICIAL 
    CONFERENCE OF THE UNITED STATES; JUDGE, UNITED STATES DISTRICT 
    COURT, DISTRICT OF ARIZONA
LEONIDAS RALPH MECHAM, DIRECTOR, ADMINISTRATIVE OFFICE OF THE UNITED 
    STATES COURTS; MEMBER, EXECUTIVE COMMITTEE OF THE JUDICIAL 
    CONFERENCE OF THE UNITED STATES
FERN M. SMITH, DIRECTOR, FEDERAL JUDICIAL CENTER, JUDGE, UNITED STATES 
    DISTRICT COURT, NORTHERN DISTRICT OF CALIFORNIA
    Mr. Rogers. The committee will come to order.
    We are pleased to have with us today a distinguished panel 
of jurists from our Federal Courts to defend the fiscal 2001 
budget request for the Judiciary.
    The panel is being led for the fourth time by Judge John G. 
Heyburn, who sits on the United States District Court in the 
District of Western Kentucky in Louisville, and who has brought 
great distinction to the bench. I might add that, in his 
capacity as Chairman of the Judicial Conference's Committee on 
the Budget, he has the task of presenting the budget for the 
entire Judiciary to the Congress, and to make the case for the 
resources necessary to assure that the Federal Courts can carry 
out their heavy duties. It is always a pleasure to welcome my 
friend, Judge Heyburn, and his colleagues to this subcommittee.
    He is joined by Judge Robert C. Broomfield, from the 
District of Arizona, also a member of the Budget Committee; 
Judge Fern Smith, Director of the Federal Judicial Center--and 
congratulations to you on your new assignment.
    Judge Smith. Thank you.
    Mr. Rogers. And Leonidas Ralph Mecham, Director of the 
Administrative Office of the U.S. Courts, and a long-time 
visitor to this subcommittee.
    As you know, fiscal year 2000 was a difficult year, for us 
as well as yourselves. We struggled to find every dollarthat we 
could for the needs of the courts, and still came up short, I'm sure, 
in yours and others' views. I think it's fair to say that the prospects 
for fiscal year 2001 are about the same as they were last year, so 
we're going in with the wick of expectations burning real low.
    We will make your statements a part of record. Judge 
Heyburn, if you would like to begin by summarizing your 
statement, we would look forward to hearing from you.
    Judge Heyburn. Thank you very much, Mr. Chairman. It is 
always a pleasure for me. This is my fourth occasion, as Chair 
of the Budget Committee, and perhaps my sixth occasion overall, 
to appear before you, and to represent the men and women of the 
judiciary, it's really a proud moment for me to have that 
opportunity.
    I practiced law for 16 years, and now it is astonishing to 
me to think that I'm entering my eighth year as a judge. I have 
a tremendous appreciation for the hard work and dedication of 
the people who are in the judiciary. It's been a very 
fulfilling experience for me and it's a pleasure to represent 
them.
    Also, as you have said on a number of occasions at the 
outset of these hearings--Congressman Serrano, welcome. As you 
have said on a number of occasions during these hearings, these 
sessions never cease to amaze me about the majesty and the 
delicacy of our constitutional system. We know that the 
founding fathers created the judiciary to protect the rights of 
our citizens and to mediate disputes among citizens and among 
branches of Government. And yet, here we are, as a separate and 
independent branch of the Government, coming before you, 
another independent branch, and asking for the resources to do 
the very job that the Constitution and your own legislation 
requires it to do.
    I feel very positive about your and Mr. Serrano's deep 
understanding of our constitutional system and the dynamics 
that are at work, and it's always a pleasure to be able to 
discuss these issues with you.
    Also, as you know, we have had a very cooperative and 
terrific working relationship with your staff, getting them the 
information that we think you need to make the tough decisions 
that you have to make. We're looking forward to working with 
Gail Del Balzo in her new capacity, and we will try to get you 
all the information that you need and look forward to working 
with you.
    Also, as you suggested, we really do appreciate the efforts 
that you, Congressman Serrano, and members of the committee 
went to, to help the judiciary receive the funding that it did 
last year. Sure, it wasn't everything we asked for, but our 
job, after we receive our appropriation, is not to complain 
about what we didn't get or what we did get. Our job is to do 
our job. Our main appreciation that we can express to you is, 
after we get the appropriation, is to go ahead and do our job 
as best as we possibly can and as efficiently and as fairly for 
the American people as we can. We hope that every year we 
justify your faith in us by doing exactly that.
    We know you had a hard year last year. I was hoping you 
were going to say that this year was going to be a little 
easier. I hope at the very least, for all of our sakes, that 
you will finish a little earlier. But we are here to help you 
and, of course, to justify our request.
    Our request this year is for about an eight-and-a-half 
percent increase in obligations, and that translates to about 
an eleven-and-a-half percent increase in appropriations. We can 
discuss that difference, of course, if you like.
    That really amounts to about a $360 million increase in the 
obligations that we need to run the judiciary. Of course, 
that's a small amount compared to the entire budget, but we 
know that every increase, every dollar, is something that you 
need to weigh against the other priorities, not only within 
this committee but compared to other committees as well.
    But of the $360 million, a huge percentage of that, about 
$260 million, is necessary just to maintain the ongoing 
operations. It's for inflationary pay increases for employees; 
it's to pay the increased rent that GSA charges us; it's to pay 
the rent for new buildings. That leaves about $100 million that 
is really meeting the new challenges of the judiciary, for new 
security needs, and for some new judges and magistrate judges 
that are coming on board.
    The focal point of our discussion this year is the 
continuing rise in the Federal caseload--that is, the work that 
we have to do. This is something that we don't complain about. 
It's just a fact of life. It's something that is, to a certain 
extent, beyond everyone's control. Particularly the criminal 
caseload continues to rise. Over the last four years, criminal 
filings have increased 28 percent, and all the things that are 
related to that have increased about the same: the number of 
people on supervision, the number of pretrial reports that are 
necessary, the number of panel representations that are 
required for indigent defendants et cetera.
    But over the past couple of years, and this year 
particularly, we have noticed another phenomenon, and that is 
the concentration of the increase in the criminal caseload in 
certain areas, particularly along the southwest border. I don't 
want to bore you with the statistics, but sometimes they are 
telling. Of the increase in the Federal criminal caseload, 
which is substantial, over the last four years, almost 70 
percent of that increase has occurred in only five judicial 
districts. What's happening is a unique set of circumstances 
created by the border situation, the crossing at the border, 
and all the related problems that go along with it, drug 
trafficking and other, both State and Federal, violations.
    The result is that the Executive Branch of our Government 
is devoting an incredible array of resources to combat this 
problem. I know in some cases there are some people who say 
they haven't devoted enough, and maybe other people say too 
much. Our job is not to question whether the resources devoted 
are too much or too little, but simply to respond and make sure 
the judiciary is not the bottleneck. But over the last four 
years, Border Patrol agents have increased about 100 percent, 
and INS and DEA agents a similar amount. The effect on our 
caseload is to be expected.
    Of course, there are other areas that also have seen a 
tremendous increase in the criminal caseload, and areas that 
are not on the border, one of which is in our own home State. 
For reasons that are probably related to geography and 
transportation methods, the Eastern District of Kentucky over 
the last two years has shown a 33 percent increase in the 
criminal filings.
    Part of what I'm here to tell you about is the 
extraordinary efforts the judiciary has already made to 
confront these challenges. We know the situation is, to 
someextent, a crisis, and we need to respond. We have done that by 
committing resources to the southwest area, making sure extra judges 
are there. We know there may not be confirmations of new judges in 
quite a while. There have been sixteen new judges applied for for that 
area. We recognize that that may not happen any time soon, so we've got 
visiting judges in. We've got personnel from other areas to try to deal 
with the problem.
    One of the reasons that I asked Bob Broomfield to come with 
me, in addition to being a member of our Budget Committee and 
being on our Economy Subcommittee, whose job it is to look for 
ways we can find efficiencies in the judiciary, but he's also 
the immediate past Chief Judge of the District of Arizona, 
which is right in the middle of this problem, so if you have 
any particular questions of him, I know he would be glad to 
address them.
    There are a lot of other things we could discuss, and I 
think I will leave that to the questions that you may have. But 
obviously, we feel like we've had some success over the past 
couple of years, and we don't take all the credit. A lot of the 
credit goes to this committee, the questions that you have 
raised, the challenges you have given us.
    In the habeas corpus area, I think we have shown some 
progress, and we've probably got some progress to make. But at 
least we're heading in the right direction on bringing down 
those costs.
    Generally, in the defender area, I think over the past few 
years, with a lot of prodding on your part, I think we have 
shown a reorganization of that program, an ability to deliver 
better service at a lower per-case cost, so I think we're on 
the right road there.
    We do need some help in defenders, though. We would like to 
get the defender panel rate up to $75.
    We've got the U.S. Sentencing Commission back in business. 
That's important for the judges. We have continued our efforts 
to evaluate our ongoing practices in security, in buildings, in 
personnel. We've got studies going in all three of those areas, 
to reevaluate how we do our work, to see if there's a better 
way we can do it. We know we've got budgetary pressures, and 
our caseload is changing. The country is changing and we've got 
to respond.
    I am proud to represent the judiciary. This has been and 
continues to be a very fulfilling experience for me, and to 
have Ralph Mecham with me, under whose charge the 
Administrative Office has really taken a leadership role in 
addressing the various problems that have confronted us. Also, 
to have Judge Fern Smith, under whose new leadership I think 
you'll see the FJC continue to be a real integral part of 
addressing the problems we have.
    In long distance learning, they have helped out already in 
the Southwest Border Initiative, and in getting information to 
judges who are confronted with habeas corpus cases, both 
capital trials and capital habeas cases that they're not used 
to. They have been getting judges the kind of training that 
will help run those cases more efficiently and hold down costs, 
if possible.
    So we're glad to be here. We are glad to help out in any 
way, and all of us would be delighted to answer any questions 
that you and Congressman Serrano would have of us.
    Mr. Rogers. And Mr. Wamp.
    Thank you, Judge.
    Mr. Serrano, do you have any opening comments you would 
care to make?
    Mr. Serrano. No. I would just apologize for being late. The 
Vice President was visiting the building, as you know----
    Mr. Rogers. No, I didn't know. [Laughter.]
    Mr. Serrano. You weren't invited. But he had some very kind 
things to say about you. [Laughter.]
    I would just like to welcome you folks. I will have some 
questions, especially on the whole issue of the Southwest 
Border.
    Mr. Rogers. Does any other witness care to give a statement 
at this time? Well, thank you very much.
    Yes, Mr. Mecham.
    Mr. Mecham. Since you did mention the fact that I have been 
here so often, I would like to thank you for your patience over 
the years. This is my 15th time before this subcommittee, in 
the modern era, and two years under the ``sainted'' John 
Rooney, in an earlier incarnation.
    My agency celebrated its 60th anniversary this last year. 
We were created because everyone felt it was inappropriate for 
the largest litigator in the courts to control the management 
of the judiciary. So in '39 my agency was created, hopefully 
also to increase efficiency and service, as we have tried to 
do. We operate ``lean and mean'' and we are pleased that you 
have supported us well--not as well as we would like, but 
always well.
    May I join Judge Heyburn in thanking you for what you did 
this last year. Not only did you do well by us in this 
subcommittee, but in conference you went higher than either the 
Senate or House figure, which was unprecedented, and we are 
grateful for that and are using it wisely.
    Thank you.
    Mr. Rogers. Well, as an old state court judge, a mentor of 
mine back home in Kentucky, once said, after I had my first 
case--this was Judge Roscoe Tartar--after the jury came back 
and acquitted my man, who should have been convicted----
    [Laughter.]
    Judge Tartar says, ``The Lord is mighty in battle, mighty 
in battle. Mighty in battle, indeed.'' So I guess in these 
budget negotiations there is some other force working. ``Let 
the force be with you.'' [Laughter.]
    I thank all of you for being here and for your testimony. 
It is a pleasure working with Judge Heyburn and his committee. 
They are always above board and fair and honest in their 
dealings, obviously.

                    APPROPRIATIONS FOR THE JUDICIARY

    It is a particular atmosphere in which we have to work in 
the courts' appropriation, because there is a special factor 
involved here that is not involved when we're dealing with the 
State Department or the Commerce Department or whatever. This 
is an independent branch that is, indeed, separate and equal. 
It is the obligation of this branch of government to 
appropriate, to tax and appropriate funds, for all agencies of 
the government, including the judiciary. But we are very 
mindful of the need and constitutional separation of powers, 
and we dare not, in any way, try to influence the other branch 
of government in dispensing equal justice.
    It is always the temptation of the appropriators--that is 
to say, the Federal Congress--it is always our temptation to 
put strings on any monies we give to another agency. And we do 
that quite often. But, my goodness, we have never attempted to 
do that with the Judiciary, nor shall we. If we do, I'm sure 
the public would be outraged. We will, though, exercise our 
obligation to scrutinize your spending, to be sure that it is 
adequate, to be sure it is being done the right way. That's the 
purpose of this procedure.
    Now, you have requested $4.6 billion in total obligations. 
That's an eight-and-a-half percent increase, as you say, over 
the current level of $4.3 billion, but I see that is the 
request for total obligations, not appropriations.
    Judge Heyburn. Yes.
    Mr. Rogers. Because, as we know, you're funded by the 
appropriated moneys that we give you, and then you have other 
sources of funds--fees, carryover balances and the like--that 
go with the appropriated funds to give you your total 
obligations. Your total obligations request is for an eight-
and-a-half percent increase, yet your request for appropriated 
funds is an 11 percent increase, an 11.7 percent increase.
    Judge Heyburn. Right.
    Mr. Rogers. And that is so, I am told, because of a sharp 
decline in your other sources of funds, a projected decline of 
almost 34 percent in the other funds.
    As we have said, Judge Heyburn, you're aware that our 
appropriated funds source remains subject to tight 
restrictions. We're not going to have a lot of money to throw 
around. So could you comment on the decline in this category of 
``other'' sources of funds and how would you explain that 
trend? Do you expect that decline to continue and, if so, how 
are we going to make up for it?
    Judge Heyburn. Well, as you know, the judiciary is somewhat 
unique in the way we are funded, not because we have other 
sources of funds--there are other agencies that have that--but 
at its high-water mark, those funds represented almost ten 
percent of the total budget. At one point we had a carryover 
that exceeded $250 million, plus fees of about $150 million. 
That's $400 million in non-appropriated funds.
    But the unusual thing about our funding, as you know--and 
it's a tribute to the trust that has developed between the 
judiciary and this committee--is that the funds that are unused 
at the end of the year have been allowed to be carried over to 
the next fiscal year. That seems to be a positive for both 
sides. It encourages us to spend the money wisely, knowing we 
won't lose it, and the next year any carryover naturally 
reduces the necessary appropriation by a like amount. If 
there's a carryover of $200 million, then that's $200 million 
less that needs to be appropriated. It's as simple as that.
    These carryovers occur for a lot of reasons that are 
basically beyond our control. We can't control the number of 
judges that are confirmed. We can't control when buildings come 
on line and when rent will be due. We can't control a lot of 
other things, such as a caseload that may result in increased 
or decreased costs.
    Of course, we're always trying to save resources. This past 
year, for instance, the individual courts returned $40 million 
to us at the end of the year. Of course, that then reduced the 
appropriation need for the next year. But each year, for the 
past two years, because of tight appropriations, we have had 
to, in essence, spend the carryover. Although I'll use sort of 
gross numbers, going into FY '99, the carryover, including 
everything--and some of this was earmarked funds--was about 
$250 million. This past year, in FY '99, we spent about $80 
million of that carryover, so that going into FY 2000, we're 
down to $190 million of carryover.
    We anticipate that this year we will spend about $100 
million of that carryover, because we don't have any other 
sources of funds. So that beginning in FY 2001, we're not going 
to have a carryover to spend. So in order to even exist at the 
same level that we had before, those carryover funds that we 
have spent need to be replaced. It's as simple as that. You can 
only spend the carryover until there's essentially no carryover 
left. Obviously, every year, even if you budgeted absolutely 
precisely, there's going to be a little bit left over.
    We have gotten to the point, as I think the chart on page 
24 of our budget summary demonstrates, where the carryover is 
going down and down and down. Of course, we're estimating right 
now that the carryover in S&E operations will be about $50 
million. As you know, as the year goes on, if we think it's 
going to increase, we'll let your staff know. Of course, that 
directly reduces the appropriation that's necessary.
    But the bottom line is that there isn't a $200 million 
carryover to spend in lieu of an appropriation any more. That 
is really the long and the short answer to your question.
    But the whole relationship I think is one of trust between 
your committee and the judiciary, and it has really worked 
well, because our courts and the judiciary as a whole 
understand that we don't spend the money just because it 
happened to have been appropriated to us. We spend it only if 
we need it, and if we don't need it this year, it's carried 
over to the next year.
    Mr. Rogers. Well, I hope you appreciate that your request 
does include an 11.7 percent increase as far as our monies are 
concerned, and that is a huge increase for anybody in our type 
of budget circumstances. So it will be difficult to do that 
kind of a number.
    Mr. Mecham. Mr. Chairman, may I raise a related point?
    Mr. Rogers. Yes.
    Mr. Mecham. This committee, in its wisdom, determined last 
year to raise bankruptcy fees in certain instances by about $25 
million. You decided to split that roughly between the 
judiciary and the U.S. Trustees.
    You may want to take a look at the Senate version of the 
bankruptcy bill, because they're going to take all that away 
from you and us, which will mean you will have less of this 
funding available than you had before and, not only that, the 
Senate bill may redistribute all the fees which we had before. 
You may want to have your staff talk with Mr. Hyde and other 
Houseconferees; otherwise, we may end up together losing a 
significant amount of some of these carryovers and other resources.

                   OPTIMAL USES OF JUDICIAL RESOURCES

    Mr. Rogers. Well, we have begun those discussions and we 
will be following through with that. Thanks for reminding us.
    Now, in a report sent to our subcommittee in February, the 
judiciary outlined optimal uses of judicial resources--and I 
quote from that report. ``The Federal Judiciary continues to 
embrace the challenge to improve services, enhance 
productivity, and reduce costs.''
    Could you provide us with some examples of your efforts to 
operate in a more cost-effective manner, and at the same time 
maintain superior service to the courts and to the American 
people?
    Judge Heyburn. As you point out, we have provided this 
report--we do every year--of the efforts that we've made to be 
more efficient. I suppose the one evidence of our increased 
efficiency is due to the budget crunch and due to the crisis, 
if you will, at the southwest border. We have had to reduce the 
funding levels to many of our courts, below what we may think 
is appropriate. And yet those courts, so far, are doing their 
job through a tremendous effort, in part due to the automation 
efficiencies that we have encouraged over the years. So, we 
think the fact that we're able to still do the job with lesser 
resources is a testament to the efficiencies that we've 
developed.
    The judiciary has, on occasion, recommended that certain 
bankruptcy judgeships go unfilled, where we don't think the 
need is there for an additional judgeship. You know, everybody 
always wants to fill judgeships, but the judiciary has, on a 
number of occasions, recommended that bankruptcy judgeships--
which we do have control over and don't require Senate 
confirmation--that those go unfilled, when we didn't think the 
workload was there.
    We have moved judges around, sought out help from visiting 
judges, to go to those areas where the workload is increasing, 
so that we haven't had to ask for additional judgeships but put 
the resources where they're needed.
    We have developed a national gateway to the Internet. A lot 
of our people do research on the Internet, and we have saved 
millions of dollars by having one national gateway, rather than 
individual gateways from separate courts. We have developed a 
hand-held drug testing system which is used by the probation 
officers and supervised releases, a tremendous savings there.
    We have ongoing studies in the space and facilities area, 
in security and in our personnel area, to try to see how we can 
use those resources in a better and more efficient way. Those 
studies, at least two of them, ought to be completed within the 
next six months.
    We continue with the bankruptcy noticing system that saves 
millions of dollars. The educational programs that the FJC has 
been involved in are continuing their use of alternative 
learning devices that don't require everybody to go to a hotel 
and travel long distances in order to have educational 
programs, for both judges and for staff. So that's another area 
where we've tried to become more efficient.

                      LONG DISTANCE COMMUNICATIONS

    Judge Broomfield is on our economy subcommittee, and from a 
budget point of view, we are constantly stressing and 
addressing: Is there a more efficient way of accomplishing the 
same objective; is there a different way of accomplishing the 
same objective. So it is something that we focus on. And your 
attention to that area obviously adds a little heft to our own 
efforts. So we appreciate that from you.
    Mr. Rogers. Have you an estimate of the amount of savings 
that have been accomplished?
    Judge Heyburn. It is millions of dollars. I would hesitate 
to guess, but I'm sure the number is in here. Just a couple of 
the items that I have mentioned could involve millions of 
dollars of savings. It is a substantial amount. It's a 
substantial amount.
    Mr. Rogers. We can perhaps address this question to the 
head of the Judicial Center, Judge Fern Smith, or anybody on 
the panel. In the field of medicine, telemedicine now is saving 
zillions of dollars. We're experimenting with using that, of 
course, in the prison system as well, to save needless trips 
from prison to the doctor's office a hundred miles away, saving 
all the expenses involved with that, and perhaps providing even 
better and more expert care for prisoners.
    The Navy, of course, uses telemedicine elaborately. If 
you're on an aircraft carrier in the Indian Ocean, you're 
hooked up by teleconference with a doctor in Bethesda, MD to be 
diagnosed.
    Can we not duplicate, to some extent more so, in the courts 
the use of these new techniques such as teleconferencing, to 
save time and money and expense in the court process?
    Judge Smith. I'll take a stab at that.
    First, if I can, let me just say what a pleasure it is to 
be here and thank you for your welcome.
    I think the courts are experimenting in that. I was reading 
recently about someone who conducted a court trial by video 
conferencing. He was a visiting judge, actually, and rather 
than go into the jurisdiction where the case was, he dealt with 
the attorneys by a video conference. That was very successful. 
I think other experiments are going on.
    There are, of course, when it gets into the criminal area, 
some constitutional problems and challenges to right of 
confrontation that are going on. We, of course, at the Center 
are using video conferencing and trying to use web-based 
communication in a greater and greater degree. We have had 
noticeable results. I think it's only a matter of time before 
it does spread more and more to the courts.
    But my guess is that, in the actual application of the 
courts, either Judge Heyburn or Judge Broomfield probably know 
more about what's going on in the Judicial Conference, if 
anything, on those programs.
    Judge Heyburn. I think Judge Broomfield may have a comment 
on that.
    Judge Broomfield. Mr. Chairman, the video is really 
catching on in the judiciary in a significant way, and in a 
variety of ways. We use it for our judges meetings, when we 
have judges a long distance away. Instead of having to get 
together and essentially losing an entire day, we do it over 
the noon hour. Nobody loses anything.
    But that's just the tip of the iceberg. We can use it on 
the civil side, and do, in the courtroom. I have tried some 
cases myself, where we've had inmates at the State prison 
testifying from the prison in a civil rights case. We've had 
psychologists testifying in a civil rights case. I just goover 
and sit in the jury box with the jurors and we all watch the television 
set. It was all pursuant to an agreement with the parties and they were 
very satisfied.
    I have even discovered that many of the inmates in the 
prison system would prefer that because they don't upset others 
who may be forced to come to the court to testify when they 
don't want to. So it is very positive.
    In addition, lawyers have tended not to want to use it, 
particularly on the defense side, to talk with their clients. 
This is on the criminal side. But we have encouraged them to 
try to use it, and they are starting to use it. Instead of 
driving an hour-and-a-half each way to the facility where they 
can interview their client, to go over a presentence report, a 
proposed plea agreement or something like that, they can do it 
by video conferencing. More and more of them are doing it 
because they see the advantage to them.
    These is a whole host of ways that technology is being 
used. Probation officers are now doing a lot of their own 
presentence reports because of the technology we have given 
them. We have even converted some clerical positions into line 
probation officer positions, just to keep up with the workload. 
That's sort of the southwest border thing. So we are using 
technology in a major way, and video conferencing is very 
strong.
    Now, someone mentioned other judges. We use visiting judges 
in our district to survive, mostly on the civil side, but not 
entirely, and we get them in a variety of ways. Sometimes they 
will come in for a week or two weeks and try whatever there is 
to try. Sometimes they will come in and try a long, three- or 
four-week trial. But for several years now we have used judges 
with block assignments. We will give them 20 or 30 cases from 
their own home district. They will deal with those cases from 
the district and will never travel to our district, unless 
there's a trial or a hearing, which doesn't happen very 
frequently.
    The one I think they were referring to was a member of the 
Budget Committee, who is the Chief Judge in Massachusetts, and 
who has a block of 20 of our cases. He was the one who used 
this video conferencing to deal with a contested evidentiary 
hearing, with the agreement of the parties, to be sure. That 
saved a tremendous amount of resources, actual dollars, plus he 
didn't have to come and was able to spend more time in his own 
home district. They're using it in a big way.
    Judge Smith. Could I add to that, Mr. Chairman?
    One of the projects the FJC Research Department has going 
on now is an update of our publication on how to effectively 
use visiting judges. It was something that we put out several 
years ago. But because of technology, and because of progress 
in that area, there are so many new, innovative ways to 
approach it, many mentioned by Judge Broomfield. And so we're 
updating that publication and we're going to make sure that all 
judges and all districts have it, so that these innovations can 
be more widely used and tested.
    Mr. Rogers. There have got to be more ways to bring this 
technology revolution that's occurring in business and 
everything else in the world, we have got to be sure that the 
courts are utilizing that machinery, where appropriate, because 
it does multiply your efficiency and save money.
    With the kind of growth in your caseload now, and expected 
in the future, unless we utilize these new methods, we're going 
to get swamped, it seems to me. I would even suggest, half-way 
tongue-in-cheek, that we hire a 21 year old to work with you in 
the Center, that understands the new machinery of this age 
better than any of us, to keep up-to-date with the Internet 
changes and all the benefits that need to be brought to the 
courts.
    Judge Heyburn. I might add that one very practical thing 
that we have done, from the Administrative Office point of view 
and the budget point of view, obviously, when you've got judges 
who span the age from 35 to 85, you've got sort of a cultural 
divide, it would be fair to say, in terms of their desire to 
use electronic means of research versus books.
    You know, clearly, electronic research is the wave of the 
future, and yet we spend $40-50 million on books every year. 
This year, for the first time, the Budget Committee 
recommended--and it was approved--that the book budget be cut 
by 10 percent, to really enforce, to begin a forced transition 
to more use of cheaper electronic means of research.
    Obviously, we have got to make available the kinds of 
research materials that judges and law clerks want, and many of 
them want the books. But we are also trying to look to the 
future and encourage, in hopefully a gentle way, a transition 
to what ultimately will be a cheaper and more accessible form 
of legal research.
    Mr. Rogers. I would like to challenge the Judicial Center, 
and the Conference, to focus, maybe in some sort of report, on 
what experimental things are going on in the electronic world, 
the information age, that could be applied to the procedures of 
the courts, that could result in significant savings or a 
multiplication of efficiencies of judges and personnel in the 
system. What do you think about that?
    Judge Smith. Well, we are actually working on that.
    Let me go back to your ``tongue in cheek'' remark, of 
hiring a 21 year old. Our computer people aren't 21, but 
they're not far removed, I'll tell you, at least in my eyes. 
They seem remarkably young and remarkably gifted. You probably 
noticed that basically all of the requests we have asked for 
would go to eight new positions, four in our computer area and 
four in our video area, because we agree with you, that it is 
the wave of the future and we need to stay on top of it.
    Sometimes I think, when you're not in the field, trying to 
understand it is like going up a down staircase. So we need 
these people. And it's a very competitive market. Trying to 
hire people in those areas and compete with private industry is 
very difficult. So we think this is critical.
    Another thing we're doing along the lines you have 
suggested, Mr. Chairman, is we are speaking more and more to 
law schools, to private foundations, to the National Academy of 
Sciences, groups who are interested in this same area, trying 
to discuss with them whether there are things we can learn and 
projects that we might be able to do with them, using part of 
their resources and knowledge, rather than re-inventing the 
wheel. So I think your idea is a good one, and we will continue 
to look into it and see what we can do about coming up with 
that kind of report.
    Mr. Mecham. I think you would be gratified, Mr. Chairman, 
to see how much has gone on. When I became Director in '85, 
there were practically no computers in the entire Federal 
Judiciary. Now we have a computer for everyone who knows how to 
use them and wants to use them.
    We set up a data communication network nationwide. Weare on 
the J-Net. We have Internet. We have now gone completely in our agency 
to sending communication out over e-mail instead of using postage and 
we're saving tens of thousands of dollars a year already. There are 
these things going on now.
    We have set up systems of case management. We are now even 
looking at electronic case filing. That may be a bit far out. 
But there is a lot going on, including, by the way, in 
partnership with Judge Smith and the FJC and, in part, because 
of your prodding, we have the largest TV training network in 
the government, except for Social Security. The AO is 
broadcasting 80 hours a month on that. I know that Judge Smith 
and the Sentencing Commission are doing 50 hours a month 
combined saving an immense amount of money in travel. It's not 
going to replace face-to-face training across the board, but we 
are making savings. I give you a lot of credit for pushing us 
in that direction.
    Mr. Rogers. Thank you very much. The subcommittee, working 
with the Center and the Conference, I'm very proud of that. I'm 
proud of what the Center is now doing to save a lot of travel 
time, and other things.
    I wonder if we could ask you to do a ``term paper'' for us. 
[Laughter.]
    Judge Smith. It's been a while, but I think I could manage 
that. What subject would you like?
    Mr. Rogers. Could we have you do a ``term paper'' for us, 
after you put some time in on thinking about it, on the 
question I asked you about what is going on in the system, in 
the courts, to electronically multiply your efficiencies; and 
two, what can we expect in the future? What do you see out 
there that possibly might be applied to the courts? I hope you 
will be futuristic and take off your judge's robe and put on 
your think tank cap and give us your thoughts.
    Judge Smith. I would be happy to do that, Mr. Chairman. 
It's an area that I care very deeply about, both as a judge and 
as the Director of the Federal Judicial Center. I think it is 
critical for us and it's an appropriate request. We will be 
happy to respond in a mutually agreed upon time.
    Mr. Rogers. I hope the audience has noticed the irony of 
the Congress trying to preach efficiency to anyone. [Laughter.]
    Mr. Serrano.
    Mr. Serrano. First of all, Mr. Chairman, let me join our 
guests in congratulating you on having the vision to work not 
only with this particular group of folks but with a lot of 
other folks, in bringing about the changes that we need to 
have.
    Any time we have the judicial branch, not being a lawyer, 
I'm always in awe. But I must tell you, I must remind you, that 
I, for one moment in my life, did play a judge on ``Law and 
Order''. [Laughter.]
    In fact, it was just replayed for the 30-something time 
this past week.
    I will tell you a quick story, Mr. Chairman, which is very 
interesting. When I was in the judge's chambers, taking a break 
from filming, I started looking around and I noticed--I was 
playing Judge Luis Rodriguez, typecasting--[Laughter.]
    I look on the wall and it says the Puerto Rican Bar 
Association honors Judge Luis Rodriguez, a plaque. I look over 
here and it says the American Federation of Teachers, whatever, 
honors Judge Luis Rodriguez. There's all these plaques. I asked 
the director, I said, ``Why do you waste money on this? Who 
sees that?'' He says, ``No, there are people who watch our 
show. They tape it, enlarge the picture, and then they write to 
us and insult us, because what's on the wall doesn't match the 
. . .'' [Laughter.]
    So, you see, judges have more video problems than you 
think.
    I just wanted to find out about this whole issue of using--
You know, I use video conferencing. I have surfed the net and 
we use e-mail and the web extensively in my office. I'm not as 
good as my 11 year old son, who set up this whole web page last 
week. It was voting, a poll on your favorite basketball team. 
I'm worried about him. He threw away any votes for any team 
other than the Knicks. [Laughter.]
    I hope that doesn't extend to his future.
    But in dealing with this technology, in dealing with video 
conferencing and the possibility of conducting trials this way, 
what are the dangers, if any, in terms of dispensing proper 
justice, dispensing justice to everyone?
    Judge Heyburn. I think we all have our own comments, but I 
think the foremost thing that would be in everybody's mind is 
that, when you're dealing with the liberty of one of our 
citizens, efficiency is not necessarily the primary objective. 
That is, justice and fairness. So everything we do has to be 
filtered through that.
    As a number of others have suggested, there are occasions 
where the technology can be used and it doesn't compromise one 
iota fairness and justice. On other occasions, you know, I 
suspect that when you've got a criminal trial going, it might 
be fairer that jurors be able to look directly in the eye and 
not through a screen at someone who is accusing one who has 
been indicted. So I think it is a challenge to us to figure out 
where the technology can be used and in what circumstances it's 
fair and in what circumstances we're better off sacrificing 
efficiency for a higher objective.
    So that would be, to the extent I have something to say 
about, our general view. Judge Broomfield has really dealt with 
this in a much more direct way than I've had to, just because 
our criminal caseload is not such that we've had to deal with 
this, although we are using video conferencing on some civil 
hearings with inmates in our State prisons very effectively.
    Judge Broomfield. Mr. Serrano, maybe it's the color of my 
hair, but I hope we never have a virtual courtroom, where 
nobody is in a common place, and everybody is at home or 
someplace else participating--jurors, lawyers, litigants and 
the like. But that doesn't mean we can't or shouldn't use 
technology to our advantage.
    I think, particularly on the criminal side, because of 
constitutional limitations, we have to be extremely careful in 
how we use that sort of technology. You notice I said what I 
did, and people disagree, but there's a potential benefit for 
them. I know that sometimes criminal defense lawyers will say 
this is the camel's nose and what you really want is virtual 
courtrooms. That isn't true. You can image that some defendant 
may have an expert witness who they simply can't afford to 
bring from Chicago or New York, or maybe a psychiatrist from 
Vienna. But you can by video, as if it's next door.
    So the potential for equal and fair use across the spectrum 
is there, but let's not ever go to a virtual courtroom.
    Mr. Serrano. So what you're saying, which makes sense to 
me, is that, in cases where you have an expert witness, a 
person who has no reason to be lying or doing anybody in, 
that's okay. But, of course, if somebody is going to accuse me 
of stealing something, the jury should be able to see me in 
person, and see my body language and how I react.
    Judge Heyburn. That is certainly one line you can draw, and 
there may be some others. But one great thing about our court 
system is that we have a lot of very qualified judges and 
administrators out there who are testing out various and 
different things, much like our Federal system where the States 
are incubators for ideas. Although we exercise some control 
over what they can do and can't do, through the Constitution, 
the statutes, and our own Administrative Office, there are lots 
of different judges who are trying various and different 
things, gingerly, and we have reports of how they're doing. I 
think we see some advancements and possibilities there.
    Judge Smith. If I could just support what my colleagues 
have said, Mr. Serrano, I think a good analogy is what the FJC 
has done in the education field, with the prodding and guidance 
of Chairman Rogers and this committee. We have shifted the 
proportion of distance education to travel-based education, so 
that a vast majority now of our educational programs are done 
by distance learning. But it will never completely, and 
shouldn't completely, displace face-to-face learning. There are 
critical programs that need to be done that way.
    I think the same is true in a court, as Judge Broomfield 
said. You wouldn't want a virtual courtroom. But there are 
certainly times when it's in everybody's best interest. I know 
that I've had even prisoners say they really don't want to 
travel three hours on a van, through heavy traffic, to simply 
come to court for a routine hearing. They would much rather do 
it from the prison and do it on television. So I think careful 
lines have to be dawn. I think we will be able to do that 
fairly.
    Mr. Serrano. So you don't envision, for instance, people 
going before a parole board via video, or do you?
    Judge Heyburn. Of course, in the Federal system, we 
essentially do not have parole any more. But, no, even our 
equivalent might be a revocation of supervised release, and 
there the jeopardy of the individual is in place. So I think 
most people would want to appear in person, unless everyone 
agreed in advance what was going to happen. And often that 
occurs. So it might be possible.
    Mr. Serrano. Thank you, Mr. Chairman.

                              COURTHOUSES

    Mr. Rogers. Ms. Roybal-Allard.
    Ms. Roybal-Allard. Thank you, Mr. Chairman.
    The administration has asked for $488 million for 
courthouse projects, which is considerably less than what the 
Judicial Conference requested, which was $750 million, for 18 
courthouses. That is going to have a tremendous impact on a lot 
of judicial districts, such as Los Angeles.
    Could you please tell me if OMB consulted with the AO's 
office and what the basis of this plan was?
    Judge Heyburn. I'll make a brief comment and I think the 
Director might want to say something, also.
    First of all, as you are well aware, this is not just the 
judiciary's request. This is the request that GSA forwarded to 
OMB, to its own administration, and their request was $780 
million or so and was cut to $480 million. Obviously, people 
can differ on what courthouses are needed, and we went through 
a whole process with GSA, according to established regulations, 
and came up with a number we felt was the right number of 
courthouses.
    But what we believe they have done is totally distorted 
this process, in a very unfortunate and very unfair way for 
everybody, by not just cutting courthouses but by lopping 
essentially the top off of courthouses, without consulting us, 
and very arbitrarily deciding the numbers of courtrooms needed. 
For instance, the courthouse at LA, which is much needed, a 
growing area of the country, they decided that rather than 
having 33 courtrooms, it should have only 24. That's like 
saying that, before that courthouse is even finished, it will 
already be outmoded and outdated. It's a very short-sighted 
approach to justice and the construction of courthouses, and I 
might say that it was done without any study, very arbitrarily, 
and certainly without any consultation with the judiciary, 
other than notifying us at the time the budget was submitted 
that it was going to be happening.
    Mr. Mecham. We appreciate your leadership on this, by the 
way. What happened was that OMB, on its own, without the 
benefit of either statutory authority or constitutional 
underpinning, undertook to come up with a formula of its own on 
how much space judges needed and how many courtrooms there 
should be. They did not consult us. GSA joined with us in the 
request that was made, and OMB acted unilaterally.
    In the case of Los Angeles, OMB cut from 33 courtrooms down 
to 24. In fact, they are forcing the judges to say you cannot 
have a single building for the court, that they're going to 
have to have two. OMB can't justify the process legally, 
economically, or in any other way. We would appreciate your 
help in trying to get this reversed--OMB won't reverse it. We 
need the Congress to do something.
    Ms. Roybal-Allard. Can you elaborate a little bit on what 
you think the impact is going to be if the OMB plan goes 
through?
    Mr. Mecham. Well, you're going to have an inadequate number 
of courtrooms for judges, and without sufficient courtrooms, 
then you're probably going to end up with an increased backlog 
in cases.
    Ms. Roybal-Allard. More than we have now?
    Mr. Mecham. More than you have now. You have a good many 
already.
    This process is one that required years of work. We not 
only set up design guidelines, working with GSA and engineers 
and architects, we set up a prioritization system, being 
prodded by Congress, by the way, to do so. It was verypainful 
for us to prioritize these buildings. We would rather have Congress do 
it and take the pain away. But it was done. OMB has basically thrown 
all of this out and said this is the way you're going to do it.
    I will give them credit since, with one exception, they did 
follow our priority list. It's just that, with respect to the 
priority list, they knocked Miami down, from 16 courtrooms to 
eight; they took D.C. from nine to five; they knocked out one 
in Richmond, and a number of others across the country, with no 
basis, no study, no nothing. No one in OMB knows anything about 
courtrooms, about the judiciary, or about buildings. But they 
undertook to do this anyway.
    Ms. Roybal-Allard. You've made my point.
    Judge Heyburn. The point is, of course, that it's not a 
simple. These are buildings that have already been designed 
and, in some cases, perhaps even had been put out for bid. Of 
course, there's going to be a substantial delay. It's not an 
easy thing to turn a building such as in LA, from 33 down to 24 
courtrooms. This is going to require substantial redesign, 
which is going to be costly.
    You know, I think you're going to end up with a product 
that really, in some cases, is probably not worth the effort. 
Then the problem will just be worse.
    Ms. Roybal-Allard. I think the judges in Los Angeles are 
very, very concerned about this, and the impact it's going to 
have.
    Mr. Rogers. Will the gentlelady yield?
    Ms. Roybal-Allard. Yes.
    Mr. Rogers. On a much, much smaller scale, I have witnessed 
the same problem, the desire for a new building in London, KY, 
in the Eastern District. It's been an absolute fiasco. What the 
judges have needed and wanted, and what GSA has come in and 
stripped away, with no knowledge at all about the needs of the 
courts, as Mr. Mecham has mentioned, it's an absolute 
abomination. I wish I had the answer, but it is a problem.
    I thank the gentlelady.

                            SOUTHWEST BORDER

    Ms. Roybal-Allard. In response to one of the questions--I 
believe it was the Chair's--you mentioned that, as a result of 
the Southwest Border Initiative, you have had to make certain 
concessions and changes. You said one of them was that you had 
to shift money from other courts.
    Could you tell me what impact that has had on these other 
courts?
    Judge Heyburn. Generally, the impact is that the resources 
they thought they were going to be receiving, based on the 
funding levels, they are not receiving currently this year. 
After we have received our appropriation, we realized it was 
going to be a very tight situation for all the courts, and then 
recognized that the caseloads were increasing in certain 
specific areas. We, in essence, cut our allocation to all court 
units, set aside a pot of resources that we could then devote 
to those courts that are most in need, and now we've done that. 
So the other courts, all of which are experiencing some 
increases, are simply getting less resources. They're having to 
make do. They're having to make very tough choices.
    Ms. Roybal-Allard. To help me understand, what kinds of 
choices are they having to make? What isn't getting done?
    Judge Heyburn. Well, people that may have retired in a 
number of cases, where courts had people retire in the middle 
of the summer, the Administrative Office had to go in and say 
essentially we're freezing the level of your employees. So 
sometimes a key employee left and they were not able to refill 
that position, or planned computer purchases to upgrade 
equipment that they couldn't follow through on, or couldn't 
follow through to the extent that they would like to. So it's 
all these things.
    We have a system of budgeting within the courts so that 
each individual district receives an allocation from the 
Administrative Office, and then has to decide for itself what 
portion the funds will be spent on--personnel, computers, 
travel, sometimes new equipment, sometimes refurbishing space. 
So we leave those decisions on what's necessary in an 
individual court to the individual court. We believe they have 
the best knowledge of what's needed in their particular 
district. They're just having to make some very, very tough 
decisions.
    We are fortunate that we have good managers, but it doesn't 
make it any easier. Again, we would like to have the resources 
so that all the courts can do what they think is necessary, and 
that's essentially what we're asking for this year. It's going 
to be tough on them this year because of the increased need and 
the challenge we face along the southwest border.
    Do you have further comments on that?
    Judge Broomfield. I have a direct comment on what's 
happening. We have had to rob Peter to pay Paul with probation 
officers and pretrial services officers. We don't have enough 
of them to do all the presentence reports and supervise the 
people as we should. We have had to take probation officers 
from supervision into writing presentence reports. The people 
they are supposed to be supervising are not being supervised 
the way you and I and the rest of society would like. That's a 
consequence of what has happened.
    If I could add something on your prior question; the 
presence of courtrooms resolves cases, whether by trial or 
settlement. Most of them settle. If you have the courtrooms, 
they'll resolve them. If you don't have the courtrooms, they 
won't resolve them. It's as simple as that. Each judge has to 
have a courtroom in order to do it.
    Ms. Roybal-Allard. That's the issue in LA, exactly.
    You recently submitted a report to our subcommittee 
regarding the habeas corpus costs of the Ninth Circuit and 
compared it to the rest of the United States. Could you 
elaborate a little bit on those findings?

                             HABEAS CORPUS

    Judge Heyburn. As you know, for the last couple of years we 
have had a discussion with the Chair and others about the 
habeas costs around the country, and particularly the Ninth 
Circuit. We have taken his challenge to heart--I call it a 
challenge. I dare say that some members of the judiciary in the 
Ninth Circuit have had occasion to view the videotape from last 
year's hearing and were either impressed or had the fear of God 
placed in them by the chairman's words.
    But in all seriousness, his challenge we have undertaken. 
The costs over the last three years of capital habeas cases in 
the Ninth Circuit has decreased about 30 percent.
    Now, our efforts in this area are nationwide, so the habeas 
costs nationwide are also decreasing, not as much as in 
California. Of course, they didn't have as far to go as 
California. We have submitted a report to the Chair, which you 
may have a copy of, which is a cover letter from Mr. Mecham and 
a letter from Proctor Hug, who is the Chief Judgein the Ninth 
Circuit, detailing all the efforts they have made over the past few 
years, and are continuing to make, to get a hold of this problem.
    Primarily, the FJC is involved in better training for 
judges and clerical personnel. We have developed a case 
management requirement for these cases, and they have put a cap 
on the rates that attorneys charge.
    Those are the three main things that have resulted in this 
30 percent decline in the costs of habeas. We hope that that's 
going to continue. But mostly we're going to continue our 
efforts. We think we're on the right track, and, of course, 
thanks to the members of this committee for their concern in 
the area. We hope that we have responded in an aggressive and 
appropriate way.
    Does that answer your question?
    Ms. Roybal-Allard. Yes. It really was under the leadership 
of our Chair that this has taken place.
    Mr. Mecham. Let me give a lot of credit----
    Judge Heyburn. This trend line that we have, it shows the 
decline in California from close to $100,000 per case, the 
average cost per case, down to $59,000 this past year. Maybe 
$59,000 is still too high, but it's a lot less than $100,000. 
So we're glad for the direction it's going.
    Sorry to interrupt.
    Mr. Mecham. I just wanted to say that Chief Judge Proctor 
Hug of the Ninth Circuit has really taken this on as a personal 
crusade. His leadership has played an important role in this, 
along with a lot of other judges, too.
    Mr. Rogers. Thank you, Ms. Roybal-Allard.
    Continuing on that topic for a moment, I do want to 
compliment you. The costs nationwide for habeas corpus 
representation is decreasing, as it is in the Ninth Circuit. 
But, a pat on the back is only six inches from kicking the 
rump. [Laughter.]
    The average annual cost per petitioner in California is 
still double the national average. How can we explain that?
    Judge Heyburn. I think there are a couple of actually 
straightforward explanations.
    I mentioned the three things that I think we have done to 
improve the situation. Unfortunately, two of them can't really 
affect the ongoing cases. That is the institution of a case 
management program at the beginning of the case. So that 
doesn't really affect a case that's already in progress. It's 
very difficult to sort of change the rules in the middle of a 
case.
    Also, the capping of the rates. If that didn't occur at the 
beginning, it is sometimes difficult to impose that once the 
case has already begun.
    Those would be the two primary things that I would cite as 
to the reason why you can't have an immediate change. But I 
think we're heading in the right direction, and hopefully the 
trend will continue.
    Mr. Rogers. Well, I like the trend lines, and you're right. 
The average cost per petitioner in California in 1996 was 
roughly $100,000, and you've got it down to about $60,000 now. 
But I would point out that the national average, not including 
the Ninth Circuit, is about $23-24,000, which is less than 
half, quite a bit less than half the California average. You 
have to understand that we can't tolerate that.
    Judge Heyburn. Well, every State is different. Judge 
Broomfield may be able to comment on this, but I have talked 
with Chief Judge Hug out there. One of the real difficulties 
they have in California is simply the way the State of 
California deals with capital prosecutions. Some of the judges, 
many of the judges who review these cases in a Federal habeas 
situation, believe--and there is strong evidence to support 
this--that the resources that the State of California is 
devoting to the defense side in capital cases is woefully 
insufficient and, therefore, it is left to the Federal side to 
test the conviction, if you will. That's exactly what the 
attorneys are doing. If there were greater resources devoted by 
the State to the defense of these cases, then we would have a 
fuller record. We would have a more complete record come before 
the Federal court.
    Many of these cases that are appealed in the California 
State courts, the appeal is rejected, it's called a ``postcard 
affirmance''. We don't get an opinion like you do in a Federal 
court, detailing all the issues and addressing all the points 
of law. You get a postcard that says ``Appeal Denied.'' That's 
very difficult for a Federal judge to deal with sometimes.
    Mr. Rogers. Let's switch from California to the Ninth 
Circuit as a whole. The Ninth Circuit costs are double what the 
national average is.
    Judge Heyburn. They are, and they're coming down.
    Mr. Rogers. I'm sure California is a little bit different 
in some of these things----
    Ms. Roybal-Allard. Careful, Mr. Chairman. [Laughter.]
    Mr. Rogers. What about the balance of the circuit? I mean, 
why are their costs double the national average, in the Ninth 
Circuit?
    Judge Heyburn. I don't know that we have an answer on 
particularly why the Ninth Circuit on the whole is above the 
national average, except that it is coming down substantially.
    Judge Broomfield. There's a variety of answers. The Ninth 
Circuit, without California numbers, would be significantly 
different. But----
    Mr. Rogers. Not that much different, if you'll forgive me 
for a moment. According to your own data, the California cost 
is about $60,000 per case, and the Ninth Circuit is about 
$48,000, while the national average is $23-24,000.
    Judge Broomfield. My understanding is the $48,000 does 
include California.
    But in more direct response to your question, many of the 
cases that were in a lot of the courts in the Ninth Circuit 
were there for a long time, because their death penalty 
statutes were being contested in the Supreme Court. A lot of 
cases were stayed. When that happens, and there is no movement, 
costs simply go up.
    The term ``case management'' has been used here before, and 
that's really a critical term that the judges are using. I want 
to echo what the others have said about Chief Judge Hug. He has 
really taken on this problem, as has the Ninth Circuit Judicial 
Council.
    The case management, in effect, has the effect of reducing 
costs, but not reducing the quality of the work that's done. It 
simply means that people have deadlines set from the very 
beginning. With the older cases--and we're seeing some of that 
still in these numbers--they've been around for many years. 
Even in the habeas process, under the new AEDPA, it is much 
less, and because of case management, I believe those numbers 
will continue to go down, not just inCalifornia, in the Ninth 
Circuit, but nationally, as the end result of the passage of that act.
    Mr. Rogers. Time will tell, and we're going to keep an eye 
on these numbers. This is still way out of line. I congratulate 
you on making some good progress, but we're still way out of 
line. The balance of the country will not tolerate us letting 
California taking half the money.
    Judge Heyburn. Mr. Chairman, we will provide you with the 
information on the average cost of these cases in the Ninth 
Circuit absent California. I think you will see that it's 
probably a lot more in line with the Nation, although maybe not 
quite down to that level.
    Mr. Rogers. So you're saying California is the problem. 
[Laughter.]
    Judge Heyburn. California is a wonderful State. [Laughter.]
    I was just out there. It's a great place to live and visit.
    Judge Broomfield. In defense of them, they are trying. 
Believe me, Mr. Chairman. We heard the Chairman's words two 
years in a row. I think the whole Ninth Circuit, including the 
California districts, are trying. The trend is going the right 
way. It can go further down, to be sure, but the trend is 
correct.
    Mr. Rogers. The trend is good. But finally, let me just say 
that the lawyers in California are great lawyers, no doubt 
about that. There are also great lawyers in all the other 49 
States, and the California lawyers are being paid at twice the 
rate of the other lawyers.
    Now, all of you are lawyers. In your private practice, 
would you tolerate such a scheme, where the lawyers of one 
State got twice the rate that you did? No. It's not fair and it 
will not be tolerated with tax dollars. Now, if California 
wants to do it with their tax dollars, that's their business. 
If some private foundation wants to help out, so be it. But for 
Federal tax dollars that run through this body, we're going to 
insist that there be some fairness and equality. I don't know 
how much stronger to put that.
    But this is not the only problem in the Ninth Circuit. 
You've heard me say that before, and I'll say it again. I hope 
the Ninth Circuit shapes up, because there may not be a Ninth 
Circuit if they don't shape up.
    Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman.
    Just for clarification, there are good lawyers in all 50 
States and the territories. [Laughter.]
    The increase in the work at the southwest border, that is 
mostly all related to immigration issues, right, or issues of 
crossing the border, if you will?
    Judge Heyburn. It's related to that, but there are issues 
of crime that are related to the influx, issues related to drug 
trafficking and other things that affect both the State and 
Federal courts all along that area. So, yes, broadly stated, I 
believe it is related to the influx of people across the 
border.
    Mr. Serrano. Are some of these related to crossing of the 
border without proper documentation?
    Judge Heyburn. Oh, absolutely.
    Mr. Serrano. How does that then compare to the workload of 
people crossing the Canadian border?
    Judge Heyburn. I don't know the answer to that question.
    Mr. Serrano. Or people coming into New York on airplanes, 
with no documentation?
    Judge Heyburn. I don't know the answer to that. I'm sure we 
can get that information because we have the information on 
specific kinds of cases in every district.
    Mr. Serrano. The reason I would like to know is because 
there's always been a dual feeling about our immigration 
service and immigration policy by many people, like myself. On 
the one hand, we need to enforce the law, and, on the other 
hand, we need to make sure the law is not being applied 
selectively on one border or another.
    As I said, we have more than borders. We have people that 
can arrive by airplane, also, in New York. The border there, 
technically, is at the airport. You can board in Puerto Rico, 
for instance, or somewhere else, and there is very little way 
of finding out if you're an American citizen getting on that 
plane going to New York or Miami, or not.
    I would like to alleviate my concerns and my fears, that 
this is not selective prosecution, which makes that workload so 
much higher, so much bigger.
    Judge Heyburn. We can certainly give you the statistics 
that we have. Of course, this area--and it's interesting that 
you brought it up--this area is like many other areas of our 
work, where we don't create the work. We're simply responding 
to someone else's statute or a policy judgment, that this is 
where resources ought to be devoted in a law enforcement area. 
We simply salute and do our job.
    If the administration decided that it was going to have a 
stricter enforcement of environmental laws someplace, then we 
would see a lot more environmental cases. In this case, a 
combination of the Congress and the administration has, for one 
reason or other, decided to devote a tremendous amount of new 
resources in this particular area, and our caseload is affected 
accordingly.
    Mr. Mecham. Mr. Serrano, much of the data we would need to 
answer your question we would have to get from INS, and I 
believe they're appearing before you this afternoon. You may 
want to pose the same question to them.
    Mr. Serrano. Yes. Unfortunately, I want to use most of my 
time to beat them up on the Elian Gonzalez issue. [Laughter.]
    Mr. Mecham. I saw you on ``Rivera Live'' last night. You 
did very well.

                           DEFENDER SERVICES

    Mr. Serrano. So it is fair to say that most of these issues 
are immigration-related, but that also speaks to any other 
crime that's committed there.
    Now, on another issue, last year we increased the fee--
forgive me. I'm not a lawyer--but the hourly fee, I think by 
five dollars?
    Judge Heyburn. Yes. It is now $70 for in court and $50 out 
of court.
    Mr. Serrano. And you want to bring it to $75 for both.
    Judge Heyburn. Yes.
    Mr. Serrano. I'm supportive of that, and I've been 
supportive of it in the past. But for the record, tell us why 
that's important.
    Judge Heyburn. It is important because we see, more and 
more, a problem in getting high-quality lawyers to represent 
indigent defendants. The Chief Justice has mentioned this now 
two years in a row in his annual report, and he doesn't weigh 
in on these issues unless he really believes they're important.
    The panel attorney rate has only been raised--and 
weappreciate what was done last year, we really do. It meant a lot to 
people. But it was only the second year in 15 that it's been raised. 
The rates, at the levels they are now, obviously don't cover the 
overhead of lawyers who are providing the service. They're essentially 
providing it as a public service, and free.
    But we need to encourage better quality lawyers. You might 
say, well, what's happening? Is bad lawyering causing innocent 
people to be convicted? I certainly can't say that. But I do 
know that the quality of justice suffers overall. Cases may be 
going to trial that shouldn't go to trial. A good lawyer would 
see the strength of a case against the defendant and get an 
appropriate plea and dispose of the case.
    The administration of justice just works so much better 
when you have equal quality, good quality lawyers going against 
each other. Unfortunately, the reports we're getting back is 
that, because of the low panel rate, we're not able to get the 
quality and number of panel attorneys that we have in the past. 
Of course, we do have Federal defenders who represent about 
half the indigent defendants. But we think that should be a mix 
of Federal defenders and panel attorneys. You will always need 
panel attorneys in multiple defendant cases, and in other cases 
where the Federal defender has conflicts.
    It's really important to have both. It keeps both on their 
toes. We're able to be more efficient. We're seeing the cost of 
these cases go down, both with panel attorneys and with Federal 
defenders. So the cost of this $75 rate is not great. It's 
only, on a total year basis, about $15 million, I think.
    We think that, over time, it would really have a 
substantial and a beneficial impact on the administration of 
criminal justice. Our people out there on the committee, the 
people who provide this service to districts all over the 
country, really believe this to be true. They're not really in 
it for gain. Most of them take a couple of cases a year. So 
this is not a big revenue source for any of these people.
    But, you know, we need to have some way of encouraging them 
to continue to participate. It's really important for the 
system.
    Mr. Serrano. Do we have any studies that indicate what the 
average rate is, if you will, for private individuals, when 
they hire attorneys?
    Judge Heyburn. Sure. It would be $150, $200, even higher, 
for a first-class criminal defense attorney. Many of these 
people that we're paying $50 an hour could charge $200 or $300 
an hour in major cities. Even in the State of Kentucky, where 
the legal rates and salaries are not exorbitant compared to 
around the country, these kinds of lawyers would be getting 
twice as much easily, I would say. In New York, who knows what 
the discrepancy would be. I imagine the difficulty is even 
worse in a city like New York or Los Angeles, the bigger 
cities.
    Mr. Serrano. Let me move on briefly to another subject. 
There's a lot of talk here about going into two-year budgeting. 
How would that affect you?
    Judge Heyburn. Well, it would affect us. Of course, we're 
not sure how. I can just tell you, number one, whatever you 
decide to do, then we'll do the best to address it. As a person 
who's interested in government, I can certainly see some 
advantages to it.
    On the other hand, it poses some particular challenges to 
the judiciary. As you are well aware, a lot of our budget is 
based upon projections of what's going to happen during a 
coming fiscal year. You have seen, in your experience on this 
committee, how I think most of the time we're pretty much on 
target. But a lot of times we're off, just because of 
circumstances completely beyond our control. We have to project 
the number of new judges that will come on line, new space that 
will come on line, the number of defendants that will be 
indicted. In a given year we can miss our projection, and if 
the projections have to be made two years in advance, this 
presents very difficult problems for us.
    Now, the positive is we have such a good working 
relationship with the committee that I think we could probably 
overcome these difficulties. But I think we each have to be 
sensitive to our own needs. So we're probably in a better 
position than most other agencies to deal with the 
difficulties. But it would certainly present some challenges, I 
believe, and the ones I have mentioned would just be a few of 
them.
    Mr. Serrano. I have no further questions.
    Mr. Rogers. Back to the panel attorney compensation, in 
capital cases, can you tell me the current rate of pay for 
capital case attorneys?
    Judge Heyburn. $125. That's the maximum.
    Mr. Rogers. Are costs associated with capital cases 
increasing as rapidly as they have been in recent history?
    Judge Heyburn. They're actually going down. The cost per 
case is going down, and the total cost is going down.
    Now, admittedly, when you talk about total cost, you know, 
we've had some very high profile cases that were in full array 
in FY '98 and '99 that are no longer going on now. But 
generally, the costs are going down, and the increase in the 
number of cases has leveled off. So, as you remember, we had a 
number of years--I think there was one four-year period where 
we went from 25 Federal capital cases in existence to 150. That 
has now leveled off.
    One problem we had is that simply most Federal judges who 
got a capital case, unless they were a State judge, it was the 
first capital case they ever had. They really were not prepared 
to deal with all the issues. So FJC has developed an 
educational program, and now, by and large, judges who get 
these capital cases I think are better prepared to deal with 
them, with case management at the outset. So generally the 
costs are more under control than they were before.
    Judge Smith. If I could echo that--and thank you for that 
acknowledgement, Judge Heyburn--we have developed, first of 
all, a whole set of materials for Federal capital cases that 
are available on our website, and that will also send a hard 
copy to judges who get those kinds of cases.
    We are also preparing a two-volume manual for judges, one 
on habeas cases and one on Federal death penalty cases, to 
bring judges up-to-date with current law, which we think will 
help considerably.
    They are very challenging cases to judges who have never 
had them before. They're challenging to judges, period. They're 
serious, but for new judges especially. So we are trying to 
develop distance materials that will make their ability to 
handle these cases more easily, while still maintaining 
fairness.
    Mr. Mecham. Apropos of an earlier question, Mr. Chairman, 
Mr. Serrano, my staff advises me that the private attorney 
billing rate, the national average, for partners, is $206 an 
hour, and an associate, $145 an hour. That's the national 
average.
    Judge Heyburn. Of course, with the explosion in legal 
salaries, we're also waiting with baited breath to see what 
impact that's going to have on the judiciary. Now, when we hire 
law clerks, for instance, we're essentially asking--you know, 
we would love to give you a job, you're at the top of your law 
school class, and we would like you to give up $100,000 a year 
for the great opportunity of working with me for a year. We 
hope we can keep on convincing young law students to take up 
that opportunity, because it is a unique one. But the economics 
are bound to have some effect.
    Mr. Rogers. On the compensation of panel attorneys, we're 
all a product of our environment, our history and upbringing. 
When I first started practicing law in 1964, there was no 
compensation for representing indigent defendants. You were 
summoned by the judge and you were ordered to defend this man, 
for free. You quit everything else you were doing and went to 
work for nothing. But it was considered a civic duty; it was 
considered an obligation of lawyers to give back to the 
community what they had been given. None of us really thought 
about being paid. Once you were summoned by the court to defend 
a person, all of your ethical obligations poured out in defense 
of that person. I did a lot of that.
    But, a side benefit of doing that was that I built up my 
reputation. It got around that, ``Hey, this guy can do pretty 
good in the courtroom. I think I ought to hire him.'' So I got 
some business because I sacrificed some time for indigent 
defense.
    I hope there is still some of that left in the profession. 
Do you think there is?
    Judge Heyburn. I think there is. And you ask a very, very 
good question. You know, although you started out a little bit 
before I started practicing, I think that ethic still exists. 
It still exists among many lawyers. It is a problem we all deal 
with and ask ourselves about.
    One thing I can say about Federal criminal work now--and 
times do change. We all say the law has gotten more 
complicated, this and that. I suppose that's true. But the 
Federal sentencing guidelines, which I happen to be a general 
proponent of--I mean, I might disagree with certain aspects of 
them--they have, to a significant degree, complicated the 
defense of Federal criminal cases. So if you're going to 
represent a person charged with the Federal offense, you can't 
walk into Federal court without a pretty thorough knowledge of 
the sentencing guidelines. If you do, you are doing a great 
disservice to your client.
    It is no longer the situation when you and I might have 
done an occasional criminal case, where you walk in and the 
judge has this huge discretion, and you argue your client's a 
good guy and he'll never do this again, and you maybe know the 
judge and do the best you can.
    It's not really that way any more. The rules are very 
technical, particularly when you're up against United States 
Attorneys, who know this stuff inside and out. If you're not an 
expert, then you shouldn't be there. It's sad to say that, and 
we do have probation officers who try and do give an even-
handed approach to the issue.
    That's not a reason to say we ought to pay them $150 an 
hour. It's just that we need to encourage quality people, and 
people who have some experience to do it.
    What we do in our district, we will pair--We have a system 
where we pay the lead attorney whatever the law allows, but 
then we get a young attorney, who has never had a case. We 
don't pay them. We pair that person with the lead attorney, so 
he gets a little bit of experience, and then he can have a case 
later that he or she gets paid for, after they've gained a 
little bit of experience.
    We have seminars that the Federal Defender puts on to 
educate our panel attorneys about the Federal sentencing 
guidelines. It's just a little bit of a different situation 
than when you and I grew up, starting out, I'm sorry to say. 
But I don't think the ethics have changed. It's just the 
situation has changed a little bit. That's all I can say about 
it.
    Mr. Rogers. Any other questions?
    Mr. Serrano. No.
    Mr. Rogers. Well, thank you very much for your testimony 
today. Judge Broomfield, we appreciate your coming from afar to 
share your knowledge with us. All of you, we appreciate your 
testimony and your dedication to your job and to justice in 
this country.
    As I said at the outset, we still have budgetary problems 
up here, even in spite of the fact that the press reports 
there's a huge surplus of funds. We are still bound, as you 
know, by the 1997 Balanced Budget Act. So even if those monies 
are there, we can't spend them. It's as if we were wearing a 
chastity belt. So we'll do the best we know how to deal with 
your legitimate needs and our real restrictions.
    It's good to see you. Thank you. The hearing is adjourned.
                                       Thursday, February 17, 2000.

                       LEGAL SERVICES CORPORATION

                               WITNESSES

JOHN N. ERLENBORN, VICE-CHAIRMAN
JOHN McKAY, PRESIDENT

                           Opening Statement

    Mr. Rogers. This morning the committee will begin our 
hearings for the fiscal year 2001 appropriations cycle and 
would like to welcome the vice-chairman of the board and former 
colleague of ours in this body, John Erlenborn. Good to see you 
John, and the president of the corporation, John McKay. We are 
pleased to have you with us today. We will be discussing your 
request for the Legal Services Corporation, which is requesting 
a budget of $340 million for fiscal year 2001. That is a 12 
percent increase over the amount provided in the current year.
    This committee will face the difficult task of doing its 
part to keep spending at a reasonable level while at the same 
time finding a way to fund a number of competing and deeply 
important priorities. It will be another tough year of tough 
choices for us, and we will be looking for ways to maximize our 
scarce resources.
    In addition to reviewing the corporation's budget requests, 
there are numerous policy issues of concern to this committee. 
These issues include serious concerns about the accuracy of 
case statistical reports which provide Congress with important 
information of the corporations grantees caseload and continued 
monitoring of grantee compliance with the reforms adopted by 
the Congress. We continue to be interested in closely 
monitoring these and other issues.
    At this point, we will insert into the record your written 
statements.
    [The information follows:]
            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 


    Mr. Rogers. In a moment, we will allow you to proceed with 
your oral testimony. In the meantime, let me recognize Mr. 
Serrano for any remarks he might have.
    Mr. Serrano. Thank you, Mr. Chairman. I want to welcome you 
both to this hearing today. But first I want to take this 
opportunity once again, Mr. Chairman, to thank you and your 
staff for all the courtesies that you have extended to me and 
to my staff in my first year as Ranking Member of this 
subcommittee. And I look forward once again to working with you 
to make sure that we come up with the kind of bill that we can 
all be proud of, though we have many challenges in providing 
adequate resources; and as we have discussed before, this 
committee will have a short period of time to accomplish what 
we have to.
    I think a good sign of our working relationship is the fact 
that you were smiling when these folks walked in and you know 
how important this agency is to me because they do the kind of 
work that unfortunately still deals with the haves and the 
have-nots in this society. I support their efforts, I try to 
help them in every way I can, and I know any consideration that 
you give to their request is something that I take very 
seriously and appreciate very much.
    And with that in mind, I want to hear their testimony, and 
commit myself to working with you this year to make this a 
productive year.
    Mr. Rogers. Thank you, and again, last year you were very 
helpful. You attended every single hearing of this 
subcommittee, which probably is a record.
    Mr. Serrano. Probably a foolish record.
    Mr. Rogers. But nevertheless you did take the job seriously 
and you are a very valuable asset to us and we appreciate you.
    Who would care to proceed? Mr. Erlenborn.
    Mr. Erlenborn. Thank you, Mr. Chairman. It is a pleasure to 
be here again to report to you and the members of the 
subcommittee on our most recent activities and requests our 
budget for fiscal year 2001.
    I am before you today with John McKay, the Legal Services 
Corporation president, to request a $340 million appropriation 
for fiscal year 2001.
    The $340 million appropriation includes an 8 percent 
increase for our basic field grants, providing $313 million to 
LSC grantees for the next fiscal year.
    This modest increase is desperately needed to ensure 
grantees can continue to provide poor Americans with critical 
legal assistance. On behalf of the board of directors of the 
LSC, I want you to know that we are very proud of our 
accomplishment this past year. In particular, we are very 
pleased with the progress we have made through our State-
planning initiative to maximize the use of Federal resources in 
every State.
    Every grantee is required by LSC to report to us on 
progress made to increase and improve services in every State. 
This process has already yielded many important improvements. 
We are also glad to report that the corporation continues to 
successfully implement the will of Congress by aggressively 
enforcing all restrictions. We have also worked very diligently 
to correct problems associated with LSC's case reporting 
system.
    Finally, I would like to mention that our board recently 
approved a set of strategic directions to guide the corporation 
into the year 2005. The plan establishes some very important 
goals of increasing access to thousands of additional clients 
and ensuring all receive high quality legal assistance. The 
plan is referenced in our budget request.
    I know John will cover these accomplishments and more with 
you shortly. My role here today is to assure you that the 
bipartisan board of the Legal Services Corporation is committed 
to faithfully fulfilling the mission of the LSC Act and working 
with you and members of the committee to accomplish this.
    I would now like to turn over the table to our president, 
John McKay. John is close to completing his 3rd year as the LSC 
president. And our board has requested that he extendhis 
service. I am very pleased to report to you that he has agreed to 
remain at the corporation until at least October of this year.
    We are very fortunate to have John as our president. His 
leadership team has worked tirelessly to improve the quality of 
the National Legal Services Program and to ensure compliance 
with all congressional restrictions.
    I yield the floor to--or allow you to recognize our 
President John McKay.
    Mr. McKay. Mr. Chairman, thank you, members of the 
subcommittee, thank you so much for giving us the opportunity 
to be here today. Obviously, we have our budget submittal 
before you and a written statement; and I just want to 
supplement that briefly by highlighting, I think, some major 
accomplishments, not just of the Legal Services Corporation and 
its many staff and volunteers across the country who do this 
important work, but also the work of this subcommittee and of 
the Congress in refocusing the energies of legal services 
across the country on the needs of individual clients. And I 
think that is a very important change in federally funded legal 
services, and I think it has very much to do with the attention 
of the Congress to this issue.
    And we in legal services across the country have embraced 
this change because it means that we focus on the individual 
needs of clients, the battered woman, the senior citizen who 
has been defrauded through an equity stripping scheme. Issues I 
think that every Member of this subcommittee and frankly every 
Member of Congress would agree with.
    As a Republican--and I know that the Chairman and others on 
the committee are aware of the fact that I myself am a 
Republican with a long history of involvement in both political 
causes and former service on Capitol Hill to the late 
representative Joel Pritchard--I embrace this vision, and it 
has been my pleasure to help lead its implementation over the 
past 3 years. It is fundamental, it is important, and it is 
pervasive now throughout the Legal Services Corporation system.
    We are restructuring the delivery of legal services around 
this vision. We have made substantial changes in at least eight 
States since I have been President of Legal Services 
Corporation, Arizona being among them, where we have required 
our programs to engage in careful planning which we direct 
their services through public-private partnerships to 
individual clients. And I think there is broad consensus 
throughout the legal aid community, not just at the Legal 
Services Corporation but in the courts, other local 
stakeholders, and folks who really care about those low-income 
people who need our help very critically.
    And I think this is a bipartisan vision. It is one that 
says there is an obligation by the Federal Government to 
participate in the access to justice issue in our Constitution. 
In all of the documents that are engaged in the creation of our 
great country, we focus on the issue of access to justice for 
all people, not just those with the price of admission. And as 
a Republican, I believe in that fervently. As a lawyer, I think 
it is my solemn responsibility, and as president of the 
corporation, I want to tell you I have been proud to be 
involved in that very substantial change that is happening 
across the country.
    I am pleased to be here, and gratefully acknowledge the 
help of the staff of this committee in the submission of our 
budget. I think it is modest comparatively. It is focused on 
the important aspect of providing adequate funding for our 
recipients and to increase our ability to monitor their 
compliance with both the law as imposed by this Congress and on 
the focus of the work that should be done which is representing 
individual clients. And I think that our recipients across the 
country have risen to this challenge, I am very proud of the 
work that they have done.
    So I am pleased to be here today and welcome any questions, 
Mr. Chairman, that you may have or any other members of the 
subcommittee.
    Mr. Rogers. Thank you, Mr. McKay and Mr. Erlenborn, thanks 
for your testimony.
    I have learned in this job that you can almost gauge the 
well-being of Legal Services Corporation by the number of 
complaints that we receive from Members around the country. And 
I will have to say that we are at a low point in that regard 
which I think is a high point in your case.
    Mr. Erlenborn. I am glad you made that clear.
    Mr. Rogers. You are not completely free, but we are hearing 
fewer complaints, at least I am, from Members around the 
country. So, you must be doing something right.

                        CASE SERVICES REPORTING

    Let me ask you now about case service reporting. At last 
year's hearings there was a good deal of concern about the 
accuracy of your 1997 case reporting.
    There were indications that the 1997 numbers were inflated. 
Questions were asked as to whether the corporation had done 
everything that it could to ensure the accuracy of the reported 
numbers.
    Last year GAO reviewed the statistics of five of your 
largest grantees and found numerous overcounting errors as well 
as other problems such as improper case file creation, files 
without required documentation of financial eligibility, files 
without documentation of citizenship or eligible alien status.
    We don't disburse funds, nor do you, based on the number of 
cases that each grantee has or opens and closes. But it is 
important, I think, to this committee and to you that we know 
accurately and completely the information about the volume of 
your work so that we can evaluate how well the taxpayers' money 
is being spent.
    Now, this has been a point of some contention and some heat 
and I want you to have a chance to tell us what is happening 
with your case reporting.
    Mr. Erlenborn. Mr. Chairman, if I may just make a preface 
to the statement that I know John McKay is prepared to give in 
answer to your question. Let me first of all remind the 
committee how this failure or shortcoming in case reporting 
came about.
    Mr. McKay, as president, and Ed Quatrevaux as the Inspector 
General, he can fill you in with more details if necessary, 
decided that it was necessary to look at several of the 
grantees to see if their case statistic reporting was accurate. 
And the answer was that it was not accurate. The Inspector 
General made the investigation, he issued the reports; and that 
is how it became a matter that the Congress was aware of 
because that information was passed on to the Congress.
    I must also say that in making his report, the Inspector 
General made it clear that there was no one who was purposely 
changing these figures. No one was guilty of fraud or deceit, 
but rather this was sloppy bookkeeping. There are many causes 
for it. But he, not only in his reports but also in the 
committee hearing last year before this subcommittee,made it 
clear that he found that there were no fraud or deceit.
    The Inspector General, I think, can be believed in this 
regard. Not only was that his opinion but the Republican 
leadership of the House asked the General Accounting Office to 
look into this. They found shortcomings very much the same as 
the Inspector General. They also, in a subcommittee hearing of 
the Judiciary Committee, rendered their report and stated that 
they found no fraud or deceit. There were real shortcomings in 
this process of collating and sending--collecting and sending 
on to the corporation who collected it across the country, real 
shortcomings that are being aggressively addressed today. But 
contrary to many of the charges that were made, no one in a 
responsible position found evidence of fraud or deceit.
    Mr. McKay. Mr. Chairman, if I may follow up with our vice 
chairman's remarks, obviously the inquiry and the conclusions 
of the GAO, the office of the Inspector General and our own 
office of compliance and enforcement that there was no fraud 
did not end our inquiry. We certainly took this issue very, 
very seriously, and I want to assure the subcommittee that the 
follow-up by first of all the Inspector General, who I want to 
commend, the decision to go out and do this investigation, of 
course, was his as our independent Inspector General. He 
initiated that, and I think appropriately. The management staff 
of LSC of which I am the head responded to his initial reports. 
And as we received more reports, we continued to develop, I 
think, an appropriate response.
    Let me tell you very briefly what we have done. Every 
single office that was found to have shortcomings in the GAO 
report has been visited or will be visited by our compliance 
and enforcement staff which will be an on-site inspection with 
a detailed review of all elements of the case-statistic 
reporting issue.
    The purpose of that is twofold. One, to determine exactly 
what the level of difficulty is or the inaccuracy in the 
reporting; and, two, to work with our recipients to implement 
systems that will correct those errors.
    We have been in the field in 14 places. We expect to do 
more. Part of our budget request is to request additional staff 
to continue that sort of monitoring, that sort of compliance 
review, and that sort of instruction because, very importantly, 
we are working with a system here which is essentially a 25-
year-old reporting system. We are not the only agency that has 
had problems with its statistics, but I certainly won't hang my 
hat on that. I am going to assure the subcommittee that we will 
continue to work on this issue.
    We also have required 42 programs to file with us 
corrective action plans which we have approved. In other words, 
we don't have to, in our judgment, go to the field in those 
programs, but they have submitted to us adequate intensive 
corrective action plans which we have reviewed, provided 
feedback, and now approved.
    We plan, with the help of this committee and with the 
Congress with additional funding, to undertake regular 
monitoring visits to try and head off any such problems that we 
have completely, in utilizing the advice of the GAO, required 
every single program that receives Federal funds through LSC to 
certify the accuracy first of their 1998 data and then, with 
additional feedback from GAO who has been very, very helpful, 
we are going through this process now with regard to 1999 data.
    We have been instructed by the Congress to report by April 
30th on the 1999 data, and we will do so. We are working also 
with our Inspector General as he goes through his process to 
certify all of the data for 1999. And I would describe that as 
a very cooperative, very professional working relationship 
between my staff and the staff of the Inspector General. I know 
he is here today, and I feel he would comment on that if any 
members of the subcommittee would like him to do that.
    We also expect to reissue guidelines to our programs. Some 
of these areas are very gray in terms of case statistics. They 
have to do with the nature of the representation, whether it is 
advice, whether it is extended representation in court. That 
has not been clarified over the years, and we have moved to do 
that. And finally, Mr. Chairman, it is our intention to 
completely revamp the way in which we determine performance 
measures for our recipients; and that is being done pursuant to 
the guidelines of the Results Act.
    Our vice chairman has reported to you that our board 
recently passed a very important statement regarding the 
strategic direction for LSC for the next 5 years. Our next step 
is to develop detailed performance measures pursuant to the 
Performance Act and that will guide our new system of 
performance measures to the field. And part of our budget 
request is for a modest effort to create pilot programs during 
fiscal year 2001 to launch that effort in a careful way in 
accordance with the Results Act.
    So I hope, Mr. Chairman, that that response--and we 
certainly welcome any questions of members of the subcommittee 
or written follow-up which we would be glad to provide on the 
way I think that we are carefully, coherently responding to 
questions regarding case statistics generated by our 
recipients.
    Mr. Rogers. Well, it is not just the number of cases open 
and closed. The GAO found that there were a lot of files that 
did not show that the person was eligible, financially, without 
the required documentation of citizenship or was otherwise 
ineligible to be represented.
    A lot of sloppiness in these files. Not just the number of 
open and shut cases. Can you help us with this?
    Mr. McKay. Actually, the number of cases, Mr. Chairman, 
those are related. It was the fact that there was not adequate 
documentation which caused GAO to throw some of those files out 
of the case count. The ultimate question would be were we 
representing ineligible clients, and the answer to that I think 
as we have gotten into the files themselves and visited on-
site, whether it be the GAO, Inspector General, or our own 
compliance staff, found that we have eligible clients but as 
you pointed out, some sloppy file work to document them. We are 
not convinced that we have a major eligibility question, but we 
have a major documentation issue and that is just as serious.
    So we have reemphasized--and when I have indicated to you 
that we have required corrective action plans first and 
foremost, it is documentation that relates to the eligibility 
of these clients.
    And the field visits have done the same. We are convinced 
that we have, one, required corrective action plans and two, 
been in the field to ensure that our project directors and 
programs are working to correct those inadequacies. And Iwould 
point out that we really have across our system a remarkable record of 
meeting the many requirements for eligibility that are placed upon our 
programs. Most of them want to practice law and represent eligible 
clients. And we have reemphasized to them that along with the Federal 
funding they receive comes some very important documentation 
requirements' that we know they do not take lightly, but it does 
require their attention.
    Mr. Rogers. Is everybody cooperating? Are all the grantees 
cooperating?
    Mr. McKay. Yes, they have.
    Mr. Rogers. Even Maryland?
    Mr. McKay. Yes, and I was involved directly in that issue. 
We had initially an issue regarding access to certain client 
file information. And I know that you can see this coming, when 
the agency comes in and asks to look at actual client files, 
there are issues of client confidentiality and attorney-client 
privilege which have to be worked out; and so we have worked 
with programs. Maryland was the first actually, in which we, 
pursuant to a referral from the Inspector General, worked out a 
protocol or methodology by which we could review the files, 
protect the attorney-client privilege, it was legitimately 
present, and do the job that the Congress requires us to do 
which is make sure that those funds are being spent wisely, 
efficiently and certainly in accordance with the law. And we 
did work that out to the Legal Aid Bureau of Maryland's 
satisfaction. We have one or two pending, but I am confident 
that we will get those resolved. And in almost every other 
case, we have been provided with actually quite wide-ranging 
access to files.

                            1999 STATISTICS

    Mr. Rogers. Well, now this first came up based on the 1997 
numbers. And you had 3 years-plus to work this thing out. And I 
want to know how far along you are. Tell me what kind of 
confidence you have in the 1999 statistics that you could share 
with us.
    Mr. McKay. Well, Mr. Chairman let me put a little bit 
different viewpoint on that. When we first became aware of the 
Inspector General's preliminary results, we were talking about 
auditing files which were already completed in programs. So 
1997 data is analyzed in 1998, by the time we were testifying 
last year in 1999 when this issue was first raised by the 
subcommittee, all of the 1998 services had been provided, and 
we were actually well into 1999. We are now into 2000.
    So what we did in reissuing our guidance to the field, as 
soon as we could in 1998, was to affect the 1999 data. And I 
think that the review of that data which is only just now 
occurring will show an improvement over the accuracy of the 
1998 data. And ultimately, what we are doing is designing a new 
system, as I said, pursuant to the Results Act so we really, in 
1999, before this committee, could only influence by tightening 
up our CSR guidance for the remainder of 1999.
    We haven't had a chance yet to report on that. My hope is 
that the data that we are starting to go into the data banks of 
each our recipients will be much greatly improved for 2000. I 
am very confident of that given the number of field visits we 
had out there, the corrective action plans, and the clearing up 
of some guidance which, frankly, was some inaccurate guidance 
from LSC. It was old guidance, it had not responded properly to 
the increases in technology, and we had to clarify that. So we 
bear some significant responsibility for the inaccuracies that 
our field programs were reporting.
    So I think the answer really is 1999 is the first full year 
that we will have had an opportunity to clarify guidance to the 
field to improve accuracy; and really, I think, the benefits of 
our field visits, the teaching, and the corrective action plans 
will not be seen until we analyze the data that is collected in 
2000.
    Mr. Rogers. Well, we are supposed to get your 1999 case 
reports by April 30 of this year. And, needless to say, the 
spotlight is going to be on those numbers not just by us but by 
the Inspector General the GAO, and the world at large.
    Mr. McKay. And we welcome that.
    Mr. Rogers. We look forward to seeing those reports to see 
how they have been corrected.
    Mr. McKay. Yes.
    Mr. Rogers. And we better not find many errors, or some 
folks on this committee may be mad.
    Mr. Serrano?
    Mr. Serrano. Thank you, Mr. Chairman. Let me just continue 
the line of questioning of the Chairman, which has concerned 
even many of the people who are not mad at your agency. With 
staff's help I came with up with some numbers. I believe when 
the bill left the committee the amount was $141 million. Then 
we amended it on the floor in a bipartisan effort. An amendment 
that I put forth took it to $150 million. And then, with 
further negotiations, it went to $300 million, and finally we 
ended up at $305 million. That is the good news.
    The bad news is that to have to go from $141 million to 
$305 million means that there were opposition and questions 
getting to that point; otherwise, it would have been easier to 
get to that point at the beginning. So I can't overemphasize to 
you the importance of what the Chairman is talking about to 
those of us who--at times almost blindly--support you and the 
work that you do. You have to make sure that you do not give 
those who have blindly opposed you the ammunition to continue 
to say that something is terribly wrong.
    And while I know that nothing is terribly wrong, and while 
I believe that you have to do your work and do it well, this 
issue of reporting is one that traditionally arises in all 
kinds of Federal funding. My experience has been that it always 
jams things up when people really feel that someone is not 
telling the truth and you are asking for money because someone 
locally is fudging their numbers. So I would hope that you 
realize that this is a bipartisan request to get this taken 
care of so that we can all be supportive to the extent that we 
all need to be supportive.
    Mr. Erlenborn. I can assure you, Mr. Serrano, that we are 
very much aware of that. And I think the steps that we have 
taken will prove to be successful in giving you much more 
accurate figures. I am not going to say that at any particular 
point in time you are going to have totally accurate figures. 
There can be some mistakes made. But certainly they shouldn't 
be more than 1 or 2 percent, and I would not focus on that. But 
I would say that under the leadership of President McKay, we 
began corrective action on this issue before it became an issue 
in Congress. And under President McKay and the strong support 
of the board, we are seeing that there is follow-up so that we 
can guarantee the greatest degree of accuracy possible.

                          GRANTEES' REPORTING

    Mr. Serrano. Let me just--how many grantees do you have?
    Mr. McKay. We currently have 237 recipients.
    Mr. Serrano. And of those, how many were involved in bad 
reporting or bad numbers that we know of.
    Mr. McKay. Well, as was pointed out by the chairman, the 
GAO visited five of our largest programs all of which were seen 
to have some difficulties. The Inspector General visited a 
number of other programs, not all of which had difficulties but 
a number of them did. In addition to that, after the inquiry 
and as part of our response to the Inspector General's reports, 
we required all of our programs to go in and look at all of 
their files and recertify them. And we had something in excess 
of 50. And I am sorry I do not have the exact number, but out 
of 250 programs, about 50 could not certify. And under that 
report, we then required corrective action plans, and in some 
of those programs we actually went on site to get them 
corrected.
    So while most programs were able to certify the accuracy of 
their statistics following protocols established by the GAO--
they had to go in and basically turn over their files, open 
them up, and assure us that the numbers they were providing 
were accurate, a major massive undertaking by our programs in 
response to this. But the 50 that couldn't certify, all have 
been required to file corrective action plans being monitored 
by Legal Services Corporation. So I think the answer really is 
50-plus programs with substantial difficulties all of which now 
have corrective action plans.
    Mr. Serrano. Now, aside from this issue, moving on, what 
would you say are the corporation's biggest challenges facing 
you this coming year and in the few years to come?

                            2001 Challenges

    Mr. McKay. I think, Mr. Serrano, that the biggest challenge 
we face is to reach the huge number of eligible low-income 
people who do not know that we exist. And although, as we 
pointed out and requested in our budget request for fiscal year 
2001, we need to learn more about the unmet legal need of 
eligible clients whom we are required to serve under the LSC 
Act, all of the anecdotal information that we have and the most 
recent reports that we have show that we only serve 1-in-4 to 
1-in-5 eligible clients.
    That means that women who are victims of domestic violence, 
senior citizens who have been victims to equity stripping scams 
are simply living with that injustice in their lives; and we 
feel it is incumbent first as the federally-funded entity 
responsible for building public-private partnerships working 
with courts and individual states, it is upon us to develop 
planning and the resources at the Federal, State, local, and 
private sector levels to address that unmet legal need.
    And the greatest challenge we have is to create a vision 
and to create the kind of management at the LSC level to build 
partnerships at State levels to provide systems that will 
address those people so that the woman who lives in the trailer 
home up the gravel road who does not know that there is a 
program in Tucson, Arizona, to help her will get that 
information. Or that there is an 800 number that she can call 
to give her some assistance. Our biggest challenge is to 
leverage the modest resources that we have to provide the 
education that we need to provide those unmet legal needs and 
reduce the injustice that is far too rampant in our country, 
that we will begin to address those needs. I mean it is a very 
fundamental basic question of injustice.
    Mr. Serrano. Do you have any thoughts about new ways of 
doing the outreach other than the traditional ways you have 
used in the past? Because if you have a number of people yet, 
and you are correct, one of the saddest parts of our society is 
the fact that so many people do not know that there are 
services available to them and suffer the consequences of the 
lack of services. Any thoughts? And in conjunction with the 
fact that you are asking for $1.6 million to conduct a 
comprehensive national legal needs assessment, how does that 
all tie in and what are you looking to accomplish? What 
approaches are you looking to use?
    Mr. McKay. Well, I appreciate the question. We take this 
challenge very seriously, and as we work through the Results 
Act, which I think has really helped LSC focus on this 
question, first we need to figure out what we are dealing with 
and how many people we are missing and where they are. That is 
why we have asked for additional funding in fiscal year 2001.
    Secondly, we are not going to wait because we know through 
the reports of our recipients, I know from my own visits to 
many programs across the country that we are not serving these 
folks. First we need to find new ways to reach them. Technology 
is a huge asset to us. When I indicated to the Chairman and the 
rest of the subcommittee that we have had eight States now 
reorganizing, many of them are reorganizing around new 
technologies. Let me give you an example.
    Public access terminals are appearing now in courthouses 
and public libraries, and we are learning that low-income 
people have access to the Internet. We think that through 
Internet technologies it is going to be possible, and we have 
seen this now already in a number of our programs, for a low-
income person to access information about their legal rights 
that has never been available to them before through touch 
screen kiosks. At this point with the technology that is 
present, a woman who is being beaten can go to an information 
kiosk and it can say, right up on the screen, are you being 
abused in your home? Touch here. And you can begin to get the 
kind of information not just about someone who might be able to 
help you at a legal aid office but a phone number to a shelter, 
maybe a direct link to a shelter.
    We are challenging federally-funded programs to work with 
the courts, to work with prosecutors, to work with local people 
in the communities to come up with those kinds of technologies, 
and we have some wonderful examples. We toured the Maricopa 
County program in Arizona to help us do this. And we are very 
grateful that in our last year's appropriation, we have some 
funds that will be granted out by the corporation to encourage 
new technologies so that we can reach these folks.
    Telephone developments, Mr. Serrano, have made a major 
improvement in the ability of Legal Services to leverage these 
funds. Some States now have an 800 number where anyone anywhere 
in the state can dial an 800 number and get an advocate who can 
help them with their legal problem.
    This is a brand-new approach, but we have problems. We have 
places in Louisiana, in California, in Texas, where low-income 
people don't have telephones. And so technology is not the only 
answer, but we do find that by emphasizing State systems that 
are coordinated and integrated with local stakeholders, with 
courts with others who, of course, are dedicated to providing 
access to justice that we will reachthose folks. We will need 
more resources to, but I think we are headed down that path.
    Mr. Serrano. Let me ask you one next question. Grantees are 
now prohibited from engaging in activities such as class action 
litigation. In the needs assessment, are you going to focus 
only on that which you are allowed to cover, represent them in 
so to speak, or will your needs assessment look at all legal 
needs that low-income folks have in this country.
    Mr. McKay. I think we are going to have to look at all the 
needs of low-income people. We will not have any preconceived 
notions about what those will be. And clearly this is a study 
that will need to be conducted with professional assistance to 
make sure that it has credibility with people here on this 
committee; and we will share, obviously, the results of this 
study with the subcommittee and with Members of Congress.
    I want to point out that we have very carefully and very 
aggressively defended the restrictions that were imposed by the 
Congress, including a recent decision to take up to the United 
States Supreme Court, a decision in the second circuit called 
the Velasquez case and it involves welfare reform and we are 
going to defend that before the United States Supreme Court, if 
necessary. That is the law, and I am sworn to uphold it. But we 
do need to take a look at the ability of low-income people and 
low-income communities to exercise their legal rights.
    A lot of our programs do important impact litigation that 
is not class action and so that is not a tool that is presently 
available to our recipients. I think a legal assessment, a 
legal needs study ought to be broad based and ought to ask 
those questions.
    Mr. Serrano. Thank you.

                           INSPECTOR GENERAL

    Mr. Rogers. We would point out that the Inspector General 
of the agency is here with us as well, and if he would care to 
say anything at any point, we would like to hear from you. 
Anything you would like to say at this point?
    Mr. Quatrevaux. Thank you, Mr. Chairman. The only thing I 
would point out is that this committee's report on the 2000 
appropriation tasked my office with performing an assessment of 
the accuracy of the 1999 data, which is due in March 1st to the 
corporation. Our report to the committee is due by July 30th. 
And we have completed our planning for that project, and I am 
confident we will be able to carry it out and report to you the 
results that are statistically valid and in which I have a lot 
of confidence.
    Mr. Rogers. You are satisfied with the corrective 
procedures that the LSC has taken on the case report?
    Mr. Quatrevaux. We haven't reviewed those procedures; we 
are aware of them. I think that the test is going to be what 
the results of this coming assessment are.

                              H2A PROGRAM

    Mr. Rogers. Thank you. I will be submitting some questions 
for the record on behalf of my colleague, Representative 
Whitfield, on the H2A program.
    [The information follows:]
            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

                        CASE REPORTING ACCURACY

    Mr. Rogers. Mr. Kolbe.
    Mr. Kolbe. Thank you, Mr. Chairman. I have a few questions 
in that area as well.
    Mr. McKay, I think what you are talking about last--using 
computers to bring--to bring your clients and your 
organization, your grantees into the modern world, I think is 
to be commended. I think too often our agencies don't do that 
rapidly enough, take advantage of what is so commonplace out 
there in the private sector. So I commend you for that.
    I don't want to beat a dead horse here, but I am going to 
come back to the issue here of the case reporting and 
paraphrase Shakespeare, this strikes me a little bit, I think 
you protesteth too much here about all of this.
    You referred to the fact that there was no fraud and no 
evidence of anybody that was deliberately misreporting, and I 
will accept that. The definition of the term fraud suggests 
somebody is getting some kind of financial gain from the act, 
personal financial gain, and I don't suggest that anybody was 
doing that. But it just seems to me that you had some pretty 
whopping discrepancies and this Congress--Mr. Serrano talked 
about the process we followed getting to the final 
appropriation of 305, I guess it was last year. And I remember 
on the floor some of the discussion of this. Andpart of it had 
to do with the caseloads that LSC or its grantees had.
    And what we now know is that those--is it not correct to 
say those numbers were greatly overstated, very vastly 
overstated? Is that not accurate?
    Mr. McKay. Oh, I don't think so. This issue--let me just--
--
    Mr. Kolbe. Just to be specific, I think that the number 
that you reported total of your grantees last in 1998 was 1.9 
million cases, and I think it turned out something like more 
like 1.1 million. Isn't it a 7 percent overstatement?
    Mr. McKay. I am not going to fight you Congressman Kolbe on 
whether it is significant. It is clearly significant, but the 
actual numbers of closed cases that we were talking about was 
in the 1.5 to 1.6 million range, and we have corrected that 
down to about 1.1 million cases closed.
    Mr. Kolbe. The latter figure we have agreement on. I would 
think that 1.6 to 1.1 million is pretty significant.
    Mr. McKay. It is very significant, and yet there is a 
massive disconnect here. We did attend an oversight hearing of 
the House Judiciary subcommittee on this issue and there is 
substantial testimony there with respect to this issue and what 
occurred my own belief is that while cases closed is an 
important indicator of the work that we are doing with the 
Federal funds that we administer, it really is not and should 
not be the only way to determine the nature of our service to 
eligible low-income Americans.
    Mr. Kolbe. I would agree with that.
    Mr. McKay. And what we are trying to do is assess the 
impact of our program in ways that are related to outcomes for 
clients that show the real ability of what we do. This is sort 
of a metaphysical equality here that Shakespeare would 
appreciate and that is going to court and representing a 
client, if you do, that may not be to the benefit to the client 
itself. I mean, it may be that you went to court, and you did a 
crummy job.
    Mr. Kolbe. I understand that, and I appreciate that. And 
that there are other criteria. But don't you agree that this 
subcommittee has to have some objective data in order to make 
our appropriation.
    Mr. McKay. Absolutely.
    Mr. Kolbe. So if you can't give it to us, when you say the 
closed cases is only one of those, fine. Can you provide us 
with other objective criteria?
    Mr. McKay. Yes.
    Mr. Kolbe. Measurable criteria that we can use? That is 
what I think the subcommittee is asking for.
    Mr. McKay. And I want to assure you that is exactly what we 
are in the process of developing.
    Mr. McKay. As we move technologically to things like 
providing websites so that they are accessible to clients, not 
to make the job easier for lawyers, but for clients, when they 
go up on the website and download a form that they can use to 
get a protective order on their own in court, I think that is a 
valuable service provided.
    Mr. Kolbe. I agree.
    Mr. McKay. We should be able to tell you how many hits 
there were on that website.
    Mr. Kolbe. I agree. It seems to me you have gone backwards. 
You come with a budget request, and now you are going to go out 
and measure the criteria of how you are going to spend that. It 
seems to me that you would say here are our goals, here is how 
we are going to measure it.
    Mr. McKay. I am going to scare you with my answer.
    Mr. Kolbe. Okay.
    Mr. McKay. I am going to scare you with my answer. I think 
the charge of the Legal Services Corporation is set forth the 
LSC Act and it is says that we will provide legal services to 
Americans living at 125 percent of the poverty level. We know, 
without the legal-needs study, we know that the best available 
information says that we are serving about 1 in 4 or 1 in 5 
clients. There is a disconnect between saying, and I think it 
has simply been disproven, that the fundamental basis for the 
congressional appropriation is the number of cases closed. We 
at the corporation have helped ourselves fall into that trap by 
relating to you on a yearly basis the number of cases closed. 
That is not the correct analysis. We, as the agency 
responsible, should be saying to you, here is our statutory 
charge, here is the need, here is what we need to accomplish 
it, and we are going to do a great job of that.
    We have not been able to do that. That is why we are before 
the committee asking you for an appropriation to conduct a 
legal-needs study.
    Mr. Erlenborn. If I might add, Mr. Kolbe, we would be 
ecstatic if the action on the appropriation was based upon the 
need.
    Mr. Kolbe. Right. And I appreciate you trying to steer me 
away from the caseload question here, and I understand that 
there are other data, and as I have said, I would agree with 
you. But since it is one, and it is an important measurement 
that we use, I just want to focus on that.
    What kind of written communications have you sent to your 
grantees about reporting? What kind of procedures have you--
have you submitted all of that to the subcommittee?
    Mr. McKay. I do not know whether we have submitted it to 
the committee.
    Mr. Kolbe. Have you had significant numbers of 
communications?
    Mr. McKay. Oh, yes.
    Mr. Kolbe. You have developed procedures?
    Mr. McKay. Yes, we have. They are detailed. Let me just put 
it this way. A lot of recipients are using the word 
``onerous.''
    Mr. Kolbe. Have you told them that accurate reporting is 
going to be a criteria for renewing a grant or giving a grant?
    Mr. McKay. Well, first of all, it really is a grant 
condition anyway, for programs to cooperate with us and provide 
us with information that we request. Let me just give an 
example. We are requiring every program to take a two-page 
checklist through every case that was filed in 1999, and they 
have to certify the accuracy of the cases that they undertook. 
They will not physically turn over every single file, but they 
will, as guided by GAO, conduct basically a massive testing of 
their case files for 1999 so that in addition to the work being 
done by the Inspector General, we will be in a position to say 
that individual programs are self-certifying, pursuant to our 
guidelines.
    We reissued a very thick case statistic reporting guide. We 
are about to do it again for 2000, as we have learned fromGAO 
and listened to what they have had to say. So we have been in a great 
deal of contact with our programs. I convened a working group of about 
15 Project Directors in Dallas, Texas to help engage the dialogue in 
how this impacts them in the field; and believe me, I have gotten more 
than an earful. But I want to say that I commend our programs. This has 
been very difficult. Many of them have been visited by GAO, by the 
Inspector General; many more are being visited by our Office of 
Compliance and Enforcement and now all of them are self-certifying. I 
have Project Directors who have said I am creating an office of audit 
to respond to all of these.
    Now, that is a light comment, but I wanted to give you it 
so that you know.

                    SANCTIONS FOR REPORTING FAILURES

    Mr. Kolbe. Has any grantee been sanctioned for their 
failure of reporting?
    Mr. McKay. Not directly, no. Not directly. Now, had we 
found instances of fraud, Mr. Kolbe, or had we found instances 
of folks who had----
    Mr. Kolbe. You told me, there is none.
    Mr. McKay. That is right. Well, we have not found any. And 
I welcome anyone, if the evidence is there--I am the chief 
regulatory officer here; and I will enforce that very 
aggressively. It just has not happened. Frankly, I bear some 
responsibility as president of LSC for having out in the field 
unclear guidance on some of these materials. We have now 
reissued that guidance. I do not think we are perfect yet, but 
we are going to keep working at it and we are going to get this 
data accurate for the Congress. So for me to go sanction 
programs, I think part of the responsibility since it lands on 
our shoulders at LSC is to get it right so that our programs 
can provide accurate data. We were not there, and we are making 
a lot of progress, but we are not there.
    Mr. Kolbe. Thank you. My time has expired. I guess I will 
have to rely on Mr. Mollohan's question to give me some answers 
to the H2A program.
    Mr. Rogers. Mr. Mollohan.

                             IOLTA FUNDING

    Mr. Mollohan. Thank you, Mr. Chairman. Gentlemen, I join 
the Ranking Member and other members of the committee in 
welcoming you all to the hearing today.
    What is the status of the IOLTA funds with regard to their 
support to grantee programs throughout the various States?
    Mr. McKay. We have had some good news in that regard, Mr. 
Mollohan.
    Mr. Mollohan. I know you had the district court dismissed 
with prejudice.
    Mr. McKay. Yes. And that was the key decision. The matter 
went up, as you know, with the United States Supreme Court and 
put in question the State IOLTA programs upon which many of our 
recipients rely for substantial additional funding.
    Mr. Mollohan. So the case has been dismissed. What impact 
has that had the possibility of grantees receiving funds from 
IOLTA?
    Mr. McKay. I do not think it ends the challenges, but I 
think in the near term, the next few years, that we can 
continue to look to State IOLTA programs to supplement our 
funding significantly.
    Mr. Mollohan. Are any States having their funds 
supplemented now with IOLTA funding?
    Mr. McKay. Oh, yes. Virtually every State continues.
    Mr. Mollohan. Still?
    Mr. McKay. Yes.
    Mr. Mollohan. So these cases did not stop IOLTA funding?
    Mr. McKay. I am aware of one or two States who temporarily 
halted the distribution of IOLTA funds to legal aid programs 
and other recipients, and I believe that those have now been 
freed up pursuant to the guidelines of individual State supreme 
courts. So that money now continues to flow to our local 
programs and to other recipients, and of course they are not 
LSC funds, but they are certainly used by our recipients to 
represent clients.
    Mr. Mollohan. That is about $60-$65 million a year?
    Mr. McKay. I believe it is more than that now. I am told it 
is about $65 million.
    Mr. Mollohan. I took the number out of your testimony.
    Mr. McKay. Okay. Well, you can depend on it. Thank you.

                         TECHNOLOGY INITIATIVE

    Mr. Mollohan. Could you explain in greater detail than your 
testimony about the technology initiative that you requested $5 
million for last year and are asking $10 million for this year? 
What has been done with the first $5 million, and what do you 
propose to do with the $10 million?
    Mr. McKay. The numbers that we have available are about 
$4.25 million. We have moved very quickly to implement these 
grants which are discretionary to the corporation. We are not 
distributing them on a pro rata basis. So we are looking for 
innovative technologies along the type that I was describing to 
Mr. Kolbe.
    Mr. Mollohan. You are soliciting proposals from your 
grantees as to how you would use this money to improve your 
operations?
    Mr. McKay. Yes.
    Mr. Mollohan. And the delivery of services?
    Mr. McKay. No, I think a little bit more directly we have 
said we are looking for programs, for technology projects that 
will be trend-setting projects and providing direct 
representation for pro se and for clients directly. So we are 
looking for in our RFP, which will be issued, our goal is the 
first of March, we have set up categories. We are looking for a 
model program, we are looking for a series of substantial 
grants out to programs who are doing innovative things like 
two-way teleconferencing which will save us the cost of 
establishing offices in areas.
    Mr. Mollohan. Is it directly increasing the number of 
clients you can serve.
    Mr. McKay. Absolutely. We are not talking about nice 
computers on the desks of attorneys, we are talking about 
reaching clients. One of the main emphases is going to be rural 
poverty. We cannot open an office in every small town in Utah, 
Iowa, or my home state of Washington. We have to find ways to 
reach them, and technology is a real opportunity. We are very 
excited. We have already put the word out to our programs, and 
we have received a huge number of inquiries about the 
availability of those funds. And we are very excited about them 
and very grateful to have this opportunity.
    Mr. Mollohan. What are some of your ideas? Take West 
Virginia, for example, not because of any other reason other 
than I am more familiar with it. How many program grantees do 
you have in West Virginia?
    Mr. McKay. We currently have three, Mr. Mollohan. But I am 
told that as of March 31st that will become one in 
WestVirginia. We will have one recipient. They are going to reorganize 
around the questions of technology. We are very excited about West 
Virginia. In the past, we actually had three programs in one building 
in Charleston.
    This did not seem to make a lot of sense to us at LSC, and 
yet they are local recipients with a lot of local input. They 
have some very interesting ideas under the leadership of a 
district court judge in West Virginia who chairs a symposium 
there. They have done substantial work in bringing new 
technologies into West Virginia, State-wide training around 
substantive law issues, and I am particularly pleased with the 
fact that they are looking at new ways to provide client intake 
and access into the system to reach people who are in remoter 
areas of West Virginia where we can't open an office.
    Mr. Mollohan. Using this technology initiative?
    Mr. McKay. Absolutely.
    Mr. Mollohan. Explain in more detail how they do that? For 
instance, operating out of Charleston, how did you serve 
Hampshire County?
    Mr. McKay. One way you can do it is by having an 800 
telephone access system. What is happening here is not that 
they call on an 800 number and someone says here is a place you 
can call to get help, they are actually getting advocates on 
the other end of the line who understand the law of West 
Virginia, who understand what the resources are, who can say to 
someone who is being abused, here is a social services 
provider.
    Mr. Mollohan. Just tell me mechanically. A telephone----
    Mr. McKay. A telephone intake system which is tremendously 
widespread.
    Mr. Mollohan. What is another one?
    Mr. McKay. Another one would be Web-based access which 
would be a Web site. We have several programs working in other 
States where in courthouses in West Virginia, in public 
libraries in West Virginia, in a public access terminal, a low-
income person could get on to the Web site of the new legal aid 
program in West Virginia.
    Mr. Mollohan. Would one tie into the grantee?
    Mr. McKay. You can tie into the grantee directly first for 
information, that is the first step. But what is happening now 
is we are starting to find down-loadable forms with step-by-
step, easily structured ways to describe your problem. You 
could take a form that comes out at the end of this touch 
screen dialogue which could be walked into a local court in 
West Virginia and you could obtain an order of protection on 
your own, without an attorney. This is exciting, and while we 
like to have an attorney there in every instance, we know we 
are not going to get an attorney throughout West Virginia that 
can serve low-income people.
    Mr. Mollohan. Is this happening everywhere?
    Mr. McKay. Yes.
    Mr. Mollohan. Where is the best case of that?
    Mr. McKay. I think the best case of the Web-based access is 
probably Pine Tree Legal Services in Maine. I have to plug some 
of my own hometown folks, I would say the State of Washington 
has moved very aggressively with Web based technology. But they 
may have the best 800 telephone system throughout the State of 
Washington.
    Mr. Mollohan. Let's take West Virginia as an example, again 
you estimate that you are servicing one in four or one in five?
    Mr. McKay. Yes. And I am not--I do not know what the 
symposium in West Virginia came up with, but they would have 
tried to study that a little more closely.
    Mr. Mollohan. It must be huge in West Virginia. If you are 
searching one in five across the State as a Nation----
    Mr. McKay. Well, we have three. It is not the number of 
programs, it is the number of clients that they are serving.
    Mr. Mollohan. Well, I think there is some correlation 
between the number of grantees and the number of clients 
served.
    Mr. McKay. No, there is not.
    Mr. Mollohan. With all three in Charleston----
    Mr. McKay. It will be one service area when we are done 
with one program. Currently there are three.
    Mr. Mollohan. So you have three grantees in West Virginia, 
all operating out of Charleston, West Virginia.
    Mr. McKay. I believe that is right. That is kind of an 
anomaly of history. But remember, we administer a system of 
nationwide grants. What we have done in the last 2 years really 
is become very aggressive about implementing this new version 
of legal services. We are telling them, you have to come up 
with innovations to reach low-income people in West Virginia. I 
think they have risen to the challenge. I am very proud of what 
they have done there.
    Mr. Mollohan. I am very supportive of your thinking about 
how you can use technology to multiply your efforts and reach a 
greater number of people. I will be very interested to see how 
it develops. I think it is a good thing, and I look forward to 
working with you.
    Thank you, Mr. Chairman.
    Mr. Rogers. Mr. Latham.
    Mr. Latham. Thank you, Mr. Chairman. I welcome you very 
much today. I really want to compliment you, John, on the 
vision and the statement that you put out. I thought it was 
excellent. Despite what maybe Mr. Serrano indicates, actually, 
I am quite happy today.
    Mr. Rogers. What?

                         GRANTEE ACCOUNTABILITY

    Mr. Latham. Yes. And maybe there is some misunderstanding. 
I have supported in the past maintaining, actually increasing 
funding for the Legal Services Corporation, and I think there 
is a role of support. Actually, George Witcrab, who maybe you 
know is from my district, is a very good friend, but he was as 
concerned as I am and have been when you are presented with 
facts which are not in line with what has been reported. 
Obviously we are very much justified last year, you know, when 
you see the account went from 1.9 million in 1997 to 1.1 
million in 1998, and it may not be part of your justification, 
but I think we are all aware on the floor of the House when we 
debate this that the people who are supporting additional 
funding use these numbers over and over and over again. So 
whether or not you use it as a justification; in fact, a lot of 
people do. I just think I would not be representing my 
constituents, the taxpayers of my district if when presented 
with real facts, that we didn't act on it. I really, I 
compliment you. I think you have acted swiftly, and I think 
your leadership has really made a difference. I look forward to 
it.
    I am curious, and the Chairman I think touched on this 
somewhat, but is there real resistance or delays by the 
grantees as far as the accountability and the--it would seem to 
me that it would maybe shake them up a little bit or they may 
think that maybe their job is not justified or something if 
their numbers were not as large as they were before, ifthey are 
really reporting actual cases.
    Mr. McKay. Oh, I think they have been shaken up. But the 
issue is not--I do not believe the issue from their standpoint 
is that we think they are less effective because their numbers, 
when they are accurately reported, are fewer. I do not think 
anybody in legal services really believes that today. As you 
know, a case--we take really a small percentage of our cases 
all the way to litigation, and that is the most time-consuming 
work that we can do, is to actually go before a court and 
handle a case.
    I was a private practice lawyer in Seattle, and I know the 
difference between trying a commercial litigation case for the 
Nordstrom Company in Federal court for a couple of years versus 
brief advice to a client who may call me on the phone. Under 
our system, each of those is one case. And that is one of the 
problems that we have and one of the shortcomings, frankly, 
that has been revealed here. We have not found a way to 
accurately and adequately report to the Congress on what 
Congress is getting when it invests in us and that is a 
terrible shortcoming and we are going to address it. But there 
are responses to that that need to be worked out.
    So we are not flipping burgers; we are not serving people 
in kiosks; we really are providing important legal advice. I 
have traveled across the country and I have been in legal aid 
offices and we have tremendously dedicated people who are 
working in these offices for wages that are far below private 
practice, far below government service, and they do it because 
they believe in this work.
    I think we have to commend them for what they are trying to 
do, which is to represent low-income people who need this 
service. We have not served them well, frankly, the leadership. 
We are not finding a way to characterize the hard work that 
they are doing and the fact that they know they bear 
responsibility in Iowa and my State of Washington and Arizona 
and California and Kentucky for not serving people who 
desperately need their help.
    So I think that is what--the resistance, in fact, is to 
what is viewed as paperwork when they have clients sitting out 
in their waiting room. But we--I can tell you, we have got 
their attention on this. I know we have their attention on 
this. I hear the phone calls, I have conducted the meetings in 
the field, I have supervised the paperwork that has come from 
our staff, I have worked with our Inspector General as he has 
done that independently under a separate statutory charge. I 
think it is the right thing to do and yet, we have to revamp 
this system, a total difference between those two kinds of 
services that are given to clients.
    Mr. Latham. You do not have to be in government very long 
to understand there is a lot of paperwork as part of the job.
    One question I would have on the technology. How do you 
know if somebody goes up to a computer screen and starts 
pushing their needs and all that, how do you know that they are 
eligible?
    Mr. McKay. You do not. You really do not. I think the 
question----
    Mr. Latham. Do we need to look at the law then?
    Mr. McKay. Yes.
    Mr. Latham. Because are you not providing services for 
people----
    Mr. McKay. We do need to look at the law on that. We have 
taken a preliminary look, and I am convinced that we do not 
have any kind of a legal issue with regard to information, 
which is available to low-income people, established for low-
income people, but happens to be accessible by say a middle-
income person.
    You know, domestic violence against a woman is not uniquely 
owned by low-income people. I am a former prosecutor and I am a 
former judge and I know that that is not the case. It happens 
in all spectrums of socioeconomic status in the country. If 
there is literally no cost, and I think in the example you 
gave, there is literally no cost if a middle-income or upper-
income woman, for example, were to come into a courthouse or a 
public library and download information. It is virtually no 
cost.
    Now, in the telephone system--I think that is the part we 
really do have to study and will study more carefully, but on 
the telephone call situation, the same screening is being done 
now. There is brief advice over a technologically sophisticated 
telephone system which is not given until eligibility is 
established, including income eligibility.
    Mr. Latham. Again, I am actually very pleased with what you 
have done. You may be shocked.
    Mr. McKay. Not shocked at all.
    Mr. Latham. I really am, and I think this committee, under 
your leadership, Mr. Chairman, has gone a long way to bring 
credibility to the legal services, and I think in the long run 
it has been very, very positive. Thank you, Mr. Chairman.
    Mr. Rogers. Thank you, Mr. Latham.
    Well, see there? I told you he was nice all along.
    Mr. Latham. Was there a question?
    Mr. Rogers. Ms. Roybal-Allard.

                     LEGAL SERVICES FOR URBAN AREAS

    Ms. Roybal-Allard. Thank you, Mr. Chairman.
    As you know, I have always been a strong supporter of legal 
aid, but I do want to associate myself with the concerns that 
have been voiced by the Chairman and others about what has 
taken place, and I am very pleased that you are moving in the 
right direction to correct that.
    I have just a couple of follow-up questions before I get 
into some others. You were talking about this Web-based 
technology. From your testimony, it sounds like this is geared 
primarily toward the rural areas. But there are urban areas in 
which people are isolated because of lack of transportation or 
even the libraries, if they exist in their community, do not 
have any computers or any of the technology necessary to even 
put them in. How are you going to address the problems in those 
kinds of areas?
    Mr. McKay. Let me just first apologize. I do not want to 
give the impression that that is the purpose of either the 
additional technology grants that we have been allowed to make 
or the vision of the corporation. The technology is certainly 
being applied in urban areas. First and foremost, it has been, 
I think, sort of incumbent on our board and on me to emphasize 
the need not to forget rural America and rural poverty.
    In fact, the truth of it is, most of the technologies that 
are occurring are occurring in urban areas. There is this--we 
are all focusing on the digital divide and whether it is 
available to our eligible clients, and we monitor that very 
carefully. In fact, one of the requirements we put on our 
programs is we have told them, you have to be in thisdiscussion 
about where we will have public access terminals and how they will be 
accessible, because you have to speak for the low-income civil, legal 
needs of eligible clients. If you set up, if you presume, for example, 
that the courts will only be accessible by someone with a PC at their 
home, you have just cut out low-income people because they do not have 
a PC sitting in their home.
    We have to be advocates for public access capability 
throughout the community if that is going to be the way that 
anyone really enters into the justice system. I think that is 
where the justice system is going. We have to be at the table 
to do that.
    So one, the grants that we receive will clearly involve 
urban areas. Two, we are at the table now, both as the 
corporation and in our recipient networks where decisions are 
being made about how people will enter the justice system, and 
we want to be the advocates for low-income people to make sure 
that isolated communities or isolated parts of the country, 
whether they are rural or just as isolated as you pointed out 
in the middle of skyscrapers.
    Ms. Roybal-Allard. A lot of these communities have people 
that have limited English skills. Will the services be 
available in Spanish or some of the Asian languages?
    Mr. McKay. Absolutely. The Orange County program has done a 
tremendous job. I was told, I do not know how many number of 
different languages there are, but it is a huge number, as you 
know, and their telephone access system which I have observed 
in operation has available Vietnamese speaking, obviously 
Spanish speaking, Chinese, and they are on call to come into 
that system as a referral. Web-based, I know the Washington 
State Web-based access system has a completely separate entry 
point for Spanish speakers.
    Ms. Roybal-Allard. In response to a question by the Chair 
to the Inspector General, I was actually surprised to learn 
that the procedures had not been reviewed prior to your 
implementation. I am trying to understand the thinking there, 
because if, in fact, the Inspector General is going to make an 
assessment of whether or not you have developed procedures that 
are effective and address the concerns that have been raised by 
this committee, would it not make more sense for the Inspector 
General to review the procedures first? And say yes, you are on 
the right track, rather than have you put procedures into place 
now that everybody is using, and now he is going to review them 
and hopefully this will not happen, but he may say these 
procedures put in place are not any good, you did not do X, Y 
and Z. I am trying to understand what the thinking was here 
that did not get the clearance on the procedures before you 
implemented them?
    Mr. McKay. If I may just ask the Inspector General to 
comment on your question and first indicate that, in fact, I 
have very much been in communication with the Inspector 
General, but some of the functions are separate functions in 
our offices. I believe they complement each other, but I think 
I should ask the Inspector General if he would be willing to 
comment if that is all right with you.
    Ms. Roybal-Allard. Sure.
    Mr. Quatrevaux. First of all, there were staff exchanges. 
Our views were solicited, and they were provided at a staff 
level. But those exchanges were based on the work we had done 
prior to that time, and we have really no way to know whether 
these procedures will be effective when implemented without 
testing them, and that is what we are going to do this spring.
    Ms. Roybal-Allard. But you did have input?
    Mr. McKay. Absolutely. Absolutely.
    Ms. Roybal-Allard. In my district in Los Angeles, there is 
the Legal Aid Foundation of Los Angeles. They have started or 
have expanded their services. I would like to, if I may, Mr. 
Chairman, just tell a story about some apartments in an area of 
my district, it is Cambria Apartments.
    What was happening there, it was a slum, it was rat 
infested, it was one of the major drug trafficking places for 
that area. The complaints of the residents were falling on deaf 
ears. The landlord did nothing. Eventually what happened is 
they went to legal aid, they started paying their rent--giving 
their rent to legal aid, and the landlord actually abandoned 
the apartments.
    Then legal aid assisted them in obtaining ownership. They 
helped them with the financing, all of the legal issues 
necessary. As a result, what was once a slum is now a very, 
very nice apartment. It is owned by the tenants, it has given 
them a sense of self-worth and independence that they did not 
have before.
    Legal aid tells me that this kind of transactional 
representation is becoming an increasing part of their 
portfolio. My question is, is this something that is unique to 
Los Angeles, or is it something that is happening in other 
parts of the country? They are also helping with the legal 
process, for example, in establishing day care centers in these 
areas which are very important in communities like that so 
people can go to work and have their children taken care of.
    So is this something that is unique to Los Angeles or is it 
happening elsewhere?
    Mr. McKay. No. But I want to say that the situation you 
described is a wonderful event, just the wonder of what they 
accomplished in that community in a way makes it unique. I have 
been to the Cambria Apartments and toured them with the new 
owners and was very, very impressed. Economic development of 
that kind, which is really a representation of low-income 
communities, we certainly encourage that. I toured a brand-new 
hospital in Brooklyn which was accomplished in the same way. 
Legal aid lawyers representing the community helped bring a new 
hospital into a low-income neighborhood in Brooklyn where there 
was no health care.
    My view is that while that is not individual 
representation, whether it is the community, business owners or 
other stakeholders in the community, nobody wants a rat-
infested apartment, and it is clearly something that everyone 
can agree is a benefit to all of the community and to the low-
income community to pursue that kind of representation. That 
was very intensive legal work--to allow the development of the 
Cambria Apartments--and to build the hospital across the way in 
Brooklyn was tremendously time consuming and hugely valuable. I 
have been to both places. A number of our programs across the 
country have dedicated resources to community development 
successfully. We want to encourage that as we represent more 
and more clients.
    Ms. Roybal-Allard. Mr. Speaker, do I have time for one more 
question?
    Mr. Rogers. Sure.

                           Domestic Violence

    Ms. Roybal-Allard. For several years, you have proposed a 
$15 to $20 million initiative regarding domestic violence.I 
notice that you do not have that in your budget this year. Yet, my 
understanding is that domestic violence is just as serious a problem as 
it always has been. Can you tell me how you are responding to this need 
and whether or not the Violence Against Women Act has been helpful to 
such an extent that you no longer need this additional funding?
    Mr. McKay. No. Let me see if I can clarify that.
    First of all, I think responding to the concerns of the 
subcommittee, as stated by the Chairman over the last two 
hearings, we took a look at the basis for our request, which 
was listed as increasing programs for domestic violence. I 
think all of our field funds should be on call for 
representation of domestic matters, most of which have to do 
with either violence or the threat of violence against women 
and children. And so I think every single dollar in our field 
funds is on call for that. We do not in any way signal a 
decrease in the commitment of legal services or its recipients 
to domestic representation and certainly domestic violence. We 
have been more successful, and I think through, in large part, 
the attention of the Chairman and this subcommittee in winning 
the award of grants to our recipients, LSC-eligible recipients.
    We have had an increase, in part because this committee has 
focused on the availability, helped us with the Department of 
Justice who I would like to commend for opening up their 
guidelines so that more can receive them. But one is not a 
replacement for another. Clearly the core of our requested 
increase, the 8 percent increase that we have requested so that 
we can continue to represent our most vulnerable clients and 
those who are subject to violence, we cannot say enough about 
the need that they face.
    Mr. Erlenborn. I might add just one thing and that is that 
every recipient program, their board must establish priorities, 
what kind of cases would come first, so that they can utilize 
the limited funds for the most important. I believe every 
community has violence against women as one of the top 
priorities.
    Ms. Roybal-Allard. Thank you, Mr. Chairman.

                 Accounting For Federally Funded Cases

    Mr. Rogers. Thank you.
    Now, the 2000 Conference Report required that you tell us 
the feasibility of providing separate accountings for the 
federally funded cases as of June 1st of this year. What are 
you doing toward that requirement?
    Mr. McKay. I am sorry, I did not hear the first part.
    Mr. Rogers. Federally funded cases, an assessment of 
feasibility for providing separate accountings for federally 
funded cases.
    Mr. McKay. Well, we are studying that issue as the 
conference report asked us to do. It is a difficult question to 
answer because, of course, our programs, as we requested them 
to do, have obtained other sources of funds. All of those funds 
bear the restrictions imposed by the appropriations language in 
1995 and since then, but it is a difficult task to account for 
a Federally funded case versus a non-Federally funded case. You 
assign the overhead of the office, for example, to a case you 
might have pursuant to an HHS grant or to a VAWA grant. But we 
are studying that, and I think that is the purpose of the 
inquiry and we will provide a report to the Congress.
    We have been urged in terms of looking at the CSR question 
to count all of the questions that we undertake. That is the 
most valid way to determine the effectiveness of the Federal 
dollar. But, Mr. Chairman, it is a difficult issue and we are 
struggling with it but we will provide you and the subcommittee 
with a report.
    Mr. Rogers. We are looking forward to hearing from you. 
Now, we also required that you submit an assessment of the 
feasibility of requiring grantees to submit case service 
reports on the Federal fiscal year basis instead of a calendar 
year basis. What is your assessment of that?
    Mr. McKay. I think that is going to be a really difficult 
task for us to meet. We have always--I think in the near term 
when we look at 2000, calendar year 2000 case reports, most 
programs are working with case data software which has been in 
place for some time. That would be a difficult adjustment. If 
the committee directs us to change it, then of course we will 
require our systems to do that. I do not think it is a wise 
request at this point. It is a wise request to have a study, 
but I do not think it would be, at this point, a wise decision 
to make, to change the reporting time.
    Mr. Rogers. Why?
    Mr. McKay. Well, because our programs have built into--we 
have learned that we have something like over 50, maybe 70 
different case management softwares around the country. To make 
this adjustment would be, we are told, difficult and require a 
significant investment into a system that we think is going to 
change radically anyway, as I reported earlier to the 
subcommittee. We are going to develop performance measures that 
are going to be substantially different. As we build into those 
changes and as we create the kinds of systems that are 
necessary, I think that is the time to build into whatever 
reporting mechanism the committee asks us to build in. Of 
course, we will do whatever we are asked to do by the committee 
and the Congress.
    Mr. Rogers. Chairman Gekas, the authorizing chairman before 
whom you testified about all of these matters some time back, 
has communicated to us and suggested that the corporation in 
2001 ought to provide Congress with accurate case reporting 
data on a quarterly basis instead of an annual basis. What do 
you think about that?
    Mr. Erlenborn. Mr. Speaker, if I might address that. There 
has been a lot of talk about the accuracy of the CSR data. In 
all of the talk that I have heard or comments that I have read, 
I have never heard that there was a problem with timeliness. 
The question is getting accurate data, and it would seem to me 
that getting it on a quarterly basis would not aid the 
Congress.
    What you want is accurate data on an annual basis because 
you make annual decisions. It would be a great burden on the 
recipient programs, and it would probably mean spending money 
again on paperwork and, in my view, unnecessary paperwork and 
unnecessary activities. It would take away from the ability of 
programs to provide legal services.

                  CARRY-OVER SPENDING ON TECHNOLOGIES

    Mr. Rogers. Now, in the current year, we gave you $4.3 
million, an increase of $4.3 million, plus the ability to use 
carry-over funds for technology projects, including pro se 
representation, and other prevention and self-help matters. How 
much carry-over do you expect to spend for technology?
    Mr. McKay. Well, I think that our carry over is really 
obligated in the current year. We have an accounting basis, and 
so there is sometimes a misperception about how much fluidity 
we have in terms of carry over. What we have and what might be 
unspent we will certainly use in terms of field grants. We just 
do not anticipate that we will have substantial carry over for 
technology use. We appreciate, however--may I add, Mr. 
Chairman, that we certainly appreciate the flexibility so that 
if we do have available management funds, that we may be able 
to grant those out.
    Mr. Rogers. What type of activities would you be funding, 
and how will that help increase the number of clients?
    Mr. McKay. Well, in addition to the Web-based technologies 
that are part of the RFPs that we expect to issue within the 
next couple of weeks. We have in Florida, for example, a Web-
based, but two-way conferencing, video conferencing capability 
that has been developed by Florida Rural Legal Services that we 
are very excited about. It is called the ICON program. What it 
allows for is a very cheap PC with a, perhaps you have seen 
them, little teeny camera that sits on top of the PC which 
really, for very cheaply, can be placed throughout what for 
them is a very broad service area. But we have others just like 
that. We are looking for those kinds of innovative technologies 
that we might be able to use.
    So I think the Internet is probably the first. Telephone 
brief advice and referral services are another. We have some 
that have gone to mobile offices that are attempting to use 
through cell technology and other access to the Internet an 
ability to extend the reach of legal services lawyers. So I 
would say access through telephone systems that are 
sophisticated, Web-based systems which offer us a myriad of 
suggestions and frankly, Mr. Chairman, we have a number of 
innovative programs out there that have not had the opportunity 
to try and address some of the unique challenges they face in 
their service areas. And we think that through the flexibility 
that the subcommittee and the Congress have given us, we will 
draw some of these out and our objective is to replicate them 
across the country. We are very excited about this.
    Mr. Rogers. Are you proposing to offer these grants 
exclusively to your grantees, or would you open the grants 
beyond the grantees to include such things as law school 
clinics, bar associations, other interested parties who might 
have innovative ways to deliver their programs?
    Mr. McKay. Well, our current proposal is for LSC 
recipients. We have asked for the flexibility to go beyond our 
recipients for one reason, and that is that the local programs, 
pursuant to our initiative to work with courts, law schools, 
other providers, people who are working with our client 
communities, it may be more beneficial, for example, to 
piggyback on to a Web that already exists through a local 
court, because the courts are moving heavily into Web-based 
access. While we do not see this today, we think in future 
grants that we may be facing the opportunity to award these 
grants to someone other than our recipients.
    So we certainly will utilize these for our recipients, but 
we would like the flexibility, if it is possible, to work more 
closely with law schools and courts and others.

                         RESTRICTION COMPLIANCE

    Mr. Rogers. Let me change gears rapidly here, and finally.
    As we discussed last year, some law students, some LSC 
grantees, and some outside parties filed a lawsuit challenging 
the constitutionality of the restrictions the Congress had 
placed on the LSC. Those were upheld except for one on appeal, 
and the one remaining issue is the restriction on challenging 
welfare reform laws.
    I understand from your written testimony that your petition 
for rehearing was denied, and that LSC has petitioned the 
Supreme Court to review the welfare issue. Is that correct?
    Mr. McKay. That is correct.
    Mr. Rogers. When do you expect the court to decide whether 
the grant is certain?
    Mr. McKay. That is a very good question. We have a number 
of guesses as to when that might occur. I would suspect that we 
will not learn anything until late in this year, if then, 
probably early part of next year. It will be some time before 
that issue is considered by the Supreme Court.
    Mr. Rogers. Well, before the enactment of restrictions, you 
had not defunded or severely sanctioned any grantee in over 15 
years. In 1998, three grantees were disciplined for violations 
of restrictions. The Inspector General has collected audits of 
a number of grantees. Can you update us from last year's 
hearing and describe for us any violations of the restrictions 
or LSC implementing regulations that were found in 1999 and 
what, if any, disciplinary actions that you took as a result.
    Mr. McKay. Well, we have had a very active Office of 
Compliance and Enforcement in calendar year 1999. Those visits 
continue. Much of our attention was drawn to the CSR issue, but 
we learned, as you point out, Mr. Chairman, that some of our 
review, of course, turned up questions regarding violations of 
our regulations, and therefore some of the congressional 
restrictions. We have not found in any of those visits a 
pervasive case of violation regulations, I think this is 
correct, since we visited the previous program in Oakland, 
California. And following our findings in Oakland, California, 
we dismissed that recipient and asked another LSC recipient to 
take over its administration.
    We have conducted approximately 13 visits in 1999. They 
involve a number of issues. The core, maybe more than half of 
them, began as CSR visits to follow up on CSR issues. Some were 
complaints which were investigated by our program. Some were 
follow-ups to referrals from the Inspector General's Office.
    In each of those cases, and I think the Inspector General's 
audit reports will show this as well with respect to his 
visits, the corrective actions that were taken by programs have 
dealt with any issues that were found. Certainly from the 
Office of Compliance and Enforcement standpoint, we have not 
found a similar situation that was exposed in Alameda.
    In our State-planning initiative, we have worked with 
States, and the decrease in the number of programs I think in 
LSC over the past 2 years, Mr. Chairman, is worth noting here. 
Part of what we have done is we have been moved by a desire to 
increase and improve the quality of legal servicefor low-income 
people. Part of that has involved either the merger or consolidation of 
some programs that were not doing the very best job for low-income 
people, and they simply are not providing that service any more, they 
are being provided by someone else.
    So we have been very active, we have been on the ground, we 
have concluded that we need to be in the field more for 
compliance review, and we have asked for some additional 
resources to do that. I think the Inspector General would join 
me in indicating to the subcommittee that it would be useful. 
We have asked for resources to make up to 40 program visits per 
year, to make sure that we are complying with the congressional 
requirements, and to make sure that we are not violating any of 
the restrictions. I think the Inspector General would join us 
in making that recommendation.
    Mr. Quatrevaux. Mr. Chairman, I would like to point out 
that my office oversees compliance-checking through a system 
put in place by this committee several years ago, which relies 
on the annual audits of grantees by independent auditors in 
their areas. In October, I sent to the committee a report 
reviewing the 3 years of their work. It indicated that while a 
number of deficiencies were reported, none of these were of the 
type that we call practice restrictions; that is, violations of 
the restrictions that were essentially put in place in the 1996 
appropriation.
    Let me correct that. In the first year, there were three, 
but two of those were transition-related where the grantees 
could not withdraw from a case quickly enough because of 
limitations imposed by the court or the State in another case.
    We then turned our attention to how good a job are these 
local auditors doing in checking for compliance, and we have 
conducted I think over 70 what we call audit service reviews 
where we go out and we check the auditor's work papers to make 
sure that they check for compliance, and we included that in 
our report as well. In general, we have found that that system 
is working effectively.

                MEANING OF PRESENT IN THE UNITED STATES

    Mr. Rogers. Now, finally, Mr. Erlenborn, at last year's 
hearing, we talked about the scope of what LSC is authorized to 
do to some degree. One of the questions dealt with a sub-
grantee who had traveled to Mexico, allegedly to provide legal 
assistance to H2A workers, and that matter stirred up a 
question.
    What does your mandate to serve those ``present in the 
United States'' mean? And you were heading up a commission that 
would be looking at that issue. Can you tell us where you are 
now with that question?
    Mr. Erlenborn. I just happened to bring a few copies of the 
report for anyone who has not had an opportunity to see it.
    Let me first say that the board, in late 1998, authorized 
the commission. I was the chair, and that is why the commission 
and the report bear my name. We had a total of five law 
professors who served as the commissioners. One was not 
currently a law professor, but had been in the past. We 
conducted hearings, two hearings. One in North Carolina and one 
in California. We published an invitation to anyone who wished 
to give us information, to either do that in writing or, if 
they cared to, they could ask to be heard before one of the two 
hearings that we had. I can assure you that everyone who asked 
to be heard was given an opportunity to be heard. All of the 
written material was reviewed by either the members or the 
staff who would then inform the members as to the content.
    It seemed rather simple when you first looked at the 
limitation on the appropriation, which, by the way, was changed 
in the early 1980s. It used to say that to be eligible for 
representation, an alien must be present--excuse me, a resident 
of the United States. The legislative history is extremely 
quiet. There is no legislative history as to why that phrase 
was changed to ``to be present'' in the United States.
    As I say, at first view, you looked at that and you said 
well, that is pretty clear. It is not ambiguous, but it was in 
the context, because it did not say when the alien was to be 
present in the United States. Was it necessary that the alien 
be present at the time the action arose, at the time they first 
saw the attorney, at the time a lawsuit was filed, continuously 
over a period. If you get into a lawsuit or an administrative 
hearing, maybe over a course of years, does the alien have to 
be continuously present in the United States every day during 
that period of time.
    So that was the question, really, that we found we were 
posed with; and we found that it was ambiguous, so we followed 
the rules of statutory construction based upon the hearings and 
the information we gained.
    We came to--I have this in a very short form somewhere. 
Well, I can find it here. We came to this conclusion. The 
commission concluded the following--and there was an awful lot 
of work. We worked on this for over a year, as I recall.
    The Commission concluded the following: for an alien--oh, 
before I read this, let me say, it has been called the H2A 
program. That is a segment of the aliens in this country who 
may be eligible for representation, and a fairly small segment, 
I believe. There are an awful lot of legally resident aliens, 
some permanent resident aliens who would be just as much 
affected as these temporary agricultural workers, the H2A 
workers.
    So we are talking about a restriction that would have a 
great impact on a great many people who have been furnished 
with, if they otherwise qualify, have been furnished with legal 
services from our grantee programs.
    But we came to this conclusion. The commission concluded 
the following: one, for an alien in one of the unrestricted 
categories, that would be those who are not H2A workers, whose 
representation is limited by law, only to those causes of 
action that may have arisen out of the contract the H2A worker 
had, so we called those the restricted category. As to the 
aliens in the unrestricted categories, representation would be 
authorized so long as the eligible alien is present sufficient 
to maintain residence or lawful immigration status. For the H2A 
workers, representation is authorized if the workers have been 
admitted to and have been present in the United States pursuant 
to an H2A contract and the representation arises under their 
H2A contract.
    And in the larger, more extensive representation of the 
commission's position, we did say in both of those categories 
that no alien who had not ever been present in the United 
States could be represented by the Legal Services Corporation 
grantees.
    I might, by the way, since this did arise because of legal 
services' lawyers going into Mexico to recruit clients, that 
the corporation and the president of the corporation took 
prompt action. The sub-grantee was no longer allowed to operate 
under the sub-grant. The grantee, since the actionwas taken, 
must run the H2A representation itself.
    But that is what the commission concluded, and I might say, 
there were many good reasons for it. I will not take the 
committee's time to go into it, but one would be, for instance, 
that if you said that the alien had to be continuously 
present--as I say, this might be over a period of several 
years, an attorney, the legal services attorney representing 
that alien would have to keep in constant communication to find 
out if that alien crossed the border into Canada, flew over to 
Italy to visit relatives or attend a funeral; and, if that 
happened, then the legal services attorney would have to go 
into court and try to withdraw from the case. He may run into 
ethical problems and problems with the court if the attorney 
did that.
    Mr. Erlenborn. So there are some very practical reasons why 
we believe that the congressional intent--and that is what we 
were looking for under the general rules, the congressional 
intent--could not have been to deny representation to people in 
that category.
    And lastly as to the H2A workers they are here for a 
specified period of time and must go back. That period of time, 
by the way, may be shortened by the employer by firing them. So 
if the case arose on behalf of an H2A alien, and we said that 
the alien had to be here present in the United States for 
representation, the employer who might have been the defendant 
in that case would have the ability to deny representation just 
by firing that worker who would then be required by our 
immigration laws to return to the country of origin.
    So there are very good reasons, I think, for the conclusion 
that the Congress could not have meant these absurd results.
    Mr. Rogers. So, these will now become the regulations by 
which you will live?
    Mr. Erlenborn. At the present time, there is guidance that 
has been given by the general counsel and the board must decide 
for itself. But I think it is likely the board may take this up 
and draft a regulation incorporating, to the extent the board 
thinks it is proper, the recommendations of the commission.
    Mr. Rogers. So is this your final answer.
    Mr. Erlenborn. Final answer.
    Mr. Rogers. Well, now that you have settled the question of 
what ``present'' means, can you take on the chore of telling us 
what ``is'' is?
    Mr. Erlenborn. I have given up on that one.
    Mr. Rogers. Mr. Serrano.
    Mr. Erlenborn. A higher authority than I has not been able 
to.

                           REACHING THE POOR

    Mr. Serrano. That is the next hearing.
    Just one final issue. And I am sorry, I stepped out, if I 
missed this. Stop me, Mr. Chairman, if I did. But there seems 
to me to be a contradiction in how you are trying to bring 
information to the needy. On the one hand you have to and you 
do use the new technologies that are available. But on the 
other hand, the poor are the least able to use technology at 
this point, not having it available to them, so there is a 
contradiction in that. How do you compensate for that?
    In our office we have made very serious efforts to 
communicate with folks. And we have our Web page and are one of 
the few Members of Congress with video conferencing. And yet I 
am embarrassed or sorry to tell you that most of my e-mail is 
from outside of my district. It has nothing to do with the fact 
that, as the Chairman knows, I am a man of international 
issues. They use what is available. For people from the South 
Bronx that write to me, the machine, the equipment is not 
there.
    So how do you deal with that in trying to reach the poor? 
And secondly, are you allowed to advertise, if you will, your 
services in other means like schools? It might be that children 
are leaving their parents behind in poor communities because 
children have more access to computers at schools than parents 
do at home. Are you allowed to use those facilities to make 
your services known?
    Mr. McKay. Just when I was starting to feel good about some 
of our accomplishments. That is a real tough issue for us. We 
do not have adequate resources to provide the kind of community 
law office that probably was envisioned in the Legal Services 
Corporation Act. And so what we are trying to do is make 
careful choices and to ask our local programs to make careful 
choices about how to use technology.
    I guess I am just old enough to appreciate the benefits of 
technology in this way. I know how to use a computer. I see 
what its benefit is; I am enthusiastic about it, but I still 
used a slide rule in high school physics so I have some 
question about its utility. I think fundamentally what we do in 
legal services is provide legal counsel and advice and 
representation. That is never going to happen through a 
computer alone.
    And so we have said, you know, be open to the use of 
technology where it will represent clients. You missed an 
earlier exchange that I had where we recognized and 
acknowledged the digital divide that exists for our clients and 
what we have said at the core is get to the table so that when 
the courts set up programs, they don't bypass low-income 
people. Our commitment is to continue to emphasize the need for 
a continuum of legal services. Some we can reach through 
telephones, computers; and if we are advocates when they set up 
those systems, we will reach more low-income people. But we 
still have to have the dedicated lawyers and staff people and 
volunteers who will somehow be available to low-income people. 
We are missing way too many of them, as you know, Mr. Serrano; 
and we have got to continue to seek the continuum of legal 
services and yet be open to the benefits that technology can 
provide our clients.
    Mr. Serrano. Does the law allow you to advertise, if you 
will, through schools or other institutions? I mean, when a 
child is in school, that child and that parent knows that there 
is a police department. They know there is a firedepartment. 
They know if they get sick, there is a local hospital. We can argue 
back and forth about the quality of services but that is different. But 
they know it is available.
    Legal access--to me--is an essential need, an essential 
service, certainly one that is at the center, at the core of 
the beauty of this democracy. But some people who can't afford 
legal services do not know they can be available to them. Now, 
we advertise the census in schools and we encourage teachers to 
let people know that November 7th is Election Day, and I am one 
who believes children should be allowed to take home a booklet 
with every candidate to let their parents know who is running 
and so on.
    But this service which is so needed in my community, are 
you allowed to step into other places to advertise your wares, 
if you will?
    Mr. McKay. Let me mention three things that are happening 
in legal services that are encouraging. One, of our programs is 
high tech, one is through accepted media, and one is really low 
tech. The high-tech one I think that our schools today are 
becoming incubators for access to information through 
technology. And clearly the availability of web sites that are 
meant for low-income people is where we need to put additional 
resources and we are doing that. Maine, Washington State, New 
Mexico, Michigan, Minnesota, tremendous movement forward in 
terms of those kinds of technologies.
    Secondly, the media. The media approach is through--more 
and more of our programs are coordinating through the courts, 
social service providers, schools--law schools, we are using 
things like public service announcements to bring people to the 
knowledge that there is someone who can help them. The fear in 
legal services is that when you tell people that the services 
are available it is like, you know, standing under the 
waterfall. The need is really huge. But we think that is the 
kind of pressure that should be brought to bear on our system. 
That we should know how many people really need our service, 
and we cannot provide it so we are using more in the way of 
public service announcements.
    And the third one is a really low-tech solution. Our 
programs all across the country have been using it for years. 
It is called community education. They do not get one CSR 
credit for what they do, but we have legal aid lawyers and 
staff people and volunteers every single night of the week in 
programs at senior centers, schools, any place where people 
gather concerned about justice and their legal rights and 
responsibilities. And our legal aid lawyers on their own time 
are out there educating people about the availability of legal 
services and about their legal rights. And I think that is 
something that has escaped the notice of the benefit of 
Federally funded legal service. It has been around for years, 
and we ought to acknowledge it. And I certainly, as the 
President of Legal Services, commend those people. They are not 
getting overtime and they are doing a great job.
    Mr. Serrano. Thank you.

                                CLOSING

    Mr. Rogers. Well, again, thank you very much for your 
testimony. And Inspector General, thanks for being here as 
well. You have got a tough chore. You have been under a lot of 
fire, the agency has, for several years. It seems to me that we 
are making some real progress now toward straightening out the 
agency. And being sure that we are doing what we are supposed 
to if not more than that. I think there have been times in the 
history of the agency when they got in the most trouble it 
seems to me when some of the grantees, subjectees, went beyond 
the legal scope of what LSC was supposed to do.
    And it seems to me like you are making progress in reigning 
in those grantees and we commend you for that. We think you are 
on the right track.
    And I think we are a lot better off this year than last at 
this stage of the game. But it is early in the season.
    So thank you for your testimony. Thank you for your good 
work, and we look forward to seeing more progress.
            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

                                          Thursday, March 16, 2000.

                   U.S. SMALL BUSINESS ADMINISTRATION

                               WITNESSES

AIDA ALVAREZ, ADMINISTRATOR
BERKY KULIK, ASSOCIATE ADMINISTRATOR FOR DISASTER ASSISTANCE
GREG WALTER, DEPUTY CHIEF FINANCIAL OFFICER
CHARLES TANSEY, ASSOCIATE DEPUTY ADMINISTRATOR FOR CAPITAL ACCESS
KRISTINE MARCY, CHIEF OPERATING OFFICER
DARRYL DENNIS, ASSOCIATE DEPUTY ADMINISTRATOR FOR ENTREPRENEURIAL 
    DEVELOPMENT

                              Introduction

    Mr. Rogers. The committee will be in order.
    We are pleased again to welcome to the subcommittee Aida 
Alvarez, the Administrator of the Small Business 
Administration.
    The hearing will focus this morning on the SBA's fiscal 
year 2001 budget request. For fiscal year 2001, you are 
requesting $1.06 billion. That is an increase of $215 million 
or 25 percent above the comparable level enacted last year. We 
want to hear today how in a climate of limited resources SBA is 
improving its lending assistance programs to the nation's small 
businesses.
    An outstanding feature of your budget is a significant 
improvement in requesting sufficient funding for the Disaster 
Loan Program for the first time in many years. We will want to 
hear more about that request as well as the pending 
supplemental request to respond to Hurricane Floyd.
    As you know, I have insisted on realistic and adequate 
funding requests from SBA, and it appears that we are finally 
making some headway in that process. This year you are seeking 
substantial program increases, including a number of new 
program initiatives. We will be seeking to identify priorities 
within your request in recognition of our funding limitations.
    We would also like to know what program andadministrative 
efficiencies are being achieved, particularly relating to your 
portfolio management and systems modernization efforts, and what you 
see as the major opportunities and challenges facing SBA in the coming 
year.
    We are very pleased to have you with us. In a moment, we 
will recognize you for your opening statement. We will make 
your written statement a part of the record, but before we do 
so, let me recognize my friend, Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman.
    It is a pleasure to welcome the Administrator, a friend of 
mine to the subcommittee. It is good to see you.
    The Small Business Administration has come a long way from 
when it was created in 1953 on a temporary basis to address 
problems facing small businesses. Today it is a vital component 
of American business, providing essential financial, technical 
and management assistance.
    Ms. Alvarez, you have submitted a significant fiscal year 
2001 budget request, and I look forward to your testimony to 
hear how the SBA will continue to assist our Nation's small 
businesses.
    Mr. Chairman, I guess at every opportunity I will proudly 
remind the Committee that Ms. Alvarez and I go back a long way. 
How proud I am to see her in the position she is in and also 
perhaps to give her some of the blame for my success. She was 
the first journalist ever to interview me when I started out in 
politics.
    Mr. Rogers. Are you saying that she is responsible for 
your----
    Mr. Serrano. And I hope that you don't hold that against 
her budget.
    Ms. Alvarez. I was a mere child.
    Mr. Serrano. She helped me out a lot.
    I remember the first thing that we did together. I was 
looking at a rotten ceiling in a public housing project, and 
the picture was me pointing to the ceiling with a story by Aida 
Alvarez. She then became a big-shot TV reporter and told me one 
time when she was interviewing somebody else to please get out 
of the picture. I have not held that against her.
    It is nice to see you, Aida.
    Thank you, Mr. Chairman.

                            Opening Remarks

    Mr. Rogers. You are recognized, Administrator Alvarez.
    Ms. Alvarez. Those are very mixed compliments there.
    Good morning, Mr. Chairman and Ranking Member Serrano. I am 
sure that we will be joined by other members of the committee. 
I am pleased to be here with all of you today and appreciate 
having my written testimony entered into the record.
    I would like to discuss SBA's fiscal year 2001 budget which 
I believe is an important part of our plan to keep this 
historic economic expansion going while reaching out to new 
markets that have been bypassed.
    I think this budget has to be viewed in the context of 
today's booming economy. This is truly a small business 
economy. There are now 25 million small businesses in the 
United States, 5 million more than in 1990 and the most ever in 
the country. This steady increase in the number of small 
businesses and our desire to continue the economic expansion, 
including new markets, are the elements that have shaped our 
fiscal year 2001 budget proposal.
    Our request of $1.06 billion primarily--you mentioned, Mr. 
Chairman, as a 25 percent increase is what I think we 
calculated as a 21 percent increase. Of this increase--about 1 
percent goes to provide full disaster funding. Actually, 14 
percent of the increase goes to our core programs, our 
traditional programs, and about 6 percent to new programs.
    I hope you all have the charts that I made available. We 
had big ones, but this hearing room is too small so I am sorry 
everybody can't see these.
    This first chart is really a very dramatic illustration of 
the way in which our core credit and investment programs have 
tripled in size since 1993, while their cost has been cut in 
half. In fiscal year 1993, for example, small businesses 
benefited to the tune of $8 billion in loans and investments at 
a cost to the taxpayer of $325 million. For fiscal year 2001, 
we project $20 billion in benefits for $200 million. So that is 
half the cost.
    Our request of $200 million will deliver more than $20 
billion of credit and venture capital assistance, which is up 
from $17 billion this year. On the loan side, what that means 
is an $11.5 billion program level for 7(a), up from the $9.8 
billion appropriated this year, $3.7 billion in 504 loans 
accompanied by a reduced guarantee fee for the fourth year in a 
row, and $60 million for microloans, which is a doubling of 
that program.
    On the venture capital side, we propose a $2.5 billion 
program level for the Small Business Investment Companies. We 
expect this investment to attract an additional $1.25 billion 
in private capital. With $3.75 billion in new SBA-leveraged 
funding, plus their on-hand private capital, we estimate the 
SBICs will be able to make $4.5 billion in investments in 
fiscal year 2001. That is an increase over what we have done 
this past year, where the SBICs made available $4.2 billion in 
equity assistance to small businesses, and that is really a 
dramatic figure. Fifty-three percent of all the venture capital 
deals done by institutional investors in the United States were 
done through the SBA's SBIC program.
    In addition, this program has returned $131 million to the 
Treasury as the taxpayer's share of profits in SBA's 
participating security program.
    What is not shown on the chart is the technical assistance 
that is a necessary corollary to our core debt and equity 
programs. Without the technical assistance, we wouldn't see the 
corresponding growth in the chart.
    The budget proposes full funding, $88 million, for the 
Small Business Development Centers, which includes $3 million 
for a Native American SBDC network, $12 million to expand our 
network of Women's Business Centers, $10 million to maintain 
our One-Stop Capital Shops and to open new ones in empowerment 
zones across the country, $5 million for SCORE, up from $3.5 
million this year, and $4 million for our veterans' program.
    The next chart is one that shows how SBA bridges the gap 
throughout the country, and what we see is sort of a curve in 
terms of the size of assistance. We start out with microloans 
and then we see a big gap which we hope to fill with the New 
Markets Venture Capital Program, followed 7(a), 504 and SBIC 
venture capital.
    From its beginning back in 1953, as Congressman Serrano 
mentioned, we started out as an experiment, if you will, but we 
have become a very important part of the economy by bridging 
the gap that the private sector alone could not fulfill. And in 
partnership with the private sector we havebeen a catalyst for 
small business growth and are doing so with 22 percent fewer employees 
than in 1990.
    The Bridging the Gap chart illustrates the gap for venture 
capital needs. There is a significant lack of equity capital 
available for growth firms in rural and urban areas as well as 
Native American reservations. Smaller-sized equity investments 
accompanied by technical assistance would bridge that gap.
    The following chart shows you the kind of investment assets 
that are available around the country, and you can see a 
tremendous disparity between what is available from the private 
sector, what is being provided through SBIC currently, and the 
really tiny sliver that currently is available for these growth 
firms, these new market firms. In fact, what most resembles the 
new market venture capital companies that we are proposing are 
these community development venture capital companies. You can 
see from the chart that what they contribute is a mere sliver, 
$157 million for the entire country as of 1999, in a venture 
capital world where billions are the rule, not the exception. 
Right now, in the entire United States, there are only 25 such 
firms of which only 14 holding assets of over $5 million, and 
we consider $5 million to be the absolute minimum for economic 
viability.
    The next chart, a map of the United States, gives you some 
idea of where these community development venture capital 
companies are located and where we are making investments 
through SBIC in low and moderate income new market type areas. 
There is a lot of empty space on this map, places that do not 
have access to equity investments. Most of the country is left 
out even with our own Small Business Investment Company program 
investing $800 million. Although there are quite a few in 
Kentucky, three, but there is also room for more in Kentucky 
and in other states.
    Mr. Serrano. I notice that there are two in New York.
    Ms. Alvarez. There you go. We have taken care of the 
committee. We have actually gotten a lot of support for new 
markets venture capital from those community development 
companies in those States.
    SBIC companies invested $800 million in low and moderate 
income areas last year, but the fact is only $66 million of 
those investments were new market type investments of a million 
dollars or less. Out of the universe of around $140 billion, 
only $200 million in investments went to our inner cities, our 
poor rural areas and Native American communities. The New 
Markets Venture Capital Program proposes to bridge that gap. 
Our request of $51 million will provide an additional $150 
million in equity investments plus technical assistance.
    Now, coupled with our desire to sustain unprecedented 
growth and to penetrate new markets, Mr. Chairman and members 
of the committee, Mr. Serrano, we have a solid commitment to 
maintaining the financial soundness of our portfolio. In fiscal 
year 1999, we instituted for the first time ever a safety and 
soundness examination program for our Small Business Lending 
Companies and examined all 14. We expect to complete a second 
round of reviews this September.
    We have established an Office of Lender Oversight--and 
thank you, Mr. Chairman, for approving that reorganization--and 
a Risk Management Committee. We have completed our first full 
cycle of reviews for the Preferred Lending Program, PLP, and 
expect to complete a second round of reviews by April.
    In addition, we request $14.3 million to fund our Inspector 
General. This level will ensure the necessary review, audit and 
oversight of SBA's programs and services.
    Mr. Chairman, Mr. Serrano, Congresswoman Roybal-Allard, 
since 1990 our portfolio has grown from $17.5 billion to about 
$50 billion. At the same time, the number of our employees has 
decreased 22 percent, from 4,000 in fiscal year 1990 to about 
3,100 now. This has been accomplished while keeping our fiscal 
house in order.
    We are proud to report a clean opinion in our fiscal year 
1999 audit report. It is the highest rating that a Federal 
entity can receive, and this was the fourth year in a row that 
we have attained this rating.
    Joe Loddo is our new Chief Financial Officer, and I am sure 
that he will be working with all of you. He is doing a terrific 
job.
    We have laid out an aggressive agenda to improve our 
internal management and infrastructure. We are requesting $13 
million for system modernization, lender oversight and risk 
management activities, $7 million for information technology 
infrastructure and $4 million to train and transition the 
workforce.
    As a result of these efforts, by this summer, for example, 
for the first time the majority of transactions with our 
lenders will be done electronically. We will have the most 
comprehensive electronic files ever on every single loan, and 
it will be available in real time as needed and will be the 
basis for some new analysis that has never been done before, 
and also the basis for monitoring risk.
    Finally, in light of the important work done by the Office 
of Advocacy, we request an increase of $400,000 to $1.5 
million. Advocacy just yesterday released its annual regulatory 
study which shows that Advocacy's work in cooperation with 
others resulted in changes to proposals that reduced the costs 
to small businesses by almost $5.3billion. So it is working.
    Mr. Chairman, this budget is very sound for fiscal year 
2001. It fully funds the disaster program, the SBDCs. It 
supports the growing demand for our 7(a), 504, SBIC and 
microloan programs. It includes a modest number of new 
initiatives to help us reach out to areas bypassed by today's 
economy, and it does all of this while maintaining the safety 
and soundness of our growing portfolio, and moves us forward as 
a modern SBA.
    Mr. Chairman, members of the committee, thank you for the 
opportunity to be here with you, and I will be happy to answer 
your questions.
    [The prepared statement of Administrator Alvarez follows:]
            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

                        DISASTER LOAN BUDGETING

    Mr. Rogers. Thank you for your testimony. I feel like 
declaring victory or celebrating because, finally, the budget 
request from the White House and the SBA for the disaster loan 
budget, which has been habitually shortchanged, even zeroed 
out, knowing that we would have to find the money somewhere, 
gaming the system, seems adequate this year. And I have had 
many talks with Jack Lew from OMB about this, and finally he 
and OMB and SBA have seen the light.
    But that has been a constant irritant, as you recollect, 
between this subcommittee and SBA, even before you came on 
board. I know that it was not your fault. I know that it was 
OMB that was gaming the system, and finally they have seen the 
light. Nevertheless, I am pleased that you have at least made a 
request in your budget for monies for the Disaster Loan Program 
without saying that we are going to have to increase the 
interest rates on the disaster victims to pay for these 
disaster loans, which I think is absolutely, incredibly 
stupid--not to say unfair. These are the people who have been 
turned down by commercial banks, and SBA is the last resort, 
and here we are proposing in previous years to pump up interest 
rates on those poor people. Finally, that has ceased.
    We have been consistent on that over time, and that is 
reflected in the fiscal year 2000 budget from the regular 
discretionary appropriation and only extraordinary needs are 
covered by emergency funding.
    So you are asking for $296 million in regular discretionary 
appropriations, which would be sufficient to support a loan 
program of $871 million. Is that an average annual loan program 
level and a reasonable projection for next year?
    Ms. Alvarez. Yes. I would be happy to comment. We use a 5-
year average, which is consistent with what FEMA uses to 
estimate the costs of the program. We believe that this request 
is sufficient to meet the projected needs using that 5-year 
average.
    Mr. Rogers. It has varied widely. In 1998, it was $639 
million; and 1999 it was $763 million; and in the current year 
it is $1.2 billion. In the past, you have estimated the level 
by averaging the past 10 years?
    Ms. Alvarez. Yes, we did. This year, along with other 
changes which you noted, OMB agreed that FEMA was using a 5-
year average all along. We were using a 10-year average, and 
OM13 agreed that it made more sense to have a consistent 
average. Actually, there is very little difference between the 
5- and the 10-year average. Berky has the exact numbers, but 
the difference is negligible.
    Mr. Rogers. We marked up the other day in full committee 
the emergency supplemental. That includes $60.9 million for the 
Disaster Loan Program, $10.4 million more than the President 
requested for extraordinary loan demands due to Hurricane 
Floyd. Assuming that is enacted, would that give you enough 
money to meet your estimated loan demand this year?
    Ms. Alvarez. Yes. Berky, do you want to add anything?
    Mr. Kulik. My name is Berky Kulik. I am the Associate 
Administrator for disaster assistance. Yes, that certainly 
would give us sufficient funding for the balance of the year, 
absent any mega disasters such as Northridge or a real killer 
hurricane.
    Mr. Rogers. This year will be the biggest year for disaster 
loans since Northridge, $1.2 billion. How much of the total can 
we attribute to Floyd?
    Mr. Kulik. As of now, Floyd loans are running at $650 
million for original approvals, which works out to $590 million 
against the appropriation. These figures are as of the end of 
February.

                      REQUESTED PROGRAM INCREASES

    Mr. Rogers. One aspect of your request that hasn't changed 
is the enormous program increases. The total amount of your 
appropriations you are requesting is $1.062 billion?
    Ms. Alvarez. Yes, sir.
    Mr. Rogers. That is an increase of $215 million. It is 25 
percent, if you take out the one-time projects.
    Ms. Alvarez. Okay.
    Mr. Rogers. How much of that increase is for mandatory 
increase in pay and inflation?
    Mr. Walter. Good morning, Mr. Chairman. I am Greg Walter, 
the Deputy Chief Financial Officer.
    Within our budget request for the operating budget, we have 
a $15 million increase, of which $11 million is for people, 
that is primarily the annualization of the pay raise that 
occurred this year. We have to annualize it to 2001 plus the 
President's proposed pay raise for employees for next January.
    Mr. Rogers. That is $15 million out of $215 million. That 
is quite an increase. That means that $200 million of the 
requested increase is for program increases?
    Ms. Alvarez. That is right. I had mentioned earlier that 1 
percent of that goes to funding of the disaster program; 14 
percent goes to increases in our traditional core programs like 
7(a), 504, SBIC, et cetera; and 6 percent goes to new program 
initiatives like PRIME, SBIR, Native American, SBDC, new 
markets and so forth. It is really a handful of new programs 
that we want to see funding for.
    Mr. Rogers. Correct me if I am wrong, you are requesting 
$40 million in new programs, $66 million for noncritical 
program increases, $65 million for increases in business loan 
programs, $19 million for increases in administrative 
initiatives. I have to tell you, without commenting on the 
merits of those programs, that we can't find that kind of 
money. It would be a miracle if we can find that kind ofmoney. 
No agency under this subcommittee will get that kind of increase.
    We need to have you prioritize for us. You have got to 
narrow down your wish list. I would rather hear what you would 
request that we do than have us blindly apply a meat ax to some 
of these program increases. So over the next several weeks we 
will want to hear from you ways to prioritize with the limited 
resources that we are going to have.
    I say that in a constructive way. I want to be helpful, but 
we can't find those kinds of moneies to fund this agency. If 
everything in your budget request is a priority, I know that, 
but that means nothing is a priority because we have to know 
where you really want to put the money with the limited funds 
that we are going to have.
    Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman.
    Let me just speak to the Chairman's comment, because I 
think it is important that we listen closely to the Chairman. 
What he is trying to do is get this issue solved before it gets 
to the House floor and conference.
    There is a bit of history that we should know that I am 
very grateful for, and that is that last year SBA did better in 
conference than it has in many cases. That happened, but we 
should know that the chairman had been agreeable to all of the 
changes right at the time that we approved the bill on the 
House floor. It was my understanding with him that the SBA 
would do better.
    So with all due respect to the White House, who did what 
they had to do in those last hours, I can tell you for sure 
that, as far as SBA goes, Chairman Rogers was on board with 
trying to make that budget better.
    Ms. Alvarez. We appreciate that.
    Mr. Serrano. I say that to strengthen his comment that it 
is better that we set priorities now than that it happens in 
conference. It is much better that way.

                         DISASTER LOAN PROGRAM

    Just curiosity here, when you folks are putting together 
your request for disaster loans, does someone look at the 
Farmer's Almanac to see what was going to happen? You never 
thought I was going to know about that.
    Mr. Rogers. We have a Farmer's Almanac.
    Mr. Serrano. I was really born in the south, and she was 
born not far from where I was born.
    How are those predictions made? Do you go based on what we 
had in the last few years?
    Ms. Alvarez. Yes. That is the 5-year average. We just look 
backwards at what the cost of the programs were in the previous 
5 years and make a simple mathematical calculation.
    Mr. Kulik. Unfortunately, there is no way of telling what 
is going to happen during the year. The 5-year and 10-year 
average are only about $3 million apart.
    Mr. Serrano. Let me ask you a question which has nothing to 
do with this hearing. Is it television that is showing us more 
disasters or are there more disasters?
    Mr. Kulik. Since 1989, disaster, unfortunately, became a 
growth industry. Prior to 1989, it was a relatively small 
operation. In 1989, we had an enormous hurricane on the East 
Coast, Hugo, and 30 days later we had the Loma Prieta 
earthquake in California and since then the Northridge 
earthquake.
    Ms. Alvarez. It might lend some credibility to the global 
warming.
    Mr. Kulik. The forecast is for increased hurricane activity 
for the next 5 to 10 years. Last year, we had Hurricane 
Georges, and that did a job on Puerto Rico; and the year ended 
with Hurricane Floyd. That covered the whole East Coast, 10 
States.
    Mr. Serrano. Thank you for that. I was just wondering if I 
had noticed things differently or was something going on.
    Ms. Alvarez. We all get a little older and don't remember 
as well. It happened in the past.
    Mr. Serrano. We are even now.

                           7(A) LOAN PROGRAM

    First of all, I know the supplemental request that came 
down had funding for 7(a) but it was not included in the bill 
reported out of the Committee. Can you tell us what that 
situation creates and why there is additional need for loan 
subsidies for the 7(a) program? And, in general, just give me a 
short rundown on 7(a) and what problems we are facing.
    Ms. Alvarez. For this year, we requested authorization for 
$10.5 billion, and we got $9.75 billion. We have worked--not 
only done our own analysis but worked with the industry to 
anticipate what the demand might be. It has turned out that, in 
fact, we are operating at a level of activity that will require 
funding for anywhere between $10.2 and $10.5 billion.
    What we are seeing is, on average, we are doing between 8 
to 10 percent more than we did last year in the 7(a) program. 
That is a huge concern for us. That is why we requested 
supplemental funding to the tune of $5.1 million for 7(a), plus 
an additional $1 million to meet the needs--the trucks are in 
town today to underscore the need for that $1 million that we 
hope will help us meet the needs of companies, small companies 
that are in the heating oil business and the oil business.
    We are very concerned. We have a source for funding the 
$5.1 million. We believe that we can take funding from the 
Delta Program and the Microloan Guarantee Program to cover 
that, to cover about $6.6 million. And the $1 million for the 
home heating oil companies would come from a program at 
Commerce.
    If we do nothing, by around Labor Day we will have to shut 
down the program.
    Mr. Serrano. By Labor Day?
    Ms. Alvarez. Around Labor Day. We are taking the 
administrative steps that we can take to at least minimally 
reduce the demand. We are pursuing a very aggressive 
cancellation policy. All of our district directors are out 
there talking to the lenders, asking them to please disburse 
funds on loans that they think are viable and, if not, cancel 
those loans, take them off the books, because that will make 
more money available to those who need it. We are also looking 
at a cap of $1.25 million for these loans that would require 
congressional notification.
    Even so, that will only reduce our needs by about a week, 
so I am very concerned. I started out at this agency as 
Administrator facing a similar situation, and it was really a 
very difficult situation. I have asked my staff to start 
looking at possible options and the only alternative I can see 
is a plan to ration the funds on a monthly basis so that we 
have some funding available every month, even if it is limited. 
Otherwise, if we don't do that, we would have to shut the 
program down without the supplemental funding.
    Mr. Serrano. And the supplemental was for how much?
    Ms. Alvarez. It is $5.1 million for 7(a), a million forthe 
home heating oil lending, and then, of course, you mentioned we have a 
request for a million dollars for PRIME and half a million for 
veterans.
    Mr. Serrano. Your budget compensates for this? Or was the 
budget put together prior to finding out that you were not 
going to get the supplemental?
    Ms. Alvarez. For this year we requested funding for $10.5 
billion in the 7(a), but we only got $9.75 billion, so there is 
a shortfall. In fact, our projections appear to have been 
accurate. At the rate that we are going with this 8 to 10 
percent increase of activity over last year, we are going to 
run out of funding.

                     SMALL BUSINESS AND E-COMMERCE

    Mr. Serrano. Okay. The three members that are sitting here, 
interestingly enough, share something in common in that we do 
not represent wealthy districts, we may not even represent what 
is considered middle income districts, depending on how you 
read our figures, per capita or median. My understanding is 
that the chairman represents a rural district which would 
qualify as one of the less wealthy districts in the Nation.
    Ms. Alvarez. We visited it.
    Mr. Serrano. One of my main concerns these days is the 
issue of the digital divide and how our communities are being 
left behind not only at the schools and in the home. How does 
this divide affect small businesses and what can we do to 
alleviate that through this committee?
    Ms. Alvarez. We are actually seeing that now as we 
modernize the SBA. By this summer we are looking to have the 
majority of lenders on-line providing us with information. 
Transactions will be done electronically. We are discovering 
that there are lenders out there that are rural, small-niche 
lenders who don't have the capacity to provide us with that 
information electronically. And of course we are going to make 
accommodations for them, but the counterpart to that is that 
there are small businesses out there who are in the same 
position, and they are a reflection of the circumstances of 
their community. I think this is a national priority. I know 
that the President is planning to do sort of a tour to focus on 
how the Congress and the Administration are trying to meet this 
need.
    We have a proposal for $5 million for an e-commerce 
initiative that we would like to develop at the SBA. There are 
two principal approaches. First of all, we had tremendous 
success with our Y2K initiative. We did thousands of workshops 
and forums. We worked with other agencies. We really raised the 
level of awareness among small businesses, and this is an issue 
ultimately having to do with technology and e-commerce, and we 
realized that we don't want to lose that momentum.
    Also, we have been studying what other agencies are doing, 
DOD, Commerce, Agriculture. They all have their own electronic 
commerce initiatives directed at small businesses, and we think 
that rather than duplicate them, we can actually leverage off 
what they are doing.
    In addition, there are courses that we can develop and 
basically just raise the awareness around the country. We have 
some pilots in mind. We have partners like LAMA that can 
basically target small businesses in underserved communities to 
raise their exposure to the computer and technology.
    Mr. Serrano. Is there going to be any collaboration with 
the Commerce Department?
    Ms. Alvarez. Yes, absolutely. What I have asked my staff to 
do is give me a report that concretely identifies the 
activities of DOD, Commerce, and Agriculture as they relate to 
small business because we can bring something to the table 
there without having to start our own centers. DOD has centers 
right now that they are directing to small businesses, but I 
think that there are pieces that are missing.
    Mr. Serrano. Right.
    Ms. Alvarez. Rather than duplicate, we can leverage.
    Mr. Serrano. We really have to look at this, Mr. Chairman, 
because a lot of our folks are being totally left behind.
    I have no further questions for now, but through your 
graciousness we were able to get some dollars for this whole 
issue, and my initial reaction was to find out if you have a 
chain store over here and a chain store over here and then all 
of the businesses in the middle here have never been on a 
computer and are something like 30 years behind. We got to the 
bottom of the problem, that this was one of the main reasons 
that they couldn't compete.
    Ms. Alvarez. That is it. It is a real problem, and it goes 
hand in hand with new markets, the idea of helping those 
businesses.
    Mr. Rogers. Thank you.
    Ms. Roybal-Allard.

                          UNDERSERVED REGIONS

    Ms. Roybal-Allard. I couldn't help notice when I came in 
that you were showing these different maps.
    Ms. Alvarez. Yes.
    Ms. Roybal-Allard. I noticed that all of the dots are on 
the east side?
    Ms. Alvarez. Yes.
    Ms. Roybal-Allard. There is kind of an East Coast mentality 
here in Washington, and sometimes we have a tendency to forget 
that the United States does exist west of the Mississippi.
    Mr. Serrano. You will get even in November when you pick 
the next President.
    Ms. Roybal-Allard. Could you briefly explain to me what the 
dots are or how we can get some dots over on the West Coast?
    Ms. Alvarez. There are mostly dots and a few stars. The 
dots are the community development venture capital companies 
which have operated without us, and they are basically 
community development organizations that invest in small 
businesses.
    For example, the chairman has a terrific one in Kentucky 
called the Kentucky Highlands. We have used them as one of our 
models for New Market Venture Capital companies. And they have 
been operating on their own. If, for example, one of those 
community development companies were to qualify as a New Market 
company, they could double and triple the amount of capital 
they would have to invest in small businesses. Plus, through 
the technical assistance component, they would get some 
breathing room. Because for these companies, this is not just 
helping a small business with their business plan, this is 
protecting long-term capital at risk. We are in it for the long 
haul. They might need to get a new management team. They might 
need to talk about digital divide upgrade. That is what we are 
talking about.
    These stars represent where we have Small Business 
Investment Companies. They made about $800 million worth of 
investments in what is technically described as low and 
moderate income areas. But the truth is that only $66 million 
of those investments really resemble new market typeinvestments 
which are a million dollars or less, the kind of growth businesses that 
are usually overlooked.
    I think it really speaks for itself. That is why we are so 
focused on the New Markets Venture Capital Program. We were 
very conservative in our estimates for that program. The cost 
of that program is high in terms of the subsidy costs because 
we were as conservative as we could be. We think that that will 
change, just as the subsidy rates for microloans and SBIC have 
changed with experience. If we added $150 million more to the 
pot, you would more than double what is available in the 
country. We would have a competitive process.
    Initially, we could see licensing 10 to 20. It is still 
modest, but I think it would make a difference.
    We have also studied the cost of developing new jobs 
through new market venture capital. We looked at how these 
community development venture capital companies have done in 
creating new jobs. It costs them between $2,000 to $4,000 to 
create a direct new job through their program, which is a 
bargain. I mean, $2,000 to $4,000 to create a new job is 
something that you don't see.
    The difference between SBICs and New Markets Venture 
Capital Companies is SBICs, by and large, are profit driven. 
New Market Venture Capital companies will make a profit, but 
they are really mission driven. They are more interested in 
community development. If you want to talk about priorities, 
Mr. Chairman, we feel quite passionate about New Market Venture 
Capital companies, because we think that it is the missing 
piece. Those in combination with microloans will really address 
the needs of true start-ups.
    When you talk to most lenders, when they talk about start-
ups, they are talking about businesses that have been in 
business for 4 to 5 years. What about the little guy who 
doesn't have a rich uncle? This is where the microloan comes 
into play.
    Ms. Roybal-Allard. That has to do with my next question. 
The President's budget requests a program level of $60 million 
for direct loan and $45 million in the technical assistance for 
the microloan program. So can you expand a little bit on how 
you are planning to use that money in terms of the needs and 
the geographic distribution of that?
    Ms. Alvarez. The microloan program started out as a pilot 
in 1994. As with most pilots, there usually are some fairly 
stringent restrictions because it is small. It is really 
relatively recently that we started to realize this is no 
longer a pilot and we can't continue to live with rules that 
make it almost impossible for people to qualify.
    At one point, you couldn't have more than one SBA microloan 
in a State. This was a self-imposed rule. Charles Tansey has 
done a terrific job in holding roundtables with members of the 
microlending community to find ways to improve the program.
    So in our legislative package we have a number of reforms 
to the microloan program. Midway through the year, we have 
already put out as much in microloan dollars as we did for the 
entire year last year. We are operating at twice the pace.
    The demand is enormous. In the chairman's State of 
Kentucky, we have been engaged in conversations because there 
is an interest in having a Statewide microloan program so many 
tobacco farmers who suddenly find themselves out in the cold 
and who are entrepreneurial can get started with a microloan. 
They are not going to get a loan from the bank, and they need 
technical assistance because they are switching businesses. So 
Charles has been engaged in conversations in Kentucky. They 
came to us for help.
    This would apply to many other States. I think you will see 
that we will more than use up the $60 million and the TA is a 
good investment.
    The way that the PRIME program fits into this is that the 
hardest money to get is money for low-income, entry-level 
people to become eligible for a microloan. You need to counsel 
and work with about 10 of these folks in order to get one that 
ultimately qualifies for a microloan, and there is very little 
money available for that kind of counseling and technical 
assistance.
    Really, we have thought through all of the pieces in this 
chain, and that other chart that shows the bridge reflects a 
lot of thinking on how do we get people into the economy, 
really starting all the way back here because the traditional 
system doesn't work.
    The other thing that we are doing is working with credit 
unions that are very focused on geographic areas that are low 
income. They have an enormous interest not only in our 7(a) 
program but in becoming microlenders. So we have been doing 
everything that we can.
    Mr. Tansey. I think that all of those points are right.
    Mr. Rogers. Identify yourself for the record.
    Mr. Tansey. Charles Tansey. I am the Associate Deputy 
Administrator for Capital Access.
    Mr. Chairman, members of the committee, all of the points 
that Administrator Alvarez has made about the microloan program 
are right to the point.
    We have talked to a series of existing practitioners. We 
have talked with the National Federation of Community 
Development Credit Unions, which represent low-income credit 
unions in rural and inner city areas. We have talked to a 
number of other trade groups. We have talked to the Department 
of Agriculture, with whom we are working in partnership--in 
particular their IRP lenders.
    This microloan structure is tailor made for the entry level 
entrepreneur. Our problem is that the program has been 
organized as a pilot, and it has a series of burdensome 
regulations and restraints. As we peel those away, the demand 
increases, and that is what is going on right now. We fully 
expect to hit the $30 million loan level projection for this 
year.
    The question regarding the size of the technical assistance 
keeps coming up. Why would we be asking for $60 million in 
loans in FY 2001 and providing $45 million in technical 
assistance? That $45 million of technical assistance is applied 
against a whole balance of loans outstanding to our 
intermediaries, and we would anticipate that by the end of 2001 
we would have, assuming this budget were approved, maybe $150, 
$160 million in loans outstanding. The technical assistance is 
based on that number, not the amount that we extend in annual 
loans.
    Ms. Alvarez. Twenty-five percent over the course of the 
life of the loan. The technical assistance accompanies that 
loan for the life of the loan, and 25 percent of the value of 
that loan can be provided in TA grants per year. It is 
substantial, but it is what works.
    Mr. Tansey. This money is what allows the technical 
assistance providers, the microlender, to provide ongoing, 
committed assistance to the entrepreneur. And, typically, it 
goes beyond a year or 2 years. That estimate is based on all 
sorts of rules of thumb that you find in the industry about the 
cost per client for borrowing which runs between $2,500 and 
$3,500.
    Ms. Alvarez. We have concluded that you have to have a 
certain level of technical assistance to really educate the 
business person to succeed.

                      Minority Business Assistance

    Ms. Roybal-Allard. We all know that the SBA programs have 
been extremely helpful in terms of helping small and minority 
businesses in this country, and that certainly has been true of 
Latino businesses which have grown between 1987 and 1992. The 
figure that I have is 83 percent, which exceeds the overall 
growth of all businesses by 26 percent.
    Last year there was a series of partnership agreements that 
were designed specifically to help Latino entrepreneurs. Can 
you elaborate a little bit on what the results of those 
agreements have been? And in your answer are there specific 
problems that are encountered by Latinos who want to start 
businesses as opposed to other small business entrepreneurs?
    Ms. Alvarez. At the national level, we have signed about 34 
partnerships with national Hispanic organizations. We have also 
signed agreements with African American organizations, women 
business organizations, and so forth. And, in addition, we have 
at the local level signed hundreds of agreements. The district 
directors have really gone out there and worked with the 
community.
    I felt that there were too many folks out there who did not 
feel welcome at the SBA. Nobody had personally reached out to 
them and said to them, this is for you. This program is for 
your membership. It is a very simple idea, but I discovered it 
was true. When I first took this job, I saw that some of our 
worst critics should have been our best friends--including 
Hispanic business organizations. And I said, why is that? They 
said, it is because we haven't talked to them. We haven't 
brought them in and made them a part of the solution.
    I am pleased to say we have had an ongoing dialogue. I have 
assigned senior people to be point of contact and entries to 
all of our programs. Not too long ago we had an entire day 
where we invited all of our partners to come to Washington, and 
it was an unbelievable meeting. I had all of my senior people 
there with them, and the exchange was really productive. They 
keep us aware of what we are doing right and what we are doing 
wrong. It is really that simple.
    We put them on our mailing list, if they have websites, we 
link up with them. In the Hispanic organizations, we have an 
on-line Women's Business Center that is in Spanish as well as 
English. We have materials in Spanish if they so desire. We 
have an 1-800 number that is in Spanish. The bilingual aspect 
is important.
    We work with the U.S. Conference of Mayors because we 
believe that we have to work at the community level with mayors 
who are so involved in economic development with small 
businesses.
    Ms. Roybal-Allard. This question has to do with the SBA 
Women's Business Centers which have more than tripled in the 3 
years from 18 funded centers to 59. You are requesting funds to 
expand the network even further?
    Ms. Alvarez. Yes.
    Ms. Roybal-Allard. Part of the answer may be similar to 
what you just stated in regards to Latinos and African 
Americans, there was never a sense that the SBA was there for 
them. Could you describe in more detail the role that the 
centers have played specifically in increasing businesses among 
women, and my understanding also is that the fastest growing 
segment of small business is among Latino entrepreneurs?
    Ms. Alvarez. That is right. Women sometimes have special 
needs. I said from the beginning, all of our programs are for 
women. When I arrived, I was told these are the women's 
programs, and I said no, all of our programs are for women. But 
the fact of the matter is in particular communities there are 
specialized needs. There are women who are single parents who 
don't feel comfortable going into our centers and asking for 
advice. Whereas if they go to a center where people understand 
what their experience is, they blossom. We have centers that 
are focused on women who have come off of welfare to assist 
them to become microentrepreneurs. Fifty-five percent of all of 
our microloans go to women, and many of our women business 
centers are also microlenders. We have a center in Chicago 
focused on understanding the venture capital needs of women. So 
they have arisen in a specialized way in response to unmet 
needs.
    Through the RFP, we invited organizations to submit their 
proposals and if they had compelling proposals that 
realistickly could meet unmet needs and they had enough 
experience, they became Women's Business Centers. Now we have a 
network of centers some of which we are no longer funding. 
Initially funding was provided for a 3-year period, which is 
now a 5-year period. They need to match the funding. After that 
they are part of our network, even when and we are not funding 
them anymore. We like to keep them connected through meetings 
and communications and projects and so forth. We think that 
there is more room to grow. There are still some States that 
don't have women business centers and there are still unmet 
needs.
    Ms. Roybal-Allard. Thank you, Mr. Chairman.
    Mr. Rogers. Thank you.

                           Operating Expenses

    As you recollect, we had a major problem with the way you 
reallocated appropriations last year. You diverted $34 million 
away from funding provided specifically for direct disaster 
loan administration, and instead used it for regular SBA 
operating. This year we solved that problem with a bill 
language cap of $20 million on transfers from disaster loans 
absent reprogramming. As a result, we now have, for the first 
time, a fixed amount, $285.7 million that is clearly for 
overall SBA operating expenses. Do youagree with that number 
and is there any change to that. Any change to that amount would be 
subject to reprogramming from the subcommittee.
    Ms. Alvarez. Yes, sir. I would certainly be in touch with 
you and also provide a written notification of any changes. I 
think we agreed that is the way we would proceed.
    Mr. Rogers. Two things. Is that figure accurate?
    Ms. Alvarez. Yes.
    Mr. Rogers. Two, any change to that figure would have to be 
approved by the subcommittee?
    Ms. Alvarez. Yes. I would seek your approval.
    Mr. Rogers. Thank you.
    Now, do you anticipate a need to reprogram funds this 
fiscal year to boost those operating expenses?
    Ms. Alvarez. No, sir.
    Mr. Rogers. The bill language cap on transfers is the only 
way we found to arrive at a common understanding of the overall 
operating expenses and staffing. You are requesting to 
eliminate that language in the current coming year bill. Why is 
that?
    Ms. Alvarez. This is referring to the request for 
reprogramming?
    Mr. Rogers. The bill language cap.
    Ms. Alvarez. I believe it is because this was viewed as a 
limitation which we would prefer not to have. In the past we 
had gotten both support from OMB and our General Counsel on the 
ability of the administrator to go forward and use those funds 
without making any kind of reprogramming request. That new 
language was introduced, which would represent a limitation on 
how we had operated in the past, and I believe that is why that 
language is there.
    Mr. Rogers. The reason we put it in was that we have been 
struggling to gain control and oversight over your operating 
expenses. That is the amount you apply to overall salaries and 
administrative costs because in the past, operating expenses 
were funded out of three different appropriations accounts, and 
bill language gave you the authority to transfer monies, and we 
feel a bit gamed here in the past. So we are attempting to gain 
some simplification of the process so we can have proper 
oversight. That is the reason for that cap on transfers.
    In 1999, in the absence of that bill language, that 
transfer authority was used to contradict explicit report 
language that we had put in the report, and so it is a fail-
safe method and we must not let that happen again, and that is 
the reason for this language.
    Now, in fiscal year 2001, you split your request for 
salaries and expenses into two accounts. What good is that?
    Ms. Alvarez. Let me ask Greg to comment, if I may.
    Mr. Walter. Mr. Chairman, exactly in response to some of 
your earlier comments about how confusing our administrative 
budget was because of the separate funding sources, this year's 
budget to fiscal year 2001 was an attempt to separate what was 
used as the operating expenses versus the program dollars, 
which are usually identified in the line items. The purpose was 
to make the budget more simplified and easier to understand by 
separating the operations from the program dollars.
    Mr. Rogers. I will have more questions in a moment. I yield 
to Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman. Let me just follow-up 
on that. Maybe I missed the earlier part. You are saying that 
your budget did not break down operating expenses from program 
accounts?
    Ms. Alvarez. Well, there are various sources of funding.
    Mr. Walter. The confusion was that the budget did break it 
down in our request, but when money was appropriated to SBA, 
both the program dollars such as those for Small Business 
Development Centers and Women's Business Centers were mixed in 
with the operating dollars, and a single appropriation was 
provided to the agency. There was confusion in trying to 
identify how much of that appropriation was for the noncredit 
programs versus the operating dollars. In order to provide 
better clarity to the appropriation, we suggested that the 
appropriation be made one side for specific program dollars and 
another side for specific operating dollars, so we have a 
clearer direction about how much is being provided for 
operations versus programs.
    Mr. Serrano. Is that common practice in other agencies, or 
is this something uniquely yours?
    Mr. Walter. We understand from OMB that this is fairly 
common, that programs are appropriated separate from 
operations.

                          SYSTEM MODERNIZATION

    Mr. Serrano. Okay. I don't know, Ms. Alvarez, if you began 
or did answer this part when talking about the digital divide. 
You identified a multi-year project to modernize your 
technology and information systems?
    Ms. Alvarez. Yes.
    Mr. Serrano. There are three phases to modernization which 
are expected to overlap. Can you fill me in rather than asking 
you a series of questions, what that is all about and what you 
need from us?
    Ms. Alvarez. In total, we are asking for $24 million. We've 
divided that into three parts: $13 million, which is really the 
most substantive piece and would be used to continue the work 
we are doing in systems modernization. I mentioned earlier, for 
example, that we were going to have, hopefully, all of our 
lenders on-line basically operating in a paperless fashion with 
us. We intend also to, for example, do electronic disaster 
lending. We are looking at totally overhauling our accounting 
systems so that it is all done electronically rather than 
manually. That is where the $13 million would be used. In 
addition, we asked for $7 million which we really need to 
update and upgrade our existing computers. We have a Novell 
operating system, which is two versions behind. We have 6,000 
workstations that are 4 to 5 years old. You can't modernize the 
SBA and invest money to make it paperless and not basically 
provide the employees and the folks who work at the agency with 
the latest equipment. So that is the $7 million.
    The $4 million is for workforce transition. What we are 
going to see in an ongoing way is the need to not only provide 
some funding for relocation because the jobs are going to be 
shifting but training. Actually, we really have done very 
poorly in terms of our funding availability for training. Right 
now, for example, in the figures I have for fiscal year 1998, 
SBA basically had about $560 per employee for training, which 
is one of the lowest compared to HUD, which had $2,000 per 
employee, and compared to the SEC, which had $643 per employee. 
We can't be modernizing the SBA and not be training employees. 
So we are looking to get some funding, a modest increase, 
really, to be part of the retraining process.
    Mr. Serrano. And you do that with $24 million?
    Ms. Alvarez. It is a piece of it. We have been workingwith 
the chairman's office and Mike Ringler, and we do have a request for 
the release of $8 million for our systems modernization in FY 2000, 
which would help us cover the costs, not only of direct staff costs in 
the modernization efforts but also would allow us to pursue the 
acquisitions and development of the systems that we need. We have spent 
quite a bit of time together with GAO and the Inspector General and 
others and our authorizing committees developing all of the steps for 
the modernization. We have now developed all of the steps, the eight 
planning steps, and we are ready to begin implementation. That is where 
the dollars would go.
    Mr. Serrano. Thank you, Mr. Chairman.
    Mr. Rogers. On that note on the systems modernization, this 
was originally presented as a 5-year, $40 million project to 
modernize all of the SBA loan and accounting systems. We 
provided the first three installments of $8 million in the last 
3 years. Then all of a sudden, we get the request this year for 
$13 million? Help me out.
    Ms. Alvarez. Kris Marcy is my chief operating officer and 
she is the lead on systems modernization. She has her hands 
full. Kris, would you like to speak to that?
    Ms. Marcy. I would. Essentially, what we did this budget 
year, fiscal year 2001 budget, we folded in the disaster 
program and its paperless disaster application process for the 
first time. So when you spoke to the $8 million for 3 years, 
that was for phase 1, the loan monitoring system, and for phase 
2, our core accounting systems, and in 2001 we have added the 
disaster program.
    Mr. Rogers. Is this still a $40 million project or has the 
baseline changed?
    Ms. Marcy. When the estimate was made for $40 million, that 
essentially looked at phase 1, the loan monitoring system and 
phase 2. The agency did not make any estimates available at 
that time nor contemplate including the disaster program, nor 
did the agency contemplate in any very specific way any of the 
program requirements for the GC/MED program or the ED program. 
So to the extent that we want to fold in those programs like 
disaster, we will have to ask for more than the $40 million.
    Mr. Rogers. Well if we approve your current year pending 
plan, I understand that you will begin to roll out the new loan 
monitoring system this summer. What results can we expect to 
see? And how soon?
    Ms. Marcy. We are currently, and we have shared this with 
your staff, contemplating most of our implementation for the 
loan monitoring system in the remainder of this fiscal year and 
in fiscal year 2001. So you will see most of the benefits for 
phase 1 by the end of 2001. I should point out, however, that 
we have worked extraordinarily closely with the General 
Accounting Office, and they have made a number of suggestions 
for improvements as we have gone along. The technology has 
changed as we have gone along. So we have looked at some 
features that no one even began to contemplate when the 
original request was made. These are things such as fraud 
detection systems, expanded credit scoring, risk determinants. 
We can't argue that these are not good technologies to use. We 
think that they are good, but when you say will you have 
everything done, probably not. Those newer technologies will 
probably be implemented in the outyears.

                   DRUG-FREE WORKPLACE GRANT PROGRAM

    Mr. Rogers. Now, we provided a total of $7.5 million for 
the last 2 years for the Drug-Free Workplace grant program and 
you request no monies for that in the coming year. Why is that?
    Ms. Alvarez. Mr. Chairman, as with so many new programs 
where you have to work across agencies, the grant money for 
that program was not disbursed until pretty much the end of the 
year, the last fiscal year, which means that we are only now 
beginning to see some preliminary results. I think it is fairly 
early. We felt that there was still funding for this year. In 
the meantime, we would like to see if this program is effective 
or not, because we really have no basis for judging whether we 
should continue to fund it.
    Mr. Rogers. You are required to submit an evaluation report 
this month, in fact.
    Ms. Alvarez. Yes. We have something in hand, I believe. 
Darryl.
    Mr. Dennis. Mr. Chairman, Ranking Member Serrano, my name 
is Darryl Dennis. As the administrator outlined, we are 
compiling our report on the assessment of grantees under the 
Drug Free Workplace Program, and we will file our report to the 
Congress. Preliminary reports appear to be favorable, and we 
will provide a more complete report to the Congress.
    Mr. Rogers. The House passed H.R. 4833 yesterday, 
reauthorizing that program at $5 million for the next 3 years. 
Every other program authorized in that bill got an increase in 
your budget request. Why do you single this one out?
    Ms. Alvarez. I don't believe that it was singled out. The 
thinking here was that there was still funding available. This 
is a program in process and we really had no basis for going 
forward and asking for any additional amount of funding. But we 
are quite hopeful, Mr. Chairman, that the program will be 
successful.

                              NEW MARKETS

    Mr. Rogers. Let me close out with--you made reference 
several times to the New Markets Initiative, which is something 
that we agree on greatly. We appropriated $16.5 million for the 
Venture Capital Program in the current year subject to 
authorization.
    Ms. Alvarez. That was the key.
    Mr. Rogers. And New Markets programs account for about $60 
million of your fiscal year 2001 budget. We are starting to run 
out of time. Can you help us out on where we are on 
authorization?
    Ms. Alvarez. Chairman Jim Talent and Congresswomen 
Velazquez have been working closely to put together a proposal 
that really meets their expectations. I am told that by next 
week we will see the results of that collaborative effort. I am 
very eager to see it because we obviously cannot go forward 
without the legislation.
    Mr. Rogers. What result would you anticipate from that 
program that you aren't getting from the existing credit 
programs?
    Ms. Alvarez. The House Small Business Committee is holding 
a New Markets hearing next week to examine it in great detail.
    There is a huge lack of equity capital for growth companies 
in this country. The availability of what will initially be a 
modest sum of money I think will produce tremendous results. We 
know from interacting with those who are in the field providing 
equity type investments, that they are very eager for this to 
happen, because those communities that have been underserved 
will benefit from it. We believe it will penetrate the cities, 
the rural areas, Native American reservations. These are places 
where businesses have been underserved.
    In a sense, this new venture capital program is not unlike 
the micro loan program. You are putting your capital at risk 
and, in each case, you do need to make a significant commitment 
to technical assistance. The difference is when you invest 
through a New Markets Venture Capital company you are a part 
owner. You would act, I think, the way an owner acts in trying 
to create a company that will be successful. A New Market 
Venture Capital company is unlike a microenterprise, which may 
be an idea in someone's mind that needs to be developed, so it 
is seed funding. New Market Venture Capital is for growth a 
business, a business that has already demonstrated that it can 
succeed but it can't really grow and develop without the money. 
The program will lead to job creation in these communities.

                            Closing Remarks

    Mr. Rogers. Thank you for your testimony here today. No one 
can say that you are not enthusiastic.
    Ms. Alvarez. I like what I do.
    Mr. Rogers. And it shows. You bring a lot of energy and 
excitement to this sometimes quiet agency and you have brought 
new ideas and you have been very impressive in your performance 
at the SBA.
    Ms. Alvarez. Thank you.
    Mr. Rogers. I enjoyed the visit that you gave to my 
district this past year. The people down there liked you and 
liked what you are doing, and I hope that you like what they 
are doing as well.
    Ms. Alvarez. I do. It is what we should be doing.
    Mr. Serrano.
    Mr. Serrano. I want to thank you for the 2 years that we 
have been together now. We are in a situation where a lot of 
folks we may be seeing for the last time.
    Ms. Alvarez. There is that possibility.
    Mr. Serrano. For that matter people sitting on this side, 
too. It is that time of the year.
    Ms. Alvarez. It is.
    Mr. Serrano. I want to once again thank you for the work 
that you do and to put in that personal note of how proud I am 
to know you personally. Thank you.
    Mr. Rogers. The hearing is adjourned.
    [Recess.]
                                          Thursday, March 30, 2000.

                U.S. SECURITIES AND EXCHANGE COMMISSION

                               WITNESSES

ARTHUR LEVITT, CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION
JAMES McCONNELL, EXECUTIVE DIRECTOR, U.S. SECURITIES AND EXCHANGE 
    COMMISSION

                              Introduction

    Mr. Rogers. The committee will be in order. I am pleased to 
welcome today Mr. Arthur Levitt, Chairman of the Securities and 
Exchange Commission. He is accompanied by the Executive 
Director.
    The fiscal year 2001 budget request for the SEC totals 
$422.8 million, an increase of $45.8 million or 12 percent over 
the current program level. The Commission is responsible for 
the oversight of the nation's financial markets. Our financial 
markets have been transformed over the past few years, both by 
phenomenal growth and by technological advances. It is an 
extraordinarily dynamic environment and one that provides no 
shortage of oversight challenges to us.
    The Congress provided an unprecedented increase to the 
Commission last year, over $15 million above the President's 
request. We will be interested to hear about how that funding 
is translating into results, particularly in detecting and 
preventing the explosion of securities fraud on the Internet.
    Your 2001 request seeks to continue funding for new staff 
and activities this year, and includes major initiatives to 
further boost enforcement staffing, improve the Commission's 
automated systems, and to address the problem of staff 
attrition. We want to hear more about these proposals as well 
as your views on other legislative developments.
    Before I recognize Chairman Levitt, let me recognize my 
friend, Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman. It is once again a 
pleasure to welcome Chairman Levitt to the subcommittee. It is 
an exciting time as we have seen phenomenal growth in the 
markets just in the last few years. The Securities and Exchange 
Commission has many new challenges ahead of them as the markets 
change and we forge ahead into the cyber age of Internet 
trading. We are very happy to have you here today, sir. I look 
forward to your testimony.
    Mr. Levitt. Thank you.

                            Opening Remarks

    Mr. Rogers. We will make your written statement part of the 
record and we would ask you to summarize for us.
    Mr. Levitt. I appreciate the opportunity to testify today 
in support of the Securities Exchange Commission budget request 
for fiscal 2001. When I testified before you last year, I 
described the market environment of unprecedented trading 
volume, tremendous growth, increased volatility, globally 
integrated markets, and continued advancements in technology. 
The environment becomes more intense almost by the day. Changes 
in market structure and the influence of the Internet continue 
to create both historic opportunities and imperatives for all 
market participants. Not surprisingly, the confluence of these 
extraordinary developments represents a time of greatchallenge 
for the Commission.
    To meet it we seek an appropriation of $422.8 million for 
2001, an increase of 45 million or 12 percent over last year's 
level. The increased funding in the President's budget will 
give us additional resources in a number of areas from 
continuing to combat fraudulent conduct on the Internet, to 
disclosure operations, to examinations and to our continuing 
focus on financial accounting fraud. Two areas, however, in 
particular, are dominating the Commission's agenda. Number one, 
our inability to retain qualified staff and, secondly, the 
widespread effects of the Internet. With the vital support of 
this committee, we have made immediate strides in our Internet 
initiatives. We have increased the number of staff 
investigating Internet fraud; new technologies to aid our 
efforts are being evaluated and will hopefully be in place 
within the next few months. The $12.5 million we received in 
fiscal 2000 was an absolutely critical first step in our 
efforts to combat Internet fraud.
    It is for this reason that, aside from fixed costs and our 
information technology program, we are requesting a small 
increase in Internet funding for the next year. We intend to 
use this year's additional resources to refine our practices 
and introduce new methods that will make us even more 
responsive to changes in law and technology.
    Now you could give us all the money in the world. It won't 
make a difference if we cannot retain and recruit the staff we 
need. In the last 2 years, the Commission has lost a quarter of 
its attorneys, accountants, and examiners to the private 
sector. It seems that almost every day I see promising young 
and mid-level attorneys or experienced accountants leave for 
compensation packages that more than double their current pay. 
For 65 years, the SEC has prided itself in consistently 
attracting and developing some of the strongest legal and 
financial minds in the country, but today's private sector 
salaries make it increasingly difficult to attract and retain 
the staff we need to oversee the securities markets that are 
growing by leaps and bounds.
    What is even more troubling, however, is the fact that SEC 
salaries are far below the salary levels of the other federal 
financial agencies, such as the OCC, FDIC, and Federal Reserve 
Board. And it won't surprise you to know that their attrition 
rates are dramatically lower than ours. It is one thing for 
staff to make salary comparisons with the private sector, but 
quite another for them to see their government counterparts 
making anywhere from 24 to 39 percent more than they are.
    While the maximum salary for a second-year attorney at the 
SEC is $66,000, an FDIC staff maybe will be paid as much as 
$91,000. The SEC's staff is its most valuable asset. Given the 
dramatic increase in starting legal salaries, unless we are put 
on equal footing with our fellow financial regulators, our 
attrition rates will only grow worse.
    I thank the committee for its interest and support in 
helping to address all of these important issues.
    [The prepared statement of Chairman Levitt follows:]
            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

                  Internet Fraud Activities in FY2000

    Mr. Rogers. Chairman Levitt, we have a vote on the floor. 
We will recess the hearing for a couple of minutes.
    [Recess.]
    Mr. Rogers. Chairman Levitt, before we get to your request 
for next year, let me take a few minutes with you on your 
current year spending with the monies that we dramatically 
increased to you for this year, particularly to address 
Internet fraud. In addition to the 42 new positions that the 
President requested, we provided $12.5 million on top of that, 
specifically to strengthen your campaign against Internet 
fraud. And last year you described the SEC as ``behind the 
curve'' in terms of keeping up with Internet fraud. Where do we 
stand today?
    Mr. Levitt. I suspect that every regulatory agency is 
always a little bit behind the curve, and that is probably all 
right. We are certainly in better shape today as a result of 
the allocation of funds made last year. We used that money to 
create 92 new positions, 75 of them within the enforcement 
division, and we also created dedicated Internet fraud centers 
in each of our regional branches throughout the country.
    What we are doing with that is to make it easier for 
investors to provide us information on fraud perpetrated on the 
Internet. And our next step, which we hope to implement within 
the next several months, will be to use technology to help 
replace some of our attorneys who are surveilling the Internet. 
We would rather have those attorneys prosecuting cases than 
watching screens, and technology, I think, will help us do 
that.
    Mr. Rogers. What can you do today that you couldn't do this 
time last year?
    Mr. Levitt. I think we can find more evidence of the kinds 
of manipulations and swindles that are taking place on the 
Internet. We are bringing more cases than ever before. We are 
able to discern between cases that represent serious fraud and 
cases that come about sometimes from pranksters. We are able to 
help the public as a result of the kinds of cases we are 
bringing and the publicity that goes with those cases to do a 
better job of protecting themselves and not succumbing to some 
of the alluring enticements that appear on the Internet these 
days, sometimes involving massive amounts of money. We had one 
case involving over $125 million that was raised for some bogus 
Internet scheme. So we are not talking about minor amounts in 
this connection.

                         Automated Surveillance

    Mr. Rogers. Part of your effort, I think, is the creation 
of what is called ``automated surveillance system'' using key 
words to search for fraud. I understand that is kicking up some 
privacy concerns here and there. How are you responding to that 
and are there other less invasive ways toget at that type of 
fraud?
    Mr. Levitt. I am keenly aware, obviously, of privacy 
issues. It is an issue that has been raised in the Congress in 
various connections in recent months, and, as a law enforcement 
agency, the Commission has always been mindful of its 
responsibilities and restrictions in this regard. As we 
endeavor to use more sophisticated surveillance methods, we are 
using technology, in effect, to replace people who are doing 
exactly the same work.
    That is not to say that we are going to have surveillance 
of chat rooms any more than we had any of our SEC employees 
entering into chat rooms. We don't do that. But if we are able 
to use automated methods to pick up key words that are being 
used in some static sites offered on the Internet, that will 
relieve our lawyers to bring cases, which I believe is the most 
efficient use of their time. So this surveillance program, this 
automation that we speak of, is in no way a new effort to seek 
out information. It is, rather, replacing people with computers 
to do the same job.

                   Internet Fraud Related Enforcement

    Mr. Rogers. How many Internet cases have you developed so 
far?
    Mr. Levitt. I have Richard Walker, our chief of 
enforcement.
    Mr. Walker. The number changes pretty much every day 
because it is a fast growth area for us. We have brought, at a 
minimum, 125 cases. This afternoon we may be bringing another 
case. We have been enhancing our output substantially over the 
past 2 years. Most of these cases have been brought in the past 
year and a half.
    Mr. Rogers. That is the total number of cases?
    Mr. Walker. That is correct.
    Mr. Rogers. What types of fraud are you uncovering in those 
cases?

             Increasing Complexity of internet Fraud Cases

    Mr. Walker. We have seen actually an evolution in the types 
of cases we have brought. Initially we saw very primitive types 
of offering schemes, people that were offering limited 
partnership interests in crazy types of ventures. Over time the 
schemes have become more sophisticated. We have seen a 
substantial amount of illegal touting where people make 
statements about a security, are being paid to make those 
statements but don't disclose the fact that they have been 
paid.
    More recently we brought some very complicated manipulation 
cases where people manipulated the markets by false and 
misleading postings to excite interest in a particular 
security, having acquired that security before the manipulation 
occurred and then sold out at a profit. We have also seen a 
number of imposter cases where people created or made false 
postings, imitating others, by either penetrating someone's 
website or, in one case, disguising postings as a Bloomberg 
story which, in fact, was false.
    In that particular instance, we tracked down the person 
that did that, and the person was arrested and sued within one 
week's time. There is constant evolution on the Internet, which 
is why it is very important to us to stay current and keep our 
best efforts up on surveillance.
    Mr. Rogers. When you say we have so many cases pending, are 
those administrative procedures?
    Mr. Walker. They are both administrative proceedings and 
cases brought in our Federal courts. We have authority to 
proceed in both venues. Many of the cases are cases that we do 
bring in Federal court, but it really depends on the facts of 
each case.
    Mr. Rogers. How many of the 125 are in Federal court?
    Mr. Walker. I don't know. I don't know the number on that. 
I would be happy to----
    Mr. Rogers. Is it half?
    Mr. Walker. I would certainly think it is half or more of 
the cases.
    Mr. Rogers. And those are criminal proceedings?
    Mr. Walker. We only have civil authority, but we have 
worked closely with criminal law enforcement authorities, and 
in several cases recently we have teamed up with criminal 
prosecutors and brought both civil cases and criminal 
prosecutions that accompanied the civil cases. We work with 
United States attorneys' offices throughout the country and the 
Department of Justice.
    Mr. Rogers. A case we saw on the news recently involved 
some area law students involved in an Internet price 
manipulation scheme. The case was settled quickly. The penalty 
seemed a little more than an agreement to cease and desist. Is 
that the right signal you want to send out there?
    Mr. Walker. We were confronted in that case with people who 
are students and who had no money to pay disgorgement and 
penalties. Under the circumstances, and when we are confronted 
with situations like that, we use all efforts that are 
available to us to determine whether these individuals have 
assets. We require that they file sworn financial statements 
with us. We may take their testimony, put them under oath, and 
we condition our settlements on the fact that if they are not 
telling the truth about not having assets, then the deal is 
busted.
    Sometimes in cases like this, over time, we may be able to 
recover some small amounts of money, but generally speaking, we 
think that as a matter of resource allocation, our efforts are 
better spent, rather than trying to chase people down for very 
uncertain recoveries to use the staff to pursue current cases 
and evolving frauds. Our experience has been when people don't 
have money for a variety of reasons, it is often very, very 
difficult to achieve collections and it is a losing 
proposition.
    Mr. Rogers. You have sufficient authority to adequately 
prosecute these cases, Mr. Chairman?
    Mr. Levitt. Yes, I think we do.
    Mr. Rogers. You need any more law?
    Mr. Levitt. No.

              Increasing Fraud Activities on the Internet

    Mr. Rogers. Tell me whether or not the Internet fraud is 
increasing, decreasing, leveled off?
    Mr. Levitt. I would say it is increasing. Obviously as more 
and more people begin to use the Internet, as our markets 
continue to be strong, the numbers of instances of fraud 
correlate very well with that. People tend to be much less 
careful at times of market--in rising markets than they would 
in more stable or falling markets. I would say we have a public 
that is more susceptible to fraud today. We have got an 
Internet that is interfacing with more of those people, and we 
probably have more fraudsters out there trying to take 
advantage of those people at this time.
    Mr. Rogers. What was the phrase----
    Mr. Levitt. Irrational exuberance.
    Mr. Rogers. He hit the phrase right off.
    Well, that is not something you learn on the golf course.
    Mr. Serrano.

          Effect of Internet Fraud on Legitimate E-Businesses

    Mr. Serrano. Thank you, Mr. Chairman. Let's stay for a 
second on the same subject. You talk about Internet fraudand it 
is most people's understanding it is people using the net to offer 
schemes, if you will, and ways to defraud people. Now, there are also 
folks that have done very well by being legitimate Internet providers, 
you have your E-Bays, Amazon.coms and so on. Now, two questions on both 
sides. One, have any of those outfits, not just those I mentioned, but 
any of the so-called dot.coms, run into trouble with the way they do 
business on the Internet and/or have any of these other people that 
defraud the public used the Internet to try to defraud these larger 
corporations? Because it seems one of the big areas in the stock market 
is investing in these stocks primarily on the Internet. How does all 
that tie into what we are talking about today?
    Mr. Levitt. The kind of problems that a large publicly 
owned Internet company would run into are much less likely to 
be instances of the kind of fraud we are talking about than 
they might have problems in terms of accounting issues, and, 
from time to time, some of those companies have had a dialogue 
with the Commission about particular accounting treatments 
which we feel may not give an accurate picture of the company's 
financial status to America's investors.
    We have seen, from time to time, efforts on the part of 
rogue investors to feed false information over the Internet--
which might have an impact on the price of shares in which they 
have an interest--by feeding into a chat room a story about a 
phony decline in earnings or proposed acquisition. Other 
participants in that chat room might bid the price of the stock 
up and the fraudsters would benefit from that by selling out at 
that point.
    So there have been a number of instances of that. I think 
you put your finger on how the Internet can be used to take 
advantage of legitimate companies, and also how companies may 
not be guilty of manipulations of any kind but they may have 
accounting problems with us.
    Mr. Serrano. The accounting problems--without telling me 
what you shouldn't need to tell me, but the way they present 
themselves to the public may not be a true picture of their 
accounting situation?
    Mr. Levitt. I am firmly of the belief that America's 
markets are the best in the world because of the confidence 
placed in them by the American public. The American public has 
that confidence because they trust the numbers, and they 
believe in the fairness of the system. Anything which tends to 
distort those numbers I think presents a substantial risk to 
the integrity of our markets, and that's why distorting the 
numbers is something that this Commission is very, very mindful 
of. And you are correct, what happens is a particular company 
tries to present their numbers in a way that is the most 
favorable, and, sometimes in doing that, they step pretty close 
to the line. That is a cause of continuous tension between some 
companies and the Commission.

                        INTERNET STOCKS ACTIVITY

    Mr. Serrano. Sounds like some of our pollsters.
    I don't know, Mr. Chairman. I have been paying more 
attention to this lately. You will have to tell me if this is 
something that has always gone on. But it seems to me I read 
more and more every day about some of these Internet stocks, if 
you will, where the stock has gone haywire in terms of the 
price and the company still hasn't made a profit.
    Now, is the percentage of that happening among these kinds 
of stocks the same in the non-Internet world, if you will, or 
is that a phenomenon unique to that area?
    Mr. Levitt. Markets tend to be fashionable, and by that I 
mean, some years ago it may have been biotechnology. In the 
1970's it was companies that acquired other companies. Today it 
is the Internet and as a result of that, you have some things 
taking place, which I think represent some risks for America's 
investors. What company is really worth a thousand times 
nothing? And too many of these companies going public depend 
upon a subsequent public offering in order to survive. When 
markets trend down, the IPO market disappears. What will happen 
to an Internet company that depends for its survival on a new 
offering? I think that is really playing a very dangerous game.
    But you have put your finger on an area of markets today 
which probably has more of the excesses in it than other areas, 
but there will be changes. Two years from now we will be 
looking at another area that people get very enthusiastic 
about, and, if you are lucky enough to get in at the right 
time, you may make money. But the risks obviously with stocks 
that are selling at extraordinary multiples are obviously 
higher.

                          INDIVIDUAL INVESTING

    Mr. Serrano. One last question, Mr. Chairman. There was a 
time not long ago when you went to a broker and you got advice 
from a broker or from somebody of that nature and you bought 
stock and whatever. And now, of course, the ability to sit in 
front of your computer allows you to do this on your own. In 
addition to what we already discussed here today, has this 
opened other doors that we haven't discussed, other than the 
doors of fraud, the ability of people to just sit in front of 
their computer and go out there and buy up half the world if 
they can afford it? There seems to me--I am not saying it is 
good or bad. I actually think it is good there is access, but 
it seems to me there was a certain control or it was sort of--
there was a circle that surrounded this whole area. Now the 
circle is broken.
    Mr. Levitt. I think you put your finger on another 
phenomenon.
    Mr. Serrano. I keep putting my finger on things I want you 
to know I know nothing of. It is shocking my staff over here.
    Mr. Levitt. What you are touching on is the fact that our 
markets have shifted from being largely controlled by 
institutional investors to markets that are being largely 
impacted by individual investors. We are seeing really an 
extraordinary empowerment of the individual investor. By and 
large, I think that is constructive, but it carries with it 
some significant risks in my judgment.
    Our society, its literature, its movies, its magazines, its 
newspapers, has kind of defied the power, the prestige of the 
trader. The trader is viewed with extraordinary strength, 
virility, wisdom, toughness, all great American values. And 
when Mr. And Mrs. America sit behind a computer and recognize 
that they can buy or sell hundreds of thousands of dollars 
worth of securities, they fancy themselves, I suspect, as 
having the same kind of power of the much vaunted trader. What 
they lack, however, is the experience, the resources, the 
temperament of the trader; and it is very risky to assume that 
they have the same abilities and the same culture.
    So I think it is a two-edged sword, but we are clearly 
experiencing today the empowerment of the individual investor. 
It is our job to see to it that that investor is not 
disillusioned in terms--not relative to the performance of 
themarket--but its fairness and its systemic soundness. I regard those 
as being the primary responsibilities of the Commission.
    Mr. Serrano. I would leave you with this thought. I know 
what you are saying. There is a need, obviously, to make sure 
that people are protected. But I think, by and large, and you 
have said it, that it empowers people. It is, to me, some sort 
of a decentralization of capitalism, maybe, and that is not 
such a bad thing at the local neighborhood level. People can 
begin to really put their hand into it at any level they can. 
So I think in the long run it is good for us.
    Thank you, Mr. Chairman.
    Mr. Rogers. Thank you. I think you are sort of saying that 
these individual traders with no experience on the Internet at 
home are a little bit like representing yourself in court on a 
very important case?
    Mr. Levitt. Not quite. I think that giving investors the 
ability to use the Internet is fine as long as they have some 
appreciation of risk, as long as they understand that if they 
are going to do without the services of an advisor, counselor, 
or broker, they would be very ill-advised not to be prepared to 
do their own homework, to read about companies, to talk to 
others about the company and its qualifications, and to have 
intellectual rather than pure emotional reasons to buy or sell 
securities. I worry about investors today becoming more 
emotional about investments than intellectual, and I think that 
is where they run into trouble.

                   EFFECT OF DOWN TURN IN THE MARKET

    Mr. Rogers. So you are talking about emotional exuberance?
    Mr. Levitt. That is correct.
    Mr. Rogers. Mr. Wamp.
    Mr. Wamp. Thank you, Mr. Chairman. Welcome back, sir. Last 
month I spent the afternoon with Bill Johnston on the floor of 
the New York Stock Exchange, and learned a lot and found him to 
be a pleasant person. I had these thoughts as I was coming back 
and thinking about what is ahead. You are coming and you have 
needs, and we need to hear about problems you are having with 
personnel and maintaining salaries, where they need to be and 
the struggles that you face day in and day out.
    But in the marketplace, the gas crisis here has caused me, 
and I think other members, to reflect on some of the questions 
that might need to be addressed when things are good and no one 
is worried, and things in the marketplace are still really 
strong and no one seems to be worried. But after just spending 
a few hours there and asking questions and talking, there may 
very well be a financial train wreck somewhere down the road 
when all this actually shakes out. And what questions need to 
be asked? What issues need to be discussed?
    If you were Bill Richardson and he is in this dilemma now 
with the energy crisis, and you recognized that things were 
happening last year that have led to this and now people are 
wondering how it all happened overnight, that is exactly what 
is going to happen at some point with this situation, I 
believe. What are the questions that we need to be asking and 
how should we be alerting the American people that there is 
going to be a major correction when all this comes to a head?
    It is going to have to happen at some point, and it could 
probably shock the markets. If Mr. Greenspan even mentioned it, 
it would cause immediate action and reaction. I really think it 
is going to happen, and when it does, much like this oil 
crisis, I wonder what we should be looking at in the Congress 
and through the Securities and Exchange Commission, et cetera, 
to try to remedy as much of the pain, or at least brunt the 
shock as much as possible.
    Mr. Levitt. Well, I think that it is essential that 
America's investors are reminded of the fact that markets, by 
definition, go two ways. No matter how often you remind them of 
that, following a period of prolonged market increase, many of 
them won't heed those warnings. So that the next responsibility 
that policymakers have is to see to it that the system is 
sound, that whatever happens in the market, that the system is 
able to handle it.
    If we have markets that rise or markets that fall on very 
heavy volume, if we have new electronic participants 
interfacing with existing markets around the country, if we are 
moving, as I expect we are, very rapidly toward a globalized 
electronic market, we need to assure that America's system 
doesn't remain stuck in the 20th century, that it has the 
capability in terms of capacity, in terms of responsiveness, in 
terms of efficiency to compete against new markets that are 
developing. If there is anything that can damage the confidence 
of America's investors, even more than economic tribulation, it 
would be a systemic rupture, and I think it is our 
responsibility as a government agency and responsibility of all 
policymakers to see to it that our system is able to handle 
these issues. And it is one of the reasons that I am concerned 
about how we introduce decimalization, because that will 
obviously raise some systemic strains. I think clearly we will 
be able to do it, but how we do it is a matter of great concern 
with the Commission.

                       STAFFING AND THE INTERNET

    Mr. Wamp. This case I read about where these guys from 
Georgetown were I guess in the NASDAQ, engaged in some 
fraudulent trading, is the Internet going to open up or has it 
already opened up major problem areas that you need to beef 
your staff up to prepare for that?
    Mr. Levitt. Sure. The Internet has opened up vast areas of 
opportunity for America's investors that far outweigh the 
obvious implications for fraud, but clearly with this kind of 
rising market, with the number of people growing that have 
access to the Internet, and with the gullibility of the 
American people at a time of rising markets, fraudsters are 
much more prevalent today than you would see in different 
market environments with different technology, and that is why 
it is essential that it remain our number one priority.
    Mr. Wamp. You retain the competent legal staff, to get to 
the bottom of these problems?
    Mr. Levitt. That is our number one priority. With the new 
legislation, the Gramm-Leach-Bliley legislation passed last 
year, the obligation of all financial regulators to work 
intimately together is essential for good government. And for 
SEC employees to be working right next to people who are doing 
similar jobs but making 30 percent more than they are is 
terribly demoralizing, and for the agency to see good people go 
not just to the private sector but to colleagues across the 
street is devastating.

                 RELATIONSHIP BETWEEN SEC AND THE NYSE

    Mr. Wamp. One final question which is kind of interesting. 
I asked Mr. Johnston last week what kind of relationship the 
New York Stock Exchange had with the Securities and Exchange 
Commission. He stopped short of sayingyou all were a good wife 
but he did say--well, I see relationships sometimes between Federal 
agencies and other institutions where they are such partners that they 
are like a marriage, you know. You can't live with them, you can't live 
without them.
    And in this deal he said they clearly know their role is a 
regulatory role. They are not in this business with us but they 
are at our side and they are supportive and helpful. It sounded 
to me like you have got a great relationship, but it is an 
arm's length relationship. That is how it ought to be.
    How about the other markets? Do you feel you have got a 
very good healthy relationship with the other markets? I felt 
like you had a healthy relationship not too close, not too far 
away from the New York Stock Exchange.
    Mr. Levitt. I think if there is one word that has been 
emblazoned on my personality, since I have been at this dealing 
with markets through the years, it has been the word balance. 
And I believe there is a balance with the various groups with 
whom we interface. Sometimes there is more tension than at 
other times, but any regulator will soon recognize that without 
the support, without the trust and the confidence of all of the 
people that he regulates, she regulates, you just can't do the 
job.
    There will be outliers from time to time, but you can't 
have a whole industry against you and be effective, and I think 
in this agency, I was fortunate in inheriting a tradition of 
balance and fairness in terms of not abusing the regulatory 
power.
    Mr. Wamp. A lot of tradition in your industry on both 
sides. Thank you, Mr. Chairman.

                     INFORMATION TECHNOLOGY REQUEST

    Mr. Rogers. Thank you. Now, last year--well, you are 
requesting $10 million to improve your information systems. 
Last year we gave you a 24 percent base increase for automation 
plus a one-time infusion of $7.4 million to address Y2K. And 
last year's money was supposed to help you monitor 
examinations, improve data distribution in your regions, and 
better handle the floods of correspondence that you get. Why do 
you need another 32 percent increase?
    Mr. Levitt. Correspondence was really an enormous problem 
for us and very disconcerting for the people who would write to 
us or call us and be unable to get answers, but I was down in 
that office the other day answering queries from irate 
customers. It was a revelation to me to hear what was troubling 
the American investor, and I am going to go down there fairly 
regularly. I am going to ask my fellow commissioners to do it 
as well. But I am satisfied that that is pretty much under 
control, but the additional funds we are using to strengthen 
our information technology security program, nearly $3 million, 
is going toward that and $2 million is being allocated to 
expand the information system support for our enforcement, our 
Internet enforcement program.
    Also using market data for research and analysis will cost 
us in the neighborhood of $2 million, and our communications 
network going out to all of the areas that we have to reach 
will cost us another million and a half.
    The rest of the funds, about a million and a half, will go 
toward improving our Website, which I think is critical. It 
will allow investors to interface with us, to talk to us, and 
to hear from us and to provide other forms of electronic 
communication to the public. This technology is wonderful, but 
it is wonderful if used constructively to help the public 
protect themselves.
    And finally, a whole new world has opened up with new 
electronic trading systems developing and it is happening 
almost by the month. So we must now capture and analyze that of 
new markets from new stock exchanges, from new dealers that are 
growing by leaps and bounds.

           RELATIONSHIP BETWEEN TECHNOLOGY AND STAFFING LEVEL

    Mr. Rogers. Will this money for automation lead to reduced 
staffing requirements?
    Mr. Levitt. I think in some areas it clearly will.
    Mr. Rogers. Can you identify that for us?
    Mr. Levitt. I am being told that it will reduce the number 
of people we are hiring rather than replacing staff that we 
have already hired.

                          SEC STAFF ATTRITION

    Mr. Rogers. Now, let's talk about your staffing and your 
attrition problem. And I think anyone from this distance even 
could see that given the nature of the business that you are 
regulating-high risk, high reward in the markets-that your 
personnel can make a good deal more money in the private sector 
than with you, and essentially doing the same thing, requiring 
the same talents, would indeed cause you problems and obviously 
it is. But you have always had that attrition problem, haven't 
you?
    Mr. Levitt. Never to the extent which we are experiencing 
today, nor do I believe the Commission has ever faced the kinds 
of challenges in terms of the public interest that we have 
today where we so badly need experienced people.
    Mr. Rogers. Well, my figures show that the attrition rate 
for attorneys actually improved from 1998 to 1999, went from 
15.2 percent to 13.5 percent. I don't know what it is for the 
year 2000. What is it for the current year?
    Mr. Levitt. Over the last 2 years we have lost 
approximately 25 percent of our attorneys and accountants. That 
is a rate that in the private sector would come close to 
putting a company out of business.
    Mr. Rogers. Is it double the government-wide average?
    Mr. Levitt. Yes.

                       COST OF REDUCING TURNOVER

    Mr. Rogers. In 1999 you asked for $7 million to pay 
retention allowances to individuals in certain posts. We never 
provided that money, so it was not carried out. In your 2001 
request, you have broadened the pool. You are asking $15 
million for a 10 percent special pay rate hike which would 
apply to about 60 percent of your work force. Under Senator 
Gramm's bill, he would give a whole new pay system, which would 
create an annual appropriation requirement between $50 million 
and $100 million for us. I don't, in any way, dispute we have 
got a real problem with attrition, but we would have gone from 
a 7 million solution to a potentially $100 million solution in 
the next 2 years. Do you think that is beyond what is really 
necessary to address the attrition problem?
    Mr. Levitt. Mr. Chairman, I don't think any of the issues 
that we faced at the Commission over the past seven years rise 
to the level of problem that the SEC's attrition rate 
represents to the whole issue of protecting America's 
investors. The cost to replace the very few people who are 
experienced in areas that can't be duplicated elsewhere in our 
markets is so consuming and so enormous that I would suggest to 
you that in terms of losses to the American public, losses to 
our government would far exceed the $50 to $100 million. And 
considering the fact that the Commission does contribute nearly 
five times what it costs to run it, I think our government has 
a pretty good deal with the Commission, and, if the Commission 
loses its viability, Ithink the risk to the system is 
considerable, and I have to say to you on a very personal basis that if 
there is any one issue that I would want to have part of my legacy to 
this extraordinary body, it would be to preserve its integrity by 
providing them with just the same kind of fair compensation that their 
colleagues across the street have.
    I owe it to them. I really owe it to them, and I believe 
that the Congress in turn does as well. I know there are other 
agencies competing for these funds, but if I were to address 
our agency's problems with respect to the government's budget, 
I simply couldn't appear before you on this, but I feel 
passionately about it obviously.
    Mr. Rogers. I know that you do because we have talked about 
it privately. I know how strongly the chairman feels on this 
issue. And we want to try to help you address it. We are trying 
to figure out how we can manage that kind of appropriation, 
particularly in another year when it looks like we are going to 
have less money than we had last year to deal with, with 
demands from all over the front for increases all over--most 
all of them legitimate. So it is something we will work with 
you on, and I want to continue to stay in touch with you and we 
will work with you to try to address what everyone admits is a 
serious problem.

        PAY DISPARITY BETWEEN SEC AND OTHER FINANCIAL REGULATORS

    Mr. Levitt. Thank you very much, Mr. Chairman.
    Mr. Rogers. One of the difficulties as well that we would 
have is trying to justify a retention, special pay rate for SEC 
while denying it for others, other agencies, who as well feel 
they have a problem, and many of them do, as you well know. 
Help me with that.
    Mr. Levitt. They don't contribute to the government as a 
whole five times the cost of running the agency as the 
Commission does, and they don't have to work hand-in-glove with 
the same kinds of regulators that do the same sorts of things, 
but who are paid far more. You could take almost any agency, 
but to have an SEC employee having to deal with an employee of 
the Federal Reserve Board or the OCC on an almost daily basis, 
and one is getting 30 percent more than the other, one of two 
things will happen: either the lower paid employee will migrate 
to the other agency, or he'll quit, and both of them are far 
more devastating to people who remain at the agency than if 
this was just a situation of losing someone periodically to the 
private sector, which is a governmentwide problem. This is a 
phenomena that has been forced upon us by the fact that these 
agencies are now working so closely together.
    Mr. Rogers. Well, that is another point. The exposure of a 
government employee to a business where zillions of dollars are 
being handled, the temptations are great in many other 
agencies. But you make a valid point.
    So you would put this at the top of your priority list?
    Mr. Levitt. Far at the top.
    Mr. Rogers. Above anything?
    Mr. Levitt. Above everything.
    Mr. Rogers. Above automation?
    Mr. Levitt. Above everything. Without these key people, 
automation won't help us.
    Mr. Rogers. Mr. Latham.

                MARGIN REQUIREMENTS AND RECOMMENDATIONS

    Mr. Latham. Thank you, Mr. Chairman.
    Welcome, Chairman.
    There was a Washington Post article, I believe it was 
yesterday talking about the margin requirements and 
recommendations from the New York Stock Exchange and from 
NASDAQ about raising the amount of cash investors have. In the 
last 6 months, according to the article, the amount of money 
people borrow from the brokers has increased 50 percent. I just 
wonder what your feeling is on this and what course of action 
the SEC is taking. They are basically day traders. We all know 
that is somewhat risky.
    Mr. Levitt. It is a casino. The day trading activity is 
characteristic of a casino mentality, but it represents a 
relatively small part of our market at this point, but I am 
concerned about the level of borrowing today because it kind of 
defines an attitude of some of America's investors that markets 
go only in one direction, and the implications to particularly 
smaller investors of a falling market in the event they are 
margined can be very, very serious. I think our job is to 
acquaint investors with the fact that markets don't go in only 
one direction and that, while they can double their money on 
the way up with a 50 percent margin, they can be wiped out on 
the way down.
    And investors should be very cautious about whether--how 
much they are borrowing. And I guess I am even more concerned 
about investors who borrow outside of regulated channels, who 
may be borrowing on other assets. And I think that is something 
that those of us who interface with the markets must really be 
mindful of. I know that the New York Stock Exchange and NASDAQ 
are considering proposals to possibly address the issue of 
margin retention rates, and it is something that we discussed 
at the President's working group, and it goes to the issue of 
risks being taken by the public.

                       INVESTOR EDUCATION EFFORTS

    Mr. Latham. Is there a timetable as far as any kind of 
decision? Also, I guess I would ask, you mentioned about 
somehow educating or informing the public of the risk. In the 
budget, was it money that you asked for to be able to do this? 
Was there a risk to OMB that was reduced or changed in this 
regard?
    Mr. Levitt. Well, we have an Office of Investor Education 
which has become critically important to the agency, and it 
does just that function. I participated in probably my 36th 
town meeting in St. Louis last week since we have been here and 
every time I meet the thousands of people that come to these 
town meetings, cautioning them about margin is something that I 
do, and I know Chairman Greenspan does the same thing.
    I think that the issue as to whether changing margin limits 
will change public behavior is an issue that really has not 
been defined, but I do believe that the symbolism of the 
exchanges addressing the margin issue as a cautionary note to 
the American public would be constructive.
    Mr. Latham. While it is a small part of the entire market, 
it is concentrated in high-tech industry as far as the amount 
of trading that is done on low margin and with the day traders. 
We have obviously seen fantastic growth in some of those 
dollars, but it could be a house of cards the way it looks to 
me.
    Mr. Levitt. I think the extent to which a particular stock 
or group of stocks has great volatility, that will obviously 
impact the implications of people being on margin, both on the 
up and the down side. But I don't know offhand whether more 
money is being borrowed on Internet stocks than other parts of 
the market for the moment, but clearly the risks for borrowing 
for highly volatile stocks that go up and down as much as 10 or 
20 percent in a day are greatlyamplified over the risk of 
borrowing on stocks that have greater inherent stability.
    Mr. Latham. Thank you.

                          RISKS OF DAY TRADING

    Mr. Rogers. Thank you, Mr. Latham. To follow up on that--on 
day trading--I know you have been closely monitoring that 
industry and have questioned the casino mentality that 
sometimes is prevalent among many of the investors in those 
confines. Have you found reason for concern in areas of fraud 
or insufficient investor education or what have you?
    Mr. Levitt. I am more concerned about fraud, which 
manifests itself in terms of certain characteristics of some of 
the day trading operations, than I am about misleading 
investors in terms of what their expectations should be. 
Occasionally, we will run into a day trading firm that uses 
false advertising to lure investors into their casinos, and I 
guess I have such an old-fashioned view about day trading 
conditioned by my experience in the markets that I frankly 
think that anyone, except the most experienced professional who 
goes into our markets as a day trader, might just as well go to 
the racetrack. Maybe do better in the racetrack.
    Mr. Rogers. I will testify to that. [Laughter.]
    Well, what are you doing about it?
    Mr. Levitt. I think public education is the best thing that 
we can do about it. To expect that you are going to get people 
to stay away from day trading or to think that it is 
government's role to tell a particular participant in the 
market such as day traders that they can't operate, I think is 
abusive of government's role. The best thing we can do is to 
educate investors to see to it that the firms that engage in 
this practice don't mislead the public and give them false 
expectations and to see to it that the system is sound enough 
to handle the business that comes.
    And the best lesson, the best discipline to be acquired in 
this connection will come from the market itself. If our 
markets trend down at some point in the future, the number of 
day traders will diminish almost exponentially.

                       DECIMALIZATION OF MARKETS

    Mr. Rogers. You mentioned decimal pricing. You issued an 
order in January calling for all self-regulatory organizations 
to implement decimal pricing on July 3 of this year. NASDAQ 
announced they won't be able to meet that deadline. What is 
going to happen and what kind of risks might there be for 
investors in this switchover?
    Mr. Levitt. I think, if the transition is handled in a 
reasonable and measured way, investors will endure no risks, 
and when I say ``reasonable way,'' I believe that we have to be 
certain that our systems are adequate to handle the vast 
increase in quote traffic that will result from moving toward 
decimalization--that not only will our markets be ready, but 
that the various firms will have systems adequate to handle 
both quote traffic as well as the order flow.
    No one can tell with absolute precision what the impact of 
decimalization will have on liquidity in our markets, and, 
again, that is another reason why we have to phase into this. I 
want to be absolutely certain that our markets are 
systematically ready to handle a transition to decimalization. 
I think the benefits to the American public in terms of 
narrower spreads and comprehensible pricing are really very, 
very considerable. But, in measuring the risks inherent in 
doing this too quickly before we are prepared for it, versus 
the rewards of doing it either by July 3 or doing it several 
months later, I think it clearly comes down in favor of phasing 
in decimalization when we are satisfied that the systems are 
adequate to handle it.
    Mr. Zarb has written to me about the inability of the NASD 
to handle a transition at this time. The New York Stock 
Exchange has indicated that they have the capability of going 
ahead and doing it in July. I have great reservations about 
having a hybrid system with trading in decimals and trading in 
fractions at the same time. I think that might be massively 
confusing to the American public. I guess my answer is kind of 
a long-winded way of saying that decimalization is clearly a 
priority for the Commission but it is a priority that it think 
must be implemented in a way that it will assure America's 
investors that the system is adequate to handle it.
    Mr. Rogers. I don't know of any down side to 
decimalization. Is there a down side?
    Mr. Levitt. The downside could be if we are not ready to 
handle it and the system can't take it. That could create very 
serious problems to force upon the NASD--trading in decimals, 
when they told us they don't have the capacity to do it--I 
think would be wrongheaded of the Commission. But I expect to 
have both Congress and the Commission bring the kind of 
pressure on those that may not be ready so it won't be very 
long from now when we will be ready. It is a priority at the 
Commission. I want and expect our markets to move toward a 
decimalized environment.
    Mr. Rogers. I can't imagine in this era, in this age of the 
Internet and worldwide communications and moon shots and 
computers smaller than the mode of your eye, that the stock 
market can't convert from fractions to decimals. That is an 
astounding discovery.
    Mr. Levitt. Well, if you consider our options exchanges, 
for instance, where there are many, many classes of options 
that investors require quotes on, and if you multiply that 
number by many times ten, you have to be certain that that 
enormous increase in quote traffic doesn't disrupt the ordinary 
run of business that takes place. Now, I think clearly we will 
be ready for that, and we have placed demands upon our options 
exchanges as well as our equity markets and brokerage firms to 
have the technology in place to do it. One of the principal 
players, however, has said we are not ready. I have asked them 
to find for us why they aren't ready to retain outside 
consultants and to tell us precisely when they will be ready 
and how much confidence I can have in that. I will be in a 
better position to determine the likelihood of a particular 
date for implementing decimalization, but we are talking about 
months, not more than that.

                 NASDAQ EFFORTS TO CONVERT TO DECIMALS

    Mr. Rogers. Well, decimalization clearly is a goal that 
needs to be achieved. What are NASDAQ's reasons for not being 
able to comply?
    Mr. Levitt. NASDAQ has explained to me that the enormous 
increase in volume, which is many times what they had 
anticipated and many times what they are geared for, has 
created a backlog in terms of their ability to have the 
technology to be certain that the public will be protected when 
we move toward decimals. I have written a letter to NASDAQ, 
which I will share with the committee in which I say that every 
single expenditure that NASDAQ makes should be viewed in terms 
of its alternative expenditures being made for technology, 
which I regard as their most important commitment today. Before 
they spend a dollar for advertising, before they spend a dollar 
for bricks andmortar, before they spend a dollar for any other 
purpose that technology be their principal concern, because I am 
frankly dismayed and disappointed that they have not been able to meet 
the commitment that they made to the Commission last summer to be ready 
for that July 3 date.
    Mr. Rogers. This subcommittee is sorely disappointed as 
well. This clearly is a goal if I may say so of Congress, the 
intent of Congress, that this be achieved. I can't imagine the 
New York Stock Exchange would be capable of switching by July 
3, even earlier than that, I think, and the NASDAQ, I gather, 
can't even tell you when they would be ready.
    Mr. Levitt. No, they have indicated when they would be 
ready. I am not thoroughly satisfied in terms of that number 
and I would rather reserve judgment on that until I have the 
benefit of the analysis that is taking place right now.
    Mr. Rogers. Well, we would like a report from you rather 
quickly here about why the NASDAQ is incapable of conversion 
and the exact reasons and exact date they will be ready.
    Mr. Levitt. I will submit such a report to this committee 
within the next 30 days.
    Mr. Rogers. And include in that the specific reasons why 
they cannot comply with your directive to switch on July 3.
    Mr. Levitt. Yes, sir.
    Mr. Rogers. If the New York Stock Exchange can do this, it 
seems to me that the others should be able to do the same.

                       EDGAR MODERNIZATION STATUS

    Now, finally, on EDGAR, we supported your $22.4 million 
multi-year plan to modernize the EDGAR database. I understand 
that for several weeks earlier this year, investors were unable 
to access certain disclosure documents from that database due 
to some technical glitches. Can you tell us what happened and 
if you have fixed it?
    Mr. Levitt. This was a capacity problem with old files that 
has been remedied. We are about two-thirds of the way through 
with the conversion of the old EDGAR to the new EDGAR.
    Mr. Rogers. And when will you be converted?
    Mr. Levitt. Next July.
    Mr. Rogers. This coming?
    Mr. Levitt. A year from July.
    Mr. Rogers. Why so long?
    Mr. McConnell. It was always intended as a 3-year effort, 
and we are about 2 years now. It may be before July but that is 
our outside date.
    Mr. Rogers. Are you requesting more money in next year's 
budget for that purpose?
    Mr. McConnell. Not to my estimation.
    Mr. Rogers. The $22.4 million we have already approved is 
for the full 3 years?
    Mr. McConnell. That is for the full 3 years.
    Mr. Rogers. Are you on schedule?
    Mr. McConnell. We have had one slippage, but we are making 
that up and we will meet the final 3-year deadline.
    Mr. Rogers. Within budget?
    Mr. McConnell. Within budget, on time.
    Mr. Rogers. Under budget?
    Mr. McConnell. We will see what we can do.
    Mr. Rogers. When that is finished, are you satisfied that 
we will have a system that provides investors easy, quick 
access to files?
    Mr. Levitt. I think we will have a pretty terrific system. 
In this era of new technology, there will be something else, 
some other enhancement, something that I think will be even 
better for investors. I think America's investors today have 
more information, more access to the kind of information 
necessary to make investment decisions than ever before in 
history, and I think it is our job to see to it that we are 
able to avail ourselves of every new development, many of the 
new developments in terms of technology to benefit investors.
    Mr. Rogers. Mr. Latham?
    Mr. Latham. No, thank you.

                            CLOSING REMARKS

    Mr. Rogers. Chairman Levitt, we are very pleased to see you 
today, pleased your health appears to be good and it is good to 
see you and your staff here. You have a tough chore these days. 
It is like riding a wild bronco the way the market is going 
over there, but we will attempt to equip you with the resources 
that are necessary to keep up with this age that we are in.
    It is ironic down here in Washington that you read about 
these huge surpluses that the economy has generated in 
government revenues and yet we are capped in what we can spend. 
That is a good thing, but it is an ironic circumstance when the 
grass is green just across the fence and we can't quite reach 
it, so to speak, to fund improvements like yours that are 
absolutely necessary. But rest assured, we will attempt every 
effort to make that happen, in automation equipment and in pay 
equity to help you with your severe attrition problem. So we 
will be staying in touch with you and we thank you for your 
testimony.
    Mr. Levitt. You have been incredibly sensitive and 
constructive, and I appreciate that, and the agency is grateful 
for the sensitivity of the Congress to their problems.
    Mr. Rogers. Well, in fact, keep in mind that next year, in 
2001, indications are that your agency will generate nearly a 
billion dollars in revenues for us to spend, but that doesn't 
make you different in many respects from other witnesses before 
this committee.
    Mr. Levitt. Thank you very much.
    Mr. Rogers. Thank you, Mr. Chairman.
                    Questions From Ms. Roybal-Allard

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                                         Wednesday, March 29, 2000.

                   FEDERAL COMMUNICATIONS COMMISSION

                               WITNESSES

WILLIAM E. KENNARD, CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION
ANDREW FISHEL, MANAGING DIRECTOR, FEDERAL COMMUNICATIONS COMMISSION
    Mr. Rogers. The committee will be in order. We are pleased 
to welcome today in his third appearance as Chairman of the 
Federal Communications Commission, William Kennard. Chairman 
Kennard will testify regarding his 2001 budget request for the 
FCC, which is $237.2 million, an increase of $27.3 million, 13 
percent over the current level. We will want to hear today 
about the details of this request and how the Commission is 
adapting and restructuring to better achieve the deregulation 
and competition goals envisioned in the Telecom Act of 1996. In 
a moment, we will recognize you, Mr. Chairman, for any brief 
summary of your written statement which we will put in the 
record, but first, let me recognize my distinguished Ranking 
Member, Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman. I would like to 
welcome Chairman Kennard to our hearing today. I am fascinated 
by the technology and the progress that is made every day in 
this information age. The FCC has a very important primary 
mission to promote competition in communications, protect 
consumers, and, something I feel very strongly about, to 
support access for every American to advanced communications 
services. I am glad you are here today. I am looking forward to 
hearing your testimony.
    Mr. Rogers. Mr. Chairman.
    Mr. Kennard. Thank you, Mr. Chairman. Once again, it is an 
honor to appear before you and before this committee. I very 
much appreciate this opportunity to present for you today the 
FCC's fiscal year 2001 budget proposal. I would like to outline 
a summary of our budget estimates and give you an update on the 
activities of the Commission, particularly with regard to our 
implementation of the Telecommunications Act of 1996. I also 
would like to present to you a clear picture of our 
accomplishments during the past year and what we anticipate our 
agenda to be for the next year.
    I also would like to present for you a report card on our 
progress in implementing my blueprint for the 21st century. 
This is a blueprint that I presented to the Congress in the 
summer which is, in effect, a strategic plan for the FCC as we 
move into this century. We have now updated the plan with some 
specific milestones that we have met, and I wanted to present 
that to you and ask, Mr. Chairman, that it be associated in the 
record with my testimony.
    Mr. Rogers. It shall be.
    Mr. Kennard. Thank you. I also would like to thank the 
subcommittee for its attention to the FCC budgetary needs 
during my tenure, Mr. Chairman. I recognize that all agencies 
that come before you have important programs and sometimes 
competing financial requirements that must be resolved by you 
during a compressed time period. Your work is critical to the 
operation of this government and provides us with a yearly 
forum to discuss our achievements and planned improvements and 
receive from you valuable input. Although we do not always 
agree on budget matters related to the FCC, I believe that we 
share a common desire to improve the Commission and finance 
programs essential to the development of a better 
telecommunications marketplace.

                          FCC Budget--FY 2001

    As you mentioned earlier, Mr. Chairman, our budget request 
for fiscal year 2001 is for $237 million. FTEs will be at a 
full-time equivalence and will be funded from both direct 
appropriations and our Auctions resources. This represents a 
$27 million increase over fiscal year 2000, a 13 percent 
increase. Most of that increase is attributable to 
uncontrollable cost increases. That is principally rent, 
salary, and increases for our information technologies program. 
The total amount to be collected from regulatory fees would 
increase from approximately $185 million in fiscal year 2000 to 
$200 million in fiscal year 2001.
    I might note, Mr. Chairman, that the FCC is a cash cow for 
the Federal Government. We bring in billions of dollars in 
Auctions revenue. Last year we brought in $1.5 billion which is 
many times more than our budget. When you combine our 
regulatory fees and our licensing fees, it exceeds the total 
amount of our appropriated budget. So we are actually a net 
profit center, if you will, for the Federal Government. And so 
we think that in marketplace terms, we are a very wise 
investment for the Federal Government.
    Mr. Chairman, we have discussed in recent months our 
request to you that we be allowed to use $5.8 million in excess 
regulatory fees from previous years to support our fiscal year 
2000 IT budget. We have done everything within our power to 
satisfy this committee's directives, yet we have had to make do 
with less than we need. We must pay our rent while 
simultaneously carrying out much needed improvements in the 
Commission.
    I have previously written to you to discuss the effects of 
your denial of the use of our excess regulatory fees, and I 
have had to implement drastic measures to fund our IT programs 
including a hiring freeze, scaling back our IT program, and 
drastically reducing our ability to travel to essential 
programmatic functions.
    We believe that it is vitally important that the FCC be 
funded adequately to fulfill our mission. We are operating in 
an environment of great change. The implementation of the 
Telecommunications Act of 1996 has been a great success for 
consumers and the marketplace. I also want to present to you 
today in that regard a report which the FCC issued on the 
fourth anniversary of the Telecommunications Act of 1996, which 
outlines--it really takes a snapshot of all sectors of the 
telecommunications marketplace 4 years into the Act. I think 
that you will see that this Act is enhancing the economy. All 
of the economic indicators are up across the board. We have 
seen tremendous growth in every sector of the 
telecommunications marketplace. It is responsible for fully a 
third of our Nation's economic growth.
    We are seeing just in the last 12 months, an explosion in 
the ``dot com'' world. When you turn on the television and the 
radio you are bombarded with these ``dot com'' ads. America is 
waking up to the power of the Internet. It didn't happen by 
happenstance, it happened in this country because we have the 
right policy and regulatory framework of limited regulation, 
open markets, and competition.
    The challenge as we move ahead is to further create 
conditions for investment in these networks. We are launching 
this country into what I call the broadband Internet age. As 
Americans are waking up to the power of the Internet in their 
lives, they want it to move faster and faster. Everybody I talk 
to that does shopping online or uses the Internet to download 
CDs, they say they love it but it moves too slow. That is going 
to change if we continue tocreate the conditions for more 
investments in these high speed networks, both in wireless and land 
line.
    This year we are going to see a very exciting development 
as the Internet moves out of the personal computer and into the 
wireless world. It is going to be very exciting because it 
means that people will be able to access the Internet over 
small network hand-held devices like Palm Pilots. That is going 
to democratize the Internet. It is going to be accessible to 
more people.
    But there is one limiting factor when you are using 
spectrum to deliver data: you must have adequate spectrum to 
fuel these devices. We have seen just in the last 5 years this 
explosion in data traffic on all of our networks. Data traffic 
is doubling every 100 days on the wire line networks. If you 
take that same rate of growth to the wireless side, we will run 
out of spectrum. What that means is that my agency needs the 
resources to manage this spectrum efficiently or quite frankly 
we are going to run out of spectrum. We are going to have a 
spectrum drought right at the time when millions and millions 
of Americans want to buy these hand-held devices to communicate 
and access the Internet.
    We also must have resources to make sure that there is a 
safety net of universal service so that all Americans have 
access to this wondrous technology.
    The other good news that I have to report to you this 
morning is that much of the uncertainties surrounding the 
implementation of the Telecommunications Act of 1996 has 
settled out. Most of the major jurisdictional challenges have 
been addressed by the courts. We are moving into a period of 
much more certainty. That is good for investment. It is good 
for consumers.
    In conclusion, Mr. Chairman, and members of the Committee, 
I would like to reiterate my pledge to continue to work with 
you to make sure that the agency does its job and continues to 
serve the American consumers, to enhance broadband deployment, 
enhance competition, and increase the productivity of this 
tremendous marketplace. Thank you again for the opportunity to 
appear before you today.
    Mr. Rogers. Thank you, Mr. Chairman.
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    Mr. Rogers. Now, before we get into a discussion of your 
request for next year, we need to--I would like to get a better 
sense of where you are going with some 2000 year funding. 
Because after 5 years of virtually flat funding, in this 
current year, we appropriated a very generous increase for 
fiscal year 2000, an $18 million increase, to be precise. And 
yet I am disappointed to learn that despite that largest 
percentage annual increase since the 1996 Telecom Act, you are 
unable to fund base requirements. You have restricted hiring 
and travel. Why is that?

                                Portals

    Mr. Kennard. Well, as you well know, Mr. Chairman, much of 
those increases went to fund what I call uncontrollable cost 
increases: fixed costs, salaries, rent and IT expenses. When we 
moved to the new Portals building, our rent increased 
approximately $9.6 million. For a small agency like the FCC, 
that is a huge increase. As you know we have had difficulty 
before and after the move to the Portals having a clarified 
situation, if you will, as to how we are going to meet these 
increased moving costs. We have struggled to make do, to try to 
amortize as much of our moving cost as possible and to cut back 
where possible. But it is very difficult, and this agency is 
facing a very, very challenging resource problem.
    I was remiss earlier, Mr. Chairman, in introducing my 
colleague, Andrew Fishel, who is our Managing Director, who I 
believe you know and has appeared before.
    Mr. Rogers. How much were you paying annually for 
headquarters rent before you moved to Portals?
    Mr. Kennard. Before we moved to the Portals, $15.3 million.
    Mr. Rogers. You moved into the Portals last year, and how 
much was GSA seeking from you for rent for fiscal year 1999?
    Mr. Kennard. I believe that GSA billed the FCC $17.9 
million for the total cost of rent, and accepted $15.3 million 
in payment.
    Mr. Rogers. So there is some precedent of withholding rent 
for some of your higher priorities, right?
    Mr. Kennard. Well, the difficulty is that we have never had 
that rent appropriated. And so we have had to rely on the GSA 
to amortize some of our cost increases as a result of the move. 
It has been very challenging because every year now we move 
into a situation of uncertainty, not knowing how to pay our 
rent and having to cut costs elsewhere in order to meet these 
increased rent cost.
    Mr. Rogers. How much do you plan to pay for headquarters 
rent this year?
    Mr. Kennard. In 2000 or 2001?
    Mr. Rogers. 2000.
    Mr. Kennard. The rent would be $24.9 million.
    Mr. Rogers. So you went from $15.3 million in your 
oldbuildings to $24.9 million, almost a $10 million increase.
    Mr. Kennard. Yes, it is a $9.6 million increase over 1999.
    Mr. Rogers. You see, some of us feel--including this 
member--that what you are doing is rewarding fraud. I think 
that there was fraud practiced on the U.S. Government by some 
of its high officials who walked out of here with a sack full 
of money expecting us to pick up the bill. That is the reason 
we have not given you money to pay GSA to reward the fraud that 
took place. That is a burr under my saddle. I am sorry, I can't 
get it out. So there may be a little bit of us going through 
you to punish somebody else. And for that I am sorry. But I 
don't have any other club to hit them with.
    Mr. Kennard. Mr. Chairman, I do feel like a whipping boy 
here because we are an independent agency. As you know we had 
no choice in whether or not we would move to the Portals. We 
were forced to move. I must say that the move has worked out 
for us, and we are enjoying our new headquarters facility. But 
we were very, very reluctant to make that move, as you know, 
because this rent situation was not clarified. We had no 
choice. And I believe that given the responsibilities of this 
independent agency in what is the fastest growing, most 
important sector of our economy, that with due respect, sir, it 
doesn't make sense to punish 2,000 employees at the FCC for 
something they had no responsibility for and no choice in the 
matter. I might add further, Mr. Chairman, that I understand 
that these allegations of fraud were fully investigated by the 
Justice Department and no action was taken.
    Mr. Rogers. Exactly.
    Mr. Kennard. So it seems to me that from our perspective at 
the agency, we had to move on and do the work of the American 
people. We have no choice but to do that. And so I again----
    Mr. Rogers. Let's not get too high on the horse here, 
because in 1997 we found out, after the fact, that you had 
entered a contract with GSA under which GSA fronted you the 
money for the move to Portals 2. And then you asked us for 
appropriations to reimburse GSA to refund you the money which 
we never knew about in the first place. If you want to get into 
that, we will get into it. So the FCC, you, are not completely 
innocent in all of this--not of the original thing but in this 
subsequent agreement--which we found out about after the fact. 
You didn't come to us at the outset and tell us here is what we 
are going to try to do. So this whole business of paying GSA 
this $10 million more per year rent still sticks in our craw.
    Mr. Kennard. Mr. Chairman, if I may, I think that we have a 
disagreement over some of those facts which may not be 
worthwhile going into now. It is sort of old history now. But 
again, the FCC was ordered to make this move under the most 
difficult of circumstances. We had no choice but to make the 
best of a very difficult situation for the agency. And the 
agency is suffering the consequences years after that event. 
And again, I just want to go on the record and say that it is 
important for the mission of this agency, its mission to the 
American consumer that we put this behind us and allow this 
agency to continue to operate.
    Mr. Rogers. Well, the administration could work with GSA 
and with you on getting the rent back down, because of that $18 
million increase we gave you in the current year, more than 
half of that has gone to pay this rent--in GSA's pocket--
something that the administration could work on if they took a 
notion to do that. But instead, your budget request last year 
included $11 million for upgrades in replacement of automated 
systems. And if I am not mistaken, hardly any of that would be 
used for that purpose this year. Is that right?
    Mr. Fishel. We first had to pay the rent, that is correct, 
so the money that we hope to pay----
    Mr. Rogers. Exactly. And so to come in here and blame us or 
ask us to bail you out again just falls on deaf ears, because 
we gave you--and rather than apply that to your automated 
systems upgrades, which you desperately need, and get the 
administration to get GSA to back off on this higher rent falls 
on deaf ears here.
    Mr. Kennard. Mr. Chairman, the FCC is really between a rock 
and a hard place here. We have gone everywhere we possibly can 
to try to improve the situation for the agency. I have met with 
Dave Baron, the head of GSA and pled my case there. We have 
pled our case at OMB. Unfortunately, our pleas are falling on 
deaf ears all over town.
    Mr. Rogers. I tell you what we probably need to do. We 
probably need to hire Jim Sasser and have him approach GSA. He 
may have some influence there. Obviously he does. Have you 
thought about that?
    Mr. Kennard. No, I haven't, Mr. Chairman.
    Mr. Rogers. Good. Well, who made the decision that paying 
$10 million more in rent to GSA, a 63 percent increase over the 
previous year, is a more important use of appropriated funds 
than these base automation improvements that are desperately 
needed?
    Mr. Kennard. Rent is a fixed cost, Mr. Chairman. The GSA 
has the ability to take that money out of our operating 
accounts to pay it. We don't have the discretion in the matter. 
It is sort of like your car payment or your rent payment. It 
has got to be made. We don't have discretion.
    Mr. Rogers. How much was the cost of the move into Portals?
    Mr. Kennard. I will ask Mr. Fishel to give you the exact 
figure.
    Mr. Fishel. Quite frankly, the agency doesn't have the 
exact figures. As you are aware, the GSA paid for the move and 
did not give us a final accounting of how much it cost the 
government.
    Mr. Rogers. But they are expecting you to pay them for 
that, aren't they?
    Mr. Fishel. We are paying the portion that they paid the 
building owner to make improvements in the building. The 
building was built for the FCC. It had no walls, no lights in 
the ceiling, no wiring for cables, no wiring for telephones. 
All of that the FCC was required to pay to build out and we are 
being asked to pay GSA for those costs.
    Mr. Rogers. No one knows how much that is?
    Mr. Fishel. We are being billed by GSA $3.3 million a year.
    Mr. Rogers. For how long?
    Mr. Fishel. 18 years.
    Mr. Rogers. That is for fitting the building for your 
purposes?
    Mr. Fishel. Yes, it is.
    Mr. Rogers. How about the actual cost of moving into the 
building?
    Mr. Fishel. GSA paid for that.
    Mr. Rogers. How much was that?
    Mr. Fishel. I don't have an amount for that.
    Mr. Rogers. Do we know how much that is?
    Mr. Fishel. We never got a cost accounting from GSA on 
their costs.
    Mr. Rogers. You have got to pay them, reimburse them for 
those costs?
    Mr. Fishel. We are no longer being asked to reimburse them 
for that.
    Mr. Rogers. Do you know how much it is or was?
    Mr. Fishel. I believe it was about--they are paying about 
$6 million a year for that.
    Mr. Rogers. Who is?
    Mr. Fishel. GSA.
    Mr. Rogers. Is paying whom?
    Mr. Fishel. They are paying themselves, basically. They are 
asking Congress in their own appropriation process for that 
money.
    Mr. Rogers. $6 million a year for how long?
    Mr. Fishel. I am not certain. I think it is 9 years.
    Mr. Rogers. The smell is so putrid. Well, so the GSA's 
costs of fitting the building for your purposes are being 
billed to you on an annual basis for 10 years?
    Mr. Fishel. 18 years.
    Mr. Rogers. How much is that per year?
    Mr. Fishel. $3.3 million.
    Mr. Rogers. Normally, who would pay that cost? Would that 
be the lessee or the lessor?
    Mr. Fishel. It always would be the tenant making the 
improvements if you are building a shell. The government 
practice is always the agency pays those costs.
    Mr. Rogers. What agency?
    Mr. Fishel. Whatever agency is moving into the building.
    Mr. Rogers. The lessee. So normally, this $3 million-plus 
per year for 18 years, that figure normally would have been put 
up by the FCC under these conditions to fix the building, 
right?
    Mr. Fishel. Yes, that is right.
    Mr. Rogers. But how come GSA said no, we will do that?
    Mr. Fishel. GSA ordered us to move into the building 
knowing that we had no appropriations to pay for it.
    Mr. Rogers. So they, in essence, fronted you the money?
    Mr. Fishel. That is correct.
    Mr. Rogers. And you are paying them back over 18 years?
    Mr. Fishel. That is correct.
    Mr. Rogers. So of your annual budget, $3.3 million is being 
used to reward the fraud, my version of fraud, that took place 
in the procurement of this lease?
    Mr. Fishel. The agency was ordered to move, Mr. Chairman. 
Whether or not there was telephone lines, cable lines for us to 
do business, we were ordered to move and the GSA was prepared 
to make use of its authority that it has under statute to do 
so. The agency needed to make certain that it could continue to 
operate its program.
    Mr. Rogers. We will come back.
    Mr. Serrano.
    Mr. Serrano. I just want to clarify that for a second. The 
agency was ordered to move. So if something went wrong, it is 
somewhere else, not with this agency?
    Mr. Kennard. That is correct. In fact, Congressman Serrano, 
we would have preferred to have had more control over the 
process. It was very frustrating to make a move of this 
magnitude and not have the ability to control the costs of the 
move, to know what the total costs of the move were. But this 
was beyond our control.
    Mr. Rogers. If you will yield on that point briefly, the 
original deal was when Reed Hunt was chairman of the FCC, 
right?
    Mr. Kennard. That is when the lease was signed, yes.
    Mr. Rogers. That is when all of this started. At the time 
you were not absent from the FCC, you were the general counsel, 
were you not?
    Mr. Kennard. I was general counsel at that time. For the 
record, Mr. Chairman, as general counsel, I sent a letter to 
GSA objecting to the signing of that lease at that time on the 
grounds that it was uncertain how our rent was going to be 
paid. And so I am on record in writing at that time as is the 
agency--in objecting to how this lease was entered into from 
the agency's perspective, not based on the purported fraud as 
you term it. But you should understand that the FCC had no 
choice in the matter. We had no choice in the matter.
    Mr. Rogers. Well, you had the current membership that 
didn't have a choice in the matter, but the FCC at the outset, 
under Chairman Hunt, was a participant in the deal.
    Mr. Kennard. No. I would take issue with that, Mr. 
Chairman. Because when I was general counsel acting under the 
direction of Chairman Hunt, Chairman Hunt had similar concerns 
about the GSA leasing arrangements for the FCC. In fact, there 
was a lawsuit about this which went on for quite some time, the 
FCC objecting to our arrangements for this lease.

                         Low Power FM Stations

    Mr. Serrano. Thank you, Mr. Chairman. Mr. Chairman, I want 
you to bring us up to date on this whole issue of low power FM 
stations. There is a certain excitement about the possibility 
of local folks and organizations being able to get on the air 
waves, but then there are questions. There is opposition, the 
NPR questions what we are going to do with their equipment for 
reading services for the blind. There is the issue of what 
happens in areas like New York with so many signals. Just kind 
of bring us up to date on where you see problems. But first, I 
hope that you don't get upset at me, but I am just thinking I 
will take the prerogative of the ranking member: How is Robert 
James Kennedy Kennard doing?
    Mr. Kennard. He is doing fine. My wife and I adopted him 
over the weekend and he is probably doing better than his sleep 
deprived parents at this point. Thank you for asking.
    Mr. Serrano. That is great. Good luck and I hope that you 
just enjoy him on a daily basis.
    Mr. Kennard. Thank you.
    Mr. Serrano. Now, let's get him a low power FM station.
    Mr. Kennard. Sure. About 2 years ago the FCC began the 
process of developing a record to determine whether we could 
have a low power FM service for the country. This was in 
response to a lot of concern around the country that in an 
increasingly consolidated market, small players were being shut 
out of access to the air waves. Community groups and schools 
and universities, nonprofit organizations wanted to access the 
air waves to speak to their communities. So after a very 
extensive process of developing a record we determined, based 
on the work of our expert engineering staff, that low power FM 
can coexist in harmony with the incumbent broadcast service.
    So in January of this year, we authorized the service. We 
authorized two classes of low power FM stations, 100 watt 
stations and 10 watt stations, small stations, but big enoughto 
serve neighborhoods or small communities so that you can give voices to 
people who want to access the air waves like the non-English speaking 
community. The Creole speaking Haitian community in south Florida is 
very interested in this. The farm working community in California, 
schools and universities all over the country who have broadcast 
journalism programs but no radio station are very interested in it. We 
have never had more interest and excitement about a new radio service 
in the history of the Commission.
    Thanks to the Internet, we get tens of thousands of e-mail 
inquiries about low power FM. So it has generated a lot of 
excitement. As you mentioned it has also generated controversy 
because the incumbent broadcasters are concerned about harmful 
interference. Our record demonstrates there will not be harmful 
interference from low power FM. We know a lot about the way FM 
signals propagate in the marketplace. We have 10 years of 
experience with FM signals. Based on that experience, we have 
determined there will not be interference.
    Mr. Serrano. I guess it works differently in different 
places. In a rural community with open spaces 100 watts can go 
a long way.
    Mr. Kennard. If their terrain is flat, yes.
    Mr. Serrano. How far would it cover in Mr. Wamp's district, 
for instance? He will get better sound than I do.
    Mr. Kennard. A 100 watt station, assuming flat terrain 
would probably be--approximately, I am not an engineer, so 
don't hold me to this--probably about 4 or 5 miles maximum.
    Mr. Serrano. In a city, in a tight building-filled area 
like mine?
    Mr. Kennard. Well, it really depends on the terrain. In a 
more mountainous area it is going to propagate not as far. In 
the more urban areas there is less space on the air waves to 
accommodate new stations. So we would probably anticipate more 
in the rural areas and fewer in the cities.
    Mr. Serrano. When is this program supposed to get going?
    Mr. Kennard. The FCC adopted rules for inaugurating the 
service in January. On Monday of this week we held a lottery to 
determine which states would be first to receive low power FM 
stations. We are rolling it out slowly. We are not opening a 
window of filing for the entire Nation for 2 reasons: One, so 
that people can get more comfortable with the concept and also 
the nonprofit groups applying for these stations--they will be 
noncommercial stations--will have the opportunity to anticipate 
when the window opens in their State and get ready for it.
    Mr. Serrano. One last question. Who cannot run one of these 
stations? We know who can, but who cannot?
    Mr. Kennard. It is a noncommercial service. So the 
application requirements state that you have to be a local 
nonprofit organization rooted in the community. We also have 
decided that anyone who has been a broadcast pirate, who has 
flaunted our rules in the past by broadcasting illegally won't 
be able to apply. We are really reserving this for community-
based organizations and schools----
    Mr. Serrano. And churches?
    Mr. Kennard. Yes.
    Mr. Serrano. Could local political organization? Could we 
have WDEM or anything like that? Or WREP?
    Mr. Kennard. It would have to be a noncommercial entity.

                             Next Wave Ads

    Mr. Serrano. One other issue. I think you have seen the ads 
that we have been kind of bombarded with about Next Wave and 
the truth in this. This I believe was an issue of pulling 
somebody's license or agreement. Could you just give us a quick 
understanding of why we are being bombarded by these ads?
    Mr. Kennard. Certainly. The company that placed these ads 
is a company named Next Wave that participated in FCC auctions 
for personal communication service licenses a couple of years 
ago. To make a long story short, we had auctions for the 
spectrum. They were offered installment payments to create 
incentives for smaller businesses to participate in the 
auction. This company bid too much. They went into bankruptcy.
    The FCC has been clear from the outset that if a company 
bids and is unable to fulfill its financial obligations to the 
government, the FCC will take the license back. That is exactly 
what we did. This company at the 11th hour after they had lost 
an important bankruptcy appeal in the second circuit came to 
the Commission and offered to pay this $4.3 billion which is 
what they owe us. The offer came too late in the game.
    As a matter of policy, the FCC has been on record as saying 
that if you can't pay, the license is reauctioned for the 
benefit of the American people. We are still in litigation with 
that company. It is my position what we should do is reauction 
that spectrum, get it out of the bankruptcy court, reauction 
it. It is likely to be very valuable, far in excess to the $4.3 
billion, and any excess money should belong to the U.S. 
Treasury.
    Mr. Serrano. How many outlets did this speak to?
    Mr. Kennard. How many licenses?
    Mr. Serrano. Right.
    Mr. Kennard. I don't know the exact number. They were the 
largest bidder in the C block options and have licenses all 
around the country. I would have to supply you with the exact 
number of licenses.
    Mr. Serrano. So as far as you are concerned, this issue is 
over?
    Mr. Kennard. As far as I am concerned, yes. We are awaiting 
the outcome of an appeal in the 7th Circuit in order to go 
ahead with the reauction process. We have already scheduled a 
reauction for July 26. We are hopeful that the courts will 
vindicate our rights to go ahead and reauction the spectrum and 
get it working for the American people as quickly as we can.
    Mr. Serrano. Thank you, Mr. Chairman. I don't want to take 
any more time because I see Mr. Wamp----
    Mr. Wamp. Sitting on the edge of my chair. Thank you, Mr. 
Chairman. I have another hearing where we have the director of 
the Forest Service, but I want to submit some questions for the 
record and not take time today on the issue of partner owners 
being required to provide telecommunications service, whether 
or not that constitutes a taking issue. I will submit those 
questions for the record.

                              Cable Rates

    I may also have some questions on the low power issue 
depending on how much we talk about that today and what 
information is provided for the record on the low power issue. 
The only question I have verbally today, Mr. Chairman, after I 
welcome you as well, is following the Act of 1996, I just 
assumed that my cable rates were going to go down and they 
haven't. As a matter of fact, they continue every year to go 
up. And people back home complain about this.
    And, frankly, I don't have any movie channels in my
house, but I have kids that love basketball and we have sports 
channels. My rates just keep going up. I wonder what the 
national experience is with respect to cable and competition 
setting in, slowly but surely, and at what point we can expect 
cable rates to go down, and should they actually be raising 
above inflation which I think is the experience in my part of 
the world?
    Mr. Kennard. Congressman, cable rates are too high. I hear 
from many Americans who, like your constituents, are concerned 
about these rising cable rates. In 1996, in the 
Telecommunications Act, Congress took away the FCC's authority 
to regulate these rates, for the most part, and opted for 
competition to constrain these rates. We are hopeful that with 
the passage in the last Congress of the changes in the law that 
allow satellite companies to access local broadcast signals, 
those companies like Echo Star and Direct TV will be more 
formidable competitors to cable television. We see they are 
continuing to take more market share.
    About two out of every three new multi-channel video 
subscribers is now going to satellite. It is a fairly effective 
product. But the fact remains that cable rates are not going in 
the right direction. I can't tell you when people will stop 
complaining about them and see them as reasonable. But we do 
know that given the tools that we have today, which does not 
include rate regulation, the only thing that we can do is 
aggressively promote more competition to cable television.
    Mr. Wamp. The point in question, and then I will close, is 
are cable companies gouging customers right now given their 
share of the market share and the profits in that particular 
industry? That is the complaint that I have.
    Mr. Kennard. I expect that some are and some aren't. We do 
an annual report to Congress on the status of competition in 
this marketplace, and clearly programming costs are going up. 
The cable industry asserts that consumers of cable television 
services are getting more product for their money, more 
channels. The problem is that many people don't necessarily 
want those channels, they still have to pay for them. The only 
long-term solution to this is more competition as quickly as we 
can.
    Mr. Wamp. Amen. Thank you.

                           H.R. 3439 and LPFM

    Mr. Rogers. Back briefly to low power radio. As you, I am 
sure, know, I cosponsored H.R. 3439 to block you from 
authorizing new low power FM radio. There are some real 
concerns that the FCC rules were rushed through without 
adequate consideration of the potential impacts on existing 
broadcasters. Why was the--what explains that brief approval 
period compared to other FCC actions such as low power TV, 
digital TV?
    Mr. Kennard. I guess I would take issue with the premise of 
your question. This docket was not rushed through. It was a 2-
year process. We developed an extensive record. In fact, the 
National Association of Broadcasters, which is the main 
opponent of low power FM, asked for and was granted 4 
extensions of time in that proceeding for a total of 10 months 
extension. That was so that we could develop an ample record 
and so that we would be able to demonstrate that we had ample 
technical data in the proceeding, which we do. In fact, Mr. 
Chairman, no radio service has been authorized, based on a more 
extensive record than low power FM. It is ironic because we 
know a lot about the FM service. This is not rocket science, 
this is not new and experimental types of uses of the spectrum. 
This is FM broadcasting. We have lived with it 50 years and we 
now how it propagates in all sorts of different circumstances 
and terrain. Indeed we can look at the marketplace and point to 
stations that have the same interference protections as low 
power FM; grandfather short space FM stations, for example, 
class D FM station; we don't get any interference complaints 
about those to speak of.
    Mr. Rogers. In the past, didn't the FCC eliminate class D 
radio licenses because it determined that those low power 
stations were an inefficient use of spectrum?
    Mr. Kennard. Yes, but not to interference concerns. That 
was because the Commission, at that time, wanted to go with 
more wide area licensing. The net effect of that has been that 
smaller companies and smaller groups, churches, universities 
and schools, have not had as much access to the air waves. So 
low power FM is the means to address their needs to serve their 
communities.
    Mr. Rogers. Well, but weren't class D radio licenses 
eliminated in the past?
    Mr. Kennard. Yes, for the reason I stated, to go to more 
wide area licensing.
    Mr. Rogers. In other words, to use that same spectrum for 
wider higher power stations?
    Mr. Kennard. Yes, but the FM band has matured significantly 
since that time. We have many more FM stations, many more high 
powered stations. The need for those wide area stations has 
basically been met. The unmet needs today are the needs of 
smaller enterprises, particularly churches and schools and 
community groups, to get access to the air waves to serve their 
smaller communities.
    Mr. Rogers. Tell us a bit about the schedule on which you 
plan to proceed with low power.
    Mr. Kennard. On Monday we announced that we will be 
licensing low power FM stations in 5 groups. Basically what we 
did is divide the country into 5 different groups based on 
States, and we will be opening the first window for filing low 
power FM applications in late May. That will be the first group 
of states. Then the other 4 will roll out over time and so that 
the last window of filing would be in November-December of 
2001, if memory serves.
    Mr. Rogers. Can you tell us the States that will lead off?
    Mr. Kennard. I would have to----
    Mr. Serrano. Kentucky, New York----
    Mr. Rogers. I'm sorry.
    Mr. Kennard. To be clear on that, the States were selected 
at random. We had a lottery and we selected them at random. I 
don't have the list of States, but we can certainly provide 
that to you.
    I do have the list of states. The lottery determined that 
the group number one would include Alaska, California, the 
District of Columbia, Georgia, Indiana, Louisiana, Maine, the 
Mariana Islands, Maryland, Oklahoma, Rhode Island, and Utah. 
Would you like me to read the other groups?
    Mr. Rogers. Just file it for the record, if you would.
    Mr. Kennard. Okay, certainly.
    [The information follows:]
            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

                       Licensing of LPFM stations

    Mr. Rogers. Now, in those first states, those are the ones 
that you will accept applications for first, right?
    Mr. Kennard. That is correct.
    Mr. Rogers. What is the timetable for that?
    Mr. Kennard. Again, that filing window would open 
approximately late May.
    Mr. Rogers. Those licenses would be acted upon by what 
date?
    Mr. Kennard. I anticipate that the first licenses in that 
group would be issued probably in the fall, September-October 
time frame, assuming things go smoothly. The benefit of that is 
that we wouldn't be flooding the marketplace with licenses 
throughout the country all at once. People will be able to get 
comfortable with this service. I am confident that once these 
low power FM stations begin turning on around the country, 
people will realize that they are not going to cause harmful 
interference and they can coexist peacefully with incumbent 
stations.
    Mr. Rogers. How many stations did you perceive this first 
group would include?
    Mr. Kennard. It is hard for me to answer that question 
because we don't know how many applicants there will be and 
what the spectrum opportunities will be. We will have to look 
at a computer database and figure out how many new stations can 
be accommodated. I can have my engineers runthese numbers for 
you and submit them if you would like.
    Mr. Rogers. Do I understand you correctly that--let's say 
Alaska is one of those states, let's say that you have 
applications for two or three or four from Anchorage, you would 
determine that the frequency that an applicant is seeking on 
low power would have no interference possibilities with 
existing incumbent stations in Anchorage?
    Mr. Kennard. That is correct.
    Mr. Rogers. Then why are these incumbent stations so upset?
    Mr. Kennard. Well, Mr. Chairman, it is quite predictable. I 
have been a communications lawyer or policy maker for almost 20 
years now, and I have seen a lot of battles waged about the use 
of spectrum. Almost invariably, when you introduce a new 
service, the incumbents try to fight it. We saw this with low 
power television. We have a low power television service in 
this country which was inaugurated in the late '70s, early 
'80s. There the incumbent commercial interest fought it tooth 
and nail. That service was authorized. We have low power 
television stations around the country. Last year Congress 
reaffirmed the value of those stations by passing an act to 
give them primary status in the marketplace, interference 
protection in the marketplace.
    Those stations today are wonderful little microcosms of 
diverse programming. They cover high school baseball games and 
local news and things that a lot of the bigger stations don't. 
A lot of the interference concerns were raised then are looked 
back 20 years later and people say they were scare tactics. We 
are having the same misinformation and scare tactics swirling 
around low power FM. I have seen some of these--this propoganda 
that is being circulated around here to kill low power FM. It 
is wrong. It belies the basic engineering facts of this 
service. I would be happy to meet with you and give you as much 
information and data as you would like about the service. I 
believe that I could convince you that low power FM is not 
going to cause harmful interference, and indeed would be good 
for the country.
    Mr. Rogers. Have you thought about a less offensive 
beginning of this service? In other words, to start it on a 
much slower scale to give it time to be evaluated before we go 
the whole route?
    Mr. Kennard. I think by opening these filing windows over 
time, we are taking a phased-in approach. Certainly if these 
stations create harmful interference, which they won't, we are 
certain they won't, we wouldn't have authorized this service. 
But if they do, we will act to take action, just like we do 
with full power stations. If there are interference complaints 
filed, we take action. But we have engineered the service so 
that each station, if it operates within its licensed 
parameters, will not cause harmful interference.
    Mr. Rogers. I would encourage you to start this process on 
a small scale for two or three reasons; one, to allay any fears 
that incumbent stations might have which they can see--if you 
did this on a small scale, we could all watch; they could all 
watch and see there is, in fact, no harm being done. And, in 
fact, some good is being done. That would be a nice test bed 
that you could then convince others to back off. And two, it 
would decrease the work load on the FCC. This is going to be a 
fairly good workload you have taken on, isn't it?
    Mr. Kennard. We have designed the application process so it 
is very streamlined and user friendly from both the applicant 
standpoint and the FCC standpoint. I don't anticipate a huge 
resource strain. But on your first point, I could show you 
stations around the country that will have comparable 
interference protection to low power FM stations. We have 400 
what we call ``grandfathered short space stations,'' which are 
not causing interference protection. They have been on the air 
since the mid 1960s, the same interference criteria as low 
power FM and they have caused a problem in the marketplace.
    So given all we know and the extensive record we have 
developed and what we know in the marketplace, it seems it 
would be wrong to deny the tens of thousands of people around 
the country who have--who are excited about this service and 
want to roll it out for interference concerns that frankly, Mr. 
Chairman, just are not realistic.
    Mr. Rogers. Well, normally this kind of a sweeping change 
is something that would be initiated either in the executive 
branch and reacted to by Congress or initiated in the Congress. 
But here we see the FCC, an independent agency, proposing and 
acting without congressional approval. In fact, in the face of 
congressional intent, willy-nilly forthwith, hurly burly going 
out there and going all of the way with stiff opposition in the 
Congress. I think that is at least a bit different from the 
norm.
    Mr. Kennard. May I respond to that, Mr. Chairman?
    Mr. Rogers. Please.
    Mr. Kennard. The Communications Act which is, of course, 
our organizing statute delegates expressly to the Commission 
the responsibility for managing the spectrum. It is our legal 
obligation to manage the spectrum in a way that promotes its 
most efficient use, which means finding ways for more people to 
use it consistent with interference concerns. If you look at 
the myriad of services that use the spectrum, from paging, to 
cellular telephone, to PCS, to satellite services, most of them 
are authorized by the FCC and historically has been, because 
the FCC is the expert agency that has been given this mandate 
to manage the spectrum efficiently and finding the uses for it. 
It is actually rare that Congress or the executive branch would 
actually authorize a new spectrum use. That is why we have an 
FCC, to manage the spectrum. This is not an unusual action by 
this agency.
    Mr. Rogers. We will see. I have a few more questions but I 
feel compelled to yield for a moment.
    Mr. Serrano. Sure. Hardly ever do I disagree with a 
chairman during hearings.
    Mr. Rogers. And you shan't today, right?
    Mr. Serrano. I will, but I will wait until you are gone. I 
really understand what you are saying, that this is all part 
of--you keep referring to the incumbents. Why would the 
incumbents complain? We do as incumbents. I think I should be 
in office forever, no one should ever run against me, but that 
is the way it is. So I can see where people just in a knee jerk 
reaction object right away to any change, anything different. 
Plus I can tell you that one of the areas that I pay a lot of 
attention to is the Spanish-speaking market. Those guys and 
ladies leave a lot to be desired in fairness in programming. 
That is another hearing someday. Sure they are going to 
complain, because the thought that someone local could actually 
have a talk show that doesn't have an agenda other than to let 
everybody talk or to bring in guests or music or whatever from 
parts that they don't want to have onthe air, because they 
control it now, this is a whole new thing. That is why I am excited 
about it because of the possibility. I will take my chances that David 
Duke will have his show. That is the country that we live in.

                             Merger Reviews

    Very quickly, one question here. As you know, both the 
House and Senate have legislation pending that would limit the 
time that the FCC reviews applications for transferring these 
applications. I understand that in response to these bills the 
Commission has pledged to complete all such reviews within 6 
months, and I applaud your efforts to conform the Commission's 
process. However, in light of this pledge, some folks are 
perplexed about the amount of time that it is taking the 
Commission to complete action on the AT&T-Media One 
transaction, given the fact that the issues that came up within 
the context of this merger of telephone service on cable, and 
Internet over cable, was addressed by the commissioner in 
previous proceedings. So our question is what is the problem, 
why is it taking so long, and how do we answer all of the folks 
that are asking questions about this?
    Mr. Kennard. It is certainly a major transaction that has a 
lot of complexity. We are in the process of developing a record 
there. We have had to go back to the company and get some 
additional information which we had to put out to public 
comment. That has extended the period of deliberation. But we 
are, I will say, in the final stages of considering that 
particular case. We believe that it is very important for the 
FCC to have procedures in place to move these transactions 
along quickly.
    But part of this is also training the industry because when 
the industry oftentimes will file an application, it is 
incomplete. We have to go back to them, they have to file more 
documents, we have to put those documents out for public 
comment. I am confident that as we get more experience with 
these major transactions then things will move more smoothly. 
That is what is happening with the Media One transaction.
    Mr. Serrano. I am going to go vote now and I will be back. 
In the meantime, I will consider whether I will ask you a 
Howard Stern question or not.
    Mr. Rogers. To follow up briefly on the merger, the 
question that Mr. Serrano dealt with somewhat, there has been a 
lot of attention given lately to the FCC's role in merger 
review. Legislation has been introduced in the House, at least, 
that would limit that role. I understand that you are 
undertaking your own independent review to improve your process 
and complete all merger reviews within the 6-month time frame; 
is that right?
    Mr. Kennard. That is correct, Mr. Chairman.
    Mr. Rogers. I assume a goal of that would be to streamline 
your efforts to make a merger review less labor intensive, 
right?
    Mr. Kennard. That is correct.
    Mr. Rogers. Tell us how many staff are currently allocated 
to merger reviews?
    Mr. Kennard. That is difficult for me to answer off the top 
of my head. We don't have a one merger review staff. The 
mergers are handled by various bureaus that have substantive 
responsibility for the industry. Their secretary is proposing 
the merger. So, for example, a merger of two wireless companies 
would go to the wireless bureau. A merger of two telephone 
companies would go to our telecommunications bureau, et cetera. 
So that information would be--I suppose I could pull it 
together for you if you would like, but it is difficult for me 
to answer off the top of my head.
    Mr. Rogers. I am trying to get some idea of the savings 
that could be achieved if you are successful in streamlining 
your efforts. At the end, what is the bottom line?
    Mr. Kennard. Well, the bottom line is more predictability 
in the way that mergers are handled by the FCC. To put this in 
context, after the 1996 Act, companies were allowed to enter 
into combinations that were not permitted by law before that 
Act. And so the FCC was flooded with these transactions. This 
industry is literally restructuring before our eyes, every 
sector of it. We are seeing combinations that were never 
possible before. A long distance company acquiring a cable 
television company, for example. So that has put a tremendous 
strain on the FCC, but we are working our way through it.
    Mr. Rogers. Well, as you know, this subcommittee funds the 
Justice Department as well as the Federal Trade Commission, 
both of which obviously are engaged in merger reviews. In fact, 
that is most of what the FTC does anymore, it seems, as well as 
the Antitrust Section in Justice, with hundreds of people 
involved. Why do we need the FCC as well, a third agency, 
looking at merger possibilities?
    Mr. Kennard. Well, the simple answer, and then I will be 
happy to elaborate, is that the agencies have different 
statutory mandates. The FCC is charged with determining whether 
a proposed transaction serves the public interest and is 
consistent with the goals of the Communications Act. That is a 
fundamentally different type of review than is undertaken by 
the Justice Department or FTC which are charged with enforcing 
the anti-trust laws. It is a different burden of proof. It is a 
different standard. I don't want to suggest that they are 
completely unrelated because they do overlap in some ways, but 
it is fundamentally a different statutory mandate. Given what 
is happening in the marketplace today, Mr. Chairman, where you 
have consolidation of unprecedented size and scope, now is the 
time to reaffirm the FCC's fundamental authority to protect the 
public and make sure that no transaction goes through unless it 
serves the public interest. Now is not the time for the FCC to 
just be rubber stamping mergers. This is an extraordinary time 
and we have got to protect the public against undue 
consolidation. That is what we have been doing.

                             Free Air Time

    Mr. Rogers. Final topic, free air time. Last year I urged 
you not to pursue Commission action--any Commission action--on 
free air time for political candidates absent any legislation 
from Congress. There has been no legislation from Congress and 
yet you proceeded regardless. Tell us what actions have been 
taken.
    Mr. Kennard. Well, under the 1996 Act, the Congress 
reaffirmed the public interest obligations of television 
broadcasters in the digital age. And as a result of that Act, 
the FCC commenced a proceeding or what we call a notice of 
inquiry to broadly examine the public interest's 
responsibilities of broadcasters. This included not only issues 
involving the political process, but also access of Americans 
with disabilities to television, for example, how to deal with 
emergency situations, public safety situations. We believe that 
this inquiry is completely consistent with our statutory 
mandate and we have developed, or are in the process of 
developing a record which I believe will be very informative to 
the Congress on these issues.
    Mr. Rogers. Well, the Congress, as you know, hasrepeatedly 
debated various proposals to grant candidates free air time. We have 
always refused to adopt that requirement. And one of the big questions 
is who would be responsible paying for the free air time that is 
mandated. The first thought would be, well, broadcasters would through 
lost advertising revenue. But we all know that they have to have a 
bottom line, so they would pass that cost on, assumedly, to other 
advertisers. And it very well could be the very candidates for public 
office buying ads on this station which was required by you to give 
them free air time.
    So it is, in essence, a tax on somebody without the 
Congress having acted on it. How can you justify that?
    Mr. Kennard. Well, first of all, please understand, Mr. 
Chairman, that the FCC has not proposed any rules on free air 
time. We have responded, however, to the scores and scores of 
members of Congress, to the President of the United States, the 
Vice President of the United States, that would have asked the 
agency to develop information on this topic to answer precisely 
some of the questions that you raise. That will be for the 
benefit of this debate and certainly for the benefit of the 
Congress.
    Mr. Rogers. How do you intend to proceed, if at all, once 
this incumbent period is over?
    Mr. Kennard. We are going to look at the record and make 
some determinations from there.
    Mr. Rogers. And would you go forward with a rule absent 
action from the Congress?
    Mr. Kennard. Well, as you know, as I have told you 
personally many times, we would be consulting with you and 
other key members of Congress before taking action. But Mr. 
Chairman, millions of Americans, as you know, are very 
concerned about this issue. Many people, not only political 
leaders and members of Congress, but many Americans have asked 
the FCC to look into these questions. It is our obligation to 
develop a record, particularly in the wake of provisions in the 
Telecommunications Act, that reaffirm the public interest 
obligations of broadcasters in the digital age.
    Mr. Rogers. So you maintain that you do have the legal 
authority to proceed, to put a program in place for free air 
time?
    Mr. Kennard. Yes. As you know, I believe, and I believed 
for many years now, that the FCC has that authority. But again, 
I respect the role of Congress in this area. We will certainly 
be consulting intensely with you and other members of Congress 
before we move forward. But I do believe that it is important 
for the FCC to serve as a constructive voice in this debate and 
provide you and other members a record that will be beneficial.
    Mr. Rogers. We do, as you know, have our own sources of 
information that we have been very happy with in the past. So I 
appreciate the offer, but no thanks.
    Mr. Kennard. Understood.
    Mr. Rogers. Now, you claim there is a great groundswell of 
support for free airtime for candidates. I have yet to receive 
the first letter, to my knowledge, asking me to go forward and 
try to get free air time for these candidates. I would suspect 
that there is more of a sentiment to deny candidates any time. 
I think people are sick of candidates on television, but I 
don't perceive that there is any groundswell of support for 
free air time for candidates. As I said, I don't recollect any 
single person ever mentioning it to me or writing me a letter 
to that effect. I guess they are writing you and not me, and 
that is fine.
    Mr. Kennard. I would love to share some of my e-mail 
messages with you on this topic, Mr. Chairman.
    Mr. Rogers. Who seeks time? Mr. Latham, are you ready?

                                 CALEA

    Mr. Latham. Thank you, Mr. Chairman. Regulations require 
all carriers to be compliant with the Communications Assistance 
for Law Enforcement Act of 1994 by June 30 of this year. 
However, the network suppliers have not even made available 
software for the industry. And suppliers are--according to 
2000, the date that the upgrades are supposed to be completed 
as a release date for the standard software. Are you going to 
give an extension to carriers in order to facility compliance 
with the statute. I have got, 154 small telephone companies in 
the state of Iowa and $10,000 a day fines is just going to be 
too much to handle.
    Mr. Kennard. Certainly. I really couldn't answer for you 
today whether we would be granting extensions. We would have to 
look at those on a case-by-case basis and determine what the 
specific request is. I will say that it is very important that 
we go ahead and implement CALEA. As you know, Congressman, it 
has been, in my view, far too many years that we have not had 
the statute implemented. It is important for law enforcement. I 
will certainly be sympathetic to the needs of small companies, 
but I would have to see their specific questions.
    Mr. Latham. But the software is not available until the 
date--doesn't that make sense that maybe there would be some 
blanket extension? For each one of these 154 small phone 
companies to have a request--these are small tiny little phone 
companies.
    Mr. Kennard. As someone who reviews these extension 
requests all the time, you really have to look at them 
carefully. We will have to independently determine whether, in 
fact, there is software available or not. That would have to be 
based on the factual record before us. We have granted 
extensions before on CALEA. And in some cases, the Commission 
has been criticized for being too easy, that the statute has 
not been implemented as quickly as it should be. So we will 
have to be diligent in that regard.
    Mr. Latham. You realize that companies are between a rock 
and a hard spot without the software available until the day 
says they have to be compliant.
    Mr. Kennard. I understand your point. But what I am trying 
to convey is if anyone comes before me and has a compelling 
reason for an extension, then certainly it would be warranted. 
But I can't just, as a general proposition, say that we will 
grant them all or not any. We would have to look at the record.
    Mr. Latham. Okay.
    Mr. Rogers. Mr. Serrano.
    Mr. Serrano. I have no questions.
    Mr. Rogers. I have no further questions.
    Mr. Latham. I think you have covered everything based on my 
other questions. So I will submit some things for the record.
    Mr. Serrano. The chairman still did not tell us when 
Kentucky and New York, what group of stations----
    Mr. Kennard. I think I can tell you----
    Mr. Serrano. That is all right.
    Mr. Kennard. Here it is. Let's see.
    Mr. Serrano. And the other question, is there any limit to 
how many applications? Did we ask that?
    Mr. Kennard. Yes. We are limiting an applicant to one 
application in the community. The goal here is to----
    Mr. Serrano. How many applicants? Are we limiting the 
number of applicants?
    Mr. Kennard. No. As many as we have opportunities for them. 
New York is in group 3. So we anticipate a filing window for 
New York opening in approximately November of 2000. Please, 
let's not forget Kentucky. The filing window for Kentucky is 
group 5, which would be the last group. We anticipate a filing 
window for Kentucky to open in approximately May of 2001. That 
would be the last window.
    Mr. Rogers. Mr. Chairman, thank you for your time this 
morning. We appreciate you and your staff for being here with 
us to answer questions. You take some punches now and then and 
you always do that with good grace.
    Mr. Kennard. I appreciate that very much.
    Mr. Rogers. Mr. Serrano, Mr. Latham, and me, and the whole 
subcommittee is congratulatory to you on the adoption of your 
son, and we wish you----
    Mr. Serrano. Robert James Kennedy?
    Mr. Kennard. That is right.
    Mr. Rogers [continuing]. And we wish you and your wife and 
your son all of the happiness in the world----
    Mr. Kennard. Thank you very much. I appreciate that.
    Mr. Rogers [continuing]. And good health.
    Mr. Kennard. Thank you very much.
    Mr. Rogers. Thank you very much.
    [Questions submitted for the record follow:]
            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 



                           W I T N E S S E S

                              ----------                              
Alvarez, Aida....................................................   131
Bosley, D. E.....................................................     1
Broomfield, R. C.................................................    43
Dennis, Darryl...................................................   131
Donnelly, Tony...................................................     1
Duff, J. C.......................................................     1
Erlenborn, J. N..................................................    69
Fishel, Andrew...................................................   211
Hantman, A. M....................................................    15
Heyburn, J. G., II...............................................    43
Kennard, W. E....................................................   211
Kulik, Berky.....................................................   131
Levitt, Arthur...................................................   169
Marcy, Kristine..................................................   131
McConnell, James.................................................   169
McKay, John......................................................    69
Mecham, L. R.....................................................    43
Miller, James....................................................    15
Pregnall, Stuart.................................................    15
Smith, F. M......................................................    43
Souter, Justice D. H.............................................     1
Suter, Bill......................................................     1
Tansey, Charles..................................................   131
Thomas, Justice Clarence.........................................     1
Turnbull, M. G...................................................    15
Walter, Greg.....................................................   131


                               I N D E X

                              ----------                              
                                                                   Page

                 The Supreme Court of the United States

Building Improvements............................................    11
Computer Security................................................     5
Computer Security Position.......................................     7
Consolidation in Agriculture.....................................     6
Federalizing Crime...............................................     6
Law Clerk Selection--Federal Court Experience....................     8
Law Clerk Selection--Law Schools.................................     7
Law Clerk Selection--Women and Minorities........................     9
Opening Remarks..................................................
Perimeter Security...............................................    13
Statement of Justice Souter......................................     2
Supreme Court Website............................................     4
Telecommunications Wiring Improvements...........................    13
Use of Modern Technology.........................................     3

                          Architect of Capitol

Anticipating Future Needs........................................    40
Building Appearance..............................................    36
Closing Remarks..................................................    41
Historic Building Modernization..................................    39
Mechanical Systems...............................................    36
Occupancy during Renovation......................................    40
Opening Statement................................................    15
Perimeter Security...............................................    38
Renovation Project Challenges....................................    37
Renovation Project Costs.........................................    38
Renovation Project Peer Review...................................    34
Security in the Building.........................................    37
Supreme Court Renovation Project.................................    34

                Judicial Conference of the United States

Appropriations For The Judiciary.................................    47
Optimal Uses of Judicial Resources...............................    50
Long Distance Communications.....................................    50
Court Houses.....................................................    57
Southwest Border.................................................    58
Defender Services................................................    64

                       Legal Services Corporation

Opening Statement................................................    69
Case Services Reporting..........................................    85
1999 Statistics..................................................    89
Grantees' Reporting..............................................    90
FY 2001 Challenges...............................................    91
Inspector General................................................    93
H2A Program......................................................    93
Case Reporting Accuracy..........................................    96
Sanctions for Reporting Failures.................................    98
IOLTA Funding....................................................    99
Technology Initiative............................................    99
Grantee Accountability...........................................   102
Legal Services for Urban Areas...................................   104
Domestic Violence................................................   107
Accounting for Federally Funded Cases............................   107
Carry-Over Spending on Technologies..............................   109
Restriction Compliance...........................................   110
Meaning of Present in the United States..........................   111
Reaching the Poor................................................   114
Closing..........................................................   116

                     Small Business Administration

Closing Remarks..................................................   166
Disaster Loan Budgeting..........................................   152
Disaster Loan Program............................................   154
Drug-Free Workplace Grant Program................................   165
Introduction.....................................................   131
Minority Business Assistance.....................................   160
New Markets......................................................   166
Opening Remarks..................................................   132
Operating Expenses...............................................   162
Prepared Statement of Administrator Alvarez......................   136
Requested Program Increases......................................   153
7(a) Loan Program................................................   155
Small Business and E-Commerce....................................   156
Systems Modernization............................................   163
Underserved Regions..............................................   157

                   Securities and Exchange Commission

Automated Surveillance...........................................   188
Closing Remarks..................................................   203
Cost of Reducing Turnover........................................   197
Decimalization of Markets........................................   200
EDGAR Modernization Status.......................................   202
Effect of Downturn in the Market.................................   193
Effect of Internet Fraud on Legitimate E-Businesses..............   191
Increasing Complexity of Internet Fraud Cases....................   189
Increasing Fraud Activities on the Internet......................   190
Individual Investing.............................................   192
Information Technology Request...................................   196
Internet Fraud Activities in FY 2000.............................   188
Internet Fraud-Related Enforcement...............................   189
Internet Stocks Activity.........................................   192
Introduction.....................................................   169
Investor Education Efforts.......................................   199
Margin Requirements and Recommendations..........................   198
Nasdaq Efforts to Convert to Decimals............................   202
Opening Remarks..................................................   170
Pay Disparity between SEC and other Financial Regulators.........   198
Prepared Statement of Chairman Levitt............................   172
Relationship between Technology and Staffing Level...............   196
Relationship between the SEC and the NYSE........................   195
Risks of Day Trading.............................................   200
SEC Staff Attrition..............................................   197
Staffing and the Internet........................................   195

                 The Federal Communications Commission

Cable Rates......................................................   232
CALEA............................................................   242
FCC Budget, fiscal year 2001.....................................   212
Free Air Time....................................................   241
Low Power FM.....................................................   229
LPFM and H.R. 3439...............................................   233
LPFM and Licensing of Stations...................................   237
LPFM Lottery.....................................................   235
LPFM Stations....................................................   229
Merger Reviews...................................................   239
Next Wave........................................................   231
Portals..........................................................   225