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



                 TREASURY, POSTAL SERVICE, AND GENERAL

                     GOVERNMENT APPROPRIATIONS FOR

                            FISCAL YEAR 2003

_______________________________________________________________________

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS
                             SECOND 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, Walter Hearne, and Tammy 
                                Hughes,
                            Staff Assistants
                                ________
                                 PART 5

 Treasury Debt Management.........................................    1

 U.S. Customs / Trade Issues......................................   89

 National Youth Anti-Drug Media Campaign..........................  223

 Outside Witnesses................................................  412
                                ________
         Printed for the use of the Committee on Appropriations
                                ________
                     U.S. GOVERNMENT PRINTING OFFICE
 81-650                     WASHINGTON : 2002




                      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               JOS 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 
                                  2003

                              ----------                              

                                         Wednesday, March 20, 2002.

                        TREASURY DEBT MANAGEMENT

                               WITNESSES

VAN ZECK, COMMISSIONER OF THE PUBLIC DEBT
BRIAN ROSEBORO, ASSISTANT SECRETARY FOR FINANCIAL MARKETS
    Mr. Istook. The subcommittee will come to order. This 
afternoon we are happy to welcome Mr. Brian Roseboro, the 
Assistant Secretary for Financial Markets; and Mr. Van Zeck, 
Commissioner of the Public Debt to our oversight hearing on 
Treasury's debt management activities and operations, those 
that go through in particular the Bureau of Public Debt.
    While the hearing will cover the complete debt program I am 
particularly interested in the savings bond program and its 
interaction with the other forms of debt management.
    Careful debt management is critical to sustaining economic 
health and prosperity at all levels for all entities, for us as 
individuals, for companies, and especially for the federal 
government. We all benefit when the Treasury provides prudent 
management of the public debt and I know this is a charge you 
take seriously.
    I realize there are many technology and process 
improvements in federal debt management and I wanted to 
congratulate you also on the web site for the Board of Public 
Debt. It seems to be a very valuable and significant resource 
not only for those interested in being lenders to the U.S. 
government but also for people looking for general information. 
It certainly impresses me and I congratulate you on that.
    I do want to learn more about your plans for remaining 
viable, to be responsive to the evolving finance needs of the 
government, the changes in financial markets. Management even 
under stable conditions of the public debt is not simple. The 
primary goal, of course, is to sustain the low borrowing costs. 
Other factors enter into the equation such as encouraging 
savings, impacting domestic and international financial 
markets, whether the debt is held by Americans or by citizens 
of other nations, and providing opportunities to participate in 
federal investments. Those are all factors, but nevertheless 
the primary goal is to sustain low borrowing costs for the 
large amount that must be borrowed because of the debt of the 
United States.
    Technology changes rapidly. Investor opportunities are 
evolving rapidly along with the world economy. All of these I 
know profoundly affect your work.
    I am especially concerned about the savings bond program 
and its high volume, low denomination paper certificates that 
create relatively high operational costs. I look forward to 
hearing your views and plans for the savings bond program.
    I am concerned about the cost of the savings bond program 
when compared to the benefits.
    Currently the savings bond program finances only three 
percent of the overall public debt but it consumes over 70 
percent of the Bureau's work force and funding resources. The 
other 97 percent of the public debt is financed by the bureau's 
marketable securities--Treasury bills, Treasury notes, and so 
forth. Savings bonds' administrative cost ratio which is the 
ratio of the cost of administering the program when compared to 
the amount of debt being financed, by my calculations that is 
about .08 basis points, or .008. In any event it is about 53 
times higher than the administrative cost ratio for the 
Bureau's marketable securities program.
    Further, I understand the Bureau uses a complex computer 
modeling program to calculate the cost of financing the debt 
which in your prepared testimony you claim currently saves 
Americans $35 million in the cost to borrowing for every $1 
billion in debt being borrowed. Using savings bonds compared to 
marketable securities.
    Frankly, I am concerned about that number. In 1985 the 
savings value was estimated at $54 million per billion borrowed 
by savings bonds. In 1988 the estimate was $70 million. In 
1995, $80 million. Now in a January report the Congressional 
Research Service cites a Treasury Department source as saying 
the number is $7 million per billion dollars borrowed.
    I realize that there is fluctuation according to what 
current interest rates may be, but I seriously question the 
methodology that's being used if it can't give us a better 
analysis than we are receiving from the witnesses and the 
agencies represented today. I do not see consistency here. I do 
not see a meaning measure that gives us some guidance about the 
cost of managing the public debt.
    Today in prepared testimony you cite one figure, when two 
months ago it was reported to be at a significantly lower 
number, only a 500 percent differential. And prior to that at a 
significantly higher savings figure, a 200 percent 
differential. That apparent discrepancy places a credibility 
question in my mind that I hope can be resolved in the hearing 
today.
    It is an open question to me whether or not it is more 
expensive or less expensive for the federal government to 
borrow through savings bonds, and frankly I do not see anything 
in the prepared testimony that provides a reliable answer.
    That concludes my opening remarks and I hope we can have a 
better understanding that comes out of this hearing.
    Before your testimony of course I want to call on my 
colleague, our Ranking Member, Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I want to 
welcome Assistant Secretary Roseboro and Commissioner Zeck to 
our hearings.
    It has been a while since the Public Debt has testified 
before this committee. As a matter of fact, we checked the 
record and the last time you testified before us was in 1995 on 
the fiscal year 1996 budget. It is nice to see you here.
    Your budget request includes a total of $204.2 million and 
approximately 1500 FTE, a little less than 1500, 1478 FTEs. The 
increase in the budget as I understand it is mainly to bring 
your budget up to speed with current inflationary factors such 
as pay and rent.
    Although your budget request is small compared to some of 
the other Treasury bills you are proposing a significant shift 
by reducing your FTE ceiling by 40 and shifting that funding to 
pay public relations and advertising efforts to promote 
Treasury securities as I understand it. I am interested in what 
benefits you anticipate achieving from this new approach.
    Mr. Commissioner, your budget also includes a reduction of 
over $1 million for what the Treasury Department calls a 
business strategy adjustment. I am very interested in 
specifically where you are going to make that $1 million 
reduction. This can be especially hard on a bureau like yours, 
in my opinion, because you do not have a lot of wiggle room, a 
small budget.
    Since the Bureau of Public Debt manages and administers the 
debt, I think it is also appropriate to mention the fiscal year 
2003 budget resolution that we have on the Floor today. Our 
nation's fiscal health has deteriorated so rapidly that the 
Administration has urged Congress to raise the statutory debt 
limit. Just last year CBO reported that all the Treasury debt 
held by the public could be paid off or payment provided for by 
2008--five years essentially from today. How different the 
situation looks a year later.
    Now the ten year budget prediction from the Office of 
Management and Budget indicates that the projected year surplus 
has gone from $5.6 trillion to $.6 or $600 billion--a loss of 
$5 trillion in projected surplus in less than ten months.
    OMB also states that 43 percent of the changes in total 
budget surplus are due to the President's tax cut enacted last 
year, not by the economy and not by the war. I compute that to 
be $2.15 trillion of that $5 trillion as a direct result of the 
tax cut.
    Instead of paying off the debt by 2008 when the baby 
boomers start to retire, the government will owe more in debt 
to the public, $3.479 trillion, than it owes today. That is I 
think a sobering reality.
    Mr. Chairman, that concludes my statement. I look forward 
to the testimony from our witnesses.
    Mr. Istook. Thank you, Mr. Hoyer.
    Let me just clarify from my opening statement, I checked 
with staff to make sure I was not missing a decimal point. We 
calculate according to the figures we have been provided by the 
witness' agencies that for administering the savings bond 
program, the administrative cost is about eight basis points 
per dollar borrowed, whereas for the marketable securities 
program, T-bills, T-notes, that administrative cost ratio is 
.15 basis points which is a ratio of 53 to 1 as far as the 
administrative cost expense of one program over the other. So I 
wanted to clarify that from my opening statement.
    Gentlemen if you would, it is our practice to swear the 
witnesses.
    [Witnesses sworn.]
    Mr. Istook. Thank you gentlemen.
    I believe the correct procedure, I believe we are going to 
hear first from Mr. Roseboro and then from Mr. Zeck, is that 
correct?
    [Witnesses nodding in affirmative.]
    Mr. Istook. Thank you. Gentlemen, please. And your entire 
written statement will of course be placed in the record. I 
always encourage witnesses to feel free to deviate, make an 
executive summary, whatever they think will be most meaningful 
for us.
    Thank you.

                           Summary Statement

    Mr. Roseboro. Thank you very much Chairman Istook, 
Congressman Hoyer. I am pleased to be here today to discuss 
Treasury's debt management approach and direction.
    Simply put, the objective of Treasury Debt Management is to 
meet the financing needs of the federal government at the 
lowest cost over time. However, achieving this straight-forward 
objective is subject to multiple constraints. The dominant 
constraint that we confront in achieving this objective is that 
we see the future only imperfectly. We are always making 
decisions in cases of uncertainty. As a consequence, debt 
management necessarily involves three judgments.
    First, what will be the likely size and duration of our 
borrowing needs?
    Second, how should we respond if actual needs differ 
substantially from expectations?
    And third, what will be the lowest cost means of financing 
those needs in the future?
    We cannot escape these three issues. We face them in our 
weekly financing decisions, in our quarterly funding, and in 
our strategic planning. Further, Treasury's continuing 
commitment to a schedule of regular and predictable auctions of 
marketable bill and note dates is a means over time to the end 
objective of the lowest cost borrowing. In the short run, 
however, this commitment serves as a constraint. With regular 
and predictable auction dates we accept the cost of 
occasionally borrowing when it is inconvenient or expensive in 
return for the lowest cost, over time, from providing greater 
certainty to the Treasury market.
    Conceptually there is another constraint. We believe the 
availability of the full faith and credit of the United States 
as a savings vehicle should not be limited only to those who 
can afford the minimum $1,000 denominations available in our 
auctions of marketable securities. Thus, we will continue to 
offer savings bonds even though they are not the most efficient 
form of borrowing in operational terms. But again, we will seek 
to minimize the cost of this constraint on our objective by 
supporting the Bureau of Public Debt's ongoing efforts to 
improve efficiency.
    Successfully achieving our debt management objective 
requires us to strive to create the broadest possible primary 
market for all Treasury securities that technology and our 
imaginations will allow. One critical dimension of creating 
this broad primary market is a balanced marketing effort for 
all our securities. The other is the technology that is making 
the distinction between wholesale and retail borrowing 
increasingly arbitrary. We will use technology to move as many 
investors, large and small, to directly access our securities 
over the internet.
    Let me illustrate how we are using balanced marketing by 
describing the challenge Under Secretary Fisher gave to the 
Bureau of Public Debt.
    He recently challenged Commissioner Zeck to increase direct 
competitive bidding in our auctions. Currently most of the 
dollar bids in our auctions come through a small number of the 
largest dealers. The dealers bid for their own account and for 
their customers. We are actively seeking new institutional 
bidders in our auctions by marketing Public Debt's new 
TAAPSLINK internet site.
    Public Debt is well positioned to take up the twin 
challenges of using technology to move as many investors in our 
securities to direct internet access and market the full range 
of securities to the public. The Bureau has a solid track 
record of innovation and creating direct access for investors. 
For example, individuals and holders in our TreasuryDirect 
system have had an internet or other electronic channel 
available to them for several years. Individuals can now buy 
Series EE and the Series I bonds at Public Debt's web page.
    At the same time, Public Debt is already shifting its 
marketing emphasis from a heavy focus on the savings bond 
components of our financing mix to ostensibly market all the 
securities we offer to the public.
    I know the committee is interested in the level of 
operational resources it takes to operate the savings bond 
program. I think it is worthwhile to make some observations 
about the program.
    First, as Treasury's debt manager I have to look at the 
total cost of borrowing, and the total cost of borrowing for 
any type of security includes administrative, as well as 
interest costs. Taking both into account the savings bond 
program, though less efficient as a borrowing tool in today's 
capital markets, actually can be a more cost effective way to 
borrow over time than market borrowing.
    Savings bonds are part of our borrowing mix and currently 
finance $190 billion of our debt. Commissioner Zeck will 
discuss in greater detail the way we evaluate the cost of the 
savings bond program.
    I would very much like to transform our savings bond 
program and move it immediately into the future. However we 
have the legacy of more than 60 years of issuing savings bonds. 
Having this legacy requires a commitment of customer service. A 
promise made is a promise kept and we must honor our obligation 
to the more than 50 million existing savings bond holders. This 
commitment requires a significant administrative infrastructure 
to support it.
    While we may be constrained somewhat by the legacy costs 
associated with servicing small denomination securities issued 
in physical form, we are now moving new savings bonds into the 
future.
    The economies of the internet are making it not only 
possible but also desirable to begin offering securities in 
accounts directly with the Treasury rather than through issuing 
millions of paper certificates. Work is now underway to make 
this a reality later this year, by offering the Series I bond 
in a new internet based system.
    In conclusion, to achieve our primary objective of the 
lowest borrowing costs within the constraints we have, we want 
to maintain a pattern of regular and predictable issuance of as 
broad a portfolio of instruments as is consistent with our best 
projections of likely borrowing requirements, our ability to 
respond if those projections are not realized, and our current 
understanding of what will provide the lowest borrowing cost 
over time. We will support our primary objective with efforts 
to move as many investors as we can towards direct electronic 
access to all Treasury securities and we will continue our 
ongoing efforts to improve efficiency and reduce costs. 
Effective, balanced marketing of all our securities is critical 
to educating the public about the variety and benefits of 
Treasury securities.
    Finally, we will keep our promise to the millions of 
investors who rely on the safety and security of Treasury 
securities by continuing to offer the high-quality customer 
service they expect and deserve.
    Thank you, sir.
    Mr. Istook. Thank you, Secretary Roseboro. Commissioner 
Zeck.

                           Summary Statement

    Mr. Zeck. Thank you.
    Chairman Istook, Mr. Hoyer, members of the committee. I 
will briefly summarize my testimony if I could. I know you have 
some very detailed questions about the savings bond program. I 
welcome the opportunity to answer those.

                 Role of the Bureau of the Public Debt

    Public Debt's job is to handle the mechanics of borrowing. 
The decisions that are made by Treasury policy officials about 
debt financing and the decisions that are made by the debt 
managers on a week to week, day to day, quarter-to-quarter 
basis are ours to implement.
    We handle several major areas. We handle the marketable 
securities area for Treasury. The auctions of securities, the 
issuance of securities, and the assurance that there is a 
secondary market available for trading those securities.
    We also handle the savings bond program. We perform here a 
different role than we do in the marketable area. In the 
savings bond area we provide direct customer service to 55 
million or so Americans that hold savings bonds. So on the one 
hand we are dealing with large amounts of money through a 
hierarchical system in the commercial book entry area with 
marketables, and in the other area we have been charged to 
provide direct service to savings bond customers.
    The third major area in which we are responsible for debt 
administration is in the area of government investments. Here 
we are responsible for some large amounts as well. These are 
the investments of the federal agencies, primarily the large 
trust funds, that you are probably aware of--Social Security, 
Medicare, various retirement funds and so forth.
    Also under this heading we handle a variety of investments 
for state and local governments that have been provided for 
through our state and local government program.
    We are also responsible for the overall accounting of the 
public debt, keeping track of the numbers as it were and 
specifically say, at a time like this, knowing precisely where 
we stand with regard to the debt subject to limit.
    Our job in Public Debt as long as I have been with the 
organization has been to do these things and do them accurately 
and do them timely. We are really proud that we do that. We 
have a great tradition of customer service and of improving our 
operations and providing better and better service to our 
customers.
    We also, I am happy to report, for five years in a row now, 
which is the entire length of time that audited financial 
statements have been required, have received unqualified 
opinions for our financial statements which are a significant 
part of Treasury's overall financial statements.

                          Savings Bond Program

    One of the other challenges that we face is that of serving 
a varied customer base. We are challenged to serve those with 
as little as $25 to invest on the savings bond side, for 
example, and at the same time we are challenged to serve the 
large institutional investors that might bid $2 or $3 billion 
in one of our marketable auctions. We also, as I said, have 
challenges and have service responsibilities that are directed 
toward federal agencies and their investments of trust fund 
dollars.
    I know that the committee is very interested in the savings 
bond program and savings bond costs. I will briefly touch on 
the approach we take and then I am sure we will get into that 
in a little more detail with regard to questions that you might 
have.
    Generally speaking, we do have a savings bond model that we 
use to compare the borrowing of savings bonds, the cost of 
borrowing through savings bonds, to the cost of borrowing 
through marketable securities.
    I would like to point out that that model was really not 
something that was created as a result of external pressure or 
through any attempt to try to defend the savings bond program. 
It was developed in Treasury a number of years ago, over 15 
years ago, at least I can remember back that far, to give us a 
feel for knowing how we were doing. Just to be able to answer 
the obvious kind of question, how well does the savings bond 
program stack up vis-a-vis marketable borrowing?
    So we have used that model off and on. We have refined it 
and improved it over the 15 year period or so and we continue 
to use the model.
    One of the things that I challenge our people to do is not 
run the model too frequently. That might sound a little 
counter-intuitive, but in fact because of the way the model is 
constructed, it is not intended to be a dynamic model that 
tells you at any moment in time exactly what the health of the 
savings bond program is. It is intended to take a look at the 
current sales of savings bonds, the current financial 
situation, the interest rates in the marketable arena along the 
yield curve, compared to the interest rates that are paid on 
savings bonds. It takes all of that, factors into that mix all 
of the administrative costs that both Public Debt and all the 
Federal Reserve banks incur on our behalf. It also takes into 
account things such as the different ways that marketable 
securities pay interest vis-a-vis savings bonds. It takes into 
account the different ways in which the federal government 
would recover a portion of the interest through federal taxes 
on both the savings bond program and the marketable borrowing.
    So it is a bit complicated inside, but it is very straight 
forward in trying to measure at a point in time what savings 
bonds that we are issuing look like over their life and over 
the expected time that the investors will hold those savings 
bonds in the context of current marketable borrowing 
conditions.
    I can talk a little bit later, I am sure you will ask 
questions about the fluctuations in the model. I think that is 
something we ought to certainly get into.
    With regard to Public Debt, though, we have a fairly 
straight-forward mission, a very focused mission, and one that 
allows us to concentrate, but with a fairly modest budget on 
providing the best service we can.
    Our direction for the future and where we are headed 
specifically is the technology, with making the best possible 
use of technology, with affording our investors the opportunity 
to make use of the best systems we can provide them for their 
investments, whether those investments are made through the 
commercial book-entry system at our auctions, a billion dollars 
at a time, or whether they are made a lot more modestly through 
our web site and perhaps would be included in our book entry 
savings bond system that we hope to bring up later this year.
    With that I will conclude my summary and I will be 
certainly glad to answer any questions that you or the 
committee members might have.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Mr. Istook. Thank you Commissioner Zeck.
    If I understand correctly, the testimony from Assistant 
Secretary Roseboro you stated savings bonds are not the most 
efficient form of borrowing, however you added that you believe 
the availability of the full faith and credit of the United 
States as a savings vehicle should not be limited only to those 
who can afford the minimum $1,000 denominations available in 
our auctions of marketable securities.
    Let me focus for a moment on the first part. I recognize 
and I appreciate the candor of the admissions that savings 
bonds are not the most efficient form of borrowing. That is 
that 53 to 1 administrative cost ratio that I mentioned a 
moment ago. In fact if you will apply that against the budget 
request that we have before us, we have $154 million of the 
budget request is to handle three percent of the public debt. 
$50 million of the budget request is to handle the other 97 
percent of the public debt.
    Now were it possible to handle everything at the same 
ratios, this subcommittee could capture $150 million that we 
could apply to other urgent needs, and everybody on the 
subcommittee of course could specify what they may believe 
those urgent needs are or otherwise accomplish a savings for 
the taxpayer. Now that is looking at it on a purely fiscal 
basis, I understand. That is where I wanted to get into the 
other part of your testimony, Mr. Roseboro where you said the 
public policy reason not to be fiscally prudent and efficient 
is to make sure that people have recourse to the full faith and 
credit of the United States in investing money even if they 
couldn't afford a T-bill or a T-note.
    Have I correctly summarized your testimony, Mr. Roseboro, 
on that point?
    Mr. Roseboro. Yes, sir.
    Mr. Istook. So here is what I wanted to ask.
    First the policy reason is to make sure that people of all 
financial categories--rich, poor and every place in between--
have the full faith and credit available for their investments. 
Are you not forgetting FDIC? You are familiar with the Federal 
Deposit Insurance Corporation and the deposits in bank accounts 
that are FDI insured up to $100,000 which certainly covers 
anybody that would invest a penny or under $1,000 or whatever 
amount it may be up to $100,000, are insured with the full 
faith and credit of the United States of America. They do have 
that vehicle available to them do they not?
    Mr. Roseboro. Yes, sir.
    Mr. Istook. And they also have the availability of the same 
full faith and credit if they are in an institution that is 
insured by what used to be call FSLIC and now is SAIF, correct?
    Mr. Roseboro. Yes.

                          Savings Bond Program

    Mr. Istook. And also there is a similar fund for those that 
invest with credit unions, what is it the NCUSIF I believe it 
is. They also have the full faith and credit securing their 
investment if they have an account at a credit union, correct?
    Mr. Roseboro. Yes.
    Mr. Istook. So if the reason for having a savings bond 
program is to ensure that people that do not have a thousand 
dollars to invest can still have their investment protected by 
the full faith and credit of the United States, they have 
multiple other ways to invest without going into savings bonds, 
do they not?
    Mr. Roseboro. Still that does not encompass the entire 
universe of potential investors, sir.
    Mr. Istook. My question is, do they have other places 
besides savings bonds that they can invest amounts less than 
$1,000 and be fully backed by the full faith and credit of the 
United States?
    Mr. Roseboro. There are other alternatives, but they could 
be costly in terms of----
    Mr. Istook. Mr. Roseboro, I just want an answer to that 
simple question. I want to make sure that we do not have a 
disagreement on that point. Is it not correct that they could 
invest in any institution that is FDIC, FSLIC, SAIF, or NCUSIF 
insured and have the investment protected by the full faith and 
credit of the United States?
    Mr. Roseboro. Yes, sir.
    Mr. Istook. Is there anybody who is eligible to invest in a 
savings bond that is not eligible to deposit funds in an 
institution insured by one of these entities that I have 
described such as FDIC?
    Mr. Roseboro. Potentially, if there are minimum account 
requirements, and the account balances are under a specified 
level, I think $1,000 as a general recollection, there would be 
significant account maintenance charges. For the school child 
who wants to save and invest in savings bonds that would be a 
problem.
    Mr. Istook. So you are saying if they go to an institution 
that has a minimum deposit or a service charge requirement.
    Mr. Roseboro. Yes
    Mr. Istook. But not all institutions have those, do they?
    Mr. Roseboro. No, not all institutions have them. Most do, 
and from a policy perspective of encouraging savings, the 
savings bonds can help serve that role as well.
    Mr. Istook. And of course an investment in this one 
institution is liquid and a savings bond is not liquid.
    Mr. Roseboro. No, I disagree, sir. The savings bond is 
liquid. Operationally to cash it in takes an additional step 
but it is liquid.
    Mr. Istook. There is a much more significant delay in 
seeking to liquidate a savings bond.
    Mr. Roseboro. Taking it down to your local institution to 
cash it in is all that is required.
    Mr. Istook. All right. But I want to understand, if I 
understand correctly your testimony, you are saying the reason 
for spending this $150 million a year is for the benefit of 
people that do not want to have a minimum balance requirement 
at a bank.
    Mr. Roseboro. No, the purpose of spending the money as 
Commissioner Zeck could detail more appropriately is to 
maintain the promise that was kept in terms of the issuance of 
60 years worth of savings bonds and to support that system.
    Mr. Istook. I guess part of the challenge here is, we are 
trying to look at financial accountability and you are evading 
financial accountability by just falling back on some vague 
policy issues.
    I understand that there are for example a large number of 
bonds invested that we have to satisfy the administrative cost 
of handling those and so forth, but I would like to be able to 
get just straight-forward testimony and differentiate between 
what are pure policy decisions and what are the financial 
merits of the decisions that we have before us.
    We have extremely tight budget requirements, as I 
mentioned. We are talking about a differential of around $150 
million here. I want to be able to have some clear 
understanding of the issues that are being brought up and not 
just a vague resort to a policy argument, especially when, and 
let me ask.
    You say most institutions have restrictions such as you 
mentioned on minimum account balances. Is that based upon some 
information the Treasury Department has formally developed?
    Mr. Roseboro. No, my experience, sir.
    Mr. Istook. So understand, we are asking people to 
differentiate between what is a fact being represented by the 
Treasury Department and what is your opinion. So you are 
telling us that it is your opinion that most institutions have 
those limitations as opposed to telling us that it is a fact.
    Mr. Roseboro. It is my personal experience, sir, yes, it is 
my opinion based on personal experience. Yes, sir.
    Mr. Istook. I understand. Because I want to understand 
whether you are testifying on your individual experience or 
testifying on behalf of the Treasury Department, and the vast 
amount of information that develops about the nation's 
financial institutions.
    I certainly have other questions but I want to give others 
on the subcommittee a chance before I come back to those. We 
will see if we have to recess because of votes. We probably 
will have to because it is more than one vote.
    Mr. Hoyer. There are four votes.
    Mr. Istook. Let me recognize first Mr. Hoyer.

                              Public Debt

    Mr. Hoyer. Thank you very much, Mr. Chairman.
    Mr. Zeck, do you have available the financial dollar amount 
of the public debt over the last five years? Do you have that 
in front of you by any chance? Five years would be, say, 1997 
or 1998 to----
    Mr. Zeck. Actually I do have some numbers.
    Mr. Hoyer. Starting with 1997?
    Mr. Zeck. In September 30, 1997 the total public debt was 
$5.4 trillion.
    Mr. Istook. What portion of that was the external debt?
    Mr. Zeck. The debt held by the public was $3.8 trillion of 
that.
    Mr. Hoyer. Why do we not go on the debt held by the public, 
I want to focus on that particularly.
    Mr. Zeck. Okay. In 1997 at September 30th it was $3.8 
trillion.
    Mr. Hoyer. 1998?
    Mr. Zeck. September 30th of 1998 it was $3.7 trillion.
    Mr. Hoyer. 1999?
    Mr. Zeck. 1999 it was $3.6 trillion.
    Mr. Hoyer. 2000?
    Mr. Zeck. In 2000 it was $3.4 trillion.
    Mr. Hoyer. 2001?
    Mr. Zeck. 2001 it was $3.4 trillion as well.
    Mr. Hoyer. 2002?
    Mr. Zeck. And where we are today, as of, the numbers as of 
yesterday, March 19th, it rounds up to $3.5 trillion.
    Mr. Hoyer. So starting in 1997, am I correct in observing 
that from 1981 to 1997 the debt went up in financial terms 
every year?
    Mr. Zeck. I do not have those numbers in front of me but 
the recollection, it certainly sounds like that was the case, 
yes.
    Mr. Hoyer. In 1997 it went down. 1998 it went down, 1999 it 
went down, 2000 it went down, 2001 it stayed even, and now we 
are going back up.
    Mr. Zeck. That is correct.
    Mr. Hoyer. Do you have a projection for 2003?
    Mr. Zeck. No, sir. I do not want to be evasive but our role 
is not to project. Our role is to count what actually is.
    Mr. Hoyer. You are luckier than some.
    Mr. Zeck. I am happy that we just have to count, sir.
    Mr. Hoyer. I am not surprised that you are happy about 
that.
    What factors generally lead to the increase in the size of 
the public debt?
    Mr. Zeck. In the total public debt the factors are that the 
government needs to borrow money because tax revenues do not 
cover expenses.
    With regard to the debt held by the public versus intra-
governmental debt it is a little bit different. One thing that 
has occurred recently, for example, is that there has been an 
increase in the intra-governmental debt, that is to say the 
trust fund balances that we invest have increased and both the 
intra-governmental or the trust fund balances and the debt held 
by the public combine to make the public debt.
    So when we have some decreases held by the public that you 
referred to, at the same time there were increases in the 
intra-governmental debt or the trust fund holdings.
    Mr. Hoyer. The internal debt as I referred to it.
    So am I correct that what you are saying is the $5.4 
trillion that you referred to in 1997, let us just jump to what 
it was in 2001.
    Mr. Zeck. At the end of September in the fiscal year in 
2001 the total debt was $5.8 trillion.
    Mr. Hoyer. So in effect what we did, we were able to pay 
down the publicly held debt starting in 1998, and we paid it 
down in 1998, 1999, 2000, 2001. Sometimes I think the largest 
payment we made in public debt was over $170 billion in 1999 or 
2000?
    Mr. Zeck. That may be correct. That is not a number that I 
have in front of me. I do not recall it specifically.
    Mr. Hoyer. I am sure somebody behind there has those 
numbers. I do not know whether that is close.
    My point being that when you say we paid down obviously 
public debt, we borrowed Social Security monies and therefore 
the trust fund goes up.
    This is essentially consistent with what Secretary Rubin 
suggested we do which would provide for greater security for 
Social Security and Medicare at some point in time and 
obviously lengthen the time that they would have resources 
available to them for the baby boomers.
    I do not know if you need to answer that. It is more an 
observation than it is a question I suppose.

                             PATRIOT BONDS

    I have a series of questions that I really need to develop 
and I am not sure that it is useful just to ask them.
    The Patriot Bonds that are a new proposal that were 
effected last year, am I correct?
    Mr. Roseboro. Yes, sir.
    Mr. Zeck. Yes.
    Mr. Hoyer. In October?
    Mr. Roseboro. It was December.
    Mr. Zeck. December.
    Mr. Hoyer. December of last year.
    Patriot Bonds are another form of savings bond, that is 
another name for the savings bond program, correct?
    Mr. Roseboro. It is the current Series EE savings bond that 
has been designated as the Patriot Bond.
    Mr. Hoyer. The cost to which the Chairman is referring 
refers to those bonds, am I correct? The differential.
    I am going to submit a long series of questions that I 
think will develop some issues.
    Well, let me ask one additional question because I raised 
it.
    The business strategy adjustment. Have you identified the 
one million in savings?
    Mr. Zeck. No sir, we have not. One of the things that we 
have been asked to do by the Secretary is to take a look and 
see what productivity opportunities present themselves. Public 
Debt has had a good history of identifying productivity savings 
and we are optimistic and certainly intend to work very hard to 
try to achieve those savings as we look forward to 2003, but 
specifically I do not know where that adjustment will come from 
at this time.
    So much of our workload you cannot really predict in 
advance. It sort of depends on what happens there, what the 
borrowing needs are at the time, and when you get into the 
fiscal year you start to see borrowing needs, savings bond 
sales, other kinds of issues that come up and we are always 
required to make adjustments at that time to identify the 
savings that are possible.
    Mr. Hoyer. Thank you.
    Mr. Chairman, I do not know if I am going to be able to 
return depending upon how long we take.
    Mr. Istook. I understand.
    Mr. Hoyer. I will submit my questions for the record.
    Mr. Istook. I do not know if other members will come back. 
I know I do have further questions I want to get into.
    We have, we are told, a series of four votes. I am just 
trying to explain to our witnesses because I do not like 
inconveniencing anybody, but the nature of the series of the 
four votes, they could be all 15 minute votes, it could be in 
excess of an hour. Maybe some will run together and it might be 
closer to 40 minutes or so. But I do need to be able to return 
to some other questions and we need to recess until that time.
    I apologize, gentlemen, for the inconvenience, but I think 
it would be more inconvenient to try to ask people to come back 
at a different time. I think that would be a greater imposition 
and I want to avoid that.
    So we stand in recess at the call of the Chair.
    [Recess.]
    Mr. Istook. The subcommittee will come back to order, 
gentlemen. I apologize again for keeping you waiting while we 
cast votes. I expect at least one other member of the 
subcommittee should be returning and I will defer to him when 
he arrives here.

                          SAVINGS BOND PROGRAM

    We were discussing before the break when I was asking 
questions about the financial need versus public policy need on 
the savings bond issuance program. One of the things that I 
wanted to understand as part of this issue is within the 
approximately, I think it is $154 million that is proposed of 
the coming year's budget that relates to the savings bond 
program, how much of that is for the program of issuing new 
savings bonds? How much of it is for redeeming savings bonds 
that are already out there? Then how much is for not general 
management, because some of that would be attributed to each of 
the functions, but to the different administrative roles. 
Somebody says I have lost my savings bond or they are making 
some sort of inquiry regarding it. I call that a managing or 
maintenance amount.
    But breaking the expenditure of the budget down between 
those three categories, how does that break out?
    Mr. Zeck. I have general numbers for you certainly, Mr. 
Chairman.
    Mr. Istook. I understand these are not strict numbers and 
you may be able to provide some more specific numbers for the 
record.
    Mr. Zeck. Correct.
    The $154 million that you referred to is the total expenses 
in Public Debt for managing the program for a particular year.
    A surprisingly, to me at least, small portion of that has 
to do with issuing new savings bonds. In fact, I have not done 
an analysis on this because we do not look at it quite this 
way, but my estimate would be about $10 million, thereabouts, 
would be associated with issuing new bonds.
    The primary reason for that number which is a low amount is 
that in fact we have made use of a lot of technology, a lot of 
those bonds are issued for us by the Federal Reserve System, 
for example, and on our end we are very highly automated and 
the bulk of the money that would be associated with the 
issuance would be for the fees that we pay to financial agents 
in the financial community for issuing bonds, so a rough 
estimate for issuing would be $10 million.
    The other two pieces are less clear to me in terms of the 
way I think about that. What I could say is that the remaining 
amount of the money that we need to operate the savings bond 
program would be, to use your word earlier, capturable, in 
theory, but it would be capturable over 30-plus years. That is 
because by and large the vast preponderance of the amount of 
money that we use of the $154 million has to do with providing 
service to customers who already have the bonds that are 
outstanding.
    Once you have issued the amount of debt we have and the 750 
million bonds that are out there, part of what we do is we 
stand ready to replace those bonds, we stand ready to provide 
information about how much they are worth, we stand ready to 
provide customer service to pay bonds in the cases where the 
owners have died, for example, and these kinds of transactions 
as you can imagine, are fairly complicated and a bit labor 
intensive.
    So the vast preponderance of the remaining amount of money 
is for servicing. That would continue for, as I said, 30-plus 
years, even if we were to issue no new bonds.
    Mr. Istook. If you can try to break that down a little 
further, you used the term servicing. Some things relate to, 
that are within the category of servicing would relate to 
somebody actually redeeming the bond, and like you say, 
sometimes it is a complicated situation that may involve an 
estate and inheritance rights or joint tenancy and so forth. Of 
course I would suppose that the vast majority are straight 
forward rather than complicated redemptions. But can you give 
us a breakdown between the servicing cost that is attributable 
to redemption of the bonds in whatever form and the servicing 
costs that are in the general information category or replacing 
lost bonds or whatever else it might be.
    Mr. Zeck. I can certainly do that and if I could submit 
that to you for the record I would appreciate it so I can be 
more precise than I can be right now.
    Mr. Istook. Certainly. I will not hold you to it, but if 
you are able to give us a broad figure that would be 
appreciated.
    Mr. Zeck. I would say that if we attribute approximately 
$10 million of the $154 million to issuing out of our budget, I 
would say redemption might be $15 to $20 million, not much more 
than that. The remainder would be what I would call servicing 
which is the basic case processing, case work associated with 
providing service to customers who have issues, need to have 
bonds replaced, have questions about their holdings, that sort 
of thing.
    Mr. Istook. Do you keep records, since these are service-
oriented, do you keep records that categorizes the types of 
inquiries or requests for assistance that you receive so that 
you are able to categorize them as far as what are the most 
common requests you receive, how many times per year is that 
particular request received? Do you keep statistics that break 
it down so that you can try to understand what resources you 
need to provide that servicing capability?
    Mr. Zeck. We have broad categories, sir, that we use to 
track the work. We have very good figures about the amount of 
work itself. As I said, we have broad categories about the type 
of work that we are involved in.
    One of the things that we find is that, not that it is not 
useful to know that, the more information the better in many 
respects, but when you are dealing with something this large 
and this large amount of workload it tends to be fairly static 
and fairly predictable as to what is going to happen from one 
year to the next.
    So our ability to have a sense of what it is going to take 
to provide the service level for the bond orders that are 
outstanding is fairly well established. So, we spend not as 
much time in the individual categories as we do just trying to 
make sure that we have the funding request in place to allow us 
to do the work generally.
    Mr. Istook. If your estimates are accurate, and I recognize 
they were estimates, you are saying that it costs approximately 
$120 million a year, that is backing out the $10 million, 
backing out the $20 million, it costs approximately $120 
million per year to provide non-issuing, non-redempting 
servicing to about 50 million holders of bonds.
    Mr. Zeck. Yes, for the $190 billion in bonds that are 
outstanding and there are approximately 750 million of them, 
yes, sir.
    Mr. Istook. And how many inquiries are received on an 
annual basis that generate this approximate $150 million in 
expense?
    Mr. Zeck. I do not have the total off the top of my head. I 
would be happy to provide it.
    Mr. Istook. I am interested in developing the information. 
If we have a universe of 50 million people that hold bonds, 
many of whom would hold small amounts. I do not know what the 
breakout is on how many people hold less than $100 in face 
value and so forth. But if we have a universe of $50 million 
people that potentially could inquire, and we know that only a 
fraction of those are actually going to be making some sort of 
inquiry, and yet it costs $120 million to handle those 
inquiries, I think it is very relevant to try to get to some 
sort of cost per inquiry basis or cost per category of inquiry. 
Do you have any of those management tools?
    Mr. Zeck. Yes, we do. We have that information available 
and we can provide it for the record.
    [The information follows:]

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    
    I would also indicate that the costs that you just alluded 
to are included in our model that I know you have some 
questions about. All of the administrative costs including for 
the servicing are included in the model.
    Mr. Istook. As you can understand, I am trying to 
understand how, and you do not know how many inquiries there 
are total, but even if it were only for example, let us suppose 
it were five percent of the 50 million bond holders that had 
some sort of inquiry each year, that would be 2.5 million 
inquiries with a cost of $120 million to respond to them. I 
just wonder, knowing there are a lot of call centers, financial 
institutions have them, computer companies have them service 
centers have them, and trying to get to some sort of cost per 
inquiry statistic I think would be very important here.
    Mr. Zeck. We will certainly provide you with the 
information.
    [The information follows:]

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    
           FISCAL YEAR 2003 SAVINGS BOND SERVICING ACTIVITIES

    One thing I would point out, sir, is that we are dealing 
with a program that is 65 years old. One of the things that we 
are dealing with every day when we handle inquiries is we deal 
with information in a variety of forms.
    When the program started there were not computers to handle 
the data, for example. So it is not at all uncommon that we get 
inquiries in that would cause us to have to look at our 
computer records, at microfilm records, at microfilm records 
that were 30 years older than that in a different form, at 
microfilm of paper records that we created when we converted 
from the paper records and accounts many years ago.
    So I think the question certainly about cost per 
transaction is a relevant question. I would just want to point 
out that we are dealing with something here with a history that 
causes us in many cases to have to look at a lot of different 
forms of media in order to answer the question.
    It actually points out the good news and bad news with 
regard to our technological processing. Through the years every 
time we have made a technological advancement, and we have made 
a number of them, we have created the opportunity to provide 
service at lower cost and that is really our objective and we 
continue to try to do that.
    Each time we do that, and we would continue to do it 
because it is worth it, we create a point of demarcation, if 
you will. That means that we now have a period of time--it 
might be eight years, it might be 15 years--where we now have 
records in a certain form and we are now moving on to something 
else.
    So the issues of providing good customer service across the 
spectrum of bonds that have been issued since the 1930s is a 
bit of a challenge. But I am not trying in any way to diminish 
the utility of a cost per inquiry, I am just trying to point 
out that these are things that have some long history behind 
them.
    Mr. Istook. Sure, and that may require some sort of 
subdivision on how you categorize inquiries to make them 
meaningful to know which type involve what type of effort.
    Let me defer now to Mr. Visclosky.
    Mr. Visclosky. Thank you Mr. Chairman.
    I apologize because I have been in and out and trying to 
follow the line of questioning from the Chair.
    Mr. Secretary, you state in your testimony that savings 
bond programs, though less efficient as a borrowing tool in 
today's capital markets are actually a slightly more cost-
effective way to borrow. Is that, everything I have been 
hearing as far as questions and answers is it is not. Is that 
prospectively looking ahead to your electronic transactions?
    Mr. Roseboro. No, sir. It is based on the information and 
analysis provided by the Bureau of Public Debt which 
Commissioner Zeck will elaborate on.
    Mr. Visclosky. My impression of everything that has been 
going on here is that it is more costly per dollar borrowed.

                           SAVINGS BOND MODEL

    Mr. Zeck. There have been certainly some questions asked 
about our model and the model itself and how we calculate the 
cost effectiveness. Now might be a good time for me to sort of 
address that a little bit.
    We have a model that compares the cost of borrowing savings 
bonds to the cost of marketable borrowing. It is a complicated 
model, but I think it is appropriately so as it tries to do a 
complicated process.
    The results of that model when most recently run indicate 
that savings bonds are cost effective relative to marketable 
borrowing. The most recent time we've run this was using fiscal 
year 2001 sales of savings bonds and the indication was from 
the model that for every $1 billion in savings bonds that we 
sold, they were approximately $35 million less expensive than 
marketable borrowing.
    This is an important element to understand the program and 
the model I think certainly.
    One of the things that has happened, I have seen the 
model--I mentioned earlier that I encourage our folks not to 
run the model too frequently and part of the reason for that is 
that you can get yourself tied in a knot if you watch it change 
over the short term. It is not designed to try to say what 
should you do today. It is trying to give you a picture over 
time and a broad view of the effectiveness of savings bonds.
    For example, I have seen the model produce results that 
indicated that we were cost effective to the tune of $7 million 
per billion, and I have seen the model produce results in the 
70s, $70 million per billion. You can look at that and you can 
suggest well what kind of a useful model is that if it is going 
to bounce around that way.
    I think it in fact is useful, and I could point out at 
least one example that might be helpful there.
    At a time several years ago when we were taking a look at 
the savings bond program and the rates that were paid on 
savings bonds, it is our job in Public Debt to have this data 
and make it available to the Treasury policy people.
    But we were looking at the rates on savings bonds and the 
cost effectiveness. The model was showing, in fact, that the 
bonds were cost effective to the tune of about 70-some million 
dollars per billion.
    To be very candid about it, that seemed inappropriate to us 
and it actually seemed inappropriate to Treasury. Because 
Treasury has always viewed in my experience, this is my 
opinion, Treasury has always viewed the program as not one to 
be a profit center. It has not been the issue of Treasury to 
say well let us see what we can make, as it were, out of the 
savings bond program.
    The purpose of the savings bond program as long as I have 
been associated with it and for every Administration and 
Treasury that I have worked for has been to try to provide 
opportunities for investors, for citizens to directly invest in 
Treasury products.
    As a result of that policy focus that it is important to be 
able to directly invest in Treasury products, whether 
marketable or savings, we raised this issue to the policy folks 
at Treasury, and in fact what happened, I do not want to 
oversimplify it because there was a lot of thought that was 
given to this, but one of the things that happened a number of 
years ago was that we raised the interest rate on the EE 
savings bond from 85 percent to 90 percent of the prevailing 
marketable rates. And the reason Treasury did that in response 
to our data as I understand it was because too much of the 
money was coming into Treasury and not enough was going to the 
investors, quite frankly.
    Mr. Visclosky. So if I can interrupt you, your comparison 
is based on a lower interest rate that is paid on savings bonds 
and that is where you are making up your differential on the 
increased costs for handling per transaction.
    Mr. Zeck. Yes, there is a slight interest rate 
differential----
    Mr. Visclosky [continuing]. Billion dollars amounts to some 
dollars.
    Mr. Zeck. Yes, it does. And we do pay less interest on 
savings bonds.
    The reason for that is not punitive, it is because it is 
trying to recognize that savings bonds are different. They have 
a couple of features, for example. You can defer, if you 
choose, as a payment of federal income tax. That is a major 
benefit for purchasers so there is a value to that.
    Another thing you can do is redeem your savings bonds at 
any time after six months.
    Mr. Visclosky. We also have employer purchase plans and you 
are paying a fee for each bond purchased and so you have to 
cover that cost as well then too.
    Mr. Zeck. As well as the bonds redeemed, yes, sir.

                   SAVINGS BOND SERVICING ACTIVITIES

    Mr. Visclosky. It is my impression of the conversation that 
has taken place today that Treasury is looking to work its way 
out of the material bonds and going to electronic transfers in 
the future?
    Mr. Zeck. One of the things that we are doing in Public 
Debt is continuing what we have been trying to do for years and 
that is to see where we want to be down the road. It is a major 
issue for us, technology and the use of systems, and we are 
trying to make as much system technology available to our 
investors as possible.
    We have developed and we are in the process of implementing 
and we hope to make available to the public later this year the 
first-ever book entry savings bond. It would be a book entry I 
Bond, an inflation index bond. We are not----
    Mr. Visclosky. You would do that over the internet?
    Mr. Zeck. We would do that over the internet. It would be 
an electronic relationship between Treasury and the savings 
bond purchaser.
    Mr. Visclosky. Could I do that through an institution as 
well?
    Mr. Zeck. No, you could not. One of the things that we are 
doing here is we are trying to create a direct relationship 
between the investor and Treasury for a couple of reasons. One 
being that is the most efficient and cost-effective way to do 
it; and two because, in fact, we can support some of the costs 
of providing this system by not having to provide fees to 
issuing and paying agents that we now pay.
    Mr. Visclosky. If I could ask about the agents, because my 
understanding either as a function of an individual employer or 
as an agent who will service a number of employers for savings 
bond purchases by their employees, that there are literally 
tens of thousands of agents out there.
    As you move towards electronic transfers is there any 
anticipation then that these agents will not at some point be 
necessary and that individually employers and employees can 
work this out without the middle man?
    Mr. Zeck. One of the things that I have, not personally, 
but on behalf of our organization, as a vision is that we will 
reach a point where we could have an electronic savings bond. 
All the new issues would be in book entry form. There would be 
a direct connection between the investor electronically and 
Public Debt to manage the----

                    SAVINGS BOND WITHHOLDING PROGRAM

    Mr. Visclosky. How would that work if I had a company and I 
had 100 employees and 42 of them wanted to be on a monthly 
withholding program. Would they individually deal with you 
under your scenario or would they still deal through an agent?
    Mr. Zeck. One of the things that our vision consists of 
right at the moment--again, these things are evolving as we 
learn. But our vision currently has a payroll component as part 
of it.
    One of the things that we want to do, this will not be 
available this fall because we are using an incremental 
approach to developing this system and it will be over a period 
of years that we will add features. One of the things that we 
envision is what we are calling a payroll connection. What we 
are hoping to do is create the opportunity for payroll 
companies that currently support the payroll program to be able 
to continue to do so. But we are hoping to make it easier for 
them to do so, rather than having to deal with savings bonds as 
exception processing and rather than having to accumulate 
various amounts up to purchase prices. We envision that they 
would withhold from salaries of employees that want to buy 
bonds a single amount. That amount would be electronically 
transmitted to us and it would go directly into their account.
    So we would envision a payroll component of the potentially 
securities in the future but it would be much streamlined and 
less expensive for us and less onerous on the employer.
    Mr. Visclosky. So you would still potentially have agents 
involved. I assume there might from a regulatory standpoint be 
a change in the fees that are paid to them per bond?
    Mr. Zeck. What I was referring to there was the payroll 
companies. In fact with regard to the agents, the financial 
institutions that are now the intermediaries for the physical 
bonds, we would not envision them being in the picture for the 
book-entry bond. The connection would be directed between the 
investor and Treasury. There would be no financial intermediary 
for the issuance of a bond that was not via payroll.
    Mr. Visclosky. So you would still have agent involvement as 
far as the payroll.
    Mr. Zeck. Actually there could be some involvement there on 
the payroll side. We have not worked out the details of that. 
We tend to look at that a little bit differently than the 
financial institution agents. We tend to view that as a 
different kind of arrangement with a payroll company----
    Mr. Visclosky. Mr. Chairman, I know I have taken a lot of 
time. But when you talk about institutions I want to make 
sure--I am talking about a specific agent who is not a bank, 
S&L, credit union and has other businesses on the side that 
they provide to employers for payroll plans.
    Mr. Zeck. Oh, okay, you are talking about a payroll service 
provider that, would be the term that we would use for such an 
entity.
    There would be a role under this book-entry program, a 
continuing role for payroll service providers because they 
would continue to provide the payroll services for the company 
and for the employees.
    One of those services would be under the book-entry concept 
for running monies directly to someone's Public Debt book entry 
savings bond account.
    Mr. Visclosky. Thank you, Mr. Chairman.
    Mr. Istook. Thank you, Mr. Visclosky.
    Mr. Sherwood.
    Mr. Sherwood. Thank you, Mr. Chairman. Welcome, and I 
apologize for not being here earlier.
    We have had a great deal of discussion about savings bonds 
as opposed to Treasuries. What percentage of the debt is held 
in savings bonds?
    Mr. Zeck. Approximately five percent, sir.
    Mr. Sherwood. And what percentage of your employees 
dedicate their time to that area?
    Mr. Zeck. Approximately 70 percent of our budget is devoted 
to providing services to, direct services or issue redemption 
services to savings bond holders.
    Mr. Sherwood. Would you help me with that again please?
    Mr. Zeck. About 70 percent of our budget is devoted to 
providing direct services, issue redemption servicing services 
to our savings bond holders.
    Mr. Sherwood. So 70 percent of your budget handles five 
percent of the investments?
    Mr. Zeck. Correct.
    Mr. Sherwood. I don't understand then how that can be cost 
effective. I understand what you told me, that there are 
differences in rates, but it does not compute to me that the 
difference in rate could cover the salaries of all of those 
people that have to play with them.

                 MARKETABLE VERSUS NON-MARKETABLE COSTS

    Mr. Zeck. Actually it does cover the costs that we have, 
sir.
    The reason why this is a bit perplexing is because to 
compare the amount of debt that is held in savings bonds to the 
amount that is held in marketable securities is to perhaps 
presume that we are providing the same services in both cases, 
and we are not.
    In the case of marketable borrowing, one of the tasks that 
Public Debt has is to borrow money that we need to fund the 
debt and we do this through a series of actions. We provide 
some direct services with marketable securities directly to 
investors through out TreasuryDirect program, but the vast 
preponderance of the debt that is issued, the marketable debt 
that is issued, is held in what we call the commercial book-
entry system. It is a hierarchy of accounts that involves 
Public Debt and the Federal Reserve System and financial 
institutions throughout the country.
    The servicing work, the direct customer servicing work, 
that must necessarily go on for those marketable securities is 
handled by the intermediaries or the end institutions that are 
out there.
    Mr. Sherwood. I understand that.
    Mr. Zeck. In the case of savings bonds we provide that 
direct service.
    Mr. Sherwood. I understand that. But still, what is your 
total budget?
    Mr. Zeck. Our request is $204 million for fiscal year 2003.
    Mr. Sherwood. So I could say that probably 70 percent of 
that is spent administering savings bonds.
    Mr. Zeck. That is correct, sir.
    Mr. Sherwood. Which are five percent of the total debt 
outstanding.
    Mr. Zeck. That is correct.

                    PURPOSE OF SAVINGS BOND PROGRAM

    Mr. Sherwood. Do you primarily issue savings bonds because 
it is a policy issue, it has always been done, and it is a 
connection of the taxpayer and the average citizen with the 
government?
    Mr. Zeck. I can give you my take on that and Brian can pick 
up where I leave off.
    My association with the savings bond program in Treasury 
goes back a long ways, and it has always been my understanding 
that the support for the savings bond program is based, not 
only the savings bond program, but our TreasuryDirect 
investment program on the marketable side as well has always 
emanated, as I have understood it, from a strong sense in 
Treasury that there ought to be an opportunity for the citizens 
of the country to have a financial connection and relationship 
directly with the Treasury Department.
    That is to say that we borrow a lot of money, we have lots 
of debt we need to fund in order to finance the government's 
operation, and my understanding that Treasury's position has 
always been that that should not be done solely through 
intermediaries or large bidders, but there ought to be a direct 
connection. That is my understanding of where we have been and 
where we are.
    Mr. Sherwood. What is your smallest denomination that you 
sell?
    Mr. Zeck. You can purchase a savings bond for as little as 
$25 which is half of the face value of a $50 bond. So the bond 
is $50 as a denomination. Its purchase price is $25.
    Mr. Sherwood. Has there been any discussion as to whether 
or not that is still cost effective to have them that small?
    Mr. Zeck. Over the years, we have taken a look at this, and 
one of the things that you will find in the detail of our model 
is that there is a lot of information there by denomination. 
The work is not just done at the gross level, it is done on the 
individual denominations of each series.
    One of the things that is tempting to do, and I think ill 
advised, is to sort of try to identify every couple of years 
the apparent most costly item and lop it off. I think the end 
result of that could be an unintended consequence.
    In fact though we have participated a little bit in that 
ourselves.
    A number of years ago we realized and did take action to 
eliminate the two lowest denominations in the payroll market 
and the reason for that was we felt that people were saving for 
their future, they were saving out of their paychecks, they 
could accumulate amounts of money and they did not really need 
the smaller denoms which tend to be more expensive to process 
and overall less effective.
    So a number of years ago we did eliminate all denominations 
under $100 in the payroll market. So in the payroll market the 
smallest denom you can get is $100. So in fact the answer to 
the question is yes. We have done that on occasion where it 
seemed to make sense and where the tradeoff was appropriate 
between serving our customers and also keeping costs down.
    Mr. Sherwood. In Economics 101 they always taught us about 
the open market window and how that was used in monetary 
policy.
    Correct me if I am wrong, but I am assuming that it is not 
your decision to make the monetary policy. It is your decision 
to execute it?

           FISCAL YEAR 2003 SAVING BOND SECURITIES ACTIVITIES

    Mr. Zeck. That is correct. We implement the decisions that 
are made by Treasury's Debt Management policy personnel.
    Mr. Sherwood. The theoretical thing we call the open market 
window where they buy and sell bonds to create, to raise or 
lower the money supply in classic monetary policy----
    Mr. Roseboro. That is Federal Reserve policy, sir.
    Mr. Sherwood. That is not you.
    Mr. Roseboro. No, sir.
    Mr. Sherwood. Okay. I understand that.
    Because of the importance of maintaining the public debt 
and the complete automation of the processing of marketable 
securities as we go forward, how secure is your computer 
network and has the Bureau conducted hacking drills to assure 
your network security?
    Mr. Zeck. We take computer security very seriously. We have 
had, as I mentioned, we have received five unqualified opinions 
on our financial statement for the last five years. The General 
Accounting Office has conducted all five of those audits and 
they are rigorous.
    As part of the GAO work, and in complement to work that we 
do ourselves, there is a computer evaluation that is conducted 
as a part of each of those financial audits. And each of those 
reviews has been very effective in identifying issues that we 
need to take advantage of to protect ourselves. We have been 
very happy and very fortunate and pleased to find that our own 
security processes were well thought of. There is always a 
suggestion for improvement, there is always a way to make 
things a little bit better and we are always looking for that, 
but we take that very seriously.
    That process includes, some processes I am aware of and 
some processes I am probably not aware of in terms of hacking 
and penetration testing that go on. I will tell you that we do 
our own penetrating testing and hacking testing of our own 
systems and we try to be as vigilant as we can about this data.
    It is extraordinarily important to us and we recognize the 
fiduciary role we have because we have people's investments and 
it is their financial portfolio or a part of it that we have 
and we take that very seriously.
    Mr. Sherwood. Thank you very much.
    Mr. Istook. Thank you, Mr. Sherwood.
    Let me ask some questions that come to mind from the 
exchanges there.
    Your testimony, Mr. Zeck, was that the difference in rates 
between the savings bonds and the marketable securities covers 
the cost. How do you calculate that?
    Mr. Zeck. Let me say first that we would be happy to work 
with you or your staff in any way you want to go into the 
details of this model as deeply as you would like. I can take 
us down a level or two and then it would be better probably for 
all of us if we turned this over to some people who were more 
statistically minded. But we would be happy to do that and 
stand ready to do that.
    But I can tell you----
    Mr. Istook. I am sorry. Are you saying that is based upon 
the model that we talked about before?
    Mr. Zeck. Yes. We can certainly go into that in whatever 
detail you would like and we can bring the right people in to 
talk to you about that.
    Mr. Istook. So the validity of understanding whether the 
difference in rates covers the cost depends upon the validity 
of that model.
    Mr. Zeck. Yes, it does. If you want me to I can tell you 
sort of in a four step generally high level----
    Mr. Istook. Go ahead.

                           SAVINGS BOND MODEL

    Mr. Zeck. Essentially the formula or the approach to the 
model is based on measuring the cost effectiveness of 
individual bonds. So the philosophy under the model is that we 
determine the present value of a savings bond. We take the 
issue price and subtract from that issue price the 
administrative costs that we incur to issue a bond. Those 
administrative costs also include the servicing costs that we 
talked about a moment ago, or half of them actually.
    We then add back the savings bond redemption value. We 
subtract the administrative costs, both ours and the Federal 
Reserve System's to redeem the bond. Those redemption costs 
include the other half of the servicing costs. And we also 
subtract out the tax revenue that is received at redemption. 
That is the basic philosophy behind the model.
    It then gets somewhat more rigorous and a bit more 
complicated as you move on. In the next step we forecast the 
life expectancy of each bond and we calculate the cost 
effectiveness for individual bonds for all the bonds we have 
sold in a year. The most recent application of the model, for 
example, took a look at every bond we issued during fiscal year 
2001, made a determination of the cost effectiveness of each of 
those bonds that were issued. We make a determination as to the 
cost effectiveness primarily by relying on historical 
redemption probabilities. We take a look at data that shows us 
how long savings bonds are held--not just in general terms but 
specific bonds by denomination. We use those redemption 
probabilities to predict the probability of when the bonds we 
issue in 2001 will be redeemed. So that is the next element 
that we fold into the model.
    The third step of the four step model is that we calculate 
the cost of borrowing using marketable securities instead of 
savings bonds. This is a process that I can describe at a high 
level but would need help to go into a lot of detail about.
    Essentially what we do is we calculate the present value of 
savings bond payouts, the amounts of money we are going to have 
to pay over time, over the 30 year life of the securities by 
denomination, and we compare that to the yields on the constant 
maturity yield curve for Treasury marketable securities. That 
is essentially the mechanism that the model uses to try to 
relate the amount we have to pay for savings bonds to the 
relevant marketable interest rate and we use rates all along 
the continuum to do that based upon how long our probabilities 
show the bonds will be held.
    There is another adjustment that is made to that particular 
yield curve that accounts for the fact that savings bonds and 
marketable securities pay interest in different ways. All the 
savings bond interest for example is paid when the bond is 
redeemed, but for marketable securities interest is paid as you 
go. So there is an adjustment made to that yield curve to 
account for the fact that with marketables you have to continue 
to have money along the way, along the stream in order to pay 
those semiannual interest payments. That is essentially, at a 
fairly high level, the third step of the four step process.
    The final step is fairly straight forward. Here we combine 
the cost effectiveness estimate of each of our two series. The 
three steps I just mentioned we do for the Series EE security 
and we do for our new inflation index product. We take the 
results of both of those analyses and we weight them based upon 
the current sales that we have of EE's versus I bonds. In our 
most recent modeling, EE dollars were at 47.8 percent of our 
sales and I bonds were at 52.2 percent, so we do a fairly 
straight forward weighting of that and that produces the cost 
effectiveness for the entire program that we express in terms 
of million dollars per billion borrowed.

                     SAVINGS BOND MODEL VALIDATION

    Mr. Istook. Who has tested and validated that model?
    Mr. Zeck. The model was originally prepared and refined 
within the departmental offices at Treasury some years ago, 15 
or more years ago. We took it over and have sort of improved it 
and refined it and modified it as necessary when you add series 
and make other changes, structural changes to the program along 
the way.
    It has been validated within Treasury. It has been used for 
many years within Treasury.
    My understanding, and I am wandering a little bit far 
afield here, but you will be able to check this better than I. 
Some years ago the Surveys and Investigations Group was asked 
to take a look at our program in Public Debt. It may have been 
by this committee, I am not sure, exactly what the source was. 
But they took a look at our program, not just the savings bond 
model, but we went into very great detail with them at the 
model at that time. So Congress has actually seen the model in 
some detail at that time.
    I do not think there has been anything since that that has 
involved the Congress.
    Mr. Istook. So any effort to test and validate it has been 
totally internal, and of course it is--So we do not really have 
anyone veryfiying the accuracy of what is reported from the 
model other than Treasury and the Bureau of Public Debt 
maternally alerting it.
    Mr. Zeck. I am very comfortable with it, but that is 
correct. There has been no outside validation of the model.
    Mr. Istook. And you say of course it was created 
approximately 15 years ago. I may be misremembering this and 
certainly I was not here and you may have been 15 years ago. 
But when the model was developed was it not developed with the 
intent of justifying continuation of the program? That model 
was developed 15 years ago?
    Mr. Zeck. That is not my recollection at all, sir. I do not 
recall--I was at Public Debt certainly but I do no have first 
hand information as to what actually motivated it. It has 
always been my understanding that it was something that 
Treasury, the Treasury Debt Management folks felt was a useful 
tool, something we ought to know about, it was information we 
ought to have, and it was information that would allow us to 
actually make sensible decisions about the savings bond rates 
that are offered to investors on the various savings bond 
programs.
    I could be wrong, but that is my understanding.
    Mr. Istook. Understood.
    And of course I realize you were giving a summation and how 
tricky it is to deal with multiple variables, but it was 
certainly my impression for example at one point you mentioned 
that you add the redemptive value and subtract the redemptive 
costs and I do not understand why the model would not say you 
add redemptive value and add rather than subtract the 
redemptive cost. Those are both outgo items.
    Mr. Zeck. One of the things that we are trying to do is we 
are trying to boil it down through a formula to one particular 
number. I hope I did not misspeak.
    What we are trying to do is reflect the fact, we are trying 
to reduce the money that we receive from selling a savings bond 
by the cost of the bond, the cost of issuing the bond to be 
fair and to include administrative costs in there.
    When we redeem the bond we have to pay out a certain amount 
of money, so what the model does is, in effect, and this is a 
bit of an oversimplification. Let us say you buy a bond and we 
have to pay you $300 when you redeem it. We will in effect in 
the model, we will add to that $300, I mean you will only get 
$300, but in the model we will add a certain amount of money to 
that payout that reflects our administrative costs for 
redeeming the bond.
    So in effect we make the payout larger to account for the 
fact that we have incurred administrative costs.
    Mr. Istook. You can understand I am sure that when you are 
attempting to verify the cost effectiveness of things that 
basically you are met with saying well, we developed internally 
a complicated mathematical formula that is beyond most people's 
ability to understand, but we programmed the computer, and the 
computer that we programmed says we are right. It saves money.
    It has never been tested by anybody else. You can 
understand the challenges of accepting information based on 
that.
    Mr. Zeck. One of the things that I have done in Public Debt 
over the last 10 years or so is I have challenged the model, I 
have challenged the people that have done it, we have talked 
about it periodically, we have refined the model. So I 
understand the importance of being able to understand and 
explain in as much detail as people are interested in, how 
these things work. I absolutely understand that and we have 
questioned it ourselves and we try to do everything we can do 
to make sure that it is doing exactly what we think it is going 
to do and exactly what we say it is going to do. I believe that 
currently it does.

                         SAVINGS BOND MODEL USE

    Mr. Istook. You of course, cautioned against using the 
model to take a snapshot that can produce widely varying 
results as you indicated and have certainly admitted that it 
does. On the most recent run through the model that you say 
generated this differential of $35 million per billion dollars 
valued, over what time period were did the information fed into 
the model cover? Was that based upon 30 days worth of 
information, a year's worth of information five years, what?
    Mr. Zeck. The current iteration of the model, and this is 
the way we tend to normally use it, it considered one year's 
worth of savings bond sales. It considered every sale in fiscal 
year 2001. So it was a good chunk of sales, a reasonable period 
of time, and something that we think represents current 
activity in the program.
    The balance we are trying to achieve there is we are trying 
to make sure that we do not take too small a slice, of course, 
because that could be misleading one way or the other, but we 
are also trying to make sure that we do not go back too far 
because you want to reflect the customer's perception and the 
current state of affairs with regard to a reasonably current 
program.
    Mr. Istook. What period of time was covered by the 
iteration that produced the $7 million figure that has been 
mentioned?
    Mr. Zeck. The same.
    Mr. Istook. That was one year at that time, a different 
starting and end points of the particular year chosen.
    Mr. Zeck. Perhaps the end points were different, that could 
very well be the case, and the other variables of course can 
change too because the marketable yield curve is the yield 
curve in place at the time an the savings bond rates that were 
used were the current savings bond rates that are being paid at 
the time.
    Mr. Istook. Right. And I know currently looking at your web 
site the current savings bond interest rates seem to hover 
right around four to 4.4 percent. I am not sure on fixed rate 
but I noticed on the variable rate marketable securities the 
general range in all but one case was below four percent. That 
was being paid on the variable rates. I can look up the 
specific, but I do not know if you call those series or issues 
or whatever, but reflected on your web site, the outstanding 
variable rate of payments, of those reflected the only ones 
that even rose to four percent were the ten year notes due 
January 15, 2010. The other inflation index securities were all 
currently paying below four percent.
    I just mention that because looking at that and also 
looking at the discount rates applied to the most recent 
options which, for example, the discount rate applied to a 182 
day T-bills or T-notes, whoever it was, a discount rate of two 
point zero something percent, essentially an annual rate of 
four percent.
    But at least based upon current numbers, savings bonds are 
yielding essentially the same, sometimes a little bit more than 
the currently issued Treasury bills and Treasury notes.
    Mr. Zeck. The rates on savings bonds, again that's a 
snapshop issue that----
    Mr. Istook. Yes, I know.
    Mr. Zeck [continuing]. You deal with as well.
    The current EE bond rate is 4.07 percent. This is actually, 
the EE rate will always be less than the five year Treasury 
note rate when it was established because it is established at 
90 percent of that rate.
    Mr. Istook. The reason I bring it up, let me explain. 
Because I understand there are a lot of variables that go into 
that. I bring it up just because when we are talking about, if 
the way that savings bonds overcome the higher administrative 
costs to be more cost effective to taxpayers is because they 
have a lower cost, a lower yield, a lower interest rate. 
Whether that is historically true or not, at this moment in 
time it does not seem to be the case.
    Mr. Zeck. One of the things I would point out is that we 
set savings bond rates every six months. So in May and in 
November are the months that Treasury establishes rates for 
savings bonds, both the inflation index bond rate, the fixed 
rate is established as well as the rate for EE and those rates 
apply to bonds issued in the subsequent six months.
    So one of the things you can find is you can that they will 
lag a little bit behind market rates. So if market rates are 
going up, for example, the EE rate will in fact lag behind that 
a bit until the next time it is set. If market rates are going 
down, for example, then you will find that the EE rate will lag 
somewhat.
    So that is an important thing to keep in mind. If you----

                       SAVINGS BOND RATE TRACKING

    Mr. Istook. I understand, you have to look at them over 
time. I appreciate that very much.
    Do you have a management tool that enables you to track the 
spread between the rate on marketable securities and the rate 
on savings bonds? I know you were talking about some sort of 
average or blended or melded rate, but do you have a tool that 
seeks to track over time what that differential, what that 
spread is?
    Mr. Zeck. That is something that I would prefer to, the 
Debt Management folks at Treasury actually handle the rate 
setting for savings bonds and they have, I do not want to speak 
for them, but we turn to them for the rate information on 
savings bonds and they are very much in tune with Treasury 
marketable yield curves and the procedures that are followed 
for establishing saving bond rates.
    So at the risk of speaking for someone else they certainly 
have a process and a tool and a procedure that they use to 
establish those rates that they provide to us.
    Mr. Istook. Certainly, and that is something that I hope we 
can get for the record because when you look at it strictly 
from a fiscal issue it is a question both of--Obviously there 
are higher administrative costs with savings bonds and the 
question is how does that track against any interest rate 
savings as to whether or not it is cost effective to use that 
mechanism. That is what I am interested in having the tools to 
look at that.
    How much is expended by Bureau of Public Debt in marketing 
expense? Sales, advertising, whatever type of expense it may 
be. How much is expended relating to marketing expenses on 
savings bonds?

                         SAVINGS BOND MARKETING

    Mr. Zeck. Our total marketing effort is approximately $17 
million for all of our products. The preponderance of that, at 
the moment, is for savings bonds.
    One of the things that Brian had mentioned earlier was that 
we are in fact in a transition period right now and we are 
looking to even ask in Public Debt to take on the challenge of 
trying to market our marketable auction participation to a 
wider number of participants.
    So what we are in the process of doing right now is 
investigating the options that we have available there, and 
over time we expect and plan to shift resources away from the 
savings bond marketing directly and to devote more attention 
than we have in the past to trying to increase the competition 
in our auctions and work on the marketable side of things to 
increase competitive bidding.
    Mr. Istook. Can you tell me over the past five years what 
have been the annual expenditures on marketing savings bonds 
and how does that correlate with what has been happening with 
the annual issuance? I understand the annual issuance is 
significantly down.
    Mr. Zeck. The issuance in terms of the number of savings 
bonds is down. The savings bond sales are actually up as a 
dollar figure.

                           SAVINGS BOND SALES

    Mr. Istook. Fewer people buying, but those who buy buy 
larger----
    Mr. Zeck. That is correct. One of the things that has 
happened, and it is continuing this year, is the popularity of 
our inflation index savings bond. That has proven to be very 
popular with investors and we have found that per transaction 
the inflation index purchasers buy more securities than the EE 
purchasers do.
    So in fact we did have a period of time where savings bond 
sales were declining but now they are increasing. In this 
particular year, they will clearly be higher than last year. So 
in 2002, dollar sales will exceed 2001.
    Mr. Istook. Maybe I do not have current numbers here. I 
have for example figures that show in fiscal year 1995 75.6 
million bonds worth $7.2 billion, and I am not sure if that is 
face value or issuing cost. But $7.2 billion of bonds issued in 
fiscal year 1995 to 75.6 million. By fiscal year 1999 that 
dollar amount was down to $4.9 billion and there were 49 
million bonds rather than 75 million issued.
    Are those outdated figures?
    Mr. Zeck. No, those are good numbers because they are 
historical. Last year's numbers of $6.6 billion----
    Mr. Istook. Last year being fiscal year 2001?
    Mr. Zeck. Fiscal year 2001 sales were $6.6 billion. And 
2002 sales will exceed that.
    Mr. Istook. Marketing costs, obviously I need some updated 
figures. The ones I have are not current. We will get those for 
the record from you. But on marketing costs, $17 million 
currently compared to what has it been in the last four years?
    Mr. Zeck. Except for inflation it has been about the same. 
It has hovered around----
    Mr. Istook. Is that mostly direct advertising?
    Mr. Zeck. Actually it is mostly personnel costs. The reason 
for that is because the traditional marketing that we have 
done, and marketing we will have to continue to do and should 
continue to do for some period of time with the savings bond 
program has been focused on talking to those companies, talking 
to those payroll companies, working with those service 
providers to try to actually encourage them to hold savings 
bonds and to offer savings bonds through payroll savings plans 
for example.
    So we have had a long history of a fairly labor intensive 
marketing effort in the savings bond program that goes back 
many many years. I think that we will need certainly to 
maintain a certain element of that going forward, but one of 
the reasons we have in our 2003 request a request to shift, to 
reduce by 40 FTE, and shift those dollars away from personnel 
to services, if you will, is because we see the need and want 
to move forward and be able to engage in some less labor 
intensive marketing, something that would in fact be more 
effective, hopefully, in the savings bond area. But maybe even 
more to the point, help us out as we take on the challenge from 
Brian and others at Treasury to increase the competitive 
bidding.
    Mr. Istook. Is that----
    Mr. Zeck. We want to use some advertising, perhaps some 
public affairs work, some other kinds of resources that will be 
less oriented to one on one marketing.
    Mr. Istook. Is that because the emphasis on marketing via 
appeals to payroll deduction plans has not generated the growth 
in those plans that you hoped or expected that it would?
    Mr. Zeck. There are a couple of reasons. The payroll 
dollars are in fact declining and continue to decline in the 
payroll program. That is one reason. So we are switching away 
from something that is less effective for us to something that 
we are confident will be more effective.
    The other side of things is I think we are positioning 
ourselves, I know we are positioning ourselves in an attempt to 
try to get ahead of the curve, as it were, with regard to the 
future and book-entry bonds and the idea of having this direct 
relationship with customers.
    So we want to be in a position where we can have the right 
kind of resources and it really for us means less labor 
intensive resources and more services oriented resources to 
allow us to operate in that environment where we are not 
dealing directly with intermediaries or quite as much with 
payroll companies.
    Now we support the payroll program and we continue to want 
to give that appropriate attention, but we have had less 
success there.
    Mr. Roseboro. Quite honestly, there is more competition 
there. There is a lot more things people can do with those 
payroll dollars today than there used to be.

                    PURPOSE OF SAVINGS BOND PROGRAM

    Mr. Istook. I understand. Frankly, whether or not, it is a 
good investment for us to want people to purchase bonds as 
opposed to enabling them to purchase bonds. It may get back to 
the question of whether that is really the most cost effective 
way for us to borrow.
    If the purpose is to satisfy a need that already exists for 
people to invest directly in a Treasury bill why do you need to 
drum up the need?
    Mr. Zeck. One of the things that it is our job to do in 
Public Debt is to have the best savings bond program we can 
have. To us that means using technology, keeping administrative 
costs low, and trying to make sure that as many people know 
about the product and take advantage of it as can, and making 
sure that they understand about how the product can fit into 
their portfolios, and where it fits and where it does not.
    So I operate from a very straight forward standpoint we 
have been challenged to have a savings bond program and our job 
is to try to do the best job we can in administering such a 
program.
    Mr. Istook. I guess to me that still does not answer the 
question. If you are trying to meet a need that exists as 
opposed to create a need, if I understand correctly because you 
were going into areas where you had declining purchases, 
putting your marketing emphasis there. Most of the resources of 
the approximately $17 million per year on marketing was devoted 
to try to stimulate corporate payroll deduction plans which did 
not work.
    I just wonder whether you are trying to satisfy a need as 
opposed to create a need. There is a significant different when 
you are talking about taxpayer dollars.
    Mr. Zeck. I think there certainly is. I think there are a 
couple of issues related to that.
    One is, and I am not trying to get into a semantics game 
here, but the role of marketing and preserving payroll sales at 
a certain level should not be dismissed. Certainly the 
competition is heavy in the payroll area for those payroll 
dollars through various 401K plans and what not.
    The fact that sales are declining in that market is 
certainly true. That does not necessarily mean that marketing 
has failed. We do believe we have to continue to pay attention 
to that. We also believe we have to shift emphasis and focus on 
some other areas as well.
    Mr. Roseboro. Mr. Chairman, if I may just add to that.
    Mr. Istook. Yes.
    Mr. Roseboro. As I indicated in my testimony, one of our 
intentions in terms of marketing Treasury securities is to 
broaden out from the over-emphasis that has been placed on the 
savings bond program to make the public aware of as well as to 
leverage off, the improvements in the technology that the 
Bureau of Public Debt has developed to make other Treasury 
securities accessible to the public.
    Mr. Istook. Certainly I want to make sure that I applaud 
the application of technology and with regard to marketable 
securities. From what I understand the basis points that it 
takes for the administrative costs are quite comparable with 
what happens in the private sector with handling investments in 
mutual funds, for example. Other things, I mentioned four. I 
think you have a very useful web site and I applaud those 
things.
    The question is not whether you are very well handling 
that. The question instead relates to the issue of the savings 
bond program.
    When we have the budgeting challenges that we do, as you 
know, the budget resolution is on the House Floor right now. 
There are enormous concerns with a great many programs, and we 
each, as I mentioned before, could single out which ones we 
have. I think we need to differentiate between where we are 
meeting needs and where we are out of inertia, trying to create 
needs to justify the continuance of different government 
programs.
    Certainly we are aware that there are a huge number of 
investment vehicles that are available to people. It is a very 
different world than when war bonds were first issued to 
finance the costs of the federal government, I believe it was 
during the Civil War that it first began.
    We know it is a very different case. You have an active and 
efficient market with enormous amounts of capital being 
available as shown by the marketable securities program. It is 
a very different situation as far as what we need to do to meet 
the need of the government.
    Now if we are talking on policy grounds that Mr. Roseboro 
and I engaged on earlier, there is a legitimate question about 
what it takes to meet the needs of investors.
    But let us talk about investors' needs if that is the case. 
There are many vehicles out there for large and small 
investors, including those that are backed by the full faith 
and credit of the United States government.
    So these are legitimate questions and I think we must take 
a hard look at them as we are trying to prioritize the dollars 
that we have to allocate in the subcommittee.
    I very much appreciate your time, gentlemen. You have been 
good about going over and it is not your fault we are going 
over.
    Mr. Visclosky.

                       SAVINGS BOND DEMOGRAPHICS

    Mr. Visclosky. I have actually found the discussion very 
interesting as far as savings bonds, and one question that 
comes to mind is as far as the need for savings bonds, has 
Treasury done any studies as far as what the breakdown is by 
income level of people who are involved in some of these bond 
purchase programs, either through their employer or as 
individuals?
    Mr. Zeck. We have a fair amount of demographic information. 
I do not have it with me today. We could certainly provide, if 
you would like it we could certainly provide what we have to 
you that describes what we know about the typical savings bond 
purchaser, for example.
    Mr. Visclosky. If you could I would appreciate that. I 
think the Chairman has raised a lot of very legitimate issues 
as far as marketing when there are other options. For some 
people, particularly if they are at the margins and they want a 
very secure investment and do not have a lot of money to invest 
I can see where this might be an attractive possibility.
    So if you have that, if you can share that with us----
    Mr. Zeck. We will share with you what we have, yes, sir.
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                SAVINGS BOND OWNERS BY HOUSEHOLD INCOME

    Mr. Visclosky. Thank you, sir.
    Mr. Istook. Thank you, Mr. Visclosky, and of course that is 
talking about is there the need of the government to have it to 
cost effectively borrow? And if it is not there, is there a 
need of the investing community to have it in today's world of 
enormous options and opportunities that are out there.
    We have other questions of course we will submit for the 
record including some trying to look at these means of 
measuring it, the performance measures that you have under the 
Government Results and Performance Act and so forth, but we 
will submit those for the record.
    Gentlemen, I do thank you again for your courtesy in 
staying beyond what we thought would be the time through no 
fault of your own, but to accommodate us. I appreciate that. 
Thank you.
    We stand adjourned.

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                                          Thursday, April 18, 2002.

                          CUSTOMS/TRADE ISSUES

                               WITNESSES

DOUGLAS R. BROWNING, DEPUTY COMMISSIONER DESIGNEE, U.S. CUSTOMS SERVICE
MICHAEL D. LADEN, TARGET CUSTOMS BROKERS
KEVIN M. SMITH, GENERAL MOTORS CORPORATION
MINDY S. FLEISHMAN, AMERICAN IRON & STEEL INSTITUTE

                            Opening Remarks

    Mr. Istook. Good morning. We appreciate everyone coming 
together for this subcommittee hearing regarding trade issues.
    This country's greatness, of course, rests on its 
openness--its openness to people, openness to ideas, openness 
to trade and the free enterprise system. Since September 11th 
this of course has been tested by level one alerts that have 
caused massive slow-downs at times along our borders. Because 
of concerns about the vulnerability of our systems of 
transportation, our government offices, public facilities, 
vulnerabilities of our mail and communication systems. All of 
these fundamentally challenge our thinking about security for 
our national infrastructure,
    Despite all of this, trade activity seems to be showing 
signs of overcoming this resistance, but we want to make sure 
that national security is handled in a manner that's consistent 
with economic security. Our national and political culture for 
the most part has treated international trade as essentials for 
national and global economic health and for world peace. Even 
the literary figure H.G. Wells noted in 1922 that the insights 
of Adam Smith carried forward to the present and that 
apparently contradictory views of class war socialists and free 
traders, as H.G. Wells said, ``were heading at last in spite of 
primary differences towards the same intimations of the new 
worldwide treatment of human affairs outside the boundaries and 
limitations of any existing state. The logic of reality 
triumphs over the logic of theory.''
    Those were the words of H.G. Wells and I believe the same 
logic of reality ultimately will trump any destructive 
ideologies that seek to harm the global ties that support our 
prosperity, support our national security, and support our 
homeland security.
    This morning we are considering issues surrounding the flow 
of trade across our borders since September 11th. It is a 
matter of great interest to this subcommittee because of our 
responsibility for funding and oversight of the U.S. Customs 
Service and of course with the U.S. Treasury Department with 
its significant role regarding international trade.
    Members of the subcommittee for a great period of time have 
been aware of the key role that Customs has in facilitating 
trade on a daily basis with some 8.8 billion dollars a day of 
legitimate goods and services coming across our borders. Over a 
million passengers, hundreds of thousands of containers, 
vehicles, vessels and aircraft each and every day.
    At the same time that Customs is enforcing U.S. trade laws 
it also serves as a front-line defense against terrorists, 
against criminals, against traffickers and weapons of mass 
destruction and illegal drugs, firearms, pornography, and the 
financing of those activities. As a result, Customs continues 
to have growing statistics of seizures and deterrents.
    Today borders and ports of entry can no longer be thought 
of as just simple physical checkpoints. They extend into 
cyberspace and part of the solutions extend into cyberspace as 
well.
    To strengthen and protect the chain of supply that we 
depend upon demands more than just physically processing 
commodities and goods. It requires automation and information 
systems, communication, high tech inspection capabilities, all 
to ensure that Customs can do its job.
    Of course we cannot rely solely upon Customs and the 
Federal government any more than we can totally rely upon law 
enforcement officers to be the means of having law and order in 
our communities. It depends upon the mutual acceptance of 
everyone of the responsibilities for law and order in our 
communities and mutual acceptance by everyone involved of the 
responsibility for homeland security for the security of 
commerce that is crossing our borders whether a person be an 
importer, an exporter, a shipper, a carrier, broker, their 
employees, the people that work on docks, the drivers of trucks 
and other vehicles, they all have a stake in reducing our 
vulnerabilities--something that cannot be done by any single 
entity.
    This has been complicated, I know, by the dynamics of 
politics in Washington. There are pressures to reorganize, 
consolidate, and unfortunately that could end up duplicating 
many activities currently carried out by the Customs Service.
    Sometimes people may not be sure of what to do next. 
Reorganization can sound good in theory, but sometimes it can 
be movement without progress and that is one of the issues that 
we have to address as well.
    I am pleased to welcome a very distinguished panel of 
witnesses to explore these. We will begin with a statement from 
the Deputy Commissioner designee for the U.S. Customs Service, 
Mr. Douglas M. Browning.
    Mr. Browning, welcome. I do not think you have appeared 
before our subcommittee before, at least not while I have been 
chairing it.
    Most recently Commissioner Browning served as Assistant 
Commissioner of Customs' Office of Regulations and Rulings and 
has a distinguished I think 25 year career with the Customs 
Service.
    Following him will be Mr. Michael Laden, President of 
Target Customs Brokers, Incorporated, and Chairman of the 
American Association of Exporters and Importers.
    Following him, Mr. Kevin Smith, Director of Customs 
Administration for General Motors.
    Finally, we will hear from Ms. Mindy Fleishman, General 
Manager of Marketing and International Trade for U.S. Steel and 
the Chairperson of the Customs Committee for the American Iron 
and Steel Institute.
    We look forward to hearing your views in addition to these 
other issues touching upon the present state of U.S. trade 
flows and insight regarding the steel tariff issue and the 
recent presidential ruling.
    To permit time to hear from our witnesses I am going to ask 
that questions from members of the subcommittee wait until we 
have heard from each of the witnesses.
    I always remind our witnesses your full written statement 
will appear in the record. I have read them all. So if you wish 
to be extemporaneous and certainly be a little bit briefer in 
your oral statements that will be appreciated.
    Before that I want to give the opportunity for comments to 
my ranking member Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I join you in 
welcoming our witnesses today.
    This is an important hearing. Obviously we, after September 
11th have changed our psychology of the porousness of our 
borders. That was understandable and correct. At the same time 
this committee is very concerned about facilitating trade 
across our borders that are so vital to our own people and 
obviously to the international economic community.
    I think that as we work through this together we want to 
accomplish both objectives--security and commerce.
    I want to say that I was pleased to hear yesterday that 
Secretary O'Neill was very happy with the statistics that he 
quoted to us in terms of the time that it was taking at the 
northern border to process some cargo, and because of the 
application of electronic technology we were able to decrease 
from hours to I think minutes, I forget exactly, seven minutes?
    Mr. Browning. Nine minutes.
    Mr. Hoyer. Nine minutes. I was gilding the lily by two 
minutes. But a phenomenal success and obviously of great value 
to the private sector and of great value to the public sector 
as well.
    Mr. Chairman, I will include my full statement in the 
record without objection at this time if you will, but I would 
close simply with welcoming Mr. Browning to the committee. I 
would be remiss if I did not comment on his background a 
little. Chuck Winwood has been an extraordinary public servant. 
He has served Customs well, he served America well. He is a 
public servant of whom we can all be proud. He is going to be 
retiring on May 3rd and going into the private sector where I 
think he will be equally successful.
    Mr. Browning, you I know have also, as the Chairman has 
noted, been a 25 year Customs employee and a leader in that 
agency and we welcome you to your new position. We look forward 
to hearing from you at this time.
    Thank you, Mr. Chairman.
    Mr. Istook. Thank you.
    If the witnesses would stand, I will administer the 
collective oath and then recognize people in the order--Mr. 
Browning, Mr. Laden, Mr. Smith and Ms. Fleishman. [Witnesses 
sworn.]
    Mr. Browning, we are pleased to hear from you.

            Deputy Commissioner Designee's Opening Statement

    Mr. Browning. Thank you, Mr. Chairman.
    Chairman Istook, Congressman Hoyer, members of the 
subcommittee, I am grateful for the opportunity to appear 
before you today to discuss Customs' continued role in ensuring 
the free flow of trade across our borders in light of increased 
security demands following September 11th. And being mindful of 
your admonishment to us, Mr. Chairman, I will in fact make a 
very brief formal statement.
    But also let me follow up on the point that was made by 
Congressman Hoyer.
    I share your thoughts, as do the 21,000 men and women of 
the U.S. Customs Service, on the significant contribution that 
Chuck Winwood has made in his 30-plus years in the Customs 
Service. I have had the privilege of working with him for 25 of 
those years, and most recently, over the last two months, have 
had the privilege of working with him as we transition me into 
this very important job of this organization.
    I only trust and pray that I am worthy of the 
responsibility that Commissioner Bonner has placed on me and 
that I am able to at least come close to the performance that 
Mr. Winwood has contributed to this organization. So, on behalf 
of the U.S. Customs Service, we also acknowledge the fine work 
that he has done for the men and women of the United States 
Customs Service and for this nation in general.
    As you are well aware, it has been the Customs' mission for 
many years to oversee and facilitate this balance of safe yet 
swift flow of trade through our ports. It has been a challenge 
we have always risen to while continuously looking for ways to 
make it work better. We have embraced the benefits of 
technology, partnerships with the trade community, and a 
trained and motivated work force to keep the upper hand against 
a constant influx of contraband and prohibited merchandise. 
Needless to say, since September 11th, the stakes have never 
been higher, and accordingly neither has the vigilance of the 
men and women of the United States Customs Service.
    Since September 11th Customs had been at a level one alert 
across the country. Level one requires sustained, intensive 
anti-terrorism questioning and includes increased inspections 
of travelers and goods at every port of entry.
    Because there is a continued threat that terrorists will 
attack again, we remain at level one and we will do so for the 
foreseeable future.
    Yet international trade has never been more robust. Despite 
a few short dips its volume continues to surge. Last year the 
U.S. Customs Service processed over 23.5 million trade entries, 
a 150 percent increase since 1990. That volume is expected to 
nearly double by 2006.
    Customs continues to find the balance of providing an 
increased level of security at our borders, without the 
consequence of choking off the ever-increasing flow of 
commerce.
    I believe that, with the right level of industry 
partnerships and the right combination of resources, we can 
succeed not only in protecting legitimate trade from being used 
by terrorists but we can actually build a better, faster and 
more productive system of trade facilitation for the U.S. 
economy.
    Today I would like to briefly outline and discuss with you 
some of the processes already in place and others that when 
implemented, will be greatly beneficial to our security 
strategy and economic growth.
    Among the many things that the 2002 terrorism supplemental 
allows us to do is acquire additional non-intrusive technology 
to assist in our security efforts.
    Yet as important as our acquiring technology is in 
thwarting international terrorism I must also stress the 
essential human element. The most important component of 
Customs success in protecting American lives and the American 
economy lies in our men and women who work directly on our 
nation's front line.
    For our strategy to be effective we must ensure that 
Customs has an adequate number of inspectors, canine officers, 
special agents, and other personnel to meet our security and 
trade facilitation mission.
    To increase security beyond that provided in level one, we 
will need more inspectors to conduct targeted analysis, operate 
additional non-intrusive inspection equipment, staff all 
available lanes, question more people, and perform additional 
physical inspections while quickly processing increased volumes 
of commercial and passenger trade.
    No discussion, Mr. Chairman, of a successful border 
security program would be complete without consideration of the 
simple importance of new automation for the mission of the U.S. 
Customs Service. That system, the Automated Commercial 
Environment, is a vital project for U.S. Customs and a key link 
to the business community. It will perform and reform the way 
Customs does business and should also greatly assist in the 
advanced collection of information for the targeting of high 
risk cargo to better address the terrorist threat.
    Because of this subcommittee's strong support, Customs 
received $130 million for ACE funding in fiscal year 2001 and 
$300 million in fiscal year 2002. That funding has allowed us 
to establish the fundamental design framework for ACE, to 
develop user requirements, and to begin programming initial 
capabilities which we expect to be deployed in the fall of this 
year.
    I want to thank this subcommittee and the Congress for 
their past support of ACE and ask for your continued support in 
approving the $313 million contained in the fiscal year 2003 
budget request. This level of funding will allow us to continue 
ACE development and most importantly begin to deliver on the 
first installment of ACE benefits to the trade community.
    The movement of ocean-going sea containers is a vital part 
of the U.S. economy. Indeed, 46 percent of all goods imported 
into the U.S. by value arrive at our nation's sea ports, mostly 
in containers. But as significant as sea container traffic is 
to the U.S. economy, the fact is that all industrialized 
nations rely heavily on containerized shipping.
    Today approximately 90 percent of cargo moves by containers 
between the world's largest ports. Over 200 million containers 
per year are now moved between those ports, constituting the 
most critical component of global trade. Unfortunately, ocean-
going cargo containers are also susceptible to the terrorist 
threat.
    Consider for a moment what would become of our nation's sea 
ports and global trade if a sea container were used to conceal 
and then detonate a nuclear device or other weapon of mass 
destruction. Simply put, the shipping of sea containers would 
stop. This would quickly bring the global economy to its knees.
    Commissioner Bonner has proposed a Container Security 
Initiative, CSI, which would establish a security architecture 
for the protection of global sea trade.
    CSI is designed to build a defense against terrorist 
smuggling using a combination of government resources both here 
and abroad and an unprecedented level of information sharing 
between Customs administrations, governments, and industry.
    So we must change our focus and alter our practice to this 
new reality. Custom services around the world must screen high 
risk cargo containers before they leave their port of shipment 
and catch weapons of mass destruction or other terrorist 
weapons before they have the opportunity to do their damage.
    We have already, Mr. Chairman, embarked on implementing 
this significant program.
    Here in the U.S. we are also working on another critical 
part of our strategy to push security beyond our physical 
borders. We are partnering with large importers and other 
members of the trade who see tight supply chain security as 
being in their best interest. We are redesigning programs with 
them such as the Customs Trade Partnership Against Terrorism, 
C-TPAT, and the companies are lining up to join that program.
    Under the C-TPAT program importers have voluntarily agreed 
to take steps to increase the security of their cargo from the 
foreign manufacturers to the U.S. border. In return for their 
efforts, we will reduce their inspections and other Customs 
compliance burdens.
    Some of the benefits to the importer are clear--fewer 
examinations, more predictable deliveries, reduced inventory 
needs, less physical threat, lower transportation costs, and of 
course improved security of their containers.
    Customs clearly cannot act alone to address the terrorist 
threat. We have been working with other key border security 
stakeholders like the Office of Homeland Security, the 
Immigration and Naturalization Service, the Transportation 
Security Administration and the U.S. Coast Guard as well as our 
international partners in Canada and Mexico. We are actively 
engaged in the Department of Transportation Security Working 
Group which is aimed at improving the security of sea 
containers entering the U.S. We are also participating in a 
multi-agency effort to develop a joint border security plan.
    Through these various efforts we are developing 
comprehensive strategies, procedures and plans, to maximize the 
use of existing resources and improve border security, to 
coordinate our enforcement activity and our responses to 
terrorist threats, and to collaborate on legislative 
initiatives.
    With the programs I have briefly outlined and new 
technology that we are purchasing, we at Customs envision a 
world in the not too distant future where all cargo, whether 
arriving by land, sea or air, will be segregated into two 
categories--low and high risk. Low risk cargo will be pre-
screened overseas and secured against tampering. High risk 
cargo, on the other hand, will receive extensive scrutiny.
    As with any proposal, implementation will not be easy but 
the size and scope of the tasks pale in comparison with what is 
at stake, and that is nothing less than the integrity of our 
global trading system.
    Even before September 11th this was the direction in which 
we were heading with our efforts to create a seamless border 
for global commerce. Now our agenda has taken on a much greater 
security dimension and a much greater sense of urgency.
    Our twin goals of increased security to address the 
terrorist threat and trade facilitation are more tightly bound 
than ever. In protecting America against the terrorist threat, 
we are looking not only to save lives, we are looking to save 
livelihoods.
    Working together I know we can and will succeed.
    I thank you for the opportunity to make this very brief 
statement and I would be more than willing to take any 
questions from the subcommittee.
    Thank you, Mr. Chairman.
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    Mr. Istook. Thank you, Mr. Browning.
    Mr. Laden.

                   Opening Statement of Michael Laden

    Mr. Laden. Thank you.
    Chairman Istook, Congressman Hoyer good morning. My name is 
Michael Laden and I would like to thank you for allowing me the 
opportunity to appear before you today. I am the President of 
Target Customs Brokers, Inc., a wholly owned subsidiary of 
Target Corporation. I am also the current chairman of the 
American Association of Exporters and Importers (AAEI), and an 
appointee to the Treasury Advisory Committee on the Commercial 
Operations of the U.S. Customs Service (COAC). Thank you for 
allowing me the opportunity to appear before you today to 
discuss the views of the U.S. international trade community on 
the fiscal year 2003 budget for federal agencies now under 
consideration. While I would rather be before you today to 
discuss matters of simplification, the atrocities committed 
against our nation on September 11th have preempted that 
discussion from the international supply chain.
    From the outset it is vital for the committee members to 
keep in mind that our industry is comprised of a very complex 
group of stakeholders; private and government, foreign and 
national. Today the U.S. Customs Service administers more than 
400 laws and federal regulations imposed on foreign commerce by 
more than 40 federal agencies and while I would rather be 
before you today to discuss matters of simplification, the 
atrocities committed against our nation on September 11th have 
preempted that discussion.
    That said, the committee should know that many of the 
regulations and laws governing our business are more than 200 
years old. Given the dynamic nature of modern commerce and the 
globalization of our economy, many of the regulations we 
operate under today are antiquated, rendering them incompatible 
with today's modern business practices.
    Simplification of onerous or outdated regulations designed 
to expedite the flow of legitimate trade will also result in a 
significant productivity savings for the U.S. Customs Service 
and other regulating agencies. This will allow those agencies 
then to optimize their resources, concentrating on more wanton 
violators and conspirators.
    At Target Corporation our Chairman is constantly reminding 
us that speed is life. Time really is money. A vast majority of 
retailers, manufacturers, and other commercial importers 
meticulously plan their inventories using the principles of 
just in time. Some intermodal transportation arrangements are 
so tightly synchronized that inventory replenishment is planned 
within hours.
    For a manufacturer, a delay may result in an assembly line 
going idle. For a retailer, a delay represents a lost sale and 
a disappointed customer.
    The rapid transmission and analysis of information is 
critical to the efficiencies with which government border 
agencies can perform their duties. This is particularly true 
for the U.S. Customs Service.
    The flow of legitimate trade and commerce into and out of 
the United States must not be impeded. In my humble and 
professional opinion, anyone who authors or promotes 
legislation requiring the physical inspection of 100 percent of 
all cargo coming into this country is misinformed.
    Given the technology and resources available today it is 
impractical and impossible to search 20 percent of the in bound 
conveyances and cargo, let alone 100 percent.
    The physical examination of a single ocean container can 
take two to three people up to five hours to complete. These 
examinations are not only time consuming but costly. The 
infrastructure at our land borders, airports and marine 
terminals is simply not adequate and cannot accommodate the 
massive quantities of cargo without becoming congested with 
shipments awaiting inspection.
    On Tuesday of this week Security Director Governor Ridge 
said it best, ``It is all about risk management.'' We must rely 
on greater intelligence gathered abroad and better risk 
assessment and targeting. Risk management and targeting is 
something that the U.S. Customs Service is very well versed in 
and has been doing successfully for years.
    Soon the Customs Service will have new tools at their 
disposal to assist in targeting and risk analysis when the 
Automated Commercial System, otherwise known as ACE, is 
deployed.
    I would like to personally thank this committee and join 
Deputy Commissioner Browning in thanking them for all the 
support you have rendered to the rapid development and 
deployment of ACE.
    Lastly, I would like to update you on the recent work of 
the Treasury Advisory Committee on the Commercial Operations of 
the U.S. Customs Service, otherwise known as COAC, and the 
collective Trade/Customs effort to address security concerns.
    The 20 member COAC is a compilation of importers, carriers, 
brokers, ports and trade attorneys. This group meets quarterly 
to provide advice to Treasury officials on Customs matters of 
particular interest to the trade community. During the November 
meeting Under Secretary of Enforcement Gurul& briefed COAC 
members on issues related to supply chain security and then 
authorized COAC to form a technical advisory team on border 
security.
    At the January 25th COAC meeting the technical advisory 
group presented a comprehensive report containing more than 50 
recommendations for enhancing supply chain security. If it has 
not already been sent over, I would urge members of this 
committee to secure a copy of this report from Treasury. This 
same group will also publish a report on security technologies 
in the coming months.
    As the technical advisory team was working to prepare their 
report, Customs was designing the Customs Trade Partnership 
Against Terrorism, C-TPAT. This important program is a next-
generation voluntary partnership between the private sector and 
the Customs Service. C-TPAT was modeled after the very 
successful Business Anti-Smuggling Coalition, otherwise known 
as BASC, created by Customs in the mid '90s to combat the flow 
of illicit narcotics from drug-producing regions.
    C-TPAT was officially launched two days ago in a ceremony 
at the Ambassador Bridge with Secretary O'Neill, Governor 
Ridge, Commissioner Bonner, and the CEOs from the seven C-TPAT 
charter members--General Motors, Ford, Daimler Chrysler, 
Motorola, BP America, Sara Lee and Target Corporation.
    The trade stands ready to work closely with the federal 
government to improve security at our borders. And based on the 
initial results and the interest in C-TPAT from some of 
America's largest importers, I predict great success for this 
program.
    Mr. Chairman, let me thank you for the attention this 
committee is giving to the security problem and for giving me 
an opportunity to appear here today and offer my views. I am 
sure that I speak for the entire United States international 
trade community when I say that we are deeply concerned about 
security and determined to prevent U.S. international trade 
from being exploited for inappropriate purposes. We are eager 
to work with the Congress to accomplish this noble and 
patriotic goal.
    Thank you.
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    Mr. Istook. Thank you, Mr. Laden.
    Mr. Smith.

                    Opening Statement of Kevin Smith

    Mr. Smith. Mr. Chairman and members of the committee, my 
name is Kevin Smith, and I am the Director of Customs 
Administration for General Motors Corporation. I want to thank 
you for giving me the opportunity to be here today to share 
GM's views on the movement of goods through U.S. ports of 
entry.
    As you are aware, the motor vehicle industry is today 
highly competitive in all areas but none more than in the area 
of cost. In response to the need to be cost competitive the 
industry has turned more and more to reducing its inventories 
of parts and building vehicles to meet specific customer 
orders. As a result, the motor vehicle industry has become 
highly integrated with parts manufacturers in the three 
countries supplying vehicle assembly plants across borders.
    Given the close proximity between the plants, nowhere has 
this practice become more important than on the border with 
Canada. The primary border crossing points in Michigan and New 
York are vital to our industry. As a result you can appreciate 
the impact the crisis of September 11th had on our industry 
when the increased security procedures were implemented on the 
border with Canada.
    The border crisis created on September 11th brought 
together many of the people, companies, local, state, 
provincial, and federal agencies that play a role in creating 
and maintaining an effective and efficient border. The 
cooperation and dedication to resolving the immediate delay 
problems while maintaining the heightened level of security was 
tremendous.
    Despite these notable efforts much work remains to be done 
to ensure that both the appropriate security and a reliable and 
efficient border is created. This is because the fundamental 
problems behind the recent border crisis remain unsolved. These 
are problems that pre-date the crisis and have been growing for 
a long time.
    While our written testimony addresses each of these 
critical areas, I will limit my remarks here to two of them.
    The status of the Customs systems and programs has been an 
issue of continuing concern since the passage of the Customs 
Modernization Act of 1993. Strongly supported by the trade 
community and the motor vehicle industry specifically, the 
legislation was expected to provide critical improvements to 
the Customs import process as well as the implementation of a 
national customs automation program that would better align the 
Customs process with standard business practices.
    Unfortunately the introduction of the promised systems and 
new programs has been continually delayed and has not kept pace 
with the developments in trade. As a result we are seeing 
growing congestion and problems at our borders as the volume of 
trade continues to increase. Although we have been disappointed 
in the past with the pace at which new Customs automated 
systems and programs are being developed, we are impressed with 
the number of prototypes. GM has participated in one of these 
prototypes, a new automated Customs process for entering and 
releasing goods crossing land borders. It is called the NCAP 
prototype.
    This new system is based upon the use of electronic data 
used in our normal business processes. What is more, this new 
system is the first fully productive automated system that 
permits importers like GM to electronically provide advanced 
import data to Customs before goods are shipped and arrive at 
the border.
    The ability to get this type of information for the 
purposes of improving security in the border is tremendous. 
Systems such as this, we believe, demonstrate what must be our 
ultimate goal--better security and more efficient borders.
    To encourage the investment in these new systems and 
programs the establishment of dedicated lanes at the border to 
process known, reliable and low risk shipments is needed. Given 
the events of September 11th, though, these types of changes 
alone will not be enough. With the need for increased security 
and the demands placed on our borders we must go beyond how it 
is viewed today and how the Customs Service operates.
    The goal of our current security needs we believe requires 
that we make all of North America safe. The governments of 
Canada, Mexico and the U.S. must work together on ensuring our 
mutual security at the external points of entry and where 
possible before these points.
    Again, I would like to thank the committee for the 
opportunity of appearing here today and I would be happy to 
answer any questions.
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    Mr. Istook. Thank you, Mr. Smith.
    Ms. Fleishman.

                  Opening Statement of Mindy Fleishman

    Ms. Fleishman. Good morning Mr, Chairman, Congressman 
Hoyer. My name is Mindy Fleishman and I come to you today 
speaking on behalf of the U.S. members of the American Iron and 
Steel Institute. I am also proud to say that my testimony has 
the support of the entire American steel producing community, 
the Steel Manufacturers Association, the Specialty Steel 
Industry of North America, the Committee of Pipe and Tube 
Imports, as well as the United Steel Workers of America. We are 
grateful for the opportunity to testify today.
    Before I begin I would just like to add that I and members 
of our AISI Steel Customs Committee have had the privilege of 
meeting with Mr. Winwood several times over the course of the 
years and we do share in your recognition of his contributions 
to this country and wish him a very happy retirement.
    We believe in the steel industry that the strict commercial 
enforcement by U.S. Customs is critical to free and fair trade 
in steel. The President has established Section 201 remedies 
covering 13 steel product lines. Also he is initiating a much-
needed program of steel import licensing and monitoring to 
ensure that these remedies are not undermined.
    I noted that in yesterday's testimony here before you 
Treasury Secretary O'Neill said, and I quote, ``The strains on 
the Customs Service are growing increasingly severe every 
day.''
    We believe that that statement was applicable prior to 
September 11th and the horrific events of September 11th made 
that statement all the more critical and serious. We share this 
concern with Treasury Secretary O'Neill, and I have come to 
discuss with you today three steel-related issues.
    Number one, we are asking this subcommittee to provide the 
essential funds for new staff and other resources dedicated 
specifically to steel customs enforcement so that Customs can 
meet its additional 201 enforcement responsibilities on top of 
the pre-existing over 200 antidumping and countervailing duty 
cases that exist on steel.
    At U.S. Steel I work very closely with our metallurgical 
engineers, with our attorneys, and with our sales offices to 
prepare these trade cases on steel.
    In the 201 case our company alone received over 500 
specific product exclusion requests, and these had 
specifications attached to them that even our metallurgical 
engineers had trouble understanding. They came with physical 
tolerances that our engineers said cannot even be measured.
    So I know again, how complicated these cases can be and 
what a horrific task Customs has ahead of them to enforce these 
cases.
    Approximately 150 of these exclusions have been granted to 
date and the USTR is going to review the balance. Again, the 
500 only covers the carbon steel industry exclusion requests. 
Overall I am told there have been a thousand exclusion 
requests. By July 3rd, USTR will announce how many more over 
the 150 will be granted and again, it will be up to Customs to 
enforce this.
    I have worked on the Customs Committee of AISI for eight 
years. I have made quarterly visits to the largest steel 
importing ports in the country. I have met with the Chicago 
Strategic Trade Center for Steel twice per year and with 
Washington Customs officials twice per year and I have never 
worked with a more dedicated or talented group of people. But I 
am here to tell you today that without your help, without 
additional resources, they will not be in a position to enforce 
the 201 remedies.
    The second item I wanted to discuss with you today is the 
Customs Education and Training Partnership that the AISI 
Customs Committee has had with Customs for the past 35 years. 
What we do on these training seminars is we bring experts from 
throughout the steel industry, metallurgical engineers across 
the product lines, trade attorneys, and I represent the 
commercial view for Customs on the trade cases. And our 
resources are severely strained right now to continue this 
program. Because of the financial meltdown of the American 
steel industry, a number of companies can no longer afford to 
send their company representative to participate in these 
seminars. That has increased the burden on those of us who are 
still participating. Again, we feel that it is within the power 
of this committee to dedicate some resources specifically for 
this Customs training partnership with the steel industry and 
we are asking for that today.
    The third item that I wanted to talk about was the steel 
import monitoring and licensing system that the President has 
initiated as part of the 201. It is being initiated to cover 
only those products that are covered by 201 remedies for a 
period of three years and one day.
    I have to share with you one of the most humiliating 
experiences I have had in my career was, I am a member of the 
AISI North American Steel Committee. This is a committee made 
up of AISI steel producing members from Canada, Mexico and the 
U.S. We meet approximately three times per year to discuss 
common trade concerns throughout the region.
    One of the meetings was dedicated to each of us putting on 
a presentation of what form of steel import monitoring and 
licensing system we have in our countries. The Mexicans put on 
a very extensive presentation and they get real-time notice of 
imports that are heading their way. The Canadians put on a very 
detailed presentation talking about their import licensing and 
monitoring system. Steel that is imported into Canada must be 
permitted. It is not, any kind of obstacle to trade. No one is 
denied a permit. They are very easy and very inexpensive to 
obtain. But what this does is, these permits are good for 30 
days.
    So the Canadian steel industry has let's say a one to 
thirty day heads-up on the steel that is headed their way 
because the Canadian government publishes on a web site which 
they update weekly, the steel product, country of origin, the 
tons and the dollar value of the steel that's headed their way.
    Then it came time for the U.S. delegation to discuss our 
import monitoring and licensing program and really the only 
thing we could say is that we get preliminary steel import data 
three to four weeks after the steel has arrived here, and that 
just simply is not adequate. And if Canada and Mexico and the 
European union can have steel import monitoring systems, we see 
no reason why we cannot.
    We know that there is movement underway from some of our 
friends in congress to codify this steel import monitoring and 
licensing system. We hope that you will join in that support.
    The beauty of this is that we feel it can be done. The cost 
of this can be covered by the permit fee which would be a very 
modest one.
    Again, I thank you very much for this opportunity to appear 
before you today.
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            STAKEHOLDER INPUT TO OFFICE OF HOMELAND SECURITY

    Mr. Istook. Thank you, Ms. Fleishman, and I appreciate from 
each of the members of the panel some of your extra remarks 
because I certainly picked up a lot of things beyond what had 
been in the written testimony already submitted.
    Let me start with kind of a big picture question because 
the overriding issue of what we want to talk about is balancing 
the need for security with the need for trade. We do not want 
trade without security. We cannot prosper if we have security 
without trade. We must find the best ways to strike the 
balances.
    You I think, Mr. Smith, referred to--and Mr. Laden might 
have also, and maybe Mr. Browning as well--referred to advisory 
committees such as within customs with the advisory committee 
on commercial operations and so forth, making recommendations 
on border security and balancing these interests. Customs has a 
setup for that. I think there are other government agencies 
that have parallels to that.
    However, now a lot of the coordination on this has been 
delegated to the Office of Homeland Security. Perhaps it has 
created some infrastructure of which I am unaware at this time, 
but I wanted to ask the witnesses first, is there a system and 
what is it that is a structure to make sure the Office of 
Homeland Security is receiving input from the stakeholders in 
trade who are going to be so dramatically influenced by the 
security issues? Is there a system formal, informal? What is 
it?
    I am not sure who to refer to first on that. Mr. Smith, Mr. 
Browning, you are both kind of reaching out.
    Mr. Browning. Sometimes it may not be good to volunteer, 
Mr. Chairman, but----
    Mr. Istook [continuing]. Service or----
    Mr. Browning [continuing]. Service, sir.
    Actually, in fact, and I do want to emphasize this and I 
apologize, I had to cut my statement considerably.
    Mr. Istook. That is fine.
    Mr. Browning. There has been a good deal of cooperation 
within all the federal agencies involved in this matter, 
probably unprecedented cooperation from my perspective of 25 
years of government service.
    I have the privilege of sitting on what is referred to as 
the Deputies Committee which is chaired by Admiral Abbott at 
the Office of Homeland Security. And indeed, our engagement in 
the Container Working Group has been a vehicle through which we 
were able to take some of the input that we received from our 
private sector stakeholders like COAC who were very 
instrumental in helping us to develop the recommendations that 
are the foundation for C-TPAT. We have taken those 
recommendations and basically exported those recommendations 
into the Homeland Security Deputies' process, so that we have 
made them aware from our perspective what our stakeholders see 
are important in terms of container security, and in terms of 
the elements and components of securing the supply chain from 
end to end.
    So I think there are a number of vehicles that exist within 
the governmental structure, where we feel the obligation to 
carry to that structure input that we receive from our private 
sector stakeholders.
    Mr. Istook. I understand that. What I was trying to 
question though is whether there is any direct input from the 
actual stakeholders in trade as opposed to the input into the 
Office of Homeland Security comes totally from other federal 
agencies, you know. So you have obviously a multi-level 
filtering mechanism that we can discuss what gets through or 
not.
    Mr. Browning. The short answer is yes because there is the 
representative to the Deputies Council who receives input from 
various trade communities.
    Mr. Istook. Who is that?
    Mr. Browning. I do not remember the gentleman's name.
    Mr. Istook. We are talking about a private sector 
representative?
    Mr. Browning. No. he is formerly private sector, formerly 
with Corning but now part of Homeland Security.
    Mr. Istook. But that is my whole question, whether Homeland 
Security has any mechanism for receiving direct input from the 
private sector.
    Mr. Smith, you wanted to address that?
    Mr. Smith. Yes. We had a meeting to discuss the issue of 
security in Detroit through the efforts of the Detroit Regional 
Chamber of Commerce, there were meetings held in the offices of 
the mayor of the city of Detroit and representatives from the 
trade community were invited to participate and discuss issues 
related to the border in a number of regional representatives 
or stakeholders in the trade community from the Bridge 
Authorities to importers to brokerage companies, Customs 
brokerage companies were involved.
    Mr. Istook. Did that address, for example, I know that 
there are some references in the testimony about concern over 
the potential consolidation of Customs with other border-
related agencies such as Immigration and Naturalization 
Service. Big picture issues such as that. Was that part of the 
discussion in Detroit?
    Mr. Smith. No, it was not. That was not discussed. What we 
discussed were issues similar to what we have discussed here 
today.
    Mr. Istook. Nuts and bolts type issues as opposed to 
framework or big picture issues.
    Mr. Smith. That is correct.
    Mr. Istook. So to your knowledge, and Mr. Laden or anyone 
else, is there any mechanism for that at this time?
    Mr. Laden. Not to the best of my knowledge, Mr. Chairman. 
And I might add, and it is not to be critical, notwithstanding 
Deputy Commissioner Browning's remarks and the recent 
appearance in Detroit of Homeland, this is to the best of my 
knowledge their first appearance, and I would suggest that it 
is a little late in the game. We began convening meetings at 
Customs headquarters on security under the guise of the COAC 
technical advisory group back in October and convened those 
meetings all the way through the COAC meeting in January.
    Members of that committee kept looking for someone from 
Homeland and kept asking where are representatives from 
Homeland, they should be involved in this process.
    If they were there they were invisible to us. We had no 
contact with the committee until just this week.
    Mr. Istook. That is something obviously that we are trying 
to have some discussions with Homeland Security to try to make 
sure that there is a mechanism of the stakeholders, especially 
on the big picture such as what happens to trade were Customs 
Service to merge with something else. That is a very major 
question I know in the community right now.
    I think, Mr. Laden, you touched upon that in your written 
testimony. Would you like to elaborate on what you see are the 
implications, the benefits or the detriments of such a 
potential merger?
    Mr. Laden. Just briefly. I think I speak on behalf 
certainly of Target Corporation and then the American 
Association of Exporters and Importers. I can see some benefit 
in removing redundancies and increasing efficiencies by making, 
if you will, a super agency along the border. While I have not 
seen any formal plans in how that whole thing would work, I 
think people or cargo crossing our borders should be and can be 
inspected by a single super agency, if you will, in charge of 
border security.
    However, we must understand that 99.9 percent of the cargo 
and people coming across those borders are legitimate. And I 
have read reports about perhaps collapsing those three agencies 
into one and then moving it over under Department of Justice. I 
would tell you from my platform today and without further 
details and knowledge, I would be averse to moving them under 
Justice. I think the Customs Service today is appropriately 
reporting up under Treasury. They do collect and handle tax or 
duties. They also are no strangers to enforcement, nor is 
Treasury. They have a very robust group of enforcement agencies 
reporting up through them and I think they do a fine job in 
both risk assessment and other risk management efforts in 
monitoring the activities along our border.
    So yes, I do believe it would be possible to look at some 
scenarios where you could in fact collapse those three agencies 
into one and then have a single entity that's responsible for 
clearing cargo or human beings as they come into the country.
    At a minimum I do believe that those three agencies need to 
begin a better dialogue or more communication with each other 
and sharing intelligence and the like.

             JUSTICE DEPARTMENT ROLE IN INTERNATIONAL TRADE

    Mr. Istook. Just one follow-up on that and then I want to 
recognize Mr. Visclosky in a moment.
    When you mentioned, it is not in opposition to the 
potential merger, it is the question about whether the parent 
department would become the Department of Justice.
    I know of course Treasury Department has extensive 
involvement in trade issues and international trade, the 
revenue and the monitoring and regulation of it. But is there 
any existing role of the Justice Department regarding 
international trade
    Mr. Laden. In a very limited sense, yes. I believe some 
agencies that Customs interacts with in conducting the flow of 
trade report up through Justice. So Customs essentially is 
enforcing laws of entities under Department of Justice as it 
relates to international trade, yes, sir.
    Mr. Istook. And you are talking about laws on restricted 
material?
    Mr. Laden. Restricted materials, exports, yes, sir.
    Mr. Istook. But that would be the extent of it to your 
knowledge.
    Mr. Laden. To my knowledge, yes.
    Mr. Istook. Mr. Visclosky.

                         TRADE RELIEF FOR STEEL

    Mr. Visclosky. Thank you very much, Mr. Chairman.
    Commissioner Browning, the President has posed a 201 trade 
relief for steel, and my question to you is what role will 
Customs play in monitoring this system?
    Mr. Browning. Actually I was following with a great deal of 
interest Ms. Fleishman's remarks in that regard.
    We have, since late October or early November, been in 
consultations with USTR and the Commerce Department on how to 
address the sanctions regime that we anticipated would be 
signed by the President in early March. Through those efforts 
we were able to prepare as best as possible.
    But as has been indicated, the sanctions regime is 
extremely complex. 102 countries are exempted from the process. 
There are 14 categories of importations that have to be 
addressed. There will be an imposition of somewhere between 30 
percent generally and in some cases eight to 15 percent. The 
collections that we anticipate from imposition of the 
additional duties, on top of the accountability and antidumping 
duties that would already be applicable in general duties, will 
take our collection from about $145 million up to as much as a 
billion annually.
    There will be a great deal of opportunity and incentive to 
try to circumvent the requirements.
    We have, however, taken the measures to automate our system 
so that we can, first of all, identify the importations and 
track those importations. We are going to be in a position 
where we can give discrete numbers rather than have them fall 
into our general importation categories. So this is a more 
technical 900 series than we would use in the normal 
classification series.
    We have alerted all of our enforcement components to be 
mindful of the fact that there will be circumventions. And to 
use the existing vehicles available to us to impose penalties 
where we find that there is in fact circumvention.
    Mr. Visclosky. It will become more complex because the 
administration is currently serving up to a thousand exemptions 
on top of the solution you have already alluded to.
    Would it be easier to implement if as far as the licensing 
program that is also going to be put in place, expands to all 
steel products as opposed to just those targeted under 201.
    Mr. Browning. Unfortunately I cannot answer that. I will 
get an answer back to you. And the reason I say I cannot answer 
is because I am unclear as to exactly what Commerce intends to 
do with the licensing regime. They are still sort of muddling 
through that process right now.
    Mr. Visclosky. As far as the complexities you allude to and 
the fact that people in Customs as I understand move from 
product line to product line, there has been a history of great 
cooperation between Customs and the industry as far as training 
and information. Do you anticipate that is going to continue? 
And as far as getting ready for this, because it is going to be 
a significant additional burden to you, do you need additional 
funds, either for implementation of the program or for training 
your personnel that are not in your budget request for '03 that 
should be?
    Mr. Browning. I think you're absolutely right, and we do 
want to extend to the steel industry our thanks for the 
training and the cooperation. There has been a real affinity 
between the Customs Service and steel on this issue.
    I think actually we need to put the question a little bit 
in context, however. When we look at the volume of importations 
that are coming in, roughly 70 to 80 percent enter into just 
ten ports of entry, by and large. So to our advantage we have 
the expertise resident in those ports of entry. We have the 
people who are there and mindful of what has to be done and 
they should be in a position where they can do that.
    The staffing issues are in fact complicated by the level 
one alert and the other activities that staff are being pulled 
away to try to deal with. We are trying to move as quickly as 
possible to fill those gaps. Our hiring plans have us in a 
position, with both our regular appropriations and the 
supplemental where we should be able to bring on as many as 
1300 additional employees both in the inspector and agent 
category, and we are moving very rapidly to bring those people 
on. About a third of them are already hired and the rest are 
starting to come out of our----
    Mr. Visclosky. Do you think that would be sufficient as far 
as the monies you have in hand and the budget requests of '03 
to meet all of those commitments plus steel?
    Mr. Browning. I think that is what we anticipate we can 
handle at this time to get out the door, on the line to deal 
with the issues that we have before us right now, yes, sir.
    Mr. Visclosky. So if a problem occurred it would not be, 
from your anticipation today sitting here, be because you did 
not have the money to do the job correctly?
    Mr. Browning. At this point I would think that would be our 
answer, yes.
    Ms. Fleishman. Congressman, if I may jump in. I am Mindy 
Fleishman. I am not sure how much of my testimony that you 
heard. But one of the purposes for my being here today is to 
ask this committee to allocate resources specifically earmarked 
for the Customs training program that is the partnership 
between industry through AISI's Customs Committee and U.S. 
Customs.
    What we would like to do is increase our visits to the 
ports. We would like to be in a better position to make sure 
that Customs has the most timely, up to date information on the 
status of our trade cases. We would like to expand the staff 
from the steel industry who participates in these training 
seminars.
    We have lost a lot of expertise as a result of the 
financial meltdown of the steel industry, and if we could find 
a way to pay the travel expenses of those experts I think the 
companies would be very willing to donate the time of these 
experts to come on visits.
    Mr. Visclosky. If you have a specific dollar amount and a 
discrete description of that program if you could submit that 
in writing for the members of the subcommittee, as well as in 
fairness to Commissioner Browning.
    Ms. Fleishman. We would be very happy to do that and 
appreciate the opportunity.
    Mr. Visclosky. If I could, Mr. Chairman, just the last 
question I would have for Ms. Fleishman is, what is your 
opinion as far as the licensing extending to all steel 
products?
    Ms. Fleishman. We think that that is absolutely critical. 
Because of, for one thing there is a terrific incentive to 
cheat on the 201s and we really need to have a handle to 
monitor all of the steel imports that are coming into this 
country.
    As I said before, the Mexicans do it, the Canadians do it, 
the Europeans do it, and I see no reason why the United States 
could not do that.
    Mr. Visclosky. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Istook. Certainly. I was prepared to give more time. 
Our problem is the floor votes. We have two votes occurring on 
the House floor.
    Was there anything else you wanted to ask before we have to 
break for those two votes?
    [No audible response.]
    I have a long list of things to get into but with two votes 
on the floor by the time we get there and come back we will 
probably be most effective if we take our break now. It will 
probably be, getting there and back with the two votes will 
probably consume approximately 15 minutes. So as soon as I 
return, we will resume at that time then.
    We stand in recess.
    [Recess.]

        ACCELERATED FUNDING FOR AUTOMATED COMMERCIAL ENVIRONMENT

    Mr. Istook. We will come back to order. Thank you so much 
for your patience. I regret that we have votes that interrupt 
us during hearings.
    I wanted to discuss the subject of the ACE system, the 
Automated Commercial Environment that I think just about every 
witness referred to in their testimony.
    I know that to gain the benefits of technology in being 
able to process items at the border much more quickly, when you 
have to interact with dozens of other government agencies it is 
not a simple computerizing task to do that. ACE is a complex 
and expensive system. The subcommittee as I think you know 
dramatically accelerated funding in the last year to take the 
contemplated development time from 14 years down to five and we 
are trying to see if we can get it down further.
    I wanted to ask, because there are references in the 
testimony, one, to concerns with whether the other federal 
agencies with whom ACE must interface are diverting the 
necessary resources to make that an effective communication 
between them or not, because obviously if you have advanced 
capability on one end but you are still communicating with a 
horse and buggy system on the other, the benefits are going to 
be limited by that.
    There was also some question raised about whether there 
needs to be some prioritizing within the development of the ACE 
system to put a higher priority on security-related aspects of 
it.
    So I would like to ask each of the witnesses that would 
like to do so to comment on these and any other aspects of the 
ACE system and perhaps elaborate if you think there ought to be 
some more emphasis on the security elements, if you can be 
specific what you mean with problems with other agencies. 
Again, specificity is what we are after.
    Mr. Browning.

                        SECURITY ASPECTS OF ACE

    Mr. Browning. Thank you, Mr. Chairman.
    Again, as I indicated in my opening remarks we do 
appreciate the support the subcommittee has given to the 
development of ACE. As you indicated, we are on track to have 
that system deployed within hopefully four to five years 
depending on what the plus-ups look like over the next several 
budget cycles.
    Let me say, sir, that we see ACE as an extremely important 
component of not only our commercial trade environment but also 
of our security environment.
    One of the things that has been most beneficial to us is 
being able to pull back into the ACE process the ITDS, the 
International Trade Data System, which as you know will link 
state and local and other agencies into our trade system.
    We know there are a number of pieces of legislation in 
which you are trying to deal with data as a means to shore up 
our security initiative nationally. We think that what ought to 
be occurring here is to really look at ACE as potentially that 
portal to address not only trade but also security elements. It 
is well along in its development. It is clear that we have 
invested the necessary resources to develop the infrastructure 
and deploy this system and indeed, if all goes well and we 
intend to make sure that that happens----
    Mr. Istook. All that is just part of the overview. But I am 
looking, we are all familiar with the overview. I am looking 
for the specifics regarding the interface with the other 
agencies and the sequencing, the prioritizing of different 
components of ACE, especially as it relates to security.
    Mr. Browning. We have made some adjustments on the 
sequencing of the security components of ACE and those 
adjustments will in fact get us to where we need to be.
    Mr. Istook. What are those adjustments?
    Mr. Browning. One of the issues, and this is one that you 
have been a great deal of help to us on is the advanced 
manifest piece. We are moving that piece forward so we can be 
ready to move that into production sooner than we had initially 
anticipated.
    Another part of that--let me back up a step because I want 
to also address specifically your issue about other agencies.
    We have some concerns about whether the other agencies with 
respect to ITDS have in fact taken a serious look at this and 
started to invest the funds that will be necessary to make then 
ready when we are ready to roll out the ITDS piece of ACE.
    I can get you specific information on where we think those 
problems are and I would in fact like to do that in writing so 
I can be very clear on that, but there are some concerns.
    Mr. Istook. I realize you cannot be thorough off the top of 
your head, but rather than waiting on writing, if you can give 
me some idea of if there is a couple of agencies or departments 
that are crucial to this, that stick out the most as having 
some problems, who are they and what are the problems?
    Mr. Browning. I think we would include the departments that 
play the major role in the process. FDA is one that certainly 
has to be pulled into this process quickly. Transportation is 
one that certainly has to be pulled into this process quickly. 
Although the good news is that Under Secretary McGaw and 
Commissioner Bonner have had a dialogue on this information 
sharing and those discussions have gone extremely well.
    I think that those are certainly examples of some of the 
agencies that need to be pulled into this process fairly 
quickly.
    Mr. Istook. Thank you.
    Mr. Laden.
    Mr. Laden. I would add to that list, and I appreciate the 
fact that Commissioner Browning will get back to the committee 
with a comprehensive list of agencies. FDA, in addition Fish 
and Wildlife, EPA and FCC come to mind immediately. Those are 
four agencies that Customs and the Trade have significant 
contact with as we try to navigate the borders.

                    INTERNATIONAL TRADE DATA SYSTEM

    I would also join with Mr. Browning in his comments about 
ITDS and the necessity for a single portal, single window, 
single system by which the federal government can communicate 
processed data as it relates to foreign commerce.
    Mr. Smith. I would add that the ITDS initiative has had its 
ups and downs over a period of time. I think it was a wise 
decision to bring that back underneath the control of Customs 
and we will integrate that fully with the ACE process as 
opposed to the way it was done in the past where it seemed to 
be competing.
    The participation of the agencies has over the time period, 
because this has gone on for quite some time, and I would point 
out that the original National Customs Automation Program was 
authorized by the Modernization Act of 1993 and that is really 
when this saga began. The participation of the individual 
agencies has ebbed and flowed over that period of time. A 
number of the critical agencies are actively participating, but 
as Mike made earlier reference to, Customs enforces laws and 
regulations for over 40 agencies. I think at its peak 14 of 
those agencies were actually actively participating and that 
has actually dropped down to believe fewer than that.
    The real issue becomes if they don't have the funding and 
they don't have the infrastructure in place to receive this 
data, then you are just basically sending data to a black hole 
and if they are still going to the insist on you handing them a 
piece of paper, then we have not really accomplished anything. 
So it is important that these agencies get into this.
    The critical ones that Mike made mention to were certainly 
the FDA, the FCC, DOT, EPA. In addition to that the Bureau of 
Census. That is very important. The Customs Modernization Act 
and ACE project created programs, things called Importer 
Activity Summary Statements which provide, permit the 
consolidation and filing of information on a monthly basis as 
opposed to a daily basis. Limitations related to how that can 
be done because Bureau of Census computers cannot accommodate 
it, are an important issue. They have participated throughout 
the ACE development but it is an area of concern. I do not know 
where they stand with regards to their funding and being able 
to accommodate the new ACE program, but it is an area which I 
would have some concern about.
    With regard to the prioritizing of security, certainly that 
is a priority. We believe that programs like NCAP where we are 
able to pre-file information with Customs prior to goods, when 
we actually contract for goods we can begin giving the 
government information about who our supplies are, what type of 
products we expect to be importing from them. But the ability 
to give that to the Customs Service and therefore the other 
agencies is obviously critically important.
    We think it should be able to be used to enhance security a 
great deal. If you know who is coming before they arrive you 
can certainly do threat and risk assessment against them and 
make judgments.
    With regards to the prioritization, they have the ACE 
program broken into four increments and some of these new 
release programs are in increment one, release two. We are 
happy to see that. It shows us that they have been given 
priority.
    What I would encourage here as I have encouraged the 
Commissioner and the Deputy Commissioner and others is to 
ensure that those types of programs we see as being very 
supportive of better security, continue to be given a priority 
and there be an emphasis put on them.
    That is pretty much a quick overview of ITDS and the ACE 
project and what we--When it is done, where we see it today, 
and what we would like to see it head in the near future.

                  STEEL IMPORT SPECIALISTS AT CUSTOMS

    Ms. Fleishman. On behalf of the steel industry, we have 
been monitoring the development of ACE with great interest over 
the years and as the Assistant Commissioner indicated, it is 
going to be four to five years by the time it is up and 
running, and of course that is going to be beyond the period of 
the 201 which is why, not to beat a dead horse, we strongly 
believe that we need more steel import specialists at Customs.
    With regard to data, we have been badgering our friends at 
Customs through the years that there is no reason why the 
import data that they collect cannot be released in a more 
timely manner, especially when ACE is up and running. But of 
course what we learned is that the obstacle to that is Census. 
It is up to Census as to when the data is going to be released.

         ROLE OF CENSUS BUREAU IN PROCESSING IMPORT STATISTICS

    Mr. Istook. Would you elaborate on the role of Census?
    Ms. Fleishman. My understanding is that of course Customs 
are the collector of import data, but that data is passed on 
from Customs to the Department of Census and they are the ones 
who release the import statistics on a monthly basis.
    So that has been the obstacle, the stumbling block we have 
run into in terms of getting more timely release of import 
data.
    Also we are hoping that when ACE is up and running that 
will enhance our ability to have a steel import monitoring and 
licensing system that covers all of the steel products.
    Furthermore, we certainly believe in homeland security and 
we recognize the importance of that, but we also feel that 
strong legal and commercial enforcement go hand in hand with 
national security.
    Mr. Istook. Let me ask Mr. Laden, you referred to data that 
goes into a black hole of course if you do not have the system 
on the other end of the ACE system. Do you understand that it 
would not be able to interact with legacy systems that the 
other agencies would have? I pose that you and Mr. Browning 
also.
    Mr. Laden. I do not know if I have the technical expertise 
to necessarily answer that, but based on the sophisticated 
approach they are taking with ACE it is my understanding that 
it would not be compatible with any of the other older legacy 
systems.
    The system that Customs operates for example under today, 
their own legacy system, ACS, yes, was done in Cobal and that 
language is pretty much obsolete now. I think many of the other 
legacy systems are coded and written under some obsolete 
technologies that would prevent them from interacting with ACE.
    Mr. Istook. Mr. Browning, do you have some information on 
that?
    Mr. Browning. I think that is my understanding also that 
there would be some difficulty. Again, I do not have the 
technical expertise to give you all the explanation, but I 
understand there will be some difficulty.
    We have been pressing hard with our other partners to get 
them engaged in this process and again I think in truth, one of 
the difficulties is as was indicated, there were ebbs and flows 
in terms of this work. I think now people are starting to get a 
little more interested in the fact that we may in fact at the 
end of the day have a deliverable so I think we are starting to 
get their interest and we are going to press hard to get them 
to be involved in this process again, but there would be some 
difficulties, is my understanding.
    Mr. Istook. That certainly is something that we will make 
some further inquiry into. There is a severe difference between 
a total inability to communicate and just a limitation on how 
well you can communicate. I hope, I would like to see upgrades 
of everything to handle the needs, but I would certainly hope 
there would be at least some intermediate ability to have, 
albeit a lesser amount, but to still have interaction with the 
legacy systems and the other agencies until they come up to 
speed. We will certainly delve into that more.
    I have some other questions, but I want to recognize first 
Mr. Sherwood.

                    SECURITY AND TRADE FACILITATION

    Mr. Sherwood. I have a question for the three 
representatives of industry here. And by way of prefacing that, 
I want you to understand that all of my experience is in 
private industry. I have only been doing this job in the last 
couple of years, so I think I underhand very well the problems 
that you would face in the import of your goods and just in 
time inventory and the fast and rapid and accurate movement of 
your goods. I know that is the lifeblood of your corporations. 
I was a General Motors dealer for years and so I know what that 
is like. Steel has been at the top of our list and everybody 
knows about Target. So I think I understand your problems.
    I am a very limited government person. But if there is 
anything that the government has the responsibility for, it is 
our defense and protection. And I am interested in just how 
safe we think we can really be by Customs giving industry all 
that leeway. Customs has a terrifically difficult job in my 
estimation in a time like this since 9-11. They're tasked with 
protecting us and also enhancing the flow of trade. I think 
those two missions might be counterproductive. I am not sure 
they can be done by the same person, buy the same organization, 
and the people who have testified here disagree with me on 
that.
    But I would like you to expand on just how safe, and 
remember, this is the security of this country we are talking 
about. How well do you know your suppliers? What keeps 
something we do not really want to come in from coming in from 
one of your trusted suppliers who had a bad apple in their 
organization or somebody got bribed? I think it is a very 
serious issue.
    Mr. Smith, do you want to lead off?
    Mr. Smith. Yeah, I will be happy to comment on your 
question.
    As we are all searching for ways to deal with this issue, 
one of the avenues we have used is the Customs Trade 
Partnership Against Terrorism. But my experience has found it 
has been very interactive. I do not feel like Customs has just 
said here, you be responsible for security. Through signing the 
Memorandum of Understanding, through doing the reviews that 
they asked that be done related to your supply chain security, 
to submitting that to them, it being subject to review, it has 
been an interactive process so I guess I do not feel that it 
has just been turned over to us and say here, you in private 
industry bear this responsibility.
    As this thing grows and what we need to do is make sure 
that everyone in the supply chain that has a role or is a 
stakeholder in it, whether it is carriers, bridge authorities, 
Customs house brokers, or manufacturers, they become a part of 
this and are held to the responsibilities that they need to be 
held to.
    This is not really, to further this, this is not really to 
say okay, everyone is safe, everyone has done the same things. 
It is to identify those companies that have actually done those 
things, that has raised the bar to better permit the Customs 
Service to focus their resources on those who might be the 
people that we all have to be concerned with.
    So I do not think the program is meant to be a panacea that 
will day that everything is 100 percent, but it certainly 
should provide the Customs Service an opportunity to better 
identify those who might pose the greatest risk.
    When it comes to, this really comes down to a matter of 
risk and threat assessment, and I do not know personally 
whether there is any way you can eliminate any and all risk. 
All we can do is try to minimize that.
    What companies can do, and I really see this as being the 
real secret to doing this is, the fact of the matter is many of 
us have put in place programs to protect our property, to 
protect our facilities, to protect our employees so that those 
types of--People who have evil intent are not in our plants and 
our buildings, and for that matter made us a target in and of 
ourselves because potentially we could be a target.
    So many of those things--In looking at those types of 
things that are already in place and what companies can do is 
really how we leverage this together, the government and the 
private side working together.
    Many of the things that we found when we started looking at 
the issue of security related to our supply chain, we found 
that we have practices in place because we have so much at 
stake because of our business interests, that the people that 
we buy goods from are in fact legitimate manufacturers of 
goods. They are not in business trying to disguise themselves. 
No one goes out and spends $50 million to make it look like 
they are an automobile parts supply company in order to smuggle 
goods.
    So there is a great deal of effort that we put through in 
screening who the people are because of our business interests. 
That was taking place before September 11th, and there are many 
things that we do to ensure that our suppliers deliver goods on 
time in the right quantity in the right place. In the mean time 
when you take goods out of our Plant A and deliver them to 
Plant B, that they do not disappear in between.
    So there are security practices, as I was saying, already 
in place in many parts of the supply chain. Some of them are 
stronger and better than in others and that really needs to be 
sorted out.
    I guess that is kind of a long answer to your question, but 
I----
    Mr. Sherwood. It was not a yes or no question. And I can 
see that if they can use your considerable knowledge of the 
system to help Customs assess what might be a possible threat 
and so that their inspections can be more targeted, I can see 
where that is a great advantage.
    Mr. Smith. I guess I would quantify it this way. We talked 
about ACE. We talked about this and the issue of trade 
compliance in the past. The fact of the matter is we really 
need to look at the Customs process today and align it with our 
normal business practices, and as you align it with our normal 
business practices, what happens is we have a great deal at 
stake to see that our plants stay open, that our inventory--
When the Customs process remains separate and apart and wedded 
in how business was done in the 1950's, it becomes a separate 
process and which is subject for someone to manipulate. But 
when you align the Customs process with our normal business 
practices as to how we manage inventory, we put a great deal of 
security around making sure that those inventories are managed 
appropriately, that goods arrive in the right place at the 
right time, in the right quantity, and you ensure a level of 
security. Not because we all started out to create more 
security to fight terrorism, because we have a financial 
interest in making sure that our plants stay open and that we 
do not lose production.
    Mr. Sherwood. I did not want to imply that I did not 
believe in the collaborative process, I do. I just wanted to 
get a discussion going about what a serious undertaking you 
were into.
    Ms. Fleishman. On behalf of the steel industry, we are very 
proud of our 35 year relationship with Customs and we were very 
gratified that Customs and EPA have been funded to have 
radiation detection equipment at the ports, and we are thrilled 
that that is going to be expanded. And Customs has come to us 
for our input as to which ports we think may be most vulnerable 
in terms of steel imports and we are more than happy to work 
with them on that effort. Again, we feel that very strong 
enforcement is a very important component to national security, 
and we believe that Customs given the adequate resources and 
manpower to do their job are the best ones qualified to keep 
our borders safe and commerce flowing in a timely and efficient 
manner which is all of our best interests.
    Mr. Laden. My comments would simply center around the 
partnership that we have experienced with the Customs Service 
and in a couple of other points.
    First of all C-TPAT, the new Customs Trade Partnership 
against terrorism was really modeled after BASC which was 
created in the early '90s to thwart drug smuggling. And as the 
drug smugglers were looking for more innovative ways to get 
their product to market they began to contaminate legitimate 
law-abiding commercial cargo such as ours.
    Kevin is right. We have an image to uphold, a reputation, 
we certainly do not want contraband in our shipments. So we 
with Customs in partnership signed up for BASC and undertook a 
responsibility ourselves to improve the security and then 
monitor our own shipments. If we recognized an anomaly from a 
drug-producing region we would self-report to Customs and ask 
that they inspect the cargo for fear that it had been 
contaminated.
    We believe that we do know our vendors, as Kevin stated, 
very well. We have people in those factories on a routine basis 
whether it is a merchant shopping for product or a quality 
inspector looking at specifications. We also send in on an 
unannounced basis compliance inspectors looking for labor 
rights violations, we are a textile importer, we have a very 
robust anti-transshipment program that those compliance 
inspectors help with.
    So we do believe we know our vendors quite well. We have a 
profile of that factory and facility. We extract data from 
there. And when we looked at our supply chain, Congressman, we 
looked for vulnerabilities and where honestly we felt most 
vulnerable was when that container departed the factory en-
route to the terminal at origin. We do not know who is carrying 
it, we have no responsibility for hiring the draymen that move 
that container, there were no metrics in place designed to tell 
us if that container was gone an unusually long amount of time 
where it could have been detained somewhere else and someone 
was putting contraband in there. We have made some changes 
since C-TPAT and since 9-11 to take responsibility for the 
dray. We have actually changed our terms of sale and we are 
converting as we speak our terms of sale where we will own the 
product at the factory and we will have responsibility for 
selecting the draymen that move it. Once C-TPAT is opened up to 
carriers, we will insist that the carrier who moves our 
merchandise is C-TPAT authorized.
    So we are working hand in hand with Customs. Can we ensure 
that every factory is secure and that there is not one bad 
apple? No, sir. I am afraid we cannot. We deal with 
approximately 5,000 primary factories. The total universe of 
factories when they subcontract because of the size of our 
orders can be up to 45,000 different factories in 52 different 
countries. That is a lot of area for us to cover.
    So the best we can hope for is working with Customs, 
cooperating, gathering intelligence. Certainly we spoke earlier 
about ITDS. We had some conversations about DOJ and now it 
comes to mind that certainly from a security standpoint Customs 
will need to be intricately tied into DOJ such as the FBI and 
CIA in exchanging information and intelligence about certain 
events happening around the world that they can then react to 
in their threat assessment and risk analysis.
    Mr. Sherwood. Thank you very much.
    Mr. Istook. Thank you, Mr. Sherwood.
    Mr. Visclosky.
    Mr. Visclosky. Nothing.

                      SECURITY DURING TRANSPORTING

    Mr. Istook. Let me pursue a little bit, Mr. Laden you were 
talking about taking responsibility for the draymen, the 
trucking operation that actually does the transporting of goods 
across the border in this case.
    I mentioned to you before the hearing started on a visit to 
the U.S.-Mexico border recently, and I will not mention the 
company, it is not really material here, but there was a 
company involved in the maquilladories [ph] there that had a 
semi full of electronics that were being transported from 
Mexico into the United States as part of that normal operation. 
It was not C-TPAT, it was one of the other somewhat parallel 
programs as far as pre-clearance, to be able to expedite the 
movement. That is the tradeoff here. The commercial enterprise 
assumes greater responsibility for assuring the security of the 
shipment in a manner that Customs can rely upon so then they 
can expedite the movement of that cargo across the border. The 
savings to the commercial enterprise of course is not only the 
security issue but also the time savings, being able to fit 
into a just in time system and so forth.
    But the story I was going to recite, the person that was 
doing the trucking across the border made a stop. They put in, 
I think it was something as much as 2,000 pounds of marijuana 
in the back of the truck and proceeded to go across the border, 
was caught. The question of course, I mean obviously you have 
the criminal charges levied against the driver and so forth, 
the driver's company certainly lost its participation until 
they might requalify at some future date in that process. But 
the real question here was how about the shipper? The people 
that were shipping the goods. And it's the accepted 
responsibility and you addressed that directly.
    It is important when we are relying upon trusted shippers 
that people have made a very full assumption of responsibility 
for the security of that shipment as opposed to a partial 
assumption which can undercut the variability to have a program 
based upon trustworthiness.
    But I would appreciate your elaborating a little bit 
further, Mr. Smith or anyone, on how much responsibility the 
companies that are actually shipping the merchandise are 
accepting under C-TPAT or any other operation and whether there 
are any limits to that because that is important to the 
perception and the acceptance of the American public as well.
    They want to know that if they see something being waved 
through Customs at a far faster rate than other things, the 
American public wants to know that it is because it is a part 
of a process that has established this is very low risk. It 
does not need the same level of scrutiny as others that are not 
a part of that process. It may be part of a random check, you 
could still check it.
    But I would like you to elaborate, if you will, on how much 
responsibility shippers are accepting as part of this.
    Mr. Laden. I really can only right now speak for Target. C-
TPAT is so new, Mr. Chairman, that many companies are still 
stopping to think in designing their security program. We went 
out on a limb, if you will. When we looked at our supply chain 
and realized this is the biggest vulnerability, the weakest 
link if you will, how do we address that, it was for us a 
fairly unorthodox move. Most of the product that we purchased 
and do purchase is purchased under a term known as FOB at a 
foreign port where we actually take title to the goods.
    We have, again, changed those terms of sale under the new 
terms to FCA which stands for free carrier, which for old 
fogies like myself in the business is really ex factory or ex 
work shipment. We own the goods now at the dock.
    We will certainly take responsibility where we have an 
ability to control either at a factory level--We have already 
gone out, we just completed a five country swing through Asia 
and met with 1100 of our top vendors in talking to them about 
security. The purposes of that trip was to sit down with those 
vendors and speak to them at length about security within their 
facilities and helping us secure our shipments and then 
converting them to these new terms of purchase.
    But again, the universe is so large that it is a daunting 
undertaking to try to reach out to 45,000 or 50,000 factories 
in 52 different countries.
    We are also hampered, in some countries you cannot do 
background checks. They have certain privacy restrictions on 
that that prevent a cartman, for example from doing background 
checks on their employees or a factory from doing background 
checks on people that are loading your container.
    Mr. Istook. Can I interrupt you just a moment?
    Mr. Laden. Sure.
    Mr. Istook. I wanted to ask, as part of the C-TPAT process 
is there within it something where, taking the example you just 
gave, where you may say look, we are a partner in the C-TPAT, 
we provide these assurances. However there are certain portions 
of the items we bring in that do not come from as secure a 
supply chain, that we cannot fully guarantee it. Is there a 
distinction even within C-TPAT where you say even though we are 
targeted or whoever else it might be, General Motors or 
somebody that is bringing in, nevertheless this particular 
shipment should not be considered part of that partnership. Is 
there anything like that?
    Mr. Laden. I do not think there is a formal distinction but 
there is certainly an understanding between ourselves as an 
importer and Customs that if we are importing something from a 
country that is recognized as a high risk, if you will, 
country, we certainly would work with Customs and understand if 
that particular shipment was pulled aside for a random 
inspection or a shipment from high risk countries had an 
instance of higher examination, we certainly would not object 
to that at all.
    Mr. Istook. Mr. Smith.
    Mr. Smith. I have several comments.
    One is most directly related to your last question. C-TPAT 
is just a program for us to identify and assess risk. In order 
to have actual treatment of low risk cargo it has to be matched 
with some program or system to do that. That is what NCAP 
really does. It is the practical application of having 
determined that something is low risk. And to answer your 
question, in C-TPAT does that exist? No. In NCAP does it exist? 
Yes, it does.
    We pre-file information about who we are going to be doing 
business with with Customs before any individual shipment is 
ever made. The Customs Service has an opportunity at that point 
to do its own risk assessment to say we know things about that 
company that we are not going to let you include them in the 
program, therefore they are not going to be treated as low 
risk. We know things about that carrier that as long as you are 
using them they are not going to be in that program. We know 
things about those goods, whether they be trade sensitive goods 
or other types of goods, they cannot be in that program. So the 
answer to your question, is there some--what is the practical 
application? Is there a way to make discernment? Yes, there is.
    With regards to your first question about responsibility. 
When customs first announced the C-TPAT program and we were 
invited, myself included, into the initial discussions about 
how this program should be done and what levels or 
responsibility there should be.
    The message that we gave Customs and we felt they have 
listened to, and that is why under the C-TPAT program there are 
separate standards and requirements for importers, carriers, 
brokers. Everyone who is a stakeholder in that supply chain 
needs to be addressed. There are separate recommendations for 
each one of them.
    Now what we can do is when, again, goods and things are 
under our control we can exercise that level of responsibility 
and control them. When we pass them over to carriers, the 
carriers have to accept that responsibility. That is why 
Customs needs to really reach out to them and incorporate them 
into this process also.
    We do not have the ability, we are as I have explained 
during these meetings, we are not a law enforcement agency. We 
cannot accept responsibilities for screening other people's 
employees. What am I going to screen them against? I mean 
Customs has law enforcement systems, they know what people are 
at risk. General Motors, we don't have that information.
    So what the focus really needs to be on are those parties, 
the incentive for others to participate. The government holds 
the incentive. It's the keys to that expedited treatment or 
that low risk treatment. If you participate you get it, and if 
you do not, you will not. And from our perspective, if certain 
carriers are participants in that and the government has 
decided that they have put those types of security things and 
they have done what they can do, the marketplace, competition 
will dictate who we do business with. They are going to--We are 
in business to manufacture and sell motor vehicles to make a 
profit. If in doing business with some parties our ability to 
do that is impeded in some way, we are not going to do business 
with them.
    So if carriers are not cooperating and therefore our using 
them results in our having to sit at the border for two or four 
hours, while we can have other carriers that we can pass 
through the border in a matter of minutes, I can assure you the 
marketplace will dictate who we ultimately do business with, 
and overall heightening the overall level of security.
    Mr. Browning. Mr. Chairman, may I add just a point here. I 
think this is really important.
    C-TPAT is not a pass. We always reserve the right, 
especially with specific information, to inspect and examine 
any shipment coming across the border.
    One of the things that we are going to do in this process 
as we roll it out to other participants and carriers, is 
provide exactly the information that Mr. Smith is talking 
about. We're going to let the trade know where the individuals 
are that have met those security standards so that indeed the 
marketplace can drive this to a great extent.
    So we are not working on the assumption that simply because 
you are C-TPAT authorized you are not ever going to be 
examined. That is not going to be the case.

               HOMELAND SECURITY COSTS ON PRIVATE SECTOR

    Mr. Istook. I would not pretend that this process is 
without costs on the private sector. Has anyone been able, 
because in essence this is a cost of homeland security. All the 
costs of homeland security are not absorbed by the government. 
It's our home, it's our country. We each accept certain burdens 
with that. But does anyone have any measurement at this point 
of when it comes to border shipments, the C-TPAT and any other 
processes. How much expense is that creating on the private 
sector to make this work?
    Does anyone have any numbers at this point?
    Mr. Smith. No. We haven't collected any numbers on what the 
cost of our participation in a program like C-TPAT, is, we are 
a few months into it. Your observations are correct. It is 
additional risk. There is additional effort. There is some cost 
related to that but we have not quantified it. We do know the 
cost of our plants being closed far exceeds it. That is what is 
driving us.
    Mr. Istook. I appreciate that. And perhaps in time those 
numbers might be developed. It would be interesting to have.
    Mr. Laden. I would say, Mr. Chairman, we haven't quantified 
it yet. We are also looking at some new technology for which we 
don't really have a cost yet. There are new seals, there's all 
kinds of new technology we hope will be developed and 
forthcoming. In fact I think Customs is also looking at some 
new technology, adapting things formerly used by Department of 
Defense and some other stuff.
    So we would hope in the next 12 month period to see new 
technologies coming forward that would allow us to ascertain 
whether a container has been tampered with, for example. 
They've had some preliminary discussions about light meters 
inside of a container so if you open the doors that meter would 
go off.
    We don't even have estimates at this point on the cost that 
we would incur by adapting that technology but we're certainly 
willing to do so.

                   SECURITY RISK OF IN BOND SHIPMENTS

    Mr. Istook. One thing I have a concern about that I know at 
some ports, I think for example Los Angeles, Long Beach, it may 
be something like 40 percent of the container shipments are 
actually brought in in bond. They are bound for some place 
inland, they are maybe going hundreds of miles. But I have 
heard very little discussion, and I have a serious concern 
about how does this impact the entire issue of being able to 
have sufficient border security? I do not have in front of me 
the statistics on in bond shipments as far as trying to 
quantify the level of it, but can we consistent with homeland 
security have a program of letting things come in in bond, 
rather than being subject to inspection at the border, unless 
they are participating in a process such as C-TPAT?
    Mr. Browning. Mr. Chairman, you are absolutely right, that 
is indeed an area of major concern for us. The statistics are 
very easy. Twenty-three percent of what arrives comes in 
intended for in bond. Seventy percent of that moves to what we 
call immediate transportation meaning into the port to an 
inland port for opening and examination at that inland port.
    One of the things we are doing in addition to C-TPAT, I had 
mentioned the Container Security Initiative where in a sense we 
are moving the process out----
    Mr. Istook. Especially the top ten----
    Mr. Browning. Precisely. Although actually our intention is 
to draw that process down even further. That will certainly 
help. But I will say to you right now we know that is an area 
of concern and one that we have got to deal with, but there is 
a major potential impact on the trade if in fact we try to move 
away from there. There is going to be a great deal of dialogue 
that has to ensue.
    The good news is everybody is starting to sit back and say 
yes, we need to deal with this. Again, some of the technology 
is going to help. Some of the programs like the Container 
Security Initiative move that process out, and are going to 
give us additional information so we can do some examinations 
before they get to the U.S. ports of entry. But we are going to 
have to sit back and take a look at that and take a look at how 
we change the law to give us the authority we need.
    You have been very very helpful on the advance manifest 
side of this process. There are a number of pieces of 
legislation that are moving forward. That will be a critical 
piece, because if we can get that information in advance we can 
look at that information and make decisions that the cargo may 
not be moving in bond until we get a chance to take a look at 
it.
    Mr. Istook. Mr. Laden, do you have any comments on the in 
bond situation?
    Mr. Laden. Just, Mr. Chairman, as Commissioner Browning 
stated, it is a very sensitive and touchy issue for other 
members of the trade, notably the brokers and some smaller 
importers that are inland and prefer to have their shipment 
cleared in Kansas City or Minneapolis, for example.
    Mr. Istook. But who accepts responsibility for what happens 
to it for example between Long Beach and Kansas City or 
wherever it may be? New Orleans and Kansas City?
    Mr. Laden. Technically the carrier actually accepts 
responsibility for it by moving it in and under their bond at 
that time.
    But yes, it goes back again to risk assessment, I think, 
and threat assessment and intelligence and if Customs gets, has 
concerns about certain containers before they would be allowed 
to move in bond they should be pulled off the line and 
inspected at the port if it relates to a security issue. Then 
the trade compliance part of it could clear further inland.
    For a company like ourselves, we do not avail ourselves of 
in bond. We clear everything at the first port of arrival. We 
operate in four primary ports--Los Angeles and Seattle on the 
West Coast and we clear all of our cargo there, have it 
stripped from a marine container and then distributed out to 
the various Target distribution centers across the nation so we 
don't have a lot of experience with in bond as an importer. But 
I am aware through my efforts at AAEI and other venues that it 
is a very sensitive issue for many in the trade.
    Mr. Istook. That is certainly something that I am concerned 
about having addressing. Everyone can appreciate there is a 
timeframe at issue. I understand there are tricky things to be 
resolved, but at what point do you say if they are not resolved 
at this time something needs to be done to address the security 
needs.
    Mr. Smith, and then I will recognize any other members that 
might have questions.
    Mr. Smith. I would just add a couple of comments to that.
    One is, goods do not move in bond without permission. They 
do not just automatically move out, so the Customs Service 
certainly has the opportunity to deny that approval to move 
inland.
    The issue really becomes how much information they have in 
order when they make those decisions that goods can move to an 
inland port to make that decision on, and that does go as Mr. 
Browning noted, to the issue of manifest data and how much 
information is available on the manifest.
    That leads to another issue of that manifest data becoming 
public information.

                       SECURITY OF MANIFEST DATA

    Mr. Istook. And how many agencies you might have to 
potentially report it.
    Mr. Smith. Right. Not only that, but by providing that 
greater level of detailed information goods which are valuable 
become targets for theft and pilferage. So the information 
needs to be kept secret. And as long as that information is 
public information and it is published, it then becomes 
competitive information in which your competitors can get 
control of it.
    So I guess I would add that maybe you folks could look at 
that issue of the confidentiality of, if we are going to ask 
for additional manifest data what are we going to do to keep it 
confidential so that it is not used to competitively 
disadvantage companies.
    My last comment on the issue is I understand the concern of 
goods being able to be moved inland and then something horrific 
taking place. But being someone who lives in a border town that 
would be the first point of arrival I do not want anything 
horrific to take place there either. So that really goes to 
speaking to the issue, again, the Commissioner of Customs has 
the container security program. In pushing that out beyond even 
the first point of arrival and ensuring some appropriate 
security is in place there, and appropriate intelligence is in 
place there so that before it even leaves the foreign port of 
lading that we have got some level of confidence that something 
is not in those containers which is going to be used to, 
whether it is destroy an inland city or destroy a border city 
like Detroit. As I said, living in Detroit I do not want either 
to happen.
    Mr. Istook. Certainly.
    I would like to give the witnesses an opportunity, maybe 
some thought that has come to mind that you have not presented 
to us that would be of use to us, I want to give each witness 
that opportunity if you do.
    Mr. Browning, anything further you think would be----
    Mr. Browning. Nothing. I would just simply reiterate my 
thanks to the subcommittee for all the support you have given. 
It is a very challenging time for the U.S. Customs Service, but 
the 20,000 men and women in the service intend to continue what 
we have done for over 200 plus years and that is to serve this 
nation seven days a week, 24 hours day, and we will do our best 
sir. Thank you for your support.
    Mr. Istook. Thank you.
    Mr. Laden, did you have anything further?
    Mr. Laden. Nothing that I can think of, Chairman. Just 
again, I appreciate the opportunity, and if the committee 
themselves have questions after this hearing has----
    Mr. Istook. I am sure we will.
    Mr. Laden [continuing]. I would be glad to assist you in 
any capacity you deem necessary.
    Mr. Istook. Very good. Thank you.
    Mr. Smith.
    Mr. Smith. First I would like to thank you for the interest 
that you have shown in this issue, and to the whole committee, 
and for taking the time to come to Detroit a few weeks ago and 
better understand what the issues are in our industry. We 
really appreciate that.
    I appreciate the opportunity to testify here, and along 
with Mike, I would be happy to provide what additional 
information or however we night be able to help in this in the 
future.
    And not in a way of actually jumping on the bandwagon, but 
when we first got started in the NCAP program which we think is 
a very futuristic and a good program, Mr. Winwood was very 
responsible, and it was partly his vision which helped us put 
that in place. So along with everyone else who has acknowledged 
today his contribution, I will add mine.
    Mr. Istook. Very good.
    Ms. Fleishman.
    Ms. Fleishman. I would just like to thank you once again 
for this opportunity to hear the steel industry's perspective 
on this, and also to thank my colleagues on the panel because I 
learned a lot today.
    Mr. Istook. I think it has been very helpful to us.
    Thank everyone again. We are adjourned.

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                                           Thursday, June 20, 2002.

                 OFFICE OF NATIONAL DRUG CONTROL POLICY

                               WITNESSES

JOHN P. WALTERS, DIRECTOR, OFFICE OF NATIONAL DRUG CONTROL POLICY
DR. WILSON COMPTON, NATIONAL INSTITUTE OF DRUG ABUSE
DR. DAVID MAKLAN, WESTAT
DR. ROBERT HORNIK, ANNENBERG SCHOOL FOR COMMUNICATIONS, UNIVERSITY OF 
    PENNSYLVANIA
STEVE PASIERB, PARTNERSHIP FOR A DRUG-FREE AMERICA
ALLEN ROSENSHINE, BBDO WORLDWIDE, INC.
    Mr. Istook. Good morning. I call the subcommittee to order.
    I apologize again that some of our idiosyncrasies in the 
House meant we didn't start quite on time. And Mr. Hoyer and 
others should be joining us as they return from the vote on the 
House floor.
    I want to welcome everyone here for this important hearing 
on the National Youth and Drug Media Campaign conducted by the 
Office of National Drug Control Policy.
    Director Walters, I appreciate your being here for your 
first appearance before this committee. Your leadership, of 
course, is essential to the antidrug efforts in America. We 
look forward to working with you during your term heading the 
ONDCP.
    After Director Walters, we have two other panels of 
witnesses. Our second panel features three witnesses deeply 
involved with the most scientific evaluation of the media 
campaign, Dr. Wilson Compton of the National Institute of Drug 
Abuse, Dr. David Maklan of Westat and Dr. Robert Hornik of the 
Annenberg School for Communication at the University of 
Pennsylvania.
    The third panel is going to be featuring Mr. James Burke--
actually, I understand he is, I believe, ill and will be 
substituted for by Steven Pasierb of the Partnership for a 
Drug-Free America. Mr. Allen Rosenshine of BBDO Worldwide, 
Incorporated.
    The partnership, of course, was a pioneer in the antidrug 
media advertising. They produced a memorable ``this is your 
brain on drugs'' advertising, and they continue to be a key 
partner with ONDCP.
    We're here this morning because since 1998 Congress has 
appropriated almost a billion dollars, almost $930 million, to 
be a little more precise, in taxpayer money, funding the media 
campaign. When you add matches and donations from the private 
sector, the total value of the campaign has been about $2 
billion. Originally it was envisioned as a plan to leverage 
effective antidrug advertising via television, radio, print, 
Internet and other media to educate youth and motivate them 
positively about the dangers of drug abuse, encouraging them to 
resist pressure, social and otherwise, to use drugs.
    It also delivered messages to parents encouraging them to 
be more active in talking and interacting with their children 
concerning drugs, and we're now in the fifth year of that 
campaign and, of course, an assessment is in order.
    The media campaign is far from the only message that our 
children receive about drugs during their formative years and 
their late teen years. Antidrug messages have to compete with 
the popular culture that too often is glorifying or 
trivializing drug use.
    In regard to marijuana, for example, we see releases of 
movies and songs that portray smoking pot as little more than 
harmless fun. Meantime, there are other films and shows 
portraying antidrug efforts as futile, hypocritical, even 
corrupt at times. For these reasons, the media campaign has to 
be as focused and as effective as possible, if only to vie for 
attention with countless other messages, and especially since 
we know that there is a famously short attention span of the 
modern American teenager.
    Everyone here who has or has raised a teenager and knows 
what I'm talking about, do you want to raise your hand? Yes, we 
know.
    Considerable sums of taxpayer money have been spent trying 
to get this attention and utilize it correctly of the 
teenagers.
    We have to be honest in identifying the flaws in the 
campaign and what steps we might be able to take to correct 
them. We owe that much to the families and communities of the 
Nation. Every year over $100 billion of the country's wealth is 
drained by illicit narcotics. Of course, that doesn't even tell 
about the damage to people's lives.
    The most recent evaluation in the media campaign was 
conducted jointly by Westat and the Annenberg School for 
Communication. It gives us cause for concern. I don't think 
despair, but definitely concern.
    This latest report is the fourth in a series of seven that 
are intended. The first of those reports attempts to gauge how 
the behavior and attitudes of the participants of the study 
have changed or not changed as a direct result of the antidrug 
advertising that we sponsor. The results so far appear to be 
inconclusive, but do generate cause for concern.
    Thus far, the reports show we have no concrete evidence 
that the campaign is producing the desired effect, namely to 
reduce drug use among youth. We expect future reports will 
provide us a better picture of the extent to which the media 
campaign is or is not working.
    I want to highlight also some of the good news from the 
report. It is clear the media campaign is successful in terms 
of exposing youth and parents to the antidrug messages, 
messages that are hard-hitting and are memorable. Awareness of 
these campaign advertisements is high.
    The report also shows that parents indicate some positive 
response by parents to the messages aimed at them. But 
ultimately it is youth behavior we are trying to influence, to 
help them avoid the usage of illegal drugs. So therefore we 
must judge the program on that particular criteria.
    Everybody here, I believe, wholeheartedly supports the 
purpose of the media campaign. We want to do everything we can 
to promote its success, but it is a time of urgent national 
priorities, crucial decisions, and always limited funding. If 
the media campaign in the final analysis is unsuccessful, then 
we need to move on and apply our scarce resources elsewhere. 
That is why we're having this hearing, and I look forward to 
hearing all of our witnesses on this matter.
    It is the practice of the subcommittee, of course, to 
receive all testimony under oath. So I'd like to ask the 
director, and I believe the other witnesses are present--if we 
could swear you all in at the same time, that would be 
efficient for us. Would you please stand.
    [Witnesses sworn.]
    Mr. Istook. Director Walters, we're happy to have you as 
well as the other witnesses here. I want to tell each of you 
the entirety of your written statement will be in the record. I 
always encourage witnesses to feel free to depart from it, to 
even be extemporaneous, as that sometimes helps to fill in gaps 
from your written testimony and especially since we have three 
panels that we want to squeeze in and allow members of the 
subcommittee to speak with each of you.
    So, Director Walters, we're pleased first to hear from you 
this morning.
    Mr. Walters. Thank you, Mr. Chairman. Thank you for 
arranging this hearing on this important program. I also want 
to thank you not only for the witnesses that you have mentioned 
from the evaluation team, but for the Committee accepting 
written testimony from Peggy Conlan of the Ad Council, General 
Art Dean from Community Antidrug Coalitions of America, as well 
as actual oral and written testimony from Steve Pasierb and 
Allen Rosenshine of the Partnership for a Drug-Free America. I 
think it is important to have these partners present. This 
program has been blessed by having many people give generously 
of their time and talent, and I think that bodes well for the 
future.
    I will summarize briefly my testimony and then be happy to 
take your questions or deal with other issues that you may 
have.
    As you mentioned, we believe this program is crucial to 
meeting the President's goals of reducing drug use by teenagers 
and adults by 10 percent in 2 years and 25 percent in 5 years. 
We would like to see it fully funded at the $180 million level, 
as requested by the administration. We would like to get the 
Campaign on a firm platform and pursue reauthorization, as you 
know.
    We are, nonetheless, concerned, as you pointed out, by the 
evaluation that shows that only part of the program is working 
well, that is, in regard to parents. We believe that the 
Campaign was successful in terms of the effect it had on 
getting parents to talk to young people and teenagers more 
about drugs and their disapproval of drug use, as well as 
supervising young people in terms of reports by parents and the 
reports of teenagers about how their parents are behaving.
    But, obviously, as you summarized so well, the other 
troubling news here is that we have not yet had a measurable 
effect on teenage drug use, and that is why this program 
exists. Nonetheless, we believe that the advertising should be 
a powerful tool for other reasons which you alluded to. Many 
cultural messages are not helpful to parents. I think many 
times, as you know, being a parent yourself, parents feel that 
the culture is working against them in crucial respects, 
especially when it comes to drugs. This is a program designed 
to have us support messages in the culture that give the right 
message to young people, not only in television and radio, but 
in the relatively small amount of the Campaign that goes to 
support other kinds of partnerships. There are many 
partnerships not only with outside groups, such as the PTA, 
Scouts, and other groups, that also will reinforce this in the 
lives of young people. Corporations also have become important 
partners in recent years, as well as the Community Antidrug 
Coalition Organization and the community coalitions throughout 
the country.
    So we have had the ability to try to create a structure of 
messages and experiences for young people that we believe, 
combined, will have an effect, but we need to make sure they 
are doing that.
    Since taking office in December, I have done several things 
to pursue some changes in the direction of the Campaign and I 
believe they are consistent with some of the problems I have 
been able to identify, given the evaluation of where we are now 
and what we need to do. Let me summarize those briefly and then 
I will take your questions.
    First, I was concerned that from what I saw, the Campaign 
had not been doing enough testing. I had seen earlier 
evaluations. I was concerned that we might not be getting to 
where we want to be but as you know, the view in this field is 
generally that it takes a while from the time of changing 
attitudes to changing behaviors, so there is a lag time here 
and people have been waiting. The question is can we improve 
the probability that we're going to see change? The ads that 
were in early stages of development when I took office in early 
December focused on the issue of the link between drugs and 
terror. The partnership had prepared some concepts, as did our 
ad firm Ogilvy, which has been a contractor to the office. I 
directed that those be accelerated.
    As it turned out, the Partnership subsequently advised us 
that they were not able to put their ad concept in a form that 
they thought was suitable within the necessary timeframe. We 
did more testing on the ads that went forward, both in terms of 
early concept testing, developmental testing and final testing. 
We had over 1200 people participate in focus groups. I watched 
several hours of focus group videotape. I was concerned that we 
have as powerful a product as possible and we decided it was 
powerful enough. We put them on at the Superbowl to get the 
largest audience we could per dollar and an audience that 
crossed demographic lines and had parents watching with kids, 
which you know is an important factor. We will get the 
evaluation of those ads in the fall.
    The preliminary tests that we did showed them to be some of 
the most powerful. We knew that they would be powerful when we 
put them on. I think that needs to be built into the program 
more.
    There has been some early testing of some of the ads. There 
has been a problem in having other ads arrive. I have tried to 
get to the bottom of this. There is an element of this that I 
was not present for and, of course, since we all regret that 
the program has not produced the results we want, there is a 
little bit of finger-pointing going on. It is hard for me to 
tell you precisely what happened in the past, because people 
have different points of view.
    I think the bottom line, from my view, is people have 
behaved with the best of motives to help young people. They 
regret that this has not been more effective. My charge to them 
is, you need to work together. We need to make this work. We 
need to learn from what we have found out, if that is even 
unpleasant, and we need to increase the power of the ads.
    I, like you, agree that the evaluation shows the ads are 
being seen in very high concentration, and there is recall of 
them. My concern is that there is not enough power in the 
content behind the ads. I think testing is one thing we need to 
do more. We need to simplify the message. I agree with the 
criticism that the division of messages has been too extensive, 
and I have asked those involved to simplify that. The ``drugs 
and terror'' ads are the first example of this. They focus on a 
more direct message in a more concentrated form. I would not 
abandon all of the elements in segmentation of the Campaign, 
but I would focus it more on powerful ads and a central 
audience.
    Third, I would change the age focus, as the drugs and 
terror ads do, and elevate the age focus to middle and older 
teens, for two reasons. First, I think we now have considerable 
evidence that there is a doubling of drug use between the 
middle school years and high school years. We need to do a 
better job to push back against that problem.
    The earlier view was also you could inoculate young people 
in their early years of teenage life and then they might not be 
subject to drug use later. The results of the Campaign showing 
the most problematic ads were in the 11 to 13 year old 
category, and some of them may actually have a pernicious 
effect. I think it shows how difficult that making ads for that 
age group may be.
    Secondly, I think subsequent analysis suggests there may be 
a problem with the inoculation theory, that kids go through a 
teenage period where they reassess their beliefs so that what 
they believed earlier in their teenage years may not be stable 
over that time.
    Again, I think we can address both of those problems by 
targeting older teens and increasing the power of the ads by 
having material that might not be suitable for younger 
teenagers be included in the ads that are targeted on older 
kids.
    Thirdly, I think that we need to focus on marijuana in the 
future. We now have begun and are working with our partners 
here across the board that are producing the ads on marijuana. 
In addition to the broader issue in coming to this office, as 
you may know, we faced also the task of implementing the 
President's commitment to add $1.6 billion over the next 5 
years to treatment.
    In assessing where that need is, for the first time last 
year, we had in the National Household Survey on Drug Abuse the 
ability to measure treatment need in the household population. 
About 90 percent of the population is covered by that segment, 
age 12 and above, in households that that survey covers. We had 
questions that were adapted from the medical instruments to 
assess people for treatment need, those who abuse or are 
dependent drug users, and we found in the household population 
an estimate of about 4\1/2\ million individuals.
    Two things about that I think are pertinent to the 
Campaign. First, 4\1/2\ million was not a relatively outlandish 
estimate, given what we have seen in the past, but for the 
first time 23 percent of that 4\1/2\ million were teenagers. I 
have never seen an estimate that high of the young population 
that needs drug treatment.
    Secondly, for the first time this assessment allowed us to 
associate dependents to specific drugs. Not that you were 
dependent in what drugs you used, but what the source of the 
dependency was. It confirmed what people had been reporting at 
treatment centers that I had also been seeing reports on 
before, but this registered it even more graphically. Sixty-
five percent of the population, of the 4\1/2\ million 
households that need and could benefit from drug treatment, are 
dependent on marijuana. Marijuana is more than twice as 
important as the next most important illegal drug for 
dependency, and that is cocaine. Most people in America do not 
understand that. People my age are skeptical, because they grew 
up watching ``Reefer Madness'' and thinking about marijuana's 
hysterically overgrown fear in our culture. In fact, today you 
cannot deal with the drug dependence problem in this country in 
any serious way without facing the fact that the medical 
science has already demonstrated that marijuana is a dangerous 
and dependence-producing substance and is the single most 
important illegal drug associated with dependence in America 
today.
    I have gone to talk to editorial boards and reporters, 
people who are well informed. They have no idea about the 
dangers of marijuana, and they are not too skeptical from their 
experience. We cannot help young people avoid this danger if we 
don't explain it is a danger. Too many parents my age believe 
that marijuana is something that is a rite of passage that kids 
can and will flirt with and move on. Certainly many people that 
try drugs have been able to avoid dependence such as when they 
try alcohol and cigarettes. The problem is too many people are 
trying marijuana, and the conversion rate and the danger is 
significant, and all the evidence we now have suggests that 
that danger is even more serious today.
    I believe we have to focus on marijuana--and this is hard, 
I recognize, because of the culture attitudes, but we need to 
do it. We have not ignored concerns relation to underage 
drinking and cigarettes. Thirty-five million dollars in the Pro 
Bono match has gone to underage drinking ads associated with 
this Campaign. I am not suggesting that we ignore other 
threats, but I do think that there is a dangerous threat that 
people--particularly young people and their parents--are 
woefully uninformed about the dangers of marijuana. We need to 
do a better job on that. That is partly my job. I need your 
help with this program and others to make that clear.
    Finally, I would like to say that for all of these reasons, 
I think the Campaign is an important prevention tool that is 
crucial to our ability to accomplish the goals that the 
President has set forth, and I know what every Member of 
Congress and every citizen and certainly every parent wants to 
have happen--to drive down drug use by youth. We know from 
large and painful experience over the last 20 years, as well as 
scientific research, that if we prevent teenagers from 
experimenting with drugs, alcohol, and cigarettes, they are 
unlikely to go on and use later. This is not a problem we 
should be unable to do something about. It is our children. It 
is not about young 20-year-olds unwisely experimenting with 
chemicals as a recreational outlet. It is about children, and 
it is about addiction, and the younger they start, the more 
likely they are to be trapped in the web of addiction. If we 
change the dynamic of drug use and experimentation by 
teenagers, we change the dimension of this problem for 
generations to come. We will not have the number of addicts. So 
we need to treat this problem for those who are dependent, we 
need to do a better job at prevention, and we need to do a 
better job at preventing the supply in the market from being so 
plentiful and powerful. I believe that other steps that we are 
taking in other areas will help us implement that balanced 
strategy. That will work, but we have to have the parts 
working. We need this program to work. I am trying to make the 
changes as I outlined that I believe give us the best 
opportunity to use what we have learned from what has been 
invested so far in the research, and to make it be as effective 
as we all want it to be.
    With that, I would like to take your questions. Thank you.
    [The information follows:]

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    Mr. Istook. Thank you, Director Walters. Let me ask Mr. 
Hoyer, did you want to make an opening statement before we have 
any questions? All right. Please.
    Mr. Hoyer. Thank you, Mr. Chairman, for holding this 
hearing. He and I have discussed this and both agree that a 
hearing was important to have, and I want to apologize, Mr. 
Walters, to you, for being late. As you know, we had a vote and 
we have some other things coming up on the floor that I was 
working on.
    I want to welcome our panelists to this committee hearing 
on the National Youth Antidrug Media Campaign. The purpose, of 
course, of the media campaign is one that I believe every 
member of Congress supports, and that is to reduce and prevent 
drug use among not only young people but as they get older as 
well.
    However, the reason we have convened here today is to 
discuss the effectiveness of the campaign and the impact it has 
had on our young people and parents in light of the looming 
fiscal 2003 appropriation process, and to discuss the $180 
million request for the campaign.
    Over the past 5 years, this committee has appropriated $929 
million to the campaign. This is obviously a large amount of 
funding aimed at drug prevention. However, as we all know, it 
is only a small piece of the Federal Government's $19 billion 
drug budget. To put that into perspective, the cost of the 
campaign is just under 1 percent of the entire drug budget.
    Director Walters, you are obviously here today to support 
the President's budget request, I presume. The same amount 
appropriated in fiscal year 2002, $180 million. However, you 
had rather negative views on the campaign prior to becoming the 
director of ONDCP. Specifically you referred to this campaign 
as, and I quote, a lazy person's way of trying to appear they 
are doing something, close quote, and called it, quote, glitzy 
public service campaign, period, close quote. In May it was 
reported in the Wall Street Journal, and I quote, the new U.S. 
drug czar John Walters says the government's antidrug 
advertising of recent years has failed. Close quote. According 
to the Wall Street Journal article, this was based on the 
survey data contained in the report by Westat and Annenberg. 
Although the semiannual evaluation results are discouraging, an 
unbiased reader, I think, may have intended the report a little 
differently.
    I've read the chairman's opening statement. He reports out 
the positive in that report, because even though the report 
noted the campaign has shown little evidence of direct 
favorable effect on youth, it has had a favorable effect, 
according to the reports, on parents' behavior. Certainly that 
is a step forward, which includes talking about drugs with 
their children, which has been, of course, a very important 
focus.
    At the same time, the report noted, and I quote, these 
interim results reflect the first 2 years of Phase 3 operation. 
Subsequent semiannual reports may show different effects, 
including favorable effects on youth, close quote.
    It is clear, however, that this campaign is not as 
effective as it once was. There are many questions that need to 
be asked to help us determine why, including where is the money 
going, how much of the Federal funding is going to ads, has the 
campaign been spread too thin in too many different message 
platforms for advertising? Why haven't the ads been tested? And 
ultimately, can these ads be effective?
    Hopefully today we'll be able to determine how best to get 
back to the vision that Jim Burke, the private sector, has had, 
General McAffrey and others have had, when the media campaign 
was created.
    Again, Mr. Chairman, I want to thank you for having this 
hearing, and I want to thank the panelists and Mr. Walters for 
being here, and I look forward to discussing these issues.
    If, in fact, this campaign is not effective, we ought not 
to spend one cent, much less $180 million. If it is, in fact, a 
lazy person's way to appear to be doing something, we ought not 
to spend one cent on this program, and I intend to oppose any 
spending on this program if that is the conclusion.
    I thank you, Mr. Chairman.
    Mr. Istook. Thank you, Mr. Hoyer.
    Let me tell members of the subcommittee that because we do 
have three panels and we started later than originally 
intended, I must be very, very strict in enforcing our 5-minute 
rule, and, in fact, if people can be briefer when appropriate, 
that is fine. But I certainly don't want to diminish any 
member's ability to get the information that they need.
    Director Walters, there is in the written testimony of 
several of the other witnesses some comments that indicate part 
of the problem that they see in the advertising campaign has 
been dilution, splitting the purposes. Sometimes, of course, we 
hear people that say, well, we want antitobacco messages or 
antialcohol messages. We want to focus on antidrug 
alternatives. You have advertising that is split at different 
groups. Do you have any sort of matrix that compares the amount 
of advertising that has been on each different area that has 
subdivided the original focus of this ad campaign that might 
give us some further insight into whether the problem is that 
the message has not been strong enough and frequent enough to 
the right target as opposed to a problem with the content of 
the message itself or a problem with the underlying theory of 
what an ad campaign can accomplish?
    Mr. Walters. Let me make sure I can answer that question by 
understanding the matrix you want. I can supply the information 
about what has been spent in the past and how it has been 
divided. Roughly of the total expenditures, 87 percent has gone 
to advertising. Of that, 87 percent has gone to actual buys of 
media, so 76 percent of the total Campaign----
    Mr. Istook. You're talking about the particular messages. 
How much resource is devoted to which of the messages in a part 
of the campaign?
    Mr. Walters. In that regard, I think we can talk about how 
the buys have gone, but let me just say the general principle 
that I understand here. As I said, I think it has become too 
complex in some regard in what I have learned since I took 
office in December. Part of what I have done in response to 
that was based on the understanding we need to simplify and be 
more direct to be more powerful. But there are parts of this I 
want to be clear that I support the division on.
    I have been involved in reviewing the creative material 
that is in other non-English languages--Spanish and some Asian 
languages. I also just released ads that were prepared before I 
got there for Native American and Alaskan Native communities. I 
looked at these as a part of the review of the question: ``Is 
there too much fragmentation? Are there too many different 
points?'' I was persuaded that there were good reasons to say 
that crucial populations that are affected by drugs, alcohol, 
other kinds of substance abuse, which the broad messages in 
some of these cases put forward. These broad messages 
especially appeal to parents, and need to be done in a way that 
does not assume one size fits all. Both the media buys and the 
content of those ads are important. Certainly there are other 
obvious non-English languages that you need to reach. In 
addition, I think there are some important ways of reaching 
populations that have been affected sometimes by particular 
substances, sometimes more broadly, that need to be done.
    I am not saying we need to have every single subgroup we 
can identify in the American society have its own ad campaign, 
but given what I have seen, I think what has been done so far 
has largely been sensible.
    From what I have seen so far other parts of this segmenting 
the Campaign into small age groups such as 11 to 13, 14 to 15, 
needs to be consolidated.
    I am not a creative expert on advertising, and I am not an 
advertising executive, but I am the person that is responsible 
in the executive branch for managing this program. I am willing 
to take the position that some of the creative process can work 
even if I do not understand how it works, provided it shows 
results. But when I do not see results and then when they 
explain it to me, and still I do not understand how that is 
going to work with young people, or that the message is too 
soft, or that there's too much information. It is not about 
drugs per se, it is about you should be doing something else. 
My view is that needs to be simplified.
    Mr. Istook. We're getting afield, though, from the focus of 
the question I was asking, because I think it is important for 
us to know how fragmented the message has been. I'm not talking 
about fragmentation in the sense of language groups, for 
example. I'm talking about fragmentation in the sense of, well, 
here we're trying to tell people don't do drugs. Here we're 
trying to take a different approach with, you know, antidrug, 
and, again, without detailing some of the things in the 
testimony of the other witnesses, that fragmentation seems to 
be a significant problem, but I think we need in this 
subcommittee the ability to measure how much fragmentation 
there has been to be able to compare it with your proposal to 
be more direct and therefore more powerful to understand how 
that splits--translates to dollars. I realize there are other 
ways of measuring how many eyes and how many ears are reached 
by a particular message, that it is not the same as the number 
of dollars spent, but we need to understand how those dollars 
have been fragmented among these messages and how you propose 
what your formal communication strategy is going to be 
regarding that fragmentation. I think that is very important 
for us to have a full and detailed understanding of that.
    Mr. Walters. Yes, I do too. I have the benefit of a task 
force report that has been formed with many of the partners of 
the program, including advertising people, the Partnership, the 
Campaign staff and some others, which makes recommendations 
about simplifying and targeting that we just got several days 
ago, and we would be happy to provide it to the Committee.
    Secondly, and I think this is the way that I am trying to 
pursue this issue, I think we need testing. I know from what I 
gathered here that there are parts of the corporate advertising 
relationship where people say, ``I have somebody who has 
creative ability, so I do not need to test.'' They have a 
demonstrated reputation of creating things but I think most 
advertising is tested before its aired. I think under these 
circumstances, we need testing about whether or not the content 
we are going to put on the air is as powerful as we can get it 
before we put it on the air, because we are going to spend the 
bulk of this money in showing the material. I think that the 
drugs and terror ads that I worked on had direct contact with 
this. We did that testing, as I said, early in the concept 
stage, in the development stage and in the final stage for two 
reasons.
    One, it is also my experience that I as an adult can sit 
and watch an ad targeted for kids and say that is going to 
work, but I know that sometimes it does not work, and that you 
cannot assume that because you like it as a parent, it has the 
same effect on your kid. We need focus group testing and we 
need to know, that it is not in just making kids think about 
it, but does it change the attitudes about drugs.
    Mr. Istook. Thank you. And, Mr. Walters, I appreciate that. 
I do want to ask out of deference for the time frame we're in 
and the other members of the subcommittee, the best you can do 
to be more succinct to enable us to cover more territory would 
be appreciated.
    I'll call next Mr. Hoyer, and if Mr. Price returns next, he 
will be next.
    Mr. Hoyer. Thank you very much, Mr. Chairman.
    Again, Mr. Walters, I want to welcome you. I'm going to try 
to be quick in my questions, and if we can be relatively 
precise. I want you to have full answers.
    You and I have had discussions in my office, and I 
appreciate your taking the time to do that. Subsequent to our 
conversations, I've taken a little opportunity to see what you 
thought about this program long before these test results came 
back. I quoted you repeating those.
    In 1996 you said that the ad campaign was a lazy person's 
way of trying to appear they are doing something, and in 1997 
you asked why is a glitzy public service campaign the best way 
to put additional incremental resources to work? And earlier 
this year, again before the test results, before the Annenberg 
findings came, you said, this campaign isn't reducing drug use.
    Now, if that is the case and all of those were accurate, 
why are you asking for $180 million? And if you have changed 
your opinion as to why $180 million ought to be spent, why?
    Mr. Walters. Thanks for the opportunity to address those.
    First of all, at this time I do not remember the precise 
context, but my concern has been that we not forget that we 
need a balanced effort here. I was involved in creating a 
public service antidrug campaign when I served in the 
Department of Education more than 15 years ago. I am not 
against the campaigns, but they are a part of an effort that 
has to be broader. I believe the comments I made at the time 
were connected to the issue that there has to be a balanced 
strategy that includes multiple parts.
    It is not my view, and I would not be here testifying under 
oath in favor of the President's request, if I thought the 
Campaign was not effective or was not worth the investment of 
time to make it effective where it is not working now.
    Secondly, on the issue of ``has it worked or had it not 
worked?'' in response to the evaluation that I got, I thought 
it was important to have the participants get together, because 
I had heard in reviewing the program there was bickering about 
how it had been run in the past. I was not here when it was 
started and when all that happened. What I wanted those people 
to do is to put aside the bickering and say, let's pick out 
what is credible here that we need to change, and let's do it, 
let's get it done. I recognize people care about this a lot. 
They invested a lot of their own prestige, energy, time, and 
sweat into this with the best of motives, but the bottom line 
is, it is not about motives and it is not about how people feel 
that I have to be as concerned about, as you do. It is about 
making the program work, as you said. So I have asked people to 
learn from this.
    Everybody wishes this evaluation was positive so everybody 
could feel good about this and know that we are going in the 
right direction. When it is not, then you get the finger-
pointing, and what I have asked people to do is not finger-
point on these issues. Let's simplify. Let's go ahead. Let's 
make sure it is powerful and let's go on.
    It remains to be seen whether we are going to be able to do 
all that, but I am hopeful that we are in a position where we 
have learned a lot and it is not a wasted effort at this point. 
I still believe it is important, or I would not be asking for 
the support.
    Mr. Hoyer. Okay. Let me ask a question, then, on the 
specific allocation of $180 million. How much will be used to 
actually purchase advertising in the--I presume you've broken 
down the budget, $180 million into objects of expenditure. How 
much will be spent to purchase advertising?
    Mr. Walters. Well, essentially the advertising budget----
    Mr. Hoyer. Time, in other words?
    Mr. Walters. Time is 76 percent of the overall budget, 
which I believe is higher than others. I have tried to compare 
this with other similar campaigns and it is higher than most of 
those campaigns.
    Mr. Hoyer. Now, is that more or less than has been 
purchased in previous years, do you know?
    Mr. Walters. We could supply that for the record. I do not 
think it is measurably different. It might be slightly higher 
or lower, but it is not measurably different, is my 
recollection.
    Mr. Hoyer. Okay. Because my information is that the 
proposal has substantially less air time, and I don't frankly 
know what substantially means, so that's why I'm looking for 
the--.
    Mr. Walters. I also think it is important to remember that 
because of the way the program is authorized and the rules 
governing the program, the Government gets an equivalent match 
for every spot you buy. So the 76 percent invested is actually 
154 percent of what you get in real advertising time on 
television, radio, and other places.
    Mr. Hoyer. Said another way, for every minute you buy, you 
get two.
    Mr. Walters. Right.
    Mr. Hoyer. How many contractors or subcontractors did ONDCP 
hire to help administer the media campaign in fiscal year 2001?
    Mr. Walters. I do not know the precise number. I will 
supply it. This came up in the hearing yesterday. Somebody else 
offered it. They said it was about 30. I will supply the 
precise number.
    Mr. Hoyer. Do you know whether that's--let's assume it's 
30. That is the figure I've heard. Do you know whether that's 
up or down from 1998?
    Mr. Walters. I do not know from '98.
    Mr. Hoyer. Or 1999? In other words, my question, I guess, 
is are we going up in terms of outside contractors, 
stabilizing, or going down?
    Mr. Walters. I do not want to misstate. I will supply that 
for the record.
    Mr. Walters. I am not aware that there has been a massive 
increase recently. There has been one area that I am aware of, 
where there was an addition of contractors to provide 
ethnically targeted and language-specific ads. It was 
impossible to get the material on a pro bono basis from the 
Partnership. We paid for it. We had to buy special expertise in 
that regard.
    Mr. Istook. Mr. Hoyer, your time is expired, and I need you 
to let Mr. Price proceed.
    Mr. Price. Thank you, Mr. Chairman.
    Mr. Walters, welcome. Glad to have you here and appreciate 
your testimony.
    Let me ask you about the perceived changes in focus, the 
areas of improvement that you've proposed here today. You talk 
about the greater testing of ads, of change in the age focus. 
You give a rationale for that, and then a focus on marijuana, 
and then some improvements in the advertising development 
process. Let me ask you first about the focus on marijuana, 
because that's one of the more significant changes you're 
proposing here, I think, and it's one of the ones with the 
briefest justification.
    I think we can all readily agree that marijuana use is 
highly undesirable, that the statistics are very alarming in 
this area, and that clearly we need to do whatever we can to 
discourage it. That said, I'm not clear what the rationale is 
here for your proposed change in focus. Is it based simply on 
the widespread use of marijuana, the fact that it's the most 
widely used drug? Is it based on the I think well-established 
fact that marijuana is a gateway drug for cocaine and heroin 
and other drugs, or is it based on both? What is the rationale 
for shifting the focus to marijuana? And a related question, to 
what extent does that imply a de-emphasis on the harder drugs, 
on cocaine and heroin? And let me just--since I have limited 
time, let me just ask if this also implies somehow a change in 
the content or the tactics of the ad campaign? These very 
powerful, hard-hitting ads have often focused on the truly 
devastating consequences of cocaine and heroin and just the way 
it fries the brain, you know, so to speak. The ads have been 
alarming, and the marijuana consequences, of course, are quite 
serious, but wouldn't be of the same character, perhaps. Are 
you talking here about--what are you talking about in terms of 
the possible change in the content and the tactics of this ad 
campaign, as I think we've understood it, and what it takes to 
get through to young people and make them aware of the truly 
alarming consequences of drug use?
    Mr. Walters. I will make two points, to be brief.
    First of all, the recommended shift would not be to ignore 
everything else, but to focus on what is the most widely abused 
of the illegal drugs. Two-thirds of the illegal drug use in 
this country is marijuana, and the other issues you raise of 
gateway and attitudes are pertinent. As I said in my opening 
remarks, we now also have reason, with the available 
information about dependency in this country, and the need for 
treatment, to understand that 65 percent of the estimated 4\1/
2\ million individuals living in households that are dependent 
or abusers, such that they need or could benefit from 
treatment. Sixty five percent are dependent on marijuana. They 
are not dependent on something else and using marijuana. 
Marijuana is the source, and people do not understand that, 
particularly young people. There is a tendency to decouple 
marijuana from the other drugs, and view it as safer and not 
only a gateway. It is the easiest kind of gateway.
    Nobody looks at a drug-dependent individual and says, oh, I 
want to be like that person. What they do is see a peer in 
almost all cases that says, this is fun; this is something that 
is safe; this is something that people are just making false 
alarms about; you can do this. And that is where the path that 
too many people start on ends up with more serious problems. 
Even sustained drug use causes them risk and harm.
    So the goal here is to take the area where there is the 
most ignorance and where we have the highest concentration of 
use and where we have the highest concentration of dependence, 
and focus more direct messages on that threat, because the 
general view of the country, both children and adults, is that 
marijuana is not addicting; marijuana is not dangerous. In 
fact, maybe we should consider, as some of the foreign 
countries are, legalizing it to a greater extent. That is their 
message.
    People are going to make their own decision about that, but 
I think part of what we are trying to provide is educational 
information about what the facts are, and I think we ought to 
use this more powerfully to do that.
    Mr. Price. Does this imply a change in content, a kind of 
de-emphasis of the kinds of ads that show the truly devastating 
consequences of cocaine and heroin use?
    Mr. Walters. I do not think it needs to, and also I think 
that if we do a better job here, I know that there are people 
who have the view that if you focus on drugs, there is a 
balloon effect, that use just shifts to something else, 
alcohol, maybe one drug to another drug. My experience from 
working in the Department of Education in the mid '80s onward 
on this issue is if you look at the data, when we do a good job 
of driving down drug use, and we drive down alcohol 
consumption, we drive down cigarette consumption, and if we 
push back effectively, there is not substitution. There is a 
better result across the board of all of these substances. I 
think the point of marijuana is marijuana has now been 
perceived increasingly as an exception, as something that is 
quasi-normalized in our society which is why we have more use, 
and which is why we have more problems associated with use. I 
think we need to provide more information about that. It is 
harder to provide these ads, because you cannot use the same 
information you have about heroin and about cocaine, but that 
is one of the reasons why this substance is more seductive. It 
presents itself as safer, and it is not safe, and we have a 
great deal of ignorance about that.
    As I said, I go around and I talk to editorial boards, 
people who are informed. They are flabbergasted about the 
numbers. But if you talk to people who are doing treatment 
admissions for teenagers or adults, they have been seeing this 
for years and they're saying hello, welcome to what we are 
living with.
    Mr. Price. Thank you, Mr. Chairman.
    Mr. Istook. Thank you. Next will be Mrs. Meek, followed by 
Mr. Sherwood.
    Mrs. Meek. Welcome, Mr. Director.
    Mr. Walters. Hi.
    Mrs. Meek. I have watched this media campaign since I've 
been on this committee since it started. Of course, any 
campaign of this type is very difficult to assess its value. I 
have seen many of the ads. I think they are good ads, and, of 
course, people say anything that exists in any amount should be 
able to be measured. So I'm sure you'll try to do that.
    I'm concerned as to the focus of your message and how it--
it looks like you have sort of splintered your target and 
splintered your messages and you haven't been able to focus a 
lot lately in the direction you're going. What plans do you 
have to try to bring it back into focus now that you've decided 
that perhaps through your assessment, this may not have reached 
the desired results? Do you have plans? Do you have young 
people advising you again, or are you keeping the same 
mileposts or measures that you started with? How effective is 
your assessment system in your agency to be able to look at 
where you're going and what direction you're going in?
    Mr. Walters. Let me answer those quickly. I would like to 
simplify and focus the message, as I said, both regarding age, 
regarding topic, and also in terms of the complexity of the 
message. We are not exactly at a final stage yet, but I am 
trying to share my thoughts of where we are going in response 
to this, and other things I have seen since I got here.
    I think there has to be more power. I think most people in 
politics understand advertising because you have to use it as a 
part of politics. No one would fail to have the best focus 
grouping of ads that you put on the air with people. I watched 
several hours of focus group videotape in regard to the drugs 
and terror ads, where we brought older teens, younger teens, 
and parents in and got the reaction and build the final product 
around what we see as most powerful. I know it is not enough 
for individual perception to be a guide here.
    In addition, I would like to say that I think the 
evaluation of this campaign, while there are concerns because 
it is expensive, it is involved, etc. but it is the best 
evaluation of a program of this size I have seen in the Federal 
Government. In a certain way I recognize, too, that this 
program is being scrutinized more because we actually know more 
about it.
    Now, I think that is appropriate, but I will also say I 
wish I had this kind of ability to evaluate other programs that 
I have to deal with in drug control on the demand and supply 
side, because I think then we would have greater pressure to 
make changes for the better. One of the things I am trying to 
do is drive those evaluations down into the system to share 
with State and local people as well so that they can hold their 
institutions accountable. It is very important.
    You could argue in a certain way this program is being 
punished, because it has had the integrity to put this 
evaluation in here, but it is that integrity that allows us to 
see the problem. Otherwise, you are going to spend a billion 
dollars, it could not be working effectively with young people 
and you would not even know it.
    The point is, I think the value of this tool is that it 
gives us the opportunity to fix it and that is what I and most 
people I have talked to, and I think Congress would agree, 
believe needs to be done.
    Mrs. Meek. I would agree with you on that, Mr. Walters.
    I'd also like to ask you to strengthen your outreach in 
this program so that you can reach out and find out really and 
truly how the people in the real world think about it and how 
strident it is to your audience. I agree with you. I think that 
the--you have been--you've had some honesty and integrity in 
the way you are testing the system. I think it does need 
improvement, constant improvement.
    Mr. Walters. If I can say one more thing on that point, not 
to take your time, but as you look at how the dollars are spent 
here, let me just say one of those priorities that I think is 
valuable is a relatively small part of the overall money is 
going to that kind of outreach. We have done things with the 
Media Campaign like take the material and print specialized 
guides for Girl Scouts on prevention. We have done this with 
the community antidrug coalitions and community coalition 
movement, by providing material and helping to design ads that 
the Ad Council ran for an equivalent donated time of $120 
million. I know there is an issue about fragmentation and 
power, but I think some of this relatively small amount is 
appropriate. People could differ about percentages, but I think 
it is important to have resonance beyond the individual spot 
appearing on the radio or the television, and this has allowed 
us to reach out. We have corporate partners that are providing 
material to their employees and their customers. Safeway is 
doing this to its 200,000 employees and its millions of 
customers. We have 25 corporate partners that are doing that.
    You can argue that is a diversion. I believe that from 
looking at it, and other people can differ, it is an important 
ability to have resonance within appropriate limits, but I 
think that it gives reinforcement. It is what we have learned, 
I think, from other kinds of behavior change, and public health 
advertising has worked in other segments, and we are applying 
it here, although I recognize this is a point of debate in some 
of the participants of this program.
    Mrs. Meek. Mr. Walters, I think that is outreach.
    Mr. Walters. I do, too.
    Mrs. Meek. Thank you.
    Mr. Istook. Thank you, Mrs. Meek.
    Next Mr. Sherwood, followed by Mr. Visclosky and Mr. 
Rothman, and we will then need to move on to the next panel.
    Mr. Sherwood. Mr. Walters, good morning, and it's with 
great interest I listen to your program, because my experience 
as a public school board member and in business----
    Mr. Istook. I don't think your mike is on.
    Mr. Sherwood [continuing]. Would agree--thank you--would 
agree that the younger--that the younger you start this 
education, the more effective it will be. And if, in fact, 
marijuana is the gateway drug, I think if you can get the 
message out that the kids that want to experiment with 
marijuana have to deal with the same low-life scum that they'd 
have to deal with to buy hard drugs, that's a point--that's a 
point that needs to be made, because we've glamorized it a 
little bit, and it's not considered to be as dangerous. So I 
think you're on the right track there.
    The thing that also occurs to me is that American industry 
has this incredibly sophisticated model of advertisement that 
works for all things, and if it works sometimes to our 
disadvantage, like teenage smoking was the result of 
advertisement a few years ago, some would say, and now we have 
too much prescription drug use of certain things because they 
are advertised, if we could use that great expertise to drive 
this scourge down, you'd be doing the right thing. And in that 
regard, do you think you have the best models and the best 
people trying to figure out how you get this message out and 
how you get it out specifically to young people?
    Mr. Walters. I think the evaluation shows we are not there 
yet. I have tried to consult widely with the best experts we 
have. I am very pleased with the talent of the people we have. 
I would say in terms of the Committee's deliberation on this 
more broadly, I would like to retain at least as much, if not 
more, flexibility in the program to do things like testing. I 
think the concern here is that if you look at the evaluation, 
we have people hearing what is being sent to them as messages. 
The messages have not yet demonstrated to be powerful enough. I 
think we would be remiss if we did not hear that--and I 
recognize there may be debates about this to increase the 
power.
    That will require more costly development, so you are going 
to have to put more resources into the cost of the focus 
grouping and maybe even providing some more complex content 
that is going to be outside where people are likely to donate. 
That has been a controversial issue, but my frank view coming 
from the outside is, it is pennywise and pound-foolish to 
insist that you are not going to do everything you can, 
especially with the findings of this result, to have as much 
and as powerful a product as you can get, because you are being 
given evidence that shows it is being heard. It is not doing 
what you need to have done for kids yet. So that is what we 
need to do, and I know there are people who want to say, no, we 
ought to maintain at all costs how we are doing parts of this 
the way it is now, but it is other parts that are wrong. My 
view is all the parts have to work better and that requires 
some flexibility. I think we do have the ability to get very 
talented expertise. I am pleased with the people I have been 
able to meet within this, and the dedication and the 
sophistication, even from the outside. I will confess, I would 
not be as critical as I was at the time in the content that Mr. 
Hoyer asked me about today, because I am very impressed with 
people I have been able to work with--both those who have 
donated and those who are consultants. I am not against either 
the bureaucrats or the contractors and I am not against the 
people who have been involved in this. They are very gifted 
people producing impressive material. Some of it needs to be 
improved. But obviously the effect we have had on parents has 
been quite powerful.
    I think the effect we have had on some of the subgroup 
materials for Hispanic, Native Americans, Chinese, and 
Vietnamese populations are important where we have inroads of 
drugs that we need to get to, and the material that we are 
providing is very impressive. I think it is a credit to what 
this Committee has helped support.
    Mr. Sherwood. The message to parents and the message to the 
young people would probably be much different, and with our 
middle-age brains, we've got to be careful we don't confuse 
those. Or older. In my case.
    Mr. Walters. You hurt me here, Congressman.
    Mr. Sherwood. In my case, I said.
    But to get to kids, you've got to advertise where kids are 
in their minds.
    Mr. Walters. Yes, sir.
    Mr. Sherwood. And, you know, that is often very different 
places from where the rest of us are in our minds, and I think 
that's so important.
    There was--and, of course, they spent a lot of time in 
school and sometimes school is what they don't want to listen 
to, but still that's where you can reach them. And are your 
campaigns targeted specifically to the venues that kids are 
interested in?
    Mr. Walters. We were trying to do this with the 
Partnership. I mentioned scouting. We also have outreaches to 
other youth groups. I know this has also been a point of 
controversy, but we have always used some of the pro bono match 
(the one we get for the one that we buy). To allow other groups 
that work with young people that have public service messages, 
to benefit from the match in the Campaign. We do this because 
we believe that obviously it is partly supervising young 
people's time, reinforcing healthy activities, giving them 
other adult supervision and encouraging some of that. I do not 
think that is disproportionate. I think it has allowed us to 
benefit and to treat this phenomenon as the broad thing it is.
    Again, you do not want to be so broad you dilute this. On 
the other hand, you do not want to be so narrow that you are 
not engaging crucial elements and reaching out, as we spoke 
about earlier.
    Mr. Istook. Mr. Sherwood, thank you.
    Mr. Visclosky, followed by Mr. Rothman.
    Mr. Visclosky. I'm fine, thank you.
    Mr. Istook. All right. Mr. Rothman.
    Mr. Rothman. Thank you, Mr. Chairman. Director Walters, it 
is a pleasure to have you here. And sorry I was a little bit 
late. It was, of course, very distressing to read that 
apparently the efforts so far have actually not had a favorable 
impact on the young people who have been exposed to these ads, 
although to some degree a favorable impact on their parents and 
some trickle-down theory, perhaps, is hopefully at work there. 
I'm not a big believer in the trickle-down theory, so--I've got 
two young kids myself, and one just graduated eighth grade and 
one just graduated the fourth grade. I've been to lots of DARE 
programs and I'm curious--by the way, I think your proposal to 
test these ads before you put them on the air is sensible and a 
good one. I'm curious, what percentage of the monies that you 
have to spend will you be spending on the testing of the ads 
themselves?
    Mr. Walters. I cannot give you a precise number because it 
would depend on the number of ads. Let me just say that the 
subset of the estimated cost of all aspects of advertising is 
now 87 percent of the appropriation, and roughly 87 percent of 
that goes to buying media. So currently 13 percent of the total 
advertising cost goes to non-advertising components. It would 
increase that slightly, but I think it is a relatively small 
investment. And there is some testing--I want to be here clear 
and not mislead anybody. There is some testing of initial story 
ideas now. But, again, my view in the experience I had with the 
ads we did at the Super Bowl is you need to be able to adapt 
the power of these as they develop, midstage and final stage. 
You would like to have enough concepts so that you can see 
which ones are powerful.
    Again, the final testing of the ads, which has been part of 
the program, has not taken place in some cases because material 
has been delivered too late. Two thirds of the ads had not been 
tested before they went on the air, and then some of them have 
been pulled because subsequent testing showed they had a 
potentially negative effect. Other ads if they are okay, are on 
the air because there is a gap. Well, ``okay'' is not getting 
the job done. I have got to have more power, I think, to say 
that we are on the right track.
    Mr. Rothman. I would join you in that belief. Do no harm 
first.
    Mr. Walters. Yes.
    Mr. Rothman. And save taxpayers' money too. At the same 
time, if there's a question of whether the material we're 
exposing these kids to is countereffective, if you will. I'm 
curious, do you have any special knowledge about what actually 
reaches these kids? Is it an appeal to the physical danger of 
these drugs, the unattractiveness of this? I remember during 
the smoking campaigns, you said you'll have bad breath or you 
won't look cool, or you'll hang around with, you know, 
undesirables. Is there anything that can get through to these 
hormone-laced kids?
    Mr. Walters. Starting in the Department of Education and 
subsequently here, and though I am not an expert on this, my 
personal experience has led me to adopt two tracks. One is 
there are a number of theories about messages that might reach 
young people, and we create material on the basis of some of 
those theories. Some of them have been harmful to you, ``Your 
Brain on Drugs'' and other kinds of health messages. Those have 
some effect if they are done right, and I think they have shown 
that in the past.
    But they also can sometimes be problematic, because at this 
age kids tend to be thinking of themselves as invulnerable. As 
I said, it is kind of like health ads for the Olympian gods. 
They do not think mortality is something they have to worry 
about. So you could have some limited effect.
    What we did in the example of the ads I was most directly 
involved in, the drugs and terror ads, is shift the focus from 
about their well-being, to try to engage their idealism. You 
are not thinking about the world you want to be in. 
Unfortunately, you are now aware of threats in that world more 
acutely. And think about what effect drug use is having on the 
forces who are using terror in your communities and around the 
world.
    Mr. Rothman. Mr. Director, have you found that that has 
been successful? Because I tell you the truth, that is--that is 
such a leap for people who read the newspapers and think about 
the world at large. I'm not sure that 12, 13, 14, 15, 16-year-
olds as a group, are aware of their role in affecting world 
terror.
    Mr. Walters. What we did in preparing those ads is a 
paradigm for what I am suggesting. We tested these with young 
people, and with parents, to a greater extent than any of the 
other ads. Over 1,200 people participated in multiple focus 
groups during the development process before those went on the 
air at the Super Bowl. To the best I could tell at the time, 
those ads were powerful. The results of that segment of the 
advertising campaign which started in February will be 
available mid-fall. The evaluation we released was through 
December of last year.
    Mr. Rothman. Can I ask one question?
    Mr. Istook. Mr. Rothman, your time has expired and we need 
to----
    Mr. Rothman. Thank you, Mr. Chairman.
    Mr. Istook. Thank you.
    Director Walters, we appreciate your time and your 
testimony. We will have some follow-up matters for the record 
and thank you for being with us this morning.
    Mr. Walters. Thank you. I look forward to working with you.
    Mr. Istook. We have the two remaining panels. One we 
consider a technical panel regarding the study and evaluation 
that has been done; the second panel involving the partnership 
and the advertising effort, people involved in that proposal, 
and the ads that have been presented. Because of our time 
situation, what I would like to do is hear the testimony from 
both panels before I call upon the members for questions, 
comments, and interaction. So it would probably be most 
convenient, gentlemen, if we might ask you all to take places 
at the witness table.
    Mr. Hoyer. We may have to set up an additional table.
    Mr. Istook. We may. We may have to turn the corner with 
people. That'll enable the members to address the questions to 
whomever they may wish within the groups. Otherwise I don't 
think we would be able to satisfy everything in the time that 
we have remaining.
    We have in the two panels--and we'll proceed in this 
order--Dr. Wilson Compton of the National Institute on Drug 
Abuse; Dr. David Maklan of Westat; Dr. Robert Hornik, Annenberg 
School for Communication; then Steven Pasierb--and I hope I 
haven't mispronounced your name, sir; I'm sure you can give us 
the correct way--of the Partnership for a Drug Free America; 
and Allen Rosenshine of BBDO Worldwide Incorporated.
    Gentlemen, we can begin with Dr. Compton.
    Mr. Compton. Chairman Istook, Representative Hoyer, and 
members of the subcommittee, good morning. I'm very pleased to 
be here, on behalf of the National Institute on Drug Abuse, to 
discuss the important role that science plays in the design and 
implementation of the evaluation of the ONDCP media campaign.
    I am Dr. Wilson Compton, the new director of NIDA's 
Prevention Division. Now, it's my division that manages the 
contract for this evaluation. And today I'm going to provide 
you with a very brief overview of NIDA's role in this important 
endeavor.
    In January 1998, ONDCP, in response to a congressional 
mandate, asked NIDA to develop an independent science-based 
evaluation to assess the outcomes and impact of its media 
campaign on parents and children. NIDA awarded the evaluation 
contract in September of that same year to the nationally known 
health survey research firm, Westat, and its subcontractor, the 
Annenberg School of Communication at the University of 
Pennsylvania.
    The goal of this evaluation has been to measure the impact 
of the campaign on the knowledge, beliefs, attitudes, and 
behaviors of parents and children in regard to illegal drug 
use. To address this important goal, a new evaluation survey 
called the National Survey of Parents and Youth, or NSPY for 
short, was developed to serve as a rigorous and accurate 
reflection of drug use trends. Existing data sets such as 
NIDA's own Monitoring the Future study and SAMHSA National 
Household Survey continue to provide essential stat information 
about overall drug abuse rates. But the NSPY was necessary to 
make sure that any changes in drug outcomes could be attributed 
to the media campaign itself.
    The NSPY uses reliable state-of-the-art computerized 
technology to interview youth and parents from the same 
household, multiple times over the course of the evaluation. 
Exposure to the campaign is measured by asking parents and 
youth if they can recall seeing the specific campaign ads which 
are shown to them on the computer that's used for the 
interview. Linking this media exposure to changes in attitudes 
and behavior is key to our evaluation approach.
    In total, almost 14,000 participants from 90 locations 
across the country have been recruited to participate in this 
study. This reflects a nationally representative sample of the 
parents and youth, ages 9 to 18, who are the target audience 
for the campaign.
    The interim findings being reported today reflect follow-up 
interviews with the first 40 percent of the overall sample. 
Once the study concludes and all the data are analyzed, the 
results may be quite different than those being reported today. 
Because behavior changes can take a long time, new knowledge 
will continue to be unveiled even after the study is completed. 
I'd like to thank you on behalf of the NIDA for providing us 
with this opportunity and allow my colleagues from Westat and 
the Annenberg school to report on the interim finding. Of 
course I'll be happy to answer questions.
    Mr. Istook. Thank you Dr. Compton. I appreciate your 
compressing things, your consideration in doing that.
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    Mr. Istook. Dr. Maklan.
    Mr. Maklan. Thank you. Mr. Chairman, Representative Hoyer 
and distinguished members of the subcommittee, I'm pleased to 
be here today to discuss the ongoing evaluation of the ONDCP's 
National Youth Anti-Drug Media Campaign.
    My name is David Maklan. I am a vice president at Westat, 
the organization selected by NIDA to undertake the evaluation. 
Accompanying me, next to Dr. Compton, is Dr. Robert Hornik, 
professor of communication at the Annenberg School for 
Communication. In the few minutes allotted to me, I will 
briefly summarize the evaluation study design and discuss the 
logic we used to assess whether the campaign is influencing 
drug-related beliefs, intentions, and behaviors of youth and 
their parents. Dr. Hornik will then present our findings.
    Now, ONDCP initiated the campaign in three phases, each 
with its own evaluation components. Our evaluation focuses only 
on Phase III, which was initiated in September of 1999 and 
marks the start of its full implementation. The objective of 
our evaluation is to determine how successful the Phase III 
media campaign is in achieving its goals.
    While there are many questions that the evaluation can and 
will attempt to answer, there is one overarching question, 
whether or not any observed changes in drug-related beliefs, 
intentions, and behaviors can be attributed specifically to the 
campaign. Operationally this question can be broken out into 
three sub-questions: First, is the media campaign getting its 
messages to youth and their parents? Second, are the beliefs, 
attitudes, and behaviors of youth and their parents changing? 
And, third, is the media campaign responsible for these 
changes?
    When designing an evaluation study it is appropriate to ask 
whether existing data collection systems can be used to provide 
the information needed to evaluate the effectiveness of the 
program being scrutinized. From the start we believed that data 
from two existing systems are crucial to measuring prevalence 
of substance use. These systems were the National Household 
Survey on Drug Abuse sponsored by SAMHSA, and Monitoring the 
Future study sponsored by NIDA.
    However, the media campaign is only one piece of the 
national drug control strategy. Any change in drug use 
prevalence rates among youth is likely to result from 
influences of many causes besides the campaign. Therefore, 
simply tracking drug use rates is insufficient to identify the 
forces behind change in these rates.
    As Dr. Compton indicated earlier, in order for us to make 
reasonable claims that the campaign is responsible for any 
changes we observe, the evaluation was designed to go well 
beyond the analysis of trends from existing data. Specifically, 
we developed the NSPY survey. In addition to collecting 
information on drug use data, this survey emphasizes the 
measurement of drug use beliefs and intentions, exposure to 
antidrug messages in general, and to the ONDCP media campaign 
advertisements in particular, as well as many peer family and 
substance abuse risk factors.
    The circumstances of Phase III of the media campaign 
presented serious challenges to the design of this evaluation. 
First, it was not possible to implement a control group 
designed to evaluate the campaign. A control group would 
require conducting a campaign in some but not all media 
markets. This approach was ruled out on at least two grounds: 
First, excluding coverage of the selected media markets was 
antithetical to the campaign's goal of reaching out to all 
youth across America to help them avoid drug problems. Second, 
in Phase II of ONDCP's campaign, Phase II of the campaign was 
national in coverage and was already in full swing for a full 
year prior to the start of Phase III. Hence, it was at least 
theoretically possible that no youth and no parents remained 
unexposed to the campaign when we started our evaluation.
    Instead of using a control group to control variation and 
exposure to campaign messages, our study tries to evaluate the 
campaign by examining natural variation and exposure to its 
ads. This means comparing groups that recall seeing many of the 
campaign ads to other groups that recall seeing fewer ads. In 
addition to looking for variation and ad recall, it is also 
necessary to measure and account for any preexisting 
differences between the groups that might also explain the 
variation and recalled exposure to campaign ads and any 
variation and outcomes of interest.
    Consequently, our study included many questions on personal 
and family history as well as measure of trends believed by 
experts to be related to exposures of media campaign messages 
and drugs.
    Dr. Compton previously indicated that the NSPY survey 
consisted of seven data collection waves, each lasting 
approximately 6 months. That is shown in our first figure, our 
first chart. During waves 1 through 3, we recruited and 
administered an initial interview to three national samples of 
youth and parents, labeled samples A, B, and C. It is very hard 
to see on that thing, but moving from left to right, A, B and 
C. Wave 1 data collection started in November of 99 and wave 3 
data collection ended in June of 2001.
    In waves 4 and 5, participants are administered their first 
follow-up interview. Wave 4 data collection started in July of 
last year and ended in December, and involved reinterviewing 
study participants first interviewed during wave 1. So each 
sample is interviewed.
    You follow down the column. These respondents, the ones we 
interviewed in wave 4, constitute approximately 40 percent of 
the total NSPY sample. The evaluation's most recent report is 
based largely on the findings from this wave 4 survey. We 
currently are completing administration of the first follow-up 
interviews of the remaining 60 percent of the sample.
    The final part of my statement presents the logic we used 
to determine whether there was evidence that campaign is 
affecting the beliefs, intentions, and behaviors of youth and 
their parents. Our approach examines three types of evidence 
each with its own strengths and weaknesses. First, it would be 
desirable to show that the outcomes we are measuring are 
trending in the direction consistent with ONDCP campaign 
objectives, as shown in the second chart. However, as I noted 
earlier, a trend alone won't mean that the campaign was 
responsible. Further failure to observe a trend might miss real 
campaign effects. For instance, the campaign might be 
successful at keeping the level of drug use from getting worse 
as a result of influences of other negative forces.
    Still, given that the trend between 1992 and 1998 towards 
increasing drug use justified that campaign, finding reversal 
of that trend is desirable. Therefore, the evaluation examines 
data from the National Household Survey on Drug Abuse and 
Monitoring the Future, as well as NSPY, for evidence of changes 
and outcomes.
    A trend is more firmly linked to the campaign--for it to be 
more linked firmly to the campaign, the presence of a second 
class of evidence is required; namely, that youth and parents 
who are more exposed to campaign ads do better on the desired 
outcomes.
    The third chart depicts this second test for campaign 
influence, which we call same-time or cross-sectional 
association. To give a campaign--for example, in our semiannual 
reports, we look to see whether youth who report seeing 
campaign ads two or three times a week are more likely to 
believe that there are negative consequences for marijuana use 
than do youth who report seeing campaign ads less than once a 
week. However, even when we find such an association between 
exposure to campaign ads and an outcome, the result is still 
subject to concerns. I will touch upon only two.
    First, there is the risk that the observed association 
between campaign ads and outcomes is the result of other 
variables that affect them both. For instance, youth who do 
less well in school may be more likely to turn to drugs and may 
also spend more time watching television and thus recall seeing 
more ads. The threat to an inference of campaign effect from 
such preexisting conditions is addressed directly through the 
implementation of statistical controls.
    The second concern in making causal inferences from cross-
sectional association might be the result of influences of 
outcomes on recalled ad exposure, rather than of exposure on 
outcomes. For example, it's possible that youth with a negative 
view of drugs are more likely to remember the antidrug 
advertising. This could explain the finding of a dissociation 
between the extent of ad recall and an outcome just as well as 
the idea that the exposure to antidrug advertising influences a 
youth's view of drugs. This concern, called the ``threat of 
reverse causation'' cannot be eliminated under most 
circumstances with cross-sectional data.
    Mr. Istook. Dr. Maklan, can I ask if it's possible for you 
to compress things a bit more to make sure that we have 
testimony from everyone?
    Mr. Maklan. I just have another paragraph to go.
    Mr. Istook. All right, thank you.
    Mr. Maklan. With the completion of wave 4 data collection, 
the evaluation now has access to over-time data. That is, we 
now have data from youth and parents interviewed at wave 1 and 
reinterviewed 18 months later. The availability of this over-
time data makes it possible to apply the third test for 
campaign effects, labeled ``delayed effects association'' 
depicted in the fourth figure.
    With these data we can examine the relationship between 
campaign ads measured at wave 1 and outcomes measured at wave 
4. The additional explanatory power gained by the availability 
of these data are critical. If delayed effects are found, they 
enable us to establish that the association between exposure 
and campaign ads--exposure to campaign ads and the outcomes of 
interest cannot be the result of the outcomes affecting recall 
exposure. Consequently, they can help sort out with some 
confidence the causal order between campaign ads and outcomes 
and therefore help us determine whether the campaign appears to 
influence the beliefs, intentions, and behaviors of youths.
    And with that, I'll turn the microphone over to Dr. Hornik.
    Mr. Istook. Thank you, Dr. Maklan.
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    Mr. Istook. Dr. Hornik.
    Mr. Hornik. Thank you. As Dr. Maklan said, we work together 
on the evaluation. I have lead responsibility for study design 
and analysis. We address three major questions: Has there been 
substantial exposure to the messages? Has the youth campaign 
been effective? Has the parent campaign been effective?
    I'll try to highlight the answers to all three of those 
although, of course, we have a very substantial report that 
we've submitted to Congress in addition to our written 
testimony. I'm going to move through the exposure material 
quite quickly because I understand that you're in something of 
a--there's some urgency here.
    There's lots of exposure. About 70 percent of both youth 
and parents report that they recall seeing or hearing at least 
one ad per week. There's clear evidence that these messages are 
being heard. Perhaps the nicest data come from their recall of 
the brand phrase, ``my antidrug'' in the case of youth; and 
``the antidrug,'' ``communication: the antidrug'' in the case 
of parents.
    The branding effort has clearly taken hold. About three 
quarters of all youth and three fifths of parents recognize 
their respective brand phrases by the end of 2001.
    So to summarize the answer to the first question, the 
campaign has used money provided to it by Congress to buy a 
substantial amount of advertising time, and the youth and the 
parents report seeing those ads with some frequency, they 
recall the brand. And this is a good first basis for evaluating 
the campaign.
    But next we address the evidence for effects on both 
parents and youth. We begin with the parents' results. Was the 
campaign effective with parents? As you know, the parent 
campaign seeks to reduce youth drug use by encouraging parents 
to engage with their children. Earlier in the campaign this 
included encouraging parents to talk with their children about 
drugs, to do fun activities with them. More recently, the 
campaign has focused on parent monitoring of children, and by 
that they mean making sure that parents know where their 
children are, knowing what their children's plans are for the 
coming day, and making sure their children are around adults 
most of the time.
    In addition, recognizing that youth behavior is the 
ultimate outcome, we have also begun to examine whether 
parents' exposure leads to changes in youth behavior.
    Here are the results. Summarized in this first chart--these 
are a couple of examples, really. For two behavioral outcomes 
for parents, the talking behavior, which is measured on a scale 
from zero to 3 for each--if a parent says they almost always or 
always know where their children are during the day, or know 
that they're around adults all the time, they get a point. So 
essentially this is a scale that goes from zero to 3.
    For the monitoring behavior--the talking behavior is 
whether they talked frequently with their children about drugs 
over the previous 6 months. So on that scale we see a positive 
trend. On talking behavior it's gone from 2.26 to 2.36. It's 
not a huge change, but it certainly is going in a positive 
direction.
    Similarly, for monitoring behavior, it went from 1.41 to 
1.46. So on our first form of evidence for parents, we did see 
some positive trends. Secondly, we saw that those most exposed 
to the ads, those parents most exposed to the ads had a better 
course on these two indexes.
    Exposure and outcomes are related. As again indicated in 
the chart, we just say yes in terms of talking behavior. For 
monitoring behavior it wasn't true for everybody, but it was 
true for fathers and for parents of sons. We saw in both those 
cases that there was an association between exposure to the ads 
and the likelihood of engaging in these behaviors.
    The same thing was true for some of the other outcomes. As 
I said, these effects were particularly strong for fathers. 
However, we didn't find evidence that parents' exposure to the 
campaign was associated yet with less marijuana use, so we 
haven't seen that trickle-down that Mr. Rothman mentioned 
before. Also, we didn't find evidence of parents' exposure to 
the campaign at the start of 2000 predicted subsequent change 
in these outcomes between 2000 and 2001.
    So we would have liked to have those two things, in 
addition to the evidence about more immediate effects, but we 
haven't been able to make that yet. We hope when we complete 
additional data collection, we will be able to see those 
things.
    So in summary about parents, we have some evidence 
consistent with the effects of the campaign on parents' 
outcomes. We would have been able to make a stronger claim had 
we had some of these additional forms of evidence. But still, 
as an interim result 2 years in the campaign, in the third 
phase of the campaign, and while we continue to collect data 
this is favorable evidence.
    What about the campaign effects on youth? We reported that 
youth were exposed to the campaign and recognized brands. That 
is far--the positive evidence goes thus far. We have little or 
no evidence that the campaign has convinced youth to avoid 
marijuana use or to change their ideas about marijuana.
    This chart that is up now says that we've seen no reduction 
in youth marijuana use since the first wave of NSPY data 
collection in the first half of 2000. We have four waves of 
data. What you have there is the data for the youngest group, 
12-to-13-year-olds, 14-to-15-year-olds and 15-to-16-year-olds. 
And what you see are very sharp differences between those three 
age groups in their annual use of marijuana, it's close to 30 
percent for the oldest group, but no effective trend across the 
four waves.
    The Monitoring the Future study basically shows the same 
thing, that there's basically stable results since 1998; 
there's a little bit of evidence from there that eighth grade 
use has gone down since '98, but our view is that that is 
probably not attributable to the campaign. Given that the rate 
of change was already present between '96 to '98, it's a small 
change, about 1\1/2\ percent between '96 and '98. There's been 
an additional downward trend for eighth graders between '98 and 
2001 of another 1\1/2\ percent. It's now about 15.2 percent in 
2001, that's still 2\1/2\ times what it was in 1991 in terms of 
eighth grade annual use of marijuana.
    So we'd have to argue that even before our measurement 
began, but really going back to '98, that the decline for 
eighth graders is probably not attributable to the campaign.
    All right. In addition to youth use of marijuana, we also 
measured their ideas about drugs that we know predict 
subsequent initiation of drug use. Those included intention to 
initiate drug use, which is very predictive of whether they 
will or not, the beliefs and attitudes, social and norm beliefs 
of their parents and peers expect them not to use drugs, and 
their self-efficacy or confidence that they feel they can say 
no to marijuana if offered.
    Again, as with the marijuana use trends, there is no 
overall favorable in any of these ideas for youth. Current 
nonusers of marijuana are mostly not planning to use marijuana 
in the next year, but that isn't changing across the campaign. 
And in fact, there was a little bit of a negative effect, a 
significant trend for social norms. In addition, we saw 
absolutely no evidence of association between exposure to the 
campaign and outcomes. Kids who were more or less exposed to 
the campaigns basically expressed the same views about 
marijuana use.
    And then we turn to the third type of evidence. We took the 
sample of youth whom we had interviewed in the first half of 
2000 and looked only at those who said they had never used 
marijuana. So we're only looking at nonusers of marijuana at 
the start.
    We interviewed them again during the last half of 2001, 18 
months later. We again compared those who reported more 
exposure and less exposure to the campaign when we first 
interviewed them. We tested to see whether their exposure to 
the campaign at the start predicted what their beliefs would be 
18 months later, and particularly whether their exposure to the 
campaign would predict whether or not they initiated drug use 
or marijuana use in the subsequent 18 months.
    The findings were unanticipated on some of the measures, 
and for the subgroups there was evidence that early exposure to 
the campaign predicted more pro-drug beliefs at the second 
interview and more likelihood of initiation of use.
    The next chart shows that girls with the highest campaign 
exposure at the start were more likely to initiate marijuana 
use than girls who were less exposed. This unfavorable effect, 
however, was not seen for boys. The unfavorable association was 
also found for the youngest respondents and for the respondents 
who were at lowest risk for initiation.
    So what are our conclusions? The campaign was successful in 
getting exposure to its advertisements. It may have influenced 
parents to engage more with their children, but has not 
affected youth positively thus far, and there is some evidence 
of unfavorable delayed effects on youth.
    What I have presented just in summary form is what we know 
so far, but it's probably worthwhile to put some additional 
background information around these results. First, we reviewed 
the evidence of unfavorable effects on some youth to be interim 
results. We're reporting on 40 percent of the sample, and we 
only therefore include the delayed effects results for youth 
exposed to the campaign in the very first half of 2000.
    The next report will include youth whose exposure to the 
campaign was in the subsequent year, and the results may be 
different then. They may be different because the campaign may 
have been more successful in that next year. The results may 
also be different because we'll have a sample that is twice as 
large, and we're going to be able to be much more precise about 
what the results have been.
    Second, these interim negative results are surprising, 
given the history of public health communication campaigns. 
There has been one field experiment undertaken previously, and 
that showed evidence that ad exposure reduced marijuana use. 
There have also been attempts to influence other substance use 
by youth. The best evidence comes from the antitobacco 
campaigns which many of you know, and the evidence from these 
campaigns is generally positive, including State campaigns in 
Florida, California and Massachusetts. There is no other 
published evidence that we know about that indicate--that shows 
a negative effect like this of a large-scale campaign, although 
there is, of course, evidence of campaigns that are 
ineffective.
    So in thinking about these, we ought not think about this 
campaign as representative of all possible campaigns. No 
advertiser, having seen a particular series of commercial fail-
to-effect sales of a product would swear off advertising. They 
would go back and try to develop a revised set of ads or a 
border marketing program that would improve sales. Only after a 
series of such efforts, none of which paid off, would they give 
up on a communication approach.
    We appreciate the opportunity to present these results, and 
of course we will be glad to respond to any questions you might 
have.
    Mr. Istook. Thank you Dr. Hornik.
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    Mr. Istook. Mr. Pasierb.
    Mr. Pasierb. If I could trade seats with Dr. Maklan, just 
so I could--it helps me to spread out my notes. I appreciate 
your indulgence.
    Mr. Istook. Please proceed.
    Mr. Pasierb. Mr. Chairman, good morning, Congressman Hoyer, 
members of the panel, thank you for calling this hearing today 
and for most--thank you through the years for your leadership 
on the drug issue and your funding of this campaign.
    My name is Steve Pasierb. I'm the president and CEO of the 
Partnership for a Drug-Free America, an organization that has 
been running this pro bono media campaign in the Nation since 
1987. I've been personally involved in this issue, although I'm 
an advertising person, for the last 11 years on the demand 
reduction side, first working in the State of Maryland on 
programs there, and for the last 9 years with the Partnership 
for a Drug-Free America.
    I can tell you that in all of our years working on the drug 
issue, I'm more convinced than ever the media is one of the 
most efficient tools that we can use to affect attitudes and 
change behaviors on drug use.
    We're here to talk to you today about the 24 million 
teenagers who are the consumers of this campaign, who are the 
audience that we need to serve through this campaign. Now, one 
thing we do know in the history of this campaign, the 4 years 
that we have under our belt, is this campaign did work and 
we're convinced this campaign can work again. And I will detail 
this a little bit further in my testimony.
    Now, each of you has run sophisticated advertising 
campaigns back in your communities as part of the election 
cycle. You know the value of good research. You know the value 
of testing of focused messages that resonate with your consumer 
and do well in the marketplace. You know the value of 
advertising. So my job isn't to tell you that.
    But we also know the tenets of good advertising really are 
quite simple. The last thing you would do in the midst of an 
election cycle is challenge them, radically changing your 
message or your target audience, or spending less on your media 
buys as the election day approaches.
    Over the last 2 years, unfortunately, this is really what 
has happened with the National Youth Anti-Drug Media Campaign. 
Although it began in its early years, years 1 and year 2, as 
effective and focused, it hasn't continued on that course. What 
has happened is the campaign has lost its way, gotten 
significantly more complex, and expanded its web of 
subcontractors, as we've heard here today.
    Congress had it right 5 years ago when you approved this 
program. You signed up for an original vision that called for 
the advertising industry, via the Partnership, to provide 
strategic counsel and hard-hitting ads on a pro bono basis. The 
government, as you know, promised to provide funding for 
testing and to secure its--excuse me--consistent heavy levels 
of media exposure for our campaigns. When the campaign embraced 
the simple, focused, research-based idea that was the beginning 
of it, it worked. During the first 2 years of the campaign we 
reached our target audiences, teenagers and their parents, with 
hard-hitting ads that focused on one theme, the risk and social 
disapproval of drugs.
    The result, as you will see on the chart that my colleague 
will put up, is a remarkable 41 percent increase in awareness 
of the campaign messages. You see the spike, you see the rising 
increase. Positive shifts in drug-related attitudes and 
indications that marijuana use was beginning to turn downwards 
after a 5-year climb. This was reported by the three leading 
national tracking studies, the Household Survey, the Monitoring 
the Future survey, and the Partnership Attitude Tracking 
survey. This tells us that we were off to a good start.
    Now, getting an accurate picture of the overall campaign's 
impact means you need to make a complete assessment of the 
campaign. From the very beginning, all the data that has been 
derived during this period, as you heard the Westat analysis, 
took place, the beginning of it, the baseline of Westat, 18 
months after the campaign was launched, 18 months after it was 
put in front of the consumer. We know that it doesn't capture 
that beginning part of the campaign, its launch where it made 
the big splash, where it was the story in the Nation, and those 
first 18 months that it was in the marketplace.
    So what we need to do is look at all the data, both the 
Westat survey and the earlier data on this, and what we find is 
that in years 3 and 4 that Westat does measure, the campaign 
moved away from its focused start, the very simple risk and 
social disapproval start that it had, and embraced a very 
complex theoretical plan. The campaign challenged really some 
of the commonsense things that any advertiser does in their 
campaign. And these are places where I think we agree very much 
with the director.
    We agree the campaign experimented with dozens of different 
message platforms, replacing that tight focus on risk and 
disapproval. We also agree that the campaign mandated a message 
for 11- to 13-year-olds, which was much lower than the older 
teens who are actually using marijuana. So our ability to drive 
down use by talking to a nonusing audience was decreased.
    One thing that we believe very strongly in is that the 
campaign established the 26-step, 10-month-long process for 
creating and approving the advertising that replaced an 8-step 
process that had served us over the prior 13 years, which took 
considerably less time. So basically if we decided today to 
create an ad, delivery might be sometime after Groundhog's Day 
next year. That's far too long to deliver on advertising.
    And finally, we feel that the campaign began to spend less 
and less on some of the core elements on why it was created. 
We've offered the term one third of the $180 million, or about 
$50 million, pulled away from the very thing Congress wanted to 
do, the core media buys. And when we say ``media buys,'' we're 
not talking about advertising overall. We're talking about the 
television time, the radio time, the newspaper time, the core 
time and space for the campaign.
    In October of year 2000, we sent a letter to ONDCP 
summarizing our perspectives on this. I have a copy that I 
would like to submit to the record today.
    Mr. Pasierb. While the campaign has not effectively worked 
as it could have or should have over the last 2 years, the 
data, the entire data that is in front of us don't support the 
insertion--the assertion that the entire campaign has been a 
failure from the beginning. Net drug use since the launch of 
the campaign is down and stable. The same is true for marijuana 
use.
    The Partnership and our industry partners across the Nation 
urge the committee to refund the National Youth Anti-Drug Media 
Campaign for fiscal '03 if, and only if, significant changes 
are made and we return the effort back to the original concept, 
that original concept that was presented to Congress 5 years 
ago, ensuring that the Partnership in collaboration with the 
director, for set and guided advertising strategy for the 
campaign, and that the vast majority of the appropriation is 
spent on immediate area time and space.
    If the media campaign is to succeed, it will require strict 
legislative language that carefully defines roles and mandates 
by law what the campaign can and cannot do.
    Submitted with Mr. Burke's testimony are also specific 
recommendations for getting the campaigning back on track, all 
focused on that campaign original vision. Along with our 
recommendations are concrete offers from the advertising 
industry to help in this regard, and Mr. Rosenshine will detail 
those in greater detail in his testimony.
    Let me close by saying that advertising alone is not going 
to solve the drug problem. But we know, as verified by 
independent research and in market experience over the last 
decade and a half, we can reach millions of kids and their 
parents with credible, persuasive information about drugs via 
the media.
    Media is an efficient tool, Mr. Chairman. To date, the 
advertising structure, through the Partnership, has contributed 
about $100 million to the campaign in the form of the 
advertising created, and the Partnership accepts no funding 
from the appropriation for the role that we play in the 
National Youth Anti-Drug Media Campaign. None of the dollars 
come to our organization. The 180 million requested for this 
campaign, as you said, represents about 1 percent of the 
Federal antidrug budgets. I know we can make that 1 percent 
work much more hard than it has over the last 2 years. We can 
produce the results that we're all demanding, and we can get 
this media campaign back on track if we restore it to its 
original vision.
    I want to thank you, Mr. Chairman, Congressman Hoyer, 
members of the committee, for my testimony. Mr. Burke had 
wanted to close his testimony by showing a brief message on the 
issue of Ecstasy. Ecstasy is a drug which in the last 2 years 
has risen 71 percent among youth. The Partnership, in October 
of 2000, decided that we needed to take action on Ecstasy in 
the Nation. On October 1, we launched a creative development 
effort to deliver an antidrug campaign on Ecstasy. That 
campaign was distributed to the media in early December, 
basically a 2-month period to develop the advertising and make 
nationwide distribution. Developed through our pro bono system 
and part of now the National Youth Anti-Drug Media Campaign, it 
has been tested, I would like to show those messages to you 
very quickly.
    Mr. Istook. Thank you.
    [Videotape played.]
    Mr. Pasierb. Thank you very much.
    Mr. Istook. Thank you, Mr. Pasierb.
    Mr. Rosenshine.
    Mr. Rosenshine. Mr. Chairman, Congressman Hoyer, members of 
the committee, thank you for inviting me here today. I have 
submitted in advance, detailed testimony on the question before 
you, and with your permission I'd offer that statement for the 
record.
    I'm chairman and chief executive of BBDO Worldwide, the 
third largest advertising agency in the world, and I've been in 
the advertising profession for all of my working life. I've 
also been involved with the Partnership for a Drug-Free America 
since its inception in 1986. I sit on its board of directors 
and its executive committee, and since the beginning of the 
Partnership, I have chaired its creative review committee which 
is responsible for approving all of the advertising that has 
carried the Partnerships' name.
    It is my belief that the Partnership, that is, the 
advertising professionals and agencies that constitute this 
unique organization, has produced some of the most creative and 
most effective advertising ever done in this country, not just 
in the field of public service but in advertising, period.
    Steve has testified today about things that have been right 
and wrong, and what needs to be changed in the National Youth 
Anti-Drug Media Campaign. We're here today to urge this 
committee, once again, to fully fund this effort if the proper 
changes are made to make the campaign effective again.
    As Steve said a few minutes ago, there are simply no more 
efficient or effective ways to reach the 24 million teens in 
America and their parents, on an ongoing basis, than through 
mass media advertising. The advertising industry stands ready 
to support the Congress as we look for ways to now improve this 
effort.
    As you consider the future of this program, there are two 
fundamental questions that need careful consideration both by 
this committee and by the authorizing committees as well. 
Number one, what should the National Youth Anti-Drug Media 
Campaign really be? What should its mission be? How should that 
mission be accomplished? And what should Congress and the 
people of America expect in the way of results?
    And, secondly, who should be the key people in making the 
strategic and operational decisions about this program?
    In our opinion, the media campaign, plain and simple, 
should be modeled on a traditional national advertising 
campaign. That's the vision for the campaign that was presented 
to the Congress 5 years ago. The idea was for the advertising 
industry, through the Partnership for a Drug-Free America, to 
continue to create advertising and provide strategic counsel, 
pro bono, while government money would be used to deliver ads 
at exceptionally high levels of media. Media companies, for 
their part, would match all the media buys with added levels of 
free advertising exposure, as has been noted. That, along with 
the research to provide strategy, and testing to measure the 
effectiveness of the advertising, was essentially the package.
    The program had a vision. It had a methodology. It had 
accountability. But the campaign moved away from this when it 
began constructing, at considerable taxpayer expense, a highly 
theoretical, ``fully integrated social marketing campaign.'' 
This questionable approach calls for multiple message 
platforms. That is fancy for ``many strategic messages,'' more 
than a dozen, in fact.
    We've had throughout an all-encompassing plan that includes 
advertising, but also celebrity endorsement, entertainment 
content, online events, corporate sponsorships, grass-root 
relationships, and briefings for Hollywood writers and 
producers in the hopes that it will affect the content of their 
work.
    It all sounds impressive, Mr. Chairman, but I believe if 
you were to offer this plan to major corporations in America 
the response would be clear: It's nice in theory, but it 
doesn't usually work in the real world of marketing. It's 
complicated. It's driven in different directions by different 
agendas. It fractionates a budget.
    In the 1980s, significant amounts of money were written off 
by companies promulgating the theories of, ``fully integrated 
markets'' only to conclude what we suggest to you today: Such 
theoretical constructs are most often ineffective and wasteful.
    When the media campaign began, it was essentially a 
traditional research-based national advertising campaign, with 
one message and heavy media exposure, and it worked, Mr. 
Chairman, at least in the beginning. When it moved away from 
this focus-driven approach that worked best, it worked less 
well.
    So what should the National Youth Anti-Drug Media Campaign 
be? Well, Congress had it right 5 years ago when it signed up 
for a clear, focused vision. It was right then; it can be right 
again.
    Coming back to question No. 2, who should be the key 
marketing strategic decisionmaker for this program? Well, 
clearly, Mr. Chairman, Congress also answered that question 5 
years ago when it accepted the fact that the advertising 
industry, via the Partnership for a Drug-Free America, would 
fill that role. They were qualified, had an exceptional proven 
track record of running a campaign for 13 years, and because it 
would receive no funding from the campaign, it could offer the 
best possible advice.
    Mr. Chairman, it is time to revisit, reconstruct, and 
reempower this vision. Here are four specific ideas we believe 
can help get this campaign back on track:
    One. Recognizing the need for ONDCP and the Partnership for 
a Drug-Free America to work together, they should be part of a 
strategic advisory group to function as the key administrative 
body of the media campaign. Ideally, senior advertising 
executives and marketing executives with no invested interest 
in the campaign or any contractual relationship to the campaign 
should participate in this working group, along with ONDCP and 
Partnership representation. I'm certain that the American 
Association of Advertising Agencies, the 4-A's, which is a 
leading trade association of adverting, would volunteer to 
assist in assembling a list of candidates for this body, which 
ideally should be a relatively small group.
    Two. We need to streamline the campaign's advertising 
approval process and related systems so that they are up to 
acceptable standards of the advertising industry. Again, the 4-
A's has offered to assemble an expert panel to make 
recommendations on the campaign's advertising development and 
approval systems by no later than Labor Day.
    Third. We need to augment the existing campaign evaluation 
systems with research that meets the standards of commercial 
advertising and marketing. Again, Mr. Chairman, our industry's 
organization, 4-A's, has offered to assist by assembling a 
panel to research; seven experts to make recommendations by no 
later than Labor Day on what measures, beyond Westat, the 
campaign might take into account when evaluating the impact on 
the actual marketplace.
    And, four, we need to ensure that appropriate funds are 
specifically channeled into media buys for the campaign's 
advertising. Mr. Chairman, last year the media campaign spent 
$130 million of its 180 million on core advertising buys. The 
$130 million working media budget was then split in two; 
roughly $59 million to reach teens, and $49 million to reach 
their parents. The balance was spent on a variety of other 
forms of nonmedia communications.
    In the commercial marketplace, we compete for share of 
voice. The challenge is to break through to your target 
audience consistently, and that requires having a fighting 
chance in terms of the amount of media you buy. Last year, 
Anheuser-Busch spent close to 400 million on media buys alone. 
Nike spent 23 million. The Gap, 229 million. The working budget 
of the American Legacy Foundation's Truth Campaign for Teens 
was 108 million.
    Our media exposure level for the parent-targeted campaign 
and the teen-targeted effort, individually, was less than one 
company paid to market its brand of ketchup. As a business man 
and a volunteer for the Partnership, I ask the committee's 
careful consideration of the next phase of this effort. The 
National Youth Anti-Drug Media Campaign can work. It did work. 
It is a worthwhile, efficient tool in reducing demand for 
drugs.
    If the committee does, indeed, continue this campaign, Mr. 
Chairman, we need the legislative language that Steve spoke 
about to ensure that it is done right once again, or it 
shouldn't be done at all.
    The Partnership and the advertising industry stands ready 
to assist you, Mr. Chairman, Congressman Hoyer, and members of 
the committee. And we thank you.
    [The information follows:]

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    Mr. Istook. Gentlemen, I want to thank each of you for the 
qualities and the strength of your testimony and your comments, 
and certainly the commitment. I know the Partnership for a 
Drug-Free America, the commitment, as you say, is not a self-
serving one, but is a public-spirited one. And I appreciate the 
researchers that, frankly, the number of--I'll just 
oversimplify and say checks and cross-checks in your 
methodology I think is very, very crucial and significant.
    Let me ask before I delve into anything else, I want to 
make sure I understand one thing about the research. There's 
been, of course--you said, you know, well, the results may be 
different when we get the other 60 percent, the 40 percent. I 
want to understand; the 60 percent that's still outstanding is 
not interviews that have already been done and not analyzed 
but, it's those people in that cohort that have yet to receive 
this next wave of interviews? I want to make sure I understand 
what that is. Dr. Compton, would you be the one to address 
that?
    Mr. Compton. This is new data that we are collecting, so 
it's not data that hasn't been analyzed yet, but it's new 
interviews being conducted as we speak.
    Mr. Istook. That's what I wanted to be sure about, that it 
was indeed further interviews as opposed to analyzing already 
data that's there but just hasn't been reviewed yet. And 
therefore, of course, because the interviews haven't been 
conducted, it'll reflect what's happening right now as opposed 
to what happened 6 months ago or 9 months ago. That will all be 
tied in together in--with the interviewees.
    Mr. Hornik. Actually, let me sort of correct that. We just 
this week finished those interviews, so they've been over the 
past 6 months that the rest of the interviews have been 
conducted.
    Mr. Istook. So they began approximately January 1st.
    Mr. Hornik. That's correct.
    Mr. Istook. Very good. That's important to understand and I 
appreciate that. You know, the concern, I think there's been 
some very clear testimony on part of what I asked the director 
about as far as the matrix of how things have gone, and perhaps 
the Partnership for a Drug-Free America has a clearer insight 
on that than the director, who, of course, has been there for 6 
months, was not there when the changes that you criticize 
occurred, but is responsible for correcting things as may be 
necessary.
    And the testimony, Mr. Rosenshine, is you mentioned that of 
$180 million in the last year, and I'm not sure if you're 
talking about the current fiscal year or the prior one; but out 
of 180 million, only 130 million went to media buys, and then 
of that, then, only 110 million was clearly targeted at teens 
and parents with a clear, shall I say, undiluted antidrug 
message and focus. Is that basically a correct summation of 
what you said?
    Mr. Rosenshine. That is correct. I'm drawing the 
distinction in those figures between mass media, as it was 
intended in the original mandate of the campaign.
    Mr. Istook. And what--you're saying there may be other 
media that you don't consider mass media that could be targeted 
afterward, such as a specialty pamphlet with the Girl Scouts or 
whatever that might be.
    Mr. Rosenshine. Absolutely correct, Mr. Chairman.
    Mr. Istook. Okay. The money that went for contracts for 
people who influenced the direction of things, which don't have 
an exact amount from your testimony, but it appears to be in 
the neighborhood of $50 million annually, or at least in that 
most recent year, out of 180 million; who are the people that 
have absorbed so much of the money that was originally intended 
to go to the mass media campaign?
    Mr. Rosenshine. Mr. Chairman, first, let me say that the 
$50 million figure you got by deducting the 130 from the 180 
probably does include nonmedia communications of some sort that 
we would not consider to be effective media in reaching our 
target with our messages. They don't even include the 
partnership messages. I cannot, therefore, answer the amount of 
money that has been spent with subcontractors. I have to leave 
that to Mr. Pasierb or----
    Mr. Istook. Can anyone try to address that for me? 
Basically I'm wanting to know how lucrative were some of the 
contracts and subcontracts that soaked up the funds, and for 
what purpose? And as part of that, gentlemen, I would 
appreciate--I do not have the dollar figure on your evaluation 
work--I'd like to understand how much we've spent on that as 
well. Can anyone try to address this for us?
    Mr. Pasierb. I can give you at least my understanding from 
yesterday's hearing. While Partnership isn't compensated, we're 
not in the loop on the contractors, but it was stated yesterday 
that the belief was that there were between 30 and 32 
contractors. The largest of those contracts was $10 million a 
year.
    Mr. Istook. And that was with who?
    Mr. Pasierb. With the public relations firm.
    Mr. Istook. Which firm was that, do you know?
    Mr. Pasierb. I believe it's Fleischman Hilliard. And that 
was just from yesterday's testimony. That is my recollection 
from yesterday, not my personal understanding.
    Mr. Istook. Understand. I appreciate the distinction. And, 
Dr. Compton, the cost of the evaluation work that has been 
underway?
    Mr. Compton. The evaluation costs approximately $7 million 
per year, or about 7 percent--about 3 percent of the total.
    Mr. Istook. Very good. Okay, thank you gentlemen. I need to 
defer next to Mr. Hoyer.
    Mr. Hoyer. Mr. Rosenshine, have you had an opportunity to 
discuss your views with the director?
    Mr. Rosenshine. Yes, sir, I have.
    Mr. Hoyer. And do you believe that the director shares your 
views?
    Mr. Rosenshine. I really cannot speak for the directors's 
point of view. In a personal meeting that I had with him, along 
with a couple of other people from our industry, he seemed very 
willing and interested in working with the Partnership and 
finding ways for us to continue the program working together.
    I do not know what conclusions he has drawn about specific 
recommendations we have made, except that the only thing I know 
for a fact is that according to the head of the 4-A's, which 
made the recommendations about the panel I talked about, the 
director has said that he could not do that for various legal 
reasons.
    I do not know beyond that what the director's feelings or 
opinions are.
    Mr. Istook. If the gentleman would yield, the director said 
he could not do what?
    Mr. Rosenshine. He could not take advantage of the offer by 
the 4-A's to create panels to establish (a) research 
methodology, and (b) what the right methodology for processing 
and administering the campaign should be, given that we felt it 
was overcomplicated.
    Mr. Hoyer. When the change occurred--you've obviously been 
involved in this program from its inception--what were the 
reasons for the change? To your knowledge, if you know.
    Mr. Rosenshine. Well, I think the reasons were primarily 
that people felt that there was an opportunity to expand the 
campaign into a more--what has been referred to as a more 
integrated effort, involving more and more ways of reaching the 
target audiences with more and more specific messages.
    Mr. Rosenshine. An awful lot of input came from behavioral 
and psychological experts talking about what would or would not 
motivate the children. And as a result, I believe that the 
campaign, very likely for good intentions, became far more 
diffuse and far more complicated because too many 
constituencies and too many agendas were being put forward as 
to ways to make the campaign work. So I do not attribute 
anything other than the desire to make the campaign work to the 
complications that occur.
    But that is essentially what occurred. We went from a 
relatively simple and straightforward campaign to one which 
became essentially extremely complicated, both to administer 
and to do work for.
    Mr. Hoyer. Did you want to comment on that?
    Mr. Pasierb. I would concur with that entirely. The number 
of subcontractors and different folks who came in who wanted to 
express an agenda, whether it was pursuing teenagers as 
sensation seekers, or believing that messages need to focus on 
positive alternatives to drug use, there were a number of 
departures from the previous 13 years of research. Data-like 
monitoring in the future, which has been going on with 
teenagers for 25 years, showed where probably our best chances 
of reaching teenagers are. And again to Mr. Rosenshine's point, 
I think all very well-intentioned, to try to make a significant 
impact. But now we see that that impact has not been made over 
the last 2 years.
    Mr. Hoyer. Doctor, you wanted to testify--I mean, to 
comment?
    Mr. Hornik. If I could. While I would certainly never 
challenge either of the gentlemen's expertise about the 
commercial industry, there was pretty good evidence from public 
health efforts that multipronged efforts were successful.
    I will give you two examples. The National High Blood 
Pressure Education Program used what has been called a 
``kitchen sink approach.'' they did everything they could with 
mortality, and others were to risks of heart disease. That was 
from about 1972 to 1984.
    Secondly, the big antitobacco campaigns, California, 
Florida, all used a multipronged approach, doing everything 
they could, doing local organization work as well as doing mass 
media work, tax changes, other things, and those both had very 
sharp success with them.
    So I don't want to argue that this has not been successful 
in other areas, but certainly in at least some public health 
areas when people try to use multipronged approaches, they were 
in fact quite successful.
    Mr. Pasierb. If I may, there was a recent analysis done of 
the American Legacy's Truth Campaign for teenagers in the 
antismoking arena, as well as what the tobacco industry has 
done on their own. And I think in a nutshell my takeaway from 
that research was that very focused campaign for teenagers that 
was really done well in the media, evaluated accurately in such 
a way that it could inform corrections in the campaign, the 
truth campaign has had a dominant, dominant effect. Whereas the 
tobacco industry's campaign, which is more theoretical and more 
diffuse, has not had the same impact.
    So that might be something interesting to study, the 
difference between the tobacco industry's approach to this and 
the American Legacy Foundation's very successful approach to 
this, because we're talking about very similar goals here.
    Mr. Rosenshine. I would also suggest, Congressman Hoyer, 
that there is little analogy between talking about drug usage--
particularly marijuana--to teenagers, and any other public 
health issue, because the perceptions of marijuana, which have 
been well discussed before this committee and well known by you 
in any event, are so totally different from high blood pressure 
or smoking or alcohol, that to draw analogies between those 
types of campaigns to me is not proper.
    Mr. Hoyer. Mr. Chairman, if I can ask one additional 
question. I know we're running out of time.
    Mr. Istook. I need to give time to Mr. Sherwood. Go ahead.
    Mr. Hoyer. On the terror campaign, though, could you just 
briefly say--I think the terror campaign is a little bit like 
telling kids to eat their food on their plate because there are 
starving people in India. I don't mean it doesn't have an 
effect and we didn't all remember it. I don't think it really 
compelled any of us, other than our parents making us do it.
    I'd like your comment on that briefly, and I apologize to 
Don. Just briefly.
    Mr. Rosenshine. Well, you're asking me to criticize the 
work of a competitive agency, which I don't like to do, but you 
said it. As far as I am concerned, the campaign, while it may 
be appealing to adults because it seems to be delivering a 
potent message to their kids, I believe that it violates some 
of the basic premises of advertising, which, number one is, you 
do not attack your consumer. You do not tell the consumer of 
somebody--of a product that you wish them to buy or a point of 
view they wish them to--that you wish them to take, that they 
are stupid and doing bad things. Even if that is done 
ironically, irony in advertising is a very tricky thing to do. 
And I believe that the net impact on the children is that--as 
you have stated--is that it is a far-removed premise at the way 
it is brought to them.
    Mr. Istook. Thank you. I need to yield time to Mr. 
Sherwood. I'm going to yield the chair to Mr. Sherwood to ask 
his questions and then close the hearing, as we have to respond 
to the vote, and I would be interested in doing some follow-up 
for you gentlemen. I'm very impressed with your efforts.
    So, Mr. Sherwood, if you'll take the chair, and then he's 
going to have to close it pretty quick when he's done to make 
his vote as well.
    Mr. Sherwood [presiding]. Thank you very much, gentlemen. I 
have been very impressed by your testimony, and I have great 
respect for the Annenberg school, but I'm afraid this morning 
has been a terrible indictment of government. Here we spend all 
this money. We achieved results we didn't want to achieve, and 
now as an advertiser all my life, the result sounds a great 
deal like I've always heard: The campaign didn't work, but if 
we spend more money, it will.
    It was a very disturbing morning. I guess the hearing is 
adjourned.

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  TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT APPROPRIATIONS FOR 
                                  2003

                              ----------                              

                                         Wednesday, March 20, 2002.

                        TREASURY DEBT MANAGEMENT

                               WITNESSES

VAN ZECK, COMMISSIONER OF THE PUBLIC DEBT
BRIAN ROSEBORO, ASSISTANT SECRETARY FOR FINANCIAL MARKETS
    Mr. Istook. The subcommittee will come to order. This 
afternoon we are happy to welcome Mr. Brian Roseboro, the 
Assistant Secretary for Financial Markets; and Mr. Van Zeck, 
Commissioner of the Public Debt to our oversight hearing on 
Treasury's debt management activities and operations, those 
that go through in particular the Bureau of Public Debt.
    While the hearing will cover the complete debt program I am 
particularly interested in the savings bond program and its 
interaction with the other forms of debt management.
    Careful debt management is critical to sustaining economic 
health and prosperity at all levels for all entities, for us as 
individuals, for companies, and especially for the federal 
government. We all benefit when the Treasury provides prudent 
management of the public debt and I know this is a charge you 
take seriously.
    I realize there are many technology and process 
improvements in federal debt management and I wanted to 
congratulate you also on the web site for the Board of Public 
Debt. It seems to be a very valuable and significant resource 
not only for those interested in being lenders to the U.S. 
government but also for people looking for general information. 
It certainly impresses me and I congratulate you on that.
    I do want to learn more about your plans for remaining 
viable, to be responsive to the evolving finance needs of the 
government, the changes in financial markets. Management even 
under stable conditions of the public debt is not simple. The 
primary goal, of course, is to sustain the low borrowing costs. 
Other factors enter into the equation such as encouraging 
savings, impacting domestic and international financial 
markets, whether the debt is held by Americans or by citizens 
of other nations, and providing opportunities to participate in 
federal investments. Those are all factors, but nevertheless 
the primary goal is to sustain low borrowing costs for the 
large amount that must be borrowed because of the debt of the 
United States.
    Technology changes rapidly. Investor opportunities are 
evolving rapidly along with the world economy. All of these I 
know profoundly affect your work.
    I am especially concerned about the savings bond program 
and its high volume, low denomination paper certificates that 
create relatively high operational costs. I look forward to 
hearing your views and plans for the savings bond program.
    I am concerned about the cost of the savings bond program 
when compared to the benefits.
    Currently the savings bond program finances only three 
percent of the overall public debt but it consumes over 70 
percent of the Bureau's work force and funding resources. The 
other 97 percent of the public debt is financed by the bureau's 
marketable securities--Treasury bills, Treasury notes, and so 
forth. Savings bonds' administrative cost ratio which is the 
ratio of the cost of administering the program when compared to 
the amount of debt being financed, by my calculations that is 
about .08 basis points, or .008. In any event it is about 53 
times higher than the administrative cost ratio for the 
Bureau's marketable securities program.
    Further, I understand the Bureau uses a complex computer 
modeling program to calculate the cost of financing the debt 
which in your prepared testimony you claim currently saves 
Americans $35 million in the cost to borrowing for every $1 
billion in debt being borrowed. Using savings bonds compared to 
marketable securities.
    Frankly, I am concerned about that number. In 1985 the 
savings value was estimated at $54 million per billion borrowed 
by savings bonds. In 1988 the estimate was $70 million. In 
1995, $80 million. Now in a January report the Congressional 
Research Service cites a Treasury Department source as saying 
the number is $7 million per billion dollars borrowed.
    I realize that there is fluctuation according to what 
current interest rates may be, but I seriously question the 
methodology that's being used if it can't give us a better 
analysis than we are receiving from the witnesses and the 
agencies represented today. I do not see consistency here. I do 
not see a meaning measure that gives us some guidance about the 
cost of managing the public debt.
    Today in prepared testimony you cite one figure, when two 
months ago it was reported to be at a significantly lower 
number, only a 500 percent differential. And prior to that at a 
significantly higher savings figure, a 200 percent 
differential. That apparent discrepancy places a credibility 
question in my mind that I hope can be resolved in the hearing 
today.
    It is an open question to me whether or not it is more 
expensive or less expensive for the federal government to 
borrow through savings bonds, and frankly I do not see anything 
in the prepared testimony that provides a reliable answer.
    That concludes my opening remarks and I hope we can have a 
better understanding that comes out of this hearing.
    Before your testimony of course I want to call on my 
colleague, our Ranking Member, Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I want to 
welcome Assistant Secretary Roseboro and Commissioner Zeck to 
our hearings.
    It has been a while since the Public Debt has testified 
before this committee. As a matter of fact, we checked the 
record and the last time you testified before us was in 1995 on 
the fiscal year 1996 budget. It is nice to see you here.
    Your budget request includes a total of $204.2 million and 
approximately 1500 FTE, a little less than 1500, 1478 FTEs. The 
increase in the budget as I understand it is mainly to bring 
your budget up to speed with current inflationary factors such 
as pay and rent.
    Although your budget request is small compared to some of 
the other Treasury bills you are proposing a significant shift 
by reducing your FTE ceiling by 40 and shifting that funding to 
pay public relations and advertising efforts to promote 
Treasury securities as I understand it. I am interested in what 
benefits you anticipate achieving from this new approach.
    Mr. Commissioner, your budget also includes a reduction of 
over $1 million for what the Treasury Department calls a 
business strategy adjustment. I am very interested in 
specifically where you are going to make that $1 million 
reduction. This can be especially hard on a bureau like yours, 
in my opinion, because you do not have a lot of wiggle room, a 
small budget.
    Since the Bureau of Public Debt manages and administers the 
debt, I think it is also appropriate to mention the fiscal year 
2003 budget resolution that we have on the Floor today. Our 
nation's fiscal health has deteriorated so rapidly that the 
Administration has urged Congress to raise the statutory debt 
limit. Just last year CBO reported that all the Treasury debt 
held by the public could be paid off or payment provided for by 
2008--five years essentially from today. How different the 
situation looks a year later.
    Now the ten year budget prediction from the Office of 
Management and Budget indicates that the projected year surplus 
has gone from $5.6 trillion to $.6 or $600 billion--a loss of 
$5 trillion in projected surplus in less than ten months.
    OMB also states that 43 percent of the changes in total 
budget surplus are due to the President's tax cut enacted last 
year, not by the economy and not by the war. I compute that to 
be $2.15 trillion of that $5 trillion as a direct result of the 
tax cut.
    Instead of paying off the debt by 2008 when the baby 
boomers start to retire, the government will owe more in debt 
to the public, $3.479 trillion, than it owes today. That is I 
think a sobering reality.
    Mr. Chairman, that concludes my statement. I look forward 
to the testimony from our witnesses.
    Mr. Istook. Thank you, Mr. Hoyer.
    Let me just clarify from my opening statement, I checked 
with staff to make sure I was not missing a decimal point. We 
calculate according to the figures we have been provided by the 
witness' agencies that for administering the savings bond 
program, the administrative cost is about eight basis points 
per dollar borrowed, whereas for the marketable securities 
program, T-bills, T-notes, that administrative cost ratio is 
.15 basis points which is a ratio of 53 to 1 as far as the 
administrative cost expense of one program over the other. So I 
wanted to clarify that from my opening statement.
    Gentlemen if you would, it is our practice to swear the 
witnesses.
    [Witnesses sworn.]
    Mr. Istook. Thank you gentlemen.
    I believe the correct procedure, I believe we are going to 
hear first from Mr. Roseboro and then from Mr. Zeck, is that 
correct?
    [Witnesses nodding in affirmative.]
    Mr. Istook. Thank you. Gentlemen, please. And your entire 
written statement will of course be placed in the record. I 
always encourage witnesses to feel free to deviate, make an 
executive summary, whatever they think will be most meaningful 
for us.
    Thank you.

                           Summary Statement

    Mr. Roseboro. Thank you very much Chairman Istook, 
Congressman Hoyer. I am pleased to be here today to discuss 
Treasury's debt management approach and direction.
    Simply put, the objective of Treasury Debt Management is to 
meet the financing needs of the federal government at the 
lowest cost over time. However, achieving this straight-forward 
objective is subject to multiple constraints. The dominant 
constraint that we confront in achieving this objective is that 
we see the future only imperfectly. We are always making 
decisions in cases of uncertainty. As a consequence, debt 
management necessarily involves three judgments.
    First, what will be the likely size and duration of our 
borrowing needs?
    Second, how should we respond if actual needs differ 
substantially from expectations?
    And third, what will be the lowest cost means of financing 
those needs in the future?
    We cannot escape these three issues. We face them in our 
weekly financing decisions, in our quarterly funding, and in 
our strategic planning. Further, Treasury's continuing 
commitment to a schedule of regular and predictable auctions of 
marketable bill and note dates is a means over time to the end 
objective of the lowest cost borrowing. In the short run, 
however, this commitment serves as a constraint. With regular 
and predictable auction dates we accept the cost of 
occasionally borrowing when it is inconvenient or expensive in 
return for the lowest cost, over time, from providing greater 
certainty to the Treasury market.
    Conceptually there is another constraint. We believe the 
availability of the full faith and credit of the United States 
as a savings vehicle should not be limited only to those who 
can afford the minimum $1,000 denominations available in our 
auctions of marketable securities. Thus, we will continue to 
offer savings bonds even though they are not the most efficient 
form of borrowing in operational terms. But again, we will seek 
to minimize the cost of this constraint on our objective by 
supporting the Bureau of Public Debt's ongoing efforts to 
improve efficiency.
    Successfully achieving our debt management objective 
requires us to strive to create the broadest possible primary 
market for all Treasury securities that technology and our 
imaginations will allow. One critical dimension of creating 
this broad primary market is a balanced marketing effort for 
all our securities. The other is the technology that is making 
the distinction between wholesale and retail borrowing 
increasingly arbitrary. We will use technology to move as many 
investors, large and small, to directly access our securities 
over the internet.
    Let me illustrate how we are using balanced marketing by 
describing the challenge Under Secretary Fisher gave to the 
Bureau of Public Debt.
    He recently challenged Commissioner Zeck to increase direct 
competitive bidding in our auctions. Currently most of the 
dollar bids in our auctions come through a small number of the 
largest dealers. The dealers bid for their own account and for 
their customers. We are actively seeking new institutional 
bidders in our auctions by marketing Public Debt's new 
TAAPSLINK internet site.
    Public Debt is well positioned to take up the twin 
challenges of using technology to move as many investors in our 
securities to direct internet access and market the full range 
of securities to the public. The Bureau has a solid track 
record of innovation and creating direct access for investors. 
For example, individuals and holders in our TreasuryDirect 
system have had an internet or other electronic channel 
available to them for several years. Individuals can now buy 
Series EE and the Series I bonds at Public Debt's web page.
    At the same time, Public Debt is already shifting its 
marketing emphasis from a heavy focus on the savings bond 
components of our financing mix to ostensibly market all the 
securities we offer to the public.
    I know the committee is interested in the level of 
operational resources it takes to operate the savings bond 
program. I think it is worthwhile to make some observations 
about the program.
    First, as Treasury's debt manager I have to look at the 
total cost of borrowing, and the total cost of borrowing for 
any type of security includes administrative, as well as 
interest costs. Taking both into account the savings bond 
program, though less efficient as a borrowing tool in today's 
capital markets, actually can be a more cost effective way to 
borrow over time than market borrowing.
    Savings bonds are part of our borrowing mix and currently 
finance $190 billion of our debt. Commissioner Zeck will 
discuss in greater detail the way we evaluate the cost of the 
savings bond program.
    I would very much like to transform our savings bond 
program and move it immediately into the future. However we 
have the legacy of more than 60 years of issuing savings bonds. 
Having this legacy requires a commitment of customer service. A 
promise made is a promise kept and we must honor our obligation 
to the more than 50 million existing savings bond holders. This 
commitment requires a significant administrative infrastructure 
to support it.
    While we may be constrained somewhat by the legacy costs 
associated with servicing small denomination securities issued 
in physical form, we are now moving new savings bonds into the 
future.
    The economies of the internet are making it not only 
possible but also desirable to begin offering securities in 
accounts directly with the Treasury rather than through issuing 
millions of paper certificates. Work is now underway to make 
this a reality later this year, by offering the Series I bond 
in a new internet based system.
    In conclusion, to achieve our primary objective of the 
lowest borrowing costs within the constraints we have, we want 
to maintain a pattern of regular and predictable issuance of as 
broad a portfolio of instruments as is consistent with our best 
projections of likely borrowing requirements, our ability to 
respond if those projections are not realized, and our current 
understanding of what will provide the lowest borrowing cost 
over time. We will support our primary objective with efforts 
to move as many investors as we can towards direct electronic 
access to all Treasury securities and we will continue our 
ongoing efforts to improve efficiency and reduce costs. 
Effective, balanced marketing of all our securities is critical 
to educating the public about the variety and benefits of 
Treasury securities.
    Finally, we will keep our promise to the millions of 
investors who rely on the safety and security of Treasury 
securities by continuing to offer the high-quality customer 
service they expect and deserve.
    Thank you, sir.
    Mr. Istook. Thank you, Secretary Roseboro. Commissioner 
Zeck.

                           Summary Statement

    Mr. Zeck. Thank you.
    Chairman Istook, Mr. Hoyer, members of the committee. I 
will briefly summarize my testimony if I could. I know you have 
some very detailed questions about the savings bond program. I 
welcome the opportunity to answer those.

                 Role of the Bureau of the Public Debt

    Public Debt's job is to handle the mechanics of borrowing. 
The decisions that are made by Treasury policy officials about 
debt financing and the decisions that are made by the debt 
managers on a week to week, day to day, quarter-to-quarter 
basis are ours to implement.
    We handle several major areas. We handle the marketable 
securities area for Treasury. The auctions of securities, the 
issuance of securities, and the assurance that there is a 
secondary market available for trading those securities.
    We also handle the savings bond program. We perform here a 
different role than we do in the marketable area. In the 
savings bond area we provide direct customer service to 55 
million or so Americans that hold savings bonds. So on the one 
hand we are dealing with large amounts of money through a 
hierarchical system in the commercial book entry area with 
marketables, and in the other area we have been charged to 
provide direct service to savings bond customers.
    The third major area in which we are responsible for debt 
administration is in the area of government investments. Here 
we are responsible for some large amounts as well. These are 
the investments of the federal agencies, primarily the large 
trust funds, that you are probably aware of--Social Security, 
Medicare, various retirement funds and so forth.
    Also under this heading we handle a variety of investments 
for state and local governments that have been provided for 
through our state and local government program.
    We are also responsible for the overall accounting of the 
public debt, keeping track of the numbers as it were and 
specifically say, at a time like this, knowing precisely where 
we stand with regard to the debt subject to limit.
    Our job in Public Debt as long as I have been with the 
organization has been to do these things and do them accurately 
and do them timely. We are really proud that we do that. We 
have a great tradition of customer service and of improving our 
operations and providing better and better service to our 
customers.
    We also, I am happy to report, for five years in a row now, 
which is the entire length of time that audited financial 
statements have been required, have received unqualified 
opinions for our financial statements which are a significant 
part of Treasury's overall financial statements.

                          Savings Bond Program

    One of the other challenges that we face is that of serving 
a varied customer base. We are challenged to serve those with 
as little as $25 to invest on the savings bond side, for 
example, and at the same time we are challenged to serve the 
large institutional investors that might bid $2 or $3 billion 
in one of our marketable auctions. We also, as I said, have 
challenges and have service responsibilities that are directed 
toward federal agencies and their investments of trust fund 
dollars.
    I know that the committee is very interested in the savings 
bond program and savings bond costs. I will briefly touch on 
the approach we take and then I am sure we will get into that 
in a little more detail with regard to questions that you might 
have.
    Generally speaking, we do have a savings bond model that we 
use to compare the borrowing of savings bonds, the cost of 
borrowing through savings bonds, to the cost of borrowing 
through marketable securities.
    I would like to point out that that model was really not 
something that was created as a result of external pressure or 
through any attempt to try to defend the savings bond program. 
It was developed in Treasury a number of years ago, over 15 
years ago, at least I can remember back that far, to give us a 
feel for knowing how we were doing. Just to be able to answer 
the obvious kind of question, how well does the savings bond 
program stack up vis-a-vis marketable borrowing?
    So we have used that model off and on. We have refined it 
and improved it over the 15 year period or so and we continue 
to use the model.
    One of the things that I challenge our people to do is not 
run the model too frequently. That might sound a little 
counter-intuitive, but in fact because of the way the model is 
constructed, it is not intended to be a dynamic model that 
tells you at any moment in time exactly what the health of the 
savings bond program is. It is intended to take a look at the 
current sales of savings bonds, the current financial 
situation, the interest rates in the marketable arena along the 
yield curve, compared to the interest rates that are paid on 
savings bonds. It takes all of that, factors into that mix all 
of the administrative costs that both Public Debt and all the 
Federal Reserve banks incur on our behalf. It also takes into 
account things such as the different ways that marketable 
securities pay interest vis-a-vis savings bonds. It takes into 
account the different ways in which the federal government 
would recover a portion of the interest through federal taxes 
on both the savings bond program and the marketable borrowing.
    So it is a bit complicated inside, but it is very straight 
forward in trying to measure at a point in time what savings 
bonds that we are issuing look like over their life and over 
the expected time that the investors will hold those savings 
bonds in the context of current marketable borrowing 
conditions.
    I can talk a little bit later, I am sure you will ask 
questions about the fluctuations in the model. I think that is 
something we ought to certainly get into.
    With regard to Public Debt, though, we have a fairly 
straight-forward mission, a very focused mission, and one that 
allows us to concentrate, but with a fairly modest budget on 
providing the best service we can.
    Our direction for the future and where we are headed 
specifically is the technology, with making the best possible 
use of technology, with affording our investors the opportunity 
to make use of the best systems we can provide them for their 
investments, whether those investments are made through the 
commercial book-entry system at our auctions, a billion dollars 
at a time, or whether they are made a lot more modestly through 
our web site and perhaps would be included in our book entry 
savings bond system that we hope to bring up later this year.
    With that I will conclude my summary and I will be 
certainly glad to answer any questions that you or the 
committee members might have.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Mr. Istook. Thank you Commissioner Zeck.
    If I understand correctly, the testimony from Assistant 
Secretary Roseboro you stated savings bonds are not the most 
efficient form of borrowing, however you added that you believe 
the availability of the full faith and credit of the United 
States as a savings vehicle should not be limited only to those 
who can afford the minimum $1,000 denominations available in 
our auctions of marketable securities.
    Let me focus for a moment on the first part. I recognize 
and I appreciate the candor of the admissions that savings 
bonds are not the most efficient form of borrowing. That is 
that 53 to 1 administrative cost ratio that I mentioned a 
moment ago. In fact if you will apply that against the budget 
request that we have before us, we have $154 million of the 
budget request is to handle three percent of the public debt. 
$50 million of the budget request is to handle the other 97 
percent of the public debt.
    Now were it possible to handle everything at the same 
ratios, this subcommittee could capture $150 million that we 
could apply to other urgent needs, and everybody on the 
subcommittee of course could specify what they may believe 
those urgent needs are or otherwise accomplish a savings for 
the taxpayer. Now that is looking at it on a purely fiscal 
basis, I understand. That is where I wanted to get into the 
other part of your testimony, Mr. Roseboro where you said the 
public policy reason not to be fiscally prudent and efficient 
is to make sure that people have recourse to the full faith and 
credit of the United States in investing money even if they 
couldn't afford a T-bill or a T-note.
    Have I correctly summarized your testimony, Mr. Roseboro, 
on that point?
    Mr. Roseboro. Yes, sir.
    Mr. Istook. So here is what I wanted to ask.
    First the policy reason is to make sure that people of all 
financial categories--rich, poor and every place in between--
have the full faith and credit available for their investments. 
Are you not forgetting FDIC? You are familiar with the Federal 
Deposit Insurance Corporation and the deposits in bank accounts 
that are FDI insured up to $100,000 which certainly covers 
anybody that would invest a penny or under $1,000 or whatever 
amount it may be up to $100,000, are insured with the full 
faith and credit of the United States of America. They do have 
that vehicle available to them do they not?
    Mr. Roseboro. Yes, sir.
    Mr. Istook. And they also have the availability of the same 
full faith and credit if they are in an institution that is 
insured by what used to be call FSLIC and now is SAIF, correct?
    Mr. Roseboro. Yes.

                          Savings Bond Program

    Mr. Istook. And also there is a similar fund for those that 
invest with credit unions, what is it the NCUSIF I believe it 
is. They also have the full faith and credit securing their 
investment if they have an account at a credit union, correct?
    Mr. Roseboro. Yes.
    Mr. Istook. So if the reason for having a savings bond 
program is to ensure that people that do not have a thousand 
dollars to invest can still have their investment protected by 
the full faith and credit of the United States, they have 
multiple other ways to invest without going into savings bonds, 
do they not?
    Mr. Roseboro. Still that does not encompass the entire 
universe of potential investors, sir.
    Mr. Istook. My question is, do they have other places 
besides savings bonds that they can invest amounts less than 
$1,000 and be fully backed by the full faith and credit of the 
United States?
    Mr. Roseboro. There are other alternatives, but they could 
be costly in terms of----
    Mr. Istook. Mr. Roseboro, I just want an answer to that 
simple question. I want to make sure that we do not have a 
disagreement on that point. Is it not correct that they could 
invest in any institution that is FDIC, FSLIC, SAIF, or NCUSIF 
insured and have the investment protected by the full faith and 
credit of the United States?
    Mr. Roseboro. Yes, sir.
    Mr. Istook. Is there anybody who is eligible to invest in a 
savings bond that is not eligible to deposit funds in an 
institution insured by one of these entities that I have 
described such as FDIC?
    Mr. Roseboro. Potentially, if there are minimum account 
requirements, and the account balances are under a specified 
level, I think $1,000 as a general recollection, there would be 
significant account maintenance charges. For the school child 
who wants to save and invest in savings bonds that would be a 
problem.
    Mr. Istook. So you are saying if they go to an institution 
that has a minimum deposit or a service charge requirement.
    Mr. Roseboro. Yes
    Mr. Istook. But not all institutions have those, do they?
    Mr. Roseboro. No, not all institutions have them. Most do, 
and from a policy perspective of encouraging savings, the 
savings bonds can help serve that role as well.
    Mr. Istook. And of course an investment in this one 
institution is liquid and a savings bond is not liquid.
    Mr. Roseboro. No, I disagree, sir. The savings bond is 
liquid. Operationally to cash it in takes an additional step 
but it is liquid.
    Mr. Istook. There is a much more significant delay in 
seeking to liquidate a savings bond.
    Mr. Roseboro. Taking it down to your local institution to 
cash it in is all that is required.
    Mr. Istook. All right. But I want to understand, if I 
understand correctly your testimony, you are saying the reason 
for spending this $150 million a year is for the benefit of 
people that do not want to have a minimum balance requirement 
at a bank.
    Mr. Roseboro. No, the purpose of spending the money as 
Commissioner Zeck could detail more appropriately is to 
maintain the promise that was kept in terms of the issuance of 
60 years worth of savings bonds and to support that system.
    Mr. Istook. I guess part of the challenge here is, we are 
trying to look at financial accountability and you are evading 
financial accountability by just falling back on some vague 
policy issues.
    I understand that there are for example a large number of 
bonds invested that we have to satisfy the administrative cost 
of handling those and so forth, but I would like to be able to 
get just straight-forward testimony and differentiate between 
what are pure policy decisions and what are the financial 
merits of the decisions that we have before us.
    We have extremely tight budget requirements, as I 
mentioned. We are talking about a differential of around $150 
million here. I want to be able to have some clear 
understanding of the issues that are being brought up and not 
just a vague resort to a policy argument, especially when, and 
let me ask.
    You say most institutions have restrictions such as you 
mentioned on minimum account balances. Is that based upon some 
information the Treasury Department has formally developed?
    Mr. Roseboro. No, my experience, sir.
    Mr. Istook. So understand, we are asking people to 
differentiate between what is a fact being represented by the 
Treasury Department and what is your opinion. So you are 
telling us that it is your opinion that most institutions have 
those limitations as opposed to telling us that it is a fact.
    Mr. Roseboro. It is my personal experience, sir, yes, it is 
my opinion based on personal experience. Yes, sir.
    Mr. Istook. I understand. Because I want to understand 
whether you are testifying on your individual experience or 
testifying on behalf of the Treasury Department, and the vast 
amount of information that develops about the nation's 
financial institutions.
    I certainly have other questions but I want to give others 
on the subcommittee a chance before I come back to those. We 
will see if we have to recess because of votes. We probably 
will have to because it is more than one vote.
    Mr. Hoyer. There are four votes.
    Mr. Istook. Let me recognize first Mr. Hoyer.

                              Public Debt

    Mr. Hoyer. Thank you very much, Mr. Chairman.
    Mr. Zeck, do you have available the financial dollar amount 
of the public debt over the last five years? Do you have that 
in front of you by any chance? Five years would be, say, 1997 
or 1998 to----
    Mr. Zeck. Actually I do have some numbers.
    Mr. Hoyer. Starting with 1997?
    Mr. Zeck. In September 30, 1997 the total public debt was 
$5.4 trillion.
    Mr. Istook. What portion of that was the external debt?
    Mr. Zeck. The debt held by the public was $3.8 trillion of 
that.
    Mr. Hoyer. Why do we not go on the debt held by the public, 
I want to focus on that particularly.
    Mr. Zeck. Okay. In 1997 at September 30th it was $3.8 
trillion.
    Mr. Hoyer. 1998?
    Mr. Zeck. September 30th of 1998 it was $3.7 trillion.
    Mr. Hoyer. 1999?
    Mr. Zeck. 1999 it was $3.6 trillion.
    Mr. Hoyer. 2000?
    Mr. Zeck. In 2000 it was $3.4 trillion.
    Mr. Hoyer. 2001?
    Mr. Zeck. 2001 it was $3.4 trillion as well.
    Mr. Hoyer. 2002?
    Mr. Zeck. And where we are today, as of, the numbers as of 
yesterday, March 19th, it rounds up to $3.5 trillion.
    Mr. Hoyer. So starting in 1997, am I correct in observing 
that from 1981 to 1997 the debt went up in financial terms 
every year?
    Mr. Zeck. I do not have those numbers in front of me but 
the recollection, it certainly sounds like that was the case, 
yes.
    Mr. Hoyer. In 1997 it went down. 1998 it went down, 1999 it 
went down, 2000 it went down, 2001 it stayed even, and now we 
are going back up.
    Mr. Zeck. That is correct.
    Mr. Hoyer. Do you have a projection for 2003?
    Mr. Zeck. No, sir. I do not want to be evasive but our role 
is not to project. Our role is to count what actually is.
    Mr. Hoyer. You are luckier than some.
    Mr. Zeck. I am happy that we just have to count, sir.
    Mr. Hoyer. I am not surprised that you are happy about 
that.
    What factors generally lead to the increase in the size of 
the public debt?
    Mr. Zeck. In the total public debt the factors are that the 
government needs to borrow money because tax revenues do not 
cover expenses.
    With regard to the debt held by the public versus intra-
governmental debt it is a little bit different. One thing that 
has occurred recently, for example, is that there has been an 
increase in the intra-governmental debt, that is to say the 
trust fund balances that we invest have increased and both the 
intra-governmental or the trust fund balances and the debt held 
by the public combine to make the public debt.
    So when we have some decreases held by the public that you 
referred to, at the same time there were increases in the 
intra-governmental debt or the trust fund holdings.
    Mr. Hoyer. The internal debt as I referred to it.
    So am I correct that what you are saying is the $5.4 
trillion that you referred to in 1997, let us just jump to what 
it was in 2001.
    Mr. Zeck. At the end of September in the fiscal year in 
2001 the total debt was $5.8 trillion.
    Mr. Hoyer. So in effect what we did, we were able to pay 
down the publicly held debt starting in 1998, and we paid it 
down in 1998, 1999, 2000, 2001. Sometimes I think the largest 
payment we made in public debt was over $170 billion in 1999 or 
2000?
    Mr. Zeck. That may be correct. That is not a number that I 
have in front of me. I do not recall it specifically.
    Mr. Hoyer. I am sure somebody behind there has those 
numbers. I do not know whether that is close.
    My point being that when you say we paid down obviously 
public debt, we borrowed Social Security monies and therefore 
the trust fund goes up.
    This is essentially consistent with what Secretary Rubin 
suggested we do which would provide for greater security for 
Social Security and Medicare at some point in time and 
obviously lengthen the time that they would have resources 
available to them for the baby boomers.
    I do not know if you need to answer that. It is more an 
observation than it is a question I suppose.

                             PATRIOT BONDS

    I have a series of questions that I really need to develop 
and I am not sure that it is useful just to ask them.
    The Patriot Bonds that are a new proposal that were 
effected last year, am I correct?
    Mr. Roseboro. Yes, sir.
    Mr. Zeck. Yes.
    Mr. Hoyer. In October?
    Mr. Roseboro. It was December.
    Mr. Zeck. December.
    Mr. Hoyer. December of last year.
    Patriot Bonds are another form of savings bond, that is 
another name for the savings bond program, correct?
    Mr. Roseboro. It is the current Series EE savings bond that 
has been designated as the Patriot Bond.
    Mr. Hoyer. The cost to which the Chairman is referring 
refers to those bonds, am I correct? The differential.
    I am going to submit a long series of questions that I 
think will develop some issues.
    Well, let me ask one additional question because I raised 
it.
    The business strategy adjustment. Have you identified the 
one million in savings?
    Mr. Zeck. No sir, we have not. One of the things that we 
have been asked to do by the Secretary is to take a look and 
see what productivity opportunities present themselves. Public 
Debt has had a good history of identifying productivity savings 
and we are optimistic and certainly intend to work very hard to 
try to achieve those savings as we look forward to 2003, but 
specifically I do not know where that adjustment will come from 
at this time.
    So much of our workload you cannot really predict in 
advance. It sort of depends on what happens there, what the 
borrowing needs are at the time, and when you get into the 
fiscal year you start to see borrowing needs, savings bond 
sales, other kinds of issues that come up and we are always 
required to make adjustments at that time to identify the 
savings that are possible.
    Mr. Hoyer. Thank you.
    Mr. Chairman, I do not know if I am going to be able to 
return depending upon how long we take.
    Mr. Istook. I understand.
    Mr. Hoyer. I will submit my questions for the record.
    Mr. Istook. I do not know if other members will come back. 
I know I do have further questions I want to get into.
    We have, we are told, a series of four votes. I am just 
trying to explain to our witnesses because I do not like 
inconveniencing anybody, but the nature of the series of the 
four votes, they could be all 15 minute votes, it could be in 
excess of an hour. Maybe some will run together and it might be 
closer to 40 minutes or so. But I do need to be able to return 
to some other questions and we need to recess until that time.
    I apologize, gentlemen, for the inconvenience, but I think 
it would be more inconvenient to try to ask people to come back 
at a different time. I think that would be a greater imposition 
and I want to avoid that.
    So we stand in recess at the call of the Chair.
    [Recess.]
    Mr. Istook. The subcommittee will come back to order, 
gentlemen. I apologize again for keeping you waiting while we 
cast votes. I expect at least one other member of the 
subcommittee should be returning and I will defer to him when 
he arrives here.

                          SAVINGS BOND PROGRAM

    We were discussing before the break when I was asking 
questions about the financial need versus public policy need on 
the savings bond issuance program. One of the things that I 
wanted to understand as part of this issue is within the 
approximately, I think it is $154 million that is proposed of 
the coming year's budget that relates to the savings bond 
program, how much of that is for the program of issuing new 
savings bonds? How much of it is for redeeming savings bonds 
that are already out there? Then how much is for not general 
management, because some of that would be attributed to each of 
the functions, but to the different administrative roles. 
Somebody says I have lost my savings bond or they are making 
some sort of inquiry regarding it. I call that a managing or 
maintenance amount.
    But breaking the expenditure of the budget down between 
those three categories, how does that break out?
    Mr. Zeck. I have general numbers for you certainly, Mr. 
Chairman.
    Mr. Istook. I understand these are not strict numbers and 
you may be able to provide some more specific numbers for the 
record.
    Mr. Zeck. Correct.
    The $154 million that you referred to is the total expenses 
in Public Debt for managing the program for a particular year.
    A surprisingly, to me at least, small portion of that has 
to do with issuing new savings bonds. In fact, I have not done 
an analysis on this because we do not look at it quite this 
way, but my estimate would be about $10 million, thereabouts, 
would be associated with issuing new bonds.
    The primary reason for that number which is a low amount is 
that in fact we have made use of a lot of technology, a lot of 
those bonds are issued for us by the Federal Reserve System, 
for example, and on our end we are very highly automated and 
the bulk of the money that would be associated with the 
issuance would be for the fees that we pay to financial agents 
in the financial community for issuing bonds, so a rough 
estimate for issuing would be $10 million.
    The other two pieces are less clear to me in terms of the 
way I think about that. What I could say is that the remaining 
amount of the money that we need to operate the savings bond 
program would be, to use your word earlier, capturable, in 
theory, but it would be capturable over 30-plus years. That is 
because by and large the vast preponderance of the amount of 
money that we use of the $154 million has to do with providing 
service to customers who already have the bonds that are 
outstanding.
    Once you have issued the amount of debt we have and the 750 
million bonds that are out there, part of what we do is we 
stand ready to replace those bonds, we stand ready to provide 
information about how much they are worth, we stand ready to 
provide customer service to pay bonds in the cases where the 
owners have died, for example, and these kinds of transactions 
as you can imagine, are fairly complicated and a bit labor 
intensive.
    So the vast preponderance of the remaining amount of money 
is for servicing. That would continue for, as I said, 30-plus 
years, even if we were to issue no new bonds.
    Mr. Istook. If you can try to break that down a little 
further, you used the term servicing. Some things relate to, 
that are within the category of servicing would relate to 
somebody actually redeeming the bond, and like you say, 
sometimes it is a complicated situation that may involve an 
estate and inheritance rights or joint tenancy and so forth. Of 
course I would suppose that the vast majority are straight 
forward rather than complicated redemptions. But can you give 
us a breakdown between the servicing cost that is attributable 
to redemption of the bonds in whatever form and the servicing 
costs that are in the general information category or replacing 
lost bonds or whatever else it might be.
    Mr. Zeck. I can certainly do that and if I could submit 
that to you for the record I would appreciate it so I can be 
more precise than I can be right now.
    Mr. Istook. Certainly. I will not hold you to it, but if 
you are able to give us a broad figure that would be 
appreciated.
    Mr. Zeck. I would say that if we attribute approximately 
$10 million of the $154 million to issuing out of our budget, I 
would say redemption might be $15 to $20 million, not much more 
than that. The remainder would be what I would call servicing 
which is the basic case processing, case work associated with 
providing service to customers who have issues, need to have 
bonds replaced, have questions about their holdings, that sort 
of thing.
    Mr. Istook. Do you keep records, since these are service-
oriented, do you keep records that categorizes the types of 
inquiries or requests for assistance that you receive so that 
you are able to categorize them as far as what are the most 
common requests you receive, how many times per year is that 
particular request received? Do you keep statistics that break 
it down so that you can try to understand what resources you 
need to provide that servicing capability?
    Mr. Zeck. We have broad categories, sir, that we use to 
track the work. We have very good figures about the amount of 
work itself. As I said, we have broad categories about the type 
of work that we are involved in.
    One of the things that we find is that, not that it is not 
useful to know that, the more information the better in many 
respects, but when you are dealing with something this large 
and this large amount of workload it tends to be fairly static 
and fairly predictable as to what is going to happen from one 
year to the next.
    So our ability to have a sense of what it is going to take 
to provide the service level for the bond orders that are 
outstanding is fairly well established. So, we spend not as 
much time in the individual categories as we do just trying to 
make sure that we have the funding request in place to allow us 
to do the work generally.
    Mr. Istook. If your estimates are accurate, and I recognize 
they were estimates, you are saying that it costs approximately 
$120 million a year, that is backing out the $10 million, 
backing out the $20 million, it costs approximately $120 
million per year to provide non-issuing, non-redempting 
servicing to about 50 million holders of bonds.
    Mr. Zeck. Yes, for the $190 billion in bonds that are 
outstanding and there are approximately 750 million of them, 
yes, sir.
    Mr. Istook. And how many inquiries are received on an 
annual basis that generate this approximate $150 million in 
expense?
    Mr. Zeck. I do not have the total off the top of my head. I 
would be happy to provide it.
    Mr. Istook. I am interested in developing the information. 
If we have a universe of 50 million people that hold bonds, 
many of whom would hold small amounts. I do not know what the 
breakout is on how many people hold less than $100 in face 
value and so forth. But if we have a universe of $50 million 
people that potentially could inquire, and we know that only a 
fraction of those are actually going to be making some sort of 
inquiry, and yet it costs $120 million to handle those 
inquiries, I think it is very relevant to try to get to some 
sort of cost per inquiry basis or cost per category of inquiry. 
Do you have any of those management tools?
    Mr. Zeck. Yes, we do. We have that information available 
and we can provide it for the record.
    [The information follows:]

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    I would also indicate that the costs that you just alluded 
to are included in our model that I know you have some 
questions about. All of the administrative costs including for 
the servicing are included in the model.
    Mr. Istook. As you can understand, I am trying to 
understand how, and you do not know how many inquiries there 
are total, but even if it were only for example, let us suppose 
it were five percent of the 50 million bond holders that had 
some sort of inquiry each year, that would be 2.5 million 
inquiries with a cost of $120 million to respond to them. I 
just wonder, knowing there are a lot of call centers, financial 
institutions have them, computer companies have them service 
centers have them, and trying to get to some sort of cost per 
inquiry statistic I think would be very important here.
    Mr. Zeck. We will certainly provide you with the 
information.
    [The information follows:]

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    
           FISCAL YEAR 2003 SAVINGS BOND SERVICING ACTIVITIES

    One thing I would point out, sir, is that we are dealing 
with a program that is 65 years old. One of the things that we 
are dealing with every day when we handle inquiries is we deal 
with information in a variety of forms.
    When the program started there were not computers to handle 
the data, for example. So it is not at all uncommon that we get 
inquiries in that would cause us to have to look at our 
computer records, at microfilm records, at microfilm records 
that were 30 years older than that in a different form, at 
microfilm of paper records that we created when we converted 
from the paper records and accounts many years ago.
    So I think the question certainly about cost per 
transaction is a relevant question. I would just want to point 
out that we are dealing with something here with a history that 
causes us in many cases to have to look at a lot of different 
forms of media in order to answer the question.
    It actually points out the good news and bad news with 
regard to our technological processing. Through the years every 
time we have made a technological advancement, and we have made 
a number of them, we have created the opportunity to provide 
service at lower cost and that is really our objective and we 
continue to try to do that.
    Each time we do that, and we would continue to do it 
because it is worth it, we create a point of demarcation, if 
you will. That means that we now have a period of time--it 
might be eight years, it might be 15 years--where we now have 
records in a certain form and we are now moving on to something 
else.
    So the issues of providing good customer service across the 
spectrum of bonds that have been issued since the 1930s is a 
bit of a challenge. But I am not trying in any way to diminish 
the utility of a cost per inquiry, I am just trying to point 
out that these are things that have some long history behind 
them.
    Mr. Istook. Sure, and that may require some sort of 
subdivision on how you categorize inquiries to make them 
meaningful to know which type involve what type of effort.
    Let me defer now to Mr. Visclosky.
    Mr. Visclosky. Thank you Mr. Chairman.
    I apologize because I have been in and out and trying to 
follow the line of questioning from the Chair.
    Mr. Secretary, you state in your testimony that savings 
bond programs, though less efficient as a borrowing tool in 
today's capital markets are actually a slightly more cost-
effective way to borrow. Is that, everything I have been 
hearing as far as questions and answers is it is not. Is that 
prospectively looking ahead to your electronic transactions?
    Mr. Roseboro. No, sir. It is based on the information and 
analysis provided by the Bureau of Public Debt which 
Commissioner Zeck will elaborate on.
    Mr. Visclosky. My impression of everything that has been 
going on here is that it is more costly per dollar borrowed.

                           SAVINGS BOND MODEL

    Mr. Zeck. There have been certainly some questions asked 
about our model and the model itself and how we calculate the 
cost effectiveness. Now might be a good time for me to sort of 
address that a little bit.
    We have a model that compares the cost of borrowing savings 
bonds to the cost of marketable borrowing. It is a complicated 
model, but I think it is appropriately so as it tries to do a 
complicated process.
    The results of that model when most recently run indicate 
that savings bonds are cost effective relative to marketable 
borrowing. The most recent time we've run this was using fiscal 
year 2001 sales of savings bonds and the indication was from 
the model that for every $1 billion in savings bonds that we 
sold, they were approximately $35 million less expensive than 
marketable borrowing.
    This is an important element to understand the program and 
the model I think certainly.
    One of the things that has happened, I have seen the 
model--I mentioned earlier that I encourage our folks not to 
run the model too frequently and part of the reason for that is 
that you can get yourself tied in a knot if you watch it change 
over the short term. It is not designed to try to say what 
should you do today. It is trying to give you a picture over 
time and a broad view of the effectiveness of savings bonds.
    For example, I have seen the model produce results that 
indicated that we were cost effective to the tune of $7 million 
per billion, and I have seen the model produce results in the 
70s, $70 million per billion. You can look at that and you can 
suggest well what kind of a useful model is that if it is going 
to bounce around that way.
    I think it in fact is useful, and I could point out at 
least one example that might be helpful there.
    At a time several years ago when we were taking a look at 
the savings bond program and the rates that were paid on 
savings bonds, it is our job in Public Debt to have this data 
and make it available to the Treasury policy people.
    But we were looking at the rates on savings bonds and the 
cost effectiveness. The model was showing, in fact, that the 
bonds were cost effective to the tune of about 70-some million 
dollars per billion.
    To be very candid about it, that seemed inappropriate to us 
and it actually seemed inappropriate to Treasury. Because 
Treasury has always viewed in my experience, this is my 
opinion, Treasury has always viewed the program as not one to 
be a profit center. It has not been the issue of Treasury to 
say well let us see what we can make, as it were, out of the 
savings bond program.
    The purpose of the savings bond program as long as I have 
been associated with it and for every Administration and 
Treasury that I have worked for has been to try to provide 
opportunities for investors, for citizens to directly invest in 
Treasury products.
    As a result of that policy focus that it is important to be 
able to directly invest in Treasury products, whether 
marketable or savings, we raised this issue to the policy folks 
at Treasury, and in fact what happened, I do not want to 
oversimplify it because there was a lot of thought that was 
given to this, but one of the things that happened a number of 
years ago was that we raised the interest rate on the EE 
savings bond from 85 percent to 90 percent of the prevailing 
marketable rates. And the reason Treasury did that in response 
to our data as I understand it was because too much of the 
money was coming into Treasury and not enough was going to the 
investors, quite frankly.
    Mr. Visclosky. So if I can interrupt you, your comparison 
is based on a lower interest rate that is paid on savings bonds 
and that is where you are making up your differential on the 
increased costs for handling per transaction.
    Mr. Zeck. Yes, there is a slight interest rate 
differential----
    Mr. Visclosky [continuing]. Billion dollars amounts to some 
dollars.
    Mr. Zeck. Yes, it does. And we do pay less interest on 
savings bonds.
    The reason for that is not punitive, it is because it is 
trying to recognize that savings bonds are different. They have 
a couple of features, for example. You can defer, if you 
choose, as a payment of federal income tax. That is a major 
benefit for purchasers so there is a value to that.
    Another thing you can do is redeem your savings bonds at 
any time after six months.
    Mr. Visclosky. We also have employer purchase plans and you 
are paying a fee for each bond purchased and so you have to 
cover that cost as well then too.
    Mr. Zeck. As well as the bonds redeemed, yes, sir.

                   SAVINGS BOND SERVICING ACTIVITIES

    Mr. Visclosky. It is my impression of the conversation that 
has taken place today that Treasury is looking to work its way 
out of the material bonds and going to electronic transfers in 
the future?
    Mr. Zeck. One of the things that we are doing in Public 
Debt is continuing what we have been trying to do for years and 
that is to see where we want to be down the road. It is a major 
issue for us, technology and the use of systems, and we are 
trying to make as much system technology available to our 
investors as possible.
    We have developed and we are in the process of implementing 
and we hope to make available to the public later this year the 
first-ever book entry savings bond. It would be a book entry I 
Bond, an inflation index bond. We are not----
    Mr. Visclosky. You would do that over the internet?
    Mr. Zeck. We would do that over the internet. It would be 
an electronic relationship between Treasury and the savings 
bond purchaser.
    Mr. Visclosky. Could I do that through an institution as 
well?
    Mr. Zeck. No, you could not. One of the things that we are 
doing here is we are trying to create a direct relationship 
between the investor and Treasury for a couple of reasons. One 
being that is the most efficient and cost-effective way to do 
it; and two because, in fact, we can support some of the costs 
of providing this system by not having to provide fees to 
issuing and paying agents that we now pay.
    Mr. Visclosky. If I could ask about the agents, because my 
understanding either as a function of an individual employer or 
as an agent who will service a number of employers for savings 
bond purchases by their employees, that there are literally 
tens of thousands of agents out there.
    As you move towards electronic transfers is there any 
anticipation then that these agents will not at some point be 
necessary and that individually employers and employees can 
work this out without the middle man?
    Mr. Zeck. One of the things that I have, not personally, 
but on behalf of our organization, as a vision is that we will 
reach a point where we could have an electronic savings bond. 
All the new issues would be in book entry form. There would be 
a direct connection between the investor electronically and 
Public Debt to manage the----

                    SAVINGS BOND WITHHOLDING PROGRAM

    Mr. Visclosky. How would that work if I had a company and I 
had 100 employees and 42 of them wanted to be on a monthly 
withholding program. Would they individually deal with you 
under your scenario or would they still deal through an agent?
    Mr. Zeck. One of the things that our vision consists of 
right at the moment--again, these things are evolving as we 
learn. But our vision currently has a payroll component as part 
of it.
    One of the things that we want to do, this will not be 
available this fall because we are using an incremental 
approach to developing this system and it will be over a period 
of years that we will add features. One of the things that we 
envision is what we are calling a payroll connection. What we 
are hoping to do is create the opportunity for payroll 
companies that currently support the payroll program to be able 
to continue to do so. But we are hoping to make it easier for 
them to do so, rather than having to deal with savings bonds as 
exception processing and rather than having to accumulate 
various amounts up to purchase prices. We envision that they 
would withhold from salaries of employees that want to buy 
bonds a single amount. That amount would be electronically 
transmitted to us and it would go directly into their account.
    So we would envision a payroll component of the potentially 
securities in the future but it would be much streamlined and 
less expensive for us and less onerous on the employer.
    Mr. Visclosky. So you would still potentially have agents 
involved. I assume there might from a regulatory standpoint be 
a change in the fees that are paid to them per bond?
    Mr. Zeck. What I was referring to there was the payroll 
companies. In fact with regard to the agents, the financial 
institutions that are now the intermediaries for the physical 
bonds, we would not envision them being in the picture for the 
book-entry bond. The connection would be directed between the 
investor and Treasury. There would be no financial intermediary 
for the issuance of a bond that was not via payroll.
    Mr. Visclosky. So you would still have agent involvement as 
far as the payroll.
    Mr. Zeck. Actually there could be some involvement there on 
the payroll side. We have not worked out the details of that. 
We tend to look at that a little bit differently than the 
financial institution agents. We tend to view that as a 
different kind of arrangement with a payroll company----
    Mr. Visclosky. Mr. Chairman, I know I have taken a lot of 
time. But when you talk about institutions I want to make 
sure--I am talking about a specific agent who is not a bank, 
S&L, credit union and has other businesses on the side that 
they provide to employers for payroll plans.
    Mr. Zeck. Oh, okay, you are talking about a payroll service 
provider that, would be the term that we would use for such an 
entity.
    There would be a role under this book-entry program, a 
continuing role for payroll service providers because they 
would continue to provide the payroll services for the company 
and for the employees.
    One of those services would be under the book-entry concept 
for running monies directly to someone's Public Debt book entry 
savings bond account.
    Mr. Visclosky. Thank you, Mr. Chairman.
    Mr. Istook. Thank you, Mr. Visclosky.
    Mr. Sherwood.
    Mr. Sherwood. Thank you, Mr. Chairman. Welcome, and I 
apologize for not being here earlier.
    We have had a great deal of discussion about savings bonds 
as opposed to Treasuries. What percentage of the debt is held 
in savings bonds?
    Mr. Zeck. Approximately five percent, sir.
    Mr. Sherwood. And what percentage of your employees 
dedicate their time to that area?
    Mr. Zeck. Approximately 70 percent of our budget is devoted 
to providing services to, direct services or issue redemption 
services to savings bond holders.
    Mr. Sherwood. Would you help me with that again please?
    Mr. Zeck. About 70 percent of our budget is devoted to 
providing direct services, issue redemption servicing services 
to our savings bond holders.
    Mr. Sherwood. So 70 percent of your budget handles five 
percent of the investments?
    Mr. Zeck. Correct.
    Mr. Sherwood. I don't understand then how that can be cost 
effective. I understand what you told me, that there are 
differences in rates, but it does not compute to me that the 
difference in rate could cover the salaries of all of those 
people that have to play with them.

                 MARKETABLE VERSUS NON-MARKETABLE COSTS

    Mr. Zeck. Actually it does cover the costs that we have, 
sir.
    The reason why this is a bit perplexing is because to 
compare the amount of debt that is held in savings bonds to the 
amount that is held in marketable securities is to perhaps 
presume that we are providing the same services in both cases, 
and we are not.
    In the case of marketable borrowing, one of the tasks that 
Public Debt has is to borrow money that we need to fund the 
debt and we do this through a series of actions. We provide 
some direct services with marketable securities directly to 
investors through out TreasuryDirect program, but the vast 
preponderance of the debt that is issued, the marketable debt 
that is issued, is held in what we call the commercial book-
entry system. It is a hierarchy of accounts that involves 
Public Debt and the Federal Reserve System and financial 
institutions throughout the country.
    The servicing work, the direct customer servicing work, 
that must necessarily go on for those marketable securities is 
handled by the intermediaries or the end institutions that are 
out there.
    Mr. Sherwood. I understand that.
    Mr. Zeck. In the case of savings bonds we provide that 
direct service.
    Mr. Sherwood. I understand that. But still, what is your 
total budget?
    Mr. Zeck. Our request is $204 million for fiscal year 2003.
    Mr. Sherwood. So I could say that probably 70 percent of 
that is spent administering savings bonds.
    Mr. Zeck. That is correct, sir.
    Mr. Sherwood. Which are five percent of the total debt 
outstanding.
    Mr. Zeck. That is correct.

                    PURPOSE OF SAVINGS BOND PROGRAM

    Mr. Sherwood. Do you primarily issue savings bonds because 
it is a policy issue, it has always been done, and it is a 
connection of the taxpayer and the average citizen with the 
government?
    Mr. Zeck. I can give you my take on that and Brian can pick 
up where I leave off.
    My association with the savings bond program in Treasury 
goes back a long ways, and it has always been my understanding 
that the support for the savings bond program is based, not 
only the savings bond program, but our TreasuryDirect 
investment program on the marketable side as well has always 
emanated, as I have understood it, from a strong sense in 
Treasury that there ought to be an opportunity for the citizens 
of the country to have a financial connection and relationship 
directly with the Treasury Department.
    That is to say that we borrow a lot of money, we have lots 
of debt we need to fund in order to finance the government's 
operation, and my understanding that Treasury's position has 
always been that that should not be done solely through 
intermediaries or large bidders, but there ought to be a direct 
connection. That is my understanding of where we have been and 
where we are.
    Mr. Sherwood. What is your smallest denomination that you 
sell?
    Mr. Zeck. You can purchase a savings bond for as little as 
$25 which is half of the face value of a $50 bond. So the bond 
is $50 as a denomination. Its purchase price is $25.
    Mr. Sherwood. Has there been any discussion as to whether 
or not that is still cost effective to have them that small?
    Mr. Zeck. Over the years, we have taken a look at this, and 
one of the things that you will find in the detail of our model 
is that there is a lot of information there by denomination. 
The work is not just done at the gross level, it is done on the 
individual denominations of each series.
    One of the things that is tempting to do, and I think ill 
advised, is to sort of try to identify every couple of years 
the apparent most costly item and lop it off. I think the end 
result of that could be an unintended consequence.
    In fact though we have participated a little bit in that 
ourselves.
    A number of years ago we realized and did take action to 
eliminate the two lowest denominations in the payroll market 
and the reason for that was we felt that people were saving for 
their future, they were saving out of their paychecks, they 
could accumulate amounts of money and they did not really need 
the smaller denoms which tend to be more expensive to process 
and overall less effective.
    So a number of years ago we did eliminate all denominations 
under $100 in the payroll market. So in the payroll market the 
smallest denom you can get is $100. So in fact the answer to 
the question is yes. We have done that on occasion where it 
seemed to make sense and where the tradeoff was appropriate 
between serving our customers and also keeping costs down.
    Mr. Sherwood. In Economics 101 they always taught us about 
the open market window and how that was used in monetary 
policy.
    Correct me if I am wrong, but I am assuming that it is not 
your decision to make the monetary policy. It is your decision 
to execute it?

           FISCAL YEAR 2003 SAVING BOND SECURITIES ACTIVITIES

    Mr. Zeck. That is correct. We implement the decisions that 
are made by Treasury's Debt Management policy personnel.
    Mr. Sherwood. The theoretical thing we call the open market 
window where they buy and sell bonds to create, to raise or 
lower the money supply in classic monetary policy----
    Mr. Roseboro. That is Federal Reserve policy, sir.
    Mr. Sherwood. That is not you.
    Mr. Roseboro. No, sir.
    Mr. Sherwood. Okay. I understand that.
    Because of the importance of maintaining the public debt 
and the complete automation of the processing of marketable 
securities as we go forward, how secure is your computer 
network and has the Bureau conducted hacking drills to assure 
your network security?
    Mr. Zeck. We take computer security very seriously. We have 
had, as I mentioned, we have received five unqualified opinions 
on our financial statement for the last five years. The General 
Accounting Office has conducted all five of those audits and 
they are rigorous.
    As part of the GAO work, and in complement to work that we 
do ourselves, there is a computer evaluation that is conducted 
as a part of each of those financial audits. And each of those 
reviews has been very effective in identifying issues that we 
need to take advantage of to protect ourselves. We have been 
very happy and very fortunate and pleased to find that our own 
security processes were well thought of. There is always a 
suggestion for improvement, there is always a way to make 
things a little bit better and we are always looking for that, 
but we take that very seriously.
    That process includes, some processes I am aware of and 
some processes I am probably not aware of in terms of hacking 
and penetration testing that go on. I will tell you that we do 
our own penetrating testing and hacking testing of our own 
systems and we try to be as vigilant as we can about this data.
    It is extraordinarily important to us and we recognize the 
fiduciary role we have because we have people's investments and 
it is their financial portfolio or a part of it that we have 
and we take that very seriously.
    Mr. Sherwood. Thank you very much.
    Mr. Istook. Thank you, Mr. Sherwood.
    Let me ask some questions that come to mind from the 
exchanges there.
    Your testimony, Mr. Zeck, was that the difference in rates 
between the savings bonds and the marketable securities covers 
the cost. How do you calculate that?
    Mr. Zeck. Let me say first that we would be happy to work 
with you or your staff in any way you want to go into the 
details of this model as deeply as you would like. I can take 
us down a level or two and then it would be better probably for 
all of us if we turned this over to some people who were more 
statistically minded. But we would be happy to do that and 
stand ready to do that.
    But I can tell you----
    Mr. Istook. I am sorry. Are you saying that is based upon 
the model that we talked about before?
    Mr. Zeck. Yes. We can certainly go into that in whatever 
detail you would like and we can bring the right people in to 
talk to you about that.
    Mr. Istook. So the validity of understanding whether the 
difference in rates covers the cost depends upon the validity 
of that model.
    Mr. Zeck. Yes, it does. If you want me to I can tell you 
sort of in a four step generally high level----
    Mr. Istook. Go ahead.

                           SAVINGS BOND MODEL

    Mr. Zeck. Essentially the formula or the approach to the 
model is based on measuring the cost effectiveness of 
individual bonds. So the philosophy under the model is that we 
determine the present value of a savings bond. We take the 
issue price and subtract from that issue price the 
administrative costs that we incur to issue a bond. Those 
administrative costs also include the servicing costs that we 
talked about a moment ago, or half of them actually.
    We then add back the savings bond redemption value. We 
subtract the administrative costs, both ours and the Federal 
Reserve System's to redeem the bond. Those redemption costs 
include the other half of the servicing costs. And we also 
subtract out the tax revenue that is received at redemption. 
That is the basic philosophy behind the model.
    It then gets somewhat more rigorous and a bit more 
complicated as you move on. In the next step we forecast the 
life expectancy of each bond and we calculate the cost 
effectiveness for individual bonds for all the bonds we have 
sold in a year. The most recent application of the model, for 
example, took a look at every bond we issued during fiscal year 
2001, made a determination of the cost effectiveness of each of 
those bonds that were issued. We make a determination as to the 
cost effectiveness primarily by relying on historical 
redemption probabilities. We take a look at data that shows us 
how long savings bonds are held--not just in general terms but 
specific bonds by denomination. We use those redemption 
probabilities to predict the probability of when the bonds we 
issue in 2001 will be redeemed. So that is the next element 
that we fold into the model.
    The third step of the four step model is that we calculate 
the cost of borrowing using marketable securities instead of 
savings bonds. This is a process that I can describe at a high 
level but would need help to go into a lot of detail about.
    Essentially what we do is we calculate the present value of 
savings bond payouts, the amounts of money we are going to have 
to pay over time, over the 30 year life of the securities by 
denomination, and we compare that to the yields on the constant 
maturity yield curve for Treasury marketable securities. That 
is essentially the mechanism that the model uses to try to 
relate the amount we have to pay for savings bonds to the 
relevant marketable interest rate and we use rates all along 
the continuum to do that based upon how long our probabilities 
show the bonds will be held.
    There is another adjustment that is made to that particular 
yield curve that accounts for the fact that savings bonds and 
marketable securities pay interest in different ways. All the 
savings bond interest for example is paid when the bond is 
redeemed, but for marketable securities interest is paid as you 
go. So there is an adjustment made to that yield curve to 
account for the fact that with marketables you have to continue 
to have money along the way, along the stream in order to pay 
those semiannual interest payments. That is essentially, at a 
fairly high level, the third step of the four step process.
    The final step is fairly straight forward. Here we combine 
the cost effectiveness estimate of each of our two series. The 
three steps I just mentioned we do for the Series EE security 
and we do for our new inflation index product. We take the 
results of both of those analyses and we weight them based upon 
the current sales that we have of EE's versus I bonds. In our 
most recent modeling, EE dollars were at 47.8 percent of our 
sales and I bonds were at 52.2 percent, so we do a fairly 
straight forward weighting of that and that produces the cost 
effectiveness for the entire program that we express in terms 
of million dollars per billion borrowed.

                     SAVINGS BOND MODEL VALIDATION

    Mr. Istook. Who has tested and validated that model?
    Mr. Zeck. The model was originally prepared and refined 
within the departmental offices at Treasury some years ago, 15 
or more years ago. We took it over and have sort of improved it 
and refined it and modified it as necessary when you add series 
and make other changes, structural changes to the program along 
the way.
    It has been validated within Treasury. It has been used for 
many years within Treasury.
    My understanding, and I am wandering a little bit far 
afield here, but you will be able to check this better than I. 
Some years ago the Surveys and Investigations Group was asked 
to take a look at our program in Public Debt. It may have been 
by this committee, I am not sure, exactly what the source was. 
But they took a look at our program, not just the savings bond 
model, but we went into very great detail with them at the 
model at that time. So Congress has actually seen the model in 
some detail at that time.
    I do not think there has been anything since that that has 
involved the Congress.
    Mr. Istook. So any effort to test and validate it has been 
totally internal, and of course it is--So we do not really have 
anyone veryfiying the accuracy of what is reported from the 
model other than Treasury and the Bureau of Public Debt 
maternally alerting it.
    Mr. Zeck. I am very comfortable with it, but that is 
correct. There has been no outside validation of the model.
    Mr. Istook. And you say of course it was created 
approximately 15 years ago. I may be misremembering this and 
certainly I was not here and you may have been 15 years ago. 
But when the model was developed was it not developed with the 
intent of justifying continuation of the program? That model 
was developed 15 years ago?
    Mr. Zeck. That is not my recollection at all, sir. I do not 
recall--I was at Public Debt certainly but I do no have first 
hand information as to what actually motivated it. It has 
always been my understanding that it was something that 
Treasury, the Treasury Debt Management folks felt was a useful 
tool, something we ought to know about, it was information we 
ought to have, and it was information that would allow us to 
actually make sensible decisions about the savings bond rates 
that are offered to investors on the various savings bond 
programs.
    I could be wrong, but that is my understanding.
    Mr. Istook. Understood.
    And of course I realize you were giving a summation and how 
tricky it is to deal with multiple variables, but it was 
certainly my impression for example at one point you mentioned 
that you add the redemptive value and subtract the redemptive 
costs and I do not understand why the model would not say you 
add redemptive value and add rather than subtract the 
redemptive cost. Those are both outgo items.
    Mr. Zeck. One of the things that we are trying to do is we 
are trying to boil it down through a formula to one particular 
number. I hope I did not misspeak.
    What we are trying to do is reflect the fact, we are trying 
to reduce the money that we receive from selling a savings bond 
by the cost of the bond, the cost of issuing the bond to be 
fair and to include administrative costs in there.
    When we redeem the bond we have to pay out a certain amount 
of money, so what the model does is, in effect, and this is a 
bit of an oversimplification. Let us say you buy a bond and we 
have to pay you $300 when you redeem it. We will in effect in 
the model, we will add to that $300, I mean you will only get 
$300, but in the model we will add a certain amount of money to 
that payout that reflects our administrative costs for 
redeeming the bond.
    So in effect we make the payout larger to account for the 
fact that we have incurred administrative costs.
    Mr. Istook. You can understand I am sure that when you are 
attempting to verify the cost effectiveness of things that 
basically you are met with saying well, we developed internally 
a complicated mathematical formula that is beyond most people's 
ability to understand, but we programmed the computer, and the 
computer that we programmed says we are right. It saves money.
    It has never been tested by anybody else. You can 
understand the challenges of accepting information based on 
that.
    Mr. Zeck. One of the things that I have done in Public Debt 
over the last 10 years or so is I have challenged the model, I 
have challenged the people that have done it, we have talked 
about it periodically, we have refined the model. So I 
understand the importance of being able to understand and 
explain in as much detail as people are interested in, how 
these things work. I absolutely understand that and we have 
questioned it ourselves and we try to do everything we can do 
to make sure that it is doing exactly what we think it is going 
to do and exactly what we say it is going to do. I believe that 
currently it does.

                         SAVINGS BOND MODEL USE

    Mr. Istook. You of course, cautioned against using the 
model to take a snapshot that can produce widely varying 
results as you indicated and have certainly admitted that it 
does. On the most recent run through the model that you say 
generated this differential of $35 million per billion dollars 
valued, over what time period were did the information fed into 
the model cover? Was that based upon 30 days worth of 
information, a year's worth of information five years, what?
    Mr. Zeck. The current iteration of the model, and this is 
the way we tend to normally use it, it considered one year's 
worth of savings bond sales. It considered every sale in fiscal 
year 2001. So it was a good chunk of sales, a reasonable period 
of time, and something that we think represents current 
activity in the program.
    The balance we are trying to achieve there is we are trying 
to make sure that we do not take too small a slice, of course, 
because that could be misleading one way or the other, but we 
are also trying to make sure that we do not go back too far 
because you want to reflect the customer's perception and the 
current state of affairs with regard to a reasonably current 
program.
    Mr. Istook. What period of time was covered by the 
iteration that produced the $7 million figure that has been 
mentioned?
    Mr. Zeck. The same.
    Mr. Istook. That was one year at that time, a different 
starting and end points of the particular year chosen.
    Mr. Zeck. Perhaps the end points were different, that could 
very well be the case, and the other variables of course can 
change too because the marketable yield curve is the yield 
curve in place at the time an the savings bond rates that were 
used were the current savings bond rates that are being paid at 
the time.
    Mr. Istook. Right. And I know currently looking at your web 
site the current savings bond interest rates seem to hover 
right around four to 4.4 percent. I am not sure on fixed rate 
but I noticed on the variable rate marketable securities the 
general range in all but one case was below four percent. That 
was being paid on the variable rates. I can look up the 
specific, but I do not know if you call those series or issues 
or whatever, but reflected on your web site, the outstanding 
variable rate of payments, of those reflected the only ones 
that even rose to four percent were the ten year notes due 
January 15, 2010. The other inflation index securities were all 
currently paying below four percent.
    I just mention that because looking at that and also 
looking at the discount rates applied to the most recent 
options which, for example, the discount rate applied to a 182 
day T-bills or T-notes, whoever it was, a discount rate of two 
point zero something percent, essentially an annual rate of 
four percent.
    But at least based upon current numbers, savings bonds are 
yielding essentially the same, sometimes a little bit more than 
the currently issued Treasury bills and Treasury notes.
    Mr. Zeck. The rates on savings bonds, again that's a 
snapshop issue that----
    Mr. Istook. Yes, I know.
    Mr. Zeck [continuing]. You deal with as well.
    The current EE bond rate is 4.07 percent. This is actually, 
the EE rate will always be less than the five year Treasury 
note rate when it was established because it is established at 
90 percent of that rate.
    Mr. Istook. The reason I bring it up, let me explain. 
Because I understand there are a lot of variables that go into 
that. I bring it up just because when we are talking about, if 
the way that savings bonds overcome the higher administrative 
costs to be more cost effective to taxpayers is because they 
have a lower cost, a lower yield, a lower interest rate. 
Whether that is historically true or not, at this moment in 
time it does not seem to be the case.
    Mr. Zeck. One of the things I would point out is that we 
set savings bond rates every six months. So in May and in 
November are the months that Treasury establishes rates for 
savings bonds, both the inflation index bond rate, the fixed 
rate is established as well as the rate for EE and those rates 
apply to bonds issued in the subsequent six months.
    So one of the things you can find is you can that they will 
lag a little bit behind market rates. So if market rates are 
going up, for example, the EE rate will in fact lag behind that 
a bit until the next time it is set. If market rates are going 
down, for example, then you will find that the EE rate will lag 
somewhat.
    So that is an important thing to keep in mind. If you----

                       SAVINGS BOND RATE TRACKING

    Mr. Istook. I understand, you have to look at them over 
time. I appreciate that very much.
    Do you have a management tool that enables you to track the 
spread between the rate on marketable securities and the rate 
on savings bonds? I know you were talking about some sort of 
average or blended or melded rate, but do you have a tool that 
seeks to track over time what that differential, what that 
spread is?
    Mr. Zeck. That is something that I would prefer to, the 
Debt Management folks at Treasury actually handle the rate 
setting for savings bonds and they have, I do not want to speak 
for them, but we turn to them for the rate information on 
savings bonds and they are very much in tune with Treasury 
marketable yield curves and the procedures that are followed 
for establishing saving bond rates.
    So at the risk of speaking for someone else they certainly 
have a process and a tool and a procedure that they use to 
establish those rates that they provide to us.
    Mr. Istook. Certainly, and that is something that I hope we 
can get for the record because when you look at it strictly 
from a fiscal issue it is a question both of--Obviously there 
are higher administrative costs with savings bonds and the 
question is how does that track against any interest rate 
savings as to whether or not it is cost effective to use that 
mechanism. That is what I am interested in having the tools to 
look at that.
    How much is expended by Bureau of Public Debt in marketing 
expense? Sales, advertising, whatever type of expense it may 
be. How much is expended relating to marketing expenses on 
savings bonds?

                         SAVINGS BOND MARKETING

    Mr. Zeck. Our total marketing effort is approximately $17 
million for all of our products. The preponderance of that, at 
the moment, is for savings bonds.
    One of the things that Brian had mentioned earlier was that 
we are in fact in a transition period right now and we are 
looking to even ask in Public Debt to take on the challenge of 
trying to market our marketable auction participation to a 
wider number of participants.
    So what we are in the process of doing right now is 
investigating the options that we have available there, and 
over time we expect and plan to shift resources away from the 
savings bond marketing directly and to devote more attention 
than we have in the past to trying to increase the competition 
in our auctions and work on the marketable side of things to 
increase competitive bidding.
    Mr. Istook. Can you tell me over the past five years what 
have been the annual expenditures on marketing savings bonds 
and how does that correlate with what has been happening with 
the annual issuance? I understand the annual issuance is 
significantly down.
    Mr. Zeck. The issuance in terms of the number of savings 
bonds is down. The savings bond sales are actually up as a 
dollar figure.

                           SAVINGS BOND SALES

    Mr. Istook. Fewer people buying, but those who buy buy 
larger----
    Mr. Zeck. That is correct. One of the things that has 
happened, and it is continuing this year, is the popularity of 
our inflation index savings bond. That has proven to be very 
popular with investors and we have found that per transaction 
the inflation index purchasers buy more securities than the EE 
purchasers do.
    So in fact we did have a period of time where savings bond 
sales were declining but now they are increasing. In this 
particular year, they will clearly be higher than last year. So 
in 2002, dollar sales will exceed 2001.
    Mr. Istook. Maybe I do not have current numbers here. I 
have for example figures that show in fiscal year 1995 75.6 
million bonds worth $7.2 billion, and I am not sure if that is 
face value or issuing cost. But $7.2 billion of bonds issued in 
fiscal year 1995 to 75.6 million. By fiscal year 1999 that 
dollar amount was down to $4.9 billion and there were 49 
million bonds rather than 75 million issued.
    Are those outdated figures?
    Mr. Zeck. No, those are good numbers because they are 
historical. Last year's numbers of $6.6 billion----
    Mr. Istook. Last year being fiscal year 2001?
    Mr. Zeck. Fiscal year 2001 sales were $6.6 billion. And 
2002 sales will exceed that.
    Mr. Istook. Marketing costs, obviously I need some updated 
figures. The ones I have are not current. We will get those for 
the record from you. But on marketing costs, $17 million 
currently compared to what has it been in the last four years?
    Mr. Zeck. Except for inflation it has been about the same. 
It has hovered around----
    Mr. Istook. Is that mostly direct advertising?
    Mr. Zeck. Actually it is mostly personnel costs. The reason 
for that is because the traditional marketing that we have 
done, and marketing we will have to continue to do and should 
continue to do for some period of time with the savings bond 
program has been focused on talking to those companies, talking 
to those payroll companies, working with those service 
providers to try to actually encourage them to hold savings 
bonds and to offer savings bonds through payroll savings plans 
for example.
    So we have had a long history of a fairly labor intensive 
marketing effort in the savings bond program that goes back 
many many years. I think that we will need certainly to 
maintain a certain element of that going forward, but one of 
the reasons we have in our 2003 request a request to shift, to 
reduce by 40 FTE, and shift those dollars away from personnel 
to services, if you will, is because we see the need and want 
to move forward and be able to engage in some less labor 
intensive marketing, something that would in fact be more 
effective, hopefully, in the savings bond area. But maybe even 
more to the point, help us out as we take on the challenge from 
Brian and others at Treasury to increase the competitive 
bidding.
    Mr. Istook. Is that----
    Mr. Zeck. We want to use some advertising, perhaps some 
public affairs work, some other kinds of resources that will be 
less oriented to one on one marketing.
    Mr. Istook. Is that because the emphasis on marketing via 
appeals to payroll deduction plans has not generated the growth 
in those plans that you hoped or expected that it would?
    Mr. Zeck. There are a couple of reasons. The payroll 
dollars are in fact declining and continue to decline in the 
payroll program. That is one reason. So we are switching away 
from something that is less effective for us to something that 
we are confident will be more effective.
    The other side of things is I think we are positioning 
ourselves, I know we are positioning ourselves in an attempt to 
try to get ahead of the curve, as it were, with regard to the 
future and book-entry bonds and the idea of having this direct 
relationship with customers.
    So we want to be in a position where we can have the right 
kind of resources and it really for us means less labor 
intensive resources and more services oriented resources to 
allow us to operate in that environment where we are not 
dealing directly with intermediaries or quite as much with 
payroll companies.
    Now we support the payroll program and we continue to want 
to give that appropriate attention, but we have had less 
success there.
    Mr. Roseboro. Quite honestly, there is more competition 
there. There is a lot more things people can do with those 
payroll dollars today than there used to be.

                    PURPOSE OF SAVINGS BOND PROGRAM

    Mr. Istook. I understand. Frankly, whether or not, it is a 
good investment for us to want people to purchase bonds as 
opposed to enabling them to purchase bonds. It may get back to 
the question of whether that is really the most cost effective 
way for us to borrow.
    If the purpose is to satisfy a need that already exists for 
people to invest directly in a Treasury bill why do you need to 
drum up the need?
    Mr. Zeck. One of the things that it is our job to do in 
Public Debt is to have the best savings bond program we can 
have. To us that means using technology, keeping administrative 
costs low, and trying to make sure that as many people know 
about the product and take advantage of it as can, and making 
sure that they understand about how the product can fit into 
their portfolios, and where it fits and where it does not.
    So I operate from a very straight forward standpoint we 
have been challenged to have a savings bond program and our job 
is to try to do the best job we can in administering such a 
program.
    Mr. Istook. I guess to me that still does not answer the 
question. If you are trying to meet a need that exists as 
opposed to create a need, if I understand correctly because you 
were going into areas where you had declining purchases, 
putting your marketing emphasis there. Most of the resources of 
the approximately $17 million per year on marketing was devoted 
to try to stimulate corporate payroll deduction plans which did 
not work.
    I just wonder whether you are trying to satisfy a need as 
opposed to create a need. There is a significant different when 
you are talking about taxpayer dollars.
    Mr. Zeck. I think there certainly is. I think there are a 
couple of issues related to that.
    One is, and I am not trying to get into a semantics game 
here, but the role of marketing and preserving payroll sales at 
a certain level should not be dismissed. Certainly the 
competition is heavy in the payroll area for those payroll 
dollars through various 401K plans and what not.
    The fact that sales are declining in that market is 
certainly true. That does not necessarily mean that marketing 
has failed. We do believe we have to continue to pay attention 
to that. We also believe we have to shift emphasis and focus on 
some other areas as well.
    Mr. Roseboro. Mr. Chairman, if I may just add to that.
    Mr. Istook. Yes.
    Mr. Roseboro. As I indicated in my testimony, one of our 
intentions in terms of marketing Treasury securities is to 
broaden out from the over-emphasis that has been placed on the 
savings bond program to make the public aware of as well as to 
leverage off, the improvements in the technology that the 
Bureau of Public Debt has developed to make other Treasury 
securities accessible to the public.
    Mr. Istook. Certainly I want to make sure that I applaud 
the application of technology and with regard to marketable 
securities. From what I understand the basis points that it 
takes for the administrative costs are quite comparable with 
what happens in the private sector with handling investments in 
mutual funds, for example. Other things, I mentioned four. I 
think you have a very useful web site and I applaud those 
things.
    The question is not whether you are very well handling 
that. The question instead relates to the issue of the savings 
bond program.
    When we have the budgeting challenges that we do, as you 
know, the budget resolution is on the House Floor right now. 
There are enormous concerns with a great many programs, and we 
each, as I mentioned before, could single out which ones we 
have. I think we need to differentiate between where we are 
meeting needs and where we are out of inertia, trying to create 
needs to justify the continuance of different government 
programs.
    Certainly we are aware that there are a huge number of 
investment vehicles that are available to people. It is a very 
different world than when war bonds were first issued to 
finance the costs of the federal government, I believe it was 
during the Civil War that it first began.
    We know it is a very different case. You have an active and 
efficient market with enormous amounts of capital being 
available as shown by the marketable securities program. It is 
a very different situation as far as what we need to do to meet 
the need of the government.
    Now if we are talking on policy grounds that Mr. Roseboro 
and I engaged on earlier, there is a legitimate question about 
what it takes to meet the needs of investors.
    But let us talk about investors' needs if that is the case. 
There are many vehicles out there for large and small 
investors, including those that are backed by the full faith 
and credit of the United States government.
    So these are legitimate questions and I think we must take 
a hard look at them as we are trying to prioritize the dollars 
that we have to allocate in the subcommittee.
    I very much appreciate your time, gentlemen. You have been 
good about going over and it is not your fault we are going 
over.
    Mr. Visclosky.

                       SAVINGS BOND DEMOGRAPHICS

    Mr. Visclosky. I have actually found the discussion very 
interesting as far as savings bonds, and one question that 
comes to mind is as far as the need for savings bonds, has 
Treasury done any studies as far as what the breakdown is by 
income level of people who are involved in some of these bond 
purchase programs, either through their employer or as 
individuals?
    Mr. Zeck. We have a fair amount of demographic information. 
I do not have it with me today. We could certainly provide, if 
you would like it we could certainly provide what we have to 
you that describes what we know about the typical savings bond 
purchaser, for example.
    Mr. Visclosky. If you could I would appreciate that. I 
think the Chairman has raised a lot of very legitimate issues 
as far as marketing when there are other options. For some 
people, particularly if they are at the margins and they want a 
very secure investment and do not have a lot of money to invest 
I can see where this might be an attractive possibility.
    So if you have that, if you can share that with us----
    Mr. Zeck. We will share with you what we have, yes, sir.
    [The information follows:]

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    
                SAVINGS BOND OWNERS BY HOUSEHOLD INCOME

    Mr. Visclosky. Thank you, sir.
    Mr. Istook. Thank you, Mr. Visclosky, and of course that is 
talking about is there the need of the government to have it to 
cost effectively borrow? And if it is not there, is there a 
need of the investing community to have it in today's world of 
enormous options and opportunities that are out there.
    We have other questions of course we will submit for the 
record including some trying to look at these means of 
measuring it, the performance measures that you have under the 
Government Results and Performance Act and so forth, but we 
will submit those for the record.
    Gentlemen, I do thank you again for your courtesy in 
staying beyond what we thought would be the time through no 
fault of your own, but to accommodate us. I appreciate that. 
Thank you.
    We stand adjourned.

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                                          Thursday, April 18, 2002.

                          CUSTOMS/TRADE ISSUES

                               WITNESSES

DOUGLAS R. BROWNING, DEPUTY COMMISSIONER DESIGNEE, U.S. CUSTOMS SERVICE
MICHAEL D. LADEN, TARGET CUSTOMS BROKERS
KEVIN M. SMITH, GENERAL MOTORS CORPORATION
MINDY S. FLEISHMAN, AMERICAN IRON & STEEL INSTITUTE

                            Opening Remarks

    Mr. Istook. Good morning. We appreciate everyone coming 
together for this subcommittee hearing regarding trade issues.
    This country's greatness, of course, rests on its 
openness--its openness to people, openness to ideas, openness 
to trade and the free enterprise system. Since September 11th 
this of course has been tested by level one alerts that have 
caused massive slow-downs at times along our borders. Because 
of concerns about the vulnerability of our systems of 
transportation, our government offices, public facilities, 
vulnerabilities of our mail and communication systems. All of 
these fundamentally challenge our thinking about security for 
our national infrastructure,
    Despite all of this, trade activity seems to be showing 
signs of overcoming this resistance, but we want to make sure 
that national security is handled in a manner that's consistent 
with economic security. Our national and political culture for 
the most part has treated international trade as essentials for 
national and global economic health and for world peace. Even 
the literary figure H.G. Wells noted in 1922 that the insights 
of Adam Smith carried forward to the present and that 
apparently contradictory views of class war socialists and free 
traders, as H.G. Wells said, ``were heading at last in spite of 
primary differences towards the same intimations of the new 
worldwide treatment of human affairs outside the boundaries and 
limitations of any existing state. The logic of reality 
triumphs over the logic of theory.''
    Those were the words of H.G. Wells and I believe the same 
logic of reality ultimately will trump any destructive 
ideologies that seek to harm the global ties that support our 
prosperity, support our national security, and support our 
homeland security.
    This morning we are considering issues surrounding the flow 
of trade across our borders since September 11th. It is a 
matter of great interest to this subcommittee because of our 
responsibility for funding and oversight of the U.S. Customs 
Service and of course with the U.S. Treasury Department with 
its significant role regarding international trade.
    Members of the subcommittee for a great period of time have 
been aware of the key role that Customs has in facilitating 
trade on a daily basis with some 8.8 billion dollars a day of 
legitimate goods and services coming across our borders. Over a 
million passengers, hundreds of thousands of containers, 
vehicles, vessels and aircraft each and every day.
    At the same time that Customs is enforcing U.S. trade laws 
it also serves as a front-line defense against terrorists, 
against criminals, against traffickers and weapons of mass 
destruction and illegal drugs, firearms, pornography, and the 
financing of those activities. As a result, Customs continues 
to have growing statistics of seizures and deterrents.
    Today borders and ports of entry can no longer be thought 
of as just simple physical checkpoints. They extend into 
cyberspace and part of the solutions extend into cyberspace as 
well.
    To strengthen and protect the chain of supply that we 
depend upon demands more than just physically processing 
commodities and goods. It requires automation and information 
systems, communication, high tech inspection capabilities, all 
to ensure that Customs can do its job.
    Of course we cannot rely solely upon Customs and the 
Federal government any more than we can totally rely upon law 
enforcement officers to be the means of having law and order in 
our communities. It depends upon the mutual acceptance of 
everyone of the responsibilities for law and order in our 
communities and mutual acceptance by everyone involved of the 
responsibility for homeland security for the security of 
commerce that is crossing our borders whether a person be an 
importer, an exporter, a shipper, a carrier, broker, their 
employees, the people that work on docks, the drivers of trucks 
and other vehicles, they all have a stake in reducing our 
vulnerabilities--something that cannot be done by any single 
entity.
    This has been complicated, I know, by the dynamics of 
politics in Washington. There are pressures to reorganize, 
consolidate, and unfortunately that could end up duplicating 
many activities currently carried out by the Customs Service.
    Sometimes people may not be sure of what to do next. 
Reorganization can sound good in theory, but sometimes it can 
be movement without progress and that is one of the issues that 
we have to address as well.
    I am pleased to welcome a very distinguished panel of 
witnesses to explore these. We will begin with a statement from 
the Deputy Commissioner designee for the U.S. Customs Service, 
Mr. Douglas M. Browning.
    Mr. Browning, welcome. I do not think you have appeared 
before our subcommittee before, at least not while I have been 
chairing it.
    Most recently Commissioner Browning served as Assistant 
Commissioner of Customs' Office of Regulations and Rulings and 
has a distinguished I think 25 year career with the Customs 
Service.
    Following him will be Mr. Michael Laden, President of 
Target Customs Brokers, Incorporated, and Chairman of the 
American Association of Exporters and Importers.
    Following him, Mr. Kevin Smith, Director of Customs 
Administration for General Motors.
    Finally, we will hear from Ms. Mindy Fleishman, General 
Manager of Marketing and International Trade for U.S. Steel and 
the Chairperson of the Customs Committee for the American Iron 
and Steel Institute.
    We look forward to hearing your views in addition to these 
other issues touching upon the present state of U.S. trade 
flows and insight regarding the steel tariff issue and the 
recent presidential ruling.
    To permit time to hear from our witnesses I am going to ask 
that questions from members of the subcommittee wait until we 
have heard from each of the witnesses.
    I always remind our witnesses your full written statement 
will appear in the record. I have read them all. So if you wish 
to be extemporaneous and certainly be a little bit briefer in 
your oral statements that will be appreciated.
    Before that I want to give the opportunity for comments to 
my ranking member Mr. Hoyer.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I join you in 
welcoming our witnesses today.
    This is an important hearing. Obviously we, after September 
11th have changed our psychology of the porousness of our 
borders. That was understandable and correct. At the same time 
this committee is very concerned about facilitating trade 
across our borders that are so vital to our own people and 
obviously to the international economic community.
    I think that as we work through this together we want to 
accomplish both objectives--security and commerce.
    I want to say that I was pleased to hear yesterday that 
Secretary O'Neill was very happy with the statistics that he 
quoted to us in terms of the time that it was taking at the 
northern border to process some cargo, and because of the 
application of electronic technology we were able to decrease 
from hours to I think minutes, I forget exactly, seven minutes?
    Mr. Browning. Nine minutes.
    Mr. Hoyer. Nine minutes. I was gilding the lily by two 
minutes. But a phenomenal success and obviously of great value 
to the private sector and of great value to the public sector 
as well.
    Mr. Chairman, I will include my full statement in the 
record without objection at this time if you will, but I would 
close simply with welcoming Mr. Browning to the committee. I 
would be remiss if I did not comment on his background a 
little. Chuck Winwood has been an extraordinary public servant. 
He has served Customs well, he served America well. He is a 
public servant of whom we can all be proud. He is going to be 
retiring on May 3rd and going into the private sector where I 
think he will be equally successful.
    Mr. Browning, you I know have also, as the Chairman has 
noted, been a 25 year Customs employee and a leader in that 
agency and we welcome you to your new position. We look forward 
to hearing from you at this time.
    Thank you, Mr. Chairman.
    Mr. Istook. Thank you.
    If the witnesses would stand, I will administer the 
collective oath and then recognize people in the order--Mr. 
Browning, Mr. Laden, Mr. Smith and Ms. Fleishman. [Witnesses 
sworn.]
    Mr. Browning, we are pleased to hear from you.

            Deputy Commissioner Designee's Opening Statement

    Mr. Browning. Thank you, Mr. Chairman.
    Chairman Istook, Congressman Hoyer, members of the 
subcommittee, I am grateful for the opportunity to appear 
before you today to discuss Customs' continued role in ensuring 
the free flow of trade across our borders in light of increased 
security demands following September 11th. And being mindful of 
your admonishment to us, Mr. Chairman, I will in fact make a 
very brief formal statement.
    But also let me follow up on the point that was made by 
Congressman Hoyer.
    I share your thoughts, as do the 21,000 men and women of 
the U.S. Customs Service, on the significant contribution that 
Chuck Winwood has made in his 30-plus years in the Customs 
Service. I have had the privilege of working with him for 25 of 
those years, and most recently, over the last two months, have 
had the privilege of working with him as we transition me into 
this very important job of this organization.
    I only trust and pray that I am worthy of the 
responsibility that Commissioner Bonner has placed on me and 
that I am able to at least come close to the performance that 
Mr. Winwood has contributed to this organization. So, on behalf 
of the U.S. Customs Service, we also acknowledge the fine work 
that he has done for the men and women of the United States 
Customs Service and for this nation in general.
    As you are well aware, it has been the Customs' mission for 
many years to oversee and facilitate this balance of safe yet 
swift flow of trade through our ports. It has been a challenge 
we have always risen to while continuously looking for ways to 
make it work better. We have embraced the benefits of 
technology, partnerships with the trade community, and a 
trained and motivated work force to keep the upper hand against 
a constant influx of contraband and prohibited merchandise. 
Needless to say, since September 11th, the stakes have never 
been higher, and accordingly neither has the vigilance of the 
men and women of the United States Customs Service.
    Since September 11th Customs had been at a level one alert 
across the country. Level one requires sustained, intensive 
anti-terrorism questioning and includes increased inspections 
of travelers and goods at every port of entry.
    Because there is a continued threat that terrorists will 
attack again, we remain at level one and we will do so for the 
foreseeable future.
    Yet international trade has never been more robust. Despite 
a few short dips its volume continues to surge. Last year the 
U.S. Customs Service processed over 23.5 million trade entries, 
a 150 percent increase since 1990. That volume is expected to 
nearly double by 2006.
    Customs continues to find the balance of providing an 
increased level of security at our borders, without the 
consequence of choking off the ever-increasing flow of 
commerce.
    I believe that, with the right level of industry 
partnerships and the right combination of resources, we can 
succeed not only in protecting legitimate trade from being used 
by terrorists but we can actually build a better, faster and 
more productive system of trade facilitation for the U.S. 
economy.
    Today I would like to briefly outline and discuss with you 
some of the processes already in place and others that when 
implemented, will be greatly beneficial to our security 
strategy and economic growth.
    Among the many things that the 2002 terrorism supplemental 
allows us to do is acquire additional non-intrusive technology 
to assist in our security efforts.
    Yet as important as our acquiring technology is in 
thwarting international terrorism I must also stress the 
essential human element. The most important component of 
Customs success in protecting American lives and the American 
economy lies in our men and women who work directly on our 
nation's front line.
    For our strategy to be effective we must ensure that 
Customs has an adequate number of inspectors, canine officers, 
special agents, and other personnel to meet our security and 
trade facilitation mission.
    To increase security beyond that provided in level one, we 
will need more inspectors to conduct targeted analysis, operate 
additional non-intrusive inspection equipment, staff all 
available lanes, question more people, and perform additional 
physical inspections while quickly processing increased volumes 
of commercial and passenger trade.
    No discussion, Mr. Chairman, of a successful border 
security program would be complete without consideration of the 
simple importance of new automation for the mission of the U.S. 
Customs Service. That system, the Automated Commercial 
Environment, is a vital project for U.S. Customs and a key link 
to the business community. It will perform and reform the way 
Customs does business and should also greatly assist in the 
advanced collection of information for the targeting of high 
risk cargo to better address the terrorist threat.
    Because of this subcommittee's strong support, Customs 
received $130 million for ACE funding in fiscal year 2001 and 
$300 million in fiscal year 2002. That funding has allowed us 
to establish the fundamental design framework for ACE, to 
develop user requirements, and to begin programming initial 
capabilities which we expect to be deployed in the fall of this 
year.
    I want to thank this subcommittee and the Congress for 
their past support of ACE and ask for your continued support in 
approving the $313 million contained in the fiscal year 2003 
budget request. This level of funding will allow us to continue 
ACE development and most importantly begin to deliver on the 
first installment of ACE benefits to the trade community.
    The movement of ocean-going sea containers is a vital part 
of the U.S. economy. Indeed, 46 percent of all goods imported 
into the U.S. by value arrive at our nation's sea ports, mostly 
in containers. But as significant as sea container traffic is 
to the U.S. economy, the fact is that all industrialized 
nations rely heavily on containerized shipping.
    Today approximately 90 percent of cargo moves by containers 
between the world's largest ports. Over 200 million containers 
per year are now moved between those ports, constituting the 
most critical component of global trade. Unfortunately, ocean-
going cargo containers are also susceptible to the terrorist 
threat.
    Consider for a moment what would become of our nation's sea 
ports and global trade if a sea container were used to conceal 
and then detonate a nuclear device or other weapon of mass 
destruction. Simply put, the shipping of sea containers would 
stop. This would quickly bring the global economy to its knees.
    Commissioner Bonner has proposed a Container Security 
Initiative, CSI, which would establish a security architecture 
for the protection of global sea trade.
    CSI is designed to build a defense against terrorist 
smuggling using a combination of government resources both here 
and abroad and an unprecedented level of information sharing 
between Customs administrations, governments, and industry.
    So we must change our focus and alter our practice to this 
new reality. Custom services around the world must screen high 
risk cargo containers before they leave their port of shipment 
and catch weapons of mass destruction or other terrorist 
weapons before they have the opportunity to do their damage.
    We have already, Mr. Chairman, embarked on implementing 
this significant program.
    Here in the U.S. we are also working on another critical 
part of our strategy to push security beyond our physical 
borders. We are partnering with large importers and other 
members of the trade who see tight supply chain security as 
being in their best interest. We are redesigning programs with 
them such as the Customs Trade Partnership Against Terrorism, 
C-TPAT, and the companies are lining up to join that program.
    Under the C-TPAT program importers have voluntarily agreed 
to take steps to increase the security of their cargo from the 
foreign manufacturers to the U.S. border. In return for their 
efforts, we will reduce their inspections and other Customs 
compliance burdens.
    Some of the benefits to the importer are clear--fewer 
examinations, more predictable deliveries, reduced inventory 
needs, less physical threat, lower transportation costs, and of 
course improved security of their containers.
    Customs clearly cannot act alone to address the terrorist 
threat. We have been working with other key border security 
stakeholders like the Office of Homeland Security, the 
Immigration and Naturalization Service, the Transportation 
Security Administration and the U.S. Coast Guard as well as our 
international partners in Canada and Mexico. We are actively 
engaged in the Department of Transportation Security Working 
Group which is aimed at improving the security of sea 
containers entering the U.S. We are also participating in a 
multi-agency effort to develop a joint border security plan.
    Through these various efforts we are developing 
comprehensive strategies, procedures and plans, to maximize the 
use of existing resources and improve border security, to 
coordinate our enforcement activity and our responses to 
terrorist threats, and to collaborate on legislative 
initiatives.
    With the programs I have briefly outlined and new 
technology that we are purchasing, we at Customs envision a 
world in the not too distant future where all cargo, whether 
arriving by land, sea or air, will be segregated into two 
categories--low and high risk. Low risk cargo will be pre-
screened overseas and secured against tampering. High risk 
cargo, on the other hand, will receive extensive scrutiny.
    As with any proposal, implementation will not be easy but 
the size and scope of the tasks pale in comparison with what is 
at stake, and that is nothing less than the integrity of our 
global trading system.
    Even before September 11th this was the direction in which 
we were heading with our efforts to create a seamless border 
for global commerce. Now our agenda has taken on a much greater 
security dimension and a much greater sense of urgency.
    Our twin goals of increased security to address the 
terrorist threat and trade facilitation are more tightly bound 
than ever. In protecting America against the terrorist threat, 
we are looking not only to save lives, we are looking to save 
livelihoods.
    Working together I know we can and will succeed.
    I thank you for the opportunity to make this very brief 
statement and I would be more than willing to take any 
questions from the subcommittee.
    Thank you, Mr. Chairman.
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    Mr. Istook. Thank you, Mr. Browning.
    Mr. Laden.

                   Opening Statement of Michael Laden

    Mr. Laden. Thank you.
    Chairman Istook, Congressman Hoyer good morning. My name is 
Michael Laden and I would like to thank you for allowing me the 
opportunity to appear before you today. I am the President of 
Target Customs Brokers, Inc., a wholly owned subsidiary of 
Target Corporation. I am also the current chairman of the 
American Association of Exporters and Importers (AAEI), and an 
appointee to the Treasury Advisory Committee on the Commercial 
Operations of the U.S. Customs Service (COAC). Thank you for 
allowing me the opportunity to appear before you today to 
discuss the views of the U.S. international trade community on 
the fiscal year 2003 budget for federal agencies now under 
consideration. While I would rather be before you today to 
discuss matters of simplification, the atrocities committed 
against our nation on September 11th have preempted that 
discussion from the international supply chain.
    From the outset it is vital for the committee members to 
keep in mind that our industry is comprised of a very complex 
group of stakeholders; private and government, foreign and 
national. Today the U.S. Customs Service administers more than 
400 laws and federal regulations imposed on foreign commerce by 
more than 40 federal agencies and while I would rather be 
before you today to discuss matters of simplification, the 
atrocities committed against our nation on September 11th have 
preempted that discussion.
    That said, the committee should know that many of the 
regulations and laws governing our business are more than 200 
years old. Given the dynamic nature of modern commerce and the 
globalization of our economy, many of the regulations we 
operate under today are antiquated, rendering them incompatible 
with today's modern business practices.
    Simplification of onerous or outdated regulations designed 
to expedite the flow of legitimate trade will also result in a 
significant productivity savings for the U.S. Customs Service 
and other regulating agencies. This will allow those agencies 
then to optimize their resources, concentrating on more wanton 
violators and conspirators.
    At Target Corporation our Chairman is constantly reminding 
us that speed is life. Time really is money. A vast majority of 
retailers, manufacturers, and other commercial importers 
meticulously plan their inventories using the principles of 
just in time. Some intermodal transportation arrangements are 
so tightly synchronized that inventory replenishment is planned 
within hours.
    For a manufacturer, a delay may result in an assembly line 
going idle. For a retailer, a delay represents a lost sale and 
a disappointed customer.
    The rapid transmission and analysis of information is 
critical to the efficiencies with which government border 
agencies can perform their duties. This is particularly true 
for the U.S. Customs Service.
    The flow of legitimate trade and commerce into and out of 
the United States must not be impeded. In my humble and 
professional opinion, anyone who authors or promotes 
legislation requiring the physical inspection of 100 percent of 
all cargo coming into this country is misinformed.
    Given the technology and resources available today it is 
impractical and impossible to search 20 percent of the in bound 
conveyances and cargo, let alone 100 percent.
    The physical examination of a single ocean container can 
take two to three people up to five hours to complete. These 
examinations are not only time consuming but costly. The 
infrastructure at our land borders, airports and marine 
terminals is simply not adequate and cannot accommodate the 
massive quantities of cargo without becoming congested with 
shipments awaiting inspection.
    On Tuesday of this week Security Director Governor Ridge 
said it best, ``It is all about risk management.'' We must rely 
on greater intelligence gathered abroad and better risk 
assessment and targeting. Risk management and targeting is 
something that the U.S. Customs Service is very well versed in 
and has been doing successfully for years.
    Soon the Customs Service will have new tools at their 
disposal to assist in targeting and risk analysis when the 
Automated Commercial System, otherwise known as ACE, is 
deployed.
    I would like to personally thank this committee and join 
Deputy Commissioner Browning in thanking them for all the 
support you have rendered to the rapid development and 
deployment of ACE.
    Lastly, I would like to update you on the recent work of 
the Treasury Advisory Committee on the Commercial Operations of 
the U.S. Customs Service, otherwise known as COAC, and the 
collective Trade/Customs effort to address security concerns.
    The 20 member COAC is a compilation of importers, carriers, 
brokers, ports and trade attorneys. This group meets quarterly 
to provide advice to Treasury officials on Customs matters of 
particular interest to the trade community. During the November 
meeting Under Secretary of Enforcement Gurul& briefed COAC 
members on issues related to supply chain security and then 
authorized COAC to form a technical advisory team on border 
security.
    At the January 25th COAC meeting the technical advisory 
group presented a comprehensive report containing more than 50 
recommendations for enhancing supply chain security. If it has 
not already been sent over, I would urge members of this 
committee to secure a copy of this report from Treasury. This 
same group will also publish a report on security technologies 
in the coming months.
    As the technical advisory team was working to prepare their 
report, Customs was designing the Customs Trade Partnership 
Against Terrorism, C-TPAT. This important program is a next-
generation voluntary partnership between the private sector and 
the Customs Service. C-TPAT was modeled after the very 
successful Business Anti-Smuggling Coalition, otherwise known 
as BASC, created by Customs in the mid '90s to combat the flow 
of illicit narcotics from drug-producing regions.
    C-TPAT was officially launched two days ago in a ceremony 
at the Ambassador Bridge with Secretary O'Neill, Governor 
Ridge, Commissioner Bonner, and the CEOs from the seven C-TPAT 
charter members--General Motors, Ford, Daimler Chrysler, 
Motorola, BP America, Sara Lee and Target Corporation.
    The trade stands ready to work closely with the federal 
government to improve security at our borders. And based on the 
initial results and the interest in C-TPAT from some of 
America's largest importers, I predict great success for this 
program.
    Mr. Chairman, let me thank you for the attention this 
committee is giving to the security problem and for giving me 
an opportunity to appear here today and offer my views. I am 
sure that I speak for the entire United States international 
trade community when I say that we are deeply concerned about 
security and determined to prevent U.S. international trade 
from being exploited for inappropriate purposes. We are eager 
to work with the Congress to accomplish this noble and 
patriotic goal.
    Thank you.
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    Mr. Istook. Thank you, Mr. Laden.
    Mr. Smith.

                    Opening Statement of Kevin Smith

    Mr. Smith. Mr. Chairman and members of the committee, my 
name is Kevin Smith, and I am the Director of Customs 
Administration for General Motors Corporation. I want to thank 
you for giving me the opportunity to be here today to share 
GM's views on the movement of goods through U.S. ports of 
entry.
    As you are aware, the motor vehicle industry is today 
highly competitive in all areas but none more than in the area 
of cost. In response to the need to be cost competitive the 
industry has turned more and more to reducing its inventories 
of parts and building vehicles to meet specific customer 
orders. As a result, the motor vehicle industry has become 
highly integrated with parts manufacturers in the three 
countries supplying vehicle assembly plants across borders.
    Given the close proximity between the plants, nowhere has 
this practice become more important than on the border with 
Canada. The primary border crossing points in Michigan and New 
York are vital to our industry. As a result you can appreciate 
the impact the crisis of September 11th had on our industry 
when the increased security procedures were implemented on the 
border with Canada.
    The border crisis created on September 11th brought 
together many of the people, companies, local, state, 
provincial, and federal agencies that play a role in creating 
and maintaining an effective and efficient border. The 
cooperation and dedication to resolving the immediate delay 
problems while maintaining the heightened level of security was 
tremendous.
    Despite these notable efforts much work remains to be done 
to ensure that both the appropriate security and a reliable and 
efficient border is created. This is because the fundamental 
problems behind the recent border crisis remain unsolved. These 
are problems that pre-date the crisis and have been growing for 
a long time.
    While our written testimony addresses each of these 
critical areas, I will limit my remarks here to two of them.
    The status of the Customs systems and programs has been an 
issue of continuing concern since the passage of the Customs 
Modernization Act of 1993. Strongly supported by the trade 
community and the motor vehicle industry specifically, the 
legislation was expected to provide critical improvements to 
the Customs import process as well as the implementation of a 
national customs automation program that would better align the 
Customs process with standard business practices.
    Unfortunately the introduction of the promised systems and 
new programs has been continually delayed and has not kept pace 
with the developments in trade. As a result we are seeing 
growing congestion and problems at our borders as the volume of 
trade continues to increase. Although we have been disappointed 
in the past with the pace at which new Customs automated 
systems and programs are being developed, we are impressed with 
the number of prototypes. GM has participated in one of these 
prototypes, a new automated Customs process for entering and 
releasing goods crossing land borders. It is called the NCAP 
prototype.
    This new system is based upon the use of electronic data 
used in our normal business processes. What is more, this new 
system is the first fully productive automated system that 
permits importers like GM to electronically provide advanced 
import data to Customs before goods are shipped and arrive at 
the border.
    The ability to get this type of information for the 
purposes of improving security in the border is tremendous. 
Systems such as this, we believe, demonstrate what must be our 
ultimate goal--better security and more efficient borders.
    To encourage the investment in these new systems and 
programs the establishment of dedicated lanes at the border to 
process known, reliable and low risk shipments is needed. Given 
the events of September 11th, though, these types of changes 
alone will not be enough. With the need for increased security 
and the demands placed on our borders we must go beyond how it 
is viewed today and how the Customs Service operates.
    The goal of our current security needs we believe requires 
that we make all of North America safe. The governments of 
Canada, Mexico and the U.S. must work together on ensuring our 
mutual security at the external points of entry and where 
possible before these points.
    Again, I would like to thank the committee for the 
opportunity of appearing here today and I would be happy to 
answer any questions.
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    Mr. Istook. Thank you, Mr. Smith.
    Ms. Fleishman.

                  Opening Statement of Mindy Fleishman

    Ms. Fleishman. Good morning Mr, Chairman, Congressman 
Hoyer. My name is Mindy Fleishman and I come to you today 
speaking on behalf of the U.S. members of the American Iron and 
Steel Institute. I am also proud to say that my testimony has 
the support of the entire American steel producing community, 
the Steel Manufacturers Association, the Specialty Steel 
Industry of North America, the Committee of Pipe and Tube 
Imports, as well as the United Steel Workers of America. We are 
grateful for the opportunity to testify today.
    Before I begin I would just like to add that I and members 
of our AISI Steel Customs Committee have had the privilege of 
meeting with Mr. Winwood several times over the course of the 
years and we do share in your recognition of his contributions 
to this country and wish him a very happy retirement.
    We believe in the steel industry that the strict commercial 
enforcement by U.S. Customs is critical to free and fair trade 
in steel. The President has established Section 201 remedies 
covering 13 steel product lines. Also he is initiating a much-
needed program of steel import licensing and monitoring to 
ensure that these remedies are not undermined.
    I noted that in yesterday's testimony here before you 
Treasury Secretary O'Neill said, and I quote, ``The strains on 
the Customs Service are growing increasingly severe every 
day.''
    We believe that that statement was applicable prior to 
September 11th and the horrific events of September 11th made 
that statement all the more critical and serious. We share this 
concern with Treasury Secretary O'Neill, and I have come to 
discuss with you today three steel-related issues.
    Number one, we are asking this subcommittee to provide the 
essential funds for new staff and other resources dedicated 
specifically to steel customs enforcement so that Customs can 
meet its additional 201 enforcement responsibilities on top of 
the pre-existing over 200 antidumping and countervailing duty 
cases that exist on steel.
    At U.S. Steel I work very closely with our metallurgical 
engineers, with our attorneys, and with our sales offices to 
prepare these trade cases on steel.
    In the 201 case our company alone received over 500 
specific product exclusion requests, and these had 
specifications attached to them that even our metallurgical 
engineers had trouble understanding. They came with physical 
tolerances that our engineers said cannot even be measured.
    So I know again, how complicated these cases can be and 
what a horrific task Customs has ahead of them to enforce these 
cases.
    Approximately 150 of these exclusions have been granted to 
date and the USTR is going to review the balance. Again, the 
500 only covers the carbon steel industry exclusion requests. 
Overall I am told there have been a thousand exclusion 
requests. By July 3rd, USTR will announce how many more over 
the 150 will be granted and again, it will be up to Customs to 
enforce this.
    I have worked on the Customs Committee of AISI for eight 
years. I have made quarterly visits to the largest steel 
importing ports in the country. I have met with the Chicago 
Strategic Trade Center for Steel twice per year and with 
Washington Customs officials twice per year and I have never 
worked with a more dedicated or talented group of people. But I 
am here to tell you today that without your help, without 
additional resources, they will not be in a position to enforce 
the 201 remedies.
    The second item I wanted to discuss with you today is the 
Customs Education and Training Partnership that the AISI 
Customs Committee has had with Customs for the past 35 years. 
What we do on these training seminars is we bring experts from 
throughout the steel industry, metallurgical engineers across 
the product lines, trade attorneys, and I represent the 
commercial view for Customs on the trade cases. And our 
resources are severely strained right now to continue this 
program. Because of the financial meltdown of the American 
steel industry, a number of companies can no longer afford to 
send their company representative to participate in these 
seminars. That has increased the burden on those of us who are 
still participating. Again, we feel that it is within the power 
of this committee to dedicate some resources specifically for 
this Customs training partnership with the steel industry and 
we are asking for that today.
    The third item that I wanted to talk about was the steel 
import monitoring and licensing system that the President has 
initiated as part of the 201. It is being initiated to cover 
only those products that are covered by 201 remedies for a 
period of three years and one day.
    I have to share with you one of the most humiliating 
experiences I have had in my career was, I am a member of the 
AISI North American Steel Committee. This is a committee made 
up of AISI steel producing members from Canada, Mexico and the 
U.S. We meet approximately three times per year to discuss 
common trade concerns throughout the region.
    One of the meetings was dedicated to each of us putting on 
a presentation of what form of steel import monitoring and 
licensing system we have in our countries. The Mexicans put on 
a very extensive presentation and they get real-time notice of 
imports that are heading their way. The Canadians put on a very 
detailed presentation talking about their import licensing and 
monitoring system. Steel that is imported into Canada must be 
permitted. It is not, any kind of obstacle to trade. No one is 
denied a permit. They are very easy and very inexpensive to 
obtain. But what this does is, these permits are good for 30 
days.
    So the Canadian steel industry has let's say a one to 
thirty day heads-up on the steel that is headed their way 
because the Canadian government publishes on a web site which 
they update weekly, the steel product, country of origin, the 
tons and the dollar value of the steel that's headed their way.
    Then it came time for the U.S. delegation to discuss our 
import monitoring and licensing program and really the only 
thing we could say is that we get preliminary steel import data 
three to four weeks after the steel has arrived here, and that 
just simply is not adequate. And if Canada and Mexico and the 
European union can have steel import monitoring systems, we see 
no reason why we cannot.
    We know that there is movement underway from some of our 
friends in congress to codify this steel import monitoring and 
licensing system. We hope that you will join in that support.
    The beauty of this is that we feel it can be done. The cost 
of this can be covered by the permit fee which would be a very 
modest one.
    Again, I thank you very much for this opportunity to appear 
before you today.
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            STAKEHOLDER INPUT TO OFFICE OF HOMELAND SECURITY

    Mr. Istook. Thank you, Ms. Fleishman, and I appreciate from 
each of the members of the panel some of your extra remarks 
because I certainly picked up a lot of things beyond what had 
been in the written testimony already submitted.
    Let me start with kind of a big picture question because 
the overriding issue of what we want to talk about is balancing 
the need for security with the need for trade. We do not want 
trade without security. We cannot prosper if we have security 
without trade. We must find the best ways to strike the 
balances.
    You I think, Mr. Smith, referred to--and Mr. Laden might 
have also, and maybe Mr. Browning as well--referred to advisory 
committees such as within customs with the advisory committee 
on commercial operations and so forth, making recommendations 
on border security and balancing these interests. Customs has a 
setup for that. I think there are other government agencies 
that have parallels to that.
    However, now a lot of the coordination on this has been 
delegated to the Office of Homeland Security. Perhaps it has 
created some infrastructure of which I am unaware at this time, 
but I wanted to ask the witnesses first, is there a system and 
what is it that is a structure to make sure the Office of 
Homeland Security is receiving input from the stakeholders in 
trade who are going to be so dramatically influenced by the 
security issues? Is there a system formal, informal? What is 
it?
    I am not sure who to refer to first on that. Mr. Smith, Mr. 
Browning, you are both kind of reaching out.
    Mr. Browning. Sometimes it may not be good to volunteer, 
Mr. Chairman, but----
    Mr. Istook [continuing]. Service or----
    Mr. Browning [continuing]. Service, sir.
    Actually, in fact, and I do want to emphasize this and I 
apologize, I had to cut my statement considerably.
    Mr. Istook. That is fine.
    Mr. Browning. There has been a good deal of cooperation 
within all the federal agencies involved in this matter, 
probably unprecedented cooperation from my perspective of 25 
years of government service.
    I have the privilege of sitting on what is referred to as 
the Deputies Committee which is chaired by Admiral Abbott at 
the Office of Homeland Security. And indeed, our engagement in 
the Container Working Group has been a vehicle through which we 
were able to take some of the input that we received from our 
private sector stakeholders like COAC who were very 
instrumental in helping us to develop the recommendations that 
are the foundation for C-TPAT. We have taken those 
recommendations and basically exported those recommendations 
into the Homeland Security Deputies' process, so that we have 
made them aware from our perspective what our stakeholders see 
are important in terms of container security, and in terms of 
the elements and components of securing the supply chain from 
end to end.
    So I think there are a number of vehicles that exist within 
the governmental structure, where we feel the obligation to 
carry to that structure input that we receive from our private 
sector stakeholders.
    Mr. Istook. I understand that. What I was trying to 
question though is whether there is any direct input from the 
actual stakeholders in trade as opposed to the input into the 
Office of Homeland Security comes totally from other federal 
agencies, you know. So you have obviously a multi-level 
filtering mechanism that we can discuss what gets through or 
not.
    Mr. Browning. The short answer is yes because there is the 
representative to the Deputies Council who receives input from 
various trade communities.
    Mr. Istook. Who is that?
    Mr. Browning. I do not remember the gentleman's name.
    Mr. Istook. We are talking about a private sector 
representative?
    Mr. Browning. No. he is formerly private sector, formerly 
with Corning but now part of Homeland Security.
    Mr. Istook. But that is my whole question, whether Homeland 
Security has any mechanism for receiving direct input from the 
private sector.
    Mr. Smith, you wanted to address that?
    Mr. Smith. Yes. We had a meeting to discuss the issue of 
security in Detroit through the efforts of the Detroit Regional 
Chamber of Commerce, there were meetings held in the offices of 
the mayor of the city of Detroit and representatives from the 
trade community were invited to participate and discuss issues 
related to the border in a number of regional representatives 
or stakeholders in the trade community from the Bridge 
Authorities to importers to brokerage companies, Customs 
brokerage companies were involved.
    Mr. Istook. Did that address, for example, I know that 
there are some references in the testimony about concern over 
the potential consolidation of Customs with other border-
related agencies such as Immigration and Naturalization 
Service. Big picture issues such as that. Was that part of the 
discussion in Detroit?
    Mr. Smith. No, it was not. That was not discussed. What we 
discussed were issues similar to what we have discussed here 
today.
    Mr. Istook. Nuts and bolts type issues as opposed to 
framework or big picture issues.
    Mr. Smith. That is correct.
    Mr. Istook. So to your knowledge, and Mr. Laden or anyone 
else, is there any mechanism for that at this time?
    Mr. Laden. Not to the best of my knowledge, Mr. Chairman. 
And I might add, and it is not to be critical, notwithstanding 
Deputy Commissioner Browning's remarks and the recent 
appearance in Detroit of Homeland, this is to the best of my 
knowledge their first appearance, and I would suggest that it 
is a little late in the game. We began convening meetings at 
Customs headquarters on security under the guise of the COAC 
technical advisory group back in October and convened those 
meetings all the way through the COAC meeting in January.
    Members of that committee kept looking for someone from 
Homeland and kept asking where are representatives from 
Homeland, they should be involved in this process.
    If they were there they were invisible to us. We had no 
contact with the committee until just this week.
    Mr. Istook. That is something obviously that we are trying 
to have some discussions with Homeland Security to try to make 
sure that there is a mechanism of the stakeholders, especially 
on the big picture such as what happens to trade were Customs 
Service to merge with something else. That is a very major 
question I know in the community right now.
    I think, Mr. Laden, you touched upon that in your written 
testimony. Would you like to elaborate on what you see are the 
implications, the benefits or the detriments of such a 
potential merger?
    Mr. Laden. Just briefly. I think I speak on behalf 
certainly of Target Corporation and then the American 
Association of Exporters and Importers. I can see some benefit 
in removing redundancies and increasing efficiencies by making, 
if you will, a super agency along the border. While I have not 
seen any formal plans in how that whole thing would work, I 
think people or cargo crossing our borders should be and can be 
inspected by a single super agency, if you will, in charge of 
border security.
    However, we must understand that 99.9 percent of the cargo 
and people coming across those borders are legitimate. And I 
have read reports about perhaps collapsing those three agencies 
into one and then moving it over under Department of Justice. I 
would tell you from my platform today and without further 
details and knowledge, I would be averse to moving them under 
Justice. I think the Customs Service today is appropriately 
reporting up under Treasury. They do collect and handle tax or 
duties. They also are no strangers to enforcement, nor is 
Treasury. They have a very robust group of enforcement agencies 
reporting up through them and I think they do a fine job in 
both risk assessment and other risk management efforts in 
monitoring the activities along our border.
    So yes, I do believe it would be possible to look at some 
scenarios where you could in fact collapse those three agencies 
into one and then have a single entity that's responsible for 
clearing cargo or human beings as they come into the country.
    At a minimum I do believe that those three agencies need to 
begin a better dialogue or more communication with each other 
and sharing intelligence and the like.

             JUSTICE DEPARTMENT ROLE IN INTERNATIONAL TRADE

    Mr. Istook. Just one follow-up on that and then I want to 
recognize Mr. Visclosky in a moment.
    When you mentioned, it is not in opposition to the 
potential merger, it is the question about whether the parent 
department would become the Department of Justice.
    I know of course Treasury Department has extensive 
involvement in trade issues and international trade, the 
revenue and the monitoring and regulation of it. But is there 
any existing role of the Justice Department regarding 
international trade
    Mr. Laden. In a very limited sense, yes. I believe some 
agencies that Customs interacts with in conducting the flow of 
trade report up through Justice. So Customs essentially is 
enforcing laws of entities under Department of Justice as it 
relates to international trade, yes, sir.
    Mr. Istook. And you are talking about laws on restricted 
material?
    Mr. Laden. Restricted materials, exports, yes, sir.
    Mr. Istook. But that would be the extent of it to your 
knowledge.
    Mr. Laden. To my knowledge, yes.
    Mr. Istook. Mr. Visclosky.

                         TRADE RELIEF FOR STEEL

    Mr. Visclosky. Thank you very much, Mr. Chairman.
    Commissioner Browning, the President has posed a 201 trade 
relief for steel, and my question to you is what role will 
Customs play in monitoring this system?
    Mr. Browning. Actually I was following with a great deal of 
interest Ms. Fleishman's remarks in that regard.
    We have, since late October or early November, been in 
consultations with USTR and the Commerce Department on how to 
address the sanctions regime that we anticipated would be 
signed by the President in early March. Through those efforts 
we were able to prepare as best as possible.
    But as has been indicated, the sanctions regime is 
extremely complex. 102 countries are exempted from the process. 
There are 14 categories of importations that have to be 
addressed. There will be an imposition of somewhere between 30 
percent generally and in some cases eight to 15 percent. The 
collections that we anticipate from imposition of the 
additional duties, on top of the accountability and antidumping 
duties that would already be applicable in general duties, will 
take our collection from about $145 million up to as much as a 
billion annually.
    There will be a great deal of opportunity and incentive to 
try to circumvent the requirements.
    We have, however, taken the measures to automate our system 
so that we can, first of all, identify the importations and 
track those importations. We are going to be in a position 
where we can give discrete numbers rather than have them fall 
into our general importation categories. So this is a more 
technical 900 series than we would use in the normal 
classification series.
    We have alerted all of our enforcement components to be 
mindful of the fact that there will be circumventions. And to 
use the existing vehicles available to us to impose penalties 
where we find that there is in fact circumvention.
    Mr. Visclosky. It will become more complex because the 
administration is currently serving up to a thousand exemptions 
on top of the solution you have already alluded to.
    Would it be easier to implement if as far as the licensing 
program that is also going to be put in place, expands to all 
steel products as opposed to just those targeted under 201.
    Mr. Browning. Unfortunately I cannot answer that. I will 
get an answer back to you. And the reason I say I cannot answer 
is because I am unclear as to exactly what Commerce intends to 
do with the licensing regime. They are still sort of muddling 
through that process right now.
    Mr. Visclosky. As far as the complexities you allude to and 
the fact that people in Customs as I understand move from 
product line to product line, there has been a history of great 
cooperation between Customs and the industry as far as training 
and information. Do you anticipate that is going to continue? 
And as far as getting ready for this, because it is going to be 
a significant additional burden to you, do you need additional 
funds, either for implementation of the program or for training 
your personnel that are not in your budget request for '03 that 
should be?
    Mr. Browning. I think you're absolutely right, and we do 
want to extend to the steel industry our thanks for the 
training and the cooperation. There has been a real affinity 
between the Customs Service and steel on this issue.
    I think actually we need to put the question a little bit 
in context, however. When we look at the volume of importations 
that are coming in, roughly 70 to 80 percent enter into just 
ten ports of entry, by and large. So to our advantage we have 
the expertise resident in those ports of entry. We have the 
people who are there and mindful of what has to be done and 
they should be in a position where they can do that.
    The staffing issues are in fact complicated by the level 
one alert and the other activities that staff are being pulled 
away to try to deal with. We are trying to move as quickly as 
possible to fill those gaps. Our hiring plans have us in a 
position, with both our regular appropriations and the 
supplemental where we should be able to bring on as many as 
1300 additional employees both in the inspector and agent 
category, and we are moving very rapidly to bring those people 
on. About a third of them are already hired and the rest are 
starting to come out of our----
    Mr. Visclosky. Do you think that would be sufficient as far 
as the monies you have in hand and the budget requests of '03 
to meet all of those commitments plus steel?
    Mr. Browning. I think that is what we anticipate we can 
handle at this time to get out the door, on the line to deal 
with the issues that we have before us right now, yes, sir.
    Mr. Visclosky. So if a problem occurred it would not be, 
from your anticipation today sitting here, be because you did 
not have the money to do the job correctly?
    Mr. Browning. At this point I would think that would be our 
answer, yes.
    Ms. Fleishman. Congressman, if I may jump in. I am Mindy 
Fleishman. I am not sure how much of my testimony that you 
heard. But one of the purposes for my being here today is to 
ask this committee to allocate resources specifically earmarked 
for the Customs training program that is the partnership 
between industry through AISI's Customs Committee and U.S. 
Customs.
    What we would like to do is increase our visits to the 
ports. We would like to be in a better position to make sure 
that Customs has the most timely, up to date information on the 
status of our trade cases. We would like to expand the staff 
from the steel industry who participates in these training 
seminars.
    We have lost a lot of expertise as a result of the 
financial meltdown of the steel industry, and if we could find 
a way to pay the travel expenses of those experts I think the 
companies would be very willing to donate the time of these 
experts to come on visits.
    Mr. Visclosky. If you have a specific dollar amount and a 
discrete description of that program if you could submit that 
in writing for the members of the subcommittee, as well as in 
fairness to Commissioner Browning.
    Ms. Fleishman. We would be very happy to do that and 
appreciate the opportunity.
    Mr. Visclosky. If I could, Mr. Chairman, just the last 
question I would have for Ms. Fleishman is, what is your 
opinion as far as the licensing extending to all steel 
products?
    Ms. Fleishman. We think that that is absolutely critical. 
Because of, for one thing there is a terrific incentive to 
cheat on the 201s and we really need to have a handle to 
monitor all of the steel imports that are coming into this 
country.
    As I said before, the Mexicans do it, the Canadians do it, 
the Europeans do it, and I see no reason why the United States 
could not do that.
    Mr. Visclosky. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Istook. Certainly. I was prepared to give more time. 
Our problem is the floor votes. We have two votes occurring on 
the House floor.
    Was there anything else you wanted to ask before we have to 
break for those two votes?
    [No audible response.]
    I have a long list of things to get into but with two votes 
on the floor by the time we get there and come back we will 
probably be most effective if we take our break now. It will 
probably be, getting there and back with the two votes will 
probably consume approximately 15 minutes. So as soon as I 
return, we will resume at that time then.
    We stand in recess.
    [Recess.]

        ACCELERATED FUNDING FOR AUTOMATED COMMERCIAL ENVIRONMENT

    Mr. Istook. We will come back to order. Thank you so much 
for your patience. I regret that we have votes that interrupt 
us during hearings.
    I wanted to discuss the subject of the ACE system, the 
Automated Commercial Environment that I think just about every 
witness referred to in their testimony.
    I know that to gain the benefits of technology in being 
able to process items at the border much more quickly, when you 
have to interact with dozens of other government agencies it is 
not a simple computerizing task to do that. ACE is a complex 
and expensive system. The subcommittee as I think you know 
dramatically accelerated funding in the last year to take the 
contemplated development time from 14 years down to five and we 
are trying to see if we can get it down further.
    I wanted to ask, because there are references in the 
testimony, one, to concerns with whether the other federal 
agencies with whom ACE must interface are diverting the 
necessary resources to make that an effective communication 
between them or not, because obviously if you have advanced 
capability on one end but you are still communicating with a 
horse and buggy system on the other, the benefits are going to 
be limited by that.
    There was also some question raised about whether there 
needs to be some prioritizing within the development of the ACE 
system to put a higher priority on security-related aspects of 
it.
    So I would like to ask each of the witnesses that would 
like to do so to comment on these and any other aspects of the 
ACE system and perhaps elaborate if you think there ought to be 
some more emphasis on the security elements, if you can be 
specific what you mean with problems with other agencies. 
Again, specificity is what we are after.
    Mr. Browning.

                        SECURITY ASPECTS OF ACE

    Mr. Browning. Thank you, Mr. Chairman.
    Again, as I indicated in my opening remarks we do 
appreciate the support the subcommittee has given to the 
development of ACE. As you indicated, we are on track to have 
that system deployed within hopefully four to five years 
depending on what the plus-ups look like over the next several 
budget cycles.
    Let me say, sir, that we see ACE as an extremely important 
component of not only our commercial trade environment but also 
of our security environment.
    One of the things that has been most beneficial to us is 
being able to pull back into the ACE process the ITDS, the 
International Trade Data System, which as you know will link 
state and local and other agencies into our trade system.
    We know there are a number of pieces of legislation in 
which you are trying to deal with data as a means to shore up 
our security initiative nationally. We think that what ought to 
be occurring here is to really look at ACE as potentially that 
portal to address not only trade but also security elements. It 
is well along in its development. It is clear that we have 
invested the necessary resources to develop the infrastructure 
and deploy this system and indeed, if all goes well and we 
intend to make sure that that happens----
    Mr. Istook. All that is just part of the overview. But I am 
looking, we are all familiar with the overview. I am looking 
for the specifics regarding the interface with the other 
agencies and the sequencing, the prioritizing of different 
components of ACE, especially as it relates to security.
    Mr. Browning. We have made some adjustments on the 
sequencing of the security components of ACE and those 
adjustments will in fact get us to where we need to be.
    Mr. Istook. What are those adjustments?
    Mr. Browning. One of the issues, and this is one that you 
have been a great deal of help to us on is the advanced 
manifest piece. We are moving that piece forward so we can be 
ready to move that into production sooner than we had initially 
anticipated.
    Another part of that--let me back up a step because I want 
to also address specifically your issue about other agencies.
    We have some concerns about whether the other agencies with 
respect to ITDS have in fact taken a serious look at this and 
started to invest the funds that will be necessary to make then 
ready when we are ready to roll out the ITDS piece of ACE.
    I can get you specific information on where we think those 
problems are and I would in fact like to do that in writing so 
I can be very clear on that, but there are some concerns.
    Mr. Istook. I realize you cannot be thorough off the top of 
your head, but rather than waiting on writing, if you can give 
me some idea of if there is a couple of agencies or departments 
that are crucial to this, that stick out the most as having 
some problems, who are they and what are the problems?
    Mr. Browning. I think we would include the departments that 
play the major role in the process. FDA is one that certainly 
has to be pulled into this process quickly. Transportation is 
one that certainly has to be pulled into this process quickly. 
Although the good news is that Under Secretary McGaw and 
Commissioner Bonner have had a dialogue on this information 
sharing and those discussions have gone extremely well.
    I think that those are certainly examples of some of the 
agencies that need to be pulled into this process fairly 
quickly.
    Mr. Istook. Thank you.
    Mr. Laden.
    Mr. Laden. I would add to that list, and I appreciate the 
fact that Commissioner Browning will get back to the committee 
with a comprehensive list of agencies. FDA, in addition Fish 
and Wildlife, EPA and FCC come to mind immediately. Those are 
four agencies that Customs and the Trade have significant 
contact with as we try to navigate the borders.

                    INTERNATIONAL TRADE DATA SYSTEM

    I would also join with Mr. Browning in his comments about 
ITDS and the necessity for a single portal, single window, 
single system by which the federal government can communicate 
processed data as it relates to foreign commerce.
    Mr. Smith. I would add that the ITDS initiative has had its 
ups and downs over a period of time. I think it was a wise 
decision to bring that back underneath the control of Customs 
and we will integrate that fully with the ACE process as 
opposed to the way it was done in the past where it seemed to 
be competing.
    The participation of the agencies has over the time period, 
because this has gone on for quite some time, and I would point 
out that the original National Customs Automation Program was 
authorized by the Modernization Act of 1993 and that is really 
when this saga began. The participation of the individual 
agencies has ebbed and flowed over that period of time. A 
number of the critical agencies are actively participating, but 
as Mike made earlier reference to, Customs enforces laws and 
regulations for over 40 agencies. I think at its peak 14 of 
those agencies were actually actively participating and that 
has actually dropped down to believe fewer than that.
    The real issue becomes if they don't have the funding and 
they don't have the infrastructure in place to receive this 
data, then you are just basically sending data to a black hole 
and if they are still going to the insist on you handing them a 
piece of paper, then we have not really accomplished anything. 
So it is important that these agencies get into this.
    The critical ones that Mike made mention to were certainly 
the FDA, the FCC, DOT, EPA. In addition to that the Bureau of 
Census. That is very important. The Customs Modernization Act 
and ACE project created programs, things called Importer 
Activity Summary Statements which provide, permit the 
consolidation and filing of information on a monthly basis as 
opposed to a daily basis. Limitations related to how that can 
be done because Bureau of Census computers cannot accommodate 
it, are an important issue. They have participated throughout 
the ACE development but it is an area of concern. I do not know 
where they stand with regards to their funding and being able 
to accommodate the new ACE program, but it is an area which I 
would have some concern about.
    With regard to the prioritizing of security, certainly that 
is a priority. We believe that programs like NCAP where we are 
able to pre-file information with Customs prior to goods, when 
we actually contract for goods we can begin giving the 
government information about who our supplies are, what type of 
products we expect to be importing from them. But the ability 
to give that to the Customs Service and therefore the other 
agencies is obviously critically important.
    We think it should be able to be used to enhance security a 
great deal. If you know who is coming before they arrive you 
can certainly do threat and risk assessment against them and 
make judgments.
    With regards to the prioritization, they have the ACE 
program broken into four increments and some of these new 
release programs are in increment one, release two. We are 
happy to see that. It shows us that they have been given 
priority.
    What I would encourage here as I have encouraged the 
Commissioner and the Deputy Commissioner and others is to 
ensure that those types of programs we see as being very 
supportive of better security, continue to be given a priority 
and there be an emphasis put on them.
    That is pretty much a quick overview of ITDS and the ACE 
project and what we--When it is done, where we see it today, 
and what we would like to see it head in the near future.

                  STEEL IMPORT SPECIALISTS AT CUSTOMS

    Ms. Fleishman. On behalf of the steel industry, we have 
been monitoring the development of ACE with great interest over 
the years and as the Assistant Commissioner indicated, it is 
going to be four to five years by the time it is up and 
running, and of course that is going to be beyond the period of 
the 201 which is why, not to beat a dead horse, we strongly 
believe that we need more steel import specialists at Customs.
    With regard to data, we have been badgering our friends at 
Customs through the years that there is no reason why the 
import data that they collect cannot be released in a more 
timely manner, especially when ACE is up and running. But of 
course what we learned is that the obstacle to that is Census. 
It is up to Census as to when the data is going to be released.

         ROLE OF CENSUS BUREAU IN PROCESSING IMPORT STATISTICS

    Mr. Istook. Would you elaborate on the role of Census?
    Ms. Fleishman. My understanding is that of course Customs 
are the collector of import data, but that data is passed on 
from Customs to the Department of Census and they are the ones 
who release the import statistics on a monthly basis.
    So that has been the obstacle, the stumbling block we have 
run into in terms of getting more timely release of import 
data.
    Also we are hoping that when ACE is up and running that 
will enhance our ability to have a steel import monitoring and 
licensing system that covers all of the steel products.
    Furthermore, we certainly believe in homeland security and 
we recognize the importance of that, but we also feel that 
strong legal and commercial enforcement go hand in hand with 
national security.
    Mr. Istook. Let me ask Mr. Laden, you referred to data that 
goes into a black hole of course if you do not have the system 
on the other end of the ACE system. Do you understand that it 
would not be able to interact with legacy systems that the 
other agencies would have? I pose that you and Mr. Browning 
also.
    Mr. Laden. I do not know if I have the technical expertise 
to necessarily answer that, but based on the sophisticated 
approach they are taking with ACE it is my understanding that 
it would not be compatible with any of the other older legacy 
systems.
    The system that Customs operates for example under today, 
their own legacy system, ACS, yes, was done in Cobal and that 
language is pretty much obsolete now. I think many of the other 
legacy systems are coded and written under some obsolete 
technologies that would prevent them from interacting with ACE.
    Mr. Istook. Mr. Browning, do you have some information on 
that?
    Mr. Browning. I think that is my understanding also that 
there would be some difficulty. Again, I do not have the 
technical expertise to give you all the explanation, but I 
understand there will be some difficulty.
    We have been pressing hard with our other partners to get 
them engaged in this process and again I think in truth, one of 
the difficulties is as was indicated, there were ebbs and flows 
in terms of this work. I think now people are starting to get a 
little more interested in the fact that we may in fact at the 
end of the day have a deliverable so I think we are starting to 
get their interest and we are going to press hard to get them 
to be involved in this process again, but there would be some 
difficulties, is my understanding.
    Mr. Istook. That certainly is something that we will make 
some further inquiry into. There is a severe difference between 
a total inability to communicate and just a limitation on how 
well you can communicate. I hope, I would like to see upgrades 
of everything to handle the needs, but I would certainly hope 
there would be at least some intermediate ability to have, 
albeit a lesser amount, but to still have interaction with the 
legacy systems and the other agencies until they come up to 
speed. We will certainly delve into that more.
    I have some other questions, but I want to recognize first 
Mr. Sherwood.

                    SECURITY AND TRADE FACILITATION

    Mr. Sherwood. I have a question for the three 
representatives of industry here. And by way of prefacing that, 
I want you to understand that all of my experience is in 
private industry. I have only been doing this job in the last 
couple of years, so I think I underhand very well the problems 
that you would face in the import of your goods and just in 
time inventory and the fast and rapid and accurate movement of 
your goods. I know that is the lifeblood of your corporations. 
I was a General Motors dealer for years and so I know what that 
is like. Steel has been at the top of our list and everybody 
knows about Target. So I think I understand your problems.
    I am a very limited government person. But if there is 
anything that the government has the responsibility for, it is 
our defense and protection. And I am interested in just how 
safe we think we can really be by Customs giving industry all 
that leeway. Customs has a terrifically difficult job in my 
estimation in a time like this since 9-11. They're tasked with 
protecting us and also enhancing the flow of trade. I think 
those two missions might be counterproductive. I am not sure 
they can be done by the same person, buy the same organization, 
and the people who have testified here disagree with me on 
that.
    But I would like you to expand on just how safe, and 
remember, this is the security of this country we are talking 
about. How well do you know your suppliers? What keeps 
something we do not really want to come in from coming in from 
one of your trusted suppliers who had a bad apple in their 
organization or somebody got bribed? I think it is a very 
serious issue.
    Mr. Smith, do you want to lead off?
    Mr. Smith. Yeah, I will be happy to comment on your 
question.
    As we are all searching for ways to deal with this issue, 
one of the avenues we have used is the Customs Trade 
Partnership Against Terrorism. But my experience has found it 
has been very interactive. I do not feel like Customs has just 
said here, you be responsible for security. Through signing the 
Memorandum of Understanding, through doing the reviews that 
they asked that be done related to your supply chain security, 
to submitting that to them, it being subject to review, it has 
been an interactive process so I guess I do not feel that it 
has just been turned over to us and say here, you in private 
industry bear this responsibility.
    As this thing grows and what we need to do is make sure 
that everyone in the supply chain that has a role or is a 
stakeholder in it, whether it is carriers, bridge authorities, 
Customs house brokers, or manufacturers, they become a part of 
this and are held to the responsibilities that they need to be 
held to.
    This is not really, to further this, this is not really to 
say okay, everyone is safe, everyone has done the same things. 
It is to identify those companies that have actually done those 
things, that has raised the bar to better permit the Customs 
Service to focus their resources on those who might be the 
people that we all have to be concerned with.


                           W I T N E S S E S

                              ----------                              
                                                                   Page
Berne, B. H......................................................   412
Browning, D. R...................................................    89
Buchanan, Richard................................................   371
Burke, J. E......................................................   341
Compton, Dr. Wilson..............................................   223
Conion, Peggy....................................................   358
Dean, Gen. A. T..................................................   372
Fleishman, M. S..................................................    89
Garcia, Cecilia..................................................   368
Gohr, Ginny......................................................   367
Healton, Cheryl..................................................   386
Hornik, Dr. Robert...............................................   223
Hurley, C. A.....................................................   383
Johnston, L. D...................................................   375
Kelley, C. M.....................................................   418
Laden, M. D......................................................    89
Mahlman, M. L....................................................   371
Maklan, Dr. David................................................   223
Manza, Gail......................................................   363
Noble, John......................................................   369
Pasierb, Steve...................................................   223
Roseboro, Brian..................................................     1
Rosenshine, Allen................................................   223
Schiraldi, Vincent...............................................   370
Smith, K. M......................................................    89
Walters, J. P....................................................   223
Warren, R. C.....................................................   365
Winsten, J. A....................................................   366
Zeck, Van........................................................     1


                               I N D E X

                              ----------                              
                                                                   Page
Treasury Debt Management, Hearing Date March 20, 2002............     1
    4-week Treasury Bill......................................... 71-72
    Book-entry Savings Bond System............................61-62, 86
    Business Strategy Adjustment.................................    17
    Committee, Questions Submitted for the Record by the.........    43
    Consulting Contracts.........................................    43
    Debt Buybacks................................................    82
    Debt Ceiling Limit...........................................    82
    Debt Management...........................................35-36, 45
    Debt Maturities.............................................. 71-72
    Direct Competitive Bidding...................................     5
    Disaster Recovery Site.......................................    87
    Federal Deposit Insurance Corporation (FDIC)................. 13-14
    Federal Reserve System.......................................    18
    Financial Accountability.....................................    14
    FY 2003 BPD Total Budget Request.............................     3
    Government Investments.......................................  6, 9
    Hoyer, Opening Remarks for Congressman.......................     2
    Intra-governmental Debt......................................    16
    Istook, Opening Remarks from Chairman........................     1
    Market Research Program......................................    61
    Marketable Securities......6, 8-9, 13, 28-29, 31, 39, 61, 78, 84-85
    Medicare..................................................16, 83-84
    Meek, Questions Submitted for the Record by Congresswoman....    83
    Mission, Bureau of the Public Debt..........................6, 8-10
    Patriot Bonds................................................    17
    Payroll Service Provider.....................................    28
    Public Debt Figures..........................................15, 70
    Publicly Held Debt...................................16, 70, 78, 80
    Roseboro, Opening Oral Statement from Treasury Assistant 
      Secretary..................................................     4
    Savings Bond Model.................................7, 25, 31-34, 69
    Savings Bond Program...5-7, 9, 11, 13, 18, 24-25, 29, 38, 47-48, 50
    Savings Bond Withholding Program.............................    27
    Savings Bonds, Debt Held in..................................    28
    Savings Bonds, Demographic of Customers..................41, 65, 68
    Savings Bonds, Denominations of.............................. 29-30
    Savings Bonds, Interest Rates and.........................48, 75-78
    Savings Bonds, Marketing of.......................36, 51, 62-63, 85
    Savings Bonds, Rate Tracking of..............................    35
    Savings Bonds, Redemption of by Financial Institutions....... 63-64
    Savings Bonds, Sale of............................36, 40, 52, 66-67
    Savings Securities Activities Costs..........................    21
                               __________
*Those items in italic are discussed in the witness' prepared 
statement.
    Servicing Activities.................................19, 23, 26, 30
    Social Security...........................................16, 83-84
    State and Local Investments..................................     6
    TAAPSLINK Internet Site......................................     5
    Treasury Borrowing Advisory Committee........................    46
    TreasuryDirect Program.......................................    29
    Zeck, Opening Oral Statement from BPD Commissioner...........     6
    Zeck, Prepared Statement of BPD Commissioner.................     9
Customers/Trade Issues, Hearing Date April 18, 2002..............    89
    Ambassador Bridge............................................   107
    American Association of Exporters and Importers.......106, 109, 131
    American Iron and Steel Institute.....................122, 123, 126
    Automated Commercial Environment........................93, 99, 107,
          110-111, 127, 134, 136, 138, 140, 158-163, 179
    Automated Commercial System............................110, 127, 139
    Border Cargo Selectivity.....................................   158
    Border Release Advanced Screening and Selectivity (BRASS)....   158
    BP America...................................................   108
    Browning, Opening Oral Statement from Deputy Commissioner 
      Designee...................................................    92
    Browning, Prepared Statement of Deputy Commissioner Designee.    96
        Automated Commercial Environment *.......................    99
        Container Security Initiative..................101-102, 104-105
        Customs Trade Partnership Against Terrorism............103, 105
        Dean, Recognition for Inspector..........................    98
        Department of Transportation Container Working Group.....   104
        FY 2002 Terrorism Supplemental...........................97, 98
        Immigration and Naturalization Service...................   104
        International Trade Data System..........................    99
        National Guard Support...................................    98
        Non-intrusive Inspection Devices.........................    97
        Office of Homeland Security..............................   104
        Trade Act of 1974........................................   100
        Transportation Security Agency...........................   104
        United States Coast Guard................................   104
        Vehicle and Cargo Inspection System (VACIS)..............97, 98
    Business Anti-Smuggling Coalition (BASC)..............112, 141, 168
    Carrier Initiative Program (CIP)............................. 167-8
    Committee on Pipe and Tube Imports (CPTI)....................   126
    Committee, Questions for the Record Submitted by the.........   150
    Container Security Initiative (CSI)............94, 101-102, 104-105,
          146, 153, 157-158, 165, 172-173
    Container Security...........................................   167
    Customs Examination Stations (CES)...........................   152
    Customs Modernization Act of 1993.................114, 118-119, 136
    Customs Trade Partnership Against Terrorism (C-TPAT).........
          94, 103, 105, 107-8, 112,  129, 139, 141-144, 146, 150, 153, 
          157, 167-168, 174-175
    DaimlerChrysler..............................................   108
    Dean, Recognition for Inspector..............................    98
    Department of Justice......................................131, 142
    Department of Transportation.................................   174
    Department of Transportation Container Working Group.........   104
    Department of Transportation Security Working Group..........    94
    Fleishman, Opening Remarks from Mindy S......................   122
    Fleishman, Prepared Statement of Mindy S.....................   126
        American Iron and Steel Institute (AISI).................   126
        Automated Commercial Environment.........................   127
        Automated Commercial System..............................   127
        Committee on Pipe and Tube Imports (CPTI)................   126
        Section 201 Tariff Remedies............................126, 128
        Specialty Steel Industry of North America (SSINA)........   126
        Steel Manufacturer's Association (SMA)...................   126
        United Steelworkers of America (USWA)....................   126
    Forced Child Labor Efforts...................................   166
    Ford Motor Company...........................................   108
    FY 2002 Terrorism Supplemental......................93, 97, 98, 175
    FY 2003 Budget Request.......................................    93
    General Motors.....................108, 112, 114, 116-117, 119, 139
    Gurulï¿½, Treasury Under Secretary for Enforcement.............   107
    Hoyer, Opening Remarks from Congressman......................    91
    Immigration and Naturalization Service.......................
         94, 104, 130, 174, 177, 179
    Import Statistics............................................   138
    In-bond Shipments......................................146, 156-157
    Information Systems..........................................   118
    Infrastructural Improvements...............................118, 154
    Intellectual Property Rights.................................   166
    International Trade Data System..............................
         99, 111-112, 135, 136, 155, 159, 162, 179
    Istook, Opening Remarks from Chairman........................    89
    Joint Border Security Plan...................................    94
    Laden, Opening Remarks from Michael..........................   106
    Laden, Prepared Statement of Michael.........................   109
        American Association of Exporters and Importers..........   109
        Automated Commercial Environmental (ACE)...............110, 111
        Automated Commercial System (ACS)........................   110
        Customs Trade Partnership Against Terrorism (C-TPAT).....   112
        International Trade Data System (ITDS).................111, 112
        Target Customs Brokers, Inc .............................   109
        Toxic Substances Control Act (TSCA)......................   111
        Treasury Advisory Committee on Commercial Operations of 
          the U.S. Customs Service (COAC).......................109,112
    Manifest Data, Security of...................................   148
    Maritime Antiterrorism Transportation Act....................   158
    Meek, Questions Submitted for the Record by Congresswoman 
      Carrie P...................................................   172
    Motorola.....................................................   108
    National Customs Automation Modernization.............136, 144, 149
    National Guard Support.......................................    98
    NCAP Prototype........................................115, 119, 158
    Non-Intrusive Inspection Technology (NII).........97, 151, 152, 163
    North American Free Trade Agreement..........................   117
    O'Neill, Treasury Secretary Paul............................107,122
    Office of Homeland Security............................94, 104, 130
    Personal Radiation Detectors (PRD)...........................   173
    Pre-arrival Processing (PAPS)................................   158
    Price, Questions Submitted for the Record by Congressman 
      David......................................................   178
    Pulsed Fast Neutron Analysis (PFNA)..........................   178
    Resource Allocation Model, Customs.....................166, 175-176
    Resource Issues..............................................   151
    Reverse Inspections..........................................   170
    Ridge, Office of Homeland Security Director..................   107
    Sara Lee.....................................................   108
    Seaports, Vulnerability of...................................   152
    Section 201 Remedies........................122, 126, 128, 132, 137
    Smart Container Technology...................................   168
    Smith, Biographical Statement of Kevin M...................114, 121
    Smith, Opening Remarks from Kevin M..........................   114
    Smith, Prepared Statement of Kevin M.........................   116
        Customs Modernization Act of 1993........................   118
        General Motors Corporation........................116, 117, 119
        Information Systems......................................   118
        Infrastructure Requirements..............................   118
        NCAP/Prototype...........................................   119
        North American Free Trade Agreement......................   117
        Staffing, Inadequacy of Customs..........................   117
        U.S.-Canada Automotive Products Trade Act................   117
        U.S.-Canada Free Trade Agreement.........................   117
    Specialty Steel Industry of North America (SSINA)............   126
    Staffing in NYC..............................................   180
    Staffing Issues, Customs.................117, 151, 164-167, 175-176
    Steel Manufacturer's Association (SMA).......................   126
    Sweeney, Questions Submitted for the Record by Congressman 
      John.......................................................   180
    Target Corporation................................106, 108-110, 131
    Target Customs Brokers, Inc................................106, 109
    Toxic Substances Control Act.................................   111
    Trade Act of 1974............................................   100
    Trade Support Network (TSN)..................................   179
    Transportation Security Administration.............94, 104, 165-166
    Treasury Advisory Committee on the Commercial Operations of 
      the U.S. Customs Service (COAC)............................
        106-107, 109, 112, 129, 153
    United States Coast Guard..........................94, 104, 178-179
    United Steelworkers of America (USWA)........................   126
    U.S.-Canada Automotive Products Trade Act....................   117
    U.S.-Canada Free Trade Agreement.............................   117
    Vehicle and Cargo Inspection System (VACIS)..............97-98, 163
    Winwood, Recognition of Chuck...............................92, 122
Office of National Drug Control Policy, Hearing Data June 20, 
  2002...........................................................   223
    Statement of John P. Walters, Director.......................   230
    Statement of Wilson M. Compton, National Institutes of Health   254
    Statement of David M. Maklan, Westat, Inc....................   263
    Statement of Robert Hornik, University of Pennsylvania.......   284
    Statement of Allen Rosenshine, BBDO Worldwide, Inc...........   297
    Questions for the Record.....................................   313

                                

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