[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



                 TREASURY, POSTAL SERVICE, AND GENERAL

                     GOVERNMENT APPROPRIATIONS FOR

                            FISCAL YEAR 2002

_______________________________________________________________________

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS
                              FIRST SESSION
                                ________
  SUBCOMMITTEE ON THE TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT 
                             APPROPRIATIONS
                ERNEST J. ISTOOK, Jr., Oklahoma, Chairman
 FRANK R. WOLF, Virginia             STENY H. HOYER, Maryland
 ANNE M. NORTHUP, Kentucky           CARRIE P. MEEK, Florida
 JOHN E. SUNUNU, New Hampshire       DAVID E. PRICE, North Carolina
 JOHN E. PETERSON, Pennsylvania      STEVEN R. ROTHMAN, New Jersey
 TODD TIAHRT, Kansas                 PETER J. VISCLOSKY, Indiana   
 JOHN E. SWEENEY, New York
 DON SHERWOOD, Pennsylvania         
                          
 NOTE: Under Committee Rules, Mr. Young, as Chairman of the Full 
Committee, and Mr. Obey, as Ranking Minority Member of the Full 
Committee, are authorized to sit as Members of all Subcommittees.
       Michelle Mrdeza, Jeff Ashford, Kurt Dodd, and Tammy Hughes,
                            Staff Assistants
                                ________
                                 PART 1
                                                                   Page
 Department of the Treasury:
     Office of the Inspector General..............................    1
     U.S. Customs Service.........................................  153
     Law Enforcement Bureaus and Offices..........................  249
     U.S. Secret Service..........................................  493
     Internal Revenue Service.....................................  559
     Secretary of the Treasury....................................  765
 United States Postal Service..................................... 1509

                              

                                ________
         Printed for the use of the Committee on Appropriations
                                ________
                     U.S. GOVERNMENT PRINTING OFFICE
 73-553         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
 HAROLD ROGERS, Kentucky             NORMAN D. DICKS, Washington
 JOE SKEEN, New Mexico               MARTIN OLAV SABO, Minnesota
 FRANK R. WOLF, Virginia             STENY H. HOYER, Maryland
 TOM DeLAY, Texas                    ALAN B. MOLLOHAN, West Virginia
 JIM KOLBE, Arizona                  MARCY KAPTUR, Ohio
 SONNY CALLAHAN, Alabama             NANCY PELOSI, California
 JAMES T. WALSH, New York            PETER J. VISCLOSKY, Indiana
 CHARLES H. TAYLOR, North Carolina   NITA M. LOWEY, New York
 DAVID L. HOBSON, Ohio               JOSE E. SERRANO, New York
 ERNEST J. ISTOOK, Jr., Oklahoma     ROSA L. DeLAURO, Connecticut
 HENRY BONILLA, Texas                JAMES P. MORAN, Virginia
 JOE KNOLLENBERG, Michigan           JOHN W. OLVER, Massachusetts
 DAN MILLER, Florida                 ED PASTOR, Arizona
 JACK KINGSTON, Georgia              CARRIE P. MEEK, Florida
 RODNEY P. FRELINGHUYSEN, New Jersey DAVID E. PRICE, North Carolina
 ROGER F. WICKER, Mississippi        CHET EDWARDS, Texas
 GEORGE R. NETHERCUTT, Jr.,          ROBERT E. ``BUD'' CRAMER, Jr., 
Washington                           Alabama
 RANDY ``DUKE'' CUNNINGHAM,          PATRICK J. KENNEDY, Rhode Island
California                           JAMES E. CLYBURN, South Carolina
 TODD TIAHRT, Kansas                 MAURICE D. HINCHEY, New York
 ZACH WAMP, Tennessee                LUCILLE ROYBAL-ALLARD, California
 TOM LATHAM, Iowa                    SAM FARR, California
 ANNE M. NORTHUP, Kentucky           JESSE L. JACKSON, Jr., Illinois
 ROBERT B. ADERHOLT, Alabama         CAROLYN C. KILPATRICK, Michigan
 JO ANN EMERSON, Missouri            ALLEN BOYD, Florida
 JOHN E. SUNUNU, New Hampshire       CHAKA FATTAH, Pennsylvania
 KAY GRANGER, Texas                  STEVEN R. ROTHMAN, New Jersey    
 JOHN E. PETERSON, Pennsylvania
 JOHN T. DOOLITTLE, California
 RAY LaHOOD, Illinois
 JOHN E. SWEENEY, New York
 DAVID VITTER, Louisiana
 DON SHERWOOD, Pennsylvania
   
 VIRGIL H. GOODE, Jr., Virginia     
   
                 James W. Dyer, Clerk and Staff Director

                                  (ii)



 
  TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT APPROPRIATIONS FOR 
                                  2002

                              ----------                              

                                         Wednesday, March 21, 2001.

        OFFICE OF THE INSPECTOR GENERAL, DEPARTMENT OF TREASURY

                               WITNESSES

JEFFREY RUSH, TREASURY INSPECTOR GENERAL ACCOMPANIED BY: DENNIS 
    SCHINDEL
DAVID WILLIAMS, TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION; 
    ACCOMPANIED BY: PAM GARDINER

                                Welcome

    Mr. Istook. The subcommittee will come to order.
    Good morning. We welcome everyone to the first hearing of 
the Treasury Appropriations Subcommittee for the 107th 
Congress.
    We have with us today representatives from two offices of 
the Department of the Treasury and we appreciate your being 
here.
    We think that they can provide us a good overview as we 
begin looking at the budget and the associated issues this 
year.
    We have with us the Honorable Jeffrey Rush, the Treasury 
Inspector General, and the Honorable David Williams, the 
Treasury Inspector General for Tax Administration.
    As does, I think, every member of Congress, I appreciate 
very much the work of the Inspector Generals. The functions 
that you perform, as you know, are very important, not only to 
look at allegations of waste, fraud and abuse, but, frankly, 
sometimes the more important work is the proactive work you do 
before we get to a situation where we have to look at waste or 
fraud or abuse--to strengthen and focus the work of the 
agencies and the bureaus, to assess their priorities, and 
whether their commitments are in tune with what their 
priorities actually are, if resources are being devoted and 
properly handled in order to meet the objectives that are set 
forth. So your analyses are very critical to us in this 
respect.
    We know it is unusual for any department, of course, to 
have two Inspector Generals. I look forward, being new in the 
chair, to learning more about the two particular groups, what 
separates you in terms of your role, your methodology, and the 
approaches you may take. And, of course, your evaluations, 
which we know is a challenge, to be an independent evaluator 
within an agency, being a part of that agency and yet being 
able to step back and make an assessment that will give us some 
guidance in the oversight that we perform and give the agency 
some guidance in understanding when it is actually putting the 
resources where the needs are or managing things in the way 
that they best can be managed. So you can give us great 
guidance in understanding where the greatest challenges are.
    So this session today is intended as more than just looking 
at the organization, the management needs and the budget needs 
of your particular offices, but also it is a window through 
which we can look into the entire Treasury Department.
    So we look forward to hearing your opening statements. I 
notice in some cases they are a little bit longer than we would 
like to have read orally, but the entirety of the opening 
statements will be put in the record.
    I think it is best if we try to have witness' statements to 
stay within approximately five minutes to make sure that we 
have enough time for the give and take that is a very important 
part of the hearing.
    And, as I mentioned to the witnesses before, it is 
certainly my standard practice and custom that witnesses should 
be sworn and I would not want anybody to think that because of 
that any witness has been singled out or is held in anything 
other than the highest esteem in which we hold each of you.
    But before we begin that, I would like to recognize our 
ranking member, Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I am please 
to welcome you back to the committee. You were on it for a 
short period of time and I think you will find that this 
committee covers some critically important agencies and 
activities of the federal government; frankly, activities 
without which the rest of the government would not operate.
    You will find our committee not only oversees the Treasury 
Department, certainly one of the three most important 
departments in our federal government, but also oversees a 
number of other agencies, including 40 percent of the law 
enforcement that the federal government undertakes. Those 
responsibilities are weighty and this subcommittee hasbeen very 
supportive of them.
    Also, because this is our first meeting, I want to welcome 
to our committee our new Republican members, Mr. Tiahrt, Mr. 
Sweeney and Mr. Sherwood. It is good to have them on the 
committee.
    Also, joining Mr. Price and Ms. Meek and me on this side of 
the dias are Steve Rothman from New Jersey, who unfortunately 
could not be here because he has a back operation, and Mr. 
Visclosky, who unfortunately cannot be here because he is also 
on the defense subcommittee that is also having a hearing at 
this time. I understand Ms. Meek will be having to leave 
shortly for VA HUD. Mr. Chairman, so the witnesses do not take 
it personally, I now will be going. Bob Been just came 
through--because I am managing a bill on the floor. I will be 
right back as soon as we pass that bill.
    I would like to welcome our witnesses as well. It has not 
been our practice to swear in witnesses, but for some 
subcontractors it is the practice, some not, and there is, as 
the chairman indicated, no implication by that.
    Treasury Inspector General Rush and Treasury Inspector 
General for Tax Administration Williams have a very important 
role to play in the department, as I said at the outset, which 
is critical to our government's effective operation.
    The Treasury Department is the only federal agency with two 
Inspector Generals, as a matter of fact, the unique nature--
from, I suppose, Treasury administration's standpoint, that is 
twice as bad as every other agency. None of us are particularly 
interested in having people look over our shoulders, but 
obviously it is a critical aspect in credibility and I think it 
is an important aspect.
    The department performs very diverse functions: tax 
administration, revenue collection, law enforcement, financial 
management, banking policy, international and domestic 
financial policy. Again, we all recognize its importance.
    In fiscal 2002, the Treasury Department, in my opinion, Mr. 
Chairman, faces a number of serious management challenges, 
improving customer service at IRS, modernizing antiquated 
computer systems, which has been a challenge of this committee 
at the IRS for a decade or more, almost a decade and a half 
now. I have been on this committee for almost two decades. 
Finally, improving the department's financial system. These 
problems will take a leadership commitment and the resources to 
address.
    Mr. Chairman, you may have heard me say in a previous stint 
on this committee that when we did the restructuring act, the 
reform and restructuring act, as you recall, one of the things 
that the task force said, led ably by Rob Portman and others, 
was that it was fine to be for IRS reform, but you need to be 
for IRS reform when you drew the budget up of the Treasury and 
IRS departments so that they could effectively carry out the 
responsibilities we give them and you had to be for IRS reform 
at tax writing time because if we change the tax code every 12 
months, given the mammoth nature of their constituency that 
that affects, keeping up with those changes on a regular basis 
is almost impossible. The restructuring reform report was very 
cogent in making those observations and, as you have heard me 
argue on the floor, we need to give the resources.
    I am concerned, therefore, about the President's fiscal 
year 2002 budget. The President's blueprint includes, as I 
understand it, $14.7 billion for the Treasury Department, which 
is a $700 million increase over fiscal year 2001. Of this 
increase, however, half is for the Internal Revenue Service's 
information technology account. Critical for us to expand, but 
understanding that that does not leave a lot left over for a 
department whose budget was, I think, $8.2 billion last year or 
in that neighborhood.
    Modernizing the IRS is a critically important effort, but 
it also is critically important that we keep up the other 
activities. It appears that the rest of the Treasury Department 
would be required to operate at levels well below the amounts 
necessary, in my opinion, to maintain current programs. And 
that is not specifically in the purview of these Inspector 
Generals, however, I think they are cognizant of the impact on 
some of their concerns that a lack of future resources will 
have.
    In particular, the Customs Service must continue to 
modernize their import processing system. You will hear from 
customers, I will hear from customers, and Ms. Meek and Mr. 
Sherwood will hear from customers if they are not served well, 
why not.
    The Automated Commercial Environment System, the ACE 
System, which we are bringing on line is critically important. 
It is a $1.3 billion, five-year process. We appropriated $130 
million for fiscal year 2001, yet it is my understanding, Mr. 
Chairman, the administration budget does not appear to provide 
an increase to meet the five-year development plan, which is 
one of the problems we have with IRS, with sort of fits and 
starts, and we did not get there. And, as a result, it appeared 
that we were always failing when perhaps we were not making the 
effort that would have ensured success.
    Mr. Williams and Mr. Rush will agree, I think, the agencies 
need adequate resources to fulfill their missions. Problems do 
not go away by underfunding them.
    In the past, this subcommittee has fought hard to ensure 
that resources are available for necessary core activities, 
activities like law enforcement, as I said before, and 
theenhanced financial systems.
    In particular--and then I am going to go because Mr. Been 
is getting very nervous, I am sure Mr. Ney is as well, who is 
waiting for me--I am very concerned about tax enforcement. It 
is very nice for us to be customer friendly, I am for that, I 
am committed to that, but we would be naive in the nth degree 
not to recognize there are some people, as a matter of fact, 
one of them has been in the news relatively repeatedly, Mr. 
Rich, who want to cheat the IRS, and they are not cheating the 
IRS, they are cheating all the rest of us who pay taxes.
    And, Mr. Chairman, if we do not adequately fund tax law 
enforcement as well as customer service, we will under serve 
all of the customers, that is, the taxpayers of the United 
States of America.
    We now have the lowest review rate in the history of this 
country and, very frankly, the least reviewed are the largest 
taxpayers. That is not good policy, it is not good enforcement, 
and it will lead to a decrease in what is the hallmark of our 
system, the voluntary compliance.
    Mr. Chairman, I know I spoke a little longer than I should 
have. Mr. Been is very nervous. I will be right back.
    Mr. Istook. Thank you, Mr. Hoyer.
    I want to express my appreciation for the great 
institutional knowledge that you provide to the subcommittee. I 
am not sure if you were on this subcommittee before or after 
you first learned to walk, but----
    Mr. Hoyer. There are some who say I still have not learned 
that yet.
    Mr. Istook. Understood. And I think you have made a number 
of very significant and important points. They will be part of 
what we follow up not only with our witnesses this morning, but 
also in some later hearings.
    If there is nothing further, before we proceed, if the 
witnesses would just stand?
    [Witnesses sworn.]
    Mr. Istook. The witnesses have been sworn and Jeffrey Rush, 
the Inspector General of the Department of Treasury, is our 
first witness.
    Mr. Rush, thanks for being here.
    Mr. Rush. Thank you.
    Mr. Istook. Please go ahead.
    Mr. Rush. And let me also thank Ranking Member Hoyer and 
members of the committee and committee staff.
    I am pleased to be here with Inspector General David 
Williams, the Treasury IG for Tax Administration. As you know, 
the Treasury Department is the only cabinet agency with two 
Inspectors General. It is ironic that for more than a decade 
after the Inspector General Act of 1978 was passed four 
administrations argued against having a single Office of 
Inspector General for the Treasury Department, now we have two.
    The Department of Treasury was created by act in September 
of 1789. The department is comprised of many offices and 
several funds. The department also has 11 operating bureaus, 
not counting my office and the Office of TIGTA. Let me remind 
you of those bureaus: the Bureau of Alcohol, Tobacco and 
Firearms; the U.S. Customs Service; the U.S. Secret Service; 
the Federal Law Enforcement Training Center; the Financial 
Management Service, the Bureau of Public Debt; the U.S. Mint; 
the Bureau of Engraving and Printing; the Comptroller of the 
Currency, the Office of Thrift Supervision and the Internal 
Revenue Service.
    Now, in my office, the audit, evaluation and investigations 
universe is quite diverse. To give you some example of the 
kinds of thing being done at Treasury that we have to look at, 
let me recall for you some of the accomplishments of the last 
fiscal year within those bureaus.
    The Customs Service collected $24 billion in duties and 
other revenues and paid back $1.2 billion refunds and duty 
drawback.
    The ATF collected $14.1 billion generated from federal 
excise taxes on alcohol, tobacco, firearms and ammunition.
    The Financial Management Service issued over $890 million 
payments totalling more than $1.2 trillion.
    The Bureau of Public Debt issued more than $2 trillion 
worth of U.S. securities.
    The Mint produced more than 56.1 billion coins.
    The Bureau of Engraving and Printing delivered 11.4 billion 
Federal Reserve Notes and 19 billion postage stamps.
    Our Office of Comptroller of the Currency has supervisory 
responsibility over more than 2200 national banks, whose totals 
assets are valued at more than $3.4 trillion.
    Our Office of Thrift Supervision has supervisory 
responsibility over more than 1000 thrifts. Their assets are 
valued at more than $900 billion.
    This is a very diverse department. Within our department, 
there are more than 900 information systems being used. More 
than 250 of those systems are considered mission critical.
    We also buy a lot of goods. The department, through its 
bureaus, purchased more than $1.8 billion in goods and services 
each year.
    In February of this year, I provided the secretary a 
summary of the most serious management and performance 
challenges facing the department and I will list these for you 
and comment on them later.
    Number one is information security.
    Number two is information technology investment management. 
Ranking Member Hoyer touched on this long view of buying IT.
    Number three was money laundering and bank secrecy.
    Number four, narcotics interdiction and trade enforcement.
    Number five was revenue protection.
    Number six was violent crime.
    Number seven was Results Act implementation.
    Number eight was financial management.
    And we have added a new area, number nine, that area 
involving the safety and soundness of banking.
    Now, I am going to honor my word about being brief because 
I am under oath and I did give you a very lengthy formal 
statement, but before I close, I do want to comment on an area 
of concern that I have and that many of my fellow Inspectors 
General have.
    Included with my testimony is an attachment that lists 14 
statutes and I only listed 14 when there are probably another 
dozen that could be included. Each of these statutes in some 
way tries to mandate an improved accountability for the 
government's resources. These mandates, particularly those 
involving the audited financial statements and our overview of 
information systems and security currently occupy more than 
one-half of all of my audit resources.
    They limit my ability to independently establish the 
priorities for the Office of Inspector General and they 
restrict our responsiveness to emerging issues that affect the 
department's accomplishment of its mission.
    I believe that the utility of these requirements to improve 
management accountability and program effectiveness should be 
evaluated in the future and be determined to be of some value 
before we continue.
    Thank you.
    [The information follows:]


              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    
    Mr. Istook. Thank you. And, Mr. Rush, let me express my 
appreciation for the detail of your written testimony. You did 
not go through it all but I found it be very helpful and we are 
fortunate, I guess, that this is at a time of turnover in the 
administration where you are giving that overview to the 
incoming secretary. I found that quite useful as well. But I 
will reserve my questions, of course, for the moment.
    Mr. Williams, as the Inspector General for the Tax 
Administration portion of Treasury, we are pleased to have you 
here and we will be happy to receive your testimony.
    Mr. Williams. Thank you, Mr. Chairman, and members of the 
subcommittee. I appreciate the opportunity to appear here today 
to discuss the accomplishments and challenges of our office, 
TIGTA, and of the IRS. I would like to focus on a few key 
points from my written testimony.
    As you know, TIGTA is fairly new to the IG community. To 
provide effective oversight, we have aligned our Office of 
Audit teams with the IRS's new business unit structure which 
allows focused audit coverage for priority tax administration 
issues.
    Our Office of Investigations reports directly to 
headquarters through geographically dispersed field divisions. 
Additionally, our Strategic Enforcement Division identifies and 
investigates unauthorized computer accesses by employees and 
illegal intrusions by outsiders into sensitive tax data.
    One of our major statutory requirements is to respond to 
acts of violence directed against IRS personnel and to 
investigate domestic terrorism. In the past two years, we have 
conducted over 1,400 such investigations, some of which 
involved anti-government groups. Currently, we are 
investigating the mailings of suspicious powder substances to 
IRS service centers, as well as two fire bombings at an IRS 
facility.
    TIGTA has achieved good results in its first year of 
operation. In fiscal year 2000, special agents closed 43 
percent more investigations than in the prior year and the 
Office of Audit experienced a 119 percent increase in the 
number of audit reports issued. As a result, TIGTA's financial 
accomplishments totaled over $1.5 billion in fiscal year 2000 
and TIGTA returned almost $14 for every dollar that was 
appropriated.
    I would like to turn next to the IRS, which is in the midst 
of a number of complex and interrelated reform and 
restructuring initiatives. There is broad consensus for the 
IRS's plan to transform itself to a more customer-focused 
organization and to modernize its computer systems, while 
continuing to implement tax law changes and collect 
approximately $1.9 trillion in tax revenue. I would like to 
address three of the IRS's most significant challenges that 
might jeopardize that successful transformation.
    The first issue is the IRS's organizational restructuring. 
On October 1, 2000, the IRS successfully initiated the stand-up 
of its four customer-focused business units. The stand-up was 
an important first step in the IRS's restructuring, though it 
is far from the last step of this long-term endeavor. The IRS 
must continue to address management and operational issues such 
as taxpayer access to walk-in and toll-free services; the 
accuracy of responses provided to taxpayers; the ability to 
hire, train, and retain a qualified workforce; and reversing 
the decline in enforcement rates.
    In addition, until a reliable management information system 
is available, IRS managers may not have all the information 
they need to effectively evaluate program activities and assess 
whether taxpayers receive the best customer service.
    Dramatically improved service to taxpayers, a major goal of 
the IRS restructuring, is heavily dependent on systems 
modernization, which is the second challenge I would like to 
discuss.
    The IRS hired the PRIME contractor to assist in delivering 
modernized systems. While progress has been made, most of the 
ongoing systems modernization projects have taken longer and 
cost more than originally planned. As a result, the benefits to 
taxpayers have yet to be realized.
    Some of the contributing factors to this are the IRS is in 
a steep learning curve in its system modernization effort; the 
roles and responsibilities of the PRIME and the IRS were 
initially inadequately defined; business needs were not clearly 
identified and continue to emerge; and established processes 
have not been fully implemented.
    While these growing pains are not uncommon for major 
systems development projects, the result is that the goals of 
the restructured IRS may take longer than hoped for.
    The last area of concern I would like to discuss involves 
computer security. The IRS maintains a significant amount of 
valuable and sensitive information. Consequently, computer 
security will continue to be a risk. The IRS faces external 
risks and risks from within as unethical employees have 
improperly viewed and manipulated taxpayer records.
    Recent TIGTA audits have identified significant weaknesses 
in the following areas: intrusion detection; disaster recovery; 
physical security of facilities and systems; and the 
certification of security controls for vital systems.
    To address unauthorized access to taxpayer information by 
employees, TIGTA uses detection criteria to search for IRS tax 
administration files. As a consequence, 373 IRS employees have 
either resigned or been removed from the organization for 
unauthorized access to taxpayer information. This has also 
included 65 criminal indictments.
    TIGTA is also working closely with the IRS to develop a 
cadre of computer specialists and criminal investigators to 
respond to computer intrusion incidents, investigate 
intentional network disruption and conduct systems penetration 
tests to detect new vulnerabilities.
    I believe the IRS is working intensely to address these 
vulnerabilities to ensure the success of its reform and 
restructuring efforts and I would be pleased to respond to any 
questions that you have.
    [The information follows:]


              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    
    Mr. Istook. Thank you very much, Mr. Williams. I appreciate 
your testimony and, as you know, the entirety will be in the 
record.
    Let me just mention to the members of the subcommittee that 
I will try to hold myself to the same five-minute customary 
standard that we all seek to utilize and I think that today we 
will have time certainly for more than one round of questions 
in that way.
    Let me go to what I perceive as the heart of a major 
concern from your testimony and from many other things and that 
is the ability of not just the Treasury Department but the 
federal government generally to keep pace with the 
opportunities and the needs created by the advances in 
technology. If government is not as swift and as adroit in 
using this technology as the private sector is, it falls 
behind, it is not able to manage the increased workload which 
is generated by the heightened activity that productivity 
increases have generated from what the technology has done.
    You mentioned, Mr. Rush, 900 plus information systems 
within Treasury, 250 of them mission critical. I do not know to 
what extent you see that they are able to communicate and 
interact with each other when necessary on a swift basis, 
rather than having to endlessly cut and paste and reformat 
information and pull it out one piece at a time rather than in 
a mass and with the organization that you require so that you 
can properly analyze it and understand it.
    So I wanted to ask first on a fundamental issue, 
considering that staying ahead in this requires a lot of 
training time, a lot of time understanding what is indeed 
available and on the cutting edge, do we have some structural 
problems with being able to make those decisions with in-house 
personnel and what do you see as the current mix and what 
should we be considering as a possible different mix of how 
much of this type of work on these information systems is done 
in-house by people that are federal employees, how much needs 
to be done by contractors and, for that matter, how much of it 
can be done if there is expertise available from other units of 
government, even if they are not within Treasury itself?
    That is a pretty broad question, but I would be very 
interested in your responses.
    Mr. Rush. Well, I can start by saying that because of the 
history of the department, one has to be careful not to look at 
these many different bureaus as having a close set of work 
relationships. They have none. They are supervised at the top 
only and interact largely at the top only.
    I say that because the problems of information security and 
information technology investment is one of not having an 
enterprise approach to anything. If you visit our department, 
and I am talking about that part that does not include the IRS, 
you will find that there are only one or two enterprise-wide 
systems. One is a payroll system that is administered by the 
Department of Agriculture. The other is a relatively new human 
resource system that is just now being put in place and will 
allow us to have a single source to look at employment data 
across the department.
    Generally, we have stovepipe, legacy systems in each of our 
bureaus and offices that were not designed to be integrated in 
any way and that the very best efforts, even on the accounting 
function, involve little more than aggregating data at the top, 
trying to consolidate information rather than looking at 
something in an integrated format.
    I would like to briefly comment, though, on your question 
about the skill sets and the talents and how do you approach 
these things.
    I think first it is clear that we need to start thinking 
not only within our department but throughout our government 
about our agencies as broad enterprises and not individual 
units and offices and divisions or we will never get out of the 
rut we have been in for at least the last 40 years in dealing 
with information technology.
    Clearly, there is going to be a mix of skills needed to 
bring new systems on line. This is already true at IRS, it is 
clearly true in the Customs Service, the largest bureau that we 
have in our area of responsibility. And I do not doubt the most 
effective way is to develop a mix of skills, those from program 
managers within the government, those with some IT management 
skills in the government, and contract skills. The private 
sector goes to the private sector to bring on IT. Obviously, 
the government has to consider going to others outside the 
government to bring on IT. But this is not, in my view, a 
skills problem.
    While much has been reported about the lack of information 
technology skills in the government, I do not think we are any 
worse off than private sector firms. These are scarce skills 
that come at high cost and that are highly mobile and clearly 
we can develop strategies to integrate those skills through 
contractors into our workforce to begin to address these 
problems.
    Mr. Williams. The Internal Revenue Service was the site of 
what might be the largest disaster in computer modernization in 
the history of the country. It is now attempting something 
larger than anything I know of that has occurred in the private 
sector or in any other government.
    The first time around, there were clearly management 
problems and there were technical skill problems that 
contributed significantly to the failure. There has been a 
massive attempt to learn from that. Some of the precautions 
that were taken this time were to hire a prime contractor to 
lead a consortium of contractors that could bring every 
conceivable skill to the table from the private sector.
    The commissioner of the IRS was selected, I am sure, in 
part because of his computer expertise. He ran a very 
successful computer firm. He has brought on a new CIO that has 
extensive experience in the private sector, John Reece, and 
beneath that level there is about to come into place a strong 
infrastructure, mostly from the private sector, too, to mix 
with the careerists that are in place and have a lot of the 
legacy knowledge and also some very advanced skills.
    So it was a very serious problem. It caused the failure. 
And this time, extraordinary precautions are being taken.
    The last thing I would add is that using all of those 
skills and all of those management talents, we are trying to 
impose a project management discipline called enterprise life 
cycle across each of the projects and across the horizon of the 
architecture.
    Mr. Istook. In this problem, which I think you each 
indicated in different ways, is not limited to the Treasury 
Department, it is a government-wide problem, it is a challenge 
for the private sector as well, but considering the size of the 
federal government as one enterprise in that way, is the 
absence of some supervening authority, some chief information 
officer, to whom all agencies can look who brings together the 
knowledge that well, maybe the Agriculture Department has a 
better handle on payroll.
    It is fascinating that the Treasury Department would look 
to the Agriculture Department to handle its payroll, but is the 
lack of some supervening structure hurting us? That people do 
not say, well, when we have information technology issues 
within the federal government here is a place that we can go 
that is the overall resource that has enough expertise, that is 
enough on the cutting edge, rather than each agency or each 
department having its own little core of people that are trying 
to keep up with it and then in the next block is another agency 
faced with the same challenge.
    Are we duplicating some of the skills that if they resided 
in some collective entity, would be available? Because I know 
we are spending huge amounts on information technology. I do 
not know that we are spending it all wisely, not because the 
objective is mistaken. I think the gains from using the 
technology are very significant, but that does not mean that 
everything we spend in the name of achieving it is well spent.
    Is there a structural problem with having this effort 
fractionated across different government agencies?
    Mr. Williams. I think that benchmarking is clearly a 
terribly under utilized exercise and resource and I have heard 
Frank Raines and others speak about the failure to aggressively 
benchmark in government. So the absence of the ability to do 
that would be absolutely incompetent and terrible on the part 
of the government.
    There are some things going on that take away from the 
risks that you correctly identified. The CIOs do have a 
council, it is a very active group that work together and OMB 
heads it and OMB attempts to issue the kinds of policy guidance 
that will assure the kinds of things that you expressed as a 
concern.
    That helps to prevent some of the things that you are most 
worried about. Whether or not a CIO for the United States would 
be essential or not, I do not understand. It clearly would have 
all the advantages that you identified and those would be 
powerful advantages to bring to the table.
    I also think it is important, though, that within the 
department there remain chief information officers that would 
either report as they do now in a council form or to a single 
head.
    Mr. Rush. The last administration and the last Congress 
explored the question about having a super CIO, probably 
located in the Office of Management and Budget. I am going to 
tell you my own view is that we need to examine what we tried 
to accomplish with the Clinger-Cohen legislation, the ITMRA 
legislation, because what it does, it does fix the 
responsibility for oversight in large agencies in a single 
individual, but it does not give that person either the 
authority or the control of funds to be effective.
    In fact, he merely can exercise some oversight. And 
watching failing systems is not fixing failing systems. And, 
again, the piece that we have in my office, there is a CIO in 
the departmental office who is a high level official, but there 
is also a CIO within every bureau. And while they do meet and 
communicate, they are not talking about or working on 
enterprise-wide solutions. They are talking about individual 
problems and solutions.
    I want to comment briefly, though, about your concern about 
money being spent on failed systems. One of the things that I 
have come to learn is that it costs a lot of money to run 
failed systems because the failed systems are the ones that 
currently deliver services to the population.
    Whether we are talking about a large system that is failing 
just because it is an old system in Customs or some of the 
smaller systems in our department that are failing, there is a 
great expense, one, to find people who have the expertise to 
maintain old legacy systems. You may recall just two years ago 
with the Y2K problem we had to literally drag people out of 
retirement who had the skills to help us bring old systems up 
to current standards.
    So there is a lot at stake here on the investment side. It 
is more than the investment in new technology. It is 
understanding how you maintain legacy systems until you can cut 
over.
    The enterprise approach to me is the best approach. Iwould 
not argue in favor of a senior CIO at the OMB level. I would argue that 
we examine the current legislation to see if it is as effective as we 
would like and if that person in each department who has been named and 
is serving as CIO does not have sufficient control over resources and 
technology that we rethink that.
    Mr. Istook. I very much appreciate the comments.
    Ms. Meek.
    Mrs. Meek. Thank you, Mr. Chairman.
    Welcome to Mr. Rush and Mr. Williams, Ms. Gardiner and Mr. 
Schindel.
    I have been on this committee for quite a while and I have 
had some experiences with IGs, good and bad and some 
indifferent, and I welcome your being here. You do have a very 
difficult job, I know.
    I do not know how in the name of God you ever get anything 
done, really, because you are supervising and overseeing so 
much that it is very difficult to really handle all of that and 
I can see where there is some confusion in the end trying to 
coordinate all of this to make sense, not only to the public 
but to government in general. So I am very glad to know that 
you are doing that.
    I have a few questions regarding internally how you make 
this work because you, Mr. Rush, you mentioned that you 
examined over--last time, fiscal year 2000, you examined over 
600 reports of investigations conducted by the internal affairs 
functions of the law enforcement bureaus, just law enforcement, 
and you reviewed over 260 discipline files.
    Now, it appears that quantitatively you did a good job, you 
were able to do this, you had the resources to do it. Do you 
have a construct of what happens when you do make this 
analysis? Where do you go from there?
    Mr. Rush. That review is part of our oversight of the 
internal affairs functions in the three bureaus. Each of those 
reviews is summarized in a written report and discussed with 
the management of not only the bureau but the head of the 
Office of Inspection or the two Offices of Internal Affairs.
    It is a full-time job because there is a large population 
within our three law enforcement bureaus and to be sure that 
the department and the public are well served by these law 
enforcement officials we perform this oversight function.
    We have tried to improve our performance, not only looking 
at the numbers of investigations that are conducted by internal 
affairs investigators, but looking at outcomes. There was some 
concern several years ago that even when our employees were 
investigated nothing happened.
    Mrs. Meek. That is right.
    Mr. Rush. And what we have found is that there is 
substantial evidence that the internal affairs bureaus do a 
very good job. Also, we have learned that there is a 
substantial amount of evidence that when those reports are well 
written and well documented, employees are appropriately 
disciplined.
    Now, we are going to continue to pursue our review of these 
bureaus. The numbers may change from year to year, I am not 
sure we are going to look at 600 year to year, but we are going 
to be looking at enough to be satisfied that the head selecting 
official of these bureaus and their internal affairs offices 
can be satisfied with the quality of the work.
    We are looking at internal regulations, by the way, to 
supplement our oversight work in the law enforcement arena. We 
have found that within the three bureaus of ATF, Secret Service 
and Customs that many people with similar jobs do not operate 
under the same kinds of policies and we think it is certainly 
in the interests of the department when looking at employee 
conduct and discipline that these three units have very similar 
policies in place.
    The last piece which we know is there is we have to be sure 
that the personnelists, the people who handle employee 
relations, understand they have to do something when these 
reports are issued or the public will lose confidence.
    But I am very pleased with the progress that has been made 
in the last few years with the law enforcement bureaus. I think 
we have a healthy tension between our offices, but also a 
healthy respect for what they are doing.
    Mrs. Meek. That is encouraging in that a lot of times in 
law enforcement you find out what the problems are but you do 
not do very much about them, so it is very good to hear that 
within your bureaus you are following up because this does a 
good thing for the morale of the people who work in law 
enforcement, as well as the people for whom they are 
responsible.
    You lament at the end of your statement, Mr. Rush, that the 
various mandates involved in the audits of financial statements 
sort of impose on your resources and you suggest that the 
utility of some of these requirements be evaluated to determine 
if they still add value.
    What do you suggest? Who do you suggest to make that 
evaluation?
    Mr. Rush. Well, within our community, there is a 
president's council that includes all of the Inspectors 
General. There is also an executive council for the designated 
agency Inspectors General. It is headed by OMB. We meet on a 
regular basis.
    We also have close oversight, both in the House and the 
Senate, with the Reform Committee and with the Governmental 
Affairs Committee.
    My view may not be the prevailing view, but I do want--and 
I look forward to opportunities to be heard on theimpact of 
trying to manage by statute. I do not doubt that each piece of 
legislation that I identified in my testimony and others are well 
meaning and well intended and serve some useful purpose. My concern is 
that there is no coherence between all of these pieces of legislation 
and when you take more than 20 years of good ideas, where one is never 
considered in light of the other, there has to be a time when we stop 
and ask ourselves is this the way we want our government to operate?
    My fear is that too often we have program managers who are 
managing towards compliance with regulation rather than towards 
economy and efficiency. Our job is to promote economy and 
efficiency.
    Mrs. Meek. Thank you.
    Mr. Chairman, I had trouble at the very beginning in terms 
of the noun usage and now I understand that you have more than 
one inspector, the word is Inspectors General. That is sort of 
a hard thing to do in terms of telling--since you do have two 
and how you pronounce that.
    Mr. Chairman, I know I do not have much time. I will wait 
until the second round.
    Mr. Istook. All right. Thank you very much, Ms. Meek.
    Mr. Peterson.
    Mr. Peterson. Good morning and welcome.
    I just want to say a few words where I am coming from and 
my perspective. I have eight years of local government 
experience and 19 years of state government experience, my 
fifth year in Congress and I have 26 years of business 
experience, kind of an unusual background. And I am not 120 
years old, I did some of those things at the same time. But in 
our modern society today, one of my greatest concerns of 
government is can we bring the information age into government 
and that has been a very difficult task. It was very difficult 
at the state level. Our systems were way behind there and I 
think we are further behind here in the immense of government.
    But I guess what concerns me is that if the IRS had been a 
private corporation, they would be out of business. I mean, 
what they went through, they absolutely would be out of 
business. I mean, their competitors would have ate their lunch 
and they would have been just history. But in government, that 
does not happen. We have to somehow fix it.
    You were just talking about your CIOs not having authority. 
Did I understand you correctly, not having the authority to 
make decisions to change things? Did I miss----
    Mr. Williams. I believe the point was that there might be a 
great advantage if CIOs could operate among departments. They 
do have authority within their department, but the dynamics of 
working among the departments and of making decisions and 
priority calls among departments cannot be made without a 
central resource.
    Mr. Rush. And our CIO does not have line authority over any 
bureau. He is part of our departmental office structure. And 
while he can report upward to our secretary about progress, he 
has no line authority or budget to direct activities within any 
other office, even those that are departmental offices. And 
that is how the statute leaves us with CIOs.
    Mr. Peterson. So it is Congress' fault.
    Mr. Rush. Well, some have more influence than others. A 
president had to sign that bill to make it law. I am sure the 
administration will share any concern.
    Mr. Peterson. Well, sure.
    Mr. Rush. But----
    Mr. Peterson. But it is our job to make sure they do not 
make mistakes.
    Mr. Rush. But we do create a person who has great 
responsibility, who has an important job, and we do not take 
the next step and look at what real control, what real 
authority they have in execution of IT investments.
    Mr. Peterson. Well, I think it is very incumbent upon you, 
all of you, to make sure we understand why the train will not 
run. I mean, seriously, you have to tell us these things and 
beg us to fix them, if it takes legislation.
    But I would like to just expand on that a bit further. I 
think we are in trouble in this country. You know, Bill Gates 
says this and I have been with him a number of times and he is 
an exciting guy to listen to, but everybody asks him why it 
happened in America, the technology revolution. I mean, we are 
way ahead of other parts of the world, way ahead. And he talked 
about the reason it did not happen in Europe, the reason it did 
not happen in Japan, the reason it did not happen in other 
parts of the world, and the reason it happened here is because 
we are the freest. We have the least bureaucratic control. In 
other words, our bureaus are better than theirs. We have less 
regulation than they do. We have more ability to adjust, so we 
are in better shape than the rest of the world and I think we 
all can be thankful for that.
    But he said we have not seen anything yet. He said what we 
think is pretty complex, we will look back in ten years as 
basic fundamentals.
    So we have to somehow learn how to fix this because we are 
succeeding economically. Companies that are not able to engage 
technology because of their own bureaucracies are companies 
that are just going by the boards. I mean, major Fortune 500 
companies are going down the chute because they do not get in 
the information age.
    And our bureaucracies are going to be huge problems for 
businesses if we do not get in the information age so we 
canreact quickly with the information we have and utilizing the 
information that is available quickly to make decisions.
    And the biggest problem I see in the country collectively 
is we are not prepared to create the information workers. I 
mean, there is a huge--you know, last year, the Secret Service 
in their hearing said--I guess it was Microsoft and Intel were 
stealing all of their top people. I mean, in other words you 
could not keep your people.
    Is that a problem in your bureaus, keeping your best? I 
mean, you get somebody that is really good and they are really 
able to sort through all this and make it all work and suddenly 
somebody steals them? Does that happen?
    Mr. Williams. It clearly does. I am going to allow Pam to 
elaborate on that.
    Ms. Gardiner. I can give you just a small scale example, 
just for our organization, TIGTA. We provided very extensive 
training to certain individuals and what we wanted to do was 
say, okay, if we are going to give you this training you need 
to stay for a year or you have to pay us back. So what happened 
was they were hired by other firms and they said, sure, we will 
pay it back, no problem. So we lost them and all the time that 
it took us to train them while we were paying their salaries 
and everything. So we got the money back, but that was, you 
know, not very helpful.
    Mr. Peterson. Do you find yourself in a situation where you 
have to train them because you cannot buy them? You just cannot 
hire them?
    Ms. Gardiner. Well, there certainly are some people that we 
would not even want to attempt to try and hire because they 
literally have to attend training on a very regular--probably 
monthly basis, almost, you know, the people that look for 
intrusion and hackers. They have to be really on top of that 
because the hackers are changing their way of doing it on a 
regular basis. So there are some folks that we would not even 
want to try and attempt to hire, but even those that we do, 
just because--IRS, their big thing is systems modernization, we 
need to be able to look at that and be well educated enough to 
figure out where they are making mistakes. And so all of those 
folks do need training, some more than others.
    Mr. Peterson. But do you think the private sector is 
adequately providing you with people that can fit into these 
jobs that you need in information technology?
    Mr. Rush. I am not sure they are any better off in the 
private sector. It is clear they have a better set of benefits, 
thus, people are more mobile in the private sector than 
government, but I think the strategy in the government is much 
like that. We actually send our IT people off, anticipating 
that some will not come back. I am putting people through 
training at great expense to be certified on all of the 
equipment that we operate, whether it is Cisco, whatever the 
training is, we send our people at great expense. We understand 
that some of them are not going to come back or they are going 
to come back for a brief period of time and go some place where 
they can be paid more money.
    Mr. Williams. The point that you are raising I think is 
true, where there have been some failures to buy the kind of 
skills. It has been very disappointing and it is just a feature 
of the landscape right now that there are not enough skills to 
go around. And so we are beginning to see the leading edge of 
some failures when we buy skills from the private sector and it 
has been very shallow and disappointing.
    Mr. Peterson. Government is going to have a difficult time 
competing with the Intels and the Microsofts and the Ciscos. I 
mean, we are just not going to be able to. But I guess the 
problem I am trying to reach for is the problem of getting our 
information systems up to speed in this country, is part of it 
the lack of our educational system providing us. Young people 
are not going to information technology much more than they 
were ten years ago. I mean, it is not the hot subject. It is 
not the expanding classrooms at our major universities and it 
should be.
    These other companies are depending on HB-1 visas to fill 
their best slots and I do not think you can do that. I do not 
think we can bring immigrants in here and say they are going to 
watch our systems. I mean, I would be a little nervous about 
that.
    So I think it is a problem that we as a country are not 
facing. You know, the military was always one of our huge 
training programs. When we had a large military, you know, they 
trained most of our technical people in all fields. It has 
downsized, it is a permanent force now, they are not in and out 
in four or five years, coming out with good skills and moving 
into the workplace. Whether it is in information systems or 
whether it is flying planes or whatever, health care field or 
whatever, but we have a dearth. I mean, I just do not think our 
educational system is prepared to prepare us for what is coming 
and what is happening and I guess that is the point I am trying 
to make. Is part of your problem the ability to hire people 
that can help you get there?
    Mr. Rush. I agree with your point, but I am going to tell 
you what I told the secretary last week. The problems that we 
see in our bureaus are not skills problems. We have the same 
problem that the private sector has with this highly mobile, 
extraordinarily talented group of folks in IT.
    One of the things we are beginning to see in IT is that the 
skill sets change every one or two years and so the very prized 
employee of 2000 is not the employee you are looking for in 
2001. The people who came in to help us remediate Y2Kproblems 
are not the people who will lead us into the future.
    What Mr. Gates said when he talked about the changes in 
technology in these short cycles, you will have high skills in 
the wrong subjects if you are not careful. That is why we are 
all engaged in an ongoing training process with our IT people. 
These are new skills and they change on a very short timeframe.
    Mr. Peterson. I think my time is up but I would just like 
to urge you to be very communicative with those of us that 
serve here to make sure we are not part of your problem.
    Mr. Rush. Thank you, sir.
    Mr. Istook. What an observation, Mr. Peterson. I would 
shudder to think that we would be part of anybody's problem.
    We have one of our new subcommittee members, Mr. Sherwood.
    Mr. Sherwood. Good morning and thank you.
    I am quite concerned about illegal endeavors using our 
government systems and our banking system to further their ends 
and, you know, you have talked this morning about improper 
behavior in the IRS itself and in your reports talked about the 
huge money laundering of the Russians through one of our major 
New York banks a while ago. I would like you to expand on that 
a little bit and tell me how pervasive you think these problems 
are and what we ought to be thinking about and what we ought to 
doing about it.
    Mr. Rush. I will start with the banking side. In hearings 
last year, largely the Senate hearings, the Permanent 
Subcommittee on Investigations, quite a bit of information was 
developed and reported for the first time on problems with 
private banking. And to be sure you are clear, the two offices 
that we have, the Office of the Comptroller of the Currency and 
the Office of Thrift Supervision, while they supervise banks, 
they have some limits on that authority, largely as it relates 
to the guaranteed deposits held by those institutions, and also 
in trying to enforce a set of rules and regulations largely 
drafted through the Federal Reserve System.
    But there are huge amounts of money in our banks that are 
not looking for deposit insurance, they are looking for a safe 
place to land, they are looking for a way to change their 
character. And, unfortunately, most of the major national banks 
have an interest in private banking because those funds are on 
deposit, they are treated as part of the asset base for the 
bank, they give the bank leverage in its dealings.
    We do not have an answer. I can tell you as a result of 
some of the audit work that we did last year on bank secrecy 
and some of the work coming out of the Senate that there is 
going to be an increased effort to look at the source of these 
deposits. This ``know your customer'' language that frequently 
comes out of our banking committees is a term that does not 
have much meaning because knowing your customer involves more 
than who they are and who is their best friend. Many of these 
individuals were public officials in foreign countries, the 
family members of public officials in foreign countries. There 
is a concern that some of the foreign assistance money coming 
out of our government was skimmed out of those countries and 
deposited in the private banks and then transferred into our 
U.S. banks and there are several examples where money was 
traced out of Central America and out of Africa that was 
handled in that way.
    So it is a serious problem. We do not have an easy answer 
as it relates to our national banks because the amounts are 
huge. The asset base in the last year was more than $3 
trillion. That involves literally hundreds of millions of 
transactions.
    The last piece I would try to contribute is that through 
one of our agencies, the Financial Crime Information Network, 
there is a concerted effort to do a better job of looking at 
individual transactions and reporting them as suspicious 
transactions, but our department is struggling with this 
information. We are trying to develop a regime where we can do 
more than merely collect the data and have a record of 
suspicious transactions and reports and be able to integrate 
that information into law enforcement, both federal and state 
law enforcement. So there are real opportunities in the next 
few years for us to begin using information technology, both in 
dealing with financial crimes and our banking systems, but we 
have not made a lot of progress.
    There is an interesting paper coming out of the last 
administration that outlines a strategy, but it does not 
deliver much in the way of a good outcome.
    Mr. Williams. The IRS databases contain personal financial 
data and corporate financial data from 125 million tax returns 
and tens of thousands of our employees have to have access to 
that in order to make the system work properly. Some of those 
employees have used that access into that very valuable and 
sometimes market sensitive data to engage in criminal 
activities and sometimes just browsing activities, they have a 
personal agenda or mere curiosity. And we have done our best to 
strike hard against that following the passage of the 
Antibrowsing Act in 1997.
    I said in my testimony that 373 of our employees have been 
fired for improper usage and some of them were involved in 
financial crimes that led to 65 indictments. We are trying to 
aggressively move to expand that program, to move against it, 
to ensure that the data that American citizens are forced to 
trust us with is well safeguarded and that is a very robust and 
aggressive program within the organization.
    Mr. Sherwood. I am sure your responses were very frankand I 
appreciate them. They are not reassuring.
    Mr. Williams. No.
    Mr. Sherwood. One other thing that I would like to explore 
a little bit, with our economy being a little uncertain right 
now, especially at the top, our oversight role or your 
oversight role on bank soundness. That in our national banks 
has historically been pretty good. We had the huge savings and 
loan deal a while ago, but the commercial banks have 
historically been pretty good, and yet you mentioned it. So I 
would like to expand on that a little bit because that would be 
the last thing we would need now is a little flurry of 
unpleasant activity in the banking system.
    Mr. Rush. Let me first be clear that in OIG, it is not our 
responsibility to supervise these activities, it is to look at 
how our examiners are supervising these activities.
    Mr. Sherwood. I understand.
    Mr. Rush. Second, let me also remind you as a matter of 
history in this country, most banks make their worst loans 
during the best of times.
    Mr. Sherwood. Absolutely.
    Mr. Rush. And we have just gone through a period of boom 
and now we are ready for the second part of that, as the 
economy is slowing down.
    We recently did a material loss review in West Virginia on 
a national bank that cost the insurance fund about $700 
million. But while there are not a lot of these failures, that 
is the only major failure in a national bank in the recent 
past, when they happen, it costs us. It costs every person who 
deposits in our banks.
    So we are trying to work more closely with the examiners, 
both in the Office of Comptroller of the Currency and Thrift 
Supervision to be sure that we are focused on their examination 
objectives.
    We are also trying to raise some new objectives. We would 
like to go into the next fiscal year looking at areas that we 
have historically not looked at. One I can mention is predatory 
lending. We are looking for opportunities in my office to work 
with both the IG's office at the Federal Reserve Bank and the 
IG's office at HUD. By looking at some of the loan flipping 
allegations that are coming out anecdotally, we think we can 
target some of our audit resources and of the examination 
resources to take advantage of the huge penalties that are 
already in law when you find flipping of loans. So we are going 
to be looking for some new opportunities.
    I do not want to alarm anyone. I am not suggesting in my 
testimony today that there is a threat to our banking system, 
but I am suggesting that my office needs to step up its 
involvement in its relationships with the examiners and with 
other agencies of government.
    Mr. Sherwood. I thought your comment was particularly 
cogent because my 30 years business experience in watching 
several cycles, one of the indicators that you are at the end 
of a cycle is that the banks will give credit to anyone. And 
when that is happening, you know things are about to change. 
And that is what we have just been going through. And, of 
course, the corollary of that, unfortunately, is in the trough 
when they need to be putting the liquidity out, they are all 
burned by the fall of the previous year or so and are too 
conservative. But that is something I am concerned about.
    Thank you, Mr. Chairman.
    Mr. Istook. Thank you very much, Mr. Sherwood.
    Mr. Hoyer, welcome back.
    Mr. Hoyer. Thank you very much, Mr. Chairman.
    We need to guard against being too conservative.
    Mr. Schindel. I do not think that will be a problem.
    Mr. Istook. Just turn the other cheek, now.
    Mr. Hoyer. I want to ask some questions, Mr. Rush, first of 
you, if I can. Both the GAO and Treasury IGs caution that 
serious flaws remain in the Treasury financial management 
system.
    As I had pointed out in my opening statement, I have been 
involved in this for a long time, we have had a lot of ups and 
downs, a lot of fits and starts, and failures in this process.
    It is my understanding that Treasury achieved its 
unqualified opinion in its audit report through manual efforts 
that compensated for flawed processes.
    First of all, can you discuss how Treasury constructed 
their financial statements?
    Mr. Rush. Certainly. Let me defer to Dennis Schindel, my 
deputy.
    Mr. Hoyer. Okay.
    Mr. Schindel. The department has a Treasury consolidated 
statement and it rolls up individual statements from about 16 
entities in the department, all the bureaus, and the debt from 
BPD and the cash accounts at FMS.
    It is not an integrated system. It is more or less a jerry-
rigged effort to roll up individual accounts in individual 
bureaus into a consolidated statement. It is not what you would 
expect to see a corporate organization with subsidiaries to be 
able to put together and that is why, for instance, it takes 
the department several months to put that information together.
    We audit the individual entities who produce standalone 
statements, each of the bureaus, about 16 entities, and that 
gives us the coverage we need to audit the consolidated 
statement.
    The issue is primarily one of the systems that produce this 
information are not in place and there are extensivemanual 
efforts after the books close to come up with the account data. 
Accounts receivables, we do not know what they are throughout the year 
until the books close and there are efforts to identify those. Some of 
it has to be done on a sampling basis because we do not have actual 
data and we have to look at that and determine whether the sampling 
methodology will hold up to give us a reasonable assurance that those 
numbers are fairly accurate.
    Mr. Hoyer. You might explain why we do not have the data. 
Because we cannot store it and compute it and recall it?
    Mr. Schindel. Correct. There are no mechanisms in place to 
produce quarterly statements, interim statements. In the 
Customs Service, trying to account for seized property, they 
have to go through an extensive inventory taking process at the 
end of the year because the data is just not reliable 
throughout the year between what is coming in and what is going 
out of the seized property vaults. So they start with a 
beginning number and then they are looking at what is on hand 
at the end of the year through significant manual inventory 
taking. We have to go out and observe all that to make sure it 
is accurate.
    The systems are not in place. Cost accounting is another 
big issue for the Department of Treasury and the individual 
bureaus. You cannot manage the operations throughout the year 
if you do not know what the individual business units, what it 
is costing you to operate those units and you cannot make sound 
management decisions about allocation of resources and whether 
funds are being properly accounted for throughout the year 
until you are trying to add up all the numbers at the end.
    Mr. Hoyer. Lacking the systems, can you give the committee 
an estimate, of how many people and resources were necessary 
because of the absence of systems to accomplish this objective?
    Mr. Schindel. Yes, we can provide that information for the 
record.
    Mr. Rush. By the way, that includes not only the General 
Accounting Office doing a major job at IRS and the work we do 
both with our direct hires and contractors, but it is quite an 
amalgam of inputs to get that statement out.
    Let me briefly comment, though, on this whole notion of 
what the financial statement outcome was this year with that 
unqualified opinion.
    I am concerned that the Chief Financial Officers Act and 
the Government Management Reform Act have led us into an effort 
to get clean opinions and not produce usable systems. I think 
our department got a well deserved opinion. We have a highly 
qualified staff that can look at these reports and draw a 
conclusion as to whether or not these reports accurately 
reflect what is going on.
    Mr. Hoyer. And before you go on, let me say my next 
question was going to be, and I am trying to focus the 
committee, on disincentives we put into the system which is, I 
think, what you are speaking of at this point in time.
    Mr. Rush. What you end up doing is you end up making the 
effort after the books close to present a product that will 
pass muster, rather than putting a system in place that will 
give managers timely, reliable, accurate accounting information 
throughout the operating year, information they desperately 
need to do their jobs.
    We have a government, not just our department, we have a 
government that largely operates on cuff records and informal 
systems because we cannot trust the core accounting systems in 
most of our agencies.
    Mr. Hoyer. In your on-the-record response to the cost 
consequences of failing to have systems in place, because I 
think this committee needs to know what the trade-offs are in 
terms of not investing in systems and then the expenditures 
that requires.
    Mr. Chairman, I have a lot of other questions. I am sure my 
five minutes has run out, though.
    Mr. Istook. We appreciate very much your questions.
    I cannot but agree with what Mr. Rush was just talking 
about, you can have books that look good at the end of the 
year, but they have not been of any benefit to you through the 
year.
    Mr. Hoyer. Right.
    Mr. Istook. Because you get it all at the end and then did 
whatever it takes to make them balance. It just reminds me when 
I was still a teen. In my father's business, he had me at the 
end of the year for tax purposes go out and post everything to 
different accounts and make sure they balance this way, up and 
down and across and so forth. It did not do him any good 
through the year. And I always remember the time that it took 
me, two and a half days, to try to get a clean opinion and 
ultimately--and I had to prove this to my father, that the 
reason was the adding machine was broken and thought two and 
two under certain circumstances was five. Try proving that to 
your father some time. But I did prove it, we got a new adding 
machine and then it balanced. So you have to have the right 
tools for the job.
    Mr. Tiahrt.
    Mr. Hoyer. That is anecdotal evidence that it is time to 
get a new adding machine.
    Mr. Istook. That is anecdotal evidence. I could not resist 
the temptation to tell the story.
    Mr. Tiahrt.
    Mr. Tiahrt. Thank you, Mr. Chairman.
    I think Mr. Hoyer brought a great point about not beingable 
to have the tools in place to have a substantial financial statement 
that you can use to manage. Every one of the contractors, I would 
suppose, that has just a fraction of the budget that your agencies or 
departments that you are looking over has a requirement for a good cost 
and schedule analysis system to be in place. It is in the FAR, the 
Federal Acquisition Regulations. And it goes beyond my degree of 
reasonability that we do not have something within the government 
structure in order to find those financial tools available to do a good 
job of managing our resources. So I think that would be a substantial 
thing.
    I do not think it is a great cost, either, to put a system 
in place. It is not talking about doubling your budget or 
anything, it is just talking about doing some things that would 
in fact, I think, save money in the long run. So I would hope 
that we can proceed along those lines and find the systems that 
are available.
    I have a couple of questions related to our tax structure 
and how we implement it.
    It seems, Mr. Williams, that every time--we all came with 
the goal of having a simplified tax structure. I think that 
would be a nice thing for America. Yet every attempt we make at 
doing something with our tax structure keeps the accountants 
and H&R Block and everybody more secure in their business. It 
seems like we make it more complicated than simpler.
    We are looking at another round of changes to our tax code. 
Is the system going to be able to handle it this time or is 
there something that we need to do?
    I know in the past, the IRS has had a computer system that 
has been discarded. Can the current system handle it? And, if 
not, what would we need to do to make sure that we have a 
secure system in collecting the revenue?
    Mr. Williams. I am going to invite Pam Gardiner to join in 
my answer of that, sir.
    The need to simplify the tax code is at an extreme level. 
We are seeing our customer service failing us and there are 
things that we could do to make it better, but I do not think 
we are going to get to the point where we are going to be 
completely competent at having a huge workforce explain the 
complexities of the tax code. That complexity is standing 
between us and all of the good things that we want to achieve 
in terms of enforcement, modernization and certainly customer 
service.
    It is a great worry, it is something that we undertook as 
an endeavor as part of the Restructuring Act of 1998 and it has 
not gone well. We need to think of ways to reform it and 
simplify it.
    With regard to introducing new tax changes, I wanted to 
give you some feel for what that means. IRS needs to change all 
of its forms, any notices need to be changed. IRS needs to 
create training and deliver training. And IRS needs to change 
the computer. I think IRS did 250 changes in the last tax year. 
That is very difficult and it is coming at a time when IRS is 
maxed out. We are trying to do computer modernization and 
reform the structure and we are moving on so many fronts that 
we are hitting capacity kinds of problems.
    With regard to the IRS's ability to do these changes, they 
can do these changes, but it will be at a sacrifice to some of 
the other fronts that I know that you want us to progress on 
because it is a multi-faceted process each time there is a 
single change.
    Mr. Tiahrt. Ms. Gardiner.
    Ms. Gardiner. A couple of little minor issues. One is that 
the IRS system just as it is is not necessarily a failure. It 
is sort of like he mentioned, it is just that it is so 
antiquated that for a taxpayer to call in and ask a question, 
then there is a change made to that person's account, and it 
takes a week for IRS' computer to catch up with that change. 
So, when you say will the computer system be able to handle it, 
it will as long as the programming occurs. It can process tax 
returns like it always has. It is more of a customer service 
issue, more than anything else, being able to update the 
records very quickly. But there are limitations.
    When the Innocent Spouse Act was passed, the computer 
system could not be reprogrammed to be able to hold information 
on two different people for the same account. Virtually two 
people filed a joint return and then later there are two 
different kinds of activities happening with that. So they 
could not update the account. They did actually have to write 
programs in a totally different system.
    So there are certain kinds of changes that are so complex 
that the computers cannot be reprogrammed to accomplish that 
until they get the new ones. So that would be the bigger 
problem. And that is part of the problem with why they are 
having a hard time implementing that change.
    Mr. Tiahrt. Well, there are a lot of people involved in 
this, 280 or 290 million people, maybe 300 million people in 
America today. When I go to the gas pump, I pull out my credit 
card and I plug it in and it can tell me whether my credit is 
any good or not, just like that. I just cannot believe we 
cannot design a system that only has so many names in it, so 
many Social Security numbers and it is just manipulation of 
data. It is not putting somebody on the moon or joining two 
space stations together that are in asymmetrical orbit, so it 
is not something that is technologically unfeasible. So it is a 
little puzzling that we cannot sort of catch up with that.
    One of the things that I think is going to challenge all of 
us here in a free country is terrorism and I would imagine that 
either system that you deal with technologically has portions 
of it that are written by engineers that are not American 
citizens, either they are subcontracted or they are somewhere 
in the process. I may be wrong about that, but I would wager 
that it is probably true.
    Do we have any safeguards in place to keep any trap doors 
from allowing data, sensitive business data, sensitive 
technological data, from slipping out a trap door into a 
foreign country, another nation?
    I do not know that we are really prepared for the kind of 
technological terrorism that is potential now and I wonder, is 
there anything underway inside the agencies? If we cannot even 
keep track of our inventory on seizures, I am a little worried 
that we are not thinking about some of the bigger things.
    It reminds me of that Biblical story about getting a sliver 
out of somebody else's eye before you take the mote out of your 
own. I think we have some big problems we are overlooking and 
we get caught up in some of the small ones.
    Is there anything available that is sort of looking at this 
type of terrorism that could get a hold of our system?
    Mr. Rush. I think the answer is yes, sir. In the last 
administration and as we understand a change that will be 
announced shortly in this administration, there was a 
presidential decision directive that looks at this critical 
infrastructure and key agencies, including Treasury, have been 
given a leading role.
    I do not doubt that all of our systems are to some extent 
vulnerable to some damage by folks who work for us or even 
disgruntled employees. What is important to understand is that 
we do have enough information about managing technology to 
build in some safeguards and our problem is not whether or not 
someone can come in and destroy, it is if they do come in and 
destroy how soon can we return our systems to functionality.
    And we have some serious problems in one of our bureaus, 
the Customs Service has a very serious problem with continuity 
of operations if there is a disruption. Most of the other 
bureaus have a much better program in place to continue their 
operations if there is a major disruption, but we are all 
vulnerable, we are all working on those vulnerabilities. Some 
are in a better position to bring systems back up if they fail. 
But this is a concern that has been shared in our community for 
actually the last three or four years and we are making 
progress.
    Mr. Williams. In theory, some really great things are 
happening and I do worry when the rubber meets the road. In the 
computer world, computer capacity and computer security are 
enemies of one another and in the restructuring of the IRS, 
there was a bias that was strong and that lasted for some time 
for delivering the capacity at the expense of computer security 
and it left us in a vulnerable position.
    We are moving now to try to close some of those doors, to 
know when an intrusion has occurred, pursue the person that 
engaged in the intrusion.
    Physical security was not good at the facilities and for 
some of the systems. We are trying to examine that.
    Certification is badly needed. We are way behind, trying to 
catch up. And disaster recovery that Jeff was talking about is 
something that we have made good progress on but we are still 
not in a good place. There is a lot to worry about.
    Mr. Tiahrt. Thank you for your answers.
    Thank you, Mr. Chairman.
    Mr. Istook. Thank you, Mr. Tiahrt.
    Let me for the record, by the way, note because the 
gentlemen have referred to a couple of their assistants that 
are here and I have not identified them for the record, Pam 
Gardiner and Dennis Schindel.
    We appreciate your participation.
    And, for the record, I should note that they were sworn 
along with Mr. Williams and Mr. Rush earlier.
    Let me follow up on what Mr. Tiahrt was asking about the 
system vulnerability. You mentioned in particular Customs. Of 
course, we have a major initiative that is underway that we 
hope would remedy that, but we realize that it takes time. It 
is a challenge because if somebody was threatening your 
records, if they were physical records in file cabinets and 
somebody carries in, you know, a five-gallon can of gasoline 
and is about to slosh it over the files, you recognize the 
threat. If someone who is a disgruntled worker that has access 
brings in a floppy disk or is provided remote access and you do 
not even see the physical disk when they log in and leave a 
virus, perhaps, it is very difficult, we know, to track those.
    But I wanted to know of some particulars about the Customs 
system vulnerability. I think it was Mr. Rush who referred to 
that.
    Would you elaborate a bit on that for us because that is 
going to be a key part of some of the financial decisions we 
make this year and I would like to understand what you see.
    Mr. Rush. I would prefer to elaborate about the 
vulnerabilities in an executive session because some of that 
information has been limited and some even classified.
    Mr. Istook. Certainly.
    Mr. Rush. I can generalize by saying that our audit 
experience in the last few years and some audit experience by 
the General Accounting Office in the last years has 
consistently reported that there are problems with theCustoms 
systems and they primarily deal with continuity of operations and the 
concern, it seems to me, the last few years is that we have been trying 
to balance within the Congress and in the administration the right 
amount of money to bring the new systems on, because I think Customs is 
literally at wits end with the resources available to keep the old 
systems operating at a time when they know they need to move to new, 
modern systems at great expense.
    And I think the challenge of this administration and this 
Congress, particularly in this year's funding, is trying to 
recognize that even if you are prepared to fund ACE into the 
future, you have to protect the system that is already in place 
and it is not an adequate system and there are a number of very 
technical problems that I would be more than happy to arrange 
to bring our folks up.
    I think we are in complete agreement with Customs about the 
high cost of doing some of the things that we have recommended. 
We issued a seven-day letter to then Secretary Summers last 
year bringing that concern to the highest level of attention in 
the department. And I think we may have briefed some of the 
staff of this committee on those concerns last year. We briefed 
the Finance Committee more than once on this issue last year. 
But I probably should reserve to an executive session some of 
the most obvious vulnerabilities so as not to create problems 
for our family. The Customs Service is part of the department 
that I am in.
    And I hope we can be heard on this appropriations issue. I 
am not here to lobby on behalf of the administration's budget. 
Certainly I am not prepared to do that, nor have I have been 
asked to do that, but it is clear that this is a resource 
driven solution. This is not a solution that is going to be 
resolved by trying to balance and juggle technologies. You have 
to fund and support an old system at a time when you are trying 
to fund and invest in new technology.
    Mr. Istook. Certainly. And I certainly appreciate and 
respect your request regarding executive session. In fact, that 
ties in with something that I had in mind that I was going to 
request perhaps later. I think there is a great amount of 
valuable information that each of you have and I think you are 
communicating it very well. I think it would be beneficial for 
those who are interested with your approval, gentlemen, to set 
up for a future time an informal get together with yourselves 
and members of this subcommittee which would also provide an 
opportunity for the executive session.
    I just think there is so much there to explore that 
sometimes can be best explored in an informal way, where there 
is just give and take and we do not worry about who has five 
minutes and we can follow lines of information and so forth. 
But if you would be agreeable to that, I would certainly like 
to set that up.
    Mr. Williams. We would welcome that, sir.
    Mr. Istook. That would be great.
    Let me ask, going back to something else that was 
mentioned--and we will look forward to this session--there was 
a lot of reference to the challenge of keeping the people that 
have the command of the information technology and Ms. Gardiner 
mentioned you can have someone, get them through training and 
even if you have a contractual penalty for their leaving early, 
they say, fine, it is worth it, we will pay the penalty, which 
does not help you.
    But when we try to translate the turnover into dollars, 
which goes back to the issue of the mix of what do you try to 
do in-house, what do you need to contract out for, when you try 
to say what is the cost and what are the benefits because of 
the inherent inefficiency and turnover, at least under the 
current government personnel standards and procurement 
standards, when you try to compare that with what we are 
spending there with an enterprise approach, as you described 
it, both in terms of costs and in terms of benefits, how can we 
get a handle on that? It is a big topic, but it is one that has 
huge budget implication and huge implications on how we 
allocate resources in this subcommittee.
    Mr. Rush. Well, we need money.
    Mr. Istook. I have heard that before.
    Mr. Rush. I do not say that to give you a flippant answer.
    Mr. Istook. Certainly.
    Mr. Rush. I can tell you now that----
    Mr. Istook. But I know it is structural as well as 
financial, because government has money----
    Mr. Rush. Sure.
    Mr. Istook. I mean, the government even has more money than 
Microsoft, believe it or not, Uncle Sam has more money than 
Bill Gates.
    Mr. Rush. We need to talk about that, too.
    Mr. Istook. But, please, go ahead.
    Mr. Rush. The Office of Personnel Management last year 
helped us develop some additional pay and benefits for our IT 
people, but largely for those at lower pay grades. I think it 
only goes to about grade 12. And certainly at that pay grade 
there are important contributions being made by employees at 
that pay grade, but the skill levels that we are looking for 
tend to be higher than that.
    Second, OPM has by regulation given us authority to pay 
retention benefits so if we have an employee who walks in and 
says I am going down the street for a better job in IT because 
they are going to offer me $10,000 more a year, we are allowed 
to have a set of programs in place that allow usto offer 
retention benefits to that person if they will remain.
    Now, again, we can only pay that benefit as the person is 
walking out the door. It is not something we can negotiate with 
as we bring people on. It has not worked in my office. We are 
looking at an opportunity to try to bring those regulations in 
place. I think TIGTA may have more experience on the retention 
bonus. In fact, I think we have looked at the TIGTA approach at 
trying to retain people.
    But this is largely driven by a set of personnel systems 
and personnel regulations that in not just IT, in many areas, 
do not give us the kind of compensation flexibility that we 
need, so when there are shortage of skills, that we can go out 
and compete with the private sector.
    It is all about money and if we have a little more 
flexibility and a little more money, I think there will be some 
opportunities to retain people. If we are going to deal with a 
mobile workforce in IT, and that is what the future is, at 
least the next three to five years, we not only have to be 
prepared to pay benefits as they go out the door, we need to 
offer something when they walk in, what gives an employee an 
incentive to invest in two or three years with an agency, which 
is close to the life cycle on some of our systems and much of 
our equipment.
    Mr. Hoyer. Mr. Chairman, would you yield?
    Mr. Istook. I certainly would. And, by the way, I should 
let people know, I understand we have four votes which is just 
extremely disruptive to being able to continue the hearing 
after the votes.
    Go ahead, Mr. Hoyer.
    Mr. Hoyer. And, unfortunately, I have a meeting with 
Speaker Hastert at 11:45, so I will not be able to come back.
    The question you were asked, obviously, is particular in 
nature in terms of what we can do for incentives and people 
leaving or to enhance in certain skills area.
    But the Bureau of Labor Statistics has reported under the 
current regime of how you make the comparison--with which, by 
the way, OMB has never agreed nor have the administrations and 
I have always challenged them to come up with a system that you 
tell me works because I am convinced that it will show if not 
the 32 percent disparity between jobs of comparable skills and 
responsibility, a 32 percent gap exists generally across 
government.
    Now, in the private sector, it is hard to convince people 
in Don's district or people in my district that that is the 
case and the reason for that is generally the federal 
government requires for the services that we perform for the 
American people a higher set of skills. And, as a result, when 
you say Microsoft does not have more money than the federal 
government, I do not know what Mr. Rush was thinking, but my 
view is that is really not accurate because Bill Gates--and I 
do not say this for partisan purposes----
    Mr. Istook. He may be able to apply more at the point of 
attack.
    Mr. Hoyer. Bill Gates would never say, for instance, we are 
charging too much for our product because it is more than it 
costs us to produce. Now, that is essentially what we are 
saying, we are taxing people too much because we are getting 
more revenues than it costs us to produce.
    But what Mr. Rush, I think, and Mr. Williams and Ms. 
Gardiner and Mr. Schindel would say not for themselves, but 
when they talk to people who are working with them who are 
implementing very complicated systems, that the guy down the 
street will pay a minimum of $10,000, it is probably closer to 
$20,000 or $25,000 differential at this skill level, that we 
have a determination to make. You and I will discuss this and 
you have been very forthcoming, because this committee has 
responsibility for overseeing the general pay schedule of 
federal employees through OPM, as you know, and it is a crisis 
situation where now not only do we have a differential, and I 
apologize for taking the time, but it is a serious problem, but 
we also have a pay compression. In the 1980s and very frankly 
the guy who was most helpful, Don, you were not here yet--was 
Ed Meese because but as one of President Reagan's closest 
advisors was responsible for hiring and working on second and 
third and fourth level appointments.
    The top level, Department Secretaries, is not a pay issue. 
And even at the Deputy Secretary level, pay is not an issue. 
First of all, most of those folks have already made fortunes--I 
dont think Rumsfeld cares what he is paid. I don't think, Rubin 
cares what he was paid.
    Mr. Istook. Maybe some day you and I can be in that 
circumstance.
    Mr. Hoyer. Or for O'Neill, it is not a pay issue. But when 
you get to the 38, 39, 40, 45 year olds, they still have young 
kids, they are sending them to college, pay becomes an issue. 
And when you are saying for these third level, very high levels 
but third level down from secretary, deputy secretary and then 
your assistant secretaries and directors of departments, highly 
responsible jobs, and you tell them we would like you to come 
on board, they have to make a financial determination as to 
whether or not they can take a $50,000 or a $100,000 cut.
    I am not suggesting that we are going to increase salaries 
that much, but we have got a real problem on our hands, Mr. 
Chairman, that you and I and this committee are going to have 
to address.
    I apologize for taking the time, but it is an 
importantissue you raised, Mr. Chairman.
    Mr. Istook. And I agree, it is a very important issue. As I 
referred to a moment ago, we have a series of four votes which 
is going to consume, to get through all those, probably at 
least a half hour. I do not want to keep people at suspense and 
waiting for us, especially if we intend to have an informal 
session that will allow people very free latitude to go into 
things deeper. Plus, of course, we always have the inevitable 
questions for the record, which will be forthcoming.
    Mr. Hoyer. I have a lot of those, Mr. Chairman, which I 
will submit.
    Mr. Istook. I am surprised, but okay. But with that, I 
think what we need to do is adjourn this particular session 
accordingly.
    I am sorry, Mr. Sherwood, that we did not get back to a 
second round there, but we will have the informal 
opportunities.
    Again, I want to express my appreciation. I think the 
witnesses are being very helpful to us on what are core issues 
with which we are going to have to deal this year, which is why 
we wanted to have you in for this opening hearing because I 
think it will do us a lot of good throughout this year and in 
the times to come.
    So, again, I express my appreciation. I thank everyone for 
taking the time and we will be adjourned.


              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




                                          Thursday, March 29, 2001.

         U.S. CUSTOMS SERVICE, COUNTERDRUG PROGRAMS AND POLICY

                                WITNESS

CHARLES WINWOOD, ACTING COMMISSIONER
    Mr. Istook. The subcommittee will come to order.
    I would like to welcome our guests to the hearing this 
morning regarding the U.S. Customs Service. I am pleased to 
welcome the Acting U.S. Customs Commissioner, Charles Winwood. 
We are going to be exploring the counterdrug mission of the 
Customs Service.
    The United States counterdrug policy is in the public eye, 
certainly that public attention has been reemphasized lately, 
whether it is dramatized in movies, expounded on and explored 
on ABC's Nightline and other programs, or, of course, as the 
constant subject of debate for pundits, politicians and 
parents, people in the schools, everyone that has an interest 
in this major problem.
    It does seem a little bit fashionable, unfortunately, 
lately to suggest that the multiple-layer approach to drug 
enforcement, interdicting drugs, enforcing the laws, treatment 
and prevention, has been a failure, in particular with law 
enforcement.
    I happen to believe that attitude is a disservice to the 
men and women who work tirelessly to stop the trafficking and 
to protect our society from the scourge of illegal drugs.
    Today we will look at one of the principal agencies in the 
battle against the drug traffic. The Customs Service, for over 
two centuries the protector of our nation's borders, is the 
first line of defense against illicit drug traffic coming in 
from overseas or sometimes just across a river or some other 
border.
    With a presence at over 300 ports, Customs ensures the 
enforcement of our laws governing the movement of goods and 
passengers. Customs carries out sophisticated investigations of 
trafficking and money laundering, ranging from long-term 
investigations into those to quick response to investigative 
leads, operating both at home and through our embassies abroad.
    The Customs Service through their Air and Marine 
Interdiction Division executes the detection, monitoring and 
interdiction mission from Bolivia to Canada as the linchpin of 
the interdiction effort. With 19,000 employees, including 
inspectors, agents, trade specialists, pilots, canine and 
marine enforcement officers and scientists, Customs is a 
complex tool, a potent tool, in our arsenal that we bring to 
bear against drugs.
    Regardless of the ebb and flow of popular opinion, illicit 
drugs have been and always will be a threat to ourselves, our 
society and absolutely to our children. Customs always will 
need its dedicated and varied workforce to anticipate, to deter 
and to stop that traffic as best can humanly be done.
    Today we will be looking at the nature of the challenges 
that Customs is facing, the tools, the resources, its role in 
joint efforts with other agencies. In addition to a description 
of those efforts, I expect we will hear how the Customs Service 
would grade its own performance and what standards we should 
expect it to achieve. In other words, how do you define success 
in a mission such as this?
    As we proceed with considering the budget for fiscal year 
2002, such information, of course, is crucial to gauge the 
tradeoffs and the priorities we have to consider and establish 
to help Customs attain that goal of reducing and halting the 
trafficking.
    This subcommittee long has been supportive of increasing 
resources for Customs to be able to do its job, both to stop 
drugs and to carry out its overall mission. By any estimate, it 
is reasonable to agree that Customs does have severe need for 
personnel, equipment and technology to meet the unfortunately 
expanding workload when it comes to drugs and, of course, the 
positively expanding workload when it comes to trade. Trade 
levels, of course, are expected to double by 2005 and drug 
seizures continue to set records.
    I look forward to hearing from Commissioner Winwood this 
morning and discussing the issues.
    I will digress just a second on a couple of recent 
newsworthy items. In fact, there is one even more recent that I 
know the Commissioner will tell us about.
    So I will not steal your thunder, Mr. Winwood.
    Let me heartily commend first the men and women of U.S. 
Customs for success in Operation Blue Orchid where the devotion 
to investigative efforts such as applied in the counterdrug 
operations was applied on this occasion to crack an 
international child pornography ring that was operating between 
here and Russia and that type of effort, of course, will 
continue to receive the strongest possible support from this 
committee and I know from the entire Congress.
    In addition, of course, there is the current crisis 
regarding the outbreak of mad cow disease and foot and mouth 
disease in Europe, with great concern over the adequacy of our 
border inspection and the resources to protect the health of 
our public, the agricultural economy and the economy in 
general.
    I know some fingers are pointing at inadequate resources 
for Agriculture Department inspectors, but I have to observe 
that Customs is working in tandem with USDA on that issue. This 
demonstrates a tendency to pay attention to significant 
problems, unfortunately, sometimes only after the problem has 
become a crisis. As global trade increase, we are going to see 
more of that sort of thing.
    By analogy, the report last year from the Commission on 
Port Security was addressing vulnerabilities and protecting the 
nation from trafficking and terrorism through seaports, but a 
plan of action is still needed to address those shortcomings. 
And I certainly hope that it is not going to require any 
significant scandal or disaster to get attention to the real 
needs that the Customs Service has for the infrastructure and 
resources and personnel that are necessary.
    That concludes my comments and before we hear from our 
witness, Mr. Hoyer as our ranking member, I want to give you a 
chance to make your statement.
    Mr. Hoyer. Thank you very much, Mr. Chairman, and I want to 
welcome Acting Commissioner Winwood to this counterdrug 
hearing.
    I certainly also want to wish him a very happy birthday. I 
understand it is his birthday.
    Mr. Istook. I was going to do that.
    Mr. Winwood. I was hoping you did not know that.
    Mr. Hoyer. Was that the disclosure that you were going to 
leave to him, Mr. Chairman, about great success?
    In any event, given our next hearing is the Customs Service 
2002 budget hearing, I am sure we will be seeing much more of 
Mr. Winwood in the future.
    As I have said in the past, Mr. Chairman, the Customs 
Service is, as you have observed, truly on the front line 
protecting the American people against terrorism, money 
laundering, child pornography, financial crimes, drugs and even 
biological threats like foot and mouth disease, mad cow 
disease, you mentioned those, as well, of course, as its 
regulatory function of ensuring that our borders and our taxes 
are paid appropriately.
    Over the past ten years, Customs' workload has skyrocketed. 
The number of entries has increased nearly 160 percent, the 
number of air and sea passengers has increased nearly 60 
percent, while personnel has remained relatively stagnant. At 
the same time, drug smugglers unfortunately have become more 
sophisticated in how they bring deadly drugs into the United 
States, making the Customs Service's work even harder and 
needing more resources.
    That is why, Mr. Chairman, I am very concerned over the 
president's fiscal year 2002 request for the Treasury 
Department. From what we have seen of the president's budget, 
and I understand we do not have it yet, the Treasury Department 
law enforcement agencies would be requested to operate at 
levels well below the amounts necessary to maintain current 
programs.
    In particular, the Customs Service must continue to 
modernize their import processing system and the automated 
commercial environment or ACE. However, the administration's 
budget does not appear to provide an increase to meet the five-
year development plan.
    In addition, last year, the Customs Service submitted its 
resource allocation model to the committee. Based on that 
report, Customs estimated that it would require nearly 15,000 
additional positions. It is not clear, of course, how many of 
these positions are funded in the president's budget, if in 
fact any are.
    This funding deficiency is even more difficult to 
understand based on the funding levels for Justice law 
enforcement agencies. This subcommittee has worked hard to 
ensure that funding for the Treasury law enforcement is on apar 
with Justice law enforcement to the extent that the needs are 
comparable. However, as I understand it, the president's blueprint 
highlights the fact that the FBI and the Bureau of Prisons receive an 8 
percent increase and DEA has received a 9 percent increase.
    Mr. Chairman, protecting our nation from the influx of 
drugs is a huge undertaking. The increase in international 
trade, advances in transportation and communication only 
complicate these efforts.
    Mr. Chairman, it is imperative that this subcommittee in my 
opinion provide the appropriate resources to stem this problem 
and to provide Customs with the resources necessary to do what 
we expect them to do.
    Mr. Winwood, I want to thank you for appearing today and I 
look forward to your testimony.
    Mr. Winwood. Thank you, sir.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Istook. Thank you, Mr. Hoyer.
    And I certainly share your concern with having adequate 
resources and I hope we can all work together to make sure that 
when we make funds available for pressing needs that we try to 
make sure we expend our resources on the things that are the 
highest priority and find ways to achieve savings on things 
that are lower priorities or perhaps are not necessary--that 
does not mean they are in this subcommittee, but in the overall 
scheme of things. It is a great challenge that we have.
    Mr. Winwood, I was going to wish you a happy birthday 
before; he beat me to the punch and that is great, although I 
did not see the punch bowl. We appreciate your taking time on 
such an auspicious occasion to nevertheless be here with us.
    It is my custom, of course, to swear all witnesses that 
appear before the subcommittee, so if you will just stand and 
we will administer the oath.
    [Witness sworn.]
    Mr. Istook. We are very pleased to have the Acting 
Commissioner of the Customs Service, Mr. Winwood, who certainly 
is a career public servant in this matter.
    We certainly appreciate your devotion. I know you have been 
at the forefront of a lot of the significant efforts that are 
underway right now to improve the capability of and to 
modernize the Servicer, and we are grateful for that.
    Mr. Winwood, we would be very happy to receive your 
testimony. We, of course, have the written version and I always 
encourage people to not worry about including the whole written 
one. You can be as extemporaneous as you wish. The entire 
witness statement will be in the record, of course.
    Mr. Winwood. Chairman Istook, Congressman Hoyer, members of 
the subcommittee, first of all, thank you for the birthday 
greetings. It is much appreciated. But more importantly, thank 
you for this opportunity to testify on the vital role of the 
U.S. Customs Service in implementing this nation's drug control 
strategy.
    As you mentioned, Customs is the nation's oldest law 
enforcement agency founded in 1789. We are responsible for 
collecting revenue, protecting the flow of legitimate travel 
and trade, and enforcing the laws of the United States. For 
over 200 years, the Customs Service has stood as America's 
front line against illegal contraband entering our borders, 
contraband that includes everything from child pornography to 
nuclear materials to illegal narcotics. Narcotics smuggling 
dominates all the others.
    Detecting narcotics in the massive sea of passengers and 
cargo entering the United States each year is an immense 
challenge for us and it has been made all the more challenging 
by the explosive growth in global trade, as you both have 
mentioned. As you can see on the chart on my left, we call 
these the windows of opportunity that smugglers may use and 
they are many and diverse. We processed nearly 500 million 
travelers last year, about 140 million cars and trucks and over 
a trillion dollars worth of trade.
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    Now, despite these difficult odds, the men and women of the 
Customs Service continue to seize drugs in record numbers, over 
a million and a half pounds of cocaine, heroin, marijuana and 
other narcotics just last year. They have also taken on the 
menacing new threat of club drugs with remarkable success, 
seizing over nine million tablets of Ecstasy in 2000, about 
triple the amount from the prior year.
    Customs' unique position at the border allows us to exploit 
the connections between drug transportation, seizures at the 
border and criminal trafficking inland through all parts of the 
country. Many of our seizures originate with our 7500 
inspectors who screen incoming travelers, conveyances and cargo 
at the 301 ports of entry across the United States.
    Our seizures are also the product of the fine investigative 
work carried out by Customs special agents who conduct 
undercover operations, controlled deliveries and Title 3-based 
surveillances in an effort to disrupt and dismantle smuggling 
networks.
    In addition, we rely on the Customs Air and Marine 
Interdiction Program as a primary tool in the fight against 
drug trafficking. Customs deploys air and marine assets along 
our borders, throughout the areas in which the smugglers 
operate and deep into the source countries to interdict illegal 
narcotics destined for U.S. markets. Operating as a team, our 
inspectors, canine enforcement officers, intelligence analysts, 
agents, pilots and marine officers contribute to a highly 
coordinated and effective strategy to prevent narcotics from 
entering our country.
    Our primary threat areas for drug trafficking centers 
around three zones: the source zone, the transit zone, and the 
arrival zone. In the arrival zone, which comprises all the U.S. 
territories, the southwest border continues to be the main 
gateway for cocaine entering the United States. Mexico is the 
preferred transit route for up to 60 percent of the cocaine 
sold in the United States. The drug transportation groups 
operating there are very powerful, they are well financed and 
they are resilient.
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    The Caribbean corridor also remains a top focus of Customs 
in the transit zone. It is the second most important route for 
narcotics trafficking. Cocaine smuggling into Florida is heavy 
in this area, eased by the shorter distances the smugglers 
travel from South America to various staging points along the 
Caribbean island chain.
    Customs also claims a strong and active presence in the 
source zone for illegal drugs. This area includes the countries 
of Colombia, Bolivia and Peru. One of the most important 
elements of our national drug strategy is continuous airborne 
surveillance over the Andean Mountains, across which most of 
the cocaine produced in that region travels. U.S. Customs is 
responsible for the vast majority of flights that perform this 
mission. Our P-3 early warning airborne aircraft, with 
detection systems designed explicitly for drug interdiction, 
are the mainstay of source zone surveillance.
    The subcommittee may also be interested in the fact that 
Customs serves as the current chairman of the Interdiction 
Committee, a federal interagency group that advises the Office 
of National Drug Control Policy. As such, we have been actively 
involved in streamlining the coordination between federal, 
state and local law enforcement agencies operating along our 
southwest border.
    Last year, the Interdiction Committee also began a process 
to designate the Commissioner of Customs as the Arrival Zone 
Interdiction Coordinator, with responsibility for developing an 
arrival zone interdiction plan. We are working on that plan as 
we speak.
    Turning back to the investigations for just one moment, 
Customs is also one of the lead agencies responsible for 
uncovering money laundering. We actively investigate the 
techniques that cartels use to repatriate drug dollars and 
seize those proceeds whenever possible. Last year, we seized 
$204 million in cash, bank accounts and monetary instruments 
derived from drug trafficking.
    One of the most sinister methods we have been dealing with 
of late is the Black Market Peso Exchange or BMPE. This is a 
system the cartels have invented to use to convert thedrug 
dollars they have accumulated in the United States into pesos in 
Colombia, mainly by exploiting U.S. business and Colombian laws. By 
working against the BMPE, Customs not only saps one of the cartels' 
most critical resources, their profits, we also help to neutralize the 
damaging impact of their money laundering activities on U.S. companies 
and economies in South America.
    Customs also participates in numerous interagency programs 
and task forces designed to cripple the illegal drug trade. In 
addition to the Interdiction Committee, we play a key role in 
the high intensity drug trafficking areas initiative led by 
ONDCP.
    We also play a major part in the Department of Defense's 
Joint Interagency Task Force, which commands and controls the 
air and marine assets of all the federal agencies in the source 
and transit zones.
    As a result of the interagency cooperation and intelligence 
sharing, we are in a position to respond to the changing threat 
on all fronts. In the south, the Air and Marine Interdiction 
Division utilizes our P-3s and interception assets, which 
include 26 Citation jets, to help host nations at the source in 
the apprehension of smugglers. Our assets detect and track 
aircraft suspected of carrying narcotics and pass that 
information off to host forces for final action.
    As this chart to my right shows, the Air and Marine 
Division deploys out of forward operating locations in Manta, 
Ecuador and Aruba, Netherlands Antilles. In addition, we have 
Citation aircraft stationed in Hermosillo and Monterrey, Mexico 
where we conduct very successful joint air interdiction 
operations with the Mexican government.
    We are vigilant in our response to the air and marine 
threat and to any changes in that threat. Of late, our 
intelligence points to the increasing use of the Eastern 
Pacific Ocean as the preferred transit route for moving cocaine 
into Mexico, where it is then transported to our southwest 
border. In fact, it is estimated that over 50 percent of the 
approximately 645 metric tons of cocaine departing annually 
from South America travels by this route. Loads are typically 
relayed to Mexico through a network of fishing vessels and go-
fast boats that link suppliers in South America with Mexican 
trafficking groups.
    Shifting to other fronts, Customs is also charged with 
seizing illegal drugs transported by commercial air. As long as 
the drug trade remains so highly profitable, Customs will have 
to contend with travelers who attempt to smuggle narcotics 
either on or in their bodies. It is one of the most difficult 
and sensitive aspects of our mission.
    As the members know, over the past two years, we have 
engaged in a thorough review of the process by which we select 
and search arriving passengers for drugs. We have instituted 
numerous reforms to the personal search procedures, overhauled 
the training we provide for our personnel, and taken every 
action necessary to guarantee that the rights and safety of 
travelers are protected.
    As a direct result of our changes, Customs decreased the 
number of searches of air passengers by 60 percent from 1999 to 
2000, while maintaining and in some regards increasing our 
overall level of airport seizures.
    Technology has also helped us immensely. Customs is 
applying new technologies in all aspects of drug interdiction, 
from the non-intrusive body-scan machines installed at major 
airports to mobile truck and rail X-ray systems deployed at our 
land borders. And no discussion of technology at Customs, or of 
our counterdrug efforts in general, would be complete without 
reference to the Automated Commercial Environment or ACE.
    We process 98 percent of the nation's trade with our 
automated systems. For the past 17 years, we have relied on our 
current system, the Automated Commercial System or ACS, to 
screen incoming goods and collect data on the commerce that 
flows into our nation. But that system is now obsolete. 
Fortunately, we believe we have an answer in ACE.
    ACE is our next generation system for trade processing, a 
network that leverages the power of today's new technologies, 
including the Internet, to move goods efficiently and target 
those shipments most likely to be in violation of U.S. laws.
    Thanks in great part to this Subcommittee, Customs was able 
to secure the first installment of start-up funds for ACE in 
our 2001 budget. We thank you for that vital support and we 
look forward to your continued assistance as we proceed with 
our development plans for new automation.
    Mr. Chairman, I have touched on an array of programs, 
policies and plans today, all related in one way or another to 
our core border enforcement mission. My goal was simply to 
paint the spectrum of Customs' counterdrug activities on the 
broad canvas on which it must be portrayed. While we will 
always be known first and foremost as a border agency, the 
truth is our drug fighting impact is felt well beyond the 
boundaries of the United States. Customs is a critical link 
throughout the chain of our national drug control strategy, 
extending the entire length of the source, transit and arrival 
zones.
    We face daunting challenges in maintaining that presence 
while contending with exploding border traffic. There is little 
doubt of that based on the numbers. The drug traffickers are 
ruthless, well financed, and relentless foes, but I am 
confident that with the continued support of Congress and this 
Committee that we, Customs, will match them step for step.
    I thank you again for this opportunity on behalf of the 
Customs Service and at your leisure would be happy to answer 
any questions.


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    Mr. Istook. Thank you very much, Mr. Winwood. And before 
posing questions myself, I want to note we have had several 
additional members of the Subcommittee who have arrived: Mrs. 
Meek from Florida, Mr. Tiahrt from Kansas, Mr. Sweeney from New 
York and Mr. Sherwood from Pennsylvania. And I think this is 
actually only our second hearing this year and the first one 
Mr. Sweeney has been able to make. We are happy to have you 
here.
    Mr. Sweeney. Thank you, Mr. Chairman.
    Mr. Istook. Mr. Price is coming in.
    I wanted to mention to the Subcommittee members, I am going 
to try to be diligent on enforcing the five-minute rule on 
myself as well and to recognize members for their opportunity 
in the order of arrival, as opposed to alternating and so 
forth, although I will try to make sure if it gets too 
lopsided, just one side of the table getting all the questions 
in a series, I might break it for that reason, but I certainly 
want to give everyone their opportunity and not hog the time 
myself, either.
    Let me ask you, Mr. Winwood, how do you define success in a 
mission of trying to interdict the drug traffic?
    Mr. Winwood. Well, that is an excellent question, Mr. 
Chairman, and I think we are developing some very good and 
rational measures to show the worth of the investment that we 
have received in this.
    The first thing I would say as a proviso, though, is it is 
very difficult to have any type of baseline measure when you 
really do not have a solid handle on the volume and the 
universe that you are dealing with. I do not think anybody has 
successfully determined the depth and extent and breadth of the 
volume that comes in. There have been very good estimates and 
those estimates obviously are larger than what we are 
physically able to interdict, at least in the U.S. Customs 
Service.
    It is a combination of factors. We take a look at the 
number of resources we use. You have costs and the time 
associated with it and then the value, the volume and the 
number of events that you determine to include--not only for 
interdiction but how you then proceed to move up through the 
organization, to dismantle, to disrupt and to close it down.
    I think an analogy I would use is the example you used, Mr. 
Chairman, on Operation Blue Orchid. It is not just enough to 
identify that there is a child pornography ring operating and 
to seize the product or an item. It is much more important to 
go all the way through to completely dismantling that 
organization.
    So that is how we measure success, not just the numbers, 
but comparing it to what the investment was, to the outcomes, 
but also what goes beyond that from the standpoint of were we 
able to prevent, dismantle or at least to cause disruption. And 
we keep measures along those categories.
    Mr. Istook. And as far as measuring whether--if you look 
back, for example, one year at a time and you say we believe 
that we were successful this year because we interdicted so 
many tons of different drugs or we had so many arrests, are you 
ever at a point where you can say a particular level of effort 
or of results is acceptable?
    Mr. Winwood. My view as Commissioner and I think the view 
of the senior people and the officers in the field is that we 
are never satisfied until we can destroy it and so the level of 
satisfaction is relative. Obviously, we have not been able, as 
a government and as an agency, to completely prevent or stop 
this terrible trafficking. I think we have made some inroads, 
but the level of satisfaction is dependent upon our ability to 
stop it and I think it is a combination of, not just 
enforcement, but also recognizing the need for education, 
treatment and building on the whole idea of prevention and 
education.
    If I may, I would like to use another example. We pride 
ourselves on getting in front of the Ecstasy smuggling 
activities coming into the United States. I talked about triple 
the amount of pills discovered in fiscal year 2000, nine 
million units. But I think more important for us, we are just 
as proud of the education campaign, the outreach campaign, our 
Internet campaign, our reaching out to parents and children, to 
describe what this threat is, how to identify it and how to 
help educate their children to stay away from it.
    So I do not think we are overly satisfied with success 
until we can look everybody in the eye and say trafficking has 
definitely slowed down and it is going away.
    Mr. Istook. I know you mentioned that--I believe it was 60 
percent of the cocaine traffic, whatever the exact definition 
was, flowing through Mexico and my last question of this series 
has to do with recent statements. President Fox and President 
Bush got together. President Fox was quoted as saying that both 
countries would re-invent the total organization for combating 
organized crime and narco trafficking. He also said the current 
certification about the level of effort by Mexico is a process 
that he believes does not work.
    Now, if you are the president of the nation through which 
more volume comes that flows into the U.S. saying the total 
organization needs to be re-invented, now, whether you agree or 
disagree with his assessment, the fact that that comes from the 
leader of Mexico in this situation indicates that it has to be 
seriously considered and recognized, what do we do to improve 
that?
    So do you agree we need to re-invent the total 
organization? And, if so, how? And what does that mean on 
certification?
    Mr. Winwood. Well, I do think that it is time for us to 
constantly rethink what we are doing and see if we can come up 
with avenues to address this. Let us talk about Mexico 
specifically.
    I think there are some additional cooperative efforts that 
have to go on and I think that the Mexican government is open 
to that. We are looking at some additional training initiatives 
between the U.S. Customs Service and the Mexican Customs 
Service, in conjunction with the two governments.
    I think we need to rethink how we position our resources. 
We do have a very successful air operation going on in 
conjunction with the Mexican government. Where we have 
Citations, as I mentioned in my testimony, they have matched 
that by acquiring similar aircraft so that we can force 
multiply for them and they can see the advantage of using this 
type of equipment.
    I think the areas that we really have to work on, though, 
Mr. Chairman, are better exchanges of information, better 
intelligence gathering, better efforts by both governments to 
dismantle Mexico as being a drop-off point.
    You know, they are a victim just as well as we are. They 
are a victim of the cartels. They do not produce, they are a 
transit zone. And I think there is a lot more that can be done 
to figure out ways to disrupt use of that country as a conduit.
    Mr. Istook. I want to come back to this, but I think my 
particular five minutes is exhausted, so I would like to 
recognize Mr. Hoyer.
    Mr. Hoyer. Thank you very much.
    I want to ask some specific questions, Commissioner. Under 
the Consolidation Omnibus Reconciliation Act of 1985, COBRA, 
you collect nine different fees for services provided to 
travelers.
    First of all, do these fees adequately cover the costs?
    Mr. Winwood. One in particular I think you are referring 
to, Mr. Hoyer, is the air passenger fee for the collection and 
processing of arriving international passengers. Right now, the 
fee does cover the cost. I must admit that this past fiscal 
year we have had a bit of a scare in the sense that the 
collections matched the expenses for the first time probably in 
the history of that fee. So we had to do some re-analysis of 
the use of the funds to make sure that we could adequately 
cover the cost of operations. There are a bunch of reasons for 
that.
    Mr. Hoyer. Prior to that time, the fees have exceeded the 
costs?
    Mr. Winwood. Yes, sir. Exceeded in the sense that we were 
able to have a cushion, a fund. As you know, there is a 
requirement under the bill that we maintain a bank account of 
$30 million and then we place anything that is not used for 
recurring costs into a revolving fund to be used as a hedge for 
the following years in case there is unusual growth, et cetera. 
This was the first year that we did not have the luxury of 
having an excess to be put back into the fund, although we did 
maintain the $30 million balance that was required.
    Mr. Hoyer. That $30 million is not just from the air 
passenger fee, is it?
    Mr. Winwood. Yes, sir. From what we call the COBRA fee.
    Mr. Hoyer. And the balance is $30 million?
    Mr. Winwood. Yes, sir. We are required to maintain a 
balance of $30 million in that account.
    Mr. Hoyer. Now, you say for the first time the fee equals 
the costs.
    Mr. Winwood. Yes, sir. Expenditures equalled the 
collections.
    Mr. Hoyer. You say that is a concern?
    Mr. Winwood. Yes, sir.
    Mr. Hoyer. What are the ramifications?
    Mr. Winwood. Well, the ramifications are, of course, that 
costs have increased because of inflation, pay grades, salary 
expenses, et cetera. The fee is also used to hire individuals 
for places where there is a recognized increase in the workload 
in the air passenger environment, so there have been additional 
people put on board. But with the volume and the increased 
costs of overtime, the concern we would have if that would 
continue is that there might be a point at which we would have 
to redesignate how we assign people and the hours of operation 
because you need those funds to pay for that operation.
    I think it looks good for the remainder of the year. The 
accounts are coming back up again because of travel and we are 
looking at ways--since the fee sunsets in 2003, as you know--in 
conjunction with the air industry and the Congress to look at 
reconfiguring the fee to take care of those contingencies for 
the future.
    Mr. Hoyer. What is the total level of the income? Do you 
know off the top of your head?
    Mr. Winwood. I do not have the number off the top of my 
head, but I can get it for the record, Congressman Hoyer.
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    Mr. Hoyer. Thank you. Non-intrusive inspection technology. 
We have visited to some of your facilities and have seen some 
of the technology that is in place such as X-ray and gamma-ray 
machines. They act, as you have said, as forceful compliance.
    In fiscal year 1999, we appropriated $134 million for 
Customs technology acquisition. Your five-year plan called for 
136 technology systems to be deployed around the nation. It is 
my understanding, however, that you have at this point in time 
54 of 136 systems deployed.
    Can you tell the committee what the current status of your 
deployment plan is and when you expect to have the remaining 
non-intrusive technologies deployed?
    Mr. Winwood. Yes, sir. For the record, I can give you the 
exact numbers because I do not have every location in my head 
right now. I will tell you that of the $134 million that was 
provided--and, by the way, that has been a fantastic, 
successful operation for the Customs Service--about $115 
million of that has already been obligated. Of that, there has 
been a specific number of technological pieces of equipment 
placed around and we anticipate having the rest of the money, 
the remainder of the $134 million, obligated this fiscal year. 
The way the production and the delivery is staged so far, we 
should have all the equipment funded with that money in place 
by 2002.
    Mr. Hoyer. And that will be the full $134 million?
    Mr. Winwood. The $134 million. All the equipment designated 
under the NII plan will be on-line.
    Mr. Hoyer. You say it is $115 million now?
    Mr. Winwood. We have $115 million obligated and I will for 
the record give you----
    Mr. Hoyer. But that is the money.
    Mr. Winwood. Yes, sir.
    Mr. Hoyer. How many systems have been deployed? I have 
referenced 54 of 136 systems.
    Mr. Winwood. Well, I do not have it in my head, but I can 
get it.
    Mr. Hoyer. Okay.
    Mr. Winwood. It is in my papers here, if you would just 
give me a second, I will get that number.
    Mr. Hoyer. All right. Well, at some point in time you can 
come up with it.
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    Mr. Istook. Mr. Hoyer, we need to--unless you have a quick 
question, we need to make sure other people have their 
opportunity to ask questions.
    Mr. Hoyer. All right.
    Mr. Istook. Thank you. We will come back.
    Mr. Tiahrt.
    Mr. Tiahrt. Thank you, Mr. Chairman.
    It is difficult to imagine wanting to be anywhere else on 
my birthday other than at a hearing being tortured by a 
congressional committee, so happy birthday, Commissioner 
Winwood.
    Mr. Winwood. Thank you, sir.
    Mr. Tiahrt. The chairman mentioned the relationship we have 
with Mexico and the new president, Vincente Fox, and probably 
his biggest challenge is going to be cleaning up the existing 
government. They even had trouble with the past drugczar.
    Do you know, has he made any progress in getting an agency 
that fights the drug trafficking? Has he been successful in 
cleaning that up?
    Mr. Winwood. You are talking about the president of Mexico?
    Mr. Tiahrt. Vincente Fox.
    Mr. Winwood. There are a couple of things that he did 
immediately. He completely restructured the treasury department 
of Mexico to include the customs service and has shifted a 
great many of what we would call port directors, officers in 
charge of major locations, to bring in new ideas and new 
people. He has also gone through a process based on discussions 
with us about new training and new techniques and has replaced 
what we would call the equivalent of the commissioner of 
Customs, to bring a more aggressive approach to border control 
and the issues they face in Mexico. That is the extent of my 
knowledge as to what he has done.
    Mr. Tiahrt. Do you think that is a good thing, this 
restructuring?
    Mr. Winwood. Well, yes, I do. I think it is important to do 
that, particularly with some of the history they have had in 
the past with people staying in their locations a little bit 
too long and getting compromised. And I am not making any 
comment about the people who were moved because I do not know 
them. But it has been effective in the past and we believe it 
will be effective this time.
    Mr. Tiahrt. Well, I am very optimistic about our 
relationship with the new president, Vincente Fox, and it is 
good to hear that you think the restructuring that he is 
undertaking is going to be a good thing.
    The aircraft that you are using, I see you have some 
pictures over in your display of the P-3 Orion which is in the 
top right-hand corner. Is that an AWACS dome or similar to an 
AWACS dome on top of it?
    Mr. Winwood. Yes, sir.
    Mr. Tiahrt. How many of those do you have?
    Mr. Winwood. Six of the domes and four of what they call 
slicks, which do not have the domes because, they have a 
different radar system. And we have six more that have been 
obligated as far as financing to be constructed, so we will 
have six more aircraft similar to that, two of which I think 
will be domes and four will be slicks, for a balance of eight 
domes and eight slicks for a total of 16. We have ten on-line 
in the organization right now, six and four.
    Mr. Tiahrt. These cover the southern border of the United 
States, which is, what, 4,000 miles?
    Mr. Winwood. Primarily, sir, the domed aircraft cover what 
we call the source zone. They fly over the source countries for 
target identification. For those targets that are identified 
within those countries, then the assets of that country do the 
tracking and interception, as long as they are within their air 
space. Those that get outside their air space, they then 
transfer off to the transit zone and they are picked up by 
other equipment, and then are either taken off in the transit 
zone or the arrival zone.
    Mr. Tiahrt. The other equipment, is that the Cessnas? How 
are the Cessna Citations used?
    Mr. Winwood. The Cessna Citations, their nomenclature is 
the C550. We have, I think, 26 of those on-line. They are more 
of our tracking/intercepting aircraft.
    Mr. Tiahrt. So it is a handoff to those?
    Mr. Winwood. Yes, sir. The target acquisition would be the 
domed.
    Mr. Tiahrt. Without revealing too much, are there blind 
spots that you have?
    Mr. Winwood. With any system, whether it be radar, 
airborne, or land-based, there are going to be blind spots 
based on the number of missions you can fly, the time of those 
missions and how many concurrent missions are going on. So that 
could happen at any given time. We are very careful where they 
might be identified and when.
    The command and control of those aircraft is done through 
the military. So our sorties are based on making sure we have 
proper coverage based on a combination of the source country 
activities, our activities, and Coast Guard activities.
    Mr. Tiahrt. So you cooperate with--the aircraft are flown 
by U.S. Customs pilots?
    Mr. Winwood. Yes, sir.
    Mr. Tiahrt. As are the Citations?
    Mr. Winwood. Yes, sir.
    Mr. Tiahrt. And one domed aircraft, one P-3, can hand off 
multiple bogies, if I can use that term?
    Mr. Winwood. If they are identified and we have the assets 
for tracking and interception, yes, sir. They can pick up 
multiple targets and then hand them off to--whether it be in 
the source country or pass them off if they have gotten out of 
the source country area.
    Mr. Tiahrt. Okay. Well, I can tell, of course, I am a 
little biased, being from Wichita, Kansas, but I do not think 
you have nearly enough Citations.
    Mr. Winwood. Well, the good news is----
    Mr. Tiahrt. I am going to make that request, Mr. Chairman.
    Mr. Istook. I can appreciate and understand that.
    Let me mention that we had the bells----
    Mr. Hoyer. Mr. Chairman, is that what you refer to as 
priority spending versus less priority spending?
    Mr. Istook. Well, Mr. Hoyer, can you tell us how 
manyaircraft are manufactured in Maryland?
    Just for the benefit of people wondering what we are going 
to do with the vote on, since we have about ten minutes left 
officially in this vote that is pending: if people are strict 
on five minutes we can actually get two other periods of 
questioning in. We have two votes, so we are going to need to 
recess briefly, but I know we can at least get one other 
member's questions in.
    Mr. Sweeney.
    Mr. Sweeney. Thank you, Mr. Chairman.
    And welcome, Commissioner Winwood. I am one who believes in 
general deterrence models for interdiction policy generally, so 
I support wholeheartedly your efforts. And I listened to your 
exchange with the chairman at the onset and recognized as it 
related to volume of traffic whether you could even estimate a 
percentage of success.
    So I am going to ask a very broad kind of general question 
to start with and that is it seems to me that we cannot even 
say with any confidence that we know from one year to the next, 
at the beginning of the year or even at end of the year, 
whether we have really made the kind of impact we want to make. 
Everything, as you said, is relevant.
    I am going to ask you a very simple question. If you had 
the magic wand, what are the two or three greatest changes you 
would want to see for your role in this process in 
interdiction? What are the two or three greatest impediments 
you face?
    Mr. Winwood. Well, I think one of the major impediments 
that governments have faced since the beginning of this whole 
process is the adequacy and the rapid movement of information 
exchange to better target, to better focus, and to better 
identify.
    Secondly, I think we are starting to make the right steps 
in the area of combining automation technology and the human 
element together. A lot of times in the past, much of this 
revolved around physical human beings in certain locations. I 
think with the right combination of automation, which allows 
you do a lot of information sorting and identifying and 
targeting, tied to technology that allows either for the rapid 
review or examination in conjunction with the right people in 
the right places, would be the second element. And even as a 
law enforcement officer, I must tell you that I think that as a 
society, in general, we have to do a lot better at education 
and prevention and demand reduction.
    Mr. Sweeney. So at a time when the world is involved in 
vast expansion of trade, where technology has exploded, you are 
facing a real crunch on your end of it because you need to keep 
up with that.
    Mr. Winwood. Yes.
    Mr. Sweeney. That gives me some perspective.
    To what extent do air package shipments contribute to the 
volume of illegal drugs entering the country? And outline, if 
you would, your efforts with air couriers. How cooperative are 
they, how can we help?
    Mr. Winwood. May I ask for a clarification? When you say 
air packages, are you talking about air cargo in general?
    Mr. Sweeney. UPS, Fed Ex.
    Mr. Winwood. Okay. What we consider to be the express 
consignment industry.
    First of all, in the air industry in general, we have a 
model--that a lot of countries have tried to use and adopt in 
the area of cooperation and having couriers do education, 
outreach, information exchange and training via the Customs 
Service on how to protect themselves and to identify where they 
are vulnerable and to cut off those avenues. So I think we have 
a great program with our super carrier initiative.
    We also have a program called BASC, which is a business 
coalition, where we will train and help educate importers and 
movers of goods. One of the principal players as an industry in 
those initiatives is the consignment industry. They have been 
extremely cooperative.
    They also have done a great deal in automation, where they 
have automated manifests and automated bodies of data that can 
be delivered to the Customs Service well before the goods they 
are carrying arrive so we can do a pre-arrival screening and 
target before it arrives and then select what we think is most 
important. They have been very cooperative in that area.
    And they have also been very cooperative in instituting 
some of the practices we have demonstrated to them that they 
need to do for self-help and self-prevention, including how to 
cut off opportunities for their equipment and their packages--
--
    Mr. Sweeney. If I could interrupt, is there any 
appreciable, tangible measurement you can put to that that you 
would consider to exemplify success?
    Mr. Winwood. Well, yes. I think there are a couple. I think 
one of them is in the Ecstasy environment. One of the first 
vehicles used to bring in Ecstasy when it exploded into our 
market in the United States was the air courier industry. We 
just about--to use a slang term--dried it up in the air courier 
industry through a variety of efforts that I just mentioned. 
The cooperation with these groups has caused smugglers to go 
back to human couriers, and to go more to the commercial cargo 
environment. Their first thrust at us was through couriers but 
it has just about dried up now.
    Mr. Sweeney. Okay. Thank you.
    Thank you, Mr. Chairman.
    Mr. Istook. Thank you very much, Mr. Sweeney.
    What I think I will do here, considering the time and such, 
Mrs. Meek would have been next, but she has already gone to 
vote, Mr. Sherwood, I will relinquish the chair to you. Your 
five minutes, if you time it right, you can do that and still 
make the vote and recess us for approximately 10 or 12 minutes 
while we have the second vote and we will come back after that.
    So your destiny as far as making the vote is in your hands.
    Mr. Sherwood [presiding]. Well, I will question you at my 
own peril of missing the vote.
    The thing that is of interest to me, and I have been 
listening with very good attention to all your tracking 
methods, but the volume of traffic, the volume of imports from 
the Mexican border at the truck ports, is just--we have seen a 
huge, huge increase. In other words, if you are at one of those 
crossing points, the tractors and trailers are lined up.
    How are you able to handle this huge increase in legitimate 
trade with Mexico and the opportunities it presents to slip 
drugs into the legitimate cargo?
    Mr. Winwood. Well, Mr. Chairman, I will tell you, it is a 
series of activities in which we have to be involved. One of 
them is a risk management program we are working in the Customs 
Service, we call it our ``How to Manage Risk,'' that takes into 
account the multiple tools that we have available to us. I will 
go through a quick series of them.
    First is having a working relationship with the major 
importers and the trucking companies from the standpoint of 
knowing extensive background as to who they are, how they 
operate, who their drivers are, and identifying them in a data 
bank and showing them how they can continue to be honest movers 
of commercial goods and not be victims. It also helps us sort 
out those who potentially are not honest movers or honest 
importers. That is part A.
    Part B is getting advance information prior to the goods 
arriving so we can do the type of analysis we need to determine 
which one of those multiple shipments we should be really be 
focusing on.
    Part C is the combination, when we have multiple targets, 
of technology and well trained officers to use that technology 
to do the type of rapid exam that allows us not only to detect 
but to allow for legitimate movement. What used to take--once 
we have identified a target based on information, et cetera--
from one to two to three hours to examine, we can now do 
anywhere from three to eight minutes with some of this new 
technology to give us an indication of whether or not it is 
being used to conceal narcotics or other illegal merchandise.
    Mr. Sherwood. Do you not think that the cartels will buy 
that very sophisticated stuff and look their own over before 
they come up so they will know what shows and what does not?
    Mr. Winwood. Probably. That is why we have to be ever 
diligent. We are constantly watching our effectiveness and we 
are constantly seeing new smuggling techniques. They are 
getting more sophisticated. But, again, with the help of the 
committee and some of the technology we use, the idea is to 
stay at least in step with them and constantly verify and check 
what we are doing.
    So, sure, they have the wherewithal. They have the money. I 
am sure they are attempting to countermand some of our 
initiatives.
    Mr. Sherwood. If I do not get a chance to get back to you, 
I am very concerned with the change in British agriculture. I 
understand that there is a great deal of used British farm 
machinery on the market for export to the United States and I 
want to make sure that we have the quarantine practices in 
place for hoof and mouth.
    Mr. Winwood. I have the response to your letter, Mr. 
Chairman, it is coming.
    Mr. Sherwood. Thank you very much.
    Mr. Winwood. You are welcome.
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    Mr. Sherwood. I am going to try and make that vote.
    The committee will be in recess subject to recall of the 
chair.
    [Recess.]
    Mr. Istook. Call the committee back in session. We should 
have other members returning from the vote momentarily. Thank 
you for your patience and sticking around.
    I am going to go ahead and take some of my time, Mr. 
Winwood. You mentioned when I asked you earlier that you think 
we should reposition or rethink how we position our resources. 
I realize some of the discussion was about how Mexico applies 
its resources and how they are positioned, but I would like 
your thoughts on how we are doing and I realize there is a 
great challenge with coordination with Customs, DEA, Coast 
Guard, FBI, Immigration Service, State Department, Postal 
Service, a great many agencies, which means there is an 
inherent problem with organization, always a need to review how 
we are doing it and certainly not only to make sure that you 
have all bases covered, but also to make sure that you do not 
have overlap that saps your resources.
    So I think your statement was that you think we should re-
think how we position our resources. Would you expand on that?
    Mr. Winwood. Yes, sir. You are right. I was referring 
initially to the government of Mexico and repositioning 
theirstaff and their people, but we are also doing the same thing in 
the U.S. Customs Service and I will use one example.
    You talk about the multiple agencies and it is very 
critical to have proper coordination. One of the initiatives 
that we have instituted in the Customs Service, in conjunction 
with two of the major agencies you mentioned, the Immigration 
and Naturalization Service and the Agriculture Department, is a 
border coordination initiative which covers the entire southern 
tier. We are working collaboratively at high levels and at the 
field level to set up coordination groups to ascertain what is 
the proper staffing and what is the proper shift positioning. 
In other words, how many shifts should we cover, where should 
the people be, what is the most advantageous use of each of 
those skill sets? In other words, where is the best place to 
have the agriculture officer and one of ours, et cetera, based 
on threat. The balance between Immigration and Customs, sharing 
primary responsibilities and, of course, our secondary 
responsibilities.
    So one of the things we have taken on is this coordination 
activity between major parts of the government, focused on a 
common goal: how do you protect a specific geographic area?
    Another example I would like to use, if I may, relates to 
government coordination and repositioning. We have a major 
initiative that we have kicked off in the latter part of 
February in conjunction with the state of Florida down in 
Miami. It is called Operation River Walk, and addresses an 
increased threat--using the bay area and the Miami River with 
freighters coming from the Caribbean and a sudden increase in 
amounts of cocaine and narcotics. It is a combination problem. 
You have the narcotics coming in, you have the money and stolen 
property going out. You have the deteriorating effect on the 
economy of the river and how it is used. So we got together 
with the other agencies and said who is best positioned and 
what skill sets do we need to bring to bear together to address 
everything from regulatory enforcement, environmental 
enforcement, and law enforcement to clean up this criminal 
activity that has taken over the Miami River. And that is when 
you bring in Organized Crime Drug Enforcement Task Force 
(OCDETF) to help with funding. We have the state of Florida, 
the city of Miami, and Dade County involved. And we have every 
agency that bring their skills sets: DEA, FBI, Coast Guard, any 
of them that you can mention, they are all there.
    The beauty of it is we have decided on a common goal, we 
identified together the threat, we identified what skill sets 
each party can bring to form synergy.
    And I must say, Mr. Chairman, I would welcome it and I 
would hope some day you could go down there, because we are 
going to be running this as a sustained operation. We are not 
going to flash in the pan and move away. The first phase is 
designed for six months alone. If you would go down there, but 
for the fact that we all insist on wearing our own uniforms, 
you would not know the difference between DEA, FBI, and Customs 
employees. You would not know the difference between Coast 
Guard personnel and Customs inspectors. You would not know the 
difference between which boat is patrolling what time of the 
day, whether it is the state boat or the Customs boat or the 
Miami City Police boat.
    So these are examples of types of activity where you not 
only reposition the people but you have to re-think what skill 
sets can be brought based on the identification of the problem. 
And those are the types of activities that we are trying to 
focus on right now.
    Mr. Istook. I realize the needs are constantly shifting and 
however you allocate resources one day may be inadequate for 
what you need three months later, but knowing that you had to 
make prioritization decisions and also knowing that Congress, 
and the executive branch for that matter, sometimes make 
requirements that certain things be done and be done in a 
certain way that are not the best use of resources, it forces 
you to put resources into lower priority areas rather than the 
higher priorities, such as the drug intercept mission.
    I would certainly invite any of your comments on what 
perhaps the Congress might do to free resources from some of 
the lower priority missions for your higher priority missions.
    Mr. Winwood. I will tell you, in a general way, Mr. 
Chairman, this Committee is helping us do that. I would like to 
use examples, if I may.
    One of the high priorities that this committee has helped 
us with over the last several years and, even as I say, put 
money on the table with is ACE. This is an opportunity to take 
people out of what I would call lower priority work from the 
standpoint of what machines and automation can do that you 
currently have people doing. It is a waste of their time. And 
the more you can divert that energy to other activities like 
drug interdiction and allow a technology solution to gathering 
information, sorting information, pinpointing targets, et 
cetera, the more time you save. It is also a cost saver. And it 
is also an efficiency enhancer. And those are the types of 
things we have to look at: what can we do to replace labor 
intensive activities with technology or computers or tools to 
allow us to then divert the human beings and the other 
activities to the most critical area.
    Mr. Istook. Are there some opportunities beyond what ACE is 
already covering for that same principle to be applied?
    Mr. Winwood. I think so. Once we get the--as Congressman 
Hoyer pointed out, the nonintrusive inspection technology in 
place--by the way, the number we have in place is 50 units and 
46 more units on order to be delivered. Once we better position 
those, and I think that is why the NII plan with the help of 
Congress and this committee serving the money is helpful, you 
have to cover the envelope because as quickly as we would have 
the right tools and equipment in place A, they will go to place 
B. But if they know that we are covering B, C and D along the 
line, then we have closed the envelope. I think once all this 
technology comes on line we are going to have the opportunity 
to look at additional ways to save what I call redundant labor 
activities.
    Mr. Istook. I would certainly appreciate, and you may want 
to do some reflection for the record, any comments on what 
might we be looking at now, what would be next wave of things 
that need to be automated so we can prioritize accordingly.
    Mr. Winwood. Yes, sir.
    Mr. Istook. We are happy Mrs. Meek has made it back from 
the vote.
    Mrs. Meek.
    Mrs. Meek. Thank you, Mr. Chairman.
    First of all, I want to welcome you, Mr. Winwood, and to 
say that during my entire tenure on this committee I have been 
very supportive of Customs. I did my very best to squeeze more 
and more money out of them. I hope this chairman will be a 
little bit better in terms of releasing things to Customs. I 
think he will be. So it is important that we realize the 
importance of the work you are doing.
    I am from Miami, Florida and I really, really appreciate 
what Customs has done there. Yet we never do enough because you 
do not have all the resources and no matter how much you have 
you probably would not be able to stop it a real significant 
way, even though I know from year to year your goals are such 
that you can do your best to do that.
    Now, you know, Acting Commissioner, you commented on 
Customs' responsibility to seize illegal drugs transported by 
commercial air. Last year, Customs had a major operation at 
Miami International Airport in which workers for the airlines 
were arrested and charged with drug smuggling. Can you give me 
an update on the status of this investigation?
    Mr. Winwood. Yes, ma'am. And, by the way, thank you for 
your comments. I very much appreciate that. And the opportunity 
I had to share in the press conference with you on Operation 
River Walk, as I was just explaining to the chairman.
    Mrs. Meek. Well, they are crying about that, Commissioner. 
They are calling me, oh, they are just leaning on us too hard, 
and I said thank God they are doing it.
    Mr. Winwood. Well, thank you for being there that day. It 
was much appreciated.
    The investigation is still continuing. There are some 
things I can talk about. We are still investigating the people 
that were arrested and the activities they were involved. There 
are still some operations going on to ensure that type of 
activity does not increase again, so we are continuing the 
diligence on controlling that environment. We are looking for 
others that are still not in our grasp and wrapping up some of 
the investigations and soon we will go to prosecution on some 
of the people that were arrested in the first wave.
    I might add that just this week we announced another type 
of operation and we have a press release on it where in the 
other environment, the seaport environment, we have just 
arrested a group of what we would call in a generic term 
longshoremen and people involved in the activities at seaports. 
We have broken up another ring in the Fort Lauderdale-Miami 
area at the seaport area which is an ongoing, continuing 
investigation which is kind of a carryover from the air to the 
sea environment.
    Mrs. Meek. How pervasive is this practice at other 
airports?
    Mr. Winwood. Well, my speculation would be, Congresswoman, 
it is pervasive anywhere there are opportunities and the type 
of volume that would entice people to be brought into the drug 
environment. So we are doing the same types of operations in 
our other major gateway ports that have the type of volume and 
the activity that dictate us looking into those events.
    Mrs. Meek. Commissioner, you mentioned that Customs has 
three zones in which you operate: the source zone, the transit 
zone and the arrival zone.
    Mr. Winwood. Yes, ma'am.
    Mrs. Meek. And the arrival zone comprises United States 
territories and I am in that Caribbean zone or transit zone and 
it is the second largest trafficking area.
    I really get very concerned over the years, I have watched 
all of the Customs programs and all the drug interdiction and I 
have seen it all. I have a problem that I have not been able to 
get a resolution for and that is of all the drug trafficking 
that goes on, in spite of all the law enforcement we have, 
these drugs still get to the inner city areas and they are 
creating a havoc in those communities.
    I am wondering if you have any ideas. It may not be within 
your purview, but because of your experience, do you have any 
idea how we can stop drug passage into those communities? These 
are the people who least need to have that.
    Mr. Winwood. Well, I will tell you, it is a very serious 
issue. As I responded to a question that was asked earlier, I 
think being a law enforcement agency and a law enforcement 
officer, obviously the critical issues that we address are the 
interdiction and breaking up the distribution networks. But I 
do think as a member of society and as a member of the law 
enforcement community, that we even have to be more diligent in 
the area of education and prevention.
    The best I can offer you is what the Customs Service is 
trying to do from our law enforcement end in outreach, 
education, and awareness beyond our traditional law enforcement 
activities. I think you know that we have a very active program 
on our Internet site. We have a very active education program 
where we go to schools around the country and talk to the young 
people in every community to explain to them why they do not 
want to be involved in this. And even our work with the 
parents. And that is the role we are trying to play as a part 
of being good citizens. But it is going to take that in 
addition to interdiction. It is going to take continuing 
education and awareness.
    And I will tell you, Congressman, I wish you could have 
been at the panel that we had last week when I testified at the 
Ecstasy hearing. The Senate committee had two witnesses that 
were 15 and 16 years old talking about them getting involved in 
narcotics and what it put them through and what they had to do 
to get out of it. We need to take advantage of bright young 
people like that and allow them to continue to get into the 
communities to talk about their experience.
    The young man made a very critical point. He said kids of 
his age seldom listen to adults because they always feel like 
they are being lectured to. What he felt needed to be done was 
people like him who have had the experience and survived the 
experience, need to get out and talk to their peers and talk to 
them about what it is about.
    So those are a couple of suggestions that I would 
recommend.
    Mrs. Meek. Could you send me some of your outreach 
initiatives that Customs has used?
    Mr. Winwood. Yes, ma'am.
    Mrs. Meek. I would appreciate it.
    Mr. Winwood. I will be glad to. Yes, ma'am.
    Mrs. Meek. Do I have enough time, Mr. Chairman, for another 
question or do I have to wait?
    Mr. Istook. Go right ahead. I started the second round and 
you were already gone for the vote and missed the first one, so 
I would extend you an additional five minutes.
    Mrs. Meek. You are so benevolent, Mr. Chairman.
    Mr. Istook. Five minutes is pretty cheap.
    Mrs. Meek. You note in your testimony that you have made 
many changes in Customs' personal search policies.
    Mr. Winwood. Yes, ma'am.
    Mrs. Meek. Their practices and that you have been able to 
increase the number of searches of airline passengers by 60 
percent from 1999 to 2000.
    Mr. Winwood. Yes, ma'am.
    Mrs. Meek. While maintaining your level of airport 
seizures. I think that is an important accomplishment and I 
commend you for it and I think that the changes you made in 
your personal search practices were a tremendous improvement. 
Yet, as you know, I do represent a minority community and many 
of us remain extremely concerned about racial profiling and it 
has kind of covered all of law enforcement, Customs being 
perhaps the least of which we hear this.
    My question to you is what steps have you taken to ensure 
that the personal search procedures that Customs has adopted 
are being followed by your employees?
    Mr. Winwood. Another excellent question. We did the study 
with independent review and brought in an outside expert in to 
take a look at what we have done in the past and what we needed 
to do. We then had a series of recommendations, which you 
mentioned, and we implemented every one of them. In addition to 
that, I personally chair a committee we call the AIM committee, 
which is the Assessment and Implementation and Management of 
all the suggestions that were made to ensure, one, that we did 
them; two, that we continue to be diligent in measuring, that 
we are continuing to stay focused on what we said we would do; 
and constantly reevaluating the steps we have taken, and 
analysing the data that we are getting.
    I will tell you, Congresswoman Meek, I personally met with 
a group of our very key managers from the field yesterday to go 
over this again. We do this periodically, we bring select 
groups in and ask have you looked at your data, have you done 
the analysis, have you run your self-inspections. I personally 
look at the self-inspection sheets. I get a report every 
morning on my desk of the activity the day before.
    So we are very focused on this. We truly believe that with 
the systems we have set up, the measures we have put in, the 
ongoing training, we are going through--every officer in the 
Customs Service this year will be recertified again and we will 
do it every year with a 16-hour refresher training on what are 
our practices, our policies and our procedures. It has started 
right now and we will do it every year.
    We have developed a CD-rom-based computer-based training 
that every officer has to take every year and then he has to 
take atest. It is logged in to the computer.
    So we are staying ever diligent. At some point, I would 
like somebody to come in and look at the Customs Service as a 
model that says we do not under any circumstances tolerate 
racial profiling, we have the systems in place to ensure that 
it will not happen by deliberate attempt or by accident, and 
that we can show through data and analysis and focus that we 
will continue to do that. And we continue to do that right now.
    Mrs. Meek. Thank you, Mr. Winwood. I think it would also 
help if you had more women and minorities hired in Customs. It 
would help a great deal. And it would show to those people that 
there are people there who can give you input regarding the 
effects or any impact of this.
    Mr. Winwood. As a matter of fact, I would like to volunteer 
for the record to show you the mix we have in the Customs 
Service of all our fine Customs employees. I think and 
speculate that you will be impressed with the balance that we 
bring to our organization by the types of people. We are very 
proud of them and they work very hard. But I think you would be 
impressed with the numbers. I really do.
    Mrs. Meek. Thank you, Mr. Winwood.
    Mr. Winwood. Thank you, ma'am.
    Mrs. Meek. Thank you, Mr. Chairman.
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    Mr. Istook. Thank you very much, Mrs. Meeks.
    Mr. Visclosky.
    Mr. Visclosky. Thank you very much, Mr. Chairman.
    Commissioner Winwood, I would, not having heard the entire 
interchange between yourself and Mrs. Meeks, add my voice to 
hers. I have a significant Arab population in northwest Indiana 
and I have been confronted with a number of complaints about 
personal searches at O'Hare International Airport and the 
people searched have been M.D.s, have been engineers, Ph.D.s 
and I would hope that the Customs is very sensitive to that.
    Mr. Winwood. We most definitely are.
    Mr. Visclosky. I apologize for not having been here for the 
whole hearing, but my sense is the emphasis has been on the 
southwest borders, the Caribbean region, Florida. I am on the 
southern shore of Lake Michigan. Could you tell me what the 
situation is that you face on the Great Lakes?
    Mr. Winwood. Well, obviously any conduit that smugglers can 
use, they will use. Our bigger concern, although we do not have 
as much activity on the Great Lakes themselves, our bigger 
concern for your area of the country is the movement from the 
southern border up across the country and into your geographic 
location from the main source countries.
    Congressman, we had a case in Chicago of an approximately 
14,000 pound marijuana seizure in the greater Chicago area that 
was a combined effort and a cooperative effort between the 
Customs Service Office of Investigation and the state and local 
authorities in the Chicago area looking for special containers, 
et cetera, that are moving around your community. So we are 
really concerned about that mode in addition to the lake area 
because I think the bigger threat is how it is coming into your 
environment from the Caribbean, from the southern border, and 
transiting through the country to come up to your area. So we 
are very diligent in that area.
    Mr. Visclosky. As far as the Great Lakes, you were 
indicating that the problem is more drugs coming up from the 
south as opposed to being transported on the waterways. What 
about the airports in that area and also as far as the 
waterways, while the problem may not be as significant as the 
southwest, is it the same, is it worse or is it better relative 
to drug smuggling than it was five years ago in the Great 
Lakes?
    Mr. Winwood. I really do not have a number for you, 
Congressman. I apologize. It would be speculation on my part, 
but I really think that the bigger concern is your air 
environment, particularly with air cargo and air passengers. I 
think the other concern is the land transportation. There is 
always a threat on the lakes. I do not mean to diminish it. 
There is also a threat, as you know, in the far western corner 
of Canada, with a very potent marijuana product up there called 
BC Bud that is very popular. It is coming in from the far 
western part of the country, down from Canada. That does not 
mean that they cannot go across Canada and come down through 
the lake district, so we have to be ever careful of that.
    But any avenue is a threat, but I do believe that of the 
three, the two biggest are the land transportation and the air 
transportation in your part of the country.
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    Mr. Visclosky. In your testimony you also talked about the 
various HIDTAs and I must tell you as a member of the defense 
subcommittee as well, and we have held hearings on the whole 
issue of drug trafficking and terrorism, that because of the 
courtesy and judgment of this subcommittee there is a HIDTA in 
northwest Indiana for which I am profoundly grateful. And I 
would just make the observation that for all of the billions of 
dollars we are spending on international interdiction, the 
millions of dollars that this subcommittee earmarks every year 
for northwest Indiana, from my perspective, to be brutally 
honest, that has had more of a positive impact than anything 
else.
    In the five years we have had the HIDTA, again, through the 
courtesy of this subcommittee, our homicide rate in the two 
county areas declined by 28 percent, and we have made some 
great strides because of the cooperation of federal enforcement 
officials such as yourself together, as well as with our local 
officials.
    And I wish you well in your endeavors. It is a daunting 
task, but I look at these HIDTAs and I see more bang for the 
buck, to be honest with you, as far as improving the quality of 
life for the average person I represent. So I certainly 
encourage you in those endeavors.
    Mr. Winwood. Well, we echo that, Congressman, if I may make 
a comment, we very much support the HIDTAs. We are a critical 
element in all the HIDTAs. And you are right, it causes us to 
come together and focus on a common goal as a law enforcement 
community. They have been very successful and we do support 
them.
    Mr. Visclosky. Thank you, Mr. Chairman.
    Mr. Istook. Thank you, Mr. Visclosky.
    Mr. Sherwood.
    Mr. Sherwood. Thank you. As we all are, I am very impressed 
with your interdiction efforts and the sophistication and the 
hard work that goes into what you do. And yet by your own 
testimony today we understand that we are just getting the tip 
of the iceberg, that as hard as you work and as sophisticated 
as your procedures are, I am afraid that Customs interdiction 
is viewed by the traffickers as a cost of doing business. And I 
am wondering how we think outside the box a little bit.
    My friends at Proctor & Gamble used to tell me that all 
organizations are perfectly designed to get the exact result 
they achieve. And we have very smart people working very hard 
with a lot of sophisticated technology to disrupt a small 
percentage of the drugs that come into the country. It is a 
national problem that has all kinds of ramifications and I am 
wondering how we think outside the box and re-look at this 
thing.
    And one of those things, being very new at it, that I might 
question, is your dual role appropriate? You are both the 
facilitators of trade which we have to have and thank God you 
are, but you are also--and I am wondering if those two roles, 
you are trying to interdict illicit drugs and shipments of 
other things, and your role as being the facilitators of our 
cross-border trade, is that a fair thing to ask of one 
organization?
    Mr. Winwood. I believe it is, but may I digress for one 
second, sir?
    I agree with you about the numbers and the daunting task, 
but I will say that I am here representing what the U.S. 
Customs Service has done in the way of interdiction. We also 
have to take into account through international cooperation 
where the product never made it out of the country and there 
are totals on that. There are events that occur once it gets 
out of the source country into some of the transit zones and 
countries stopping it there. And then there are the other 
federal agencies who have their success stories also. So there 
is more success than just what we do and it is really 
international success.
    As an example, I have the press release we issued for 
Operation Journey, which was a group of seizures and 
interdictions and success stories in four or five major parts 
of the world with six or seven different agencies for a 
tremendous amount of success in the total disruption of 
particular narcotics smuggling in cocaine.
    But back to your most direct question. I definitely think 
it is a fair thing to have both facilitation and enforcement 
responsibility. I am a firm believer, in all the years I have 
worked in this organization, that you can have a legitimate 
risk management approach to your work and that facilitation is 
not opposite enforcement, it is a prime factor in helping you 
be more effective in enforcement.
    You need to do both together, using your ability to help 
those who are in legitimate trade help us identify when 
anomalies occur. We can then be more diligent to allow that 
free flow and then to focus our resources.
    Sometimes I use the analogy of a police officer. When he is 
on the street corner helping a child, giving directions,is he a 
facilitator or is he a police officer trying to stop crime?
    I say he is both.
    And when he is helping that child or that person or that 
store owner, is he in any way denigrating his law enforcement 
responsibility?
    I say no.
    I think it is the same way in our organization. I think 
they go hand in glove. I think very well focused, well thought 
through, systematic facilitation with the right information is 
a force multiplier for direct enforcement and I think the 
better focused enforcement is an absolute aid in proper 
facilitation of the honest importer and the honest traveler. I 
do believe they go hand in glove.
    Mr. Sherwood. I would just observe that that police officer 
is working in more of a static environment and he is building 
his community and as he builds his community everything works 
well. You are up against such a ruthless organization.
    When you answered the question about the Great Lakes area, 
you thought that transportation of air and ground 
transportation into the area was pretty serious and I am 
concerned with the changes in rules on the border points. In 
other words, now all the trucks come in and they are dropped 
and they are put in a lot and then different drivers pick them 
up. And it looks like the rule is being changed where the 
foreign national drivers will be allowed to once they clear 
Customs to go anywhere in the country.
    Where does that put you? Does that make your job more 
difficult?
    Mr. Winwood. Well, none of these events make our job any 
easier, but I will tell you that we will have to adapt our 
screening methods to take that into account. Even though the 
trucks are dropped and there is a limit as to where a foreign 
driver and a foreign truck can go right now, it is still the 
sorting at the point of arrival that is critical. It is still 
the targeting at the entry point that is critical.
    We just may have to adapt our targeting a little 
differently because even though the truck is passed off, it 
does not necessarily mean that because it comes to the border, 
it is passed off, that it gets any more scrutiny than when it 
goes straight through. So it is just a matter of how we are 
going to operate in that environment. So we will have to adapt 
a bit if the transportation route is going to be able to go 
straight through. But it is not going to be as difficult or as 
daunting as one might think. It is just going to be slightly 
different.
    Mr. Sherwood. Thank you.
    Mr. Istook. Thank you, Mr. Sherwood.
    And, Mr. Visclosky, we are back to your second round here.
    Mr. Visclosky. Mr. Chairman, thank you very much.
    Mr. Winwood, Mr. Regula had a provision included in last 
year's Commerce appropriation bill relative to earlier 
reporting on steel imports. Do you have a sense as to how that 
program is proceeding or could you answer for the record for 
us?
    Mr. Winwood. I will definitely answer for the record 
because there have been some discussions with the Department of 
Commerce on this. They are the keepers of the government's 
import/export statistics. We are a gatherer. We have certain 
responsibilities for the admissibility and movement of goods 
and then all the information is turned over to Commerce, which 
compiles it for official government publication.
    There have been some discussions on ways to issue earlier 
reports. I personally met with some of their senior staff about 
six months ago and they were working out the details then. But 
I will give you the details for the record as to what stage it 
is in right now.
    They were trying to come up with a way to allow for earlier 
but at the same point accurate early reporting. That is the 
key. It might be earlier, but it may not be as accurate as 
everybody would want, so they were trying to strike a balance 
between early and accurate.
    We will get something for the record for you, sir, on that.
    Mr. Visclosky. If you could, because that is very important 
to the industry and I appreciate it.
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    And I thank the chair for returning to me.
    Thank you very much.
    Mr. Istook. Thank you, Mr. Visclosky.
    Commissioner, you mentioned before with the increased 
volume of trade and some that may be purely financial 
transactions as well as the trade of goods, and the challenges, 
of course, of searching things that are going through a 
commercial cargo carrier as well as those that may be through a 
shipper in larger volumes, but as we both know, it does not 
take much space to contain a very high value of drugs, as of 
course is demonstrated by your own exhibit, of course.
    And I have been made aware, of course, that there is 
sometimes depending upon the type of a way something is being 
transported that that can make a difference. You have things 
coming in internationally that they may come in some places 
that are close to the border, that is on the border, such as 
Laredo or Nogales and so forth, or close to the border such as 
Miami.
    And for Mr. Visclosky, the last I looked at the map, you 
know, Indiana does not have an international border, but that 
does not mean they do not have problems, with flights coming in 
directly not only to places such as New York City, but to 
Dallas-Fort Worth and so forth and Chicago.
    And then there are things that come in to different hubs 
for those that may carry cargo and they may carry just the 
smaller packages.
    What is the difference in the level of sophistication of 
the equipment that you have with the ability to detect with 
technology or canines and the different standards you have for 
what things you can inspect or not inspect because it may be 
diplomatic, it may involve the Postal Service?
    What are those different standards at different points of 
entry where things actually arrive in the country and the 
different levels of either the resources you have or how you 
are required to handle things?
    Mr. Winwood. I will try to take this in a couple of parts, 
if I may, Mr. Chairman.
    First of all, from the standpoint of examination techniques 
and the ability to discover, particularly with deeper 
concealment methods, I will tell you in today's environment, 
thanks again to some of the technology money you appropriated, 
it is the difference between the past and the future that we 
have not envisioned yet. That is a broad spectrum and I would 
just give you an example.
    It was not as long ago as eight years when, if we wanted to 
do a container or some type of product within a container, it 
was actual physical labor: open the container, unload the goods 
and use hand drills, chisels, metal probes, and muscle. Today, 
thanks to technology and some far thinking people, the example 
I mentioned to you before the hearing, Mr. Chairman, just 
yesterday we had a container arrive in Fort Lauderdale, 
Florida. Based on advance information and analysis through 
computers, the container was targeted because of some anomalies 
in the shipping route.
    When the container arrived at the dock, an ion scanner was 
used to see if any particles could be picked up. It alerted 
positive. They then moved the container to our VACIS system 
that was appropriated out of this NII money. It uses gamma rays 
to penetrate without X-rays through a 40-foot container, 
through the product in the container. The gamma ray process 
takes, by the time you line the truck up and drive it through, 
about five minutes.
    They discerned that the gamma rays penetrated some PCV pipe 
and other PVC pipe it did not. They unloaded the container and 
within a matter of minutes 200 kilograms of cocaine.
    Now, that same operation eight years ago, or even five 
years ago, would have taken that same crew of people probably 
all day. All day from the identification to the unlading to the 
hand drilling to the sawing.
    So technology wise, it has moved forward. The key we need 
to focus on, as you said, is do we have it everywhere and the 
answer is not yet.
    Do we need to place it not only in traditional or what we 
call border locations, but should it not be in other locations 
that could be a threat? The answer is yes.
    For instance, a VACIS system has been purchased, is being 
manufactured and will be placed in Champlain, New York at the 
northern border point, the same VACIS system to help us screen 
containers there.
    From the standpoint of the different methods and the 
different transportation routes, that is very difficult for us. 
For inbound, for coming in, the Customs Service, as you know, 
Mr. Chairman, has a very unique body of law that has been held 
up since the Constitution was formulated. Border authority is 
very strong for the Customs Service and it is very important to 
protecting the border.
    We do not use probable cause for the examination of people 
or things arriving in the United States. The only exception 
are, through international agreements, diplomatic containers. 
And even then, if there is a major concern, working in 
cooperation with the country, they can authorize access even to 
diplomatic packages or diplomatic shipments. It is a reciprocal 
process, as you know, between countries.But other than that, we 
have access.
    Even mail coming from foreign countries to the United 
States is subject to Customs scrutiny and we have major mail 
processing centers around the country that we have Customs 
officers assigned at screening and reviewing and examining 
international mail. One of our most successful ones is in 
California. They must make five seizures a day there. At a 
minimum.
    On the outbound side, it is a little different and where it 
is different is particularly in the outbound mail. We do not 
have the same authorities based on interpretations of the 
statutes in Title 39, between the Postal Service and the United 
States Customs Service. So there is one area in which we do not 
have carte blanche and the ability, using our border authority, 
to do the appropriate type of examination. And where the 
outbound is important, as I mentioned earlier, is goods come 
in, proceeds go out.
    And our biggest concern is that proceeds in addition to--if 
you are really going to attack this problem, you have to attack 
it holistically. Not only do you want to dismantle, disrupt, 
and stop, but you also want to attack.
    The one thing that they are interested in is they want 
their money. They do not produce this good for other reasons, 
certainly not medicinal. So outbound is important to us because 
it is the proceeds.
    I hope I addressed that. It was an important question.
    Mr. Istook. I think what I would like to do is have for the 
record or for our benefit, whether it is in the record or not, 
a little bit of analysis of all the different points of entry 
and the differences in the level--I will say technology, but 
the level of resources you are able to apply measured against 
the volume and so forth. I think that would be useful because, 
as you know, the traffickers are always going to find--they are 
going to find your weak points.
    Mr. Winwood. Yes, sir.
    Mr. Istook. They are going to exploit the weak points. And 
I want to make sure that we understand what I know that the 
traffickers understand.
    Mr. Winwood. Yes, sir.
    Mr. Istook. Mr. Price, welcome back. We know you were kept 
away. We have been through two rounds. You have not had a 
chance yet, so to finish the hearing, I would recognize you for 
ten minutes.
    Mr. Price. Well, thank you, Mr. Chairman. I appreciate that 
and I will try to be brief and maybe submit some additional 
items for the record.
    Commissioner, let me add my welcome to you.
    Mr. Winwood. Thank you, sir.
    Mr. Price. Let me return to a topic that has been touched 
on a couple of times this morning, one that has excited great 
concern for good reason and that is the possible spread of foot 
and mouth disease that could be transmitted into this country 
from the European Union or other places.
    I have been in consultation with our state emergency 
management agency about this issue and today, in fact, North 
Carolina's Commissioner of Agriculture, Meg Scott Phipps, is 
here to talk with USDA and members of the North Carolina 
delegation about this situation.
    Now, I realize that the Animal and Plant Health Inspection 
Service, APHIS, in USDA takes the lead regarding farm animal 
disease. In a press release issued yesterday by USDA, Secretary 
Veneman has indicated that there is a heightened alert and 
increased coordination being undertaken of programs in states 
across the country. And, furthermore, the release indicates 
that USDA has been coordinating and meeting regularly with 
appropriate federal, state and other officials in these months 
or weeks since foot and mouth disease cases were discovered. 
Now, these groups, of course, include your agency.
    What can you tell the subcommittee about what is actually 
being done in your agency and/or in partnership with USDA and 
other federal agencies to safeguard and prevent the 
introduction of foot and mouth disease into the U.S.?
    Mr. Winwood. Well, thank you very much. This is a great 
opportunity to really express the cooperation that is 
occurring.
    Being at 301 ports of entry around the country, as soon as 
the information became public about the outbreak in Europe, the 
first thing we did as an agency was to personally contact 
Agriculture and offer our immediate assistance. We asked for 
national guidance as to what we could do to further alert our 
officers and, two, what we could do from the standpoint of our 
automated systems to set up appropriate lookouts and, three, 
what is it they would want us to tell our Customs officers to 
make sure that the proper diligence was conducted by our 
inspectors, both at the land border and in the air environment.
    As a matter of fact, there was a meeting March 27th, two 
days ago, between our National Director of Air Passenger 
Processing and his counterpart at the Department of Agriculture 
to ensure that the instructions that we gave our air officers 
at our airports were correct and to discuss what else we could 
do to further help with the sorting of passengers, particularly 
coming from European flights.
    So in synopsis, I would say that we have the national list 
from Agriculture, and we have met with them every other day, 
probably, for the last month. We have those alerts in our 
automated system for our cargo movements and for our trade 
movements coming in by air, land and sea, and we have done some 
updated training for our officers at our airports and put our 
officers on alert. We have even given them a checklist that 
they should consider when they are dealing with passengers for 
questioning, et cetera.
    Mr. Price. Does this represent an activation of procedures 
and emergency provisions that have long been in effect or is 
this requiring a good amount of innovation on your part?
    Mr. Winwood. I think it is the former. The procedures are 
always there. As a matter of fact, I was mentioning during the 
break to a colleague that if you have ever traveled 
internationally and you look at the Customs baggage 
declaration, one of the traditional questions that has been on 
there since the beginning of time is have you visited a farm in 
your journeys and where and are you bringing back any type of 
food, plant or other product. This question was done with the 
cooperation of APHIS--gosh, I do not even know how many years 
ago.
    And so what we have done in effect is we have used very 
well organized and established procedures. When incidents like 
this occur, of course we go to what we call heightened alert.
    Mr. Price. And less reliance, presumably, on people's self-
identification.
    Mr. Winwood. Yes. Most definitely. That is the other 
discussion we are having now. There is the self-identification, 
that is very important and very helpful. But there are also 
other techniques we use and, in this particular case, we know 
now through a lot of automation and work over the years exactly 
where flights are coming from, and where they are transiting 
through.
    We get advance information from the airline as to who is on 
the plane and where they are coming from. We have all their 
itineraries. So now there is heightened alert and we use those 
tools in addition to the self-declaration, and just 
automatically refer those individuals for more detailed 
questioning and scrutiny.
    Mr. Price. All right. That is helpful. Thank you. And let 
me in the limited time I have remaining turn to quite another 
subject which, again, you touched on it in other respects. I 
want to focus especially on the infrastructure needs and 
personnel needs related to increased levels of trade among 
United States, Canada and Mexico.
    It has grown by 75 percent, we are told, since the North 
American Free Trade Agreement came into force in 1995 and from 
1992 through 1999 the number of individual shipments of goods 
entering the U.S. has increased from 9.4 million to 21 million. 
There is a concern by commercial interests and others that 
congestion at the borders could impair their ability to do 
business. So that is the basis for my question.
    Could you discuss briefly and perhaps furnish whatever 
information you would like for the record information 
concerning infrastructure needs at the ports of entry on the 
northern and southwest borders of the U.S.?
    What can you tell the subcommittee about Customs' current 
staffing in particular that is needed to protect our borders 
and adequately perform the many missions that are conducted at 
these points of entry?
    Mr. Winwood. Again, another great question. It gives me an 
opportunity to highlight a couple of things, if I may, 
Congressman. I think it is a combination of three factors.
    First of all, we must have the right technology. And I 
think, as I mentioned several times, when we get the ACE 
environment in place, that is part A and that is having the 
right technology, the right computer systems connected 
nationally to help us expedite legitimate trade. We are 
beginning to build that now. That would be a tremendous quantum 
leap in addressing this issue.
    Part B, which goes hand in glove with that, at the request 
of Congress, we just did an infrastructure study, north and 
south, and we have given the report to Congress that identifies 
that there are additional infrastructure upgrades that need to 
occur. These are not just having the automation to be able to 
advance review and to expedite the movement of goods, but also 
having the infrastructure to swiftly pass people and goods 
through as appropriate. So that infrastructure study has now 
been delivered and it identifies some of the issues and the 
upgrades that should occur from the standpoint of the type of 
booths, the parking areas, the roadways, the physical plant of 
a particular location. So that is up here and it is being 
reviewed by Congress and we have also coordinated that report, 
as requested, with GSA which is now going out and confirming 
through their expertise some of these findings.
    And then the third part I would suggest to you or the two 
and a half part would be the right tool technology. You have 
the automation and then you need the right tools to allow for 
the expeditious review when necessary, like the things that I 
was mentioning to the chairman. The ion scanners and the gamma 
ray systems, et cetera, which we are putting around both north 
and south.
    And then the last part is having the proper mix of the 
people to augment those tools in those locations and that is 
what we are constantly looking at, how do we make sure as we 
get either additional appropriations or the ability to move 
people through attrition and new hires, that we are putting 
them in places where we can see the growth. One thing that we 
are doing constantly is monitoring the growth and seeing where 
the peaks are occurring so that as the positions are available 
to us we put them in those locations.
    And if we combine it with the right automation, the right 
technology and upgrades in infrastructure, now you have a 
holistic approach to addressing the very issue that you brought 
up.
    Mr. Price. Thank you. We will look forward to examining in 
greater detail the proposals that you bring to us for the next 
fiscal year and we know we will have a chance next month to do 
that in more detail.
    Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Istook. Thank you, Mr. Price.
    Commissioner Winwood, we appreciate your taking the time to 
be here today, as well as all your years of service. We will, 
of course, have questions for the record that we will submit 
promptly.
    We appreciate everyone's attendance and we will stand 
adjourned.

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                                          Wednesday, April 25, 2001

       LAW ENFORCEMENT BUREAUS AND OFFICES, U.S. CUSTOMS SERVICE

                               WITNESSES

JAMES F. SLOAN, ACTING UNDER SECRETARY FOR ENFORCEMENT
CHARLES WINWOOD, ACTING COMMISSIONER, U.S. CUSTOMS SERVICE

                          Chairman's Statement

    Mr. Istook. Good morning, everyone. We are going to go 
ahead and proceed. I think our attendance is going to be low 
this morning, despite the significance of the things that we, 
of course have to do.
    I call the hearing to order. I am pleased to welcome the 
Acting Under Secretary of Enforcement, James Sloan, and the 
Acting U.S. Customs Commissioner, Charles Winwood.
    We saw you last month, Mr. Winwood, for our first hearing 
and we are pleased to have you back.
    It is fitting, of course, to have Secretary Sloan here to 
testify about the law enforcement aspects of Treasury and the 
challenges that it faces, especially in conjunction with the 
Customs Service. The central and prominent role of law 
enforcement within Treasury sometimes is not well understood 
across the country or here on Capitol Hill, even though it is 
about 40 percent or so of all federal law enforcement. 
Similarly, the Customs Service often faces a lack of awareness 
or understanding, despite the fact that they have to guard our 
borders.
    Treasury law enforcement, of course, cuts right to the 
heart of many areas of law enforcement that are critical to 
major problems in our country today. Protecting our currency, 
our financial systems from fraud and money laundering, 
advancing the strength of our economy with the increasing level 
of trade and at the same time protecting the country and our 
citizens from the drug trafficking and any other illegal trade 
activities which relates to protecting our communities from 
violence, to protecting us from terrorism, heading it off at 
the shores, and, of course, stewarding the training needs of 
Treasury and other federal law enforcement officers. So it is a 
pretty wide swath we know that you cut and it is very difficult 
to handle it in the way that it needs to be done, especially 
with the growth in these sectors. So we look forward to hearing 
about the recent developments for law enforcement within 
Treasury.
    The Customs Service, of course, has the experience of the 
business side of ever-growing levels of trade, both coming in 
and going out, a dramatic increase in the passengers coming 
through our borders, increasing security and criminal threats 
that come with it and then, of course, there are the historical 
aspects of things such as NAFTA, GATT, the trade agreements 
that were under consideration in Quebec just a week ago with 
perhaps a new trade agreement in the Western Hemisphere that 
can only make the challenges ever greater, although we hope 
that the benefit will be just as great.
    So we know that you have your hands full, gentlemen.
    Doing this at the same time, of course, involves a 
workforce that largely is static in its size. Resources we are 
certainly seeking to increase, whether it be in the computer 
systems or some of the air and marine fleets that we know are 
vital to this activity.
    So I am not trying to suggest that Customs is broken or 
that law enforcement is broken, simply that in the growing 
level of trade and, unfortunately, the growing temptations 
involving drugs, that that challenge is heightening and it is 
necessary, of course, that you with our assistance heighten 
your efforts to meet the challenges.
    So as we hear the testimony today, I hope that we are going 
to be considering how and whether Customs can manage with the 
tools that it has now and, if not, what is necessary in terms 
of tools and in terms of the management decisions and 
investments that may have to be made on that.
    I would certainly welcome the opportunity for the record 
for a statement from our ranking member, Mr. Hoyer. He is 
absent, but certainly his statement, of course, we can put in 
the record as well.
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    Mr. Istook. There being no other members here at the moment 
from whom to receive any comments, we welcome the opportunity 
to hear testimony from our two witnesses. Mr. Sloan is the 
Acting Under Secretary for Enforcement and Mr. Winwood is the 
Acting Commissioner of Customs.
    As is certainly my practice as chairman, I would like first 
to swear you each as witnesses and then proceed.
    [Witnesses sworn.]
    Mr. Istook. Mr. Sloan, and, Mr. Winwood, of course we will 
have your entire statements in the record. Please feel free to 
depart from it if necessary. Obviously we do not anticipate any 
severe time restrictions, so I am not going to worry as long as 
I am the only one here about the five-minute rule.
    Mr. Sloan, we will be happy to hear from you.

            Acting Under Secretary for Enforcement Statement

    Mr. Sloan. Thank you, Mr. Chairman, and good morning. And 
thank you also for the comments. I am not going to underscore 
the point, but I am the Acting Under Secretary, but acting or 
not, I consider it a great privilege to sit here and represent 
the Treasury enforcement community to you this morning and to 
have an opportunity to introduce the fiscal year 2002 budget 
request for the Department of the Treasury's Law Enforcement 
Bureaus.
    As you have indicated, with me today is Charles Winwood, 
the Acting Commissioner of the Customs Service, and this 
afternoon I will return with Bradley Buckles, the Director of 
the Bureau of Alcohol, Tobacco and Firearms, and then later, 
next week, I believe, I will return with Brian Stafford, the 
Director of the Secret Service.
    As you know, in addition to these bureaus, the Office of 
Enforcement also oversees the Federal Law Enforcement Training 
Center, the Financial Crimes Enforcement Network, the Office of 
Foreign Asset Control, otherwise known as OFAC, and although 
not directly reporting to the Office of Enforcement, an 
integral part of our enforcement effort is the Internal Revenue 
Service's Criminal Investigations Unit, IRSCI. So we appreciate 
your support of these contributors to the Department of the 
Treasury's law enforcement mission and, as you say, it is a 
large part of the federal law enforcement activity.
    So that each of the bureaus can have ample opportunity to 
present their statements and respond to your concerns, as you 
suggested, I will ask that my full testimony be included in the 
record of the proceedings.

                             FY 2002 BUDGET

    As to the departmental budget, our request reflects funding 
that we believe is necessary to most effectively carry out the 
important law enforcement mission areas for which Treasury is 
responsible and which so directly impact the lives of American 
citizens.
    [Clerk's note.--Full time equivalent (FTE) positions result 
from annualizing positions.]
    If enacted, the budget would provide, for instance, ATF the 
ability to annualize more than 300 positions for agents, 
inspectors and other staff to enhance explosives, arson and 
firearms enforcement efforts; the Customs Service would be able 
to annualize almost 400 previously enacted positions to help 
conduct smuggling and money laundering investigations.
    Overall, the president's fiscal year 2002 budget proposal 
will request $4.3 billion and over 30,000 FTEs for the 
Department of the Treasury's law enforcement bureaus and 
offices, allowing the addition of over 900 full-time equivalent 
positions to the Department of the Treasury's enforcement 
effort, above the fiscal year 2001 total enacted level.
    Funding and increased staffing levels are not the only 
elements of a strong and successful law enforcement effort. 
Equally important are clear policies and priorities. The 
Department of the Treasury seeks to provide the needed support, 
oversight and policy guidance to enhance the performance of our 
enforcement bureaus and to facilitate an even stronger and more 
coordinated enforcement presence.
    To this end and at the subcommittee's request, we have 
begun a comprehensive review of the Department of the 
Treasury's law enforcement resources and infrastructure. We 
have completed a series of issue papers on many complex 
challenges facing the law enforcement bureaus. The Department 
of the Treasury's law enforcement bureaus face an increasingly 
more demanding and complex operating environment, highly 
sophisticated and complex criminal activities, growing use of 
the Internet, globalization, and requirements to do more and 
having to do it with less.
    We believe these issue papers propose strategies and next 
steps to help ensure that the Department of the Treasury will 
have the human and technical resources as well as the physical 
facilities necessary to meet mission demands now and in the 
future.

                          2002 WINTER OLYMPICS

    The 2002 Winter Olympics has been designated a national 
special security event and will occur, as you know, in February 
of 2002, actually, February 8th through the 24th in 2002, in 15 
major sporting venues in and around Salt Lake City, Utah. The 
Secret Service is the lead federal agency fordesigning, 
planning and implementing the security for such designated national 
special security events.
    In addition to providing a secure environment for the 
Olympic athletes and for spectators from all over the world, 
the Secret Service will also be responsible for providing 
security for numerous foreign heads of state and government who 
attend the Olympic events next February.
    In 2001, the Secret Service began developing a security 
plan for the 2002 Olympics. When developing the plan, the 
Secret Service considered the location of the Olympics, the 
expected attendance, media coverage, duration, prior incidents 
at Olympics and the historical and political significance of 
the Olympics.
    Once the Olympics games begin, the areas will be secured, 
technical sweeps for detection of weapons of mass destruction 
will be conducted and various other counterterrorism and 
terrorist prevention assets will be provided by the Secret 
Service as needed and air space security will be provided.
    So the Customs Service role comprises both its core mission 
and responsibilities relative to presidential directives 
regarding counterterrorism. The Customs Service will support 
the Secret Service by contributing approximately 200 special 
agents and examination equipment, as well as the airborne 
support.
    Under its core mission responsibilities, the Customs 
Service estimates that it needs approximately 310 temporarily 
assigned duty inspectors, canine enforcement officers and 
import specialists, particularly along the northern border, 
laboratory van operations, special agents, intelligence 
analysts and other personnel.
    The Customs Service and the Salt Lake City organizing 
committee have coordinated a list of United States airports 
that will be used for foreign athlete and tourist travel to 
Salt Lake for the winter games. They include New York, Newark, 
Atlanta, San Francisco, Los Angeles, Chicago, Miami and 
Seattle.
    The Bureau of Alcohol, Tobacco and Firearms has a 
responsibility to assist in the prevention, detection and 
response to potential arson, explosives and firearms incidents 
at the games. The ATF will provide intelligence analysis of 
threat data and augment the Secret Service protection details 
with approximately 100 special agents and provide tactical and 
special response teams, hostage negotiators and emergency 
medical technicians.
    Other Treasury organizations, including the IRSCI, the 
Treasury Inspector General for Tax Administration and the U.S. 
Mint, will also augment the Secret Service protection detail.
    The security plan has identified the need for approximately 
1600 law enforcement officers and 300 support staff. It is 
anticipated that the Department of the Treasury will provide 
over 1000 officers and outside of the Department of the 
Treasury we have identified the need for approximately 600 
additional officers. Assignments supporting operation security 
at the venues may range from two weeks to a month, depending 
upon the venue schedules.
    We are committed to enhancing the overall performance of 
the Department of the Treasury's law enforcement bureaus and to 
providing strong leadership within the law enforcement 
community.
    The Department of the Treasury's law enforcement bureaus 
have a distinguished record of service. We are committed to 
building on this record and achieving even greater performance.
    In closing, I want to express my appreciation again for the 
outstanding support of the Department of the Treasury's law 
enforcement by you and the subcommittee. Our law enforcement 
bureaus have grown, they are better equipped and they have 
become more professional as a result of your oversight and 
support and I look forward to answering your questions.
    Thank you.
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    Mr. Istook. Thank you.
    Mr. Winwood.

                 Customs Acting Commissioner Statement

    Mr. Winwood. Good morning, Mr. Chairman, and members of the 
subcommittee. Thank you again for allowing me to testify today. 
It is a privilege to appear before you to discuss the Customs 
2002 budget request.
    As you mentioned, Mr. Chairman, I have submitted a 
comprehensive statement for the record that I will summarize 
briefly today.
    Last month, I appeared before this subcommittee to testify 
on the U.S. Customs narcotics interdiction role. I was pleased 
to report that despite an ever-increasing workload, our men and 
women serving on America's front line registered yet another 
record year for drug seizures in the year 2000. Yet narcotics 
were not their only priority. The successes of the past year 
speak not only to Customs' mission to facilitate trade and 
defend America from contraband, but to our increasing role in 
fighting the spread of Internet crime, combating global money 
laundering, defending U.S. businesses from copyright 
infringement and fraud, stopping the smuggling of weapons of 
mass destruction and preventing the importation of goods made 
with child labor and prison labor. And, Mr. Chairman, the list 
goes on.
    From a management perspective, we have no greater 
responsibility to our employees and the public we serve than to 
plan effectively for the future. That is especially true when 
our workload is expected to increase so dramatically in the 
coming years, impacting our national economy and security.

                       Resource Allocation Model

    At Customs we are busy addressing future challenges in a 
very systematic way, beginning with our people. Staffing in 
general will continue to be a critical issue for our agency. 
With the help of a leading consultant, we built a resource 
allocation model to help us project future staffing needs at 
our Customs locations. The model was designed as a planning 
tool for management and can be programmed to take into account 
changing scenarios that impact our mission such as expanded 
volume of trade or shift in a threat.

                  Non-Intrusive Inspection Technology

    Thanks in large part to resources provided by the Congress, 
we are also acquiring the technology needed to supplement the 
skills of our people. We are currently working towards 
completion of a five-year counterdrug technology plan. Under 
that plan, we have adopted a range of non-intrusive inspection 
technology for our busy southern tier. The use of these tools 
has cut down our processing time and enabled us to seize more 
illegal drugs.
    Earlier this month, Customs inspectors at Otay Mesa, 
California found 15,000 pounds of marijuana concealed in a 
tractor trailer with the help of one of our new truck X-ray 
systems. It was believed to be the single largest shipment of 
narcotics ever seized at a land border crossing.

                         Counterterrorism Plan

    With funding in our 2001 budget, we were also able to 
implement a counterterrorism plan that includes upgrades to 
northern border infrastructure, such as increased security and 
lighting, acquisition of non-intrusive inspection systems and 
the posting of additional Customs agents to the National Anti-
terrorism Task Force.

             Ports of Entry Infrastructure Assessment Study

    The rapid increase in border traffic has major implications 
for ports of entry all along our northern and southern tiers. 
At the request of Congress, we completed a core infrastructure 
assessment study to identify our important challenges. That 
study, conducted with the GSA and our partner federal 
inspection service agencies, included a look at health and 
safety and operational initiatives to increase the traffic and 
processing capability of our ports.

                   Air and Marine Modernization Plan

    Modernization of our air and marine assets is also 
essential to keeping up with an ever flexible smuggling threat. 
Again, at the request of Congress, we completed an air and 
marine interdiction modernization plan in 2000.

                Western Hemisphere Drug Elimination Act

    We are very pleased that the president's 2002 budget 
includes $35 million for Customs' air and marine interdiction 
division in support of the Western Hemisphere Drug Elimination 
Act.

                    Customs Automation Modernization

    We have identified the priority areas to be addressed with 
this funding, consistent with our modernization plan. Of all 
the modernization efforts being undertaken at Customs, perhaps 
none will benefit the American public in more ways than our new 
automated system for trade.
    Customs' ability to continue to meet a spiraling workload 
hinges largely on the development of the Automated Commercial 
Environment (ACE). ACE will not only help Customs to move 
imports across our borders more effectively and efficiently, it 
will enable us to do a better job of protecting America from 
contraband and other threats.
    Last year, we received the first down payment on ACE with 
$130 million for new automation provided in our 2001 budget. 
Part of that funding was designated for the hiring of a prime 
contractor to help build this new system. With the assistance--
and I mean the tremendous assistance--of this subcommittee, the 
General Accounting Office and the continued hard work of the 
men and women of the Customs Office of Information and 
Technology, we have completed the source selection process for 
that prime contractor. Customs will be ready to announce the 
prime contractor in the very near term. Once brought on board, 
that prime contractor will begin work immediately on the first 
series of critical tasks.
    I want to personally thank the subcommittee once again for 
its steadfast support of the Customs Service and particularly 
in the area of ACE modernization. We ask for your continued 
support in our fiscal year 2002 budget request.
    Mr. Chairman, I thank you again and at the appropriate time 
I will be willing and able to answer your questions.
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    Mr. Istook. Thank you very much, Mr. Winwood.
    I was kind of listening to see if anybody had a sigh. Some 
people thought that you might be announcing the prime 
contractor on ACE this morning and I guess the suspense is just 
going to have to hold up for a little bit longer.
    I would like to welcome Mr. Rothman, who has arrived, and 
Mr. Sununu was here a moment ago and I am sure he will be back.
    We had, of course, opening statements. I do not know if you 
had any that you wanted to deliver or place in the record?
    Mr. Rothman. The only statement is that I am delighted to 
be here and to work with you, Mr. Chairman, and all the other 
members of the subcommittee, and to learn a lot and to do my 
job as well as I can.
    Mr. Istook. We appreciate that and we are glad that you are 
here.

                    Automated Commercial Environment

    Let me start, then, regarding some questions and certainly 
we had some testimony from Mr. Winwood a few weeks ago relating 
to the drug interdiction, the use of technology in trying to do 
so, and I know that the technology concerns with the Automated 
Commercial Environment are very high.
    I believe last year, the information brought by Customs to 
the subcommittee indicated that were the current ACS system to 
go down for as little as one day--I say as little as, but the 
point is that one day, we are told, would equate to losing some 
$8 billion worth of trade. And I think there was in the year 
preceding that I believe you had outages that approached about 
ten hours, it was.
    I do not know how it has been in the last year, I know 
there is great concern in the business community about getting 
the ACE system in place as rapidly as possible, lest you have 
any repeat of those problems.
    So I suppose the first question I would like to pose really 
is one of how quickly under optimum conditions, and I realize 
you do not plan on the basis of optimum conditions, but 
considering the progress being made on the selection of the 
prime contractor, is there any change in any of the deadlines 
that are anticipated or in the capability of the Customs 
Service to handle whatever level of funding?
    In other words, are we limited in the progress toward the 
ACE system by the time that it takes to accomplish certain 
things or is the limiting factor the amount of money that is to 
be appropriated?
    Mr. Winwood. Well, Mr. Chairman, that is a very good 
question and if I may say one thing, I do have some information 
for you about the continuation of what we call the brownouts 
and the problems with the legacy system which is 17 years old 
and we continue to track that by month and we have an updated 
chart for the record that will show you up through April where 
we are at with the two systems.
    If I may just add one other editorial comment, again, I 
have to thank you for your continued support on ACS life 
support money that we have gotten last year and again it is in 
this----
    Mr. Istook. Love that term, life support.
    Mr. Winwood. We could not think of a nicer way to say it, 
but that is basically what it is, when you have a system that 
is 17 years old that needs constant repair and updating, even 
for the simple business of capacity because of the tremendous 
growth.
    Because of that money, we have been able to make some of 
the adjustments to diminish some of our concerns on one end of 
what we call our brownouts or our problems and that is in 
connectivity to the Trade via the Automated Broker Interface. 
We have reduced some of the outages there. We still have some 
concerns, what we call on the back end, behind the scenes 
processing, that affect the Customs Service and you will see 
from our charts that I will give you that we still have 
problems with what we call the brownouts or the problems with 
the system.
    As far as the question about the technology concerns, is it 
money or time, it is a little bit of both. At some point, if we 
continue at a less than planned appropriation and expenditure 
of a four-year development cycle, we are going to extend out 
the time it takes and the more you extend it out, the more 
difficult it is going to be to catch up by throwing larger pots 
of money at it, if that makes sense.
    Mr. Istook. Yes.
    Mr. Winwood. For instance, the first year, getting $130 
million, which, believe me, I am very optimistic about that, I 
think we should look at the good news side of that. We are in 
the game, we are ready to go, and I think it is a tremendous 
first step. Our initial estimate for the first year was $210 
million. So automatically the time line stretches out.
    If we continue with $130 million again this year, which is 
in our request, that time line then extends for the full 
development of the program to about seven years.
    Now, we could catch some of that up by increasing the out 
year appropriations, but at some point, if you continue that 
lesser amount, then it is harder to catch up. There is only so 
much even a prime contractor can do in a specified period of 
time.
    So we are still on the edge. There are still some concerns. 
We can catch up some of the time with increased appropriations, 
but at some point we will not be able to catch up all the way.
    Mr. Istook. Earlier, you mentioned that $210 million was 
pegged as the figure that would optimize the ability to do as 
much as possible in the first year. I think it is always good 
tohave analogy on something like this. It is kind of like if 
you are building a house, if you can get all the foundation work done 
immediately, then you can proceed with the other things, but if you are 
still having to pour a foundation while other people are trying to put 
walls or the roof or install plumbing, whatever it may be, then you 
just cannot be doing as much other work simultaneously because you do 
not have the same foundation down.
    I know you have earlier documents, but realizing this is a 
dynamic process, anything that you have that updates the 
ability to absorb a level of funding this year or this next 
year that maximizes how speedily the entire system can be 
brought up properly, any updates on those figures would be very 
much appreciated because I know that there are many people in 
the business community that see the fees that they are paying, 
which they would like to see going toward this effort, and they 
want to make sure that the level of effort and the level of 
commitment by Congress matches the level of investment that 
they are having to make.
    So updates on those would be appreciated, certainly as we 
go through the budget cycle because I am as anxious as anyone 
else to have that done, but to have it done right.
    Mr. Winwood. Yes. I agree, Mr. Chairman. As a matter of 
fact, based on the first year of 2001, $130 million and the 
proposal for the budget for this year we have already adjusted 
our time line for deliverables and reordered them, which is 
part of being a very flexible, dynamic plan. We have the 
ability to do that. And so we have some of that information to 
show what we will deliver according to the funding and 
capability we have right now so we can do that.
    Mr. Istook. I understand that. You are talking about 
changing the work to meet the $130 million that is budgeted, 
but I want to make sure that we understand the capacity to do 
it.
    Mr. Winwood. Certainly. We can do that, too.
    Mr. Istook. For example, it would do no good to appropriate 
$500 million if there was no capacity to handle a workload 
greater than $150 million, $200 million, whatever it may be, in 
a quality fashion.
    Mr. Winwood. We can do that.
    Mr. Istook. So that is what I want to know, what is the 
maximum speed at which we can safely proceed on that.
    Mr. Winwood. Yes, sir.
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    Mr. Istook. Mr. Rothman.

                               COBRA Fees

    Mr. Rothman. Thank you, Mr. Chairman.
    Mr. Sloan, Mr. Winwood, thank you for being here. I very 
much appreciate the work you do and the Customs Service does 
and I want to thank you for appearing before the subcommittee 
this morning.
    Commissioner Winwood, if I may, I am impressed at how 
Customs is tackling a workload which you noted in your written 
testimony is growing every year. I have some concerns that 
Customs has found that fees from the 1985 COBRA have generated 
significantly less revenue than expected so far in fiscal year 
2001, $300 million versus an expected $350 million.
    I understand that this shortfall has caused Customs to 
reduce inspectional overtime and delay hiring new inspectors 
and may be causing understaffing at ports of entry throughout 
the nation. I would like to know if that information is 
correct, number one.
    Number two, Customs does have, as I understand, a reserve 
fund of approximately $30 million, which is available to it by 
statute. In light of your testimony which indicates growing 
trade and increased commercial and other entries, does Customs 
plan to make available to itself the $30 million reserve fund, 
or any portion of it, for inspectional overtime? And, if not, 
what alternative plan does Customs intend to implement to keep 
up with what is alleged to be understaffing associated with 
reduced COBRA fees?
    Mr. Winwood. That is a very good question. If I may take a 
moment, there are several parts there, if I may start with a 
historical perspective of the collections starting in 1985 and 
moving forward to this date.
    One of the issues with COBRA, one of several issues, is 
that it sunsets in 2003, so that is a bigger issue as to 
thecontinuation of it and preparing now to get the proper either 
extension of the sunset or lifting of the sunset to continue the 
collections for these services.
    The second addressed with that is that 1985 was the start 
of these collections and the fee has been $5 since that time. 
One of the issues we face is not so much just the fluctuation 
in collections, but the constant increase of inflation. So what 
cost us x amount of dollars in 1985 obviously costs us more 
now.
    The third issue we had this particular year, when we 
started doing projections, Congressman, for fiscal year 2001, 
we saw that our anticipated collections were not going to match 
our anticipated expenditures and we had to make some 
adjustments. So working with the union, NTEU, the National 
Treasury Employees Union, our employees and our management, we 
took a look at those issues where we needed to readjust and we 
did several things.
    We looked at could we/should we bring on additional COBRA 
staff, hiring permanent people, or should we delay that; should 
we look at adjusting our work schedule, our shifts, our times 
and the numbers of people assigned; and through cooperative 
efforts of our employees, we made those adjustments. So we did 
it in a way not to affect delivery of service to the American 
public and that was done cooperatively in anticipation of the 
decline in collections.
    That is how we have been able to now match our projected 
collections to what our expenditures are going to be because we 
wanted to get around the $300 million marker, that is what we 
thought the collections would be.
    The other thing we have to anticipate from time to time 
with the COBRA collection is fluctuation in traveling. There 
are instances that occur that we have no control over. For 
instance, the economy of certain Asian nations in 1999 
fluctuated rapidly so a lot of people that normally would 
travel did not travel, so the collections went down in that 
particular year. And you never make that up. What you do not 
collect in 1999, you do not make it up by collecting more in 
2000. It is contingent upon who travels.
    The other issue we have to address is that $30 million. It 
is required by statute that it be held as a safe account that 
is only to be used for what we consider to be emergencies, 
unanticipated concerns, end-of-year expenditures that might 
arise that are either unanticipated or because a wild 
fluctuation in receipts occurred that you would not be able to 
prepare for. It is not something you can--you do not schedule 
it or plan it pre, it is done post, only if you have concerns.
    Another issue we face, if I may throw another number at 
you, and I am sorry for all this, but in 1996, we have--in 
addition to the $30 million, we are required to keep every 
year, I call that in the bank, for those emergencies I just 
mentioned--we also have a carryover capability. In other words, 
what we do not spend in year 1 we can carry it over in a no-
year fund and hold it for emergencies, fluctuations, pay 
increases, benefit increases, et cetera.
    In 1996, counting the $30 million plus the carryover from 
the previous years, the bank contained approximately $184 
million. This year, the bank contains approximately $72 
million. So you can see what happens with inflation and costs.
    The reason we do not use all in expenditures for a given 
fiscal year of that carryover, is because the $42 million 
carryover, is to take care of concerns like the pay raise. 
There is an anticipation that there might be a pay raise in the 
new fiscal year for the government. We have to cover that. And 
COBRA also has to cover the pay raise for either COBRA 
positions or inspectional overtime costs and salaries and 
benefits and so we have to use what we call the carryover to 
handle those types of circumstances. So we always want to make 
sure that we have what I would call a reasonable financially 
sound appropriate safety net to take those things into 
consideration.
    So basically that is kind of the historical perspective, 
where we are at right now and why we budgeted the way we did. I 
hope that addresses your concern, but it was done 
cooperatively. We did change some of our scheduling approaches, 
we did change some of our assignment practices, but that was 
done in open discussions with the union. We did that so that we 
could match expenditures to collections and not severely eat 
into the $42 million carryover so we could anticipate pay 
raises, et cetera.
    Mr. Rothman. Let me follow up. Let us assume worst case 
theory and let us hope it never happens, but let us assume that 
there is another drop for some period of time; or one of your 
cost factors goes up dramatically; so that the COBRA fees are 
so grievously low that there needs to be a further adjustment, 
expenditure versus revenue.
    How low can you go in terms of reducing staff or moving the 
chairs around before you say, you know what, we are at the bare 
bones of staffing and it is at a dangerous level in terms of 
our meeting our mission, we do have to tap in further to that 
$42 million fund, at the very least, if not then the $30 
million.
    Mr. Winwood. Right. That is what the $42 million fund can 
and should be used for, so we do not get to what I would call 
that crisis stage.
    Mr. Rothman. And you do not anticipate getting to that 
stage?
    Mr. Winwood. No. No. We do not want to reduce in fiscal 
year 2001 service delivery to traveling and in someminor 
circumstances the processing of trucks that serve the importing public. 
And we think we have a plan that we have laid out for the rest of this 
year that we can do that within our expenditure plan based on the 
actions we took in preparation for the collections for this year. And 
that is why the goal would be, you do not want to anticipate spending 
all the carryover in a given year so that you have the flexibility to 
adjust for these contingencies.
    I will give you an example. Right now, and I think because 
of the European Community, I am going to give them credit based 
on what I read in the newspapers, for really having a very 
aggressive approach to handling their foot and mouth disease 
problem. There was an anticipation two months ago that travel 
to the European Community was going to drop dramatically.
    Now, it initially dropped a little bit, but things are now 
under control, people are feeling more comfortable that the 
proper network has been set up to allow people to move at least 
somewhat through the community for tourism, et cetera, so we 
have not seen the drop that could have been anticipated, but we 
have to be prepared for those types of situations. If there was 
a drop over an extended period of time, that would definitely 
drop the collections even further than we had anticipated.
    Who would have known that this outbreak would occur right 
in the middle of the fiscal year?
    So those are the types of things that we like to use what 
we call the carryover, that is in addition to the mandatory 
requirement of having in the checking account $30 million as 
the statutory safety net to ensure that if there is a crisis at 
the end of the year that was totally unanticipated that that 
money can be used to cover it.
    I hope that addresses that issue.
    Mr. Rothman. It does. Thank you.
    Mr. Istook. Thank you, Mr. Rothman.
    Mr. Sununu.
    Mr. Sununu. Thank you, Mr. Chairman.

                    AUTOMATED COMMERCIAL ENVIRONMENT

    I want to talk to you a little bit about the ACE system and 
I apologize, I know you covered some of it in your testimony 
and I was called out for another meeting, but it is important 
enough, with all due respect, it is probably worth repeating 
because I think it is one of the more critical initiatives 
going on at Customs.
    We appropriated $130 million for the system last year, that 
is my understanding, and your request is for $130 million this 
year. What are the total costs for the implementation and with 
an appropriation of $130 million, what will be the remaining 
balance that needs to be appropriated until the system is fully 
implemented?
    Mr. Winwood. If I may, just so I can keep comparing apples 
to apples, I am going to talk about the development of the 
program, because there are several figures that are out there. 
There is a number we use for the four-year life cycle 
development and three years of operation and maintenance. I am 
going to stick strictly with a number that is associated with 
the development over four years. That was the original plan 
that we submitted and was reviewed by GAO and the Congress, 
that we thought we would have the four-year development 
program, which we are working off a set of numbers.
    It is approximately for a four-year development, 
approximately around $1.4 billion rounding everything off. And 
we have laid out an expenditure plan for the development of the 
four-year life cycle for preparation and implementation of $210 
million the first year, I think $308 million the second, and, 
excuse my math, but then subsequent numbers to come up to about 
$1.4 billion for implementation over a four-year development 
cycle.
    With $130 million in 2001 and $130 million in the 2002 
budget, you can see what remains, another $1.1 billion. I am 
just trying to do the math in my head real quick here, it is 
like $1.14 billion. That has to be appropriated to complete the 
project and I think that is when the Chairman had a very good 
question, how much can you handle in those out years 
efficiently to allow you to deliver and at what point is the 
money not as critical as the time that you have.
    So that is what remains. So right now, if we continue with 
$130 million through FY 2002, the development of the program 
will take approximately seven years. And, by the way, then you 
have to continue with costs that you incur, there is some 
additional--and I think the chairman likes my term--life 
support for the existing ACS, running two programs at the same 
time, the ACS and the ACE.
    And in the cost of the program, if you do that over seven 
years, for development now goes from about $1.35 billion to 
about $1.52 billion if you do it in seven years.
    Now, I hope that answered your question. I am not sure.
    Mr. Sununu. Well, it does. It begins to answer it. What are 
the operation and maintenance costs?
    Mr. Winwood. We anticipate that if we did an operational 
maintenance on a four-year development cycle and three years of 
operation and maintenance of ACE, we are speaking of ACE, the 
cost went from about $1.35 billion to about $1.8 billion if you 
did the four-year development cycle and three years of 
operation and maintenance of the new architecture and the 
software.
    Mr. Sununu. And you are going to continue to operatethe old 
system?
    Mr. Winwood. Well, we have to. What we are going to be 
doing in the first several years is building on a parallel 
track. As we roll out functionality--and, for instance, by the 
way, we have the first phase of what we would call ACE, the 
NCAP prototype in Detroit, we actually have a functioning 
prototype in Detroit, Port Huron, and Laredo operating right 
now.
    That particular location will continue to function on the 
ACE, but just think about as we extend out the development of 
the program, we are going to be running dual tracks, ACS for 
those who do not have the new hardware and software 
applications and ACE for those who do. So we will have to run 
on parallel tracks.
    Mr. Sununu. At how many sites do you install the system, 
the hardware and the software?
    Mr. Winwood. We have three sites operating right now, which 
was our NCAP prototype. If we were to continue on the four-year 
cycle as originally planned, we have a roll-out for the first 
year, which would be next year, seven sites.
    Now, since we are going to be looking at $130 million for 
2002, those sites will be cut in half, so we will be rolling 
out three more.
    Mr. Sununu. But when it is fully implemented, $1.4 billion 
covers system implementation at how many?
    Mr. Winwood. Our ports of entry. Major service ports of 
entry where we process commercial trade.
    Mr. Sununu. Which is how many?
    Mr. Winwood. We have 301 ports of entry. Of that, though, 
probably--I am going to say about 60 to 70 are your principal 
locations that handle the vast majority of the commercial trade 
and then there are some others, but we will have the capability 
of supplying the new architecture and the applications to our 
ports of entry around the country that handle commercial 
operations.
    Mr. Sununu. It is a simplified way to look at it, but if 
you are talking about $1.4 billion or $1.5 billion amortized 
over 70 critical points, you know, that is $20 million.
    Mr. Winwood. Well, it is more than 70. I do not want to 
leave the impression there are only 70, but 60 to 70 of the 
locations handle the lion's share of commercial traffic. We 
will have the capability of using this system at all the ports 
of entry that do commercial work in the Customs Service.
    Mr. Sununu. Do you think collections will increase by $250 
million annually?
    Mr. Winwood. If I can remember the cost benefit analysis 
that was done in conjunction with GAO and others who reviewed 
our work, and outside contractors, there is a return on 
investment of about 13 percent, based on the investment of this 
money for this program, a 13 percent return on investment back 
to the government, which means more efficient processing, cost 
savings, and more timely and effective additional efficient 
revenue collection.
    Mr. Sununu. Will it result in any reduction in operating 
costs for collection systems?
    Mr. Winwood. Oh, most definitely. Not only the operating 
costs, but the time and the cost. Yes.
    Mr. Sununu. Is that reflected in your budget?
    Mr. Winwood. I am not sure I understand that.
    Mr. Sununu. Is the forecast reduction in collection costs 
reflected in any of the budget material that you have submitted 
to us?
    Mr. Winwood. For this particular budget?
    Mr. Sununu. Or is it foreseen to be so far off in the 
future that you are still unable to reflect it.
    Mr. Winwood. Not so much cost reduction as cost avoidance. 
I think that is the issue that was laid out in our cost benefit 
analysis. It showed the cost avoidance that can be achieved by 
having a more efficient system.
    Mr. Sununu. But what about administrative costs, overhead 
costs, cost of collection?
    Mr. Winwood. Well, those costs----
    Mr. Sununu. Personnel costs required to collect $1 of 
revenue.
    Mr. Winwood. As I said, it would allow us to have cost 
avoidance so that we would not have to continue to add either--
using the existing system or to add personnel to do things that 
the other system can do. So instead of having to increase that, 
we can avoid increasing that and allow the system to do things 
that right now are a combination of people and systems.
    Mr. Sununu. Thank you.
    Thank you, Mr. Chairman.

         AUTOMATED COMMERCIAL ENVIRONMENT DEVELOPMENT STRATEGY

    Mr. Istook. Thank you, Mr. Sununu.
    The challenge is there are about six things I want to ask 
about all at once right now. Let me continue a moment with ACE, 
though.
    I recognize that you are embarking upon a great adventure 
in computer modernization and it is always of great concern to 
people because of the spotted record that various government 
agencies have in undertaking this level of challenge. I know 
there has been an intense amount of networking and reaching out 
for assistance in developing the architecture and laying out 
the plans and developing all the implementation time lines.
    Recognizing that you are interacting with an enormous 
number of businesses, American and foreign as well, and 
theyfeel they have a terrific stake in this, I would--one, I want to 
know about what is going in what I am about to describe and, secondly, 
what is intended? Because knowing that these businesses with whom you 
work themselves have enormous investments in data processing and 
information management systems that are going to be interfacing with 
yours, they have a lot of high end people that are employed in this 
area.
    My question is as far as making sure that we are doing the 
right things and in the right way and not making some of the 
mistakes that we have seen happen in other government agencies 
in this area, how are you seeking the expertise from the 
business sector in this whole IT area and what is the model for 
seeking that involvement in the future?
    And I am not speaking purely of interfacing with them, but 
I am talking about having the benefit of the strategic level of 
analysis that some of their expertise might bring to the 
process. We know that you are hiring the prime contractor and 
all these other people, you do not want so many people looking 
over your shoulder that it gets in the way, but yet I think it 
would be a shame to not take advantage of the enormous 
expertise that businesses have in putting in complex systems 
such as this and making sure that they proceed in an optimum 
fashion.
    So can you tell us what you have done before, what is 
planned now and whether there might be any room for improvement 
of how you are seeking their help in looking over this whole 
process?
    Mr. Winwood. Well, I think there have been several things 
we have done and I would like to go back, if I may, to the 
beginning. Before we even embarked on this, and I have some 
knowledge of this because I was there at the beginning and this 
is truly a labor of love for me as an individual.
    At the beginning, we realized that there were two principal 
ingredients that were necessary if we were going to rethink 
what the future should be for dealing with a more efficient and 
effective way to deal with international trade.
    First was to really rethink our business process. Before we 
even thought about automation and how to automate, we need to 
think about what is it you eventually would automate to enable 
you to work more effectively. So the first thing we did was a 
complete analysis of what do we do and how do we do it.
    As we did that, and that took about 18 months, we started 
back in 1994, we had a lot of business people come in who are 
in the business, either importers, brokers, service providers, 
people who are in transportation companies, and actually 
analyzed what it is we do now and what is wrong with what we do 
now and how does it or doesn't it match with how businesses are 
operating, how they plan on operating in the future.
    The second phase was then to ascertain with our own folks 
how they were actually operating, put that all in the mix. We 
then laid out a broad, high level design of what the future 
should look like.
    As soon as we started thinking it out, we were going to 
have to make some changes, we established, an organization is a 
wrong term, we established something we called the TSN, the 
Trade Support Network. We went out and asked for input and 
partnership and participation by everybody and anybody that is 
in the global trade environment. Now, not everybody, but at 
least a sample, so we touched base with major businesses, major 
trade associations, major service providers and formed what we 
called the Trade Support Network. And we met with that group 
and we asked them to bring their technicians in, their 
automation folks, their actual people who process trade, from 
ordering to accounting to delivery to consumption, and formed 
this group. At the time, it was about 80 representatives 
representing major organizations, major importers, et cetera.
    We formed that group and used them as our sounding board, 
as our check of are we on the right track, how would this 
affect you, what would this do and how can we go about getting 
this accomplished. As we were doing that, it further refined 
what our business process should look like.
    While we were doing that, then we started to engage major 
consulting organizations that had been recognized as experts in 
either building or helping build major systems and I wish I 
could remember all the organizations in my head right now, but 
I cannot.
    We then refined further what our process was and then 
started getting into what the potential requirements would be. 
This was all done in partnership with, like I said, the actual 
users, the people that work in the business and people who have 
built big systems before.
    As we progressed to this point, we also brought on, as you 
know from some of the briefings we have given, the Mitre 
Corporation to oversee, to be kind of our check to make sure we 
are staying in line with that whole theory of cooperation, 
partnership, input and review.
    Our hope is now, having all that in existence, that when 
the prime contractor is announced and selected they then will 
take over that role to bring in the additional subject matter 
expert in today's environment and to review what we have done 
and to make sure that they are bringing in additional subject 
matter experts that have experience, have lessons learned, have 
benchmarks, the best practices, and to make sure that 
everything we have done so far is still on the right track.
    Those groupings I talked about, for instance, the Trade 
Support Network, it still exists. It is larger now. The world 
has changed. Who would have thought in 1994 we would 
havedotcoms that are out there actually providing a service for the 
international movement of goods? Well, they have some expertise now, 
software applications, they have expertise in using certain types of 
software, they have some experience in using the Internet, which our 
system will be Internet enabled.
    The Trade Support Network now is about 150 people, to 
include these new service providers that have evolved. It is 
very well organized. They are broken down into work committees, 
they are contributors to their potential users, the potential 
recipients of the service, so the Trade Support Network still 
exists and we will continue to use them as part of outside 
counsel in addition to the people who have built big systems 
and in addition to technical subject matter experts.
    As a matter of fact, the Trade Support Network's next 
meeting is May 14th, where they will come back together again 
and tell them where we are at. By then, we should have the 
prime contractor announced and ready to go and give them an 
update as to the status of funding, what we have done, what we 
need to do next, and get the committees rolling on thinking 
about the high level user requirements necessary for future 
programming and get their concurrence that it is still on the 
right track.
    I hope that addresses your question.
    Mr. Istook. Well, I think that certainly does help. And it 
is certainly my hope that as this effort continues and expands 
that it is both a formal and an informal process that is 
accepting, that is open, because we are talking about the end 
users in a very important sense there and it is important to 
recognize that this particular set of end users themselves have 
a vast amount of expertise and experience in the IT area and I 
am sure that recognizing how important it is to them to have 
this system up and function that there is a lot of excellent 
advice to be had without expenditure.
    Mr. Winwood. Exactly.
    Mr. Istook. In the sense of hiring them, people that find 
it in their self-interest, of course, to volunteer that aid and 
I want to make sure that the process that we have is open 
enough to take advantage of that, at the same time recognizing 
that you cannot yield control outside of the hands of the prime 
contractor and, of course, Customs itself. But I think that 
everyone in the private sector knows what is at stake for them 
and that there is a lot of synergy to be had working with them 
that way.

                         Trade Support Network

    Mr. Winwood. By the way, Mr. Chairman, if I may interject 
one other thing, the Trade Support Network are all people who 
volunteered to help, it is at no cost. I mean, they are doing 
it because they know it is the right thing to do, they know it 
is a benefit not only to the government but obviously to the 
importers and the major companies of the country.
    The other group I failed to mention, if I may, just one 
more, is that in our plan for development and building of the 
system, we also set up an executive oversight group that is 
chaired by the Commissioner of Customs and we have added to 
that, we call it the ESC (Executive Steering Committee), and 
not only do we have the Customs senior managers to make sure 
that we are staying on track, following the plan that we laid 
out that was agreed to, we also have a major corporation, a 
private corporation, on the board. We have GAO as an advisor on 
the board. We have two outside other government agencies on the 
board, in addition to senior members of the Customs Service and 
Treasury Department automation folks on the board, so we have 
that group also overseeing to make sure we are staying true and 
honest to what we agreed to do, when we agreed to do it, how we 
agreed to do it to make sure it gets the proper top level 
review.
    Mr. Sununu. Would you yield for a moment for a question, 
please?
    Mr. Istook. Yes, go ahead.
    Mr. Sununu. Who is the GAO representative on the board?
    Mr. Winwood. Mr. Randy Knight.
    Mr. Istook. Mr. Rothman, did you want to----
    Mr. Rothman. No. Thank you, Mr. Chairman.
    Mr. Istook. That is fine. Okay.

                            Volume of Trade

    Let me pose one other question here that relates to this. I 
realize you are talking about resource intensive things 
involving the ACE system, involving the expansion of trades, 
trying to make sure that the growing volume coming through the 
ports is handled. I think there is great concern with whether 
there is sufficient investment in the seaports, whether there 
is sufficient investment in the air and marine capacity to 
interdict them and the personnel, not just the physical 
facilities and items such as aircraft and boats that are 
needed. But in this whole thing, there are a couple of measures 
that I am looking for that might help to get a handle on it.
    One relates to the expanding volume of trade, sometimes 
with static numbers of people, and something that is basically 
a measure either of productivity as it exists or productivity 
levels as would be needed. For example, rather than expressing 
it in terms of manhours at a particular port, it could be a 
relationship between the number of manhours per item or dollar 
volume of trade measuring the historical levels of--I am going 
to call it productivity, it may not be quite the correct term 
here--but what that measure is and how it is changing with the 
volume of trade because I think that helps us to get a handle 
on the sufficiency of resources.
    Also, I do not know how you define the difference between 
someone that you will consider to be on the front line and 
someone that you consider to be in a support function and 
sometimes they may be directly supporting that frontline 
person, sometimes it may be a different level of administrative 
support with the overall facilities, but I would like to get 
information on the mix of those.
    Frankly, this is not just specific to Customs, it has to 
do, Mr. Sloan, with Treasury in general, to understand as the 
roles change, as information technology enables people to do 
things in different ways, are we seeing those savings by 
diminishing the number of people that are necessary in some 
sort of support role in expanding the ratio that is actually on 
the front lines?
    Now, you may have some technical definitions of that, but 
it is important also to distinguish when you talk about those 
numbers, I am talking about the numbers of people actually 
doing it as compared to those that, for example, may be 
authorized for the position.
    But I think those levels are important and we may have some 
of that within some of the material we have, but I want to make 
sure that we highlight that.
    I was going to recognize Mr. Rothman, but do you want me to 
wait a minute?
    Mr. Rothman. I have now learned a lesson about the 
committee work and I have shut off my phone.
    May I ask a few questions?
    Mr. Istook. Yes, please.

                          ACE DEVELOPMENT COST

    Mr. Rothman. Thank you very much.
    I just want to see if I understand the math a little bit. I 
was a political philosophy major and my twin brother was the 
math major.
    The ACE program was originally a four-year plan?
    Mr. Winwood. The way we designed the development of ACE was 
to develop the ACE functionality for trade in four years.
    Mr. Rothman. And it would be a $1.4 billion plan funded 
over four years?
    Mr. Winwood. For development. Yes. Approximately. It was 
like $1.35 billion something.
    Mr. Rothman. And the first year, last year, was $130 
million.
    Mr. Winwood. Yes, sir.
    Mr. Rothman. And this year the president's budget increased 
it $130 million?
    Mr. Winwood. The total FY 2002 request is $130 million.
    Mr. Rothman. And you anticipate seven years to accomplish 
this?
    Mr. Winwood. Well, with that level of funding because the 
way we broke it out was our first year we said we would need 
$210 million.
    Mr. Rothman. I did the math, and, again, I am not the math 
major, but seven times $130 million would be $910 million.
    Mr. Winwood. I am sorry. I am sorry if I misled you. If we 
get $130 million and $130 million, and then made up the 
difference over the next subsequent years to get to the $1.35 
billion something, we could do it in seven years. I am sorry.
    Mr. Rothman. If we did $130 million and $130 million and 
extend it out over the entire development?
    Mr. Winwood. It would take 14 years. And remember each year 
you extend it out, your costs go up. So what would cost us in a 
four-year development approximately $1.38 billion, if you do it 
over seven years, it is going to cost you about $1.5 billion. 
If you do it over a longer period of time, for development, 
now, it is going to cost about $1.8 billion.
    Mr. Rothman. Right. So 12 to 14 years at the present rate. 
Does that disturb you that a program that you thought--
presumably you thought should be in place in four years, now 
assuming rosy economic projections down the road, may not occur 
until at the earliest seven years? Does that disturb you, since 
presumably many years went by before there was some consensus 
about awareness that the ACS system was really a problem, and 
knowing how government works, you had really hoped for four 
years?
    Mr. Winwood. Well, if I may answer it this way, it is a 
good start. It is not the optimum start, as the chairman has 
mentioned. If you had optimum funding, would this be perfect 
solution? We think so. But I will tell you, being an optimist, 
I think it is a good start, it gets us moving in the right 
direction. It makes the proper commitment.
    Would I be happier if we could do it in four years? Yes. 
Just like anybody would be happy to have the perfect solution 
to every question they had placed in front of them.
    Mr. Rothman. At some point, is there a point of diminished 
returns? For example, to reduce it to the absurd so I can 
understand it and then we will work back to reality I guess, 
although we do not know exactly what reality will be in terms 
of prediction capabilities or the accuracy of our predictions, 
let us say that instead of having as good an economy as we had 
last year and as much of a surplus as we have this year, 
because of steps that may be taken this year, we do not have 
surpluses in five years. Or they are not as big as we 
projected.
    Then your anticipation of more than $130 million every 
year, in order to finish it within seven years, is not going to 
happen and then it would take even longer than seven years--you 
have said if you continue at the rate of $130 million each 
year, it would be 14 years.
    What happens to the ability of the Customs department to 
function and meet its mission if this system cannot beinstalled 
in either seven years or, in a less rosy scenario, 14 years?
    And if that is a real problem, should we not be arguing for 
the additional funds up front? Because there may be all kinds 
of things happening on draining the budget, like tax cuts and 
the rest in the future, that may affect revenue negatively, 
although I understand some say it may affect it positively.
    Mr. Winwood. Now, let us just say it would be stressful 
times. It would be very difficult to do. With the tremendous 
growth of work, et cetera, it does cause some other issues and 
it does really increase your costs. By extending it out to a 
long period of time, and I am optimistic that that is not going 
to happen, but just using what we are saying, we are kind of 
speculating here, the worst case scenario, I do not think that 
is going to happen, but using the worst case scenario, it 
causes increases.
    I think reasonable people when they take a look at that and 
the analysis is done they will find that it is going to cost so 
much more that it is beneficial to re-think the delivery, re-
think how to go about this. Not to stop it, but to re-think how 
to accomplish it. But that is the best way I can answer it. I 
mean, it is speculation and I truly believe that it is going to 
not happen that way.
    Mr. Rothman. If I may ask one more question?
    Mr. Istook. Please go right ahead.
    Mr. Rothman. Thank you, Mr. Chairman. You are very kind to 
a newcomer and I am grateful.
    Mr. Istook. We are glad that you are able to be here now. 
We appreciate that.
    Mr. Rothman. Thank you.

                           $36 MILLION OFFSET

    Your budget, Commissioner, includes a $36 million reduction 
that is offset through improved resource management.
    Mr. Winwood. Yes, sir.
    Mr. Rothman. Can you specify or describe a little more what 
that means and how or where these savings will come from 
through improved resource management?
    Mr. Winwood. Thank you. I think one of the things we are 
looking at is having more of an enterprise approach to what we 
call our administrative functions. Working with Department of 
Treasury, we are looking at an enterprise approach to handling 
travel, which we think will reduce our actual travel costs when 
travel is necessary.
    We are working with the Department of the Treasury on an 
enterprise approach to telecommunications and telephones. We 
think there is a tremendous cost savings that can be gained 
there. And I will give you a very specific example.
    I am taking a hard look at some of the things that we think 
we need or thought we needed that maybe are not mission 
critical. For instance, we have--and I hate to use this as an 
example, but we had a space problem and we felt it was 
appropriate to get some additional space, reconfigure it and 
then move folks out.
    Well, when you look at it, this year's costs and next 
year's costs, based on the fact that we would rather have that 
money used for front line operations, not to reduce service to 
the American public, I cut it. And, you know that? We will do 
fine. We do not need it. It is not mission critical. It was 
important to do, it was thought to be necessary, we decided not 
to do it.
    Estimated savings right there alone is probably--for next 
year, probably $2.5 million.
    So those are the types of things we are taking a hard look 
at right now. I cannot give you specifically dollar amount or 
the specific program, but for sure we are looking at the--in 
cooperation with Treasury the telephone enterprise approach 
and, believe me, there can be savings there. One contract, one 
service, one department.
    I think if you take a look at what happens in the community 
today, go out and take a look at the different cell phone 
offers. If you were buying a lot for a larger group, the cost 
savings are tremendous. Same thing in the government. And I 
think we can do a lot more in those areas.
    Mr. Rothman. Close to $36 million?
    Mr. Winwood. Well, when we add it all up, I think we can 
achieve it.
    Mr. Rothman. Thank you very much.
    Mr. Istook. Thank you, Mr. Rothman. You were touching on 
something that I was wanting to ask about.
    The big question there is if I understand correctly, Mr. 
Winwood, you are talking about finding this approximately $36 
million in savings within the Customs budget. We are not 
talking about Treasury wide there, which kind of brings in what 
I wanted to start posing to Mr. Sloan.
    Mr. Winwood. Right. Correct.

                            WINTER OLYMPICS

    Mr. Istook. Because, you know, every time somebody is being 
asked to do more with less, you have things such as this $36 
million--I do not know if shortfall is the right term to use, 
let us say a differential.
    I know you have put a lot of focus in your testimony on the 
special event coming up with the Olympics in Salt Lake City, 
detailing the number of people that were going to be involved, 
yet I do not believe there is a specific line item, as was 
sought in the proposed budget to handle the extra expenses of 
that, which of course is a significant amount of travel, had 
the potential for a lot of overtime expense, space that will be 
used for a fairly brief period, I guess for a couple of years 
or so as opposed to longer term needs.
    But if there is the ability right at the start to findthe 
savings and absorb that type of expense, how much more is there that 
could be done that has not yet been done?
    And here I management agreement speaking about Treasury 
wide, or at least within your area of the law enforcement 
aspects of Treasury.
    Mr. Sloan. Using, for example, the Olympics as a national 
special security event, in planning for the Olympics, and 
clearly there are significant costs associated with the 
Olympics, as the Secret Service will lead in most of these 
operations, the scrubbing, quite frankly, is continuing as we 
speak. I mean, we are not saying that we have even finished 
looking at every detail of the potential expenditure as it cuts 
across all of Treasury relative to the Olympic spending and 
there may very well be more savings involved there.
    In other words, even the Olympics are not exempt from the 
impact of such a scrub that we are talking about within the 
Customs Service. We certainly hope to continue to find savings 
in that regard and, in fact, we have in the period of time that 
we looked at it just since January. I think the costs have been 
able to come down somewhat as far as the manpower required and 
the deployment of other resources.

              REVIEW OF TREASURY LAW ENFORCEMENT RESOURCES

    Mr. Istook. Who has been placed in charge of that Treasury 
wide, within law enforcement, within Customs? How is that 
structured as far as finding those?
    Mr. Sloan. Finding the savings?
    Mr. Istook. How have you structured the effort?
    Mr. Sloan. Well, first of all, the Secret Service has a 
responsibility for coordinating the overall effort for the 
Olympics because it has been declared a national special 
security event.
    Mr. Istook. I am talking about the scrubbing effort.
    Mr. Sloan. The scrubbing effort, as an example, the 
scrubbing effort that recently went on within the past 30 days 
which reduced clearly the manpower based on the examination was 
conducted by senior level Secret Service officials who visited 
the venues actually and applied what they know to be the best 
business practices for security to the venues. In other words, 
just like any other protective operation that the Secret 
Service engages in, they start with the large operation and 
then they begin to scrub it to the point where once the 
operation starts to unfold, once we know what the venues are 
going to look like, once we know what the traffic is going to 
look like, once we know what the other agencies involved may be 
contributing as far as their resources are concerned, the scrub 
begins.
    And then you also start to look at the most effective way 
to use resources even beyond Treasury resources and a scrub of 
that nature was conducted within the last 30 days, which 
reduced the numbers that had originally been anticipated by the 
Secret Service to the number that I reported today, so that is 
going on as we speak and that continues.
    Mr. Istook. And that particular effort, as you say, is 
regarding the significant national event of the Olympics.
    Mr. Sloan. Yes.
    Mr. Istook. But is there a structure that has been set in 
place, not related just to that specific event, but to Treasury 
as an entity or the law enforcement aspects of Treasury? 
Whatever it may be, I mean, it really begs the question, if 
there is this level of savings to be had for the effort, why 
has that effort not been made already? That is the question 
that kind of begs.
    Mr. Sloan. Mr. Chairman, obviously I cannot speak for the 
past, but I can tell you that this secretary, Secretary 
O'Neill, has challenged me personally with scrubbing the 
Treasury enforcement budget and every dime of the $4.5 billion 
without any sort of protected entity within that budget. I 
mean, I will take the money laundering budget, for instance.
    Secretary O'Neill has instructed me and we have begun the 
process already to look at every dime enforcement and 
enforcement support--people who support the Office of 
Enforcement with regard to money laundering to determine 
whether or not the output and the outcome of that money is the 
amounts that we should continue to move forward with.
    So he has challenged--of course, he has not only challenged 
me, he has challenged the entire department, it is not business 
as usual. We are scrubbing from top to bottom and making 
certain that the money that we are spending does have some 
direct nexus to value for the American public.
    Mr. Istook. And the structure of that effort? Who are the 
persons tasked with it or what resources do you bring in?
    Mr. Sloan. In the case of enforcement, I have been tasked 
with looking--and, of course, I am not looking at all $4.5 
billion on the same day, I mean, clearly I am doing it in a 
very deliberate way, but I am using, for instance, the--take 
the money laundering expenditures, for instance. I mean, we 
have money laundering expenditures that are associated with 
Customs, with Secret Service, the IRS, FINCEN, across the 
board.
    I have assigned a team within Treasury enforcement to begin 
that scrub and we actually have begun meetings within 
enforcement by bringing the bureaus together. In fact, we are 
even going to be asking OMB to go out for us. When, for 
instance, we get a budget call on money laundering, for 
instance, how much are you spending? Well, if an agency or a 
bureau is coming back and saying we are spending X amount of 
dollars, then we would like to know why is it that we need to 
have that amount of money spent in the forthcoming year, tell 
us whether or not you have been successful in that 
oneparticular area of your mission and in that process we have begun--
actually, we began on March 8th in that scrubbing process. It is not 
something I can report to you today on success, obviously, because it 
is certainly something that we have started engaging in pretty actively 
for the last 30 days. And I think there is going to be a measure of 
success and I think there is going to be a measure of result that will 
help us look at everything from the administrative costs to actual 
enforcement costs.
    Mr. Istook. Is any part of that look something that would 
directly involve the Congress? For example, if there is an 
indication to you that you cannot accomplish certain potential 
savings because of congressional requirements? Is there 
anything we should be anticipating?
    Mr. Sloan. Well, I think it would be premature for me to 
say today how the outcome of this internal scrub would affect 
what we would be asking for in subsequent budget submissions, 
but it would seem to me common sense would dictate that if we 
scrub our process and we take a new look at it and a fresh look 
at it in accordance with the secretary's direction, then 
certainly it is going to have some positive impact that will 
involve our relationship with Congress in that regard.
    Mr. Istook. And I am speaking about something such as, 
well, we can achieve savings in a particular way but we cannot 
go there because Congress has a requirement that we handle it 
differently.
    Mr. Sloan. I see what you mean. But I think that if we 
demonstrate the way we do business could be done in a different 
way, which both saves money and still can accommodate Congress' 
needs, I think that common sense would indicate that that would 
be a worthwhile project.
    Mr. Istook. I have to ask and then I need to yield to Ms. 
Meek for her questions, but I have to ask, recognizing that 
just a few years ago there was an undertaking that was called 
the National Performance Review, which had certainly a lot of 
related goals as this. You have been there.
    Mr. Sloan. Yes.
    Mr. Istook. Throughout that time. Does this differ in any 
significant way from what was undertaken with the National 
Performance Review or is it, for example, taking ideas that 
were developed but not implemented at that time? How does the 
two things interrelate?
    Mr. Sloan. I was there during the National Performance 
Review, but I was not--I mean, just like everybody else in 
government, I was there. This is a scrub of, for lack of a 
better term, are we getting the best bang for our dollar, 
particularly in those areas that Treasury enforcement is 
responsible for. In other words, when I report to the secretary 
that we are spending, let us say, $100 million overall across 
the budgets of Treasury enforcement for money laundering, he 
would like to know that the outputs and the outcome mean 
something more than just, okay, then we have to spend another 
$100 million next year. That is what I am talking about and 
that is the very, quite frankly, passionate direction that the 
secretary has moved us in and that is what we are doing now.
    Now, whether or not we can expand upon the positive aspects 
of the performance review or other similar examinations of 
government activities, then I think that would be good, but 
this is first and foremost an examination of whether or not we 
are getting the best bang for our dollar in what we do.
    Mr. Istook. Do you have the information systems in place 
for collecting and analyzing the data in the different cross-
cutting ways as you are doing here? Are your information 
systems up to this task internally?
    Mr. Sloan. For the most part, yes. We are finding that we 
do have the information. Now, bringing it together in a 
cohesive way in which we are all talking the same language, I 
will give you another example.
    In the area of money laundering, we find that 
statistically, many agencies will report money laundering 
prosecutions or investigations in a language that might not be 
the same language that their sister agency uses in law 
enforcement. I mean, clearly, we have to start making sure that 
we are all speaking the same language with the result of this 
sort of activity. That is a challenge and I think we are making 
a great deal of headway in that regard.
    Mr. Istook. Thank you.
    Let me yield to Ms. Meek from Florida.
    I know, Ms. Meek, you have a special interest inasmuch as 
there is much activity involved in Customs as goes through 
Florida and the law enforcement concerns that go with it. So I 
will be happy to yield to you.
    Mrs. Meek. Thank you, Mr. Chairman. I am so sorry that this 
committee is held at the same time as my other committee.
    Mr. Istook. I have the same problem.

                       RESOURCE ALLOCATION MODEL

    Mrs. Meek. Customs is a very, very strong concern of mine, 
as you well know.
    I am concerned, Commissioner, regarding your resource 
allocation report and what your model showed. I am from Miami 
and certainly I have strong concerns about what goes on there 
and over the years I have fought very hard to be sure that the 
needs were being met.
    The analysis that was made showed that the Miami airport 
needed about 443 inspectors over its 1998 base, they had 420 at 
that time, to meet the workload requirements and theidentified 
enforcement threats. As you know, those threats largely come from 
drugs, money laundering and you name it, we have the whole nine yards 
in Miami.
    The Miami seaport due to that study needed 82 inspectors 
above its 1998 base and they need 82 more and the SAC needed 
145 more agents, which just goes to show the propensity of 
problems in the Miami area as far as Customs is concerned. The 
Miami airport needed 49 more canine enforcement officers and 
they are very much in need.
    Well, suffice it to say, Mr. Commissioner, that the report 
shows a lot of substantial shortfalls on an agency wide basis 
there in many locations and I could site many of these facts 
and statistics as we find out from visiting our people there 
and talking to them, but I do see a disconnect between the 
resource model allocation and your testimony, your written 
testimony.
    So you identified these high unmet needs in there, but when 
you read your testimony, it does not seem to be that you are 
addressing many of those needs and it seems to me you are 
fairly satisfied with what is going on there. And I guess my 
submission here today is that I am not because I know the 
problem, it is a very real one there. And I would certainly 
like Customs to meet its responsibilities, which it has always 
tried to do, but I would be less than a good congresswoman if I 
were to tell you that the model and what is happening are not 
fitting together. There is a disconnect there.
    I want to know what was your request for additional agents, 
inspectors and canine enforcement officers before that little 
acronym by the name of OMB went through your request?
    Mr. Winwood. Well, first of all, Congresswoman Meek, I do 
appreciate your support and particularly for the support of 
your district and for south Florida. And we all agree that it 
is a hotbed of activity, as you know.
    Mrs. Meek. Yes.
    Mrs. Winwood. You and I have been down there several times 
and sometimes on the same occasions.
    Mrs. Meek. Yes.
    Mr. Winwood. May I go back for one second? You have 
mentioned the resource allocation model. If I may say for the 
record, as you know, since you have had a chance to see it, I 
believe, this is the first time I think that a government 
agency has taken a holistic look at building a model that would 
allow for input of information to help determine as a 
management tool what the proper resources would be to address 
several key areas for an entire agency, for all your 
activities. And the key areas that we address are increasing 
workload, need for presence, and what I mean by need for 
presence, there are some locations that when you do a model for 
management and where you put resources there are requirements 
for safety or need or hours of operation that based on workload 
might not be the critical place you would put somebody, but for 
the convenience of the American public you need to put somebody 
and you need to put them for extended hours, and the third 
would be for our enforcement concerns, identified enforcement 
concerns based on historical events before.
    Now, we built that model and shared it and got it released 
and had it reviewed and some say--it can be used right now and 
does give us an indication of the proper resources to meet 
those three identified areas.
    In the preparation of the budget, back when--last summer 
when you start preparing for budget submissions for the future 
year, for 2002, we did use the model to give us a gauge of what 
would be the appropriate staffing according to that model under 
those three conditions for the Customs Service. It came up to 
about--I forget the exact number, but what we requested based 
on the use of that model was about 1000 people or 500 FTE and 
the appropriate salaries to cover that over the budget cycle.
    The reason it was that number and not the whole number was 
because we had to take another consideration into account as to 
how many people at any given time, if you got them, could you 
bring on board in a reasonable amount of time to have them be 
effective. So we realized that it was not just these factors, 
it was who can you really hire and how fast and how many can 
you hire based on attrition, your present vacancies and what 
else you could bring on board, what is the capacity of your 
personnel system to bring people on.
    So we did have a budget in the first scrub as it went 
forward. We did use the model as an indication of future 
staffing for 2002. The budget is submitted as you see it, with 
that scrubbed out.

                       Customs Staffing in Miami

    Mrs. Meek. So are you going to try to redirect some 
personnel to cover these needs?
    Mr. Winwood. Well, our hope is with the proper balance of 
some of the new technology we have put into south Florida and I 
will tell you we have used south Florida, particularly the 
Miami seaport, in some cases the Miami airport, using 
technology to help achieve some of the manpower savings 
necessary to make us more effective. If I may use an example, 
based on some funding from Congress the year before last, we 
have now at the Miami airport a prototypical, first of its kind 
X-ray capability for our task group processing that never 
existed before.
    It has turned out to be the most efficient system we have 
ever put into the aid of a Customs officer who is fighting the 
drug war in south Florida and it has dramatically increased 
their success rate. We have already discovered moreinternal 
swallowers--and Miami sets the record every year for numbers anyway, 
but we have discovered more internal swallowers this year at Miami 
International Airport to this date than we did all of last year. And 
part of that is due to having available to our officers, the latest in 
technology that was supplied through money from Congress and by putting 
it there because it is in a critical area and not only does it make us 
more efficient, but what used to take at a minimum approximately four 
hours once a decision was made to do that type of examination now takes 
30 minutes. So instead of having two officers tied up for four hours, 
they are now having to deal with that environment for 30 minutes. So 
you can see what we have tried to do is match technology where we 
cannot necessarily always match people, marry them together to get the 
efficiencies necessary to improve how we do things, which are less 
manpower intensive.
    We have done the same thing at the Miami seaport. As you 
know, you have visited the area down there, they were the first 
location to get the new modern VACIS machines that I talked 
about at the last hearing with Congresswoman Meeks and Mr. 
Chairman. They were the first place to get one, they were the 
first one to have the mobile truck X-ray. They will be the 
first ones to get the larger--under the NIII five-year plan, 
the first large container X-ray which allows the officers there 
to do more with greater efficiency, and safety and to have 
better results. And then, of course, where necessary, based on 
the support from you and several other folks and the State of 
Florida, as you know, we have Operation Riverwalk. Where as 
appropriate, when we are trying to address a particular issue 
we will then move resources for a specified period of time to 
attack and identify a problem. So that is how we are trying to 
deal with these----
    Mrs. Meek. And I want to say that is working, Mr. 
Commissioner.
    Mr. Winwood. Well, I appreciate that.
    Mrs. Meek. It is working. It makes us very happy to see 
those resources.
    Mr. Winwood. And that is a long-term commitment.
    Mrs. Meek. That is right.
    Mr. Winwood. That plan is----
    Mrs. Meek. The message has gotten out.
    Mr. Winwood. Good. Excellent. Excellent. So that is how we 
are trying to adjust and adapt according to the new 
environment. It is not just people all the time, we have to 
have the right combination of the technology, the proper use of 
the technology in the right places, and that is how we are 
trying to deal with it in this budget segment.
    Mrs. Meek. And in our capacity as an overall manager of all 
this, you still maintain the authority to redirect personnel if 
you need to, for example, where there is this hot spot and 
utilize that in your methodologies.
    Mr. Winwood. As appropriate, we can and we do. For 
instance, on Riverwalk, we have made some sacrifices monetarily 
and personnel wise to move people in for a period of time to 
address this. But, you know, as valuable as south Florida is 
and as important as it is, as demonstrated by our enforcement 
capacity and how active it is--and, as you know, when we were 
down there for that press conference, I started my career 
there, so if you are going to touch my heart, you are going to 
talk about south Florida and the Miami area. But we also have 
301 ports around the country?
    Mrs. Meek. Really?
    Mr. Winwood. Yes. There are 301.
    Mr. Istook. You thought there was only one.
    Mr. Winwood. No, there is more than one.
    Mr. Istook. Well, maybe two, Miami and South Miami.
    Mr. Winwood. That is a very good plan. I am close to that 
one, too. So there are needs that we have to balance. We have 
to balance the needs of the entire universe against specific 
geographic locations and we have tried to make sure we maintain 
that balance. Because as we have found and as you have seen 
from some of our enforcement statistics we have discussed, that 
if you move permanently to address one issue and leave the 
other area vulnerable, it just moves. And so we have to make 
sure that we have the network, the fence, the envelope 
addressed as best we can and that is how we try to use that. So 
we have used that ability to move judiciously because of those 
issues.

                           Customs Resources

    Mrs. Meek. I just want to make one other comment, Mr. 
Chairman.
    When I came to this committee, Customs was sort of like the 
stepchild and I certainly do not want it to become that again. 
That is, you were always understaffed, you were always really 
in terms of the other agencies, you were not getting the 
attention and I do hope that you will maintain what you have 
and get more because the need is there throughout the country.
    Mr. Winwood. Well, I appreciate that. As a matter of fact, 
we talked at the beginning and I did thank the subcommittee and 
will continue to thank them for their tremendous support. As I 
said earlier, I am very optimistic on the modernization, on the 
automation. A step forward. The funding was fine. We are 
getting tremendous support from the Treasury Department and I 
guess I could say that through your support, through the 
support of the Treasury Department, a lot of fine work by our 
own customs employees showing their value, we are not a 
stepchild. We are first among equals.
    Mr. Istook. Did you have any other questions, Mrs. Meek?
    Mrs. Meek. I do, but I can yield if someone else----
    Mr. Istook. No, no. Please, go ahead.

                               COBRA FEES

    Mrs. Meek. Do you plan to tap into the $30 million reserve 
fund for inspectional overtime, which I understand is available 
to you by statute? If not, tell me why.
    Mr. Winwood. Okay. I will have to repeat a few things. 
Hopefully, for the record, I will say exactly what I said to 
Congressman Rothman.
    Mrs. Meek. I am sorry.
    Mr. Winwood. No, no, no. That is fine. This gives me an 
opportunity because there was something I left out when I spoke 
to Mr. Rothman and it will give me an opportunity to give you 
some news that I did not give him.
    The $30 million by statute that is in the COBRA user fee 
account is required to be maintained for emergency purposes. It 
was designed by Congress, and rightfully so, to say that on 
your best planning, on collections and expenditures, if 
something would happen at the end of the year that was totally 
unanticipated, that put you in a position that there is no 
other way to pay for it, and it is directly related to services 
provided under the COBRA fee, then you use that money, but we 
cannot use it for anticipated needs and to build it into our 
expenditure plan, to forecast money for a given year. It is 
really, in layman's terms, an emergency fund to be set aside 
and held in case you need it.
    We have not run into that situation yet. Part of that is 
due to a lot of good cooperative effort between the Customs 
Service and management and the employees' union, NTEU, 
realizing that in fiscal year 2001 that we looked at our 
potential collections and our potential costs for the fiscal 
year and realized that they did not match, that the collections 
were going to be below what the expenditures could be.
    So working in adjusting staffing, adjusting how we used our 
staff, not to eliminate or reduce service, but to adjust to 
deliver the same service at a lesser cost wherever practical 
and to readjust expenditures of money on new or additional 
personnel, we were able to match collections to expenditures.
    Now, in addition to that, the $30 million banked that we 
are required to maintain for emergencies only there is what we 
call a carryover, so there is another $42 million in our 
account that we use that we call a carryover, money that was 
not expended the previous year based on your expenditure plan 
and the collections. We have $42 million.
    What we use that fund for and why we do not want to project 
out and spend it prematurely and budget according to having 
that at the beginning of the year is that helps us take care of 
inflation, increase in costs, salary increases, benefit costs 
increases, administrative costs. So we have to have that safety 
net to cover those contingencies and to cover what we do not 
anticipate in a downturn in travel.
    I will use 1999 as an example of why we have to carry that 
carryover to protect ourselves. In 1999, it was unanticipated 
that due to the economic impact of the economies of the Asian 
countries travel dropped quickly, which means our collections 
dropped and the little quirk in the COBRA, what you do not 
collect this year, you do not make it up next year. So that is 
what we sort of use that carryover reserve for.
    In 1996, as I mentioned earlier, the carryover reserve 
including the $30 million was about $184 million. That 
carryover plus the $30 million mandatory reserve for 
emergencies this year is down to $72 million. With the pay 
raise coming up that the Congress is anticipating, I am sure, 
at 3.6 percent, and other inflationary costs, we have to make 
sure that we do not use all that money prematurely to cover 
those costs.
    Now, we think there is a solution. This is what I did not 
tell Congressman Rothman, so this is new news. For sure we 
think that the sunset of COBRA needs to be lifted. It is to 
sunset in 2003, which we think needs to be lifted.
    Two, we think that the funding mechanism needs to be 
changed because it does not allow for inflation. In 1985, when 
the fee was established, it was $5. It is 2001, it is still $5. 
Our costs have gone up, salaries have gone up, overtime expense 
have gone up. It has not been adjusted.
    And, third, it is time to consider when we lift the sunset 
and re-enact the legislation, that we also take into account 
full collection from all the countries that have air travel 
fees in contiguous countries which we do not collect a fee from 
now, which would resolve some of the potential money shortfalls 
for the future.
    Mrs. Meek. Thank you.
    Tell me this. Are you expecting COBRA to expire with the 
authorization for 2003?
    Mr. Winwood. Yes, ma'am.
    Mrs. Meek. I am concerned as to--because you are having to 
shift a lot of things, you have to jostle, to rob Peter to pay 
Paul in some instances here.
    It appears to me that maybe some of your ports are 
suffering a little bit because you are having to do a lot of 
moving around. Have you heard any rumblings on that kind of 
thing? I have not, I just want to know if you have.
    Mr. Winwood. Oh, thank God. I will tell you that I think we 
avoided that and professionally avoided that because knowing 
what the collections were going to be, all right? What they 
were anticipated to be. Knowing based on historical data and 
what the growth was going to be and so therefore what our costs 
were going to be and then working hand in glove with the 
employees to say we need to adjust here, we do not have those 
types of situations.
    By the same token, by addressing them professionally and 
thinking it through, we are not having major concerns right now 
from the traveling public, the airlines and others who we 
provide the service to because we tried to work with everybody 
to say, hey, this is what we anticipate, this is what it looks 
like, these are the adjustments we think we can make to 
maintain service, deliver high quality, make sure that our 
employees are properly compensated and work in an environment 
that they are safe and able to get the job done. So we have 
been able to make those adjustments and that is why I believe 
right now there is not a lot of rumbling because I think we 
worked hard to preclude any missteps.
    Mrs. Meek. I have more questions, Mr. Chairman, but----
    Mr. Istook. Do you want to do them for the record or do you 
want me to come back to you?
    Mrs. Meek. Yes. Come back to me.

                    AIR AND MARINE PROGRAM STAFFING

    Mr. Istook. Okay. Let me do that because I have just one 
other area of other things for the record that I wanted to 
inquire about and then, Ms. Meeks, we can come back to you and 
Mr. Tiahrt may arrive and assume the chair so that I can try to 
go to a hearing with the Education Secretary Paige.
    Let me ask regarding the air and marine programs and the 
efforts to interdict things accordingly and certainly the need 
for training and cooperation was certainly illustratedin Peru 
this week.
    Now, correct me if there is some direct involvement of the 
Customs Service as opposed to others there, but I am not aware 
of any, but yet it has enough similarity with our programs 
that, as I say, it highlights the need for the type of training 
of our people, the cooperative training and the training 
assistance with other people in other nations. And yet I know 
that although there is a budgeted--I believe it is $35 million 
for acquisition of additional aircraft and boats, there is not 
a similar reflection in the budget of the personnel that are 
necessary.
    I know that the pilot shortage in particular is not just 
something that hits the armed forces, it hits all of those that 
are involved in these programs of drug interdiction, whether it 
be Customs or drug enforcement, border patrol, everyone that 
has need for qualified people who find a lot of more 
financially attractive offers if they go with the commercial 
airlines or other private aviation jobs. I do not see a 
reflection in the personnel budgets of this particular 
priority.
    I know that there have been some steps to be able to try to 
retain people and yet I hear, too, that even when they have 
someone that they have found, perhaps coming out of the 
National Guard or whatever it may be, there are significant 
delays in getting them on line. I am not sure if that delay is 
within Customs, within Treasury, but I was really surprised to 
hear about that, when you have difficulty finding people to 
begin with and then you have to wait many months before you can 
bring them on board, in the meantime, they are going to take a 
more attractive offer.
    What is being done or what is the problem with trying to 
have the people that are qualified to handle these jobs and 
with retaining them? To get them on board, to retain them and, 
of course, to make sure they have the resources because all of 
these efforts, you know, it is not simple, it is high tech, it 
involves a law enforcement person with the flying capability 
and so forth.
    Mr. Winwood. Well, Mr. Chairman, if I may start with a 
statement first and I would like to make it very clear for the 
record the United States Customs Service was not involved in 
any fashion in that incident that has been widely reported in 
the newspaper over Peru. We were not.
    Mr. Istook. That was my understanding, but I appreciate you 
making it crystal clear for the record.
    Mr. Winwood. The second issue, on the area of guidelines, 
we have very strict operational guidelines that are well 
documented that all our pilots are trained with and constantly 
review as to what is and what are their responsibilities in 
flying detection responsibilities in the air environment in the 
source country.
    They are very clear, they are well defined and our air 
pilots, that is why we like having law enforcement officers 
that are assigned to the Customs Service, trained by the 
Customs Service flying Customs equipment that has been provided 
by the Congress and the government. And so they are trained and 
our guidance is clear as to as what their responsibilities are.

                       AIR PROGAM PILOT STAFFING

    On the personnel front, there are no requirements in this 
particular budget for personnel because we believe that with 
the modernizing of the equipment that has been authorized--and 
several things, one, we are requesting $35 million for some 
additional equipment in modernization of some of our existing 
equipment in the Western Hemisphere amount for the $35 million 
in this budget.
    In addition to that, we got $68 million for the air 
program, out of Plan Columbia, to further modernize and that is 
for safety equipment for our planes, FLIRs, new radar, et 
cetera.
    In addition to that, in fiscal year 2001, we got 
approximately $7.5 million for other safety factors for air and 
we have, as you know, Mr. Chairman, based on working with us, 
the money and the approval from this committee on the CNAC 
which is the Oklahoma centralized training but more 
particularly the two helicopters.
    So from the standpoint of money, that will give us the 
opportunity to modernize several aspects of our fleet, the air 
primarily.
    The reason there is no personnel is we think with the 
equipment we have, and bringing the equipment up to the new 
standard, that if we hire via the vacancies we have, we have 
the right personnel to operate the equipment that we are 
authorized.
    Now, I will take a hit for not having those jobs filled. We 
have some good news. I have some news and I have some good 
news. The news is we have vacancies that need to be filled. On 
what I call the operational air wings, this is not P-3, people 
who fly the fixed wing or the helicopters or whatever. We had 
26 vacancies. Based on an effort working with my air and marine 
program, my Office of Investigations and our Offices of Budget 
and Human Resources Management, we made offers over the last 
five days to fill 22 of those jobs right now and we have 
commitments that they are going to take the jobs. We are going 
to fill those jobs as quickly as we can.
    On the P-3 pilots, it is a little more interesting. One, 
they are too rare but also they have multiple opportunities to 
take jobs elsewhere and we are not necessarily competitive in 
pay and benefits. I do not think anybody in the government can 
be competitive in pay and benefits to a commercial carrier 
right now.
    Mr. Istook. And you are talking about those who are 
qualified on the P-3.
    Mr. Winwood. Qualified as P-3. Correct. So what we have 
done over the last month is worked real hard collaboratively 
within Customs, pulled our team together and said let us re-
think this and what it is we need to do.
    So we are taking some immediate actions. Number 1, we have 
already had some new job offers go out on the existing register 
and we have had one acceptance already for a P-3 pilot and we 
are going to do two things. We are going to quickly and 
forcefully recruit people who have the qualifications, number 
one.
    Number two, we have decided that we have some people within 
our organization that, with the proper skill set, could fly the 
P-3. They have other qualifications, they just need to be 
checked out on the four engine. We are going to recruit within 
to bring them on board for P-3 and there are some people within 
the organization that can be transitioned over with the proper 
training, so we are starting that.
    We have decided under the authority of the Customs Service 
to pay at a different pay scale for P-3 pilots and we are going 
to do it like the airlines do it, based on number of hours, 
their seniority from where they came and seniority within the 
organization, so they will have a staged salary that they can 
move up to, to a higher grade salary, in addition to the 
retention bonus that we are already authorized and the age 
limit that we have been able to adjust within our authority.
    So we think doing those things right now, and this has all 
come about in the last month, that we can be much more 
competitive in recruiting to fill the 18 P-3 pilot vacancies 
that exist right now. And once that is done, I think we are in 
a position to fully be able to operate the equipment that is 
available to us and that is why we are more concerned with 
upgrading the equipment right now versus adding more people.
    I think we have an obligation to fill the vacancies we have 
and make sure that we are brought up to the appropriate level 
with 100 percent staffing in those air programs and I think we 
have done half the job already by making those job offers and 
having acceptances. We made 24 offers, we got 22 acceptances 
for pilots and now we are working on the P-3 to fill those 
critical jobs also.
    Mr. Istook. Well, I certainly appreciate, Mr. Winwood, 
knowing of that and I presume from your testimony those 22 
vacancies, the 22 out of those particular 26, that those are 
going to be filled immediately with the offers and acceptances.
    Mr. Winwood. Yes, sir. And I have also talked with my 
Office of Internal Affairs. We are going to get them to focus 
on the issue of risk management and priority order. The 
background checks are required and I think are most necessary.
    Mr. Istook. Yes.
    Mr. Winwood. They are going to put those at the top of the 
list. We are going to get these--whatever administrative 
matters that we are required to do, we will fulfill all our 
administrative requirements, but we will get the backgrounds 
done and we will get all the checks done and we will move this 
process along.
    I think we have a good system. I think we have the 
capability of hiring efficiently. It is just that from time to 
time we have to make sure we are focused on it.
    Mr. Istook. I appreciate that. I know the challenges of 
being focused on so many things simultaneously and I appreciate 
getting some focus on that particular thing because I know how 
essential it is to have the interdiction levels increased, both 
with people and the equipment necessary.
    I am going to yield time back to you, Ms. Meek, and you 
will be the final set of questions. I have a number of other 
things for the record.

                   Treasury Forfeiture Fund Resources

    Mrs. Meek. Thank you, Mr. Chairman.
    Mr. Commissioner, as you know, I have this strong interest 
in drug prevention and treatment and, of course, almost all of 
what you do and what this committee looks so strongly at is law 
enforcement. I think law enforcement is needed and it should 
continue to be good or even better.
    What I am concerned, last year in the testimony, I asked 
some questions regarding what Customs would do with its 
forfeiture funds, when they seized monies, and Customs advised 
that the Treasury Department guidelines did not permit a state 
or local government to seize proceeds, to seize cash to fund 
drug prevention or treatment programs unless a windfall 
situation existed.
    And then my question to them was to what extent can you use 
some of the monies to be used for drug prevention and treatment 
and they said that unless a windfall situation existed, that is 
a circumstance where the amount being transferred to the state 
or local from the forfeiture fund represented more than 25 
percent of the state or local government's budget.
    Now, when they receive monies from Treasury for its work on 
an investigation, why should the agency not be free to spend 
any or all of such transferred cash to drug prevention and 
treatment programs if it feels that is the best use of the 
money at that time?
    I have been on this question since I was in the state 
legislature and I have yet to see very much of these funds 
being used for drug prevention and treatment. And I do not 
know, we spend a lot of money here in the Congress on our drug 
programs and there are many who say they are not workingand 
those who say they are, we could stay here all day talking about our 
media program and all the things that we spend money for in drugs.
    I just need to really know whether or not you feel that 
some of these monies can be used for that kind of thing or is 
it statutorily denied?
    Mr. Winwood. Well, I am going to do my best to try to 
address this. I will say, if I may make an editorial comment, I 
spent the last week studying materials about this thick and the 
one question that I do not have is the one you just asked me, 
so you got me. But I will say this, I do know from the 
standpoint of the forfeiture fund that there are very clear 
definitions of what it can be used for, by whom and when. Now, 
I must tell you, I am not the expert in that area. For the 
details, I would be more than glad to supply the details of the 
statutory requirements, the administrative requirements and the 
policy requirements as laid out by the Treasury Department and 
the forfeiture fund policy and the law that enacted it, because 
I am not an expert it, but I will do that.
    Mrs. Meek. Thank you.
    Mr. Winwood. So the best I can say to you is that I do not 
know under what circumstances the proceeds can be used for 
those purposes and who has the authority to do so, but I would 
be more than glad to have the research done.
    Mrs. Meek. If someone will tell us.
    Mr. Sloan. Mrs. Meek.
    Mrs. Meek. Yes?
    Mr. Sloan. This answer will sound remarkable similar to 
Commissioner Winwood's answer. Neither have I examined the 
specific question, but the Executive Office of Asset Forfeiture 
is part of the Office of Enforcement and as soon as I return to 
Treasury, I will find out exactly what the statutory 
requirement or prohibition is relative to this and we will make 
certain that we get an actual specific answer for you.
    Mrs. Meek. Thank you. I appreciate that. And if there is 
any precedent for this type of thing.
    Mr. Sloan. And the question as I understand it is the 
transfers of money to state and local and some prohibition 
against them using it.
    Mrs. Meek. Right. Right.
    Mr. Sloan. I will find out the answer and will have it back 
to you very quickly.
    Mrs. Meek. All right. Thank you so much.
    Mr. Sloan. You are welcome.
    Mrs. Meek. And thank you, too, Mr. Winwood.
    Thank you, Mr. Chairman.
    Mr. Istook. Thank you very much, Mrs. Meek.
    Mrs. Meek. That is all my questions.
    Mr. Istook. Very good.
    We will have the questions for the record, as I indicated. 
I certainly appreciate your taking the time this morning. We 
want to help you meet these very significant challenges that 
you have in front of you and I certainly want to applaud your 
efforts to try to scrub the budgets and the activities and take 
closer looks at analyzing what you are doing, what the 
productivity levels are, what is necessary and what is not. I 
think that is very important because everything that we can 
squeeze out certainly to accelerate the time table on the ACE 
program I think is something we want to do.
    Mr. Winwood. All right. Thank you.
    Mr. Sloan. Thank you, sir.
    Mr. Istook. Thank you very much.
    Let me go ahead and adjourn the hearing and you can go on 
through there.

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                                         Wednesday, April 25, 2001.

  LAW ENFORCEMENT BUREAUS AND OFFICES, BUREAU OF ALCOHOL, TOBACCO AND 
                                FIREARMS

                               WITNESSES

JAMES F. SLOAN, ACTING UNDER SECRETARY FOR ENFORCEMENT
BRADLEY A. BUCKLES, DIRECTOR, BUREAU OF ALCOHOL, TOBACCO AND FIREARMS

                           Afternoon Meeting

    Mr. Istook. I call the meeting to order this afternoon. We 
should have some other members arriving. We have a lot of 
hearings going on today and people going in and out to 
different ones.
    This afternoon we are welcoming the Acting Under Secretary 
for Enforcement, the Under Secretary of the Treasury, James 
Sloan, who was with us this morning.
    Thanks for letting us take your day.
    And the Director of the Bureau of Alcohol, Tobacco and 
Firearms, Brad Buckles.
    Happy to have you here as part of the review of the 
administration's FY 2002 budget request for the ATF. The ATF, 
of course, has challenging missions. The three strategic goals 
reflect not only the interrelationships of different issues but 
also how strenuous their work is. It is not only enforcing laws 
to stop violent crimes, whether from firearms, from explosives 
or arson, but also it has to regulate major commodity 
industries to have an acceptable level of product safety and, 
of course, the consumer protection that is a part of that as 
well.
    And, of course, you get to be a part of the tax collection 
system. It is the third major source of tax revenue in the 
federal government after the IRS and the Customs Bureau, so 
under the umbrella of ATF we find undercover investigators, 
forensic scientists, tax lawyers, law enforcement individuals, 
and it is a very unusual mix, but it is because of some 
interrelationships that it is put together in that way.
    Now, we have seen significant increases in recent years for 
the resources of ATF to work as a major arm in attacking 
violent crime and, in particular, preventing it before it can 
threaten our children, our young people, or anyone else.
    There is a high standard of investigation and expertise 
that has assembled to investigate crimes involving not only 
explosives, but arson and, in particular, the church arson 
recently was a major focal area for ATF. There is a strong 
reputation for technical skills and analysis in its 
investigations, even being utilized overseas.
    You have the explosives detection canine facility in Front 
Royal, Virginia, state of the art for breeding and training the 
dogs. They can do things that we cannot in sniffing things out. 
So you have become a standard bearer, I know, in that. And I 
understand you are organizing a trip for members that will be 
able to make it, I believe, the first week in May or something 
like that.
    So I certainly want to commend ATF not only for its 
technical expertise, but I have heard good things about the way 
the management has been organized to create and utilize solid 
performance measures as a way of assessing operations and 
evaluating whether we are really achieving our intended 
purposes and where our strengths are, where our weaknesses are.
    The performance section of the ATF budget justification is 
one that I have heard very universal praise for as being very 
clear and something we want to recognize positively and use as 
a good example for other people as well as a best practice.
    So we look forward to constructive discussions about ATF's 
programs, the requests, the challenges that you have, and we 
appreciate your taking time to be with us today.
    Mr. Hoyer is not able to be with us.
    Mr. Visclosky, did you have any opening statement?
    Mr. Visclosky. No, I am fine. Thank you very much.
    Mr. Istook. Okay. Very good. All right.
    If we can, then, just take a moment and briefly swear the 
witnesses.
    [Witnesses sworn.]
    Mr. Istook. I am trying to recollect, Mr. Sloan, whether 
you had an additional statement this afternoon that we should 
have first? And then Mr. Buckles.
    Mr. Sloan. Mr. Chairman, I am very satisfied with the fact 
that this morning you were kind enough to allow my written 
remarks to be part of the permanent record and I am not going 
to repeat any of the things I mentioned in my oral statement 
other than to reintroduce Bradley Buckles, the Director of ATF.
    Thank you.
    Mr. Istook. Very good. All right.
    And, Mr. Buckles, we will have the entirety of your 
statement in the record, so I always encourage witnesses to 
feel free to speak extemporaneously on your testimony if you 
wish, because we will have the substance regardless.
    Mr. Buckles. Okay. I will keep it short.
    Mr. Chairman, Congressman Visclosky, members of the 
subcommittee, thank you for this opportunity to testify in 
support of ATF's 2002 fiscal year budget request and to report 
to you on returns from your past investment.
    Our request this year is for $803.5 million and 4,982 
fulltime equivalents (FTE). This represents essentially a 
maintain current services budget.
    Over the past several years, this committee secured 
additional resources for ATF in matters related in large part 
to our firearms mission and I am happy to report that those 
investments are paying off. The numbers of investigations, 
referral, prosecutions, and convictions are all up 
dramatically.
    Since our cases focus on armed, violent and often repeat 
offenders and those who knowingly supply firearms to those 
people, removing these people from the streets has a very 
direct and tangible effect on the communities which they 
threaten. At the same time, we remain committed to prevention 
programs as well, like the Gang Resistant Education and 
Training (GREAT) program, which is designed to prevent the next 
generation of youth from going down the road of crimes, guns 
and violence.
    Recent reports show that violent crime is down at its 
lowest level in a couple of decades, maybe even 30 years, and 
when you consider where we have been, that is a pretty 
encouraging statistic. But if you consider that about 30 years 
ago, it was the alarming crime rates and gun violence of the 
1960s that led to the Gun Control Act. It is clear that we 
still have a lot of work to do. You might say back to the base 
camp, if you will, from where we were in the late 1960s and 
early 1970s.
    Around the country, what ATF is doing is we are forming 
coordinated strategies with state and local and other federal 
agencies and these unified efforts are working and this budget 
is going to be essential for us in keeping our part of the 
bargain in putting these groups together.
    The collective goal of our efforts is to turn the tables 
and make criminals with guns the people who have fear to be on 
the streets of America and not the American public.
    Another investment made by this committee, however, is 
proving to be problematic and I wanted to make sure that you 
were aware of it. Our project to build a new laboratory and 
fire science center is costing us much more than we originally 
anticipated. The General Services Administration (GSA) has 
informed us that there is a $20,000,000 shortfall in the 
construction account that must be met this fiscal year, 2001, 
in order to complete the building.
    I am currently working closely with the Department to 
arrive at a solution that both funds necessary construction and 
meets the approval of the committee. And when this process is 
completed, I am prepared to give you a full briefing on the 
nature and causes of the cost increases and what our proposed 
solutions would be.
    Our important work in the alcohol, tobacco, explosives and 
arson area is also funded in this budget and it is also vital 
to the well being of this nation. ATF's annual revenue 
collections is over $14,000,000. We protect millions of state 
revenues by helping prevent interstate smuggling in alcohol and 
tobacco products, and we are the source of leading edge 
technology and expertise in the area of arson and bombings.
    Although it is sometimes painful, I believe that oversight 
and strict scrutiny are essential to ATF's efforts to continue 
to improve. The Inspector General (IG) examination of our Youth 
Crime Gun Interdiction Initiative and oversight hearings held 
by this committee are a good example of that.
    The men and women of ATF are determined to make this bureau 
a great value to the American public as we pursue our goals for 
a sound and safer America.
    Thank you for this opportunity to address the committee and 
I would be happy to answer any questions that you have.
    [The information follows:]

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    Mr. Istook. Thank you very much, Mr. Buckles.
    Let me start with what you brought up on the fire research 
laboratory. And I recognize that you are not fully prepared to 
address all the issues, but I think the members of the 
subcommittee would be interested in a little bit more specifics 
on the overview. Especially, I think it is necessary to put it 
in context, the potential overrun figure.
    Could you fill us in briefly and just cover the basics of 
the original concept, the originally anticipated cost, how much 
of that has already been expended and on what and then relate 
what may be the potential drivers of higher costs. Because I 
think it is always important to understand when we look at a 
significant change, the potential of it, whether we are really 
undoing any of the assumptions that went into the original 
plans.
    Mr. Buckles. The original concept started in 1995. That was 
the year our building, our laboratory building, was more or 
less condemned as a laboratory facility. It was originally an 
office building and we had been making makeshift improvements 
to it since, just to make sure that we could continue to 
function there. But that is when the process started and we 
started looking for a new building. And at that time, it was 
suggested that since it is a special use building, it would 
make more sense to construct it rather than to go out and try 
to just lease another building and then turn it into a 
laboratory. So that was how the project first started.
    At the same time, ATF was looking at developing fire 
research capabilities because of our arson program. There are 
various laboratories around the country that do certain types 
of fire research, but there was a gap in the research when it 
came to certain types of arson fires. And we work with all the 
various organizations that deal with fires and fire research to 
define what those gaps are and where ATF could fill in the gap.
    As we developed that concept, it was probably the most 
difficult one for GSA and ATF to figure out how to build a cost 
model on that because we were building something that had never 
been built before. Laboratory space had been built before and I 
think there was a fairly good idea how to cost that out, but it 
is primarily the fire research center where a lot of the costs 
have turned out to be much more than we originally believed 
they would be because we were starting something that 
unfortunately we did not know enough about, I think, when we 
started, what all the details would be.
    The original prospectus had the building, I believe, at 
$62,000,000. I do not have those figures right in front of me. 
And what has happened since then, there have been a series of 
things that have caused the price of it to go up. The very 
first one was the price of land. The price of land that we had 
money for in the original appropriation was off by about 
$3,000,000 on what we needed.
    We then moved into a situation where after Oklahoma City, 
new construction standards were adopted for law enforcement 
facilities and certain others. When those standards were 
adopted, all of a sudden the hardening of the building, the 
amount of setback that we had to have, bomb resistant glass and 
all of those, caused another increase in the building in the 
nature of $5,000,000 or so. I can get you all those exact 
figures.
    Mr. Istook. Certainly. I am just looking for the overview, 
of course.
    Mr. Buckles. Right. And then the fire science center, I 
think, is responsible for the largest portion of that, which is 
somewhere in the neighborhood of--$10,000,000 to $15,000,000. 
That overrun has to do with the details of that fire science 
center including issues relating to fire suppression systems 
that required in buildings and having backup systems, issues 
relating to air pollution and water pollution, and issues that 
had to be built into the plan, most of which were somehow 
underestimated when we first started down this road.
    Mr. Istook. And on those, of the amount that has been 
expended so far, I am not sure if the land has actually been 
acquired----
    Mr. Buckles. Yes.
    Mr. Istook. It has been acquired?
    Mr. Buckles. Yes. Actually, the stage of the laboratory now 
is it is under construction. The land was acquired and there 
are trucks and people working furiously on building that 
laboratory right now.
    The money that has been expended to this point is a little 
bit different. ATF has expended all of our money because we 
gave it to GSA and put it in their account. GSA has a 
construction account that I could not tell you exactly what 
level they have funded. There are a series of contracts that 
have been let and there are still residual contracts that need 
to be let. That is the problem on the construction; they have 
not been able to let all the contracts because we do not have 
enough money in that account.
    One of the other causes for the cost overrun is the 
increase in the cost of the construction between what it was 
estimated to be in 1996 when the prospectus was presented, and 
what construction costs are today. So that is another factor 
that ended up increasing the cost. It was just the delay in 
getting this project going.
    Mr. Istook. Let me ask you, then, on a separate matter, 
thank you for providing that and I think there are some other 
things for the record that we will want to get on that, but let 
me ask you something about a much happiertopic, if you will, 
and that is the success of things such as Project Exile, your 
initiatives with young people and so forth.
    I would be interested, I think you have probably costed and 
said the cost of implementing these programs or the incremental 
cost of doing that compared to the return because I certainly 
get the impression that these have been highly successful in 
trying to change the environment, if you will. You are trying 
to effect cultural change, as opposed to just putting 
regulations or requirements on people. And the feedback I have 
certainly received and seen reported by ATF is very positive on 
that.
    But I would be interested to know what really has been the 
actual cost, the incremental cost, of putting those in play? 
Because I think that would be an interesting comparison against 
the cost of other approaches that have been taken.
    Mr. Buckles. I cannot tell you exactly how that would play 
out in terms of the incremental costs. Of course, portions of 
these things, had we not gotten additional resources to 
implement these programs, they could have been done in some 
places at some lower level. For example, Project Exile in 
Richmond, I believe we started before there were any 
initiatives to get additional funding for that. We would not 
have been able to do this. We have them in probably about 58 
cities right now and we are continuing to work on more as we 
move along.
    So a lot of the incremental costs would go to being able to 
get these projects off the ground in different locations.
    I would be happy to have our people try to sit down and 
come up with exactly what that would be.
    Mr. Istook. Good.
    Mr. Buckles. We are also working hard on trying to figure 
out measures for those and, as you mentioned in your opening 
statement, we are trying to be creative and not in the sense of 
blowing smoke, but trying to really capture what is occurring 
in these locations and what we are getting for our money.
    It is also part of the planning that we have with the 
Attorney General and the Justice Department on rolling these 
cases out further and molding them in certain ways, because a 
performance measure is going to be a key element, a required 
element, of each of these projects as they are rolled out in 
different cities and we have them in place now. But they are 
going to continue to be remolded and defined and a performance 
plan will be part of each one of those.
    I was just in Kansas City where we rolled out a project, I 
cannot remember the name of that one. I think it was called 
Cease Fire, but it was--they have different names, but they are 
essentially the same thing, aimed at the armed violent felons 
in communities. And one of the key elements is that the private 
sector which is participating with us, has raised money to hire 
two professors from the University of Missouri at Kansas City 
to work with us to look at that.
    The advantage of that is rather than ATF trying to measure 
just whatever benefit we bring to it, and that is very 
difficult, because we have in the Kansas City area and the 
other ones, we have ATF agents, the Kansas City Police 
Department, Missouri State Police, Kansas State Police, and 
everybody working together and it becomes a lot easier if you 
are not trying to measure one person's performance but the 
collective result of what we are doing.
    Mr. Istook. Right.
    Mr. Buckles. So a lot of the performance measures that we 
are looking at are also on an individual city basis and see, 
with all of our cooperation and working together, what are we 
getting out of this.
    Mr. Istook. All right. Very good. I will look forward to 
that information.
    Mr. Visclosky.
    Mr. Visclosky. Thank you, Mr. Chairman.
    Director Buckles, the administration, as I understand it, 
provided monies for inflation, but did not provide for non-
inflation programs. Am I correct about that?
    Mr. Buckles. Non-inflation program increases.
    Mr. Visclosky. And that would, for your agency, amount to 
about $9,700,000?
    Mr. Buckles. Correct.
    Mr. Visclosky. Could you identify how you are going to 
absorb those costs?
    Mr. Buckles. Well, that is obviously something a lot of the 
agencies are faced with, on how we are going to absorb those, 
and we have identified so far that a little over $2,000,000 of 
those costs will probably come out of the funding that we have 
asked for for NIBIN, the National Integrated Ballistics 
Information Network, that we are rolling out.
    Mr. Visclosky. How does that differ from the Integrated 
Ballistics Information System (IBIS)?
    Mr. Buckles. It is the same thing, it just has the N in 
front of it because we are networking them together so that 
they will be a more complete system on comparing ballistics 
data. It is IBIS equipment, but it is being rolled out 
nationwide.
    Mr. Visclosky. So you would just have $2,000,000 less 
provided for that.
    Mr. Buckles. That is right. Because we had a two-year plan 
that would roll that out to, I think, another 28 states at 150 
sites, so there will be some money out of that program that 
will slow us down a little bit. We believe we can still 
accomplish almost everything we need to in that, but it will 
have some minor impact on that effort to roll it out to 150 new 
sites.
    Mr. Visclosky. And what base was that $2,000,000 off of?
    Mr. Buckles. I believe it is 24 next year. I am not sure as 
to the exact number. It was 26 this year. It is a little bit 
less next year.
    Mr. Visclosky. Okay.
    Mr. Buckles. The other $7,000,000 what we are going to have 
to do is just try to absorb it out of all sorts of different 
operating accounts. Exactly where it will come out, I do not 
know. We are going to have to look at our budget next year as 
we go into it to see where we can do it.
    My guess, it is going to have to come out of things like 
space renovation. Some things that we can legitimately put off 
for a year without jeopardizing the safety of anyone, without 
jeopardizing their direct mission. But with all the new hiring 
we have done, we may have to put off some of the space 
renovation and acquisition of new space that we would otherwise 
be getting next year. That would be a way in which we would get 
a portion of that $7,000,000.
    There may be monies that we would find in travel and some 
other areas that we would just have to put off transfers and 
other things that we might need to do.
    Mr. Visclosky. Mr. Sloan, my understanding is this morning 
during the Customs hearing, you had mentioned that you will be 
doing a scrub of the various agencies at Treasury. I assume 
when it is completed the subcommittee will be provided 
information as to how these reductions will affect the agencies 
and their ability to perform?
    Mr. Sloan. Yes, sir. The answer to your question was I did 
say that this morning and the issues of the overall scrub would 
obviously encompass the issues that you are talking about with 
Director Buckles, at this point, how would he be able to 
accomplish the absorption for this year, but they go beyond 
even the 2002 budget. We are trying to look at essentially, as 
I indicated this morning, the best bang for the buck overall, 
make sure that we are not year after year just spending money, 
making sure that we are not spending it for inappropriate 
outcome and output.
    So it will encompass the entire area of Treasury 
enforcement. Clearly, these would be part of that discussion 
and certainly we would be sharing with the subcommittee the 
benefit of that information because I think it would certainly 
be beneficial, both to us and to the subcommittee.
    Mr. Visclosky. We have the Olympics coming up in 2002 and 
it is going to be a major security issue. Has that event and 
your participation in security been factored into that budget? 
Is that part of the $9,700,000 shortfall or is that separate?
    Mr. Sloan. That is going to be an expense that we will 
incur in addition to the $9,000,000 shortfall. At the present 
time, we do not have specific budgeting for the Olympics and 
absent some other way to deal with that, that is going to be 
probably another $9,000,000 or $10,000,000 in costs that we are 
going to have to figure out how to absorb because the cost it 
has to us is to be more travel, lodging, per diem, overtime. In 
some cases, clothing, cold weather clothing or equipment. I 
think it is around $9,000,000 in expenses that we will have to 
face with the Olympics in 2002.
    Mr. Visclosky. Mr. Buckles, I assume that these were not 
your decisions as far as the shortfalls and the failure to ask 
for money for the Olympics. I would just make the comment that, 
one, I think the ATF is doing a pretty good job, and two, I am 
certainly not opposed to continuing to look to see how we can 
provide the same level of services as efficiently as possible. 
But I think we run a danger of making a mistake here if we do 
not make sure you have the necessary funds that you need, 
particularly for an event of this magnitude. The Olympics is 
going to be held next year, and we know we have potentially a 
$9 million shortfall. Not to plan for that and to have to be 
scurrying around looking for money in the renovation projects 
and others, I just think is not the best policy, to be honest 
with you.
    Mr. Buckles. Well, submissions were made in the last 
administration for this funding and it did not end up making 
its way through the budget.
    Mr. Visclosky. Then my comments would apply to them as 
well.
    If I could just have one last question, Mr. Chairman.
    We have an IBIS in Northwest Indiana. Could I just ask how 
can ATF make the individual IBIS systems better? Obviously, you 
are looking to integrate it on a national system. I must tell 
you I think efforts are much better today in Northwest Indiana 
than they were, but clearly more needs to be done to make sure 
that we are maximizing potential in that system.
    What should individual program scenarios such as mine be 
thinking about doing?
    Mr. Buckles. Well, as part of rolling out the network, what 
we are looking at first is to have local networks, because that 
is the most likely place that you are going to have connections 
with the ballistic evidence, and roll it out into regional and 
then potential for national in some kinds of cases where there 
may be a situation where some evidence may want to be run on a 
larger basis.
    In putting this network together, we are making sure we 
have funding to make sure that everyone is trained, that the 
plan is rolled out in terms of how the network will be used and 
how it can be maximized.
    As you know, in the past, we have largely rolled out 
equipment on a case-by-case basis and there was not an overall 
national plan on how it was going to be used. But I think you 
will see as part of what we call now NIBIN, there will be that 
greater definition as to what the program is about, how it can 
be used and what the benefit can be; a more structured training 
curriculum. We have established a firearms experts 
certification academy where we will have people using this 
equipment and examining the ballistics evidence that will be 
all trained and certified in the same way. The NIBIN program is 
bringing much more definition to the use of this ballistics 
equipment.
    Mr. Visclosky. Thank you.
    Thank you, Mr. Chairman.
    Mr. Istook. Thank you, Mr. Visclosky.
    And let me let the subcommittee members know, we will go 
next to Mr. Tiahrt and then Mr. Rothman and then Mr. Sherwood 
and I am going to excuse myself for just a few minutes and I 
will be back.
    If you would take the chair while I am gone?
    Mr. Tiahrt. All right.
    Mr. Istook. And make sure you do not take too much 
advantage of the time there.
    Mr. Tiahrt. I will be on the 15-minute rule; everybody else 
be on the five-minute rule.
    Mr. Istook. That is exactly what I was talking about.
    Mr. Tiahrt [presiding]. Welcome to the committee.
    Mr. Buckles. Thank you.
    Mr. Tiahrt. How many full-time equivalents are in the ATF?
    Mr. Buckles. Well, this budget would ask for 4,982 full-
time equivalents for the 2002 budget. It is around 46 something 
this year. What we are looking for is an FTE level that would 
end up funding us at around a 5,100, 5,150 level.
    Mr. Tiahrt. How many of the 5,100--well, let us use what 
you have now, approximately 4,600. How many are field agents 
and how many are in headquarters in supervisory roles?
    Mr. Buckles. I believe the number of field agents that we 
have is somewhere around like 1,400 field agents and then there 
is some supervisory role on that. I will have to get you the 
exact numbers.
    [The information follows:]

    (The Agency adds: The total number of field agents 
currently is 1,431, and the total number of agents in 
headquarters is 134.)

    Mr. Tiahrt. Some of them are in labs somewhere?
    Mr. Buckles. We do not have too many agents in 
laboratories.
    Mr. Tiahrt. Well, tell me about NIBIN. I am not familiar 
with that program.
    Mr. Buckles. NIBIN is computer equipment that allows for 
imaging of ballistics evidence, and then the computer conducts 
matching of that because a firearm leaves what amounts to a 
fingerprint on a shell casing or a projectile and this computer 
equipment will allow those to match thousands against each 
other at the same time, when in the old days you would have to 
have a suspect round and a live round and somebody could look 
at them and tell you, but you could not compare them against 
thousands of them that had been recovered. And that is what 
this equipment will do.
    Mr. Tiahrt. So you developed a central computer that people 
have access to or is this a system that will be available?
    Mr. Buckles. There will be machines available in each 
location and then they will be networked together so that 
comparisons can be made on a metropolitan area basis, on a 
regional basis or, in some cases, even on a national basis if 
it was necessary.
    Mr. Tiahrt. You will have access to a national database or 
a given police department would have access or a prosecutor 
have access to a national database, then?
    Mr. Buckles. In the sense that they could send their 
evidence out to have it compared against it. They would not 
actually be, as I understand the way system worked, you would 
not actually being going into other people's databases; you 
would balance your evidence off of databases that had been put 
together by other police departments and stage forensic labs.
    Mr. Tiahrt. Does this overlap with what the FBI was doing 
in the area of ballistics?
    Mr. Buckles. No, it is actually--this is a product of the 
agreement, the Memorandum of Understanding, that we signed with 
the Federal Bureau of Investigation just a couple of years ago. 
There was a point at which we had what was called IBIS 
equipment, Integrated Ballistics Identification System, and 
they had a system called DRUGFIRE, both of which did shell 
casing and ballistics evidence.
    We signed an MOU with the FBI to make the systems--to come 
up with a unified system and to network them, and under that 
agreement, ATF is responsible for coming up with the unified 
ballistics system. What we are rolling out right now, is 
replacing the DRUGFIRE equipment, so it is replacing that 
equipment with new unified equipment and the FBI will be 
responsible for running network capabilities.
    Mr. Tiahrt. So because of this MOU, this memorandum of 
understanding, I assume is that it stands for?
    Mr. Buckles. Yes. I am sorry.
    Mr. Tiahrt. There is no overlap that you know of between 
this system and the FBI?
    Mr. Buckles. No.
    Mr. Tiahrt. Excellent. Are there other areas where you 
think you may be duplicating your effort with other branches of 
the federal government? Including the FBI.
    Mr. Buckles. Right. I mean, there are areas where we 
duplicate some of what we do, but I do not believe in awasteful 
fashion, if you will. Almost every police department or every crime lab 
has fingerprint capability, fingerprint scientists and the capability 
and we have that, the FBI has that, any number of other laboratories, 
so we duplicate, but it is so that we can provide our own service.
    What we try to do is, where there is jurisdictional overlap 
that we have with the FBI under the explosives laws, there is 
one provision on the bombings that provides that the Attorney 
General and the Secretary shall have authority to investigate 
bombings. We have a memorandum of understanding with the FBI in 
terms of which kinds of bombings they will investigate and 
which kinds we will do.
    We have also recently signed some protocols with the FBI to 
make sure, in those cases where we are working jointly, we have 
agreements on how we are going to work and who is going to 
process evidence, so that is an area where I think it is 
working very well.
    Mr. Tiahrt. So in your opinion, do you think that the areas 
where there are duplications it is a necessary duplication and 
where there may be overlap you are working towards memorandums 
of understanding so that there is a division of those 
capabilities between ATF and FBI, for example?
    Mr. Buckles. Correct. We all have more than we can do, so 
there is no sense in duplicating it because we all have more 
than we can do, so if we can come to an agreement, you will do 
this one and we will do this one, for the most part everybody 
is happy about that kind of agreement.
    Mr. Tiahrt. You are increasing in employment. Is that plan 
tied to the Olympics in any way?
    Mr. Buckles. No.
    Mr. Tiahrt. Or is it based on other workload?
    Mr. Buckles. No. The Olympics would be using all existing 
resources in the sense of personnel. The costs that I referred 
to are just the extra cost of those personnel while they are 
assigned to the Olympics venue.
    Mr. Tiahrt. So you are going to be diverting people from 
their current job responsibilities to take this one-time task, 
whatever the life span?
    Mr. Buckles. Right.
    Mr. Tiahrt. And then they will return to their assignments?
    Mr. Buckles. Correct.
    Mr. Tiahrt. So you will not have any hiring?
    Mr. Buckles. We will not have any hiring. The impact will 
be that normal work during the six-week period which is, I 
think, the broad area that we are looking at, we will have our 
normal work being affected by having agents and other personnel 
assigned----
    Mr. Tiahrt. Do you think six weeks is enough time for 
preparation for the Olympics?
    Mr. Buckles. Well, that is the basic time we are there. We 
have people already preparing for the Olympics in Salt Lake 
City now, but the main impact of assigning large numbers of 
personnel there is going to be during basically a six-week 
window. But we will have people there--we have them there now, 
and we will have people there for some time after as well, but 
it is a six-week period that is the bit--where we will have the 
largest number of people assigned there.
    Mr. Tiahrt. What is the maximum that you anticipate being 
there at this point?
    Mr. Buckles. About 200.
    Mr. Tiahrt. And there will be some needs for additional 
equipment?
    Mr. Buckles. Right.
    Mr. Tiahrt. You mentioned clothing, transportation, 
housing, some equipment, I assume?
    Mr. Buckles. Right. Radios and some of those kinds of 
things that we will have to have to make sure everybody can 
operate on the same frequencies and all the law enforcement and 
security people can communicate, so we will run into some of 
those kinds of costs. I mean, the real big items, you are going 
to have that many people on per diem for six weeks, and the 
travel to get there and the housing costs are going to be very 
high during that period of time.
    Mr. Tiahrt. Is there one responsible agency for 
coordinating security?
    Mr. Buckles. Well, I believe the way it works, because this 
is designated as a special event, that the Secret Service is 
responsible for the overall coordination and some of what we 
will do will be supporting the Secret Service needs as part of 
that special event. Some of it will be our normal mission 
responsibilities, but the Secret Service is the coordinator.
    Mr. Tiahrt. You will not be the only federal agency.
    Mr. Buckles. No. Every federal agency you can find will be 
there, I am afraid.
    Mr. Sloan. Mr. Tiahrt, Director Buckles is correct, the 
Secret Service for about four years now has been planning for 
the Olympics under the presidential decision directive that 
required that they be the planners, coordinators and designers 
of a prevention activity at the Olympics. They share the larger 
responsibility of the presidential decision directive with the 
FBI, who manages any potential crisis, and Federal Emergency 
Management Agency (FEMA), that would manage any potential 
consequence or emergency. But the Secret Service has put a plan 
together which essentially is still evolving because, as I 
mentioned this morning in the Customs hearing, we are 
constantly looking at the resources of the Secret Service as 
identified from federal resources to be applied at the 
Olympics. It isroughly a five week period beginning in February 
and perhaps going until the last venue closes, perhaps late February or 
early March of 2002.
    The Secret Service is tasking not only Treasury bureaus but 
other departments and agencies within government for staff 
support, both as agents and support function, for that period 
of time and they have been working not only with ATF but over 
the last year and a half have probably worked on a weekly basis 
with all the agencies involved. So everybody has a pretty good 
idea today what their tasking is likely to look like.
    Mr. Tiahrt. Okay. Thank you.
    Mr. Rothman.
    Mr. Rothman. Thank you, Mr. Chairman.
    Director Buckles, nice to see you again.
    Mr. Secretary, nice to see you.
    Director Buckles, I am very grateful for the work that the 
ATF does, and for your work in particular leading that 
organization. The Youth Crime Gun Interdiction Initiative is, 
among all the other very important programs that you have, one 
that really gets my attention and cries out for some solutions 
that are not readily obvious to me.
    For example, I represent a portion of Jersey City, New 
Jersey, and the ATF apparently found that 47 percent of the 
traceable crime guns recovered in Jersey City, New Jersey were 
first purchased from federal firearm licensees in North 
Carolina, South Carolina, Florida and Georgia--47 percent of 
the guns found on our streets of Jersey City. That is a big 
percentage.
    What is it that your program, the Youth Crime Gun 
Interdiction Initiative, can do to stem that flow or eliminate 
it? Recognizing the right to bear arms is American and one of 
our rights, how can we nonetheless prevent these guns from 
other states, significantly far away from our state, ending up 
in the hands of kids on our streets in New Jersey?
    Mr. Buckles. One of the purposes behind the Youth Crime Gun 
Initiative is to make some of those efforts information driven. 
In the old days of law enforcement, we simply looked for leads 
and followed the case that we found and if it looked like a 
good case, we went for it. But what we tried to do with the 
Youth Crime Gun Initiative is to start tracing every weapon to 
come up with more information driven directions to go so that 
we were making sure we were being more efficient and targeting 
the right kinds and the most effective way to target our 
resources in going after the sources of those guns.
    What we are doing under that initiative is several things. 
Quite often, by tracing every gun we are finding commonality on 
where those guns come from. Back in the old days, the only time 
a police officer traced a gun was when he might think it might 
help him solve the particular case in front of him and if it 
did not help him solve that, it was not worth all the 
paperwork. Now we are getting every gun traced, whether it 
solves the particular crime or not and we are finding patterns, 
we are finding similar individuals, we are finding similar 
dealerships that weapons are coming from. So that is the real 
benefit of doing a comprehensive tracing and following those 
back.
    Mr. Rothman. What do you do when you find out about 
particular dealerships that are responsible for so many of the 
guns involved in crime?
    Mr. Buckles. Well, there are a couple of things. First of 
all, there are some dealerships that end up under investigation 
and we have had some that have been prosecuted because they 
were knowingly involved in illegally selling firearms. I must 
tell you that is really more the exception than the rule, that 
in most cases, when we have gone out and we have seen licensees 
that may have a high number of firearms traced back to them, we 
will find that some persons are having straw purchasers come in 
who are purchasing the weapons, who are perfectly legal to do 
so and there is no reason why the dealer would not make that 
sale.
    In some cases you have situations where simply it is a very 
high volume dealer, somebody who sells 10,000 guns a year. If 
you have somebody that big, some portion of those are going to 
end up in the wrong hands because of what happens.
    So it is not always the dealers, but we do find sometimes 
it is and we have had dealers prosecuted. Other times, we find 
the people who are actually going out and doing the straw 
purchasing, hiring other people to do straw purchasing, which 
is a common plan that we find as well.
    Mr. Rothman. Again, given my belief that we do have a right 
to bear arms in our country and thus would need legitimate 
licensed gun dealers to sell them, nonetheless, do you have any 
ideas or legislative thoughts on how we can address the straw 
purchasers who will carry out a sack of guns and just sell them 
on the streets of Jersey City or Newark or Camden or any other 
major city?
    Is there a way to both respect the right to bear arms, but 
also acknowledge the reality that the cheap handguns are 
finding their way to the streets of our major cities?
    Mr. Buckles. Well, that is what we are trying to do, both 
with the tracing, with the ballistics information system that 
you talked about which will lead evidence back to--quite often 
back to whoever purchased the gun and trace it from there and 
we will find common elements.
    The situation is--I mean, there are 250 million firearms in 
the United States and, you know, the vast majority ofthose are 
in the hands of people who use them responsibly and who would not dream 
of selling them to somebody who they thought might do something wrong 
with them.
    So what we believe is if through the tracing, through our 
ballistics technology, through focused inspections with 
dealers, through cooperating with legitimate dealers, we can 
find ways to take laser focus on the people who are responsible 
for moving those guns illegally.
    There are currently provisions that require multiple sales 
to be reported to us so that we can watch those and if there 
are repeated multiple sales and it looks suspicious, that is 
something that we can address. But there is a whole variety of 
things.
    We are working with the dealer community on an issue now 
which is a program that is called ``Don't Lie For The Other 
Guy,'' an educational campaign in which the straw purchaser who 
comes in there is going to be told that he could be prosecuted 
and put in prison for being asked to come in and do this.
    Mr. Rothman. Mr. Chairman, may I ask one last question?
    Mr. Istook [presiding]. Go ahead.
    Mr. Rothman. Thank you.
    Do you find and have evidence of the success of these 
programs in apprehending more and more straw purchasers or 
those engaged in illegal conduct, in terms of the distribution 
of firearms? And has it resulted in a decrease in gun crimes or 
is there any way I could say to my constituents, for example, 
the ATF is working on this, they have focused like a laser and 
they have been doing so for X number of years and have had this 
kind of success and I can quantify it in some way?
    Mr. Buckles. Well, the best project to look at along those 
lines would probably be the Boston project that we were 
involved in with the Boston police and others that did just 
that. Our role in Boston was primarily to concentrate on the 
flow of firearms coming into the city, but it was a coordinated 
effort where the police had a role, everyone had a role in 
making that project work. There was a study that was published 
in--I cannot remember where, I can get that, that talks about 
both what the project was and how they measured it and what the 
consequences were. These are the types of things that we are 
trying to roll out nationwide where we have--in particular 
areas like you are talking about where we can all come together 
and decide this is what we are going to do so that we cannot 
just attack it from a supply side if things are not being done 
on the other end. But by doing all this together, we believe we 
can make a difference. I can get you the information on the 
Boston study so you can see how that worked.
    [The information follows:]

    (The agency adds: The name of the program in Boston is 
Ceasefire. It is aimed at preventing youth homicide. It 
combines a local, State, and Federal effort to crack down on 
the illegal gun supply with a strategy to deter violence by 
youth gangs. The study on Ceasefire the Director refers to was 
a section in a publication entitled ``Promising Strategies To 
Reduce Gun Violence''. The study was published in February 1999 
by the Office of Juvenile Justice and Delinquency Prevention, 
which is part of the U.S. Department of Justice.)

    Mr. Istook. Thank you, Mr. Rothman.
    Mr. Sherwood.
    Mr. Sherwood. Thank you.
    Director Buckles, good to talk with you again. It seems we 
have the Olympics coming up which you know is a huge workload. 
I understand that last year your criminal investigations 
increased 26 percent.
    What can we do on this committee to make sure that you are 
more successful in your mission?
    I know that you have a nice increase in the budget and you 
have more people that you very much needed, no longer a hiring 
freeze in the last couple of years, the agency is back, 
growing.
    What can we do to make this very important enforcement of 
the U.S. Government more effective?
    Mr. Buckles. Well, a lot of times money is the issue, but, 
you know, quite frankly, this committee has been very 
supportive of us and the reason that we are starting to show a 
lot of success in the last few years is because of the support 
of this committee.
    The budget that we are looking at here in fiscal year 2002 
is not an ideal budget, but I do not think anybody is facing an 
ideal budget. We are looking forward to the 2003 budget where 
we will have a chance to sit down and really go through 
everything we are doing and come up with a thoughtful 2003 
budget that will probably contain some things where we will be 
asking you for maybe a little bit more that you could do to 
help us along. But, quite frankly, this committee in the last 
couple of year has been very supportive and I think the numbers 
you are talking about are reflective of the support we have 
had.
    Mr. Sherwood. In the last few years, from a time when it 
was frightening, we have seen a substantial drop in serious 
crime like gun related crime. To what do you attribute that?
    Mr. Buckles. Well, there is a lot of discussion on that. I 
would like to say part of it is our enforcement strategies in 
working with state and locals. A lot of people take credit for 
it and it is probably the result of a lot of things, but I have 
to believe that getting serious about how we are dealing with 
the criminal misuse of firearms, both on a Federal level and a 
state level, is a big factor in that.
    Other people will attribute part of it to the economy, part 
of it to maybe the reduction in use of crack cocaine. So there 
is probably a lot of things that can be looked at, but I think 
a major portion has been the way in which law enforcement has 
begun really working together on this problem and not all of us 
just having our own kind of disjointed programs that local 
police decide they are going to up patrols and we are deciding 
we are going to trace guns and Ithink that the way we have been 
working together over the last few years has really been important.
    I would say, as I pointed out, I do not believe you were 
here, in my opening testimony that it is way down, but I 
consider that we are back at the base camp because, you know, 
it is down to where it was in 1968 or 1970 when the gun laws 
were first passed because of all of the alarming increase in 
gun crimes. So we still have a long ways to go in getting 
America to where we think it needs to be.
    Mr. Sherwood. Tell us some more about straw purchasers and 
how common it is and how effective are we at eliminating that 
and what are the penalties?
    Mr. Buckles. Well, it is a felony for a person to be a 
straw purchaser, to falsify the forms, to aid and abet the 
felon in the acquisition of a firearm, so there are strict 
penalties on that.
    How common it is? We think it is fairly common and, 
unfortunately, it is one of the most difficult ones to detect 
because that is the person who can walk in and look legitimate, 
have an ID, and purchase a firearm, pass a National Instant 
Criminal Background Check System (NICS) check, everything looks 
fine.
    What we are trying to do is make people know that that is a 
serious crime, that is not a crime they can get away with 
because, frankly in the past, you could just lie on a form, 
firearms may never be traced back to you, there was very little 
risk on being a straw purchaser. And we are trying to make that 
a much more risky enterprise of being a straw purchaser than it 
was in the old days and that is going to involve us tracing 
back because straw purchasers tend to do this as a pattern. 
They do not just do it one time. If they are trafficking in 
guns, they are buying more than one and they will show up on 
our trace reports and we will have a better idea who they are.
    Mr. Sherwood. With your integrated ballistics 
identification systems and the imaging equipment, what you have 
told us, I understand that there were like 650,000 images with 
about 8,300 matches. How effective have we been getting those 
8,300 ballistic matches to convictions?
    Mr. Buckles. I cannot give you the exact numbers on that. 
We may be able to, if I go back and have that scrubbed, a 
little bit more, but they are very important because even when 
they do not directly lead to a conviction they quite often will 
associate two different crimes that police might have otherwise 
thought were completely unrelated and provide leads in either 
one of those incidents that could lead to the conviction.
    Somewhere in there we are probably not tracking as well as 
when that particular lead linking those two crimes ended up 
being a key factor, but police investigators everywhere will 
tell you that that is an incredibly important piece of evidence 
to be able to have, when you can link up two crimes that 
otherwise seemed unassociated because then you have leads from 
one and leads from the other so that when you put them together 
it is going to take you to the suspect.
    Mr. Sherwood. Thank you.
    Mr. Istook. Thank you, Mr. Sherwood.
    Mr. Peterson.
    Mr. Peterson. I apologize if I ask questions that have been 
asked.
    I guess when should local authorities involve you?
    Mr. Buckles. Well, we try to work with local authorities, 
number one, so that they involve us whenever they recover a 
crime gun because how that individual acquired the firearm is 
something that, when put together with the hundreds of 
thousands of other traces, may have to start identifying people 
who are straw purchasers or otherwise trafficking in firearms. 
You never know when that is going to be a key piece.
    Secondly, what we try to do with local authorities is work 
out plans with them so that what they are doing and what we are 
doing is done in a coordinated way, we do not just have 
individual plans.
    The most difficult situation is when we start getting into 
cities where ATF does not have any direct presence. It becomes 
very difficult for us to have anything thoughtful and 
meaningful in terms of a joint strategy when you are talking 
about cities that we do not have an office for hundreds of 
miles around. That becomes very difficult. In those cases, we 
try to work with the locals so that they understand what your 
jurisdictions are, what criminal laws we can bring to bear, 
when something would be of federal interest and if they call, 
they know ATF will be there.
    Mr. Peterson. Where are your offices in Pennsylvania?
    Mr. Buckles. In Pennsylvania, we have offices in 
Philadelphia, Pittsburgh, Reading----
    [The information follows:]

    (The agency adds: The total number of ATF field offices 
located in Pennsylvania includes: Philadelphia, Pittsburgh, 
Reading, Harrisburg, Lansdale, Kingston, and Trenton.)

    Mr. Peterson. Erie?
    Mr. Buckles. I do not believe we have one in Erie.
    Mr. Peterson. See, I have the most rural district east of 
the Mississippi. I have 17 counties north of Interstate 80 in 
Pennsylvania, very rural. And so I guess that is why I asked 
that question. We have a hard time even getting the state narc 
units in to work in our areas because they do not like to work 
the rural areas. So rural America is in my view a little more 
vulnerable than you would think it is, because crime has moved 
out there, gun crimes are out there. A mile from my house an 
individual got shot with a stolen gun. For the first time in my 
life, my wife wanted a loaded gun in the house, available to 
her because I am away so much. I mean, that is how things have 
changed, I guess.
    Mr. Buckles. Well, something that I appreciate, I am from 
Wyoming and lived in Cheyenne and Cheyenne is about 300 miles 
from some other parts of the state in Wyoming and our office in 
Wyoming is in Cheyenne and if they get a call from Buffalo, 
they have to drive an awful long way and an awful long time to 
get up there and do some of the work. And it is a frustration I 
have heard from the U.S. Attorney there and I am sure it is the 
same thing that you face and U.S. Attorneys face in many of 
these areas. They have tried to push out satellite offices, for 
example, U.S. Attorneys, but we have not been able to keep up 
with those. That is something that we would like to be able to 
do, that wherever there is a U.S. Attorney who has a satellite 
office, we believe we ought to have a presence and have someone 
there available to work the cases. But that is--you know, it is 
a larger staffing issue. We are bigger than we have ever been 
in ATF right now, but if you think about adding 300 new agents 
and we have 300 offices around the country, sometimes you do 
not feel a big impact if you are not able to move out into some 
new areas, but that is something that we want to be able to do 
eventually.
    Mr. Peterson. Well, now, do you work closely with the state 
police?
    Mr. Buckles. Yes.
    Mr. Peterson. I guess I was trying to look at the chain of 
command, how you are available. See, every county in 
Pennsylvania has a state police barracks, so that is our local 
hook to the state. The Attorney General has a few regional 
offices, but they are few and far between. I guess that is why 
I was asking the question; how do our local----
    Mr. Buckles. Well, you know, we would have to know which 
ATF office services that area. Normally, the ATF agents are 
pretty good at getting out and meeting the different county 
authorities and city authorities. In some places, there are a 
lot more than they can make all the personal contacts with, but 
they will generally go to some of the state law enforcement 
association meetings and that sort of thing so that people know 
where we can be found and what it is that we can do for them.
    Mr. Peterson. I guess I need to do some work of my own to 
figure out if all of my district is served by the same office.

    (The agency adds: ATF's Field Division in Philadelphia and 
Field Office in Harrisburg would serve this congressional 
district.)

    Mr. Buckles. It probably is. It is probably all served by 
the Pittsburgh office. We will see if anybody throws anything 
and hits me in the back of the head because I am wrong. But we 
will find that out and I will get you that information.
    Mr. Istook. If you would yield for a moment?
    What portion of the work is actually done to assist local 
authorities, not necessarily by making a personal visit, but 
with the type of things that are handled through a phone 
inquiry, through an Internet presence? How does that relate? 
Because I know that there is a lot of support that you can 
provide that does not necessarily mandate that you have a face-
to-face visit.
    Mr. Buckles. That is right. And sometimes we do laboratory 
services for the state and local authorities where they do not 
have laboratories that are available to do things. But, yes, 
the websites are always--I guess that is being the universal 
way in which anybody can connect with anyone else, but there is 
a variety of things that we could probably do to help smaller 
departments out.
    I know we work with them every day because I get letters 
every day from a police chief in a town somewhere that I have 
not heard of.
    Mr. Peterson. But do you have some sort of a piece that we 
could share with our small police agencies? We are pretty 
rural. It might be helpful to show us how you hook in, if you 
need this, this and this. I guess that might be helpful.
    Mr. Buckles. Okay. I am also on the board of directors of 
the International Association of Chiefs of Police and that is 
an organization that involves--and it actually is for the most 
part run by chiefs of police from mid-size and smaller 
departments, so we also try when we are there to make sure we 
have a presence there and make sure people know what it is, we 
run some of the seminars in terms of explaining what we do and 
can be done. But I would be happy to get you some information 
specifically as well.
    Mr. Peterson. Historically, rural America, they have 
everything--everything that is in the cities is there, maybe on 
a lesser scale, but it is there. I mean, there is nothing 
different.
    Quality of life issues in your agency.
    Mr. Buckles. Well, I would say there are probably in a 
sense better than they ever were because ATF has been an 
agency, quite frankly, that has always got by on a shoestring. 
When other people were being funded at different levels, we 
have always been a remarkably resilient group that knew how to 
get by with maybe not having everything that everybody else 
had.
    In the last couple of years, we have been able to improve a 
lot of those things with the support of this committee. The 
computer equipment we have, we have been able to build up a 
first-rate training directorate that provides better training 
for everyone. We have been able to improve space and equipment 
that people have.
    Those are some of the things where we are finally getting 
to where I think we should be on quality of life and I am 
afraid that some of the things that are going to cause us to 
absorb money here and there will start eating away at that and 
itis easy to be able to not do certain things. On the one hand, 
if we do not staff up, then I have agents and inspectors that are being 
asked to do more than they should be asked to do. But if we keep the 
staffing high and cut somewhere else, then they are crowded into 
offices where they do not have adequate space, so there are difficult 
tradeoffs. But, again, I would have to say right now for ATF, we are in 
pretty good shape.
    Mr. Peterson. Do you struggle to get technology workers, 
people that deal with your high tech stuff?
    Mr. Buckles. Struggle to get what?
    Mr. Peterson. High tech workers, people with your 
information systems.
    Mr. Buckles. Actually, I think we are doing a little bit 
better than some agencies. We received authority a few years 
ago to set up a pay demo project where we can actually pay 
people a little bit more than some of the other agencies can. 
We use the pay demo project largely for laboratory personnel, 
the chemists and also with some of the high tech people. And, 
to tell you the truth, it has been helping us out in terms of 
attracting people. Not that we can keep them when they are 
competing with some of the outside vendors in terms of what 
they can do, but relatively speaking, I think we have held our 
own and we have a very strong and dynamic information 
technology department at ATF.
    Mr. Peterson. Thank you.
    Mr. Istook. Thank you very much, Mr. Peterson.
    Let me follow up with you, Director, on a couple of these 
things. And I appreciate the people's questions regarding, for 
example, straw buyers and the related problems and I know, for 
example, sometimes in high profile cases, Columbine, for 
example, there was certainly prosecution of the people that 
were involved in being a form of straw buyer in that, but 
realizing that part of what you are trying to do is to shape 
the demand side with your involvement in these initiatives and 
in shaping public opinion and I know it is very important for 
people to know that when someone violates these laws, whether 
it be a felon with a gun, whether it be somebody involved as a 
straw buyer, it is very important that the prosecutions be 
known, be visible so they might indeed have the deterrent 
effect, which is part of the cultural change that you are 
seeking.
    But sometimes the news about enforcement of existing laws 
gets obliterated and overshadowed because other people use some 
event as an opportunity to push for some new form of laws and 
the media. I speak as a former reporter myself: the media 
sometimes only has a limited capacity on different stories and 
they can spend so much time covering people who very noisily 
agitate for new laws that they do not give the same attention 
to whether an incident led to enforcement of current laws and 
the penalty that fell upon someone to try to have the deterrent 
effect that you are after.
    Do you see any such challenge in dealing with the media, 
trying to get them to focus upon your efforts not only to 
enforce the current laws but by enforcing them to dissuade 
people from breaking them in the first place?
    Mr. Buckles. Well, I do not know exactly what efforts we 
make, but I think it is safe to say we have not had the media 
trying to beat down our doors to handle some of these kinds of 
stories. We do try to get it whenever we can to put out a 
message of what is happening in a particular program. We have 
had some of our things highlighted on different programs. It is 
why in some cases, though, we have turned to other sources to 
get the message out. My reference to Kansas City, we got the 
Kansas City Crime Commission involved in running prime time TV 
ads telling people what is going to happen to them if they have 
a gun.
    Mr. Istook. Right.
    Mr. Buckles. In the case of straw purchasers, we try to 
partner with the National Shooting Sports Federation to get out 
information at a dealer's premises where the person is standing 
there getting ready to buy the gun and all of a sudden, well, 
maybe this is a little more serious than I thought it was, that 
I should not be doing it, they told me it is no big deal, but 
maybe I am going to get in big trouble over this. So we do need 
ways to get that out. As the head of the Crime Commission in 
Kansas City noted, that if our message can scare every felon 
from carrying a gun, then we have accomplished something, we do 
not need to put them all in jail. If they quit carrying guns, 
we have accomplished something right there. And we agree with 
that as well, something has got to turn that tide where the 
culture is not kind of the arms war that we used to be in with 
guns with criminals. Everybody had to have more and more guns, 
we have to have it turned around where guns are looked at by 
criminals as a liability. It is something that might be traced 
to them. It is something that leaves almost like fingerprints 
when they are at a crime scene because there is ballistics 
evidence. It has a lot of liability if you use a gun in a crime 
and it will land you in jail automatically for five years or 15 
years.
    And those are messages that we want to get out and we are 
working as best we can, like I say, on local levels to have 
that kind of message out so that people realize there are 
serious consequences with using a gun.
    Not to belabor it, but one of the stories told in Kansas 
City was of this woman who called up the head of the Crime 
Commission crying saying her son was just being sentenced to 12 
years in prison.
    ``What happened?''
    ``He was carrying a gun, it is all your fault with this 
Cease Fire thing.''
    And he says, ``Well, was he a convicted felon?''
    ``Oh, yeah, he had had several armed robberies and 
burglaries.''
    And he says, ``Well, you know--''
    And she says, ``Well, he had been picked up a lot of other 
times with a gun and nothing like this ever happened.''
    So that is part of it. If you get used to getting picked up 
with a gun and it does not get you in trouble, then people just 
keep doing it. So people have to have the message that 
something really does happen before you can change that kind of 
behavior.
    Mr. Istook. I think that is an excellent example and, you 
know, perhaps some laxity on some people's part in not 
enforcing the law previously contributed a lot to the problems 
we have.
    I know we as members of Congress of course do not have, 
quote, the bully pulpit that, of course, is commanded by the 
president, but collectively we have a number of smaller bully 
pulpits and I would certainly be willing to assist you and I am 
sure other members would, too, in whatever form would be best, 
maybe get some of this material about these enforcement efforts 
to us and I could certainly work with members of Congress to 
help you to get that message out and highlight indeed that many 
cases where people just hear about the crime and then suddenly 
there is the clamor for all sorts of new laws and the public 
can be left with the mistaken impression that nothing was done 
about it or nothing was done to deter future things. And we can 
certainly help get the very messages out and I know I would be 
interested in working with you, I am sure many other members 
would, too, and perhaps put it together in some different forms 
that makes it easy for members of Congress to address that, 
because it does deserve that attention.
    Mr. Buckles. Thank you. And we will look for putting 
something together where we could have some ideas on how we 
could carry that forward.
    Mr. Istook. That would be great. Let me ask, you mentioned 
in your testimony that--a phrase you used, you mentioned ATF is 
the first federal agency to implement a seat management 
contract, outsourcing end user computing support to private 
industry. We have a lot of things that interrelate with 
information technology within the federal government, with 
handling it, with getting routinely, of course, the necessary 
people, as well as staying enough on the cutting edge and some 
parts of the federal government do well in information 
technology, others have a pretty poor track record.
    But I am interested in what you mentioned about your 
approach, realizing you not only have the general 
organizational needs for computers, you have the ballistics, 
you have the records of whether it be former federal firearms 
dealers or other things that you have in the tracing process, 
you have significant computer needs and your seat management 
contract, would you elaborate a bit on how that works and which 
portion of your information technology operations are actually 
within that and which, for whatever reason do not? Because I am 
trying to learn the lessons that will help us in analyzing the 
needs and the costs of those needs for a number of agencies. 
Generally speaking, seat management was aimed on a hot, new 
project. And so it is going to be desktop computers, laptop 
computers, and that kind of equipment.
    As opposed to a dedicated system.
    Mr. Buckles. As opposed to servers and some network 
aspects, which we would probably be running ourselves or maybe 
with contractors. But the seat management deals primarily with 
the end user.
    Well, I can remember before we did this we must have had 10 
different kinds of computers and versions of software, and e-
mails could get some places, and they could not get other 
places in the organization, and what this did was all in one 
fell swoop we replaced every computer on a lease basis for the 
seat management. Every computer had exactly the same software 
and version of software. It all worked alike. Everything was 
compatible immediately in terms of communication capability and 
everything we had.
    We can even push down to every computer in the agency 
upgrades of software as they occur. So this allowed us to make 
kind of a giant leap forward. If we had kept trying to spend 
the same amount of money each year to replace this portion of 
just our older equipment, what we found was then we had part of 
the agency had really new stuff, and then somebody else was 
still behind, and we were leapfrogging and never really 
catching up. So this allowed us to make an investment that 
really put everybody with equipment that worked and could then 
take advantage of the abilities we have for tracing.
    For any kinds of information we have larger data bases in 
the bureau that the people need to get it, we could suddenly 
have the architecture that would allow all of this to be 
integrated, and the people who need it could have access to it, 
licensing center information, for example.
    Mr. Istook. So what portion of your information technology 
is doing that annual costs? Who is your vendor on that, and how 
do you handle contracting with that vendor or determining 
whether anyone else has a chance to compete?
    Mr. Buckles. Well, they are competed every time we go into 
a cycle. We are going through that cycle right anyhow. Unisys 
was the vendor the first time we did this, and we have now a 
new contract that was competed, and I believe we selected a new 
vendor who will be supplying the equipment. I can give you the 
details on all of that so you can see what the annual costs 
are, who the vendors, how we compete the bids on it so we can 
give you a full package, and you can see how that works. But we 
believe it is the only way we would have been able to get into 
the position we are in and be able to really take advantage of 
all of the information we have.
    [The information follows:]

    (The agency adds: Our Seat Management arrangement with 
Unisys Corp. was awarded through their multi-year GSA schedule 
contract. the initial three year engagement was recently 
renewed for another three years, giving us the opportunity to 
refresh all of our end-user computing equipment throughout the 
Bureau. Our agreement required Unisys to provide all hardware, 
software, maintenance, training and Help Desk support for three 
years while we pay a single monthly payment for each ``seat,'' 
or employee served.)

    Mr. Istook. I appreciate that because I certainly know some 
agencies that do have a compatibility problem. I guess, the 
term in vogue is where the best practices are on this, utilize 
your experience, because it has been going on for how long in 
ATF now?
    Mr. Buckles. It was a three-year cycle. I think we actually 
skipped and went one more year on last year's contract, so I 
think it has been four years now that we have been doing this, 
but it is time to refresh this equipment.
    Mr. Istook. So you are in the second cycle of it.
    Mr. Buckles. Right.
    Mr. Istook. I appreciate that. Let me wait and give some of 
the other members an opportunity.
    Mr. Buckles. Okay.
    Mr. Istook. Mr. Price, I think you came in next, if that is 
agreeable. You do not have a time problem, do you, Mr. Hoyer?
    Mr. Hoyer. No. I don't have a time problem.
    Mr. Istook. Right. I just wanted to make sure. If you did, 
I could come to you next.
    Mr. Hoyer. Can I make just a brief opening statement?
    Mr. Istook. How could I stop you?
    Mr. Hoyer. Thanks.
    Mr. Istook. No, that is fine.
    Mr. Hoyer. And I apologize to the secretary and director 
for being late. We had a four-and-a-half-hour hearing on 
election reform, and we went straight through, so I was unable 
to be here. I am the ranking member of the House Administration 
Committee as well.
    I want to welcome you both here. I know Mr. Visclosky has 
asked a number of questions that I am concerned about. Mr. 
Price will as well. So I am not going to ask questions, because 
I have not been here. But I have real concerns about whether 
ATF has the resources in this budget necessary to carry out the 
responsibilities that we have given to you, and I will be 
working with the chairman as we review your budget and the 
members of this committee to ensure that one of the most 
important law enforcement agencies in the federal government 
has the resources, necessary to do its job. So with that, Mr. 
Chairman, I appreciate the time. I have a statement. If you 
will include that in the record.
    Mr. Istook. Absolutely.
    [The information follows:]

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    
    Mr. Hoyer. But I appreciate your allowing me to address the 
witnesses. And, again, I apologize for my lateness. Thank you.
    Mr. Istook. You bet. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman. Let me add my welcome 
to our witnesses today and my apologies for being late. We are 
strung out all over the place these days with hearings of 
various kinds. But we appreciate your being here, and we place 
great importance on your budget and the work that you do.
    I would like to focus in on a couple of programs, first, 
the gang resistance, education, and training program, and then, 
I hope, maybe in the second round, the work you are doing on 
gun dealers, those who are involved in the guns traced through 
crime.
    The gang resistance, education, and training is a program 
that you have invested a great deal in. You have publicized the 
results widely. Many members, I think it is fair to say, 
support this program. Your request is for $16 million, which I 
think is flat funding, no increases, even for inflation.
    Could you tell us what the total request for GREAT funding 
was that came from state and local officials and how did you 
determine the level of funding that you are requesting, and 
assuming that this falls considerably short of the requests 
from state and local officials, how are you going to allocate 
this limited funding, given the level of demand?
    Mr. Buckles. I am not sure in this case, since we were in a 
situation where we were coming up with a flat-line budget. We 
came up with a budget that would amount to the same amount of 
money that could be handed out last year as was handed out this 
year. You are correct. It would not include any inflationary 
costs that would go along with that. Even our overhead, which I 
think is three million of that $16,000,000 is flat lining what 
we had from last year in terms of running the administration of 
that program.
    I am not in a position right now where I can give you those 
exact numbers on what it would take to make sure that the 
program was supported at the exact same level this year or 
compared to what some of the requests for funding are, but I 
can certainly get you that information.
    [The information follows:]

    (The agency adds: ATF received requests for GREAT funding 
from State and local entities totaling $20,122,116 for Fiscal 
Year 2000.)

    Mr. Price. Well, I wonder, given the fact that this study 
that I understand is going to look at the long-term impact of 
the GREAT program is under way, and I assume it is close to 
completion. Does that have something to do with the restraint 
in this funding request? And the obvious question that follows, 
then, is, can you share any preliminary findings with us, and 
what do you think their funding implications might be?
    Mr. Buckles. I think what we are going to see from that 
longitudinal study on the GREAT program is going to be very 
positive. We have seen preliminary results from that study from 
the University of Nebraska. It is currently in National 
Institute of Justice (NIJ), where it is undergoing peer review, 
and I think the final report will be out shortly.
    But what it will show is that GREAT does have an impact on 
the people who go through that program in terms of their 
conduct into the future, not just during the period of time 
that they are involved in the program. Earlier on, when we saw 
what some of the findings were, I think we even made 
adjustments to the program to improve it to meet some of the 
areas that were mentioned in the report that we might do better 
in terms of follow up.
    So the results are going to be very good. The reason there 
is not more money in it, frankly, Congressman, is we were 
developing a flat-line budget, and that is where we were. We 
were not asked to come up with additional initiatives. The 
administration just came in. There was not a time or process, I 
guess, to go through the normal budget cycle where you would 
have the presentation of initiatives and where you might want a 
program to go. We pretty much just started at the idea it was 
going to be essentially a baseline budget and worked from 
there.
    Mr. Price. Well, the preliminary indications that this is a 
successful program that has had desired results are going to 
lead obviously for pressures for more and not less funding and 
for more and more communities to be part of this.
    The experience we have had in my congressional district 
with killings in recent weeks related to gang activity--these 
are not communities where normally gang activity is located, 
but this is changing, unfortunately, and there are many, many 
communities around the country, I think, that are going to see 
this problem and want to anticipate and deter problems. And so 
I think there will be more, not less, demands for these funds. 
And when you start thinking about $16 million and how far that 
goes, it really is quite limited.
    Mr. Buckles. It does not go very far. We know there are 
many jurisdictions that would like to have this program and 
would like to have some of the federal assistance that we could 
provide in putting it together, who are not able to do that.
    Mr. Price. Thank you. Mr. Chairman, I do have some other 
questions, but I am happy to wait in the next round.
    Mr. Istook. All right. Mr. Hoyer, you did not have 
questions. I just want to make sure that I do not pass you by.
    Mr. Hoyer. I will wait until the next round.
    Mr. Istook. Okay. Let me go back to Mr. Sherwood, then.
    Mr. Sherwood. I would like to go back to computers, because 
what you are telling us is entirely different fromwhat I have 
been hearing everywhere else, and I am delighted.
    How did you determine to bring your computer systems up to 
date? I realize we are being a little redundant here, but I 
want to go back over this because we have other agencies in the 
federal government that need that model so badly.
    And you said you used Unisys, but did you have them come in 
and do a survey? I thought that the way we are set up in the 
federal government, if you have somebody come in and do a 
survey to tell you what you need, then you cannot hire them. 
How did you get around that problem?
    Mr. Buckles. Well, our essential decision to go to a seat-
management approach, with Unisys, for example, we just put out 
a contract on what we wanted in terms of----
    Mr. Sherwood. In other words, you knew what you needed.
    Mr. Buckles. We knew essentially what we wanted to do, and 
they and many other companies put in a bid. I am not sure. I 
think we had a contractor come in and help us define those 
things to begin with. But we were desperate and looking for 
some new way to take on this problem because we knew if we just 
kept adding things on, everything we added would not work with 
the things we had before, and we were looking for a radical, 
new approach.
    I have got two gentlemen back here who were running the 
information technology section at the time that this plan was 
arrived at, and it was spelled out to the rest of us who were 
on the leadership committee of the bureau that decided to take 
this leap. I mean, I cannot tell you how well it has worked. It 
is impossible.
    With almost anyone else I talk to about how the computers 
work and for whatever problems we had, they seem to be minor 
compared to what other people are struggling with. We put on 
programs in the Treasury Department about how we got there, 
what the benefits are, what the costs are, so we have been 
getting a lot of requests to come out and spread the word.
    What I might like to do for you is to have our technology 
people come, and they could actually set out the whole thing 
and how we do it and the way we got from where we were when we 
started and how we are managing it now.
    Mr. Sherwood. But do you have real-time responses? In other 
words, if a person in Los Angeles wants information that is 
here in Washington, do they get it immediately?
    Mr. Buckles. Not if they e-mail me. What we are doing with 
most of our data bases is that you can go into them and get 
real-time information. Before, we had a whole series of data 
bases. We have a licensing center. We have a revenue center. We 
have import data. We have National Firearms Act registration 
data. All of these different data bases that in the old days 
the only way you could get it was to call somebody up who was 
near it and had the right kind of terminal to get into it to 
give you the information.
    What we have done is once we built the platform, an 
architecture, how it works, we have now taken each one of those 
data bases and put it into--I think it is an Oracle data--base 
that makes it then compatible to everything else we have so 
that you can have the accessibility by whoever needs to have 
that information real time. We are not there with every single 
data base we have now, but that is the process we are going 
through, and most of the information that people need to get is 
going to be real-time information.
    We have a financial management system. You go into it. It 
is real-time information that is in the financial management 
system. Somebody from Los Angeles puts in a requisition. 
Somebody in financial management wants to see how much was 
charged against their account or what is out there in terms of 
requisition. They are going to see real-time that somebody in 
Los Angeles just put through a requisition.
    So that kind of information is available, and the most 
important thing is we can now turn all of those data bases into 
things that are accessible to everyone who needs it. We do not 
have every one of them set up yet that way, but we have got all 
of the architecture there that allows us to do it.
    Mr. Sherwood. And now you are one year over your three-year 
cycle, but your intention now is to get new hardware so that 
you are faster.
    Mr. Buckles. Right. It is like everything else. When you 
want to have more connectivity, and dealing with it we have to 
upgrade the hardware to continue to deal with the applications 
that we have built to go along with it.
    Mr. Sherwood. Are you sure that ATF is part of the U.S. 
Federal Government?
    Mr. Buckles. Yes, sir.
    Mr. Istook. I think that was a little bit rhetorical, 
wasn't it?
    Mr. Sherwood. We need to take this model on the road, Mr. 
Chairman.
    Mr. Istook. I am glad to see your enthusiasm for it because 
I think there is a lot of promise in this approach, and it is 
the type of thing we want to be aware of because we are trying 
to find the best models. As I say, it is a spotted history. 
Some agencies have done very well; some have not.
    I look around, and I find a lot of new federal Web sites 
that have come on line just in the last year or two, trying to 
fill certain needs and be more responsive to citizens and, of 
course, to those that interact directly with them.
    So I think getting yourself and others on the subcommittee 
better educated on this process and knowing how it is the same 
and how it is different from what other agencies are doing is 
very helpful.
    Mr. Istook. Did you have something now, Mr. Hoyer? Okay.
    Mr. Hoyer. Mr. Buckles, I know that Congressman Visclosky 
discussed some of the budget items, and I made an opening 
statement about your resources. You have a net change of 3.2 
percent, which you refer to as a baseline. That is last year's 
ensited appropriation plus inflation. Is that what you are 
saying?
    Now, once you take into consideration the president's 
adjustment on salaries, which is not yet at parity with the 
military, which I think it ought to be, 3.6, how much of your 
budget is personnel?
    Mr. Buckles. Well, right now, our salary costs, salary and 
benefits, are running somewhere around, I think, 58 percent of 
our budget.
    Mr. Hoyer. So 3.6-percent increase in the salary element of 
that 58 percent. Obviously, it will leave you less than 4.2 
percent for everything else. Am I correct?
    Mr. Buckles. Yes.
    Mr. Hoyer. Okay. Now, are you aware of the fact that 
Justice law-enforcement agencies are getting an eight-percent 
increase?
    Mr. Buckles. More or less, yes.
    Mr. Hoyer. And these are obviously questions I presume you 
know the answer to.
    Mr. Istook. How do you and your brother get along?
    Mr. Hoyer. My brother and I get along very well because I 
have no brother.
    Mr. Istook. That was rhetorical on my part. It is always a 
question whether mom loves you more than she loves me. Right.
    Mr. Hoyer. Are you aware of the fact that INS and FBI are 
getting an eight-percent increase?
    Mr. Buckles. Yes.
    Mr. Hoyer. And are you aware of the DEA getting a nine-
percent increase?
    Mr. Buckles. Yes.
    Mr. Hoyer. Do you know why there is a discrepancy between 
the Justice law-enforcement adjustment and the Treasury law-
enforcement adjustment?
    Mr. Buckles. No.
    Mr. Hoyer. We will have to find that out.
    Now, let me go on to another subject, the Youth Crime Gun 
Initiative, which I am very interested in. I know you are as 
well. The Treasury IG testified on this issue last year, and I 
am going to ask some questions about it. First of all, with 
reference to the IG's concerns. Have these concerns been 
addressed, or is this still an ongoing process?
    Mr. Buckles. Well, we have addressed every one of the IG's 
concerns. Some of it is ongoing because what the IG recommended 
was that we put in some ongoing procedures that would run the 
program. If you recall, when I testified last at the oversight 
hearing on this, there were three different IG reports, and we 
had already met the recommendations of the IG on all of the 
principal recommendations in the first two, which had to do 
with managing the program from the headquarters.
    The real issues that the IG had that we had not yet 
addressed at that time had to do with how the program was being 
rolled out, concerns about consistency around the country, and 
concerns about whether police departments were being adequately 
trained and understood how the program was going to work, 
because in some places they were, and it looked like in some 
places they were not. And those are all issues we have now 
addressed in terms of what all of the standard operating 
procedures are for these programs when they go in.
    We have trained something like 1,600 ATF personnel and 
local police in what the process is on the tracing and 
identification of firearms and what to do with the information 
that comes out of it. We have rolled out new reports to every 
one of the cities involved in terms of the data that was 
developed from their tracing information. So we are taking 
action on every one of the items that the IG recommended.
    Mr. Hoyer. Have we had any indication of the IG's position 
with respect to that which has been done today?
    Mr. Buckles. The IG, to my knowledge, has not done any 
followup. They made those recommendations. At the time, we told 
them what we intended to do, and, as I recall, from their 
testimony, they were satisfied. If we did everything we 
indicated we would do, they felt that that would be sufficient 
to get the program back on track.
    Mr. Hoyer. Mr. Chairman, the IG will not be testifying 
individually.
    Mr. Istook. I do not think we have a hearing scheduled on 
that one.
    Mr. Hoyer. We might want to ask the IG to let the committee 
know----
    Mr. Istook. I think we need to find that out.
    Mr. Hoyer. Last question on this subject. The plan, as I 
understood it, was to extend this program to 76 cities. We are 
now serving 50 cities. Correct?
    Mr. Buckles. Correct.
    Mr. Hoyer. What, then, is our status of expansion to the 
full 76 cities?
    Mr. Buckles. Well, that would have been in a normal budget 
request that we would have prepared initially, but begun with 
the transition, we were in a flat-line, no-new-initiative mode 
so the proposal for those additionalcities did not go forward. 
These are matters that we are going to be able to take up in a little 
more thoughtful manner in the 2003 budget that we are already starting 
that cycle here.
    Mr. Hoyer. Is it your view that it is appropriate to extend 
this to 76 cities?
    Mr. Buckles. I believe it would be. That is what we should 
do, yes.
    Mr. Hoyer. Thank you. Thank you, Mr. Chairman.
    Mr. Istook. Thank you. Let me say, Mr. Hoyer, I joked with 
you about your question on the percentage increase. But what I 
was going to say is I think you posed a very legitimate 
question relating to the proposed budget increases at the 
Justice Department law enforcement versus Treasury Department.
    Mr. Hoyer. Mr. Chairman, as you know----
    Mr. Istook. I imagine there could be justifications, but we 
do not know until we know what their reasons are.
    Mr. Hoyer. Mr. Kolbe, as you know, our previous chairman, 
was very concerned about the disparate treatment, and he 
happened to be on the Commerce State Justice Committee as well.
    Mr. Istook. Right.
    Mr. Hoyer. So we had the perspectives of both committees. I 
am very concerned about the disparate treatment between the 
Treasury law enforcement, which, as you know, is 40 percent of 
federal law enforcement. Obviously, there are important things 
that both do. As you say, there may or may not be reasons to 
fund more generously one than the other, but it is such a 
consistent pattern----
    Mr. Istook. Right.
    Mr. Hoyer [continuing]. That it gives one pause that, 
frankly, the OMB or somebody else has made a judgment that 
Treasury law enforcement ought to not to be given the resources 
it needs to carry out its duties. And I know you are very 
concerned about that, as I am.
    Mr. Istook. Certainly.
    Mr. Sloan. Mr. Chairman, if I could just say one thing on 
that, I think it is important to also remember that part of the 
issue, if you will, might be the demonstration in a concrete 
way of the value and utility of Treasury law enforcement 
sometimes gets lost. And I think those of us in Treasury law 
enforcement appreciate that, and I think it is important to 
note that by virtue of this subcommittee's requiring during the 
current process, we are concluding, as I mentioned earlier this 
morning, an infrastructure and resource study at Treasury that 
is probably the most comprehensive study we have had going 
across all of our Treasury enforcement activities. I believe 
that is due around the 10th of May. But the point I am getting 
at is that I think it will demonstrate in a much clearer way 
some of the value and utility issues that, I think, have gone 
unnoticed.
    Mr. Hoyer. I think you make a good point.
    Mr. Chairman, one additional point. This is obviously not a 
partisan issue. The Clinton administration did the same thing 
in some respects, but a dramatic example of this is the FBI's 
role in the Olympics is funded.
    Mr. Istook. I was going to come back to that question, yes.
    Mr. Hoyer. The Secret Service and the ATF's role in the 
Olympics is not funded. Now, there is a pretty clear example 
where all three agencies are going to be intimately involved 
and importantly involved in maintaining the safety of the Salt 
Lake City Olympics. One is funded; two are not.
    It is hard for me to believe there is a rationale for 
treating those specific items disparately, even if you make any 
judgments about other aspects of law enforcement. I think that 
is the example of what you are talking about. Thank you, Mr. 
Chairman.
    Mr. Istook. And as I said, Mr. Hoyer, of course, we can 
imagine other things, too. It could be part of the manner in 
which different duties are delegated within OMB that they may 
be in two different people that have oversight internally with 
that. But it is something that certainly merits getting into.
    I have got a couple of more questions, but before I do, Mr. 
Price. Are there any other members that have any other 
questions they want to pose, too? All right.
    Mr. Price. Thank you, Mr. Chairman. I would like to return, 
as I said, to the matter of gun dealers and your work in 
investigating so-called ``problem dealers.''
    A report issued last year entitled ``Commerce in Firearms'' 
reported that 1.2 percent of licensed, retail, and pawnbroker 
dealers accounted for over 57 percent of the crime guns traced 
to current dealers in 1998. Are those statistics still accurate 
or approximately accurate, and in any case, could you bring us 
up to date on how you have targeted inspection resources at 
these problem dealers, and what have you found?
    Mr. Buckles. Sure. I have not seen the latest figures, but 
if I had to venture a guess, they are probably pretty 
consistent with what you saw in that figure, and I base that on 
what we found when we went out and investigated. We did a 
focused inspection on these thousand dealers. One, because it 
asked the logical question, why are all of these guns coming 
from such a small group; and, two, maybe we are inspecting the 
wrong people; maybe we need to focus our information better. So 
when we went out, we were trying to find out both whether these 
were people who are actively involved in supplying guns, if 
there was sloppy record keeping, or if there was some other 
reason that they were the source of guns.
    Mr. Price. All right. So the target group you are 
describing is the one to which you trace these guns----
    Mr. Buckles. That is right. That is that one and a half 
percent, about a thousand dealers.
    Mr. Price. About a thousand, yes. What percentage of these 
dealers turn out to be problem dealers?
    Mr. Buckles. Well, there was actually a very small 
percentage that turned out to be in some way actively involved 
from what we found in trafficking firearms. I cannot remember 
the exact number. There were 20 or so that we revoked their 
license and/or referred to for prosecution. There were some 
who, when we showed up, immediately dropped their licenses, and 
these things turned into criminal investigations. But if you 
put all of that amount together, it is probably less than a 
hundred of that whole group that we were looking at.
    Mr. Price. What is the threshold condition for defining a 
problem dealer?
    Mr. Buckles. Well, it is when we get there, and they cannot 
account for firearms that supposedly have received, and they 
cannot account for where they have been.
    Mr. Price. So it is not merely the quantity of firearms.
    Mr. Buckles. On one extreme, we might go into a dealer and 
find out that maybe he has only received 200 firearms during 
the last year, and he has got 50 of them that have shown up in 
crimes. He does not have records on where most of the guns went 
at all. That is somebody who has turned into a criminal 
investigation.
    I visited a dealer in Houston, Texas, recently who is the 
largest retail dealer in the United States. He was also on that 
list. They sell 12,000 firearms a month. It is some gigantic 
number of firearms, most of which are rifles, but they deal 
with a range of firearms. Now, he shows up on that list because 
you cannot sell that many firearms for as many years as he has 
been selling them--he has been in business since 1968--without 
somewhere along the line some of those guns being traced to him 
just because of the volume.
    But we found in his case that he had remarkable inventory 
practices, very careful about who they sold to. So you cannot 
jump to the conclusion that just cannot because there were a 
hundred firearms traced to this dealer that there is a problem 
if it is a dealer who was responsible for over the period of 
time selling 100,000, for example.
    But there were cases that were the other extreme, where we 
went in and found there were dealers who simply were not 
keeping any records at all, that were receiving firearms and 
selling them, did not know where they went. They were showing 
up in Chicago. We have had problems over the years in terms of 
being able to keep track of as many dealers as there are.
    I believe that, you know, we found some of the problem 
dealers in Mississippi, but at the time I think we only had one 
inspector for the entire State of Mississippi. So not everybody 
could be inspected all of the time to find out what they were 
doing.
    I do not want to keep sounding redundant. By having traces 
of what the crime guns are and where they come from, it gives 
us the opportunity to start knowing where we need to focus our 
resources and who we need to look at, because with one 
inspector in the state, they just cannot inspect everybody. 
They have got to have an idea of who to look at, and when we 
use this program, it started telling them who to look at, and 
we found some very serious problems with a few dealers there 
who were just openly violating the law.
    Mr. Price. This leads to a couple of final questions. One 
is, do you have sufficient inspectors in the field to pursue 
even this targeted approach? Granted, this kind of targeting is 
necessary in order to use your resources efficiently, but one 
inspector in the State of Mississippi sounds like an inadequate 
manpower, no matter what kind of targeting you are doing. So 
that is the first question. Are the inspector levels, the 
manpower and womanpower levels, sufficient to let you pursue 
even this more selective approach?
    And then, secondly, once you do identify this limited 
number of problem dealers, what kind of regulatory or criminal 
action have you taken or do you anticipate taking?
    Mr. Buckles. Well, we have taken the whole range. There 
have been criminal investigations opened and prosecutions. 
There have been revocations and denials of renewals, depending 
on the level of criminal culpability we felt could be 
established in the case, whether it was sloppy record keeping, 
whether it was obviously something intentional, something that 
amounted to intentional disregard of the rules. But that is a 
factual-based question----
    Mr. Price. Could you furnish a statistical summary of that 
for the record?
    Mr. Buckles. Sure. Yes. We can provide that.
    [The information follows:]

    (The agency adds: Out of 1,012 focused inspections 
completed, covering 508,749 firearms records, a total of 3,338 
violations were found. Further action was recommended in 49% of 
those inspected. Twenty licenses were recommended for 
revocation, 11 licenses voluntarily surrendered their records, 
and 45 licensees voluntarily went out of business.)

    Mr. Price. How many cases have been pursued and with what 
result?
    Mr. Buckles. But the larger question that you asked; I 
believe we submitted a report to the committee earlier this 
year that indicated that the committee wanted to know what we 
would feel the ideal staffing level for inspectors would be, 
and the number was more like 1,300. I am trying to think 
exactly what the number would be if we only talked about 
inspectors. If you are talking about inspectors on the street 
right now, it is, like, 350 that we have for the whole country. 
Then there are supervisors and other people on top of that.
    But that shows you how far off we are in terms of what we 
need. We have 104,000 firearms licensees, 9,000 explosives 
licensees and permitees that we cannot get to all of them every 
year. And when you add in the alcohol plants and the 
inspections we need to do for revenue, you are talking 120,000 
businesses that we are supposed to be keeping an eye on, and 
these are businesses in a business of extremely sensitive 
commodities. The only two in the Constitution, when you think 
about it, were firearms and alcohol.
    So they require special attention, and with the level we 
have now of inspector resources, we do not believe that we are 
in a position to do everything we could. Targeting is a way 
that we can try to do it as effective as we can with the least 
amount of resources.
    Mr. Price. But you are saying even with the targeted 
approach, you would need three or four times as many inspectors 
as you have now.
    Mr. Buckles. Yes. We practically had to pull everybody off 
of everything to get that 1,000 dealer inspections done, and it 
caused us to be low on explosives facilities. We were 
inspecting dangerously low on some of the alcohol plants we 
need to be inspecting. When you think about $13.50 a gallon, if 
nobody is ever visiting to make sure you are paying that, you 
know, revenue will be affected if we are not showing up at 
those facilities.
    So that is why this was very costly this last year to do 
this with the dealers, but we felt that we had to have some 
kind of information base that we could begin operating from in 
terms of how we target and who we could put these limited 
resources on.
    Mr. Price. Mr. Chairman, if I could just ask one additional 
question that obviously comes to mind, I know in previous years 
you have stressed, you and your colleagues have stressed, the 
importance of these explosives investigations, which have 
become a much greater problem and had not been adequately 
investigated in the past. Are we talking here about a trade-off 
between work with these problem gun dealers and the explosives 
work? Where does that leave the explosives initiative?
    Mr. Buckles. It leaves the explosives initiative--this last 
year, where I think we were only able to inspect about 52 
percent of them. We were heading up towards 85 and felt that 
with explosives licensees, permitees that have magazines with 
explosives, that we should be visiting those people at least 
once a year, and everything is a trade-off. We have got people 
dying with guns and with illegally trafficked guns, and we have 
had to make trade-offs this last year.
    Mr. Price. Is it a fair assumption that the budget before 
us would really not remit any significant increase in the 
inspection manpower in either of these programs?
    Mr. Buckles. No. It would not. There are inspectors hiring 
that is included in last year's budget, so it is going to be 
above that 350 I mentioned, but nothing anywhere near where we 
are talking about in terms of what we need to be.
    Mr. Price. Thank you. Thank you, Mr. Chairman.
    Mr. Istook. I want to cover a couple of things if I can. 
One, going back to the Olympics again, I recognize the 
significance of the event. I know of ATF's commitment as well 
as other others to making sure that that occurs and is not only 
a safe event, but that people have an awareness of the security 
so that they feel safe and secure and can act accordingly and 
be safe and secure also.
    But with that in mind, there was some mention earlier of, 
well, you know, scrubbing things to find it. Have you made a 
specific assessment that specifies if this is your funding 
level, and there is no allocation that is directed toward the 
Olympics, that these are the trade-offs of both, one, what 
would be done as far as a reduced effort with the Olympics 
themselves, and, two, what specific things it will reduce 
elsewhere in your budget?
    Mr. Buckles. Well, we have not done that fine scrub yet 
because we are still working to see if some larger solution can 
be arrived at. Again, you can see the difficulties we are going 
to face if we cannot find the $9,000,000we are already 
absorbing. And I can tell you, like I said, with cars getting older and 
crowded offices, we can somehow deal with that, but if you keep putting 
on nine more here and then a pay increase there, at some point it 
really does have an impact.
    I have to say when we were talking about that issue with 
Justice, this is something where I am sitting here telling you 
how hard we are going to work and try to make this work, and I 
often feel guilty about it because, you know, ATF is an outfit 
that is always just been concerned, first, about getting the 
job done and, second, about some of the other things. If we sat 
around and worried about whether everything was fair, everybody 
would quit.
    But people do not, and people do the job, and that is why I 
feel particularly troubled when we finally start getting 
everything built back up, and I am going to have to go back out 
next year, after telling them things, you know, we are finally 
being recognized, your work is being rewarded, and I am going 
to go out next year and say, well, you know, all that money we 
got, was good, but now next year we are going to have to leave 
you guys in these offices for another year, and we are going to 
have to do this and that.
    And it is a real morale factor when people look around and 
see what other agencies are getting, because believe me, they 
also know what the FBI got, the DEA and everyone else. It is a 
morale issue, and it is not a killer because we have got people 
who do not let that be. They have got more important things to 
do. But it is something that troubles me when I have to leave 
them in that situation to deal with things with less than what 
they should in terms of resources.
    Mr. Istook. Mr. Sloan.
    Mr. Sloan. May I just add?
    Mr. Istook. Yes.
    Mr. Sloan. Mr. Chairman, I just want to make certain that 
this does not get lost. We are examining obviously funding 
streams available to us for the Olympics, and although there 
are clearly hoops that have to be hurdled and jumped through, 
the counterterrorism funding that is available to the Treasury 
Department has certainly been identified as a funding mechanism 
that will take into consideration the costs the Treasury 
bureaus are likely to incur.
    Now, because of all the things that are necessary to push 
the counterterrorism out the door, I could not say here today 
that it is a guarantee, but we are not looking to have the 
Olympics leave the agencies in the lurch further than they may 
already consider themselves in.
    Mr. Istook. Sure. And I can certainly appreciate the 
description you gave at the different planning sessions. It is 
kind of like you think maybe, like, students are getting 
together, and they are talking about this field trip that they 
are going to take together, and everyone else is planning what 
they are going to do, and you are sitting there saying, how can 
I afford to go?
    Mr. Sloan. Yeah.
    Mr. Istook. Right. I appreciate the significance of that.
    Let me ask about something that ties in. You mentioned, of 
course, that as part of the transition, basically you were 
told, well, do a flat line, adjust everything in order to 
create that. And we all recognize the time pressures that were 
more unusually tight than after even most elections. But 
identifying that in your case, at least, the budget was rushed, 
and you are saying, well, we can come back and fix some things 
when we review things for fiscal year 2003. We are still, of 
course, here in Congress working on fiscal year 2002 and are 
going to be working on it for several more months.
    Is there not any sort of internal process, and I am talking 
about something that is official with the sanction of OMB, that 
is saying, we recognize there are some things that we had to 
rush, and we want the chance to revisit them during this fiscal 
year 2002 consideration of the Congress because there is still 
certainly time? I am sure they would probably say the bottom 
line of the overall budget, talking about the entirety of the 
budget, has not changed, but here are some other internal 
adjustments within it. Should we expect to be receiving 
something as opposed to anything that we may wish to do would 
automatically be deemed something that conflicts with the 
administration's proposal as opposed to meshing with it? Is 
there any sort of internal review that way?
    Mr. Sloan. I am not sure what there is. I mean, to be 
honest, what the process was is that I was told what the budget 
was and then asked for what the impact was after the fact. So 
we have supplied information as to what the impact of this 
budget is, but we had very little input into how it got to 
where it is and why it was 4.2 instead of eight. So we gave 
responses afterwards of what the impacts were.
    I would certainly welcome the idea that the administration 
would be open to looking again at some of those impacts and 
seeing if there is not some way within the process that these 
matters could be looked at. I am trying to be a good trouper 
and not attack what has happened.
    I realize this is a difficult process with the new 
administration, but at the same time it would be very 
appropriate, as far as I am concerned, for us to have an 
opportunity to look at some of those issues again and resurface 
funding issues so that I do not have to be faced with some of 
the things I will have to tell my people in 2002.
    Mr. Istook. Certainly. And if we can, you know, have a 
process that makes any adjustments by consensus rather than by 
having Congress go one way and the administration go the other, 
it would certainly be better if we could do it by consensus, 
and that is why I am wondering if there is a process of making 
any amendment to the budget proposal so that we could know we 
are all together on--
    Mr. Sloan. I think it has been compounded by the fact that 
there have been too few people confirmed in leadership roles--
--
    Mr. Istook. Yes. I agree.
    Mr. Sloan [continuing]. In the department to try to work 
any of the issues through.
    Mr. Istook. I do not think this is a case of trying to 
point fingers and say, well, somebody did not do the things 
they should have. They had an extremely compressed time frame 
because of what happened after the last election. There is 
still exactly, as you say, only a very small number of the 
political appointees that have been nominated and confirmed. I 
realize that that affects the process.
    But my concern is making sure that we do it right as 
opposed to saying, well, we will have a chance to revisit it a 
year from now, because we are in the very stage of the process 
that is intended to be fine tuning and inquiring and making 
adjustments. That is natural, that is normal, and I would just 
like to see us all working together rather than putting it off 
for a year.
    Mr. Sloan. I would love to work with you on that.
    Mr. Istook. We will look forward to doing that. We have 
plenty of things for the record, of course, that I will submit 
to you, but I certainly appreciate it. It has been very 
insightful.
    Mr. Hoyer. Mr. Chairman, can I ask one last one?
    Mr. Istook. Absolutely.
    Mr. Hoyer. I want to ask one additional question. I have 
not had an opportunity to read your statement. But just in 
looking at it, ``ATF, I present your requested level of 
resources that maintains the strong foundation you have firmly 
established, while resources focus on personnel and technology, 
et cetera, et cetera.'' Then you say ``resources necessary 
resulting in the expansion of the focus of programs such as 
Project Exile and expansion of the youth-crime gun interdiction 
initiative.''
    Now, I asked you a question about the youth gun. What 
expansion are you referring to in this?
    Mr. Buckles. I think that might be referring to what the 
committee did last year.
    Mr. Hoyer. Oh, this is last year.
    Mr. Buckles. Right. I think I was just referring to setting 
the foundation of last year in this committee.
    Mr. Hoyer. What I read was, ``I present your requested 
level of resources that maintains the strong foundation you 
have firmly established.''
    Mr. Buckles. Right.
    Mr. Hoyer. The transition I made in the same paragraph was 
not as quick as you made, I see, in the paragraph, ``which last 
year provided us with the resources.''
    Mr. Buckles. That is right.
    Mr. Hoyer. Now, you presented us a budget that builds on 
that strong foundation. I want to ask you to rationalize with 
me----
    Mr. Buckles. This budget does not build on that foundation.
    Mr. Hoyer. Okay.
    Mr. Buckles. This budget would allow us to maintain that 
foundation.
    Mr. Hoyer. I am concerned about the morale at our law 
enforcement agencies in Treasury, because if they constantly 
get treated as stepchildren, they are going to think of 
themselves as stepchildren. They are not.
    Mr. Chairman, let me say, and not in a partisan way, 
because we have people on both sides of the aisle on this, but 
frankly, we on the appropriations committee see that there are 
needs that we do not meet. The proposition that we have debated 
during the course of tax bills, the reduction of taxes, is that 
we are collecting too much money. I am interested in that 
proposition.
    I am for a tax cut, but the fact is, in my opinion, we are 
not meeting all of our responsibilities. Why? Because we had 
constraints, then we had to constrain. In the labor and health 
committee, on which you and I serve, 50 percent of the children 
who are eligible for Head Start have no seats in Head Start. 
That is a very dramatic, I think, indication that there are 
places for additional resources, from my perspective.
    But here, Mr. Chairman, is an example where we have the 
Olympics being a specific, dramatic example of a need that is 
not funded that will have to be funded. So while we may be 
collecting more revenue than we need, I think the argument is 
how much? And what we tried to do in the debate between passing 
the tax bill first and then the budget after, at least on the 
first leg, as you recall, was that we really needed to 
determine, our committee and the budget committee, what our 
needs were to decide how much revenue we needed, and then base 
the tax cut on that reduction. I do not say that in a partisan 
sense. I say it in the sense that that is really how we ought 
to do our business.
    Now, there were some, obviously, who had the proposition 
that whatever revenues we receive, we will spend. I think, 
frankly, in a bipartisan way, we have shown restraint, whichis 
why we have the surplus. I think it has been a partnership. Each side 
would argue how much credit they deserve, but in any event, this 
budget, I think, is an indication that we need to make a determination 
to serve our people, the country, the safety of our country, and the 
business community that relies on the efficient, regulatory aspects of 
your business, that they can do their job that we expect of them in an 
efficient manner.
    So we will be discussing all of these issues, and we are 
going to have a long time between now and September and October 
when, I guess, ultimately we will adopt the appropriation 
bills. I look forward to working with the chairman to ensure 
that this agency has sufficient resources to do its job. Thank 
you, Mr. Chairman, for your kindness.
    Mr. Istook. Certainly, and, of course, I look forward to 
working with you and with everyone else. We know it is always a 
challenge because there are many variations, but there are 
still two functional approaches. One is to say, well, how much 
does it cost to do everything we want to do, and that is the 
amount it should be. Another approach is to say how much do we 
feel is available, and how much can we get for that. And then 
there are many variations between those.
    I think we have got challenges here, realizing, for 
example, in the private sector we see a lot of companies right 
now that are going through some contraction that just two years 
ago were going through expansion. And a year or two from now 
they may be going in the opposite direction. Again, they have 
the flexibility.
    Mr. Hoyer. What do you think about 10 years from now?
    Mr. Istook. Ten years from now, that is tough.
    Mr. Hoyer. My brother made me do that, Mr. Chairman.
    Mr. Istook. Well, now I find out that it was not a brother. 
It was a stepchild, you said. Okay. But, you know, having that 
flexibility, and it is very difficult within the federal 
government because you have certain things that are given to 
you that have the force of law. We are not as flexible as many 
corporate boards of directors in responding to those things, 
and that is a real special challenge.
    But things such as you were doing with the information 
technology, for example; every time we take a different 
approach and perhaps find other ways of doing it, that may be 
one of the ways out of the woods. I am not going to sit here 
and, you know, reach conclusions about what we may or may not 
be doing regarding ATF or any other aspect of the budget right 
now. But I think it is important that we try to provide the 
same sort of flexibility within the federal government rather 
than the rigid systems, the ridged practices, that so often 
lock us in so that then you are not able to do it.
    Just as a matter of law enforcement, there may be some 
things that from a law-enforcement perspective you may say, 
well, the decision is easy: We will do A rather than B. But 
since you have a mixed role, actually being a tax collector as 
well, being a regulator, you may say, but if I do my law 
enforcement job, then am I providing the level of regulation 
that I am required to do or the level of tax collection? That 
is part of the challenge sometimes when you have some rigid 
requirements.
    So having mused philosophically for a moment, like we 
established earlier, we will look forward to working with you, 
trying to find the ways to make sure the important needs are 
met, including not only the needs of the agency, but the needs 
of the American people that we know you work so hard to serve. 
Thank you for coming together, and we will stand adjourned.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]







                                            Wednesday, May 2, 2001.

        UNITED STATES SECRET SERVICE, DEPARTMENT OF THE TREASURY

                               WITNESSES

BRIAN L. STAFFORD, DIRECTOR, UNITED STATES SECRET SERVICE
JAMES F. SLOAN, ACTING UNDER SECRETARY FOR ENFORCEMENT
    Mr. Istook. Good morning. I am pleased to welcome again 
Acting Under Secretary for Enforcement James Sloan, the Secret 
Service director, Brian Stafford, as we are considering the 
fiscal year 2002 budget request for the U.S. Secret Service.
    It is always a fascinating name. I know that the Secret 
Service is not so secret anymore. Everybody knows about it, and 
it is because of a reputation hard earned and well deserved, a 
solid reputation, a reputation for outstanding investigative 
effort reflected in strong performance in combating 
counterfeiting and other financial crimes, as well as combating 
the continuing to emerge forms of cyber crime and cyber 
terrorism.
    I notice, Mr. Director, in your performance report for 
fiscal year 2002 the Service actually exceeded its targets 
regarding seizure of counterfeit currency, which is saying 
quite a lot considering the proliferation of the technology 
with personal computers and the ability to do that. I certainly 
myself walked into an office supply store recently and bought 
some of the check writing software for my own home system 
there, but I can imagine the perfidious uses to which different 
people can use it.
    The Secret Service, of course, enjoys the status of being 
the premier protective agency on the globe, widely respected 
for professionalism and thorough attention to key details.
    Support and advice in providing protection is sought by 
others from the Secret Service not only here, but also abroad. 
Here at home it makes its expertise available to schools and 
local law enforcement through the National Threat Assessment 
Center, and it consults with its counterparts and other 
executive branch agencies, as well as those in foreign 
governments.
    With the recent enactment into statute, the mission to 
provide security planning for national security special events, 
NSSEs as we may use the acronym, has developed into a mature 
program, which is seen, of course, in the ongoing work to 
prepare for the Winter Olympics of 2002 to be held in Salt Lake 
City. I know that will be one of the topics, as I mentioned to 
you, Mr. Director, that we will be getting into today.
    As one of our oldest law enforcement agencies and arguably 
the oldest one with an investigative mandate, there is a great 
tradition of professionalism and loyalty in the Secret Service. 
We have certainly tried within the Congress and certainly in 
this subcommittee to be supportive of the efforts to reduce the 
burdens of overtime and other pressures that we know if not 
unchecked could lead to poor morale and higher attrition rates 
amongst general agents and uniformed personnel.
    We certainly hope that we can continue progress to assure 
that the hard efforts of the agents are met at lest halfway and 
hopefully more with a reasonable compromise or better than a 
compromise when it comes to the quality of life conditions.
    Before I conclude, I should add my congratulations to 
Deputy Director Kevin Foley. I understand that after 21 years 
you will be departing to retire to the private sector later 
this month. I know that all of my colleagues want to express 
their appreciation and admiration for the work that you have 
done in the Service and wish you the best in the new endeavors 
you undertake.
    Director Stafford and Secretary Sloan, we look forward to 
hearing your testimony. My Ranking Member, Mr. Hoyer, is across 
the hall at the hearing with HHS Secretary Thompson. He will be 
coming in and out. I myself will be going over there at some 
times during the hearing as other Members arrive. I will 
briefly yield the chair to them when that time arrives.
    The attendance here today is expected to be in and out 
because there are multiple hearings underway, and subcommittee 
Members have to bounce back and forth sometimes to try to have 
the opportunity to consult with the witnesses in each of those. 
We will let Mr. Hoyer make his comments when he gets here.
    In the meantime, Mr. Stafford, of course you know that your 
testimony will be in the record in its entirety. I always 
encourage people to feel free to speak extemporaneously on the 
subject matter to help flush out what may not be in the lines 
of the written report.
    It is, of course, our practice to make sure that all the 
witnesses are sworn before testifying, so if you would, please?
    [Witnesses sworn.]
    Mr. Istook. Thank you. Mr. Stafford, we would be quite 
pleased to hear from you.
    Mr. Stafford. Thank you, Mr. Chairman. I am still trying to 
convince Mr. Foley to stay, so I am not sure that helped me at 
all with your congratulatory comments.
    Appearing with me here today are the seven assistant 
directors of the Secret Service, which I am very proud of, and 
also Kevin Foley, who has been with the Secret Service for 21 
years and with the DEA for five years before that, so he has 
served our country and the American people extremely well, and 
I want to take this opportunity to thank him.

                   FISCAL 2002 APPROPRIATION REQUEST

    It is a pleasure for me to be here today, Mr. Chairman, to 
speak to you about the fiscal year 2002 budget request. The 
Secret Service fiscal year 2002 funding request will advance 
our primary goals of protecting our leaders and reducing crimes 
against our nation's currency and financial systems.
    We currently have more permanent protectees than at any 
time in our 136 year history. Their travel has been 
unprecedented, putting considerable demands on Secret Service 
resources. Our protection activity has increased 43 percent 
since 1998.
    Furthermore, the threats and risks to our protectees exist 
in an increasingly sophisticated and mobile environment. 
Existence of these threats of terrorism prompted Congress to 
enact legislation designating the Secret Service as the federal 
government's lead agency for design, planning and 
implementation of security for national special security 
events.
    Our preparations for the Salt Lake City 2002 Winter 
Olympics are ongoing. We are developing a comprehensive 
counterterrorism security plan for all official venues of the 
Olympics. In conjunction with the security for the Olympic 
Games, the Secret Service is also responsible for the safety of 
all visiting foreign heads of state or government that will be 
in attendance. The Winter Olympics present a unique challenge 
to us, and we are working very hard to ensure that the games 
are not marred by terrorist attack or other security-related 
incident.
    Despite the heavy protection workload, the past year was 
also very productive for the Secret Service's investigative 
program. In fiscal year 2000, we closed a total of 18,611 
criminal cases and made 7,843 arrests. In the past five years, 
the Secret Service has made over 50,000 arrests related to our 
core investigative responsibilities, averting the potential 
loss to the banking and commercial credit industry of over $5 
billion.
    The Secret Service is confronting a technological 
transformation in criminal methodology and has adopted 
investigative methods to meet this new challenge. Our first 
line of defense in this effort is the electronic crimes special 
agent program. These agents are highly trained and are 
qualified as experts in the preservation and analysis of 
electronic evidence. They also provide expertise in the 
investigation of network intrusions and database thefts.
    The Secret Service has forged strong alliances with our 
private industry partners and promotes the task force approach 
in our field offices worldwide. This method allows us to tailor 
our investigative programs to the local community, thus 
maximizing favorable economic impact.

                      ELECTRONIC CRIMES TASK FORCE

    As an example, the New York electronic crimes task force 
begun by the Secret Service in 1995 represents an unprecedented 
regional confederation of law enforcement agencies, 
prosecutors, academia and private industry. This is a strategic 
alliance designed to pool competencies and resources to address 
electronic crimes.
    With over 250 members, this task force is the largest in 
the world and has had a positive impact on the local community. 
Given the extraordinary success and effectiveness of this task 
force, it is not surprising that some of its most avid 
supporters come from private industry.

                             COUNTERFEITING

    The Secret Service is also responding to the globalization 
of crime. Since the early 1980s, we have seen a sizeable 
increase in the production and distribution of counterfeit 
currency. Much of this activity has been linked to organized 
crime syndicates. In the past five years, the Secret Service, 
in cooperation with other law enforcement agencies, has 
recorded over 2,400 foreign counterfeit arrests and suppressed 
over 141 counterfeit plant operations.
    In addition, many nations have recently adopted the U.S. 
dollar as their base unit of currency. While dollarization does 
offer economic and political benefits, it also makes these 
countries vulnerable to the importation and distribution of 
counterfeit currency. In light of the proliferation of the U.S. 
dollar as the international currency of choice, the Secret 
Service will work to expand its reach throughout the world to 
guarantee the integrity of the currency of the United States.

           NATIONAL CENTER FOR MISSING AND EXPLOITED CHILDREN

    The Secret Service is very proud of its continuing 
commitment to the National Center for Missing and Exploited 
Children and will continue to provide technical and forensic 
support to further improve on the current 93 percent recovery 
rate of our nation's children.
    Computers and the internet have revolutionized the way that 
we communicate, entertain and learn. The significance of this 
has been recently applied to our partnership with the Boys and 
Girl Clubs of America. In support of this partnership, our New 
York field office and the New York area chapters of the Boys 
and Girls Clubs conducted the first cyber safety for kids 
seminar on January 30, 2001, at John Jay College in New York 
City. The seminar was attended by over 500 children, age 6 to 
16. The theme of the seminar focused on the prevention of on-
line victimization and instructions on where to go for help.

                   NATIONAL THREAT ASSESSMENT CENTER

    In furtherance of our protective intelligence mission and 
as a direct result of this subcommittee's support, our National 
Threat Assessment Center continues to expand its capabilities 
to provide consultation, training and research in areas of 
targeted violence. The Center's mission focuses on a broad 
spectrum of threat assessment and targeted violence pertinent 
to the Secret Service's, Protective Mission, as well as the 
public safety interests associated with such social problems as 
school violence, workplace violence and threats to public 
figures.
    Mr. Chairman, I am extremely proud to represent an 
organization comprised of some of the most talented and 
dedicated men and women in all of government. In both the 
protection and investigative arenas, the successes we have 
achieved can be credited to the personnel that we are so 
fortunate to have attracted and retained.
    Since becoming director, I have made it my priority to 
improve the quality of life of our personnel. To that end, for 
the past two years you have supported us in reversing the 
critical personnel shortage within the Secret Service resulting 
from mandatory workload increases.
    I am pleased to report we are in the process of adding 
about two-thirds of the additional staffing identified by the 
interagency working group. I would also like to express my 
gratitude to this subcommittee for supplying pay reform for our 
Uniformed Division Personnel.
    Mr. Chairman, on behalf of the men and women of the Secret 
Service, I want to thank you, the subcommittee and the staff 
for your ongoing support.
    I will be happy to answer any of your questions.
    [The information follows:]

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    Mr. Istook. Thank you very much, Mr. Stafford.
    Is it correct, Mr. Sloan, you did not have any formal 
statements today?
    Mr. Sloan. That is correct, Mr. Chairman, in light of the 
fact that you have also accepted my full testimony at the 
beginning of these proceedings.
    Mr. Istook. Certainly. I JUST wanted to make sure we were 
not cutting you out of any opportunity.
    Mr. Sloan. No, sir.
    Mr. Istook. Thank you.
    Let me start with one issue that I know is mentioned a lot 
by a number of people, and that is the special mission that the 
Secret Service has in regard to the forthcoming Winter Olympics 
in 2002 to be held in and around Salt Lake City, Utah.

                           PROTECTIVE PROGRAM

    Director Stafford, as you know, there is no specific item 
in the proposed budget from the Administration for the expenses 
of that. I know that they are significant expenses, which would 
be a challenge to try to absorb through the budget.
    Can we start perhaps by having you detail what the 
anticipated extra expenses involving the Secret Service are to 
be and what is the potential for finding those funds from any 
place else within your budget unless there is some sort of 
special allocation for that?
    Mr. Stafford. Mr. Chairman, let me start out with the 
potential for finding it in our budget. We could not absorb 
that. It is too much money.
    We are going to need approximately $19.5 million for the 
Secret Service this year to satisfy our mandate to design, plan 
and implement a security plan at the 2002 Winter Olympics. That 
amount of money we could not absorb within our existing budget.
    Mr. Istook. Generally speaking, and I realize we do not 
want to get into security details that are not, you know, 
proper for a public session right now, but basically what are 
the components of that figure that are the most expensive? What 
is driving that figure?
    Mr. Stafford. Most of that are for things that surround our 
people that we will have to bring in to support us for the 27 
days the Olympics are going on.
    There have been a lot of conversations for probably the 
past 18 months to two years about the funding mechanism not 
just for the Olympics, but for any national special security 
event that is designated by the President. That is a bit 
unsettling for us in that no mechanism has been put in place.
    In the past, we have either absorbed the cost, or we have 
gone in for a supplemental later to recoup the money that we 
spent, but we have never done anything and had this much money 
that we would have to absorb. We could not do that.
    Mr. Istook. Let us see now. In the prior Olympics that were 
held in this country, you have really had the particular 
assignment that you have now as far as being in charge of 
overall security arrangements.
    Mr. Stafford. That is correct. This will be a first. In 
prior Olympics, what the Secret Service involvement has been is 
that we have gone in with the President or the Vice-President 
or some foreign heads of state or government that we are 
required to protect and carved out and upgrade the security for 
the periods of time that we are there, and then we leave.
    This one is very different in that it has been designated a 
national special security event, which does bring in the Secret 
Service now by law on the front end to design, plan and 
implement it. It does not make any difference whether there is 
a protectee there or not now.
    We have been there for almost two years now in the planning 
stages, and we approach this as we approach any of our 
responsibilities in a very comprehensive manner. The funding 
again is a problem and a concern to us as to how that will 
unfold.
    Mr. Istook. As I said, I do not want to go too far in a 
public session on some things relating to security, but I think 
it is important to have a record.
    If you can give us some idea of, you know, what the ramp up 
has been in terms of personnel as far as the positioning of 
people or temporary assignments of people during these past two 
years and during the time and, of course, during the event 
itself.

                           PROTECTIVE PROGRAM

    Mr. Stafford. We are talking specifically about the 
Olympics?
    Mr. Istook. About the Olympics. Correct.
    Mr. Stafford. Again, I would want to stay away from the 
numbers. I would be happy to talk about numbers in executive 
session with you.
    There has actually been a ramp down rather than a ramp up. 
When we originally looked at this, the numbers were quite a bit 
higher. We have looked at every efficiency we can possibly look 
at. We continue to have efficiency reviews. We think we are 
about where we need to be on the numbers.
    Mr. Istook. For the benefit of the Members of the 
subcommittee, if there is interest in doing so we can always 
schedule some sort of executive session if necessary to dig 
into details that would be sensitive for a public session on 
that.
    I want to go into that further, but Mr. Hoyer has had the 
opportunity to arrive from the other hearing. I do not want to 
go too far without giving him his opportunity to make an 
opening statement and have his first round of questions.
    Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I had come in 
earlier and told Director Stafford and Secretary Sloan that I 
would be across the hall with Secretary Thompson, but I 
appreciate your giving me this opportunity.
    I, of course, want to welcome the director and the 
secretary and tell the director how pleased I am, and I think 
most people are--everybody, I think--with your leadership and 
with the extraordinary organization that you lead.
    The mission of the Secret Service is obviously critical in 
protecting the President, Vice-President, and visiting heads of 
state. The Service helps to safeguard our financial system as 
well, which most people probably do not know about.
    Over the last several years, the Service's mission has 
expanded, as you know, Mr. Chairman, into other critical areas 
such as providing leadership in the field of threat assessment. 
I appreciate their participation in that with some of our 
educational leaders to figure at how to keep our schools safer. 
Most people would not think that is the Secret Service's 
bailiwick, but obviously the Secret Service has real expertise 
in threat assessment as to who might be of danger to the 
President, to the Vice-President and to others and as well who 
might pose a threat in our communities.
    Providing assistance in matters involving missing and 
sexually exploited children is a critical area of concern in 
our society. Designing, planning and implementing security for 
national security events, a new responsibility, but a critical 
responsibility as our concern of terrorism rises.
    Threats that the Secret Service deal with every day, be it 
computer financial fraud or threats against the President, are 
becoming clearly more complex. That is why I am so concerned 
with the President's fiscal year 2002 request for the Service.
    The President has requested $860 million. No funding is 
requested to complete the critical work force retention 
initiative about which we have talked so much in previous 
hearings. The budget proposes that the Secret Service absorb 
$14 million of inflationary costs. That cannot be done and 
maintain levels of services that are expected, in my opinion, 
by the President and by the Congress.
    Perhaps most troubling, however, is the budget does not 
include an increase to fund the Winter Olympics. I know, Mr. 
Chairman, you have referenced that as well; an event that was 
designated as a special security event almost two years ago. 
This is not an unanticipated expense. It is an expense that is 
critical and was and should have been budgeted for.
    The lack of funding for the Winter Olympics is particularly 
glaring, given the increased request of the Secret Service's 
NSSE partners, the FBI. The FBI's budget was increased by eight 
percent and includes an increase of $12 million to cover the 
Olympic cost.
    Mr. Chairman, I know you share my concern about these 
shortfalls. We cannot allow Secret Service activities to be 
eroded or to be undermined. I look forward to working with you 
to ensure appropriate funding for the critical activities.
    Mr. Director, I appreciate again the leadership that you 
are showing to the men and women of the Secret Service and also 
your very effective work with the Congress on both sides of the 
aisle towards insuring the most effective Secret Service we can 
have.
    Thank you very much, Mr. Chairman, for the opportunity to 
make an opening statement.
    Mr. Istook. Thank you, Mr. Hoyer. I wanted to extend the 
opportunity for your first round of questions now if you are 
prepared for it.
    Mr. Hoyer. I will defer to you, Mr. Chairman.
    Mr. Istook. Okay. We will come back to you on that.
    Mr. Hoyer. Thank you.
    Mr. Istook. Mr. Sweeney.
    Mr. Sweeney. Thank you, Mr. Chairman. I would like to start 
by associating myself with both your remarks and the Ranking 
Member's remarks.
    Welcome, Under Secretary Sloan and Director Stafford. 
Director Stafford, I share in I think the entire panel's esteem 
for you. You are a symbol of someone who has been forced to do 
more with less, and you have done it. I greatly admire the work 
that you have done with the Secret Service, and I am hopeful 
that we can be helpful in getting you to a better place than 
where you stand now.
    I would like to talk about and ask a couple of questions so 
for the record we are able to establish some what I think are 
pertinent facts in terms of what you face, the challenges you 
face.
    Work force balancing is a major issue I think obviously, 
given the realities you are facing on the budgetary end. I am 
aware of what are exceedingly unacceptable levels of overtime 
within the career levels of the agents within the agency. I 
think it is greater than 90 hours a month per agent or 
something. You can correct me on that. I commend your efforts 
in recruitment and retention.
    I want to ask a couple of questions on that. If you could 
talk a little bit or speak a little bit more in depth to us 
about the funding required to continue your three year effort?
    Mr. Stafford. The first thing I would like to say about 
that is when I became director two years ago, the first thing I 
spoke to and my highest priority, and it continues to be, are 
our people. Our people are very special. They work very hard. 
That is our culture, but the 90 hours a month of overtime is 
too much. We are pushing them too hard.
    As a result of being able to hire about 70 percent of the 
required numbers we have hired, I think--I know--that we will 
later this year and surely next year a reduction just by virtue 
of the fact that we were able to hire about 70 percent of these 
people. Those numbers we project will be down into the eighties 
of overtime, but we will never reach the goal of 62 hours of 
overtime, which we think is reasonable.
    That was a 1994 figure, and that is the goal that we are 
trying to retain. To do that, we feel that we need to hire at 
least another 200 agents, and that is what we will be looking 
for your support to do, to hire those numbers.
    Mr. Sweeney. I would imagine, and you mentioned in your 
testimony, that the changes in technology and the changes in 
the world, every employer faces new challenges in terms of what 
skill levels are required. You, I think more acutely face that, 
compounded by the fact that you need to recruit 200 more 
agents, because cyber crime and cyber terrorism are realities, 
and those skill levels have risen exponentially as well.

                               CYBERCRIME

    What I would like to ask is in your opinion, do you and do 
other law enforcement agencies have the necessary technology to 
protect information resources and to keep up with the cyber 
crime, the cyber criminals? What improvements are needed?
    Given the highly technical nature of the field, how is it 
affecting your investigation? How is it affecting your 
recruitments?

               WORKFORCE RETENTION AND WORKLOAD BALANCING

    Mr. Stafford. Speaking to recruitment first, we are doing 
extremely well there. I mean, there are a lot of people who did 
not think we could hire the numbers we did in the short period 
of time that we did. We were successful with that. We are right 
at where we need to be hiring. We have over 1,000 agents right 
now on a shelf ready to be hired, extremely qualified people. 
The recruitment has not been an issue for us.
    Have we lost people to the private industry, you know, that 
can pay them more money? We have, but we have not lost the 
numbers that some others have lost. Can we keep up? 
Emphatically no. Nobody can keep up in law enforcement unless 
you partner with private industry, state, federal and local law 
enforcement agencies, which is what we have done.

                      ELECTRONIC CRIMES TASK FORCE

    There is a model that we have established in New York. It 
is called the New York Electronic Crimes Task Force that 
Imentioned in my opening comments. It is the largest in the world. 
There are 250 members. It is comprised of law enforcement, prosecutors, 
academia and private industry, and they have had tremendous success up 
there. That is the answer. That is what we need to go with nationwide, 
and again that is what we will be looking for your support to do.

                         INFORMATION TECHNOLOGY

    The IT situation for us is bleak. The $14 million that was 
mentioned earlier about the non-pay MCLs, we will have to 
absorb that. That will be absorbed again through people. We 
will have to cancel a lot of transfers. It will be taking the 
space, and the additional people that we have been able to get 
hired, will not have any place. It will impact on our IT 
investment.
    Right now, I think we are ranked, and Under Secretary Sloan 
might be able to correct me on this, but I think we are ranked 
thirteenth out of fourteenth in Treasury in IT investment, 
which is not very good. It will continue to get worse if we do 
not receive that kind of support.
    Mr. Sweeney. I applaud you again for your efforts with the 
New York task force. This is a pretty good round of questioning 
for you, is it not?
    Mr. Stafford. Thank you.
    Mr. Sweeney. Outside of the New York task force, is there 
the capacity with other local law enforcement? Are there 
significant gaps in the level of technical expertise? Do you 
see that as a broad national problem?
    Mr. Stafford. There is no doubt it is a broad national 
problem, but again we addressed it early on as a result of our 
financial crimes responsibilities.
    As Congressman Hoyer mentioned, our protective 
responsibilities often times overshadow what we do in the 
investigative world, but we have been around since 1865, and we 
were created for investigative reasons. We are extremely good 
at it.

                ELECTRONIC CRIMES SPECIAL AGENT PROGRAM

    What we have established is an electronic crimes special 
agent program. We have about 144 special agents that are 
trained as experts in the evaluation of electronic evidence. 
Those agents are positioned in every one of our field offices 
worldwide, so what we have is a mobile lab. That is the way we 
approach electronic crimes, financial crimes.
    Those people are used daily by state and local law 
enforcement officials. They are used daily by the National 
Center for the Missing and Exploited Children to help them with 
children that are taken. That is our approach. We think it is 
proactive. We think it is the way to go, and we think we do 
have a model in New York that we want to expand about five or 
six more places.

                         INVESTIGATIVE PROGRAM

    Mr. Sweeney. I want to switch gears, but I think there is a 
corollary here. It relates to civil asset forfeiture of the 
Reform Act of 2000. I would like to ask broadly how it has 
affected your agency.
    I think it is going to take some time for us to have a real 
sense of how it has affected law enforcement generally, but I 
would like to get a sense from you on how it has affected your 
agency's ability to fight crime, especially organized crime.
    The second question would be have you seen a reduction of 
seizures already or not, and, if you have, how has that 
hampered your ability to secure adequate funding to continue 
the efforts that you have?
    Mr. Stafford. Well, for us it is a bit different because we 
do not have a line item for investigative jurisdictions. We 
never have. Funding for investigations, including cyber crime, 
comes from the Treasury forfeiture fund.
    Obviously if that is reduced or affected in some way, yes, 
that will drastically reduce what we can do investigatively and 
also as to forfeitures.
    Mr. Sweeney. Thank you, Director and Under Secretary.
    Mr. Istook. Thank you, Mr. Sweeney.
    Mr. Hoyer.

               WORKFORCE RETENTION AND WORKLOAD BALANCING

    Mr. Hoyer. Thank you very much, Mr. Chairman.
    I am going to ask some questions, near the end of the 
hearing regarding national security events because I am 
interested in their designation, but I want to ask you about 
work force retention first.
    As I understand it, the average last calendar year was 90 
hours of overtime per agent.
    Mr. Stafford. Actually, it was over that. If you take the 
field agents, excluding supervisors and those in their first 
year on the job, it was a tad over 90. If you take the agents 
that are primarily assigned to protection, it is probably 91.
    Mr. Hoyer. Okay. Now, you indicated you thought that as a 
result of new hires we could get that down into the eighties?
    Mr. Stafford. That is our projection, all things being 
equal. Again, I qualify that because of what drives the 
protection side of the house.
    Right now we have 20 full-time protectees, which is more 
than we have ever had in our history. In July we will be down 
to 17 full-time protectees, which is still more than we have 
ever had in our history. They are all fairly active.
    We do not have a true picture yet of the current 
Administration, the current President, as to how active he and 
the First Lady will be, so the projection is based on 
historical numbers and nothing else.
    If you look at the numbers we have been able to hire, and 
again we have hired approximately 70 percent of what we need. 
Once those agents are trained, and some of them are coming out 
now. The rest of them will come out by the end of this year and 
the beginning of next year. We do predict that we will be able 
to get that overtime down somewhere into the mid eighties. 
Again, that is too much.
    Mr. Hoyer. What is your goal?
    Mr. Stafford. Our goal is 62 hours of overtime per month, 
and we picked that for a couple of reasons. One, we think it is 
reasonable. Two, that is where we were in 1994.
    Mr. Hoyer. It still, does it not, puts quite a strain on 
families? Sixty-two hours a month. You are talking 15 to 17 a 
week.
    Mr. Stafford. Well, it does, but again we do a tremendous 
job of preparing families for what is in store for them when 
you assume a position with the Secret Service. They know that 
there will be a lot of overtime hours, and we expect that of 
our people.
    Mr. Hoyer. To get to 62, what would we need to do in terms 
of people and budget?
    Mr. Stafford. Again, we projected in the original study, 
which is a three year hiring plan of which this is the third 
year, we would need now approximately 204 additional agents and 
approximately 70 support people to go along with them, which 
amounts to about $32 million.
    Additionally, you would need someplace for them to sit, and 
that is probably about another $13 million as far as 
renovations and expansions of some of our field offices.

               WORKFORCE RETENTION AND WORKLOAD BALANCING

    Mr. Hoyer. So in order to attain the objective of 62 hours 
per month overtime average, you would need $45 million 
approximately, $32 million for personnel and----
    Mr. Stafford. That is correct.
    Mr. Hoyer. That is agents and support personnel, and then 
$13 million additional for space requirements.
    Mr. Stafford. That is correct, Congressman. The only thing 
I have not commented on is the uniformed division. As you 
know----
    Mr. Hoyer. I will get to that.
    Mr. Stafford. Okay. I will wait.
    Mr. Hoyer. We could do it now to be consistent, but let me 
get to it.
    Now, how much of the $45 million is provided for in the 
budget now?
    Mr. Stafford. The 2002 budget?
    Mr. Hoyer. Zero?
    Mr. Stafford. Zero.
    Mr. Hoyer. In that absence of additional funding, what do 
you think will be your overtime levels? You mentioned the 
eighties.
    Mr. Stafford. We are projecting mid eighties. It will stay 
in the mid to low eighties until these 500 or so agents are all 
trained and in field offices.
    Mr. Hoyer. And when do you expect that to happen?
    Mr. Stafford. Probably by the beginning of mid fiscal year 
2002 we should have everybody, you know, out of the pipeline.
    Mr. Hoyer. But essentially then, as I understand it, we 
will be at least 33 percent over the goal?
    Mr. Stafford. Correct.
    Mr. Hoyer. Now, what is the impact of maintaining this kind 
of overtime over a prolonged time?
    Mr. Stafford. Well, there are a number of things. I mean, 
first and foremost is operationally. You know, people are 
tired, and that is not good. You know, it is business oriented. 
You cannot have them tired.
    Secondly, we are losing too many agents. The attrition is 
too high. Again, if you go back to 1994, we lost nine agents 
through attrition. Now we are averaging 55 agents through 
attrition. That is a 500 percent increase.
    Mr. Hoyer. 1995 equaled nine, and you say----
    Mr. Stafford. 1994 equaled nine. Now we are averaging about 
55 a year that we lose.
    We do exit interviews with all those agents, and basically 
what they tell us is they do not have a life. They are never 
home. They work too much overtime. There are other 
opportunities out there in other law enforcement agencies that 
they do not experience that kind of lifestyle.
    Mr. Hoyer. So as I understand it, we have a 600 percent 
increase in attrition.
    Mr. Stafford. Five hundred.
    Mr. Hoyer. Okay. Fifty-five. Fifty-four.
    Mr. Stafford. Right around there.
    Mr. Hoyer. In any event, the----
    Mr. Stafford. I will take the 600. That is fine.
    Mr. Hoyer. Whatever. It is too high whether it is 500 or--
--
    The issue then is how much do we spend to train an agent 
and get an agent on board in this position? How much does it 
cost us to do that?
    Mr. Stafford. I think the book value, and Dan or Larry can 
correct me, is around $240,000 to bring an agent on board.
    Mr. Hoyer. So that every time we lose those 55 people, if 
it is $250,000 obviously we are talking about losing about $10 
million to $12 million to $15 million or $14 million in 
training.
    Mr. Stafford. But again, and I am very fiscally responsible 
and sensitive to that, but, more importantly, I mean, these 
agents are, you know, four to six year agents that you cannot 
replace the kind of experiences we have given them and so some 
of them are our best people that are having to go.
    We are very young now, as most federal law enforcement 
agencies are. I mean, most of our agents now have less than 
five years on the job, so when you start losing the five and 
six and seven year agents because of quality of life issues, it 
is a huge problem for us.
    Mr. Hoyer. Effectively, what you are saying is although it 
is $11 million in training when those folks walk out the door, 
what you are losing in addition to that is the six years' 
experience that is irreplaceable----
    Mr. Stafford. Correct.
    Mr. Hoyer [continuing]. At any cost.
    Mr. Stafford. Correct.
    Mr. Hoyer. I understand.
    Do I have a little more time? Thank you.

               WORKFORCE RETENTION AND WORKLOAD BALANCING

    Let us go to the uniformed division.
    Mr. Stafford. All right.
    Mr. Hoyer. First of all, why do you not tell the committee 
what does the Uniformed Division do?
    Mr. Stafford. Sure. The uniformed division has been part of 
the Secret Service since 1932. They were created in 1922 as 
mostly metropolitan police officers. From 1922 to 1932, they 
actually reported directly to the military aid at the White 
House. In 1932, they came under the Secret Service and have 
been ever since. It is actually a police department with a 
chief and a ranking structure similar to a police department. 
The chief answers to Assistant Director Danny Spriggs of 
Protective Operations.
    They have a tremendous responsibility in the Secret 
Service. You see them at the White House, at the Naval 
Observatory, at the 463 foreign missions that they safeguard in 
Washington, D.C. They also have tactical responsibilities for 
the President.
    Our counter snipers, which are the best in the world, come 
from the uniformed division. Our canine officers, which are the 
best in the world, come from the uniformed division. The 
magnetometer officers that travel wherever the President does 
come from the uniformed division ranks, so they are a very 
large, important component of the Secret Service.
    They, too, have some lifestyle issues, some quality of life 
issues and concerns. We did a similar study in their ranks as 
we did with the agents.
    Mr. Hoyer. What are the overtime levels for the Uniformed 
Division?
    Mr. Stafford. It is not so much the overtime levels, and I 
would have to get you those figures later because it depends 
on--it is very different depending on where you are assigned.
    The problem with the Uniformed Division is that, one, we 
have to force them to work a lot of overtime. Two, we have to 
force them to work a lot of days off. Three, it is very 
difficult to give them vacation time when they want it.
    The positive thing that has happened, as you are aware,and 
we appreciate the committee's support, is a pay raise for the Uniformed 
Division, which will go into effect actually July of this year, so we 
are hoping that that will help out.
    Mr. Hoyer. I have other questions, Mr. Chairman, but I know 
I have taken significant time. I will hold them until the next 
round.
    Mr. Sweeney [presiding]. Thank you, Mr. Hoyer.
    I have a follow-up question to Mr. Hoyer's last round of 
questioning. You mentioned that agents in the Uniformed 
Division are effectively forced into overtime depending on the 
coverage that is needed. How do agents become members of the 
Uniformed Division?
    Mr. Stafford. Normally it is Uniformed Division that become 
the agents. We have two categories, the 1811 series, which are 
the special agents, and then we have the Uniformed Division 
officers, so there are two different series. The agents are 
about 2,800 strong. The Uniformed Division are about 1,100 
strong.
    Mr. Sweeney. I see. I would turn to the gentleman----
    Mr. Hoyer. Could I ask just a follow-up to that since I do 
not know where Mr. Sherwood is going to go?
    Let me ask you something. Are there resources in this 
budget to begin hiring new uniformed folks so that we can get 
some of the problems in terms of vacation time and working at 
times that they are not----
    Mr. Stafford. No. No.
    Mr. Hoyer. Thank you.
    Thank you, Mr. Chairman.
    Mr. Sweeney. The gentleman from Pennsylvania, Mr. Sherwood?
    Mr. Sherwood. Thank you, Mr. Chairman.
    Gentlemen, good morning. I am always glad to see you, and 
we appreciate very much what you do. It is easy to be very 
enthused on this committee about the quality of your agency.
    We have developed pretty carefully here your shortages in 
manpower, but I also hear that though we are very short, you 
are picking up new agents, and you are growing at an 
interesting rate. I believe it is hard to put more people on at 
a given time. You have to sort of work them in.

                         INVESTIGATIVE PROGRAM

    To take the other track and go over to the computer fraud 
area, the security there, I am very concerned if we have enough 
of the right type of hardware. I know you have very, very 
talented people, but as this stuff changes all the time I see 
that there is no special account for that.
    How are we managing to keep our hardware up to date in this 
increasingly complex field?
    Mr. Stafford. Again, it is very difficult, as I mentioned 
earlier. We do not have a line item for that or any of our 
investigative responsibilities. Most of the money comes from 
Treasury forfeiture funds for that.
    As far as keeping abreast of where we need to be, we do 
that in many ways; through private industry, which I mentioned 
earlier, the New York electronic crimes task force and others 
like it. We also have agents that actually are assigned to 
Carnegie Mellon. There is a think tank at Carnegie Mellon that 
has been there since 1988. All they do is look at 
vulnerability, software vulnerabilities, hardware 
vulnerabilities, and we stay very much on top of that.
    Now, as far as having the funds to follow through, 
sometimes that is very difficult, particularly when you run 
into situations that you have to absorb a particular issue, you 
know, the $14 million or almost $14 million in non-pay MCLs. 
Most of that comes out of people things. It will come out of IT 
initiatives that we, you know, hope to go forward with.
    Mr. Sherwood. Should there be a dedicated account to ensure 
that we keep track of that? I think if we do not have a line 
item for IT, it would be easy--like the theory of deferred 
maintenance, it gets worse and worse. It would be easy to put 
you in a hole there.
    Mr. Stafford. I would be very happy to follow-up on that 
line item recommendation, and I think we do need that.
    Mr. Sherwood. Thank you very much.
    Mr. Sweeney. Thank you, Mr. Sherwood.
    The gentlelady from Florida, Mrs. Meek?
    Mrs. Meek. Good morning.
    Mr. Stafford. Good morning, Congresswoman Meek.
    Mrs. Meek. Director Stafford and Under Secretary Sloan, I 
have a great deal of respect for the Secret Service, and so 
does the American public. We do not know as much about it all 
the time as we would like to, but we know that it is the best 
that law enforcement can bring on the federal level.
    I think the organization is outstanding with your 
protection, your investigative, in the face of a lot of things, 
criminal and whatever. Your agency is there to work for it and 
for the people under you. In my opinion, the Secret Service is 
overworked and underpaid.
    As I read through all the things that you are doing and 
things that you are trying to cover, I think that this Congress 
should look a little bit more closely at you as they have at 
some other agencies, especially the military. I am hoping that 
this committee will look very strongly at that and, of course, 
the Administration as well.

                                LAWSUIT

    I am going to spend my time this morning trying to get an 
update on the status of the lawsuit that I talked about in the 
last meeting of this group. It was brought in the Federal Court 
on May 3 by certain African-American agents in the Secret 
Service. They claimed racial discrimination with regards to 
promotions, evaluations, firing, hiring, testing, discipline, 
awards and bonuses and the like.
    Now, this is a matter you and I and your staff have 
discussed, but you did not address it in your written 
testimony. I addressed this subject with you at last year's 
hearing when this complaint was still in the EEO process before 
a case could be filed in Federal Court.
    The Federal Court has received quite a bit of media 
attention since this has happened. Articles have appeared in 
the Washington Post. Two articles have appeared in the 
Washington Post, which without the inside information one would 
be led to say that all of this is true.
    I think that I know that all these charges are not true, 
and I know that the fact that it has been charged is not true, 
understanding in this day and age many people become 
disgruntled or maybe unhappy about something and can always 
bring some kind of suit or some other means of attacking the 
agency.
    I have seen too many situations in law enforcement agencies 
such as the ATF and the FBI where racial discrimination has 
been proven. It has been alleged, and it came out to be the 
truth. I cannot presume that all of these racial charges are 
baseless because they may not be so in light of what has 
happened in the past.
    I know this is challenging to you, and no person of 
goodwill wants to be accused personally. That is not what this 
is. This is an accusation against the system. That iswhere my 
questions lead, yet we must face the fact that a lawsuit of this nature 
is challenging for the plaintiffs as well. It does not put anyone up 
high on management's call to have this kind of lawsuit.
    I believe that these claims challenge the credibility of 
the organization, and if the organization does not 
satisfactorily address these claims it can erode the high 
feeling, the high public confidence that people have in the 
Secret Service.
    If you could address this publicly for me as short and 
succinctly as you can, and you have given written testimony on 
this, too. Would you give the committee quickly the nature of 
the charges against the agency and your response and tell us 
whatever you are prepared to say publicly about this matter?
    If you do not feel too good about talking about it 
publicly, say what you can to educate the committee. If not, 
they are apt to believe what they read in the Washington Post.
    Mr. Stafford. Well, Mrs. Meek, I hope they do not because 
much of what you read there is not very accurate. I do not mind 
talking in public about this at all, as you know, because I do 
want the truth to get out.
    Unfortunately, our chief counsel is here with me and will 
start throwing things at me depending on what I do say because 
it is in litigation. It is in Federal Court, as you have 
pointed out.
    The status is we have asked for or we have filed a motion 
for dismissal. We filed that last December. We are still 
awaiting the Judge's ruling. The allegations, as you have 
pointed out, are for discrimination. There have been four 
current agents and six former agents are the plaintiffs in this 
case. There has been a lot of misconception about that. I have 
heard everything from 50 to 250 agents. None of that is 
accurate. There are four current agents and six former agents 
who are the plaintiffs. That will minimize those numbers.

                                LAWSUIT

    As you know and as I told you last year and I told you in 
two other sessions we have had, I am dismayed by these 
allegations because that is not what we are about. The Secret 
Service has fair hiring practices, fair promotion practices.
    I have seven assistant directors in the Secret Service that 
make recommendations to me as to who we promote within the 
Secret Service. Of those seven assistant directors, and all are 
here today, two are African-American, one is female, so three 
of the seven are women or minorities.
    Additionally, our senior executive service positions, of 
which we have 36 in the agent ranks, 11 of those 36 are 
occupied by women or minorities, and 17 percent are African-
American.
    If you look at the article, since you brought up the Post, 
that I read in the Post last week, it was in the Federal Diary. 
It says Diversity Makes Headway in Senior Executive Service 
Ranks. It says here that African-Americans made headway in the 
1990s from 4.6 to 7.8 percent in senior executive service 
ranks. The Secret Service figures are double that.
    So can we do a better job? Sure, we can. Are we doing a 
good job compared to the rest of the government? I think we 
are.
    Mrs. Meek. Is that why you did not settle this case with 
these agents who brought the claim?
    Mr. Stafford. No. I did not settle it because there is 
nothing to settle. In our situation, we have four agents that 
feel that they were not promoted on the time line that they 
should be promoted on. That is unfortunate. We have a lot of 
agents that feel that way.
    Unfortunately, we have a lot of agents every time we 
promote people that go away and feel bad that they were not 
promoted. That is a situation we live with.
    Mrs. Meek. I was going to ask you about your point system. 
These agents appear to contend that the Secret Service 
promotion system is a sham because the elaborate point system 
used to rank agents for advancement is ultimately disregarded.
    They are saying that the point system identifies the 30 
highest rated applicants for each promotion, but that a group 
of top Secret Service officials actually make the promotion 
decision and that their decisions frequently bear no relation 
to the point system.
    Does this fairly characterize the role of the point system 
in the Secret Service? If not, why not?
    Mr. Stafford. No, it does not because there are a few 
things they conveniently leave out there. It is not that you 
can only look at the top 30. You can actually look at in some 
cases the top 100 candidates. You cannot go beyond that.
    Recommendations come from the appropriate assistant 
director to the other seven assistant directors. They 
methodically review every promotion. Again, as I pointed out 
earlier, this is not--I have heard that group referred to as 
the good ole boy network. Well, in that good ole boy network we 
happen to have the seven, the two African-Americans and one 
female, so if that is the definition of a good ole boy network, 
you know, that is it.
    They methodically look at every promotion that we make, and 
then they make recommendations to me based on those that are 
eligible.
    Mrs. Meek. One more dimension of my question. What about 
the fact that you have minority promotions?
    As you have said in your testimony and in the documents 
that you have shown me, the information is that in the minority 
promotions that the agents have not yet served enough time in a 
particular grade level to qualify for a promotion. Is that 
correct? If so, would you elaborate?
    Mr. Stafford. First of all, what you are referring to again 
is I think one of the articles, which again they conveniently 
left out information. I think they have portrayed us as having 
200 and some odd African-Americans in the Secret Service and 
only promoting a very few of them from GS-13s to GS-14s. I 
think it was somewhere around four percent.
    Again, what they left out was that of those 200 and some 
odd African-Americans there were only 36 that were even 
eligible to promote based on a time requirement that everybody 
has to serve regardless of what your race is.
    Secondly, of those 36, only 16 elected to be involved in 
the process. Of those 16, eight of those 16 were promoted, so 
they kind of left that part out of those articles.
    Mrs. Meek. One concern, however, is a problem in the system 
in terms of bringing minorities in. They cannot be promoted 
unless they are there, and ultimately in the end it appears 
that they have not yet served enough time at a particular 
level. It is the same effect.
    Mr. Stafford. I agree. We need to actively seek out 
minorities. We have a diversity program that we have had since 
1988. We have mandatory minority conferences. Lastyear, we 
spent $240,000 on recruiting. Much of that was for magazines in 
colleges that are specific to minorities.
    Again, I have no excuses for that at all. I mean, we are 
doing the best job that we can to find the best qualified 
people, and we have very fair hiring and very fair promotion 
practices. That is why I have not, nor will I, settle that 
case.
    Mrs. Meek. Mr. Director, do you feel that the minority 
employees that you have in your jurisdiction are satisfied and 
happy with the system, the promotion system, the system within 
your organization? Are they happy with it?
    Mr. Stafford. I think. I think, yes. As I mentioned 
earlier, every time we promote people there is only one person 
who can go into the position. The rest go away unhappy, 
regardless of who they are, so at times there are some unhappy 
people because they are not promoted. That is unfortunate.
    We have, as you have pointed out, and I thank you for doing 
that, very unique, very special and very competitive people, 
and it is difficult sometimes to get promoted. You have to work 
very hard to do that. Unfortunately, when somebody is not 
promoted, particularly on a time line that they think they 
should, they go away not very happy, but usually that passes 
and they get back to work, and eventually they are promoted.
    Mrs. Meek. Thank you, Director.
    Mr. Istook [presiding]. Thank you, Mrs. Meek.
    Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    I want to welcome our witnesses here today and appreciate 
your appearing before us.

                             COUNTERFEITING

    Director, I understand historically the Secret Service's 
initial function when it was created in 1865 was to suppress 
the counterfeiting of U.S. currency, and I know that is still a 
major concern of yours. I think you remain the only federal law 
enforcement bureau with responsibility for suppressing 
counterfeit currency both domestically and abroad.
    Can you describe any current trends in this area of 
counterfeiting? Where? What denomination? What method? I know 
last year you testified that approximately 60 percent of the 
counterfeit currency originated overseas. Has that figure 
changed?
    What efforts have you been making to deal with this 
particularly to increase your presence in the countries 
identified as the source of counterfeiting?
    Mr. Stafford. Congressman, that figure has actually 
increased a little bit. It is closer to 70 percent now.
    As I know that you are probably aware, depending on what 
day you count in our country we have about $540 billion of 
genuine U.S. currency. Two-thirds of that is outside of our 
borders. Therefore, most of the counterfeiting is outside our 
borders.
    This year domestically there was about $40 million passed 
domestically. In the last few years we have experienced a trend 
where there has actually been more money passed than we have 
seized, which is very unusual. The reason for that is again 
technology, computers, printers, people actually printing on 
demand now one bill at a time versus the old fashioned way, the 
offset method where you had to have some skill and some ability 
to actually print up large quantities.
    The trends right now are going towards technology, towards 
printing on demand. The trends are also we see a lot more 
outside of our country. The Colombians particularly are the 
most prolific counterfeiters in the world. With the 
dollarization of many of the Central and South American 
countries, it is going to be a huge problem. Ecuador, for 
example, just went to our dollar, and Colombians were flooded 
with our kind of currency.
    With that, we have to expand to where the issues are. We 
have done that. We recently opened an office in Moscow. We have 
opened offices in South Africa, one is Lagos, Nigeria. In the 
near future we will open one in Mexico City, and I look forward 
to opening a few more with the support of the committee.
    Mr. Price. So the trend is toward an increase in the 
overall amount of counterfeiting and how much of it is located 
in these overseas locations?
    Mr. Stafford. Right.
    Mr. Price. What is the significance of what you described 
as the one bill at a time printing? Can you underscore that a 
bit? I am not sure. What is the significance of that in terms 
of the difficulty of detection and enforcement?

                             COUNTERFEITING

    Mr. Stafford. Well, the difficulty is much more--we refer 
to it as running a note out. In our field offices, every time 
that a counterfeit note surfaces--not only every time there is 
a threat on the President's life--our agents get out of bed, 
and they go find out who passed it, where it is and what the 
history of it is.
    Historically if you go back five to ten years, less than 
one percent of our money was printed on demand by computers. It 
was all done on an offset press. Therefore, normally there was 
a large printing operation that you could investigate and 
ultimately large seizures that you could make.
    Now it does not take very much skill, you know, to scan a 
$100 bill or a $20 bill and send it over the internet to 
somebody else to pass, so we have to actually wring those out 
one at a time, which is very manpower intensive.
    Additionally, our sentencing guidelines have not caught up 
with that. I mean, most people look at that as a federal 
offense, but it is no big deal. It is one bill at a time. You 
know, criminals know that, and they will intentionally, you 
know, print one bill at a time.
    Mr. Price. As you say, this detecting and tracking this 
down is a labor intensive operation. Surely these foreign 
operations you are talking about are going to have serious 
implications, I would think, in terms of budget and manpower 
and womanpower. Is this fully reflected in your budget request?
    Mr. Stafford. No, it is not. There is nothing in there for 
expansion for foreign offices or for counterfeiting at all.
    Mr. Price. Is that something that you had proposed as a 
part of your initial submission?
    Mr. Stafford. Our baseline request under the previous 
Administration did not include any new initiatives.
    Mr. Price. Let me back up just a bit. Tell me again about 
the expansion into these overseas operations. You were talking 
about a Moscow office. What other locations?
    Mr. Stafford. Moscow, South Africa, Lagos, Mexico City.
    We take that money out of our base funding and/or out of 
forfeiture, Treasury forfeiture funds. That is basically how we 
have always funded our investigative operations.
    Mr. Price. All right. Compared to five years ago, how many 
of those offices are new just in the very recent past?
    Mr. Stafford. All the ones I just mentioned.
    Mr. Price. All of them?
    Mr. Stafford. Right.
    Mr. Price. And the dollarization trend obviously is going 
to create all kinds of new problems and opportunities for 
counterfeiters to take advantage over any kind of lax 
enforcement.
    Mr. Stafford. Huge problems. Right now there have been 15 
countries that have gone to our currency. Most economists feel 
in the next ten years most of Central and South America will go 
to our currency.
    If that happens, we will have to drastically expand because 
basically we will be in other countries suppressing the 
counterfeiting of our own currency. Not only operationally does 
that cause some problems, but legally with different laws 
there.
    Mr. Price. You say this expansion of enforcement activity 
has come out of your base funding. Do you say anything about 
the personnel, the impact on your work force needs and 
projections? How many people does it take to do this?
    Mr. Stafford. Well, right now we have 44 agents overseas, 
depending on Department of State and what authority we can get 
first to go into the country and, second, what space there is 
in the embassy, and, third, how many billets we would have.
    Normally our approach to the overseas problem is we do a 
kind of a market analysis first. Bogota, Colombia, is a perfect 
example. We knew that most of our counterfeit--that two-thirds 
of the counterfeit that is passed in our country comes from 
Colombia, just like drugs. We originally approached that by a 
task force concept where we put agents in there to see if we 
could stop it without actually permanently transferring them 
there. We found out we could not. Then we negotiated with the 
Department of State to get authorization to bring people in 
permanently. I know we have three permanent agents in Bogota, 
Colombia.
    That is the same approach we take nationwide. We look for 
the hot spots. We go in with a task force concept and try to 
resolve it as efficiently as we can. If we cannot, then we look 
to move people there permanently if there are financial crimes 
investigations that we just cannot combat on a temporary basis.

                             COUNTERFEITING

    Mr. Price. I may have missed some aspects of your budget 
submission, forgive me if I am overlooking something, but is it 
in fact clear from the documents this committee has the scope 
and scale of the operations you are envisioning in this area 
and the amount of funding and the amount of manpower this is 
going to require? Is it a diversion presumably from your base 
funding?
    Is that clear from the documents the committee has? If not, 
can you furnish that information?
    Mr. Stafford. We can furnish it, but you are right in that 
we would not be able to take--the type of expansion that we 
probably need to do overseas again we could not do that from 
base funding. We probably could not do that from the forfeiture 
fund.
    Mr. Price. That is not present in the 2002 budget?
    Mr. Stafford. No, it is not.
    Mr. Price. All right. We will check what we have available, 
of course, but to the extent you can supplement that with an 
indication of your 2002 plans and your 2002 needs that would be 
extremely helpful because this is something that I think we 
really have not gotten the focus on that we should.
    Mr. Stafford. We will do that. Thank you.
    Mr. Price. Mr. Chairman, thank you.
    Mr. Istook. Thank you, Mr. Price.
    Mr. Rothman.
    Mr. Rothman. Thank you, Mr. Chairman.
    Mr. Secretary, good to see you again. Knowing that you are 
a former law enforcement officer in the Garden State, it is 
always good to see you.
    Mr. Director, it is good to see you as well.
    Mr. Stafford. Yes, sir.
    Mr. Rothman. I know we met last week and had a very good 
discussion about the issues facing the Secret Service.
    I had wanted to follow up on my colleague's question a 
little bit about your expansion into other countries where 
there is a great activity of counterfeiting. First of all, I 
think somebody must do so, and we obviously need to do that to 
make sure that our currency is not counterfeited abroad.
    I am wondering what is the legal authority we have to go 
into those other countries, and are those other countries 
cooperative? In fact, what is the mechanism for apprehending a 
bad guy who is doing this? Do we use our own forces, local 
police, et cetera?
    Mr. Stafford. Again, that kind of market analysis we do, is 
all part of that before we go in someplace. First of all, we 
look at trends. A lot of those trends come to us from the 
private industry, so it is not just counterfeiting. It is whole 
realm of financial crimes that can affect our country.
    You can sit in Bucharest right now and punch a couple of 
keys in a cyber cafe and capture a whole lot of credit card 
numbers all over our country. Ultimately there are issues.
    We have no authority at all to kick a door in or to arrest 
anybody. We have to work in a very cooperative effort with the 
local authorities. As a component of whether we go in at all, 
particularly permanently, it is what the laws are, and can we 
make an impact for the American citizens by being there. All of 
these are components of whether we ever spend the money to send 
permanent people in.
    Mr. Rothman. And needless to say, if there was resistance 
locally to your efforts or to cooperating with you, I presume 
that that word would get back to the Administration, and they 
would make any formal request they needed of the Congress to 
facilitate your work?
    Mr. Stafford. I assume so. Again, we work very closely, you 
know, with State. We have to key off of them as far as, you 
know, how much we get involved and how many people we can send 
to that country. They usually have pretty good relationships 
and buffer much of that for us.

                         INVESTIGATIVE PROGRAM

    Mr. Rothman. I know we have a vote coming up. I just wanted 
to ask one last question. I know the Secretary looks like he is 
anxious to speak about this other issue, but I wanted to 
quickly address your feeling about your capability as an 
organization to deal with hackers.
    You have responsibility, I understand, for protecting 
banking and telecommunications infrastructure. Was any of the 
activity that was reportedrecently in the paper, by allegedly 
Chinese nationalists or Chinese individuals from the Republic of China, 
did any of that involve matters that you had jurisdiction over, and can 
you speak about it?
    Mr. Stafford. No, I cannot speak to the Chinese issue, but 
I can speak to ongoing computer crime and cyber crime.
    Mr. Rothman. Can you not speak to it because it is 
classified or because it did not affect you?
    Mr. Stafford. Both.
    Mr. Rothman. Thank you.
    Mr. Stafford. We have had concurrent jurisdiction with the 
FBI since 1984 on cyber crime, computer crimes, Title 18.
    Very early on we recognized that computers would be a 
component of every violation that we are involved in and today 
they are, so we are very much involved in that world whether it 
is tracking an e-mail threat on a President or whether it is a 
takeover or a shutdown or a hospital supply or a brokerage 
firm.
    Mr. Rothman. Director Stafford, I gather I am not going to 
get a lot of detail from you in this forum on this.
    I was advised that my colleague, Congressman Sherwood, had 
discussed a little bit with you about the advisability (if not 
this time in the next budget) of a line item for this work. 
Have I got that right?
    Mr. Stafford. You have.
    Mr. Rothman. Do you concur with that?
    Mr. Stafford. I can talk to you a lot about that. That is 
something that we very much would like to go forward with.
    Mr. Rothman. If you had your druthers, would you prefer one 
in 2002, a line item for that purpose?
    Mr. Stafford. Yes, we would.
    Mr. Istook. Thank you, Mr. Rothman.
    Let me mention, as you heard the bells, we have a couple of 
votes, which means that we are going to need to recess. I do 
not know that there will be that many questions after the 
recess. Not being sure, I would ask you to wait while we do 
that, and I will hustle back as quick as I can.

                           PROTECTIVE PROGRAM

    Before that, let me pose a couple of questions. Mr. Sloan, 
this one is coming to you. I recognize, as the Director 
mentioned, the challenge for the Secret Service of finding the 
funding for the special mission they have in regard go the 
upcoming Olympics. In fact, this applies not only to the Secret 
Service, but theother Treasury Department agencies, whether it 
be Customs, ATF and so forth.
    The total requirement regarding this special security at 
the Olympics is estimated to be $52.5 million, none of which in 
the case of the Treasury Department agencies, none of which is 
specifically appropriated in the proposed budget of the 
Administration.
    My question, therefore, is because it is not just the 
Secret Service, it is this multiple of $52.5 million, where do 
we expect that the funds would be to make sure that they can 
accomplish the special mission of the Olympics without 
jeopardizing the remainder of their work and their 
responsibilities? Is there a proposal?
    Mr. Sloan. Yes, Mr. Chairman, there is, although the 
proposal has associated with it certainly a lot of hoops and 
hurdles that would have to be overcome obviously because we are 
talking about the proposal that we would utilize in what has 
been referred to as the counterterrorism fund.
    The counterterrorism fund that was appropriated in the 2001 
budget that President Clinton, prior to the end of his 
Administration, had actually reported to Congress a request 
that about $10 million of that fund be utilized for what would 
be best described as seed money for Olympic activities both for 
the Secret Service and Customs.
    I am aware of the fact that in the President's 2002 
proposal there is discussion of the utilization of the same 
funding to include the funding that would be asked for in that 
counterterrorism fund for 2002 to accomplish the Treasury 
responsibilities for the Olympics.
    Saying that, I recognize that we are not at the point yet 
where we would commit to the utilization of that fund until we 
have had obviously further discussions with the Congress.
    Mr. Istook. Let me ask because if you take I believe last 
year's was $55 million, and the request for 2002 was $45 
million for the counterterrorism fund----
    Mr. Sloan. That is correct.
    Mr. Istook [continuing]. Which is a combined figure, of 
course, of $100 million. I believe there has already been 
approximately $10 million drawn down for this specific effort 
during this year.
    If there is a further draw down of $52.5 million for these 
activities regarding the Olympics in fiscal year 2002, then 
that would mean that even though we had appropriated $100 
million to a counterterrorism fund in two years there would be 
remaining in it less than $40 million.
    The question, therefore, becomes would we have an adequate 
amount in that counterterrorism fund to address the 
contingencies that it is intended to address since we never 
know when there is going to be a situation such as the World 
Trade Center, such as the bombing we experienced, and the 
Secret Service was one of the victims of it, in Oklahoma City?
    Would we still have an adequate amount in the 
counterterrorism fund were we to use that to fund the expenses 
of the security at the Olympics?
    Mr. Sloan. Taking away the Olympic monies that you referred 
to, clearly we would hope that we would not have to expend the 
money obviously for such a contingency, but it is clear that we 
are essentially walking a fine line to make certain that we do 
have funds available in 2002 for such a contingency.
    This is part of the discussion that will absolutely have to 
be engaged in among not only Administration officials, but with 
this subcommittee and Congress as to the utilization of that 
money and then ultimately what is left over for what many 
people seem to think and believe is the original intent of the 
money, so this is clearly a discussion that must continue.
    Mr. Istook. And I agree. It is a very important discussion 
because when you have money that is supposed to take care of 
unknown events that are very drastic in their impact and use it 
instead to spend on things that you know are happening, then 
your contingency fund, your ability to respond to that type of 
emergency, becomes very limited.
    I think that is a very serious question about whether we 
should dip into that fund to fund for Olympic activities 
because certainly we have had ample notice and have ample 
opportunity to prepare. This obviously will be a continuing 
discussion.
    Let me recess as of this time because I need to go make the 
Floor votes. I will be right back as immediately as I can.
    [Recess.]
    Mr. Istook. I call the subcommittee back to order. I 
appreciate the witnesses remaining.
    I think Mr. Hoyer may be back and have some further 
questions. Most of my remaining ones I will submit for the 
record.

                           PROTECTIVE PROGRAM

    I did want to follow up one bit more. We were talking, Mr. 
Sloan, about the potential of using the counterterrorism fund 
to take care of the special financing needs regarding the 
security at the Olympics.
    If there were not recourse available to that particular 
fund, do you have any other mechanism where you think it would 
even be possible to handle the funding for the Secret Service 
and the other parts of Treasury to meet the security needs at 
the Olympics as they have the legal requirement to do?
    Mr. Sloan. If the counterterrorism fund did not exist or 
was not available for the funding?
    Mr. Istook. Correct. I am not quite sure what the 
parameters are for utilizing it as far as whose approval is 
required, but if for whatever reason there was not recourse to 
that.
    Mr. Sloan. As we sit here today, the answer is no. I mean, 
we would clearly have to address it as a need that the funding 
is not available for at this moment.
    Mr. Istook. Has there been a studied decision that the 
level of the counterterrorism fund does not need to be at the 
amounts that were appropriated last fiscal year and that is in 
the budget for appropriation this year?
    Has there been any study or attempt to determine what is 
the correct amount that should remain available in that 
particular fund to make sure that we have the ability to meet 
any unanticipated events?
    Mr. Sloan. Well, the fund for 2002 roughly compares to the 
fund that was appropriated for 2001.
    Mr. Istook. Yes. It is a multi-year fund, so----
    Mr. Sloan. Right. That is correct.
    Mr. Istook [continuing]. It is essentially accumulating to 
be there.
    Mr. Sloan. Yes.
    Mr. Istook. Right.
    Mr. Sloan. Unfortunately, and I do not want it to sound 
like a cop out on my part. I was not part of the discussions 
obviously. As the acting under secretary, I came through the 
door on January 20, but I am certain that the formula that 
was--certainly there was discussion of the formula that would 
arrive at that amount that then was repeated in 2002.
    I can certainly provide you with information about those 
discussions. I just do not have the information on those 
discussions in preparing for the 2001 budget, which would have 
been in 1999.
    Mr. Istook. Certainly. Regarding the question of what is an 
adequate amount to be available in the counterterrorism fund to 
be able to respond to things, how do you make that decision? I 
mean, is it simply you grab a figure out of thin air, or is 
there a methodology that you use?
    Mr. Sloan. Clearly, Treasury has had some tragic experience 
in the need for counterterrorism funding. You have addressed 
some of them; the World Trade Center, Oklahoma City.
    Clearly, the experience, and I am sure I am speaking from 
afar and as not part of those discussions, but clearly those 
experiences and the lessons learned and the costs associated 
with those experiences played a major role, I am certain, in 
the funding that would be suitable to prepare oneself for those 
sorts of contingencies. Beyond that, I was not a party to the 
discussion.
    Mr. Istook. Are you able to tell us what is the methodology 
that is used to project an amount that should remain available 
in that counterterrorism fund or who establishes or applies 
that methodology?
    Mr. Sloan. Currently the methodology that we would be using 
would be consultation with the Treasury bureaus that would be 
affected by the expenditures from that fund. Clearly, before 
the fund got dangerously low I would certainly make a part of 
any discussion that I would have to deal not only with Director 
Stafford, but the other bureau heads relative to the 
anticipated needs for the fund.
    In fact, we have had some discussions with regard to the 
utilization of the fund with the other bureaus already for 
issues outside of the Olympics, which you may or may not be 
aware of.
    Mr. Istook. I may not be, and I think that would be useful 
to us. I mean, if there has ever been any actual effort to 
determine what is the proper amount for the fund, I think a 
copy of whatever was done on that, and I am presupposing that 
something has been done on writing on it. A copy of that 
information with the pertinent details, as well as information 
about the requests, even if they were not honored, for when 
people sought to draw upon that particular fund.
    Those would be very useful for us because, as you can tell, 
there is a huge amount of hesitation I think within Congress to 
tap that particular fund for the Olympics, but at the same time 
there is I think a very strong desire to make sure that 
security needs of the Olympics are fully funded.
    As I mentioned to you and the director before, I certainly 
recall. I was a reporter back then and recall being in our 
newsroom when the flash came over the wire regarding what had 
happened in Munich. Nobody wants a repeat of that or anything 
that potentially could come to it.
    I recognize that perhaps the best way to make sure that 
there is no significant problem at the Olympics in 2002 is that 
everybody who might consider doing anything knows that we are 
prepared. We anticipate. We planned in advance, and we have cut 
off their opportunities before they can ever get started. That 
deterrence is probably the best thing that we can have to 
assure the safety and well being of everybody that is involved 
in the Olympics there.
    I know that there is certainly a personal determination, 
and I am sure it is shared by most within the Congress, to make 
sure that there is no temptation out there for anybody that 
might consider any type of terrorist act at the Olympics.
    I would appreciate receiving that information regarding 
this fund so we can consider whether it is really an 
appropriate source or not to make sure that we meet this need.
    Mr. Sloan. Yes, sir. I will see that you get that.
    Mr. Istook. Thank you.

                           PROTECTIVE PROGRAM

    Let me ask. Let me ask and switch topics and ask something 
regarding I realize that there are references regarding making 
up approximately $13.5 million I believe is the figure in the 
Secret Service budget, of changing some of the requirements 
that have to do with travel, transfers,personnel, some of the 
rotation that I know you use when people are tasked differently within 
the Service.
    Considering, Mr. Stafford, the potential savings of that, 
can you fill us in a bit on what is usually the recommended 
transfer rate and for what purposes, at what cost on an annual 
basis and how does that compare with efforts in other law 
enforcement agencies to rotate people to different duties?
    Mr. Stafford. Mr. Chairman, the Secret Service is very 
unique in that we have dual responsibilities, which you are 
aware of and have heard a lot about today. We have the 
investigative side. We have the protection side.
    On the protection side, we do that better than anybody else 
in the world. There are some reasons for that, one of which is 
we do not leave our people there for a lifetime. First, if we 
did, we would burn them out. Secondly, we probably would not be 
able to attract the kind of people we need to attract if that 
was their lot in life for 25 years.
    Thus, we have to rotate them through the major protective 
details. Not just the major ones; all of them, the major ones 
being the Presidents and the Vice-Presidents, although we have 
all former Presidents now, as you are aware.
    We have a period of time that we feel comfortable with to 
leave our agents in those roles because they are primarily 
working shifts for that period of time; days, afternoons, 
midnights. Every two weeks they change. As we talked about 
before, a lot of overtime. A lot of travel. A lot of shift 
work. A lot of disruption to their family.
    Every agent knows they have that in store for them sometime 
during their career, but they also know that there will be an 
end to it at some point. Those periods of time we try to rotate 
them back then to more stable assignments, what had previously 
been more stable assignments, in the field offices.
    To absorb the figures we are talking about, we drastically 
would have to reduce the transfers. The transfers right now, 
and you asked what they cost. I think the average is about 
$62,000 to move somebody. We would drastically have to reduce 
that, which again is very disruptive as far as how long we 
prolong people in their current assignments.
    We get back to people issues, quality of life issues, 
morale issues and ultimately operational issues if you leave 
them in one place too long, particularly on a protective 
assignment like that.
    Mr. Istook. I think for the record or, if necessary, if it 
gets into areas that should not be placed in the record, but I 
think we certainly want to get more details on the specifics of 
those rotations and what old rates versus new rates of rotation 
would be and the potential consequences, realizing that there 
may be some rotations out of the more highly demanding, highly 
stressed details, and some of the rotations might not involve 
as stressful an assignment. I think that knowing the difference 
between those would certainly help us in reviewing that.

                         INVESTIGATIVE PROGRAM

    The final thing that I wanted to ask about, and then I will 
have Mr. Hoyer pose whatever he wants to pose. Knowing that the 
Secret Service is involved in aspects of computer crime, 
detecting and deterring cyber terrorism, theft of identity, 
these are some areas, of course, where there is always concerns 
about overlap with other law enforcement agencies. They are 
working on some of the same issues.
    I think it is very important that we understand as best as 
possible what our memorandums of understanding regarding where 
the jurisdiction of one agency, whether it be Customs or FBI or 
whoever it might be, where their jurisdiction with 
investigating and deterring something may start and stop and 
where yours is.
    The understanding of that interface and the potential of 
overlap is very important to us because we want to make sure 
that those needs are covered, but we both recognize that there 
are some areas in which other law enforcement agencies have 
very excellent capabilities also, and if we are duplicating 
something there may be some savings to be achieved in that way. 
We want to be aware of it, but we do not want to leave the 
important things uncovered.
    Can you give us just a broad outline, and some more details 
can follow, regarding where these boundaries are in any 
memorandum of understanding or similar agreements that may 
exist between the Secret Service and other entities?
    Mr. Stafford. Sure. Mr. Chairman, we are very comfortable 
with and indeed very sensitive to that issue. We do not have 
enough people or enough money, nor does any other federal law 
enforcement agency I think, to go down a road of duplication. I 
think everybody is very careful about that.
    We ensure that we do not do that in many ways. One is 
through memorandums of understanding, which we have with a 
number of other federal law enforcement agencies, including the 
FBI where we have concurrent jurisdiction. In both of those 
areas it has worked extremely well for both organizations, and 
we feel it is good public policy because there is so much of it 
there. Nobody can stay abreast of it.
    We ensure that we are not stepping on each other through 
the U.S. Attorney's Office and at the direction of the U.S. 
Attorney as to who would be the lead in certain cases.
    We also approach that again, as I mentioned, from a task 
force concept. We are on 24 task forces nationwide, of which 
many federal law enforcement agencies are a part of and work 
together in concert to suppress many of the financial crimes 
and cyber crimes issues.
    I do not see that as a problem. We are very sensitive to 
that. That would be my answer to that.
    Mr. Istook. I appreciate that. Thank you, Director Stafford 
and Secretary Sloan.
    Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman.
    I want to go through quickly, Mr. Director, the National 
Special Security Events. First of all, how are they designated?

                           PROTECTIVE PROGRAM

    Mr. Stafford. The national special security events are 
actually designated by the Presidential National Security 
Advisor, who chairs a group called the counterterrorism 
subgroup that everybody has a seat in.
    Mr. Hoyer. Everybody being?
    Mr. Stafford. Everybody as far as the Treasury law 
enforcement bureaus. The Secret Service sits and speaks for all 
Treasury law enforcement, but the other law enforcement bureaus 
and Justice are there. OMB is there. Military is there.
    Mr. Hoyer. DOD is involved in that as well?
    Mr. Stafford. They are there. They collectively discuss an 
event that they possibly want to bring the full force of the 
government behind, the Olympics being a perfect example, to 
declare a national special security event.
    Mr. Hoyer. Pursuant to that process, how many have we had 
designated since the directive?
    Mr. Stafford. We had 8 in 2000, including the 2002 
Olympics. Two in 2001.
    Mr. Hoyer. How have we funded the activities of the Secret 
Service as it relates to those?
    Mr. Stafford. It is pretty much as we talked about. There 
has been no funding mechanism established for those, so 
basically, you know, most of them have been somewhat smaller. 
You might absorb the cost and later have gone back. If it was 
supplemental, we went and might have been able to recoup what 
was spent.
    Mr. Hoyer. Can you give us, and you do not have to do it 
now off the top of your head, but the cost for the five 
previous?
    Mr. Stafford. Five.
    Mr. Hoyer. Obviously there may be an average cost. 
Obviously you say some are----
    Mr. Stafford. For example, you had the Republican National 
Convention, the Democratic National Convention, the State of 
the Union, the WTO. All are different costs, depending on how 
long and how much planning, but I can give you those.
    Mr. Hoyer. If you can give us the five, then we could have 
some sort of feel for how much this is costing us.
    You say there are none designated other than the Olympics 
for 2002?
    Mr. Stafford. None so far, but the problem that you have is 
often times unless you have something like the Olympics that 
everybody is aware of and everybody pretty much agrees that we 
have to designate, these things can surface in mid budget 
cycle. There is no recourse.
    For example, we are still discussing how we are going to 
pay for the Olympics. If another one was designated tomorrow or 
the next day, the issue then is how do we pay for that? What 
mechanism? Basically and traditionally what we have done is we 
absorb it and try to recoup it.
    Mr. Hoyer. Now, is there any indication that this 
Administration will pursue a different kind of policy or 
process as it relates to national security events?
    Does the secretary want to answer that?
    Mr. Sloan. Yes, Mr. Hoyer. The quick answer is yes. I think 
in fairness to the Secret Service and the process, I mean, it 
has been long proposed that NSSEs or national special security 
events should not arise in the planning process unless there is 
a funding mechanism that parallels it and rides along with it.
    Having spoken to the secretary personally about this issue, 
he is very concerned about that. In fact, I think he may even 
be commenting on it. With all the planning that goes into the 
special security event that the Service has talked about today, 
there is no question that there has to be an equal amount of 
funding consideration and planning that accompanies those 
activities.
    In fairness to the Secret Service, the Presidential 
decision directive back in 1998 alludes to that fact that there 
needs to be funding stream discussion with the national special 
security events as they develop. I think we need to 
institutionalize that idea as much as we did the national 
special security event authority itself.
    Mr. Hoyer. So to the extent that the Administration is 
looking at this, they are looking to beef up the planning 
process and the funding process?
    Mr. Sloan. They should go hand in hand. Ideally there would 
be an examination of national special security events on the 
horizon as far out as you can determine. At the moment that 
they are identified, there should be a simultaneous budget 
discussion for the funding necessary for that event.
    Mr. Hoyer. Do you expect a recommendation toward that end 
to occur at any time in the near term, i.e., before we mark up 
this bill?
    Mr. Sloan. I will have to get back to you with an answer in 
that regard, sir, but clearly the discussion is a top priority 
discussion.

                           PROTECTIVE PROGRAM

    Mr. Hoyer. Let me ask you because I get this question a 
lot. Some years ago we had hearings on the closing of 
Pennsylvania Avenue, and obviously that continues to be an 
issue of real concern for Representative Norton, for Mayor 
Williams, for the District of Columbia and for the business 
community in the District of Columbia.
    Can you tell us where we are on this issue?
    Mr. Stafford. Congressman, as you are aware, we had 
hearings on that topic a few weeks ago, and the Secret Service 
position continues to be that we need to keep Pennsylvania 
Avenue closed to vehicle traffic.
    The reason for that is that nobody has found any technology 
that will mitigate an explosive laden vehicle, so we feel very 
strongly until we or somebody becomes aware of some technology 
that we would continue to take the position that it needs to 
remain closed to vehicles.
    That said, we are working very closely with the federal 
city council and others, the National Capitol Planning 
Commission, to try to find some solution that we could all 
agree to and go forward with.
    Mr. Hoyer. If we have a solution other than closure, is it 
your expectation that the alternative will require more 
resources through the Secret Service because of the increased 
threat? Have you reached that conclusion yet?
    Mr. Stafford. We really haven't because we haven't reached 
an agreement as to what that would look like. Just taking a 
guess, if it was opened back up I would say yes, it would be 
again extremely manpower intensive for us to implement some 
additional safeguards there, so I think I can safely say yes.

                     FY 2002 APPROPRIATION REQUEST

    Mr. Hoyer. Let me go back. I think you were discussing as I 
came in the issue of this non-pay inflation, the so-called $14 
million. The Administration's budget did not provide for non-
pay inflation costs as I understand it not just for Secret 
Service, but for most of the bureaus.
    Your budget request did not identify offsets for those cost 
requirements. Have you identified the costs that will be 
absorbed? You talked about personnel in terms of the inability 
to pursue additional hires.
    Mr. Stafford. Right. Most of that money would have to come 
from, of course, discretionary areas and not operational areas. 
It would have to come from personnel areas, particularly PCSs, 
change of station, transfers of people. We spoke about some of 
the ramifications of that.
    Most of that money would have to come from drastically 
reducing the number of people we transfer. Additionally, some 
of the other things we were going to do is we have been able to 
hire. We had some renovations planned, some relocations planned 
in some of our field offices to accommodate the additional 
people. We would not be able to do that.
    Thirdly, it would be the IT investment. Again, one would 
have to look at that to reduce that investment. As I mentioned 
earlier, we already are in the basement, like twelfth out of 
thirteenth in Treasury, as far as our investment in that area.
    Mr. Hoyer. Director, if you would do me a favor? If you 
would specifically, and I do not mean line item, but generally 
what you have said now, which I think was a pretty good 
exposition of what you probably have to do, but if you could 
more specifically so that at the time of markup, and I do not 
think the Chairman wants to see this happen. I do not want to 
see it happen.
    I am hopeful that we will get additional resources so that 
we will not be dealing with these alternatives, but I want to 
have the information available on the what if we are confronted 
with this because I think it will undermine your ability to 
operate the way we want you to, so if you could give me that 
help I would appreciate it.

                   NATIONAL THREAT ASSESSMENT CENTER

    Let me go to national threat assessment center. I talked 
about that in my opening statement. We have experienced some 
horrific violence in our schools over the past two years. Can 
you tell me why the national threat assessment program was 
established just to give it a background on it for the record?
    Mr. Stafford. I can. Shortly after Columbine, many people 
came to us, including the Department of Education, to ask if we 
could help with that issue because that is our business. We 
have been in the prevention business, the prevention of 
targeted violence specific to the President and others, for 100 
years now.
    Everybody was seeking answers to this problem when we 
started experiencing the violence in our schools. We felt we 
could help. We created the National Threat Assessment Center 
specific to targeted violence, whether it be in our schools, in 
our workplace, and also, of course, issues specific to the 
Secret Service.
    Our behavioral psychologists have traveled the nation. We 
have given 65 seminars this past year, one of which was in your 
district. Another one was in the former Chairman's district, 
Congressman Colby. Many congressmen have been interested in and 
very supportive of that program.
    We do not claim and we do not feel that we have all the 
answers, but we do feel very strongly that we have brought a 
new perspective to this. We found in our study, and we have 
looked at all school shootings for the past 25 years, and we 
have learned quite a few interesting things that we passed on 
in these seminars and to the Department of Education.
    That study will come to closure very soon. That will be 
published again with the Department of Education. The good 
thing, is we have found that there is time. There is time to 
prevent these traumas that we have been having in our schools. 
They are not happeningimpulsively. These children are telling 
people. They are telling a lot of people what they are going to do. 
They are just not telling adults. The information is not getting to the 
people it needs to get to to prevent these traumas.
    That is the next part of our research is to figure out why 
that is happening and continuing to move forward with that. We 
think it is a tremendous center, and we want to continue to do 
as much as we can with it.
    Mr. Hoyer. Mr. Director, are there any plans for a 
permanent center?
    Mr. Stafford. There are. We have a five year master plan at 
our training facility J. Rowley Training Center in Beltsville. 
We have plans for a multi-purpose national threat assessment 
building where we can bring people to us to impart this 
information. We have plans for a 200 room dormitory.
    We think we have an excellent business case that we will 
not have to rely on hotels not only for the Threat Assessment 
Center, but also for other operational issues within the Secret 
Service.
    Mr. Hoyer. Have you a projected cost?
    Mr. Stafford. We do. For the National Threat Assessment 
Center building it would be approximately $9.5 million and 
about the same thing for the dorms.
    Mr. Hoyer. So about $19 million?
    Mr. Stafford. Correct.
    Mr. Hoyer. Mr. Peterson, this is very interesting. I had, 
as you heard, a seminar in our district, and Mr. Kolbe did in 
his. Although I have not talked to Mr. Kolbe, my educators, and 
I had educators from all of my districts there, principals, 
superintendents and law enforcement officials there, and they 
found it very, very useful.
    You might find it useful in your district as well because 
obviously of the critical job for Secret Service is to 
anticipate. Honestly, if somebody is there on site it may be 
too late. If you can anticipate and watch and identify and cull 
out possible threats, you are much better off than if you are 
confronting the threat on site with the protectee there.
    Of course, as Director Stafford said, that is part of their 
expertise, and it is very, very valuable for educators, 
parents, students, the school systems generally and obviously 
has broader application than that obviously in terms of 
employers and employees. We see a lot of workplace or too much 
workplace violence.
    In any event, I found it very helpful. Thank you. We need 
to pursue this because I think it is a tremendous educational 
opportunity for our country.
    Mr. Stafford. I just wanted to follow up and thank you for 
your comments, but you are exactly right. What we do, and what 
I have said many times, is prevention. We have the ability to 
tactically respond to anything, but we do not want to be in 
that situation.
    If the government is feeling they have to come out for us, 
we have made a lot of mistakes. Prevention is the business we 
are in, whether it is prevention of an attack on our of our 
protectees or safeguarding our children. We think we are very 
good at it. This operational study nobody else is doing, and I 
think we can continue to find some very good ideas and bring 
some very good perspectives to the whole front.
    Mr. Hoyer. Thank you.
    Thank you, Mr. Chairman.
    Mr. Peterson [presiding]. Thank you. I would like to talk 
to you sometime about having one of those in my district. I can 
think of a place that could use one right now, if you are 
watching the news.
    I wanted to also share with you, Brian, about the meeting I 
had. I appreciated it. I found it very helpful and informative. 
We found out that we only live 65 miles apart. He was born and 
raised in the town my mother was born and raised in, and it is 
only 65 miles from where I live today, so we are almost 
neighbors, our families anyway.
    I want to welcome you. I am sorry I was here late. I was 
tied up in another hearing across the hall.

           NATIONAL CENTER FOR MISSING AND EXPLOITED CHILDREN

    I have one question. In fiscal year 2001, you received 
about $3.2 million for forensic and grant assistance for 
National Center for Missing and Exploited Children, about the 
same in 1999. What was the breakout of funding between forensic 
aid and grant support in the year 2001, and what levels of 
funding are included in this year's budget?
    Mr. Stafford. Congressman, this figure, the grant is, if I 
am not mistaken, $2 million for the grants, and I think it was 
$1.6 million versus the $1.2 million for the forensic support 
that we provide to the National Center, which again, as I 
mentioned in my opening comments, that we are very proud of.
    We support the Center in many ways; usually through local 
law enforcement. The Center has just come up with some historic 
figures as far as recoveries of children. They are up to 93 
percent. We feel that we have contributed a lot to that. Last 
year, we did 42 polygraphs on people, 21 of which we got 
admissions to sexual molestation and murder.
    We are very interested in staying involved in that and 
could use any support we can get.
    Mr. Peterson. What has been the progress and use of your 
children's identification system kits?
    Mr. Stafford. Again, it is a program that we are proud of. 
We work it through our field offices. We advertise it. We bring 
the children in, take photographs, a lot of biological 
information photographs. We scan fingerprints and return to the 
parents a document that would be extremely beneficial to them 
should their child be taken.
    Mr. Peterson. And it is a free service that is available?
    Mr. Stafford. Correct. That comes from our grant money.
    Mr. Peterson. Grant money. Okay. Do the users pay?
    Mr. Stafford. No, no, no. We do it through the money that 
we are budgeted.
    Mr. Peterson. You are getting technical with me.
    Mr. Stafford. No. Actually, I was not, Mr. Chairman. What I 
was pointing out is this is a service we give to the public, 
but it is obviously another cost.
    Obviously when we squeeze, as we are squeezing Treasury law 
enforcement, there are some services, and this is one of them, 
that may not be perceived as a direct line authority and 
critical responsibility of the Secret Service, but which is 
extraordinarily useful to the American public.
    I did not mean to quibble, but----
    Mr. Peterson. I am just teasing.
    Mr. Stafford. No. I gotcha. It is important to note that 
there are other kinds of services that are important, but if we 
do not give them the resources necessary the other kinds of 
things will probably go first.
    Mr. Peterson. I guess we are ready to conclude. I would 
just like to share with you my personal view of the wonderful 
job that you do of protecting our leaders, keeping them safe 
and people who visit us safe that are in leadership positions. 
It has to be a very difficult job.
    I think you are a model maybe around the world, and I just 
want to say thank you for being the leader of that operation, 
both of you.
    Mr. Stafford. On behalf of the men and women of the Secret 
Service, I thank you for those comments.
    Mr. Peterson. Okay. Thank you. This meeting is adjourned.

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                                            Wednesday, May 2, 2001.

                        INTERNAL REVENUE SERVICE

                                WITNESS

CHARLES O. ROSSOTTI, COMMISSIONER

                           Afternoon Meeting

    Mr. Istook. The Subcommittee will come to order.
    Good afternoon, Commissioner Rossotti.
    We are pleased to welcome Commissioner Rossotti. I will 
share what I did with you because this was what, a day or two 
after filing closed. It was nice to visit with you, but 
probably the best thing that could have happened to me that day 
would have been to have a press photographer, that had seen me 
strangling you or attacking you with tire iron or something 
like that, considering the time of year.
    You appreciate the good nature of which that is intended. I 
know that on an occasion like this, that this is one of those 
days when you play your role of spear catcher. The sins of the 
many are visited upon the Commissioner. We appreciate your 
being here. We are grateful for the expertise and the 
advancements that you have brought to the IRS.
    Although by its nature this hearing will probably focus 
more upon the things that have yet to be done, than those that 
have been done already. You are, I believe, in your fourth 
appearance before the subcommittee. You have served three full 
years so far as the Commissioner. We are looking forward to 
your testimony regarding the fiscal year 2002 budget, which 
encompasses, of course, the changes that have been made.
    Perhaps I should point out of course that we are talking 
about the President's fiscal year 2002 budget request. I 
recognize that the Oversight Board at the IRS submitted a 
proposal that was different in some funding levels. But, of 
course, in reviewing your written statement and submissions, we 
are aware that you are testifying in support of the President's 
submission for 2002, rather than the Oversight Board's.
    Mr. Commissioner, there are several concerns that I have 
and that many people have about the IRS. The first, of course, 
is financial management. The IRS has achieved a major milestone 
in obtaining a clean and unqualified audit opinion from the 
GAO. But as you know, it nevertheless took months to close the 
books.
    There are serious financial weaknesses that are indicated 
that they still remain. For example, findings by the GAO that 
the IRS is still unable to routinely and reliably generate 
financial information. Errors and delays are still with us and 
the recording of taxpayer payments.
    It is a challenge for the IRS to give reasonable assurance 
that all of its budget resources are controlled and reported 
appropriately. These are weaknesses that we know seriously 
challenge the IRS ability to manage the Federal funds, and our 
ability to judge your funding requirements.
    Your needs for the fiscal year 2002 budget in the proposal 
are an increase of $582 million above the previously enacted 
level. That is more than 80 percent of the entire proposed 
increase for all the Treasury Deportment. The GAO's findings, 
of course, raise serious questions, and require us to raise 
serious questions about these funds, and how this amount would 
be used within the IRS.
    Nobody wants to downplay, of course, the significant 
advances that you have made, your personal leadership or the 
notable success in that clean and unqualified audit opinion.
    There are other improvements that are showing, since the 
enactment of the Reform and Restructuring Act of 1998. Customer 
service is improving. We know that neither you nor we are 
satisfied, yet. But it is important to recognize the rate of 
change, as well as the current situation. It is equally 
important to realize many financial and other management 
challenges are still with us.
    We recognize that ultimately the solution may be with 
modernization of the financial management and the information 
management systems, part of the ongoing IRS systems 
modernization.
    There is pending the request for $128 million for release, 
which is the balance of funds available for business systems 
modernization, now pending before the Congress.
    We have been briefed by your staff and by GAO. We have a 
letter of April 20 to amend the spending plan. Of course, that 
is under review right now, in light of the continuing 
weaknesses that, of course, we all recognize exist.
    The IRS budget request would add another $325 million to 
this systems modernization account, to bring the total fiscal 
year 2002 funding level close to $400 million.
    The increase requested for that item, which is $325 
million, is 45 percent, in and of itself, of the entire 
increase for all of the Treasury Department, and more than half 
of the increase being requested by the IRS. So it is an area 
that we have to look at closely and seriously.
    Mr. Commissioner, Congress has been very supportive of your 
efforts and your previous budget requests. So we are looking 
forward to your testimony, answers to questions and those 
submitted for the record of course, which often are more 
important than the ones that we cover orally.
    We do want to hear more on the status of the reform, the 
progress that you are anticipating in the coming year, and 
accomplishments, of course, that you have made so far.
    Of course, your full statement will be in the record. So 
please feel free to speak more extemporaneously in your 
testimony before the Committee, the part that you give orally.
    That concludes my statement and let me give time to Mr. 
Hoyer.
    Mr. Hoyer. Thank you very much Mr. Chairman.
    I want to begin by again recognizing what I think has been 
the contribution made by Secretary Rubin to the improvement in 
IRS, the focus on management issues, not only at IRS, but at 
Treasury, as well.
    Secretary Rubin of the four or five Secretaries with whom I 
have dealt over last 18 years, I think uniquely was concerned 
about, not only the policies that confronted the the Treasury 
Department, but also the management of the Treasury Department.
    As you have heard me say before, I had discussions with the 
Secretary and with then-Deputy Secretary, who subsequently 
became Secretary, Larry Summers, with reference to IRS, and the 
necessity to have somebody who was a manager at the head of 
IRS, as opposed to someone who was focused on tax policy, which 
is really not the job of IRS. That is not to say that they do 
not have ideas on management, but it is not their principle 
focus.
    I think that Secretary Rubin and Deputy Secretary Summers, 
in reaching out to and hiring somebody with an expectation of 
longer tenure, who had management experience and very 
successful business experience running his own company, I 
think, was a great contribution to the taxpayers of America.
    Mr. Commissioner, I want to again congratulate you on the 
job that you have done during your three years. I know that you 
have two years to go, and I hope that we can hold you beyond 
that. I am not sure we can, as much fun as your this job is. 
But in any event, I want to congratulate you and thank you.
    It is clear that this Agency is making progress towards the 
requirements of the 1998 Restructuring and Reform Act, and the 
desires of the Congress.
    Last October, the IRS began functioning under a new 
organizational structure, one that we hope will better serve 
the needs of the taxpayers, and one that will enable the IRS to 
fulfill its responsibilities more efficiently.
    You are now organized, as a result of your leadership, Mr. 
Commissioner, to focus on the taxpayer in the areas of pre-
filing, filing and compliance services.
    Recent data, as I understand, shows that this 
organizational structure is helping. This is too soon to make a 
final judgement, but it certainly seems to be helping.
    Statistics from this year's filing season indicate that 
electronic filing is up again over last year, to almost 30 
percent. People are using their computers more to file, and the 
processing rate continues to improve. This is all good news.
    Still, there is room for improvement. Audit rates continue 
to decline, which is of great concern to me, and I know to you, 
Mr. Commissioner. The IRS now audits less than one-half of one 
percent of individual returns. That is not a sustainable figure 
if we are going to maintain a voluntary system that believes 
that there are some checks and balances within the system.
    That is less than one in two hundred tax returns. Among 
those in the upper income brackets, the audit rate dropped to 
less than one percent.
    Compliance is a serious issue, and we must improve on those 
statistics if we are going to continue to have the voluntary 
compliance that we have been proud of, and which has been 
essential for our system.
    Telephone services continues to be a problem. The answer 
rate for the 2000 filing season was 62 percent, which is lower 
than the 72 percent the IRS achieved in the 1998 filing season.
    Mr. Commissioner, your budget requests for fiscal year 2002 
is for $9.276 billion, an increase of $579 million, or 6.7 
percent over the 2001 budget. However, $325 million of that is 
increases for improvements to your IT. That leaves only a 2.9 
percent increase for the rest of the Agency to operate.
    I am very concerned about the $57 million inflationary 
costs the IRS is being required to absorb. Since the enactment 
of the Restructuring Reform Act, I have repeatedly said, as I 
said on the Floor when I voted against it the first time 
through, that if you are going to be for the IRS at tax writing 
time, you need to be for the IRS at budget time.
    There is no way we can continue to change the code on a 
regular basis, and expect the IRS to handle changes, educate 
the public, and advise the public, without sufficient resources 
to do so.
    The Commission on Restructuring the Internal Revenue 
Service recommended in its FY97 budget, that we must provide 
the IRS certainty in its operational budget.
    I refer to that often, Mr. Chairman, and I have 
highlighted, marked it and read it. I hope that all of the 
members of our Committee have read this book. It is a good 
book. It is balanced and it understood what some of the 
challenges were at IRS, as it makes for recommendations.
    It also reflected upon what the Congress needed to do, and 
certainty and continuity of budget levels was clearly one of 
the important objectives that the Restructuring Task Force 
suggested was important. I am concerned, therefore, that a 2.9 
percent increase is not enough to meet the responsibilities 
that the taxpayers and the Commission demanded.
    Mr. Commissioner, I look forward to asking you a number of 
questions to try and elicit from you exactly what you think the 
situation of the IRS is now, and what it will be if this budget 
were adopted; and to try to elicit from you, as well, what 
might be your thoughts as to needs that are not met in this 
budget.
    Thank you Mr. Chairman.
    Mr. Istook. Thank you Mr. Hoyer. Mr. Rossotti, of course, 
it is our practice to swear the witnesses, so if I can 
administer the oath.
    [Witness sworn.]
    Mr. Istook. Thank you.
    Mr. Commissioner, we are very pleased to receive your 
testimony.
    Mr. Rossotti. Thank you very much, Mr. Chairman and Mr. 
Hoyer. It is a pleasure to be here.
    I first want to start off by thanking the President, and 
particularly Secretary O'Neill, for their support of the IRS, 
having come in very, very quickly and having to act on our 
budget request.
    They did make a proposal, as you know, for $9.28 billion. 
This amount will, we believe, enable us to continue to improve 
our operations, and especially to make the crucial investments, 
for the longer term, in business systems modernization.
    Of course, most of the $325 million increase is needed for 
replenishing the business system modernization fund, which is 
going to be drawn down at the end of this year, presuming that 
the committee approves our $128 million request.
    I would like to go back just very briefly, though, to look 
at a little bit longer term perspective, and note that even 
before the RRA 1998 became law, which is almost three years 
ago, I think that it was clear from the hearings and the 
Commissioner's Report, that a long-term commitment was going to 
be required to fix the IRS.
    Now that we are a number of years into this, I think that 
perhaps we can see more clearly some of the larger changes to 
our organization and our business systems that are necessary, 
and therefore, really realize the enormity of the challenge 
that we have really undertaken in this.
    Clearly, progress is hard won on this particular road. We 
are just beginning really to reap the benefits of some of the 
internal changes we have made, as well as the budget increase 
that was provided in this fiscal year, which was actually 
requested more than two years ago. It just shows the lag time 
that it takes to get things done. But certainly, the Congress' 
support in 2001 is very important for us.
    Now if you just look at some of the things that have 
happened since the enactment of RRA 98, we have a new mission 
and new strategic goals. This means that we have greatly 
changed the way we value success in the Agency, both 
individually, in terms of individual employees, as well as 
collectively as an organization.
    We have invented a new means to quantitatively measure 
success in the Tax Administration Agency, without considering 
the amount of dollars we collect. We are implementing and 
administering 71 new taxpayer rights provisions that were in 
RRA. These represent a tremendous challenge of learning how to 
do new business for most of our 100,000 employees.
    We have inaugurated the new customer-focused organization 
structure, and have eliminated a 50 year old structure of 
district service centers, regions, and national office staffs. 
This required that tens of thousands of IRS managers and 
employees assume new jobs and recognize that many old jobs were 
abolished in the process.
    Now we are going about the job of redesigning almost every 
business process and system, from the way examinations are 
planned and conducted, to the way phone calls are answered, all 
the way to the way facilities repairs are ordered.
    While we are doing this, we are making these changes, while 
achieving our first clean financial opinion from the GAO; 
stopping the drop of enforcement revenues in fiscal 2000, that 
had been occurring for several years prior to that; managing, 
of course, the Y2K program, and carrying out increasingly 
successful filing seasons for three years in a row.
    I do want to mention a few things about the filing season 
that was just completed. It was, I think by all measures, 
quantitative, and also anecdotally, the best that the IRS has 
ever provided, which does not mean that we are satisfied with 
it. But if you look at it, electronic filings set new records. 
Actually, in all of the returns that have been filed as of now, 
one third of them have been filed electronically. We still have 
about 10 million more extensions to expect.
    Home computer use was up about 35 percent. It is growing 
very rapidly to file returns. We shattered all of the records 
in terms of the use of our website.
    The number of forms and documents that were downloaded was 
up 100 percent over last year, and other hits are up 57 
percent. With respect to the telephone service which is, of 
course, an important one, we actually answered eight million 
more calls this year than we did last year. That is 16 percent 
more total calls.
    That is partly because of some of the automation that we 
were able to get in. For those that wanted to speak in person 
to an assister, the taxpayers were able to get through about 
two-thirds of the time, which is actually up from about 62 
percent last year, still far from where we want to be, but a 
steady improvement.
    Our accuracy rate for tax law calls was at 78 percent, and 
for account calls, 88 percent; also, not where we want it to 
be, but certainly an improvement.
    So these are, I think, examples of the basic plan that we 
have, which is to make year-by-year improvements and, at the 
same time, count on more fundamental improvements over time 
that will be enabled by our Business Systems Modernization 
Program, and which are mapped out in our strategic plan.
    I want to stress, I think there is one key difference right 
now between the IRS situation today, and what it was even a 
year ago, I think, when I testified before this Committee. That 
is, the uncertainty about the future is reduced. It is not 
eliminated, but reduced.
    That is because we have laid out these plans, both for 
modernization and strategic planning in more detail and, I 
think, with a greater level of confidence than we had before. 
We still have much to do, but I think that we have a better 
knowledge of how to do it, and we put some of the foundations 
in place.
    The $9.28 billion that the President has requested for the 
2002 budget will, of course, be used to address our highest 
priority gaps in our ability to meet our mission and goals. We 
will be focused on the areas that we know will need more 
resources, even while modernization continues.
    For example, taxpayers who were seeking to comply with the 
tax laws, which is most of our taxpayers, need to get the 
assistance that they expect. That is only reasonable.
    On the other hand, unpaid tax debts need to be collected in 
areas where noncompliance is occurring. Because people are not 
filing what they are expected to, or are not reporting what 
they are expected to, we need to identify those areas, and be 
more effective in correcting those.
    We know that we are falling short in all of these areas; 
not exclusively because of resources, but in part because of 
resources.
    Beyond these mission goals, we have to support key programs 
that were specifically mandated by RRA 98, which includes 
expansion of our electronic tax administration program, and 
reducing back logs and key RRA provisions, suchas offers and 
compromise, innocent spouse, and collection and due process.
    We also need to improve our internal delivery of 
information systems to more nearly commercial levels, so that 
our employees will realize better productivity from the use of 
these tools.
    With respect to BSM which, Mr. Chairman, you correctly 
noted as the big increase, we know that. It is a $325 million 
increase in appropriated funds, from this year to the next 
year.
    I do want to note that, in terms of funds actually 
available to us, it is really a $20 million increase from 2001, 
because we had $305 million of funds carried over, which I know 
you are aware of because of the draw down.
    So in terms of the level of effort in the program, it is 
really going up about $20 million, not $325 million.
    We think that this funding will provide us, obviously, the 
ability to continue this important program, and will begin to 
convey significant benefits over the next 18 months, and 
especially over the next several years. This little road map to 
modernization that you all have is kind of a way of just 
illustrating this.
    Just to note a few of the things, in the next 18 months, we 
expect to able to use these systems to improve the quality of 
phone service to the taxpayers, and to begin to provide limited 
Internet services to taxpayers, who need information about 
their taxes and refunds.
    It will also provide us better tools for our employees, who 
are examining corporate income tax returns; and for the first 
time, very importantly, beginning in 2002, it will allow us to 
exchange taxpayer data in a secure way over the Internet, with 
authorized practitioners.
    In the following two years, progress will greatly 
accelerate, as we dramatically speed up the issuance of refunds 
from a matter of weeks to a matter of days; increase the 
quality and timeliness of responses to all kinds of taxpayer 
inquires, and begin really to provide adequate tools to our 
employees who are out there, trying to collect overdue 
accounts, and find areas of non-reporting in tax returns.
    Longer term, we will dramatically improve the quality, 
speed, and effectiveness of all of our compliance and service 
activities, while ensuring protection of taxpayer rights.
    So Mr Chairman, in conclusion, I think the IRS is on the 
right track. I think we have a clearer plan than we have ever 
had. I think we have demonstrated an ability to make some short 
term improvements in service, and I think, most importantly, to 
lay out how we are going to make even more improvements through 
our Business Systems Modernization Plan and our Strategic Plan.
    I am more than ever convinced that with the support of 
Congress and the Administration, we will succeed in this 
endeavor.
    Thank you for the time.
    [The information follows:]

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    Mr. Istook. Thank you very much, Mr. Rossotti.
    Let me ask first, we are discussing a number of efforts to 
try to improve the efficiency and reliability of the work that 
is done by the IRS.
    Although we talk about the computer modernization systems, 
if you look at the cost to the taxpayers if they have problems, 
probably the largest single items are the concerns with fraud 
in the EITC, the earned income tax credit.
    I think it would be good, and we discussed this some 
recently, but I would like you to comment for the record, if 
you would, on the current level, and how it is established, 
regarding the fraud level in the EITC. Because the figures I 
have indicate that that part of it alone is approximately $8 
billion a year of checks being written out of the Treasury, 
that should not be written out, were it not for this fraud.
    I realize there are efforts under way, but I would 
appreciate your testimony, to begin with describing the level 
of the problem, why it exists, what are the current efforts to 
correct it, and any suggestions that you may have, because I 
realize the political sensibilities here.
    There may be some things that the IRS believes that could 
be done, that are not being done, because of strictures placed 
by the Congress. But if we could start with covering that area.
    Mr. Rossotti. We have, of course, as we all know, problems 
of non-compliance or lack of payment, what people should have, 
all over the spectrum, from the top to the bottom. I think with 
respect to that particular problem in the EITC, we do have some 
reliable data from the 1998 filing season, and we will be 
updating that with new reports.
    What it showed was that out of about $30 billion, and we 
can give you the report if you do not already have it, but just 
to summarize it, it did show that there was about $30 billion 
of claims under the EITC. When all was said and done, based on 
our study, about $7.5 billion were incorrect.
    There are many causes of incorrect claims. It is a rather 
complex program. Not all of them are intentional or fraud. Some 
of them are fraud.
    With the special guidance that the Congress gives us and 
the funds of $146 million a year, we have tried to take a 
balanced approach, as we do with all of our compliance 
programs; on the one hand, trying to prevent as many of these 
incorrect claims as possible by especially going out to 
practitioners and other people who prepare a large percentage 
of these returns and explaining what kind of errors they 
typically make, and also by enforcing the due diligence 
requirements, as well as we can, on the practitioners. We have 
also worked with a number of groups to try to educate the 
public on these requirements.
    On the other side, when the claims come in, we have special 
units that screen returns, and try to identify those returns 
that look like they might have errors in them. Obviously, the 
things that we can check with the computer, such as Social 
Security numbers, we do. Those that require further follow up, 
we do through an examination process. That process altogether, 
we estimated in our study, actually prevented or saved about 
$1.5 billion of claims that otherwise would have been paid, 
that were not paid.
    So in terms of that effort, it was successful in that 
regard. On the other hand, there was still $7 billion that was 
not collected.
    There was one new feature in this filing season just 
completed, that I think has great potential. We experimented 
with it in the previous year, and put it into operation this 
year. We do not yet have evaluations of how successful it was.
    But through legislation that was passed a number of years 
ago, we now have access to a data base. It is called the 
dependent data base, that is maintained by the Health and Human 
Services Agency, with cooperation from the states, which gives 
us information on custodial parents and other information that 
is relevant to fixing or assessing whether the EITC claims are 
valid. This is one of the key tools that we use for the time to 
screen potentially erroneous refunds. I have seen it and I have 
been down to Austin where they developed a lot of this. In 
fact, I invite you to come to see it. I think that it has some 
real potential here to help with this problem.
    We do, even with those tools, still have limited resources 
as to all the returns that we can screen. We could kick out 
more if we had more resources.
    The last component I will say is our criminal investigative 
unit. It has a specific strategy to try to identify promoters, 
because there are people who specifically try to induce 
taxpayers, and have various kinds of schemes that promote or 
attract them to trade numbers and to do things to get erroneous 
refunds. We identified, just recently, 3,000 returns that were 
specifically viewed to be fraudulent. We will be investigating 
those.
    Our newly invigorated CI organization has a specific focus 
now, a more direct focus to take these things, and send them 
out to the field to investigators and investigate them. This is 
primary focused on the promoters who try to promote these 
schemes.
    So we have a balanced program. Obviously, it has had some 
success, because it has prevented each year, at least when we 
have measured it, 10 times as much potential outgo as we have 
spent on it.
    On the other hand, there is still a significant problem 
here. I think that one concern that I would just raise to you, 
the Joint Committee just issued a report about a week ago, the 
Joint Committee on Taxation, that identified a number of areas 
for simplification of the tax code, and dealt not necessarily 
specifically with EITC, but with unifying the definitions of 
qualifying child for a number of dependent exemptions, and 
filing status, and other things.
    I think that if you talk to our employees, and if you were 
to go down and see what kind of errors come up, there are 
significant number of problems that come up, just because of 
the complexity of these different definitions. Obviously, there 
are other people who are just deliberately going out there and 
filing claims that they should not.
    But there are also significant problems in trying to make 
this thing accurate. I think I would only recommend to the 
Committee the report of the Joint Committee as an area that 
could have some potential in helping to simplify this 
particular area for administration, if their recommendations 
were considered seriously.
    Mr. Istook. I know that one of the approaches, 
Commissioner, has been identifying certain categories, and 
holding back or delaying refunds or cash payments on them. Can 
you tell us, since we are just in the height of processing 
season for you, can you give us some comparison relating to 
whether it be by numbers or by dollar amounts; how many EITC 
returns were being delayed or held back a year ago, compared to 
what has happened this tax season?
    Mr. Rossotti. I do not have that data with me today, but I 
can get it for you very soon, within a matter of a few weeks. I 
will be happy to provide it for the record.
    Mr. Istook. I think that it would be useful to understand 
the level of efforts.
    Mr. Rossotti. Yes, and we can give it to you now, because 
we have these two programs. We have the more traditional way of 
identifying them, and then we have this new dependent data base 
program. So if you would like, we could give you statistics on 
both of those, and show how they are working.
    Mr. Istook. Certainly; to what extent is this a situation 
that responds to the level of resources that you have in it? 
You have the $146 million allocation. You mentioned that you 
believe that it saves 10 times that expenditure, which is $1.5 
billion. But that is still less than a fifth or so of the size 
of the problem.
    To what extent do you believe that this particular problem 
responds to having extra resources or not?
    Mr. Rossotti. It does respond to extra resources, because 
we could kick out more returns to audit checks for the 
dependant data base, if we had more resources to do that. I do 
not think that it is unlimited. I do not think that justadding 
more, it would go up for ever.
    But I could get you an estimate, if you wanted it, in terms 
of how many additional returns we could check out, if we had 
more resources. It would be an interesting exercise to do, in 
light of this new technology that we have.
    Mr. Istook. That is something that I do want to pursue 
further, but I do not want to take all the time myself. I know 
that kind of plays into the question of the level of audits 
that are being undertaken now, and the resources and the rate 
of return for those. But I will defer my questions on that 
right now and recognize Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman.
    First, let me ask you something, as it relates to the 
resources available to you. As you know, we are considering 
major tax bills. Have you contemplated the passage of one or 
more of the bills, either a marriage bill, estate tax, or 
income tax, and the impact that would have on your workload for 
the coming year?
    Mr. Rossotti. Well, obviously, these bills have not been 
really passed yet, entirely, but we have been looking at them. 
Actually, most of the bills do not have too much of a material 
impact, because they are just things like rate changes or 
dollar changes.
    The one item that would have a short term impact is if 
there was a special rebate that required sending out checks to 
large numbers of taxpayers this fiscal year. We have been 
working with Treasury on that. I believe we are really relying 
on Treasury to communicate those requirements.
    But there would be sizable costs in the short term if that 
rebate were done, because it would be a special one-time 
effort. Just the postage and the printing and the additional 
phone calls that we would get, and those sorts of things, there 
would be some not insignificant costs for those items, if that 
special rebate were done.
    On a longer term basis, those, the other changes that I am 
aware of, really are not the kind of changes that would 
materially increase or decrease our requirements.
    Mr. Hoyer. Would they require reprinting of materials?
    Mr. Rossotti. Well, I think that each year, yes, we would 
have to reprint. Every tax season, we reprint for the following 
year.
    But I think the one item that is a special item, that would 
not be covered by the normal process would be the rebate.
    Mr. Hoyer. If you put aside the increase for the IRS 
computer modernization, which is $325 million, you actually say 
that it is $20 million?
    Mr. Rossotti. It is $325 million of appropriated funds. It 
is $20 million of available funds; the difference being the 
money that was carried over from prior years.
    Mr. Hoyer. So what you are saying is, the $305 million was 
already in the pipeline?
    Mr. Rossotti. Yes, it was appropriated in previous years, 
and assuming that the Congress approves the release of it, we 
would have used up that money this year.
    Mr. Hoyer. Okay, so I want to be clear here, there is $20 
million of new funds that are available for modernization. Now 
under the plan, how much was going to be spent last year and 
this year?
    Mr. Rossotti. Well, we are going to be spending, again, 
assuming that the money is released, about $370 million. 
Actually, it is obligating, because we have to obligate these 
things.
    But if you take obligating, we would, I believe, obligate 
approximately $370 million this fiscal year, and it would be a 
little under $400 million, the next fiscal year, 2002.
    Mr. Hoyer. All right, now, are those funds available, with 
the $325 million, or the $20 million, included in this bill?
    Mr. Rossotti. Yes, if the President's put the $325 million 
in at this point, we would have $397 million available to 
obligate in fiscal 2002.
    Mr. Hoyer. Now when I ask for the plan, you responded that 
that is what the budget will allow you to do.
    Mr. Rossotti. Yes.
    Mr. Hoyer. Was the plan initially adopted two and-a-half 
years ago? What did that plan contemplate?
    Mr. Rossotti. Yes, well, I think that we did not really 
have a dollar number by year, two and-a-half years ago. We have 
been constantly updating this.
    I think, frankly, with all of our plans, what we try to do 
is to determine what our dollar ceiling is, that we have to 
plan to, and then fit the plan to that. I mean, they are very 
closely tied together. We do not plan for, you know, unlimited 
funds. We plan for the funds are that are available.
    Mr. Hoyer. Mr. Commissioner, I am sorry, I did not mean to 
interrupt you.
    Mr. Rossotti. No, I was just going to say, in the budget we 
have laid out what the projects are that would use up the $397 
million, if that were appropriated.
    Mr. Hoyer. All right, and I guess my question is, 
initially, we talked about [a] wanting to do this correctly, as 
we have been through a lot of fits and starts; and [b] we 
wanted to do it on a schedule that could be met.
    I know what you are saying, in terms of you do not have 
unlimited dollars, and you are going to spend the dollars that 
are appropriated, and no more than that.
    Mr. Rossotti. Right.
    Mr. Hoyer. I accept that.
    My question to you is, if the dollars were available, how 
many dollars could you spend effectively, to accelerate and 
realize what was originally contemplated as the schedule?
    Mr. Rossotti. Well, I mean, I guess the best way I could 
answer that is to say that I do not believe that this would be 
the ultimate limit, at this point. There would be a limit. I 
mean, unlimited funds, you know, would not be what we are 
asking for.
    Mr. Hoyer. Let me ask the question this way. If we had the 
dollars available, how much could you spend, efficiently and 
effectively, to get the tax systems modernization on line, and 
still be confident that you were spending the money 
appropriately.
    Mr. Rossotti. I hesitate to give a precise number. But I 
would say that I think that modestly, a greater amount could be 
effectively used during fiscal year 2002, if the funds were 
made available. I guess that is probably the closest answer 
that I can give.
    Mr. Hoyer. For an agency that has 8.9 billion, I am just 
trying to figure out what modestly means.
    Mr. Rossotti. I mean, we would not be doubling the amount. 
I would not come in here and say, if you said, look, just do 
this as fast as possible, I would not come in here and say, 
give us 50 percent more or double the money to spendduring that 
time period, because there are management constraints, and we are very 
conscious of them.
    I mean, I have said often to the members of this committee 
that I feel, myself, like I try to look at this money and this 
modernization account just like it was my own company's money. 
You know, I would not want to spend anything unless I really 
felt we could do it. I think that we could accelerate modestly.
    Mr. Hoyer. If this were your own company, if you try to 
affect this as efficiently as possible, would that mean doing 
it as quickly as you could accomplish it, within the framework 
of your revenues?
    Mr. Rossotti. Yes, it certainly would, because I believe 
the benefits are significant, and the sooner we get them, the 
better off the Agency is going to be.
    So, I mean, if this were completely a business, I think 
what we would do, and assuming that we could get capital 
markets to fund us, which I think we could, because we could 
show the return, I would limit it by the risk.
    I would basically manage it by what I thought the balance 
of risk was, in terms of accelerating the program, which is why 
you can not accelerate it, instantaneously. I do not think that 
would be wise. But you could certainly accelerate it, to some 
degree.
    Mr. Hoyer. To what degree?
    Mr. Rossotti. Well, I think it probably wise, in my 
position, not to give any additional numbers as to what could 
be spent. You know, I am obviously committed to supporting the 
budget that has been presented.
    Mr. Istook. Would the gentleman yield a moment?
    Mr. Hoyer. I would be glad to yield.
    Mr. Istook. I understand what Mr. Hoyer, I think, is hoping 
to learn. Can you identify, Mr. Rossotti, areas that if there 
were additional funding available, what might it be applied 
toward? I mean, would it be applied toward more equipment this 
way, more program, or something else? Where would those areas 
be?
    Mr. Rossotti. Well, one way to answer that, there was a 
budget also prepared and submitted by the Oversight Board that 
laid out some differences. In the area of modernization, there 
were really three areas that were identified by them, that 
would involve funds for 2002. Then there was a fourth area 
really that had to do with sort of the method of funding.
    But in terms of 2002, the three areas that were identified 
were, Mr. Chairman, in trying to respond in that way, just to 
identify those as the areas where the Board felt there were 
some additional opportunities to accelerate.
    The first one was an additional $54 million to accelerate 
the replacement of our desktop/laptop hardware, which has the 
advantage that if can put the hardware in place, you can deploy 
the software faster. So that was one area.
    A second area was another $50 million for acceleration of 
some of the planned projects in the business systems 
modernization program itself. The last one was $20 million, 
related to enhancements to our installed systems to support the 
program.
    So I guess if you wanted to answer it that way, those could 
be examples of items that could be funded.
    Mr. Hoyer. I yield my time.
    Mr. Sununu [presiding]. Your time is expired. But you know 
what I think of you, and how willing I am to be generous. If 
you could summarize, though, it would be nice to get in one 
more round of questioning, before voting.
    Mr. Hoyer. I am going to ask one more question. I am not 
trying to put you on the spot, but I am presuming that you are 
in agreement, or I am going to put you on the spot. Are you in 
agreement with the observation, as I understand I think you 
just said you are, with the Oversight Board's request for total 
modernization?
    Obviously, in agreement, by that I mean, as a business 
manager in a business judgment, is the Oversight Board correct 
that $568 million could be spent effectively to realize the 
modernization program in a timely manner?
    Mr. Rossotti. Well, I think I have answered it about as 
best or as well as I can. I mean, let me just say this. I think 
that any agency----
    Mr. Hoyer. Excuse me, that is $1.268, as opposed to----
    Mr. Rossotti. Well, just to say, the other part of the 
money was really a two-year funding.
    Mr. Hoyer. Right.
    Mr. Rossotti. It was an advanced funding, which really did 
not have anything to do with the money that would be obligated 
in 2002.
    But I think it would be best to answer it this way, by just 
simply saying that I think I, probably no different than any 
head of an organization, if I were asked, could we make 
progress faster if we had more funds, within certain limits I 
think the answer is yes.
    Mr. Hoyer. Mr. Commissioner, I do not think this is either 
politically a difficult question, very frankly, for you or the 
Administration. I understand we have constraints, and we may 
not want to spend more money.
    Mr. Rossotti. Right.
    Mr. Hoyer. But all I am asking you is, if the IRS had the 
dollars available, could you spend them effectively. The IRS 
has been working at this modernization for sometime, and you 
are new relatively speaking, but I have been at this 
modernization project for over a decade and a half. We have had 
a lot of failures and a lot of stumbles. Hopefully, we are on 
the right track.
    Now what I understood you saying is, from a business 
standpoint, if you were in private business, you would try to 
capitalize and get this done as quickly as possible, because 
you could show your lenders, or if you were taking it out of 
earnings, that you would get a better return, the more quickly 
you completed.
    So I am not trying to put you in a political difficulty 
with the Administration. I am just asking you a business 
management question, can this be done more quickly.
    Mr. Rossotti. I think the answer is, within the limits that 
I have discussed, I think it could be done, yes.
    Mr. Hoyer. Thank you.
    Mr. Sununu. Thank you, Mr. Hoyer, and thank you, 
Commissioner.
    I will begin my questioning perhaps offering by way of 
comment, a rephrasing of Mr. Hoyer's question. I think the 
difficulty in responding to it has more to do with your own 
modesty. I mean, face it, the question is, how much money could 
you spend, before you start acting irresponsible? That is a 
tough question for anyone to answer. I do not know that I have 
ever heard it asked of any agency head, and maybe we should ask 
it more often.
    But I will also say that in my limited experience, your 
threshold is probably a heck of a lot higher than it is at most 
other agency heads. I have confidence in your ability tospend a 
lot more money, more responsibly than many other agency heads, and that 
has a lot to do with the degree to which you are very well suited to 
your current task, as difficult as it may be.
    So while I certainly recognize that you could spend more 
money, if we gave you more money, and do so responsibly, 
knowing what we do about implementation and timing and 
budgeting, and the realities of the budget, you know, we are 
going to do what we think is appropriate. That, in all cases, 
might not be exactly what you would like.
    I have a few questions and, for the most part, follow-ups 
to things we addressed the last time I had a chance to question 
you about the implementation and sort of reform proposals.
    First, on the issue of full-time equivalents, we talked a 
year ago about 2,500 or so full-time equivalents, the new 
employees that were requested and where in the organization 
they would fit, at a grade level. I think the budget request is 
for approximately an increase of 1,800 FTEs, and I know there 
are a lot of nuances in there.
    But my question is, how many of those are supervisory 
positions, and how many of those are, you know, front-line 
positions? Are we sort of putting people in management roles, 
or are we putting them to work on the ground, where they are 
going to be the most effective.
    Mr. Rossotti. Actually, I do not have the exact number 
here. I did provide it in a letter to Mr. Istook, which I can 
get to you. The answer is, it is a very small number, under 
100. I think that out of the total STABLE initiative, which was 
3,800, I think that all but maybe 100 or so are front-line 
positions.
    Mr. Sununu. They are non-supervisory.
    Mr. Rossotti. Non-supervisory.
    Mr. Sununu. Terrific; we had a chance to talk earlier 
yesterday, but I would like you to address, for the record, or 
talk a little bit about the progress and success you have made 
on addressing the property and equipment issues raised by the 
GAO, where you feel that is right now, and what, if any, 
improvements or modifications to the system are left.
    Mr. Rossotti. Well, let me say, in general terms, about 
property management, if there is more on the audit, I have got 
Mr. Rogers here with me, who was the CFO at the time. The only 
reason I might have to not answer questions is, I have an 
ethical recusal on some parts of these things related to the 
financial audit.
    But I think on property, let me just make this general 
comment. I think that was one of the areas that in last year's 
financial audit was cited as an ongoing material weakness in a 
very serious way by GAO. I think that we have made significant 
progress in that particular area.
    We still have some weaknesses but, in addition to just 
getting the information that we needed to do the year-end 
statements, we did, as I mentioned at the hearing last year, 
finally have just appointed a single person as executive, as 
part of our information technology organization, to manage 
this. That has been an important step.
    They have, as part of their job this year, done a 
significant one-time clean-up of the entire inventory of 
equipment.
    They have also put in place a process to maintain those 
records on an ongoing basis that includes linking our 
purchasing system, our financial system, and our records 
system. So those are some important steps.
    Finally, one other thing is, we have put in some new 
technology, with particular software products. Most of our 
equipment is computer equipment. There is some new technology 
now that when the equipment is networked, you can actually use 
technology to track it on line, continuously.
    We have deployed that for about 70 percent of our 
equipment. The net of it is that going forward this year, we 
will not, we do not think, have to do one of these one-time 
clean-up things. We have got an ongoing process to really 
manage this.
    Now it is not perfect yet. This is the first year that it 
is really going to be operational. But it is dramatically 
improved over where it was.
    Mr. Sununu. One of the issues addressed last year with 
within EITC, was not specifically fraud. You had talked to the 
Chairman about that already.
    But it was errors that seem to have been driven by the 
preparers, and we will call them, for lack of a better term, 
professional preparers. You indicated that there is an ongoing 
process of outreach to go to the preparers, to help educate 
them.
    To what extent are errors driven by preparers still a 
problem, and what has been the experience and, I hope, the 
success, of that outreach program?
    Mr. Rossotti. We do not know the answer to that 
quantatively yet, because we have not yet measured the result 
after having done this program, which we will do. So 
quantitatively, I can not answer the question.
    Mr. Sununu. Those results will be felt or measured, once 
you review the outcome of the finances.
    Mr. Rossotti. Yes, and it really takes a significant amount 
of time, by the time you go through the process of gathering 
this data. So we do not really know quantatively, definitively, 
the answer.
    We only know, in a sense, qualitatively, from surveying the 
practitioners and from the reports of our own employees, that 
these visits were well received, that they seem to be useful, 
in most cases; and that, they did identify, in their 
discussions--and I think we did about 10,000 visits and then we 
did some refresher visits--a significant number of 
misunderstandings, if I could say that, about what was really 
involved in doing some of these EITC returns.
    So we can not yet answer your question quantatively, how 
much difference did it make, but it seems like it was viewed by 
the participants as having a beneficial impact. That is all I 
can say at this point.
    Mr. Sununu. In your submission, you talk about an 
efficiency improvement initiative, focused around the automated 
call distribution system. It had been raised to me, at some of 
my visits with employees and those working in the customer 
service area, that previously, there had been concerns with 
queing of customer service calls, the routing system, which at 
times could be construed to be somewhat arbitary.
    Blocks of calls were moved, and not necessarily moved in a 
way that was responding to the average time on a phone call, 
staffing needs, unplanned absences, those kinds of things.
    To what extent will the new distribution system address 
that, and when will the call distribution system be fully 
implemented?
    Mr. Rossotti. Well, a major part of it has already been 
implemented through this filing season. But it is not just 
implementing the system; it is learning how to use the system.
    I mean, it was only, I think, last year was the first 
filing season where we had any kind of automated call routing 
at all. Prior to that, it was done on a site-by-site basis. We 
have about 25 different sites that accept calls around the 
country.
    Mr. Sununu. Is that still the number, 25 sites now?
    Mr. Rossotti. It is the same number of sites, but they are 
now managed in an enterprise-wide mode, with automated call 
routing, and we have a joint operations center down in Atlanta 
that now manages this, and does scheduling in advance on a 
half-hour by half-hour basis, and then adjusts the calls. This 
is only the second year that we are beginning to do that.
    So I think what you are probably hearing from the employees 
is not so much a technology issue, as it was a management issue 
of learning how to use this technology effectively.
    I think that the fact that we made progress this year in 
answering eight million more calls and increasing the level of 
service is an indicator that we have been learning. But we have 
still got a lot more to do.
    In terms of what is coming, there are really two big things 
coming, and they will begin to come or they will come each 
year, beginning next filing season, and extending over the next 
two to three filing seasons.
    One of them is that we will be enhancing this call routing 
system to be able to be more precise, especially on account 
calls. In other words, we have got 70 percent of the calls that 
are people calling about their specific account. The other 30 
percent just want tax law advice.
    On the account calls, we can take advantage of what we 
already know about the taxpayer accounts, to route them much 
more precisely, to precisely who is best qualified to answer 
their account question. We cannot do that yet. We will begin to 
do that sometime next year.
    The second thing though, is that we are literally studying 
the entire network of 25 call sites and all the thousands of 
employees there, and trying to figure out what is the best way 
of organizing them, in terms of specialized groupings, so they 
will have the best training to answer those calls. That will 
take about two to three years to fully do that specialization.
    Mr. Istook [presiding]. Thank you, Mr. Sununu.
    Mr. Commissioner, with the current technology that you are 
seeking to apply, matching reports from different entities, 
whether they be a 1099, a W-2, a Schedule K and so forth, I 
understand, of course, some things are being matched 
systematically, using computers, and others are still in the 
works.
    Can you tell us, and I am talking about in an appropriate, 
modern way, what matching programs have been brought on line 
within the last couple of years, and what are the anticipated 
dates that that capability will be established and functional, 
and which ones may be further ahead in the future.
    Mr. Rossotti. Well, in terms of programs that are available 
today, and that have been actually for some years, it is not 
relatively recent. I do not remember when these were brought 
out, but the previous tax system modernization brought this on.
    But that system is used, and it is called Automated Under 
Reporter, to match basically W-2s and 1099s. It is a billion 
documents a year. We use that very effectively to match those 
items to identify discrepancies and to send adjustment notices 
to the taxpayers accordingly.
    The area that it is not being used for right now, the most 
significant area that it is not being used for, which was 
actually requested funds in our STABLE initiative, are for K-
1s, which are the documents that are reported by partnerships, 
trust, and pass-through corporations, S-Corporations.
    That is an area that has grown very, very significantly, in 
terms of the economy. There are now over seven million returns 
filed by those kinds of entities, that represent, $5 trillion 
worth of gross receipts, and about $600 billion worth of net 
income.
    We are not at the present time, and we will be starting 
soon, but we have not in the past been matching those documents 
against individual income tax returns for the same purpose as 
we do the 1099s and the W-2s.
    So that is the main initiative that we have, and it 
represents a big one, because of the magnitude of the income 
that is being matched.
    I will say that the matching is only the first step, 
because all that does is identify a discrepancy of what is 
reported on the K-1 and what is in the income tax return. You 
then have to follow-up on that.
    It also does not deal with whether the income was reported 
correctly on the K-1 in the first place, which is an entity 
level issue. That, we have to deal with through audits, and we 
have a program to improve. One of the things we want to do is 
to substantially increase our coverage in that area, just 
because of the growth and income. So those are some of the 
things that we have.
    Now longer term, through business systems modernization, it 
will not be so much that we will cover any more areas, because 
those are pretty much the main areas that we can cover.
    What they will do is, they will enable us to do it somewhat 
more efficiently. In other words, we will be able to do, we 
think, better technology, better matching, that will require 
less manual intervention, and less time to process the case, 
after it is identified.
    Mr. Istook. Now as far as, for example, the dependant child 
data base, are those matchings not being done with automation?
    Mr. Rossotti. Oh no, those are being done. I was telling 
you about matching with third party documents.
    We also have what is called the up-front matching, which is 
basically two things. It is matching against Social Security 
numbers that we get from the Social Security Administration, 
and now just recently, with the dependant data base. That is 
done during the processing of the returns.
    Mr. Istook. So does that mean that that processing would 
happen, for example, before any refund was issued?
    Mr. Rossotti. It does.
    Mr. Istook. And is there any other type of matching that is 
done currently before a refund would be issued?
    Mr. Rossotti. We basically do three things. We check the 
internal consistency of the return, to make sure that the 
numbers add up and that the numbers that are reported in 
oneplace are right, compared to another place, and we check Social 
Security numbers.
    We have been adding more and more Social Security numbers. 
This year, we added, for the first time, checking the second 
spouse. If there are two, married filing jointly, we now check 
both of those this year, for the first time.
    Then the last issue is checking on the dependant data base, 
which is for people that are claiming a qualifying child, and 
their EITC and certain other kinds of dependency kinds of 
exemptions.
    Right now, those are the only items that I am aware of, and 
I will check when I get back, to make sure I have not missed 
anything. But I think those are the only items that we do.
    You see, the data that comes in on 1099s, W-2s, is not 
available in time to check during the return processing 
process. It comes much too late to be used during the filing of 
returns.
    Mr. Istook. So really, it is only the dependant data base 
that you are able to check before returns are issued, because 
of that time frame?
    Mr. Rossotti. That and the Social Security data base.
    Mr. Istook. Yes; what proportion of these other documents 
are being submitted electronically; whether it be, I am trying 
to remember the form number that corresponds to the 1099 and so 
forth, on the employer side.
    Mr. Rossotti. That is the W-2.
    Mr. Istook. Okay, well, yes, but I meant the 1099, as 
opposed to the W-2 here. But anyway, the point is, the 
employers and partnerships and so forth have corresponding 
forms, that are are submitted in this matching program.
    What proportion of those are being electronically 
submitted, and what proportion is requiring manual input?
    Mr. Rossotti. I will have to get you the exact numbers.
    Mr. Istook. Right.
    Mr. Rossotti. But with respect to the W-2s and the 1099s, 
which is one billion documents, roughly, a year, there are 
three ways that they come in actually. One way they come in is 
on magnetic media, physically sending us a magnetic tape or a 
floppy disk, or something of that kind. Actually, most of them 
come in that way. That is the way most of them come in.
    Then there are a few that are coming in with a new system 
we have, which is electronic transmission, from computer to 
computer, which is where we want to go in the future.
    Then there is a smaller number that actually come in on 
paper documents. I do not remember how many that is, but it is 
a relatively small percentage. It is still a significant number 
of documents.
    With respect to the K-1s, there is a new requirement that 
partnerships with over 100 partners submit them electronically. 
We are just getting that program going. There has been some 
delay in it. That is a legislative requirement.
    There has been a bit of a delay, because there has not been 
qualified software out there that the taxpayers had available 
to them, to actually produce, in an acceptable way, these K-1s.
    So we are just getting that going. But it only applies to 
the partnerships with over 100 partners. So most of the 
documents that come in on K-1s actually come in on paper.
    Mr. Istook. Do you have the information, or if not the 
exact, at least an approximation, and you could of course 
follow-up with details, but what is it costing us to process 
these documents that are external to the return itself; whether 
they be the W-2s, the K-1s, the 1099s, and so forth? What is 
that costing us, and how does that relate to the overall cost 
of the items that are still being manually input?
    Mr. Rossotti. I can get you that. I do not have the data. 
That is data I can readily get you. I do have one number, 
though. In terms of the 1099s and the W-2s, but not counting 
the K-1s, 98 percent of it comes in on magnetic media.
    Mr. Istook. Of which ones?
    Mr. Rossotti. The 1099s and the W-2s; the third party 
reporting-type documents; only 50 million come in on paper. I 
mean, it is still 50 million documents.
    Mr. Istook. I am sorry, was that 15 or 50?
    Mr. Rossotti. 50 million.
    Mr. Istook. 50 million?
    Mr. Rossotti. 50 million of them come in on paper. We do 
those, basically, in the low period, in other words, when we 
are not processing the 1040s and things like that.
    But in terms of the cost of doing that, I can get that for 
you. Obviously, the 50 million on paper costs more, relatively 
speaking, than the 98 percent that come in on magnetic media.
    There is an opportunity to improve even on the magnetic 
media, though, because even though you do not have to key it 
in, you still have a physical handling process, to bring in 
those tapes.
    Where we are going there, we have a new system. It is 
essentially electronic filing for third party reporters. We 
have a new system that seems to be well received, that will 
allow people like banks and employers to simply transmit that 
data to us electronically, and not have to physically send us a 
tape. We are just getting that one going, too.
    Mr. Istook. Is the software for the third parties to enable 
them to transmit it electronically, neither with paper nor with 
the bulk tape being submitted; is that software developed and 
provided to them by the IRS, as opposed to third parties?
    Mr. Rossotti. No, that is just readily available commercial 
software.
    Mr. Istook. It is usually packaged, I am sure, with the 
overall accounting software that they have. I am trying to get 
at the question of the breakout of the different aspects that 
require manual processing, and some understanding of what 
proportion of the IRS's expenses are tied up in that.
    I know there have been proposals before regarding mandatory 
electronic submissions, that have had different problems, but I 
also know that that is a continually changing environment, as 
more and more people are using that.
    Can you try to give us some perspective on how much of the 
labor costs relate to the cost of manual processing of things 
that could be done electronically? You mentioned, of course, 
that one-third of the returns submitted so far this year, with 
about 10 million on extensions, that about one-third of those 
this year have been electronic.
    What does that mean in terms of the FTEs that it takes to 
process those, the processing costs? The budgetary implications 
of each stage in changing something from a physical, manual 
process into electronic is what differentialin expenditures?
    Mr. Rossotti. Well, let me answer this, if I could, in kind 
of a summary way here, and we can get back to you with more 
specifics.
    Mr. Istook. Sure.
    Mr. Rossotti. I know my staff is going to have a headache, 
because I am going to cite these numbers, and then they are 
going to say, those were not the right numbers.
    But I just want to make sure that I answer as well as I can 
here. Just to take the big picture, roughly speaking, and I 
think these are the right numbers, about seven percent of the 
IRS budget, which would be $450 million or $460 million, and I 
think that is the right number, is everything to do with 
processing; processing the forms, all of them, 1040s, 
everything.
    Again, I say this with a qualification, and they are going 
to get it for me. We will get that.
    Mr. Istook. Sure.
    Mr. Rossotti. But let us say it is in that range, seven or 
eight percent.
    Now that breaks down, roughly speaking, into three major 
categories as far as forms. There are the individual forms, the 
1040 series of forms. There are $614 million for everything to 
do with submissions processing.
    Now in the categories, it breaks down into basically about 
three or four significant categories. The biggest one, of 
course, is what you think of, processing the 1040 forms, what 
happens during the filing season. Interestingly, that is only 
about 60 percent of the number, because it is a large number of 
forms, but it is one form.
    The biggest part of the other 40 percent are about 500 
other different kinds of forms that we process, mostly 
business-oriented forms. I mean, there is a lot. For example, 
the employment tax forms, the 941s, the 940s. There is just a 
wide range, several hundred of these other forms, that are 
processed, that are not part of the individual filings. That is 
the other big piece.
    Then the smallest piece would be the 50 million or so of 
these paper forms that I mentioned, that are the third party 
documents. Those are approximate numbers. I can get you 
somewhat more definate numbers.
    Then there is a final element of it. Included in here are 
some items that are not directly processing, but are related to 
processing, such as all of the revenue. Most of the people that 
actually account for the $2 trillion of cash that we have come 
in, and do all the remittance processing, all the payments 
processing, are in there, too.
    So, I mean, it is not just the forms. We also take in $2 
trillion. Most of it comes in electronically, but we also 
process a lot of checks, and then we have lock boxes with banks 
that process many checks.
    So there is a whole process of managing that whole 
remittance stream and accounting for that money, which is 
obviously a critically important thing to get right. That is 
the other big component that is in that money.
    So when we talk about e-filing, we mainly focus on 1040s. 
It is a very important strategy for us. It only, however, 
addresses a part of a part of a part, so it is not a solution 
to everything at the IRS.
    Mr. Istook. Certainly, and I am not quite sure what the 
current breakdown may be of those things that have to be 
processed, between those that are read with some type of 
scanning technology, or those that require manual input by a 
keypunch operator.
    What I am trying to arrive at, for example, when you 
mentioned the one-third of the returns so far this year being 
electronic, I am not quite sure how that relates to the past 
year, and I am not quite sure how that relates to the costs of 
processing.
    Mr. Rossotti. Right.
    Mr. Istook. Do you have a handle on the cost differential 
from last year to this year, because of that?
    Mr. Rossotti. Yes, well, first of all, it is about five 
million more that are received electronically than last year.
    What is interesting though is the number of returns, in 
total, grows about two million. So your number of paper returns 
only shrinks about three million.
    Mr. Istook. Right.
    Mr. Rossotti. In terms of cost, over the long term, we have 
done a very careful study of all the costs related to 
processing. As with all cost studies, there are short term 
savings, which is just the labor, and then there is the longer 
term, when you shut down facilities and things like that.
    The short term savings, just labor, are about $1.70. The 
longer term savings are about $3.00.
    Mr. Istook. Per return?
    Mr. Rossotti. Per return; now that is assuming an average 
mix of returns. Some 1040s are more complex than others.
    Unfortunately, in the early stages of the e-filing, we tend 
to get the more simple returns, which are not as heavy, in 
terms of cost savings. But, I mean, if you extrapolate this 
longer term, we will save that money. That is part of what we 
were counting on, to be able to reallocate those monies to be 
able to do the things that we are not doing now, like answer 
the phone calls and do the audits.
    Mr. Istook. Certainly, and that $3.00 long term, compared 
to the $1.70 short term, is the long term in addition to the 
short term?
    Mr. Rossotti. No, it is a total part of.
    Mr. Istook. So it is $1.70, short term?
    Mr. Rossotti. Again, these are round numbers.
    Mr. Istook. And it is an additional $1.30, long term.
    Mr. Rossotti. Exactly.
    Mr. Istook. Where is that going to lead, in terms of 
facilities? It is one thing to say, well, each facility can be 
only 75 percent of its current size. It is another thing to 
say, we are going to have 25 percent fewer facilities.
    Mr. Rossotti. Yes.
    Mr. Istook. Where is that going?
    Mr. Rossotti. Well, actually, we have been doing a lot 
planning on that. We have 10 centers where we process returns.
    Mr. Istook. Right.
    Mr. Rossotti. Interestingly, if you look at what we call 
campuses now, because really in some cases, fewer than half of 
the employees at those centers are actually involved in the 
processing. That is where we have a lot of our call sites that 
do the phone calls.
    We do the things like the EITC exams, the dependant data 
base, all of those kinds of correspondence exams, a lot of the 
collection work. Those activities are based in those same 
facilities. A lot of times, there are multiple buildings. 
Ithink you have been down to Austin and, as you know, there are 
multiple buildings there.
    So what we have done is, we have now, under the new 
organization, clarified that, and we have one part of the 
campus that is strictly processing. Then we have another part 
that handles the customer service or account management, and a 
third part that handles these compliance activities.
    Generally speaking, where we are going to be increasing, 
for example, we do need to add gradually, some employees to 
handle more phone calls. We are not answering all the calls.
    We also have some things, like I mentioned, the offer in 
compromise and the innocent spouse, which are programs that 
were specified under RRA.
    What we are doing is, we are centralizing the people that 
handle, for example, offer in compromise, which is a very large 
program, with several thousand employees. We are centralizing 
those at two of these service center campuses.
    What we are doing, as the processing of the returns phases 
down, we are reallocating that space and retraining some of 
those people to deal with the longer term requirements. So that 
is point number one.
    Point number two, as part of the reorganization, another 
thing that we are doing that will be actually effective in 
2002, which we think will have especially important benefits to 
small business, is that previously we did all 400 or so kinds 
of forms at all 10 places. The individual returns, obviously, 
because of the huge volume of them, tend to get the attention.
    What we have done, as part of the reorganization, and will 
be completed in 2002, two of the processing sites will 
specialize only in doing the business forms.
    They will be dedicated all year round. They will do no 
individual returns. They will do only business returns. Those 
are the Cincinnati site and the Ogden, Utah site. That is 
already partially completed. By 2002, it will be largely 
completed.
    We think that will significantly improve, once we get 
through a training transition, the quality and responsiveness, 
and these are mostly small businesses that are filing most of 
these returns.
    The other eight sites will only do individual returns, so 
they will obviously be able to specialize and focus on that. 
Gradually, those number of eight sites will decline. They will 
go down from eight to seven to six, and we are already doing 
this, as a matter of fact, because we are gradually drawing 
them down.
    We will be using that space and some of the personnel there 
will be trained to handle things like offer in compromise, 
which is a very big program now. We are specializing that at 
two sites, and we are putting innocent spouse in a third site.
    Also, we will be increasing the volume of telephone 
collections, which is a place that we ask for money in STABLE, 
for example, because we are not collecting all the debts that 
we could collect with telephone collection.
    So we have got this whole master plan, and it is not 
completely finished yet, that would involve essentially two or 
three major thrusts. One of them is to specialize the 
processing, as we are doing with the business returns, to get 
better quality.
    The second is to eventually reduce the number of sites 
where we process individual paper returns, because we will not 
need as many; and then to re-use those facilities and re-train 
those people to handle the gaps that we currently have in 
compliance and customer service.
    Mr. Istook. Let me ask one other question relating to the 
forms, before I yield to Mr. Hoyer. As far as forms that are 
submitted by taxpayers or third parties to the IRS, that are 
not actively processed, that may be retained, filed for some 
sort of reference purposes, in the course of an audit, for 
example, what types of forms and what volumes really are 
submitted, but not keyed into the system, or actively utilized?
    Mr. Rossotti. I would have to get you a more precise answer 
to that. But as an example, all the K-1s that we had been 
receiving for the last several years would have fallen into 
that category, because they were only being used selectively 
during audits. They were not being keyed in.
    Usually, what it is though, for example, with respect to, 
say, the 1040, you know, which may have many different 
schedules and attachments, not everything in those schedules 
and attachments is keyed in, because that would be way too 
expensive to do.
    So there has been very careful analysis over the year to 
figure out precisely which line items out of which schedules 
are keyed in.
    Now one of the advantages, longer term, as we get almost 
everybody on electronic filing, when you electronically file, 
you do not have to worry about that. You have all the data in 
there. But for the paper keyed-in returns, we only key in 
selective data off the schedules and forms.
    Mr. Istook. And as far as those for however many years, 
they are still indexed, so that you can retrieve them.
    Mr. Rossotti. Yes.
    Mr. Istook. And they have to be stored. How long are we 
keeping those? What kind of storage expense is there for these 
that have been indexed, but not processed, historically?
    Mr. Rossotti. The forms that are stored are actually stored 
not by the IRS directly, but by the Federal Records Center, I 
believe. I could get you the cost. We pay a fee to the Federal 
Records Center.
    Mr. Istook. Is that under GSA?
    Mr. Rossotti. It is $26 million a year, under GSA.
    Mr. Istook. GSA?
    Mr. Rossotti. $26 million a year and they retrieve them for 
us, too, when we need them.
    Mr. Istook. And that overall fee covers the cost of 
retrieval, as well as the cost of storage.
    Mr. Rossotti. Yes.
    Mr. Istook. And they do the indexing, or do you do the 
indexing?
    Mr. Rossotti. I am not sure about that. We will have to 
find out how that is done exactly.
    Mr. Istook. Thank you.
    Mr. Hoyer?
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Chairman, at the end of my statement, I should have 
asked for unanimous consent to include the report of the 
Internal Revenue Oversight Board which, as you know, was 
created by the formal restructuring. I will ask for unanimous 
to include that for the record.
    Mr. Istook. Certainly, without objection, that will be 
done.
    Mr. Hoyer. Thank you.
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    Mr. Hoyer. Mr. Rossotti, again, I am not trying put you on 
the spot, but I am concerned by the Oversight Board conclusions 
that, and I quote from the report, ``The Administration's 2002 
budget does not adequately support the IRS strategic plan, and 
provides inadequate support for technology modernization.''
    They go on to say that they are concerned that this is the 
first time that there will be a zero balance at the end of the 
fiscal year.
    There has, as you point out in your testimony, been a very 
substantial carryover, subject to authorization by this 
committee, which obviously gave you the opportunity to 
negotiate for further steps, or to plan for further steps, with 
some degree of confidence that if things were going as they 
should, that that money would be available.
    Obviously, if you have a zero balance, as I understand the 
concern of the Oversight Board, you will not have the 
confidence, and they are afraid of fits and starts.
    That is really what my questions were trying to get at; not 
so much, Mr. Sununu, is it a question of irresponsibility. It 
is a question of effectiveness in terms of the application of 
resources to the accomplishment of an objective.
    As I understood your business judgment was, that you would 
try to do this more rapidly, because the risk level was low, 
and the probability of profit was high. Is that an accurate 
statement?
    Mr. Rossotti. Well, up until the point that you push the 
risk level too high, then you would want to go as quickly as 
you could, to get the benefits.
    Mr. Hoyer. Right; do you think the Oversight Board has 
pushed the risk level in their recommendation?
    Mr. Rossotti. No, I think that the risk level would be 
acceptable, in terms of the build-up.
    On the other point, the issue about the fits and starts, I 
think that was the other concern that they had. That is not 
really so much a funding level, in terms of how much you are 
actually spending. It is a timing issue.
    I mean, it is a question of the original idea of the ITIA 
account, when it was originally funded, which was actually 
before I came to the IRS, to put sort of a working fund, as I 
understand it, together, where the money would be appropriated, 
but it would not be able to be drawn down, until various 
appropriate kinds of reviews were held. But at least the money 
would be there, and you would not have to wait until an 
appropriation went through.
    Mr. Hoyer. It was not only to wait for an appropriation to 
come through, but the theory was that you have contractors out 
there who may be able to help us, and there would be a much 
greater opportunity to engage those contractors in meaningful 
negotiations, if they knew what the resources were there, if 
approved; as opposed to speculating that you may.
    Mr. Rossotti. Yes, I think that is the idea, that it would 
create better greater assurance of continuity of the program, 
for all parties.
    Mr. Hoyer. Right, in any event, I will go on to another 
line of questioning. What is the total FTE IRS requesting this 
year; do you know?
    Mr. Rossotti. Yes, I have got so many FTE numbers, I have 
to look them up. I apologize.
    Mr. Hoyer. I do not blame you. Maybe we have that; do we 
have it?
    Mr. Rossotti. Okay, exclusive of the EITC, which is a 
separate fund, and I think the number in the budget is 99,116, 
I believe.
    Mr. Hoyer. And the EITC is?
    Mr. Rossotti. 22,036; so if you add that in, that is 
101,352.
    Mr. Hoyer. Of the 99,116, how much is attributed to 
computer modernization; do you know that?
    Mr. Rossotti. Oh, computer modernization, that is an 
important point to make. It is none, because the ITI account 
funds only outside contract money.
    Now we do have some FTE that is funded by our internal IS 
staff, that are part of our Business Systems Modernization 
Office, which is a relatively small number. I believe that is 
on the order of 100 or so, and I could find out.
    Those are the FTEs that are just part of the Modernization 
Office that oversees the program. But all of the work on the 
program is really done by contract, and all of the money in the 
ITIA contract fund is contract money.
    Mr. Hoyer. You were not here for the testimony of the 
Secret Service; but factually, the testimony was that while the 
money was included for the employee raises, there was nothing 
above that. Therefore, any other cost of living increments 
would have to be, in effect, absorbed.
    Now your budget, personnel is approximately what percentage 
of your budget; 80 percent?
    Mr. Rossotti. Seventy percent.
    Mr. Hoyer. Seventy percent?
    Mr. Rossotti. Yes.
    Mr. Hoyer. If you take out your IT money, and you give the 
3.6 percent or 4.6 percent increase to your employees, will you 
have additional dollars to apply to incremental adjustments in 
costs?
    Mr. Rossotti. I do not believe so.
    Mr. Hoyer. So could I conclude from that, that if this 
budget remains as submitted, other than the employee 
comparability adjustments and IT, this budget is essentially a 
stand-still budget?
    Mr. Rossotti. Yes.
    Mr. Hoyer. In other words, it is not a base line budget. A 
base line budget would be this year, plus cost of living.
    Mr. Rossotti. Well, as you can see in the submission, it 
provides $210 million for the labor cost increases. Then there 
is another $58 million for the annualization of the previous 
year's pay increase. So that is the total amount of labor MCLs, 
which is $266 million.
    Mr. Hoyer. Now will there be certain costs that you will 
have to absorb, then?
    Mr. Rossotti. Well, there are, because as noted in the 
budget, there is a program offset of $57,674,300, which is just 
that; it is a program offset.
    Mr. Hoyer. Have you identified where the offsets are going 
to occur?
    Mr. Rossotti. We will have to do the best we can to try to 
minimize the impact on our programs. But, I mean, we have got 
to do that as we get closer through the year.
    Mr. Hoyer. That would be helpful, however, when we mark up 
the bill, to determine the ramifications of certain numbers. I 
understand what you are saying from your perspective; from our 
perspective, marking up a bill, or my perspective in arguing as 
to what the proper level of funding ought to be.
    Mr. Rossotti. Correct.
    Mr. Hoyer. We live in a world of alternatives, I have 
found, through life, and life is a series of tradeoffs, I like 
to say. If we do not have that additional $57 million, it is 
going to have to be traded off against something.
    Mr. Rossotti. Well, yes, I mean, traditionally what has 
happened in the past, and we will do everything in our power to 
minimize this; but what has happened in the past is that the 
IRS has had to handle that by slowing down the replacement, or 
not fulfilling the replacement hiring of people who would get 
out of the Service, because there is just not enough money to 
replace them and meet the other things. I mean, that is one way 
to absorb a thing of this kind.
    I can only say, and again, I have not said, we have not 
identified precisely how to do this, but we can go back and 
look over five or ten years with these things, and 
traditionally, that is what has happened.
    If you have so many vacancies, you just basically do not 
fill them all; therefore, you absorb a certain amount of money 
through that means.
    The 70 percent labor, that is the biggest cost that you 
have. A lot or most of the rest of the other money is computer 
contracts and rent, you know, so there is not muchyou can do 
about those.
    Mr. Hoyer. Right.
    Mr. Rossotti. There are small costs in things like 
training. But frankly, since I have been here, there have been 
times in the past when training has been cut. I have done 
everything in my power to protect the training costs, because I 
think it makes no sense to have people on the payroll that are 
not getting trained.
    Mr. Hoyer. I agree with that.
    Might that have a service impact?
    Mr. Rossotti. Well, I think to the extent that you have 
more staff versus less staff, you obviously can accomplish 
less.
    We are going to do everything we can to get as much program 
impact out of this budget as we can. We have submitted a 
performance plan, which shows some really, I think, quite 
aggressive goals for performance improvement. Most of those, 
they are partly due to the resources that were provided in the 
current budget.
    But they are also, I think, heavily driven by our hope that 
our management improvements, that we have listed at length, are 
going to have some effect, in terms of really enabling our 
employees and motivating our employees, and getting the 
obstacles out of their way, so that we can deliver more 
service. That is our number one method of improving.
    Mr. Hoyer. Mr. Chairman, I do not know how long you are 
going to go.
    Mr. Istook. My thinking, Mr. Hoyer, since the other members 
did not return after this, I was thinking that when we have to 
recess for these two votes, it was my intention to terminate 
the hearing at that time. I still have some other questions 
that I would pursue otherwise, too, but I do not want people 
waiting needlessly, just to answer a couple more that can be 
done for the record.
    Mr. Hoyer. Well, can I ask just a couple more questions, 
then?
    Mr. Istook. Please, go ahead.
    Mr. Hoyer. On audits, as you know, I am very concerned, and 
you and I have discussed and everybody has discussed, the level 
of audits, where as I understand it, it is less than a half a 
point, one in 200, in terms of the average, and we are less 
than one percent on the large taxpayers. Is that pretty 
accurate, or in the ballpark?
    Does that give you concern in terms of compliance; and if 
it does, what are we doing to overcome that?
    Mr. Rossotti. Well, I think that it does give me concern. I 
have expressed this concern, you know, even last year and in 
previous years, which is why we came in, or one of the reasons 
that we came in and asked for some funding to try to turn this 
around.
    Let me say that I think that if we are successful, and we 
set some very aggressive goals, we will begin to turn this a 
little bit in 2001, but more in 2002; at least instead of going 
down, as it has been for year after year after year after year, 
and we will begin to stabilize. So that is, I think, an 
important term, if we can accomplish that.
    But I think that having it go down, year after year, is a 
very dangerous thing for the tax system. I think that for two 
reasons. One is, just the obvious point, that if the numbers 
get low enough, even though we have a very honest taxpayer 
base, by and large, there are temptations.
    It could cause more people to consider, should I play audit 
lottery? I think that is an obvious risk that, you cannot 
quantify precisely when that happens, but it is certainly a 
matter of concern, and we certainly get anecdotal evidence from 
practitioners and others, saying that there are more taxpayers 
starting to ask questions like, ``Why should I do this, when I 
am not really going to have to worry about being audited?''
    I, personally, think that as bad as that risk is longer 
term, there is another risk, which I think may be equally 
serious, which is that the whole system depends on people 
believing that the tax administration is fair. In other words, 
okay, I am paying my taxes. You know, the guy next door or the 
neighbor across the street has got to pay his, too. If he does 
not, you know, the IRS will eventually come around.
    I think the problem we have is that with document matching 
and with things like the dependent data base, we can, at least 
to some level, detect errors in certain kinds of returns, 
certain kinds of income more readily, because we do not need 
audits to do that. Those kinds of incomes tend to be 
concentrated in taxpayers that are lower to middle income 
taxpayers.
    The kind of income such as capital gains, business income, 
Schedule E, you know, partnership-type income, that is more 
heavily concentrated in upper income individuals, is the kind 
of income that we need audits to be able to find, just because 
of the nature of the income.
    But if we get to a situation where people think, well, we 
are doing more and more, and finding more and more errors on 
``the little guy'' below $100,000, and we are not able to do 
anything about potential errors that are among upper income tax 
payers, just because they have a different source of income, I 
think people begin to believe that the system is not as fair as 
it should be, and the IRS is not being as fair as it should be.
    We see these newspaper reports, you know, the IRS is 
spending more time auditing the poor. That is not because we 
like to audit the poor, but because it is just the nature of 
document matching and pin matching and correspondence audits. 
By definition, that is the kind of technique that you can use 
on simpler, lower income returns.
    I think that is a fairness problem. That concerns me, in 
the long term. I think, you know, what we have done in the 
budget, in assuming that the Congress sees fit to pass the 
budget for 2002, we do hope to turn that around; not 
instantaneously. We are not going to go back to where we were 
five years ago, immediately.
    But we will turn it around, and we have shown in our 
performance plan that we will have more audits, and we will 
focus them on the upper income returns, on the partnership 
returns, which is where we have the greatest problem, in terms 
of coverage, right now.
    Mr. Hoyer. Thank you, Mr. Chairman. I know we only have 
about two minutes left to go, and I will submit the balance of 
my questions for the record.
    Mr. Istook. Certainly, and I appreciate that, Mr. Hoyer. I 
will be doing that, with several other questions that I have.
    But let me ask one question at this time, Mr. Rossotti. 
When we talk about matching documents, as we were talking 
earlier, and we talk about levels of audit, whether now or at 
any earlier time, was matching of documents equated with being 
an audit or a form of audit?
    Mr. Rossotti. No, it has not been ever counted as an audit, 
and there is a technical reason for that in the tax code. The 
reason is that there is a provision in the tax code that says, 
in normal circumstances, the IRS has the right to go to a 
taxpayer and ask the taxpayer to produce books and records for 
us to audit.
    But in normal circumstances, for any one given tax year, we 
are only allowed to do that once. There are exceptions.
    Mr. Istook. So where you labeled matching programs, were 
you to give it the label of an audit, it would have 
consequences that limited you?
    Mr. Rossotti. Well, and to put it another way is we do not 
ask for books and records. We already have the books and 
records, so we do not have to ask for the books and records so, 
therefore, it is not an audit, because of that reason.
    Now, I mean, the statistics are all published and you can 
see them, recently.
    Mr. Istook. Sure, but to say that audit activity might be 
down is not the same as saying that enforcement or monitoring 
activity is down?
    Mr. Rossotti. No, we need to look more broadly, and I have 
made that point. I have made that point to taxpayers, quiet a 
few times on various TV shows, during the filing season; do not 
read these reports and think that it is a great way to gamble, 
because you would be better off to go to the casino and gamble, 
for most taxpayers.
    Mr. Istook. Well, I appreciate that. I wanted to make the 
point.
    Mr. Rossotti. Right.
    Mr. Istook. Because as you agree, you know, auditing is not 
the only way that you have of enforcing and checking it out.
    Mr. Rossotti. Absolutely.
    Mr. Istook. Increase in monitoring is very significant that 
way.
    Mr. Rossotti. Absolutely.
    Mr. Istook. Thank you.
    Commissioner, thank you very much. Obviously, I am going to 
need to scurry, to make the vote. But we appreciate very much 
your time, and we will have further things and follow-up for 
the record.
    Thank you.

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                                             Thursday, May 3, 2001.

                       SECRETARY OF THE TREASURY

                                WITNESS

PAUL O'NEILL, SECRETARY OF THE TREASURY

                            Opening Remarks

    Mr. Istook. I'm going to call the subcommittee to order. 
Good morning, everyone. Thank you for being patient as we had a 
vote on the House floor. We hope we won't be interrupted again 
during the hearing, but there's no guarantees, as we all know, 
and I thank you for the patience, and I know, Mr. Secretary, 
this is a challenge for you anyway, because you have had a lot 
of time commitment lately in working with the administration on 
the budget and tax issues and somewhat directly involved. We 
know this is not the most convenient time for you to be with 
us, but we are grateful that you nevertheless are here.
    So I am pleased to welcome Treasury Secretary O'Neill this 
morning. I know, Mr. Secretary, it is the first appearance 
before the subcommittee. We have had about six hearings so far 
on the operations and budget of the different parts of the 
Treasury bureau that fall under your direction, and I would say 
that generally I'm pleased with the performance and budget 
request of most of the bureaus. There are some areas that I 
think clearly could use your personal attention in regard to 
financial management and the level of resources being devoted 
to those responsibilities, and perhaps within the framework of 
what has been renegotiated on the budget, perhaps that is a 
good way to handle these things.
    I do support most definitely the President's efforts to 
restrain the tremendous growth in domestic spending that we 
have unfortunately seen in recent years, as well as his efforts 
to use innovative technology, management reform, best business 
practices and sound management of resources to achieve greater 
efficiency in government, and I recognize the President had a 
very condensed schedule for putting together his proposed 
budget for this upcoming fiscal year. So there was not the 
opportunity to do the same level of reviews that normally you 
would have had. But I do want you to know, Mr. Secretary, there 
are some areas of concern that I have with proposed funding 
levels, and I will be specific on those.
    There's a question of whether the funding increases are 
balanced in the manner that they are spread across the 
different agencies. The President's budget has significant 
increases for the IRS and for the Departmental offices within 
the Treasury. 80 percent of the total increase proposed within 
the Department of the Treasury is dedicated to the IRS, which 
has a significant challenge in its reorganization, 
restructuring and improving its information technology systems.
    But for the rest of the Treasury functions with the 
possible exception of the 35 million for the Customs Air and 
Marine Interdiction Program, there's really virtually no 
growth, and the particular concern, of course, involves law 
enforcement. In regard to investing in technology, definitely I 
am pleased to do what's necessary to keep on track the business 
system modernization at the IRS. I do have a special concern 
about the Customs ACE program and the fact that the funding 
level is frozen. We had testimony--I may be inexact in the 
numbers--but we had testimony that if that is not improved, 
that enacting this necessary modernization within Customs could 
take as long as 17 years, maybe a lesser number, but I don't 
think that is very satisfactory, considering the urgency of the 
upgrade and the insufficiency of the current system and the 
jeopardy that sometimes the system can be in, whether it is 
going to stay up and function.
    As you know, Mr. Secretary, the requested level of funding 
for ACE falls short of the current business plan by about 258 
million. In the past 5 years, cooperating with Customs and the 
GAO, the subcommittee has worked hard to ensure that Customs 
both had a comprehensive business plan and a proper 
architecture for the ACE program. Customs has been diligent in 
persistence. Last week a prime contractor, of course, was 
announced and they are ready to proceed and we want to make 
sure we handle that program so that it can move at the maximum 
rate that is consistent with economy and efficiency and 
effectiveness.
    The President's budget unfortunately appears that it would 
stretch the project out by several additional years and in 
doing so would also add significant costs in developing ACE and 
the maintenance costs for the legacy system that right now is 
failing. So with your background, Mr. Secretary, I look forward 
to your thoughts on the impacts of this.
    The second point, of course, I wanted to raise is regarding 
law enforcement programs. Especially I am curious, and we had 
testimony regarding it yesterday, about why the President's 
budget does not include specific funding for the well-known 
costs of the security efforts involved in the upcoming winter 
Olympics.
    Approximately 2,000 Federal law enforcement personnel are 
going to be utilized, actually, Mr. Secretary, I think it may 
be greater than that. Those might be the Treasury personnel, 
but in any event, multiple thousand Federal personnel are going 
to be utilized in implementing the plan for which the Secret 
Service is the heart and the core agency involved in that to 
protect the athletes, the public and, of course, the 
dignitaries that will be visiting from around the world. It has 
been designated, of course, as a national special security 
event. That designation was made August 19th of 1999, and since 
1998, the Secret Service has been involved in planning for it.
    Yet there's no money in the President's budget to support 
their efforts, and it would be a great challenge for 
SecretService to try to absorb that amount from their budget when they 
already have some shortfalls with trying to remove the tremendous 
overtime burdens that their protective details are already bearing.
    The necessary funding for wireless communications systems, 
Treasury law enforcement and so forth, are estimated at $63 
million; 52 of it this fiscal year that we are working on. That 
is not the entire Federal cost. It is the Treasury share. The 
Department of Justice has a key role with the FBI. FEMA, the 
Federal Emergency Management Agency, has the lead on certain 
aspects, and there are line items regarding those but not when 
it comes to the Treasury Department for the Secret Service, the 
Customs, the ATF, the very groups with the main charges.
    That troubles me, of course. I look forward to hearing your 
thoughts on this as an advocate for Treasury law enforcement so 
that we may properly divide the resources for national 
priorities involving the Winter Olympics.
    Now Mr. Secretary, I do applaud your efforts to ensure the 
health and safety of the 150,000 Treasury employees. In fact, I 
still remember when we first met, most Treasury Secretaries or 
Treasury Secretary designates would be talking about what they 
are going to be doing involving local trade, overall Federal 
spending, taxation levels all worthy and proper goals.

                            OPENING REMARKS

    It very much impressed me that you were talking about how 
you were going to work with and help improve the quality and 
the satisfaction with the people that work in the Treasury 
Department. Your focus upon the people impressed me 
terrifically. So I am concerned that a key part of that, of 
course, is the Secret Service that I think, under the 
President's proposed budget, bears an inordinate burden with 
what they are being asked to do.
    Finally, Mr. Secretary, I want to mention concerns about 
the financial management systems with Treasury. The IRS, we are 
all pleased has finally achieved a clean and unqualified audit 
opinion. Yet there is serious financial management weaknesses 
that remain. We know that they are being worked upon, but we 
also know that it is necessary to keep the focus upon the job 
that is yet to be done in order to make sure it is going to be 
accomplished.
    GAO found that the IRS routinely is unable to generate 
reliable financial information, certainly not on a timely 
basis. There continue to be significant errors and delays in 
recording of payments by taxpayers, and IRS cannot provide 
reasonable assurance that the resources of its own internal 
budget are being properly controlled and reported.
    Now IRS consumes 70 percent of the budget of the Treasury 
Department. So I am sure that you join me in, and I know that 
the Commissioner feels the same way that in believing that it 
is unacceptable that the IRS cannot properly account for the 
money that we provide to them.
    So Mr. Secretary, I do look forward to your testimony, to 
hearing your thoughts on these challenges and the other 
pressing issues that are under your leadership. So before we 
begin though, I would like to recognize our ranking member, Mr. 
Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman. Mr. Secretary 
I want to join the Chairman in welcoming you to this committee. 
I want to thank you for spending some time in my office 
discussing issues of importance to the Treasury Department, and 
as most Secretaries of the Treasury, you have a much broader 
influence on fiscal policy, on budget policy than many of the 
other cabinet officers because you have oversight in terms of 
the economy.
    You bring a wealth of knowledge from the private sector and 
a very impressive biography. You presided over a company of 
140,000 people, a company comparable to the Treasury 
Department, which is unusual to have a secretary come that ran 
an enterprise of that size. Your responsibilities, of course, 
were based worldwide. Although the Treasury Department has a 
unique mission, its workforce is similar in size and maintains 
global responsibilities.
    I will not ask you today, because it is too early, but at 
some subsequent time, a year from now perhaps, I will ask you 
the question to compare for me your public sector employee 
experience with your private sector employee experience.
    I have asked that question of almost every major private 
sector executive who has come into the public service, because 
I think it is important for the public to know that persons who 
come in from the private sector, very successful, have a very 
positive, I think, perception of the quality of public 
personnel.
    The responsibilities you have include the stewardship of 
this country's finance, the administration of our tax code and 
nearly 40 percent of the Federal law enforcement capability. 
Your leadership will be critical in areas of fiscal and 
economic policy. It will also be important for you to be a 
strong manager of the Departments 13 bureaus.
    As I mentioned to you, I have dealt with a number of 
Secretaries of Treasury over the 18 years that I have been on 
this committee, and I have been impressed with all of them. 
Some, however, have concentrated almost exclusively on policy 
issues and not on management issues. I am confident that you 
will concentrate on both. That is your history and that is your 
inclination, and I think that will go down not only to the 
benefit of the Treasury Department, but our country.
    The Treasury Department is in the process of two major 
modernization efforts. IRS is in the process of modernizing 
their computer systems, most of which were built in the 1960s, 
and the Customs Service will be replacing its current data 
system, of which the Chairman had just spoken.
    I believe it is critical that we fund those at levels, as 
Mr. Rossotti said yesterday, consistent with the risk and also 
consistent with the economic benefit of accomplishing those 
projects within a shorter time frame rather than a longer one.
    Treasury law enforcement, there are many challenges such as 
the emergence of cyber crimes, financial fraud money 
laundering, and sophisticated terrorist threats. Your budget 
request calls for a $750 million increase over last year's 
appropriation of $13.7 billion. In terms of operating costs, 
however, the budget provides for resources which hopefully are 
necessary to maintain current pay levels for the bureaus, but 
as I understand, it does not provide other inflationary costs 
necessary to maintain baseline budgets.
    Specifically, department-wide, the Treasury Department will 
have to absorb $124 million in inflationary costs if this 
budget is approved as submitted. I am concerned about the short 
term and long term consequences of that requirement. 
Programmatically the budget provides for two initiatives. One 
to continue improvements to the InternalRevenue Service's 
computer systems, and the others for the Customs to purchase additional 
assets for its marine and air program.

                            OPENING REMARKS

    Aside from those increases, the total request for the 
Department is 2.7 percent above Fiscal Year 2001. This is a 
very lean request indeed, and now I want to go off my 
statement, Mr. Secretary, and quote from a document that was 
submitted by OMB to us on page 126. Because it reflects, and I 
make this in response to the Chairman's observation, his 
concern about the rising levels of expenditure. I have been on 
the Appropriations Committee for 18 years. In fact, the 
discretionary spending levels have gone down, and continue to 
go down dramatically.
    In 1982, the first Reagan budget, I didn't use 81, but they 
are about the same number. As a matter of fact, they are 
exactly the same for the total expenditures. Mr. Chairman, in 
1982, as a percentage of GDP, the Federal Government spent on 
discretionary spending--10.1 percent of GDP. In 2000 the last 
full year that we have figures for, the Federal Government will 
spend 6.3 percent of GDP, almost 40 percent lower in the amount 
of discretionary spending that the Appropriations Committee has 
authority over and makes a decision on an annual basis, only 
6.3 percent of our gross domestic product.
    Now for nondefense, because the immediate response is, oh 
well, we have cut defense, which, of course, is the case, but 
in nondefense in 1982 in the Reagan budget, which was not cut, 
some funds were shifted around, but it was not a cut. 4.3 
percent of GDP in domestic discretionary spending as opposed to 
3.3 percent today, a 1 percent reduction in GDP of what the 
Federal Government spent on discretionary spending. Now I think 
the popular rhetoric, Mr. Chairman, is what you reflected, but 
it is not accurate. And I think it is important, not on a 
partisan basis, but we on the Appropriations Committee and the 
American public know that effectively, Congress is making 
decisions on less and less of the pie as to how appropriated 
dollars are spent.
    Now, I will reference domestic discretionary spending. I 
gave you total discretionary spending, but let me reference, 
just domestic, nondefense expenditures. We have gone from 3.9 
percent down to 3.0 percent. So almost a point reduction in 
nondefense discretionary spending. Now if you go to mandatory 
spending, you go from 11.2 percent down to 10.1 percent. If you 
look at interest on the national debt, because we have started 
to pay off and we are borrowing less, we have gone 2.6 percent 
down to 2.3 percent. So the fact of the matter is 
notwithstanding the rhetoric that unfortunately is all too 
often used in campaigns from my perspective, the fact of the 
matter is we as policy-makers are making decisions on less of 
the GDP than we once were.
    Now that obviously is in the context of tax bills and those 
debates, but I think your request, Mr. Secretary, is a lean 
request, one that I feel underfunds some critical areas.
    Let me address some of those if I can. For the Customs 
Modernization Project, of which the Chairman has spoken, ACE, 
the budget includes level funding of $130 million. With the 
current stream of funding, the development of ACE could take up 
to 14 years to complete. I frankly don't think that is what the 
private sector wants. People have to deal with the system on a 
daily basis in their businesses, and to them, obviously time is 
money and the rapidity with which they can move their goods and 
services, not only with the cost increase to develop the ACE 
system, it puts the legacy system in a position, in my opinion, 
to crash and immobilize trade in this country, I think that is 
a risk. I don't know how high that risk is but it is a risk.
    Secondly, the budget for the Secret Service does not 
include funding for two critical items: funding for the Winter 
Olympics is not included in their budget, and funding to 
complete their workforce retention and balancing effort is not 
funded.
    Mr. Secretary, I would ask you to pay particular attention 
to that because of I know of your concern for workplace safety. 
This Committee heard testimony yesterday that we have Secret 
Service agents working over 90 hours of overtime during the 
course of a month. Clearly as you well know, being overtired on 
the job, particularly a stressful job, must inevitably heighten 
the risk of injury and poor performance.

                            OPENING REMARKS

    Third, this budget zeros out the First Accounts Program. It 
is a small program, and I am not sure you are aware of what 
that program is, but it is an effort to empower people. One of 
the ways we empower people is to give them the opportunity to 
invest or to at least have a checking account, some people 
obviously because they have very low balances can't afford the 
cost of maintaining that.
    As you know, the first account program tries to help people 
get in the system, if you will. These are items that I feel are 
necessary just to maintain current levels of performance, Mr. 
Secretary.
    Now don't get me wrong. I agree with the premise we should 
force these as cost effectively and efficiently as possible, 
but not in a manner that could erode their capabilities. Mr. 
Secretary, I look forward to your statement. I am pleased that 
somebody of your experience and capability, both in government 
and in the private sector, is in this position. I think it will 
be a benefit to our country. Thank you, sir.
    Mr. Istook. Thank you, Mr. Hoyer, and let me just say I 
know neither one of us would want to get into running debate. I 
appreciate your figures regarding GDP and discretionary and 
mandatory spending level, ACE. I am sure you appreciate the 
concern of whether those burdens are equally borne because 
for--because many millions of Americans have been exempted from 
payment of income taxes, the burdens, no matter what percentage 
it may be of GDP, is not being borne equally by everyone, so 
there is an overall concern. But I think it is good to have the 
perspective that you certainly shared with us.
    Mr. Hoyer. Mr. Chairman, I thank you for that observation. 
My point is not to debate that, but to point out that if we are 
going to make honest decisions on what we are doing as a 
country, we need to make those decisions. For instance, some 
Americans believe that we spend 30 percent or 40 percent of the 
budget overseas on foreign aid. Their perception is we give 
away a lot of money. Point of fact is we invest in 
international security, from my perspective, less than one 
percent. Now, that discrepancy makes for a skewed public 
debate. That is my only point because if we did give 40 percent 
of the American taxpayers' hard-earned money to people 
overseas, they would be justifiably outraged by that, and 
because they think that they are outraged.
    Frankly, when my constituents learn it is less than 1 
percent that we are investing and that of the industrialized 
nations of the world, we are, at best, in the middle of the 
pack in terms of international investment. My only point iswe 
need to deal with accurate information so that we can make sound policy 
judgment and I appreciate that. I am one of those who doesn't mind 
bearing more of the burden than most of my constituents because most of 
my constituents are less able to bear the burden than I can. I make a 
good income and can pay higher taxes. So I don't mind that, but that is 
a separate debate and how we divide up what we decide we need to spend.
    Mr. Istook. Sure. As you know, that particular comparison 
is comparing government spending to other people's money. I can 
talk about whether my income is up or down as a percentage of 
Bill Gates' income, but Bill Gates money is not my money and 
taxpayers' money is not the government's money.
    Mr. Hoyer. I am not sure I get the relationship, but we 
will end now.
    Mr. Istook. Okay. Very good. Mr. Secretary, of course it is 
our custom to swear the witnesses, and Mr. Flyzik might be 
sharing testimony. I suppose we should swear him also if I 
could administer the oath.
    (Witnesses sworn.)
    Mr. Istook. Thank you, Mr. Secretary, we are pleased to 
hear from you, and of course the entirety of your written 
testimony will be in the record, so please feel free to depart 
from it to be as extemporaneous as you wish.

                          SECRETARY'S REMARKS

    Secretary O'Neill. I will. Mr. Chairman, Mr. Hoyer and 
members of the committee. It is indeed a pleasure to be here, 
and I am glad it looks like we are going to have an opportunity 
to work in an uninterrupted way, at least for a little while. I 
appreciate your willingness to simply put my prepared statement 
into the record and then let me say, with the comments that you 
and Mr. Hoyer have made in your own introductory comments, you 
have given me about four hours worth of answers that I could 
engage in, but I think, rather than do that, let me make just a 
couple of comments and then turn to the specific questions that 
you want to raise and get me to respond to.
    You are right in observing that we did not have what one 
would consider to be a reasonable amount of time, to understand 
the details that are associated with more than a $14 billion 
budget, to be able to own every detail, which is my intent. 
When I come back before you next year I will own the details. 
But you know, it's my goal to own the details in a way that 
take to be different from ownership in the past, and I don't 
say that with any intent to call attention to what I would say 
is a shortfall in the past. It's simply to tell you how I think 
about these things.
    I am very intent on the idea that we should know together, 
I should help you know because I don't think you can know 
without my help just exactly what it is we are getting for the 
money that we are taking from the American taxpayers and 
deploying across all the purposes that have been legislated for 
Treasury Department, and for that matter, for all the other 
departments and agencies of the government, and as I have tried 
to get on top of my own Treasury Department, I found gaps in 
the information, frankly, that I would like to have that helps 
me to make judgments about where we need infusions of 
management, talent and ideas and best practices that I know 
from my own experience exist out there in the real world, so 
that we can gauge together what resource levels are required 
and have a reference point to understand how high up should 
really be.

                          SECRETARY'S REMARKS

    Both of you mentioned my interest in the employees of the 
Treasury Department, and you should be sure that I am going to 
pay attention to all the management aspects of the Treasury 
Department. I am interested in and fascinated by working on 
global policy matters, and I will give a due amount of 
attention to those matters as well, but it's not my intent to 
say it that these people don't deserve a leadership and 
direction from me about everything that they do, and so I am 
going to, for example, go out and look at the border conditions 
to better understand what law enforcement looks like on the 
ground, not in some abstract report, and to understand the 
intersection of law enforcement and Customs activities that 
have to do with trade and be able to report to you my own 
conclusions about the rate of possible speed and in changing 
Customs systems so we can get to a point that we can say 
together that we are operating at a level of proficiency beyond 
what others could imagine, and no one in the private sector 
could say they do better because we are doing it correctly 
here.
    There's a couple of matters that you touched on 
individually that I must say I share your concern about. You 
know, I do not believe that as a general matter, it makes any 
sense for people to work extraordinary overtime hours, and I 
don't understand frankly why we have gotten--I guess I do 
understand and having been here before for 15 years I must tell 
you I think the concerns and conventions and the restrictions 
that come from focusing on head counts are crazy. I think 
that's maybe not too strong a word. You know, at least out 
there in other sectors, and it's not just private sector, but 
private nonprofits and the rest.
    First of all, you decide what your mission is and then you 
provide whatever resources are required to produce your 
mission. And frankly, I think because we have become so--so 
unwilling to accept a criticism of having more Federal 
employees, that often we have written laws that say we are 
going to do something and then we have made it impossible 
because we have got a secondary constraint that says well, of 
course we can't ask for more people.
    I need to quickly say to you I am not a great advocate of 
flooding the place with additional people because it makes 
someone unhappy to have more government employees, but I think 
having meaningless or even counterproductive constraints is 
simply not the right thing to do, and to the degree it affords 
us, for example, maybe the best of people in the Secret Service 
to work extraordinary hours, because we haven't provided the 
right number of people is not something I want to be a part of.
    So when I gave up my own security detail, I was glad that 
those people could go and help reduce the overtime hours that 
other people had to work, and I am not yet prepared to tell you 
they want more head count for Secret Service because, first of 
all, I want to understand why we need all the people we have. 
You know, why is it that we have the level of protection for 
all of the people that are getting continuing protection. 
That's a pretty sensitive subject, because some of those people 
are pretty famous people. But if I don't ask the question, I 
don't know who you think will ask the question.
    And so it's my intent for everything that we do to ask the 
hard questions. Why are we doing this? How is there a better 
way to do it, including for the IRS? You know, I have said in 
other places and I will say to you that while there is a 
rationale, and for sure there was probably a good reason for 
every word of 9,500 pages in the Tax Code when it wasenacted, 
but when you put them all together, they are an abomination, and they 
are an impossibility for even the best intentioned people to be able to 
administer in a way that I frankly would say in my previous 
incarnation, this is a reasonable thing to do.

                          SECRETARY'S REMARKS

    To not be able to answer more than 67 percent of the phone 
calls at least that's one reported statistic or to give wrong 
information to constituents I think it's an unfair thing to 
suggest that that's because the people are unqualified or 
incapable. It's simply because we have given them an impossible 
task that's kind of akin to giving people a 40-foot high 
vertical wall and telling them they have to climb up it every 
day. And therefore, I think we need to attend to the question 
of what is a fair tax to give to these well-meaning, 
hardworking people so that they can perform every day at a 
level that they can say I am doing something that gives--I am 
making a contribution and it gives meaning to my life.
    I am not simply engaged in this process that demeans me 
every day and so I am going to, over the next 6 months or so, 
get myself into a position so that I can personally say to you 
that I believe in what you have before you, and I am prepared 
to defend to the bitter end the things that we have asked you 
for, or to ask you to please take things away that I find don't 
represent what the government should be investing our people's 
money in.
    Mr. Chairman, I'd be very happy to answer any questions you 
may have.
    [The information follows:]

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                       INTERNAL DEPARTMENT REVIEW

    Mr. Istook. Thank you, Mr. Secretary, and I appreciate you 
taking me up on the offer to add some extemporaneous comments. 
I think that's useful. I gathered from your comments that you 
are, in essence, saying that there is additional things that 
you are trying to take a look at within the Department, asking 
is this work really necessary? Is this work really productive?
    Secretary O'Neill. That's right.
    Mr. Istook. You don't yet have the answers but potentially 
and this is an unknown, of course, but potentially, you may be 
identifying areas within Treasury or its subsidiary components 
where you say we don't need to be doing this, we are not 
statutorily obligated to do this, and I think that we could 
cease performing some particular function and achieve savings 
through that. Did I understand that correctly?
    Secretary O'Neill. Yes, sir, and there may be areas where 
we're statutorily required to do things, and then I think it's 
my obligation to come back to you and to the authorizing 
committees and raise these subjects in a plain-spoken way, and 
you know, I understand that we do have a democratic process, 
and there's plenty of room for disagreement and difference of 
opinion. There may be things where you say thank you very much, 
Mr. Secretary, we don't care what you think. This is what we 
want you to do. Please go and do it. I respect the difference 
between our responsibilities, but I do think I have a real 
responsibilities to tell you the best of what I think, and to 
challenge the things that don't make any particular sense to 
me, and as well, to tell you the level of resources that I 
think we need so that we don't ask people to do impossible 
things. And we face up to the resource requirements that are 
necessary to do the things that the Congress has said we should 
be doing.
    Mr. Istook. I certainly agree and I would certainly 
appreciate it if all persons within the Federal Government or 
responsible roles within it would take the approach if they--
that some unnecessary or unproductive work is being done that 
perhaps is required by statute, that they would directly come 
to the Congress and say, please relieve us of this particular 
obligation, because they are the persons that typically will 
have the most direct knowledge of that, and we need that kind 
of input. But let me ask, the process that you are describing, 
a review, is there a formal process of review that you have 
established? And if so, how is that being conducted and when 
might we be receiving some results of it to try to plug back 
into the budget numbers that we are working with?

                       INTERNAL DEPARTMENT REVIEW

    Secretary O'Neill. Well, we are. We were talking while we 
were across the street about this very question of how we 
deploy a process because it's simply not possible for one 
person, or even for 20 people or 200 people, to do this 
themselves. We have got to fashion and deploy a process down 
through every aspect of the Department that begins by being 
really clear about what the appropriate measures of 
effectiveness are, and let me give you some examples. A couple 
of weeks ago, I went to Philadelphia for a series of events, 
including going to the Philadelphia Mint to look at the 
manufacturing process. And as you know, from my background, I 
know a lot about manufacturing. I spent 23 years crawling 
around on factory floors and when I walk into a factory, I know 
what's good and what isn't good, and as an example, if you walk 
into a factory and you find that there isn't a physical 
separation between pedestrian traffic and vehicular traffic, 
you have got a place that's likely to be hurting people because 
there's confusion of where people should be.
    Well, you also find in the best of factories that they have 
long ago gotten over the idea that forklift manufacturers 
manufacture forklifts that leak. They put grease on the floor 
and cause people to be hurt and interfere with the work 
process. Well, you know, I am sorry to tell you there's no 
vehicular pedestrian separation in the Philadelphia Mint, and 
there's oil and grease on the floor, and when, you know, when I 
say this to you, please understandthat this is not a smart 
aleck coming in to find fault; this is someone who has eyes to see.
    This is a really important distinction between someone who 
just likes to find fault and someone who knows what it looks 
like over the top of the mountain. Now over the top of the 
mountain in a manufacturing process means this: That something 
close to, not at, but close to a 100 percent of the raw 
material that goes into the process ends up on the shipping 
dock without any loss or rework. When you think about that 
concept and you apply it to the Philadelphia Mint, we are 
talking about something short of 40 percent, okay. And I have 
to tell you, that's not unusual. There's a lot of American 
manufacturing at that level.
    You know if you really know what you are doing, you really 
know what you are looking for, you can go into lots of places 
with very big names on the door that are manufacturing at the 
40 percent first pass, good product level, and they don't know 
that they are not doing well. But there is a different class of 
activity out there in the very best of places where people are 
very close to 100 percent.
    So what kind of a process are we going to do? Well, first 
you have a process of discovery. Then you have to have a 
process of comparison and identification. What is the 
theoretical limit of what you can do? And if you just take 
those facts that I just gave you, you can think about moving up 
to even the high eighties of first pass productivity. In 
effect, you double, you double the throughput capacity of the 
same equipment, and if you are going to think about it in terms 
of unit product cost, you just cut the unit product cost by 50 
percent.
    And so this is, you know, what I said to you earlier about 
giving the resources right, is not so much about going out 
there and figuring out how to reduce the number of secretarial 
support. This is about the serious stuff about how you look at 
every process, not just manufacturing, but every process 
including the ones Charles Rossotti is looking at, and 
systematically figuring out how to get close to a 100 percent, 
and what the more typical 40 percent value added process, and 
what we are going to do over this next 6 months is teach these 
ideas to enough people that we can begin to first calibrate 
where we are, and you may not think this applies to everything, 
I think it does.
    Money laundering is a popular subject. Together the 
government agencies are spending $700 million on this issue and 
we need to mention how big is this problem. Have you seen, I 
can't find anyone who's mentioned how large this problem is, 
what the avenues of assault are, and we have got a bunch of 
avenues of assault. But for example, understanding the 
connection between the requirement that financial institutions 
notify us of every transaction of over $10,000, and then trying 
to understand how many interventions were we able to make 
because of this transfer of information, which by the way, 
imposes a significant cost on the society and on the banking 
community, what's the consequence of that from a point of view 
of reducing the incidence and practice of money laundering?
    I am sorry, that's a very long answer, but I want to make 
sure I fully convey what it is we are about and what we are 
going to try to do. Then I have to say one more thing to you. I 
know from my own experience, you know, as easy as it is to talk 
about these things, it takes a long time to actually get them 
operating and effective and producing results. But I want to be 
careful to make sure you understand we are going to be able to 
get some high impact results fairly quickly with some of the 
simpler things, but it's going to take determination and 
persistence and several years worth of effort to be able to 
really turn over a new leaf, if you will, and be at a new level 
of proficiency and operation which we can do. We can do and 
will do.
    Most important thing that I am going to try to do while I 
am here is create a learning process that will go on when I am 
gone. It doesn't do any good for one person to do this for 3 
years and go away. I will not have succeeded unless I succeed 
in working with all these great people to create a process that 
keeps delivering ever better results.

                  CONGRESSIONAL APPROPRIATIONS PROCESS

    Mr. Istook. Mr. Secretary, I agree with and applaud your 
efforts to revisit things and check those out. I am sure you 
can appreciate that another ongoing process that neither you 
nor I are going to be able to change with any immediacy is the 
process of the congressional appropriation process, and if the 
reviews that you recited are going to be 6 months worth of 
reviews, that may generate some results at one time and other 
results later.
    That's well and good, but fitting it into the process we 
have within the time frame with which we operate, we are on the 
threshold of approving an overall budget figure for fiscal year 
2002. Nothing's going to happen very soon that's going to 
change the onset of the next fiscal year, October 1st, and 
with, as you know, this is an institution that is cumbersome in 
many ways, and, frankly, deliberately designed that way to make 
certain things difficult to do because they are going to 
influence and have such consequences for so many millions of 
people. But as we go through that, we have a lot of lead time 
that's involved.
    We are about to have the adoption of the budget, then the 
subdivision of that budget into the 302(b) allocations which 
affects this subcommittee. What we receive in the 302(b) 
allocations are difficult to adjust later, and by the time that 
you may have some of those results, we will be past the time to 
implement those, some of those changes within this budget.
    Yes, it's an ongoing process. I keep coming back to that 
word, as we go through the House, we go through the Senate, we 
go through a conference, we make different refinements along 
the way, but there are certain things that we are needing to 
know now, at least in some broad outlines so that we can make 
decisions accordingly, and the challenge is to match that up 
with the time frame that you describe, and probably there's not 
a good match at the moment, but we need some guidance regarding 
your intent on the issues that I have mentioned. And Mr. Hoyer 
may mention others or others may as well.
    The last thing we would want to do is say, oh, we think 
there's going to be savings someplace over here, but we need 
that. We have made the budget cuts or increases in a wholly 
different area, and that's the difficulty that we have. So I 
want to discuss that with you further, but I think it's time 
that we provide the opportunity to Mr. Hoyer.

                                TAX CUT

    Mr. Hoyer. Mr. Secretary, again, thank you for your 
responses to Mr. Istook's questions, which I think are very 
important responses. They are general, obviously, as you say. 
You don't have ownership yet of what needs to be done 
specifically because you are not sure exactly what the problems 
are, but it is encouraging to know that you are about the 
business of how to make this work as well as we can make it 
work.
    Let me ask you a general question on the Fiscal Year 2002 
budget resolution. Members haven't seen the budget conference 
report. As you know, on our side of the aisle, we have great 
concern that 2001 is a repeat of 1981, and 1981 as you know, we 
passed Graham-Latta I and II, and then Conable-Hance signed in 
August, and what we did at that point in time was we gave up 
significant revenues, and as Mr. Stockman said in his book, 
without a real plan of how to cut expenditures to meet the cut 
in revenues, notwithstanding the fact that we had growing 
revenues.
    As you know, we had skyrocketing deficits. My concern is 
that that's what's going to confront us as a result of this 
budget, and because I think there is a high cost of the tax 
cuts that have been passed plus the cost of the tax cuts which 
are still being talked about, alternative minimum tax 
extenders, and other tax cuts that I think we are probably 
going to do and many of us will support. I am very concerned 
that we are going to have a repeat of 1981 where we neither 
have the political will or plan to squeeze revenues into--
excuse me, squeeze expenditures into what we have provided for 
revenue. Do you share any of that concern, sir?
    Secretary O'Neill. In a way I do, although it's interesting 
to me that the members, and I think the President has 
contributed as well to this idea that whatever we do, we should 
not invade the Social Security surpluses, that they should 
effectively be used to pay down a debt held by the public. And 
my sense is as I talk to members, that there's such a wariness 
about invading that domain, that the $2.6 trillion that's 
represented by the anticipated budget surplus for Social 
Security over the next 10 years is going to be there because no 
one had the courage to invade that 2.6.
    And now with the agreements that are being reached in the 
budget process on a tax relief, looks like there is an 
agreement between the parties, and more importantly, maybe 
between the House and the Senate, that we are in the process of 
defining the level of free-board, if you will, that is 
available for spending increases and because there's been such 
a ferocious dedication to this notion of protecting and not 
invading the Social Security funds.
    I have more hope than I must say than I have had in the 
past that, in fact, as much as it's difficult to do, we are 
going to stay in a reasonable corridor of spending increases.
    Mr. Hoyer. We could spend, of course, those four hours that 
you referred to on simply this issue. The only thing I would 
add is it's my understanding there's a consensus in the 
Congress, certainly on our side, and I think on the other side, 
that not only will Social Security but Medicare will not be 
invaded, which is about 2.7 of the 5.6 projection.
    Without going into specifics, let me tell you, Mr. 
Secretary, John Spratt, who in my opinion is one of the most 
responsible members of this House on either side of the aisle, 
ranking member on the Budget Committee, believes that the 
budget that's being proposed will inevitably lead at least $600 
billion in deficits over the next 10 years if you adopt the 
premise that we do not invade Social Security and Medicare, 
which means that there is some $60 billion a year more in 
projected expenditures, which includes additional interest that 
will be owed because of the not paying down debt as quickly as 
possible. That is of great concern, a legitimate concern, and I 
think that's frankly shared by some members of the Republican 
side of the aisle as well.

                                BAILOUT

    And one of the things I most admired Secretary Rubin for 
was, A, had great influence with the administration, and B, I 
thought he had great common sense, not just good fiscal sense 
but good common sense, and I think the Congress responded to 
that in some respects in a bipartisan way. The Mexico bailout 
could have never happened if the Republicans, if some 
Republicans had not had faith and confidence that Rubin was 
giving good advice on that, which ultimately turned out to be 
good advice. In any event, you don't need to comment on that, 
or you may want to. If so, I'd be glad to hear it.
    Secretary O'Neill. Oh, I have said often in other places 
that I think what Bob Rubin and Larry Summers did while they 
were Secretary of the Treasury was really quite good, and the 
one bailout, so called bailout that I have testified I thought 
was well done, was the one in Mexico, the one that you have 
identified, and I have less charitable feelings about sending 
the billions of dollars that went to Russia without any hope 
that we knew who was responsible and who was going to take care 
of the American people's money. I thought that was really the 
other side of the coin as far as I was concerned. And the time 
I have been here, and I have been working very hard, both on 
the Turkish situation and the one in Argentina with the IMF and 
the World Bank, and I have said to the finance ministers, prime 
ministers of those places, presidents of those places, I view 
my role in this as a fiduciary for the American people, and to 
make it clear, I said there are carpenters and plumbers out 
there who make $50,000 a year and they send 25 percent of it to 
the Federal Government for wise use, and I am not going to be a 
part of suggesting that we send money to countries that have 
major financial problems, because their political leadership 
was not willing to take the steps that were clearly indicated.

                                BAILOUT

    So that, in effect, we socialized the cost of certain-to-
fail policies into the pocketbooks of the American people. I am 
not going to be a part of that, and so I have really been tough 
with these conversations we have been having insisting that 
before money flows, everyone from the secondary institutions 
that are represented to us in these cases, that the political 
leadership stand up and take the responsibility for correcting 
the policies that have led them into the financial abyss before 
any money flows.
    Mr. Hoyer. Mr. Secretary, we agree on that.
    Secretary O'Neill. We have not followed, as a practical 
matter, in practice.
    Mr. Hoyer. And I understand and we may have some, and I 
think we all agree that on the Russian situation, certainly 
that money has been not well spent there, unfortunately for the 
Russian people. My point was, though, a broader point and that 
was that there's great reliance on your advice and counsel, and 
to the extent that both sides of the aisle can rely on that as 
honest as I know it will be advice that will be useful to the 
country.
    I have a number of specific questions but I have already 
used up my time, so I do those on the next rounds.
    Mr. Istook. Thank you, Mr. Hoyer, and let me just mention 
to the members and the Secretary, because unfortunately we were 
delayed by the vote, it's eaten up a lot into the time that 
hopefully we wanted to have. So I just wanted to mention to 
members that I am going to try to be pretty strict now on the 5 
minute rule, and Mr. Secretary, as best you can do in providing 
consistent responses, that would be appreciated also.
    Mr. Sherwood.

                     CUSTOMS SERVICE MODERNIZATION

    Mr. Sherwood. Mr. Secretary, thank you for coming today, 
and it's a pleasure to chat with you. And although Mr. Hoyer 
and I might disagree on rather us having control over a larger 
or smaller part of the G and P is a good thing or a bad thing, 
I think it might be a good thing, we will all agree that we 
need better management in the Federal Government, and I think 
that's something that we are looking forward to with you. But 
as a part of that better management, I think we were coming 
here today hoping to get a little advice from you as to where 
we could put some funds to make these agencies that we know 
have a very, very strong and definite mission, and what I am 
particularly concerned about, and you talked about it a little 
bit, is the modernization and the status of our information 
technology. And you spoke about people having meaningful jobs 
and going to work and knowing that they were doing the right 
thing.
    Well, if they have a information technology system that has 
been allowed to become 20 years out of date, it's very hard for 
them to go to work and put in a meaningful day'swork, and I 
realize that you said that and I am agreeing with you, but what do you 
need from us to help win this battle?
    Secretary O'Neill. Well, I think in fact, if I understand, 
the committee, in some ways, has been ahead of what you have 
been asked to do in working on some of these issues, and I 
understand the committee's played a major role in anticipating 
and understanding the improvement requirements that existed at 
Customs. And I know in, Mr. Chairman, both in your question and 
Mr. Hoyer's introductory comments, you both commented about the 
Customs Service Modernization Program, and let me tell you, my 
understanding of where we are with this.
    It's true that we have asked for $130 million for this 
year, and I know there's some sense of alarm that this is going 
to take 14 years or 17 years, or some unbelievable amount of 
time, to actually get this amount of work because of the pace 
of spending. As I understand the facts, we still have $80 
million from this fiscal year that hasn't been drawn down on 
under the agreed procedure yet.
    And so there's a belief that with what we have requested, 
we will be able to maintain a reasonable pace of 
implementation. One of the things that I will do for you over 
the next 6 months is form my own judgment about how fast we can 
get this job done, because I would like to associate myself 
with the idea that once you have begun doing major systems 
improvements, the longer it takes you to do it, the less 
probably it's really going to be worth doing when you finally 
get it done.
    So having made a decision to do it, you know, I don't want 
to get into some kind of funny game playing of what cutting it 
up into 10 pieces over 10-year period of time. If I can satisfy 
myself, it's something we ought to do, and that we can 
accelerate resources to get it done quicker so that we have got 
a good product. I will be back here to tell, you know, I want 
more money and I want it more quickly. At the moment, I am 
listening to what staff are saying, and I am convinced that 
they are genuine in their belief we can maintain the 
appropriate pace for this and we will see. If we need more, I 
will be back to ask you for more on a quicker timetable.
    Mr. Istook. Mr. Secretary, would you just clarify when you 
say listening to the--when you say that are you talking about 
Treasury Department staff or Customs staff.
    Secretary O'Neill. I'm talking about the Treasury 
Department staff.
    Mr. Istook. Thank you.
    Excuse me. Mr. Sherwood, please.
    Mr. Sherwood. I think what we're trying--.
    Secretary O'Neill. May I say one more thing? I have to get 
all the people in my department to understand that we're all in 
this together, and that I don't--I have no intention of being 
caught up in what have been a traditional budget game, you 
know, people saying on the side they won't let us have 
everything we ask for. We were going to stop operating like 
that. Excuse me, Mr. Sherwood.
    Mr. Sherwood. That was a breath of fresh air. With my Army 
experience and my school board experience, everybody always 
wants more money, and they're afraid if they don't get it or 
they don't spend it, they don't have it when they do need it 
and it will go down next year, and it is a vicious cycle.
    Now, we do know though that we need some modernization in 
our information technology systems, and we know that if it 
takes a long period of time, they will be obsolete by the time 
we get them in. And we have seen with the FAA about this, you 
do it on a general basis and it just doesn't--you're always 
behind. And I am delighted to have a professional manager in 
charge who will bring management systems to the U.S. 
Government, and I think that's exactly what we need.
    I think you will find this committee will be very glad to 
fight hard for the funds that you need. But we want you to come 
to us, not defending a budget that might have been created for 
a political reasons, but defending--giving us a budget that you 
need to run your department in the best method possible. And I 
don't know what more I could say about it.
    Secretary O'Neill. I will do that.
    Mr. Sherwood. Thank you.
    Mr. Istook. The gentleman's time has expired. Thank you, 
Mr. Sherwood.
    Mr. Rothman.

                                ECONOMY

    Mr. Rothman. Thank you, Mr. Chairman.
    Mr. Secretary, it is a pleasure and a privilege to be with 
you and to have this opportunity to ask you some questions.
    Mr. Hoyer talked about his concern, and the ranking member 
on Budget's concern, and many Americans' concern, frankly, that 
the size of the tax cuts will put us back into a deficit 
situation. And Americans that I talk to of both parties don't 
want that to happen and, frankly, are startled to think that it 
might happen, since we just finished this long period of 
economic expansion and we are sitting on, presumably, 10 years 
of budget surpluses. So the thought that we would mess this up, 
spend this 10 years' worth of surpluses and put ourselves back 
into deficits terrifies people. It annoys them, it aggravates 
them, and they think we are just dummies up here, or that the 
new guys in charge are a bunch of dummies if they will let that 
happen in pursuit--some would say, maybe it is unfair--of some 
political or ideological predilection.
    Let me ask you my question. It is not about the deficits it 
is that worry which--I will associate myself with Mr. Hoyer's 
remarks it is about this year's budget and maybe next year's 
budget. We say we don't want any more deficits this year in 
terms of our budget. There is a finite amount of money to be 
spent, the taxpayers' money, so we need to be very careful in 
how we spend that money. Yet many Americans feel that the tax 
cut is too large, and it consumes too much of this finite sum 
of money, leaving, for example, some long-range infrastructure 
needs of the country begging and unmet.
    We don't have a capital budget here in our system so far. 
So it is all in one budget, and we had better start planning 
for the future. For example, 60 percent of America's schools 
are in need of major repair; 45 million Americans areuninsured; 
Medicare is going broke in the year 2015.
    This President's budget is calling for a cut in 
transportation funds and environmental protection funds, and 
there is not sufficient money, I think both sides of the aisle 
agree, for an adequate prescription drug plan under Medicare, 
under the President's budget. In light of all those needs, what 
many believe are unmet needs, we see a tax cut that many argue 
is balanced disproportionately towards the wealthiest. There 
are some that ask why is that appropriate. But regardless, the 
size is such that many of us in America believe unmet needs 
will occur and not be met.
    I have heard justifications on the order of economic 
stimulus that the economy was slowing down, that we need a 
boost in the arm right away. But I read the Wall Street Journal 
from my conservative Republican colleagues and conservative 
economists, that say this is no economic stimulus package. It 
kicks in too late, too little, too late. So they doubt whether 
it really is an economic stimulus package.
    Some Americans would say, if we are in trouble, we need to 
prime the pump really fast. But this does not appear to be what 
this tax cut is all about.

                                ECONOMY

    The only other thing, and that is what I am asking you, and 
I am so delighted to have the opportunity to ask you--the only 
other thought that I have heard as to why this tax cut is 
appropriate at this huge size, as many of us think it is 
oversized, is because of an idealogical belief by people of 
goodwill who think it is the taxpayers' money, give it back to 
them. If the government holds onto it, they will just waste the 
money.
    But I think that loses sight of the needs for investment in 
America's infrastructures--roads, bridges, military, schools, 
uninsured, Medicare and Social Security. So can you justify or 
give your rationale from the horse's mouth--and by the way, I 
have an enormous regard for your contribution in the private 
and public sectors and look forward to your work here.
    Can you give us the administration's or your own personal 
rationale for these tax cuts, when many feel it will come at 
the expense of America's short- and long-term infrastructure 
demands?
    Secretary O'Neill. Would you--I don't think I can do this 
in 5 minutes, Mr. Chairman, but let me see what I can do in a 
short period of time.
    First of all, I would observe this: This year, with a just-
recorded 2 percent real growth in our economy in the last 
quarter, the first quarter of the fiscal year, we are running 
at 1 percent real growth. With those two quarters behind us 
and, I think you could argue, something close to 0 to 1 percent 
real growth over this period of time, we are still forecast 
being--we are going to collect here at the Federal level $280 
billion, maybe even as much as $300 billion, more than is 
required to pay for agreed public purposes in 2001, in fiscal 
2001. And I think what I would call the ``nonpartisan best 
economic estimates'' is that the tax system, as it exists 
today, is going to continue to produce very large surpluses 
going forward.
    And in that context--and I think this is without starry-
eyed forecast of what the real rates of growth are going to be, 
I think you know, people of goodwill would stipulate these 
numbers, that we are going to produce something over $5.6 
trillion worth of surpluses with the tax structure as it exists 
now, with an assumption of real spending going forward at a 3 
percent rate.
    I think you know, you can argue about the absolute levels; 
and the truth is, no one knows. But I think it is indisputable 
that we are collecting a significant amount of money beyond 
what is required to pay for agreed-upon public purposes.

                                ECONOMY

    I went around on the other side, having been deeply 
involved in public policy issues on the ground--not in theory, 
on the ground in Pittsburgh--and say to you, are there potholes 
in the streets of Pittsburgh? Are there public purposes that 
need to be attended to? I think the answer to that is yes. But 
I was doing everything I could on the ground level in 
Pittsburgh, working with the mayor, working with the county 
executive, to figure out how do we get these things done.
    I must tell you, you know, we didn't spend an awful lot of 
time shaking the tree in Washington. You might say, well, you 
know, everybody else is shaking the tree in Washington. I 
frankly think, on the ground, that it is our responsibility; as 
property owners and people who make money, it is up to us to do 
what people used to think was normal, which is look at your own 
resources first before you go ask somebody else to send you 
money.
    And so we are out there working very hard, and you know--
Mr. Chairman, if I may just give--I know you are running out of 
patience with the timing of this, but I will give you an 
example of how I think about these things.
    The mayor asked me to help him figure out, how can we solve 
our fiscal problem here in Pittsburgh; and I didn't say to him, 
go to Washington. What I did is, I went in with a group of 12 
people and took the city apart and I found things like this:
    In a city of--you know, safety is one of my things. In a 
city of 4,000 people, their Worker's Compensation bill is $20 
million a year. It was 10 times bigger than Alcoa with 140,000 
employees. Why is that? Because they thought God intended for 
them to be hurt at work. They didn't know it isn't necessary. 
In a city of 4,000 people, they had 23 people who could make 
decisions about copier contracts, if you can imagine, and the 
difference between the lowest cost copier contract and the 
highest cost copier contract was a factor of two.
    Now, you know, if you really want to know how we are going 
to get the resources that we need, we need some hard-headed 
people out there who don't go say, give us more money; they go 
say how the heck can we get the resources that we need and free 
up the waste that is happening in the current allocations? And 
there is more than enough to pay for things.
    In the city of Pittsburgh, we didn't have an inventory of 
the property the city owned so that we could have an auction of 
stuff that was surplus and boarded up and the rest of that.
    So I am here to tell you, I have the same sense you do 
about the compelling importance of doing the things that make 
this a better society, but I don't start by--I start by looking 
at, how do we get efficiency out of the resources we have 
already committed, so that I can go to the people and say we 
need a tax increase because we are getting 100 percent 
efficiency.
    I don't think we can make that claim about the resources 
that are out there now in the schools, in the 
transportationsystems. So I don't think we have a shortfall in--for 
sure, we don't have a shortfall in compassion, and the idea that we 
should have more than 4 percent real spending increases at the Federal 
level just seems to me not to be grounded in good fact. It is all a 
ratio game. It is all a game that isn't supported by the reality of 
having gotten 100 percent out of the resources we have already got 
here.
    Mr. Rothman. Can you----.
    Mr. Istook. Mr. Rothman, I am sorry, but I am afraid your 
time has expired. I appreciate your interest.
    Mr. Tiahrt.

                          IRS COMPUTER SYSTEM

    Mr. Tiahrt. Thank you, Mr. Chairman.
    Welcome to the committee. In your testimony, I was going 
through, there is about $400 million or $325 million to update 
the Internal Revenue Service's computer system. Many of us 
think the tax system is too complex, takes too long to get tax 
refunds, and we get too little back. We have put some--more 
than a billion into a computer system for the Internal Revenue 
Service that was just dumped; the system didn't work. I don't 
know whether the system is too complex or just wasn't handled 
appropriately as far as the design specifications, statement 
work and the follow-through.
    What management techniques or what safeguards have you put 
in place that will assure us that when we invest this money in 
upgrading the information technology at the Internal Revenue 
Service that we will have something that we can use, and it 
will benefit the taxpayer?
    Secretary O'Neill. I am going to ask Jim to give you a more 
detailed answer.
    I think we have a reasonable structure in place. And I 
myself have started attending the oversight group meetings that 
you have put in place. I have attended a couple of them now, 
and I am frankly impressed by the technical understanding of 
the members that have been put on this board. I think they do 
know what they're talking about.
    Larry Levitan is a person who has substantial experience in 
installing and auditing systems of this type and magnitude, so 
I think you all have put the right kind of process in place. I 
think we in the Treasury and the Internal Revenue Service are 
following with the right level of implementation. I will be a 
personal witness on this subject.
    I started my career as a computer systems analyst, computer 
programmer. And as I have more time over the next 6 months to 
work this, I will be able to give you my own personal testimony 
that we have got the right things in place to make sure we 
don't have another disaster.

                          IRS COMPUTER SYSTEM

    One of the things, frankly, that occurs to me that we have 
not done is something that I did in the private sector, which 
is to write turnkey contracts, which means that the provider 
assumes all the risk for performance, so that you don't pay 
them anything unless the system really performs. I need more 
time to understand why we haven't done that in this instance 
and then turn to the broader proposition, because these are 
very complicated things, and they're very----
    Mr. Tiahrt. If you are developing new technology I think 
there would probably be room for them to say, we are going to 
sink some cost into this, but this is not new technology.
    Secretary O'Neill. That's exactly my point. I think we 
should be able to turnkey these kind of things, even though 
they're big and quite complicated, and put all the risk on the 
provider. We'll look to see if we can't do that in our future 
work.
    Mr. Tiahrt. Thank you.
    Mr. Flyzik. Thank you, Mr. Secretary.
    I would like to believe we have learned best practices, but 
based on the past, we have learned how not to do things also. 
In the case of the IRS, one of the key differences this time 
is, we have a prime contractor from the private sector as our 
integrator and we're forming a partnership to bring best 
practices from the industry into our model.
    This model, unlike the last one where--the last model, we 
had this one big billion-dollar procurement for a display 
processing system which was pushing state of the art back then. 
We have learned that's not the way to do these major 
procurements.
    The other thing I would say in terms of governance is, we 
work very, very closely with this subcommittee and the staff 
members here to put a governance process in place which now 
includes, of course, Charles Rossotti, who comes with a very, 
very strong information systems background, as well as GAO, 
OMB; and I sit as the Treasury CIO on the oversight committees 
with the Commissioner, and we have a very strong investment 
review process in place to make sure we don't allow these 
runaway programs to get out ahead of us and we are making 
decisions as they need to be made.

                      FINANCIAL MANAGEMENT SYSTEMS

    Mr. Tiahrt. You mentioned, ``best practices,'' I believe, 
is the way you put it. Going back to the bookkeeping function 
of government, the Department of Agriculture--excuse me, the 
Department of Labor--has millions of dollars they can't account 
for that is supposed to be going to retraining employees, the 
Department of Education cannot account for more than a $100 
million, the EPA spends over half his money on lawyers and not 
cleaning up one drop of pollution.
    What financial system can we put in place--financial 
accounting system, a best practices, best procedures, perhaps, 
that we can put in place so we have a real management tool? If 
Congress is part of the problem, if we are asking the wrong 
questions so that accounting systems are confused by it, we 
should change the way we ask questions.
    So I hope that with your experience maybe you can give me 
some assurance that we can have an accounting system much like 
what Mr. Sherwood is mentioning, that we can understand; it is 
a good management tool.
    Secretary O'Neill. It is a great question. I like it a lot.
    Let me tell you about what we have started doing in the 
Treasury Department exactly on this issue. I was frankly 
surprised to find that it takes the government 5 months to 
close its books. That's something that I did where I was before 
in 36 countries with 350 locations in 2\1/2\ days.
    Now, we were the best in the world. No one reported their 
quarter earnings faster than we did. But it was because our--
because we set the right goal. The right goal was, and is, to 
do this job with no elapsed time and no cost and no repair 
work. Now, the fact that it took us 2\1/2\ days tells you we 
didn't figure out how to get to the theoretical limit, but we 
were pretty close; and we can do the same thing in the 
government.

                             BEST PRACTICES

    But you said it just perfectly right, that we all need to 
have a coin of the realm, if you will, which is about the right 
things. It is not about inputs, it is about performance. And 
the performance metric that we need about the financial systems 
of the Federal Government is that, in the most idealized sense, 
any time, any minute of the day,any day of the year you want to 
know what the financial accounts are in balance in the Federal 
Government, you should be able to turn on your computer and look at it, 
and it should be real time.
    Now, it is going to take us a while to get there. I 
suggested to the Treasury that we should strive to get to a 3-
day closing of the Treasury books. And they sent me back a memo 
that laid out a way to do that over the next 4 years, and I 
said that's all very interesting, what about June the 1st of 
2002? And they came back to me and said, wow, okay, we are 
going to do that; and they will.
    You watch and see, in 1 year's time, about a year from now, 
we will close the Treasury books in 3 days, because we have 
given people--we have given them a vision, we have given them 
permission, and they will do it. And, importantly, this will 
make their life a hell of a lot more meaningful because instead 
of spending their time doing repair work and hating systems 
that don't work, we are going to all work together to overcome 
those problems, and then we are going to spread these same 
ideas to all the rest of government. Because the government 
should not be a third-class citizen when it comes to operating 
at what we know to be possible levels.
    I must tell you, when I came here in 1961 part of the 
reasoning I came here is because the Federal Government was the 
leader in the use of information technology. You know, 
something happened over the last 40 years. We lost our way. We 
came to believe it was okay for us to be, and for public 
purposes, second rate. I don't believe that's right. And I will 
tell you something, it doesn't cost more to be the best, it 
costs less to be the best.
    But we need to get the metrics right so that instead of 
saying you know what are the right systems that are adopted by 
Arthur Andersen or something, we need to have a conversation 
about what are the metrics we want to achieve; and they all 
need to be about performance metrics, including how do we close 
the books without any mistakes, without any elapsed time. And 
then we can organize people and energize people to achieve 
really worthwhile goals.
    Mr. Tiahrt. Thank you, Mr. Chairman. I'll forgo my question 
about why our tax cut is so small in light of our large 
surplus, even though it is smaller than what Mr. John F. 
Kennedy requested.
    Mr. Istook. Mr. Tiahrt, you of course are aware your time 
has expired, unfortunately.
    Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    Mr. Secretary, let me add my welcome to you and thank you 
for appearing before us today. I'd like to register my 
agreement with a number of the concerns that have been raised, 
and that are partially addressed in your statement concerning 
the size and compensation, overtime requirements and so forth, 
with respect to your workforce. Questions about the 
modernization programs, questions about the funding of Treasury 
law enforcement as compared to law enforcement agencies 
elsewhere in the government.
    I may have some additional questions for the record that 
I'd ask you to respond to in these areas.

                                TAX CUT

    Mr. Price. I want to turn to a more immediate and more 
pressing concern, namely, the budget resolution that is pending 
before us at the moment. As we understand it, from press 
reports, this budget resolution will call for a tax cut of 
$1.28 trillion over 10 years; with interest costs, that would 
come to $1.67 trillion and that doesn't include, as I 
understand, any likely changes in the alternative minimum tax.
    Now, we haven't seen this budget, although we may be asked 
to vote on it later today. We don't know what specific tax cuts 
are included in that 1.28 trillion. So my first question to you 
is, do you know, can you enlighten us?
    Secondly, several Republican Members including members of 
the Republican leadership have declared that they intend to 
enact tax cuts in addition to those called for in the 
conference agreement. In fact, we have heard that there may be 
a strategy to enact less popular tax cuts as part of a 
reconciliation bill under the protections that the 
reconciliation process provides and then add on more popular 
tax cuts beyond that, in addition to legislation, obviously 
adding to the $1.67 trillion cost as well, as to the explosion 
of costs after 2011.
    So my question is, what is the administration's position on 
those suggestions that we should be enacting additional tax 
cuts beyond the 1.67 trillion total we are looking at in the 
budget resolution?
    Secretary O'Neill. Well, thank you very much for your 
question. First, on the composition of the tax bill, I honestly 
don't know how the composition is going to turn out.
    You know, this morning I had an early morning meeting with 
Chairman Grassley and Chairman Thomas, who are sitting in the 
control positions on determining the details of what will go 
into the tax reductions under the umbrella of the budget 
resolution. It appears there is agreement on the overall 
numbers that are in the budget resolution for tax reduction and 
spending purposes. And so far as I know, the committees of 
jurisdiction are going to work on these details, hopefully over 
the next week or so, so that there is in fact substantive 
content underneath the budget resolution; and then the 
committees and the conference committees will have to work out 
the details of what actually ends up under this agreement.
    So, no, I don't know specifically what is going to be in 
the tax bill.
    On the other question you asked, it sounds to me like the 
kind--without saying a yes or no about whether such things are 
being entertained, it sounds to me like a pretty typical 
legislative process of how things are done here, as best I 
understand them.
    Mr. Price. Well, that may be, but I am asking you whatthe 
administration's position is on these discussions.

                                TAX CUT

    First of all, the President has touted this agreement, has 
declared victory pretty much, as I understand it. Is there an 
administration view as to what tax cuts are assumed, or should 
be assumed, in that 1.28 trillion? And then, secondly, what is 
your position on the numerous suggestions that we should go 
beyond that?
    Secretary O'Neill. All right.
    On the first question, the President said over and over 
again, I have said over and over again, the front edge of the 
tax reduction bill needs to be the marginal rate reductions, 
because they are of the most consequence going forward for our 
economy.
    There has been a lot of back-and-forth about the details of 
these, of marginal rate reductions. I am surprised that we have 
not done a good job, obviously, of communicating the importance 
of the top marginal rate reduction for small businesses. You 
know, as I understand from our tax experts, something like 77 
percent of the potential opportunity, related to the top rate 
reduction, goes to small businesses, which is where the energy 
and the new job creation comes from in our economy. And so 
these--this piece of it is the most important.
    The other piece that--as the President has said over and 
over again, he believes in the principles that are associated 
with the other components, and we are prepared to work with the 
Members of Congress to figure out the degree to which we can 
deal with the beginning implementation and phase-in of these 
other principles behind the marginal rate reduction. So I think 
we have been very clear about the preference and the importance 
of components, beginning with the marginal rate reductions.
    To the other question about what people are saying about 
not just adding on additional tax reductions, but adding on 
additional spending, you know, it seems to me that there is an 
endless conversation--perhaps that's the way our founders 
intended for it to be--even when there is an agreement, as 
there seemed to be yesterday, about the terms and conditions of 
the budget resolution, that individual Members certainly have a 
right to have a different point of view about whether that is 
the end of it and they should go on adding things on.
    And so, yeah, those conversations are going on. I am--you 
know, I was asked this morning, is the President prepared to 
use his red pen in the event people send him things that go 
beyond the special resolution; and I said, I hope we can use 
sweet reason to get people to do the right thing, and then we 
won't have to address that question.
    So I am going to work hard on sweet reason and hope we 
don't have to take presidential blocking action on the things 
that people are talking about.
    Mr. Price. Well, the red pen aside----
    Mr. Istook. Mr. Price, if you want to take a second to 
close, but I need to let the gentleman know, his time has 
expired.
    Mr. Price. Well, it is fair to regard this then as a 
ceiling, not as a floor. Is that what you are saying, this 1.28 
trillion, that's the way the administration views it?
    Secretary O'Neill. The President has agreed to the 
arrangement that's been worked out on the tax cut, and that's 
what we are for.
    Mr. Price. Thank you.
    Mr. Istook. Mr. Peterson.
    Mr. Peterson. Thank you.
    Mr. Secretary, as a fellow Pennsylvanian, I want to welcome 
you to Washington. I, for one, feel pretty good about having 
someone with your background and your experience in this very 
high-level position that I think, just listening to the last 
hour here, shows what your experience can bring to government.
    I want to thank you for the willingness to do it.
    Secretary O'Neill. Thank you.

                                TAX CUTS

    Mr. Peterson. We just had a little discussion here--the 
gentleman from New Jersey left, but a discussion I hear often, 
that somehow it is risky to cut taxes. And I, for one, with 19 
years in State government--just a little over 4 years here, and 
I am amazed at what goes on here--think it is far more risky 
than what we did last year.
    We had over 8 percent growth in government when we had 3 
percent inflation; and when you are growing government 200-and-
some percent of inflation, you do that for a long period of 
time and government will be everything. I mean, it is just--and 
I don't know whether they feel more comfortable with that much 
more government, but I don't.
    And I have been in local government, I have been in State 
government, and I have been in Washington, and Washington 
scares me the most because of our power here.
    But if we leave the money on the table this year and next 
year, we would have continued to spend it. And I hear the 
ripple effect of some States that are already in tax problems 
this year. And I'll lay you money, because I have watched four 
governors; they spend every dime every year at the peak. And 
when you get off that peak, you can't sustain it in the 
valleys. They didn't understand budgeting.
    And would you like to respond to that?
    Secretary O'Neill. I agree with you. I think the facts are 
clearly there. We are now taxing at a higher rate than we have 
in the modern history. And you know, the facts support your 
point. We are going to spend whatever we don't give back to the 
people beyond what we need to pay for already-agreed public 
purposes. It just seems to be in every table.
    And you know, I am sorry, but it is not a partisan issue. I 
mean, nothing can be enacted without a majority of both 
Congresses, and the evidence is--last year, we were 8 percent. 
And there are those who believe we need to have a lot more than 
4.9 percent this year. And when you listen to the individual 
projects that would be funded, it is hard to say that those are 
wrong, but somehow the aggregation of the composition doesn't 
turn out very well.
    Mr. Peterson. Well, I think the thing that has amazed me is 
that this Congress historically has been unwilling to stop 
anything that it starts. And you know, in your company you had 
projects, and when they were completed, they were over; if they 
didn't work, you scrapped them.
    We don't scrap anything. If we don't start anything here, 
the screams and cries come out and then we can never stop 
funding it. And until we learn to prioritize--we have enough 
money in Washington, maybe too much, but until we learn to 
prioritize, we have got to shut it off. I mean, I think we 
ought to give some of it back to the people.
    The one final issue I would like to share with you is, it 
is the higher rate we hear the same people complaining about. 
But most of those are our entrepreneurs who are creating our 
jobs and are paying a very high rate and are trying to grow 
businesses and would reinvestment that money if we allowed them 
to have something back; am I correct?
    Secretary O'Neill. Absolutely right.

                             ENERGY PRICES

    Mr. Peterson. Last year, I had a discussion with your 
predecessor at this very same time; and I questioned him on his 
support for the interest rate increases, because of the energy 
costs that were already seeping into our economy. Now--I am 
most concerned about our economic future on energy prices.
    Now, you come from a major energy user. But I see the great 
commitment that we have made to natural gas in this country for 
power generation, something we normally didn't do; and for 
reasons, but maybe not thought through. We went through this 
last winter when home heating fuels doubled and many corporate 
gas fuels doubled if they didn't buy ahead, and many of our 
smaller businesses don't have the cash to buy ahead or growing 
businesses. This year looks to me like we will have a higher 
push in gas prices which could force seniors out of their homes 
and could force energy-using businesses to be noncompetitive. 
Is that a fair concern?
    Secretary O'Neill. Indeed, I think it is. You probably know 
that I am serving on the energy policy development group with 
the Vice President that the President has created to--with a 
task of organizing and beginning to talk about an energy policy 
for the United States. And as we have done this work, you know, 
it is interesting to see that the actions that we have taken 
over the last, I guess over the last 10 or 15, years I think 
with the best of intentions have had consequences in the energy 
area that we are now all going to pay a price for. As an 
example, we simply don't have enough refinery capacity in this 
country to supply our own needs.
    You go and look at why it is we don't have enough refinery 
capacity, it is because of the rate of returns of the refinery 
segment of the oil and gas industry has been about half the 
market rate of return that is required to cause private 
investment to flow. Because there has been such a shadow 
created by the regulatory process that we put in place.
    Even if we wanted to do something about it tomorrow, we 
can't do something about it tomorrow because we have got to 
build new refinery capacity. Unless the Government wants to go 
into the business, which I frankly think would be a disaster, 
we have got to fix some of the regulatory provisions that has 
caused us problems.

                             ENERGY PRICES

    We have other problems that are related to the way our 
energy system has developed in the United States. Most of it 
has been locally developed. And as a consequence of that, we 
don't have the equivalent in this country of the interstate 
highway system. So that if you look at New York City's 
potential problem for this year and for the near-term future, 
there is energy available in upstate New York and Maine and in 
the new England States, but if you will the pipes aren't big 
enough to put more energy into the city because the 
transmission system isn't adequate.
    So the same kind of circumstance prevails on the West Coast 
in Southern California. We could get more energy from Mexico, 
but we can't get it from the border to San Diego because we 
don't have the transmission capability. And again these are 
regulatory-inspired problems. It is not that we don't have the 
intelligence to do it, but the consequence of the regulatory 
crazy quilt that we have created and, frankly, the resistance 
of some States to having energy generation in close locales, 
has created a real difficult situation that is going to have 
consequences for the real people that you talk about in your 
comments. We are doing as quickly as we can a review that will 
begin to change some of these things so that we can have the 
energy that is necessary to having real growth of 3.5 or 4 
percent in our country.
    Mr. Peterson. I look forward to working with you. The 
reason I was late, I was with Abraham at the Interior committee 
meeting. It is an issue I look forward to working with you.
    Mr. Istook. The gentleman's time has expired. Thank you, 
Mr. Peterson. Mr. Secretary, I have got to note if I know of 
anyone that is concerned with being in a place where they do 
have energy available, we have it in Oklahoma. They would all 
be welcome. So I hope you'll help us spread that word. I know 
we are getting up toward the noon hour. I hope you still do 
have a few minutes to remain with us due to the unfortunately 
late start we had.
    Mr. Secretary, I appreciate what you said about trying to 
find the things that are being done that don't need to be done 
or that can be done much better. And the good thing is we know 
that from your own track record we are speaking to an 
individual that has done those things and has the ability to do 
it. And as I mentioned before, I applaud and want to assist in 
every way that I can. And you know as well that doesn't solve 
our problems for information that we would like to have now 
that you do not yet possess.
    And as we are trying to go through these things, whether it 
be resolving what is the optimum rate at which the ACE program 
can proceed, because we want to fund it at that optimum rate, 
we don't flow what it is, you don't know what it is, customs 
has given us an opinion and maybe that opinion could be 
scrubbed and improved upon and that is great. But we do want to 
know what that optimum is so we can make sure that we proceed 
at that rate. Businesses are paying fees to implement the 
system and certainly as customers they want to get what they 
pay for. And I know that you appreciate that attitude.

                  DEPARTMENTAL OFFICES BUDGET REQUEST

    With the desire to do that scrubbing and to take care of 
the needs, there is some concern that internally within the 
internal administration, the Treasury budget I was looking at, 
a portion, it was--and forgive me if I am looking at the 
incorrect subset, but I guess the internal number for Treasury 
administration is approximately 12 percent, which is a level 
not granted to other agencies. Is there something distinctive 
there that there is a different criteria being applied or is 
there a different process you have already gone through? Or is 
this in some way related to your need to have the people in 
place to make sure that you can do this particular analysis? 
Because I didn't see that in the budget request if that is a 
part of it. I saw other things that related to information 
technology and adjustments in personnel, but nothing that 
seemed to being bringing the resources together to be able to 
review everything else. So can you explain to us why there is a 
difference there?
    Secretary O'Neill. It is a good question. And I think, in 
fact, the amount of absolute money you're talking about is $5.6 
million, or something on that order.
    Mr. Istook. The particular--what I am looking at is more on 
the line of $18 million. Going from 160-something, I think 162 
to 181.
    Secretary O'Neill. So it is a broader number. Let me talk 
about the part that I want to say is specifically money that I 
think is desperately needed. It has to do with improvements 
that I think have a great potential for the country.
    Let me give you just a couple of examples. As I have been 
here now for 3 months and testified before a number of 
different committees, I have been asked repeatedly are you 
worried about the current account deficit? And I won't torture 
you with the long answer to that, but the question is important 
because it comes out of a thought process and a set of 
conventions about how we think about our economy and about the 
world economy that I think are wrong.
    It is not that they've always been wrong, but the notion 
somehow that we should be worried about funds flowing here from 
other nations as though that were some kind of big negative 
thing and then we beat ourselves up because our national 
savings rate isn't high enough, I think maybe was appropriate 
when these concepts were invented in 1940, but we don't live in 
a 1940's economy anymore. And I want to investsome money very 
deliberately in trying to create a new framework for thinking about how 
our economy works that is consistent with the way it really does work 
now, which is not like it did 60 years ago.
    And this is going to take some dedicated highly intelligent 
resources to create a new way of thinking about these issues. 
And you know, I would say well why do have you to do that? Part 
of the reason you have got to do something about it because 
important decisions are being taken including some of the 
Congress because of this concern about current account deficit, 
which is a very, I think, not helpful way to think about flows 
of funds in the world monetary community.
    Now a second kind of an example of things that we need to 
do that don't exist is to put together a series of information, 
regular information collection from around the world economy. 
This is not just about the U.S. economy, but information that 
is not available now. With all the government statistics and 
information we collect, there is no place you can find the 
series of data that describes on a real-time basis the value-
added chain of events, for example, that takes place in moving 
from rubber to create tires and metal to create fenders and 
electronic equipment to create the internal electronic 
distribution system for an automobile that ends up in an 
automobile that collect that information from all different 
places from around that world that now goes into creating an 
automobile and then extending that thought process to the major 
value-added change so that we can have a better understanding 
for policy-making purposes both in the administration and the 
Congress that better reflects what is going on in the real 
world instead of the fanciful stuff people are using to make 
decisions now.
    It is going to take some money to get this done to create 
an information network that draws information from Brazil and 
Argentina and whatever your favorite places are around the 
world, China and Taiwan and Germany and Hungary and Russia, so 
that we have for the first time an information system that 
describes what is going on in the real-world economy that 
doesn't exist today. It is going to take a few million to do 
that.
    Mr. Istook. So that is, if I understand you correctly, 
you're saying that that is behind the internal administrative 
request. Of course we'll want to get further information on 
that. If I understand you correctly, Mr. Secretary, you're 
saying with regard to balance of trade and trade deficit issues 
that really--and forgive me if I am putting this in electrical 
terms--really it is not so much the polarity; it is not the 
direction of the flow. It is the amperage; it is the rate of 
flow.
    Secretary O'Neill. That is a good analogy.
    Mr. Istook. I appreciate that. And I certainly will look 
forward to talk with you further. But I know that time is 
limited right now. So I yield to Mr. Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman. First of all, I want to 
take the opportunity to welcome to our committee someone who 
testified here on numerous occasions, the former director of 
the Officer of Management and Budget, Mr. Raines, who, if we 
have a tax cut, Frank, you're going to get a heck of a benefit. 
My understanding is your salary went up from 135,000 just a 
little bit--maybe 152,000. Whatever you were making, I 
understand it went up at Fannie Mae.
    Mr. Istook. Our guest, the Secretary, has the opposite 
problem. But if you average the two of them.

                               TAX REBATE

    Mr. Hoyer. If you average the two of them, we are going to 
be lamenting the fact deeply. Let me ask you something, some 
direct questions. The tax rebate, which is part of the tax bill 
stimulus, my understanding, is going to cost the Financial 
Management Service $48.9 million in their estimates. Is that 
correct?
    Secretary O'Neill. Yes, sir.
    Mr. Hoyer. It is going to cost Internal Revenue Service 
66.2 million?
    Secretary O'Neill. These are best estimates. I am very 
hopeful that we are going to able to figure out a way to 
include those amounts in moving with the tax bill so we can get 
this going really quickly. I hope that is consistent with what 
the committee wants. We need the authorization, the 
appropriations so we can get this moving because these are 
significant amounts of money. And Charles does not have the 
money and neither does the FMS.
    Mr. Hoyer. Bottom line is they could not absorb these 
dollars.
    Secretary O'Neill. No, sir.
    Mr. Hoyer. So they would have to be a hundred million plus 
in order to fund that.
    Secretary O'Neill. One hundred fifteen.

                 DISPARITY BETWEEN TREASURY AND JUSTICE

    Mr. Hoyer. Let me go on. Nonpay inflation. Actually the 
chairman I think covered some of the nonpay inflation issues 
and the fact that in the administrative office that they're not 
absorbed, but they are added on.
    Treasury versus Justice law enforcement. You've heard a lot 
about that. But you were in a unique position as a member of 
the budget review board, which was a new mechanism utilized by 
the administration. Normally Secretaries of Treasury are not in 
that mix as much as you were, although I think, again, 
Secretary Rubin, as well as Frank Raines, were extraordinarily 
influential in this budget process; but you have been as well. 
Can you describe the process, particularly as it relates to the 
comparison of law enforcement resources available to Treasury, 
and Justice? Because as you well know, there is a substantially 
disparate treatment of those two agencies.
    Secretary O'Neill. Yes. Indeed, I was included in the task 
for that partly because I had a reputation as a slasher when I 
was a deputy director of OMB, so the President thought that 
would be useful.
    Mr. Hoyer. Everybody in OMB has that reputation.
    Secretary O'Neill. It puts you in a very compromising 
position because you're supposed to be a slasher. It makes it a 
lot more difficult to be a pleader at the same time when you 
have a departmental responsibility. In any event, as we looked 
at these things frankly, we look at what the rate of change had 
been over a period of time; and we observed in the case for 
example of Treasury that last year's increase, if I remember 
correctly, was 24 percent for the law enforcement activities. 
Justice was at a lower rate. And we have provided what I think 
is a reasonable increase year to year.
    And if you look at the 2 years together, it is still an 
enormous rate of increase. And as I looked at the Justice 
Department activity, obviously again without enough of a kind 
of what I would call necessarily satisfactory data to describe 
what we are buying with these dollars, which I think frankly is 
the most important thing so that we can make better judgments, 
it is at least--I am not a fan of momentumbudgeting. I am much 
more interested in seeing what are we getting. And as we looked at 
these program years together, we basically made a judgment that these 
are prone to what has happened over the last few years and with the 
absorption capacity of these places, and then to resolve it we need to 
get on top of the question of what are we getting here so that we can--
so that we have a better basis honestly for talking to you about what 
it is you're trying to do with the people's money.

                 DISPARITY BETWEEN TREASURY AND JUSTICE

    Mr. Hoyer. Mr. Secretary, you and I agree; and we had this 
private discussion before the hearing. Obviously, our budget 
ought to be objective driven, not add-on driven.
    Secretary O'Neill. Right.
    Mr. Hoyer. Just incremental increases, whatever incremental 
increase. But although you mentioned last year the 24 percent 
figure, I don't know off the top of my head if that is 
accurate, but let's assume it is. If you look over time between 
the two agencies, there has been a real disparity between the 
INS, DEA, FBI and Treasury law enforcement; especially when you 
bring it down to specifics such as 90 hours of overtime of 
Secret Service agents. One of the reasons, as you point out, 
you gave up protection of the Secret Service, but we kept 
adding on protectees, they now have 17 or 18 or 19 major 
protectees.
    Secretary O'Neill. I think 23.
    Mr. Hoyer. And given that they perform at a high level as 
is demanded of them, they didn't add them on voluntarily. And 
so I think we need to look at that. I am concerned about that. 
And we need to deal with that before we mark up this bill.
    Secretary O'Neill. All right.
    Mr. Hoyer. Is my time up?
    Mr. Istook. I am afraid so, Mr. Hoyer. I am sorry we have 
to be so limited today. Mr. Sherwood.

                           COMPUTER SECURITY

    Mr. Sherwood. We are going back over this ground a little 
bit, but our investigative mission in the Secret Service to 
fight computer fraud we know we have some real dedicated people 
there with amazing skills, but I am concerned that they have 
the equipment that they need. And it has been my limited 
experience in that that equipment changes monthly, you know; 
and what is good--what was good equipment 2 years ago in the 
computer if you really are on the leading edge, computer work, 
what was good 2 months ago can be obsolete already. And we 
might be using stuff that was good 10 years ago. How are you 
going to get a handle on it?
    Secretary O'Neill. In fact, I am going to ask Jim to talk 
about the details. He was the CIO. He has been working this 
matter internally. I think it is okay for me to tell you about 
a meeting that we in the administration had a couple of weeks 
ago to look at this on a broad basis across the whole 
government.
    And frankly, I was surprised to find what I think are needs 
that we have to adopt practices that exist out there in the 
other world. It is not to say they don't exist some places in 
the Federal world, but there are some standard practices of 
doing what is called the red team attacks on the cyberworld to 
see if you can break through the protections that have been 
created to try to avoid major problems.
    And let me assure you that we in the administration who 
have responsibilities in these areas and have a need to work 
together because as you appreciate given the linkage that 
exists today if you can find a penetration in a fire wall in a 
civil agency, it may permit you to go into a national security 
activity. And some of these things you have to be careful how 
you talk about them; but believe me, we are working these 
issues hard, not just in the Treasury Department but across the 
Government because they're really quite important.

                           COMPUTER SECURITY

    You know, before you get to the cyber-area, I have to tell 
you I am surprised to find some of the conditions that exist 
that are staggering to me. And there is a matter of an audit 
report, so it is something you would otherwise know anyway, 
that the internal audit activity found that we had a major set 
of computers systems that didn't have any backup. And the best 
estimate was it would take 70 days to restart and get back to 
the beginning point. I don't know of another place in the 
private sector where people would accept less than, you know, 
almost instantaneous full backup for customer--important 
customer-dependent computer systems. So we are taking a look at 
every aspect of these. Frankly, I am a little surprised at some 
of the things we are finding, but believe me we are going to 
make sure we do what needs to be done quickly.
    Mr. Flyzik. Thank you, Mr. Sherwood. My response--it partly 
addresses the chairman's questions on the DO portion of the 
budget for the departmental offices. You'll see in that 18 
million a big issue strategy the Secretary and I have been 
talking about are enterprise approaches to a lot of these 
issues. Rather than have 14 bureaus all with separate 
independent approaches, we think the enterprise approach has 
potential to drive out a lot of redundant costs. And in so 
speaking, if you go back and look at the 18 million in the 
departmental offices, you will see the overwhelming majority of 
those requests are things that will benefit all bureaus. We are 
doing them at the departmental level first to be able to import 
them into our bureaus. If you look at the 18 million, a very 
high percentage of that is on critical infrastructure 
protection, secure data networks, backup and recovery systems. 
We have made that a priority, and we are addressing that in the 
departmental offices budget request.
    Mr. Istook. Thank you, Mr. Sherwood. Mr. Price.

                         GRAMM-LEACH-BLILEY ACT

    Mr. Price. Thank you, Mr. Chairman. Mr. Secretary, I 
appreciate your staying with us here past the appointed hour. 
I'll try to be very brief as we wrap up. I do want to raise a 
matter that has not been raised this morning having to do with 
the joint proposed regulation between the Federal Reserve and 
your Department that would expand banking powers to include--to 
allow real estate brokerage and management activities by 
financial services holding companies. As you can imagine, I've 
heard from a number of constituents about that. I expect every 
member has. People have concerns about it, some on both sides, 
obviously, but especially from the real estate community.
    Now the Gramm-Leach-Bliley act was enacted at the end of 
1999, and this is the first proposed rule since its enactment 
to attempt to define new activities as quote ``incidental to 
financial activity.'' The law ruled out real estate 
development, but left the status of brokerage and management 
uncertain. I wonder if you could speak this morning first to 
the decision-making process on this matter, particularly as 
regards the joint Treasury-Federal Reserve responsibility and 
how that works. Secondly, as you know, this proposed rule was 
issued under the previous Secretary with the new administration 
in place. Do you expect that this rule will continue to move 
forward? And thirdly, if it does move forward, what are your 
thoughts as to the timing of the final rule?
    Secretary O'Neill. Let me tell you, there are few subjects 
on which I have had more mail from both sides and I suspect 
that you have had the same experience. We are working on the 
rule. And my sense is probably in the next couple of months we 
are going to have a rule that represents the judgment of this 
administration. Our people are talking with the people at the 
Fed. Alan Greenspan and I spend a lot of time together. We talk 
about a lot of things. We frankly do not spend a lot of time 
talking about this particular issue because it hasn't worked 
its way up in the staff process yet.
    There's all the expertise we have in the room today. But my 
staff tells me from what I said earlier, Mr. Price, in response 
to your questions, I need to do this clarification because I 
may have left the impression that after this agreed tax bill is 
done the administration won't seek further changes and reflows 
of money back to the people who sent in the taxes. I certainly 
don't want to leave you with the impression we are done with 
the question of trying to get the right balance between the 
resources and the U.S. economy with a prejudice toward leaving 
resources with the people who earned it.

                                TAX CUT

    Mr. Price. Well, let me just ask you then returning to that 
topic which I hadn't necessarily intended to do, you're saying 
then that the agreement to the $1.28 trillion, the new size of 
the tax cut, that that is--has no finality about it as far as 
you're concerned or as far as the administration is concerned.
    Secretary O'Neill. We have time ahead of us. I frankly 
believe that the estimates of surplus are understated, if we 
can run our economy at something better than the 3 percent 
real-growth rate. And so I think it would not be wise--I think 
you would agree it would not be wise to make determinations for 
the next 3 or 4 years until we see how all this plays out.
    Mr. Price. I am glad to hear you say that because indeed 
you would find a great deal of agreement on both sides of the 
aisle, certainly on our side of the aisle on that proposition. 
One of the things that's a concern is the shakiness of the 
surplus plus the fact that over two-thirds of the surplus 
projections are more than 5 years away. So if the proposition 
is that 2, 3 years down the road we ought to take a look at the 
economy and what we can afford in the way of tax cuts and new 
investments and all the rest, you'll get no quarrel on that.
    That wasn't the question I was raising though. The question 
I was raising is about this current congressional session and 
the budget process in which we are now engaged and whether this 
agreement on a new tax cut number of 1.28 trillion means 
anything.
    Secretary O'Neill. Indeed, I think it does. The President 
had the leadership down and thanked them for shaping this 
agreement and finding common ground on a bipartisan basis. 
These are the terms that should judge how much we are going to 
spend and how much we are going to provide in tax relief in the 
context of this year's legislative session. And as I said to 
you, you know, I am hearing from lots of members different 
views about whether or not neither the spending nor the tax 
reduction numbers are enough.
    The President has said he agrees with these numbers. And we 
are going to do everything we can to get this process done. But 
if, for example, it is in the wisdom of the Congress that they 
decide they're going to do something more, that is going to 
have to be individually and independently judged as it happens 
by the President, by the administration.
    Mr. Price. Well, the President earlier had been quite firm 
about 1.6 being the number. You're telling me that he's not 
equally firm about 1.28 being the number. Is that a fair 
inference?
    Secretary O'Neill. Actually, it is 1.35 trillion.
    Mr. Price. I am talking about the 10-year number.
    Secretary O'Neill. I am talking about obviously the 11-year 
number. Because the President wants it all, that the President 
has agreed to this compromise, which, I think, is as best we 
can have an agreement for what we are going to do this fiscal 
year.

                                OLYMPICS

    Mr. Istook. Thank you, Mr. Price.
    Secretary O'Neill, we very much appreciate your extending 
your time with us. We have imposed upon you by getting a late 
start. I do have one final thing I think it is important to 
ask. Realizing what you have described as an ongoing process to 
scrub the budget that relates to Treasury and its components, 
which will require us certainly to be in close communication to 
see what adjustments might or might not come out at, but with 
that in mind and realizing that we have this new agreement that 
has been reached regarding the overall budget, should we 
anticipate that within the framework of that agreement going 
from the 4 percent to the 5 percent that that will include some 
proposed adjustments potentially regarding the expense of the 
security of the Olympics or potentially regarding the ACE 
program? Should we on this subcommittee anticipate that there 
may be some adjustment in that or any other accounts in our 
jurisdiction coming to us pursuant to that budget package?
    Secretary O'Neill. Frankly, I had not begun to entertain 
the possibility of supplemental if there is a supplemental for 
some other purpose.
    Mr. Istook. I don't mean a supplemental appropriation. I 
mean an adjustment to the regular, although I am interested if 
you have a comment on the supplemental as well, of course.
    Secretary O'Neill. Well, specifically to Olympic financing, 
a lot of the work that needs to be done needs to be done before 
the Olympics are ever on top of us, and there is a process 
working to use the counterterrorism fund to provide the money 
for Olympic financing. Frankly, I don't know why the previous 
administration didn't fully fund the necessary incremental 
requirements for the Olympics; and when we got here, we found 
that there had been an understanding this is the way the 
funding was going to be provided, and we simply persisted in 
that.
    In the future, I think it really makes sense if we have 
things that are consequential and that are significant and they 
cross lots of agency lines that we ought to put it into the 
budget and accommodate that way for this purpose. I think this 
is down the track, and it is our intent to use these funds. I 
understand there's a reasonable degree of agreement that for 
this time this is an appropriate thing to do.

                         COUNTER-TERRORISM FUND

    Mr. Istook. Well, as you can appreciate--and I appreciate 
your comment of you saying that the outgoing administration 
also intended to tap the counterterrorism fund. Our concern, as 
you understand is, that we need both to provide the adequate 
security for the international games, the Olympics, and also 
make sure that the reserve that remains in the counterterrorism 
fund is adequate to respond to any potential unknown need that 
may arise. And that's, as you understand, there's reservation 
about if you are tapping the counterterrorism fund for a known 
purpose did you really need that counterterrorism fund in the 
first place; and if we have a need for one, we need to be sure 
that we have the counterterrorism fund remaining at its 
necessary level as well. But we look forward to continuing to 
work.
    Mr. Hoyer. Mr. Chairman, can I make a point.
    Mr. Istook. Mr. Hoyer.
    Mr. Hoyer. Mr. Secretary, I understand what you are saying, 
but the fact is there was disparate treatment. The FBI was 
funded; ATF and Secret Service were not funded. Now if what's 
good for the goose, i.e., funding out of the counterterrorism 
fund, then it ought to be funded out of the counterterrorism 
fund for the incremental increase for the FBI. In fact, their 
lobby is better than ATF and Secret Service, Mr. Secretary, 
very frankly; and that has been consistently the case, and I 
understand what you say about the 24 percent.
    I didn't respond immediately because I think that figure 
frankly is inflated by maybe the ACE funding in fiscal year 
2001, but I accept your figure at this point in time because I 
can't contradict it.But the point is on the one hand it was 
determined that the Olympic expenses ought to be funded in the budget. 
On the other hand, it was determined not to fund it in the budget. 
We'll either make them eat it or we'll pay for it out of the 
counterterrorism fund.
    I share the chairman's concern, which I hear him saying, 
that the counterterrorism fund, whether from the previous 
administration or this administration, Congress intended that 
money to meet contingencies that were unforeseen; and to the 
extent that we dip into the fund, it undermines our response 
capability without a supplemental. Thank you, Mr. Chairman.
    Mr. Istook. Thank you, Mr. Hoyer. And, Mr. Secretary, if I 
understood you correctly, however, the money may be designated, 
I believe you've expressed that it is the desire that the 
security for the Olympics be fully funded and that the--we 
retain a counterterrorism fund at an adequate level for any 
unanticipated emergencies there.
    Secretary O'Neill. Absolutely, Mr. Chairman. And beyond 
that to say to you, you know, I just am not going to be part of 
playing games with the budget process. And what you get from us 
next year, you will not need a microscope or something to see 
around corners to figure out what the heck it is; and, you 
know, I will do my best to deliver that to you so that we're 
dealing with each other straight up on important matters of 
public policy and not playing games with each other. It just 
seems to me not appropriate.
    Mr. Istook. I very much appreciate that. Thank you, Mr. 
Secretary. We are adjourned.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]






                           W I T N E S S E S

                              ----------                              
                                                                   Page
Buckles, B.A.....................................................   405
O'Neill, Paul....................................................   765
Rossotti, C.O....................................................   559
Rush, Jeffrey....................................................     1
Sloan, J.F................................................249, 405, 493
Stafford, B.L....................................................   493
Williams, David..................................................     1
Winwood, Charles...............................................153, 249


                               I N D E X

                              ----------                              
                                                                   Page
Office of the Inspector General..................................     1
    Questions Submitted for the Record by Congressman Hoyer......   128
    Questions Submitted for the Record by Congressman Hoyer......    97
    Questions Submitted for the Record by Congresswoman Meek.....   102
    Questions Submitted for the Record by Congresswoman Meek.....   132
    Questions Submitted for the Record by the Committee..........   107
    Questions Submitted for the Record by the Committee..........    69
    Statement of David C. Williams, Inspector General, Treasury 
      Inspector General for Tax Administration...................    43
    Statement of Jeffery Rush, Jr., Inspector General............     7
United States Customs Service, Counterdrug Programs and Policy...   153
    COBRA........................................................   174
    Customs Air and Marine Operational Areas.....................   160
    Diversity of Personnel.......................................   189
    Diversity of Supervision/Managers............................   189
    Fiscal Year 2000 Windows of Opportunity for Drug Smuggling 
      (National Statistics)......................................   158
    Foot and Mouth Disease (FMD).................................   182
    Great Lakes Narcotic Smuggling...............................   192
    Non-Intrusive Technology.....................................   176
    Questions for the Record Submitted by Congressman Hoyer......   244
    Questions for the Record Submitted by the Subcommittee.......   203
    Statement of Charles Winwood, Acting Commissioner of the U.S. 
      Customs Service............................................   164
    Steel Import Reporting.......................................   196
United States Customs Service....................................   249
    $36 Million Offset...........................................   310
    2002 Winter Olympics.........................................   254
    ACE Development Cost.........................................   308
    Acting Under Secretary for Enforcement Statement.............   253
    Air and Marine Modernization Plan............................   272
    Air and Marine Program Staffing..............................   320
    Air Program Pilot Staffing...................................   321
    Automated Commercial Environment Development Strategy........   304
    Automated Commercial Environment...........................293, 301
    Chairman's Statement.........................................   249
    COBRA Fees.................................................299, 318
    Countererrorism Plan.........................................   272
    Customs Acting Commissioner Statement........................   271
    Customs Automation Modernization.............................   272
    Customs Resources............................................   318
    Customs Staffing in Miami....................................   316
    FY 2001 and FY 2002 Customs Modernization Program 
      Deliverables...............................................   296
    FY 2002 Budget...............................................   253
    Non-Intrusive Inspection Technology..........................   271
    Ports of Entry Infrastructure Assessment Study...............   272
    Questions for the Record Submitted by the Committee..........   326
    Questions Submitted for the Record by Congressman John E. 
      Sweeney....................................................   352
    Questions Submitted for the Record by Congressman Peter 
      Visclosky..................................................   355
    Questions Submitted for the Record by Congresswoman Anne 
      Northup....................................................   357
    Questions Submitted for the Record by Congresswoman Carrie P. 
      Meek.......................................................   362
    Resource Allocation Model....................................   271
    Statement of Charles Winwood, Acting Commissioner of the U.S. 
      Customs Service............................................   274
    Statement of James F. Sloan, Acting Under Secretary for 
      Enforcement................................................   256
    Statement of the Honorable Ernest J. Istook, Jr..............   251
    Trade Support Network........................................   307
    Treasury Forfeiture Fund Resources...........................   323
    Volume of Trade..............................................   307
    Western Hemisphere Drug Elimination Act......................   272
    Winter Olympics..............................................   311
Bureau of Alcohol, Tobacco and Firearms..........................   405
    Afternoon Meeting............................................   405
    Opening Statement of Congressman Steny H. Hoyer..............   446
    Questions Submitted for the Record by the Committee..........   465
    Statement of Bradley A. Buckles, Director, Bureau of Alcohol, 
      Tobacco and Firearms.......................................   408
United States Secret Service.....................................   493
    Counterfeiting.............................................495, 526
    Cybercrime...................................................   516
    Electronic Crimes Special Agent Program......................   517
    Electronic Crimes Task Force...............................495, 517
    Fiscal 2002 Appropriation Request............................   494
    Information Technology.......................................   517
    Investigative Program............................518, 522, 530, 535
    Lawsuit......................................................   523
    National Center for Missing and Exploited Children.........496, 541
    National Threat Assessment Center..........................496, 539
    Protective Program....................................513, 531, 536
    Questions Submitted for the Record by Congresswoman Meek.....   557
    Questions Submitted for the Record by the Committee..........   543
    Statement of Brian L. Stafford, Director, U.S. Secret Service   498
    Workforce Retention and Workload Balancing.................516, 518
Internal Revenue Service.........................................   559
    Afternoon Meeting............................................   559
    Internal Revenue Service Oversight Board Report..............   604
    Questions Submitted for the Record by Representative Anne 
      Northup....................................................   759
    Questions Submitted for the Record by Representative Carrie 
      P. Meek....................................................   744
    Questions Submitted for the Record by Representative David 
      Price......................................................   742
    Questions Submitted for the Record by Representative John E. 
      Sweeney....................................................   756
    Questions Submitted for the Record by Representative Steny 
      Hoyer......................................................   747
    Questions Submitted for the Record by Representative Steven 
      Rothman....................................................   741
    Questions Submitted for the Record by the Committee..........   632
    Statement of Charles O. Rossotti, Commissioner, Internal 
      Revenue Service............................................   566
Secretary of the Treasury........................................   765
    Bailout......................................................   782
    Best Practices...............................................   790
    Computer Security............................................   799
    Congressional Appropriations Process.........................   780
    Counter-Terrorism Fund.......................................   803
    Customs Service Modernization................................   783
    Departmental Offices Budget Request..........................   796
    Disparity between Treasury and Justice.......................   798
    Economy......................................................   785
    Energy Prices................................................   794
    Gramm-Leach-Bililey Act......................................   801
    Internal Department Review...................................   778
    IRS Computer System..........................................   788
    Olympics.....................................................   802
    Opening Remarks..............................................   765
    Questions Submitted for the Record by Congressman Hoyer......   828
    Questions Submitted for the Record by Congressman Rothman....   834
    Questions Submitted for the Record by Congresswoman Meek.....   824
    Questions Submitted for the Record by Congresswoman Northup..   836
    Questions Submitted for the Record by the Committee..........   805
    Questions Submitted for the Record by the Committee..........   842
    Secretary's Remarks..........................................   771
    Statement of Paul H. O'Neill, Secretary of the Treasury......   774
    Tax Cut...............................................781, 791, 801
    Tax Cuts.....................................................   793
    Tax Rebate...................................................   798
FY 2002 Congressional Budget Justifications......................   941
    Bureau of Alcohol, Tobacco and Firearms......................  1184
    Bureau of Engraving and Printing.............................  1259
    Bureau of the Public Debt....................................  1285
    Community Development Financial Institutions Fund............  1477
    Department of the Treasury Franchise Fund....................  1070
    Departmental Offices.........................................   941
    Department-wide Systems and Capital Investments Program......   993
    Expanded Access to Financial Services........................  1061
    Federal Law Enforcement Training Center......................  1087
    Financial Crimes Enforcement Network.........................  1043
    Financial Management Service.................................  1159
    Interagency Crime and Drug Enforcement.......................  1146
    Internal Revenue Service.....................................  1303
    Office of Inspector General..................................  1010
    Treasury Counterterrorism Fund...............................   986
    Treasury Forfeiture Fund.....................................   980
    Treasury Inspector General for Tax Administration............  1027
    United States Community Adjustment and Investigation Program.  1501
    United States Customs Service................................  1206
    United States Mint...........................................  1273
    United States Secret Service.................................  1446
    Violent Crime Reduction Trust Fund...........................  1474
    United States Postal Service.................................  1509

                                
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